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From: wolda002@umn.edu
Date: Thu Aug 05 2010 - 00:42:57 EDT
More stimulus won’t stop Asia’s rise
By Andy Xie
Published: July 22 2010 12:52 | Last updated: July 22 2010 12:52
The current debate in Europe and America over the need for stimulus seems
strange to most Asians. When people from China visit the west, they see
economic paradise in these supposedly stagnant economies. After all,
stagnation at such a high income level isn’t so bad; just ask the
Japanese. But whatever happens in the current economic debate, relative
stagnation in the west is inevitable in the medium term.
At the moment the global economy appears to be double-dipping, and many
(including those in this Financial Times debate) have argued for another
round of stimulus. But another round of spending would support growth only
temporarily, while increasing the risks of more sovereign debt crises, more
overheating in emerging economies, and pushing the global economy into high
inflation down the road.
There are well-known arguments against unlimited stimulus. The bond market
could freak out over excessive national debt. Currency values could
collapse. When an economy faces structural imbalances like now, the impact
of stimulus on employment is low. But there is a new and perhaps more
powerful case for austerity: globalisation has made even large economies
such as America, which used to operate under special rules, behave as if
they were small, open economies.
This is because the main players in today’s globalisation are not
countries, but multinational companies. These large businesses now allocate
investment and production across the world, taking cost and regulation
levels into account. Because companies can now move their investments
across borders, government spending to boost demand in one country now
leaks across borders into others. This leakage dramatically decreases the
effectiveness of any Keynesian stimulus. Put simply, it now costs more to
produce the same growth, and the growth does not become self-sustaining.
This same trend also explains the recent pattern of weakening economies in
the west and the strengthening trade performance in emerging economies.
During the big downturn in 2008 many multinational companies closed
factories in the high-cost west, and expanded their operations in low-cost
countries such as China. Hence, today, more stimulus in the west will have
a more limited growth impact at home. That said, it will increase
inflationary pressure in emerging economies, where average inflation is
already above 5 per cent and rising. As their inflation transmits back to
the west through trade and currency market, the west will suffer
stagflation.
One might argue that rising costs in the emerging economies will eventually
make the west competitive again. But it will be a very long wait. The
average labour cost in the west remains over 10 times higher than in the
emerging economies. Emerging economies also have five times as many people
as the developed economies. Globalisation is creating an insurmountable
headwind for growth in the west. As a result, even with huge new stimulus,
it is quite likely that the west will experience a growth pattern like
Japan’s for a decade or longer.
Of course, globalisation is not a lose-lose proposition for the west. Its
multinational companies will make far more than in the past. It is possible
that western stock markets will decouple from their economies in the decade
ahead, and fare well. This would be a big boon for the western societies
that are struggling with the cost of ageing.
Some argue for trade protectionism to promote growth in the west. As high
levels of unemployment persist, such calls will strengthen. But that is not
a solution either, in particular because it would cause a sharp drop in the
value of the west corporate sector just at a time it might be about to
boom.
It is even possible that western living standards will decline in the next
decade. But, as those looking from Asia will tell you, one should not focus
on growth and ignore the level. While the west looks enviously at booming
Asia, people here would much rather stagnate at income of $40,000 per
capita than boom at $4,000. It enjoyed decades of high living standards
because the emerging economies were not organised to compete. It was a
lucky break. Now the luck is over. And no amount of stimulus will bring it
back.
The writer is an independent economist based in Shanghai
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