There is no global economy
The
concept of the ‘global economy’ is largely exaggerated. The U.S. can
— and should — still set its own economic policies
By
Mark Weisbrot Read Spanish Version
From
The Guardian
"This
is the day that the world came together, to fight back against the
global recession. Not with words but a plan for global recovery and
for reform and with a clear timetable," said U.K. Prime Minister
Gordon Brown at the end of the G-20 Summit last week.
This
was somewhat exaggerated. There was no plan for global recovery or
even a commitment to increased fiscal stimulus. It remains to be seen
what kinds of reforms will actually materialize.
But
recovery and reform will not necessarily hinge on what the G20 agrees
to do. Roll back to the last major economic crisis — that which
began in Asia in 1997 and spread to Russia, Brazil, Argentina, and
other countries. In September 1998, Fed Chair Alan Greenspan warned
that "it is just not credible that the United States can remain
an oasis of prosperity unaffected by a world that is experiencing
greatly increased stress."
But
the U.S. economy kept booming right through the crisis, as a result
of consumption driven by the stock market bubble. This continued
until the bubble burst, pushing the U.S. economy into recession in
2001.
It
should not be surprising that the United States economy has the
potential to grow even while many other economies are contracting.
Eighty-seven percent of what is produced in the United States is
consumed here. To be sure, the other thirteen percent can make a
difference — but U.S. recessions are not brought on by falling
exports. It is not comparable to the 47 percent of GDP that Germany
exported last year, or even the 28 percent for Mexico.
Of
course the current world recession is much worse and more widespread
than the crisis of the late 1990s. The high-income countries that
comprise the majority of the world economy, including the U.S.,
European Union, and Japan are mostly in recession. There are some big
imbalances, built up over many years, that are adjusting at a pace
that is not easy to predict — including the U.S. savings rate, which
had fallen to zero by 2007. And there are major weaknesses in much of
the world’s financial system.
Nonetheless
the United States is capable of recovering on its own, with a
sufficient domestic economic stimulus and a sensible resolution of
the major insolvencies in the financial system — regardless of what
other governments do. The U.S. recovery will in turn help the rest of
the world. The fact that the dollar is the key reserve currency of
the world gives the U.S. even more leeway. There are loud complaints
from conservatives about our recession-induced free-spending ways,
but investors world-wide are willing to lend the U.S. government
money at the historically low (both real and nominal) rate of 2.9
percent on ten year Treasury bonds. This is not the sign of an
impending fiscal crisis.
It
is good that the G-20 leaders are at least talking about increased
international co-operation in order to deal with the world recession,
and there are some areas — e.g. regulation of the financial sector
or preventing illegal international capital flows and international
tax avoidance — where increased international co-operation can be
especially helpful. But even in these areas, many of the most
important reforms can be implemented by individual governments.
The
global nature of the "global economy" has been grossly
exaggerated, as have been its implications. The world today is still
much more a collection of national economies, and national
governments — especially in the larger economies — have the
potential to choose most of their economic policies much as they did
thirty or forty years ago. The government of China, for example, has
for decades controlled capital flows into and out of the country,
regulated foreign investment in accordance with national development
needs and plans, fixed its exchange rate, and owned most of the
banking system. In this way it was able to take advantage of
"globalization" — both international trade and foreign
direct investment — to achieve the fastest economic growth in world
history.
The
contemporary idea of the "global economy" is based on a
misapplied analogy to the historical development of national
economies. For example, the United States economy was much less
stable, with more frequent and much longer recessions, before the
creation of regulatory institutions, including most importantly the
Federal Reserve (1913) and the New Deal reforms of the 1930s. (The
current crisis, which has occurred after decades of deregulatory
reforms, appears to be the exception that proves the rule).
Thus,
it is reasoned, we now live in a "global economy," and this
too must be regulated to iron out some of the irrationalities and
instabilities inherent in a market economy.
Of
course there is some truth to this argument. The idea of a world
reserve currency to replace the dollar, for example, most recently
floated by China, is a potential reform that could improve world
macroeconomic stability.
But
the concept of the "global economy" is very often an
exaggerated one, generating confusion and negative political
consequences. Reforms that are both necessary and feasible at the
national level, such as appropriate exchange rate, fiscal, and
monetary policies (especially in normal times), or capital controls,
are rejected as incompatible with the "global economy." At
the same time, reformers often mistakenly look to supra-national
institutions that are mainly deregulatory, unaccountable, and
regressive — the International Monetary Funs (IMF), World Bank, and
World Trade Organization are prime examples — to resolve the
problems that these institutions have themselves helped to create.
Finance Ministers (or Treasury Secretaries) that are beholden to
powerful interests at home are even less accountable to the public
when making decisions in these bodies that are another step removed
from the electorate of member countries. If they won’t do the right
thing at home, they are far less likely to do it at the IMF or the
World Bank. For the present, at least, reform at the national or
perhaps regional level is a much better bet.
Indeed,
"globalization" under inappropriate rules and policies has
contributed significantly to the current crisis. Even the European
Union, a project that compares favorably to the "race-to-the-bottom"
economic integration of the NAFTA variety, is currently hampering the
Eurozone’s recovery. The restrictions on budget deficits and the
ultra-conservative central bank set up by the Maastricht treaty are
making it more difficult for Europe to counteract this recession.
Efforts
to redraw the rules for global commerce in a more equitable and
rational manner — such as those of the UN commission headed by
Joseph Stiglitz — are a vital part of creating a better future for
the generations to come. But the world cannot wait for the time when
the governments of the rich countries are willing to cede
decision-making power to institutions — such as the United Nations
— that they cannot completely dominate. Nor does it have to wait.
Mark
Weisbrot is co-director of the Center for Economic and Policy
Research, in Washington, DC. (www.cepr.net).
