A closer look: The global take Douglas O. Walker Professor of Economics Robertson School of Government Regent University Virginia-Pilot—July 2, 2006

Viewed from mid-2006, the world economy presents a mixed picture of stunning advances and dismaying reversals over the course of the past six months.  It is at once a scene of widespread gains and yet one painted on a canvas of great imbalances and growing strains presenting a formidable challenge to the continued prosperity of the world.

Across the globe, production and trade have been advancing much more vigorously than expected at the start of the year.  The tempo of the global expansion has not only been strong in recent months, it has accelerated in many developing countries to a pace more than 2 percentage point higher than anticipated last fall.  Growth in Asia, especially in China and India, has been extraordinary, and the countries of Sub-Saharan Africa have recorded their most rapid economic advance in decades.  Although slower than other developing countries, growth in the Western Hemisphere picked up from the slowdown of 2005, and is now considerably faster than the increase in population.  While growth has slowed somewhat in the states-former of the Soviet Union, it remains buoyant.  In the more economically advanced countries, the upswing is stronger than previously assessments suggested, and business and consumer confidence and labor market conditions appear conducive to continued growth well into next year.  Looking forward, the IMF and other international agencies forecast the momentum to continue through 2006 into 2007, subject to stability in the international economy.

While the expansion in global production is broad-based, with all main world regions registering significant increases in output, the matching increase in global demand remains concentrated in only a few areas of the world.  The expansion now underway in the economically advanced countries, in particular, has been marked by highly disproportionate increases in their aggregate demand and an unprecedented absorption of not only foreign products but also foreign manpower and capital.

Nowhere is this clearer than in the case of the United States.  Despite a rapid increase in its economic output during the past six months, its overall use of the world’s produced output grew even faster, and the imbalance between its domestic production and its domestic absorption of goods and services has reached an unsustainable 7 per cent of its GDP, with no sign of reduction.  Let there be no doubt about it:  An imbalance between production and use of this magnitude represents a serious threat to the United States, politically as well as economically, and it is one reason for the increased volatility in global financial markets and the rising price of oil.

The long-standing nature and huge size of the imbalances between production and use that now characterize the world economy are reflective of deep-seated problems that must be addressed if world economic growth is to be sustained over the longer-term.  Financing the present pattern of world economic growth with its massive external deficits and surpluses, as one example, requires a continuing net flow of world saving and productive resources from the poorer and less developed areas of the world to its higher income regions, indeed, to the world’s richest and most prosperous country.   Clearly, this is not wise and cannot continue. 

Past efforts to dampen pressures from external imbalances have not met with success, and therefore there is no reason to believe that reconciling the expansion in world production with an equitable and sustainable pattern of world demand will be easy.  On the contrary.  The present state of global disequilibrium is the by-product of both long-standing domestic policies and an international economic environment that has become increasingly unstable in recent decades.  Changing the unsustainable trends of the past and restoring a stable foundation for international commerce will take many years and great sacrifices on the part of all countries. 

In the middle of 2006 we are rightly enjoying what appears to be a spreading prosperity reflected by welcome gains in world production and in a vigorous expansion of world trade.   But these advances should not blind us to the difficulties underneath the facade of our present fortune. Nor can we ignore the fact that we are doing little to counter them.  Worse, it is unsettling to think that the statement issued by the world’s finance ministers following their recent St. Petersburg meeting presents a public stance of seeming unconcern about the implications of ever widening balance of payments deficits and ever growing external debts.

When looking at the world economy, a more welcome sight would be national governments and international agencies acknowledging the difficulties we are in and beginning the task of rebuilding a stable and equitable international economic order for the twenty-first century.