Jürgen Stark: The changing global economic structure - a view from Europe
Speech by Dr Jürgen Stark, Vice President of the Deutsche Bundesbank, at the American Council on
Germany, New York, 14 April 2005.
* * *
It is both a pleasure and an honour to speak to you here today. My remarks will focus on the changing
global economic structure.
What has changed since the early 1990s? An increasing proportion of economic activity is
marketdetermined. Within a period of only 15 years, major centrally planned economies have turned into
market economies and several previously strongly regulated emerging market economies have
implemented radical reforms.
All of this has stimulated very strong and ongoing growth dynamics. Consolidated and
internationalised competitive conditions have ensued from this process, thus continuously placing
adjustment requirements on all economies. This challenge is being accompanied in many,
predominantly advanced economies by demographic changes which require additional efforts.
I
Under realistic assumptions the US, but in particular also Asia, will remain the centres of gravity of the
global economy in the next years. However, without changes in the conduct of economic policy this
would also mean that the existing global current account imbalances would become even more
pronounced. This could result in an increasing risk of sudden exchange rate and financial markets
movements. Moreover, enormous challenges add to the vulnerabilities connected with the current
global imbalances. The changes in the global economic structures in the wake of globalisation are
particularly important:
1. Production processes can be regionally fragmented to a greater extent than ever before.
2. The number of tradable goods has risen sharply - many services have become tradable.
3. The financial markets are closely integrated on a global scale.
4. Economic policies, but also tax systems and regulations, are competing with one another
internationally for capital investment and savings.
The number of countries affected by today's globalisation processes is far larger than the number
involved in earlier phases. This applies particularly to the involvement of emerging markets and
developing countries in the global economic integration processes. The shares which these countries
have in the world's goods markets, direct investment flows and portfolio inflows have expanded
considerably.
II
The increasing integration of above all large emerging economies into the global economy means that
the volume of world trade and global growth prospects will continue to rise. The so-called BRIC
countries - Brazil, Russia, India and China - are arousing particular interest in this respect, with the two
large Asian countries - China and India - assuming a prominent role.
While China has established itself as the intra-Asian platform for the production of labour-intensive
goods - especially for the US - India's strategy is based on the export of services. However: China and
India import a considerable volume of goods from other, in particular, Asian countries and record only
small current account deficits.
What obviously differentiates India and China from other Asian emerging economies, but also from
Brazil and Russia, is their sheer size. Both countries combine a population of roughly 21⁄2 billion,
representing more than a third of the world's population. The global economy is therefore confronted
with an adjustment process of a special type and magnitude that is significantly larger than those
witnessed in the past. The growing range of goods and services from China and India, produced and
supplied at low cost, will lead to significant changes in global production patterns, trade and relative
prices.
The continuous shift in the global economy's centre of gravity towards Asia with its enormous labour
reserves also means that the employment prospects for low-skilled workers but increasingly also for
highly skilled employees in the industrial nations will continue to deteriorate. On the other hand, the
development of the as yet inadequate infrastructure in these countries and their rising demand for
high-quality industrial goods will offer the industrial countries tremendous export opportunities.
If the countries which today are at the leading edge of the global value-added chain maintain their
advantages in the development and production of technology-intensive goods and services, they can
but profit from the low-cost products from Asia. It is not absolute but comparative cost advantages
which decide the pecking order of economies and regions in the context of the international division of
labour.
This adjustment process to the changes in the world economy will vary from country to country and
may result in economic and political tensions between the trading partners in these countries.
Integration of the large emerging market economies involves the risk of increasing protectionism.
Countries which see themselves as losers in the globalisation process will resort to short-term isolation
measures that endangers both the progress already made and further progress in the global division
of labour.
III
The shift in the global economic focus towards East and South-East Asia also raises the question of
economic cooperation within Asia and its possible political implications - including the shift in the
balance of power.
One has to bear in mind that rising regionalism is a global phenomenon because countries - big and
small alike - have used this to respond to global challenges and developments. They integrate
because they do not want to lose out in the global competition for export markets and foreign direct
investments. And because of the dynamics in multilateral trade negotiations, small nations resort to
regionalism to enhance their bargaining leverage and to gain some degree of international political
influence.
In previous years East-Asian countries, in particular the ASEAN member states, have intensified their
cooperation. As a whole, the ASEAN region comprises a market of no less than 500 million people,
which is a sizeable entity also for foreign investors. In addition, these countries have distinguished
themselves as investment locations with attractive business conditions.
In spite of the dynamic developments in Asian economic cooperation integration along EU lines is
rather improbable. This is due partly to the diverging levels of economic performance. Another
important aspect is the lack of strong political institutions in Asia.
In fact, the various regional organisations in Asia are much less institutionalised than those in the EU.
Their chosen mode of interaction is intergovernmental. The established bodies have nothing more
than an advisory function.
However, there is good reason to assume that regional integration will deepen in Asia. This leads to
the interesting question: Who will be the main driving force of this process?
IV
What has to be done in the respective regions to cope with the challenges posed by globalisation? A
high degree of adaptability will be needed.
