The U.S. boom of the 1990s not only enriched many Americans but tugged the rest of the world behind it. From Europe to Asia, that world stumbled and staggered through the decade but, thanks to the American locomotive, never quite derailed.
Now that the American economy is stuck on a siding, it might be time for the rest of the world to pull the global train for a while.
Don’t bet on it.
The world economy has gone global. In a global economy, all players share the benefits, at least in theory, but also the contagions. If the leading economic power (that’s us) gets sick, the rest of the world suffers the aches and pains too.
Official forecasters are more optimistic than this. The International Monetary Fund predicts that the U.S. will avoid a double-dip recession and grow by no less than 4 percent next year. Europe’s economy will go up by nearly 3 percent, the IMF says, and Japan will end its decade of virtually no growth with a 2 percent recovery. (So far this year, the U.S. has grown by 1 percent and Europe by 1.5 percent, and Japan’s economy has actually shrunk.)
Meanwhile, the IMF says, China, India and Russia will boom by up to 8 percent. Even Latin America, a continent of constant crisis, will join the party with 4 percent growth.
The upshot, according to the IMF, will be a world economy growing by 4.5 percent, which is double the current rate.
This outlook is breathtaking only if you smoke a lot. A more sober analysis says that both the U.S. and the world will be lucky to avoid a relapse into recession.
The Economist magazine of Britain, in a 28-page study of the world economy last month, concluded that predictions of a coming American boom “are likely to be wrong. America’s economic downturn is not over.” Worse, it said, globalization means that economies move up and down together, “so that downturns in different countries are more likely to reinforce one another.”
Until recently, the world didn’t work this way.
`Locomotive effect’
For most of the postwar years, the major economies were nicely out of sync. If America was down, Europe was up. If both were tanking, Japan was booming. This meant that, if American consumers weren’t buying or if American businesses weren’t investing at home, there were vibrant markets elsewhere that took in imports or foreign capital and kept the economic wheels turning.
This “locomotive effect”–this ability of countries to take turns pulling the international train–persisted even after the international economy began to go truly global. But this happened mostly for non-economic reasons.
The United States had its last recession during the first Bush administration, when the gulf war sent oil prices climbing and helped push an already weak economy over the brink. But Europe and Japan kept booming–Europe because of the excitement surrounding its growing unity and the economic jolt provided by German reunification, Japan because of its artificially inflated bubble in land and stock prices, which led later to its decade-long stagnation.
By the time Europe and Japan slowed down, the American economy was speeding into the 1990s boom. When the 1997 financial crisis struck Southeast Asia and South Korea, then moved on to Russia and Latin America, the U.S. kept the situation from becoming even worse by opening its markets to all the goods that these countries could export. At the same time, Asian and European investors, frightened by the crisis, pumped their money into the the United States, providing much of the financial kick to the closing years of the American stock market boom.
No more separation
It could happen again, but it probably won’t. The world is becoming too global to be kept so separate.
World trade amounts to at least 25 percent of world economic activity. With the spread of manufacturing into China and much of the rest of the Third World, this trade flow affects economies everywhere. With this trade growth shrunk from nearly 13 percent two years ago to only 2 percent now, the pain is global.
The global fabric is woven even more tightly than this. About 40 percent of this trade is not between countries but between branches of global corporations, like Boeing and Motorola and Caterpillar, operating in dozens of countries. In an era when many of these corporations are richer and more powerful than the countries where they do business, it’s not surprising that the countries can’t shelter themselves from a global chill.
Much of the boom of the 1990s was driven by heavy U.S. investment in computers and other information technology. The bulk of this IT investment was made abroad, largely in Asia. Now, American IT investment is slumping along with the rest of the economy, and the Asian technology companies are feeling the bite.
Investment trumps trade
The spread of global corporations is the main reason foreign investment is now more important than trade. In other words, the money these corporations make from selling abroad the goods they make abroad is even greater than their trade flows. After Sept. 11, many corporations cut back foreign investment, especially in Third World countries. So long as economies stay weak and terrorism stays undefeated, this investment is unlikely to recover.
Everything is more connected these days. As The Economist has pointed out, American automakers are manufacturing in Japan, German automakers are manufacturing in Alabama, and they’re all manufacturing in Mexico and Thailand. Global capital markets mean that a weak dollar or a strong euro costs the same everywhere. Global stock markets mean that Australian investors can buy German stocks on Wall Street and suffer along with Germans and Americans when those stocks tank. Thousands of companies merge or buy pieces of each other across borders: If the European widget market goes bad, an American firm making widgets in Belgium may recoup by cutting jobs in Chicago.
Finally, if an American attack on Iraq sends oil prices soaring, as seems likely, that oil will be more expensive for everyone, not just Americans. When $30 barrels of oil go to $40 or $50, that will amount to a tax on business everywhere. The more an attack disrupts the Middle East and the longer it lasts, the higher that tax will be.
At some point, the U.S. stock market will recover, European unemployment will fall, Argentina’s economy will recoup, Japan’s cycle of recessions will end, and the world will boom. These goods things will happen because, in economics, nothing lasts forever. But in the meantime, many analysts still think stocks are overvalued, Europe will remain anemic, Brazil will join Argentina in chaos and Japan has no idea how to restore growth.
American-run world
The Bush administration thinks it has the key.
Its new National Security Strategy paper, laying out its plan for an American-run world, says all nations must adopt low taxes, free trade, investor-friendly openness and fewer regulations, to encourage “entrepreneurial activity.”
This is no more than a restatement of the ill-famed “Washington consensus” that was blamed for the Southeast Asian crisis. Most nations, even the Europeans and Japanese, reject this one-size-fits-all strategy on grounds that it can do a lot of good or a lot of harm, depending on local circumstances. Indeed, about the only economies still booming are in countries, like China and India, that explicitly reject this “consensus.”
The Clinton administration made a halfhearted attempt to begin writing guidelines for a global economy that would take every country’s interest into account.
The Bush administration has rejected even these feeble plans, shunning any global governance in favor of American-imposed tactics aimed at the well-being of American investors.
In the long run, this strategy is bound to fail. In a globalizing world, no economy is an island, as we are discovering. Economic pain in one major country is felt across the globe. Until economists and governments figure out how to ease as well as share this global pain, there will be no safety net when economies, unhappily synchronized, begin to fall together.
