Market Advisory Features

A New Economic Order?
Japanese Economy in Terminal Decline
Just a Glimmer
Global Economic Gloom
Is Globalisation Doomed?


A New Economic Order?
Oct 4th 2001
The Economist Global Agenda

The terrorist attacks on America last month have transformed the economic-policy debate there. President George Bush is now asking Congress to approve a package of measures to stimulate the economy

“ONE person laid off is one person too many.” This is not a sentiment which George Bush would have been expected to stress as a priority before September 11th. But the attacks on America, and the blow to confidence and sheer disruption which they brought in their wake, have transformed the economic debate in America and, at least for the moment, turned many of the doctrines of Mr Bush's administration on their head. When he declared his concern for layoffs to New York businessmen on October 3rd, Mr Bush was signalling that now he sees a direct role for government in constraining the rise in unemployment. In the same speech, Mr Bush also talked about his plans for a package of measures to stimulate the economy. Later the same day, Paul O’Neill, the treasury secretary, went to Capitol Hill to tell senators more about the fiscal stimulus which the Bush administration is now seeking.

The looming budget deficit, the source of much political embarrassment for the president, has vanished from the political agenda. It is, for the foreseeable future, simply not an issue. By contrast, public spending, once anathema to most Republicans, is back in favour. Even Alan Greenspan, chairman of the Federal Reserve, and not the sort of man normally to favour more government intervention in the economy, is reported to support a fiscal stimulus.

Of course, these are extraordinary times in America, and it would be a mistake to get too carried away by the political rhetoric. There is no evidence, as yet, that Mr Bush and his advisers have undergone a Damascene conversion. The language they use makes it clear that the need for a fiscal stimulus is a direct result of the uncertainties which now afflict every aspect of American economic life following the terrorist attacks. The aim is, as Mr O’Neill put it, to “restore confidence and prosperity in our economy.”

It’s not the economic impact of the attacks themselves that worries Mr Bush, Mr O’Neill and, indeed, Mr Greenspan. It is the fact that they came just as the American economy was on the brink of recession. Even before September 11th, many thought recession had become inevitable, while some thought America might avoid one, but only by the narrowest of margins. Since then, it is hard to find anyone who is not convinced that America is, or will soon be, in recession. Mr O’Neill said on October 3rd that negative real growth was now certain, made so by the impact of the attacks on business and consumer confidence.

The president and Congress have already agreed on about $50 billion of extra spending in the wake of the attacks. Of this, $40 billion was for meeting relief needs on the ground, extra security and extra military outlays. Another $5 billion was for a rescue package for airlines, who also got $10 billion in loan guarantees. Now Mr Bush is looking to Congress to work with him on a new package, of between $60 billion and $75 billion, which would come on top of what has already been agreed. This is bigger than the $50 billion or so many in Congress had been contemplating, and would bring the fiscal stimulus to more than 1% of GDP.

What form the new package will take is still uncertain. It might include further government spending—and there are already signs that pork-barrel politics are alive and well on Capitol Hill, judging from some spending ideas already being put forward. But the package is also likely to include some form of tax cuts. One idea is to speed up the tax cuts already in the pipeline, as part of Mr Bush’s ten-year tax-cut plan. Another is to introduce some form of temporary tax cut, or a one-off payment to low-income households who did not benefit from the tax rebate received by many American taxpayers over the summer.

What the president wants, of course, is something that will have a speedy economic impact. Yet the problem with many, if not most, fiscal measures is that they take a long time to work and often have an uncertain impact. Tax cuts, for example, might not be spent by consumers anxious about the future: they may decide to save the money instead. Even some sort of time-limited voucher spending may not lead to increased spending—people might use the vouchers for spending which they had already planned, and save the money they would have used instead. The Japanese government has spent years trying to get its citizens to spend instead of save, and dismally failed.

One alternative, proposed by Alan Blinder, an economics professor at Princeton University and a former vice-chairman of the Fed, is for the government to re-imburse states for a temporary reduction in sales tax. This might encourage people to buy now rather than later. It also would not adversely affect America’s long-term budget position.

