Increasingly, the story of the global economy is a tale of two worlds. In one, there is only gloom and doom; in the other, there is light and hope. In the traditional bastions of wealth and power -- America, Europe and Japan -- it is difficult to find much good news. But there is a new world -- China, India, Indonesia, Brazil -- in which economic growth continues to power ahead, governments are not buried under debt and citizens remain remarkably optimistic about their future. This divergence between the once rich and the once poor might mark a turn in history.
Over the past six months, much conventional economic wisdom has been discredited. The experts who spoke confidently about unending global growth -- the boomsters -- have been debunked. But the new pundits of pessimism -- the doomsters -- have demonstrated a similar hubris, ignoring evidence that might complicate their story. Six months ago, stock markets worldwide swooned in unison as the U.S. financial system seemed on the verge of collapse. This led many to conclude that the emerging economies of Asia and Latin America had been growing only because of their exports to the United States and Europe; that they had no independent strengths of their own and probably would collapse faster and more furiously than the sophisticated economies of the West. After all, these were Third World countries.
But a funny thing happened on the way to a global depression. Once the panic that seized global markets abated, there began a fascinating and disparate recovery. The S&P 500 is roughly where it started the year, as is the London FTSE. Japanese stocks have fared better, up nearly 7 percent.
Around the globe, though, markets are humming. China's Shanghai index is up 45 percent, India's Sensex is up 44 percent, Brazil's Bovespa is up 38 percent and the Indonesia index is up 32 percent. Stock markets don't tell the whole story, but many are rising because the underlying economies of most of these countries are still registering significant growth.
Consider: In April, India's car sales were up 4.2 percent from a year earlier. Retail sales in China rose 15 percent in the first quarter of 2009. China is likely to grow at 7 or 8 percent this year, India at 6 percent, and Indonesia at 4 percent. These numbers are not just robust but astonishing next to those of the developed world. The U.S. economy contracted at an annual rate of 6.1 percent last quarter, Europe by 9.6 percent and Japan by 15 percent, something that truly begins to rival the 1930s.
Compare the two worlds. On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. The United States is having trouble selling its IOUs at attractive prices (the past three Treasury auctions have gone badly); its largest state, California, is veering toward fiscal collapse; and the U.S. budget deficit is going to surpass 13 percent of GDP -- a level last seen during World War II. With all these burdens, the United States might not return to fast-paced growth for a while. And its economy is probably more dynamic than Europe or Japan's.
Meanwhile, emerging-market banks are largely healthy and profitable. (All major Indian banks, government-owned and private, posted profits in the fourth quarter of 2008.) The governments are in good fiscal shape. China's strengths are well known -- $2trillion in reserves, a budget deficit below 3 percent of GDP. Brazil is posting a current account surplus. Indonesia has reduced its debt from 100 percent of GDP nine years ago to 30 percent today. Unlike in the West, where governments have run out of ammunition and are praying that their medicine will work, these countries have options. Only a year ago, their chief concern was an overheated economy and inflation. Brazil has cut its interest rate substantially -- but only to 10.25 percent, and it can drop it further if things deteriorate more.
The mood in many of these countries is upbeat. Their currencies are appreciating against the dollar because the markets see them as having more fiscal discipline and better long-term growth prospects than the United States. Their bonds are rising. This combination of positive indicators is unprecedented.
The United States remains the world's richest and most powerful country. Its military spans the globe. But since the Spanish empire of the 16th century, the fortunes of great global powers have begun to turn when they get overburdened with debt and stuck on a path of slow growth. These are early warnings. Unless the United States gets its act together fast, the ground will continue to shift beneath its feet.