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Global economy: Flying on one engine?

By webadmin on 9:12 pm October 6, 2011.
Category Archive

Wijayanto

In many aspects, the 2008 economic crises shared the same characteristics as the European crisis of the early 1990s, Japan in 1991, Mexico in 1992, Asia in 1997, Russia in 1999 and Argentina in 2001. However, in terms of scale, it is distinctive. It affected Japan, the EU and the US, countries that represents 60% of the global economy.

In the past economic crises tended to be regional so that there were always countries that could provide help. In contrast, the current crisis is truly global: it has almost paralyzed three of the most important global economic engines. 
Nowadays, we feel like we are flying in a Boeing 747 in which three of the four engines are in trouble. The question is how long it will take for the three troubled engines to recover and how long the plane can fly with only one engine.

Engine 1: Japan
Japan has not really recovered since the 1991 crises. Annually, its economy grew by 1%, much lower than the performance in 1960-1990. Japan failed to reform its economy, mainly due to its rigid political and financial system.
The 2008 economic crises made the situation more complex; then came the 2011 tsunami and nuclear disaster.
With public debt twice the size of GDP and a massive budget deficit, the government has limited capacity to stimulate the economy.
Moody’s recent rating downgrade explains Japan’s delicate situation. While the short-term situation is rather bleak, the long-term picture is not much different. Japanese life expectancy increases continuously while at the same time the fertility rate decreases. Japan is experiencing an aging population problem, a serious challenge for economic competitiveness. In short, Japan is on a slippery slope to regain its role as a world economic engine.

Engine 2: the EU
Japan is not alone. The EU also faces serious aging population issues in addition to the current economic crises that have had to be faced. Most EU members have a weak fiscal position depicted by huge public debt, large budget deficits and enormous fixed expenditure for healthcare and pension expenses.
After more than two years of effort and a multi-billion euro program to support the economy, the light at the end of the tunnel still cannot be seen.

With a credit rating of CC, it is very likely that Greece will default on its debt if there is no further bail-out. If that happens, the cost to the EU will be enormous: Portugal, Ireland, Spain and Italy may follow.
The question is, will France and Germany still have the will to lend a hand, despite the domestic political risk for their leaders?
In the longer-term perspective, the EU faces a complicated challenge. There are too many freeloaders in the EU and it has no mechanism to expel them from the union. It also has conservative welfare systems.
While such systems will work perfectly assuming there are stable living costs, continuous economic growth and a stable dependency ratio, at the moment unfortunately these three assumptions are not in the picture. In fact, living costs are increasing, economies are stagnating and the population is aging at an unprecedented speed.
In summary, the current crises and the long-term challenge make it difficult for the EU to maintain its role as a source of world economic growth.

Engine 3: the US

For the first time since World War II, US public debt has reached $14 trillion, equivalent to its GDP. If we include under-funded government pension funds, the number could easily double.

Unfortunately, reducing debt and providing stimulus to the economy is not an option nowadays, since the US is also experiencing an acute trade and budget deficit. 

Medicare is another headache. According to Michael Mandlebaum of SAIS, this consumes 17% of the US economy and the figure could reach 30% by 2030. Interestingly, more than 20% of Medicare expenditure occurs in the last two months of life and 30% in the last year of life, to cover state-of-the-art medication and doctors to extend the life of the elderly by several months. I am sure there is a better way of spending money.

Clearly, the US has a long list of homework to do. Unfortunately, the inability of US policy makers to sit down, to talk and to decide makes the list of problems even longer.

Engine 4: China

China is a phenomenon. Despite the 2008 crises, its economy grew at close to double digits and provided demand for a big chunk of world products. For several Asian countries, including Indonesia, China’s role as a trading partner has become more important.
Despite this crucial position, China is not free from potential risk. As an export-led economy, the prolonged crises in Japan, the EU and the US will negatively impact China’s position.

Certainly, China needs to shift gears and utilize its huge domestic market as the main economic pillar. It needs to address various challenges including governance in its financial system, asset bubbles, inflation, over-investment and rising social unrest so that it will be able to take a greater role in the world economy. 

Maintaining high economic performance is a priority for China, to provide jobs for its people. Learning from the Arab Spring, unemployment and inequality can trigger massive protest en route to regime change – a story that the communist regime doesn’t want to replicate.

Despite the above challenges, China is playing a vital role in helping the world recover from the crises.

The need for new engines

The global economy is becoming more complex. Everybody wants to innovate in the search for efficiency. The world economy becomes a bottom-up system with no-one in charge at the top. It is very dynamic and at the same time quite risky.

It is possible that economic boom and bust could happen more frequently. In this context, four engines are not enough. The world needs six, seven or more centers of growth. The role of countries like Indonesia, India, Brazil, South Korea and Turkey will become more strategic. These countries are in good shape with considerable economic scale and growth levels.
For Indonesia, maintaining economic progress and quality has become an important task. It is benefiting not only the people of Indonesia, but also the global community in general.

According to an experienced pilot, a Boeing 747 can fly with one engine, but it is quite risky to do so. The same is true for the world economy.
We hope that the three troubled engines will recover soon and, for safety reasons, the world should have more engines in the future.

Wijayanto is a vice rector at Paramadina University. He is also the co-founder and managing director of Paramadina Public Policy Institute. He can be reached at  wijayanto@paramadina.ac.id   

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Global economy: Flying on one engine?

