The Truth about the Global Economy

Here is my recently published Political Review article, in case you missed it:

Whether it is the heated barbs of Eurozone bailout debates for the PIIGS (Portugal, Ireland, Italy, Greece and Spain), trade quarrels with China, or rising concerns with capital flowing rapidly to emerging markets, some see current events as evidence of the fact that our increasingly multipolar system is losing both civility and stability. But do the actions of global economic actors match up with the heated rhetoric we hear in the press?

We find that despite the hot air, the post-crisis global economic recovery has been marked by strong unanimity and global consensus in taking the most vital steps toward recovery. Why is this not more apparent? Perhaps it is because analysts fail to acknowledge the difference between what politicians say to their constituents out of political necessity and what they say when sitting at the negotiation table.

For example, it might be a surprise for some to learn that China is letting its currency appreciate. That means the US strategy is working. Since September 2, the Chinese renminbi has been allowed to appreciate 2.2%, a rate that if continued would signal an important step toward dealing with global imbalances. It is happening slowly—but it is happening. One of the principle reasons China will continue to let the renminbi appreciate is that it is feeling pressure from more than just the United States. Developing nations’ export industries are being undercut by the undervalued renminbi as domestic manufacturers lose market shares. Although most lack the chutzpa to stand up to China on their own, when nations all sit around the G20 table, they agree that China needs to respect the rules of the international economic system. The recent G20 summit was far from the failure that some media outlets attempted to cast it as. Leaders agreed that structural imbalances must be addressed, and agreed on targets for creating a framework to help mitigate the danger these imbalances can create with help from the IMF.

Furthermore, the notion that the world is currently in a “currency war” is a myth. The truth is that measures to limit the flow of capital, called capital controls, are being used carefully and judiciously. Capital controls were once discouraged by the Washington Consensus, but the IMF and other key economic players have recently reversed their positions, acknowledging that when used properly, capital controls can alter the composition of capital flows away from dangerous “hot money” into more stable long-term investments. Brazil, South Korea, Thailand, and Peru have instituted capital controls that, some argue, will help the United States’ quantitative easing promote domestic growth by discouraging the flight of capital to emerging markets.
Although quantitative easing, dubbed QE2, is indeed a controversial Keynesian stimulus move, there is widespread consensus that full economic recovery for countries ranging from Mexico to Malaysia will require getting the US economy rolling once more. As is generally the case with monetary policy, the purpose of QE2 is to grease the economy’s wheels in order to lower unemployment, and make up for a lack of fiscal stimulus from a gridlocked congress. Unlike Chinese policy, however, the effects of QE2 on exchange rates are a byproduct rather than a primary objective. Some analysts have protested that monetary policy will mean skyrocketing inflation, but so far these predictions have not held any water: October’s core inflation trickled in at a shockingly low 0.6%, the lowest recorded since 1957. At this point deflation is a much more pressing concern.

However, the US must return to taking a greater role in global economic leadership by reversing its abandonment of free trade. It appears President Obama may have made a significant step in this regard by completing negotiations with South Korea on a free trade agreement just last Friday (December 3). Moving free trade forward gives Obama a chance to prove to voters that he can buck protectionist pressures from both agro-subsidy-drunk conservatives and seemingly luddite labor in order to boost long-term economic growth. Other agreements have already been negotiated with Panama and Colombia, and have been waiting years for a signature. Obama needs to quit stalling and sign them immediately.

Despite some hiccups, it seems global leaders are doing the right thing and then telling constituents what they need to politically. Since the crisis, the G8 has been modernized into the G20. The IMF and World Bank’s leadership structures have shifted greater power toward emerging economies. Trade has rebounded and flourished faster than anticipated. Protectionism has not rebounded, nor set back years of careful integration. Do not underestimate the global consensus—the howls and polemics are misguided and misplaced.

Mike is a Senior studying Economics. He is currently an intern with the International Affairs Department of the United States Treasury.


http://www.byupoliticalreview.com/index.php?option=com_content&view=article&id=134:the-truth-about-the-global-economy&catid=34:articles