Big-government policies are stalling economic growth
The global scope of the economic downturn is now official. On Monday, China cut its economic-growth expectation to 7.5 percent, down from the lofty 8 percent level where it has been since 2005. Unless governments all over the world undertake significant structural reform, the downward spiral could continue for a very long time.
The European Union is sliding into recession. Its gross domestic product shrunk 0.3 percent for the fourth quarter of 2011, and this year’s outlook is equally grim as exports fall and businesses cut investment. The lack of investment is a sure sign that businesses see little prospect for expansion in the days ahead. It’s hard to blame them as unemployment in eurozone countries reaches 10.7 percent and over 20 percent in troubled Greece. So long as governments stubbornly refuse to address the root cause of the crisis, the smart thing to do is not to invest.
Japan performed the worst of the major economies, contracting 0.9 percent over 2011. By comparison, the United States isn’t quite so bad off, but we’re still in a malaise. The U.S. economy grew a paltry 1.7 percent through 2011, and a mere 0.7 percent in the last quarter.
Developing world powerhouses Brazil and India are feeling the pinch. Brazil’s growth slowed from 7.5 percent in 2010 to 2.7 percent in 2011, and the most recent data have industrial output growing at a meager 2.1 percent. Brazil has a strong currency, which makes its exports more expensive, but the biggest barrier to progress is high taxes. The current government is cutting interest rates and printing money, which isn’t the best policy for a country with Brazil’s inflationary history.
India’s growth rate has slowed to 6 percent. That’s down from the annual rate of 8.7 percent that held from 2003 to 2008, a figure substantial enough to make a significant dent on the poverty rate. It did so with moderate inflation of about 5.5 percent annually. Unlike so many of the Central and South American countries, India has managed to avoid the instability of rapidly rising prices.
It’s easy to look at growth rates of 6 and 7.5 percent and think those figures are high, but these are growth rates from a relatively small base. The per-capita income in China is about $7,570, and only $3,560 in India, while the U.S. figure is $47,140. China and India need to sustain growth in the 8 percent to 10 percent range if they are to catch up to rich countries. Based on the per-capita income figures, they have a long way to go.
The slump in rich countries inevitably spreads to developing countries. The poorer nations rely on selling their goods to and attracting investment from the wealthy ones. The slowdown in Europe, India, Brazil, China and the United States shares a common factor: government intervention. The solution is likewise common. Countries the world over must adopt market-friendly reforms and reduce the regulatory burden on the private sector. That’s the one sure path out of global economic stagnation.