While the global financial crisis appears to have been contained, stress fractures continue to appear in various parts of the world. Interestingly, while growth prospects for advanced countries are sluggish, Asia and Africa are turning out robust performances.
There has been a sigh of relief among policy makers that the global financial storm did not trigger the economic depression and protectionism of the 1930s. World trade is steadily increasing, thus reviving output growth and commodity prices, although the recovery is still tepid, especially in the OECD regions, and largely jobless.
Ben Bernanke, the US central banker, summing up this sombre mood, said: “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.” Olivier Blanchard, chief economist at the International Monetary Fund (IMF) agrees: “The world economic recovery is proceeding. But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries.”
The IMF expects growth in advanced economies at 2.7% this year and 2.2% in 2011, with the US and Euro Area again slowing down as policy stimulus is gradually withdrawn. Banking sector weaknesses still remain, hindering both credit provision and consumption.
In marked contrast, Asian-led emerging markets (EMs) are projected to surge at 7.1% and 6.4% respectively, this year and next. Concurrently, global output is forecast to grow by 4.8% in 2010 and 4.2% in 2011, but a sharper downturn or ‘double-dip’ recession is unlikely, according to latest World Economic Outlook survey.
The 2009 crisis inflicted colossal human cost in terms of job losses and rising poverty. Unemployment is a major worry since 210m-plus people across the globe may be jobless, an increase of over 30m since 2007.
The International Labour Organisation (ILO) believes the advanced world must wait until 2015 to regain the total level of employment registered before the crisis and warned that this delay can increase social tensions in communities. It noted: “In the 35 countries for which data exists, nearly 40% of job-seekers have been without work for more than one year and therefore run significant risks of demoralisation, loss of self-esteem and mental health problems.” The impact is far more severe in poorer nations with no social safety nets for vulnerable groups.
Areas of conflicts
The challenge is to engineer a smooth transition from public- to private-sector-led growth in several OECD economies, and from external to domestically inspired growth in key dynamic EMs. The world is now strongly integrated and that requires closer coordination.
Unless advanced countries can achieve robust private demand, both domestic and foreign, they will find it difficult to regain fiscal consolidation. Conversely, if growth in advanced world were to stagnate, EMs would suffer from a plunging export demand and lower diaspora remittances.
With a fragile and very uneven recovery, national interests are diverging and the ‘progressive era of international cooperation’ pledged at the G20 summit in April 2009 is rapidly fading. Yet to avoid renewed crises, “there needs to be a sense of shared responsibility between the developing and advanced economies and the international institutions”, the IMF’s first deputy managing director John Lipsky said. The long-running conflict is between Washington and Beijing over the undervalued yuan alongside China’s huge $2.42 trillion forex accumulation.
The US favours the yuan’s appreciation in order to aid a rebalancing between surplus and deficit countries. For Beijing, the cheaper currency supports export growth. Guido Mantega, Brazilian Finance Minister, recently spoke of the risk of a ‘currency war’.
Over the past year, the use of money-printing schemes (i.e. quantitative easing) to pump liquidity into the economy via the purchase of government bonds and ultra-low interest rates in the US and Western Europe, has led to swelling capital inflows into leading EMs. That led to upward pressure on currencies, asset prices and inflation rates.
With the risk of economic destabilisation caused by asset price bubbles, some countries have imposed, or are planning, controls on hot money (the influx of short-term capital). Brazil has doubled a tax on foreign purchases of domestic debt to 4%, whilst Thailand reinstated a 15% withholding tax on interest payments and capital gains on bonds held by foreign investors.
We are witnessing a ‘new world order’ – with the surge of EMs, that now account for the bulk of global expansion – and the erosion of US-European power. For sub-Saharan Africa (SSA), the stellar growth of EM economies presents ideal opportunities to diversify trade and FDI flows, which are already happening at a faster pace with China, India, Malaysia and Russia.
Chinese FDI stock reached $7.8bn by end-2008 (40% confined to South Africa) and one tenth of India’s total outward FDI is in SSA (mostly in Mauritius) with its offshore financial facilities and attractive tax regimes. CÔte d’Ivoire, Senegal and Sudan have also attracted Indian investors.
This year, India’s Bharti Airtel bought much of the African mobile phone networks of Kuwait’s Zain for $10.7bn, while the total value of African mergers and acquisitions sales to Russian investors in 2009 reached $2bn. Recently, Arab Gulf investments in Ethiopia, Sudan and Tanzania have risen, especially in agriculture.
But seizing this opportunity requires strengthening African economic competitiveness, notably by improving public infrastructure. “Taking advantage of faster emerging market growth also requires bringing economic policies back on an even keel by rebuilding the policy buffers that served so well during the crisis,” explained IMF’s African Department head Antoinette Sayeh.
Fortunately, most of SSA weathered the external downturn with greater resilience thanks to prudent macro-financial policies and improved state institutions. Regional growth is predicted at 5% this year and 5.5% in 2011, thus close to regaining levels seen before the crisis. “Not enough credit was given to the countries’ policy leadership,” Nancy Birdsall, president of the Centre for Global Development told the panel in New York. Significantly, health and education spending rose in real terms in 20 of the 29 SSA countries during 2009.
Improving local capacity
The 2009 recession has set back progress towards achieving the Millennium Development Goals (MDGs), which aim to cut hunger, disease, maternal and child deaths, and other ills, by the 2015 deadline.
The World Bank estimates that 71m fewer people will have escaped abject poverty by 2020 and 100m more people could lack access to clean water in 2015, while an additional 1.2m children might die before age five between 2009–2015. To regain momentum, it’s vital that rapid and inclusive growth be restored quickly.
Low-income countries (LICs) face substantial financing needs to close the infrastructure-gap barrier to sustainable development. With tighter global markets, reflected in scarcer and more costly capital, as well as diminishing official aid, these economies will need to increasingly rely on domestic sources of funding. This puts a premium on financial development – hence the need for developing well-regulated, viable local capital markets and banking systems.
To spur growth and attract foreign capital, LICs should invest more in basic infrastructure (mainly power generation and transportation) and nurture a pro-business environment. Public-private partnerships, in stable legal frameworks that minimise fiscal risks and diaspora bonds, also offer innovative financing.
The IMF stressed, “Countries need to mobilise and use domestic resources more effectively, create conditions to attract FDI, and strengthen their capacity for safe borrowing. All these should aim at engendering private sector-led growth.” The main goal is making LICs more resilient to future exogenous shocks.
The rich world should keep intact their Gleneagles promises on bilateral aid, and liberalise trade by unlocking agricultural markets and providing technical assistance. Moreover, initiatives are needed to improve poor countries’ market access – for example, extending 100% duty-free and quota-free access to the least-developed countries, with liberal rules of origin. Such initiatives will promote manufacturing-based exports – hence greater diversification of the economy.
Improved market access need to be supported by stronger trade facilitation and aid for trade programmes to enhance these countries’ trade capacity. Foreign trade is one of the most effective ways that rich nations can help their poorer counterparts without much budgetary cost. A long-awaited conclusion to the Doha Round would unblock trade.
In sum, much of the world continues to struggle through a jobless recovery and the growth outlook is subject to downside risks. Lacklustre progress with financial restructuring weighs on credit, thereby slowing the normalisation of fiscal monetary policies, with adverse effects on EMs.
“Everything hinges on restoring balanced and sustainable global growth. Growth is not enough but certainly, without it, other efforts to achieve the MDGs will be frustrated,” urged IMF chief Saleh. More efforts are needed to improve supervision/regulation of the banking sector, which was at the heart of near global disaster, but still remains a weak point.