Here are two illuminating graphics from the Financial Times and Economist. First up is a figure from Martin Wolf’s latest column in the FT, itself based on a new paper by Carmen Reinhart and Kenneth Rogoff, showing the proportion of the world economy affected by banking crises, from 1900-2008. Its main features are a spike around the Great Depression of the 1930s, then a period of tranquility from 1940-1975 – an era of strong and stable growth and the post-war ‘Keynesian consensus’. All that comes to an end in the 1970s, when the world enters the financial chaos of the modern era, after the US suspended dollar-gold convertibility in 1971, effectively ending the post war period of stable exchange rates. Casino capitalism was born, as capital flows boomed and became more volatile, provoking regular financial crises. After a brief lull in the boom years of the early noughties, banking crises are now surging and look like they could surpass the level of the Great Depression.
The graph brings home the cost of excessive deregulation of capital and financial markets – the last three decades have seen a series of banking crises, each of which destroys GDP and leaves governments North and South saddled with substantial burdens as they are forced to nationalise bank debts to get financial systems working again. Question: what would it take to return us to the 1940-75 status quo ante?
The second graph is from this week’s Economist. It shows the % share of world growth accounted for by developed and emerging economies. First the well known part – led by China, emerging economies have been accounting for ever greater chunks of world growth, overtaking the rich world around the turn of the millennium. But the interesting numbers come at the end – even though both rich and emerging economies are being hit by the downturn, the rich economies are being hit harder – the result has been to accelerate the move of the economic centre of gravity Southwards. This year emerging markets are forecast to account for 80% of global growth. An economic tectonic shift of that order is highly likely to precipitate a matching political shift – maybe the G20 will eclipse the G8; perhaps regional financial mechanisms, such as Japan’s proposal for an Asian Monetary Fund, will eventually replace global institutions like the IMF. A shock of this magnitude is bound to trigger change on a grand scale.
Also based on the Economist’s coverage of the Reinhart and Rogoff paper is the table below which pulls together the track record of 14 severe banking crises since 1929. Topline message? On average GDP takes two years to recover, unemployment nearer five. Looks like Enver Hoxha was right (see last post). Sorry.