The world is stuck in a vicious cycle writes Lawrence Summers

If the global economy was in trouble before the annual World Bank and IMF meetings in Tokyo last week, it is hard to believe that it is now smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors and the wealthy financial sector hangers on, it is difficult to see what of immediate value was accomplished.

The US still peers over a fiscal cliff, Europe staggers forward trying to prevent crises King Canute-style with no compelling growth strategy, and Japan remains stagnant and content if it can grow at all.

The Bric countries, meanwhile, are each unhappy stories in their own way. On the one hand, they are constrained by deep problems of corruption and financial imbalances that are impeding growth, while at the same time demographic trends cast doubt on their long-term prospects.

In much of the industrial world, what started as a financial problem is becoming a structural one. If growth in the US and Europe had been maintained at its average rate from 1990 to 2007, gross domestic product would have been between 10 and 15 per cent higher today and more than 15 per cent higher by 2015 on credible projections. Of course, this calculation may be misleading because global GDP in 2007 was inflated by the same factors that created financial bubbles. However, even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1tn short of what could have been expected in the US and EU. This works out to more than $12,000 for the average family…

“If there is no consensus on the causes or solutions to serious problems, it is unreasonable to ask a political system to implement forceful actions in a sustained way. Unfortunately, this is to an important extent the case with respect to current economic difficulties, especially in the industrial world.”

via The world is stuck in a vicious cycle – FT.com.