It would be an understatement to say that recent economic news across the globe has been... unsettling. With that in mind, Floyd Norris had a front-page essay in yesterday's New York Times on the failure of global policy coordination:
[T]here seems to be little willingness — or perhaps lit-tle ability — for the major countries to act together again. Squabbles have grown, some countries are in fiscal distress, and others face daunting domestic problems. The European situation is the most pressing. Banks are under pressure in many countries, for a combination of reasons. They did not raise as much capital as they might have when markets were more buoyant last year. In some cases, they appear to have been slow to recognize their real estate loan losses.
But the most important factor may be that national governments are weak — in every way possible.
This prompted FP head honcho David Rothkopf to tweet, "Current global economic leadership void likely to be seen by history as worst since that preceding Great Depression."
To which I have to say... bulls**t.
Bemoaning the lack of "global leadership" is the international relations equivalent of bemoaning the failure of a national leaders to possess the political will to Do The Right Thing or make the Really Big Speech that will change everything. Most of the time, "global leadership" doesn't change a thing.
For an example, in a follow-up tweet, Rothkopf provides a useful list of what ails the current global economy:
Euromess, rest of developed world spluttering, faltering EMs, bldg risk in global financial system, currency, trade issues
An excellent list -- and yet it's not at all clear whether global leadership would solve any of these problems. The Euromess a Europroblem. Weakening growth in the developed and developing world is a problem, but largely a function of domestic policies rather than global ones. The "currency war" meme has largely played out -- don't tell anyone, but the RMB is appreciating quite nicely right now. As for trade, Doha might be dead, but trade growth is still outstripping output growth. Protectionist actions have not matched protectionist sentiment -- indeed, the past few years might be definitive falsification of the "bicycle theory" of trade.
In fact, in some instances, global leadership might have exacerbated these problems. For example, one of the areas where there has been leadership is in the creation of the new Basel III core banking standards. And, hey, guess what's contributing to a drying up of cross-border credit?
Lending to banks in the eurozone fell $364bn or 5.9pc, with drastic reductions of 9.8pc in Italy and 8.7pc in Spain.
The BIS's quarterly report said the decline in lending was "largely driven by banks headquatered in the euro area facing pressures to reduce their leverage".
Banks must raise their core tier one capital ratios to 9pc by the end of this month or face the risk of partial nationalisation. The global Basel III rules are also pressuring banks to retrench.
So what, exactly, is "global leadership" supposed to do at this point? As I read it, those who complain about poor leadership want one of two things. First, they would like national leaders to excercise their "political will," defy domestic constraints, and push for greater economic growth. Fine, but remember -- asking politicians to exercise political will means asking them not to behave like politicians. As a rule, politicians don't do this.
Second, I think there is a desire for one leader to knock some global skulls together and get Germany to start consuming more and the ECB to print more money and China to stop saving and any other action that would jumpstart the global economy. Again, fine, but in the history of the global economy there has only been one instance in which one country had sufficient economic power to exercise this kind of leadership -- the United States of the late 1940s. Truman's leadership was important -- but the U.S. being responsible for close to half of the world's economic output was even more important. Even if Barack Obama had an iron grip over all of America's policy levers, he couldn't do what Truman did with the Marshall Plan and the Dodge Line. Leadership without power is simply someone ranting on a street corner.
Look, I don't like defending Angela Merkel or Barack Obama or the Standing Committee of the CCP Politburo. I do agree with my fellow wonks that they've made some mistakes. All I'm saying is that the notion that some kind of global policy coordination will lift the global economy out of its doldrums is a chimera. The biggest problems with the global economy are almost exclusively domestic in origin at this point. The big global steps, such as boosting IMF reserves, have already been taken. Greater trade liberalization might help a little, but it's not a panacea. Greater capital account liberalization might make things worse. Stronger global regulation might be the prudent long-term policy but it's causing havoc right now. Convincing Germany that a higher inflation rate might be a good idea would be wonderful, but anyone who suceeds at that would be pushing against 90 years of economic history.