The long-term position still matters to many of those who will be deciding on how to structure the stimulus package. Yes, there is widespread support for efforts to tackle the short-term problems and a readiness on the part even of the president to tolerate a budget deficit in the fiscal year which started on October 1st. But Republicans in particular are anxious not to repeat the mistakes of the Reagan presidency which was plagued by huge budget deficits that took years to eradicate.

A large projected increase in government borrowing could push up long-term interest rates—something Mr Bush has already made clear he wants to avoid. Such a rise would also undermine the substantial cuts in short-term interest rates which Mr Greenspan’s Fed has pushed through this year. The cut announced on October 2nd was the ninth since the beginning of the year; interest rates are now at 2.5%, down from 6.5% when the cutting started.

It is now conventional wisdom that monetary policy is a more effective tool for short-term economic adjustment than fiscal policy. Interest-rate cuts can be reversed quickly if, for example, inflationary risks were to increase. Mr Greenspan, who has been closely involved in discussions in Congress about a fiscal package, has been urging caution on that front. The fact that even he is now reported to favour a package on the scale talked about by the president and Mr O’Neill is likely to speed its passage.

As American economic life starts to return to normal, though, the challenge for Mr Bush will be to avoid presiding over a longer-term return to big government and big budget deficits.

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Global Economic Gloom
Oct 5th 2001
The Economist Global Agenda

With most of the industrial world on the brink of recession, or experiencing a sharp slowdown, the outlook for the world economy is worse than it has been for decades. Last month’s terrorist attacks on America have made recovery more difficult and uncertain, and posed great challenges for economic policymakers

THE world has changed so much in the past few weeks that it is hard to recall what life was like before the September 11th attacks on New York and Washington. There is an understandable, but mistaken, tendency to blame bad news on the fallout from the terrorist attacks. This is especially true in the economic sphere. Every job lost, every gloomy statistic, every confirmation of the worsening economic environment is ascribed to the events of that one day. The meeting of G7 finance ministers and central bankers in Washington on October 6th, itself postponed from September, takes place against an unusually gloomy backdrop.

But that backdrop was largely in place before September 11th: the world economy was in deep trouble well before the terrorists struck. Economic forecasters everywhere were busily revising their estimates of global growth downwards; for some countries, the downward revisions were radical and underlined the speed with which the economic outlook had changed. America, the world’s largest economy and for so long the engine of global growth, was on the brink of recession, according to many economists. Even those who thought recession could be avoided accepted it would be a close call.

Japan, the world’s second-largest economy, is experiencing its fourth recession in a decade, according to the International Monetary Fund (IMF). And European leaders, who at the start of the year were almost smugly confident that they would remain largely immune from an American-led global slowdown, have been taken aback by the turnaround in their economic fortunes. A European recession is still likely to be avoided, but the pace of growth in the euro area has slowed dramatically.

For many parts of the developing world, the outlook is at least as bleak. Many countries in South East Asia are already in recession. Singapore, for example, has been badly hit by the collapse of American demand for its high-tech exports. Taiwan is experiencing its worst downturn since the 1970s. On October 4th, the Philippines government released figures showing the biggest export decline in 21 years. Mexico’s economy has been blighted by the American downturn. Emerging market economies from Turkey to Argentina have found it increasingly difficult to deliver on their commitments to the IMF—partly because of political failures, and partly because of the deteriorating economic environment.

What has most alarmed economists is the coincidence of the downturn in so many parts of the world. There has not been a comparably wide downturn since the 1970s

What has most alarmed economists is the coincidence of the downturn in so many parts of the world. The last American recession, in 1991, came at a time when Japan and Europe were growing at a respectable pace. The Asian crisis of 1997-98, which saw deep recession in many parts of the region, came against a backdrop of healthy growth, especially in America. The current slowdown, though unequal in its scale, is global in its reach. There has not been a comparably wide downturn since the 1970s.

