AmerCon : Intl Programs : IMF

Wall Street Journal
2004.11.03

We Grow, They Grow
Author: David Malpass
Is Chief Economist At Bear, Stearns

Terrorism may have eclipsed the global economy as a focus in yesterday's election, but
there's been a material change in international economic circumstances which should be
recognized and fostered. The world economy is growing at its fastest pace in 30
years, 5% in 2004 according to the IMF, with a robust 4.3% real growth rate
expected in 2005.

Obscured by America's election frenzy and Western Europe's gloomy unemployment, the
environment for global growth has been the best in many decades. U.S. GDP grew a solid
3.9% in the four quarters through September, while economies in Japan, Brazil, China,
India, Turkey and Russia are expanding at or near their highest pace in decades. Thus,
fast growth likely encompassed more of the world's population and land mass in 2004 than
ever before. This broadening of global growth emphasizes the power of freedom and
markets and the past weight of communism, world wars, the 1970s inflation and the late
1990s deflation.

It also presents challenges and opportunities for the new administration. Granted, the
world won't grow 5% every year, at least not unless it wins the war on terrorism, reforms
the anti-growth IMF, or adopts sound money as a pillar of monetary policy. But the
combination of a new non-deflationary monetary era and growth in Asia creates the
likelihood of a durable global expansion and the chance to build a better economic decade
than previous ones.

In the '90s, the U.S. was practically the only engine of global growth, making the outlook
vulnerable and volatile. The U.S. may have rejoiced, then, in its own economic conditions,
but it should have been concerned that economies in many parts of the world were
shrinking or growing well below their potential. As the U.S. became isolated in its full
employment and wealth, economic conditions abroad affected its national security,
immigration policy and future growth.

The disinflationary, ultimately deflationary, monetary era of the '80s and '90s produced lost
decades in Japan, Latin America and Africa and the devastating Asia crisis of 1997-98.
The environment was in many ways good for U.S. growth as capital flooded to the safe
haven. But it was painfully capital-draining for much of the rest of the world, ending badly in
2000 and 2001 with the strong-dollar deflation crisis, a bitter-sweet victory over inflation.
Investments in much of the world were so depleted that per capita income growth fell way
behind the U.S.

The new environment is beginning to repair this global imbalance, though the core criticism
of the U.S. -- its inability to project abroad its economic vision and strength -- persists.
Driving the global expansion, the U.S. interest rate cuts of 2001 and the post-9/11 liquidity
injection weakened the dollar, ending the strong-dollar disinflation process. With this, the
world entered the most pro-growth monetary era since the gold standard, coincident with
the start of the ongoing U.S. economic expansion in December 2001.

Japan is exiting its 12-year deflation spiral, allowing growth in the world's second-largest
economy to resume. China's growth remained fast through September, refuting the many
hard-landing predictions from outside its borders. And the promise of the euro and the
faster growth that goes with sound money are spreading into eastern Europe, burying the
communist economic bloc that once saddled the region. In return, Russia and eastern
Europe are sending western Europe the challenge of lower tax rates.

Though unsettling in the transition, the new monetary era is providing a much better
environment for developing-country growth. The consolation for the deflationary extremes
of the late '90s is the possibility of below-average interest rates in much of the world for at
least several years. Already, higher commodity prices and lower interest rates have added
to incomes in developing countries, contributing to 2004's fast global growth.

The growth environment is far from perfect. Outside the U.S. and China, the world is still
light on capital formation -- the aggressive building of factories, machines, small
businesses, houses, roads and educational institutions. The global expansion will also
have to contend with the U.S. trade deficit and the harmful policy temptations it presents.
The biggest threat is for the U.S. to hunker down into protectionism, stopping an otherwise
durable expansion. Another dangerous idea being bandied about is to weaken the dollar to
pre-empt the U.S. move toward protectionism. A weak-dollar policy would risk inflation and
capital flight without addressing the issues underlying the trade deficit -- the attractiveness
of the U.S. investment climate, our heavy taxation of saving, and the weakness in
investment and growth abroad.

A better alternative to protectionism and an even weaker dollar would be to launch an
energetic Global Prosperity Initiative aimed at lengthening the global expansion and
helping lift living standards in developing countries. The principles of U.S. growth are
clear: limited government, sound money, trade liberalization, low tax rates, and a
brief constitution as the basis for the rule of law. An initiative based on these
principles would align our foreign economic policy with our domestic economic and security
policies. It would complement the physical and diplomatic war on terrorism, improve our
self-absorbed image abroad, and help balance China's efforts to provide commercial
leadership in Asia and Latin America. A good first step in a Prosperity Initiative would be for
the U.S. to state clearly that it wants itself and foreigners to do well economically and will
make institutional changes to play a constructive role in this. Americans may think that this
is self-evident -- of course we want others to do well -- but around the world U.S. policy
muddles this message.

Despite the negativism in the election, the fast global growth in 2004 and favorable
monetary and tax policy developments add to the prospects for a long global expansion
and higher living standards abroad. Hope and progress should once again be America's
main message to the world, rather than reaction and caution.

///