This is a remarkable achievement in many ways. For the first time in the modern era, countries with diverse political ideologies and at different stages of economic and social development have made common a cause to tackle the world’s first truly global economic crisis and prevent a repeat of the Great Depression of the 1930s. They have done so by keeping interest rates low and by taking concerted steps to provide unprecedented amounts of financing to banks, businesses and consumers.
As the world recovers back to health, policymakers should not succumb to the temptation to undo the gains achieved since London. Returning to the old world order is not an option.
As a result, China is recovering from its most severe slowdown in decades to report a 7.9 percent growth in the second quarter from a year earlier, up from 6.1 percent in the previous quarter. India has reported a 6.1 percent growth in the same quarter. All the major Asian economies have returned to growth, including Japan. Even Germany and France, the Eurozone’s two biggest economies, are back on the growth path.
Yet, this is no time for complacency. The US economy, the world’s biggest and still the main engine for global commerce, remains in recession – its deepest and longest since the 1930s. Companies are still shedding jobs, mainly in the US and Europe, and millions of people in the developing world have been forced back into poverty. Meanwhile, financial institutions worldwide, after writing off more than $1.6 trillion of credit losses, are still cautious about making loans and investments.
These are red flags, which should provide enough reasons for global policymakers to carry on with the well-orchestrated fiscal and monetary stimuli embarked upon less than a year ago. For sure, governments and central bankers will need to map out an equally well-coordinated exit route to reabsorb the unprecedented levels of liquidity when the global economy is securely out of the woods. That time has not arrived, not yet.
Indeed, the follow-up G20 meeting in Pittsburgh couldn’t have come at a better time. Global leaders must know that the ongoing global recovery will remain fragile as long as rising unemployment in the US, Europe and Japan is reversed and until consumers in those economies start loosening their purse-strings after repaying some of their debts and rebuilding their savings.
Any move at this stage to tighten monetary and fiscal policies, especially in the developed world, risks the world economy repeating Japan’s mistakes during the 1990s when a hurried rise in tax rates, without simultaneously loosening of monetary policy, triggered a financial crisis and eventually led Japan into the path of quantitative easing in 2001, which lasted for five years. We are all very familiar by now with Japan’s last couple of decades.
Policymakers gathering in the US manufacturing heartland must also reflect on all that has been achieved so far in unwinding the global imbalances that led to the crisis in the first place. They must revisit the phenomenon of excessive savings generated by the manufacturing powerhouses in the East, through mammoth trade surpluses and the excessive consumption in the West.
The resulting surplus of liquidity amassed by Asia’s export-oriented economies found their way to the West, through investments in Western government bonds, helping keep global interest rates low and perpetuating the excessive spending patterns of consumers in the US and Western Europe.
Although exporters in Asia have seen their trade surpluses shrink dramatically this year as consumers in the West cut back on spending following the onset of the economic and financial crisis, it will be some time before we see a substantial pick up in consumer demand in the East, enough to offset the slump in Western consumption.
Paving a consumption-led growth path for Asia is essential but it will take years to implement. It will require Asian governments to provide social safety nets and healthcare guarantees for its citizens so that consumers do not have to save excessively for the rainy days.
It will also require Asian governments to carry on with economic reforms to create jobs and increase overall efficiency and productivity. It will require deepening and broadening of the region’s capital markets to prepare them to absorb large amount of capital generated by the region’s own savers.
Asia’s reliance on equity capital markets to fund corporate investments often leads to excessive volatility and, in some cases, asset bubbles. Meanwhile, the lack of deep and liquid corporate debt markets prevents the companies from accessing long-term capital.
It is clear by now that the West will take a long time to repair the damage to its economies caused by the financial and economic crisis and return to a sustainable growth path. The onus for engineering a relatively quick recovery now largely rests with China, India, Korea, Indonesia and the other large emerging markets.
Indeed, these emerging economies, increasingly aware of their responsibilities, have played their new roles with aplomb so far. China’s unprecedented 4 trillion yuan fiscal stimulus was the cornerstone of the global economy’s recovery this year. India’s free-trade agreements with Korea and Asean in recent months are laying the foundation for greater trade and investment flows within Asia.
It is perhaps pertinent to remember that the leading emerging economies in Asia – G20 members China, India, South Korea and Indonesia – are largely driven by domestic demand. The comparatively low levels of consumer debt, high savings and large populations mean that these economies could surprise on the upside as they move to a consumption-led growth model.
Asia’s biggest economies have also pledged to further the Doha round to give a much needed fillip to world trade. This is a welcome development as protectionist sentiment, particularly in the West, risks stifling growth and perpetuating global poverty. Meanwhile, China and India have both pledged to play a constructive role in limiting the damage caused to the environment from their growing economies at the UN climate change talks in Copenhagen later this year.
Developed economies among the G20 member nations have a particularly important role to play in Asia’s efforts to curtail greenhouse gases while maintaining the region’s growth trajectory. Japan and Korea are already thinking of innovative ways to share their advanced technology and to finance their use in the rapidly developing countries of Asia.
All these are signs that the emerging powers are keen to play a leadership role in reshaping the global economy. One of the biggest achievements of the April G20 meeting in London was the agreement by the developed nations to share major economic decision making powers concerning the global economy with the emerging economies such as China, India, South Korea and Indonesia.
May the Pittsburgh meeting be remembered as a congregation that furthered this trend.
The emerging powers deserve greater control over international financial institutions such as the IMF and the World Bank, reflecting their increased economic contribution and role in international trade since those institutions were formed in the aftermath of WWII.
Only greater participation by the developing economies will ensure that these world bodies can effectively serve their developmental role. The crisis has set back the cause of ameliorating global hunger and lifting the most underdeveloped countries from the poverty trap. World leaders must not lose sight of this slow-burning fuse, even as the global economy returns to the growth path.
As the world recovers back to health, policymakers should not succumb to the temptation to undo the gains achieved since London. Returning to the old world order is not an option – the old ways will perpetuate the imbalances and inevitably lead us to another, and possibly more severe, crisis.
The need of the hour is to maintain the pro-growth fiscal and monetary stimuli; keep working at restoring confidence in the financial markets by reducing complexity and leverage; and fixing the imbalances that caused the biggest economic turmoil in our lifetime. Only a gathering as inclusive as the one assembling in Pittsburgh can take on such a demanding task.
(Writer is CEO Asia, Standard Chartered Bank.)
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