Byline: Patrick Minford and Peter Stoney
WE HAVE been used to a world dominated by the US, in which the rest of the OECD and the emerging markets all vibrated to the rhythm of America's economy.
This world is no more.
The US is in a slowdown - not yet a recession but effectively zero growth and possibly going negative - but the rest of the world is booming.
The emerging market economies are mostly growing in a range of 5-11%, while the OECD countries supplying them with capital goods, Japan and Germany predominantly, are finding their capital export sectors are fizzing still.
Primary producer OECD countries like Australia and Canada are also benefiting.
With such a world boom going on, we believe it is unlikely that the OECD countries will slip into recession. Even the US is probably being held out of recession as much by its buoyant exports and the low dollar as by the large drop in interest rates and other government action on mortgages and taxes.
The problem with the current situation is the serious inflation now being unleashed in the emerging market economies.
Emerging countries have poor monetary policies, rely greatly on price and credit controls, often have deficit-generating public sectors and intervene heavily in foreign exchange markets to keep their currencies down. Inflation is nearly 10% in China and moving into double digits across most of these countries.
So far their governments have paid scant attention to the issue, arguing that it is worth having inflation for the sake of growth.
This position, however, is quite unsustainable; inflation is expensive in both economic and social terms.
So ironically and quite contrary to the views widely seen today, the OECD countries are not doing too badly out of the world boom. Yes, most face a nasty term of trade movement against them, as imported commodities have risen in price.
But no, they have no inflation problem other than a temporary one because wage growth is weak given their tight monetary policies. They do not face recession as they continue to participate in the world boom.
I F WE look a year or two ahead, however, things will change sharply as emerging market countries are forced by their own internal politics to confront the inflation dragon.
We know from the early 1980s that the cure of bad embedded inflation is painful and results in a sharp recession until the new tough monetary regime has been understood and accepted. With emerging markets currently leading world growth, the same anti-inflation medicine for them will cause a sharp world slowdown, possibly a world recession - at least unless counter measures are taken by OECD countries. …