Global Trends by Martin Khor

Monday 4 January 2010

2010 – the year of uncertainty

The new year 2010 will be marked by uncertainty on whether the economic recovery will strengthen or slip, and if there will be a global understanding or anarchy on climate change.

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The new year has been ushered in with fireworks and parties in Malaysia and around the world.  It certainly will be an interesting year ahead.  How it will turn out is anybody's guess.

“Interesting” and “Uncertainty” are key words as 2010 gets down to business.

The first and main uncertainty is in the world economy.  The dreaded Depression predicted for last year fortunately did not materialise.  The big question is whether the recovery that started in the second half of 2009 will continue and strengthen in 2010, or sputter out, bringing about a new downturn.

The optimists have an upper hand at the moment, because we are in the midst of a recovery.  The stock markets are on an up-trend, GDP growth has turned positive in the last quarter in most countries, and property prices are even soaring in some countries like China.

But the pessimists, and they include such heavyweights as Joseph Stiglitz and George Soros, are persuasive in arguing that the crisis of 2008-9 was caused by structural flaws in the Western economies which remain uncorrected and the present recovery is simply due to their being put on artificial life support.

That life support comprises trillion-dollar bailouts of banks and companies, huge government injections of liquidity, very low interest rates and massive fiscal stimulus, or large increases in government spending financed by thumping budget deficits.

The underlying weaknesses (global trade imbalances, over-consumption in the U.S., over-leveraging of financial institutions, laissez-faire in the financial sector) remain.  And when conditions make it impossible to retain the life support systems, the patient may relapse into a life-threatening state.

The present recovery phase should thus be used to strengthen the immune system and restore health so that the life support can be withdrawn without harm. Instead, there seems to be a return to “business as usual”, with the disgraced financial institutions in the Western countries fighting, quite successfully, to be free to continue most of their former practices, albeit with a little more regulation.

The fact that Goldman Sachs, Wall Street's biggest investment bank, could reap record profits, and that so many other banks could continue with billion-dollar bonuses for their executives, shows the limited extent to which the governments were in the end willing to instill the required discipline, even on firms that just several months ago received huge government bailouts paid for by the public.

Just a year ago, when the global economy was tethering on the edge, there was a lot of interest in  major reforms to the global financial architecture, including strictly regulating the financial institutions and limiting the massive speculative cross-border flows of funds that have led to destructive cycles of booms and busts in developing countries, as capital would first enter in search of quick profits and then move out on the slightest sign of trouble.

Today there is hardly the same level of interest in correcting the flaws. 

There is one certainty, however.  The American consumers who were given so much credit to over-spend on housing and consumer goodies, will no longer be able to provide the demand boost to global economic growth, as they are now asked to account for their debts.

Even if the US economy continues to recover, there will be less consumer spending, especially since unemployment is high and growing.  The European and Japanese economies are also too weak to take up the slack.

Moreover at some time this year, the major economies are expected to put into effect their “exit strategy”, or withdrawal of the life support of fiscal spending and loose monetary policy. 

Though China will continue its high growth (which may reach 9 to 10 percent according to recent estimates), this is not sufficient to fill in the gaping hole in global effective demand. 

As 2010 progresses, the effects of this new reality will be felt in developing countries, especially in South-East Asia, that have depended so much on export-led growth. 

Up to some months ago, the countries were contemplating the need to switch to new development strategies that are less dependent on exports to major developed countries. Because of the recovery, they are now waiting to see if they can stick to the same model that served them so well in the past.

It would be wise for them to formulate options for new growth strategies, in anticipation of another slowdown or even recession in the big countries.

The other big issue of 2009 was climate change. Unfortunately the much-anticipated Copenhagen climate conference ended in an anti-climax, without any new or firm understanding on how countries are to cooperate.

The new year will provide a chance for the countries to move beyond the blame game and pick up the negotiations again.

This much is clear.  The challenge is not only to come up with a goal of cutting global emissions by 2050 but even more so to agree on each country's allocation of emissions rights from now to that year.

The other challenge is to ensure that the developed countries live up to their pledge to fund the costs incurred by developing countries in shifting to a climate-friendly development path.

These are huge and complex issues, combining the science of what needs to be done physically with the economics of working out the economic pathways and costs of shifting to a less emissions-intensive development model, and the politics of distributing the burden of adjustment globally.

We might just conclude that the issues are too complex and highly charged for the world to reach an understanding, in which case there will be a fall from cooperation to anarchy, with each country looking after itself, and humanity will hurtle down the slippery slope to doom.

Or else a near miracle may happen, and 2010 could mark the beginning of genuine international partnership.  It's worth striving for.  A lot is at stake.