A sustainable recovery
Jeffrey D Sachs
The global recession now underway is the result not only of a
financial panic, but also of more basic uncertainty about the future
direction of the world economy. Consumers are pulling back from home and
automobile purchases not only because they have suffered a blow to their
wealth with declining stock prices and housing values, but also because
they don’t know where to turn. Should they risk buying a new car when
gasoline prices might soar again ? Will they be able to put food on the
table after this year’s terrifying rise in food prices?
To a large extent, economic recovery will depend on a much clearer
sense of the direction of future economic change. That is largely the
job of the Government. After the confused and misguided leadership of
the Bush administration, which failed to give any clear path to energy,
health, climate, and financial policies, President-elect Barack Obama
will have to start charting a course that defines the American economy’s
future direction.
The US is not the only economy in this equation. We need a global
vision of sustainable recovery that includes leadership from China,
India, Europe, Latin America, and, yes, even Africa, long marginalised
from the world economy, but very much part of it now.
First, the US cannot continue borrowing from the rest of the world as
it has for the past eight years. America’s net exports will have to
increase, meaning that the net exports of China, Japan, and other
surplus countries will consequently decrease. The adjustments needed
amount to a sizeable deficit-to-balance swing of around $700 billion in
the US current account, or nearly 5 percent of US GNP.
Second, the decline in US consumption should also be partly offset by
a rise in US investment. However, private business will not step up
investment unless there is a clear policy direction for the economy.
Obama has emphasised the need for a “green recovery,” that is, one based
on sustainable technologies, not merely on consumption spending.
The US auto industry should be re-tooled for low-carbon-emission
automobiles, either plug-in hybrids or pure battery-operated vehicles.
Either technology will depend on a national electricity grid that
uses low-emission forms of power generation, such as wind, solar,
nuclear, or coal-fired plants that capture and store the carbon-dioxide
emissions. All of these technologies will require public funding
alongside private investment.
Third, the US recovery will not be credible unless there is also a
strategy for getting the government’s own finances back in order. George
W. Bush’s idea of economic policy was to cut taxes three times while
boosting spending on war. The result is a massive budget deficit, which
will expand to gargantuan proportions in the coming year (perhaps $1
trillion) under the added weight of recession, bank bailouts, and
short-term fiscal stimulus measures.
Obama will need to put forward a medium-term fiscal plan that
restores government finances. This will include ending the war in Iraq,
raising taxes on the rich, and also gradually phasing in new consumption
taxes. The US currently collects the lowest ratio of taxes to national
income among rich nations. This will have to change.
Fourth, the world’s poor regions need to be seen as investment
opportunities, not as threats or places to ignore. At a time when the
major infrastructure companies of the US, Europe, and Japan will have
serious excess capacity, the World Bank, the European Investment Bank,
the US Export-Import Bank, the African Development Bank, and other
public investment funds should be financing large-scale infrastructure
spending in Africa, to build roads, power plants, ports, and
telecommunications systems.
Recovery will require major shifts in trade imbalances, technologies,
and public budgets.
These large-scale changes will have to be coordinated, at least
informally if not tightly, among the major economies. Each should
understand the basic directions of change that will be required at the
national level and globally, and all nations must share in the
deployment of new sustainable technologies and in the co-financing of
global responsibilities, such as increased investments in African
infrastructure. We have arrived at a moment in history when cooperative
global political leadership is more important than ever. Fortunately,
the US has taken a huge step forward with Obama’s election. Now to
action.
The writer is Professor of Economics and Director of
the Earth Institute at Columbia University Daily Times |