And Obama must become engine driver of world economy
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.