Ongoing increases in the prices of imported products have an impact on inflation in the advanced countries.4 This effect occurs through two channels. The first is simply mechanical, arising from the weight of imported goods in the basket of goods and services purchased by households. For example, food and energy account for about 30% of the average shopping basket in the euro area. Assuming that, as a result of increased demand from EMEs and insufficient supplies, commodity prices increase on average by 4% a year, more or less in line with the growth rate of the world economy (or long-term interest rates, according to the Hotelling rule), average prices in the euro area will increase by 1.2% simply because of the effect of these products. What about the implications for prices of other products? The remaining 70% of the basket includes manufactured goods and services, some of which are imported and others are produced domestically. Assume, for simplicity’s sake, that these goods are only produced domestically. If the prices of these products grow at a rate of 2% per year, the overall average inflation is 2.6%, exceeding the 2% objective of most central banks in advanced countries, including the ECB’s. If some of these goods and services are produced abroad, the rate of their price increase may be even higher, due in particular to the BalassaSamuelson effect that I mentioned previously.
Let me put it differently: is potential growth in those economies being affected by the fact that one part of the world, with nearly two-thirds of its population, is growing on average by 6–7% (or more) per year? If so, in what ways? One hypothesis which we may want to assess and test is that the so-called “long term equilibrium” variables which are so important in our economic models are in fact affected by globalisation, as advanced economies are becoming smaller and smaller. Not taking this into account may induce policy-makers to misjudge the situation and cause international surveillance to fail. These are clearly very difficult issues to examine. However, it seems to me that the analysis so far is insufficient. I won’t go into detail but would just like to pose some questions. Growth The first issue, or question, I would like to raise is whether the increase in growth rates in EMEs has had, and will have, a negative or a positive impact on trend growth in advanced economies. Taking a standard neo-classical trade model, the answer depends on various assumptions. The prevailing consensus is that globalisation provides opportunities for all, including advanced economies; their growth will not necessarily suffer. This is the conventional wisdom.