The mixed blessing of a return to global growth.

• Author: Posen, Adam S.
• Position: Letter From Washington

For nearly the past decade, the hanging international economic policy question has been what will happen when the United States stops growing faster than the rest of the developed world. Through the Asian and Russian financial crises, the creation and depreciation of the euro, and the seemingly unending decline of the Japanese economy, the U.S. economy has been the best-performing major economy. And in current forecasts, it seems the United States is prepared to take the lead on growth and imports again in 2004. As a result, in now-tired phrases, the U.S. economy has served as the global economy's "importer of last resort," its "one engine to fly on," and its "magnet for investment."

Thus, policymakers should be understandably worried that when the U.S. economy slows down--and needs to export more on net to stabilize its mounting foreign indebtedness and eventually its currency--so could growth in the rest of the world. The resulting process of adjustment, if it prompts contraction of world trade, could put at risk both the welfare of the developing world and the viability of the global trading system. The breakdown of the Doha WTO Round in Cancun appears to bear this danger out.

Resistance in the rich countries alone to exchange rate movements and competitive pressures between themselves could heighten trade conflicts and economic disputes. It is this fear of an unbalanced shortfall of global demand feeding protectionism, and some backlash against globalization more broadly, that motivates the debate over the utility of G7 coordination on growth (see Bergsten versus Siebert in this issue).

What happens, however, if we are stuck in too-dour economic expectations? What happens if growth rates in the rest of the major economies begin to catch up instead? Rather than being a far-fetched hope, this may become a reality in 2004. Remember, if our concern is the degree and pain of adjustment (that is, the size of the needed dollar decline and drop in U.S. import demand), not some sort of league-table rankings, it is not necessary that Japan or Germany grow as fast as the United States does--all that is required to reduce the scale of adjustment is that the gaps between German or Japanese and American growth rates shrink.

And shrink they will. Japan has begun growing again at a relatively rapid clip, fuelled by some progress on resolving its bad loan problems, by the global recovery of manufacturing demand, and by (finally?) enough monetary...