Note on the three Imbalances and on the need for Inclusive Growth

1. Note on the three Imbalances andon the need for Inclusive Growth Brief prepared for the workshop on Lessons from Crisis and Prospects of Internally-driven Growth Organized by Economic Research Group and UN-ESCAP 26 June 2010, Dhaka

2. Outline • Macroeconomic (global) imbalance • Socio-economic imbalance – inequity and poverty • Ecological imbalance – growth, poverty, and their impacts on relations within nature and between humans and nature • Where does consumption come in to redress imbalances? • Boosting consumption and inclusive growth • Inclusive and internally-driven growth Sajjad Zohir and Lamya Islam, Economic Research Group

3. Macroeconomic Imbalance • Confusing term – global imbalance, or imbalances in international flows between countries or regions • Flows in Goods, Labor & Capital = Δ in stock (NX + NR) + NFI = ΔR (1) ΔRA - NFIA = - (ΔRB - NFIB) (2c) S − I = G + Current Account Surplus [mistake in p. 121: (or increases in consumption)] • Balance of payments always balance – where is the imbalance? Sajjad Zohir and Lamya Islam, Economic Research Group

4. Where are the imbalances? • Relative size of deficit (or, surplus) exceeding some critical threshold? • The choice of ΔR and NFI differs from a desired mix of the two? • CA deficit was associated with high growth that reflected higher return to capital, NFI would match both direction of goods & services and the relative return to capital. When growth and CA surplus are found to co-exist; and yet one expects NC outflow from these countries in order to ensure balances in the international flows – there is surely an imbalance. • Is this the case in Bangladesh? • NX < 0, but the size of current account deficit is on decline; • Thus, need for NFI to meet deficit is on decline; • But, ΔR > 0; • And one observes external borrowing to continue at old pace. Sajjad Zohir and Lamya Islam, Economic Research Group

5. Last three issues • Increase in inequity does not necessarily reduce aggregate consumption demand; but increase in % of people below a poverty line income is expected to reduce aggregate consumption • Relation between the first two ‘imbalances’ • Is safety net the way out? • Inclusive growth will involve higher level of consumption demand compared to non-inclusive growth; but whether it will lead to sustenance of growth depends on the location of capital. • Growth and poverty are equally bad for ecological balance; and governance is critical. • What is green? Needs further ideas. Sajjad Zohir and Lamya Islam, Economic Research Group