LONDON — U.S. President Barack Obama caught the imagination of the world when he talked recently of a new “Sputnik moment.” He outlined a bold plan for improving education, infrastructure and technology, and vividly compared the resolve required to put a man on the moon to the determination needed to restore growth to the U.S. economy.
Obama is right to say that the West faces not only great challenges, but also great opportunities. In the last decade, the global economy was transformed by 1 billion Asian workers entering the ranks of industrial producers. In 2011, for the first time in two centuries, Europe and America face being out-produced, out-exported and out-invested by China and the rest of the world.
Yet Asia’s growth also gives the West unprecedented economic hope. In this decade, the world will be transformed yet again by the rise of the Asian consumer. By 2020, Asia’s domestic markets will be twice the size of America’s. The world’s middle class will have swelled from 1 billion consumers to 3 billion.
The opportunities for growth in Europe and the U.S. from this additional global demand are enormous. The countries and companies that will flourish in Asia’s new markets will be those that can provide the technology-driven, custom-built, high value-added goods and services needed to serve Asia’s 2 billion consumers.
But neither Europe nor the U.S. is in a strong enough position to take best advantage of these new markets. The West must again begin to out-invent, out-innovate and out-skill the rest of the world if it is to seize the opportunities that Asia presents. Indeed, unless the West significantly expands its capital investment in engineering, science and new technologies, it will be marginalized by countries whose governments back their innovators with hard cash.
Obama’s investment plan could be the foundation stone for a formal global agreement that delivers higher levels of growth to all corners of the world and creates millions of new jobs. Under such an agreement, Europe would join the U.S. in raising levels of investment — complementing America’s “moonshot” initiative with a program of structural reform aimed at building a digital, green, energy-efficient, and competitive economy — while China would play its part by increasing its consumption. I believe that such an agreement could boost the world economy by around 3 percent by 2014 — and lift 100 million people out of poverty.
I presented this plan when I chaired the Group of 20 summit in London in 2009. I wanted East and West to commit to a strategy of delivering more enduring results than those promised by the rescue packages that we were putting together at the time. In the end, no agreement was possible on a shared growth objective, and there has not yet been enough political will for the coordinated action to achieve it.
Since then, Europe and America have grown well below their capacity and unemployment has climbed to around 10 percent (reaching 20 percent among youths) on both continents. The global growth agreement that evaded us in 2009 remains the unfinished work of the G20.
Front-loaded public investment could be funded through an enhanced European Investment Bank. China has already laid the foundation for its part: Its policy of expanding the middle class should create a market for billions of dollars of Western goods and services.
The West should propose that if China’s consumption increases by two to four percentage points of its GDP over the next three years, America and Europe will expand their public investment by similar amounts. If other Asian countries do likewise, and agree to create a level playing field for exporters, we could create around 50 million additional jobs.
Of course, in the West, an investment plan invites criticism from those who prefer that we do nothing but talk about growth strategies. Indeed, critics argue that raising public investment conflicts with the drive to reduce deficits, and warn of higher interest rates on the back of further spending.
But critics are wrong about the impact on the deficit of focused investment. A recent study by the International Monetary Fund produced unequivocal evidence that we can actually maintain deficit-reduction plans while benefiting from the additional capital investment that the U.S. and European economies need.
My extrapolation of the IMF model shows that Western countries can boost their long-term GDP growth significantly by increasing their levels of capital investment over a three-year period. An annual stimulus equivalent to just 0.3 percent of GDP yields a return in the U.S. of 0.8 percent in economic growth at its peak in 2013, and 0.4 percent in Europe. This approach, which secures growth and cuts unemployment without raising the deficit, is needed to energize the private sector and mobilize some of the capital that has accumulated on corporate balance sheets in recent years.
The West’s workforce must not be condemned to policies that willfully produce a decade of slow growth.
Gordon Brown, a former British prime minister (2007-2010) and chancellor of the Exchequer, is the author of “Beyond the Crash: Overcoming the First Crisis of Globalisation.” © 2011 Project Syndicate