Small countries with idiosyncratic economic advantages
— such as Mongolia and Macau — have powered their way to the top of
world growth charts these days as traditional leaders, such as the
United States and China, are bouncing well below normal levels. Sure,
Mongolia and Macau (formally an administrative region of China) are
tiny, and their outsized increases in gross domestic product (GDP)
benefit from computations based on Lilliputian bases. Mongolia is
building its economy atop vast mineral wealth and Macau is gambling —
and winning big — that its proliferating gaming tables are a good bet to
carry its economy.
Still, their contrast with wheezing neighbor China highlights worldwide
trends. The powers that be have, at least for the moment, and maybe in
some cases for the future, been. Many developing world economies are
ascendant.
The Chinese economic engine that could suddenly can’t. Though it may hit
7 percent growth in 2013, economists such as Colin Moore, chief
investment officer at Columbia Management, believe the rate will be
closer to 5 percent, meaning China is in the throes of a relative
recession.
The United States is hiccupping along, slowly clearing away bad
mortgages and even more slowly dealing with serious fiscal problems,
which threaten to restrict GDP growth to 1 percent in 2013, and maybe
beyond. Germany is spinning its wheels in the eurozone muck. The rest of
the BRICs — Brazil, Russia and India — have become bric-a-brac, at
least at the moment.
Meanwhile, the prospects for healthy, long-term growth seem brightest
for developing countries with burgeoning, young working age populations
and plenty of room for productivity growth. Going forward, forget about
the BRICs; here come the MITS (Malaysia, Indonesia, Thailand and
Singapore). Global Trends 2030: Alternative Worlds, a study released in
December by the U.S. National Intelligence Council, reported: “The
health of the global economy increasingly will be linked to how well the
developing world does — more so than the traditional West.”
Though it didn’t exactly write an epitaph for China, India and Brazil,
it did predict the ascendancy of countries such as Colombia, Indonesia,
Nigeria, South Africa and Turkey.
Global Economy for a Global Generation
So is there a changing of the economic guard? The International Monetary
Fund’s (IMF) Managing Director Christine Lagarde’s address to the
annual Davos conference in Switzerland on Jan. 23, 2013 was titled A New
Global Economy for a New Generation. In her statement, Legarde said: “I
believe we are standing in the antechamber of a new global economy,
marked by rapidly shifting circumstances and new modes of thinking. This
new economy will be geographically different, driven more by the
dynamic emerging markets and developing countries. But it will also be
generationally different, shaped by different values and principles.”
Keith Hembre, chief economist for Nuveen Asset Management, agrees that
emerging market economies will grow fastest going forward, in part
because they are starting from a low level. But he is not ready to
relegate the U.S. and other developed economies to the status of
also-rans. “It is not historically the role of emerging market economies
to replicate productivity gains,” he adds. “The U.S., China and Europe
will shrink in relative size but their economies will not be eclipsed by
those in the developing world.”
Certainly, near-term prospects are not good for traditional economic
locomotives. The World Bank’s Global Economic Prospects (GEP) report,
issued in January 2013, contained reductions in forecasts for
international economic growth in 2013 compared to the estimates the bank
published in June 2012. The bank said it expects the world economy to
expand 2.4 percent this year, compared with 3 percent growth it had
forecast as of June.
“The economic recovery remains fragile and uncertain, clouding the
prospect for rapid improvement and a return to more robust economic
growth,” said World Bank Group President Jim Yong Kim.
All countries face the same challenge: how to grow their economies on
the backs of younger, more productive work forces. Some countries with
more potential than Mongolia and Macau to carry economies outside their
borders are having some success. Mauro F. Guillen, director, Lauder
Institute, and Felix Zandman, professor of International Management,
both at The Wharton School of the University of Pennsylvania, say
Indonesia and Malaysia are good prospects. They are considerably larger
than Mongolia and Macau, and if they continue to grow at six or so
percent a year, they may be able to do some of the heavy lifting —
especially in Asia — that China has been doing, but won’t be able to do
at a growth rate of 7 percent instead of 10-12 percent.
Joseph Davis, chief economist, The Vanguard Group, points to Australia
and Canada, whose banking systems never faltered. “They continue to turn
in impressive performances,” he says.
If the world economy is to be pulled out of the ditch, the U.S., China
and Europe will have to gain some traction. But at the moment, the first
two are spinning their wheels and the third is moving in reverse.
European Union growth in 2013 may be negative, even though banks in
Italy, Spain, Portugal and Ireland have healed considerably.
U.S. growth, forecast at around 1 percent for 2013, is not very dynamic.
And in what must be a maddening reversal of fortune, Chinese
manufacturers are moving to lower-cost labor countries such as Thailand
and Vietnam.
