Opinion
Balancing act for post-crisis era
By Liu Yuhui (China Daily)
Updated: 2009-12-08 07:57
The global economy has shown signs of shaking off the prolonged downturn and taking a turn for the better following a raft of stimulus packages unveiled by various governments over the past year.
The US, Japanese and European economies, which staggered under the weight of the worst global financial crisis in decades, have regained ground. Meanwhile, some emerging economies, especially China and India, have enjoyed comparatively rapid economic growth.
However, the robust price rebound in the capital and real estate markets and bulk commodities around the world, especially in emerging markets, has caused widespread concerns over new property bubbles. Against this backdrop, some countries, such as Israel, Australia and Norway, have chosen to raise interest rates to mitigate growing inflation pressures. Such policy revisions have engendered deep concerns over whether other countries will follow suit and exit from their easy monetary polices.
Experience indicates that it is very difficult to perform such a balancing act between the two economic tools. The underlying reason is largely decided by the nature of the economic crisis caused by overproduction. At a time of crisis, consumption demand plunges suddenly with the busting of property bubbles. The well-developed credit- and securities-founded economic model would easily cause the negative impact produced by contracted currency supply, income and liquidity to quickly spread to all economic spheres. As a result, an economic slump would follow.
To restore the delicate supply-demand balance, a country should either reorganize its supply structure and reduce production or inject new liquidity into its deflationary economy. Reducing production means a painful process which results in worse deflation and more unemployment. But following these throes are always long-term economic rejuvenation and prosperity as well as the creation of a new and sustainable economic growth model.
On the other hand, injection of liquidity to expand credit and payment ability to absorb overproduction, as Keynesianism advocates, leaves bigger risks to the future. Whether such a stimulation tool reactivates a good economic balance between investment, and consumption and income growth remains in question. No economics faction in the world, including Keynesians, believes monetary stimulation serves as an effective long-term tool to boost economic development.
Experience also indicates that a country's currency policy alone remains impotent in tackling the negative impact caused by surging property bubbles and inflation. That is because any economic rebound pushes property prices up and forms new bubbles. As a result, the government and public agencies have to shoulder an enormous deficit and debt. Consequently, heavy taxes are likely to be levied on enterprises, which would result in a decreased production and put employment and income growth at stake.
To completely avoid such an intractable economic crisis, an intensive development model that values economic quality more than quantity should be created. It should aim at adjusting a country's extant resources distribution structure and giving birth to a new and innovative wealth producing formula.
To help the world extricate itself from the lingering economic crisis, the United States, as the world's largest economy, should re-industrialize, which does not mean the resumption of the traditional manufacturing sector, but choosing to develop a low-carbon economic model based on pharmaceutical manufacturing, alternative energy, and an energy-friendly auto manufacturing industry. The US should try to restore its economic vitality through economic restructuring, innovation and re-investment in a bid to provide a new engine for the next round of global economic growth.
As the world's third largest, and fastest-growing economy, China should grab the opportunity presented by the changed global economic order and step up reform of its political and economic systems. Great efforts should be made to revise the country's long-controversial wealth distribution structure between the government, enterprises and residents to tap depressed domestic demand. Also, the country should take some forceful and effective measure to reduce industrial monopoly, relax government restrictions on economic activities and reduce domestic deposits to push for a demand-dominated economic transformation.
The author is director of the Center for Chinese Economic Evaluation at the Chinese Academy of Social Sciences.
