Flexibility key to ‘new normal’On my way to work, I noticed an advertisement at a store in the subway station selling sweaters and pants for 5,900 won ($5.56). That price was far cheaper than 20 years ago. The quality was probably better, too. According to the producer price index by the Bank of Korea, TVs cost half the price they did eight years ago and the price of a refrigerator has fallen by half from 20 years ago.
A country with a population of 1.3 billion people has recorded an average growth rate of 10 percent over the past 30 years. China is already the second-largest economy in the world, making it the largest producer and the largest exporter.
India, with 1.2 billion people, and the Asean countries, with 600 million people, have also recorded an average growth rate of 6 percent over the past two decades. Those figures are no comparison to the average annual growth rate of 2 percent or 3 percent in Europe and the United States during their industrialization periods in the past.
England took 150 years to double its per capita income, while Germany took 64 years and the United States 53 years. In contrast, China took only 14 years and India 17 years. As they pour out goods manufactured with cheap labor, concerns about inflation, which dominated the world in the 1970s and 1980s, are being transformed into worries about deflation. Only the prices of the natural resources that people cannot manufacture, such as gold, oil and copper, and the things that cannot be imported, like real estate and services, have skyrocketed. Over the past two decades, the global economy experienced enormous, unprecedented structural change.
The speed of that change was extremely fast. It took 13 years for 50 million people to own televisions. It took four years for iPods, three years for the Internet, one year for Facebook and nine months for Twitter to reach 50 million users, indicating that the global market is merging fast and the cycle between technology and product is shortening.
The amount of content posted on YouTube over the past three months is larger than the total content of the ABC, NBC, CBS and CNN television networks in the United States over the past 100 years. It makes us curious what new record will be set tomorrow.
In the past, a natural disaster or a crisis on one side of the global economy allowed prosperity on the other side, but the integration of the global market means that regional economies are now synchronized. Shortly after the financial crisis in the United States, the growth rates of all the economies around the world recorded negative growth in 2009 for the first time since economics statistics have been kept because of economic synchronization.
In 2012, China’s national income per capita was 87th globally. When it reaches a similar level as Korea, somewhere around 30th on the list, how many more goods will this country be producing for the world market?
As countries that account for about half of the world’s population rapidly industrialize, classic macroeconomic theories from Western academia have increasingly lost their persuasiveness. In particular, the relationship between interest rates and variables in the real economy has become ambiguous.
Before the recent crisis, the U.S. Federal Reserve was able to maintain low interest rate policies for a long time without inflation and managed to operate a Goldilocks economy. But that policy led to the 2008 financial crisis. Since then, the Federal Reserve has implemented a zero interest rate policy, but people have refrained from taking out loans. Instead, they are paying off debt and curtailing consumption.
Despite an expansionary monetary policy of rapidly increasing the supply of money in the economy, the market remains slow. The inflation targeting adopted by central banks around the world based on their experiences with inflation in the 1970s and 1980s is now used as a goal to heighten prices.
It is a blessing for the global economy today that cheap products have increased the purchasing power of consumers, but it is also a curse that economic policies have lost their way in the rapidly changing global economic structure. Last month, Lawrence Summers, former president of Harvard University, talked about a “new normal” at an International Monetary Fund forum. He said the global economy is currently in a situation of oversupply. He made an attention-grabbing argument that world economy has entered an era where low growth, low prices and low interest rates are the new normal and the equilibrium real interest rate will be negative.
This week, the Bank of Korea said the producer price index fell for 14 consecutive months and the U.S. Federal Reserve announced it will start drawing down its quantitative easing. The economic policies of our era appear to require many adventures and experiments. No one can say for sure where our path on this foggy route will lead us. Theories and experiences from the past are not a reliable guide and changes are taking place too rapidly to predict our future.
At such times, flexibility can be the best virtue in economic policies. Charles Darwin’s conclusion in his famous book, “On the Origin of Species,” appears to apply to today’s economic policies. “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
*The author is a professor of economics at Sogang University.
By Cho Yoon-je