Economic Tectonics

Article by Chris Waller
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As the juggernaut of the world recession continues on its course, commentators are making their various predictions about what will happen next and where we will be in a year or two's time. We should be wary of predictions, particularly in the field of economics, where what passes for reasoned projection would, in the 'hard' sciences be regarded as little more than reading the tea-leaves.

It has been argued that the centre of gravity of the world economy is shifting towards China and India, and that this shift is largely a consequence of the 'western' world's current economic problems, brought on by the banking crisis. The banking collapse did not help matters but the shift in the world economy had been set in motion long before Lehman Brothers et al. fell in a heap. The United States has always had great faith in its economic model but it came to that view in the immediate post-war period when 'American know-how' pushed all before it and there was little competition from a Europe shattered by war and a Japan struggling to rebuild amidst the wreckage left by the Pacific war. It has to be admitted that America, despite its effectively fighting two wars, one in the Pacific and one in Europe, had managed to maintain its economic strength, while Britain was left virtually bankrupt. When, in October 1957, the Soviet Union launched Sputnik 1, the American were quick to respond, and in 1961 when Gagarin became the first man to orbit the Earth, NASA followed with its own launch within a matter of weeks. Though the Soviet Union was first out of the traps in the space-race, it was America that, within less than a decade, put men on the Moon. At that time it seemed that anything was possible where America was concerned.

Whatever else the space-race might have required, most of all it needed vast economic resources and, in that aspect, America had no equal. Can the same be said today?

In many respects America is seen as self-confident to the point of brashness, but is it justified in so being? There are many commentators who have said that the glow of victory in 1945 soon faded as the Korean War was fought to a stalemate. Some have said that America began to decline in 1953. In 1974, when America was finally kicked out of Vietnam, the glory had departed. Yet America continues to view itself as the benchmark against which all others must be measured; its economy may well be still the biggest on Earth, but these days it is in reduced circumstances. America still regards economic models which differ from its own as somehow defective, not of the True Faith, and adhered to only by those yet to experience economic enlightenment. It is said that only 20 percent of Americans hold a passport, the greater majority preferring never to leave its borders and one wonders to what extent America's view of itself and the rest of the world are the consequence of a certain introversion.

Adam Posen, of the Peterson Institute for International Economics, writing in 2006, described Germany's economic performance as 'lastingly poor'. He was not alone in his condemnation: Jude Blanchette, of the right-wing Mises Institute, wrote in 2003 that Germany's future was one of "rot and indolence"; in that same year Larry Elliott of the Guardian, a newspaper hardly known for its embrace of libertarian economics, declared that Germany' economy had come "to a virtual halt". Edmund L Andrews argued that the foundations of the German economy were cracking "like a house on a California fault-line", further claiming that Germany was only surviving insofar as it was adopting American libertarian economic principles.

Much the same criticism was levelled against Japan. It has been said that the Japanese economy is moribund, that its major companies are falling by the wayside, that its established employment practices have broken down, that its consumers have abandoned the shops, that its banks are in crisis and that its government finances are in a dire state.

Implicit in all of the above is that the US economy still dominates the world, but is this the case? What we are given is a perception, but what do the numbers say? Let us look firstly at GDP. The following table lists the top five countries ranked by GDP for 2003. (A note here: although the figures are taken from the Economists' 'Pocket World in Figures' for 2005, the figures actually relate to the end of year 2003, it taking two years to collate the figures.)

GDP ($ billions) 2003
USA JapanGermanyUKFrance
10,3833,9931,9841,5661,431

 

Now let us look at the situation in 2008:

USA JapanGermanyChinaUK
13,7514,3843,3173,2062,772

 

In five years the US has increased its GDP by 32.4 percent, Japan has increased its GDP by only 9.7 percent, but Germany has increased its GDP by a staggering 67 percent. The UK, long regarded as a basket case, increased its GDP by no less than 77 percent.

I have to say that I find those figures hard to swallow at face value. Anecdotally I see little evidence to confirm that Britain's GDP has increased more than that of Germany. I sense we need to look a little further into those figures.

If we look at GDP per capita, a different story emerges.

GDP/capita (2003)GDP/capita (2008)
USA35,990 (4th)45,590(13th)
Japan31,320(7th)34,310(28th)
Germany24,200(19th)40,320(23rd)
UK26,420(15th)45,440(14th)
France23,970(20th)41,970(19th)

 

The USA has dropped dramatically in the ranking in the five years 2003-2008, while Japan has seemingly fallen even more precipitously. Germany has dropped a little in the ranking while France and the UK have made a small recovery.

GDP is acknowledged, even by economists, to be an imperfect measure of economic performance and GDP per capita, though a little more informative leaves much untold, but it is all we have as a common basis for comparison. China, despite its massive overall GDP in 2008, does not appear in the top 70 countries as ranked by GDP per capita, an indication of the magnitude of the task of bringing its population up to the developed world's standard of living.

Let us move on to world trade in an effort to shed more light on the situation. The following table ranks countries according to their percentage of all world exports, both visible and invisible.

