Be­yond the gabfest in Davos, stark dis­par­i­ties in global growth

The Washington Post Sunday - - BUSINESS - STEVEN PEARL­STEIN

It’s prob­a­bly be­cause I’mal­ready an­tic­i­pat­ing the ill ef­fects of Dana Milbank’s month-long mora­to­rium on any men­tion of Sarah Palin, but I found­my­self fan­ta­siz­ing last week about what Palin would have said if in­vited to speak at the an­nual gabfest in Davos, Switzer­land.

“So how’s that global free-mar­kety stuff workin’ out for ya?” Palin might have asked.

In truth, the glob­al­iza­tion long cham­pi­oned at Davos has turned out to be some­thing of a mixed bag.

There’s no doubt it’s been a big plus for hun­dreds of mil­lions of peo­ple in Asia and Latin Amer­ica who have been lifted out of poverty and the mil­lions in those re­gions who have joined the global mid­dle class. And, de­spite some un­pleas­ant mo­ments in 2008, glob­al­iza­tion has en­hanced the wealth and stature of the fi­nan­cial, tech­no­log­i­cal and phil­an­thropic elite that have turned Davos into their play­ground.

For the rest of us, though, you’d have to say it’s been some­thing of a dis­ap­point­ment. Rapid glob­al­iza­tion is as­so­ci­ated with rel­a­tively stag­nant in­comes, ris­ing in­equal­ity and, most no­tably, gut-wrench­ing eco­nomic in­sta­bil­ity. TheMex­i­can peso cri­sis, the Asian fi­nan­cial melt­down, the dot.com de­ba­cle and the burst­ing of the re­cent credit bub­ble — you don’t need a PhD in eco­nom­ics to see the cor­re­la­tion be­tween the dra­matic rise in cross-border ac­tiv­ity and the in­creased fre­quency and sever­ity of booms and busts.

In read­ing through last week’s dis­patches from Davos, it seemed that even the high priests of glob­al­iza­tion ac­knowl­edge that the search for a sat­is­fy­ing and sus­tain­able global equi­lib­rium re­mains elu­sive.

On the out­look for the next sev­eral years, the con­sen­sus seemed to be that we now have a tri­par­tite global econ­omy, with growth in the de­vel­op­ing coun­tries of Asia run­ning at more than 7 per­cent, growth in Ja­pan and most of Europe re­main­ing painfully slug­gish at be­low 2 per­cent, and with the United States and much of the Amer­i­cas fall­ing some­where in be­tween.

The prob­lem with this ar­range­ment and its wide dis­par­i­ties is that is looks to be highly un­sta­ble.

Al­though de­vel­op­ing coun­tries are be­gin­ning to shift to­ward sell­ing

more goods and ser­vices to their own pop­u­la­tions, they re­main highly de­pen­dent on sales of man­u­fac­tured goods to wealthy na­tions where in­comes won’t be grow­ing and the em­pha­sis will be on pay­ing down ex­ces­sive lev­els of debt and car­ing for ag­ing pop­u­la­tions. Un­less de­vel­op­ing coun­tries can re­ori­ent their ex­port ma­chines to­ward sell­ing to each other — a pos­si­bil­ity, yes, but not a cer­tainty — the ro­bust growth of the past two years will be hard to sus­tain.

More­over, some of the re­cent growth in de­vel­op­ing coun­tries re­sults from a surge of for­eign cap­i­tal flow­ing into those na­tions. Some of that flow is longer-term in­vest­ments made by in­di­vid­u­als, banks and cor­po­ra­tions from wealthy coun­tries who see big­ger re­turns in the de­vel­op­ing world. Not only does this have the ef­fect of slow­ing growth in their own coun­tries even fur­ther, but it also is help­ing to stoke in­vest­ment bub­bles through much of the de­vel­op­ing world.

These bub­bles are fur­ther in­flated by the flow of short-term “ hot” money into de­vel­op­ing economies as in­vestors bor­row at low in­ter­est rates in the United States, Europe and Ja­pan and in­vest in much higher-yield­ing in­stru­ments in de­vel­op­ing coun­tries.

