Since September 11, U.S. media have focused their attention strongly on terrorism, Osama bin Laden, anthrax, Afghanistan and Israeli-Palestinian conflict. But other international news, especially economic, has largely dropped off the screen. This is unfortunate.
Ongoing economic crises in Japan and Argentina have implications for us. Things are not going well in either country. While neither threatens immediate harm to the United States, ongoing problems in these two countries bode ill for a world economy struggling to return to growth.
Let’s start with Japan. Last Tuesday, Moody’s dropped its rating of Japanese government bonds. This followed similar actions by Standard & Poors and Fitch a few days earlier. The Japanese national debt, for decades one of the lowest of the industrialized countries relative to GDP, now stands at about 130 percent of annual output. The Japanese stock and real estate markets broke more than a decade ago and show little recovery. Indeed, any recovery achieved in the late 1990s has largely been erased in recent months. The Nikkei 225 stands at about half of its level in early 2000 and at just a fourth of where it was in 1990.
Prime Minister Junichiro Koizumi, the most recent in a bewildering whirl of prime ministers and finance ministers during the last decade, gained office promising to clean up massive bad debt in Japanese banking, rein in government spending and close or privatize money-losing public businesses. But he has not been able to accomplish much in the way of cleanup, and the economy continues to worsen.
Why should we in the United States care? A bad Japanese economy does not help the U.S. economy. It is easier for us to be prosperous when other nations are prospering than when they are in the doldrums.
Weak conditions in Japan reduce demand for U.S. exports to that country, including Minnesota pork and other high-value agricultural products. Weakness in Japan can harm the economic health of other countries in that region, including such important allies and trade partners as Taiwan and Korea. Slack domestic demand forces Japanese industries to sell what they can abroad at whatever price they can get.
Yes, U.S. consumers benefit from lower prices for cars and electronic devices. And yes, international competition promotes productivity. But it is hard for U.S. manufacturers to be profitable in a global environment when 100 million of the world’s potentially richest consumers wallow in economic doldrums caused by bad policies.
The Argentine government is in the late stages of a seemingly inexorable, slow-motion default on its domestic and international debt. The most recent government action was to “dollarize” all bank accounts but then limit any cash withdrawals from such accounts to $250 per week. This keeps Argentines from taking cash to Montevideo, Uruguay or Miami, but it is viewed as the first step toward some form of confiscation.
Argentina also has called for its creditors to accept longer-term IOUs at lower interest rates in exchange for their existing paper. There is little response to this appeal.
The International Monetary Fund and United States have effectively announced that they are unwilling to take any extraordinary measures to resolve the situation. This reticence is in part philosophical. Treasury Secretary Paul O’Neal and Under Secretary for International Affairs John Taylor are much less inclined to commit U.S. resources to international bailouts than were their counterparts, Robert Rubin and Lawrence Summers, during the 1997-98 Asian financial problems.
It is also pragmatic. Most observers agree that there is not a lot that external institutions can do to solve Argentina’s underlying fiscal problems and the political stalemate that is their root cause.
How do Argentina’s problems affect the U.S.? The short answer is—much less than Japan’s. The Argentine economy is smaller than that of Japan, and U.S.-Argentine trade and investment flows are a fraction of those between the United States and Japan. Banks and other lenders to Argentina have already accepted the fact that they will have to take large write-offs, but no major U.S. financial institution faces insolvency as a result.
Even so, Argentina’s problems are a setback for economic reform and growth in Latin America.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.