Weekend Read: Trade Balances in China, US Driven by Domestic Macro Forces | Awakening Europe's Private Sector | Ufuk Akcigit on the Innovation Paradox

In today's edition, we highlight:

• Trade balances in China, US driven by domestic macro forces
• Awakening Europe's private sector
• Ufuk Akcigit on the innovation paradox
• September 2024 F&D magazine
• Back to Basics video on productivity, and much more

INTERNATIONAL TRADE

Trade Balances in China, US Largely Driven by Domestic Macro Forces

China’s widening trade surplus and the growing?US trade deficit since the pandemic have renewed concerns about global imbalances and fueled an intense debate on their causes and consequences, write the IMF’s Pierre-Olivier Gourinchas, Ceyla Pazarbasioglu , Krishna Srinivasan , and Rodrigo Valdes in a new blog .

“There are increasing worries that China’s external surpluses result from industrial policy measures designed to stimulate exports and support economic growth amid weak domestic demand,” the authors say, noting that some worry that the resulting overcapacity could lead to a surge of exports that would displace workers and hurt industrial activity elsewhere.

This trade and industrial policy view of external balances is incomplete at best and should be replaced with a macro view, the authors note.

“To understand the pattern of global external imbalances, we need to understand the macroeconomic drivers of desired saving relative to desired investment, not only in China, but also in the rest of the world including, importantly, the United States. While other countries contribute to global imbalances, the United States and China together account about?one-third of the global current account balance .”

Even if industrial policies may not be the major factor driving countries’ overall external surpluses, they still matter. These may well generate sizable negative spillovers in trading partners , by undercutting the competitiveness and market access in other countries, exacerbating trade tensions. To avoid undue distortions, industrial policies in all countries should be confined to narrow objectives, the authors say.

EUROPEAN UNION

How to Awaken Europe’s Private Sector and Boost Economic Growth

In the European Union, income per person is on average one-third less than in the United States, mostly because of lower productivity. Europe’s aggregate productivity problem can be traced back to performance differences at the firm level, write Diego Cerdeiro , Gee Hee Hong , and Alfred Kammer in a new blog .

Among large, leading companies, productivity and innovation have diverged markedly across both sides of the Atlantic, the authors say. This significant difference is underpinned by much greater innovation efforts among enterprises in the United States, where research and development spending as a share of sales is more than double that of Europe. Europe also suffers from a broader lack of business dynamism beyond large corporations. This weaker business dynamism is partly due to constraints to scaling up, particularly in innovation. Two key factors are a smaller market size and access to finance, note the authors.

Addressing these root causes behind the underperformance of European businesses will require significant action at both the EU and domestic levels, the authors say. At the EU level, deepening the European single market would lift constraints to growth for Europe’s most productive firms, and removing remaining barriers to trade within the EU and advancing the capital markets union would incentivize firms to undertake R&D other investments that only pay off with a large customer base. On the domestic front, easing remaining administrative barriers to entry would help more people start businesses, especially in services sectors.

F&D MAGAZINE

The Innovation Paradox

Investing more in research and development, we’ve long assumed, is a surefire way to spur innovation, increase productivity, and fuel job creation and economic growth. And yet, as the US dramatically expanded R&D spending over the past four decades, the opposite happened. Innovation, productivity gains, and economic expansion slowed. What went wrong?

Real-world data show that there’s more nuance to encouraging innovation than simply throwing money at it, University of Chicago economist Ufuk Akcigit writes in F&D magazine . “Giant enterprises came to dominate vast swaths of the American economy, crowding out more innovative smaller businesses and start-ups,” he says.

“Across sectors, the biggest players prioritized strategic moves to defend their businesses rather than seeking genuine innovation, and as a result the economy missed potential growth opportunities, according to recent research.”

Read Gillian Tett 's coverage of this article in the Financial Times .

Sign up for a free print copy of the magazine here .

Watch our latest Back to Basics video to learn about productivity and why it’s a key concern for policymakers everywhere.

CENTRAL ASIA

Harnessing the Power of Integration: A Path to Prosperity

Against a backdrop of new and unprecedented challenges, raising living standards in Central Asia requires bold, concerted action, said IMF Deputy Managing Director Bo Li in a speech this week in Bishkek, Kyrgyz Republic.

“We must strengthen stability and resilience, promote regional integration, and launch a new wave of reforms," he said. “This is how we can unleash the full economic potential of the region and its vibrant young populations, accelerate growth, create jobs and open-up opportunities for generations to come."

“Now is the time for us to come together and take bold steps to unleash a new wave of reforms that will durably raise growth, create more jobs, and improve living standards," he continued. "This requires reforms to increase productivity, strengthen resilience to shocks, and expand markets. While this is ambitious, it is within our reach as long as there is consensus to move ahead on this path.”

AFRICA PERSPECTIVES

Charting Democracy and Development in Africa

In the latest Africa Perspectives episode, Professor Emmanuel Gyimah-Boadi, co-founder and board chair at Afrobarometer, and Abebe Aemro Selassie, Director of the IMF's African Department, discuss the pressing issues facing democracy in Africa and the region’s quest for genuine democratic governance and development. Watch the full conversation here .

IMF PODCAST

The world has changed since postwar economic thought placed GDP growth as its guiding principle. 20th-century progress has pushed planetary resources to the limit and brings the sustainability of traditional macroeconomic models into question. In this podcast , Kate Raworth talks with journalist Rhoda Metcalfe about her alternative model Doughnut Economics, which places economic objectives within the social and ecological boundaries of the living planet.

WEEKLY ROUNDUP

STAFF PAPER

How Do Economic Growth and Food Inflation Affect Food Insecurity?

During the global recession of 2020, food insecurity increased substantially in many countries around the world. Fortunately, the surge in food insecurity quickly came to a halt as the world economy returned to its positive growth path, despite double-digit domestic food inflation in most countries. A new staff paper explores the relative importance of income growth and food inflation in driving food insecurity. The authors find that income growth is the dominant driver of annual variations in food insecurity, while food price inflation plays a somewhat smaller role.

STAFF PAPER

At the Threshold: The Increasing Relevance of the Middle-Income Trap

Over the last sixty years, the ranks of high-income countries have expanded more slowly than might once have been expected. Many countries in Latin America and the Middle East have spent several decades at an intermediate level of development. But since World Bank researchers introduced the idea of a middle-income trap in 2007, wide-ranging discussions of its policy relevance have far outweighed formal statistical evidence. In the policy literature, the existence of a trap has often been investigated using informal methods based on charts, with plenty of room for disagreement over each approach and its interpretation. Meanwhile, many discussions take the existence of a trap as more or less given and explore what this implies for growth strategies. This staff paper provides a rigorous assessment of its extent and origins.

STAFF PAPER

Geopolitical Proximity and the Use of Global Currencies

After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, this new staff paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions. Since World War II, the U.S. dollar has served as the dominant currency. The authors find that closer proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, and note that the effect on renminbi usage is more pronounced during periods of heightened trade policy uncertainty. The findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role.

Thank you very much for your interest in the Weekend Read! Be sure to let us know in the comments what issues and trends we should have on our radar.

Miriam Van Dyck

Editor, IMF Weekend Read