Is there life after the crisis?
A lunch time talk by Niall Ferguson suggests a grim picture. Even if the world economy is not headed towards a 1930s-style catastrophe, it will remain mired in a "depression" like that experience in the 1870s, argues Ferguson, with long-term stagnation and deflation. This will be a bad time for everyone, except for populists and those who like to demonstrate in the streets.
The biggest winner? Ferguson suggests it may be China, who will supplant the U.S. as the global hegemon, as the U.S. replaced a similarly heavily-indebted Britain at the end of World War II.
I don't know about the China bit, but the rest is pretty scary. For a somewhat more cheery prognosis, you may want to turn to my latest Project Syndicate column, right here.
I agree with Niall Ferguson that the U.S. and the other advanced countries will not resume rapid growth anytime soon. With so many trillions of asset destruction, consumption growth will remain slow for a while, as will the process of finding another engine of growth to replace finance.
But as far as the developing nations are concerned, this need not be a tragedy. After all, their growth depends on their ability to import and deploy the stock of knowledge that already exists in the rich world--a stock that will not disappear or dissipate just because growth there has slowed down.
And as long as the de-globalization in question is simply a reversion to something like what we experienced in the 1960s and 1970s rather than the 1930s, the opportunities for convergence will still be there.
What will be ruled out of course is the kind of strategy that depends on external demand to increase the supply of domestic non-traditional tradables (manufactures, tradable services, and non-traditional agricultural products). This kind of undervaluation-cum-trade surplus strategy needs to be replaced by one that relies much more on domestic demand.
As I explain in my column, it is possible to spur the production of tradables without generating a trade surplus. The country that will need to undergo the largest adjustment of this type is China. And it is not clear that China is ready to undertake that transition.
So in the end, China may not emerge as the ultimate winner.
Read more at Dani Rodrik's Weblog
Professor Rodrik, what about countries like Mexico the Philippines and other countries whose economies depend heavily on exporting labor? It's impossible to stop the shift of labor that uses computers. But what about agricultural, service, and other kinds of labor that are routinely exported to the U.S. and many European countries?
May 11, 2009 8:59 PM | Reply | Permalink
The theory that developing nations “growth depends on their ability to import and deploy the stock of knowledge that already exists in the rich world” is a curious one. Having lived and worked (as a private sector, non-financial macroeconomist) in developing nations since 1980, it strikes me as both arrogant and unsupportable to proclaim that nothing useful or original arises from outside American (OK, the “first world”).
Then, there’s this buried gem, barely poking its head out of the muck: “And as long as the de-globalization in question . . . ”
THE WHAT? Deglobalization? Sorry, but the first reference to such a bizarre notion in an article has to be to explain why the demise of entire post-WWII era (not to mention the pre-WWI era) is suddenly to be taken as a given.
And strike three: “This kind of undervaluation-cum-trade surplus strategy . . . ” Why not just make up an entire new universe to populate these ideas? They certainly don’t have any connection to this one!
This is a very poorly written article.
May 11, 2009 9:21 PM | Reply | Permalink
Most of the worlds research and development does occur in the developed nations, who spend by far the most on these activities. This is true for science, technology, engineering, and business and financial processes. The output is not only in published work, but also in proprietary methods and trade secrets that are closely held. This advantaged the economies of the developed countries so long as they could charge rents on the intellectual property, make use of advanced production and service creation techniques, and protect their advantage by restricting or discouraging communication of the information to the rest of the world.
However, the situation is now changing. In the digital age "information wants to be free".
A developing country can take advantage of this situation if it does two things:
- educate its population not just to basic universal literacy (as needed for a manufacturing economy) but a high level of competence in science, technology, engineering, and mathematics, and
- organize its political and business processes to use the capabilities of its entire workforce to the greatest extent possibly at all times.
This allows the developing country to absorb the available information coming from the developed world, to establish its own goods and service producing industries, and to contribute to the development of indigenous technologies to avoid paying rents for imported intellectual property.
In an information economy, the third factor is the size of the population. A large population increases the number of outstanding individual contributors available, plus it enables a significant R&D effort even if only a small percentage of the overall population can be engaged at the beginning.
China appears to have exploited these strategies successfully.
May 12, 2009 10:43 AM | Reply | Permalink
There's no doubt that the vast majority of technology is developed in the "developed world."
For example, cheap thin-film solar panels or high efficiency wind turbines, which could bring affordable and sustainable electricity to the world, including much of the developing world, could not be developed outside technology centers like the US, Japan, and Europe.
