ECONOMY

We should start thinking about economic revival the day after war is over

No one can have the slightest doubt that a war is imminent. The only hope to the contrary would be Saddam’s removal, a rather far-fetched prospect. The great powers are now turning their attention to the post-war situation (with one caveat: a longer-than-expected duration). In any case, the rest of the world will watch the war on TV, as usual and unable to determine events. With such developments, the economy cannot come out unscathed. The crisis of confidence, already apparent, will deepen. Production will slacken and investments postponed, although for a very short time. The interest is now focused on what will happen «the day after.» If the price of oil begins moving downward, four to six months after the end of war, dropping below $20 per barrel, it will mark the beginning of some fat times. However, the economy’s main problem is not the war, or lack of war. What is really missing is the «engine of development.» Technology, the previous decade’s favorite story seems to have exhausted all possibilities. A new wave of development requires a new technological production model. Will the new model be based on energy technology? It will take us at least a decade to find out. So, what really counts in the meantime is the realignment of economic relations among the three regions – the USA, Eastern Asia and Europe – where the greatest amount of production and wealth creation through investment is concentrated. We will also need new success stories, less fragile than of the former so-called «Asian tigers.» That is why China attracts the greatest interest from the USA and Europe. It is no coincidence that direct investment in China exceeded $50 billion in 2002. Europe can look to the new European Union members as the new growth story. The ex-«socialist» countries, along with regions in the current EU members (most of Greece, southern Italy and southern Spain) have lagged behind and have a pressing need for very quick growth. Success, on this front, will depend on the speed, flexibility and effectiveness in opening up their markets to international investment. It is true that the bigger countries have only a small margin for growth. States that are already rich, with over-invested economies and high levels of living ensure that any further step ahead will be a costly one, and no one is willing to pay dearly to make that step a reality. It is a logical choice, then, for the bigger countries to turn their attention to internal restructuring. They will seek another mix of market and welfare policies, capable not to exclude from the main body of society those categories that still have an important say in politics, such as low-wage earners, the unemployed and the increasing numbers of pensioners. In other words, this restructuring will not try to upset an equilibrium reached during the previous century. The USA needs the Europeans to ensure their own restructuring of the economy far more than they need them to win the war against Iraq. All indicators show that the US economy can avoid deepening the economic crisis, contain inflation at present levels, restore the level of savings (which has dropped to 1.6 percent of the US gross domestic product from 9 percent during the Reagan years) and is capable of narrowing its trade deficit, a large part of which is created in its trade relations with Europe. On the other hand, Europe requires bolder measures to increase its weak annual growth, even by a percentage point. Will the European Central Bank set the tone by offering lower rates? Certainly not in March, amidst the war, as its president, Wim Duisenberg has declared. But, once the war is over, it must not waste a single day. Let’s not turn a crisis into a catastrophe.