Global Rebalancing: Now or Never

Time and again, lessons of a troubled world economy are the same: unbalanced world is an unsustainable world. A decade ago, the world had just come through three difficult events in the span of three years, the Asian financial crisis, the Y2K scare, the bursting of the US equity bubble. The unbalanced world was ill equipped to deal with the asymmetrical shocks bound to follow. Steeped in denial, unstable global economy continued its race to edge. The price for denial was steep. The world peered into the abyss in late 2008, experiencing the greatest financial disaster since the Great Depression of the 1930s. Sadly, this was just the latest in a steady string of crises over the past 30 years, including the 1980s Latin American debt crisis, the subprime crisis and the European sovereign debt crisis raging today. Behind most of these crises is a major macro imbalance, which could have been avoided with pro-active, disciplined, responsible policies. But temptations of false prosperity proved too alluring. It’s essential to understand forces at work on both sides of unbalanced global macro equation. The demand side is dominated by American consumer. With about 4% of world’s population, US consumers spend about $10.7 trillion annually. By contrast, China and India, comprising nearly 40% of world’s population, have combined consumption of about $2.5 trillion. Based on this unbalanced mix, the outlook for global consumption is likely to be weak. The main source of this weakness can be traced to the United States. Reflecting bursting of US property and credit bubbles, American consumer has pulled back as never before. Anemic consumption growth is also likely to persist in crisis-torn Europe and in Japan. China and India, with solid prospects for consumer demand, lack the scale to offset US-led shortfall of consumer demand in the developed world. The supply side is dominated by the Asian producer. But fastest growing economic region in the world has severe imbalances of its own. Specifically, private consumption share of developing Asia’s pan-regional GDP has never been lower, its export share never higher, after recovering from crisis-induced plunge of 2008-09. With the anemic consumption growth likely to persist in advanced economies, persistent imbalances on the Asian-led supply side of the global growth equation remain a worrisome feature of post-crisis climate. Nowhere is that more evident than in China. In 2007, Premier Wen Jiabao spoke of the great paradox of Chinese economy: The economy looked strong on the surface, but was characterized by a model that he depicted as increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.” The 2008-09 crisis and collapse in world trade hit China’s most dynamic source of economic growth, exports, with unprecedented shock. Lacking support from external demand and backstop of internal private consumption, relied on an aggressive stimulus of fixed investment. China did what it needed to do to sustain economic growth and maintain social stability in the midst of wrenching crisis. Still, renewed weakness on the demand side of global equation has pushed its GDP growth back down to 7.6% in mid-2012, holding to a soft-landing trajectory, yet another important reminder that China must change its growth model to derive greater support from internal demand, especially private consumption (…..)



Acerca de ignaciocovelo
Consultor Internacional


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