Fighting Headwinds

July 7th, 2010

This week, as U.S. families gathered to celebrate their nation’s 234 years of Independence, headlines worldwide announced signs the global economic recovery is stalling or, perhaps, even reversing.  The U.S. Labor Department reported that the world’s largest economy added just 83,000 private sector jobs in June and overall the nation lost a total of 125,000 jobs, as the U.S. Census temporary workers exited their jobs.  Other economic indicators boded ill as well, with auto sales rising a ho-hum 14% in June, sales of existing homes dropping 30% over the month of May, and consumer confidence slipping almost 10 points.

President Obama, speaking to reporters after the release of the June unemployment figures, offered the explanation that the U.S. “continues to fight headwinds from volatile global markets.”

The President was obliquely referring to Europe and Japan, where rising deficits and stubborn unemployment figures have led to falling confidence in the private sector and stock market plunges.  As the Great Recession has made abundantly clear, pulling the global economy out of such a deep hole will require coordinated effort from every major economy.  The U.S. will not be able to regain robust growth again without at least healthy growth from its industrial counterparts across the Atlantic.  And the same goes in other direction, as well.

In fact, most nations seem to understand that the current economic situation is “all for one and one for all,” as even the failure of a smaller developed nation could threaten the entire world.  That’s why you see the IMF and Eurozone taking unprecedented action, and some nations risking even their own fiscal positions and political bases, to pull Greece from the edge of a fiscal crisis.  Ironically, as the U.S. celebrated its Day of Independence this year, it may have realized that it has perhaps never been more Integrated.

This is not an argument for isolationism.  It is an argument, however, for a less polarized global economic system, one in which all of the players drive economic demand, where wealth is diffuse and so one nation can compensate for others and prevent one nation from pulling us all down.  I see it as the same debate surrounding the banking industry: it is a system composed of a few, over-leveraged players that are “too big to fail,” any one of whose failure would signal systematic risk throughout the entire system.  Though I would certainly not argue that industrial nations should shrink their economies, I would argue that it may be elemental to global economic health if global demand was not driven by only a handful of nations.  And this is where developing countries come into the picture.

Developing nations, to the extent that they are able to develop fiscally and economically, can–and should–play a more central role in the global economic system.  Just like with the banking industry, we would reduce systematic risk by increasing the number of players involved.  A more even global market, one less prone to such erratic contractions and expansions, would be a healthier global market.  This could be achieved as contractions in some economies could be more effectively buffered by others.  To abuse a probably already bad pun, a mix of countries could provide tailwinds to the global economy, even as others are blowing at the head.

There is evidence that this picture is not a fairy tale.  In the past months we have seen Latin America buck its history of inflation, debt defaults, and tremendous illicit outflows, and post surprisingly strong growth.  Though the economic slowdown has certainly put a crimp in China’s tremendous-growth-style, the nation has showed some encouraging signs, as well.  If nothing else, the Great Recession has shown the Chinese government it cannot always depend on insatiable-Western consumption and so the government has turned an interested eye to domestic demand.  Two weeks ago, in a move that bucked its standard economic policy, Beijing promised to allow its currency to appreciate, which would cause the relative price of Chinese goods to rise on the global market, thereby increasing imports to China and decreasing the country’s exports.

And as both an Economist and an American, I have no problem with a nation of over one billion people spending more money in the international market.

In fact, the day before U.S. Independence Day, General Motors announced that in the first half of 2010 it sold more vehicles in China than it did in the United States.  And today the company predicted sales in Brazil will skyrocket 68% by 2014, as Brazilians get richer and the currency gets stronger.  I can only cheer this news along.  As GM loves to say, “What’s good for General Motors is Good for America.”  Indeed.

This all goes right back to those headwinds.  The GM case shows us that increased demand from developing nations could be a critical component of–not just the economic recovery–but also of a healthier, more wealth-diffuse global economy.  And that, from a purely selfish standpoint, rising wealth in developing countries will be nothing but good for the developed world as well.

But to achieve robust growth, for GM to keep selling cars and trucks in China, Brazil and beyond, developing nations must pursue even-handed and prudent fiscal and economic policies, healthy doses of domestic capital, balanced government deficits, stable exchange rates, and maintain relatively high levels of security.  In this vision there is little room for reductions in domestic capital and government revenue through illicit financial flows.

Written by Ann Hollingshead

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