There is no doubt that, in the short term at least, the events of September 11th have made the outlook far worse. The terrorist attacks brought with them a new mood of uncertainty: businesses and consumers have reacted anxiously, nervous of travel and of forward planning until they have a clearer sense of what will happen next. How long this mood of uncertainty will last is unclear. While it persists, policy action to speed economic recovery will be even more difficult than usual.

That does not mean that policy action will be ineffective. Nor does it mean that the same policy prescription is right for everyone: the unmistakeably global nature of the downturn underlines the extent of linkages between economies, but that is not to say that the causes of the slowdown are the same everywhere.

This is most clearly seen in the case of Japan, which has had so many recessions in the past ten years that there was a good chance one of them would coincide with slowdowns elsewhere in the world. Japan’s persistent failure to escape from the aftermath of the bursting of its massive asset-price bubble more than a decade ago reflects, in the opinion of most economists, the longstanding reluctance of successive Japanese governments to tackle the country’s structural problems. The Japanese central bank has also been criticised repeatedly for its sluggish response to the deflation which has plagued the country for so long. On October 4th, a member of the bank’s policy board repeated the bank’s opposition to inflation targeting—a policy advocated by several economists as a way of ending deflation.

Japan’s prime minister, Junichiro Koizumi, in office for barely six months, has pledged that he will get to grips with the structural problems which have been at the heart of the country’s poor economic performance; in particular, the banking system’s long-standing burden of bad loans. So far, though, he has made slow and unconvincing progress. The one hopeful sign in recent weeks has been the apparent recognition by the Japanese ministry of finance that it must avoid a further appreciation of the yen. As the dollar weakened, first as the American economy slowed and then much more rapidly in the wake of the terrorist attacks, the yen rose. This is potentially catastrophic for Japan’s hopes of kickstarting its economy. The ministry of finance repeatedly, and publicly, intervened to sell yen and buy dollars and euros in order to push the yen’s value down.

Europe’s problems are very different and, as yet, far less serious than those afflicting Japan. But it has become clear this year that Europe needs to do more to grapple with its own structural problems. The European economies have been affected both by the American downturn and by the worldwide high-tech slump. But some of Europe’s slowdown has been home-grown. In Germany, for instance, domestic demand fell faster than exports. Most economists agree that Europe still needs to do more in the areas of labour-market flexibility and economic deregulation.

A large body of economists also believes European economic policy-making needs to be more flexible. As the economic outlook deteriorated during the year, the European Central Bank (ECB) sometimes seemed just as reluctant as the Bank of Japan to respond. Interest-rate cuts were slow in coming, as the ECB struggled to achieve the credibility it craved as a guardian against inflation, even when it seemed to many that inflation was among the smaller risks facing Europe and the world economy. When the Federal Reserve cut American interest rates on September 17th, partly to generate confidence ahead of Wall Street’s re-opening (after its longest closure since the 1930s), the ECB quickly followed suit. But it has so far refrained from following that with another cut: the next test comes when the bank meets on October 11th.

The contrast between the Fed and the other big central banks could not be greater. The Fed has cut interest rates nine times this year, most recently on October 2nd. Alan Greenspan, the Fed’s chairman, is determined to do all he can to mitigate the effects of what most people now concede will be an American recession, following the terrorist attacks. The federal government, too, has ditched—temporarily at least—its opposition to government spending and its attachment to a budget surplus. In the short term the overwhelmingly important objective is to get the economy moving again. The challenge for American policymakers is to persuade their G7 colleagues to do the same.

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Japanese Economy in Terminal Decline
October 28, 2001


The Sept. 11 attacks on the World Trade Center and Pentagon did more than just gut American confidence. They also heralded the downfall of the world's second-largest economy, Japan. About the only option left for the Japanese prime minister is to restart massive deficit spending.


