Kenneth Rogoff, Harvard University CAMARA COLOMBIANA DE LA CONSTRUCCION - CAMACOL Cartagena, June Colombia

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1 Kenneth Rogoff, Harvard University CAMARA COLOMBIANA DE LA CONSTRUCCION - CAMACOL Cartagena, June Colombia

2 Has trend world growth slowed? International Monetary Fund estimates of medium term trend global growth have marked down the past couple years This reflects a decline in consensus trend growth both for advanced economies and for most large emerging markets. Perhaps exaggerated? Colombia, with its growing oil revenues and expanding trade opportunities is the exception although expanding innovation is a challenge as in all economies. Kenneth Rogoff, Harvard University

3 Outline We will first explored views about why world growth might have slowed. if indeed it has We will then turn to a few ways an economy like Colombia can enhance innovation

4 Many alternative explanations of slow growth in advanced countries Summers: Secular Stagnation insufficient demand Austerity Gordon, Theil, Kasparov: Slowing Innovation Postponed structural reforms Policy Uncertainty Demographics Reinhart and Rogoff: Aftermath of the Financial Crisis Kenneth Rogoff Harvard University

5 Austerity in advanced countries a difficult balancing act after the financial crisis But falling government spending is hardly a secular trend

6 GOVERNMENT SPENDING /GDP: THE MARCH TO AUSTERITY? IMF FISCAL MONITOR, April 2014 Kenneth Rogoff Harvard University

7 Austerity is hardly a general secular trend in emerging markets or less developed countries either

8 General Government Spending/GDP in EMs NOTE: This chart covers a much shorter time period than previous chart for advanced countries IMF Fiscal Monitor April 2014 Kenneth Rogoff Harvard University

9 Interest rate inflation rate differential has collapsed Average of United States, United Kingdom Germany and France Source: IMF World Economic Outlook, (simple average) K Rogoff, Harvard University

10 K Rogoff, Harvard University As return to inflation indexed Bonds also shows

11 Many theories of low real interest rates Slowing population growth (implications?) Excess saving in fast-growing emerging markets Aging population in Germany and Japan, etc. Changing correlation between bond and equity prices Liquidity Fear or rare disasters Policy uncertainty Financial repression Kenneth Rogoff, Harvard University

12 Certainly combination of low interest rates and high unemployment make a compelling case for infrastructure investment, in both Keynesian and classical models Kenneth Rogoff, Harvard University

13 Oxford Union Debate: Has innovation has slowed? November 2012: Rogoff/Shuttleworth versus Kasparov/Theil, Oxford Union

14 Gordon s synthesis of why 250 years of growth is an aberration No real innovation or growth until 1750 The First Industrial Revolution (Steam engines, railroads) The Second Industrial Revolution (electricity, internal combustion engine, running water, indoor toilets, communications, entertainment, chemicals, petroleum ( ) Later airplanes, container ships, air conditioning, interstate highways etc., are extensions of IR II. Kenneth Rogoff, Harvard University

15 Gordon-Kasparov Theil continued Third Industrial Revolution: Computers, cell phones, the internet, 1960s-1990s Gordon-Theil Kasparov argue it much less impactful Estimate that US will be lucky to get 1% per year productivity growth in the next century against headwinds of demographics, globalization, inequality, education, energy, debt deleveraging Kenneth Rogoff, Harvard University

16 But has innovation really slowed? Artificial intelligence Advances in bio-medicine Energy revolution Improvements to quality of life that are difficult to measure such as connectivity Kenneth Rogoff, Harvard University

17 Magnus Carlsen world #1 in chess August 28, 2012 Exhibition blitz game ending in draw Kenneth Rogoff, Harvard University

18 Three keys to innovation (Mokyr) New instruments play a key role in scientific discovery Telescope and microscope are most famous but there are many others, e.g, Volta s battery Access to information Expands number of people who can help invent and create Institutions and incentives that allow ideas to develop Chinese famously developed many inventions such as gunpowder, silk, paper, moveable type. But institutions, especially lack of middle class entrepreneurs, did not foster development Kenneth Rogoff, Harvard University

