It is very rare for a World Bank chief to issue successive warnings about the gravity of the impending risks to the world economy and their capacity to destabilise the whole system. Talking to an Australian newspaper on 13th August, 2011, Robert Zoellick warned that we are in the early moments of a new and different storm, it is not the same as 2008 .
It is a more dangerous time for the world economy as Europe struggles to resolve its debt crisis. Eurozone s sovereign debt issues were more troubling than the medium and long-term problems which saw the US downgraded by S&P last week, sending global markets into panic. The lesson of 2008 is that the later you act, the more you have to do, added Zoellick. Most of the developed countries had already eased their fiscal and monetary policy space by loosening them as far as possible and there was less room to manoeuvre this time around.
Speaking at the Asia Society dinner in Sydney on 14th August, the World Bank chief was more forthright and even blunt to a certain extent. According to him, the loss of market confidence in economic leadership in key countries like the United States and Europe coupled with a fragile economic recovery had pushed markets into a new danger zone, something that the policymakers had to take seriously.
These events combined with some of the other fragilities in the nature of recovery had pushed us into a very precarious position. The process of dealing with the sovereign debt problem and some of the competitive issues in the eurozone were tended to a day late , leaving markets worried that the authorities may not be ahead of the problem or moving in the right direction.
Concerns had accumulated as we are moving from drama to trauma for a lot of the eurozone countries. Zoellick continued that he was not saying those words lightly so that policymakers recognise and take it seriously for what it is. On the United States, the World Bank chief was doubly worried because the world s biggest economy was not only facing imminent problems but markets are used to the US playing a key role in the economic system and leadership.
On the fiscal front, the US was so far focused on discretionary spending as opposed to the entitlement programmes such as social security. Until they make an effort on those programmes, there is going to be continued scepticism about dealing with long-term spending. Giving high marks to Australian policymakers, Robert Zoellick said that the country was in a much better position than other developed countries because it had undertaken structural reforms.
We feel that sounding the alarm by the head of the World Bank about the impending threat is very timely and also not overly exaggerated. There is absolutely no doubt that global economies and financial markets are heading fast towards a danger zone if appropriate measures are not taken in time to stop the rot.
It is unfortunate that, unlike the past when a single economy had to be put on track or a single issue had to be resolved, most of the developed economies are now facing a host of problems at the same time and there are no visible remedies still in sight to pull the global economy out of quagmire.
In fact, policy inadequacies in most of these countries are having a contagious effect on each other and almost every country is blaming the other for not doing enough and sharing the responsibility to save the situation from further deterioration. The US habit of living beyond means has created such a mess at the world stage that its credit rating has been downgraded and its last minute raising of public debt limit does not inspire the hope that it is prepared to undertake bold structural measures to confront the situation head-on.
Europe is struggling to resolve its debt crisis but some of the most affected countries in the eurozone do not find the courage to give the badly needed treatment to their economies due to stiff resistance by the electorate. War on terror is a new phenomenon sapping the energies of most of the developed countries. Another reality that has to be faced now is that the US and Europe no longer have a monopoly on determining the fate and policies of the world economy.
The difference this time is that the emerging economies are also now a source of growth and opportunity and about half of the global growth is represented by the developing world. This rapid change in a relatively short period of time has made it imperative to take these stakeholders also on board and forge a much broader consensus on various issues. The insistence of countries like China to follow strategies of their choice shows the complexity of the task at hand.
It is against this background that world financial markets are now in a tail-spin and investors are baffled due to all kinds of uncertainties. Apprehending the erosion of currency values, investors are increasingly hedging their risks by investing into gold and other precious metals but that is no solution to the overall problem.
A suggestion could be made that the Bretton Woods system set up in the 1940s needs to be reformed to adequately reflect the changing economic realities and be more responsive to the challenges at hand. However, in order to do that, a more co-operative and less self-centred approach by all countries needs to be adopted.
Another sad aspect is that multilateral institutions like the World Bank and the IMF, dominated as they are by the US and Europe, are spreading information about the issues but do not seem to have the clout or done their homework properly to come up with solutions which could be acceptable to the major economic powers and beneficial to most of the countries in the long-term.
In the meantime, developing countries, including Pakistan, should not think that the problems of developed countries would remain confined to their territories. They also need to prepare themselves for the negative fallout of the evolving situation and at the same time hope and pray that the crisis is over soon.
Courtesy: Business Recorder
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