Recovery from the worst economic crisis since the Great Depression remains incomplete, and there are numerous tough challenges ahead, but most experts concur that the worst is behind us, and growth, however slow and painful, is the path ahead.
Now, with breathing room, economists, policy makers and analysts alike are asking, how did we get here? How did financial institutions, regulatory agencies and laws fail to prevent the catastrophic crash that cost the world trillions in wealth?
More importantly, what lessons have been learned? Have the past failings been rectified? Has the new global financial landscape evolved in ways that will prevent a future reoccurrence?
These were some of the issues discussed at "The Currency of Trade," a conference in Beijing hosted by Arizona State University, the Kearny Alliance and Tsinghua University.
The talks in China resonated with additional import, since China's massive stimulus spending -- exceeding that of most western nations -- produced the greatest positive impact among all the world's biggest economies. Growing by double-digit annual rates for decades, China's economy barely stumbled in the global slump and, according to speakers, has already regained its momentum.
The China example
"China responded with huge spending in 2009," explained Xiao-Sheng Chen, general manager of China-specialist SWS Research. "The recovery has been a surprise," he said, noting that the speed and strength of recovery had exceeded the expectations of most economists. "We should have confidence in even greater recovery in 2010."
Other speakers questioned whether China's renewed boom would help pick up the rest of the Asian economies, and act as an engine for global growth. Chen noted that the initial markers of the economic resurgence were the recovery of the real estate market and the renewed spending on big-ticket items like automobiles.
"Chinese people want to consume more, and want to buy houses and cars." This confidence helped China to pass the United States this year, as the world's top market for automobiles.
He predicted that growth would consolidate this year with increased investment and a boost in exports. Early in the economic meltdown, China experienced a rash of factory closings, particularly worrisome in light of the enormous pressures to maintain employment in industries where worker turmoil has often sparked civil unrest.
Yet, by the last quarter of 2009, factory orders were picking up, and in fact growth surged to 10.7 percent in the fourth quarter. China passed Germany to become the world's largest exporter. But many wondered whether this robust recovery would ever translate into the kind of consumer confidence that prompts Chinese spenders to splash out on foreign goods, boosting the gloomy global economy.
For China, more change needed
"China needs to shift its emphasis," said Louis Kuijs, senior economist at the World Bank in China. For a long time now, China has seen rapid economic growth and development. But the growth has been particularly relying on investment and industry, and less on consumption and services. This pattern of growth has led to some imbalances that the government has also recognized. Several of the imbalances are domestic in nature, such as the impact on inequality, energy intensity, and impact on the environment. But, externally, it has shown up in a dependence on exports and a growing current account surplus. As the global crisis hit China's exports and thus the overall economy, China's first response was to implement a massive stimulus plan. This stimulus has been successful in keeping growth up in 2009.
"Now that the government has basically succeeded in dampening the impact of the global crisis," he noted in a report on China's economy at the end of three quarters, "it is a good time to concentrate and focus efforts on the structural reforms that are needed to rebalance and get more out of the domestic economy on a sustained basis."
He explained: "Achieving this calls for more emphasis on consumption and services, and less on investment and industry."
Unfortunately, few believe China will take any bold steps such as allowing its currency to float more freely, thereby rebalancing what most around the world consider a grossly undervalued currency. Keeping exchange rates low gives China an unfair advantage in exports, critics charge, and prices foreign goods out of the market.
Even amongst mounting global pressure, China has maintained its tight control of the currency, and the economic crisis has only seemed to harden China's resolve to keep currency movement to a minimum. However, many see hope that as the recovery gains momentum, China will feel less need for cautious economic policies in 2010.
Meanwhile, the outlook around Asia has been surprisingly robust, especially when economists recall the massive collapse of the last big crisis in 1997-1998. That is usually called the Asian Financial Crisis, as it began and had its biggest impact in Asia.
A decade later, Asia clearly learned its painful lessons about economic collapse. "The Asian Financial Crisis was the most serious the world had seen since World War II," said Pieter Bottelier, senior adjunct professor of China studies at Johns Hopkins University's School of Advanced International Studies.
He detailed significant differences between the recent recession and the Asian Financial Crisis. The latter followed excessive borrowing by Asia's "Tiger" economies. As the crisis spread, "they couldn't survive as liquidity was withdrawn."
