Global economic growth: Sluggish, prolonged

The mood was somber at the recent Asia-Pacific Economic Cooperation summit held in Bali, Indonesia, among the leaders of 21 countries (including President Aquino) on two key concerns: global economic growth and trade negotiations.

“Global growth is too weak, risks remain tilted to the downside, global trade is weakening and the economic outlook suggests growth is likely to be slower and less balanced than desired,” sums up the APEC leaders’ official statement.

And on trade negotiations, the prospect seemed dimmer: the Doha round under World Trade Organization auspices has remained in “impasse” since 2010.  The APEC leaders limply urged their trade ministers, who are set to convene in Bali in December, to get the negotiations back on track.

A similarly somber mood is likely to pervade this week’s annual joint meeting in Washington of the International Monetary Fund and the World Bank, attended by the central bank governors and finance ministers of member countries.

Both the IMF’s “World Economic Outlook” and the WB’s “World Development Report” cautiously speak of continuing sluggish global growth and lingering financial risks, specifically to the poor and developing nations. In nine of its last 10 economic updates, the IMF has kept adjusting its forecasts for the global growth rate, mostly downwards.

Last Tuesday the IMF forecast a rate of 2.9% in 2013, and 3.6% in 2014.  Note that these figures –- five years after the global financial-economic crisis started in the United States (the world’s largest economy: GDP at $15.685 trillion) -- are way below the 5.4% growth rate in 2007. 

Nobel Prize laureate Joseph Stiglitz, former WB chief economist, wryly commented in the Guardian last Thursday:

“Five years later, while some are congratulating themselves on avoiding another depression, no one in Europe or the United States can claim that prosperity has returned. The European Union is just emerging from a double-dip (in some countries, a triple-dip) recession... some member states are in depression.”

His norm for saying that an economy is still in recession is when most people’s incomes are below pre-crisis levels; for economies in depression, it is when 25% of workers (50% of them young people) cannot find jobs (as in Greece and Spain).

Stiglitz noted that almost 27 million Europeans are jobless, and 22 million Americans willing to take a job cannot find one. Most Americans’ incomes and wealth, he added, are below their pre-crisis levels.

 With the US economic recovery anemic at 1.6% and Europe rising from economic contraction at 0.4%, the “emerging” and developing nations of East Asia and the Pacific, which are part of APEC, are deemed collectively by the WB as the “main engine of global growth.” 

Yet, according to the IMF, growth among these “emerging” nations’ economies has dropped by 3% since 2010 — with China, along with India and Brazil, accounting for 2/3 of the decline.

China’s economy, which in the past decade grew well over 10%, is expected to expand by 7.6% in 2013 and 7.7% in 2014 — still considerably higher than the average growth rate that the IMF forecast for all of Asia: 5.2% in 2013 and 5.3% in 2014.

The IMF-WB tandem prods China to hasten the shift of its economy from an investment-and-export-reliance mode to a “more balanced one,” with greater emphasis on boosting domestic consumption (ergo, to absorb more imports).

IMF Managing Director Christine Lagarde laments that the prolonged sluggish growth or “low-gear” global economic expansion continues to inflict lower living standards and higher rates of joblessness on hundreds of millions of people around the world.

On its part the WB warns the “poorer” countries to build “strong balance sheets and public policies” that can enable them to contend with two kinds of disasters: 1) the financial crisis emanating from the US, and 2) natural disasters.

The WB warning finds context in Stiglitz’s indictment of America’s financial elite for its greed and indiscretions that spurred the 2008 global crisis, the key elements of which he said still persist.

“A bloated and dysfunctional financial system had misallocated capital, and rather than managing risk, had actually created it.  Financial deregulation – together with easy money – had contributed to excessive risk-taking,” he wrote. “With monetary policy relatively ineffective in reviving the economy, greater reliance on fiscal policy – increased government spending – would be necessary.”

“Yet,” Stiglitz warned, “some of the risky derivatives (varied tradable financial instruments) – the financial weapons of mass destruction – have been put in exchanges… but large volumes continue to be traded in murky over-the-counter markets.”

Moreover, “the financial system has become even more concentrated, exacerbating the problem of banks that are too big, too interconnected, too correlated to fail — but also too big to manage and be held accountable.”  Thus, he added, “despite scandal after scandal” involving bad banking practices “no senior official has been held accountable.”

The much-touted credit-rating agencies (Moody’s, Fitch, Standard and Poors, that all gave the Philippines “investment-grade” status) didn’t escape Stiglitz’s sharp criticism either.

These agencies “have been held accountable in two private suits” and made to pay paltry fines, he pointed out, but “the underlying problem — a perverse incentive system whereby they are paid by the firms that they rate — has yet to change.”

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