The New World Order

PIMCO’s Mohammed El-Erian sees a new world economic order:

NEWPORT BEACH – A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world’s major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces’ implications may be equally unsettling.

For decades, many people lamented the extent to which the West dominated the global economic system. From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests. While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.

That was then and this is now:

Suddenly, the world turned upside down: “rich” countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.

Little did these countries know that their divergent paths would end up fueling large global imbalances, and eventually trigger a financial crisis that has shaken the prevailing international economic order to its foundations.

There is no restoring fully that order. Rather than recovering strongly, sluggish Western growth is periodically flirting with recession at a time of high unemployment and multiplying debt concerns, particularly in Europe. In an amazing turn of events, virtually every Western country must now worry about its credit ratings, while quite a few emerging economies continue to climb the ratings ladder. We can now consider the image of Western delegations heading to emerging countries to plead, cap in hand, for financial support, both direct and through the IMF.

I don’t think he’s wrong in pointing out that we don’t really know what is happening right now. I do think he is wrong in calling it a “new economic order”. Rather I think it’s a major problem developing for countries that are heavily dependent on exports for economic growth. Consider Germany’s balance of trade:

China’s:

and Japan’s:

For Germany exports are more than 40% of GDP; for China 30% (and constitutes the lion’s share of its economic growth); and for Japan 12%. Until quite recently Japan’s exports had recovered back to nearly 20% of total GDP. The Japanese are in near-panic about the collapse. Note, in particular, that the United States, Germany, China, and Japan all have one thing in common besides being the largest economies in the world: we all import oil and oil constitutes a hefty proportion of total imports. For the U. S. oil makes up about half of our trade deficit; China’s oil imports comprise about a quarter of all its imports.

The problems with a “beggar they neighbor” mercantilist economic policy really materialize when you’ve actually beggared your neighbor. Our problems with China or Japan’s dependence on exports pale by comparison to the problems it creates for small developing economies. Or Greece’s problems with Germany.

The world has geared up to sell to the American consumer but the American consumer is decreasingly in a position to buy. I think that’s less a new world economic order than upheavals waiting to happen.