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Who will lead us out of the financial crisis?
DR. JIM LEONTIADES
CIIM, The Cyprus Business School
Even before the current financial crisis, the position of the United States as the world’s "engine of economic growth" was seen to be a thing of the past. The American economy with its chronic deficits was already in decline relative to a number of new national competitors.
The crisis simply added fuel to the speculation that the time was ripe for a change in world economic leadership. China was one of the countries frequently cited as a possible future leader of global economic growth. Goldman Sachs, the Wall Street investment firm, has promoted the "BRIC" countries (Brazil, Russia, India and China) as the most likely to assume a leadership role. Germany as the largest European economy and a Euro member has been mentioned as another candidate, particularly since the drastic decline of the dollar relative to the Euro. Japan as the second largest world economy has also been considered as a leader candidate.
The unfolding of the financial crisis has now shown this issue in a different light, bringing with it some surprises. At first, the above-mentioned candidates appeared to be less effected by the crisis and hence even more likely to move into a leadership role. But as the markets of the industrial countries began to feel the full impact of the crisis, oil prices dropped. It soon became clear that neither Russia nor any of the other oil exporting countries were likely leadership candidates. Russia's economy will not recover until the price of oil rises substantially (ie. above 80$ per barrel). That is not likely to happen until the major industrial countries, which are the main oil importers, find their way out of the crisis first.
As for China, Germany and Japan, it was soon evident that these economic powers had one major economic feature in common – they too were dependent on exports. Germany relied on exports of its traditional high quality engineering products, China on toys, consumer goods and numerous lower priced manufactured goods. Japan is famous for its automotive exports. Moreover the major customers for these exports were the same countries which had initiated the financial crisis. It would be difficult for these three exporters to provide leadership out of the crisis until their exports recovered or they became less dependent on such exports. How likely is this?
Savers and spenders
The role of exports has highlighted a major economic difference between world powers. There is a split between "saver" and "spender" countries. Countries which are net exporters (such as China, Germany and Japan) are "savers". The fact that the value of their exports is greater than that of their imports means that they "save" a portion of their production. They receive payment from other countries for their surplus of exports over imports. Payment for these exports accumulates in the form of foreign assets – the two trillion dollars in China's foreign reserves are an example. On the other hand, spender countries such as the USA and Britain have the reverse situation, saving very little. The USA in particular often spends more than it produces, the difference being made up by net imports.
In a nutshell, the problem is that the saver countries depend on the spenders to absorb their savings in the form of exports. If the spenders do not buy their products, the saver countries will experience a sharp drop in demand. This is exactly what is happening today. As the crisis develops, unemployment in these countries is growing as the factories producing for exports remain idle. So long as this dependency on exports continues we cannot rely on the saver countries to demonstrate economic leadership.
Encouraging local spending
One solution would be for the saver countries to reduce their exports and sell more of their output locally to their own citizens. Factories would resume production to supply the increased local demand. This would require that local citizens save less, using this money to buy locally produced goods.
Japan has for a good number of years tried to implement such a solution. It has made every effort to encourage its population to save less and spend more at home. The results have been disappointing. The government has tried to fill the gap by increasing its own spending on new roads, bridges public buildings, etc. The main result has been to give Japan the world’s largest national deficit. The savings rate of the Japanese population has changed very little.
The attitude toward spending or savings appears to be difficult to change. If someone is determined to save for their children's education or for their old age, the urgings of the government are not likely to change that. China and Germany have something of the same problem.
Age distribution also plays a role. Young families tend to spend more than they earn while older people tend to be concerned with saving for retirement. Germany has an aging population as does Japan and China. China's aging problem is due to accelerate. China introduced its "one child policy" in 1979. Authorities estimate that this has prevented births in the hundreds of millions. The first of these many millions would today have been entering the high spending "young married" category, but they do not exist.
In a global financial crisis characterized by deficient demand it is unlikely that any of the "saver" countries can lead the recovery. Leadership toward a better economic future will most likely come from the same "spender" countries which led us into it.
