A New World Faces the Next Leader
Reprinted from The Financial TimesBy Robert Hormats, F66, and Jim O'Neil
June 27, 2008
Whoever moves into the Oval Office in January 2009 will have to deal with a significantly different global economy from the one George W. Bush inherited just eight years earlier - and will need to forge a very different set of policies to address it. The most dramatic changes are that the emerging economies - most notably Brazil, Russia, India and China (the Brics) and the big oil exporters - now play a far greater role in the world economy than they did then, and that the US is now a great deal more dependent on their financial decisions, economic policies, capital and markets.
Since 2001, the US share of world gross domestic product has fallen from 34 per cent to 28 per cent, while that of the Brics has risen from 8 per cent to 16 per cent. China's reserves have rocketed from $200bn to $1,800bn, Brazil's from $35bn to $200bn, Russia's from $35bn to $500bn and India's from $50bn to $300bn. World oil consumers have transferred more than $3,000bn to exporters. Because of America's very low savings rate and heavy reliance on credit, US consumers, companies, financial institutions and the federal government must borrow heavily from these countries. The dollar now has a world-class competitor, the euro, which accounts for nearly 30 per cent of all international currency reserves, a proportion rising fast. And US trade, especially with emerging economies, is climbing as a portion of GDP, with fast-growing exports now giving the economy a desperately needed boost.
The incoming US administration will need to make significant changes in domestic policy and adopt a more collaborative approach to the global economy to take advantage of new opportunities and meet new challenges.
First, America's political leaders must recognise that, unless recent improvements in the country's trade balance can be sustained and accelerated, and domestic savings rise sharply, the US will remain heavily dependent on foreign capital in the form of purchases of government or corporate bonds, stocks and direct investment. US policymakers will need to find ways to increase domestic savings, shrink the federal deficit, reduce the heavy reliance of American consumers on credit and curb oil imports. Without these measures, massive amounts of foreign capital will be needed for years to come. This is not a matter of politics, but of arithmetic.
In such circumstances, the US must remain attractive to foreign capital or suffer adverse consequences. Sound finances, enabling the US to borrow on reasonable terms, will remain an important factor in national strength. Frequent financial crises, large trade imbalances, a series of outsized budget deficits and failure to put Social Security and Medicare on a more sound financial footing could undermine investor confidence. That would discourage overseas investments and the willingness of central banks to hold dollar reserves, causing a plunge in US financial markets and the dollar, thereby jeopardising America's growth.
Second, with foreign competition intensifying, robust growth taking place in many parts of the world and large numbers of US jobs and corporate profits dependent on expanding exports, the US needs to boost its own competitiveness and further open foreign markets for its goods and services.
A robust response requires vastly improved training and education, especially in mathematics, engineering, physics and science. More than ever this must benefit minorities and immigrants, the fastest-growing portion of the US workforce. Critical also is acceleration of government and private-sector investment in research and development to create competitive new jobs, products and industries. This is especially true in energy, where a variety of new sources and new technologies are urgently needed: such measures can produce increased employment opportunities, reduce oil dependence and the attendant massive outflows of funds, and sharply curb greenhouse gas emissions. The financial system and tax code must encourage greater domestic savings and investment, and channel funds to the most productive sectors.
Washington should also offer incentives for the private sector to invest in physical infrastructure, and provide more reliable assistance and wage, pension and health insurance security for individuals displaced from their jobs.
Last, the new president must lead the world to a more representative global economic policy architecture to reflect the ongoing shifts in financial wealth, commodity power and trade flows. This must give the Brics and other dynamic emerging economies a greater say in shaping the rules of the system, while ensuring that they take greater responsibility for it as major stakeholders. This means increasing their role in the International Monetary Fund, World Bank and World Trade Organisation, as well as enlarging participation in the Group of Eight leading industrial nations.
The world's economies have reached a new level of interdependence. The new president should reflect this by pursuing policies that sustain investor confidence, increase trade opportunities and the number of Americans who benefit from them, mobilise US human and financial capital to boost competitiveness, and engage in a collaborative effort to restructure the global policy architecture. Globalisation is unlikely to stop; the challenge for the next president will be to enable greater numbers of Americans to derive more benefits from it, rather than feel threatened by it, and to seize the growing opportunities it provides.
• Robert Hormats is vice-chairman, and Jim O'Neill head of global economic research, at Goldman Sachs Inter-national.