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In a ‘Rebalanced’ World Economy, a Diminished US role?
http://www.csmonitor.com/
Excerpts from article by: By Mark Trumbull | Staff
writer |
October 13, 2009 edition
American consumers can no longer borrow madly to buy
so many goods from abroad. Shoppers in emerging
nations must be the next engine of growth, some argue.
Back in the golden days of 2004, American consumers
were the fuel for a historic expansion of the world
economy.
Ringing up sales of everything from GPS navigators to
gasoline, they drove US imports to a record level. The
United States devoured $500 billion more in imports
than it exported – single-handedly enabling booming
trade surpluses for countries from China to Japan to
Germany. For several years, the world economy clicked
along at 5 percent growth, as Americans paid for this
consumption binge partly by pulling unprecedented
amounts of equity out of their homes.
You know how the story ends. A financial crisis and a
deep recession curbed home-equity borrowing and erased
any notion that US consumers will provide the chief
path to global growth anytime soon.
That means the search is on for a new, more
sustainable model for world economic growth – one that
avoids the pitfalls of what policymakers now call
“global imbalances.”
Already, the imbalances have been partially corrected
by the harsh hand of recession. American consumers can
no longer soak up extra output from Asian factories
the way they did earlier this decade.
But this leaves two big questions related to
rebalancing the world economy:
Who or what will fill the hole left as US consumers
retrench? And how can nations – especially the US and
China – avoid a repeat of the kinds of imbalances that
set the stage for the great recession?
These urgent questions have an important subtext: a
longer-term shift in economic power from advanced
nations to the emerging countries.
For the US, this doesn’t necessarily portend a period
of decline, policy experts say. But challenges lie
ahead. Belt-tightening for government, restraint by
consumers, strategies that revive exports, the need
for artful financial diplomacy – these could become
themes in a new economic chapter for America.
The recession has become a catalyst for the world to
focus on imbalances and the ongoing shift in economic
power, but these aren’t the kinds of issues that can
be resolved at a single summit. Still, important signs
have emerged in recent weeks:
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US Treasury Secretary Timothy Geithner has been
working hard on the pivotal US-China relationship –
both to nudge changes by Beijing and to reassure
China, a major creditor, that the US will get its own
house in order. After a US-China economic dialogue two
months ago, Mr. Geithner summed up the outcome: “China
will rebalance toward domestic demand-led growth,” he
said. “President Obama has committed to lowering
federal deficits to sustainable levels once recovery
is firmly established.” For both nations, such
achievements will be a tall order.
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At a Pittsburgh summit of the Group of 20 nations
last month, a wider pool of leaders rallied around the
idea of working together on “global rebalancing.” The
process lacks an enforcement mechanism, but the group
asked the International Monetary Fund (IMF) to assess
how individual nations do.
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At the G-20 meeting, the world’s economic old guard
agreed that major emerging nations should get formal
seats at the table when big policy issues arise. In
effect they said goodbye to the old Group of Eight and
made the enlarged G-20 pool the primary forum for
big-country discussions in the future.
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In early October, IMF forecasters gave an upward
bump to their outlook. In part, this stems from
stabilization in advanced economies. But the recession
has amplified the importance of emerging economies.
China and Brazil, to name two, appear to be
recovering faster than expected. The IMF forecasts 5.1
percent growth in emerging nations next year, and just
1.3 in the advanced economies.
“The current numbers should not fool governments into
thinking that the crisis is over,” IMF chief economist
Olivier Blanchard has warned. Sustainable growth for
the world will depend, he said, on solving the problem
of big imbalances.
The biggest of these, perhaps, is the US trade
deficit. It reached $840 billion last year. That’s how
much America imported, over and above the value of its
exports.
Since 2002, as China’s exports ramped up, the US trade
gap has surged into what some economists see as a
danger zone – a size greater than 5 percent of
America’s gross domestic product. That’s way beyond
where it was in the 1980s and ’90s.
One cause for the trade gap is US financial habits.
High federal budget deficits and consumer debt mean
that America is forcing itself to borrow overseas –
and in effect that means imports must outrun exports.
The danger is that other nations will become wary of
lending so much, and a messy collapse of the dollar or
a spike in US interest rates could result. That would
be bad news for the US – and for the rest of the
world.
But another cause stems from policies outside the US.
Asian nations manage their currency values to promote
exports, economists say.
The trade deficit has eased this year, as recession
curtails Americans’ appetite for Chinese electronics
and other goods. But the trade gap could widen again –
or at least fail to keep shrinking – absent additional
actions by policymakers, economists say.
Beyond the gigantic trade deficit, some economists
worry most that the overseas migration of America’s
manufacturing base is reaching a crisis level.
The US is now running trade deficits in
advanced-technology products such as computers – a
trend that began in 2002. In a few years, Chinese
firms expect to export cars to the US. Even America’s
longstanding leadership in aerospace and
semiconductors is at risk, says economist Charles
McMillion of MBG Information Services, in a new report
for the US-China Economic and Security Review
Commission.
Beyond any single product category, the weakening of
America’s broad supply chain overall “is the most
urgent challenge to US economic and military
security,” he writes in the report. The need is not
just to reduce imbalances but to do it in a way that
allows both advanced and emerging nations to grow. US
consumer spending is expected to rise in 2010 at
barely half the pace typical in some recent expansion
years, many forecasters say.
Americans faced worries about economic decline before,
a quarter-century ago. One big difference today: US
government debt has ballooned, is on pace to keep
growing, and is held in large part by foreign
governments and investors.
“The US then was the world’s banker, and now we’re the
world’s debtor,” Mr. McMillion says.
A degree of debt is not a problem, but many economists
see current trends as unsustainable.
Still, with the right policies, America can prosper
and remain a world leader, they say.
So how does the US adjust the imbalances and retain
its vigor? Here’s a checklist of economists’ top
ideas:
Currency adjustments. If the value of Asian currencies
were to rise and the value of the dollar to fall, US
exports would be more competitive. Some researchers
warn that currency changes are at best only part of
the fix. But since 2002, a dollar decline has made US
factories more competitive. So far, the dollar has
adjusted mainly against European currencies, with the
euro now looking unrealistically strong to many
analysts.
Trade rules. The US-China Commission’s 2008 report
to Congress urged tougher efforts to prevent
violations of World Trade Organization treaties (along
with currency changes and other steps). The trick is
to balance enforcement with pursuit of trade openness,
which has buoyed global growth, economists say.
Industrial policy. A revival of US manufacturing might
be aided by federal policies to promote jobs in
leading-edge industries. One recent initiative will
make sure the US gives China a run for its money in
automotive batteries. Anything that reduces reliance
on fossil fuels could be a double win - helping the
environment and reducing dependence on oil imports.
Human capital. Strengthening education – and enticing
more high-skilled foreign students to stay after
studying in the US – can help America remain the
leader in innovation and entrepreneurship. Economists
also urge better support for displaced workers to
train for new careers.
Consumer behavior. Greater saving by US consumers
would reduce the need to borrow from abroad. Personal
savings rates have already jumped, a welcome move
although it was prompted by recession.
Federal deficits. It’s hard for the US to rebalance
while the government is borrowing huge sums from
abroad. This looks to be a long-term battle centered
on healthcare costs, although any dollar or
interest-rate crisis could force tough decisions on
Congress. When Wall Street went haywire last year, the
dollar actually rose, because it’s the world’s haven
currency. But “looking forward, there will
increasingly be other opt |
