Global economy seems to be getting nowhere. A depreciating dollar, appreciating euro, fluctuating and unpredictable financial markets and stocks, recession and deflation in big economies are affecting it. How to give a direction to it and make it a facilitator of economic growth particularly for developing economies is the real big challenge.
End of cold war was an end of centralised economic system in socialist and communist countries. It was also beginning of international capitalism based on American model seeking free market economy, free movement of capital across international borders whereby around $1.5 trillion per day were transacted during peak days, lowering of tariff and unrestricted movement of goods but not of human beings. Russia and China have embraced it. China has emerged fourth industrial country in the world. Its cheap quality products are cutting the prices of consumer goods of all sorts across US, Europe, South Asia and Southeast Asia.
International capitalism has certainly done real good to the Chinese and Southeast Asian tiger economies. But, for a variety of reasons it could not deliver and stabilize the South American Continent economies. Argentinean, Brazilian and Mexican economies have suffered after short span of economic booms because of international capitalism model nurtured by the IMF and the World Bank through Washington Consensus related conditionalities imposed at the time of providing bail out funds running into billions. The trouble with international capitalism continues to persist. Common persons across the world keep on sufferings because of increase in the cost of utilities. Whenever and wherever officials of the WTO and leaders of G-8 have met, there were always protests, though at small scale. It only reflected their disenchantment with the post-cold war economic system which has affected their lives negatively, increased poverty and made rich, richer.
US economy is facing recession over past more than two years. The Japanese economy has suffered recession over past a few years and is now facing deflation. According to latest analysis, German, French and Italian economies are on the verge of recession. They could also face deflation. Busting of stocks, corruption in US corporate sector surfacing after September 11 attacks in Washington and New York, US-led war against terrorism, and Iraq war in one way or the other have affected world’s leading and global economies. Problems faced by them are of different nature. But, they also have a few common problems like unemployment and low growth rate.
US economy, the world’s richest with around $10.5 trillion GDP, equivalent to one-fourth world’s GDP and a strong US dollar have worked as locomotive of world economic growth during the decade of 90s. US dollar is now facing depreciation vis-‘-vis euro and yen. The chances of giving impetus for growth of US economy are modest if not bleak in short term because worldwide demand is at the lowest ebb. According to global currency strategists, era of strong US dollar of 1990s is on the decline. US dollar has dipped against a rising euro, by 30 per cent during past 17 months and is likely to decline further. According to Jim O’Neill, global currency strategist for Goldman Sachs, “US dollar may sink for four to five years more”.
Bush administration is caught up with the dilemma of economic recovery in the midst of huge new fiscal demands and an urgent domestic and international security imperatives that have consumed billions during post-September 11 period. According to former US commerce secretary Peter Petrson, “when Bush took office, the 10 years budget projection showed a $5.6 trillion surplus. The first tax cut coupled with continued spending growth and post-September 11 costs, brought the projected surplus down to $ 1.0 trillion. Bush administration’s second tax-cut package in 2003 ($350 billion) has reduced 10-years fiscal projection to $4 trillion deficit”. US current account deficit now runs at $500 billion.
According to one analysis, “in the 1990s, Japan’s and China’s excess savings were financing US private sector investment because US government was in surplus. Now, with these looming deficits, China and Japan are being asked to finance US government’s actual operations”. Such problems faced by world’s largest economy would negatively affect global economy also. US administration is conscious about it. Will tax cuts measures give impetus to economic growth? Will the US administration use a weak dollar to boost economic growth through cheaper exports at the expense of EU and Japanese exports?
These two questions are important to deliberate. The latter question also drew attention at the G-8 summit held from 1-3 June at Evian (France). President Bush made a commitment for a strong dollar. But, notwithstanding his commitment, according to White House spokesman, “the president’s position is the US supports a strong dollar and a strong dollar is determined by the market and that is why it is important to secure policies that advance growth in the US”. The message is clear: US may use a weak dollar to give boost to economic growth.
