Stock markets are up then down. The value of the dollar is soaring while the ruble and many other currency values plummet. Are we going back to another recession? Didn’t we just get out of a recession? Are we doomed to decades of slow growth? Was Elvis a transsexual? These are just some of the questions being asked these days.
To oversimplify what is going on now is risky but why have a blog if you aren’t willing to stick your neck out? It seems to me that what is going on today reflects an ongoing evolution of the global economy. In the rich places of the world we are playing out a dramatic financial evolution. In the wanna-be-rich places of the world we are seeing the results of logical but unfortunately dangerous economic development policies.
Whether we focus on Russia or Venezuela there are similarities. These countries are trying to catch up to their richer neighbors. Impoverished by rigid autocratic and socialist policies before the 1990s, these and other so-called emerging or developing countries plunged into less regulated and more market-oriented systems. Just as when an old man tries to learn to play the guitar, the physical, cerebral, and other transitions required in such a transition are slow and painful. No country found transition easy and no country did it the same way. But by the dawn of the 21st century many were finding success in global capitalist markets. And some of the ones with the most startling successes were those that chose to specialize – or build their new economies around one or a few industries often featuring the exportation of commodities like oil, copper, and aluminum.
And so it was in 2007 when the signs of economic slowdown first became apparent, a catchword was "decoupling". That is, the developing countries had advanced so far that even if the US or other rich countries experienced recessions – the developing countries would be fine. They had decoupled their economic growth from industrial world. Well—that was optimistic and mostly wrong. Just as a one-handed juggler of flaming knives finds out – when the going gets rough it helps to have two hands! Building your economy on only a few sectors means you have nothing to fall back on when those sectors experience difficult times.
Human nature and politics suggest that we should not be too critical of developing nations. It is not easy to dig from the ruble of failed socialism and build a broad, dynamic for-profit economy. And once you get a few sectors humming, it is tough to divert resources away from the successful ones to build the lagging parts. Critical or not, as the world languishes in slow growth, these one horse countries are not going to quickly or easily return to the heady days. One reason is that world growth may take awhile to recover. The other reason is that bad policy seems to follow bad policy.
Excessive debt and inflation hamper what can be done with traditional Keynesian policies. Most of these countries are raising interest rates to defend against currency depreciation and inflation. Many are going through fiscal contraction because of excessive debt. They are between the proverbial rock and hard place.
This brings us to a JD break and a brief discussion of the other countries – the rich ones. These countries might be richer but they are not necessarily smarter and are not immune from historical evolution. They may not have one-horse economies, but as Brian Westbury often writes, they have created plow horse economies. Perhaps in the name of “progress” or because of sophisticated caring for people and resources – the richer countries have saddled capitalistic engines with more regulations, higher taxes, higher government debts, and uncertain business environments. It is interesting that while an energy revolution has finally strengthened the US in economic and security terms – there are those in politics who want to throw even more regulations, costs, and uncertainty on US firms.
To bring this all together, it is unexplainable that the rich and not-so-rich cannot learn from each other. The rich should vividly see that too much debt and regulation can virtually destroy a country’s economy and leave it with no good policy alternatives. The less-rich need to see that reforms to widen the economic base are necessary for future growth. The past should inform us.