It takes a lot of brilliant people at excellent universities, with a robust information network and lots of computational power, to create many small innovations which cumulatively make possible a small number of truly revolutionary innovations.
May 12, 2009 2:47 PM | Reply | Permalink
Even accepting, for sake of argument, a (in fact questionable) "hegemonian" view of long-term global trends, it does not not necessarily follow that therefore the decline of one "hegemon" must be directly followed by the rise of another. A period of "semi-hegemonianism" with the US continuing to lead the world in some areas, while yielding overall to a more "multi-polar" world economy, is also entirely possible, if not likely.
May 12, 2009 11:13 AM | Reply | Permalink
In the past, the decline of the hegemon and the rise of competing powers, coupled with a scramble for resources and rigid economic and social structures has led to an outbreak of total war within a few decades.
In this instance, the exhaustion of cheap fossil fuels is likely the cause of conflict.
The only ray of hope is that defensive technologies are proving to be capable of countering attempts to take and hold geography by force if the populace is sufficiently determined.
May 12, 2009 1:57 PM | Reply | Permalink
Re: In the past, the decline of the hegemon and the rise of competing powers, coupled with a scramble for resources and rigid economic and social structures has led to an outbreak of total war within a few decades.
When has there ever been a "the hegemon"? Since the fall of Rome at least the situation has been one where two or more great powers jockied and competed for dominance but with no clearly overwhelming superpower of the sort the US has represented since the end of the Cold War.
May 12, 2009 7:49 PM | Reply | Permalink
Great Britain from 1815 to 1870 was in a similar hegemonic position. France had been completely beaten by the end of the Napoleonic wars. Austria-Hungary was disorganized and decadent. Prussia was rising, but it did not come to power until 1870 and the unification of Germany. Italy was also fragmented until 1870. Russia and China were backward. Japan was in isonlation, and India was under British rule. The Ottoman Empire was the "sick old man" of Europe.
The end of the Civil War consolidated American power and allowed the United States to begin its rise to equal Britain by Wold War I. The Panic of 1873 did not affect the US as badly as Britain.
The unification of Germany following the Franco-Prussian War marked the beginning of Germany's rise to compete with Britain.
Even France made gains compared to Britain, which was in the Long Depression from 1873 - 1896, and which became more and more dependent on trade within its Empire thereafter.
May 12, 2009 10:47 PM | Reply | Permalink
I don't believe the argument that we must necessarily remain in recession or depression. Infrastructure alone, such as green energy and deploying next generation broadband, has enormous growth potential. A ten year plan to rebuild the nations energy and data infrastructure would create enormous prosperity.
Just print the money and do it.
Yes the dollar will fall and the price of imports will increase, but so will our exports become more competitive and demand for domestically produced electronics and such will increase creating more domestic jobs. It's not as though we lack the technology or labor on any front.
May 12, 2009 2:42 PM | Reply | Permalink
Just print the money and do it
Kozmik--not wrong on everything
May 12, 2009 4:08 PM | Reply | Permalink
Merrill,
Research in the developed world? Sure. Development? Not for most of the last 20 years (although, I’ll grant you financial engineering is mainly a 1st World thing).
Patents aren’t real work; they’re just the documentation. Talk to anyone in the pharmaceuticals industry and you'll get an earful about testing protocols around the world.
As for China successfully “educating its population not just to basic universal literacy (as needed for a manufacturing economy) but a high level of competence in science, technology, engineering, and mathematics,” my guess is you haven’t spent much time in the countryside. Trust me, basic literacy is achieved, but little else.
Do you really think China has “organized its political and business processes to use the capabilities of its entire workforce to the greatest extent possibly at all times?” Or, do you think the ineffective legal system that encourages deep and wide-spread corruption is a major hindrance to further development?
On population size, I’ll grant you that China has a bigger problem than anyone but India.
= = = = =
kozmik,
Exactly who were you thinking we’d be selling exports to? There is no demand, anywhere. This time, devaluation is the least likely strategy for any trading nation to get itself moving again.
May 12, 2009 9:57 PM | Reply | Permalink
The quote below shows the amounts spent on Basic Research, Applied Research, and Development in the US. I'd expect similar ratios in Japan and the EU.
In 2006, China moved past Japan in R&D spending at $136 billion to Japan's $130 billion. The EU15 spent $230 billion.
China is moving fast, both increasing its percent of GDP spent on R&D as well as increasing its GDP.
Note also that the US grew rapidly, both economically and in terms of scientific and technological innovation, during the period 1865 - 1914, when it was unencumbered by its current legal system.
Excerpt from Science and Engineering Indicators 2008
May 13, 2009 10:11 AM | Reply | Permalink