Global Economic Prospects: The Recession May be Over but Where Next?
| Published date | 01 May 2011 |
| Date | 01 May 2011 |
| DOI | http://doi.org/10.1111/j.1758-5899.2010.00074.x |
| Author | Yılmaz Akyüz |
Global Economic Prospects:
The Recession May be Over but
Where Next?
Yılmaz Akyüz
South Centre, Geneva
Abstract
The global economy suffers from a demand gap in large part because of sustained declines in the share of labour
income in most major economies. So far the deflationary threat posed by underconsumption has been averted thanks
to debt-driven consumption and property investment in the US and several European economies. This has, however,
resulted in growing global trade imbalances and financial fragility which has culminated in a global crisis. A return to
the pre-crisis pattern of growth could prove to be even more damaging. A US–China rebalancing is necessary but not
sufficient to restore stability and growth in the world economy. The two major mature surplus economies, Japan and
particularly Germany, which have been siphoning global demand without adding to global growth, will also need to
reduce their reliance on exports and add to global demand.
Policy Implications
•All major economies should pursue full employment policies and higher wage settlements in order to avoid under-
consumption crises and sluggish growth.
•The US should not allow its economy to be driven by speculative asset and credit cycles. It should live within its
means and shift to export-led growth.
•China should shift to consumption-led growth by significantly increasing the share of household in GDP through
faster wage growth and greater government transfers and by raising public spending on social services.
•Germany should stop competitive disinflation and accelerate growth based on domestic consumption.
1. Issues at stake
After a deep and widespread contraction in economic
activity and significant loss of output and employment,
policy makers, financial analysts and media pundits all
appear to be heartened by the news coming from differ-
ent parts of the world that the worst is over. The main
concern now is how to maintain the pace of the recov-
ery and recuperate most, if not all, output and employ-
ment losses incurred during the past two years. Over the
medium term hopes are for the global economy to go
back to the kind of rapid and broad-based expansion
enjoyed from the early years of the decade until 2008
without, however, the accompanying financial fragilities
and trade imbalances. This optimistic scenario depends,
to a large extent, on a measured rebalancing of the US
and Chinese economies )the largest deficit and surplus
countries, respectively. In view of the central place occu-
pied by the dollar in the international reserves system, it
is recognised that international monetary stability cru-
cially depends on the spending discipline of the US, in
line with its income, allowing for a fundamental and
sustained balance of payments adjustment. However, in
order to maintain growth, the US should not simply cut
domestic absorption but also shift to export-led growth.
An orderly US adjustment would also require, inter alia,
a shift by China from export-led to consumption-led
growth and the realignment of the exchange rate of the
renminbi (RMB) against the dollar. In this way, prospects
for global stability are expected to improve without sac-
rificing growth.
1
Even if such a rebalancing proceeds smoothly, most
developing and emerging economies (DEEs) are facing
an uncomfortable future: they are damned if the US
Global Policy Volume 2 . Issue 2 . May 2011
Global Policy (2011) 2:2 doi: 10.1111/j.1758-5899.2010.00074.x ª2011 London School of Economics and Political Science and John Wiley & Sons Ltd.
Research Article
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