The best economy ever

The world economy is currently experiencing a level of growth unsurpassed in human history. World growth has been running at close to 5 per cent for over three years – the highest level since the late 1960s. Three major factors help explain the current buoyancy of the world economy, says David Hale, chairman of Hale Advisers, a Chicago-based economic consultancy.

First, the globalisation process resulting from the end of the Cold War has encouraged a tremendous growth of world trade:

Between 1990 and 2006, global imports more than tripled, rising to over $11.6 trillion from $3.5 trillion.

The expansion of world trade has helped to increase competition and reduce inflation.

Secondly, in many countries the globalisation process has encouraged a large increase in the profit share of gross domestic product (GDP):

As a result of the competitive pressures in the world economy, corporations in North America, Europe, and Japan have been striving to maximise productivity while restraining wages.

The large rise in profits has encouraged major stock-market rallies everywhere since 2002; high profits help to bolster investment and improve productivity growth.

The third factor is the increased mobility of capital:

Practically all countries had capital controls 25 years ago; most of those controls are now gone, while there has been a revolution in communications technology which has vastly reduced the cost of transferring money across national borders.

Financial markets have therefore blossomed in dozens of countries; the stock market capitalisation of developing countries has expanded from only a few trillion dollars 10 years ago to $15.7 trillion today – or 26.5 per cent of the global total.

The gross value of global capital flows is now equal to 16 per cent of world GDP, compared to 3 per cent to 6 per cent during the mid-1990s.

Source: David Hale, The Best Economy Ever, Wall Street Journal, July 31, 2007.

For text: http://online.wsj.com/article/SB118584709244782989.html

For more on Trade Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=42

FMF Policy Bulletin/ 07 August 2007