How consumer spending can help create a fairer, richer, greener and more stable global economy.
by Philippe Legrain
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uch questions had never even crossed the minds of most people in rich countries until the recent financial crisis.
If the government continues to print more money to control inflationary condition, the value of money willbecome less and less. It can be very bad thing making our money almost useless.
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Economic meltdown might strike poorer places such as Argentina, Asia or Africa. It may feature in the history books: Remember the soup kitchens and welfare lines of the Great Depression in the 1930s. But it did not happen—surely could not happen—nowadays in advanced economies. Or so we thought—until September 2008, when banks were suddenly falling like ninepins, markets were plummeting and governments seemed overwhelmed. Was everything we took for granted falling apart around us. Now that the recovery has begun, powerful voices argue that little needs to change, really. The financial system may need a few tweaks here and there, but otherwise the world should go back to business as usual. The faster economies recover, the stronger such siren voices will grow. Others feel that everything must change. Global capitalism is a giant wrecking ball that crushes the poor, destroys jobs and is killing the planet; such a dangerously unstable and destructive force needs to be tamed, they argue. Meanwhile, many people aren’t quite sure what to make of it all. Angry but confused, they lash out at all and sundry: greedy bankers, conniving politicians, dastardly foreigners. Unfortunately, this debate is generating more heat than light and too little action where it is needed, too much where it is not. Contrary to those who argue that global finance should be left largely intact, it requires radical reform. Yet the changes that policymakers are considering are too timid; some are irrelevant, others wrong-headed. The understandable furor about bankers’ bonuses is diverting attention from much more important issues, not least the
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The problem start with the fact that household fet much smaller shares of the economic pie than in America and Britain. For example, they then save a bigger chunk of it.
GLOBAL ECONOMY CONSUMPTION RATE IN 2008 unacceptable notion that some banks are “too big to fail” and so have a license to gamble at public expense—heads they win, tails taxpayers lose. Economists call this “moral hazard.” But that is a huge understatement—it is a racket. Capitalism without risk of failure is like power without accountability—it corrupts absolutely. But while finance needs radical reform, the global economy still offers huge opportunities for progress.
help homegrown consumers
Westerners often wonder gloomily where tomorrow’s jobs will come from these days. Increasingly, they will come from selling to China and other emerging economies. So instead of worrying that China is going to take everyone’s jobs, people should be looking to the huge opportunities that its growth offers—and going out and grabbing them. But while emerging economies’ imports will almost certainly continue to grow quickly in the years ahead, will they expand fast enough to fill the gap left by Americans and others tightening their belts? That is the trillion-dollar question on which the world economy’s prospects for recovery rest. The answer depends in large part on whether politicians try to resist the necessary changes to the global economy or embrace them. It is deeply unfashionable—almost blasphemous—to say so now that the Era of Excess is over and we live in an Age of Austerity, but consumption is wonderful. It’s what makes the world economy whir round. Without consumption there is no production, no income and no jobs. While some people have spent too much and have no immediate desire for more, plenty of people around the world have such unmet needs. People in countries like Germany and Japan pat themselves on the back for being prudent—for squirreling away surplus savings while others spent—yet now that their customers in English-speaking (and many Mediterranean) countries are no longer spending, their production has slumped. Now is their time to be profligate. Emerging economies are also bursting with people who would love to go on spending sprees. The world (and youw own) economy needs you If you’ve got it, spend it. Now policymakers have to make it possible. But for countries such as Germany, Japan and China that have long focused on exporting, it may be trickier than it seems to stimulate domestic spending and restructure the economy to cater more to homegrown consumers. The problem starts with the fact that households get much smaller shares of the economic pie than in America or Britain, for example. They then save a bigger chunk of it. As a result, whereas consumption accounted for 71 percent of the U.S. economy in 2008 and 67 percent of Britain’s, it was only 55 percent of the total in Japan, 54 percent in Germany and a mere 37 percent in China. Consumption in Britain and America is arguably too high. But if Japan and Germany raised theirs to Canadian rates—60 percent of the gross domestic product (GDP)—it would give a big boost to domestic as well as global demand. Had Germans spent like Canadians in 2008, consumption would have been $220 billion higher. Had the Japanese done likewise, it would have added $246 billion. If China had emulated Hong Kong’s rate—53 per cent of GDP—consumer spending would have been $692 billion higher in 2008. This would have filled the shortfall left by a slump in American demand of nearly 5 percent of the GDP. Together with higher spending in Japan and Germany, that would be equivalent to nearly 2 percent of the global GDP. Of course, this cannot happen overnight—and would require a currency appreciation (or a burst of inflation) to displace exports and encourage imports. But it could happen faster than people think, not least because China’s economy is growing like gangbusters. Even without much reform, China’s household consumption is growing by nearly 10 percent.
merging econonies are also bursting with people who would love to go on spending sprees.
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CHINA
GERMANY
JAPAN
BRITAIN
UNITED STATED
If Japan had spent like Canadian in 2008, 60% of GDP, it would have added $246 billion.
Much of their has been financed by a surge in borrowing leading to record levels of household debt.
Exceeding gains in incomes and indicating the economy may avoid slipping back into a recession.
37% 54% 55% 67% 71% If china had emulated Hong Kong’s rate53% of GDP-consumer spending would have been $692 billion higher.
Consumption would have been $220 billion higher, if German had spent like Canadian, 60% GDP.
LOW
MODERATE
HIGH
China’s leaders committed themselves to a more aggressive program of comprehensive reform, they could raise private consumption above 50 percent of GDP by 2025. Clearing that threshold would bring the consumption rate in line with its peers in Asia today, vaulting China’s economy into a new phase.
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