[Viewpoint] Facing a very troubled economyExchange rates will likely dominate round-table discussions when world leaders gather for the G-20 Summit in Seoul next week.
At the curtain-raising G-20 meeting of finance ministers and central bank governors in Gyeongju last month, the leaders quickly agreed to restrain competitive devaluation.
Markets will closely observe the summit for a real action plan and specific targets to be convinced that the situation is under control.
Many doubt that state leaders will do more than endorse the loosely-knit and unclear communique devised by the finance ministers.
The statement, which requires advanced countries - especially the United States - to be “vigilant against excessive volatility and disorderly movements in exchange rates,” while demanding emerging members to “refrain from competitive devaluations,” may be enough to maintain order for now on currency manipulations to avoid trade wars.
But the question is: will the returned order in the exchange rate market fix global imbalances and put the global economy back on course for growth?
In fact, the exchange rates are technical problems. More fundamental and serious problems weigh down the global economy and its future prospects. This is the risk of a global slowdown.
When it faced financial turmoil in 2008, the global economy narrowly escaped a meltdown through quick coordinated actions by the G-20 economies. It limped on with negative growth in 2009, but rebounded with 4 percent average growth this year, thanks to synchronized stimulus measures by world economies.
But the world economy remains too fragile to declare smooth sailing. Economists believe that the global economy will slump to mid-3-percent growth next year.
A closer look is more discouraging. Advanced economies like the U.S., European Union and Japan are expected to grow no more than 1 to 2 percent, while emerging economies like China and South Korea are likely to post greater recoveries.
Global growth is being driven by emerging economies and the imbalance in growth will likely widen.
Some may think it doesn’t matter who does the pulling as long as the global economy moves along. But the mechanism of the world economy is not that simple.
Advanced economies are key consumers of the exports that drive the emerging economies. Consumption in advanced economies is directly connected to industrial activities in emerging economies. If consumers in advanced markets cut back, emerging economies will lose customers. Emerging economies, primarily led by exports, will inevitably slow down and join the global recession.
The structural imbalances in the global economy have triggered the recent currency spat. When the economy was faring well, advanced economies cared less about exchange rates in exporting countries. But when their economies worsened, taking a toll on growth and job figures, they sought out scapegoats in the countries raking in huge trade surpluses.
Of course, strong domestic demand in emerging countries could offset the losses in exports. But these economies cannot change their export-oriented industrial and economic structure overnight. In fact, slower growth and job losses from sluggish exports will dampen domestic consumption and make any demand-boosting measures in vain.
This is exactly why China is dragging its feet over letting its exchange rate appreciate, while rhetorically emphasizing measures to strengthen domestic demand. No countries - whether they are advanced or emerging - will sit around and watch their growth and jobs go down the drain.
But growth is not likely to pick up in advanced economies any time soon. Spending still remains languid and cautious after the horrific experience with the last financial meltdown.
An aging society has also weighed down the potential growth rate. The downward trend in long-term potential growth coupled with decreasing consumption jammed the brakes on the global economy.
The U.S. government is trying a cocktail of policies to breathe life back into the world’s largest economy. But so far, the remedies aren’t working any miracles. European countries, laden with heavy debt, went on a fiscal diet, aggravating the depressive tone of the global economy.
G-20 leaders should look beyond immediate currency strains and address the deeper and more fundamental problem of revitalizing the global economy.
A world slowdown can affect the advanced economies just as well as the poorest countries. And worse, it can escalate trade tension and conflict. That’s why advanced and emerging countries must have a shared vision to seek a path for co-prosperity.
Due to the slow recovery of the advanced economies, our export growth rates have already begun to fall, hurting growth figures as well. Growth is no longer fed by a single country’s efforts. It needs a global-scale debate and endeavors to put it back on track. The world still needs to grow and we still need to learn.
*The writer is an editorial writer of the JoongAng Ilbo.
By Kim Jong-soo