There’s more to economics than shopping

We live in a world obsessed with consumption. Half the time we worry that we are consuming too much, and the other half we fret about insufficient shopping leading to economic collapse.

This obsession was particularly clear over the Christmas and New Year period. The media were full of stories about how too much consumption is making us, both literally and metaphorically, fat. Overconsumption is said to be swelling our bodies and destroying the planet. The rapid development of emerging economies such as China and India gives an added edge to such concerns.

But, at the same time, TV crews are regularly dispatched to shopping malls to monitor the level of retail sales. If a leading store suffers a seasonal dip in sales it often leads to an angst-ridden discussion of how a painful economic recession could be imminent.

A key problem with such discussions is their impressionism. Trying to understand the economy through focusing on consumption is like trying to understand the human body by staring at people’s faces. Although consumption is important, it is only one dimension of a bigger picture.

For example, the rapid economic growth of the developing economies in recent years, and Asia in particular, is likely to lead to two important and related shifts. Yet viewing the economy from the perspective of consumption means that these key changes are likely to be missed or at least their significance underestimated. First, on a global level the balance between consumption and production is likely to move closer into line. Second, economic and political power are also likely to experience a rebalancing.

In relation to the first trend, in recent years the rapidly growing Asian countries have increasingly come to subsidise Western consumption. Although Asia is still far poorer than the West, the perverse reality is that Asian capital flows have played a key role in buoying economic activity in the developed countries.

This trend is clearest in relation to America. The world’s largest economic power is currently running a current account deficit at a historical high of almost six per cent of gross domestic product (GDP) (1). In other words, it is importing more than it is exporting by a substantial margin. The only reason it can afford to do this is because it is receiving huge external financing from overseas. It is a bit like someone who relies on bank loans or credit cards to enable them to spend more than they earn. Only the scale is massive. Asians are buying enormous quantities of American financial assets, such as bonds (IOUs) issued by the US Treasury.

Of course Asian countries are not buying American debt for altruistic reasons. The export-orientated Asian economies have an interest in propping up America as it is one of their largest markets. If America experienced a significant economic downturn, then, at least to some extent, Asia is likely to suffer.

However, huge subsidies of the American economy by Asia will not continue forever. At some point there is likely to be an adjustment, with American consumption falling in relative terms and Asian consumption rising. In other words, on a global scale the amount each country consumes will correspond more closely to the amount it produces.

Indeed, there are signs that this rebalancing is already under way. The fall of the dollar is one of the key mechanisms to bring such an adjustment about. It tends to make American imports more expensive and its exports cheaper.

The rise in the oil price to a record level of over $100 a barrel can also be seen as, at least in part, a reflection of dollar weakness. Oil prices, which are generally expressed in dollars on the wholesale markets, have not typically risen as much in other currencies.

So it looks like the world is already seeing, in a partial and tentative way, a rebalancing of production and consumption. America looks set to experience a period of slower growth as developing countries become more reluctant to subsidise its consumption. And Asian consumption is likely to rise, to some extent, to more closely correspond to its rapidly rising output.

However, the rebalancing of production and consumption is only part of the story. A parallel trend is the rebalancing of economics and politics. The countries which have grown rapidly in recent years are likely to demand a larger role in world affairs. As their economic muscle increases, it will become harder for the existing powers to resist this trend.

Official statistics are far from perfect, but they give some indication of the trend. Back in 1990, America accounted for almost 22.5 per cent of global GDP, Britain 3.4 per cent and the whole of developing Asia only 17.7 per cent. By 2006, the corresponding figures were 19.7 per cent for America, 3.2 per cent for Britain and 27.0 per cent for developing Asia (2). Although the changes might sound small, it should be remembered that even a small percentage of a figure as large as global GDP represents a massive amount. Developing Asia’s shift from 17.7 per cent of global output to 27.0 per cent in only 16 years is truly dramatic.

To a limited extent, the existing world powers have made some political gestures towards this economic shift. For instance, at the annual G8 summit of the leaders of the world’s industrialised nations in Germany in 2007, several of the large developing countries were allowed to participate in ‘outreach meetings’: Brazil, China, India, Mexico and South Africa (3). However, over the longer term, such token moves are unlikely to be sufficient to placate the demands of emerging economies.

From historical experience it should be clear that the acknowledgement of a greater political role for the developing economies could take some time. Those which already have a seat at the top table, including Britain, will not easily give up their leading positions. But the tide of history is moving in the direction of the developing economies, and the Asian giants in particular.

The overwhelming obsession with consumption has blinded many to the significance of such shifts. While Western commentators fret about consumers shopping too much, or too little, the world, largely unnoticed by them, is becoming a different place.

Daniel Ben-Ami is a financial and economic journalist. Visit his personal website here.

(1) International Monetary Fund (IMF) World Economic Outlook database, October 2007

(2) IMF World Economic Outlook of May 1993, p117; World Economic Outlook of October 2007, p209
All GDP figures quoted are at purchasing power parity.

(3)See page on participants on the official G8 Summit 2007 Heiligendamm website