So please, I beg my fellow wonks -- when you ask for more "global leadership," be specific -- what exactly do you want to see happen? Cause I don't think there's much at the global level that would really help right now.
Am I missing anything?
Your humble blogger is slammed with day job duties this week, but for your reading pleasure, do check out this debate I moderated between the Financial Times' Gideon Rachman (author of Zero-Sum World) and the Brookings Institution's Robert Kagan (author of The World America Made) on the future of American power.
WARNING: I fear I might stink as a moderator, as I conclude:
I hereby declare myself to be a uniter rather than a divider when it comes to moderating exchanges, thereby guaranteeing that The Powers That Be at will never ask me to do anything like this ever again.
Still, check it out for yourself and come to your own conclusion.
Let's face it, there's a general anxiety about the future of America. There's Tom Friedman's column today, which my doctors have now forbade me from critiquing in order to keep my blood pressure down. Books suggesting the United States is kowtowing to China are forthcoming. The Economist recently observed on the highlights of a sobering survey of Harvard Business School graduates, which contained the following:
Fully 71% of the businesspeople polled expected America’s competitiveness to decline over the next three years. (National competitiveness is a slippery concept: countries do not compete in the same way that firms do. But the businessfolk in question answered some clearer questions, too.) Some 45% said that American firms will find it harder to compete in the global economy. A startling 64% said that American firms will find it harder to pay high wages and benefits.
Intriguingly, the Harvard alumni were gloomy about where America is headed, rather than how it is now. Some 57% felt that today the business environment in America is somewhat or much better than the global average; only 15% said it was worse. But when asked to compare its prospects with those of other industrialised economies, only 9% felt that America was pulling ahead; some 21% said it was falling behind. A striking 66% expected America to lose ground to Brazil, India and China; only 8% thought it would pull away from them.
This would seem to jibe with popular laments about why Apple can't make its products domestically. There are a lot of reasons, but a significant one is the lack of necessary skills for higher-end manufacturing. This is in no small part because American students shy away from the training necessary to do these kind of jobs even if they originally think they want to be engineers. Why? Because American college students don't like doing homework.
So, America is doomed, right?
To be honest, this sounds like a lot of pious baloney. As Michael Beckley points out in a new article in International Security, "The United States is not in decline; in fact, it is now wealthier, more innovative, and more militarily powerful compared to China than it was in 1991." The whole article is worth a read, and a good cautionary tale on the dangers of overestimating the ease of national catch-up:
The widespread misperception that China is catching up to the United States stems from a number of analytical flaws, the most common of which is the tendency to draw conclusions about the U.S.-China power balance from data that compare China only to its former self. For example, many studies note that the growth rates of China’s per capita income, value added in hightechnology industries, and military spending exceed those of the United States and then conclude that China is catching up. This focus on growth rates, however, obscures China’s decline relative to the United States in all of these categories. China’s growth rates are high because its starting point was low. China is rising, but it is not catching up.
What about the future? One could point to the last few months of modestly encouraging economic data, but that's ephemeral. Rather, there are three macrotrends that are worth observing now before (I suspect) they come up in the State of the Union:
1) The United States is successfully deleveraging. As the McKinsey Global Institute notes, the United States is actually doing a relatively good job of slimming down total debt -- i.e., consumer, investor and public debt combined. Sure, public debt has exploded, but as MGI points out, that really is the proper way of doing things after a financial bubble:
The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years....
As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt.
Indeed, the deleveraging is impressive enough for even Paul Krugman to start sounding optimistic:
the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.
Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.
