Tuesday, November 23, 2010

Global Economic Crisis - The Quest for Growth

This article is written by brother Adnan Khan

The IMF's annual gathering in Washington had one message, that the worlds economies need to work together to achieve sustainable economic growth. "The most important policy question we confront together is how to strengthen the pace of growth and repair," US Treasury Secretary Timothy Geithner reiterated the same remarks at a Brookings Institute speech.

At the G-20 summit in June, world leaders pledged to coordinate their economic policies, putting particular emphasis on the need to refrain from currency actions that could endanger global economic health. But a sluggish global economic recovery set the stage for fractious talks on currencies and growth-rebalancing as financial leaders from the world's largest economies gathered at the G-20 conference in South Korea. Charles Dallara, head of the Institute for International Finance, which represents many of the world's largest private banks, said the lack of collaboration threatening the recovery extends beyond currency issues. "Sustaining growth and restoring confidence will require not only astute domestic policymaking, but an unprecedented level of multilateral coordination," Dallara said. "It will also require action that transcends purely domestic short-term concerns."

Economic Growth: Mission Impossible

Over the past year, world output and trade have expanded and financial conditions have improved, but policymakers have still had to deal with the strains of sovereign debt crises and the start of public sector austerity. Ben Bernanke, chairman of the Federal Reserve, summed up the global economy in 2010 at the annual get-together of central bankers in October 2010: "Notwithstanding some important steps forward ... I think we would all agree that, for much of the world, the task of economic recovery and repair remains far from complete."

The global economy in 2010 has been unable to achieve sustainable economic growth. In some ways the global economy today is in the same position it was in 2009. Whilst the worlds largest economies attempted to kick start growth with stimulus plans, any stimulus was always a high-octane boost and a temporary measure. They are designed to kick-start stalled economies, not to fuel sustained economic growth. The growth figures achieved in 2010 are the inflated results of stimulus measures achieving their intended effect to be temporary. Brian Bethune, economist at IHS Global Insight highlighted this: "It's good to have the economy growing again, but we don't think that rate of growth is sustainable because it is distorted by all the government stimulus. The challenge here is to get organic growth - growth that isn't helped by fiscal steroids." This is why over 15 million people remain unemployed in the US.

The stimulus packages have driven artificial growth, whilst Western nations have not provided such a leg up for their economies for some time the free market has been unable to grow on its own in any sustainable way and has brought the spectre of double dip recession ever closer.

The US Economy and Unemployment

The US economy the largest in the world has seen its recovery stalled. US policymakers in October were considering how much ammunition they had left to throw at the economy as global economic co-operation, so strong at the start of the global financial crisis descended into quarrels over currencies and economic nationalism. The global financial crisis has left an unprecedented degree of unemployed in the US and underused factories in its wake. The possibility of the recovery faltering has pressured the Federal Reserve, America's central bank, to unleash a new round of Quantitative Easing (QE) - the electronic equivalent of printing money. The various stimulus measures may have prevented economic collapse, but the spending programs that were financed by them are winding down, and cash-strapped local governments, have resorted to layoffs and other cost-cutting measures.

Economic nationalism

The consensus driven response to the financial crisis has started to crumble. This was most apparent at the G20 summit in June 2010. Whilst the US called for a continuation of stimulus which would encourage consumer spending and stimulate the economy with new jobs and allow the recovery to take hold. Europe however was calling for austerity, as the various fiscal stimulus plans and Quantitative easing was creating even more debt in Europe - the Greek debt crisis also caused Europe to focus on individual strategies for economic recovery rather than a global approach. These differences have sharpened over the year due to the different effects the global financial crisis has had on the premier economies of the world. Mohamed El-Erian, chief executive of Pimco, the world's largest bond investor, said: "A once promising global response has now been replaced by inadequately co-ordinated national economic policies and growing frictions among countries."

US-China currency war

The weak recovery has led to many nations to resort to protective measures for their own economies which have led to currency wars. The sharpened differences between China and the US recently has led to some senators to consider the support China provides to its currency a subsidy which has an adverse impact on the US economy. Various senators attempted in September 2010 to mark up the ‘Currency and Reform Fair Trade Act,' the new bill would force the US commerce department to treat China's undervalued currency as a subsidy for its exports and retaliate accordingly.

The value of the Yuan plays an important role in China's rapid economic development. China is an export driven economy, its economy is built to produce goods which are exported around the world. This is why most consumer goods have a ‘made in China' label. To make Chinese goods more attractive then Japanese and German goods, the Chinese government controls the value of the exchange rate of its currency, rather then let it float freely. This is in order to achieve certainty - certainty in a number of areas. China keeps the value if its currency low, which makes it cheaper to purchase consumer goods - far cheaper for the world than anyone else. By China undercutting the world, aside from keeping Chinese factories open, this also means most Chinese citizens have a job. When Chinese citizens have jobs this deals with domestic social unrest which has long plagued China. Chinese factories make little profits on the goods they export, as due to the low exchange rate the potential profit is lost. However for China - profit is not the real concern but territorial cohesion is what drives its currency policy.

The impact this has on the wider world - especially the US is that its companies are unable to complete with Chinese craftsmanship as China is under cutting the market. This has led to most of the world to turn to China for consumer goods rather then domestic suppliers. This causes unemployment across the world as such industries lose business to China. It is those senators who have seen many businesses collapse in their states, due to China, that have led the campaign to have the US pass legislation to counter it.

As China is an export driven economy, it has to ensure it can sell goods globally cheaper than anyone else, its currency policy is central to this. This has the impact of those industries closing in the West - where most of Chinese exports go, as they are unable to complete with china on such a low price. It results in China selling more goods to the world than what China buys from the world. This is why China has a trade surplus with the world, whilst the world has a trade deficit with China. Commerce Minister Chen Deming told the BBC in 2009 that when economic growth slowed ‘the chances of possible social unrest increase as well.' I don't worry a lot about the GDP growth, however the biggest challenge to China is unemployment.' We need to create sufficient jobs for university graduates and the redundant workforce from the countryside.'

Conclusions

As the West struggles in its quest for economic growth, unemployment is now at the top of the agenda. The breakdown in the multilateral approach that characterized the early response to the financial crisis will lead to more and more economic protection by the world's economies which will compound the recovery. The currency war is just the beginning. The conditions in the world economy have stopped worsening, however unemployment remains high and consumer spending is still low to sustain any economic recovery. At best the current growth rates seen in some of the world's major economies is premature, the underlying economic fundamentals remain absent.

The spectre of double dip recession has not subsided and as the US implements another round of stimulus, the economic crisis the engulfed the world in 2008 is far from over

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