The Looming Lost Decade
By Ashoka Mody-Mareeg.com-PRINCETON – As 2013 comes to an end, it looks like the world economy will remain
stuck in low gear. For those reading the tea leaves of global recovery, the
third-quarter GDP numbers offered no solace. While the United States is ahead of the
pack, some of its gains could soon be lost, as accumulating inventories begin
eroding profits. Despite glimmers of hope, the eurozone and Japan are struggling to
cross the 1% threshold for annual economic growth. And the major emerging economies
are all slowing, with Russia practically at a standstill.
Not surprisingly, a catchphrase in economic-policy debates nowadays is “secular
stagnation,” the idea that excess savings chronically dampen demand. The economist
Robert Gordon has also argued that the world is low on economically productive
But before we despair, there is work to be done. The coordinated fiscal stimulus
that saved the world from economic collapse in 2009 disappeared too quickly, with
governments shifting their focus to domestic politics and priorities. As domestic
policy options have been exhausted, economic prospects have dimmed. A renewed
emphasis on stimulus must be augmented by global coordination on the timing and
content of stimulus measures.
The crisis was and remains global. Trade data tell the story: after increasing by
about 7% annually in the decade before 2008, world trade fell faster than global GDP
in 2009 (and more sharply than during the Great Depression). Once the brief
stimulus-fueled recovery faded, growth in world trade again slowed quickly, falling
to 2% year on year over the past 18 months. Disappointing export performance is
largely responsible for the recent weakening of economic-growth prospects.
At the end of 2008, when the scale of the impending economic destruction was not yet
apparent, Olivier Blanchard, the International Monetary Fund’s chief economist,
boldly called for a global fiscal stimulus, stating that, in these “not normal
times,” the IMF’s usual advice – fiscal retrenchment and public-debt reduction – did
not apply. He warned that if the international community did not come together,
“vicious cycles” of deflation, liquidity traps, and increasingly pessimistic
expectations could take hold.
Fortunately, world leaders listened, agreeing in April 2009 at the G-20 Summit in
London to provide a total of $5 trillion in fiscal stimulus. The US and Germany
added stimulus amounting to about 2% of GDP. And China’s banks pumped massive
amounts of credit into the country’s economy, enabling it to sustain import demand,
which was critical to the global recovery.
But hubris rapidly set in, and parochial interests took over. Before the wounds had
fully healed, the treatment was terminated.
The worst offenders were the US and Germany, which shirked the responsibility to
protect the global common good that accompanies their status as economic hegemons.
The United Kingdom, with its contrived rationale for fiscal austerity, was not much
better. Fiscal stimulus by these three countries – together with smaller
contributions from France and China – could have continued the necessary healing.
Countries now seem to think that monetary-policy measures are their only option.
But, whereas fiscal stimulus boosts growth at home and abroad, enabling mutual
reinforcement through world trade, monetary policy is guided primarily by domestic
goals, and, in the short term, one country’s gain can be another’s loss.
America leads the world in monetary-policy ambition. The researchers Cynthia Wu and
Fan Dora Xia estimate that the US Federal Reserve’s open-ended asset purchases
(so-called quantitative easing, or QE) have led to an effective US policy rate of
-1.6%. QE helped American exports by weakening the dollar relative to other
currencies. Once the Japanese engineered their own QE, the yen promptly depreciated.
That has kept the euro strong.
The weakest of the “big three” developed economies – the eurozone – has thus been
left with the strongest currency. In the third quarter of 2013, Germany’s export
growth slowed and French exports fell. After a spike earlier in the year, Japan’s
exports have also contracted. Only US exports have maintained some traction, thanks
to the weaker dollar.
In the 1930’s, after the gold standard broke down, world leaders could not agree on
coordinated reflation of the global economy. In his book Golden Fetters, the
economist Barry Eichengreen argued that the lack of coordinated action dragged out
the global recovery process. Such delays are costly, and risk allowing pathologies
to fester, prolonging the healing process further.
Now, despite unfavorable political circumstances, Blanchard should make an even
bolder call. These are still not “normal” times, and the “vicious cycles” persist.
Another global fiscal stimulus – focused on public investment in infrastructure and
education – would deliver the adrenaline shot needed for a robust recovery.
More public investment is twice blessed. It can shake the world out of its stupor;
and it can safeguard against “secular stagnation.” The US, Germany, the United
Kingdom, France, and China should act together to provide that boost. Otherwise, a
sustainable global recovery may remain elusive, in which case 2014 could end in low
gear as well.
Ashoka Mody, a former mission chief for Germany and Ireland at the International
Monetary Fund, is currently Visiting Professor of International Economic Policy
at the Woodrow Wilson School of Public and International Affairs, Princeton
Project Syndicate, 2013.