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Viewpoint: When America sneezes, will the rest of the world catch a cold?

April 19, 2008
Marietta Times
Economists and decision-makers used to say, “When America sneezes, the world catches a cold.” Is this still true? The answer is: Maybe not.

A new look at the global economy shows the United States is not going to be alone when it comes to a possible recession. The International Monetary Fund (IMF), in its latest World Economic Outlook report released on April 9, not only cuts the projected growth of the U.S. economy to a dismal 0.5 percent in 2008 and a negligible 0.6 percent next year—its worst showing in almost two decades, but also down-rated many developed and “third-world” economies’ growth forecasts.

The IMF report sees a risk that the still-deepening financial crisis could cause deeper losses, therefore further slowing the world economy. The IMF now warns that there is a one-in-four chance for a global recession: “The financial market crisis that erupted in August 2007 has developed into the largest financial shock since the 1929 Great Depression,” the report said.

In the developed world, Japan, the world’s second-largest economy, will slow to 1.4 percent this year and 1.5 percent in 2009. The 15-member Euro-zone will see its growth slow to 1.4 percent in 2008 and 1.2 percent next year, down 0.2 percentage points and 0.7 percentage points, respectively, since the IMF’s January forecasts. As for the world’s poorest, also known as the “third world” countries, they will feel the impact of slowing global growth as well, as foreign aid from rich countries stalls. And the Millennium Development Goals for these poorest countries, set by the international community in 2000, are highly unlikely to be met by the target year of 2015.

Bad news for the world’s most- and least-developed economies, however, turns out to be good news for some emerging economies in East and Southeast Asia, the Middle East and Central Europe.

As London-based Economist has noticed, “The world is experiencing one of the biggest revolutions in history, as economic power shifts from the developed world to China and other emerging economies. Emerging economies are growing much faster than developed ones. In 2006, according to our estimates, emerging economies produced more than half of world output measured at purchasing-power parity. They also accounted for more than half of the increase in global GDP in current-dollar terms. There is a widening gap between their growth rate and that of the sluggish developed world. According to the IMF, they are growing almost four times as fast in 2007.”

While the developed and least-developed countries either stagnate or contract, growth in China, India and other emerging economies in Asia and the Middle East continues to accelerate. China is growing at 9.3 percent this year and 9.5 percent in 2009; while India’s economy is expected expand by 7.9 percent in 2008 and 8.0 percent in 2009. Collectively, these emerging economies are likely to post a robust 8.3 percent rate of growth this year.

True, it used to be that when the American economy sank into recession, other economies sank along with it. “But,” writes Robert Reich of the University of California at Berkeley, “that probably won’t happen this time. Much of the Middle East is swimming in oil money—petro-dollars—while China has built up its own huge stock of Sino-dollars. These petro-dollars and Sino-dollars aren’t just sitting there. They’re being put to work—building new infrastructure, skyscrapers, power plants, power grids, roads, ports. While still relatively small, growing middle classes want the things middle classes in advanced nations want—cars, refrigerators, houses, and lots of stuff to fill their houses. All this spending on infrastructure and on goods and services by emerging middle classes, in turn, is pulling in resources, goods and services from the rest of the world. This means these nations are no longer nearly as dependent as they used to be on the United States and other rich nations.”

World economic growth is no longer solely driven by economies of the United States, European countries, and Japan, but rather by emerging economies like China and India. As George Soros, chairman of Soros Fund Management, has pointed out, “Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend.” “The danger,” however, says the world’s legendary financier, “is that the resulting political tensions, including U.S. protectionism, may disrupt the global economy and plunge the world into recession or worse.”

Xiaoxiong Yi is a professor at Marietta College and director of the China Institute.


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