If the global economy was in trouble before the annual World Bank and IMF meetings in Tokyo this past weekend, it is hard to believe that it is now smooth sailing. Indeed, apart from the modest stimulus provided to the Japanese economy by all the official visitors to Tokyo, it’s not easy to see what of immediate value was accomplished.
The U.S. still peers over a fiscal cliff, Europe staggers forward preventing crises King Canute-style with fingers in the dyke but no compelling growth strategy, and Japan remains stagnant and content if it can grow at all. Meanwhile, each BRIC is an unhappy story in its own way, with financial imbalances impeding growth in the short run and deep problems of corruption and demography casting doubt on long-run prospects.
In much of the industrial world, what started as a financial problem is becoming a deep structural problem. If growth in the United States and Europe had been maintained at its average rate from 1990 to 2007, GDP would be between 10 and 15 percent higher today and more than 15 percent higher by 2015 on realistic projections. Of course this calculation may be misleading because global GDP in 2007 was inflated by the same factors that created financial bubbles. Yet even if GDP was artificially inflated by 5 percentage points in 2007, output is still about $1 trillion short of what could have been expected in the U.S. and EU. This works out to more than $12,000 for the average family.
With these results, it will be argued that the process of international economic cooperation is failing. It will be suggested that there have been failures of leadership on the part of the major actors. There will be calls for changes in the international economic architecture.
There is some validity in all of this. Political constraints interfere with necessary actions in much of the world because international processes do not trump domestic imperatives. U.S. politics have been dysfunctional in the run-up to the 2012 election. The European Union sometimes makes the U.S. Congress look like a model of crisp efficiency in coming to conclusions. In Russia and China, authoritarian leaders lacking legitimacy have difficulty driving economic reform. So also do those with democratic mandates in India and Brazil.