China

By Eswar Prasad and Karim Foda

The global economic recovery is on the ropes, battered by political conflicts within and across countries, lack of decisive policy actions, and governments’ inability to tackle deep-seated problems such as unsustainable public finances that are stifling growth. Growth in global trade has weakened and the spectre of currency wars, with countries looking to maintain export competitiveness by keeping their currencies weak, has returned to the fore.

The Brookings-FT Tiger index shows growth momentum has dissipated in nearly all major advanced and emerging market economies. Central banks of the major advanced economies have responded with a range of conventional and unconventional policy monetary policy actions. These measures have put a floor on short-term financial market risks but have been unable to reverse declining growth momentum. As a result, financial markets continue to go through short-term cycles of angst and euphoria even as indicators of real economic activity remain mired in weakness. 

By Domenico Lombardi

The IMF has just elected the first woman to its managing directorship, and already Christine Lagarde’s new desk in Washington is piling up with folders eagerly awaiting her arrival. 

Widespread agreement exists that the international monetary system needs reform. The present system, dominated by reserve holdings of US dollars, places an unsustainable burden of creating reserves on the US. 

Shankar Acharya

By Shankar Acharya

What might 2011 hold for us? Given the intrinsic uncertainty about the future, the really honest answer would be: I don’t know. But that would be far too boring a response and, perhaps more to the point, would not fill a column. So, at the risk of looking foolish in a year’s time, here are some predictions for 2011. 

Shankar Acharya

Suddenly this month the esoteric world of international finance is resonating to the clash of currencies. On September 27 Brazil’s finance minister stated that an “international currency war” has erupted. In its October 16 issue the London Economist put “Currency wars” on its cover, with evocative imagery of an aerial dogfight between paper planes of currency notes from different countries. 

Shankar Acharya

These are uncertain times for global economic governance. For over six decades after the second world war the west framed the rules of engagement for the global economy.

In the initial years, the United States was the preeminent power, which oversaw the creation of the Bretton Woods system (International Monetary Fund and World Bank) and the initial rounds of trade liberalization under the newly-born General Agreement on Tariffs and Trade (which became the World Trade Organization at the end of the Uruguay Round in 1993).

As Europe recovered from the ravages of war and Japan launched on its high growth phase, these new leviathans (especially Europe) increasingly asserted themselves and won greater voice and roles in world economic governance. But it was still an essentially western enterprise, with a demilitarized Japan content to go along in return for an American nuclear umbrella.

The Soviet Union and its satellites were not an integral part of this economic system and the developing countries didn’t carry significant economic clout, not even the populous Asian giants of China and India. 

By Ronald I. McKinnon

Speculation is rife about when, not just if, China should exit from its policy of stabilising the renminbi/dollar rate. The Financial Times editorial policy more generally, and Martin Wolf in particular have joined the usual ranks of American protectionists in bashing China for failing to appreciate. 

“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.

Continue reading “China and Germany unite to impose global deflation”. Please post comments below.

As part of the FT’s week-long series on the Brics emerging markets, experts on each of the four economies will contribute to the debate about the role of Brics consumers in the global economy. The last entry focuses on China, read the entries from the other countries below.

By Michael Pettis

Given the speed of its economic transformation, its sky-high bank-stock valuations, the unprecedented size of its accumulated reserves, and its much-advertised desire to change the global monetary system; it is tempting to assume that China will radically transform the world’s capital markets and financial systems with the same ruthless speed with which it has transformed export markets.

But this won’t happen.  Beijing is skeptical of arguments supporting rapid financial and monetary deregulation, and policymakers continue to measure the usefulness of the financial system mainly to the extent that it serves the needs of rapid growth in manufacturing and infrastructure. This means continued heavy-handed control of the capital allocation process and the level of interest rates, the relinquishing of which are the two key measures of real financial sector liberalisation.

China’s main impact on the global financial system will continue, for the foreseeable future, to be limited to its massive accumulation of reserves. And because the US is still the only economy large and flexible enough to accommodate the high trade surpluses that the Chinese economy relies on, it will continue to accumulate dollars. 

The only truly global power was in rapid relative decline. Not long before, it had won a pyrrhic victory in a costly colonial war. New great powers were on the rise. An arms race was under way, as was competition for markets and resources in undeveloped areas of the world. Yet people still believed in the durability of the free trade and free capital flows that had nurtured prosperity and, many believed, had also underpinned peace.

That was how the world looked to many at the end of the “noughties” of the 20th century. Yet catastrophe lay ahead: a world war; a communist revolution; a Great Depression; fascism; and then another world war. The world order – built on competing great powers, imperialism and liberal markets – proved incapable of providing the public goods of peace and prosperity. It took calamity, the cold war and the replacement of the UK by the US as hegemonic power to re-establish stability. That then facilitated decolonisation, unprecedented economic expansion, the collapse of communism and yet another epoch of market-led global integration.