Sunday, November 23, 2014

Will the Global Economy Add Up?

CAMBRIDGE – This year has begun on a note of cautious optimism for the global economy. Europe is back from the brink. The United States did not fall over the fiscal cliff. Japan is moving to change its economic strategy, and China appears to be getting back on track.

Financial-market indices in the US, moreover, are near pre-crisis levels, and expected volatility is at multi-year lows. Major financial institutions are, for the most part, better capitalized than they have been in a long time. Balance sheets have been repaired, and many actors are awash with cash. While 2013 will not be a banner year, it may nonetheless come to be viewed as the first year of the post-crisis period.

To be sure, the political environment remains challenging almost everywhere. The US will face a trifecta of new fiscal hurdles – lack of legal authority to pay debt, no operating budget for the federal government, and the dreaded prospect of sequestration – before the end of March. Crucial elections lie ahead in Italy and Germany. China’s new government comes to power amid unprecedented levels of public concern about corruption and inappropriate enrichment of public officials. And it is not clear that Japan’s fractured politics will permit stable governance in the years ahead.

But there is the prospect of a virtuous circle in which economic improvement leads to less surly politics, in turn reducing uncertainty and boosting recovery further. So far, at least, the worst fears about the adverse political consequences of poor economic performance have not materialized – even in Greece. So my guess is that if nothing else goes terribly wrong, politics will not undo the global economy.

Unfortunately, much else could go wrong. In particular, while each of the global economy’s major regions has a plausible growth strategy, these strategies may not add up. Virtually the only proposition on which international economists agree is that the sum of all trade balances must equal zero. And, as a corollary, every bit of export-led growth that countries enjoy must be offset somewhere in the system by output growth that falls short of demand growth. So, a major challenge now is that around the world there seems to be far more planning for export-led growth than acceptance of reduced competitiveness and increased imports.

At the beginning of 2010, US President Barack Obama set the lofty goal of doubling America’s exports by the end of 2014. More than halfway through that five-year period, the US is pretty much on track to meet that target, implying that export growth is ahead of import growth or growth in the global economy.

In Europe, the only way that the financially distressed countries of the periphery can reduce their debt is to run trade surpluses. With limits on Germany’s willingness to accept a reduction in its competitiveness and repeated signals from the European Central Bank that monetary policy will remain highly accommodating, export-led growth seems to be the goal here, too.

And, in Asia, Prime Minister Shinzo Abe’s new Japanese government has already depressed the value of the yen and buoyed export prospects by placing reflation through monetary easing at the center of its agenda, while the most recent statistics out of China suggest significantly faster export growth than was anticipated.

So, where will the extra imports needed to support all of this additional exporting come from? Perhaps weaker commodity prices will create space for other imports, and commodity producers’ trade positions will swing toward lower surpluses. But lower commodity prices in a highly buoyant global economy would not be in line with past patterns.

Perhaps emerging economies with improved prospects will attract higher capital flows, financing larger trade deficits as capital goods are purchased directly or indirectly. But will this be enough to offset all that is happening in the larger economies? It is quite likely that some would-be export champions will be disappointed as planned competitiveness increases do not materialize.

This is why serene views of the effects of austerity based on historical experience are misguided. A single country or region consolidating or deleveraging in a thriving global economy can expect that its lower interest rates will translate into a weaker currency and an improved trade position. But most major economies cannot expect this in a struggling global economy. Each country’s austerity imposes external costs by reducing demand for other countries’ products. In this sense, it has a beggar-thy-neighbor aspect, which may be enhanced if the austerity is offset by monetary expansion.

The implication for policymakers is clear. More than at almost any time in recent years, international coordination to avoid excessive austerity will be essential for global economic success. Ensuring that national strategies are not just locally prudent, but also globally consistent should be the central task for the G-20 and the International Monetary Fund in 2013. Otherwise, the global growth equation may not add up.

Read more from our "New Kids on the Bloc" Focal Point.

