"Reversals of Fortune?"

Among key insights:

• The 1930s-era precedent suggests that policy responses to the crisis in Europe will be damaging to future growth prospects. The legacy of the crisis will probably be increased protectionism and financial repression both of which will impair productivity growth. As a result of the crisis, the ratios of public debt to Gross Domestic Product (GDP) stand at levels that threaten growth. Some of the productivity gains from European integration are jeopardized by problems of the Euro that are unlikely to be resolved quickly. Projections by the Organization for Economic Co-operation and Development for productivity growth in the Euro area of 1.8 per cent in 2018-30 compared with 1.0 per cent pre-crisis are very optimistic
• The extremist and right-wing parties that play an increasingly influential role in Western democracies today offer prime examples of globalisation’s effect on attitudes toward market integration. The situation raises serious questions about policies regarding immigration, public spending and redistribution. The political situation underscores the need for incumbent politicians to take into account the fears of globalisation’s losers, particularly when deciding on welfare state spending, redistribution, regulation of immigration, and how to deal with the emergence of extremist groups and parties.
• Governments seeking to maintain popular support need to develop strategies that are capable of balancing the conflicting forces that characterize the era of globalisation. There is no one optimal solution for all. Political leaders in Western democracies must make difficult choices balancing domestic demands from voters and international pressures that have continued to increase in the era of globalisation. Market integration enhances gains from trade and overall welfare, but also exerts downward pressures on regulatory and fiscal matters, in addition to generating distributional conflicts.
• Although BRIC countries may be expected to become larger in terms of GDP, they are unlikely to become per capita GDP leaders because their per capita income levels today are still very low and changes of leadership in per capita income have been rare in history. In fact, although many countries have started on the catching-up path, most have stalled a long way short of the frontier. Policies that help to initiate growth accelerations may hinder growth in the later stages. As a result, a country that adjusts its institutions catch up more quickly via industry may struggle to compete in services at later stages of development. India is the only BRIC country where success has been driven more by services than by industry, and this bodes well for its future, as a key characteristic of many rich countries is their strong performance in the services sector.
• Policy experimentation, good conflict resolution institutions and learning in shaping the trajectory of economic development are key ingredients to dealing with economic crisis. However, there are no one-size-fits-all recipes suitable for developing countries. A country’s political institutions are vital in establishing speeding policy responses and economic adjustments in the wake of a crisis. Leaders need to be able to buy time to experiment and to avoid taking a myopic view when crafting the optimal policy response to an economic shock.
• Policies that seek to alleviate chronic poverty in developing countries will have a greater affect if they take ‘internal’ constraints into account, rather than solely ‘external’ constraints. Recent economic research suggests that ‘internal’ constraints – such as learned helplessness and pessimistic beliefs – perpetuate poverty, as well as ‘external’ constraints, such as lack of credit or insecure property rights.

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