Changing the Fundamental Economic Structure...?

GDP is defined as sum total of income or expenditure of everyone in the country. The expenditure approach adds up the value of total expenditures in the economy. Thus the GDP of any country is

GDP = Personal Consumption + Investment + Government Expenditure + Net Exports

Every economy has an inherent fundamental structure and it grows adhering to that structure. For example the US economy is consumption driven and the huge consumption growth is netted off by a large trade deficit (US is a net importer). German economy is completely investment driven. World's top engineering and mechanical firms are from Germany, take the likes of Siemens or Volkswagen. Chinese and other Southeast Asian economies are mainly by exports and then a little part is consumption also.

The point I am trying to make here is that some or the other characteristic is inherent in each of the world's economy and those characters are the fundamental drivers of their growth. The way a tree will only grow if its roots are watered and not the branches or leaves, in the same way an economy will also grow if its fundamental structure is properly looked after.

The moment the global economy was in recession, the pundits started blaming USA's consumption dependency, China's export dependency and so on. They started suggesting policies to fight the recession, which were quite different than the fundamental structure. This I believe is and will be the cause of slow recovery. One can not challenge the structure and still expect recovery.

If US have to grow now it has to be consumption that can drive the growth. US economy is super well developed and thus does not need infrastructure investment and its not a low cost destination so that it can be competitive in the world export markets. The government is already finances loads of industries/benefit programs and they can not increase their deficit further. Thus the only tool left is consumption.

In the same way Germany can only grow if it takes advantage of its huge economies of scale and Japan by exporting world class cars and technological equipments. If one is suggesting an alternative recovery, then probably he is expecting some sort of miracle which does not occur in the real world.

Hence, the policymakers need to understand this and take the right steps otherwise the 'green shoots' of recovery will slowly turn out into 'yellow weeds'. This “recovery” has fragile foundations and the big source of demand—government stimulus—is unsustainable.

Governments can prop up economies temporarily, but rising budget deficits are not a route to sustainable growth, because 'G' is not the only component in GDP, the Cs, Is and the NXs also need to come and more so according to the structural requirements.

As the Economist says " The hardest part, however, will be the microeconomic reforms required to smooth the macroeconomic adjustments. China’s leaders need to boost household income (for instance by encouraging more labour-intensive growth and forcing state enterprises to pay fatter dividends) as well as improve health-care and pension provision so that people feel less need to save. Japan and Germany both have to encourage investment in services, by freeing markets from health care to education. America must counter the rigidities that have arisen after its asset bust. Millions of people with negative equity in their homes, for instance, cannot move to get a new job"

The to-do list is a long one, the risk of missteps is high, and it will take years to complete. That is why the world economy is not yet out of the woods