  • Contact us to secure rights


  • Hide Comments Hide Comments Read Comments (10)

    Please login or register to post a comment

    1. CommentedRay Tapajna

      First of all free trade is not trade as historically practiced and defined. Today it is based on moving production from place to place for the sake of cheaper labor. It has separated production from investment. The value of labor and workers has been degraded and deflated with this value being a better money standard than paper money created out of nothing. The real commodities being traded are workers who are put on a global trading block to compete with each other for the same jobs down to wage slave and even child labor. With more than a billion people in the world who are ready to work for practically nothing, it is a race to the bottom. Real trade is based on people who have money to trade. It is not something that can happen any other way. See

    2. CommentedKathy Holland

      Competitiveness is the American game. Unfortunately, this competitiveness has evolved in rather sinister ways. It will be a welcome period of "growing up" once these particular players reach that stage of "disappointment".

    3. CommentedEnrique Woll Battistini

      November 15, 2011

      At the Brink of Recovery or Conflagration: The World at a Tipping Point

      © Enrique Woll Battistini 2011

      The world the baby boomer generation’s grandparents knew as children has been obliterated by a century of recurring monstrous wars, concurrent with exponentially increasing revolutionary scientific and technological discoveries and inventions, and massive economic, social, political, and legal changes which for many signify development. These changes have occurred in a stark and pervasive moral and ethical vacuum, in the context of unconscionable, unsustainable, and monotonically increasing welfare disparities between the rich and the poor. The world as we know it now is at the historical fork between the threshold of recovery and the brink of a new conflagration, indeed at a very promising and very threatening tipping point, and begging for drastic global financial, economic, and social redress, which only the most comprehensive multilateral and national governance reforms that would redefine the social contracts in the East and the West, the North and the South, and between them, could satisfy. Some of the more evident issues in need of holistic attention are the following.

      The failure of post World War II governance paradigms

      It appears that the world has reached a point where the paradigms of national and supranational government in the fields of finance, industry and commerce, justice, and security, at both levels, established at the end of World War II through global institutions such as the United Nations, the World Bank and the International Monetary Fund, have on the one hand reached a certain level of philosophical irrelevance, and on the other, a level of practical incompetence, a la Peter Drucker. In this situation would also fall, under their own weight, sooner rather than later, the old British Commonwealth of Nations, the Organization of American States, the Commonwealth of Independent States created by the Russian Federation after the Soviet Union's demise, with its recent Eurasian Economic Community, the North Atlantic Treaty Organization, currently without any counterweight, and even the European Union, preceded by its Euro Zone and nascent fiscal union, and the probably hundreds of dependent organizations, treaties, and multinational projects. This will be so, of course, if the pernicious global socio-economic disorder, a historical ball and chain legacy that is being dragged about in this new century, and millennium, to common loss, and which is now focused on by new global protest organizations such as and Los Indignados, and Occupy Wall Street, in a climate of neglected global warming and pollution, is sufficient indication of the incompetence of these mammoth and very expensive governance organizations to solve the serious problems facing humanity at large. This global disorder, which at the end of last century and the millennium operated somewhat below the radar of the great majority, which still accepted with some hope each day as it came, suddenly became visible, to all, as of the abominable event of September 11, 2001, and the resulting advent of new, frightful, and costly wars in the Middle and Near East, always fratricidal, and increased terrorism, and is frontally contravening the ambitious objectives of the fight against poverty of the United Nations for this new Millennium. This world disorder has been widening at an accelerated pace since the Lehman Brothers bust in 2008, with the recent repeated threats of insolvency by the U.S. Government, because of the blind political and fiscal disagreements between Democrats and Republicans, with the 2011 Arab Spring of unpredictable consequences, which may well be worse than terrible, and with the near term threat of chained bankruptcies in European Union countries. No one is exempt from this without large, and in some cases enormous, sacrifices. There remains, then, only the Organization for Economic Cooperation and Development, whose high principles and achievements deserve generalized attention, as an ideological and practical resource, and forum, for the democratic reformulation of the purpose of the current supranational and national entities, and their reorganization, or for the design and development of better institutions to replace them. The much-quoted New World Order, candy bait that led the G8 to the wars against Afghanistan, and Iraq, by the nose, is now, clearly, the manifest of the New World Disorder.

