Stephen Roach continues to pound away at his central point: the massive instability of a US centric global economy with the US 'twin deficit'. He argues that two key changes are necessary: a US current account adjustment and 'structural reform' in Europe and Japan. Since neither of these seem likely to occur, the former at least in the short term, and the latter in any way which will impact sufficiently due to long term demographic changes, the famous 'downside risks' are clear to see. Thus Roach's vision of a dysfunctional world remaining stuck looks an all too real possibility. This scenario only seems even more likely in the light of the growing US deficit problems, the fact that 'winning the peace' may turn out to be even more difficult than winning the war (ie a sustained return of confidence doesn't look too realistic), and that the global tensions which have arisen within the G7 itself may prove to have an enduring impact on global economic collaboration.
And so it may well be that a dysfunctional world remains stuck -- unwilling or unable to uncover new sources of growth and, therefore, waiting by default for yet another kick-start from the now dormant US growth engine. But that kick may be a long time in coming. Not only does America need slower domestic demand in order to narrow its current-account deficit, but it also faces the negative wealth effects of a post-bubble hangover. Consequently, a world that waits for another shot of US-centric growth may be in for a rude awakening. In my view, the days of US-centric global growth are numbered. The time has come for the rest of the world to wean itself from the American growth engine and draw on internal sources of domestic demand. A failure to do so unmasks the true flaws of a dysfunctional world -- the inability to generate self-sustaining economic growth. America has carried the world for long enough..............
.......the war in Iraq could well spell trouble for globalization. To the extent that this conflict undermines the supra-national alliances that have long bound the world together, globalization will lack the collectivism of political support that it needs for further success. That possibility, in conjunction with the potential for trade frictions arising from a weaker dollar, a super-competitive Chinese economy, and the outsourcing of white-collar jobs to nations such as India, spells tough times ahead for globalization. Moreover, the war could well push an already weakened world economy into its second recession in three years -- an outcome that would only make matters worse for globalization. In recession, nations look inward to matters of self interest. By contrast, the look outward to collective interest that globalization requires usually comes in good times.
Ironically, the feel-good case for a “victory recovery” that financial markets are craving could also exacerbate the imbalances of a dysfunctional world. That would be especially the case if the US led the way -- not just on the battlefield but also in a restarting of the US-centric global growth dynamic. Under those circumstances, America’s current-account conundrum would only intensify. A resurgence of US domestic demand would boost imports. That would provide yet another excuse for the rest of the world to stay the course of externally-led growth and defer the reforms needed for an unlocking of domestic demand. The last thing a dysfunctional world needs, in my view, is to go back to the well of US-centric growth.
It has become conventional wisdom to believe that the war is the root cause of the perils now afflicting the global economy. I don’t buy that. In my view, an unbalanced, US-centric global economy was in serious trouble long before the war in Iraq commenced. Yes, the seemingly inevitable victory will undoubtedly unleash a sigh of relief on the confidence front. But rest assured it won’t fix what ails a dysfunctional world.
Source: Morgan Stanley Global Economic Forum
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