The world’s biggest economies are recovering from the Great Recession at troublesome speeds: too fast or too slow.
China, India and other major developing countries quickly returned to breakneck rates of growth after escaping the worst of the economic downturn in 2008 and 2009. Their rapid recoveries showed for the first time that emerging economies have grown big and strong enough to thrive independently, while the US and other developed countries struggle.
Today, to an unprecedented degree, the developing world is driving the global recovery, instead of relying on the US for economic leadership as it used to. This picture emerges from the Associated Press’ new Global Economy Tracker, a quarterly analysis of 22 countries that account for more than 80 percent of the world’s economic output.
The shakeup in the world’s economic order has taken 30 years. The developing world’s share of global economic output has risen from 18 percent in 1980 to 26 percent last year, the World Bank says. So growth in emerging markets now has a far bigger effect on the world’s economic performance.
Leading the transformation is China, an economic backwater three decades ago that last year replaced Japan as the world’s second-biggest economy. Japan, after more than a decade of stagnation, is struggling again in the aftermath of the earthquake and nuclear disaster that struck on March 11.
Rapid growth in emerging economies has lifted hundreds of millions of people out of poverty and created vast consumer markets for US goods and services. At the same time, “this two-track world poses some unusual risks,” said Nobel Prize-winning economist Joseph Stiglitz of Columbia University. He and others fear that too much money flowing to developing economies is driving up commodity prices and inflating dangerous bubbles in emerging market stocks and housing prices.
Rapid growth in the developing world is also pulling jobs and investment from the US and other developed countries, and is fanning international disputes over trade and currencies.
The AP Global Economy Tracker found that:
‧ The fastest-growing countries — Argentina, China and India — are all in the developing world. The slowest are all European: Spain, Britain and France. The US ranks 12th among the 20 largest economies plus Argentina and South Africa.
‧ Speedy growth is triggering inflation in emerging countries. The countries where consumer prices rose the most last year were Argentina, India and Russia.
‧ High unemployment is plaguing developed countries. At the end of last year, unemployment was more than 20 percent in Spain, 9.6 percent in the EU as a whole and 9.4 percent in the US. The US rate fell to 9 percent in January and 8.9 percent in February. In contrast, the unemployment rate was 5.3 percent in Brazil.
In the past, the developing world depended on advanced economies — particularly the US — to generate global growth, which trickled down to them when the developed countries bought their exports, so that when developed countries faltered, poorer ones suffered too.
“The conventional wisdom was when we went into recession, they went into recession,” said Robert Lawrence, professor of trade policy at Harvard University’s Kennedy School of Government.
The Great Recession overturned the old relationship. Emerging economies dodged the housing crisis that froze credit markets in the US and Europe and threw the developed world into the worst downturn since the 1930s. Developing countries just kept growing, though more slowly.
They never had to bail out their banks or endure the high unemployment and stagnant growth that historically follow financial crises. India’s heavily regulated banks never made disastrous bets on the US subprime mortgage market.
Neither did China’s, which are almost all owned by the government. As fear paralyzed financial markets in the developed world, Beijing simply ordered state-run banks to keep lending to support the Chinese economy. And they did, unleashing more than US$1.4 trillion in new loans in 2009 alone — a year when bank lending fell in the US.
In 2009, developing countries continued to expand, eking out 2.6 percent growth, while developed economies shrank 3.4 percent. Last year, developing countries grew 7.1 percent, developed ones 3 percent. And this year the IMF expects developing countries to outgrow the developed world 6.5 percent to 2.5 percent.
Japan’s wealthy economy faces new uncertainty after the quake and a tsunami devastated the country’s northeastern coastline and raised the threat of radioactive contamination at a damaged nuclear plant.
The World Bank says developing economies accounted for 45 percent of global growth last year, the first full year since recession ended in June 2009. They contributed just 14 percent of worldwide growth in the first full year after the deep 1981 to 1982 recession, 11 percent after the 1990 to 1991 recession and 38 percent after the 2001 recession, World Bank numbers show.
Developed countries continue to lag because of their devastating financial crisis. Their banks are still writing off bad debts. Their governments are saddled with gaping deficits — the result of shrunken tax revenue, the cost of bailing out banking systems, rising health care costs and the need to stimulate their economies.
US consumers are still paying the bills they charged up during the mid-2000s debt binge.
Nearly 14 million Americans are unemployed, 1.8 million of them for two years or more. They’re people like John Dail Galvin, who lost a computer specialist job at a health care company in December 2008. Galvin, 48, has burned through savings and unemployment benefits. He says he’s facing foreclosure on his house in McHenry, Illinois.
