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 than Japanese and German goods, the Chinese
government controls the value of the exchange rate of its currency, rather than
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 than 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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