Reposted from The Atlantic Monthly
By Ruchir Sharma, author of Breakout Nations and the head of emerging markets at Morgan Stanley and a longtime columnist for Newsweek, the Wall Street Journal, and the Economic Times of India.
Quite like an Olympic sport, hand-wringing about “America’s decline” is popular, practiced all around the world, and often dominated by Americans, themselves. Unlike an Olympic event, it’s wasted energy.
Usain Bolt is the most dominant sprinter the world has seen in a century, perhaps more, so when he runs at the London games, anything less than victory by a blistering margin will be greeted as a disappointment. Results are always relative to expectations, and this as true for global economic competition as for the 100-meter dash. These days, the United States is an underestimated underdog, while China is still widely seen as something more like Bolt. The expectations gap is crucial to parsing the confused public discussion of the American recovery, and what it means for America’s future.
Since the crisis of 2008, most Americans have come to expect gloom rather than gold in the near future. The long-term US growth rate is now burdened by our huge debts, and is slowing to 2.5 percent, down from 3.4 percent between 1950 and 2007. This fall is stoking a premature sense that American preeminence is already over. Polls show that a majority of Americans think China is already the world’s “leading” economy, even though it is still about one third the size of the U.S. economy. The reality is that, at 2.5 percent growth, the US remains the fastest-growing rich economy, and is in fact regaining some of the recent ground lost to newcomers like China.
America’s performance should be measured against the current competition, not against the records it set in the 1990s or 2000s. All the big emerging markets are slowing, most notably China, which has lowered its growth target to under 8 percent for the first time in many years and may well fall under 7 percent. It is hard to grow at a sprinter’s pace when you are hitting middle age, growing careful and a bit fat. China is all three, having recently reached an average real income of more than $5,000, with a total GDP of more than $7 trillion, and a new taste for welfare state programs. Every “miracle economy,” from Japan in the 1970s to South Korea in the 1990s, slowed at this real income level.
Unhappily, for those who like to imagine that globalization can produce “win-win” finishes, China’s slowdown will be America’s gain. The story of American growth slipping by a point will pale in comparison to the three or even four point slip in China. If the U.S. grows 2.5 percent this year, and China slips to 7 percent, the United States should regain the title it lost to China in 2007: that of the single largest contributor to global growth.
This year, the United States will also grow faster than the global average for the first time since 2003, the year an unprecedented boom in emerging market growth began. For the next four years, emerging market growth doubled to over 7.0 percent, creating the widespread perception that the rich nations of the West were being overtaken by the rise of the poor. Now, the historic norm is reasserting itself — the big emerging nations are slowing dramatically, and the coming years are once again likely to produce more laggards than winners. As of 2007 the emerging markets were on average growing three times faster than the United States; now they are growing only twice as fast.
Evidence of an American revival, against both developed and emerging world competition, is mounting, driven by the traditional strengths of the American economy–its ability to innovate and adapt quickly. America’s worst worries — heavy debt, slow growth, the fall of the dollar and the decline of manufacturing — will look much less troubling when compared to its direct rivals. While US growth has slowed by a full point so has growth in Japan and Europe, leaving the United States on top of the league of rich nations.
In a global economy that is increasingly shaped by competing forms of capitalism, the American brand appears to be winning. Consider the key challenge of “deleveraging” or digging out from debt. A new study from the McKinsey Global Institute shows that the United States is the only major developed economy that is even loosely following the path of countries that successfully negotiated similar debt-induced recessions, like Sweden and Finland in the 1990s. Total debt as a share of GDP has fallen since 2008 by 16 percent in the United States, while rising in Germany and rising sharply in Japan, the United Kingdom, France, Italy and Spain. As in Sweden during the 90s, the fall in total US debt is due entirely to sharp cuts in the private sector, particularly the finance industry and private households.
The weak link in the U.S. response to the debt crisis is the government. The Scandinavian cases show that government needs to start cutting spending and debt roughly four years after the downturn — exactly the stage where the US is today. Washington has so far failed to put in place a plan for long-term debt reduction, in part because some politicians and pundits are still pushing for more borrowing to ward off “depression.” The Scandinavian cases suggest this is exactly the wrong worry right now. The public debt is a big reason that long-term US growth is likely to slow, but even then, it is important to keep America’s debt problem in perspective. China is arguably worse off, with total debt equal to 180 percent of GDP. The more wealthy you are, the more debt you can carry, so America’s total debt (350 percent) is actually less of a challenge.
The most dramatic signs of a US revival are in manufacturing. Even as it was losing out to emerging manufacturing powers in the last decade, the U.S. was reacting much more quickly than other rich nations, by restraining wage growth, boosting the productivity of remaining workers with new technology, allowing a steady fall in the dollar that has made US exports much more competitive, particularly relative to Euro nations, and incorporating inexpensive new foreign sources into its supply chains. The result was that China’s rise came largely at Europe’s expense. Since 2004 China has gained market share in the export of goods and of manufactured goods, while Europe’s share is falling and the US share has held steady. After losing 6 million manufacturing jobs in the last decade, the US gained half a million in the last 18 months while Europe, Canada and Japan lost jobs or saw no change.
Energy is also rapidly emerging as an American competitive advantage. After falling for 25 years, the share of the US energy supply that comes from domestic sources has been rising since 2005, from 69 percent to around 80 percent, due to increasing production of oil and particularly natural gas. This is pushing US natural gas prices to the lowest rates in the world, inspiring manufacturers to relocate to the United States. Textiles was one of the first industries to leave the developed world, but recently Santana Textiles moved from Mexico to the US due to energy costs.
The big danger in the U.S. remains that the government will fail to attack the debt problem. Just as it makes no sense to analyze emerging markets in terms of generic rubrics like BRICs, developed markets also need to be analyzed as individual stories. The dramatically different approaches of the developed nations to the basic challenges — deleveraging and maintaining strength in manufacturing — is going to put them on very different growth paths. And if you compare the United States to its rich peers, it has the best chance to be a Breakout Nation, particularly if Washington can get its game together and attack the public debt.