DP264 Technical Progress, Global Imbalances and World Economic Recovery Without Inflation
This paper reviews three problems of the world economy since the collapse of the Bretton Woods system; an unreliable price mechanism, spending imbalances between countries, and increased technological competition. It argues that the third phenomenon is the most fundamental and creates potential global instability. A model, stemming from Hicks's paper 'The Long Run Dollar Problem', is deployed to examine this question. We consider a world of two regions -- 'Asia' and the 'North' -- in which technical progress is rapid in Asia. In the case of export-biased productivity growth there are cheaper imports and almost no adjustment problems for the North. With import-biased technical progress in Asia, however, the North's wages and spending must both be reduced. Reasons are advanced as to why, in principle, the adjustment of wages and spending might not be forthcoming. I consider whether foreign investment might assist the adjustment process, but conclude that "adjustment processes do not work very well in the present world". This fact is used to suggest an explanation of present instabilities in world currency and financial markets.