Jeremy Warner's Outlook: Investors look to the Far East to counter the growing gloom about the US economy

Click to follow
The Independent Online

Nothing should be read into the coincidence in timing between the International Monetary Fund (IMF) annual meeting, which begins in Singapore next week, and the fifth anniversary of 9/11, which is also on Monday. Yet it none the less provides a useful excuse to reflect on where the world economy has come from and where it might be heading.

The terrorist atrocities in New York and Washington marked in so many ways a turning point in events that it seems almost fatuous to point to the way it also changed perceptions about the pros and cons of globalisation.

Yet watershed it was in this regard. Prior to 9/11, there was broad consensus around the idea of globalisation as a generally beneficial force that would drive economic progress in rich and poor nations alike. The anti-globalisation brigade, though already big and vocal, was regarded in politically and intellectually respectable circles as wrong headed and irrelevant. The process was unstoppable, and despite some obvious downsides, in most respects "a good thing".

Some nations in east Asia and Latin America which had suffered badly during the financial crises of the mid to late 1990s, didn't share that view, but their argument was mainly with the destructive power of the capital markets and the subsequent, austere policy prescriptions of the IMF than with the process of globalisation itself. The general presumption was that reform of the global financial architecture, and particularly the IMF itself, would eventually find ways of dealing with these issues.

By highlighting one particular downside of globalisation, international terror, in such spectacular and devastating fashion, 9/11 began to explode this consensus. The anti-globalisation case gained voice and started to get heard. As the bandwagon gained speed, it took left and right on board alike, cutting a dash across the political divide. It also became part of wider public opinion, forcing the politicians to sit up and take notice.

Few have managed to articulate the economic case against globalisation better than Joseph Stiglitz, the Nobel prize winning economist. He's been in London this week to promote his new book, Making Globalisation Work. A more passionate, engaging, and considered advocate of root and branch reform would be hard to imagine. He speaks from the heart as well as the head when he insists that while globalisation was meant to make money flow from the rich to the poor nations, in fact it is increasingly going in the other direction.

Consider what's happened since 9/11. In order to keep the US economy going in the wake of this profound shock to business and consumer confidence, the US Federal Reserve delivered a series of sharp cuts in interest rates. In combination with let-rip federal spending and tax cuts, the effect was to generate a housing and spending boom of unprecedented proportions. A US recession wasn't entirely averted, but it was a shallow and short one. In little more than a year, the economy came bounding back again.

But who was ultimately paying for this spending binge? In essence it was the producer nations of the Far East. When a country develops a big current account deficit, it has to be paid for in some way or other. This is achieved through the mechanism of equal and opposite inflows of foreign capital.

The flipside of the US trade deficit coin is a growing capital imbalance, with the savings of some of the poorest nations in the world in essence being lent through the purchase of US Treasury bills to fund the profligacy of some of the richest. As Professor Stiglitz graphically puts it, you might expect that capital like water would flow downhill from rich to poor. In fact, it seems to flow uphill from poor to rich.

These imbalances are at the core of today's concerns about the future of the world economy, as well as the debate about the future of globalisation. They are also at the top of the agenda for next week's meeting of the IMF. They didn't begin with 9/11: the US current account deficit is as old as the hills, and in many respects no more serious in its size and consequences than those associated with dominant empires down the ages. But they have been greatly exaggerated by the consumer boom generated to counter the September 11 atrocities.

There is much which is right about the Stiglitz analysis. Where I think he's got it wrong is in the blunt assertion that globalisation is helping rich nations at the expense of poor ones. The real picture is a great deal more complex.

The backlash we are seeing against globalisation in the developed West is driven not by concern for the world's poor, but by self interest. As wages and skills equalise globally, as the effect of international trade and communication levels bring down living standards and relative wealth, the greatest losers are the already rich nations. Past advantages of industry, education, technology, intellectual know-how and skills are being scattered to the four corners of the earth. The people who lose in this process of homogenisation are those who already have these things, for they now have to share them out.

International surveys of the public mood show it is the developed West which is filled with gloom about the future, not the "poor" of the world, who in the main look to a better future. For the West, it is all downhill. Their power and wealth is about to be eclipsed by the East. By contrast, the spirit in China and India is largely one of unbounded optimism. Rightly or wrongly, people believe things are getting better, and will continue to do so.

These are huge generalisations, obviously, but so are many of the observations made by Professor Stiglitz. And while the IMF plainly needs urgently to be adapted to the demands of a fast-changing world, it is actually at the level of national policy, not in the global arena, that most can be done to counteract the growing inequalities and divisions that globalisation is producing, for they are mainly manifest at a national level. The IMF can't do it; only national governments can put in place adequate social safety nets, or invest in education, research and development in a way that might produce a competitive economy.

Most of Professor Stiglitz's ideas for a better world are essentially utopian in nature. Few nation states, both rich and poor, are at a stage of such altruistic abandonment of self interest that they would willingly submit to a global reserves system.

Nor would centrally awarded prizes for medical cures and treatments as a way of incentivising discovery and development be any substitute for the present system of intellectual property rights. It's a nice idea, which in theory would make these breakthroughs accessible to all, but it is also naive. In practice, the only jobs created by this authoritarian approach to innovation would be in the field of bureaucracy. Corrupt and suspect practice would run riot and medical advancement would grind to a halt.

Globalisation has drawbacks aplenty, not least the acceleration of global warming, but actually it is working largely as it was expected to. The developing world is getting richer, and it is doing so partly at the expense of already rich nations. The growing inequalities it is also giving rise to within nations is something that only nations themselves can do something about, not international organisations.

This growth in the developing world is the strongest reason for believing the world economy is not about to go to hell in a handcart. China, India and the other developing nations of Asia and Latin America are becoming the true drivers of growth in the post-9/11 era.

For the US, the economic outlook is particularly uncertain as the Fed deliberately chokes off the consumer boom it activated five years ago. Yet for the first time in nearly 100 years, it may not actually matter that much. The pessimists in financial markets right now are those whose focus remains glued to the US housing market, as if the fate of the entire world lies in the hands of US real estate agents. It would be silly to underestimate their importance, of course, but for the optimists, it is the Far East that now matters more. For better or worse, it is globalisation which has brought about this seismic shift.