Source: Financial Times
The Growing Risks of Our Four-Speed WorldDuring the worst days of the financial crisis, investors and policymakers talked of decoupling, asking if emerging economies would continue to grow if the rich countries crashed. They did. But this spawned another mantra: the two-speed world, in which emerging markets surged even as the advanced nations stagnated. We believe it is time to start talking about another, more ominous moniker for the times ahead: the four-speed world, and the dangers it poses to global growth.
This world is one divided not just between countries with fast and slow growth, but also those with low and high inflation. The original two-speed world was the cousin of another hoped-for mantra, global rebalancing. This pushed emerging markets to stimulate domestic demand, and thus help sustain global growth, while the US and others took time out to fix the deficits that impaired their economic dynamism. But it is that same process that is now starting to stoke inflation in many parts of the world.
In a few countries, such as Venezuela, there is slow growth and high inflation. In a few others, such as Taiwan, there is fast growth and low inflation. But in most countries inflation and growth go together, as one would expect. In the slow-growing, advanced countries, inflation is contained at about 2 per cent, whereas in the fast-growing, developing countries it has become a threat, at 6 per cent or higher.
The larger developing countries, including China, India and Brazil, are among those now seeing inflation in excess of government targets. Higher prices, especially for food, cooking fuel and gas have also increased absolute poverty, according to the World Bank, while consumers in most advanced countries barely notice price increases in their personal expenditures.
As one emerging economy after another tightens fiscal and monetary policies to fight inflation, exchange rate appreciation and other symptoms of overheating, the notion that developing countries will keep the world economy motoring along even as the advanced countries slowly mend their broken economies is becoming harder to sustain.
And that is not all. As they try to deal with the repercussions of the four-speed world, advanced countries are showing signs of confusion too. One day they worry about how to ensure China and other fast-growing, developing countries contribute to global growth, the next day the same policy wonks in Washington agonise about these countries’ dangerously overheating economies.
The latest manifestation of this overheating anxiety is – in an ideological about-face – the International Monetary Fund’s recent embrace of capital controls. Another is the prodding to let exchange rates in emerging markets appreciate, to lower the prices of their imports and thus check inflation. This would make their exports less competitive and perhaps curb their growth.
This intellectual instability is also seen in another flawed assumption of those backing rebalancing – namely that China and other emerging markets representing 20 per cent of global gross domestic product can continue to serve as the new locomotive that pulls the rest along. This would require a large and sustained expansion of their import bill, driven not only by public spending but also an even greater appreciation of their exchange rates. To boost the growth of the rest of the world by just half a per cent of GDP, China and others like it would have to increase their net imports by about 2.5 per cent of their economies every year.
While China and a few others could do – and are likely to do a little – more, the strategy is not viable in the long term. Several of the emerging markets menaced by inflation are already rejecting this approach. And why wouldn’t they? With fragile banks in the main financial capitals, sovereign debt crises in Europe, the US outlook downgraded to negative and international interest rates bound to rise from record low levels, there are strong incentives to play it safe.
The point is that a four-speed world is one in which the advanced countries must bear the brunt of the adjustment to the mess that they themselves created. This means first and foremost re-establishing fiscal sanity. But it means doing this with little help from those friends in emerging countries upon whose vibrant economies we have come to rely.