The financial crisis poses threats to globalization as nations take measures to shield their economies from external shocks, while struggling to recover from the worst recession since World War II, a visiting Nobel Prize-winning economist said yesterday.
Paul Krugman, who won the Nobel Prize last year for his work on trade theory, told a forum in Taipei that the downturn had stabilized but that it may leave the world economy in near-stagnation for 10 years — similar to what happened in Japan in the 1990s.
“The world as a whole looks quite a lot like Japan during its lost decade,” Krugman said, meaning the recovery could be slow and protracted with high unemployment and weak private demand.
OPTIMISM
The Nobel laureate said he was optimistic about the short-term outlook, with the chances of a slump as ominous as the Great Depression dropping to 5 percent.
However, the Princeton University professor was pessimistic about the economic landscape for the next 10 years.
Krugman said he saw threats to globalization following the financial crisis, which he attributed to excess leverage and consumption in the US that have evolved into global economic woes.
The slump has dampened world trade, with demand for durable goods falling sharply, the economist said, adding that the trend would likely continue.
PROTECTIONISM
Krugman also voiced concern that the downturn could fuel protectionism, with some governments implementing measures to protect their industries.
He also cautioned that the crisis may encourage a return of mercantilism, with governments promoting exports and frowning on imports.
That would help realize “the beggar thy neighbor” phenomenon where nations compete to reduce export costs to boost their trade surpluses, Krugman said.
Krugman advised against the practice as people already question the wisdom of debt expansions by governments that serve to benefit other countries such as China.
“Some are asking why we got the debt, they got the stimulus,” he said.
“Protectionism is hard to reverse once it is in place,” Krugman said.
IMBALANCES
Krugman added that persistent currency imbalances between nations amid the economic slump would prove unfavorable to globalization in the end.
The economist cited China as a major example, saying the country had strangely engaged in exports of currency capital to boost its foreign exchange reserves.
He saw little chance of further monetary interventions as central banks had already cut interest rates to record-low levels.
The root of the economic woes lies in slumping demand, Krugman said, not inadequate supply, and they tend to last longer when financially driven.
RSS