WHILE it is increasingly clear that the United States economic recovery is finally gathering momentum, economic conditions in the rest of the world are much bleaker.
Germany and Japan are in recession. The Japanese downturn threatens to slow growth in the rest of Asia, while Latin America's emergence from its decade-long crisis looks increasingly vulnerable. The descent of Russia into depression and hyperinflation casts a shadow much larger than warranted by what is left of the Soviet economy.
All of this is mirrored in unstable currencies and nervous capital markets. It directly affects the prospects of the US economy. Unfortunately for President-elect Clinton, the US economy has become dependent on foreign trade and foreign capital. American savings are too low to finance the recession-swollen budget deficit by themselves. Exports, whose share of the economy is at a post-war high, account for most of the little growth in recent years.
Weakness abroad will inevitably limit the pace of recovery in the US. If the result of faster growth in the US than in its main markets is rapid deterioration of the trade balance, then the Federal Reserve could be forced to raise interest rates. Heavily indebted consumers and companies would inevitably curb their spending, and the expansion now underway would again falter.
Not all the news is bad. The recent agreement between the US and Europe on agricultural subsidies could lead to a resolution of the six-year-old global trade negotiations. This would not only forestall a potentially disastrous trade war, but would create new opportunities, especially in services. Nevertheless, international conditions represent a risk to a US economy already burdened by a range of factors that have prevented the normal recovery from recession. Debt levels are too high, the probability of
increases in taxes is too certain, the need for companies like General Motors and IBM to restructure is too great, and the monetary policy has been too restrictive.
The result is not only modest growth and slow job creation, but an economy more vulnerable to developments in the rest of the world than has been the case in the post-war period.
S Mr. Clinton comes to grips with this reality, it is essential that he recognize two basic threats to global economic stability. First, there is a worldwide lack of savings and, second, the major industrial countries have failed to find common purpose in the wake of the collapse of the Soviet Union.
The US has long been a net borrower from the rest of the world; during the 1980s Germany, Japan, and parts of the developing world filled the savings gap. Germany's decision to finance a rapid rise in the living standards of its reacquired Eastern provinces and the re-flow of capital into Latin America have significantly reduced the supply of savings in the 1990s. Only cyclically lower credit demand in the US has allowed world interest rates to fall. But US economic recovery, without a rise in savings, w ill quickly change this. Ironically, the largest remaining source of world savings, Japan, can expect only increasing criticism as its external surplus - the counterpart of increased domestic savings - rises.
During the cold war, fear of Soviet adventurism assured that trade and currency disputes would not be allowed to threaten the basic coherence of the industrial world. Now that economic competition has replaced the East-West confrontation as the basic organizing principle in international affairs, the risk of an uncontrolled trade war or debilitating currency crisis has considerably increased.
The leaders of the great economic powers have yet to define new understandings and new institutions capable of containing these pressures, which are likely to grow even stronger during a period of worldwide slow growth.
The challenges for the Clinton administration will be to realize that any economic strategy which ignores these issues is doomed to fail, and to reassert American leadership at a time when the country's persistent failure to control its budget or to boost savings has undermined its international credibility.
The early signs from Clinton are not encouraging. His endorsement of the North American Free Trade Agreement has been qualified, and he has reserved his support for the nearly completed multilateral trade negotiations. More fundamentally, there is little evidence that he sees that international developments will, to a considerable extent, determine the effectiveness of any domestic economic policies he proposes.
Clinton was elected because of a widespread sense among voters that the economic strategy of recent years was badly flawed. Unless he can solve both of these problems, he is destined to follow George Bush as a one-term president.