Andrew G Haldane: The big fish small pond problem Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, of the Bank of England, at the Institute for New Economic Thinking Annual Conference, Bretton Woods, New Hampshire, 9 April 2011. *  *  *  The views are not necessarily those of the Bank of England or the interim Financial Policy Committee. I am grateful to Shekhar Aiyar, Shaheen Bhikhu, Martin Brooke, Damien Charles, Spencer Dale, Andrew Hauser, Robert Hills, Glenn Hoggarth, John Hooley, Marius Jurgilas, Priya Kothari, Salina Ladha, Lara Lambert, Chris Peacock, Jonathan Rand, Maureen Snow, William Speller, Jo Spencer, Iain de Weymarn and Peter Zimmerman for comments and contributions. 1. Introduction  Global capital markets are engaged in a footrace. On the one foot, capital markets in emerging market countries are widening and deepening in order to improve domestic capital intermediation. On the other, international investors in developed countries are diversifying their portfolios in order to boost returns and spread risk. Both are typically seen as essential ingredients of global financial liberalisation and integration. Yet their implications for global financial stability are potentially quite different. The first determines the absorptive capacity of high-return, capital-recipient countries. The second defines the distributive capacity of lowreturn, capital-providing countries. Any imbalance between the rate at which international capital is distributed and absorbed may spillover to global capital markets. Reducing these spillovers may require a rethink of the rules of the international financial system. Experience during 2010 provides a good illustration.

To keep these experiments as transparent as possible, consider the simplest possible one-factor model of financial liberalisation. The one factor is the level of economic development of the G20 economies, as proxied by GDP per capita. Theoretically, we would expect financial liberalisation to be shaped by economic development. This is consistent with the economic growth literature emphasising the positive, two-way relationship between financial deepening and economic growth (Levine (2005)). The cross-section and time-series evidence presented here supports that hypothesis. To generate projections for the single factor – GDP per capita – we use a calibrated crosscountry convergence model, in the spirit of Barro and Sala-i-Martin (1992) and Mankiw, Romer and Weil (1992). These GDP per capita projections are then adjusted for expected future changes in population growth to give a set of cross-country projections for GDP from 2010 to 2050. Chart 7 shows the global distribution of G20 GDP at decadal intervals over this period. These projections are necessarily tentative, but are broadly in line with external estimates.3 Nominal GDP in the emerging G20 exceeds that in the advanced G20 by 2030. The advanced economies’ share of G20 GDP halves between 2010 and 2050, from 70% to 36%, while the emerging G20 economies’ share rises from 30% to 64%. Over the next 40 years, advanced and emerging countries will most likely swap GDP shares. By 2050, China’s share of G20 GDP is 22% and India’s 18%, with the US falling to 20%.