Last Friday, ArcelorMittal?the world?s largest steel maker?said it could be sacking up to 9,000 workers (3% of its workforce), and also be slashing output by 30%. A response to slumping demand, such measures could save the company $1 billion, though earnings are still expected to fall by 48% for the fourth quarter of 2008. Meanwhile, this year, the company?s stock lost 63% of its value in the Amsterdam Stock Exchange. This is just an example of how the world economy has re-entered the marshalling yard, with recce teams out in earnest and looking for ready-to-run ?locomotive? economies.
Their intent: to bring some action onto the scene. But, this time, no one is looking at just the developed economies. Far greater interest resides in the developing economies of China, Brazil and India (Bric). They have proved their worth. China has done so in manufacturing, India in services, while Brazil?s comparative advantages straddle commodities as well as manufactures.
Furthermore, the slowdown has focused attention right on to the issue of import demand. The World Bank?s International Trade Statistics (released November 5) actually admits that the slowdown ?is due to a deceleration in import demand, mainly in the US, but also in Europe and Japan.?
That stands in sharp contrast with the (developing) economies of Africa, West Asia, CIS, Asia, and south/central America. Trade levels held their ground in most of them. They in fact even gained from recent commodity price increases, and terms-of-trade improvements in fuel and food. And even trade in services has been notching up higher values than have manufactures.
As for the recession ridden OECD, the Brics? continental size, their asp-iring population, and demographic composition, are all irresistible. They make for immense domestic markets. Accordingly, another interesting twist to the old locomotive allegory is that these emerging economies are no longer being exhorted to export. Instead, the OECD itself eagerly awaits the smallest of market-entry chinks that might drive these arriviste locomotives into importing.
The surest sign of that interest is to be seen from the manner in which the OECD have been pledging, and implementing, ongoing credit support for developing country imports. Such support hugely mitigates the uncertainties that dog developing economy importers during uncertain times. The stress, accordingly, is on liquidity support and programme support.
But all that is in the present. Even earlier, the OECD?s initial rationale, and method, had been explained in the Organisation?s Economic Outlook (December 1976), where it had recommended that the better balanced from amongst the OECD economies should stoke up their economy. At that time, that specifically meant the US, West Germany and Japan?the three whom the OECD assessed as the likeliest candidates, given their balance-of-payments and prices. As for the reason that had been advanced by the OECD secretariat, it had said that domestic demand should outstrip output growth in order to create the conditions needed to fuel export-led growth on the part of others.
In short, expansionary policies were intended to boost investment in the locomotive economies so that the slower ones could ride on the coat-tails of the former. The creation of such demand would also insure against domestic fiscal splurges?something that could end up by accelerating the rate of inflation. (Indeed, slow-coach economies were even advised to refrain from fuelling domestic demand in order to avoid such dreaded bouts of inflation.) They were also told that this was their golden opportunity to narrow existing current account deficits?perhaps even attain a surplus.
In short, there was a time when ?locomotive? economies were those which had been charged with the task of energising ?weaker? ones. But the worry then?as also now?is that no one economy finds that there are any great rewards to being a locomotive.
That was seen early on, following the official enunciation of the doctrine. And it continues thus until the approach changed from ?locomotive? to the (collective) mode of travelling in a ?convoy?. That was reassuring for all, since it also meant that the dynamic would be shared not amongst just a few, but an entire cohort of economies which had volunteered to pull in unison. That would be acceptable, since there would be no defectors, and every economy stood to either gain or lose from the collective endeavour.
Game theorists call this ?pre-play commitment? on the part of the major participants. All of them would first have to agree on tangible policy measures, and undertake mutual sacrifices, but on an unprecedented scale.
Japan, for instance, promised to target 7% growth?but did so in the midst of a tight budgetary situation. That ensured Tokyo would be able to provide the economy with much needed stimulus only through huge deficit financing. (But there was an uproar against PM Fukuda for accepting a sacrifice of this nature in the midst of a tight budgetary situation; indeed, the latter implied that added stimuli could be administered only through immense deficit financing.)
Germany also committed itself to target an extra 1% in growth. US also agreed to a sacrifice by limiting the volume of oil imports?something that had been contributing to the deterioration of its current account balance of payments. But that will no longer work within the current OECD milieu of import competition and systemic underconsumption. The point, therefore, is to target developing economy importers and consumers.
Take China. Its consumers still fall short of the voracious appetites of US consumers, but their outlays are on the fast track. The most recent data suggest that Chinese retail sales jumped 22%, no less, in October?while, in the US, there was actually a decline (after seven years) in third quarter purchases. Is it any wonder that Jim O?Neill of Goldman Sachs recently said: ?Since October 2007, the Chinese shopper alone has been contributing more to global GDP growth than the American consumer??
In fact, the Bric economies seem to have surprised even O?Neill. In 2001 he had hazarded that they would account for 10% of global output by 2010?whereas, in reality, they already account for 15% today. Merrill Lynch?s Global Economics Team even queried in October whether the Bric economies could help in stabilising global economy. Clearly, the key to that is Keynes? working rule that the less well-off are the ones who have higher propensities to consume. And, thus will the poor stabilise?even if not inherit?the world.
?Author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies