Ready for a Return to Global Growth?
"Letter from Washington" for The International Economy
© The International Economy
For nearly the past decade, the hanging international economic policy question has been what will happen when the United States stops growing faster than the rest of the developed world. Through the Asian and then the Russian financial crises, the creation and depreciation of the euro, and the seemingly unending decline of the Japanese economy, the US economy has been the best performing major economy. And on current forecasts, it seems the US economy is prepared to take the lead on growth and imports again in 2004. As a result, in now tired phrases, the US economy has served as the global economy's "importer of last resort," its "one engine to fly on," and its "magnet for investment."
Thus, it is understandable that policymakers should be worried that when the US economy slows down-and needs to export more on net to stabilize its mounting foreign indebtedness and eventually its currency-so could growth in the rest of the world. The resulting process of adjustment, if prompting contraction of world trade, could put at risk both the welfare of the developing world and the viability of the global trading system. The breakdown of the Doha WTO Round in Cancun appears to bear this danger out.
Resistance in the rich countries alone to exchange rate movements and competitive pressures between themselves could heighten trade conflicts and economic disputes. It is this fear of an unbalanced shortfall of global demand feeding protectionism, and some backlash against globalization more broadly, which motivates the debate over the utility of G-7 coordination on growth. Certainly, it was concern about this scenario that led me in 1997 to begin my own research on restoring Japanese economic growth.
What happens, however, if we are stuck in too dour economic expectations? What happens if the rest of the major economies begin to catch up with the US growth rates instead? Rather than being a far-fetched hope, this may become a reality in 2004. Remember, if our concern is the degree and pain of adjustment (that is, the size of the needed dollar decline and drop in US import demand), not some sort of league-table rankings, it is not necessary that Japan or Germany grow as fast as the US does-all that is required to reduce the scale of adjustment is that the gaps between German or Japanese and American growth rates shrink.
And shrink they will. Japan has begun growing again at a relatively rapid clip, fuelled by some progress on resolving its bad loan problems, by the global recovery of manufacturing demand, and by (perhaps, finally?) enough monetary expansion by the Bank of Japan to begin countering deflation. The core eurozone economies-France, Germany, and even Italy-are beginning to reap the benefits of serious structural reform programs akin to those that their peripheral neighbors had already undertaken. Their rising growth potential is underappreciated.
The good news does not stop there. The UK and the small Anglo-economies are in position to come back after a slight slowdown this year. China is a bit worried about overheating, but will not put on the credit brakes or raise its currency sufficiently to throw itself off of its 7-8% a year growth trend. Add in the better prospects in East Asia post-SARS and Latin America ex-Venezuela, and we have ourselves a robust expansion if not a boom. Global growth in 2004 will likely be up more than a full percentage point over 2003.
Moreover, the sources of this increase in growth in the eurozone and Japan are not limited solely to the cyclical upswing or net exports: continental Europe is making lasting changes in its labor markets and tax policies, which will kick-in with a lag; Japan may be en route to removing the bad debt and mistaken policy regimes that have aborted that economy's two previous recoveries. If so, it has a lot of potential for ongoing catch-up growth. The narrowing of the growth gaps with the US may be sustained beyond 2004.
Are economic policymakers ready to handle the good news? More balanced global growth would seem to ameliorate if not solve our adjustment problem. In turn, this should reduce the political risk to globalization from demands for protectionism or competitive devaluations, independent of anything policymakers do. But it would be dangerous to take too much comfort from more balanced-or simply more-global growth alone.
A number of fundamental institutional issues arose in the international economy between the early 1970s and the early 1990s, when the share of the US in the global economy was markedly shrinking, but they never got dealt with. These include: the relative voice of Asia, particularly that of China and Japan, in the IFIs; the resolution of the tension between the EU's, or now sometimes the eurozone's, unity in economic spheres and the member states' (over-) representation in international institutions; the question of who will provide or at least assess payments for the provision of global public goods, like development aid or an open-trading system, while the shrinking US hegemon loses interest; and the successful integration of the major emerging markets into the trade negotiation process, something begun but far from completed (as Brazil and India's assertion of emerging markets leadership at the expense of the Cancun meeting just illustrated).
These issues were dropped in the last decade when the US surged ahead (and Japan and continental Europe fell behind) because the US government was more happy to have a free hand being the leading economy as it was to build-in mutual restraints. The fact that attempts to use these weakened institutions to resolve crises or change other countries' policies often failed, or were often misperceived by the Congress to have on balance hurt the US, did not help. Nor did the repeated unwillingness of Japanese or continental European policymakers to improve their macroeconomic and structural policies when it was their turn to act in response to calls by the IMF, the OECD and other fora.
Yet, the distance between our international economic institutions and the underlying economic and political realities has widened in the last decade, hidden by the US's temporary growth lead. A return to potential by Japan and the eurozone, and perhaps even a increase in their potential growth rates, combined with the ongoing economic rise of China and Korea will reduce the economic weight of the US. If the Bush administration continues to squander the US' wealth through excessive tax cuts and unpaid-for imperial adventures, the ability of the US to act as a hegemon and provide stability a la Kindleberger will diminish further. A not unlikely rapid decline in the dollar would have a similar effect.
We can expect, however, that perceptions of US economic dominance will persist on all sides of the G-7 and IFI tables for some time after the relative performance shifts. Remember, it was only the most farsighted of US Treasury officials who around 1996 caught on to the fact that the world economy had more to fear from Japanese economic decline than from a resurgence of Japanese growth. And we can expect US policymakers, particularly the current administration's security-driven rollers of coalitions-of-the-willing, to resist any recognition of the declining US ability to say in economic matters "lead, follow, or get out of the way."
So the good news of the long-awaited return to growth in Europe and Japan may be a mixed blessing for maintaining an open world economy. For all that it should ease the economic aspects of inevitable global adjustment to years of unbalanced growth and US trade deficits, delayed recognition or even denial of its implications by international policymakers could offset those gains politically. Globalization will remain in danger. And it will increasingly be up to leading policymakers outside of the US (calling Mervyn King?) to step-up to roles matching their economies' relative gains, while somehow coaxing along an increasingly recalcitrant US government. Washington is as unready for the coming international political shifts as it is for global economic adjustment-and it is going to get more than a little of each.