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GFC: Just a big blip after all?

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COMMENTS

12 November 2009 13:59

In the period before the GFC, Australian policymakers focused on how the industrialization and urbanization of India and (especially) China were contributing to a major global shift in relative prices that was significantly boosting Australia's terms of trade. 

Back in 2006, Ken Henry was explaining how the resource boom was going to have profound implications for Australia's exchange rate, current account position, structure of output and employment, and distribution of income and wealth, a theme he revisited in May 2008. 

In the aftermath of the crisis, the same themes are now reappearing. Thus, in a speech delivered late last month, Henry was again telling Australians to 'get used to the idea that we could have structurally higher terms-of-trade for quite some time' along with a series of associated structural adjustments. Earlier this month, Glenn Stevens described the prospects for a build-up in resource sector investment over the years ahead, the likely large current account deficits that would result, and the prospect of an even more pronounced 'two-speed economy.'

The GFC, it seems, has done little to alter the medium-term trajectory of the Australian economy. Perhaps, at least as far as we are concerned, it was just a big blip after all?

I'm fairly sympathetic to this judgment, since in large part it's the kind of argument I was making in a paper I wrote back in February, called 'All change or plus ca change...?', in which I suggested that the GFC was unlikely to significantly derail any of four major trends that were shaping the world economy pre-crisis: the Great Convergence, a resource-constrained world, second thoughts about the benefits globalisation, and the return of the state. 

But there are several important qualifications to make here (some of which I also made in the paper).

First, there are clearly big differences across countries. Australia got off relatively lightly in this crisis, in large part because we avoided a financial crisis. The fallout from the GFC is set to be much more profound elsewhere.

Second, it's still way too early to tell what the final consequences of the GFC will be. For example, there's a case to be made that, in part, the current crisis arose out of the global savings and investment imbalances triggered by the 1997-98 financial crisis. So we could still be feeling major aftershocks from this one in at least a decade's time.

Finally, even if the GFC has left my four big pre-crisis trends in play, I suspect it is going to turn out to have altered most of them in important ways. For example, it seems clear that the external environment within which the Great Convergence is taking place is going to look quite different to the pre-crisis status quo (think of the rise of the G20, question marks over the future status of the US dollar, the dramatic shift in monetary conditions in the rich world, the advance of murky protectionism and so on). 

And as a close corollary, it also appears that the shift in the balance of economic power that was always going to be a product of the Great Convergence has been significantly accelerated by the crisis. Similarly, the story about the return of the state now has to be adapted to take into account the big increase in fiscal burdens that has just taken place. So while I continue to believe that our post-GFC world is not going to be one of 'all change', its still going to differ from what went before.

Photo by Flickr user coda, used under a Creative Commons license.

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