Op-Ed Contributors

Some reflections on the post-crisis period

By Zhou Qiren (China Daily)
Updated: 2010-02-03 07:49

People have already begun to talk about the post-crisis era only a year and some change after the global financial crisis erupted. But what is the fundamental reason why the post-crisis era has come much faster than expected? An accurate analysis of the magnitude of the crisis and its negative impacts will help people better gauge the pulse of the global economy.

Countries across the world have undergone a rollercoaster ride from an initial underestimation to an overestimation due to the global financial crisis. After the sub-prime mortgage crisis began to finally wreak havoc in the United States, widespread opinion was that its impact would be confined to the world's largest economy and would not affect other regions.

But as the crisis quickly spread globally, public pessimism began to escalate and some critics believed it would be worse than the Great Depression. That proved to be an exaggeration.

During the Great Depression that swept the world from 1929 until the late 1930s, the US was hit by an unemployment rate of more than 25 percent. Many US banks went bankrupt; its stock market dropped by 90 percent. In comparison, the recent global financial meltdown is much minor in magnitude, as evidenced by the recovery of the global economy less than two years after the crisis' outbreak.

The Great Depression began amid the gold standard system adopted by main developed countries at the time in which their currencies were pegged to gold. With this system, the possibility was thin that a vicious inflation would break out. But there is always the other side of the coin.

Under the gold standard, countries would have fewer tools available to stimulate their economies, such as increasing currency supplies, provided that deflation emerges. In fact, the world economy managed to pull out of the Great Depression only after the pound and the US dollar, two leading currencies in the world, were disconnected from gold.

When it comes to the latest global financial crisis, it erupted nearly eight decades after the world's leading currencies were freed from gold. As a result, affected countries had myriad tools and ways to stimulate economic development in case of deflation.

The huge economic advantages produced by developed and emerging economies advancing from the past isolation to the current openness and integration have also pushed the global economy forward and improved its capability to tackle potential risks.

Once a global financial crisis is looming, which will unavoidably trigger systematic horror, recession and depression, affected countries still have some weapons and means, such as relaxing currency supply, to spur economic development. In this sense, the latest crisis is not a parallel to the Great Depression.

Chinese people have also been affected by the initial underestimation of the crisis to the overestimation about its impact on the Chinese economy.

The country's economic boom has partly been driven by its flourishing export-bound manufacturing sector. However, by mid-2008, the country's export declined to a negative 20-percent growth rate from the positive 20-30 percent rate in previous years. Under such circumstances, some concluded that the country would likely face a negative growth in 2009 and 2010, dismissing the 8-percent growth target previously set by the central government.

The adverse economic environment prompted the Chinese government to launch a basket of stimulus packages, including a $586 billion investment campaign and a $110 billion special fund on healthcare construction. The packages, together with an astronomical $1.32-1.47 trillion in bank loans, helped the country obtain an 8.7-percent economic growth in the past economic year.

So what is this year's economic outlook? Worries are abound that the country's economic recovery is not steady and is still precarious. However, data shows that investments contributed 7.3 percentage points to last year's economic growth, consumption at 4 percentage points, and exports at negative 3.6 percentage points. New macroeconomic policies by the central government also indicate that the contribution of investments and spending to the economy is not expected to drop. Under such preconditions, the pace of the country's economic growth will accelerate if its exports begin to recover this year. The expected growth in US, as the largest world economy grows steady, will also expand China's exports.

A problem that all countries should not ignore is the possible price they should pay via their stimulus packages to rescue the staggering world economy. So will China, a country that has launched a stimulus campaign to check its economic slowdown. The country's supply of M2 (money and "close substitutes" for money), which is 20 percentage points higher than its GDP growth, is sure to produce negative effects for long-term economic development. The flood of currency supply in a variety of sectors is expected to push up domestic commodity prices sooner or later. That makes it necessary for the country to attach importance to the problem of inflation and take effective measure to minimize inflation risks.

The author is director of China Center for Economic Research, Peking University. The article was originally printed in the center's bulletin.

(China Daily 02/03/2010 page8)