Potential growth will then be at a higher level. On the other hand, increased demand from countries such as China and India combined with a synchronised economic upturn could contribute to the global output gap being closed more rapidly than we at present assume. In this case, inflation could rise earlier than anticipated. The major question is, of course, whether the low international price pressure will endure, and, if so, how long. One factor indicating that the developments we see now are a more lasting phenomenon is the combination of more independent central banks with inflation-targeting and increased global competition. In addition, rapidly-growing low-wage countries like India and China still have some way to go before they are completely integrated into the global economy. Events that could radically alter the picture are, for instance, increased protectionism and introversion, extensive armed conflicts and irresponsible fiscal policy. Protectionism may lie close to hand as a response to increasingly troublesome competition and difficulties in adapting national labour markets and production patterns, which is indicated, for instance, by the present US debate prior to the presidential elections. However, there is little that now indicates that these factors could grow sufficiently to outweigh the trend towards increased integration and globalisation. The conclusion is therefore that the low-inflation economy appears to have become established, although we cannot take it for granted. What consequences will this have for monetary policy in the future? Monetary policy in a low-inflation economy The target for monetary policy is price stability.
This somewhat contradictory, in historical terms, price picture is probably partly due to developments in China, where on the one hand the vigorous industrial expansion has led to a marked increase in the demand for commodities, while on the other hand the plentiful supply of low-wage labour has meant  2  BIS Review 21/2004  that production of cheap goods for the world market is accelerating rapidly. This clearly illustrates one of the conditions of globalisation, namely the increasing specialisation and increased utilisation of comparative advantages. These factors, among others, provide better resource allocation, increased productivity and greater efficiency, which in turn have a subduing effect on prices. The increasing strong international economic activity and the upturn in commodity prices indicate that international price pressure will increase gradually in the future. However, the globalisation process may mean that price increases remain moderate over the coming years, despite the economic upturn. China and India together have more than 2 billion inhabitants, which corresponds to one third of the total world population. So far, only around 10 per cent of the Chinese population is estimated to be affected by the modern economy. This means that there is a very large unutilised labour reserve that could contribute to keeping down price increases for a long period of time.