With rules changing, economic future is unclear

"The past is a foreign country: they do things differently there."

— L.P. Hartley, English novelist

WASHINGTON —

It must now be obvious that, economically speaking, we're in another country. Things we once took for granted no longer apply; things we never imagined occur all the time. We've entered a zone of ignorance where familiar experience and ideas count for less. "Thirty years ago, if you'd said that the United States and Europe were going to be the centers of financial crises, people would have thought you were crazy," says economist Fred Bergsten. The unforeseen is now routine.

Profound changes to the global economy contributed to today's crisis and make it harder to resolve. Bergsten — director of the influential Peterson Institute for International Economics — cites three shifts.

First is the rise of "emerging market" countries, led by China, India and Brazil. In 1981, when the Peterson Institute was founded, these nations were laggards. "Now, they're more than half the world economy and are growing three times faster than high-income countries (the United States, Japan and European nations)," Bergsten said in an interview. "They drive the world economy."

Second, the United States has moved from the largest-creditor to the largest-debtor nation. Through the 1970s, the United States generally ran trade surpluses, and U.S. multinational investment abroad overshadowed foreign investment here. But since 1980, U.S. current account deficits exceed $8.5 trillion. (The current account is a broad measure of trade.) And foreigners have invested trillions in U.S. stocks, bonds, factories and real estate.

Finally, financial crises have mushroomed. After World War II, countries restricted the flow of money across borders. This changed in the 1970s and 1980s, when these controls were gradually dismantled. Unexpectedly, rapid inflows and outflows of foreign money caused booms and busts: first in Latin America in the 1980s; then in Asia and Russia in the late 1990s. And the American and European financial crises, though largely homegrown, have had global repercussions.

Globalization, it turns out, is a double-edged sword. It raises living standards by promoting trade and spreading modern technology around the world. But it also causes disruptions and deepens downturns.