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Long-Term Fundamentals of the 2008 Economic Crisis

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  • David Mayer-Foulkes

    ()
    (Division of Economics, CIDE)

Abstract

The current economic crisis has long-term causes that are rooted in the economic dynamics of globalization. I construct a Solow-style endogenous model of capital accumulation, technological change, trade and cheap-factor-seeking foreign direct investment (FDI), based on myopic agents. Combining advanced technologies with low costs, FDI yields extraordinary profits that generate asymmetric innovation incentives that explain the following stylized facts. Globalization (a) increases capital accumulation; (b) is consistent with development, underdevelopment and miracle growth; (c) increases inequality in leading countries; (d) generates a transition path along which the interest rate diminishes if capital accumulates at a faster rate than technological change. Over the period 1980-2007, liberalization unleashed a wave of globalization, and the international sector experienced miracle growth. Profits rose to all time highs and global saving exceeded global investment. This savings glut or investment shortfall fueled a global housing appreciation, after which excessive risk in a deregulated financial market led to a financial meltdown. While restoring financial markets and reducing the housing market fallout are immediate priorities for the US, economic growth can only be recovered by restoring global investment. Lowering interest rates cannot generate very much investment, nor will consumption flows from fiscal spending. To stimulate the global economy, whole new economic sectors and technologies must be developed in advanced countries, and economic development deepened in underdeveloped countries. A global harmonization of taxes, which is eventually necessary anyway, is required to fund publicly provided goods, to balance incentives between local and international production, to reduce the polarization between developed and underdeveloped countries, to balance global markets with global governance, and to reinforce global cooperation. Developing the green energy sector is consistent with these aims.

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Bibliographic Info

Paper provided by CIDE, División de Economía in its series Working papers with number DTE 467.

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Length: 47 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:emc:wpaper:dte467

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Related research

Keywords: Economic Crisis; Globalization; Solow model;

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Cited by:
  1. Naude, Wim, 2009. "The Global Economic Crisis after One Year: Is a New Paradigm for Recovery in Developing Countries Emerging?," Working Paper Series UNU-WIDER UNU Policy Brie, World Institute for Development Economic Research (UNU-WIDER).
  2. Mellár, Tamás, 2010. "Válaszút előtt a makroökonómia?
    [Does macroeconomics face a dilemma?]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 591-611.
  3. David Mayer-Foulkes, 2012. "FDI, Polarized Globalization, and the Current Crisis," DEGIT Conference Papers c017_052, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Roe, Terry L. & Shane, Mathew & Heerman, Kari, 2011. "Macroeconomic Imbalances in the World Economy," Working Papers 109244, University of Minnesota, Center for International Food and Agricultural Policy.
  5. David Mayer-Foulkes, 2011. "A Causal Panorama of Cross-Country Human Development," DEGIT Conference Papers c016_049, DEGIT, Dynamics, Economic Growth, and International Trade.
  6. Giancarlo Bertocco, 2011. "Global Saving Glut and housing bubble: a critical analysis," Economics and Quantitative Methods qf1112, Department of Economics, University of Insubria.

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