Economic recipe bordering on the bizarre - for now

<i>Managing the world economy</i> by John Mills (Macmillan, &pound;42.50 or &pound;20 direct)

Anyone who believes the New Economy has been hyped will find sanctuary in John Mills' book. The current US economy, not to mention that of the European Union, is described as suffering from a crisis of slow growth, inadequate demand and lack of national competitiveness. Commuters, IT and the internet don't rate a mention, even in a chapter titled "The Future". Modern economic heroes like Federal Reserve chairman Alan Greenspan don't exist. Although the book is published this year, it reads as if it were written in the era of George Bush senior, rather than George W Bush.

Anyone who believes the New Economy has been hyped will find sanctuary in John Mills' book. The current US economy, not to mention that of the European Union, is described as suffering from a crisis of slow growth, inadequate demand and lack of national competitiveness. Commuters, IT and the internet don't rate a mention, even in a chapter titled "The Future". Modern economic heroes like Federal Reserve chairman Alan Greenspan don't exist. Although the book is published this year, it reads as if it were written in the era of George Bush senior, rather than George W Bush.

It is possible that an overdue correction to the internal and extended imbalances in the US economy will soon result in a less sanguine view of recent US growth (and weaker echoes of it in the UK and other Western economies). It is also possible this remarkable economic sprint owes more to steroids injected by over-exuberant financial markets than to long-term improvements in technological fitness. All those who built their reputations writing about the Japanese technological and economic miracle (and, before that, the German miracle and the Italian miracle) have particular cause to remember that economic performance and intellectual fashion can be fickle.

Although I find it difficult to believe, as Mr Mills does, that the world is essentially unchanged from the 1970s and 1980s, it is still a useful discipline to think through a gloomy scenario in which the US once again becomes entangled in a growth-sapping process of painful adjustment.

If that happens - and a nasty oil shock would be a plausible starting point - there will be plenty of analysts taking up the cry that there is a serious problem of national competitiveness in the US and elsewhere. National competitiveness concerns may also be a useful point of departure for one country with an over-valued real exchange rate. Indeed, Mr Millswrote books arguing that the British disease was (and is) an exchange rate motive.

However, it is more questionable to apply the mantra of national competitiveness and the slogan it's the exchange rate, stupid to global problems. The world does not trade with Mars and Venus. Mr Mills meets this problem by arguing the Western world has a collective competitiveness problem with the rest of the world (by which I think he means Greater China, Korea and possibly India - it isn't clear).

He believes what is required to stimulate demand and revive manufacturing is a big, real and sustained devaluation against the Chinese, Korean, Indian and Malaysian currencies. A cynic might say this is what European Central Bank president Wim Duisenberg is trying to achieve for the Euro zone with the Euro. But as a recipe for macro economic policy in the main Western countries, this borders on the bizarre. Moreover, it is impossible to see how a collective devaluation could be engineered, even if governments agreed to it.

There are nonetheless some important thoughts in this book. The first is that the major Asian economies - notably China, India and Korea - may well continue to outgrow the West. East Asia has recovered remarkably quickly from the financial crisis of two years ago and China and India were hardly touched by it. The IT and communications revolutions are also spreading there rapidly. These economies have the advantage of technological catch-up.

If the pattern of growth is resumed whereby the Western economies average two to three per cent growth and emerging economies over six per cent growth, then the centre of gravity of the world economy will continue to shift towards the latter quite rapidly. This shift has exchange rate implications since on a purchasing power parity basis the Chinese and other currencies are heavily undervalued. As liberalisation and globalisation (through Chinese accession to the World Trade Organisation, for example) bring price levels into line, these Asian real exchange rates will gradually appreciate. However, it is more helpful to see this as an inevitable historical process rather than a quick fix for struggling Western manufacturers.

If an economic shock does derail the US economic locomotive and the Euro zone train behind it, concerns about Asia would soon move to the fore. Even in the midst of economic boom President Clinton has been unable to muster much political will for a new round of multilateral trade negotiations. The US retains a hard line in trade negotiations over steel and textiles. The debate on whether China should be treated as an opportunity or a threat is finely poised. Although Mr Mills seems to be living in the past, history has a habit of repeating itself and what seems a dated set of arguments and prescriptions may re-emerge.

The reviewer is the Liberal Democrat spokesman for trade and industry and former chief economist at Shell