The World Bank’s chief economist yesterday urged countries not to abandon their stimulus policies, citing the risk of a second dip in the global economy.
Justin Yifu Lin (林毅夫), a senior vice president at the bank, said the global economy was showing signs of recovery but there remained a “lot of uncertainties.”
“Yes, we have a recovery, but the foundation for recovery is still quite weak,” Lin told journalists on the sidelines of Global Korea 2010, an annual international forum in Seoul.
He said one of the main challenges the world faces is excessive production capacity, which raises the risk of a double dip.
“To avoid that, [countries need] to maintain fiscal stimulus,” he said.
“We can turn this crisis into an opportunity to promote long-term, sustainable growth ... for that, it’s very important for governments to use stimulus funds in areas like green economy and infrastructure,” Lin said.
He said this type of stimulus, “in the short run, may accumulate public debts, but in the long run you will have more long-term higher growth, government revenues will increase and debts will be serviced.”
Kenneth Rogoff, a Harvard University economics professor and former IMF chief economist, called for global uniform standards for regulating capital markets in order to avoid another financial crisis.
“At least international money banks that have a large presence around the world will probably need much more uniform capital standards, more regulations,” he said.
Rogoff also warned that China’s economic growth will plunge to as low as 2 percent following the collapse of a “debt-fueled bubble” within 10 years, sparking a regional recession.
“You’re not going to go a decade without having a bump in the business cycle,” Rogoff said in an interview in Tokyo on Tuesday.
“We would learn just how important China is when that happens. It would cause a recession everywhere surrounding” the country, including Japan and South Korea, and be “horrible” for Latin American commodity exporters, Rogoff said.
China, expected to surpass Japan as the second-largest economy this year, has helped pull the world out of its deepest postwar slump. Record lending, soaring property values and accelerating economic growth prompted the government to begin retracting stimulus measures implemented during the global recession.
“Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy,” said Rogoff, who in 2008 predicted the failure of big US banks.
While Rogoff said he was not sure what would cause China’s bubble to pop, he said land was “the best bet” as it is “the most common source” of crises.
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