Stagnation and Emerging Market Economies: Keynesian versus Schumpeterian Approach to World Issues

Policy makers in the advanced economies at the core of the global financial crisis can make the claim that they prevented a new “Great Depression”. However, recovery since the outbreak of the crisis more than 5 years ago has been sluggish and feeble. Since these macroeconomic outcomes have to some extent been shaped by policy mixes adopted in those economies in response to the crisis, the appropriateness of those policy choices is a question worth revisiting. This is particularly the case as one considers the hypothesis that a long-run trend toward stagnation may have already been at play during the pre-crisis period, even if temporarily countervailed by pervasive asset price booms. On the other hand, there is a core divergence among those “Keynesian” and “Schumpeterian” economists who have proposed such stagnation hypotheses. While both groups agree that asset bubbles momentarily offset underlying stagnation trends before the crisis and that the recovery has been subpar, they point to different underlying factors for continued anemic levels of growth. “Keynesians” argue from the “demand side” and believe that fiscal policies have been far too restrictive, with too much emphasis on monetary policies recently, whereas “Schumpeterians” believe that the necessary force of creative destruction has not been allowed to fully take place for a long time now. Given the possibility that, for Keynesian and/or Schumpeterian reasons, advanced economies may be facing strong headwinds to return to significant growth, much attention has been directed to emerging market economies and other developing countries as potentially alternative sources of growth to the global economy. We argue here that, despite such possibility, it will become material only provided that these countries pursue their own country-specific agendas of structural reforms.