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A new year approaching amid intense turmoil
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09:20, December 25, 2008

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· U.S. financial crisis triggered global turmoil
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The world economy is suffering from financial crisis

At present, the crisis has been across national borders, and is spreading through developed countries. People have reason to worry that the crisis will sweep across emerging economies and developing countries, and devour the fruits of development of the recent years.

Even before the financial crisis occurred, global economic growth had visibly softened, which is demonstrated in the second-quarter economic performance in Europe, Japan and many developing countries.

In the US, despite the ongoing financial market turmoil and falling housing prices which led to a decline in domestic demand, the start of the US economy's recession was postponed to the third quarter of this year due to strong import demand in some developing countries. The economic growth was relatively strong in the first half of 2008, but a downturn was manifested in the second half of the year.

These two factors are likely to cause the economic growth rate to fall to 1.3% in high-income countries and to 6.3% in developing countries in 2008. The global GDP growth rate will decrease to 0.9% in 2009, the GDP growth rate in developing countries will be 4.5%, far below the 7.9% in 2007.

At the same time, global trade will rapidly decline; the increase in commodity prices and the trend of inflation will stall; and oil and food prices in 2009 will be much lower than those in 2008.

Some 1.4 billion people living at the brink of extreme poverty are in developing countries. Any economic crisis could result in the most serious consequences for these people.

Inevitable recession in developed countries

The current financial crisis is called a "once-in-a-century credit tsunami" by former US Federal Reserve Chairman Alan Greenspan. It is originated in the deep-seated collapse in the US real estate sector and spread to other sectors. Such instability spreads from one sector to another, from the real estate industry to the banking industry, and then to the financial markets, and finally impacts the various sectors of the real economy.

Many countries, including developed countries and emerging market countries, have recently experienced bubbles in asset markets. The broken bubbles are so large that they brought about financial consequences to the credit market and stock market, and resulted in the inevitable plunge into economic recession in the US and other developed countries, as it has been seen in recent weeks.

The US, as the world's largest economy, must adjust and rectify the imbalance in the bubble era, but such adjustment will inevitably lead to economic recession. Due to an unprecedented large-scale simultaneous collapse of multi-asset markets, coupled with adverse news from other sectors, the growth of consumption will face a slow and difficult recovery.

Emerging economies' advantages highlighted in crisis

In this crisis, the advantages of many developing countries lie in the fact that these countries have learned from the experience of the crises that occurred in the 1980's and 1990's. On one hand, these countries have reinforced macroeconomic policies which help reduce their vulnerability; their sovereign debts have been better managed than in the past; and most countries tend to adopt a flexible exchange rate, which mitigates the impact brought by exchange rate adjustment to some extent.

On the other hand, the occurrence of the financial crisis has weakened the inflationary pressure and greatly changed the expectations. It has also brought commodity prices down, alleviating the pressure of some developing countries (for net importing countries). In addition, well-coordinated policy intervention, effective operation of the financial sector as well as relatively low commodity prices, help offset the impact of the crisis.

Developed countries must rely on emerging economies to be out of recession

The demand arising from the investment spree in developing countries, to a large extent, has promoted rapid expansion of the global economy over the past 10 years. Whether or not some industrialized countries can avoid deflation and recession will depend on their ability to maintain this momentum of growth.

Despite of the prompt actions that have been taken to deal with the crisis, there is still a huge risk. That means the global economy may experience deflation similar to what Japan experienced in the 1990's if the credit crisis cannot be effectively solved.

Under this context, the standard monetary policy is unlikely to produce expected results in developed countries. A variety of fiscal stimulus plans adopted by various countries, in principle, are necessary to fight against the recession. But some developed countries have limited space for infrastructure construction. That is why developed countries must rely on emerging economies to get out of the recession, in that they can invest in infrastructure construction in developing countries, so as to create demand and get out of the recession indirectly.

The era needs "New Multilateralism"

After the financial crisis took place, leaders of various countries have reached a consensus on reviving the Bretton Woods system. The system emphasizes the importance of wisdom, policy and political will when multilateral actions are implemented in order to change a crisis into opportunities.

The international multilateral structure formed after World War II cannot adapt to the requirements of the international reality of the 21st century. As World Bank President Robert Zoellick has put it, we need a flexible and highly efficient "New Multilateralism" that is suiting our time, one that embodies developed countries, emerging economies and developing countries, and is not a fixed system or one that comprises of only one unit.

In order to solve the current problems, including the existing financial and economic crises and global warming, which have no national boundaries, it is necessary for the stakeholders including developed countries, emerging economies and developing countries, to put forth a concerted effort.
The new international multilateral framework should be a flexible and efficient organization which addresses specific problems, respects national sovereignties, and is conducive to settling differences and promoting cooperation among stakeholders.

World places high expectations on China

The Chinese economy has performed very well over the past 30 years, which not only greatly reduces poverty, but also reflects the efficiency of the pragmatic economic development system. Pragmatic economic development is based on the comparative advantages and combines the market economy with governmental intervention.

In the face of the global economic crisis, the world places high expectations on China. Nonetheless, there is a hard path ahead. Even before the outbreak of the global crisis, there was increasing evidence in China that the economy was slowing down.

However, the global banking crisis had little direct impact on China. China has strong foreign exchange reserves, a fiscal surplus which accounts for 1% of its GDP, and a current account surplus which is in excess of 10% of the GDP. These three factors has enabled China to adopt a proactive fiscal policy to strengthen construction in infrastructure, environment, social security, education, health care, to stimulate domestic demand and to upgrade export.

During the financial crisis and its resulting global economic turmoil, China's ability to maintain its own high-speed growth is its biggest contribution to the global economy.

By People's Daily Online

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