Lo­co­mo­tion needed

And Obama must be­come en­gine driver of world econ­omy

Finweek English Edition - - Economic Trends & Analysis - HOWARD PREECE howardp@fin­week.co.za

HERE’S A THOUGHT that has much rel­e­vance to the cur­rent eco­nomic cri­sis. Switzer­land’s econ­omy grew more slowly than that of any other de­vel­oped coun­try in the gen­er­ally boom­ing Nineties. Its real gross do­mes­tic prod­uct edged up by only 1,1% on an­nual av­er­age over that decade. That was a poorer per­for­mance than even that of Ja­pan, (1,5%/year), which is pop­u­larly sup­posed to have been bot­tom of the premier growth league be­tween 1990 and 1999.

But while there was mas­sive global at­ten­tion paid to the ap­par­ent “ap­palling plight” of Ja­pan the global fo­cus on Switzer­land was vir­tu­ally nil. Why so? A key part of the an­swer, cru­cially, is that Switzer­land was rightly seen as a very rich na­tion with ex­cep­tion­ally high liv­ing stan­dards. In other words, did it re­ally mat­ter if Switzer­land was get­ting only frac­tion­ally richer?

But surely that ar­gu­ment also ap­plied to Ja­pan? That coun­try had also be­come im­mensely wealthy. Why then did it count so much more in­ter­na­tion­ally when liv­ing stan­dards in Ja­pan showed only mod­est over­all gains in the Nineties and as­set prices – crit­i­cally, houses and eq­ui­ties – plunged so se­verely?

Here we come to the sec­ond part of the an­swer to the ques­tion posed above. Ja­pan was a world eco­nomic colos­sus: Switzer­land was com­par­a­tively in­signif­i­cant.

The huge re­ver­sal of for­tunes in Ja­pan ini­tially greatly wor­ried such or­gan­i­sa­tions as the In­ter­na­tional Mon­e­tary Fund, be­cause they feared po­ten­tially ad­verse domino ef­fects on the world’s econ­omy. But fears about the wider im­pli­ca­tions of Ja­pan’s eco­nomic malaise then made steadily less im­pact on in­ter­na­tional fi­nan­cial head­lines.

How come? A new sub­sti­tute power had ap­par­ently emerged from the wings to more than fill the now re­duced role (still enor­mous in ab­so­lute terms) played by Ja­pan. That, of course, was China. More, the ad­di­tional ar­rival of fast-grow­ing In­dia – hav­ing at last shaken off the dead hand of Pan­dit Nehru’s bu­reau­cratic so­cial­ism – was also highly im­por­tant.

Also, from 1945 on, the global econ­omy saw the United States as mostly dom­i­nant. How­ever, there were still oc­ca­sions when the US fal­tered badly. That hap­pened in the Sev­en­ties: a com­bi­na­tion of a ma­jor oil cri­sis and the af­ter-ef­fects of Pres­i­dent Lyn­don John­son’s “Great so­ci­ety” and Viet­nam. The US dol­lar slumped and Ja­pan and West Ger­many were called on by the IMF to take over a much greater “lo­co­mo­tive” role in driv­ing the world econ­omy.

Then in the Eight­ies Pres­i­dent Ron­ald Rea­gan and the Fed­eral Re­serve greatly boosted growth in the US – but at heavy cost to its dol­lar. Again, an­other in­ter­na­tional agree­ment – with Ja­pan and West Ger­many to the fore: the Plaza ac­cord – was stitched up to bail out the US dol­lar tem­po­rar­ily and keep the world econ­omy go­ing while the US re-gath­ered mo­men­tum, as it cer­tainly did.

The cen­tral point is that apart from brief mo­ments – gen­er­ally sparked by huge rises in oil prices, which I again see as the trig­ger of the cur­rent world fi­nan­cial cri­sis – the world econ­omy al­ways had at least one or two en­gines work­ing.

Now we’re told only China is func­tion­ing well. But is China go­ing that strongly and, crit­i­cally, can it pull the world econ­omy up? On the last points, I nec­es­sar­ily hope so. How­ever, I have big doubts at this stage.

But look first at the tra­di­tional global big pic­ture – led by the US, the Euro­pean Union (headed by Ger­many), China and Ja­pan: ly got his “stim­u­lus pack­age” en­dorsed by the rul­ing Democrats in Congress. But Obama seems rather too obliv­i­ous – al­most in­dif­fer­ent – to the dan­gers of new global pro­tec­tion­ism and that poses ma­jor threats to world eco­nomic re­cov­ery. Daily Tele­graph re­ports: “Europe’s econ­omy is fac­ing its worst re­ces­sion in at least two decades, with fig­ures show­ing the re­gion’s econ­omy con­tracted by 1,5% in the fi­nal three months of 2008.” “melt­down” – des­per­ate news for Aus­tria in par­tic­u­lar, whose banks have lent the equiv­a­lent of 70% of that coun­try’s GDP to the re­gion. than 5,0% – but its im­ports have fallen far more than its ex­ports, bring­ing no help to most of the rest of the world. by the largest amount in more than 20 years. and De­cem­ber 2008 by the big­gest per­cent­age crash since 1974, far more than any sin­gle dis­as­ter of the Nineties. What’s es­sen­tial now is that all the ma­jor economies work to­gether. It’s no use the US, Bri­tain, France or any­one else pin­ning their hopes on sub­sidised ex­ports if there aren’t buy­ers – and that only pro­vokes even more pro­tec­tion­ist re­tal­i­a­tion any­way.

The lead must come from Obama. How­ever, he’s yet to show he’s grasped the full re­al­i­ties of that fact. But hard pol­icy de­ci­sions, some­times po­lit­i­cally painful, are what’s needed now from the US Pres­i­dent.

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