Is there anyone left who doesn’t expect (and fear) a world-wide economic downturn? Maybe I’m too close to my old profession as a dismal scientist. Perhaps I’m obsessive about economic concerns, but I can’t find any optimism among those who tend to matters of international growth. Regardless of where you look, there are clouds either overhead, as in the U.S., or on the horizon and blowing towards shore, as in Europe, Asia, Africa, and Latin America. The old giants are staggering, and the new ones will be soon!
The table below (click to enlarge), taken from Bloomberg, is a little outdated in what to expect in terms of real growth, but it is the latest available. In my view, and increasingly that of many others, real GDP growth in the U.S. and probably Europe will decline for 2008, and not be much better in 2009. Stagflation will not be a purely local affair for us.
Of course, there is no agreement about the severity or longevity of the downturn. There never is. But slower times are upon us, and the greater fear is that it could turn into a 1930s scenario of economic activity spiraling downward. This scenario unfolds like this: to protect themselves, the developed nations (the U.S. and Euroland, e.g.) will blame everyone else and begin pulling back from their bilateral and multilateral trade agreements. This they will do, trying to protect their domestic workforce from falling real wages and businesses from the effects of higher commodity prices. This, in turn, would be met by retaliation of our former partners in the developing world, in the form of trade embargoes, higher tariffs and inflated currencies. World trade plummets, and the heady times of ever expanding world economies comes to an end. It’s a horror of a scenario, and it did happen in the early stages of the 1930s depression.
Personally, I don’t think this will happen now, at least not to the worst extent. But, I do believe that this scenario will unfold in a modified form. We are already seeing embargoes of food commodities. Many of the rice producing nations in Asia are already prohibiting exports. Argentine farmers are trying to mobilize an embargo of their grain crops in order to lower domestic prices.
From our side, there is already talk of modifying NAFTA, hoping to scotch the flow of jobs to south of the border. It won’t work, of course. Muscle jobs are not coming back to America. But, our southern neighbors make tempting targets for demigods looking for a way to exploit our troubles for their benefit.
Fortunately, it doesn’t have to unfold in this way. The rapid expansion of the emerging nations has undoubtedly fueled the increases in prices for world commodities. And, in the short run world production of most of the commodities cannot be dramatically expanded. Prices did and will go up. But, over a longer time, additional production will brought on line. Already, in the U.S., farmers in the Midwest are planting new crops on land that has been fallow for decades. More oil will be found, and energy substitutes will be developed. All over the world there will be increases in production of foods and commodities.
On the demand side of the equation, adjustments will also be made that help lessen the blow. Americans and Europeans will learn to be more efficient with their petroleum products. We will develop more efficient cars; we will use cars less and public transportation more; we will move closer to work and take fewer driving vacations and unnecessary trips. Given some time, we will lower our use of the petroleum and help moderate the escalation of prices that has driven our real income down.
In the developing world, the same adjustments will be made. They will lower their production of manufactured goods (and the demand for the commodities used to make them), as the effects of the slowdown reach their factories. They will suffer from higher prices, just as we have, and their real incomes will fall some in the adjustment, just as ours has. China and other nations that are now subsidizing low petroleum prices will change, and bring market forces to their side, thus helping reduce demand for petroleum products.
In the end, the growth rate of the world’s economies will resume, but they will resume at levels more sustainable in both the developed and emerging markets. It was too much to expect that every nation could become rich overnight. The resources of the world are too constrained to allow for that—and that’s what we are bumping up against now. But, incomes around the world can rise as we accommodate the new demand and higher prices. It’s the old economic story: resources are limited, and the price system allocates them to the most efficient use. There are limits to growth in every economy, and the usual suspect in limiting it is the availability of raw materials to produce the higher income and the capacity to process it. But, that doesn’t mean that growth isn’t possible. It just means there are constraints. Growth will come back, only at a more moderate and sustainable level.
It will happen again, as it always has. We simply have to allow some time for it to come about, and we can allow for this adjustment not by panicking and setting off a retaliatory round of trade-repression measures.
