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21 May, 2010 12:13

What is really delaying global economic growth?

What is really delaying global economic growth?

An overemphasis on US-China relations is not the only misleading focus detracting from the root of the problem surrounding the worldwide economy and impairing the track for sustained global recovery.

A reliance on using GDP as a method of measuring the state of a country’s economy is also hampering growth.

Since the world’s biggest power and the world’s rising power became economically “engaged” – an unimaginable achievement just a few generations ago – there has been a huge emphasis on US-China relations, regarded as the most imperative issue in “ironing out” monetary imbalances and achieving global economical growth.

Whilst China and US currency relations are important in the adjusting of global trade imbalances, there has been a misleading picture painted that the global economic woes are merely a US-China affair. The US is so convinced its economic worries stem from China that US members of Congress and economists for the Obama administration are threatening to take actions against China, such as a 20 per cent levy on Chinese imports, if it does not revalue its currency.

As movements in currencies do not generate additional demand for the global economy, the changing value of the US currency and the Chinese currency is therefore far from the blueprint for promoting worldwide fiscal development. For the world to recover from the economic slump, and if it is to sustain fiscal growth, there needs to be a boost in global demand.

According to a recent analysis by South Center, which analyzed the degree the world’s major economies are bearing on global demand, the solution to achieving economic stability stems from implementing strategies and policies designed to reduce over-consumption in the US, whilst addressing under-consumption in those countries running on surplus.

The United States is a civilization that is well-used to spending beyond its means, and according to the report by South Center, the US’s tendency for over-consumption – which has led to phenomenal levels of household debt and thereby a large trade deficit – has to be reduced, alongside an increase in exports, if the US is to adjust its financial imbalances.

Although the US needs to curb excessive spending, reduce personal debt and adjust its trade deficit, a conflicting problem has manifested itself in many other countries. Presently in countries where pubic spending has been dramatically cut due to wage cuts and the desire not to be in debt, import demands have lulled through suppressed consumption habits. The crux of the issue is that if the world is to emerge from the economic downturn countries need to increase wages, which will encourage public spending. Then there will be a higher demand for imports, which will other countries exports and GDP growth.

This is the current situation in countries such as Japan and particularly Germany, which has been “siphoning global demand without adding much to global growth,” according to the South Center. A combination of high levels of unemployment and a stagnation of wages means that there is little demand for imported goods, which in turn forces global demand to languish and suppresses countries GDP growth.

China, however, is the anomaly in the current “no win” model of under-consumption, repressing global growth as, while most countries are experiencing fiscal insecurity, China is emerging as an economic power.

Due to the fact that China has witnessed high economic growth and is maintaining high GDP growth, it is projected by many as the “engine for attaining global growth and security” and according to the South Center report, “China too needs to adjust, but it cannot be a global locomotive.”

“China cannot keep its exports growing at similar rates and continue to increase rapidly its penetration in markets abroad at a time when growth in the US is below potential, unemployment remains high and sticky, and reduction in global imbalances is seen as the key to global stability,” said the report.

There are, however, problems associated with using GDP as a method of measuring useful domestic production. It is all very well the US blaming China’s growth in exports on America’s tendency to over consume. In reality, although in American stores such as Wal-Mart an abundance of products have a “made in China” label, the GDP from the creation and the sale of the product shows up as US GDP.

The price on the ticket represents ‘US’ costs, including warehouse and store costs and transportation. When considering that goods made in China and sold in America are not an accurate representation of the “true” cost of the product and are added into US GDP, and the fact that most US spending is on products not imported from China (according to the New York Times the US spends little more than two per cent on GDP on goods from China), America’s commitment to blaming China’s “aggressive” export trade in its economic afflictions is overemphasized to say the least.

The penchant of blaming global imbalances on US-China relations is therefore not only overemphasized and exaggerated, but also grossly inaccurate. Stress on US-China relations, an inclination for viewing China as the ‘locomotive for global growth’, and even measuring a nation’s economic behaviors in GDP, needs to be replaced by a greater emphasis on the problem of global under-consumption. This in turn is a product of lethargic salaries, which decrease public spending, weakening a reliance on imports and curbing global growth.

Instead of pinning the blame on individual countries, the solution to sustaining global economic stability will require a co-ordination of national policies into an international process, so that each individual country plays its own role into ironing out economic imbalances and promoting growth.

Gabrielle Pickard for RT