The Old Normal for The World Economy |

The Old Normal for The World Economy

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Returning to an “old normal” for the world economy

Well into the 21st century, the world is starting to look more like the late 19th century than the 20th century, according to Dr Adam S. Posen, President of the Peterson Institute of International Economics. Amid the rise of developing countries such as China, the relative political and economic power of the United States – which has dominated the global stage in the last century – is shrinking. Meanwhile, countries left out of the development race in the 20th century are quickly narrowing the gap with their richer peers, which are growing more slowly. Dr Posen shared his views on why the world is shifting back to this new “old normal” in a talk chaired by Professor Razeen Sally, Visiting Associate Professor at the Lee Kuan Yew School of Public Policy.

No single-country domination

In a deviation from 20th century norms, the world is reverting to a global situation reminiscent of the 19th century, “where no one power in geopolitical terms and no one economy in size terms totally dominates the world”, said Dr Posen.

The shift towards this new “old normal” is due to two big trends. “First, the relative size of the US economy and power has fundamentally shrunk,” he said. “It remains in absolute terms incredibly rich and sophisticated in technology, but we have seen the decline long foretold.”

Secondly, technological progress seems to be waning, allowing developing countries to catch up with their developed counterparts. Unlike great leaps forward in the past such as the steam engine, railroad, car, internal combustion engine and air-conditioning, “technological advances today do not have quite the same legs that these other technologies do”, Dr Posen added. He argued that today’s world looks like that of the 19th century: “It is a world in which there is clearly technological progress, but it is the bursts of occasional leaps forward and actually relatively slow general growth rate”.

Dr Posen cited the example of genomics, which “by definition is about targeting more and more narrow, specialised conditions, leading to more and more individual treatments”. Advances in this field will likely be “hugely important” in saving lives, he said. But he added: “In terms of economic transformation, it is not something that is going to add five years to life expectancy overnight, which is what happened when we put in cleaner water supply in various parts of the world.”

A “bumpier” world economy

In the “new old normal”, business cycles will become sharper and more divergent between countries, and macroeconomic conditions will be bumpier, said Dr Posen.

In the past, the United States was able to provide ballast to the world’s economy, for example by buying more from countries that were in an economic downturn. Business cycles were more synchronised across the globe since many small economies were dependent on the United States, he explained.

 “But in a world where China, Japan, South Korea, arguably Brazil and certainly western Europe have their own large enough domestic economies, the synchronisation with the US is less, the impact of the US Federal Reserve and budget policy is less, and therefore the stabilisation of the world economy is less,” he said.

The increased prominence of the developing countries, set against the relative decline of the richer countries, may also lead to more “friction and dysfunction in international discussions”, and possibly more regionalisation. Asian countries, for example, could set up their own regional banking institution if established ones like the World Bank do not cede more power and control to them, Dr Posen suggested.

Technological convergence

Another consequence of the new “old normal” is that the provision of global public goods will recede and become more uncertain, said Dr Posen. Poorer countries are thus likely to catch up with the richer ones, and probably even do so faster, as the US is now less able to enforce protections of international norms such as intellectual property rights.  

“The countries at the technological frontier such as the US, Japan, western Europe, are going to advance more slowly on average. At the same time, the catch-up of the developing economies is much faster because the technology is diffuse and more easily copied,” said Dr Posen.

“Until we reach a point where a China, India or Brazil decides they are sufficiently advanced that they too want to protect intellectual property rights, we will have this accelerating of convergence,” he said.

On 6 August 2014, Dr Adam S. Posen, President of the Peterson Institute of International Economics, gave an evening talk titled “The Old Normal for the World Economy”. The talk was chaired by Prof Razeen Sally, Visiting Associate Professor at the LKY School. An expert on macroeconomic policy, Dr Posen is an adviser to the US Congressional Budget Office. He also served on the Bank of England’s Monetary Policy Committee from 2009 to 2012 and has acted as a consultant for the International Monetary Fund, the United States Federal Reserve, the European Central Bank and other central banks. He is the author or co-author of six books, and writes regularly for the Financial Times.  He received his Ph.D. and A.B. from Harvard University.


After the North Atlantic Financial Crisis, Dr. Posen argues that we are returning to a world much more like the late 19th than the 20th century, at least in economic terms. In his view, this is a world where globalization continues but is less rules-based than it was under clearer US hegemony.

This is a world in which the poor countries are likely to continue to catch up with the rich, and probably do so even faster, but the richer countries are likely to grow more slowly. This is a world in which macroeconomic conditions are bumpier in real terms, sustained inflation is rare, and multiple reserve currencies will emerge.


Dr Adam S. Posen, President of the Peterson Institute for International Economics

Wednesday, 06 August 2014
5:15 p.m. - 6:30 p.m.

Block B, Level 3,
469G Bukit Timah Road,
Singapore 259776

Seats are limited and will be available on a first-come, first-served basis. Kindly register your interest in attending to .

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