Here is part of the problem, according to Wharton’s Guillen: “The big
three haven’t found common ground,” he says, referring to the U.S.,
Germany and China. He argues that those three, maybe plus Japan and
Great Britain, should be meeting as a G-5 instead of the G-20 group,
which includes nations that have no hope of contributing to the healthy
growth of the world economy.
Even within the big three, there are anti-growth policies being pursued,
for example, the widespread changes of manipulation of currency, and
not only by the Chinese.
The U.S. is printing dollars at a drunken rate. China is awash in cash,
since the government has expanded the broadly measured money supply over
the past five years much more rapidly than the U.S., even though the
Federal Reserve’s moves have attracted considerably more international
attention. China’s money supply is now larger than that of the United
States, even though China’s economy is half as large. There is no safe
haven, given doubts about the dollar, yen and euro.
The sad thing, according to Moore, is that the currency wars are a zero
sum game, or, as he calls them, a race to the bottom, and says, “I have
never seen a race to the bottom work.”
Fiscal Trends Not Encouraging
Nor are fiscal trends any more encouraging, at least short term. The
U.S. is a good example. Democrats and Republicans can’t seem to agree on
a long-term fix for the looming federal deficit.
“The policy uncertainty remains extremely pointed, hence the recovery
here is not as strong as it could be,” says Davis. “The precondition for
a strong U.S. recovery going forward is that fiscal policymakers convey
to the markets that they have adopted comprehensive deficit reform.
That doesn’t have to mean a balanced budget, nor austerity starting
right away. Needed are meaningful steps, which assure we don’t have a
structural deficit even when we get to full employment.”
Asked what factors are important if a nation wants to assure strong
growth, Davis ticks off things such as access to capital, prudent
government regulation, protection of property rights, ease of doing
business and openness to skilled labor and immigration. “The U.S.
measures highly on many of these, but we have slipped a little,” he
adds.
Moore agrees that we need more immigration given the aging of the U.S.
population. Increasing the productivity of the current workforce may be
possible, but given the current high level of productivity, that is not
likely. Nor is adding “leverage,” another important component to growth,
most characterized by consumer spending. In fact, U.S. consumers are
deleveraging after the recession, cutting back on credit card spending
and increasing saving.
So from where can growth come? Moore says one way is to alleviate income
inequality by adjusting the tax code. He had no problem with Obama’s
push to raise taxes on earners over $400,000.
But the U.S. retains some advantages, technological innovation among
them. Hembre points to the explosion of the U.S. energy natural gas and
oil sectors because of fracking, an extraction technology developed by a
small Texas company. Domestic companies are pioneering advancements in
mobile communications, too.
China also retains some structural advantages. But though it is not
deleveraging like the U.S., Chinese consumers are not spending either.
Part of the reason is that the country has almost no safety net, meaning
a social security-like system, and people are saving 30 percent of what
they earn for a rainy day.
Moreover, three developments in particular are now undercutting demand
for Chinese exports and its domestic growth: higher labor costs, lower
worldwide demand and sometimes careless capital spending. Boston
Consulting Group (BCG) says that in 2000, Chinese factory wages averaged
52 cents an hour. But annual double-digit percentage increases will
bring that to $6 an hour in high-skilled industries by 2015.
Moore says, “There are a lot of poor people trying to make it up that
ladder, and that is not going to happen if the country keeps building
bridges to nowhere.”
Mark Williams, chief Asia economist at Capital Economics, agrees. Quoted in
the Economist
magazine, he says, market optimism over China’s prospects risks being
disappointed if in 2013 “the recovery remains centered on infrastructure
and real-estate investment rather than consumption.”
The 27-country European Union (and the smaller 17-country eurozone)
appears to face even deeper challenges than either the U.S. or China.
Lingering banking problems, pretty much eliminated in the U.S., continue
to cripple major economies in Europe, with the European Central Bank
(ECB) continuing bailouts in Portugal, Spain and Italy.
In Europe, Issues Abound
Germany, Europe’s biggest economy, is doing “okay,” nothing more. The
German government itself has cut its growth forecast from 1 percent to
0.4 percent in 2013 after a shaky 2012 where the rate was 0.7 percent,
well off the 2 percent of the previous two years.
But France, Europe’s second largest economy, faces a flagging economy.
The socialist government of Francois Hollande has in some ways
discouraged foreign investment and failed to temper the power of labor
unions and the rich packages they obtain for French workers. So unit
labor costs are not decreasing there, as they are in Ireland, for
example, which is in the midst of a turnaround.
Moreover, Hollande has raised taxes, whereas Irish Prime Minister Enda Kenny has cut them.
