Recent actions by central banks around the world indicate the near-term global economic outlook is improving, but even assuming that the United States delays the “fiscal cliff, ” it is difficult to expect high growth and therefore the intensity of competition that such an environment spawns will decrease.
Although competition is the key reason market-based economies are efficient at allocating resources, financial and public sector actions can impact the outcome in ways that are less than optimal for the economy as a whole.
Growth is not uniform.
The global economic outlook, with or without fiscal cliffs in the United States, Japan and Europe, indicates low growth as these economies strive to reduce debt levels, which hampers consumer spending.
U.S. consumers are hampered by low employment growth and high levels of household debt. Demographics in North America, Europe and Japan also indicate slow consumer spending growth. China and Brazil have growing middle classes, but these are not large enough to offset slower consumer spending in developed economies.
A low growth rate does not mean everything will grow at a low rate. Some things will grow faster, some slower, while others will contract. One can see this in the inflation data in that new products tend to see price declines as more producers enter the market. Older products tend to see price increases since those markets tend to have fewer producers as a result of the maturing of the industry that only allows the lowest cost producers to remain in business. Computer prices have declined in the last three decades while automobile prices have increased.
High growth, or expectations for it in a market, attracts new entrants, particularly when profit margins are high. Global trade has grown much faster than GDP for several decades despite numerous shocks such as oil price spikes. The offsetting factors were:
- Reductions in trade barriers due to trade agreements.
- Containerization of trade which lowers the cost of moving goods.
- Development of information and communications technologies which allows companies to make global production and distribution decisions using real-time data from almost any location in the world.
- Investment in transportation infrastructure such as highway systems, railroads, ports, and transloading facilities.
- Relocation of production to faster growing lower cost locations such as China.
These game-changing factors are still supporting trade growth as their ripple effects continue to impact the structure of the world economy and attract more investment.
Latin America and many Asian economies have seen what infrastructure investment did for Europe, the United States, Japan and China, and have followed that lead. Mexico’s trade with both North and South America is growing at double-digit rates as it builds highways, improves railroads and ports. Brazil is initiating a major infrastructure investment policy that should improve the access of its vast inland resources to the world market.
For various reasons, such as those listed above and others like the expansion of the Panama Canal, ocean carriers have been increasing their fleet of larger vessels. Ports have been deepening their channels and berths. Railroads have been double-tracking their networks and removing height limitations. Trucks are campaigning for heavier weight limits for roads and longer vehicles.
Some of this investment is being deployed while the world economy struggles to recover from the global financial crisis. Some pockets of excess capacity in areas where trade flows have not fully recovered exist simultaneously with others that are experiencing increasing congestion. Some of this is the result of a structural change in the world economy.
U.S. home sales, which supported container volume growth last decade, remain depressed and are unlikely to return to pre-2008 levels for some time. However, food demand from the rising middle class in emerging markets has been growing. U.S. exports have consequently been increasing faster than imports. Infrastructure that supports exports has been much busier than that for imports.
Risk of irrational competition.
Competition takes many forms. Some enterprises compete by focusing on improving efficiency and reliability, while others may simply offer prices below cost until less financially endowed or supported competitors are driven out of business.
Price competition is generally good for the economy because it eliminates less efficient producers and forces their resources to be reallocated to other pursuits where they are more valuable. However, sometimes a less efficient producer with a very large balance sheet can engage in price competition that forces a more efficient producer out of business.
This financial element of competition is one reason why the private sector regards the public sector with suspicion. Politics and regional pride can result in government support for lower quality infrastructure that can drive out better facilities. Higher public sector debt and lower quality infrastructure is not a desirable outcome.
The U.S. economic outlook is critically dependent on the transportation infrastructure policy that it will pursue. It is imperative the United States supports development of infrastructure that improves the competitiveness of its exports. Support for lower quality transportation infrastructure can be very detrimental to the U.S. economy’s long-term outlook. Non-market support, such as subsidies, can be even worse if not done for the right reasons. Public sector representatives and market participants should seek to support the best of breed so we can all have a better future. Rational competition, not irrational non-market competition, is good.
Kemmsies is chief economist of Moffatt & Nichol, a marine infrastructure engineering firm. He can be reached at (212) 768-7454 or by e-mail.