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Monday, July 6, 2015
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- After a deep and widespread contraction in economic activity and a significant drop in output and employment, policy makers, financial analysts, and media pundits all appear to be heartened by the news from different parts of the world that the worst is over. The main concern now is about the strength and the shape of the recovery.
Over the medium term, the hope is that the global economy will resume the rapid and broad-based expansion enjoyed from the early years of the decade until 2008 -without, however, the accompanying financial fragility and the trade imbalances.
This optimistic scenario depends to a large extent on a measured rebalancing of the economies of the US, with the world largest deficit, and China, with the world’s largest surplus. In view of the central place occupied by the dollar in the international reserve system, it is recognised that international monetary and financial stability depends fundamentally on spending discipline by the US -in line with its income- which would allow for a fundamental and sustained balance-of-payments adjustment.
However, in order to maintain growth, the US should not simply cut domestic absorption but also shift to export-led growth. An orderly US adjustment would also require, inter alia, a shift by China from export-led to consumption-led growth and the realignment of the exchange rate of the renminbi against the dollar. In this way, prospects for global stability could be expected to improve without sacrificing growth.
Even if such a rebalancing proceeds smoothly, most developing and emerging economies (DEEs) are caught in a dilemma: they are damned if the US adjusts and damned if it does not. On the one hand, ‘business as usual’ would expose them to recurrent currency and financial instability. On the other hand, retrenchment and adjustment in the US could cause problems on several fronts. It is likely to lead to tightened global financial conditions with negative effects on several DEEs that have structural external deficits and are hence dependent on capital inflows to sustain acceptable growth.
More important, there is no other country that could act as a global locomotive. China could not replace the US even if it maintained Gross Domestic Product growth of 10 percent based on domestic consumption rather than exports. Its GDP is about one-third that of the US; the share of household consumption in GDP is much smaller; households save a much higher proportion of disposable income; and the import content of household consumption is much lower than in the US. We thus need more than US-China rebalancing to sustain global stability and growth.
While there has been an almost exclusive focus on US-China relations, a global restructuring of the pace and pattern of demand cannot exclude the two other major surplus countries, Japan and Germany, which have been siphoning off global demand without adding much to global growth and relying on exports to a much greater extent than China.
There is more, however, to global imbalances than macroeconomic geography. Income distribution has played an important role and should also be part of the solution. Market-driven globalisation has systematically tilted the balance of economic power against labour and in favour of capital, as indicated by the falling share of wage income almost everywhere. The outcome has been under-consumption in all major surplus countries, notably China, Germany, and Japan. However, the threat of global deflation has been avoided thanks to consumption and property surges financed by growing debt and capital gains brought about by rapid credit expansion and asset inflation, notably in the US but also a number of other advanced economies and DEEs, particularly in Europe.
This process has, in its turn, produced growing trade imbalances, large shifts in net asset positions of countries, and increased financial fragility, culminating in the most serious post-war economic crisis.
The world economy now faces a serious dilemma: financial consolidation and retrenchment in deficit countries would raise the spectre of economic stagnation, while a return to financial bubbles and debt-driven expansion could mean that the next crisis might be even worse and the state could be in a much weaker financial position to respond effectively. But in either case, the adjustments exist only in appearance since, without restoring the balance between labour and capital, neither stability nor growth may be sustained for long.
There is thus a need for adjustment in the four major economies -the US, China, Japan and Germany- with the aim of removing imbalances while ensuring adequate global demand without a return to financial bubbles and debt-driven spending.
The US needs to live within its means. China, Germany, and Japan all need to boost domestic consumption by reversing the downward trend in the share of wages in GDP. In the latter two countries, this is needed to accelerate growth, while in China it is needed to avoid a growth slowdown that may result from a deceleration of exports. Furthermore, China should not only accelerate domestic consumption but also increase its import content.
All these changes need to be complemented with a reform of the global financial architecture so as to ease the payments constraints of deficit and indebted developing countries.
However, there are no signs that the reorientation of policies needed for such a rebalancing is on the agenda of the major countries or the international community at large. Consequently, the world economy generally and DEEs particularly may face more serious challenges in coming years than they have seen during the recent global downturn. The outcome could be sluggish, with uneven and erratic growth, continued and even deepened instability in currency and asset markets, the rise of protectionism and economic nationalism, an escalation of conflicts in the international trading system, and a backlash against globalisation. (END/COPYRIGHT IPS)
(*) Yilmaz AkyÃ¼z is Special Economic Advisor of the South Centre (Geneva) and former director of the Division on Globalisation and Development Strategies, UNCTAD. This column is based on Research Paper No. 26 for the South Centre ( www.southcentre.org).