Global economy needs to work with Asian growth, Andrew Sentance claims

A successful Asian model of development spreading out and becoming more self sustaining is likely to influence the global economy of the next 20 to 30 years, according to one of the UK’s top financial experts.

In a speech to the Jersey Chamber of Commerce, Andrew Sentance, external member of the Bank of England’s Monetary Policy Committee, said that the global economy has become more integrated and interdependent.

‘Four main forces have come together in the past two decades to create the new global economy of the 21st Century. First, new technologies have had a major impact, notably the development of global information technology, media and communications networks,’ he said.

‘Second, barriers to trade have been reduced, with most of the world's nations now participating in a liberal and open trading system. Third, political change has extended the global market economy to large parts of the world which were previously closed to international trade and investment. And fourth, there has been a tide of deregulation of markets, including financial markets, in many countries, and as markets have been deregulated, they have also been opened up to international competition,’ he explained.

These changes pose a number of challenges, he told the audience, in particular for economic policy makers trying to maintain stability when they are constantly in danger of being buffeted by powerful global economic forces.

The first challenge is presented by the shift in the centre of global economic gravity towards Asia, he said as the pattern of the last 30 years has been ‘of a successful Asian model of development spreading out and becoming more self sustaining’. He added that the most likely scenario is that this pattern will continue over the next 20 to 30 years.

‘The key for economies like the UK, other European economies and the United States to prosper and succeed in this new world economic order is to have the right supply side policies which help businesses to remain competitive and adapt to changing market conditions,’ he said.

Such policies might include those aimed at enhancing education levels, and maintaining a business climate which is conducive to enterprise and innovation, along with a flexible labour market.
As a by product of continued Asian economic development, Sentance expects the second challenge to be ‘a prolonged period of upward pressure on energy and commodity prices’.

And there is a risk that ‘the inflationary trend could become embedded in the rate of increase of wages and prices more generally. That is a risk that cannot be dismissed lightly, given the experience of the 1970s when this did indeed happen,’ he explained.

The third challenge is that greater interdependencies and linkages in the global economy ‘have greatly increased the potential for global economic shocks and volatility of various different kinds.

He added; ‘In an ideal world, we would develop stronger international mechanisms for dealing with these potential sources of economic fluctuations. But the difficulties of establishing and operating frameworks for international co-operation mean that policy frameworks for managing global economic volatility are likely to remain inadequate and imperfect for some time to come. As a result, economies which are very open to international trade and business like the UK are likely to have to live with more economic volatility than we would ideally like.’

He told the audience that the second two challenges are most directly relevant to the role of the MPC. ‘In the future, we may not be able to achieve the high degree of stability for growth and inflation that we saw in the MPC's first decade. But our experience also suggests that we are not powerless to act in the face of significant global economic changes either.