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Archive for the ‘Global Economy’ Category

President Obama’s budget projects 1.3 trillion dollars in deficit in fiscal 2011. This has provoked a Republican outrage that I simply fail to understand. Here are the facts:

  • When President Bush came to power, America was in its 3rd consecutive year of budget surplus.
  • He cut taxes and went on a spending binge, with strong Republican support. He eventually spent more than any other president since LBJ, including nearly a trillion on the invasion of Iraq.
  • In the process, the Republicans used up the surplus so swiftly that America ran a large deficit 7 out of the 8 Bush years, consecutively since 2001.
  • They accelerated the hands-off policies started during the Clinton era, giving financiers the biggest say in a democracy, and ushering the biggest downturn since the Great Depression.
  • The administration spent another $868 billion on bailing out the financiers and providing stimuli before bowing out in 2008.

So after the “frat boy shipped out,” as The Economist put it, leaving America in a mess on multiple fronts, his supporters are now upset that the “socialist” Obama administration has to run another budget deficit?

This is the type of irresponsible amnesia on part of the Republicans and the Tea Party fanatics that’s going to hurt America’s global position.

And that’s what my article is about.  But I had to introduce the context, because another irresponsible refrain you hear from the right is that the rest of the world is just out to get America.

My question is, will the world continue to sponsor the debt that the United States has raked up? America’s “aura of invincibility,” wrote David Sanger in the New York Times, will last “maybe a long, long time.” While investors would malign any other economy under similar management, it shrugs off “American financial exceptionalism.” So the capital markets worried this week about Europe’s growing debt, but they hardly paid attention to Moody’s polite warning that America’s financial health “will at some point put pressure on [America’s] triple-A government bond rating.”

This optimism and this belief in exceptionalism is a dangerous consequence of the way US politicians allowed the development of a neo-laissez faire: Just borrow and spend, all will be fine in the end. You see that in consumer habits, in subprime markets, in Wall Street’s philosophy of heavy leverage, and in wanton federal spending while lowering taxes. Risk management was mostly rhetoric.

And so, the US government debt burden now is 85 percent of GDP. This is higher than the proportion in the “socialistic” Europe vilified by the American right. Germany: 79 percent, France: 77 percent, Portugal: 76 percent, Britain: 69 percent, and Ireland, which IMF claimed was the sickest of them all: 61 percent.

Still ok, if someone (read: China) is willing to underwrite the debt. China still holds the world’s highest share of US treasury bonds, almost $800 billion worth. But it has been buying less and less, signaling discomfort.

In the 1990s, Canada lost Moody’s triple A rating when its combined federal and provincial debt approached 100% of GDP. As the US inches to that level, a ratings blow may be nearer than most optimists believe.

And for America, that type of a blow will be more than economic. It will send a powerful political message about the overstretch of the world’s superpower. The world wants to believe that US politicians will be able to enact meaningful fiscal change, keeping its long term financial health squarely in sight. But so far, especially with the naysaying, amnesiac, and reactionary performance shown by the right, they will have little to find comforting.

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The global recession is beginning to end. Asia is beginning to recover: South Korea, Taiwan, and India are doing very well. Some countries outside are also faring better, and we’re beginning to see commonalities as to why. In this post, I’ll point to two examples.

The first is from the Economist, Aug 8-14, on the strength of the German economy:

Germany’s economic machine is made of honest iron and steel, not subprime mortgages, collateralised debt obligations and other financial chicanery. Having been concocted in Wall Street and the City of London, the crisis, it is said, has proved the merit of Germany’s solid social-market economy.

The second insight is about Brazil, which was “one of the last [countries] to enter recession and now looks like being one of the first to leave it.” The ingredients are:

  • responsible economic policies, ignoring pressures from left-wing Workers’ Party.
  • insistence on “rational economics” and free trade, and.
  • “ambitious social policies have helped to lift 13m Brazilians out of poverty; searing inequalities of income are narrowing steadily.”

See any commonality? Social safety nets. Social policies–public support for good health, good education, minimum income, and crisis assistance. In fact, this insight is supported by decades of serious research. (I will write about that in another post.) And it’s not just policy (frequently and stupidly derided in the US as big government), but an economic culture that is thankfully more social-ist.

In America, of course, sustaining social support needs an astonishing amount of selling, so much so that the government finds it easier to bail out big investment banks and big insurance companies, whose criminally-negligent incursions into risky financial products helped create the crash in the first place, than extending funds for a sound healthcare system. Funds for public education, similarly, have been difficult to come by for years.

Yes, in the end big banks got us in the mess, and as Paul Krugman says, big government has saved us. But that’s true if “save” = “getting worse more slowly.” 

If saving = learning so that the next recession may be less of a surprise, then it’s another story. The American style of capitalism–the type that has prioritized home ownership over thrifty spending habits as the mark of success, and typically promotes the likes of Rumsfeld and Paulson as the main shapers of fiscal priorities–is sure to not learn well from this recession. The priorities of the economic culture of Brazil and Germany are quite different.

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Many analysts are putting trust in Asia to pull the West up from the slump into which it has fallen due to its profligate appetite for credit. In addition to production and trade, The Economist recently hoped that Asian consumers would become shopaholics, like their Western counterparts. Never mind that rampant credit-fueled consumerism was a major part of the problem facing the West.

