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Tough decade may lie ahead for world economy

By Luo Lan (People's Daily Overseas Edition)

15:20, August 25, 2011

Edited and Translated by People's Daily Online

Many global financial institutions have lowered global and U.S. economic expectations after the U.S. and European debt crises. People are paying more attention the question of when the global economy can shake off a recession after the recent series of events.

Stimulus policies do not work any more.

The world economy is indeed staying low and it may take five to 10 years to recover. Experts, including Ding Yifan, deputy director of the World Development Research Institute of Development Research Center of the State Council, and Guan Jianzhong, chairman of Dagong Global Credit Rating Company, believe that the world economy needs time to bottom out and may even need more than 10 years.

The reduction of economic stimulus of governments is also a major factor restraining another economic rebound, said Jiang Xianling, associate dean of the International Economics and Trade Institute of the University of International Business and Economics. Jiang said the current global economic recovery is mainly driven by governments’ stimulus policies, and the economy’s independent recovery capability driven by consumer spending and enterprise investments is weak. Because of rising prices and the spreading of the sovereign debt crisis in developed countries, many governments have significantly weakened stimulus policies.

Jiang noted that declining global trade was another important factor restraining the world economic rebound. Meanwhile, inflation pressure was obviously increased due to high oil price, which made the global economy suffer the risk of stagflation. Currently, the overall price level in either emerging economies or developed economies is on the rise. All of these factors increased the uncertainty of world economic recovery.

Debtor powers are all developed countries

Experts believe that it is difficult for the world economy to rebound, and the main problems were from developed countries.

Ding told reporters that developed countries were unable to get rid of debt problems and could only rely on printing money, which may finally lead to inflation, devaluation and a partial debt write-off. Moreover, currencies of developed countries, the dollar in particular, are hard currency, and they are also global pricing currencies for energy sources and bulk commodities. Their devaluation will result in rising prices. Emerging industrial economies will face imported inflation, and asset bubbles may appear in emerging markets.

The fact that developed countries continue to maintain a lifestyle of high consumption regardless of high debts also made it harder to solve the problem. Guan said that the top 15 debtor nations were all developed countries, and they borrowed money from creditor nations. It was impossible for developed debtors to reduce debts through their own efforts, and their capability to create wealth was also limited. It was also impossible to greatly cut the fiscal deficit, therefore, developed debtors could hardly provide positive factors for global economic development.

International cooperation is the way out of economic crisis

Jiang said that the international community should make active use of economic cooperation mechanisms such as the G20, G7, International Monetary Fund and the World Bank to coordinate the response to the economic crisis as well as to firmly promote free trade and fair trade. The rising of trade and investment protectionism in recent years had hindered the global economic recovery. Therefore the international community should establish a balanced multilateral trading system and bring benefits of free trade to the people of all countries.

The international community should continue to promote the global financial restructuring and reform, pay great attention to the monitoring and analysis of the fiscal and financial situations of all countries, prevent major economies from printing money immoderately and take a flexible approach to stabilize financial systems of various countries for economic recovery, Jiang added.

Guan urged that the current top priority was to reform international credit rating system in order to ensure the disclosure of fair credit rating information to the world and make capitals flow rationally. Thus, money will not be lent to insolvent countries and capitals will flow to countries that can create value and wealth. World economy can only recover by establishing such a relationship between debtors and creditors.

China must seize the opportunity to emerge from the economic downturn. Ding said at first, China should focus on domestic markets, expand domestic demand, transform its economic growth pattern, prioritize the intensive economic growth over the extensive economic growth, save energy and raw materials and further elevate the quality and levels of industrials goods. Second, China should develop its financial market and lay a foundation for internationalization of RMB to make yuan more universal after the crisis.

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