2) Manufacturing is on the mend. Another positive trend, contra the Harvard Business School and the GOP presidential candidates, is in manufacturing. Some analysts have already predicted a revival in that sector, and now the data appears to be backing up that prediction. The Financial Times' Ed Crooks notes:
Plenty of economists and business leaders believe that US manufacturing is entering an upturn that is not just a bounce-back after the recession, but a sign of a longer-term structural improvement. Manufacturing employment has grown faster in the US since the recession than in any other leading developed economy, according to official figures. Productivity growth, subdued wages, the steady decline in the dollar since 2002 and rapid pay inflation in emerging economies have combined to make the US a more attractive location.
“Over the past decade, the US has had some huge gains in productivity, and we have seen unit labour costs actually falling,” says Chad Moutray, chief economist at the National Association of Manufacturers. “A lot of our members tell us that it sometimes is cheaper to produce in the US, especially because labour costs are lower.”
Now, whether this boom in manufacturing will lead to a corresponding boom in manufacturing employment is much more debatable. Still, as The Atlantic's Adam Davidson concludes: "the still-unfolding story of manufacturing’s transformation is, in many respects, that of our economic age. It’s a story with much good news for the nation as a whole. But it’s also one that is decidedly less inclusive than the story of the 20th century."
Growth in shale oil and gas supplies will make the US virtually self-sufficient in energy by 2030, according to a BP report published on Wednesday.
In a development with enormous geopolitical implications, the country's dependence on oil imports from potentially volatile countries in the Middle East and elsewhere would disappear, BP said, although Britain and western Europe would still need Gulf supplies.
BP's latest energy outlook forecasts a growth in unconventional energy sources, "including US shale oil and gas, Canadian oil sands and Brazilian deepwater, plus a gradual decline in demand, that would see [North America] become almost totally energy self-sufficient" in two decades.
BP's chief executive, Bob Dudley, said: "Our report challenges some long-held beliefs. Significant changes in US supply-and-demand prospects, for example, highlight the likelihood that import dependence in what is today's largest energy importer will decline substantially."
The report said the volume of oil imports in the US would fall below 1990s levels, largely due to rising domestic shale oil production and ethanol replacing crude. The US would also become a net exporter of natural gas.
Note that this will take a while, and doesn't mean that the U.S. will be energy independent. Still, it's quite a trend. Or, rather, trends.
Since the Second World War, the pattern in the global political economy has been for the United States to adjust to systemic shocks better than any potential challenger country. A lot of very smart people have predicted that this time was different -- the United States wouldn't be able to do it again. These trends suggest that maybe, just maybe, that might be wrong.
Am I missing anything?
Anne Applebaum points out an interesting conundrum for U.S. foreign policy:
[W]e are left with a curious situation: America no longer wants to be the sole superpower. The American president no longer wants to be the leader of a sole superpower. Nobody else wants America to be the sole superpower, and, in fact, America cannot even afford to be the sole superpower. Yet America has no obvious partner with which to share its superpowerdom, and if America were to cease being a superpower, nothing and no one would take its place.
This might not be the end of the world—there are quite a few trouble spots that could do with a long period of benign neglect—and it might not last forever. Europe, when counted as a single entity, is still the world's largest economy. China, whatever else it might be, is still the world's fastest-growing economy. Sooner or later, the simple need to defend their economic interests might persuade one or both to start taking the outside world more seriously.
This does mean that the Obama administration has a problem, however: Having come to office promising to work with allies, it may soon discover that there are no allies with which to work.
One could argue that this is the downside of path dependence. The United States enjoys many perquisites of power because the U.S. has been the hegemonic power for so long that everyone else expects the U.S. to continue as the lone superpower.
The plus side of this convergence in expectations is that U.S. leadership of the international system is by and large accepted. Of course, leaders are useless without followers, so this is more about the appearance of power than power itself.
The down side of this arrangement is that the United States gets blamed when global public goods are not provided -- even if the United States is largely blameless.
Applebaum goes on to suggest that thw U.S. should reconsider the unilateralism of a few years ago. Actually, I wonder if the U.S. shouldn't go in the opposite direction. The current problem is one of free-riding -- rising powers assume the United States will shoulder a disproportionate burden in msnaging the international system. If the U.S. was prepared to weather the effects of non-cooperation, a retrenchment strategy eliminates the "moral hazard" issue that blunts the incentive for rising powers to share the burden.