“I’ve been working since I was 15 years old,” he said. “I’ve never seen it this bad.”
Britain, Ireland and Spain have cut spending, raised taxes or both to narrow budget gaps. The US, slowed by a budget deficit that could reach a record US$1.65 trillion this year, is debating its own spending cuts. The World Bank warns that austerity measures will trim 0.7 percentage points from growth in developed countries this year and 0.4 percentage points next year.
Unburdened by a financial crisis, China, India and other developing countries resumed fast growth as they continued their transition from agricultural to industrial economies. In fact, they’re now generating their own growth instead of relying on exports to the developed world. The World Bank says, for example, that internal demand — including business investments, government programs and consumer spending — accounted for 80 percent of China’s growth last year.
“The emergence of a huge middle class in both China and India is generating internal demand,” said Lawrence, who has written extensively on growth in emerging markets.
An example, in the southern Chinese city of Dongguan, is Xu Maolin, 31. Working as a mid-level manager at a factory that makes medical equipment, auto parts and aircraft components, Xu earns more than US$7,200 a year — a middle-class living in a country where the per-capita income is US$3,650.
A decade ago, Xu left a poor farm village in central China for a job at the Dongguan factory at US$100 a month. His wife and two children live in a house he bought in his home village. He also owns an apartment in Dongguan that he rents to other migrant workers.
Xu has an air-conditioned room to himself in the factory -dormitory. After work, he logs onto his desktop computer to read news, download movies and chat with friends and family.
For all its benefits, fast growth is causing problems for China and other developing countries. Surging demand for commodities — oil, grain and steel — is pushing prices ever higher. Inflation is running near 5 percent in China, over 9 percent in India and near 11 percent in Argentina, AP’s Global Economy Tracker found. Inflation in the US was just 1.9 percent last year.
“I don’t feel I’m any better off than, say, last year,” said Li, a waiter in Beijing who would give only his surname. “My salary might have gone up a little bit this year, but the prices of everything just went up like crazy.”
The developing world’s financial markets are drawing cash from developed countries. The US Federal Reserve and other central banks have pushed interest rates to record-low levels to stimulate their sluggish economies.
As investors in search of higher returns snap up Asian stocks and real estate, they risk creating dangerous asset bubbles. To cool speculative fever, policymakers from Bangkok to Brasilia have been imposing taxes on foreign investors and raising interest rates. In January, Brazil’s central bank raised its rate for overnight lending from 10.75 percent to 11.25 percent. In the US, the rate is only about 0.15 percent.
China and other developing countries could fight inflation by letting their currencies rise rapidly — a move that would drive down the price of imported goods. However, they are reluctant to do so because stronger currencies would make their own exports more expensive and less competitive in other countries. China is especially resistant to sacrificing exports by letting its currency appreciate quickly. Exports account for about 30 percent of China’s economic output, versus about 11 percent of the US economy.
Congress has threatened to impose tariffs on Chinese goods if China won’t relent on its currency. The threats are raising fears of a trade rift between the world’s two biggest economies.
US heavy-equipment maker Caterpillar says it frets that the divide between fast and slow-growing countries is eroding the cooperation that served international policymaking at the depths of the recession. Caterpillar, which generates 68 percent of its revenue overseas, warns that a global recovery could be derailed by disputes over trade and currency.
The growth gap between emerging economies and developed nations may even be feeding on itself: US companies are shifting jobs overseas to take advantage of cheaper labor and to be closer to their fastest-growing markets. Between 1999 and 2008, US multinationals slashed 1.1 million jobs in the US and added 2.4 million overseas, including more than 520,000 in China alone, according to the Bureau of Economic Analysis.
Consider General Motors (GM). Last year, for the first time, GM sold more vehicles in China than in the US. However, 99 percent of the 2.35 million vehicles GM sold in China were made in Chinese factories by Chinese workers; just 11,796 were made in the US.
In some ways, though, the US is benefiting from the rise of living standards and consumer markets in China, India and other developing countries.
Exports have been one of the US economy’s strengths as it strains to climb back from the Great Recession. The US last year exported US$1.29 trillion in goods, up nearly 21 percent from 2009. A record US$92 billion in US goods went to China.
“We’re going to be looking to consumers in China and Brazil and elsewhere as new engines for the global recovery,” said Lael Brainard, the US Treasury Department’s undersecretary for international affairs.
Associated Press Writers Sharon Silke Carty in Detroit, Zhao Liang in Beijing and Anita Chang in Dongguan, China, contributed to this report.
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