EVERYTHING'S GOING OUR WAY:

Relax, it's not the end of the world: Despite a few insecurities, the U.S. and global economies are strong enough to handle setbacks and continue growing (Francis Fukuyama, February 4, 2007, LA Times)

[B]efore we get too discouraged with the state of the world at the beginning of 2007, we should stop to consider a broader context in which things look a lot brighter. The single most notable but overlooked fact about today's world is that the global economy has been driving ahead full speed, raising living standards and closing the gap between the First and Third worlds. The economies of the world's two most populous countries, India and China, have been growing in recent years at nearly 9% and 10%, respectively. A decade after the 1997-98 financial crisis, East Asia as a whole has returned to its torrid pace of development.

But the rest of the world is growing steadily too. Latin America, despite instability in the Andes and a backlash against "neo-liberalism," has been averaging 4% to 5% growth based on exports. Sub-Saharan Africa, after three decades of decline, has seen greater than 5% annual growth in recent years, and the Middle East is not far behind. These trends in the developing world are increasingly driven by south-south trade, as India and China consume commodities and natural resources from Latin America and Africa. This has spawned world-class multinational companies from developing countries, such as Mittal (originally of India), Cemex (Mexico) and Embraer (Brazil). Even Europe, despite the dislike of many of its intellectuals for an American-led globalization, has seen rates of unemployment fall to levels without recent precedent as the European Union expands and integrates with the global economy.

What is even more striking than the fact of economic growth has been its robustness. The early years of the 21st century have not been peaceful ones, after all: The world has seen the 9/11 attacks on the United States; horrific bombings in London, Madrid, Istanbul and Bali; two wars in the Middle East and one in Afghanistan; and an enormous increase in commodity prices. Similar shocks in the 1970s sent the global economy into a tailspin, leading to recession and inflation in the U.S., the debt crisis in Latin America and stagnation in Europe. And yet the U.S. economy has not even suffered a technical recession (two back-to-back quarters of declining output) in the last decade.

Ah, many would say, but today's rosy economic picture masks huge vulnerabilities, particularly in the form of the twin American trade and budget deficits and the unsustainable buildup of U.S. dollars in foreign central banks. These deficits, and the global imbalances they represent, are indeed worrisome and unsustainable, but people misunderstand where they come from. They do not arise primarily from American profligacy but rather from decisions taken by non-Americans to build up dollar reserves and thus ensure themselves against financial risks. The decade following the fall of the Berlin Wall was marked by constant financial instability, but since the Asian financial crisis, countries have weaned themselves off short-term capital flows and built up reserves through export-led growth. The International Monetary Fund is in trouble today because it has run out of customers for its fire brigade services. We evidently suffer, as Federal Reserve Chairman Ben Bernanke once suggested, from a global oversupply of capital that keeps real interest rates low even as growth takes off.

In fact, when the numbers are all in we won't have had a technical recession since the early '80s and as the Islamic world and Africa are pushed and dragged into the 21st Century their peoples too will begin to enjoy the fruits of the End of History. It's not a question of whether or not but of how quickly. America is an impatient country so we forced the pace.

Posted by Orrin Judd at February 4, 2007 9:02 AM