Ultimate fix for the global economy

Don't build a new ship out of old wood, says a Chinese proverb. In China, as in many nations that set their sails to the winds of exports, this global recession comes with a warning flag: Don't rebuild your economy on an export-led model. "New wood" lies in more freedom for domestic consumers and more reliance on home markets.

Unless export-heavy countries such as China, Japan, and Germany shift their policies away from favoring such producers and limiting consumption, the danger remains of perpetuating the root cause of the sharpest decline in the global economy since World War II.

An excess of US dollars earned from these countries' exports was a big contributor to the global financial crisis. Those dollars flooded the US, allowing credit to flow to Americans who bought homes they could ill afford.

An agreement to prevent a repeat of this imbalance would be the best outcome at the April summit of G-20 nations, which represent 85 percent of the world economy. The last G-20 summit in November warned of "unsustainable global macroeconomic outcomes" behind the current crisis. Clearly, artificially pumping up exports is now seen as having left the world askew.

In much of East Asia, exports have accounted for one-third to more than half of the national economies. That development path required subsidies to exporters and government meddling in currency rates. And often, workers' wages were kept purposely low.

It was a model perfected by Japan after World War II and encouraged by the US during the cold war to help friendly nations, making them dependent on the US market. When China followed Japan's lead and became an export juggernaut, the distortions in global finance really magnified.

China then led the way by investing its dollars in US securities, such as bundled mortgages, and helped create the housing bubble. After that bubble burst and US consumers cut spending drastically, export-first nations saw a steep drop in economic growth.

Rather then simply wait for the good times to roll again and throw money at their economies, these nations need a basic change. Japan, for instance, needs more help for entrepreneurs while Germany needs to end policies that dampen consumption. And just as Americans must learn to save more and spend less, the Chinese won't reduce their instinct to save until they have a better social safety net; once their future is more secure, they will spend more at home.

Exports will always be vital to any economy, especially those with few natural resources or large populations. But the competitive race by many nations to quickly build up manufacturing industries with a heavy government hand does have negative consequences for these countries and the world.

There are hopeful signs of a shift. Monitor reporter Peter Ford in Beijing writes of Chinese exporters turning toward the domestic market. Toyota talks of making cars in each country with no imports or exports – only locally made and only sold in those countries.

Making such basic changes during a slowdown won't be easy. But unless they are made, using the old wood of an overreliance on exports won't make for a very seaworthy ship for the world economy.