Dec 29th 2015

New Year’s Resolutions for the Global Economy

by Michael J. Boskin

Michael Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993.

"The US may have a lot on its plate, but unless it leads effectively, the challenges it faces will only grow."

STANFORD – Over the last year, global growth has been anemic – and the forecast is only slightly better for 2016. Something must be done to boost incomes and expand opportunities for people everywhere. Here are some economic resolutions that could bring good cheer in the new year and beyond.

Let us begin in Europe. Despite the European Central Bank’s monetary accommodation, a sharp depreciation of the euro, and negative short-term interest rates, the European economy remains in the doldrums.

In 2016, Europe’s leaders must stop expecting monetary policy to solve their problems, and instead pursue faster, firmer resolutions to the myriad crises they face, from the intertwined growth, banking, currency, and governance crises to the escalating refugee crisis, which is threatening free movement across internal borders. They must pursue supply-side fiscal, structural, labor-market, and regulatory reforms, with common-sense solutions for the struggling periphery economies’ fiscal crises and the stronger economies’ medium-term debt woes topping the agenda.

In Latin America, the situation is more varied. After a decade of progress (with some exceptions, notably Venezuela), the region is facing serious challenges, stemming partly from a sharp decline in global commodity prices.

Indeed, plummeting oil prices helped to push the region’s largest economy, Brazil, into its worst recession in decades, while a major corruption scandal at Petrobras, the state oil company, has thrown the country’s politics into disarray, with President Dilma Rousseff now facing impeachment. This makes the pursuit of economy-saving resolutions exceedingly difficult. The new leftist finance minister will probably make things worse.

Political instability is undermining economic prospects elsewhere, too. In Ecuador, where President Rafael Correa, who seems intent on imitating Venezuelan Chavismo, has eliminated term limits on his office, high inflation is a growing risk.

In Latin America’s second- and third-largest economies, however, new leadership offers reason for hope. President Enrique Peña Nieto’s decision to open Mexico’s deep-water oil deposits to international energy companies will help the country overcome declining production, lagging technology, and corruption at Pemex, the national oil company. Nieto also recognizes the imperative of improving Mexico’s education system, and thus is taking on the powerful teachers’ union.

In Argentina, newly elected President Mauricio Macri is nothing like his anti-business, anti-American predecessor Cristina Kirchner, who pillaged the central bank, channeling funds toward favored local governments, and even fudged national statistics to obscure skyrocketing inflation. Among Macri’s resolutions are market-oriented reforms, and clearing the many economic land mines that Kirchner planted. He is off to a good start, having freed the peso from its official peg, reduced taxes, and moved toward freer trade.

Venezuela also has reason for hope. The opposition, having won a supermajority in parliament, defeating the ruling socialists for the first time in 17 years, should be able to limit the harm caused by the policies of President Nicolás Maduro, heir to Hugo Chávez. But if opposition forces are to turn the economy around, they will need to win the presidency in 2019.

In Asia, all eyes are on China, the epicenter of a growth slowdown that has reverberated throughout the region (and beyond). The remarkable growth spurt of the last three decades has degraded the natural environment considerably, produced vast excess capacity in basic industries like cement and steel, and left the banking system saddled with bad loans.

China’s government has committed to reform, but its efforts are lagging. The rebalancing of its economy from exports to domestic demand remains a major challenge, not least because its consumers are slow to cooperate. And the government maintains significant control over major companies, even some that are listed on public stock markets.

To engineer the soft landing that Asia needs, China’s leaders must redouble their reform efforts. One key resolution should be to dispense state-owned companies’ profits directly to the population, to consume the proceeds or invest them elsewhere.

Japan, for its part, has sunk back into recession, despite Prime Minister Shinzo Abe’s large and costly economic-revitalization strategy. The Japanese, like many of their neighbors, hope that enactment of the Trans-Pacific Partnership (TPP) trade deal – which would, among other things, lower tariffs on thousands of commodities and reduce non-tariff barriers – will provide a much-needed boost.

Africa has been a less visible success story in the last decade. Despite the many difficulties the continent faces, foreign investment and trade (not aid) provide major opportunities for growth and development. A resolution to break the scientifically illiterate opposition to genetically modified food would help boost agriculture and exports to Europe substantially.

In North America, Canada’s new center-left prime minister, Justin Trudeau, will be tempted to expand government spending and regulation. But he must not loosen the strings of the public purse too much. Thanks to the collapse in oil prices, western Canada is in the early stages of a serious downturn.

Fortunately, there is room for Trudeau to meet the demands of his supporters, without wasteful spending. To this end, he should press America’s next president to pursue the implementation of the TPP in a way that protects NAFTA; to maintain a sound monetary policy; and to reverse President Barack Obama’s veto of the Keystone Pipeline.

These steps would also be in the interest of the United States. In fact, US efforts to promote free trade should go beyond the TPP to target the revitalization of the moribund Doha Round of multilateral trade liberalization. Both monetary- and fiscal-policy normalization are critical. And the US must capitalize on its expanded energy production, such as by enabling exports of oil and natural gas, to reduce its European allies’ dependence on Russian energy.

But perhaps America’s most important New Year’s resolution should be to return to global leadership – a role that has gradually eroded over the last decade, with devastating consequences. That erosion, rooted in deep political fissures that are evident in the current presidential election campaign, is disturbing global economic, financial, and security arrangements that depend on American leadership. The US may have a lot on its plate, but unless it leads effectively, the challenges it faces will only grow.

Copyright: Project Syndicate, 2015.


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