GLOBAL ECONOMIC GROWTH: TRANSITORy DECELERATION OR THE NEW NORM?
1.4 financial markets, investments and allocation efficiency
The textbook and mainstream macroeconomic approaches are mostly abstracted from the financial sector, as they assumed that apart from the occasional frictions or the temporary overstatement of external shocks and prolonged adjustment, their operation had no impact on the longer-term equilibrium path of the economies. Well-informed agents see through the financial and monetary veil, and they make their optimal decisions based on real considerations. However, if it turns out that financial variables can steadily divert the allocation of resources from the sustainable path, it may happen that a longer adjustment will be necessary in the real economy as well, in order to reach the pre-crisis growth rate once again. Then the recovery from the financial crisis requires not only deleveraging, but also real economy adjustment, which is not only slow, but also expensive. It is enough to consider that due to the lax lending conditions before the crisis a large number of residential and other properties were built, which some private or corporate builders are unable to finance after the crisis. Due to the high degree of investment overhang only part of these can be sold, and even that at depressed prices. Such “misallocated” real assets cannot even be reconverted into other physical objects. In the new situation, most probably part of the machinery and equipment used in construction will also become redundant and difficult to exploit, and it is similarly difficult to convert these capital elements into cash. Finally, the headcount of the workforce employed in construction will be also too high due to the lower capacity requirement that can be sustained in the long run, and therefore the workforce must flow to such sectors the output of which is required permanently. This may as well entail the change of profession and geographical location, which is time consuming, and may also be accompanied by private and community costs.
We could estimate the possible degree of economic policy error, if we knew the impact on potential growth of the deviation from the resource allocation ensuring an optimal growth path. Up to now only a few analyses have dealt with the empirical estimation of this, partly due to the estimation difficulties.22 In part, this is also attributable to the prevailing paradigm, which assumed that the financial sector and nominal variables cannot have a secular real economic impact. These few analyses include the work of Cecchetti et al. and the BIS 2015 report,23 in which they tried to estimate the impact of the sub-optimal allocation of the resources on growth. According to the fundamental assumption of the research strategy, the expansion of lending beyond a certain point diverts real economic resources to an increasing degree towards industries in which productivity lags behind the average. Thus, the credit boom may be regarded as an indicator of deterioration in economic efficiency. According to BIS, the deterioration of productivity, as interpreted above, was significant: had the growth rate of lending not exceeded the growth rate of 1994– 2000, the productivity grow rate in 2004–2007 would have been higher on an annual average by 0.2 per cent in the USA, by 0.4 per cent in Italy, by 0.7 per cent in Spain and by 1 per cent in Ireland (Chart 1-9). Based on the above, it can be seen that the cause of the lower growth potential is not that the economy is physically unable to generate higher output: it does have this capacity, but the utilisation of the resources in the given ratios and structures proved to be partially unsustainable in financial terms. With different resource and income allocation, it may also be possible to achieve or even exceed the precrisis growth potential. For example, if properties had been built only in a sustainable volume and as a result of a more even income distribution, and the indebtedness of home buyers had also remained at
In such research it must demonstrated how the growth would have developed on a path that did not materialise. That is, a counterfactual-type question must be answered. 23 Cecchetti and kharroubi (2015). See also the “Credit boom-induced resource misallocations stifle productivity” section in BIS (2015) pp. 50–51. 22
GROWTH REPORT • 2015
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