In a more sta­ble and bal­anced global econ­omy, of course, in­ter­est rates would con­verge and the flow of hot money would sub­side. But as long as growth re­mains too slow in some coun­tries (prompt­ing their cen­tral banks to keep in­ter­est rates low), and too high in other coun­tries (prompt­ing those cen­tral banks to push in­ter­est rates up), this “carry trade” can con­tinue.

Float­ing ex­change rates are an­other mech­a­nism for bring­ing na­tional economies into bet­ter align­ment by mod­er­at­ing trade im­bal­ances, re­duc­ing in­ter­est-rate dif­fer­en­tials and curb­ing flows of hot money. But as long as China and other ex­port-ori­ented economies pre­vent their cur­ren­cies from ad­just­ing up­ward by peg­ging them to the dol­lar, that ad­just­ment won’t hap­pen, ei­ther.

Global in­fla­tion is yet an­other dan­ger. The rapid growth in de­vel­op­ing coun­tries has al­ready driven global com­mod­ity prices back to near-record lev­els as an emerg­ing global mid­dle class de­mands more food, more cars, big­ger homes and more elec­tric­ity. In ad­di­tion, all that cheap money be­ing churned out by the Fed and oth­erWestern cen­tral banks is be­ing used to fuel a new wave of spec­u­la­tion in com­mod­ity fu­tures and de­riv­a­tives. A lit­tle in­fla­tion prob­a­bly wouldn’t be a bad thing for debt-bur­dened in­dus­trial coun­tries like Ja­pan, Bri­tain and the United States. But in­fla­tion rarely comes in small doses, and it can be down­right dan­ger­ous in de­vel­op­ing coun­tries, as the rulers of Tu­nisia and Egypt can at­test.

Back when there was a strong ten­dency for peo­ple and com­pa­nies to buy and in­vest at home, none of this would have much of a prob­lem. Over time, coun­tries de­vel­oped mech­a­nisms for deal­ing nat­u­rally with such im­bal­ances within their own bor­ders.

As yet, how­ever, no­body’s fig­ured out how to re­ally solve these im­bal­ance on a global ba­sis. Ex­ist­ing mar­ket mech­a­nisms are of­ten frus­trated by na­tional poli­cies aimed at im­prov­ing eco­nomic con­di­tions within one coun­try, ir­re­spec­tive of the im­pact on other na­tions. And what po­lit­i­cal mech­a­nisms ex­ist for co­or­di­nat­ing poli­cies and coax­ing coun­tries to do what is in the best for the rest of the world — well, those re­main weak and in­ef­fec­tive. “Global gov­er­nance,” it turns out, is no more pop­u­lar among Chi­nese and Ger­mans than it is among Amer­i­cans.

In­deed, even 50 years af­ter the launch of what is known as the “Euro­pean project,” mem­bers of the Euro­pean Union still strug­gle with what it means to op­er­ate a truly open econ­omy with a sin­gle cur­rency, co­or­di­nated fis­cal and mon­e­tary poli­cies and a uni­fied set of reg­u­la­tions. That’s what the re­cent euro cri­sis is about, and it is nowhere close to be­ing re­solved.

Even the high priests of glob­al­iza­tion ac­knowl­edge that the search for a sat­is­fy­ing and sus­tain­able global equi­lib­rium re­mains elu­sive.

Af­ter the Asian fi­nan­cial cri­sis inn 1997, there was hope­ful talk at Davos that the G-7 in­dus­trial na­tions step in and be­gin to man­age the global econ­omy. Af­ter the fi­nan­cial mar­ket melt­down two years ago, fo­cus shifted to the G-20, a more in­clu­sive group of world lead­ers that was meant to re­flect the ris­ing im­por­tance of de­vel­op­ing na­tions. This year, strate­gist Ian Brem­mer of the Eura­sia Group may have cap­tured the mood at Davos with his wry ob­ser­va­tion that all we’ve re­ally got is the G-Zero.

Yes, we have glob­al­iza­tion. What we don’t have yet is a global econ­omy or the in­sti­tu­tional in­fra­struc­ture to sus­tain it.

FABRICE COFFRINI/AGENCE FRANCE-PRESSE VIA GETTY IM­AGES

Glob­al­iza­tion has en­hanced the wealth of the fi­nan­cial, tech­no­log­i­cal and phil­an­thropic elite who have turned Davos into their an­nual play­ground.

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