The horrific story of deaths in the European migrant crisis grows out of oppressive — even murderous — governments in war-ravaged countries on one hand, and an inability of governments in destination countries to organize legal procedures to deal with the crisis on the other.
Speaking of China, the recent turmoil in global financial markets was partly triggered by the bursting of a Chinese stock market bubble, one the authorities there didn’t just allow to inflate; they facilitated it.
From the beginning of 2014 until this June, the Shanghai Composite Index rose about 150 percent, over a period when the Chinese economy was decelerating (there’s the economy and there’s the stock market — they’re not the same). The market was clearly overvalued, propped up by debt-laden over-investment, relaxed rules on margin requirements, and government propaganda. As reported by the Financial Times, this year’s econ graduates from Tsinghua University are instructed to “…shout loudly the slogan, ‘revive the A shares, benefit the people; revive the A shares, benefit the people’.”
Meanwhile, European economic policy makers have doggedly pursued austerity — fiscal contraction while private demand remains weak — leading to anemic growth and high unemployment, currently 13 percent in the euro zone (excluding Germany).
The U.S. economy remains solidly on track, yet despite the lack of inflationary pressures, our central bank appears intent on raising interest rates, a move with the potential to both slow growth and exacerbate a problem intimately related to developments abroad: the appreciation of the dollar and the growth of our trade deficit.
All of these stories serve as a stark reminder that globalization is a double-edged sword. Our increased interconnectedness has clear upsides in terms of the increased supply of goods, services, opportunities for emerging economies to grow more quickly, and, at least in theory, human mobility, both in geographic and economic terms.
But it also raises threats, both existential and economic. Many economies got a strong dose of the economic lesson toward the end of the last decade, when real estate and financial market bubbles set off a recession from which many economies, including our own, have yet to fully recover.
Any yet, policy officials continue to make bad decisions (one of which is inaction), seemingly more so than usual, and not just in China. That would be bad enough in a disconnected world; in an interconnected one, where mistakes reverberate across the globe, it’s worse.
Why would the Chinese government inflate an equity bubble? For one, it was a way to improve the highly-leveraged balance sheets — to lower their debt-to-equity ratios — of state-owned companies. Second, the Chinese government wrongly believed it could manage the correction. Third, it was a way to paper over the slowdown in the real economy. Chinese growth numbers are notoriously shaky, but economic growth there appears to have slowed by half in recent years, from around 10 to 5 percent per year.
Here, the interconnectedness gets close to home in a more lasting way, as opposed to daily market swings. While most recently, Chinese exports are down—another reason their growth has slowed — for years, we’ve run large trade deficits with China. In 2014, we bought $343 billion (2 percent of our gross domestic product) more from them than they bought from us.
That imbalance is partly a function of Chinese currency management: In various periods (not lately), they’ve suppressed the value of their currency, the yuan, relative to the dollar to lower the cost of their exports to us and raise the cost of our imports to them (earlier this month they devalued the yuan by 3 percent).
As the U.S. economy is outperforming most others, the dollar is already appreciating in foreign markets, up 16 percent over the past year against a broad index of other currencies and that has cost us in terms of exports. Our growing trade deficit has already shaved about half-a-point off of GDP growth over this period and that trend is likely to deepen. In turn, that has slowed job growth in our factory sector. So far this year, U.S. factories have added 50,000 jobs. Over the comparable period last year, they added twice that many.
Germany, for the record, plays the same game, taking advantage of an undervalued currency to build trade surpluses at the expense of peripheral countries in the euro zone. In doing so, they’ve imported labor demand from abroad, one reason why unemployment there, at 4.7 percent, well under half that of the rest of the euro zone. At the same time, European economic power brokers of have long imposed austerity on economies that needed fiscal support, while deepening the suffering of the Greeks by refusing to recognize their insolvency.
Though they claim to be “data driven,” our Federal Reserve may soon buck the data, which is showing little in the way of price or wage pressures, and raise rates (China and the market turmoil may push back their liftoff date). Note that this move will exacerbate the dollar-appreciation problem, adding to the drag from the trade deficit.
Whether it’s retail investors in China, the unemployed in Greece and Spain, factory workers in our rust belt, or the many who’ve yet to benefit from recoveries here and abroad, these mistakes are costly. In much more serious cases, they are deadly. We simply must develop a better understanding of the implications of our interconnectedness.
To be clear, none of this is easy. Especially in tough economic times, countries cannot handily absorb hundreds of thousands of migrants. Many German citizens don’t want to bail out Greece. Recent dollar appreciation is not due to currency manipulation, but to relative growth rates.
But managing globalization means assiduously avoiding mistakes like premature fiscal balance, inflating financial markets and corporate accounts, misappropriating public capital, or managing currencies to build large trade surpluses. And, of course, inaction in the face of a migrant crisis.
Instead, it calls for strong market and government oversight, while investing in the people, jobs, and incomes of the vast majority who should be the beneficiaries, not the victims, of globalization.
