The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
U.S. BUSINESS IN THE GLOBAL MARKET OF THE 1990s Remarks by Robert P. Forrestal, President Federal Reserve Bank of Atlanta To the Jacksonville Economic Roundtable September 25, 1990 Good afternoon! It is a pleasure and an honor to be speaking to the Jacksonville Economic Roundtable. I think it is particularly important that Jacksonville, one o f the growing economic centers in Florida and the Southeast, have a forum o f this nature, and I am gratified to be initiating the revitalized economic roundtable after its decade o f dormancy. During that decade, perhaps the single most striking development was the increasing globalization o f markets for goods and services. Indeed, it is now inappropriate to talk about the economic outlook for a single country without alluding to the international dynamics which increasingly shape the economies o f all nations. Therefore, I would like to talk about the outlook for U .S. business in the global economy o f the 1990s. I w ill begin with a brief overview o f the emerging global market and then give you my thoughts on the outlook for the various countries and regions that comprise it. Finally, I w ill make a few remarks on what that outlook implies for U.S. business. Overview of the Globalizing Market Let me begin by saying I am optimistic regarding the long-term outlook for the w orld’ s economies. M y chief reason for this positive view is the strong trend toward the melding o f national markets into a single global market. Numerous countries that had earlier limited their international commerce now seek to enhance their trading relationships. The people in the formerly communist nations o f Europe and Asia as well as in those Latin American countries that erected barriers to foreign products and investments now clearly desire to develop in ways that 2 w ill improve their living standards. Chronic shortages o f basic goods and poor quality in the few products that are available have led them to realize that inward-oriented economic policies run counter to that objective. Nothing has demonstrated the broadening base o f global cooperation more clearly than the isolation o f Saddam Hussein. Hussein is a symbol o f the kind o f self- centered nationalism that is becoming an exception to the emerging sense o f community among nations. The unity o f the United States, the Soviet Union, and a broad array o f nations in opposing Iraq’ s designs underscores the desire to create a new environment o f international cooperation in place o f the confrontation and fragmentation that has marked the past four decades. As the movement toward globalization encompasses more o f the less developed parts o f the world, I think w e should see faster growth worldwide. The pace o f expansion in individual countries is likely to vary, however, depending where they stand on the spectrum o f development. Growth in some developing economies could be quite brisk as they rebuild infrastructures that suffer from years o f neglect and satisfy pent-up consumer demand. In the more advanced economies—especially the United States—a degree o f saturation seems to have taken hold. A s the demand for first-time purchases o f homes and automobiles ebbs among the "baby boom" generation in this country, for example, the U.S. housing and auto industries have already felt the effects o f the kind o f satiation to which I refer. This slackening o f demand is not entirely negative, however, insofar as it mitigates to some extent the inflationary pressures that have been troubling for some time. Nonetheless, the implication for businesses in the advanced industrialized countries is that opportunities w ill lie perhaps less in their domestic 3 markets and more in those developing countries where demand is greater. One common denominator in the economic outlook for industrialized and developing nations alike is oil prices. From our present vantage, it is virtually impossible to foresee where oil prices w ill finally settle after the Persian Gulf crisis is resolved. Still, prices would have to rise extraordinarily to surpass their levels o f the first two years o f the past decade in inflationadjusted terms. Nevertheless, this critical uncertainty must be borne in mind as w e turn to the outlook for growth in the industrialized and developing economies. Outlook for the Industrialized Countries I think in general the industrialized countries’ overall capacity to grow over the next decade is positive and ranges from moderate in North Am erica to fairly strong in Europe and the Pacific Rim. Beginning with North America, I see growth potential in the United States and the closely related Canadian economy as somewhat reduced from past levels. Whereas w e have viewed long-term potential for real gross national product as being around 2 and 1/2 percent per year in much o f the post-World W ar II period, I think w e need to shade that expectation back to 2 percent or even a little less in the 1990s. M y main reasons for this view are the implications o f demographic trends already taking effect in our economy and, second, greater worldwide competition for investment capital. As a result o f moderate growth and the relative satiation o f consumer demand I mentioned a moment ago, domestic consumption is likely to provide less impetus to overall growth than in the 1980s. The trade sector should support expansion, on the other hand, as greater volumes o f U .S. exports flow to foreign consumers. 4 The demographic factor is the shrinking pool o f entry-level labor compared to the past now that the baby boom has been absorbed into the workforce. Scarcer supplies o f labor imply higher costs over most o f the coming decade. U .S. industries w ill need to counter these costs by greater investment in labor-saving technology. Unfortunately, competition for capital is likely to be greater in the coming decade. One source o f competition could be the U .S. government’ s funding needs associated with large budget deficits i f Congress cannot resolve this critical issue. The international economy also provides numerous alternatives for investors, among them emerging opportunities for higher rates o f return in Eastern Europe, strong investment demand in Western Europe, and, eventually, perhaps, a resumption o f lending in Latin America. Meanwhile, greater integration o f the world’ s economy should continue to bolster exports for U .S. firms. A s w e shall see in a moment, the outlook for Europe is a bit stronger than for the United States, and this suggests healthy markets for U.S. goods. Farther down the road, I also look for