The Payoff From The New Economic Order

Aspecter is haunting the industrialized world--the specter of sluggish growth. Communism has been vanquished in much of the globe, the victim of its own failure to deliver a decent living to citizens under its rule. Yet capitalism in the industrialized nations is limping along. Unemployment is rising in Europe and Japan and remains high in the U.S. Policymakers are paralyzed by budget deficits and distracted by unwarranted inflation concerns. Business executives are stumped by economic conditions and plagued by a lack of strategic vision. Consumers are holding back, worried about their jobs and the future. Across the industrialized world, people are coping in tough times--but not thriving.

The end of the cold war was supposed to be a boon to all, bringing a release of resources and energy that would catapult growth to new heights, sowing prosperity for millions. That process has already begun, although it may be difficult to detect in the U.S., Europe, or even Japan. Billions of people are joining the world economy, not as beggars but as producers. Cheap labor is drawing investment and production away from the industrial countries. Plentiful goods and materials are crowding world markets, and annual exports from developing nations to industrialized nations have risen by $100 billion since 1989. A new economic order is being born.

Eventually, the entire world should share the bounty of this new order. As nations develop, their need for imported goods rises, and worldwide demand grows. Multinationals expect the developing countries to become vast new markets by the end of the decade, as productivity and incomes climb worldwide. History is on the side of the optimists.

Right now, though, new opportunities are just a tantalizing vision. The rich countries are struggling, even as poorer countries blossom. So what are industrialized nations to do? The voices of reaction say: Forget the new economic order. Close the borders. Keep out Mexican workers, Taiwanese computers, and Russian aluminum. Keep our jobs, our money, and our technology for ourselves.

But you can't put the genie back in the bottle--and in truth, you wouldn't want to. Instead, the U.S. and other industrial powers must follow a two-pronged strategy: They must compete ever more vigorously against new rivals. And they must nurture the new economic order through aggressive, pro-growth policies.

Few people have to be convinced of the need to become more competitive. Companies in the U.S. have shed millions of workers since 1989, boosting productivity and cutting costs. Now, European companies are following suit, and even the Japanese are making big adjustments.

But that's not enough. Cost-cutting is a powerful survival tool, but it's hardly a growth strategy. New products, new ideas, and new technologies are what drive sales, and companies in the U.S. and Europe have to adopt offensive rather than defensive strategies. They must become pioneers, producing sophisticated products and services. The nations and companies that invest heavily in research and development will be the ones that succeed in the new economic order.

Governments must also be bold. For too long, the world's central bankers have been fighting old wars, battling an inflation demon that exists only in their memories. While slow growth saps the strength of industrial countries, central bankers continue to hold interest rates too high. The industrialized countries are operating at 5% below capacity, which means that output is a staggering $800 billion less than it might be. Add in the vast surge of industrial capacity from the Third World, and it's clear that the central banks can lower interest rates and stimulate the world economy without rekindling inflation.

Leaders of industrial nations must also redouble their efforts to rein in budget deficits, now at an average of 4% of gross domestic product. Deficit-cutting measures help to lower inflationary expectations in the financial markets, and so push interest rates lower. Social spending and defense outlays remain the prime targets for cuts. And when governments do spend, the money should go toward education, science, technology, and training for displaced workers--the items that help countries compete.

These are the near-term prescriptions. But as de facto guardians of the world economic system, the industrial countries must take a longer view. Instead of heeding calls for protectionism, for instance, their leaders should encourage new ties with developing nations. Over the next few years, they should usher countries such as China and Russia into, say, the General Agreement on Tariffs & Trade, in exchange for having those nations open their markets to all foreign goods. For the U.S., passing the North American Free Trade Agreement should be a top priority.

But increased trade alone won't solve one of the biggest problems of the new economic order: the enormous gap in incomes between industrial and developing countries. Right now, average incomes in rich countries are six times those in poor countries. That's a recipe for big trade imbalances, such as the $20 billion surplus that China runs with the U.S. It also encourages people to migrate in search of greater riches elsewhere.

So, strange as it may sound, it's in the interest of wealthy countries to encourage the enrichment of poor nations--not only through trade, but also by leaning on them to raise the standard of living for their citizens. In Mexico, for instance, the government has been holding down wages to keep its low-cost competitive advantage. That has postponed the income gains that should follow strong productivity growth.

The new economic order is still young and vulnerable. Its course can be easily derailed by a wave of protectionism or a military conflict that escalates. But trade is not only good for growth. It also forces nations to maintain ties out of self-interest. And in the long run, that self-interest serves the greater good. Today, not everyone is enjoying the benefits of the new economic order. Given time, however, those benefits will be widely shared. It's up to policymakers and managers to take steps to ensure that the promise of the new economic order is not lost.

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