Friday, July 09, 2010

Is the global fiscal deficit the right path for the global economy recovery?

In recent weeks, very much of the discussion about global economic recovery has been focused on the role of fiscal deficit to push up global demand, such that to get back the economic activity to normal levels.-
Some key considerations about this issue, deals with the fact that even though the global economy might be considered a “closed economy”, it is a kind of decentralized economy , with both strong and heterogeneous commercial ties within their members. These commercial ties make the difference between regional rate of economic growth, which add up to global economic growth . Thus, those economies with better quality commercial ties , (outward looking economies) might expect to growth faster, than others with so to speak, more restricted commercial ties (Inward looking economies).Therefore, there are asymmetries between the quality of these commercial ties, as much as the level of openness to commercial ties differ. It follows that as long as these asymmetries includes key global economic players( let say Europe, USA , China, South east Asian countries and Japan, which become “regional economies” from the global economy perspective), it is hard to get a common ground at global scale to get through the global economy recovery with the same “real side “ approach. It means every one working on the side of additional fiscal stimulus.-
The real issue is not about what it is best for the global economy on their own, as much as its performance depends upon of the result of regional economies economic growth. In other words, the argument of the “Closed global economy”, which gives ground for additional fiscal stimulus, do not a fully apply, because the effects are different depending on the nature of commercial ties orientation, those economies “inward looking” get the benefit , but those economies “outward looking”, get the cost .
The alternative view, considers the global economy fractioned by regional economies, each one with different levels of commercial ties, which they must consider as the alternative option to domestic demand expansion, to get faster economic growth. This domestic expansion ,is more suitable for economies with lower level of commercial ties and a higher share of domestic expenditures ( higher level of domestic consumption).
Therefore, beyond the conventional wisdom of industrial homogeneous economies, there are two approaches: that one suitable for regional economies more “inward looking oriented” ,(Fiscal stimulus),and that one suitable for economies more “out ward looking oriented”( Fiscal austerity ). However, the nature of commercial links, make both approaches complementary. Higher domestic expenditures will boost aggregate demand and imports (export from other regional economies which must be competitive, otherwise they stay out of the market). On the other side ,coordinated Fiscal deficit every where at a global scale, will push up both inflationary pressures and higher interest rates sooner than otherwise, besides raising the expectations of higher taxes, making more difficult a sustainable recovery.-.
So, What is all of this about?. As long as the Global Economy become more relevant as the frameworks for policy makers decisions, the nature and scope of such decisions might differ, given the fact that economic heterogeneity become more relevant. Alternatively whether we considered all regional economies as an homogeneous case, we miss the relevance of cross over interdependence, which arise from commercial links diversification. A more complementary designed policy framework, fit better with this interdependence.