It's official: the world is in a global slowdown -- maybe not a recession, but certainly a slowdown. Growth this year is expected to be half of last year's.
Japan seems headed for a real recession, and Europe's bragging that its strong fundamentals will allow it to weather the US slowdown with hardly a dent on its growth seems to be without foundation.
ILLUSTRATION: MOUNTAIN PEOPLE
As the world sinks into slowdown, several policy lessons emerge. Some are more obvious than others; each devastates the conventional wisdom of but a short while ago (a salutary reminder, perhaps, of the precariousness of our knowledge).
Slowdown has cast a pallor over the Clinton Administration's boasting, its promise that if a country adhered to capitalism US-style then it would be assured of unprecedented and sustained prosperity. It now appears, however, that some of the boom of the last years of the 1990s was as much a mirage as the collapsed boom of East Asia.
In each case, irrational market exuberance fed excessive investment which led to excess capacity. In retrospect, the best that can be said of former US Treasury Secretary Robert Rubin and current US Federal Chairman Alan Greenspan is that they enjoyed the ride while the going was good, and Rubin was smart enough to bail out before the crash. Each, however, can also be said to be guilty of dangerous driving.
Once, the new economy was thought to mean the end of the business cycle. With "just-in-time" production that entailed smaller inventories, new information systems that allowed for better control of inventories, and the decline in manufacturing, inventory cycles seemed a thing of the past. But economic fluctuations have marked capitalism since its origins, and inventory cycles are only one source of fluctuation.
The 1997 to 1998 global crises were merely the most recent manifestation of the financial crises that have plagued capitalism forever -- and capital and financial market liberalization combined with globalized capital markets have, if anything, created increased vulnerability, especially in small countries. Real estate bubbles are another fact of life; and when they break, as they did in the 1980s in the US, Scandinavia, and Thailand, they bring down economies with them. What is clear is that the claim of market fundamentalists that markets are self-adjusting is wrong. There is an important role for government in macroeconomic-stabilization. The question is, what is that role?
The tendency to fight the last war, sadly, is true for economic policymakers as well as generals. The oil crises of 1973 led to a decade or more of inflation, and the scars are still being felt. Worry about inflation led the Fed to increase interest rates late last year, when the impending slowdown required the opposite medicine.
With two of the world's largest economies facing sustained deflation in the last few years, and inflation contained almost everywhere, the focus should not be inflation, but rather unemployment and underuse of economic capacity. Potential losses from this are far greater than those associated with the slight increases in inflation that a more aggressive macro-policy might entail. Indeed, statistical studies find virtually no evidence of significant adverse effects of increases in inflation, so long as it remains low to moderate.
Today's systematic lack of aggregate demand is a cause for worry. Several of the world's countries seem determined to maintain large trade surpluses. There is a basic law in economics: the sum of the trade surpluses and deficits must add up to zero. If some country has a surplus, another country must have a deficit.
But the International Monetary Fund (IMF) is telling everyone not to have a deficit. Someone, however, must run a deficit, if others run a surplus. Deficits are like hot potatoes, passed from one country to another. A country with too large a deficit faces a crisis and soon switches policy to secure a surplus -- that is what has happened in East Asia.
The deficit does not disappear; it just moves on.
Fortunately, one country has been willing and able to run large trade deficits -- the US. It is now no longer clear how long this can continue without a loss of confidence. It may be difficult to predict the trigger -- the impending fiscal deficits resulting from US President George W. Bush's tax cut may do trick. When that happens, more than a global economic slowdown may result.
The problems of insufficient global aggregate demand were on the minds of John Maynard Keynes and others who conceived and founded the IMF. There is a framework for enhancing aggregate purchasing power, through the creation of special drawing rights (SDRs). One way of thinking about this is the following: assume that the nations of the world wish to maintain reserves equal to a fixed percentage of their GDP. With global GDP of around US$40 trillion, and growth of around 2 percent, if reserves were equal to 5 percent of GDP, aggregate reserves would grow by US$40 billion a year.
Given China and Japan's surpluses, a number twice that size might be more realistic. An annual issue of SDRs in that amount would offset the purchasing power set aside in currency reserves and would thus not be inflationary. These SDRs could be used to pursue global interests -- from helping poor countries to improving the global environment.
For the past several decades, the IMF has focused on bailing out creditors and pushing the neo-liberal agenda. The time is ripe for the IMF to return to its original mission -- ensuring global liquidity to enable sustained global growth.
Joseph Stiglitz is the Nobel prize laureate in economics this year and professor of economics at Columbia University. Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Singaporean Prime Minister Lee Hsien Loong’s (李顯龍) decision to step down after 19 years and hand power to his deputy, Lawrence Wong (黃循財), on May 15 was expected — though, perhaps, not so soon. Most political analysts had been eyeing an end-of-year handover, to ensure more time for Wong to study and shadow the role, ahead of general elections that must be called by November next year. Wong — who is currently both deputy prime minister and minister of finance — would need a combination of fresh ideas, wisdom and experience as he writes the nation’s next chapter. The world that
The past few months have seen tremendous strides in India’s journey to develop a vibrant semiconductor and electronics ecosystem. The nation’s established prowess in information technology (IT) has earned it much-needed revenue and prestige across the globe. Now, through the convergence of engineering talent, supportive government policies, an expanding market and technologically adaptive entrepreneurship, India is striving to become part of global electronics and semiconductor supply chains. Indian Prime Minister Narendra Modi’s Vision of “Make in India” and “Design in India” has been the guiding force behind the government’s incentive schemes that span skilling, design, fabrication, assembly, testing and packaging, and
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.