Global economy after the Great Recession
By Shahid Javed Burki
Monday, 08 Feb, 2010
MOST large economies posted respectable growth numbers for the fourth quarter of 2009. The United States saw its GDP increase by 5.4 per cent on annualised basis in the quarter ending December 31, 2009. The increase was much more than expected by most experts.
The Chinese economy expanded by 10.7 per cent, again more than anticipated. Even European economies have begun to show some signs of life. What is now called the Great Recession seems finally over, having taken a heavy economic toll across the globe. In what shape has it left behind the global economy?
Perhaps the greatest consequence is on the conceptual front. The previous consensus on how to manage economies, global as well as national, was wrong. It was called The Washington Consensus. There was the assumption that the best way to take care of the world economy was to leave it alone. This is what was meant by “globalisation”. The enormous increase in global output and trade over the previous 30 years was the result of removing barriers to trade and capital flows. This was also the period that saw the largest reduction in the levels of global poverty even though it may have increased the income gap between poor and rich nations.
There are, in fact, three consequences of the Great Recession of which all policy makers, no matter where they are located, should be mindful. One, while the world is linked by different types of flows – capital, trade and that of people – these links need to be tended. This is particularly the case in the sector of finance where most large firms operate across national borders.
Two, private initiative is important and what is loosely described as “capitalism” should be the guiding philosophy for all nations, developed and developing. That notwithstanding, activities of private operators in the economy should be kept under constant observation so that they don’t do social harm.
Three, the world is being reshaped with the centre of economic activity moving from the Atlantic to the Pacific. This will have enormous implications for all world economies.
The collapse of financial and capital markets all over the world after the demise of Lehman Brothers in the United States showed that governments could not stand by and let the markets take care of themselves. They had to intervene. The recently published biography of Hank Paulson, the US Secretary of Treasury at that time, reveals how close the world economy was in September 2008 to a total meltdown.
Led by the United States, governments intervened massively in both developed and developing countries. Washington provided tens of billions dollars each to several financial institutions that were near collapse. That help kept institutions such as Citibank, Bank of America, and Goldman Sachs afloat. The governments also realised that much of what John Keynes, the British economist, had said about macroeconomic management and the role of the state was correct. The United States and China launched stimulus programmes that had no historical peace-time precedence in terms of their size.The IMF was given additional resources to help the countries in acute distress. Pakistan was among the countries that were assisted.
It is also now recognised that the state has to play a much larger role in managing the domestic economy and the assumption that financial markets are selfcorrecting was deeply flawed. Under Alan Greenspan, who served for nearly two decades as chairman of the US Federal Reserve, the American central bank, the belief that even regulation could be left to the markets had become popular not only in the Anglo-Saxon world. It was also the basis of economic policy making in Islamabad during the period of President Pervez Musharraf. Islamabad under Musharraf left the private sector mostly alone. Even the regulatory agencies that had the power to watch over the private sector were defanged. The Competition Commission, although led by a strong chairman, was not encouraged to prevent monopolistic behaviour by large firms. The result was that significant shares of the market were captured by a few producers manufacturing some critical commodities.
The Great Recession seems to have quickened the pace at which global output was being distributed across the globe. China is expected to overtake Japan as the world’s second largest economy. It has already become the world’s largest trading nation. It is now the world’s largest market for automobiles. That the centre of gravity of the global economy was moving from the Atlantic to the Pacific seemed a far-fetched assumption a few years ago. It has become a reality.
In the next one decade, almost twothirds of the increase in world output will come from the emerging economies. Not too long ago, policy makers in the developing world – including those from Pakistan – focused on their relations with the rich western nations to ensure that they had adequate availability of financial resources and access to the markets of rich countries in order to promote domestic economic development. Pakistan has spent a great deal of time and effort in cultivating the United States as a supplier of much needed external capital flows. It has also sought to improve access to the markets in the United States to improve its export earnings. That strategy has to be rethought.
The Great Recession, therefore, has left the global economy in a very different shape from the one that existed before it took hold. Those policy makers who have sharp instincts will be able to draw for their countries the benefits that these changes can provide. Islamabad needs to do at least three things. It must develop a strategy to strengthen the institutions of economic management. There has been weakening of the state over many decades. That has to be arrested. This will involve movement on several fronts: civil service reform, redesign of the fiscal system, reform of the regulatory system, greater autonomy to the provinces. These are some of the areas that need immediate and thoughtful attention.
What will be more difficult for Islamabad is to ensure that it would not be completely left out of the emerging international system of global economic management. At this time, Pakistan has no presence in G20; a very weak voice in the boards of the IMF and the World Bank; little say in matters such as international trade, international migration and climate change; weak links with the more rapidly growing economies of Asia. All these subjects are of great importance for the country but they are being left largely unmanaged.
It is the rise of China that Pakistan must study and understand in order to draw full benefit from the fact that this rising global economic power sits right across its borders. This relationship has not been neglected; there is a constant flow of officialdom from both sides across the border. The problem, however, is that all this energy is being applied without a well thought out strategy.
To begin with Islamabad would do well to establish an inter-ministerial group tasked to oversee the development of economic relations between Pakistan and China. This group should be ideally headed by a person who has the rank of a federal minister so that its deliberations and actions are kept under review by senior politicians. I have proposed on several occasions that Pakistan needs a China strategy to benefit from the reshaping of the global economy.