x Abu Dhabi, UAEThursday 18 January 2018

US economic power is part of a healthier global order

It's time to re-think the old adage about the rest of the world catching cold whenever America sneezes. Several emerging economies have boomed right along all through the US slowdown.

It is one of the most oft-used clichés of globalisation: "When America sneezes, the world catches a cold." Amid the 2008-2009 American financial crisis and recession, commentators and pundits dusted off that favourite saying as global markets felt the pain of America's storm.

But the 2008 financial crisis was no mere sneeze. It was a heart attack. America's financial system went into cardiac arrest, ultimately shocked back to life by drastic mega-billion dollar government intervention. So, if an American sneeze elicits a cold elsewhere, then a heart attack surely ought to have had devastating consequences for the world economy, especially for less developed markets. It didn't.

From China to Brazil to South Africa to India and most of the world's leading emerging economies, America's crisis only briefly halted their steady drumbeat of growth. Both China and India re back to near 10 per cent growth, and the emerging markets machine continues to rumble forward, now accounting for nearly half of global GDP.

Indeed, as the author Fareed Zakaria rightly pointed out in a recently updated version of his celebrated book, The Post-American World, it was inaccurate to call the crisis that began when the US financial system nearly collapsed in 2008 a "global" one: "For China, India, Brazil and Indonesia, this has not been much of a crisis. It has resulted in an acceleration of the power shift," Zakaria writes.

He notes that this story is not about American decline, "but the rise of the rest". He is right. On US campuses and in newspapers, there is too much hand-wringing about the "decline of America". While the economy is bruised, it's still worth remembering that the US economy is nearly three times the size of its nearest competitor, China. It boasts states with economies the size of many countries. If California were a country, it would have the ninth largest economy in the world. At least five other US states - New York, Texas, Florida, Illinois and Pennsylvania - have economies that would rank them in the top 20 of countries.

Let's take this even a step further. There is much justifiable talk of the rise of Turkey these days. Turkey's entire economy is roughly equivalent to the US defence budget. Indeed, the US defence budget itself is larger than the entire economies of all but 18 or so countries around the world. This is a powerful economic machine.

But, what if the US economy really does sneeze, and wheeze, and limp along with a bad head cold rather than a dramatic heart attack? What if America enters a Japan-style "lost decade" of sluggish growth and heavy indebtedness? Or put more clearly: what happens when the world's largest economy, one that accounts for a little more than a quarter of global GDP, stumbles for a decade?

This is not an unreasonable scenario. Lawrence Summers, the former head of President Barack Obama's Council of Economic Advisers, wrote in the Financial Times this month that America is already "halfway to a lost economic decade." Carmen Reinhart, a leading economist, suggested in an interview with CNN that "I don't think the next six years look great." Mr Summers also mentioned the dreaded "J" word: Japan.

Few major economies want to hear the Japan comparison. Japan has just completed what might be called its second straight "lost decade". Japan's 1980s "cheap credit and over-priced asset party" ended with a stock and real estate crash and it has never fully recovered, limping and wheezing its way through the 1990s and on through the first decade of this millennium.

Thus, the world faces the prospect of America slipping quietly into a "lost decade" of sluggish growth - of America sneezing and wheezing and coughing, but not facing a crisis moment. What will this mean for the world?

Japan's growth throughout the 1970s and 1980s bolstered many of their Asian trading partners. Japan's demand was a boon. But Japan's lost decade in the 1990s did not stop the Asian tigers from rising. In some cases, countries such as South Korea and Taiwan even benefited from the Japanese slowdown, stealing away market share in key industries. The same may happen with an American "lost decade".

A World Bank report in late 2009 noted that Latin American countries - the most exposed to American contagion - did not feel severe effects from the American crisis. The same goes for other emerging markets. So, perhaps the world will shrug off a steady American economic decline over the next five years.

This is partly because the global economic pie is not a fixed size. As "the rest" rise, it grows. Thus, America controlled a quarter of the world's GDP in 1970 - roughly the same as today. But the pie is much bigger. Global GDP has tripled since 1970 and Asia today accounts for a quarter of global GDP. The pie is not only larger, but it is more balanced.

Will there even be a "lost decade" after all? American corporations are sitting on large piles of cash. The problems with the economy have as much (perhaps more) to do with business confidence as with fundamentals. That could change.

To be sure, the world is better off when America grows and produces and innovates. But if the declinists prove correct, then the cliché of "when American sneezes" will truly be tested once and for all. Or perhaps the world will be too busy to notice: emerging markets will be growing their middle classes, oil-rich Middle East states will be bolstering ties to Asia, and Chinese investments will flow across Africa and Latin America. And that sneezing $14 trillion (Dh51.4 trillion) economy would still be the envy of most countries around the world.

We can put the cliché to rest: an American sneeze might not breed a global cold after all.


Afshin Molavi is a senior fellow and co-director of the World Economic Roundtable at the New America Foundation, a non-partisan think tank in Washington DC