A Goldilocks World Economy?

Over the past decade and half, two developments in the world economy have come together to create conditions for what could be a new era of faster economic growth and rising prosperity. One development involves the integration of China, India and the former Soviet Union into the global economy. The inclusion of these three populous regions into the global economy has created what economists call positive supply-side shocks, resulting in surpluses in labor, capital, and productive capacity. The most obvious impact of China, India, and the former Soviet Union has been on the world's labor market. Their entry into the world economy has, in effect, doubled the global labor force in the course of a decade, raising the return on capital and dampening wages and inflation. Capital has also become plentiful because of the high-saving propensities of China and other Asian economies. In fact, Asia is producing more savings than the world can absorb. This glut of world savings, together with the increasing globalization of financial markets, has predictably driven down the cost of capital and has helped keep interest rates low worldwide.

The other development relates to the technological advancements and other changes associated with the new economy, which have substantially increased U.S. and world productivity growth. American productivity growth has risen to the pre-1973 levels that were responsible for the rapid improvements in American living standards, jumping from an average of 1.53 percent for the period 1973-95, to 2.6 percent in the period from 1996 to 2005. World productivity has shown a similarly impressive increase. This productivity acceleration is the product of three over-lapping revolutions: a technological revolution in data processing and communications; a related revolution in the production and distribution model made possible by globalization and these new techonologies; and an efficiency revolution in materials and energy.

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