Wednesday, August 30, 2006

Growing Globalisation but US Economic Health Remains Important

US Fed Chairman Ben Bernanke, said in a speech on globalisation last Friday that in recent years, global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly. But these data understate the magnitude of the change that we are now experiencing. The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth's population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development. Columbus's voyage to the New World ultimately led to enormous economic change, of course, but the full integration of the New and the Old Worlds took centuries. In contrast, the economic opening of China, which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating.

Bernanke said that the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent. Notably, the nineteenth-century pattern, in which the core exported manufactures to the periphery in exchange for commodities, no longer holds, as an increasing share of world manufacturing capacity is now found in emerging markets. An even more striking aspect of the breakdown of the core-periphery paradigm is the direction of capital flows: In the nineteenth century, the country at the center of the world's economy, Great Britain, ran current account surpluses and exported financial capital to the periphery. Today, the world's largest economy, that of the United States, runs a current-account deficit, financed to a substantial extent by capital exports from emerging-market nations.

With the US economy slowing, it is striking how dependent much of the world is still on it powering ahead.

Imports by the United States currently account for about 5 percent of the entire world economy. That is only part of the story. Investors from around the globe own trillions of dollars worth of American companies and property. Millions of workers in the United States regularly send money to their friends and relatives abroad.

Ireland's top exporter is Dell and about 87% of our exports are made by foreign-owned firms.
Many of us have good reason to wish America's economy well.