How to make the recovery sustainable?


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What can policy makers do to make the recovery more sustainable?

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How to make the recovery sustainable?

  1. 1. HOW TO MAKE THE RECOVERY SUSTAINABLE?Ekkehard ERNSTRegulating for a fair recovery, July 8th 2011
  2. 2. OVERVIEWHow inequality threatens the recovery • The two-speed recovery is giving way to global cooling Loss in income (growth) has lowered disposable revenues and aggregate demand around the globe • Recovery remains protracted in advanced economies Only few advanced economies have managed to take advantage of the global recovery • Tightening speed limits in emerging countries Commodity prices on the rise again  Wages and disposable incomes have still not recovered  Domestic demand falters in the absence of stronger world trade
  3. 3. Global cooling is underway....partly due to lack of income generation 8 7 Pre-crisis growth (2002-2007) 6Real disposable income growth Post-crisis growth 5 (2008-2010) 4 (p.a., in %) 3 2 1 0 -1 Arab Advanced Latin America Africa Emerging Asia Emerging countries economies Europe -2 -3
  4. 4. Structural change starts to bite • Global rebalancing has led to structural change The slowdown in activity has further exacerbated labour market inequalities • Restructuring is particularly severe in countries with large imbalances  Earlier housing booms give rise to sharp sectoral adjustments  Often, structural change comes with long-lasting and high structural unemployment • Demand-led policies can help speed up internal restructuring New job demands in service-related sectors (e.g. health care, personal services) can mitigate the impact, in particular for young people
  5. 5. New jobs are needed as job reallocation has accelerated Japan Switzerland Sweden F inland C hile Belgium Housing Austria depression Korea I taly N etherlands C anada N orway F rance Australia U nited States Portugal C zech R epublic Poland N ew Z ealand Greece Spain H ungary Estonia Slov enia HousingSlov ak R epublic bubble I relandU nited Kingdom D enmark Turkey Q1-2001 Q1-2002 Q2-2003 Q3-2004 Q4-2005 Q1-2007 Q2-2008 Q3-2009 Q4-2010
  6. 6. Inequality lowers policy effectiveness • Policy space becomes more limited Rising inequalities limit policy effectiveness • Traditional macroeconomic policies need to be replaced  But even activation policies work less effectively when structural unemployment is high  Early action is necessary, but the window of opportunity might have gone already
  7. 7. C -10 Median of coefficient 5% confidence interval -20 Emerging structural challenges complicate labour market interventions Note: Iterated estimates Note: Iterated estimates Government consumption Non-wage government consumption Hiring incentives Structural unemployment rate Training expenditures Structural unemployment rate Intermediate High Low Intermediate High 150 40 Coefficient estimate 100 Coefficient estimate 30 50 20 0 10 Median of coefficient -50 5% confidence interval 0 Low Intermediate High Low Intermediateestimates Structural unemployment Note: Iterated estimates rate Structural unemployment rate Note: Iterated estimates Note: Iterated estimates Hiring incentives Training expenditures 60 Coefficient estimate 40 20 0 -20 Intermediate High Low Intermediate High Structural unemployment rate Structural unemployment rateestimates Note: Iterated estimates
  8. 8. Equality-enhancing fiscal measures work • Income-led recovery possible An income-led fiscal stimulus can still help  Use spending measures with the largest multiplier attached, such as social spending (e.g. unemployment benefits) • Tightening of social spending is likely to worsen both the economic and the fiscal situation  Austerity measures fall heavily on low-income earners  The demand-depressing effects cause second-round deflationary effects that further worsens fiscal positions
  9. 9. Coordinated stimulus would still help Employment recovery in G20 countries 0.2 0.0 -0.2 -0.4 -0.6 -0.8 2005 2010 2015 2020 Baseline scenario Early withdrawal Additional spending for Additional tax reductions 3 years (3% of GDP) for 3 years (3% of GDP)