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Seek cooperation, not trade protectionism to tackle this crisis
By Sun Lijian |
February 2, 2009, Monday
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THE current global financial crisis defies solutions by any single country.
The effects of earlier crisis were usually limited to several countries or a region, however, this downturn developed from the credit crisis of an individual country and morphed into a systematic global liquidity crisis.
The root of the crisis was insufficient market supervision and the misuse of financial innovation. In this regard, there is little possibility such a crisis would reoccur in emerging economies.
The deleveraging (paying off or otherwise reducing borrowed capital) resulting from misuse of financial innovation led to the sharp decline of investment and consumption from Europe and the United States. These two regions are major drivers in the world's economic development.
That seriously reduced the exports of manufactured products from emerging markets that are highly dependent on European and US markets.
Thus, the worst damage the crisis has inflicted on most Asian countries is to their export sectors.
The crisis is essentially an inevitable result of the world's economic imbalance.
The US trade deficit is ever-growing while the trade surplus is always building in East Asian manufacturing countries and even Europe.
When, and if, the US' creditors lose faith in America's ability to repay, and then withdraw their capital, it would be a great shock to the US economy.
At this time, however, US' creditors - mostly developing countries highly dependent on the US economy - find it difficult to reduce their trade surplus with the US because of great pressure for economic growth.
That's why many of them continued to hold US dollars during the liquidity crisis, which led to appreciation of the currency rather than depreciation.
By applying a zero-interest rate policy, the US Federal Reserve has increased the opportunity-cost for holding US dollars and paved the way for depreciation of the currency. This does not mean an end to the dollar appreciation, caused by the panic arising from a liquidity crisis.
To ease the situation and lead the market into a period of recuperation and asset restructuring, the US must find a new area for growth, for example, new energy technology.
Protectionism
Whatever happens, it is unlikely that the imbalanced global economy will be rebalanced within a short time.
Yet new economic growth areas may help relieve unemployment. Otherwise, if all nations undertake trade protectionism this year, they would probably push the world economy into a worse recession, one that would require a much longer and more painful period of recuperation.
Admittedly, most US dollar assets held by manufacturing countries must flow back to the US to have their value preserved, which ensures liquidity for US financial innovation and leverage financing.
Therefore, the cooperation among nations worldwide is necessary to prevent similar crises triggered by misuse of financial innovation.
Changing the imbalanced global economy involves the industrial restructuring of many countries - no one country can do this alone.
Nations worldwide will not be able to handle the crisis unless each is willing to sacrifice some short-term national interests for the common good of the world's economy. This means stronger economic cooperation and policy coordination.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
The effects of earlier crisis were usually limited to several countries or a region, however, this downturn developed from the credit crisis of an individual country and morphed into a systematic global liquidity crisis.
The root of the crisis was insufficient market supervision and the misuse of financial innovation. In this regard, there is little possibility such a crisis would reoccur in emerging economies.
The deleveraging (paying off or otherwise reducing borrowed capital) resulting from misuse of financial innovation led to the sharp decline of investment and consumption from Europe and the United States. These two regions are major drivers in the world's economic development.
That seriously reduced the exports of manufactured products from emerging markets that are highly dependent on European and US markets.
Thus, the worst damage the crisis has inflicted on most Asian countries is to their export sectors.
The crisis is essentially an inevitable result of the world's economic imbalance.
The US trade deficit is ever-growing while the trade surplus is always building in East Asian manufacturing countries and even Europe.
When, and if, the US' creditors lose faith in America's ability to repay, and then withdraw their capital, it would be a great shock to the US economy.
At this time, however, US' creditors - mostly developing countries highly dependent on the US economy - find it difficult to reduce their trade surplus with the US because of great pressure for economic growth.
That's why many of them continued to hold US dollars during the liquidity crisis, which led to appreciation of the currency rather than depreciation.
By applying a zero-interest rate policy, the US Federal Reserve has increased the opportunity-cost for holding US dollars and paved the way for depreciation of the currency. This does not mean an end to the dollar appreciation, caused by the panic arising from a liquidity crisis.
To ease the situation and lead the market into a period of recuperation and asset restructuring, the US must find a new area for growth, for example, new energy technology.
Protectionism
Whatever happens, it is unlikely that the imbalanced global economy will be rebalanced within a short time.
Yet new economic growth areas may help relieve unemployment. Otherwise, if all nations undertake trade protectionism this year, they would probably push the world economy into a worse recession, one that would require a much longer and more painful period of recuperation.
Admittedly, most US dollar assets held by manufacturing countries must flow back to the US to have their value preserved, which ensures liquidity for US financial innovation and leverage financing.
Therefore, the cooperation among nations worldwide is necessary to prevent similar crises triggered by misuse of financial innovation.
Changing the imbalanced global economy involves the industrial restructuring of many countries - no one country can do this alone.
Nations worldwide will not be able to handle the crisis unless each is willing to sacrifice some short-term national interests for the common good of the world's economy. This means stronger economic cooperation and policy coordination.
(The author is professor of finance and executive vice dean of the School of Economics at Fudan University.)
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