Recovery despite disharmony

The world economy, according to most forecasters, is expected to grow in 2010 by nearly five per cent. This surprisingly good performance, however, hides the fact that the recovery continues to be uneven among the three broad categories — the United States, the Euro zone, and the developing countries. Equally significantly, the recovery is taking place despite a marked lack of coordination among the major economic powers in solving their common problems. Dire predictions of a year ago have not materialised to the extent feared. Financial sector concerns shared by many countries have dissipated in recent months, although, as the world's leading central banks never fail to warn, the possibility of another global financial crisis cannot be ruled out. In the U.S., regulatory rules for the financial sector had to be toned down.

Going by several indicators — including the relatively buoyant stock markets, greater investor confidence, and the pick-up in cross-border flows — the world economy is a more confident place today, with the deep pessimism of just a year ago receding. To be sure, deep-seated problems remain. High up in the list is rebalancing of the global economy, which remains elusive despite being an important part of the agenda at all the G20 summits. The highly publicised currency wars — the most visible manifestation of the global imbalance — are now seen in a muted fashion.

It is clear that, in the context of the global recovery, countries have fewer incentives to negotiate and reach an agreement on the outstanding problems. Besides, the uneven recovery has prompted many countries to address domestic concerns first. Protectionism has resurfaced in the U.S. and some other developed countries. There is very little chance of concluding the Doha round any time soon. Beset with persistently high unemployment rates and low demand, the U.S. has fashioned an ultra-loose monetary policy that is akin to a stimulus for its economy.

But it is flooding the emerging markets with cheap dollars. The tax cuts agreement reached two weeks ago by President Obama with the Republicans will also act as a stimulus. In contrast, Europe as a whole has embarked on a programme of austerity. Some of the European countries like Greece, Portugal, and Spain are facing economic stress, while a few led by Germany are posting robust growth. A weak recovery in the developed world might have an adverse impact on exports from the developing countries. The divergence in economic policies, however justified by short-term domestic concerns, militates against global harmony. One hopes the divergence in performance does not lead to trade and currency conflicts that may derail the economic recovery. Hindu News