New statistics from Japan show that consumer prices dropped 1.2 percent in August, the 24th-straight month of decline. The data indicate Japan's deflationary spiral is intensifying. But Tokyo's problems are far more severe than economically crippling deflation.

About the only option left for Japanese Prime Minister Junichiro Koizumi to stop the economic degradation is to restart massive deficit spending, even though it may appear self-destructive, as soon as possible. Japan's economy has been extremely weak for more than a decade. But due to the Sept. 11 terrorist attacks in the United States, the country is now locked into an irreversible and terminal decline.

With its own people unwilling to spend, Japan is dependent on foreign consumers, particularly Americans, to sustain itself. To keep its exports flowing, Japan also repeatedly intervenes in the currency markets to keep the yen artificially low.

Such actions have made Japan hostage to international events. It has already completely tapped out monetary and stimulus policies as viable options. Now its federal debt, a nearly $6 trillion behemoth that makes America's 1980s debt seem small in comparison, is so high that industry-boosting tax cuts are no longer possible either. Adding to the misery, Japan's Nikkei-225 stock exchange is at an 18-year low, having shed 30 percent of its value in the past nine months.

The country's banks are helpless as well. Their capital adequacy ratio is estimated at a mere 1.4 percent, the Economist reports, following numerous bailout plans that required no one to take responsibility or truly write off losses. International banking rules require an 8 percent adequacy ratio.

The downturn still won't be fatal as long as foreign demand for Japanese goods remains high. Throughout the 1990s the United States, Japan's largest export market, was in the midst of its longest economic boom ever. The 2001 slowdown threatened Japan's precarious perch, but with the United States poised for recovery in the third quarter, there was a light at the end of the tunnel. Sept. 11 changed all that.

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Just a Glimmer
Sep 28th 2001
The Economist Global Agenda

New figures released on September 28th show that consumer confidence in America fell sharply in the second week after the terrorist attacks on New York and Washington. According to the latest forecasts from the International Monetary Fund the world’s economic prospects had dimmed even before the attacks

ECONOMIC forecasting is becoming ever more speculative. The widespread uncertainty and anxiety, which has blighted normal life in so many parts of the world since September 11th, has made it impossible to assess the economic impact of the attacks. Economists have been consulting their history books in the search for comparable examples of severe shocks to individual economies or the world as a whole. The second world war, the Gulf war, Hurricane Andrew and the Kobe earthquake have all been examined. But while some attempts can be made to measure the direct economic effects of the terrorist attacks, no sensible assessment of the indirect effects—the impact on consumer and business confidence, in particular—can yet be made.

And all the while, the bad news piles up. On September 28th, the latest survey from the University of Michigan showed a sharp fall in consumer confidence in September, particularly in the second week after the terrorist attacks, apparently as people came to terms with the extent of the damage. The September confidence reading was well below that recorded in August; and some economists expect it to fall still further in October.

There was one snippet of better economic news from America with the release, also on September 28th, of the final GDP figures for the second quarter: an upward revision, showing that the economy expanded by 0.3% in the three months to June, marginally more than the 0.2% growth previously estimated.

Most new data, though, confirms that the world economy was in trouble long before September 11th. What will happen now is anybody's guess. In its latest World Economic Outlook, published on September 26th, the International Monetary Fund (IMF) has been disarmingly candid about its inability to make much sense of what the terrorist attacks could mean in economic terms. Its economists haven’t even tried to alter their forecasts, prepared before September 11th. It could be argued that it might have made more sense to postpone their release until crunching the numbers again was worthwhile. But then again, the numbers are gloomy enough as it is.

The IMF’s figures show clearly how dramatic has been the turnaround in global economic fortunes since this time last year. Then, the IMF was predicting the world economy would grow by 4.2% this year; by May that had been reduced to 3.2%; and now it’s down to 2.6%, a figure some would define as barely avoiding global recession. For next year, the IMF has also trimmed its May 2001 forecast, to 3.5%. And that is not taking the aftermath of September 11th into account.

