Paradigm shifts are inevitable when the existing paradigm is insufficient to deal with an emerging anomaly. The 2008-2009 financial crisis is an unprecedented anomaly that has had a severe impact on many countries and hindered their economic growth. Major global forecasting agencies all expect that the G7 developed countries will see GDP contraction this year.
Decreasing world demand caused by the crisis has also hit trade-oriented countries like never before. The Asian Tigers — Taiwan, Hong Kong, South Korea and Singapore — are all projected to see tremendous reduction in exports of goods and services this year. With advanced countries and the role models in economic development like the Asian Tigers stumbling, the world might be in the process of creating a whole new economic order. With this new economic order, the traditional growth model could be replaced by a new one.
Agencies including the Economist Intelligence Unit and the IMF recently adjusted their annual forecasts of global economic growth upward. The adjustment has two implications: First, the world is recovering from the crisis, and second, government measures — e.g., stimulus packages — have come into effect.
While expansionary fiscal policies, along with looser monetary operations, have slowly had positive effects, signs of recovery are becoming more obvious. At this moment, policy debate on when to end economic intervention is taking place everywhere. From the recent experience of dot-com bubble to the US housing bubble, we see that economic policies can be a two-edged sword. We simply do not wish to resolve this crisis with another bubble.
However, if we learned anything from Japan’s painful lessons in the 1990s, which plunged the world’s second-largest economy into deflation for a long while, policymakers should consider an appropriate exit strategy.
The adequate timing for policymakers to end their involvement depends on the diverse factors and recovery of different economies with their particular economic structures. It is evident that some countries rely more on domestic markets than others.
In addition to markets origin, policymakers should pay more attention to demand rather than supply. Therefore, the optimal decision of withdrawing stimulus policies should be derived with respect to specific economic environments and constraints.
Regardless of whether governments have done enough or too little in battling the crisis, the global economy is now in a different shape. Before the crisis, the US’ current account deficit suggested that there existed a significant trans-Pacific imbalance in the Asia Pacific, which occurred mainly between the US and Asian countries such as China, Japan, South Korea, Taiwan and a number of Southeast Asian countries.
In other words, strong US internal demand and Asian countries’ sturdy export capacity together formed the main global economic structure. The inward-looking US and outward-looking Asian countries together built the old global economic order.
The crisis is a new anomaly, making the original economic order ineffective. Therefore, a paradigm shift occurred to resolve the anomaly. The new global economic order should no longer rely on US consumption and Asian exports. This new order should resolve the longstanding trans-Pacific imbalance and reach a new equilibriums that supports sustainable growth.
In addition, advanced countries are not as central to the global economy as they were prior to the crisis. Other economies that have shown economic resilience in addressing the crisis must share the burden of carrying the world economy.
Recent indicators show that US citizens have changed their consumption behavior and increased their savings. Furthermore, economists have continued to recommend that Asian countries move from external demand to internal demand. Hence, Asian consumption and investment could play a more important role in the new global economic arena.
The economic crisis must be resolved globally. For that reason, added to diminishing Western influence because of the crisis, the G7 must be replaced by a more inclusive and influential G20.
With this new order, global economic power will be more decentralized.
With a new economic order and framework, recovery or even sustainable growth will require different growth engines in addition to stimulus packages. The global economy must rebalance the different sets of supply and demand associated with new markets. Trade was at the heart of the global financial crisis; and yet, trade will also be the engine that will drive recovery.
Trade is a solution for the crisis and can be revived and promoted through deeper regional integration. For example, APEC, the most active intergovernmental forum in the Asia-Pacific region, must move ahead of the snail-paced WTO negotiations and chart the agenda for more concrete action. Although Taiwan is not a member of the G20, it is an active member of APEC (under the title “Chinese Taipei”). Taiwan can still take part in creating a new world order.
More concrete action through APEC could include: building a green economy and supporting energy efficiency, promoting structural reform and deregulation, improving social safety nets, creating jobs and relevant training program, enhancing the quality of corporate and public governance, forming healthy financial systems and investing in education and healthcare. These are all capable engines for economic recovery and growth.
Public-private partnership at the domestic level and international cooperation through APEC or other platforms would be the mechanisms to coordinate new engines to establish the new world order.
Building a green economy involves allocating valuable resources and sustaining potential growth. Promoting structural reform and deregulation seeks to remove trade barriers, which help reduce transactional costs and stabilize economic growth. Strengthened social safety nets assist vulnerable groups in regaining confidence that was shattered by the crisis and reduce reluctance to consume.
Enhancing public and corporate governance is how the world economy can prevent a crisis caused by a bursting economic bubble from happening again. A healthy financing system keeps trade and investment in a better shape, which is crucial for improving both external and internal demand. Moreover, quality education and better healthcare systems can ensure that future generations will be better equipped to meet future challenges.
Prior to the crisis, the world was run by an old model using outdated growth engines. The old model was not good enough to meet the challenge. The crisis has ushered in a new model, which we hope will be better designed this time around. This new model should be devised not only for recovery, but also for growth in a more sustainable way.
Darson Chiu is an associate research fellow at the Taiwan Institute of Economic Research.
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