19 Stunning advances in computing allowing new innovation but also many other developments such as lens technology Kenneth Rogoff, Harvard University

20 Telescope at South Pole used to detect Big Bang Harvard University 2014 Physicist Justus Brevik K Rogoff, Harvard University

21 Picture of Gravitational Waves Created seconds after Big Bang Harvard-Smithsonian Center for Astrophysics, March K Rogoff, Harvard University

22 Access to information always important, but used to be much more expensive than today.early encyclopedias helped foster industrial revolution

23 Pinmaking Factory: Diderot s 1751 Encyclopedia Courtesy of Joel Mokyr

24 Institutions and Incentives very important Access to education at all levels Rule of law Financial system to support innovation Property rights (including stable tax system)

25 Heightened policy uncertainty (Bloom, Davis, Baker) clearly important Especially to explain why a fall in investment is a nearly universal phenomenon worldwide But above all, recent slow growth has all the quantitative footprints of a systemic financial crisis

26 Past Experience with Severe Financial Crisis, Peak to Trough Changes Spain (1977), Japan (1992), Norway (1987) Philippines (1997), Sweden (1991), Hong Kong (1997), Colombia (1998), Korea (1997), Malaysia (1997), Finland (1991), Thailand (1997) Indonesia (1997), Argentina (2001), Cumulative % change Duration Housing prices -36% 5 years Equity prices -56% 3.4 years Unemployment 7% 4.8 years Real GDP per capita Reinhart and Rogoff, 2009 The Aftermath of Financial Crises -9.3% 1.7 years Kenneth Rogoff Harvard

27 Real Equity Prices and Banking Crises Index Average for banking crises in advanced economies Average for the "Big 5" Crises Index t-4=100 US, 2003= t-4 t-3 t-2 t-1 T t+1 t+2 t+3 Reinhart and Rogoff TTID 2009 Rogoff AEA/AFA address 27

28 US HOME PRICES UP SHARPLY BUT STILL BELOW PEAK

29 Housing has add negative addition to US GDP the last two quarters But many signs that the slowdown will be short-lived and that housing will begin adding again to GDP in 2014

30 PRICES BACK TO 125 YEAR TREND

31 In advanced economies, financial institutions have done significant deleveraging after 2008, and many corporations are awash in cash. But households and governments are less well positioned. Still a large overhang of public, private and external debt

32 Rising Public Debt not the problem in EMs as in DMs Source: IMF Kenneth Rogoff Harvard University

33 Although growing household debt in many EMs Source: IMF Kenneth Rogoff, Harvard University

34 Private Domestic Credit as a Percent of GDP: 22 Advanced and 28 Emerging Market Economies, Emerging markets: Credit boom, crisis and debt overhang, Emerging Markets Advanced Economies Reinhart, Rogoff 34

35 Can Financial Innovation Help Buyers and Sellers Deal with Interest Rate Uncertainty?

36 WAYS TO ESCAPE VERY HIGH PUBLIC and PRIVATE DEBTS Very high growth with or without budget discipline Default A burst of inflation Financial repression Extended period of debt overhang Converting illiquid government assets? Kenneth Rogoff, Harvard University

37 Colombia Inclusive growth Infrastructure development Avoiding natural resource curse by maintaining dynamic creative economy Continue reducing size of informal economy Security Kenneth Rogoff Harvard University

38 Output Volatility Average Country Rankings, Source: IMF April 2014 Kenneth Rogoff Harvard University

39 Colombia has low rate of government (civilian) employment Source: IMF 2013 Article IV for SA Kenneth Rogoff Harvard University

40 Trade Openness: Average Country Rankings, Source: IMF Kenneth Rogoff Harvard University

41 Financial Openness: Average Country Rankings, IMF, April 2012 Kenneth Rogoff, Harvard University

42 Rogoff Commodity Prices and China Growth CHINA

43 Kenneth Rogoff Harvard