The United States in the World Economy
Speech: The United States in the World Economy.
In this speech, C. Fred Bergsten, founder of the Peterson Institute for International Economics, contextualizes the United States within the scope of the global economy.
Since we are in a time of great crisis, and the world is seeking answers now more than ever, I found the commentary by Mr. Bergsten to be most informative and profound. The speech is rather long, but it provides excellent insight on America’s roll in the 21st century global economy. Here is a more concise breakdown of his most important points (my personal short summary is at the very bottom of the page):
The United States has integrated dramatically into the world economy over the past half century. The share of international transactions in our national economy has more than tripled. It now exceeds 30 percent of total output. We are more dependent on external economic developments than the European Union as a group or Japan, the other large high-income parts of the world, which have traditionally been regarded as much more engaged in global competition than the United States.
As already noted, however, this means that we have become heavily dependent on external developments for our own prosperity and stability. Unfortunately, we have failed to recognize that dependence and have behaved in ways that exacerbate our vulnerability. We have run large trade deficits for 30 years. As a result, we have become by far the world’s largest debtor country. Our gross foreign debt totals about $23 trillion, and our net foreign debt, even after taking account of our very large (mainly privately held) assets abroad, is about $2.5 trillion. The ongoing debate about our national debt and deficits must therefore proceed with a wary eye on the fact that much of it is owed to investors in other countries, some of the largest of which are institutions owned by governments (e.g., China, Russia, and several Middle Eastern oil exporters) that may not always be our best friends.
We have let down our guard in a number of ways. Our primary and secondary education system is no longer qualifying our people to succeed in a highly competitive global economy. We do not save enough as a nation to finance adequate levels of investment, and we therefore borrow about $500 billion annually from the rest of the world. Our infrastructure is falling behind world-class standards and, in many cases, is literally crumbling. Our governmental support for technological innovation, which has been critically important for some of the most important advances of the past half century, is lagging. Our tax system encourages footloose multinational firms, based both here and abroad, to invest in countries other than the United States and rewards consumption (including of energy and pollutants) instead of saving. We have let the exchange rate of the dollar, by far the single most important determinant of our international competitiveness in the short run, remain substantially overvalued for prolonged periods.
Today’s Global Setting:
To answer these questions, we must first recognize that the world economy of the 21st century is very different than the world economy of the 20th century. The locus of globalized economic power and vitality has shifted drastically. Virtually all of the rich industrialized countries that have been the past drivers of the world economy—the United States itself, Western Europe, and Japan—are struggling. Virtually all of the emerging market economies—especially China but also India, the rest of Asia, Latin America, and even Africa and the Middle East prior to its recent disruptions—are booming. We live in a bifurcated rather than synchronized world economy. (China and India regard themselves as re-emerging economies since they dominated world output for a long while until at least some time into the 18th century.)
Europe succeeded brilliantly in creating the euro, the first currency to rival the dollar in almost a century, over a decade ago. But its Economic and Monetary Union, as the project was formally called, was an unstable halfway house from its inception. The monetary side was complete with a common currency and area-wide European Central Bank. But there was no economic union: no central fiscal policy or authority, no coordination (let alone fusion) of structural policies with respect to key issues like labor markets and financial regulation, and limited economic governance institutions.
The euro area was able to finesse this glaring discrepancy for a decade, abetted by the global boom of 2003-07. But the financial crisis and succeeding Great Recession of 2008-09 laid bare its problems and, as a result, posed both an existential threat to European integration itself and major risks to the entire world economy.
But Japan imploded in the early 1990s. Its financial bubble burst and, exacerbated by several huge policy mistakes, ushered in two lost decades of stagnation and indeed deflation—the only example of such performance since the Great Depression of the 1930s—from which it has not yet recovered. It faces the worst demographic profile of any country in the world, aging so rapidly that it will have barely one worker per retiree by the middle of this century. So the United States and world economies will not get much help from Japan either, and we indeed now fear its weakness much more than we ever feared its strength.
Emerging Economies Boom:
Fortunately, as already noted, most of the emerging market economies are booming. These developing countries now account for half the world economy (using purchasing power parity exchange rates). They have provided three quarters of all global growth over the past decade. They are growing three times as fast as the traditional leaders: about 6 percent versus 2 percent. Hence their global share is rising substantially every year and will reach at least two- thirds over the next decade. They, especially China, will play increasingly decisive world economic roles.
These emerging and developing countries are in fact now growing so rapidly, despite the continuing sluggishness of the three rich economic zones, that their immediate policy priorities are virtually opposite to ours. We desperately seek ways to accelerate growth and create employment while our excessive deficits and debt force us to pursue restrictive policies instead. By sharp contrast, they increasingly need to restrain their expansions to prevent excessive inflation and the risk of new financial bubbles—but enjoy strong fiscal and monetary positions that will enable them to again step on the accelerators if need be.
