The
IMF's annual gathering in Washington had one message,
that the world’s 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 world’s 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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