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The American Recession and the World’s Emerging Economies

March 11, 2008

Robert Reich

It used to be that when the American economy sank into recession, developing economies sank along with it. But that probably won’t happen this time. And a big reason lies in the Middle East and in China.

Much of the Middle East is swimming in oil money — petro-dollars — while China has built up its own huge stock of sino-dollars. These petro-dollars and sino-dollars aren’t just sitting there in the Middle East and in China. They’re being put to work – building new infrastructure in both places: skyscrapers, power plants, power grids, roads, ports. And building middle classes that, while still relatively small, want the things middle classes in advanced nations want – cars, refrigerators, houses, and lots of stuff to fill their houses.

All this spending on infrastructure and on goods and services by emerging middle classes, in turn, is pulling in resources, goods and services from the rest of the world. That includes exports from other emerging economies.

consumer spending is rising almost three times as fast in developing nations as in rich nations.

This means the world’s developing nations are no longer nearly as dependent as they used to be on consumers in the United States and other rich nations to keep them going by buying their exports. In fact, consumer spending is rising almost three times as fast in developing nations as in rich nations. Real capital spending is rising by double digits there while it’s rising only a bit over 1 percent a year in rich nations. And emerging economies’ trade with each other is increasing faster than their trade with richer nations.

Is this de-coupling emerging from developed economies good news for the United States? Yes and no. It’s good news to the extent that even as America falls into recession, developing nations will continue to demand some of our exports. They’ll also continue to generate healthy returns for American investors who put money into them. And they’ll invest in U.S businesses and financial institutions that desperately need the capital. These revenues will offset a bit of the decline here.

But in a more significant way, the de-coupling is not at all good news for us. It means the price of many things we buy from developing nations — especially raw materials like oil – will continue to be high, and might even rise. Years ago, recessions in the United States depressed prices in the developing world, including oil prices — and these price drops helped cushion us against even deeper recessions. Now it’s the reverse. China’s almost insatiable need for Middle-East oil, for example, continues to bolster oil prices even though demand for oil is slowing here as the American economy slows. As a result, high global oil prices are making our slump even worse.

So it’s two cheers for the developing world. Emerging economies are growing almost regardless of downturns in rich nations. In terms of global equity and long-term stability, we should all be happy about that. But viewed narrowly and in the short term, from the perspective of world’s richest nation now heading into deep recession, it’s only two cheers rather than three.

Robert B. Reich is Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He has written eleven books (including his most recent, Supercapitalism). Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s “Marketplace” are heard by nearly five million people. This entry originally appeared on his blog.

Copyright 2008 Robert B. Reich

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