"Cooperative Global Political Leadership is More Important than Ever"

Jeff Sachs:

A worldwide vision of sustainable recovery, by Jeffrey Sachs, Commentary, Project Syndicate: The global recession now under way is the result not only of a financial panic, but also of more basic uncertainty about the future direction of the world economy. ...

To a large extent, economic recovery will depend on a much clearer sense of the direction of future economic change. That is largely the job of government. After the confused and misguided leadership of the administration of US President George W. Bush, which failed to give any clear path to energy, health, climate and financial policies, president-elect Barack Obama will have to start charting a course that defines the US economy’s future direction.

The US is not the only economy in this equation. We need a global vision of sustainable recovery that includes leadership from China, India, Europe, Latin America and, yes, even Africa...

There are a few clear points amidst the large uncertainties and confusions. First, the US cannot continue borrowing from the rest of the world as it has for the past eight years. The US’ net exports will have to increase... The adjustments needed amount to ... about US$700 billion in the US current account, or nearly 5 percent of US GNP. ...

Second, the decline in US consumption should also be partly offset by a rise in US investment. However, private business will not step up investment unless there is a clear policy direction for the economy. Obama has emphasized the need for a “green recovery,” that is, one based on sustainable technologies, not merely on consumption spending.

The US auto industry should be retooled for low carbon emission automobiles, either plug-in hybrids or pure battery-operated vehicles. Either technology will depend on a national electricity grid that uses low emission forms of power generation, such as wind, solar, nuclear, or coal-fired plants that capture and store the carbon dioxide emissions. All of these technologies will require public funding alongside private investment.

Third, the US recovery will not be credible unless there is also a strategy for getting the government’s own finances back in order. Bush’s idea of economic policy was to cut taxes three times while boosting spending on war. The result is a massive budget deficit, which will expand to gargantuan proportions in the coming year...

Obama will need to put forward a medium-term fiscal plan that restores government finances. This will include ending the war in Iraq, raising taxes on the rich and also gradually phasing in new consumption taxes. The US currently collects the lowest ratio of taxes to national income among rich nations. This will have to change.

Fourth, the ... World Bank, the European Investment Bank, the US Export-Import Bank, the African Development Bank and other public investment funds should be financing large-scale infrastructure spending in Africa to build roads, power plants, ports and telecommunications systems. ... The benefits would be extraordinary for both Africa and the rich countries...

In typical business cycles, countries are usually left to manage the recovery largely on their own. This time we will need global cooperation. Recovery will require major shifts in trade imbalances, technologies and public budgets.

These large-scale changes will have to be coordinated, at least informally if not tightly, among the major economies. ... We have arrived at a moment in history when cooperative global political leadership is more important than ever. Fortunately, the US has taken a huge step forward with Obama’s election. Now to action.