Published: Sunday, Mar 29, 2009
Sunday March 29 2009
The world economy is on a brink. Since December last, the world's leading economies have been pouring billions of dollars in a desperate bid to forestall anything like the Depression of 1930s. Now, their leaders head off to London for possibly the most crucial economic summit of our times, searching for the "green shoots" of recovery, at home, and around the globe.
In the run up to the April 02 summit of world leaders in London, the International Monetary Fund (IMF), in its latest update on its much watched World Economic Outlook, has come out with more bad news -- news which seems to get worse at every update. The latest prediction is that the world economy will shrink for the first time in the postwar era.
In 2009, world GDP is slated to decline by 0.5 to 1.0 per cent. Industrialised countries are expected to register negative growth of 3.0 to 3.5 per cent. Developing countries, which averaged 5.0 per cent growth for the past decade, will only be growing by 1.5 to 2.5 per cent, according to IMF. Not until 2010, says the IMF, is the world economy expected to revert to positive growth, as the stimulus package unleashed worldwide will need time to take hold.
As if this was not bad enough, Pascal Lamy, vociferous Director General of the World Trade Organisation (WTO), announced WTO's latest projections of world trade for 2009. World trade volume is slated to shrink 9% in 2009, also for the first time since the second World War. Exports from the developed countries are expected to fall by 10% while those from developing countries, 2.0-3.0%. As the recession deepens, and production sags, trade volumes shrink. In tandem with the credit squeeze in financial markets and declining cross-border financial flows, depleted trade finance has been making matters worse.
Recall that throughout the post-war period, world trade growth outpaced output growth, creating jobs and income around the world. Trade had become an engine of global prosperity. So Pascal Lamy chose to sound a note of warning as the WTO observed rising protectionism around the globe lately - in rich countries and emerging markets alike - which he rightly believes will "choke off" trade, a potent engine for the economic recovery that is the target of global leaders meeting in London. Drawing lessons from the 1930s beggar-thy-neighbor tariff increases that literally destroyed world trade and made the Depression worse, WTO is carefully monitoring trade policy developments, urging governments not to make the situation worse by reverting to protectionism.
All said, world leaders will have to confront a number of burning issues, some inherently contentious. A pre-summit meeting of Finance ministers last week sought to thrash out existing differences of which there are quite a few. Too much is at stake for world leaders to let this opportunity go without a well coordinated approach to turning the global economy around in as short a time as possible. Below is a glimpse of some of the key concerns on the table.
First item on the agenda, perhaps, will be the matter of size of the stimulus packages. The developed and emerging market economies together have formulated packages totaling $1.8 trillion or some 3.0% of global gross domestic product (GDP) of $62 trillion. Governments have built up huge debts to finance these packages. Yet, many economists in the US have said the US package of $787 billion is not enough. How much is enough? Quite frankly, nobody knows. President Obama will make a pitch for greater stimulus from Eurozone countries. Emerging market economies with large current account surpluses, and China, in particular, would be urged to pitch in more.
Second, turbulence and credit freeze in financial markets will have to be grappled with. Talk of a new global financial order with a supra-national regulatory body has all but died down on the anvil of sovereignty. Instead, there is likely to be renewed commitment to stronger financial regulation and monitoring at the national level. Improved cross-Atlantic coordination of financial market policies is in the offing. Therefore, don't expect the emergence of a new Financial Authority or IMF with extra regulatory powers. What is likely to happen is that the Financial Stability Forum in Basel, the exclusive club of finance ministers of a few rich nations, will have to widen its membership by adding all or some of the BRIC countries (Brazil, Russia, India, China).
Third, the IMF came under heavy stress as demands on its limited emergency stabilisation funds got stretched to the limit due to heavy requirements of many developed and developing countries which found their economies teetering in the face of the financial crisis. Bolstering IMF resources has become an immediate priority. Effort is on to mobilise some $500 billion of emergency resources for a new "open facility", called the Flexible Credit Line (FCL). Loans from FCL will not have a cap on each country's borrowing quota but disbursements will be based on country needs under prevailing circumstances. Here again, China and Saudi Arabia are being wooed to come up with sizable funds in addition to the $100 billion each committed by Japan, the US and the European Union (EU). The quid pro quo will be greater voice and weightage for emerging market economies in the IMF.
Fourth, a lot is riding on the G20 summit in the realm of global trade. Quite a few of the economic stimulus schemes contained anti-trade, if not outright protectionist stance with regard to domestic industries. The popular argument has been that since the fiscal stimulus have been financed with taxpayer money, they should protect jobs at home rather than abroad. Consequently, support to US auto makers was mimicked all across Europe where agricultural subsidies also went up on the back of slumping farm prices. In the past, the US has led the campaign for greater trade openness across countries. The onus will be very much on him and UK's Gordon Brown to douche the fires of rising protectionism that seems to be spreading fast. But, first, both have to come clean by making sure their own stimulus packages contain no protectionist component. President Obama, therefore, had to quickly play down the "buy American" slogan of his stimulus package, as he heads to the summit. A major fillip to global trade could come if the Doha Round gets a fresh boost from the summit if members raise the stakes on freer trade as a means to restore growth in the world economy.
Finally, there is the ghost of a global currency making the rounds. China, the holder of nearly $1.0 trillion of US treasury bonds, is concerned about the future value of the dollar as the US budget goes into over a trillion dollar deficit, thanks to TARP (Troubled Assets Recovery Plan) and the fiscal stimulus package. A serious proposal has been made by China for an IMF-based reserve currency that could ultimately prove more stable in times of crisis. That would dethrone the US dollar as the reference currency it has been since the second World War - a possibility that might not be welcomed by the leader of the world's largest economy.
What is there for Bangladesh? In the long run, all of the issues at stake are of serious relevance for developing economies like Bangladesh. In the immediate future, the success of a coordinated global stimulus package means sustained demand for our readymade garments (RMG) and non-RMG exports. That will keep economic growth going in the 7.0 per cent plus range. Remittance flows from the Middle East, UK and USA would continue to reduce poverty in our rural economy. Reforms in global financial institutions will stimulate private and official capital flows, on which so much of our future prosperity depends. Commitments to stave off protectionist policies will help keep world markets open for our growing exports. So, for Bangladesh, as well as for other developing economies sitting out this summit of leading world economies, there is much to hope for in its success.
All said and done, the April 2 summit in London will be historic in scope and impact. But those who expected this to be a Bretton Woods of sorts will be disappointed.
(Dr. Zaidi Sattar is Chairman, Policy Research Institute of Bangladesh. He may be reached at e-mail: firstname.lastname@example.org)
Last Updated on Thursday, 06 January 2011 05:18