      The definition of a nation in the wider global context

      Whether or not a Global Financial Authority that would, for instance, constitute a World Central Bank having as voting members the two hundred or so existing National Central Banks, or simply regulate them, is on the horizon, and it very well might, no nation can today afford to define itself, its citizens, and it objectives within the sphere of its current or even future domestic concerns and interests, and must do so in the wider global context, as is very obvious to all. This is especially true of the USA, the sole remaining superpower, the lone leader of the West, if not the world, especially in the context of domestic and foreign poverty, whose resolution is mutually dependent, and without which real and meaningful long term world peace based on justice, and not arms, will never be had. This happy ending, I fear, will not happen spontaneously as a result of economic and social growth, and will require Global Private-Public Partnerships for Development, with Multilateral participation. But Government plans for domestic action of any kind, moreover against domestic poverty, and Government plans in the multilateral context for hemispherically articulated action against poverty in the Americas, or worldwide, if ever really considered, are hindered and defeated by commonplace political realities in the USA, such as those which beleaguer President Obama. Given the paradoxical reality that warring is a known quantity, ever present in the American folklore, and a recurring phenomenon in practice, whereas large scale Private-Public Partnerships for Development, and peace, are simply not, I believe that movements such as the Ninety-Nine Percent Declaration should take into account the wider global economic and social protest context. This threatening groundswell, which must be addressed, is exemplified by the “Los Indignados” of Spain, begun on May 15, that has spread not only to the USA, in the form of Occupy Wall Street, begun on September 17, but to the UK, is being amplified by other movements, in the First World, in the context of the European crisis, and is widening its reach to very many other countries in it and in the Second, Third, and Fourth Worlds, echoing the current global revolution begun earlier this year in the Arab Spring.

      The XXI century tax reform

      This topic is of obvious world importance in this century of growing confrontations between the rich and the poor, in which general social peace will be attained only if we can fast establish a privately led Private Public global articulated system for sustainable development: That is, a system for comprehensive, fair, and environment friendly development. It is also fitting to note that the development and dissemination of an effective proposal for such a system would necessarily require and include a proposal for a complementary major global tax reform through which the public sector could perhaps make its greatest contributions to development in the XXI century.

      Taxes should not be an instrument of envy, of punishment, or of forced economic or social leveling of the peoples. Most persons, no doubt, would agree with this. But taxes should also not be used by the State as instruments of manipulation, nor of indirect management or prosecution of the national economic activities, because the health of the economy should result, primarily, from the activities of the private sector. Rather, the State can and should preserve the health of the economy, at the macro level, essentially through the Central Bank, and by means of the Treasury. These institutions must act with independence, and coherence, within the general and specific regulatory frameworks applicable to the activities of the public and private sectors. The former, by controlling inflation by means of variations in the discount rate, and performing purchase and sale operations of Treasury Bonds in the open market, and the latter, by complementing, exceptionally, the funding of the comprehensive State budget by responsibly incurring debt, issuing and retiring its Bonds as may be appropriate.

      Thus, taxes should not only be the source of State funding, in order that it may fulfill its constitutional ends, but must also be its source par excellence, almost exclusive. In addition, the constitutional ends of the State and its consequent activities must constantly aim at the direct search for tangible citizen welfare through the provision of services within its exclusive competence, in the areas of Environment Food and Health Security, Energy Education and Comprehensive Development Security, Social and Internal Security, and National Defense Security, drastically limiting the supplementation of State tax revenues through indebtedness, or complementary activities, or entrepreneurial ventures, particularly those in which it would compete with the private sector, something with which the great majorities would also agree. Moreover, when State interventions in private sector activities are socially necessary, accepted, and extant, they must not be conducted by the State as entrepreneur, as stated, save in rare exceptions, and must always be done directly, through the comprehensive State budget, targeting the pertinent strategic sectors and actors, without neglecting the most impoverished social strata, and without resorting to special tax regimes.

