Tuesday, July 22, 2003

Stephen Roach wrings his hands again this week over the global economy to more interesting results.
My concerns hinge mainly on recent developments in foreign exchange markets and on the response of politicians and policy makers to those developments. From the start, I felt that a significant shift in the world�s most important relative price -- the US dollar -- would be the central lever of global rebalancing. A weaker dollar puts pressure on a saving-short US economy to restrain domestic consumption and rebuild national saving. The related outcomes of a stronger euro and a stronger yen put comparable pressures on Japan and Europe to do the opposite -- to transform externally driven growth into support from domestic demand. As is often the case, what seems so logical in theory turns out to be much tougher in practice. For years, the Japans and Europes of the world have been either unwilling or unable to accept the heavy lifting of structural reforms that is so essential to unshackle domestic demand. My biggest fear has been that such politically and socially induced resistance could derail global rebalancing (see my May 27, 2003 Forum dispatch, �The Heavy Lifting of Global Rebalancing�). Those counter-forces now seem to be coming into play.
This is an excellent example of why Roach's analysis is simultaneously excellent and frightening. Roach is clearly no brainless cheerleader for global capitalism. His structuralist approach to studying the global economy makes him particularly sensitive to aspects which usually only Marxists see. At the same time, Roach is a liberal (in the European sense) through and through. As is clear from Monday's comments, only "structural reforms" within Europe and Japan will solve the global demand imbalance. That is, social democracy (or what's left of it) must go.

Roach's logic is that only "structural reform" will allow the US dollar to fall and the yen and euro to consequently rise. Without "structural reform" both the Japanese and the European will continue to intervene in forex markets and keep their currencies low.

Unfortunately, this story doesn't have a lot going for it. We can see this best in Europe. First, the Europeans have not intervened to keep the euro low. In fact, it is the Europeans more than anyone else who have a right to complain about global policies which have sent the euro soaring in the midst of a flagging economy. Second, until the mid-1990s US-EU trade was more or less balanced. Only with the boom in the US economy (fueled primarily by stock market speculation as well as IT investment) of the late 1990s did the present imbalance arise. "Structures" don't dramatically change over the course of five years, and blaming the European "structure" for the imbalance is completely unfair.

The United States clearly overconsumes, and the world is addicted to it. The real solution is not "structural reform" and the end of social democracy so much as it is a global economy which moves off its dollar foundations and away from US imperialism. If Roach could see the world as a nascent American empire, these "problems" would no longer be interpreted confusedly as a story of parts. It would be a story of the whole. If the whole is to be fixed, the whole must be changed.


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