There is No Global Economy

"This is the day that the world
came together, to fight back against the global recession. Not with
words but a plan for global recovery and for reform and with a clear
timetable," said Gordon Brown at the end of the G20 summit last week.

This was somewhat exaggerated. There was no plan for global recovery or even a commitment to increased fiscal stimulus. It remains to be seen what kinds of reforms will actually materialise.

But
recovery and reform will not necessarily hinge on what the G20 agrees
to do. Roll back to the last major economic crisis - that which began
in Asia in 1997 and spread to Russia, Brazil, Argentina and other
countries. In September 1998 Federal Reserve chair Alan Greenspan
warned: "It is just not credible that the United States can remain an oasis of prosperity unaffected by a world that is experiencing greatly increased stress." But the US economy
kept booming right through the crisis, as a result of consumption
driven by the stock market bubble. This continued until the bubble
burst, pushing the US economy into recession in 2001.

It should
not be surprising that the US economy has the potential to grow even
while many other economies are contracting. Eighty-seven percent of
what is produced in the US is consumed here. To be sure, the other 13%
percent can make a difference - but US recessions are not brought on by
falling exports. It is not comparable to the 47% of GDP that Germany
exported last year, or even the 28% for Mexico.

Of course the
current world recession is much worse and more widespread than the
crisis of the late 1990s. The high-income countries that comprise the
majority of the world economy, including the US, EU and Japan are
mostly in recession. There are some big imbalances, built up over many
years, that are adjusting at a pace that is not easy to predict -
including the US savings rate, which had fallen to zero by 2007. And
there are major weaknesses in much of the world's financial system.

Nonetheless
the US is capable of recovering on its own, with a sufficient domestic
economic stimulus and a sensible resolution of the major insolvencies
in the financial system - regardless of what other governments do. The
US recovery will in turn help the rest of the world.

The fact
that the dollar is the key reserve currency of the world gives the US
even more leeway. There are loud complaints from conservatives about
our recession-induced free-spending ways, but investors world-wide are
willing to lend the US government money at the historically low (both
real and nominal) rate of 2.9% on 10-year Treasury bonds. This is not
the sign of an impending fiscal crisis.

It is good that the G20
leaders are at least talking about increased international co-operation
in order to deal with the world recession, and there are some areas -
eg regulation of the financial sector or preventing illegal
international capital flows and international tax avoidance - where
increased international co-operation can be especially helpful. But
even in these areas, many of the most important reforms can be
implemented by individual governments.

The global nature of the "global economy"
has been grossly exaggerated, as have been its implications. The world
today is still much more a collection of national economies, and
national governments - especially in the larger economies - have the
potential to choose most of their economic policies much as they did 30
or 40 years ago.

The government of China, for example, has for
decades controlled capital flows into and out of the country, regulated
foreign investment in accordance with national development needs and
plans, fixed its exchange rate and owned most of the banking system. In
this way it was able to take advantage of "globalisation" - both international trade and foreign direct investment - to achieve the fastest economic growth in world history.

The
contemporary idea of the "global economy" is based on a misapplied
analogy to the historical development of national economies. For
example, the US economy was much less stable, with more frequent and
much longer recessions, before the creation of regulatory institutions,
including most importantly the Federal Reserve in 1913 and the New Deal
reforms of the 1930s. (The current crisis, which has occurred after
decades of deregulatory reforms, appears to be the exception that
proves the rule).

Thus, it is reasoned, we now live in a "global
economy", and this too must be regulated to iron out some of the
irrationalities and instabilities inherent in a market economy.

Of course there is some truth to this argument. The idea of a world reserve currency to replace the dollar, for example, most recently floated by China, is a potential reform that could improve world macroeconomic stability.

But
the concept of the "global economy" is very often an exaggerated one,
generating confusion and negative political consequences. Reforms that
are both necessary and feasible at the national level, such as
appropriate exchange rate, fiscal and monetary policies (especially in
normal times) or capital controls, are rejected as incompatible with
the "global economy".

At the same time, reformers often
mistakenly look to supra-national institutions that are mainly
deregulatory, unaccountable and regressive - the International Monetary
Fund, World Bank
and World Trade Organisation are prime examples - to resolve the
problems that these institutions have themselves helped to create.

Finance
ministers (or Treasury secretaries) that are beholden to powerful
interests at home are even less accountable to the public when making
decisions in these bodies that are another step removed from the
electorate of member countries. If they won't do the right thing at
home, they are far less likely to do it at the IMF or the World Bank. For the present, at least, reform at the national or perhaps regional level is a much better bet.

Indeed,
"globalisation" under inappropriate rules and policies has contributed
significantly to the current crisis. Even the EU, a project that
compares favourably to the "race-to-the-bottom" economic integration of
the Nafta variety, is currently hampering the Eurozone's recovery. The
restrictions on budget deficits and the ultra-conservative central bank
set up by the Maastricht treaty are making it more difficult for Europe
to counteract this recession.

Efforts to redraw the rules for
global commerce in a more equitable and rational manner - such as those
of the UN commission headed by Joseph Stiglitz - are a vital part of
creating a better future for the generations to come. But the world
cannot wait for the time when the governments of the rich countries are
willing to cede decision-making power to institutions - such as the
United Nations - that they cannot completely dominate. Nor does it have
to wait.