European Central Bank (ECB) till recently remained wedded not to cutting down interest rate because it’s focus was on currency stability and not on economic growth unlike American Fed Res. In order to let not euro-zone exports decline and make them competitive vis-a-vis US exports, a few days earlier it cut down interest rate between 0.5 to 1.75 per cent. Will measures taken by US and ECB avoid clash of currencies and interests in exports regime by the two economic giants, is to be watched with interest during coming weeks and months.
It is to appreciated that increase in the exports of US, EU, Japan, China, emerging and developing markets will depend heavily on better global demand and growth. For this, it was imperative that G-8 leaders at Evian should have at least worked out a closely coordinated and multi-pronged strategy that would have kept in check their clashing economic interests and also helped growth in developing and poor economies. Nothing of the sort came out from G-8 summit except a few cosmetic measures particularly to help HIPCs (highly indebted poor countries) and control AIDS in some of the African countries. There was no debt relief either.
Iraq war had thrown spanner in trans-atlantic political as well as economic interests and created a sort of tension between them which if continued during post-Iraq war would have affected prospects of recovering global economy adversely. For example, continued hostility could have damaged nearly $ 100bn in annual trade between US and France alone, according to one estimate. Declaration of co-operation at G-8 summit would help to develop positive trade relations by putting aside vested trans-atlantic interests in agriculture, subsidies and other industries. This would also re-energise stalled WTO negotiations. Analysts are of the view that G-8 cooperation, “also means to ensure that US dollar’s until-now-welcome decline does not turn into a rout that roils financial markets”.
The second largest economy of Japan is presently facing deflation. It has having dual effect; helping some of the Japanese people, entrepreneur and ruining others. It is also affecting social life in Japan. According to financial analysts, economic recession and deflation “have led to record high suicide rates. Over the last two years more than 60,000 people have taken their own lives, 50 per cent more than in the mid-1990s. The present economic situation breeds weak, vulnerable people”.
Corporate bankruptcies, unemployment, fall in wages and lay-offs are on the increase. It is a rather gloomy picture of social life for people of second largest world economy. According to IMF officials, Japan needs economic growth, may be, with a little inflationary kick to the economy. Bank of Japan should do everything it can to increase liquidity. Japan also needs to clean up debt-ridden banking sector through reforms rather than bail out finance. The government’s $17 billion recent bailout package for one of the leading banks has been watched with skepticism because it could lead to more costly bailout which are least desirable.
European large economies of Germany and France are now tied down with euro-zone. They are unable to spend more than 3 percent of GDP fiscal deficit in accordance with the Maastrisht pact to come of out recession. The need to loosen fiscal deficit limit seems obvious to some experts including IMF chief economist. Will it be possible? It is a big question and may take sometime to address.
But, one point is clear that national economic interests, prevailing fiscal constraints and trading parameters are obstructing global economic growth which has direct effect an economic growth of developing economies because of two specific reasons:
One, enough funds will not be provided by developed countries to developing countries and HIPCs. Two, in a highly competitive free market regime engineered by developed countries, developing economies will be losers unless the WTO comes up with trading rules that favour developing countries. Chances for such a favourable trading parameters are quite bleak.
In the midst of global and leading world economies faced with problems of recession, deflation, currency depreciation, falling interest rates, Pakistan economy mainly because of external economic factors has done well during outgoing fiscal year. A futuristic budget for next fiscal year has been put in place planned on sound macro-economic indicators. Growth rate of 5.3 percent has been projected and exports target is likely to be fixed at $11.5 billion against export target of $ 10.2 achieved during out going fiscal year.
A stable and growing global economy is essential for developing economy like Pakistan to grow. Hopefully, concerns about imperatives of balanced economic growth across the world ranging from worldwide trading system favourable to developing and poor countries, liberal financial assistance from donor institutions, stable world currencies and financial markets and peaceful co-existence between powerful and weak states will be addressed by world leaders as early as possible.
Unless, it happens the fear that global, developed and developing economies may suffer equally is not without genuine reason.