Migration from developing countries partly reflects a problem that also triggered the current financial crisis: international capital flowed in the wrong direction. In recent years, the US absorbed half the world’s capital exports, while China provided one-fifth of the total. In 2007 alone, the US imported US$790 billion of capital, while the emerging and developing countries exported US$714 billion.
This made it possible for US households to stop saving and enjoy an exorbitant consumption level, but it stood on its head the conventional wisdom that capital should flow from rich to poor countries, where it can more productively be invested. Since the world will not continue to provide the US with goods in exchange for dubious financial securities, Americans will have to leave their dream world. They will have to brace themselves for an extensive period of diminished expectations that will last much longer than the next economic boom and that will require substantial structural changes to the US economy.
In the next few decades, the biggest challenge for the world will be peace, because the changing economic power structure will require corresponding political changes, which the US, as the incumbent superpower, will not easily accept. The situation is similar to Germany’s challenge to British geopolitical hegemony in the nineteenth century, when the German economy blossomed. The resulting political tensions led to a second Thirty Years’ War that brought Western civilization to the brink of collapse. It can only be hoped that the political leaders who shape the course of the 21st century will be wise enough to avoid such an outcome.
Hans-Werner Sinn is a professor of economics and public finance at the University of Munich and president of the Ifo Institute.
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