It has been 20 years since Alan Greenspan became chairman of America’s Federal Reserve Bank. The years since then have seen the fastest global average income growth rate of any generation, as well as remarkably few outbreaks of mass unemployment-causing deflation or wealth-destroying inflation.Thus, Bradford deLong in an article in ET today. Very true. He might have added that, in recent years, the world economy has seen the highest growth rates in several decades in the face of high oil prices.
As deLong notes, it is not as if the world economy has not faced shocks in the past two decades. There was the US stock market plunge in 1987, Saddam Hussein's invasion of Kuwait in 1991, the east Asian crisis, the dotcom collapse in 2000 and, of course, 9/11. How come the world economy remains resilient?
deLong cites three reasons commonly put forward: luck, greater skill shown by central bankers and less short-termism in the financial markets. He rejects the first and third explanations. Only the second, he contends, is valid.
Indeed, what deLong says is largely true. Central bankers have learnt to be far more focused- they have been single-minded in fighting inflation. Moreover, there is greater coordination among various central banks in times of crisis. Central bankers have understood the importance of maintaining liquidity in the markets, the lack of which is said to be one of the reasons for the Great Crash of 1929 and the Depression that followed. Much of this, of course, represents a triumph for Milton Friedman and his followers.
I would cite a few other factors that have contributed to resilience in the world economy. One, the shift to services in the developed world and diminished oil intensity of output. This has given the world economy a measure of insularity from oil shocks. Two, greater globalisation- of trade as well as capital flows- and its efficiency-inducing effects. In particular, by dispersing manufacturing activity, globalisation provides a buffer against terrorist or other disruptions. Three, the absence of large, extended wars and the uncertainties these create. The US invasion of Iraq, for instance, had a surgical precision that was missing in Vietnam.