Saturday, February 11, 2012

Future of the world economy

A grim picture of the future of the world economy is depicted here
"Globalization, it turns out, is a double-edged sword. It raises living standards by promoting trade and spreading modern technology around the world. But it also causes disruptions and deepens downturns. The future of the world economy hinges heavily on whether this instability is modest and tolerable or massive and intolerable. As Bergsten asks: "Are we on a path not only of crises but also of crises of increasing frequency and rising severity?"

We don't know. What we do know is that mutual dependencies have grown. For years, U.S. trade deficits promoted globalization by boosting other countries' exports. Ideally, emerging-market countries would now return the favor. Their fast economic growth would swell demand for U.S. and European exports, making it easier for these countries to pay their debts and reduce unemployment. The odds of this happening seem no better than 50-50.

What countries see as their narrow self-interest may subvert their collective interest in a stable world economy. Political power has fragmented along with economic power. The currency dispute with China is a case in point. For years, American presidents have failed to persuade China to stop undervaluing its currency and, thereby, subsidizing exports and penalizing imports. Indeed, some economists argue that China's trade surpluses -- converted into dollars and invested in U.S. bonds -- fueled America's financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans."
Is the answer to this uncertainty more "protectionist" policies as well as "reclaiming" the domestic policy space? To understand domestic policy makers' reservations against a multi-lateral trading system that "hurts" domestic industry interests, this letter from a U.S. Congressman to the USTR Kirk summarises it all," ...
In the last decade six million American manufacturing jobs and 55,000 plants have been lost.We must stop China's abusive practices that cost countless American jobs and contribute to our enormous trade deficit.Stronger U.S. manufacturing will help keep America a place of world leading innovation with a strong middle class"
Recent statements of China (in the context of the Ban on Exports case at the WTO), actions of Brazil (imported car tariffs), thrust of the US's "Inshoring policy" point towards the trend that countries are gradually re-visiting the notion of free trade and reduction of barriers. Are these trends temporary in reaction to certain events or a more permanent paradigm would be the question to ask.

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