The Group of Seven or G-7, the leading industrial states in the world, recently met in Washington, D.C. as did the World Bank and the International Monetary Fund. Beyond the now standard protests against the dangers of globalization alleged against the IMF and World Bank and the so-called “million woman march” to advance women’s rights, the news from the G-7 was positive. After years of little or no economic growth and rising concern about breaking out of that condition, the immediate expectations were for overall growth and with it, reduction in unemployment and increases in savings and investment.
Against these brighter prospects, external factors and forces, some entirely unexpected and others not, can always accelerate or derail the engines of economic growth. The key tests are identifying the more likely of these potential forces and understanding what, if anything can be done, to intensify or moderate their impact. For most of history, the search for this holy grail of economic prediction has been unsuccessful. Yet in an age of instant information, and lots of it, and the ability to observe many of these happenings globally and simultaneously, this kind of effort should be encouraged.
Since this journal has a certain geographic focus, the remainder of this article will confine its search for economic Holy Grail to the greater Middle East.
For even the casual reader, the psychology of the market place is indeed a primal force. Items, whether works of art or chop sticks, have inherent and real value beyond simply costs of production, marketing and distribution. During the stock market crash of 1929 and the Great Depression that followed, it turned out that in the United States, economic conditions actually worsened in the late 1930’s. However, the general psychology is that 1929 was the crash and the economic bottom.
From the greater Middle East, political and strategic factors can have huge positive psychological values. Resolution or diminution of the Israeli-Palestinian conflict, genuine improvement in the political and economic reconstruction of Iraq, increases in OPEC oil production to drive down price and even the capture or elimination of Osama bin Laden all can have beneficial psychological effects on world economies. The converse is also true. Psychology can turn things in the opposite direction as well.
Of these possibilities, only a few have a chance of occurring. The Israeli-Palestinian conflict is in perpetual stalemate. With the Likud Party’s rejection for the moment of Prime Minister Ariel Sharon’s proposed withdrawal from Gaza, a policy supported by the Bush administration, further political turmoil is inevitable. Even though Sharon has returned Palestinian leader Yasser Arafat to the endangered species list, protected from Israeli targeted assassination, violence will continue if not intensify.
Reconstruction efforts and democracy building in Iraq faced grievous setbacks with the release of photographs showing unconscionable atrocities committed by American forces against Iraqi prisoners. The Bush administration launched a public relations counter attack against the appalling and illegal behavior. However, the evidence of American mistreatment and torture of Iraqis held in captivity spread like wildfires throughout that region. Rumors and exaggerations of the abuses withstanding, Muslims and Arabs will be rightly offended and incensed.
Hence, the only source of possible good economic news, presaged in a comment attributed to Saudi Arabia’s ambassador to the United States Prince Bandar in a book by investigative journalist Bob Woodward called “Plan of Attack,” that described the decisions leading to the Gulf War and its aftermath, OPEC oil production was likely to be increased, thereby cutting prices. The impact, economically and psychologically, would largely take hold in the Fall and in time to aid the re-election chances of President Bush. Presumably, the effects would be beneficial to most economies as even a small decline in energy costs would reverberate to other sectors. As of this moment, however, oil prices are going up, not down.
Assuming psychology plays a role in economics and politics, the likelihood is that bad rather than good news will dominate the next months. The analysis above indicates the reasons why pessimism, at least within the Greater East, seems more likely. It, of course, may be argued that this forecast is really a highly American-centric view of the world. Most states are not involved or affected by specific events in the region beyond truly cataclysmic such as wars, oil embargoes and horrific acts of terror emanating from the Greater Middle East. In this case, the G-7 forecasts may prove better indicators for the short term rather than the vagaries of American policy and the latest news flash from Baghdad, Tel Aviv or Riyadh. Still, with the United States preoccupied on this region, and the United States by far the strongest economic power in the world, de-linking the Greater Middle East from any impact elsewhere is probably not prudent.
While Chairman of the U.S. Federal Reserve system Alan Greenspan and his colleagues did not raise overnight interest rates at their last meeting, many are predicting that the accumulation of sizable American budget deficits for as far as the eye can see means interest rates must rise. However necessary, any interest rate increases are likely to have a drag on the world economy as the cost of borrowing money goes up.
Economies can be stimulated on both supply and demand sides as well as domestically and internationally. Under current conditions, increased trade, provided it is “fair and free” meaning there is value added for the parties involved, remains the obvious target for achieving at least some growth and positive economic movement. A decline in oil prices may have short-term positive benefit. However, especially in East Asia where a return to the boom years of the past decades has been slow in coming, trade needs to be given a higher priority.
The G-7, World Trade Organization, APEC and other regional and non-governmental organizations have generally been the vehicles of choice for advancing trade. Perhaps it is time for the Japanese government to re-examine its policies with the express purpose of assessing what, if any small contribution, it can make in this area. With the American economic juggernaut preoccupied on the global war on terror and the Greater Middle East, it is not clear that many other important issues can fit on this already overcrowded agenda. Japan, China and Korea, along with much of South East Asia, remain tremendous potential engines for growth. Perhaps additional regional emphasis by these parties can have broader and beneficial economic impact elsewhere.
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