a revival o f the once-important but now stagnant trade relations between the United States and Latin Am erica as those countries continue to get their economic houses in order. I am hopeful, too, that the current Uruguay Round o f the General Agreement on Tariffs and Trade (G A T T ) could bring greater compensation for intellectual properties like patents and copyrights. Today this country’ s comparative advantage lies increasingly in doing the basic and applied research that leads to the development o f new products. Many o f these may sooner or later be manufactured abroad. In my view , it is vital not only to the United States, but for the encouragement o f creative advances in all countries that G A T T works to ensure that new 5 technologies are licensed and distributed in a way that adequately rewards the firms undertaking the risks associated with such research and development. Assuming such developments occur, I feel that exports w ill probably be a major source o f U .S. growth in the coming decade. H ow ever, slowing growth in the labor force, competition for investment funds from domestic and international sources, and low er consumption are likely to keep overall growth from being as strong as in the 1970s and 1980s. Western Europe could grow at a 3 to 4 percent rate on average during the coming decade, with a spurt o f growth coming in the early years o f the 1990s. One primary source o f this expansion should be the lowering o f remaining restrictions on the movement o f goods and services within the European Community (E C ) after 1992. Direct savings w ill occur from the elimination o f tariffs and other barriers to trade among the 12 EC countries. The removal o f such restrictions should foster more competition across and within borders, spurring more efficient production. M oreover, we w ill likely see more merger and acquisition activity in numerous industries, suggesting new economies o f scale. Certain countries-Germany in particular—could show higher rates o f growth resulting from their investments in Eastern Europe. However, none o f these developments w ill come easily or quickly. Much discussion remains on the question o f unifying monetary systems in Europe and numerous details o f the 1992 economic integration. Some countries, like Spain, Portugal, and Greece, whose economies are not as highly developed as those o f Germany and France, for example, may not participate as fully in the short-term gains o f an economically integrated Europe. Indeed, these countries may feel some antagonism toward efforts o f their stronger partners to develop Eastern Europe. 6 Along the Pacific Rim, Japan and the newly industrialized countries o f Taiwan, South Korea, Hong Kong, and Singapore could display an even higher capacity to grow than Western Europe. These countries w ill continue developing new sources o f labor in China, Thailand, Malaysia, Indonesia, and they may also capitalize on emerging opportunities in Viet Nam and Cambodia. For both cultural and geographical reasons, these developing Asian nations represent natural markets for Japan and the newly industrialized countries, supplementing their already profitable penetration o f U .S. and European markets. Japan has relatively energy-efficient industries, which should allow better absorption o f higher petroleum prices in spite o f that island nation’ s dependence on imported energy. The aging o f the Japanese population w ill gradually slow growth potential there, however. M oreover, in spite o f some progress toward alleviating structural problems in their domestic markets and non-tariff barriers that discriminate against foreign producers, trade surpluses are likely to persist. Such imbalances could aggravate the kind o f tensions that were the focus o f talks between U .S. and Japanese negotiators earlier this year. Outlook for the Developing Countries The outlook for the developing countries is mixed. Those in Asia could show steady improvement. A s I mentioned a moment ago, the developing Asian economies stand to benefit as Japan and the newly industrialized countries expand their investments in Southeast Asia. These countries do not struggle under the debt burdens that beset many developing countries elsewhere, and more o f their income can therefore go to productive investments at home. 7 H ow ever, internal instability could continue to plague Cambodia, Burma, Pakistan, Sri Lanka, and the Kashmir in India. Economies in the Soviet Union and the former communist nations in East Europe could improve after a few years o f adjustments. These countries need to resolve how they w ill make their currencies convertible and evolve functioning markets for capital, labor, and consumer and capital goods. In addition, their future business leaders have much to learn about doing business in a capitalistic manner. Hopefully, joint ventures with established industries from outside can speed up the learning process. As the process o f making these kinds o f structural and conceptual changes proceeds over the next several years, though, economic disruptions are likely to flare up and fray the patience o f people who have already suffered a good deal o f privation. Thus, the road w ill be a difficult one, but I am hopeful that as the decade wears on, w e w ill see real improvements in many o f these economies. I am also optimistic about our neighbors to the South. In fact, Latin America appears more promising to me now than at any point in the past ten years. F or one thing, the region’ s national leaders are now mostly elected in contrast to the military-backed dictators o f the recent past. These leaders are also adopting economic readjustment policies that, while painful in the present, hold promise for the future. Reforms are being built on the region’ s considerable natural and human resources and on an industrial base which is large, though often inefficient and in need o f modernization. Privatization and fiscal reforms are already showing signs o f rejuvenating the Mexican economy, and other countries appear to be moving in the same 8 direction. T o consummate such reforms, greater investment w ill be needed, and the sizable foreign debt o f many o f these nations inhibits the flow o f capital to productive ends. For this reason, I am enthusiastic about the "Enterprise for the Americas" concept advanced by the U.S. government in June o f this year and endorsed by the G-7 heads o f state at their meeting in July. This initiative would provide opportunities to reduce some o f the official debt owed to the United States, suggest steps for liberalizing Latin American-U.S. trade flows, and