Central to this gloomy reassessment of prospects is, of course, America, the world’s biggest economy, and the engine of world growth during the 1990s. The slowdown in America which began towards the end of last year had been widely expected: economists were largely in agreement that the boom America enjoyed in the late 1990s was unsustainable, and that growth rates needed to ease to more moderate levels. Less widely expected, though predicted by some, was the extent of the slowdown which took place. Business investment has fallen sharply and industrial production shrank by 4.8% in the year to August. Unemployment crept up only slowly to begin with, but the rise has recently begun to accelerate, going from 4.5% to 4.9% between July and August.

Yet plenty of people thought the turning point was in sight. They were reassured that, in spite of the apparently endless stream of bad corporate news, and the sharp falls in share prices, consumer confidence and spending had stayed more buoyant than might have been expected. Personal consumption accounts for about two-thirds of the American economy, after all.

Unfortunately, figures released since the terrorist attacks, but relating to the period before September 11th, have shown a marked worsening of consumer confidence. The American addiction to shopping, which propped up the economy for so long during the year, was clearly wearing off. And the first figures covering the period since the attack were published by the Conference Board, a private business organisation, on September 25th: they confirmed expectations of a continuing decline in confidence. Confidence is now at its lowest level for five years, having registered its worst monthly fall since the Gulf war in 1991. Anecdotal evidence of empty shops, half-empty planes, and large-scale cancellation of hotel bookings across America don’t imply any rapid recovery in either business or consumer confidence.

Most economists now reckon that the American economy is probably already in recession, or close to it, and the terrorist attacks only make that even more likely. Officials, though, have tended to avoid committing themselves, partly for fear of damaging confidence still further. In a candid moment during the IMF’s press conference, though, Kenneth Rogoff, the Fund’s new chief economist, conceded that a US recession was, as he put it, “a done deal”: a remark he subsequently withdrew, saying it was too soon to know.

Bad economic news for America is, generally speaking, bad for the rest of the world as well. A new working paper published by the IMF on September 25th offers econometric evidence in support of a close link between growth in America and growth in the rest of the industrial world and many developing countries. The IMF’s latest Outlook has a whole chapter dedicated to the linkages in the world economy, noting that these were underestimated at the beginning of the latest downturn in America. The Fund suggests that one reason for this underestimate was the absence of a synchronised global slowdown when America went into recession at the beginning of the 1990s; this resulted, the Fund thinks, from unusual events—German unification and the asset bubble in Japan.

It is clear from what has happened this year that other parts of the world are vulnerable to an economic downturn in America. This seems to have been made worse because the slowdown was so pronounced in the high-tech sector, which has had a rapid global impact. Growth in Europe has slowed more than most people had expected at the beginning of this year. Many economies in East Asia have been severely affected by the collapse in high-tech investment in America. Singapore and Taiwan, for instance, are already in recession. And, of course, Japan has its own longstanding problems: it is now entering its fourth recession in ten years, according to the IMF.

While acknowledging that the new, much more pronounced uncertainties make a reliable assessment impossible, the IMF does see some reasons for hoping that recovery in America will come fairly quickly. For a start, as the Fund points out, the world is in somewhat better shape to cope with economic shocks than it used to be. Inflation is generally low, and most industrial economies have sound monetary and fiscal policies in place. The Federal Reserve has cut interest rates eight times so far this year, including once since September 11th. In addition, some stimulus to demand will come from extra government spending already announced, and, possibly, a further stimulus package, perhaps including new tax cuts.

Global policy co-ordination will also help. The IMF believes the European Central Bank was right to cut rates as it did in May and August, and again on September 17th. Even in Japan, the government has relaxed monetary policy and has now established a timetable for implementing the reforms for which economists and policymakers outside Japan have so long argued.

In the uncertain atmosphere of the moment, though, the IMF’s cautious optimism should not be exaggerated. If consumers in America—and elsewhere—start returning to the shops, and to something approaching normal everyday life, business confidence will eventually start to pick up as well. Until that happens, the impact of the events of September 11th remain unquantifiable.