The US, with its flexible economy, comparatively favourable demographics and high degree of
penetration of the economy with information and communications technology has every chance of
successfully overcoming the challenges described. However, the US current account deficit is a clear
indication that there is a need for structural adjustment, too. The necessity to finance net around 51⁄2%
of US GDP externally in 2004, has made the United States the biggest "debtor" in the world. This
credit-financed "overconsumption" cannot be sustained in the long term, not even by the US. A
gradual adjustment process, which includes not only exchange rate changes and internal adjustment
but also higher growth rates outside the US, would be desirable.
A crucial requirement if the US current account deficit is to be reduced is that the US national savings
must increase. The IMF, the US Federal Reserve and also the G7 are therefore emphatically calling
for a consolidation of government budgets.
Despite the progress that Japan has made in removing structural rigidities, there is still a need for
reform if it wants to restrengthen its economic role in the region. Structural rigidities in the domestic
market and, in particular, the age structure of the Japanese population are restricting its economic
potential. This is also a reason why the OECD estimates Japan's annual potential growth at only just
over 1%. The situation is compounded by the precarious state of public finances with the government
debt level at almost 170% of GDP.
In the case of the emerging economies in East Asia, what matters is not the adjustment of existing
structures, but rather the creation of new ones. The Asian countries must overcome the prevailing
bilateralism to be able to benefit from the international division of labour more than has been the case
thus far. This includes establishing an institutional framework for their regional cooperation.
China's political and economic development will depend largely on how the country deals with its
growing internal imbalances, for example, the tensions between urban and rural areas to name just
one. In China, the most pressing reform project is the creation of a well-functioning financial system
able to channel national savings towards efficient uses and as an important step towards more
exchange rate flexibility. Furthermore, it is necessary to create a social security system for which the
state-owned enterprises have hitherto been responsible as well as a framework for a market-oriented
fiscal and monetary policy.
V
In Europe the process of structural reforms has to continue. Europe has problems. The most pressing
problems include high unemployment, a lack of economic flexibility and an ageing population.
However, one should not overlook the fact that more than 10 million jobs have been created since
1997. That is two million more than in the US. There has also been a maturing awareness of the need
for reform. Reforms have now been introduced in the labour markets and social security systems.
Following the accession of 10 new members to the European Union last year, we now have a large
single market which unites the purchasing power of 450 million citizens.
However, in view of its possibilities, the euro area's growth potential is low. The OECD estimates it to
be about 2% per year; by comparison, the US growth potential is estimated at over 3%. These growth
differentials are to a large extent attributable to different rates of population growth.
Even so, I am optimistic. With increasingly flexible economies, greater efforts in R + D, greater
willingness to be innovative and for longer working hours, Europe is on the way to becoming an
economically more dynamic region over time. Not to forget: The EU is an extraordinary success in
terms of stabilising the continent politically. Despite occasional setbacks, integration has made
continuous advances and has culminated in a single currency.
VI
Today, globalisation is by some argued to be much of a triadisation. The process of integration is at its
most intense among the three regions that contain most of the world's developed market economies:
North America, Western Europe and East Asia. But we should also not forget South America and
Africa.
On the one hand, the US and the EU continue to be the "traditional" driving forces of the global
economy, accounting for more than half of global trade and investment.
At the same time, the most dynamic growth region is non-Japan Asia.
With globalised markets and increasing competition, the integration of large emerging markets are
giving rise to structural adjustments in the global economy.
Forces of globalisation and competitive markets are driving Americans, Europeans and Asians
together, not apart. This represents a major challenge since geo-economics and geopolitics are deeply
intertwined. To rise to this challenge, a sound international framework must be in place in which all
parties involved commit themselves to a multilateral approach. We must not allow the integration of
large emerging markets into the global economy to lead to increased protectionism. Its consequences
would have to be borne by all parties involved. Instead, we must foster the willingness to make
adjustments, as the necessity to do so is evident in all of the world's large economic regions.
VII
This brings me to my concluding remarks in raising questions to which we might not have the
appropriate answers yet.
1. With the appearance of new economic players on the international scene the global
economic structure is changing. The global economic relevance of Japan, Europe and the
US might be affected. What might be the impact on the regional and global balance of
power?
One important aspect in this context are the huge internal imbalances in the leading Asian
emerging economies. These imbalances may absorb much of the political capacities in order
to contain potential regional and social tensions and conflicts.
2. Thus, the US is most likely - if not for sure - to remain the only economic, political and
military power! However, it is desirable that the US in its political choice remains open for
international cooperation and multilateralism. Isolationism and unilateralism should not be
real political options.
3. What is most likely to change globally are alliances and relationships. New alliances and
altering relationships might affect the global role of individual countries.
4. What about Europe? Europe has the potential to become internationally more relevant again,
economically and politically. Since the early 1990s Europe has primarily dealt with its
domestic problems in a rather inwardlooking attitude:
- the fall of the Berlin Wall, the fall of the Iron curtain and the political and economic
transformation process of the former communist states in central and eastern Europe
1989/90;
- the preparation for EMU in the second half of the nineties;
- enlargement by 10 new member states in 2004;
- the structural reform process starting at the end of the nineties.
The future international role of the EU will depend on the speed and the results of the
adjustment and reform process. To deepen political integration and to have a vision about
Europe's future role are key.