By webadmin on 9:12 pm October 6, 2011.
Category Archive

Wijayanto

In many aspects, the 2008 economic crises shared the same characteristics as the European crisis of the early 1990s, Japan in 1991, Mexico in 1992, Asia in 1997, Russia in 1999 and Argentina in 2001. However, in terms of scale, it is distinctive. It affected Japan, the EU and the US, countries that represents 60% of the global economy.

In the past economic crises tended to be regional so that there were always countries that could provide help. In contrast, the current crisis is truly global: it has almost paralyzed three of the most important global economic engines. 
Nowadays, we feel like we are flying in a Boeing 747 in which three of the four engines are in trouble. The question is how long it will take for the three troubled engines to recover and how long the plane can fly with only one engine.

Engine 1: Japan
Japan has not really recovered since the 1991 crises. Annually, its economy grew by 1%, much lower than the performance in 1960-1990. Japan failed to reform its economy, mainly due to its rigid political and financial system.
The 2008 economic crises made the situation more complex; then came the 2011 tsunami and nuclear disaster.
With public debt twice the size of GDP and a massive budget deficit, the government has limited capacity to stimulate the economy.
Moody’s recent rating downgrade explains Japan’s delicate situation. While the short-term situation is rather bleak, the long-term picture is not much different. Japanese life expectancy increases continuously while at the same time the fertility rate decreases. Japan is experiencing an aging population problem, a serious challenge for economic competitiveness. In short, Japan is on a slippery slope to regain its role as a world economic engine.

Engine 2: the EU
Japan is not alone. The EU also faces serious aging population issues in addition to the current economic crises that have had to be faced. Most EU members have a weak fiscal position depicted by huge public debt, large budget deficits and enormous fixed expenditure for healthcare and pension expenses.
After more than two years of effort and a multi-billion euro program to support the economy, the light at the end of the tunnel still cannot be seen.

With a credit rating of CC, it is very likely that Greece will default on its debt if there is no further bail-out. If that happens, the cost to the EU will be enormous: Portugal, Ireland, Spain and Italy may follow.
The question is, will France and Germany still have the will to lend a hand, despite the domestic political risk for their leaders?
In the longer-term perspective, the EU faces a complicated challenge. There are too many freeloaders in the EU and it has no mechanism to expel them from the union. It also has conservative welfare systems.
While such systems will work perfectly assuming there are stable living costs, continuous economic growth and a stable dependency ratio, at the moment unfortunately these three assumptions are not in the picture. In fact, living costs are increasing, economies are stagnating and the population is aging at an unprecedented speed.
In summary, the current crises and the long-term challenge make it difficult for the EU to maintain its role as a source of world economic growth.

Engine 3: the US

For the first time since World War II, US public debt has reached $14 trillion, equivalent to its GDP. If we include under-funded government pension funds, the number could easily double.

Unfortunately, reducing debt and providing stimulus to the economy is not an option nowadays, since the US is also experiencing an acute trade and budget deficit. 

Medicare is another headache. According to Michael Mandlebaum of SAIS, this consumes 17% of the US economy and the figure could reach 30% by 2030. Interestingly, more than 20% of Medicare expenditure occurs in the last two months of life and 30% in the last year of life, to cover state-of-the-art medication and doctors to extend the life of the elderly by several months. I am sure there is a better way of spending money.

Clearly, the US has a long list of homework to do. Unfortunately, the inability of US policy makers to sit down, to talk and to decide makes the list of problems even longer.

Engine 4: China

China is a phenomenon. Despite the 2008 crises, its economy grew at close to double digits and provided demand for a big chunk of world products. For several Asian countries, including Indonesia, China’s role as a trading partner has become more important.
Despite this crucial position, China is not free from potential risk. As an export-led economy, the prolonged crises in Japan, the EU and the US will negatively impact China’s position.

Certainly, China needs to shift gears and utilize its huge domestic market as the main economic pillar. It needs to address various challenges including governance in its financial system, asset bubbles, inflation, over-investment and rising social unrest so that it will be able to take a greater role in the world economy. 

Maintaining high economic performance is a priority for China, to provide jobs for its people. Learning from the Arab Spring, unemployment and inequality can trigger massive protest en route to regime change – a story that the communist regime doesn’t want to replicate.

Despite the above challenges, China is playing a vital role in helping the world recover from the crises.

The need for new engines

The global economy is becoming more complex. Everybody wants to innovate in the search for efficiency. The world economy becomes a bottom-up system with no-one in charge at the top. It is very dynamic and at the same time quite risky.

It is possible that economic boom and bust could happen more frequently. In this context, four engines are not enough. The world needs six, seven or more centers of growth. The role of countries like Indonesia, India, Brazil, South Korea and Turkey will become more strategic. These countries are in good shape with considerable economic scale and growth levels.
For Indonesia, maintaining economic progress and quality has become an important task. It is benefiting not only the people of Indonesia, but also the global community in general.

According to an experienced pilot, a Boeing 747 can fly with one engine, but it is quite risky to do so. The same is true for the world economy.
We hope that the three troubled engines will recover soon and, for safety reasons, the world should have more engines in the future.

Wijayanto is a vice rector at Paramadina University. He is also the co-founder and managing director of Paramadina Public Policy Institute. He can be reached at  wijayanto@paramadina.ac.id   

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