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Is Globalisation Doomed?
Sep 27th 2001
The Economist print edition

According to its critics, globalisation has a lot to answer for

IN CHOOSING the World Trade Centre for their principal target, the terrorists were striving not merely to kill as many Americans as they could, but also to tear down a potent symbol of America's economic might, of its ideas and values, of capitalism. If the shock of the attacks and the war on terrorism that is just beginning do lead to global recession, as many fear, the West's faith in market economics may indeed be tested. If this happens, will it be right to see it as merely a brief swerve in sentiment, as one would expect in any severe economic slowdown? Or does the terrorist “backlash” against the ideology of America and the West, if that is what it was, demand a deeper response—a reappraisal, even, of that very ideology?

Some in the West are arguing that it does. John Gray, a professor at the London School of Economics and a much-quoted thinker on these matters, spoke for many last week when he declared that the era of globalisation is over. “The entire view of the world that supported the markets' faith in globalisation has melted down...Led by the United States, the world's richest states have acted on the assumption that people everywhere want to live as they do. As a result, they failed to recognise the deadly mixture of emotions—cultural resentment, the sense of injustice and a genuine rejection of western modernity—that lies behind the attacks on New York and Washington...The ideal of a universal civilisation is a recipe for unending conflict, and it is time it was given up.”

Wicked and dangerous

Is there no limit to the crimes for which globalisation must be held to account? Not only does it oppress the consumers of the rich West, undermine the welfare state, emasculate democracy, despoil the environment, and entrench poverty in the third world; we knew all that already. In addition, we now find, it is a utopian scheme for global ideological conquest—like Stalinism, minus the compassion. Truly, the idea that people should be left free to trade with each other in peace must be the most wicked and dangerous doctrine ever devised.

Either that, or a lot of people are talking nonsense. In fact, this is a distinct possibility. Western governments do a poor job of explaining and defending globalisation—so poor as to breed disaffection with democratic politics. This does not alter the fact that the substantive charges of the anti-globalists fail to stand up. This week, we publish a survey reviewing their arguments. We had intended it to coincide with the annual meetings of the IMF and the World Bank, scheduled for this weekend but cancelled after the attacks; the article was written (for the most part) before September 11th, but in view of the links that are being drawn between the perils of globalisation and anti-western rage, we believe it remains relevant. Globalisation undermines neither the welfare state nor democracy, our survey argues; it is entirely consistent with sound environmental policies (see article); above all, far from increasing poverty in the third world, it is the most effective force for reducing poverty known to mankind.

But what about the view that globalisation is a kind of cultural conquest? This too is plainly wrong. Under a market system, economic interaction is voluntary. This is the market's greatest virtue, greater by far than its superior productivity. So there is no reason to fear that globalisation itself threatens traditional non-western cultures, such as Islam, except in so far as individual freedom threatens them. McDonald's does not march people into its outlets at the point of a gun. Nike does not require people to wear its trainers on pain of imprisonment. If people buy those things, it is because they choose to, not because globalisation is forcing them to.

In some countries, governments may see globalisation as a threat to their power as tyrants. They probably overstate the danger, but in any case we leave Mr Gray to speak for them. Where governments reflect the preferences and beliefs of most citizens, democratically or otherwise, and where those preferences call for cultural distinctness and non-western values, economic integration does not militate against diversity, least of all against religious diversity. In the West, globalisation has been running at full power for years. Has it mashed the United States, France, Italy, Germany, Sweden and Japan into a homogeneous cultural putty? It has not, and there is no reason why it ever should.

This is not to say that the future of globalisation is assured. Far from it. Economic liberty suffered a terrible reverse in the 1930s, thanks to war, financial breakdown and bad government. That brought one era of globalisation to an end, and history could repeat itself. Let us at least agree, however, that if governments allow this to happen it would be a tragedy—and not for the rich West, first and foremost, but for all the poor of the developing world.

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