Then there is Great Britain. U.K. Prime Minister David Cameron sent
tremors through the EU when he announced in late January that he would
allow Great Britain to vote in 2015 on continued participation in the
EU, should his Conservative Party win the election. Cameron is a bit
schizophrenic. He doesn’t like the EU rules in the area of business and
government regulation, but he likes the privileged access to European
markets that comes from the integration begun in early 1993 when the EU
was formed.
Robin Bew, editorial director and chief economist, Economist
Intelligence Unit, wrote last year: “The truth is there are no good
options left for Europe. Opportunities to get ahead of the problem have
been squandered. Leaders face an unpalatable choice between a eurozone
break-up — which risks plunging the region into depression — and a
deeper union, which would make core countries such as Germany liable for
the periphery’s problems.”
Which brings us to the third largest economy in the world: Japan —
number three after the U.S. and China. Japan has been climbing out of an
economic abyss for what seems like 30 years. Shinzo Abe, its new prime
minister, has undertaken a somewhat radical approach to powering up the
economy by initiating a major infrastructure spending program despite
the fact Japan has the highest debt burden in the developed world, at
220 percent of gross domestic product.
That is being paired with a devaluation of the yen — there is that race to the bottom again — meant to help Japanese exporters.
At a press conference in Washington in January, the IMF’s Lagarde said
the Japanese measures may not be the right way to go unless Japan also
shows a “determination to change the debt trajectory and reduce the
deficit.”
Though Asia does have pockets of potential economic promise, large and
small, from Mongolia to Indonesia, India does not appear to be one of
them. Moore says that while the country has a well-educated workforce,
it is the “most bureaucratic country” he has ever experienced. “If a
project can be delayed, it will be delayed,” he says.
Moore is more excited about another BRIC, Brazil, as well as South
America generally. He is not alone. Michael Reid, the Americas editor
for the Economist, writing at the end of last year, noted that economic
growth in Latin America will be solid rather than spectacular, at
between 3.5 percent and 4 percent, barely up on the 3.1 percent of 2012.
The uptick will come mainly from recovery in Brazil, where growth should
return to around 4 percent, thanks to a combination of lower interest
rates and cuts in business and consumer taxes. Peru, Chile and Colombia
will once again grow above the regional average.
Brazil, the world’s sixth largest economy, has been the big dog in
South America. But it has had its tail between its legs of late. The
problem has been somewhat declining prices for commodities and a
consumer base, which after running up purchases of most everything, has
started to pay off its television and auto loans, and subsequently
slowing spending. Some stimulus is needed there, and it needs to come
from productivity growth, since it cannot rely on consumption.
Trade Agreements to the Rescue?
Brazil can’t do it alone, given the need to sell its commodities to some
buyers. Which brings up the question of international trade agreements,
which can spur economic growth in a nation by allowing for increased
exports and imports. The latter, however, is a double-edged sword since
consumers buy cheaper foreign products and disadvantage domestic
manufacturers, although some domestic manufacturers benefit from
lower-priced industrial inputs.
The U.S. is already negotiating one such broad agreement, the
Trans-Pacific Partnership (TPP), and getting serious about another one, a
trade pact with the EU (as announced in President Barack Obama’s State
of the Union address on Feb. 12). In fact, the U.S. and EU have launched
negotiations, as reported in The Wall Street Journal two days following
the president’s address, “to pursue one of the most complex trade packs
ever, aiming to reshape global standards by uniting two international
economic powers.”
The Journal article further noted that “officials from both sides of the
Atlantic said it could take two years to work through thorny regulatory
divisions, but that ultimately the talks could lead to a far-reaching
agreement that serves as a model for international trade deals.”
Finishing such agreements isn’t easy. Canada’s efforts to conclude a
free trade agreement (FTA) with the EU is a case in point. Those
negotiations have been ongoing for years, and lately the Conservative
government of Prime Minister Stephen Harper has been “spooked” by the
specter of the U.S. signing its own FTA with Europe, which could leave
Canada on the outside looking in.
Canada and the U.S. are both involved in the TPP negotiations, along
with Malaysia, Australia, Vietnam and Chile, among others. The current
thinking is to conclude an agreement in time for the APEC [Asia-Pacific
Economic Cooperation] summit in Bali, which begins Oct. 5. The
Philippines, South Korea and Japan are thinking about joining, and
there’s even talk of asking China to sign on.
In the end, though, a resurgence of the international economy depends on
individual governments adopting three basic economic policies:
non-manipulation of currency, reduction of wasteful government spending
and stimulation of consumer spending.
Supportive political initiatives — such as refreshing older workforces
through immigration, reducing regulatory burdens and supporting
technological innovation — would supercharge growth. But doing all those
things in concert requires dexterity, which seems to be in short supply
at this point in time, in country after country.
Stephen Barlas (sbarlas@verizon.net) is a freelance writer in
Arlington, Va., who has been covering Washington, D.C., and government
since 1981.