On the U.S. debt crisis:
There are two standard ways to resolve the dilemma. One relates to the policy mix: tighten the budget to limit the debt buildup but maintain easy monetary policy to spur growth. The other addresses the timing of corrective actions: adopt corrective fiscal measures now to restore market confidence, but implement them over time to avoid weakening the economy even further. (Some of the most promising budget measures, such as an energy or gasoline tax and increasing the retirement age for Social Security and Medicare, should be phased in gradually in any event to cushion their impact on those Americans most directly affected.) Both strategies will be part of any definitive restoration of robust US growth.
U.S. Structural Issues:
Whatever measures are adopted in the short run, a fundamental rebalancing of the composition of the US economy will be required. We simply cannot expect to resume buoyant and job-creating growth on the basis of the same four elements that drove the economy over the past decade or so: debt-financed consumer demand and housing, government deficits, and easy money. None of these, let alone the four in combination, offer a sustainable path forward. We must rebalance the US economy to achieve such a path.
This brings us squarely back to the world economy and the opportunities that it offers for the United States. A resumption of substantial US growth, even to the modest level of 3 percent or so annually that is needed to restore and maintain full employment over several years, will require a major expansion of US exports to the rest of the world and a sizable reduction of our trade deficits. This in turn calls for substantial private investment in the United States, to strengthen our competitive position and provide the capacity to service foreign markets (as a second major component of the new US growth model.) The United States must achieve export-led growth for at least the next decade.
Impediments to U.S. export growth:
A cardinal goal of the International Monetary Fund, which was created to avoid replication of the beggar-thy-neighbor policies that deepened the Great Depression, is to prevent competitive currency devaluations through which countries keep their currencies cheap to provide large price advantages for their exporters and their firms that compete with imports. Yet China has intervened massively in the foreign exchange markets for at least five years,buying at least $1 billion every day to keep the dollar strong and its own renminbi weak. The result is an undervaluation of the renminbi of at least 20 percent, which is the equivalent of a subsidy of 20 percent on all China’s exports and an additional tariff of 20 percent on all China’s imports. This is by far the largest protectionist measure adopted by any country since the Second World War—and probably in all of history.
A second area of international commercial conflict is protection of intellectual property rights (IPR). The United States and some other high-income countries compete primarily at the high-tech end of the product spectrum and rely on being paid for the innovations (like Microsoft Windows, iPads, wonder drugs, and Oscar-winning movies) that are the results of their corporate investments and employees’ unique skills. But many developing countries steal these secrets and thus deny their producers much of the fruits of their work. China is again by far the largest though by no means the only culprit; the US government has estimated that it robs US firms of $50 billion to $100 billion annually through this route. The global loss to the US economy is probably at least twice as large.
Another major thrust of US economic strategy must therefore be to open foreign markets to our services exports (notably including intellectual property as already discussed). This strategy must focus on the rapidly growing emerging markets, who are still in fairly early stages of the development cycle and have still to experience the burgeoning of the services sector that accompanies the normal evolution to high-income or even middle-income status. The extreme outlier is again China, where services represent only about 40 percent of the entire economy (compared with 80 percent in the United States). Moreover, most of these economies maintain very high impediments to imports of services from the United States and other foreign suppliers.
What the U.S. must do now:
As noted, we will first have to put our own house in order. We must place our budget deficits on a credible path to substantial correction. We must get serious about our international competitive position. We must implement trade agreements negotiated years ago rather than letting them languish in yet another battle between the Administration and Congress.
On the international front, we will want to create alliances to the maximum extent possible. China has become more responsive to external pressure to let its exchange rate strengthen as Europeans, and especially a number of its fellow emerging market and Asian economies, have joined the chorus of criticism. We will want to use the international economic institutions, especially the WTO and the IMF, whenever possible to mobilize such “coalitions of the willing” to effectively implement the current international rules and to write new rules where none now exist.
We will also have to offer concessions of our own. We can only induce other countries to enhance our access to their services markets if we relax our own remaining impediments, such as agricultural subsidies (which should be dismantled for budget reasons anyway), high tariffs on some textile products, and tight visa policies that limit entry to the United States for many foreign nationals (even when they would strengthen our own economy).
We will also have to get much tougher with some of our foreign partners. The Treasury Department, for example, has never been willing to label China a “currency manipulator” despite its blatant manipulation and the law of the land that directs Treasury to do so and then launch negotiations to remedy the situation. We could take China to the WTO for violating that organization’s proscription (like that of the IMF) of competitive undervaluation and sharply limit its access to our market if the case prevailed. We could initiate “countervailing currency intervention,” buying Chinese renminbi to offset the effect on our exchange rate of their massive purchases of dollars.
NeilS — Essentially, the global economy is rapidly changing because traditional sources of growth (U.S., Europe, Japan) are all running into major problems with debt and stagnation. On the other hand, emerging economies such as Brazil, China, and India are booming and continued to grow even in the midst of our “Great Recession.”
The solutions presented here are multi-fold but rely on two major points. First, the United States needs to get its financial house in order so as to restore confidence in the monetary and fiscal system. Second, the United States needs to pursue tactics that will open up emerging markets to our service sector and increase our exports. In order to do this, we must cooperate with emerging economies to create beneficial conditions whereby multilateral agreements benefit the world economy as a whole.