The
picture that emerges is that of fluctuating rates of expansion, but
overall a fairly dismal performance. The other point to note is that the
employment expansion of the US economy is not all that impressive in
comparative perspective, and has been less than 2 per cent per annum
over the past five years on average.
This
is confirmed by the rather rough estimates of employment
elasticity of aggregate output (per cent change in
employment by per cent change in real output) that
are provided in Chart 8. Once again, after the early
1990s, the US economy does not emerge as considerably
more dynamic than other OECD countries in terms of
generating more employment. (It should be noted, however,
that the figure of 1 for the European Union for the
period 1990-94 is misleading, for it refers to a period
when both output and employment growth were mildly
negative.) In fact, in recent years the employment
elasticity of output growth in the US economy appears
to have been very low.
Chart
8 >> Click
to Enlarge
This
points to a major structural weakness of the past growth pattern, which
is likely to have important effects on the prospects for early recovery
in the developed world. As long as basic employment conditions do not
improve, attempts to generate economic expansion by encouraging private
savings and investment – such as in the form of tax cuts and easy
money through low interest rates - are likely to falter. This is because
those in employment are likely to guard against the possibility of
future job loss by saving more rather than spending more. To counter
such a tendency, fiscal packages have to be not only very large but also
explicitly directed at job creation. This has not been the case so far
in either US or Japan, while in Europe the fiscal stimulus has in any
case been weak.
In
addition to this, there are other reasons why it may be futile to expect
another US-led boom to bring about a recovery in the world economy once
again. After all, the current recession in the US reflects the collapse
of a speculative bubble, and it would be strange if the economy could
immediately create another such bubble to generate that kind of economic
growth.
At present,
the bursting of the bubble involves the corporate
sector cutting back investment because of overcapacity
and the household sector reducing its consumption
because it is already financed by record levels of
private debt. A rapid reversal of these tendencies
is not only unlikely, but it would also require additional
international financing, with the rest of the world’s
savings once again rushing in to maintain high levels
of US consumption and economic activity.
An increase in US growth levels
sufficient to lift the world economy would lead to
a further rapid widening of the US balance of payments
deficit, which is already at more than 4.5 percent
of GDP. Such a payments gap would in turn require
an increased financial inflow from the rest of the
world to sustain it. But the rest of the world already
provides nearly $2 billion per day in their savings
to the US economy. It is difficult to see how this
can be increased in a wider international context
of lower income growth and stagnant employment generation.
The
prognosis
If
history is any guide, the need for a leader to pull the capitalist
system out of this slump is obvious. It is also clear that the IMF
is too misguided in its policy responses and too small in terms
of its resources, to play the role of lender of last resort. Indeed, the
Bretton Woods institutions have earned such a bad name in the current
crisis that even the London Financial Times has referred to them as
''the gruesome twosome''. But in any case, the amount of resources
required to prevent international financial debacle is certainly beyond
their capacity.
Similarly
the world desperately needs a major buyer of last resort. If the
vulnerable economies of Asia, the teetering economies of Latin America,
the oppressed primary exporters of Africa, and the devastated regions of
Eastern Europe are to recover, they must find markets for their goods in
the west. Thus the developed capitalist countries must increase their
imports from such regions dramatically on order to avoid a more
generalised slump. Big trade deficits in the most prosperous nations are
an essential part of a resolution of the present crisis.
Clearly,
the only feasible solution for international capitalism is concerted
expansion, directed by a responsible world ''leader'' who would behave
in a Kindleberger fashion to organise such an expansion. But the current
international political economy suggests that such a solution is not
feasible or likely at the moment. Therefore, some sort of major slowdown
in world economic activity does indeed seem likely, and the world
economy could be condemned to a repetition of the widely read history of
an earlier depression.
Of
course, that particular depression did also mark the first systematic
attempts at industrialisation in a range of underdeveloped countries
across three continents. In fact a reading of history tells us that
periods of instability and confusion in the world economy are precisely
those periods which also allow for some autonomous industrialisation in
what has been called the Third World. So, while world economic recession
is both likely and potentially painful, it may also represent an
opportunity for governments in developing countries to activate
strategies of autonomous industrialisation. The extent to which this
occurs will of course depend in turn on the various political economy
forces which determine policy in our own countries as well.
