The U.S. Is Losing Market Share. So What?

January 28, 2007 Economic View The U.S. Is Losing Market Share. So What? By DANIEL GROSS LAST week, Mayor Michael R. Bloomberg and Senator Charles E. Schumer released a report that warned of New York’s decline as a global financial capital. To remedy this dire state of affairs, the report, by the consulting firm McKinsey & Company, suggested solutions as diverse as easing regulation on publicly held companies and changing visa requirements so investment banks can more easily recruit foreign math whizzes. But the report, which focused on domestic issues like securities regulation, overlooked a major economic trend. The United States is losing market share in the global economy, and that is not necessarily a bad thing. “It seems to me that the New York intelligentsia are going through one of their occasional bouts of hysteria,” said Jim O’Neill, head of global economic research in the London office of Goldman Sachs. New York’s comparative decline, he said, “is probably in large part a simple reflection of the growth of the rest of the world.” According to Goldman Sachs, the United States’ share of global gross domestic product fell to 27.7 percent in 2006 from 31 percent in 2000. In the same period, the share of Brazil, Russia, India and China — the rapidly growing emerging markets referred to as the BRICs — rose to 11 percent from 7.8 percent. China alone accounts for 5.4 percent. To be sure, the weakening dollar has aggravated the apparent shift. Even adjusting for the differential power of currencies in their home markets, growth in the United States has lagged global growth over the last 10 years, said Brad Setser, senior economist at Roubini Global Economics in New York. This development is not surprising. For much of the 20th century, China, India and Russia did not participate in the global economic system. As they modernize and build consumer-driven markets, they will grow more rapidly than established economies. The same dynamic led to a convergence of economic performance between Japan and Europe, on the one hand, and the United States on the other, in the decades after World War II. Economists note that the United States continues to play an anchoring, even dominant, role in global financial services, thanks to its deep markets and strong banking systems. In this sphere, the United States is losing out more to European capitals than to Shanghai — and for reasons that have less to do with regulation and more to do with geography and geopolitics. The euro zone has expanded in recent years to include more countries, thus increasing the appeal of the currency. “The share of global financial assets denominated in dollars is declining, and that’s in large part because of the rise and growth of the euro,” said Catherine L. Mann, senior fellow at the Peterson Institute for International Economics in Washington. Meanwhile, the capital that the United States exports to China, Russia, India and the Persian Gulf is increasingly being used to develop local financial markets. “It’s not entirely surprising that a certain share of financial activity is migrating to foreign geographical locations where savings growth is taking place,” Mr. Setser said. Add it up, and the United States, while still the world’s largest single economic power, is clearly no longer the sole superpower. From 2002 to 2005, the United States accounted for 35 to 40 percent of the world’s economic growth, according to Goldman Sachs. But in the second half of last year, Mr. O’Neill estimated, the BRICs’ contribution to global growth was slightly greater than that of the United States for the first time. In 2007, he projects, the United States will account for just 20 percent of global growth, compared with about 30 percent for the BRICs. Despite such trends, Diana Farrell, director of the McKinsey Global Institute, believes that the United States “will maintain its share of growth over the next two decades.” She points to a McKinsey survey of global executives in which 27 percent said the United States would account for the most growth in company revenue over the next five years, compared with 25 percent who chose China. Ms. Farrell says she believes that the continued growth of China, India and the rest of Asia will come at the expense of slowly growing, aging Japan and Europe. Ultimately, the decline of economic pre-eminence may be more damaging psychologically than economically. Ms. Mann notes that many people gauge their well-being not simply as a function of how much their income grows, but how much it grows relative to that of their neighbors. “By virtue of the world becoming richer, in part because of our engagement in international trade, we are getting richer, but many of the poor are getting richer, too,” she said. “Psychologically, a lot of people are going to view that narrowing gap as a negative.” More broadly, the fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the United States, not a defeat. “Many of the countries that are doing well are mimicking the best of what America has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs. “There’s nothing that New York and U.S. policies can do about it unless they want to roll back globalization.” Daniel Gross writes the “Moneybox” column for Slate.com.