GLOBAL ECONOMIC VIEWPOINT
UNCERTAINTY OVER WAR DAMPENS GLOBAL ECONOMY
By Laura D'Andrea Tyson
Laura D'Andrea Tyson, dean of the London Business School, was chairman of the Council of Economic Advisors to U.S. President Bill Clinton. Her comments are adapted from a conversation with Global Viewpoint editor Nathan Gardels in London.
LONDON -- As business and political leaders from around the world gather in Davos for the annual World Economic Forum, what is the state of the global economy?
In the second half of the 1990s, the global economy was much too dependent on the United States as the market of last resort, engine of growth, safe haven for capital and the leader of trade liberalization. Now that the U.S. economy is sputtering and preoccupied with other matters, such as the war with Iraq, the rest of the world is affected.
America may still be a haven for capital, if only because of the lack of other alternatives. Due to the synchronous downturns in Japan and Germany, there are no other economies weighty enough to take up the slack and right the imbalance of overdependence on the United States. While Europe has achieved a major political accomplishment in its march toward integration, economic performance has been very disappointing.
In Asia, both India and China are large enough to keep growing through domestic demand. And, indeed, China's dynamism has boosted inter-Asian commerce and will continue to do so. But neither is a large enough weight in the global economy at this point to offset the downturns elsewhere.
Thus, the relative dependence of the world on the United States remains, showing up in the large trade and current account deficit. The wealthiest nation, in this circumstance, becomes a larger and larger debtor nation.
The newly announced Bush economic policy will have little effect on this global scene. Clearly, most of the $674 billion tax relief package -- with half devoted to dividend exemptions -- will not have any impact until 2004. Whatever effect that may have, it will not stimulate the American economy in the near term. A real stimulation package, well timed and targeted, would have included a range of policies from a temporary payroll tax holiday for 2003 to increased aid to fiscally ailing state and local governments.
While those who get dividend relief are not likely to spend it any time soon, a bigger paycheck would immediately affect spending behavior. In recessionary conditions, government spending, however, is more stimulative than tax breaks. And since the American states are cumulatively $50 billion short of revenues, they would be certain to spend federal aid immediately.
The Bush policy furthermore sends a signal that the United States has totally given up on budgetary rectitude. All the hard work of the 1990s has been overturned. There are now no budget enforcement rules to speak of, and the possible war with Iraq is not even included in the budget proposal. In short, the longer run outlook for the Unites States has sharply deteriorated.
It is difficult to assess the economic impact of a war with Iraq because no one knows how long it would take and how much it would cost to achieve the military objective and then finance stability in Iraq and the rest of the region. Estimates range as high as $1 trillion over a decade if the United States engages in a nation-building effort beyond the war itself.
The real issue now is that the uncertainty about war with Iraq is floating like a huge cloud over global investor confidence. No one is willing to make future plans unless he or she knows what to expect.
The other problem is that policymakers' fixation on the Iraq issue has paralyzed any possible collective initiative by the United States, Europe and Japan to give the global economy some forward momentum. All the focus now is on geopolitics, not international economic policy.
This is very unfortunate since the global economy is quite vulnerable at the moment, more so than in a long time.
(c) 2003, Global Viewpoint. Distributed by Tribune Media Services International.
For immediate release (Distributed 1/23/03)