Global impalancies

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Without a doubt, the sweeping financial crisis has reshaped the world's economic order. The ripple effect is prompting profound changes to the global economic landscape. The question is: How well will the world economy fare in 2011 and what changes will happen to the global economic landscape? Ba Shusong, Deputy Director of the Financial Research Institute at the Development Research Center of the State Council, answered these questions in an interview with the People's Daily. Edited excerpts follow:

Chinese policymakers at the Central Economic Work Conference believed the world economy is likely to resume growth in 2011, though uncertainties loom large. This shows China's enhanced confidence for global growth and also its vigilance to possible risks given the European debt crisis and the vulnerability of the U.S. economy.

Two years after the financial crisis, the world economy has come to a stage of adjustment and reform, with emerging markets on the path of rapid development. This will be the external environment facing China in 2011 and even in the long term.

In 2010, the world economy staged a mild recovery, with the year-on-year growth rate expected to reach 4.5 percent. Of this total, 25 percent came from the three economies—the United States, the European Union and Japan—60 percent from emerging economies, and 20 percent from China. In other words, the world economy will rely more on the emerging world, including China, as a growth engine, since developed nations have yet to shake off the downturn.

Globally, the world economy is regaining lost ground and downside risks have moderately eased, but doubts are growing over the prospects for developed countries.

Job creation currently lags far behind economic growth. Developed economies and emerging ones are recovering at different speeds. The sharp contrast between developed countries' quantitative easing (QE) and emerging economies' monetary tightening is becoming one of the major destabilizing forces for the global market.

The pace of recovery for financial markets and the real economy also differs. Financial markets can be invigorated via massive money issuance, but if the money issued cannot flow into the real economy, instead remaining in the financial system, it will take longer for the real economy to recover. That's the current problem with the U.S. economy.

In addition, the current growth of the world economy is also different from the pre-crisis growth trend. The potential growth rate of the world economy will be at a lower level and is unlikely to return to pre-crisis growth levels in the short run.

Currently, developed economies and emerging economies are at different stages of their economic cycles. The developed countries are still fighting deflationary forces while the emerging ones are striking hard against inflation. Global monetary policies in 2011 will diverge into developed countries' QE and emerging countries' monetary tightening. The United States, the euro zone and the emerging markets are set to put in place different monetary policies in 2011.

U.S. policymakers will decide the pace of QE2 and the necessity of future rounds of QE, according to the recovery level of the U.S. real economy, the consumer price index, consumption rate and corporate activities. The euro zone is expected to further contain fiscal risks and prevent a deeper debt crisis, and is also likely to adopt QE when necessary. In striking contrast, emerging economies like China will tighten their monetary policies to combat inflation and curb asset bubbles.

Global rebalancing

One lesson learned from the financial crisis is that developed countries must wean their reliance on excess consumption as a source of growth. Instability of the world economic recovery has also enhanced the need for structural adjustment. In the future, developed countries will be required to encourage savings and expand exports to prop up the growth of the real economy, and refocus on the manufacturing sector to redress trade imbalances. For emerging markets, it is necessary to widen consumption and imports to rebalance their macro-economies.

China's Central Economic Work Conference also stressed the importance of bolstering imports and pledged to allow imports to play a bigger role in economic restructuring. This means boosting imports will be key to the country's trade balance and economic rebalancing.

The global trade imbalance is the result of an imbalance of the international economy, and also an imbalance between savings and investments. Bigger imports could help soothe the problem, but a root solution is rebalancing international economy and adjusting internal economic structures.

For the United States to optimize its economic structure, there is the growing need to repair the balance sheets of households, enterprises, financial institutions and the government, as well as boost the savings rate. China will also take part in the global economic rebalancing, during its 12th Five-Year Plan (2011-15).

In the wake of the financial meltdown, the international community is pushing forward reforms for the global economic management system. A new and more effective system should be able to reflect changes on the global economic landscape and also help put up defenses against future crises. There has already been some progress in global economic governance that has reflected the growing strength of emerging economies and prompted developed nations to quicken their internal restructuring. Meanwhile, the IMF is also considering setting numeric targets for trade surpluses, exchange rates and foreign exchange reserves.

Another change in the global economic management system is a shift of power to emerging economies. Developed economies are less likely to fulfill their pre-crisis potential growth rates, even though they are back on the path of recovery. The emerging markets face some downside risks as well, but they will maintain a relatively fast pace of growth and become a significant driving force for the world economy.

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