2011: Waiting for the global economic tsunami
The wholly unexpected and unprecedented winds of change blowing through the Arab world in the past month have overturned decades of expert assumptions and careful alliances. But this political transformation may yet be dwarfed this year by even more significant shifts in the tectonic plates of the global economy. The nature and dynamics of globalization ...
The wholly unexpected and unprecedented winds of change blowing through the Arab world in the past month have overturned decades of expert assumptions and careful alliances. But this political transformation may yet be dwarfed this year by even more significant shifts in the tectonic plates of the global economy. The nature and dynamics of globalization are in the process of being transformed by underlying pressures that have been building for years, but are just not bursting to the surface. Here are a few key events to keep an eye on in the months to come:
OPEC meetings are always prominent makers in the calendar of events for the global economy. But the upcoming June 11 summit in Vienna has already been preempted by the rise of oil prices in the wake of the revolution in Libya. Of course, Saudi Arabia has assured the world that they will pump more oil to offset any lost Libyan production. Nevertheless, the sudden price spike underlined the potential for another oil crisis. Coming in conjunction with a global rise in food and other commodity prices, it also signaled generally increasing inflation driven by short supplies as well as strong demand from the rapidly growing emerging market economies.
This poses a particularly difficult problem for Europe and the United States, whose economies are still in a fragile stage of recovery from the Great Recession and whose central banks have been keeping interest rates low to help stimulate the recovery. Should they now raise rates to deal with inflation despite the risk of sliding back into recession? And if they do, will the export-led high growth economies be able to sustain that growth in the face of slowing export markets and rising domestic inflation? Those will be the key questions facing the World Bank/IMF meetings in Washington this April.
Linked to the inflation/renewed recession question and also hanging over the World Bank/IMF meetings will be the question of currency valuations. Many analysts see the growth of China and other key emerging economies as being driven in part by deliberate currency undervaluation. This is seen by the United States , Europe, and even some of the rising powers themselves – Brazil in particular — as an unacceptable distortion of markets, contributing to global trade imbalances, unemployment, destabilizing capital flows, and distortion of global interest rates. The World Bank will huff and puff about the impact of rising commodity prices on poor developing countries but has little ability to do anything about them. The IMF, in particular, is supposed to be the arbiter of global currency rates and capital flows, but has proven woefully inadequate to the task. It will not be able to do or say anything terribly useful in April and will put another nail in its own coffin by kicking the can down the road to the November meeting of the G-20 countries in Cannes.
The ASEAN, Mercosur, and East Asia Summit leaders meetings of May, June , and July will underscore three important trends of the present global economy. One is the rise of regional global economic power centers and the increasing multi-polarity of the global economy. A second is the continuing fractionation of the global trading system as constituted under the WTO into a proliferation of so called regional and bilateral free trade agreements that are, in fact, preferential trade agreements akin to those that prevailed before World War II. Virtually all of these arrangements are parts of global supply chains that focus primarily on supplying the ultimate demand of the United States.
A big focus of U.S. attention in this category will be the Obama administration’s attempt to obtain Senate approval for the already signed U.S.-South Korea Free Trade Agreement. This deal will mutually lower U.S. and Korean tariffs and other trade and investment barriers on a preferential basis (other countries will not get the same deal). The administration and global U.S. companies are strongly pushing the deal, arguing that it will stimulate U.S. exports and jobs because South Korea’s barriers are higher and more extensive than U.S. barriers. Whether it will pass or not is unclear, however, because labor unions and U.S. companies that produce mainly in the U.S. for the American market oppose it on grounds that it will only increase the U.S. trade deficit and cost jobs. After all, Seoul’s main barriers are local procedures and prevailing attitudes not subject to negotiation. For what it’s worth, this writer has been told by one South Korean ambassador that the deal will probably increase his country’s trade surplus with the United States.
Ironically, free trade deals with Colombia and Panama that actually would reduce the U.S. trade deficit will almost certainly not be concluded this year because of the opposition of U.S. trade unions and human rights NGOS, due to the murder of some trade unionists in Colombia.
Much more important with regard to regional trade and economic agreements are the momentous developments now underway in the European Union. Because it has what amounts to a continuous meeting, there is no one E.U. meeting on which one can concentrate. But the fundamental issue is whether, in the wake of the Greek and Irish crises and the threatened crises of Portugal, Spain, and Italy, the euro will fail as a single currency and trigger the disintegration of the EU itself. So far a huge bailout fund, extraordinary efforts by the EU Central Bank, and agreements by the key countries on a variety of fiscal and repayment conditions have held things together, but at the likely cost of painful deflation and high unemployment across much of Europe.
The heart of the matter is that the European Union has been structured such that Germany saves, invests, and exports while nearly everyone else imports, and consumes. For the rest of Europe to grow out of its difficulties, Germany will have to consume and and export relatively less while the others will have to invest, and export more while consuming relatively less. The Germans, however, have made it clear that they have no intention of changing what they see as a winning formula. That means that the only way for the euro to survive and the Union to hang together is for it to essentially to become German itself (or perhaps we should say Chinese) and pursue export led growth on an international scale.
The last two important meetings of the year will be the Nov. 3-4 G-20 summit in Cannes and the APEC (Asia Pacific Economic Cooperation) meeting in Honolulu on Nov. 8-13. In the lead up to these there will be much urgent talk of the necessity of completing the now 10-year-old Doha Round of WTO free trade talks. But it is a measure of the increasing insignificance and difficulty of these traditional WTO negotiating rounds that it doesn’t matter that much whether the deal — which would open developed country agricultural markets in return for opening of developing country services and investment markets — is done or not.
Because globalization goes far beyond trade and even beyond finance, the really big stuff has moved out of all the other institutions into the G-20. At issue in Cannes will be whether globalization can be made sustainable. At present, virtually all the world’s economies are attempting to grow and create jobs by exporting primarily to the United States, which, despite the recent economic crisis, high unemployment, and a fragile recovery, is still acting as the world’s buyer of last resort. But with its budget deficits, and global indebtedness rising and true unemployment hovering around 17 percent, the ability of the United States to continue this role while also acting as the global security provider is questionable. Similarly, the ability of China and other high-growth emerging economies to maintain growth through ever-rising investment, low consumption, and undervalued currencies is also questionable. Few believe this situation to be indefinitely sustainable.
The fix will require the United States to find a solution to its budget deficits while doubling present household savings rates. It will also require massive investment in the upgrading of U.S. infrastructure and in new U.S. based production facilities. It will require a 40-50 percent devaluation of the dollar versus the Chinese yuan and some other Asian currencies and a lesser devaluation against the euro, or against a new German deutschmark if the euro should disappear. Indeed, it may require the dollar to relinquish its role as the major reserve currency.
By the same token, Germany, China, Japan, and the east Asian tigers will have to stimulate consumption, reduce saving, investment, relative production, and exports while revaluing their currencies.
Since these changes are not going to be made at Cannes or Honolulu despite their better beaches and warmer water. An economic earthquake or tsunami that will reset globalization is in our future. Stay tuned.