      Now therefore, having linked the tax issue with the constitutional ends of the State, in its natural context, which is the comprehensive State budget, the heart of the State fiscal system, and a fundamental instrument of governance, it should be noted that the State fiscal system in the XXI century must gather certain essential characteristics for the State to be able to comply in the most effective and efficient manner with its central objective, the direct search for tangible citizen welfare:

      1. Conceptual simplicity
      2. Administrative simplicity
      3. Fiscal divorce
      4. Absolute transparency

      The indicated conceptual and administrative simplicity requirements would demand the existence of a single tax, or unique tax, which would be a unique consumption tax, or UCT, applicable exclusively at the consumer product level without exception, and would have a flat fixed rate, say of less than 20%. That is, the UCT would be applicable to the goods and services produced wholly or partially in the country, for direct personal consumption, acquired by natural persons, or by legal entities, regardless of the purposes or uses intended or given, including as inputs, or for resale, or for export. This tax would be paid by the natural persons and legal entities at the time of purchase, in a similar manner to the current payment of the general sales tax, IGV, segregating its amount, in the invoice, from the total price of goods and services concerned, with the natural persons or legal entities selling, that would collect it, regardless of their nature or size, incurring the obligation of immediate payment to the Tax Authority, as allowed by the information and communication technologies in existence at the time.

      The conceptual and administrative simplicity required would also demand, as already stated, the absence of special tax regimes, that is, the absence of tax credits of any kind, or deductions, or exemptions, or reductions, or fragmentations, or waivers, or any distinction in the tax rules applicable to different legal entities or different natural persons, or between these categories. Thus, having only the UCT, there would be no taxes on income, or property, or inheritance, for example, and it would per force have to be collected and administered at the central level by the Tax Authority and the Treasury, respectively. The required fiscal divorce within the State would consist of and require the total and irreversible separation and independence of the category of revenues from the category of expenditures in the comprehensive State budget, that is, of UCT collections from the category of uses or applications of funds to public expense and to public investment, without exception, beyond the correspondence that they must keep to maintain a reasonable fiscal balance and the national debt from Treasury bond issues at a minimum level, and under control. Therefore, the comprehensive State budget must consider and include a National Prosperity Reserve Fund (NPRF) which would allow for the growth of public spending and investment in line with the historical growth of the national GDP in times of Economic Recession, and even of Economic Depression, that is, that would enable the State to perform compensatory counter-cyclical economic stimuli whenever convenient.

      Furthermore, in the absence of the referred traditional instruments of manipulation through taxes, in order for the State to be able to comply fully with its primary purpose, which would be the direct search for the tangible citizen welfare, as pointed out, there would per force be cases of socially necessary and accepted State interventions in private sector activities, that it would not perform as an entrepreneur, but rather would be made directly, targeting the pertinent strategic sectors and actors, without forgetting the most impoverished population strata, by means of nonrefundable contributions, or of loans, or of complementary capital stock, by the Treasury according to the referred comprehensive budget. These interventions by the State in the activities of the private sector, through the Treasury, would be subject to private and public oversight, to satisfy the requirement of absolute transparency, by publishing the details of each case in the corresponding Web page, as part of the fiscal accountability of the nation.

      This new instrument of economic stimulus, and of social justice, would eliminate the deceptions and errors to which the more complex elements of the current tax system are subject, by individuals and legal entities, as well as the armies of private sector lawyers constantly confronted with the armies of public sector lawyers that produce a zero-sum economic result. In addition, this instrument would simplify the State function, allowing its reorganization, reform, and consequent reduction and public savings, and would eliminate tens of thousands of lawsuits of all types related to tax issues and the consequent futile efforts of and at the Judiciary to make or undo justice, resulting in savings and increased productivity in the private sector.

