DAVOS – Could 2013 be a better year for the global economy than 2012 was? The answer, in principle, is yes. In practice, however, the answer could be more depressing.
In the United States, the pieces are in place for stronger growth. The housing market is finally recovering. The Fed has signaled that it is prepared to do more to support growth and bring down unemployment. All that other US policymakers have to do to ensure that 2013 is better than 2012 is avoid shooting themselves in the foot.
In particular, to eliminate the uncertainty that continues to depress consumption and capital spending, they need to avoid “fiscal cliffs” (now and in the future), dangerous sequester mechanisms, and the silliness surrounding the periodic approach of the debt ceiling. They also must establish a credible plan for medium-term fiscal consolidation – one that entails both higher tax revenues and expenditure reforms, but only once the economy is strong enough to handle such measures.
Can US policymakers achieve this bare minimum? The consensus forecast for US growth in 2013 is lower than for 2012, which is not a vote of confidence that they can.
Similarly, it should not be hard for Europe to do better in 2013, given how dismally 2012 turned out. The elements of a banking union, starting with a single supervisor, are beginning to materialize. The European Central Bank has promised to do more to support the eurozone periphery. Even the International Monetary Fund believes that the slight eurozone contraction in 2012 will turn into a limited expansion in 2013. By the eurozone’s modest standards, that is progress.
But here, too, policy blunders could torpedo hopes for improvement. Negotiations over the banking union could collapse. The ECB could keep interest rates stubbornly high and fail to reach the agreements with peripheral governments that are needed so that it can buy their bonds on the secondary market. Governments could double down on their failed austerity policies. Plan A could collapse, with no Plan B in place.
The IMF sees China’s GDP growth accelerating in 2013. The Chinese economy remains heavily dependent on exports, which should pick up as growth in other countries recovers.
The danger is that the Chinese authorities will continue to do too little to rebalance their economy, allowing vulnerabilities to build up. When export growth softened in mid-2012, they halted the appreciation of the renminbi and rolled out additional costly capital projects like the high-speed rail line – the world’s longest – that was recently completed.
The problem is that growth based on low wages, supported by an artificially competitive exchange rate, cannot continue for much longer. Trophy investments threaten to produce low returns and bad debt. Yet, heedless of the dangers, powerful export interests and regional governments continue to fight for these policies.
The common element is that while the pieces are in place for faster growth in the three largest economies – the US, the eurozone, and China – politics may prevent it from materializing. This means that the needed reforms are as much political as economic.
Specifically, the US needs to address the problem of so-called “super PACs,” political action committees that allow rich special interests and individuals to buy elections. It needs to develop news media that neither channel only one position nor treat all points of view, no matter how absurd, as equally valid. Informed voters need reporting grounded in facts and analysis. When the American public is provided with careful analysis of issues related to gun violence and climate change, for example, we can be confident that it will also be getting reasonable economic analysis.
Europe, for its part, needs political reform at the level of the European Union. It must strengthen the European Parliament’s powers so that the EU has a political counterweight to its increasingly powerful economic entities – not just the ECB and the single banking supervisor, but also the European Commission, which will eventually become the enforcer of fiscal discipline. If stronger EU-level economic institutions are to work properly, stronger EU-level political institutions will be needed to hold them accountable and give citizens voice.
And, in China, greater transparency is needed to control corruption and keep special interests in their place. Chinese policymakers talk the talk, but they have yet to walk the walk.
Japan is the one place where the political system has delivered change that bodes well for faster growth. This is ironic, given that the country’s political system has long been regarded as dysfunctional. But Prime Minister Shinzo Abe, in his second time around leading the government, promises to force the Bank of Japan finally to end deflation, and that the public sector generally will do more to support economic growth.
We actually may be seeing a politician capable of learning from his mistakes and an electorate prepared to reward him for doing so – in the country least likely to witness such a breakthrough. If that is indeed what plays out in Japan, the world will gain a beacon of hope.