encourage domestic and foreign investment in the region. I believe this could move us farther in the positive direction established last year by the Brady Plan. In Africa, the prospects are considerably bleaker. A number o f African countries have extensive foreign debt burdens, and civil disorders continue to disrupt economic development. Markets for many o f the continent’ s primary products are likely to remain weak. M oreover, there are no obvious "partners" who might step forward with investment assistance as Germany and Japan might in other regions. One shared resource that could work to the advantage o f African, as w ell as some Latin American and Asian countries in the 1990s is the dwindling rain forests. As w e work out solutions for mutual concerns like global warming and ozone depletion, the rain forests’ oxygen production, not to mention the potential medical and scientific value o f as-yet-undiscovered species o f plants and animals they contain, are assets that can only increase in value. There is a pressing need to evolve market mechanisms for valuing these assets, which have long been taken for granted as free to the taker. I acknowledge that this is a complex issue with a range o f scientific, economic, and social implications. Still, I believe the next decade w ill be a period o f increasing environmental awareness. Thus I have some optimism that developing 9 countries may receive some form o f incentive to conserve their irreplaceable natural assets. O pportunities fo r U .S . Business in the G lobal M a rk e t On balance, the economic picture for the 1990s looks fairly good, at least among the industrialized countries. And I think there is reason to be optimistic that at least by the end o f the decade, an increasing number o f the developing nations could be drawn into more productive participation in the evolving global market. Ironically, I think it is time that the United States, the world’ s most powerful economy, began to play a more consistent role in the global economy as well. O f course, at the most sophisticated levels o f banking and finance, U .S. firms have long been important international players. Our largest companies have also extended their reach around the world. This involvement has helped the share o f both imports and exports for the United States to grow substantially over the past forty years. Exports, which were just over 7 percent o f G N P in 1947, ran about 14 percent o f total G N P last year. The share o f imports rose from 4 to 16 percent during this period. H ow ever, it is past time that w e realize that significant opportunities are being forgone because many other businesses stubbornly cling to an insular view o f the world, one in which the U .S. market is seen as the only one that matters. I f for no other reason than the moderate demand w e should expect in our domestic economy, this view is increasingly out o f step with reality. A t the national level w e also treat our financial services industry-in many ways the keystone o f our econom y-as i f foreign competition did not exist. I would like to elaborate on these two themes as a way o f drawing out the implications o f globalization for U .S. business. 10 There is no better example o f the need for U .S. businesses to broaden their international horizons than the market potential o f post-1992 Europe. As you know, the EC is progressing toward market integration at a rate that would have seemed impossible even two years ago. It seems more certain than ever that in the first few years o f this decade Europeans w ill draw together into a market with more consumers than in this country. This development w ill have a major impact on the future course o f business in Europe and among the E C ’ s trading partners, including the United States. M ost immediately, the dismantling o f barriers to shipping and selling goods should open this large market for the kind o f retailing to which w e are accustomed here. Our industries are geared toward large manufacturing runs that supply products to nationwide retail outlets and distributors with numerous local accounts. It seems likely that post1992 Europe w ill tend toward a similar market structure, and this shift should prove advantageous to U .S. producers. W hile many foreign firms have long invested in understanding the preferences o f American consumers, not many U.S. companies have made a comparable commitment o f resources. W e need to develop a cadre o f internationalists in management and marketing who can provide cultural insights, whether within companies or as consultants, especially the smallto medium-sized firms. U .S. businesses in this size range bring many o f our most innovative products to market, yet they are somewhat behind their foreign counterparts in seeking out overseas customers. Such companies need to discover the foreign markets that are receptive to their products. They also must acquire a sense o f how to appeal to consumers and businesses in other countries and begin to speak their languages. 11 One U .S. industry in particular, the financial services industry, is being kept from gearing up for the global market in an optimal way by anachronistic regulations. Multinational corporations are attracted to banks that can offer "one-stop" convenience for a full array o f services from loans to underwriting equity issues as w ell as the capacity to handle sizable transactions. Those big international players may take their business to European and Japanese banks i f U .S. banks remain strapped by lack o f uniformity among 51 state and national banking laws and by our failure to complete the task o f product deregulation in this country. It is therefore important that Congress take three fundamental actions: (1) reform deposit insurance; (2) repeal Glass-Steagall; and (3) enact interstate banking legislation. Together, such measures would strengthen U .S. banks and allow them to diversify their activities and geographic scope and better serve their customers seeking to transact business overseas. Conclusion In conclusion, the 1990s promise to be a period during which the global market, which has been gathering momentum over the past decade or more, becomes a fait accompli. The collapse o f communism and the return to civilian governments in Latin Am erica have illustrated the desire o f the less developed countries to progress toward greater partnership in a world more unified in economic purpose. The challenge for U.S. businesses in the decade ahead is to shake o f f their narrow focus on their home market and seize the initiative in a newly unified world market.
@FedFRASER