Of course, I'm not convinced of this -- I'm just wondering. It is entirely possible that countries like China are perfectly prepared to shoulder a greater burden -- they just have a different set of preferences than the United States. Or, it could be both.
Question to readers: do you think the Obama administration should follow Applebaum's advice?
Three months ago I blogged that the World Bank's growth projections for this year were too optimistic. Let's review my reasons:
- Credit markets have yet to really unfreeze, because the underlying problem -- putting a price on a lot of toxic debt -- has yet to take place;
- It's going to take some time for trust -- a vital public good -- to return to global capital markets;
- The crisis has done nothing to unwind the global macroeconomic imbalances that contributed to the asset bubble in the first place -- if anything, the crisis has temporarily reinforced it;
- There is a very dangerous prisoner's dilemma game brewing in the interplay of fiscal expansion and trade policy. Unless export engines like Germany start to signal that they'll prime their pump as well, you're going to start to see some nasty protectionist attachments to any new government spending;
- Fiscal expansions are going to take a long time to kick in, and the ones being proposed are not necessarily conducive to countercyclical boosts.
- Beyond the fiscal expansion, this crisis is going to result in a lot more state intervention in the economy. Given what's happened, it would be intellectually dishonest of me not to acknowledge that some of this intervention will be necessary. A lot of it, however, is going to be misguided and stunt long-term growth.
I would be very surprised if global growth was not negative in 2009.
With the very partial exception of no. 5, all of the other factors are still very, very present in the global economy.
And, alas, it now appears that the Bank has caught up with my doom and gloom.
Developing countries face a financing shortfall of $270-700 billion this year, as private sector creditors shun emerging markets, and only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said....
The global economy is likely to shrink this year for the first time since World War Two, with growth at least 5 percentage points below potential. World Bank forecasts show that global industrial production by the middle of 2009 could be as much as 15 percent lower than levels in 2008. World trade is on track in 2009 to record its largest decline in 80 years, with the sharpest losses in East Asia.
The financial crisis will have long-term implications for developing countries. Debt issuance by high-income countries is set to increase dramatically, crowding out many developing country borrowers, both private and public. Many institutions that have provided financial intermediation for developing country clients have virtually disappeared. Developing countries that can still access financial markets face higher borrowing costs, and lower capital flows, leading to weaker investment and slower growth in the future.
There's something else going on that should bother IR scholars. One of the benefits of having a hegemon is supposed to be greater provision of global public goods. According to hegemonic stability theory, if the United States is really still the hegemon, then it should be providing the following things:
The U.S. did all of these things during the Asian financial crisis, for example.
This time around, the U.S. grade is not as high. There has certainly been provisions of liquidity -- though if one defines the start of this crisis as the fall o 2007, then it's not like LIBOR has fallen to pre-crisis levels.
The U.S. is not a market for distressed goods. On the margins this is due to incipient protectionism, but mostly this is due to the U.S. economic contraction. Indeed, this is why the recession has so deeply affected Pacific Rim exporters.
The worst grade, however, is on counter-cyclical lending. As the New York Times' Peter Goodman writes:
American investors are ditching foreign ventures and bringing their dollars home, entrusting them to the supposed bedrock safety of United States government bonds. And China continues to buy staggering quantities of American debt.
These actions are lifting the value of the dollar and providing the Obama administration with a crucial infusion of financing as it directs trillions of dollars toward rescuing banks and stimulating the economy, enabling the government to pay for these efforts without lifting interest rates.
And yet in a global economy crippled by a lack of confidence and capital, with lending and investment mechanisms dysfunctional from Milan to Manila, the tilt of money toward the United States appears to be exacerbating the crisis elsewhere.
The pursuit of capital suddenly seems like a zero sum game. A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.
Developing.... in a very, very bad way.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.