What is penalizing the industrialized countries?

Business trends are also perceived as asymmetrical. They always seem to be coming up against a specific stumbling block which prevents them from forging ahead at a faster pace. This may be due to the fragility of the real estate market, or to an excessive burden of public or private debt. Then again, it is perceived that business is capable of a sustainable recovery on the strength of the long-term trend, thereby maintaining its fragile dynamics, especially in terms of jobs.

Therefore the main characteristic of business activity is that it cannot forge ahead swiftly or reduce the imbalances caused by economic crisis. Thus it has proved impossible to make good the losses incurred by the recession.

The Western countries economies still seem unable to implement a sturdy, autonomous trajectory of growth

Philippe Waechter

Industrialized countires: persisting fragility ?

The first distinctive signs in the economies of the industrialized bloc (no tensions within the production fabric) have ushered in unemployment, which is still high and is taking some time to reduce. Consequently, there is no boost for internal dynamics to give business the autonomy it requires. Due to these constraints, the expectations of economic players, and consumers in particular, remain lackluster.

This places limitations on any ability to keep pace with a sturdier economic trend. This absence of economic recovery, which is inflicting so much damage today, is no isolated case in History. In their review of the history of debt, Carmen Reinhart and Kenneth Rogoff [2] claim that during a financial crisis, it always takes longer to implement adjustment mechanisms:

 In a recession, business is adversely affected by an economic shock which modifies behavior patterns and alters expectations. In general, however, the effects of persistence are reduced. An active economic policy enables a more satisfactory business profile to be swiftly taken up, thereby "stoppering" the costs of the recession.
 In a financial crisis, the situation is much more complex because the crisis exacerbates financial behavior patterns which, at the height of the upward trend, are no longer sustainable. If the economy is to be relaunched on the basis of healthier, more solid criteria, these excesses must be stoppered. And that takes time.

The depth of the crisis exceeeds that of a mere recession because governments have been forced to take action on a large scale in order to offset sluggishness within the private sphere (consumers and businesses). This has led to a huge increase in public debt. Although this strategy has succeeded in cutting back a reduction in business activity, it can nevertheless act as a constraint and a handicap during the recovery phase. Governments will either be tempted to rebalance their public finances (too) swiftly (which will hit demand), or to detach themselves from constraints in relation to public finances (which could damage their credibility)

Thus the lessons of the past are clear and generally unambiguous. Economic recovery will be a long time taking shape. Thus, even after two years of growth (even moderate growth), financial fragility continues to haunt investors. We are now perceiving fresh sources of deterioration. The issue of peripheral nations’ debt or the negotiations to cap US public debt are still bringing pressure to bear on the expectations of economic operators.

A new equilibrium for the industrialized bloc

It is likely that the scope and equilibrium of the model have changed. Guidelines have also changed in the industrialie=zed bloc because the external parameters are no longer similar to those operated in the past. The environment of industriliazed nations is no longer what it was

This is borne our by an analysis of contributions to world economic growth, demonstrating that the economic drivers worldwide are no longer the same. Up to the end of the 1990s, to a very large extent it was the dynamics of the industrialized nations which explained world economic growth. This is no longer the case (see chart)

It is now the merging markets, led by Asia, which are responsible for the lion’s share of expansion. This new competitive situation requires some complex administration. Growth stimuli are no longer produced by the United States or Europe, but by the emerging nations. This is the opposite of what we had observed in the past, even the very recent past. Emerging nations are eating into market shares, thus limiting the ability of the industrialized bloc to lay its hands on stimuli that can produce sustainable economic drive.

Two new abrupt changes to the economic fabric

These changes to the rules feature two more substantial changes to the economic fabric.
 The first is the change in the pricing profile of commodities. It no longer conveys the tensions of the production fabric of industrialize nations, but rather the dynamlics of emerging nations. This entails far-ranging modifications to regulating mechanisms. Commodity tensions now transmit inflation signals, whereas they had previously relfected pressure on business
 The second change is that many firms are being tempted to expand to where the growth is. It is no longer simply a matter of relocating production facilities (and sending production back to industrialized countries) - it is now local production to meet local demand.
This shift in the pattern could be accentuated in the years to come if emerging nations decide en masse to rebalance their growth by focusing on their domestic markets. This would further boost the attraction factor of emerging nations. It would also lead to rapid development of finance markets, thereby giving them much more autonomy towards growth

Conclusion

The difficulties encountered by the European countries and the United States are therefore the result of a dual constraint that weakens their ability to secure new growth.
They are already bound by the necessary adjustments and constraints produced by financial crisis, in the knowledge that this process still has a long time to run. Another constraint, a new constraint, is the emergence of other players, the size, the power and dynamics of which substantially alter the conditions and balance of world economic growth. The sources of economic stimuli nowadays are located in the camp of emerging markets. This should send a signal to industrialized nations to ponder on the new social and economic model they must foster if they are to remain competitive.