Global economy not as healthy as it looks

January 25, 2011

By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The global economy is not as healthy as it looks. The International Monetary Fund now predicts 4.4 percent growth for 2011. But inflation has reared its ugly head across the globe, suggesting that many economies are growing faster than can be sustained without structural changes. Spurring on reform should be the main focus of the annual World Economic Forum shindig this week in Davos.

If one wants to look at the glass half full, there are things to feel positive about. The U.S. economy is growing smartly again — the IMF predicts 3 percent this year. China and India should each grow at around 9 percent this year. Even the euro zone may be pulling itself out of crisis.

But the glass is still very much half empty, too. America is only growing so rapidly because it has engaged in loose monetary and fiscal policies. The monetary splurge has resulted in hot money spilling out across the world — which, in turn, is driving asset and consumer price inflation and that is causing difficulties in emerging economies. The fiscal profligacy, meanwhile, will have to be reined in — or America will suffer its own sovereign debt crisis in a few years time. The same goes for Japan, which is living on borrowed time and borrowed money.

China and India, meanwhile, are trying to curb inflation. But each is moving gingerly. Beijing is unwilling to allow the yuan to appreciate significantly — something which would also help rebalance global trade flows. And India is maintaining negative real interest rates, despite nudging up policy rates by another 25 basis points this week.

In the euro zone, the big question is Spain. If the authorities can regain credibility with investors, the crisis will end with Portugal. Creating a firewall in the Iberian peninsular will, however, require Madrid to recapitalise its weak savings banks. The plan announced this week may work but there’s a risk that investors will conclude it is too little, too late. What’s more, even if the hot phase of the crisis ends, the periphery of Europe is still saddled uncompetitive economies and heavy debt burdens.

There are, though, many things that can be done to create a healthier global economy in the long term. Unfinished business from the last financial crisis is tackling the “too big to fail” problem among banks. More coordinated effort across frontiers is required to ensure that a future Lehman Brothers could be packed off to the knackers’ yard without running the risk that doing so would bring the rest of the financial system down with it.

Clearer thinking is also required on how to tame destabilising capital flows. Part of the answer is to distinguish between what is healthy (foreign direct investment) and what is not (short-term foreign currency borrowing). The emerging “macroprudential” toolkit can be used to tackle the latter. South Korea is, for example, considering imposing a levy on banks’ foreign currency liabilities. A code of conduct on capital flows, as advocated by Nicolas Sarkozy, who is chairing the G20 this year, may also be part of the solution — so long as France’s president doesn’t try to stuff the code with pet anti-market ideas.

Improved governance should also be high on the list of priorities. Large swathes of the world — whether it is corruption-riddled India, Greece with its rampant tax evasion or most of the Arab world with its democratic deficit — are held back by poor governance.

Finally, there is liberalisation. It has become fashionable to blame the global financial crisis on free markets. But the problem rather was that markets were distorted by bailouts and skewed incentives. Freeing up markets — whether it is liberalising hiring and firing, or sweeping away restricted practices in professions — still has the capacity to deliver a big long-term boost to productivity in much of the world. The Davos delegates should grasp this agenda.


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I have to take my hat off to a PPE degree and Eton scholarship boy.

In Anthony Sampson’s anotomy of GB in 1965 he noted that every member of a conservative cabinate had a PPE from Oxford and went to Eton or Harrow. Did we have much better management prior to 1965?

Education of world leaders has got to be the way forward. The G20 will have a role as a school and participants will go home with the knowledge of what is expected of them to reduce global imbalances. If they get on the wrong side of global imbalance they will learn from the G20 what the consequences are.

The only alternative to a G20 education is learning from the hard knocks school. That is, you get into trouble and you have no alternative but to seek a bailout from the IMF conditional on accepting professional outside management that guarantees that the loan will be repaid.

The G20 is here to stay. It is the post great recession mechanism just as the IMF and World bank were the post great depression mechanisms.

Globalism requires global mechanisms like the G20. Western democracies like the PIIGS, Japan and the US must take their direction from the G20 and not pander to their electorate. Statesmanship should return and leaders should do the right thing rather than pander to their voters. Statemanship, leadership and professional management must replace popularism. Leaders must sell the education they get from the G20 at home. And the backstop against populist mismanagement at home (vote for me and 95% of you will get a tax cut, you will all get a free NHS and we will increase the NMW, Obama in the US) will be a forewarning from the IMF that any loan comes with conditions that your voters will not like. A high interest rate and a matching austerity package.

A bailout should be seen for what it is. It is not a bailout, it is not charity, it is not a rescue that you can always turn to. It is the big stick in response to the reckless behaviour of your servants, your elected representatives, your bad government, your bad management.

Bad management has been the enemy. Good management is the saviour. Education via the G20 will give us the direction we need.

Posted by objectiveknow | Report as abusive


If world leaders would do a fraction of what you preach, we would all be living in heaven. You summon ethics, sensiblity and good management. But politics has become BIG business and show business. It’s mostly about glamor, material gain and selfish agendas.

Talk of PIIGS and the likes of it makes me want to vomit. They behave like the rest of the world owes them a favor and the would-be saviours are actually more concerned than the wretches.

We need more than good management to reverse our suicidal plunge towards the demise of humanism. Our technology-driven mentalities are on a course of no return. God bless.

Posted by doctorjay317 | Report as abusive

Nature can seem quite cruel and some may come to believe it is necessary but the question is since you have evolved to the point you can read this – do you want money, army boots, grave-stones or flowers and butterflies for your children’s children? Maybe reading is just a waste of natural resources.

Posted by phyvyn | Report as abusive