In contrast, the current crisis was typified by excess liquidity, which drove up asset prices to unsustainable levels. In the ensuing collapse, Asia managed to escape the banking failures and recapitalizations common in America and many western nations.
Hans Genberg, visiting advisor, Bank for International Settlements and former executive director of research at Hong Kong Monetary Authority, noted that many Asian economies were well equipped to provide fiscal stimulus as they had huge reserve savings. These accumulated in response to the Asian Financial Crisis, in order to battle the widespread currency speculation.
"There were important lessons learned. Both in 1997, and in the current crisis, we saw the need for good macro-economic policies and also that self-insurance works," said Genberg. "Large reserves proved good for the spending and stimulus required."
"Of course," he added, maintaining such funds, "is a costly approach."
Changes in the world economy
Yet many believe this costly strategy will be the norm for many nations, as confidence in the American dollar, long the global currency of trade, has been greatly undermined by the economic meltdown. Western financial management practices and financial institutions have similarly suffered a massive blow of confidence.
"There is no question that a lot of countries have grown suspicious of unfettered American capitalism," conceded Bottelier. This same mistrust extends to concepts of financial regulations, he added, and especially to mechanisms like derivatives that were devised in the West, but are now widely associated with the causes of the crisis.
The global economic crisis has also cast a pall over western-style capitalism and institutions, said Robert E. Mittelstaedt, Jr., dean of the W. P. Carey School of Business at Arizona State University. "It's going to be difficult to go back."
Genberg added: "This turmoil started in the West, and is widely seen as a problem of the western financial system." Repairing the tattered reputations is likely to take even longer than the economic recovery.
Bottelier suggested that there would have to be a response to the huge loss of faith in the American financial system. "There is bound to be a shift. I believe there will be a huge change in the American financial system. It's suffered a loss of a lot of prestige around the world, and people just don't look at it as a model anymore."
The meltdown revealed a devastating lack of financial oversight, said Mittelstaedt. "There was no question there was too much spending and credit, and people taking advantage of that. There is a need for more oversight to prevent this from happening again."
Future for global economy
On a positive note, there were no trade wars that many predicted, in which nations tried to close off markets to protect national economies at the expense of global trade. Nor were there serial currency devaluations, with one country trying to gain an exchange advantage over others, as happened in previous recessions.
Clearly, though, economic caution is commonplace around the globe. "Violent changes occurred the last year or so. Nobody wants to see that again," said Michael Melvin, managing director and head of currency research at Barclay's Global Investors.
Already, he noted, countries and companies are taking new measures to limit their exposure to any repeat events. "Since the crisis, there has been more interest in hedging than ever before," he said. "It's like buying insurance after a crisis, but understandable. Many firms took a big hit. I think this will be with us for a while."
Moving forward, many are pessimistic that the root causes of the collapse will alter. "What I think will happen, is we will rapidly return to a system as before," predicted Michael Dooley, professor of economics at the University of California, Santa Cruz.
"China and Asian economies will continue to rely on export-oriented growth, the trade surplus will build, U.S. deficits will grow, and nobody will mind," he added. "By 2010-11, the monetary system will look much like it did in 2006, before this happened."
China's economy has rebounded faster than any other big country, thanks in part to its massive US$586 billion stimulus plan.
By the last quarter of 2009, China's factory orders were picking up. Exports for the year declined by 17 percent overall, but the exports of other countries experienced even greater slumps. China's market share of U.S. imports rose to a record 19 percent, and China passed Germany to become the world's top exporter.
Asian economies also weathered the global crisis comparably well, helped by big reserves accumulated during the Asian Financial Crisis of the previous decade. Few banks in Asia experienced the problems that caused widespread closures in the West.
Faith in western financial institutions and practices has suffered severely in the crisis. "A lot of countries have grown suspicious of unfettered American capitalism," noted Johns Hopkins University professor Pieter Bottelier.
Even as recovery is expected to continue strongly in 2010, a natural caution persists. Companies and countries are relying more heavily on hedging and reserve currency holdings to insure against future financial volatility.
Despite widespread calls for more stringent financial oversight, Michael Dooley, professor of economics at the University of California, Santa Cruz, predicts that little will really change. "By 2010-11, the monetary system will look much like it did in 2006, before this happened."
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