Jayati Ghosh

It is fairly obvious that in the immediate future, and probably for some time to come, the United States cannot continue to be the engine of growth for the world economy. For various reasons, consumption demand (especially that emanating from wage incomes broadly defined) is likely to remain suppressed for some time, and this will prevent a more balanced recovery. Household savings rates have already started rising from their very low levels. It was expected that increased public spending would substitute for the repairing of private balance sheets, and that has actually been the case in the past year. However, the remarkably rapid political backlash against “excessive” government spending – even though it has little validity within a Keynesian macroeconomic framework – seems to have already affected the ability and the willingness of the US government to engage in further spending to ward off potential recession. The dangers of early withdrawal of stimulus measures are thus very high.

Whether the adjustment of global macroeconomic imbalances occurs through exchange rate shifts, or increased protectionism in the US, or other tendencies causing savings rates to rise and consumption rates to fall, is at one level immaterial for the rest of the world, because in any case other countries will have to find other sources of growth, in domestic demand (which should ideally be through wage-led growth) or by diversifying exports.

This requires a major re-direction of growth strategy in most of the developing world (as well as in some developed countries like Germany). The economic orientation of many developing countries has been and continues to be towards export-led growth, despite the slowing down of the impetus from global markets. Such export orientation also meant that consumption has been (and indeed continues to be) relatively suppressed. In “successful” developing countries, the relative lack of mass demand was an important element in enabling export-driven growth, both because of its association with lower wages and because it allowed more export surpluses to be squeezed out. But, in addition, it was relevant in preventing more balanced growth based on the development of domestic or regional markets. This was an important element contributing to the unbalanced and unequal nature of the previous boom.

As evident from this chart, household consumption as share of GDP in some of the more “successful” developing economies declined over this period, in some cases quite significantly, reflecting the strategy of suppressing the home market in order to push out more exports. Profits soared but wage shares of national income declined sharply in most countries, as growth in real wages was well below increases in labour productivity.

This led to the peculiar situation of rising savings rates and falling investment rates in many developing countries, and to the holding of international reserves that were then sought to be placed in safe assets abroad. This is why globally the previous boom was associated with the South subsidising the North: through cheaper exports of goods and services, through net capital flows from developing countries to the US in particular, through flows of cheap labour in the form of short-term migration. The collapse in export markets brought that process to a stop for a time, but in any case such a strategy is unsustainable beyond a point, especially when a number of relatively large economies seek to use it at the same time.

So obviously, what is required is a shift whereby new sources of global demand are found, particularly in the developing world. For this to be sustainable it should emphasize wage consumption rather than debt-driven consumption of the rich. Unfortunately, such re-orientation of economic growth in the world economy has been made more difficult by pro-cyclicality of adjustment measures being imposed on developing and transition economies that have been hit hardest by the crisis. The IMF has continued to impose stringent pro-cyclical conditionalities on countries like Pakistan, Hungary and Ukraine, while Ireland and Greece are finding that EU membership does not protect them from such austerity either. This reduces current and future growth potential in these economies.

Even in developing countries where the impact of the global crisis was less extreme, fiscal balances have been upset first by rising oil and food prices (in importing countries) and then by recession that affected tax collections. Since a lot of policy response has been directed to preventing institutions from collapse, this means that proportionately more state resources have been directed to bailouts and to monetary and fiscal incentives for business, rather than to maintaining public services or increasing employment. In fact public spending is still being cut even as development projects remain incomplete and citizens are deprived of essential socio-economic rights.

Without significant restructuring of global demand in favour of the large segments of the world’s population that still has to meet basic needs, world growth will not just be more unequal: it will simply run out of steam.

Leave a Reply