Business | Investment
It's time for nations to sing in harmony
With two wars still continuing and Georgia dominating the foreign policy debate; and with the financial crisis and economic insecurity for families dominating the domestic debate, US international economic policy is receiving less attention in this presidential election year than usual.
- By Lawrence Summers, Financial Times
- Published: 23:12 September 5, 2008
With two wars still continuing and Georgia dominating the foreign policy debate; and with the financial crisis and economic insecurity for families dominating the domestic debate, US international economic policy is receiving less attention in this presidential election year than usual.
The limited attention it has received has focused on concerns about specific trade agreements, not broader questions of international strategy. That is unfortunate. The next administration faces the prospect of having to make the most consequential international economic policy choices in a generation at a time when the confidence of governments in free markets is being increasingly questioned.
The current distribution of regional economic power is unlike anything that was predicted even a decade ago. The rise of the developing world, its growing share in global output and far greater share of global growth, is perhaps a quantitative but not a qualitative surprise. The qualitative surprise is this: with almost all the industrial world in or near recession, much of the momentum in the global economy is coming from countries with authoritarian governments that are pursuing economic strategies directed towards wealth accumulation and building up geopolitical strength rather than improving living standards for their populations.
China, where household consumption has now fallen below 40 per cent of its gross domestic product - which must be some kind of peacetime record - is the most extreme example. Similar tendencies, however, can be seen in other parts of Asia, Russia and other oil exporting countries.
Flow of capital
Even before the slowdown in the industrial world, a striking feature of the global economy was the substantial net flow of capital from the emerging periphery to the industrial centre. Rising oil prices have geopolitical as well as economic consequences. The run-up in oil prices over the past year has generated more than $10 billion a week in extra revenues for Opec members. Asian export powers and oil exporters have enjoyed a vast accumulation of wealth, adding about $1,000 billion a year in assets.
These shifts have affected almost every global economic issue. The pressure created by the investment of these surpluses was one of the big factors driving the excesses that preceded our financial problems. Concern about the flow of imports from countries that have pursued a strategy of export-led growth is a big reason for the protectionist backlash now being seen in the industrialised world. It is now recognised that meaningful efforts to address climate change require a framework that induces China and other emerging markets to co-operate.
It has become a cliche to suggest that the world's institutional approaches to economic co-operation need overhauling to take into account the rising economic clout of emerging markets and the decline in dominance of the group of seven leading industrialised nations (G7). This is correct. The steps taken so far - the initiation of the G-20 during the 1990s and the adjustments of voting shares in international fin-ancial institutions - are valuable if insufficient.
But the problems are much deeper than the question of who sits around the negotiating tables. For all the disagreements over the past decades, there has been a shared premise behind international economic policy discussions - the goal of increased economic integration, the spread of market institutions and more rapid growth for all nations. While companies may compete, the premise has been that nations co-operate to build a stronger economy in the interests of all.
It is no longer clear that this premise remains valid. Nations are increasingly preoccupied with their relative economic standing, not the living standards of citizens. Issues of strategic leverage and vulnerability now play a bigger role in economic policy discussions.
At the same time, it is unclear which underlying driver of global growth will replace the one in place for the past decade - the US as importer of last resort. Global growth has depended on US growth, which has depended on the US consumer; and the US consumer has depended on rising asset values first of stocks and more recently of real estate. With falling house prices and a challenged financial system, US consumer spending is falling.
The US is no longer in a position to be a net source of demand for the rest of the world. Indeed, with the drop in the value of the dollar, US growth - which had been focused on imports and which had enabled the export-led growth of other countries - is a thing of the past. Already, Europe and Japan are in or are very close to being in recession.
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