2003 % 2008 %
USA13.5(2nd)USA11.4(2nd)
Germany9.1(3rd)China10.4(3rd)
UK6.6(4th)Germany8.8(4th)
Japan6.1(5th)UK6.1(5th)
France5.26th)Japan4.6(6th)
China4.3(7th)France4.4(7th)

 

In the above table, first place goes to the Euro Area with 17.1% of world trade in 2003 and 16.1% in 2008. Notwithstanding the Euro Area's performance, the USA still holds second place, though a little down on 2003, while China has risen significantly, almost tripling its exports in five years.

The above table gives the rank for all exports, that is, goods and services, but tabulating them separately tells a slightly different story. The table below gives the percentage of world exports in each category and the country's ranking.

2003VisibleInvisible2008VisibleInvisible
USA14.9 (2nd)19.0 (2nd)Germany10.1 (2nd)6.6 (5th)
Germany8.9 (3rd)7.3 (4th)China 9.1 (3rd)12.6 (3rd)
Japan5.6 (4th)5.5 (6th)US8.6 (4th)16.2 (2nd)
UK5.1 (5th)11.2 (3rd)Japan 5.0 (5th)4.0 (7th)
China4.9 (6th)(-) (-)France4.0 (6th)4.9 (6th)

 

Once again, the Euro Area takes the top slot with 15.1% of visibles and 19.3 % of invisibles in 2003, against 15.4% of visibles and 17.8% of invisibles in 2008. The UK, though not featuring in the top six for visible exports still ranks 4th in the world for invisibles, taking 10.7 percent of world exports in that category. However, it does confirm our decline as an industrial exporter.

However, discounting the Euro Area, a clearer account starts to emerge here. China has moved from 6th place in visible exports in 2003 to 3rd place, an unsurprising move given China's manifest presence in the shops on our High Streets. What is very surprising is China's rise in the invisibles ranking. Having not appeared as a contender in the top 40 places in 2003, it has rocketed to 3rd place in 2008.

Let us dig deeper and look at the current account. The following table ranks the countries and gives the surpluses and deficits in $ (billions). The figures are rounded down to the nearest billion.

2003Surpluses2003Deficits
Japan112US480
Germany45 UK26
Euro Area64Australia17
China35Spain15
Russia29Mexico14
2008Surpluses 2008Deficits
China371US731
Germany252Spain145
Japan210UK78
Saudi Arabia95 Australia57
Switzerland76Italy51

In five years China has increased its trade surplus by more than ten times, Germany has achieved a fivefold increase, while Japan has almost doubled its surplus. In that same period, the US deficit has increased by more than half, while the UK deficit has tripled. The surplus generated by the entire Euro Area in 2008 ($38 billion) places it 13th in the world ranking, a drop of 10 places. Thus if one extracts the contribution made to this figure by Germany, the rest of the Euro Area must be struggling.

The predictions quoted above, by Posen, Blanchette and Elliot regarding Germany's economic performance, are now seen to be way off the mark. Far from 'rot and indolence', the German economy seems to have dome very nicely, thank you. Japan's supposed economic stagnation seems more the stuff of fiction than of fact. It has been rumoured that Japan has suffered these past twenty years from deflation contingent upon lack of demand in the economy. Nothing is further from the truth: the household savings rate, which stood at over 15 percent in 1989, dropped to just over 3 percent in 2007, indicating vigorous demand. Japan is a nation of technophiles and early-adopters of every new technology to come along: advanced mobile phones, large flat-panel screens, high-definition video, laptop computers, fast Internet connections and digital cameras. Meanwhile, the Japanese have developed a taste for larger cars, causing an increased demand for new roads and bridges, and thus an increase in public works. Such deflation as Japan has experienced is due to the massive increases in productivity. Japan leads the world not only in the production of advanced electronic components and materials (e.g. semiconductors), but also in production technologies and equipment.

To put this in a broader perspective, let us look finally at national debt. The figures for this are rather more difficult to disentangle. The US national debt stood, as of 2008, at about $9 trillion (i.e. $9,000 billion), while that of China stood at $373 billion. The United Kingdom's debt, at the end of 2008, stood at about $800 billion. At present, 2010, the US national debt is estimated at about $13,500 billion, while that of the UK is estimated at about $1,000 billion.

To whom does America owe this debt? Ah, now, that's interesting. If we look at the biggest buyers of US government bonds, we find that China holds almost 25% of the total, while Japan holds a further 20%.

The US economy is still the biggest in the world by a considerable margin, but there is no room for complacency. China and Japan between them are holding 45% of US government bonds, which must give them considerable political leverage. China has a vested interest in maintaining American consumption since it needs a market for its goods, but America cannot go on living on other people's money indefinitely: at some stage, the bill has to be paid. This whole situation is a precarious balancing act and I fear that the global economic and political edifice is due for another shock in the not too distant future. The world economy is far from secure: two Irish banks have recently been bailed out, while Spain, Portugal and Greece remain on the critical list. As Britain retrenches fiscally, there will be a further impact on Europe more broadly. I think that 2011 will be an interesting year.

Sources
Fingleton, Eamonn - writing in 'The American Prospect', March 2010 and for the journal of The Foreign Correspondents' Club, June 2010. (See - www.unsustainable.org)
'Pocket World in Figures', publ. The Economist (2005, 2010)
Guardian Newspapers
http://www.ukpublicpsending.co.uk

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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