Steven Pearlstein
Steven Pearlstein
Columnist

Davos shows us the instability of a tripartite global economy

It's probably because I'm already anticipating the ill effects of Dana Milbank's month-long moratorium on any mention of Sarah Palin, but I found myself fantasizing last week about what Palin would have said if invited to speak at the annual gabfest in Davos, Switzerland.

"So how's that global free-markety stuff workin' out for ya?" Palin might have asked.

Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.

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In truth, the globalization long championed at Davos has turned out to be something of a mixed bag.

There's no doubt it's been a big plus for hundreds of millions of people in Asia and Latin America who have been lifted out of poverty and the millions in those regions who have joined the global middle class. And, despite some unpleasant moments in 2008, globalization has enhanced the wealth and stature of the financial, technological and philanthropic elite that have turned Davos into their playground.

For the rest of us, though, you'd have to say it's been something of a disappointment. Rapid globalization is associated with relatively stagnant incomes, rising inequality and, most notably, gut-wrenching economic instability. The Mexican peso crisis, the Asian financial meltdown, the dot.com debacle and the bursting of the recent credit bubble - you don't need a PhD in economics to see the correlation between the dramatic rise in cross-border activity and the increased frequency and severity of booms and busts.

In reading through last week's dispatches from Davos, it seemed that even the high priests of globalization acknowledge that the search for a satisfying and sustainable global equilibrium remains elusive.

On the outlook for the next several years, the consensus seemed to be that we now have a tripartite global economy, with growth in the developing countries of Asia running at more than 7 percent, growth in Japan and most of Europe remaining painfully sluggish at below 2 percent, and with the United States and much of the Americas falling somewhere in between.

The problem with this arrangement and its wide disparities is that is looks to be highly unstable.

Although developing countries are beginning to shift toward selling more goods and services to their own populations, they remain highly dependent on sales of manufactured goods to wealthy nations where incomes won't be growing and the emphasis will be on paying down excessive levels of debt and caring for aging populations. Unless developing countries can reorient their export machines toward selling to each other - a possibility, yes, but not a certainty - the robust growth of the past two years will be hard to sustain.

Moreover, some of the recent growth in developing countries results from a surge of foreign capital flowing into those nations. Some of that flow is longer-term investments made by individuals, banks and corporations from wealthy countries who see bigger returns in the developing world. Not only does this have the effect of slowing growth in their own countries even further, but it also is helping to stoke investment bubbles through much of the developing world.

These bubbles are further inflated by the flow of short-term "hot" money into developing economies as investors borrow at low interest rates in the United States, Europe and Japan and invest in much higher-yielding instruments in developing countries.

In a more stable and balanced global economy, of course, interest rates would converge and the flow of hot money would subside. But as long as growth remains too slow in some countries (prompting their central banks to keep interest rates low), and too high in other countries (prompting those central banks to push interest rates up), this "carry trade" can continue.

Floating exchange rates are another mechanism for bringing national economies into better alignment by moderating trade imbalances, reducing interest-rate differentials and curbing flows of hot money. But as long as China and other export-oriented economies prevent their currencies from adjusting upward by pegging them to the dollar, that adjustment won't happen, either.

Global inflation is yet another danger. The rapid growth in developing countries has already driven global commodity prices back to near-record levels as an emerging global middle class demands more food, more cars, bigger homes and more electricity. In addition, all that cheap money being churned out by the Fed and other Western central banks is being used to fuel a new wave of speculation in commodity futures and derivatives. A little inflation probably wouldn't be a bad thing for debt-burdened industrial countries like Japan, Britain and the United States. But inflation rarely comes in small doses, and it can be downright dangerous in developing countries, as the rulers of Tunisia and Egypt can attest.

Back when there was a strong tendency for people and companies to buy and invest at home, none of this would have much of a problem. Over time, countries developed mechanisms for dealing naturally with such imbalances within their own borders.

As yet, however, nobody's figured out how to really solve these imbalance on a global basis. Existing market mechanisms are often frustrated by national policies aimed at improving economic conditions within one country, irrespective of the impact on other nations. And what political mechanisms exist for coordinating policies and coaxing countries to do what is in the best for the rest of the world - well, those remain weak and ineffective. "Global governance," it turns out, is no more popular among Chinese and Germans than it is among Americans.

Indeed, even 50 years after the launch of what is known as the "European project," members of the European Union still struggle with what it means to operate a truly open economy with a single currency, coordinated fiscal and monetary policies and a unified set of regulations. That's what the recent euro crisis is about, and it is nowhere close to being resolved.

After the Asian financial crisis inn 1997, there was hopeful talk at Davos that the G-7 industrial nations step in and begin to manage the global economy. After the financial market meltdown two years ago, focus shifted to the G-20, a more inclusive group of world leaders that was meant to reflect the rising importance of developing nations. This year, strategist Ian Bremmer of the Eurasia Group may have captured the mood at Davos with his wry observation that all we've really got is the G-Zero.

Yes, we have globalization. What we don't have yet is a global economy or the institutional infrastructure to sustain it.

pearlstein@washpost.com

 
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