Deficit Thinking
Wriston, Walter B.
2007
Deficit Thinking by Walter B. Wriston for the Far Eastern Economic Review
Deficit Thinking by Walter B. Wriston for the Far Eastern Economic Review
When we read that an athlete ran 100 metres in 9.93 seconds, we assume that someone has measured the length of the track accurately and that the timing of the event was correct. In short, we tend to accept finite numbers as an accurate portrayal of realities. | |
This is a good bet in sports but a bad one in assessing international trade and investment. The published balance-of-trade figures between Japan and America that cause such political trauma are in many ways an artefact of the past and a poor guide to public policy. | |
With the G7 leaders recently squabbling over trade terms in Tokyo and the conclusion of the Uruguay Round postponed yet again, the fate of the open trading system that has been the foundation of the world's huge post-war economic expansion hangs in the balance. The new, plainspoken head of the General Agreement on Tariffs and Trade, Peter Sutherland, was quoted as believing that a successful conclusion of the Uruguay Round could generate US$200 billion of new trade a year, which would help kick-start the economy. Since failure could generate dire consequences for rich and poor alike, it is more important than ever to base policy on meaningful measures and not outmoded data. | |
The explosion of scientific discoveries has created whole families of new measurement terms ranging from the double-helix of DNA to gigaflops in computers. International trade -- in its broadest context -- is changing about as fast as science. But our measuring system is stuck in the past. | |
Today, for example, about one-half of all American imports and exports are transacted between companies and their foreign affiliates or parents. "From the viewpoint of political geography," Murray Weidenbaum has written, "these are international transactions. But from an economic and technological viewpoint, the flow of goods and services are internal transfers within the same enterprises." In these circumstances, does a trade "deficit" mean what it once did? | |
To complicate the issue further, in the not so distant past companies exported "products" that could be counted and recorded so that balance-of-trade figures had much more precision than they have now. The traditional business of import and export among nations is being replaced by a new transnational system of product development, design, production and marketing. A typical "product" today has value added in several different countries before it reaches its ultimate market. | |
The dress one buys in a smart store in New York may have had a long journey: the cloth woven in South Korea from imported American cotton; finished in Taiwan; cut and sewn in India; sent to Milan for a "Made in Italy" label; and then shipped to New York. With value added in several countries, the current international bookkeeping system is incapable of producing any useful numbers for policymakers. The horizontal integration of the world's production is destroying the reason that a balance of merchandise trade should exist between countries. As long as capital -- both human and money -- can move towards opportunity, trade will not balance. | |
The third reason the old metrics lead to bad conclusions is that the trade in services was uncounted. With some 80% of Americans employed in the service business, this omission grows more egregious each day. Indeed, it is hard to find a place on the globe without American credit cards, computer software, hotels, banks, insurance companies and airlines. | |
A great many of our thinking and measuring systems were designed for a world that no longer exists. When these old metrics are applied to today's world, they lead to false conclusions and bad policy. At the time they were invented no one contemplated the globalisation of the market. To survive and grow today, companies in all countries have established a variety of overseas subsidiaries, alliances, joint companies and a host of other arrangements that have overwhelmed our antique bookkeeping systems and made balance-of-trade figures misleading and certainly a poor guide to policy. | |
McKinsey and Co. in Tokyo has a database of foreign-owned companies operating in Japan that shows that as long ago as 1987 they were already producing 10.9% of Japan's GNP. These sales are uncounted in any country's exports. Basing political decisions on out-dated metrics is dangerous, and bureaucrats attempting to redress the balance of trade only make the situation worse by creating new government barriers. | |
If the goal of national economic policy is to improve one's citizens' standard of living, then framing policies based on these outmoded accounting concepts will not achieve that end. Indeed, it may do just the reverse. Some thriving areas of the world like Hong Kong do not even publish statistics on current and capital accounts but clearly do well nonetheless. | |
The world has been knit together by a global telecommunications network that not only lets people everywhere know that there are new and better products available, but also allows transnational corporations to manage the horizontal integration of design and manufacturing in accordance with the most efficient division of labour. | |
Since the technology of the network that permits a true global market will not go away, but will only get better, the globalisation of the world's economy has become a reality. Only our metrics are out of date -- and dangerously so. It is long past time that we design a new system of measurement for the Information Age and rid ourselves of one that was designed for the dead hand of mercantilism. | |