via Joris Claeys Which countries are the real heroes of the global economy? Led by China, scores of emerging and developing countries have registered record-high growth rates over recent decades, setting precedents for others to follow. While advanced economies have performed far worse on average, there are notable exceptions, such as Germany and Sweden. “Do as we do,” these countries’ leaders often say, “and you will prosper, too.” Look more closely, however, and you will discover that these countries’ vaunted growth models cannot possibly be replicated everywhere, because they rely on large external surpluses to stimulate the tradable sector and the rest of the economy. Sweden’s current-account surplus has averaged above a whopping 7% of GDP over the last decade; Germany’s has averaged close to 6% during the same period. The world’s current-account balances must ultimately sum up to zero. In an optimal world, the surpluses of countries pursuing export-led growth would be willingly matched by the deficits of those pursuing debt-led growth. In the real world, there is no mechanism to ensure such an equilibrium on a continuous basis; national economic policies can be (and often are) mutually incompatible. When some countries want to run smaller deficits without a corresponding desire by others to reduce surpluses, the result is the exportation of unemployment and a bias toward deflation (as is the case now). When some want to reduce their surpluses without a corresponding desire by others to reduce deficits, the result is a “sudden stop” in capital flows and financial crisis. As external imbalances grow larger, each phase of this cycle becomes more painful. The real heroes of the world economy – the role models that others should emulate – are countries that have done relatively well while running only small external imbalances. Countries like Austria, Canada, the Philippines, Lesotho, and Uruguay cannot match the world’s growth champions, because they do not over-borrow or sustain a mercantilist economic model. Theirs are unremarkable economies that do not garner many headlines. But without them, the global economy would be even less manageable than it already is.
Posted on: Wed, 27 Nov 2013 15:06:03 +0000