Wednesday, 19 February 2014

Why America could be the next "emerging economy"

Pessimistic predictions about America’s economic future are having a tough time squaring with statistical reality in 2014. As much as some would have been overjoyed to see the world’s only remaining superpower succumb to the pressures of merciless capitalism, the US has managed to keep its head above water. The question is why.

The irritating fact (for some) is that America is set not just to float in 2014, but swim strongly and make up significant lost ground, which could last well into 2015 and beyond. According to the US Federal Reserve, who aggressively predict an American GDP increase of at least 3% this year, a gradual slowdown of quantitative easing and a deleveraging of real estate assets are just two reasons pointing to fresh buds of growth.

This particular Fed prediction is higher and much more bullish than the general Wall Street consensus, but the feeling of revitalisation is the pattern connecting many economic soothsayers. Even the extraordinary renaissance in energy extraction currently underway in the Land of the Free is helping push the economic turnaround.

But these reasons aren’t enough to explain the growth entirely satisfactorily. Causal factors for this turnaround are likely too complex for a short article like this, nevertheless as actual emerging markets are beginning to show signs of struggle, one Wall Street analyst has even facetiously called the United States the next great “emerging market”.

This description might be a bit overwrought, but it does reflect the importance of a reinvigorated America to the world system. The US dollar remains the world’s reserve currency and last month’s tapering of the US Federal Reserve’s monetary expansion by a mere US$10 billion caused ripples all throughout the world.

To put the recent taper into perspective, US$10 billion of debt purchases is greater than the monthly portfolio investments into Turkey, India, Brazil, Chile, Ukraine, Indonesia, and Thailand combined. However painful it might be for these and other countries as the fiscal faucet from the Federal Reserve tightens, the decision to taper was made in response to and on behalf of the American economy - the rest of the world be damned (to an extent).

Gradually phasing out of extraordinary monetary stimulus has been a long time coming. The US government was becoming too reliant on stimulus even though it was introduced as a temporary measure to boost the economy out of a slump.

Should broad destabilisation become noticeable in the American economy, the Federal Reserve will need to reassess its evolving policies and perhaps continue the quantitative easing. US monetary decisions are ultimately made by considering the health of the American domestic market. And clearly the US Federal Reserve is confident the pace of recovery can withstand a bit less introductory money buoying the markets artificially.

Over the years since the Global Financial Crisis (GFC), the Reserve’s monetary expansion policy has also been relied upon - potentially too much - by truly emerging economies as well as the American. Many were very concerned about the timing of the expected taper this quarter, fearing that tightening the flow of money might expose serious fiscal flaws and endemic weaknesses in their own economies.

For instance, the Morgan Stanley Emerging Markets Index fell by 5% last year while the United States gained 30% on the Standard & Poor’s benchmark 500 index.

Of course, US consumers will have a rough time if prices rise; and if wages remain subdued despite President Barack Obama’s efforts, any recovery might actually be quite tepid. Although there are some headwinds facing the American economy, it is unlikely that rising gasoline and food prices will affect their expected trajectory of recovery.

So what exactly is driving the latest American resurgence? Well, it’s a bit hard to pinpoint directly as these things are never isolated events. But a critical factor seems to be in the American knack for innovation and flexibility. Many major technology breakthroughs which go on to be used around the world begin in the United States.

The shale gas boom is a perfect case in point. Tapping the easy-to-reach hydrocarbons over the past century quickly reached a point of diminishing returns for larger companies. After they were depleted, the United States looked overseas for its energy, leading to decades of reliance on foreign governments for its economic sustenance.

Then hundreds of smaller, more agile companies eventually moved in to review the dry fields and experiment with new techniques to access to tight oil and gas deposits. Those companies were relatively unexceptional; it was the economic climate and society around them which set them apart. They were able to succeed or fail without the threat of vanishing thousands of jobs or losing millions of dollars.

They were also small enough to soak up the inevitable collapses expected when processing new technologies in the real world. Some survived, many failed, but they managed to reduce the United States’ oil imports from 60% of total consumption in 2005 to 40% today. Natural gas imports have fallen by 27% over the same period.

On the other hand, Russian energy giants Gazprom and Rosneft are together in control of enormous potential reserves of tight gas and oil in Siberia. However, they have both proven to be too large and cumbersome to take advantage of the deposits quickly enough to compete with the American hydrocarbon revolution.

And to a large extent, that is what is setting the United States apart from the other giant economies in the world system. Not only are they comfortable letting smaller companies fail if they are not efficient enough - which is the very essence and consequence of capitalism - the crucial innovation this approach breeds is extremely beneficial to the America.

After all, necessity is the mother of invention and the Americans do bottom-up innovation better than most.

America’s free society stands in stark contrast to China or Russia where a top-down approach to innovation still reigns. Free societies tend to encourage scepticism and critical thought even though it might lead to instability in the short term.

Yet that initial instability fades away when the benefits of new technologies honed on the whetstone of unforgiving competition brighten the future. As the United States has discovered, the key is in encouraging originality. This is something that - so far - the Chinese and many other emerging economies are yet to fully embrace, but they will need to if they wish to compete with a booming America.

No comments: