GOVERNMENT interventions around the world may have staved off what was initially touted as the second Great Depression but they have created a dire side effect: Painful lessons have not been learnt as the global economy resumes business as usual.
As Financial Times associate editor and chief economics commentator Martin Wolf laments, there is a palpable air of complacency given how the global economy emerged relatively unscathed.
Speaking to Weekend Today, the renowned British economist-turned-journalist dismissed as "completely laughable" the idea that the global economy is back on the path of sustainable recovery.
Instead, he warns that the global economy could be set for a big, ugly fall should bullish political and business leaders believe too much of their own rhetoric. And if the cards are not played right, a fiscal and currency crisis could be just round the corner - triggering another recession which could usher the end of liberal trade as we know it.
Prominent figures around the world have been proclaiming that the worst is over - backed up by the economic statistics that are, generally, looking better by the day. How would you convince people that the global economic crisis is far from over?
A turnaround is not the end of the crisis - the crisis ends when you get back to where you were before.
The main reason for this turnaround has been massive - indeed completely unprecedented - stimulus policies around the world, particularly in the Western economies and in China. None of this is sustainable in the long run.
At some point, all these exceptional policies will have to be reversed. (Then) the private sector will have to take up the strain of spending. And we are years - and I mean years - away from seeing that sort of private sector upsurge.
One of the main reasons is there was an extraordinary debt accumulation in the households and the financial sector during the boom time. The deleveraging of this debt accumulation is a long-term process and it has barely begun.
Finally, there is a real risk that a fiscal and currency crisis will emerge, affecting some of the world's most important currencies, and particularly, the US dollar.
Public debt is rising very rapidly ... the dollar is under strain and monetary policy is extremely aggressive. It is possible that there will be, at some point, a flight from the dollar which will force higher long-term interest rates in the United States and (set off) another recession.
Some commentators, including yourself, lament the speed at which the crisis has apparently been resolved. They believe that, as a result, lessons have not been learnt ...
We have encouraged the financial sector to go back to doing business as normal but with even more 'too-big-to-fail' firms than before, and even more confidence that they are too big to fail.
That's a recipe for a very substantial financial crisis again at some point in the future ... This does not mean that I think it would have been right to allow another Great Depression but one of the consequences of the tremendous government-led rescue effort is that we may have become too complacent.
What are the 'massive changes' that you believe are still needed to ensure a sustainable recovery?
If export demand is to play a much bigger role in income generation in countries like the US and the United Kingdom then, by definition, other countries in the world, which previously have large surpluses, must undergo a structural shift towards deficit - with demand rising faster than GDP.
At the moment, nearly all the strain (in the global economy) has been taken by increases in public sector demand and exceptional monetary policy designed to maintain private sector spending in the affected economies, rather than a long-term structural rebalancing of the world economy.
The Asian growth model - characterised by export-led growth, strong current account - is no longer a sustainable model because it has simply run out of credit-worthy spenders on the other side of the equation.
So the most pressing change is an adjustment in that model. It would also mean changes in exchange rate policy.
Meanwhile, in the developed countries, there's going to be a huge fiscal consolidation which is going to take many years. And all these changes have to occur together.
You believe that inaction could even mean the end of this era of globalisation. Is that too alarmist?
If the US does not get a healthy private sector-led and export-led growth, unemployment will not fall by any significant amount over the next year or so.
If, at the same time, the US current account deficit starts to expand again while the Chinese current account surplus starts rising again - add to that the possibility of rising oil prices which further exacerbates the global imbalances - then I think it's going to be very difficult to maintain liberal trade.
People underestimate the possibility that, if unemployment remains persistent in the US, the political commitment to open trade is going to collapse. This is a society extremely resistant to high unemployment and there is a very good chance that it's going to last for a very long time.
People are far too complacent, in my view, about the maintenance of the open world economy.
How much has the political dimension been a factor in what is essentially an economic problem?
An event of this kind is political in the highest degree. Just think of some of the political aspects: The imperative to avoid mass unemployment and depression; the immense unpopularity of being seen to help the financial sector; a very large potential for international friction over who is doing the right thing to save the financial sector and the world economy; and, particularly, the potential for conflict between China and the West, particularly the US.
Success or failure in managing the crisis is clearly regarded by policy-makers as determining their ability to hold on to power - that's true in a democratic system and probably even true in a non-democratic system.
I'm sure that one of the reasons the Chinese government was so aggressive in its stimulus programme is that it recognises the danger to political stability of a long-term fall in China's growth rate.
The question is whether the political realities allow policy-makers the right policy choices which would actually deliver results they want ...
To give you one example: At some point we are going to have to have a massive fiscal consolidation in the developed countries where the deficits are so large.
And it's not clear at the moment whether the countries will be able to make the commitments to massive tax rises and expenditure cuts which will be needed. So, that's again politics.
Mr Martin Wolf is associate editor and chief economics commentator at the Financial Times. He will be speaking on Dec 2 at the Global Insights Series organised by the Singapore Institute of International Affairs.
24 Nov 2009
24 Nov 2009