      A fiscal system of this kind, under equal internal and external economic environments, in comparison with the current, traditional system, would not only facilitate but would encourage the establishment of a socially acceptable minimum standard of living for the most impoverished, by aiming to achieve, for the poorest population strata that would together generate 1% of the national GDP, a monotonically increasing average per capita GDP relative to the national per capita GDP, over time, and with national per capita GDP growth, as an objective, and realistic, economic and social inclusion index, according to the economic possibilities of the nation. Given time, this fiscal system would, at the micro level, achieve this goal and the wider national objective of economic and social inclusion, by allowing the financing of all manner of regular and emergency social support programs, including a program of supplementary liquid income, and their monitoring in a scheme of comprehensive zero-based State budgeting by results, with the necessary transparency to effectively combat corruption in the public and private sectors. Crucially, a fiscal system of this type would enable the citizen determination, in a democratic and direct manner, of the percentage share of the various categories of expense and investment in the comprehensive State budgets, at least for the aforementioned broad categories of Environment Food and Health Security, Energy Education and Comprehensive Development Security, Social and Internal Security, and National Defense Security.


    4. CommentedEnrique Woll Battistini

      Undoubtedly sustained global trade deficits incurred by any nation will eventually lead it to international trade cessation, economic breakdown, and bankruptcy, and possibly to national and international political imbalances paving the way to war. Sustained long term bilateral international trade surpluses for given nations impinging, or expected to impinge, on struggling nations may lead either of them to war, even sooner, especially, perhaps, the latter. The history of the 20th century, I think, is recent proof of this. But it seems clear to me that the zero-sum game of unbalanced international bilateral trade, or of global trade (which is always balanced), does not imply zero growth for the economies of the nations involved or for the world economy, even if all trade deficits were perpetually debt-financed, short of very significant wars perhaps. I don't think these views would quarrel with those of Dr. Lawrence H. Summers, as I understand them. Moreover, I agree with his view that "More than at almost any time in recent years, international coordination to avoid excessive austerity will be essential for global economic success. Ensuring that national strategies are not just locally prudent, but also globally consistent should be the central task for the G-20 and the International Monetary Fund in 2013. Otherwise, the global growth equation may not add up", but with the variant that it would not add up to its optimal value, only. In my view, again, the best way to ensure the sought after local prudence and global consistency of national strategies for global economic success is as follows:

    5. CommentedVal Samonis

      Definitely, there is a beggar-thy-neighbor feeling to this stage in the global financial crisis but I think that the next stage featuring competitive devaluations (currency wars) will beggar the neighbors much more; a backhand repetition of the Great Depression 1?

    6. CommentedRobert Wolff

      Dr. Summers is expressing the fear that failure to achieve trade balance in the midst of international competition will destabilize the national economy and lead to international political instability.

      Larry's statement that,"Virtually the only proposition on which international economists agree is that the sum of all trade balances must equal zero" is the ultimate sarcasm (since it cannot mathematically be other).

      The US grew at 2% in 2012 and corporate profits were 12% - a disparity that put Americans another 10% of their GDP into debt.

      Wishful thinking and more meetings with officials with other countries will not resolve the national dilemma.

    7. Portrait of Pingfan Hong

      CommentedPingfan Hong

      The world will add up, and always adds up, as global imports must be equal to exports, ex post, if not ex ante as policymakers planed. Every country tries improve its international competitiveness may not a bad thing. As all countries are not competing for exporting the same thing, but different things according to their comparative advantages, the improvement in each country's competitiveness (lowering the costs of its exports) can lead to a higher share of tradable goods in each country while at the same increase the total trade of the world, a welfare gain for every one.

    8. CommentedTsuda Shoken

      Dear Sir,

      There is no concern of global natural environment. This is very big problem. The world that we can't live freely and enjoy the Sun shine well is coming soon. How to live with less materials and make economy better are important issues especially in developed countries.

    9. CommentedTom Shillock

      "Balance sheets have been repaired..."

      See Richard Koo's response to that:

    10. CommentedThomas Lesinski

      ECB policy is not accommodating at all if you judge it by the results: