August-September 2010
Return to: Our market viewNO UNIVERSAL PANACEA FOR ECONOMIC ILLS
In recent months, governments around the world have been seeking a consensus as to the optimal policy to ensure a sustainable global economic recovery. Despite attempts to show unity in public, there are clearly differences
of opinion among the governments concerned as to how this can best be achieved. Essentially, the choice is between accelerating and diminishing economic stimulus measures. Disagreements in this regard
reflect the dissimilarities not only of the characteristics of national economies, but also of the remedies needed to rejuvenate them.
A case in point is the difference between the economies of the US and Germany. One of the major characteristics of the US economy is its dependence on credit. US consumers typically spend their income; historically at least, belt-tightening has rarely been an option, and if income is inadequate to satisfy spending needs, US consumers tend to borrow the required amount. In contrast, German consumers generally prefer to save until sufficient funds are available to realise their materialistic ambitions, and are only likely to borrow for “big-ticket” items such as property or a new car.
While such observations might be dismissed as generalisations, official statistics do confirm an overall disparity between US and German consumer behaviour (savings ratios in the US and Germany are around 4% and 11.6% respectively, whereas consumer spending as a percentage of GDP is about 71% and 57%). In fact, the two economies are fundamentally different in many ways: exports, for example, account for more than 40% of German GDP but only about 13% of US GDP.
ONE MAN’S MEAT IS ANOTHER MAN’S POISON
Given their differing natures, it is most unlikely that a common policy can be applied to stimulate both economies. From a US perspective, increased spending makes sense perhaps, given the prevailing situation relative to historical experience, which suggests that US consumers may indeed respond positively to loose monetary and fiscal policies. For Germans, whose economic history is distinctly different from that of the US, postponing the day of reckoning in this way, and expecting future generations to pick up the tab for the profligate spending of previous ones, is simply unthinkable. And, given the recent relative strength exhibited by the German economy, additional stimulus would hardly appear to be necessary at this time, despite dire warnings from (mostly US) Keynesian economists that, by not doing so, the country is risking a double-dip recession.
So, while accepting the notion of a global economy, it is important to recognise that the world is made up of different national economies that, at least as far as consumption is concerned, are essentially characterised by the heterogeneous beliefs (social, moral, religious etc.) of their consumers, which, in turn, determine overall national spending patterns. These disparate economies are not and have never been wholly synchronised (nor are they ever likely to be), despite the influences of other cultures, such as that of the US in the UK, and despite an unprecedented degree of globalisation-induced economic interdependence.
HORSES FOR COURSES
Because national and regional economies are naturally “out of sync” with each other, a one-size-fits-all policy response would be ultimately unworkable from a global perspective. Some economies might respond to whichever regime is implemented, while others may continue to languish or even deteriorate. Instead, in their efforts to engender a global recovery, policy makers should acknowledge the discrete nature of national and regional economies, and agree to implement the most appropriate and effective strategy on a case-by-case basis.