But a dose of reality was injected recently by Minxin Pei, who doubted Asia’s ability to fill in for the West. Pei wrote in an article in Foreign Policy: “Even at current torrid rates of growth, it will take the average Asian 77 years to reach the income of the average American.”

The problem with most economist-driven expections of Asia’s ability to pull the world out of a slump is that such analyses ignore the crucial part that politics, and states, play in economic globalization.

But if lack of ability is one issue, so is a possible lack of willingness.

Political scientists and political risk analysts for decades have pointed out that international financial movements take place only within parameters allowed by states. Ian Bremmer of the Eurasia Group recently restated that observation, from the angle that post-financial-crisis state capitalism is now the main decision-making prism.

What this means is that competition between states will inevitably dampen Asia’s ability and willingness to clean up the mess left by the West. As I have argued in my book, India’s Open-Economy Policy, India’s political rivalry with China, whether in securing energy or in inward foreign investment, will be the first influence on its international economic policies. China’s assessment of the US and Japan will determine its foreign acquisitions. US interpretation of Chinese influence in the Middle East and Africa will also temper cooperation toward free markets.

On top, you have respective Buy American and Buy Chinese policies. These have stayed below maximum so far — but put all of these together and the expectation that Asian consumerism or dynamic growth will be West’s savior is just economic optimism, not political reality.

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As the global recession deepens, the big question is whether we will see a repeat of the protectionist and nationalist policies that marked the Great Depression era.

In the US, President Obama had to temper down Congress’s Buy American provisions to ensure that that the US stance is not misinterpreted. But he is under pressure to consider greater forms of protectionism.

The UK Prime Minister Gordon Brown addressed the US Congress yesterday, and tried to support a pro-globalization position. But he is also under pressure. Anti-immigrant sentiment is rising in Britain. Demonstrations have taken place even against fellow workers from other EU countries.

Both Obama and Brown may be sheltered a little bit, for they don’t face immediate elections.

India is heading for elections next month. While the major parties, Congress and BJP, are pro-openness, fallout from the global slump may begin to empower the Bahujan Samaj Party, which draws more from the poorer classes and the lower castes. If BSP gets a bigger share of the electoral pie (which I think it will), then Indian policy will be under pressure to extend protection of the poor. Deficit spending will rise there as well.

It is unlikely that India will become protectionist. But it will have to diversify, because no matter how rosy its industry associations are sounding, FDI will continue to fall for the foreseeable future.

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The forecasts for the world economy are getting gloomier by the week. The IMF, which in October last year somehow predicted 2009 world output to grow by 2.2 percent, now estimates it to be 0.5 percent.

The US won’t grow this year. The Irish economy is no longer the poster child of Europe. Iceland’s government has recently resigned for economic reasons. And the UK is estimated to shrink by 2.8 percent, the worst among industrialized nations.

India, similarly, has been rocked by lower foreign investment, the reverberations of Mumbai, and more recently, the fiasco at Satyam.

But one sector seems to be steaming on. Legal process outsourcing (LPO), whereby corporations and law firms outsource some of their legal services to cheaper counterparts in other countries, is growing.

The LPO sector in India reported a 200 percent growth in the last 12 months. By 2010, it’s estimated to grow to $640 million, from $225 million in 2007. The top LPO firms are hiring people by the hundreds.

What’s driving this? Interestingly, a boom in legal services related to bankruptcies. I guess that’s one silver lining to a recession.

But the broader underlying reason is cost-cutting. As competency grows in India, Western firms need to explore this option much more. But they also need to do their due diligence and obtain independent advice before proceeding, keeping the Satyam implosion in mind.

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To start with, my “G” doesn’t stand for globalization, it stands for the G-8, the leaders of the industrial powers, who are now meeting for their annual summit in Hokkaido, Japan.

They’re meeting in troubled times. The distributional issues of globalization–the fact that the benefits are shared extremely unequally–have finally come to the fore, especially now that consumers of the West are feeling the pinch from rising food and energy prices.

The public is in agreement about the inequality stemming from globalization. The Christian Science Monitor reports: “The majority of the public in 27 out of 34 countries surveyed said the benefits and burdens of economic change are not being shared fairly.”

The problem is not inequality per se. The problem is the global political risk associated with it. Expect electoral turbulence around the world, expect accelerated shifts in international relations, expect the Saudis and China to get more influence as the global role of the West comes under question.

In his Washington Post column, Jim Hoagland came down particularly hard: “The world that these leaders and their predecessors have promised for the past three decades is not today’s world of energy and food-price shocks, global financial irresponsibility, menacing climate change, and terrorist networks seeking weapons of mass destruction. The G-8 leaders — most of them disdained by their publics in these hard times — have failed, and they should accept responsibility.”

No wonder, then, that the UN Secretary General cautioned on the eve of the summit: “Never in recent memory has the global economy been under such stress.”

Some argue that the G-8 needs to be expanded to a G-20 to make the group more representative and thus assure better global management. Hoagland rightly suggests more focused economic management, centered around a G-3: US, EU, and Japan. But neither will be sufficient. The first will be impossible to manage; the other is out of touch with global shifts.

A forward-looking concept of economic management should balance representation, future outlook, and focused manageability. It’s time to think of a G-4: US, EU, China, and India. Fixing energy problems or financial excesses across borders, and battling climate change or global terrorists will all fail without the active involvement of the two most populous (and increasingly assertive) countries of the world.

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