Glimmer of Hope
In a few days, the fiscal year for many financial institutions in Guyana will come to an end. As these institutions tally up their revenues and expenses to determine how well or how badly they did, a glimmer of hope peeks out from behind the cloud of despair that, one year ago, darkened the economic atmosphere of Guyana and the world at large. The activities of the financial institutions in Guyana are still a relatively small slice of the economy, but as conduits and creators of the medium of exchange, their impact is huge. With one full quarter to go, it might still be too early to tell how the Guyana economy will perform this year, especially in light of the new US attitude to the management of the global economy. But, the dark clouds of economic recession that threatened Guyana and the rest of the world have begun to lift and optimism is returning to the global economy.
Change in Economic Leadership
As economic recovery takes hold, global economic leadership is looking different from one year ago. In a realignment of the star economies, the Group of Eight (G-8) is no longer calling the shots. Made up primarily of the leading western industrialized countries and Russia, the G-8 often underestimated the importance and impact of some of the largest and fastest growing countries in the world. The G-8 was unable to foresee or even prevent the possible collapse of the global financial system.
The nature of the current global economic crisis revealed the weakness in global financial management and how unsuitable it was for a rapidly changing global economy. The G-8 was in the habit of activating the G-20 when trouble was brewing and then left them behind once the trouble passed. This time it may not be easy for the G-8 to abandon the G-20.
Many of them are bigger and stronger. Many of them play a much more critical role in the world economy. China is the third largest economy in the world. Brazil is the eighth largest. Both of them are ahead of Canada while China is larger than both Canada and Italy, members of the G-8. China holds the largest amount of US treasuries and grows twice as fast as any of the G-8 countries. The near collapse of the G-8 economies last year and the magnitude on which they depend on other G-20 countries hit home hard with the current crisis. Last year, the G-8 eventually gave way to the G-20 which includes countries like Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia and South Africa to bring the crisis under control. Some of these countries are among the fastest growing and have economies that are larger than member countries of the G-8.
The change in economic leadership has taken hold in what President Obama referred to as a “new era of engagement” for the United States of America (USA) in his maiden address to the United Nations General Assembly on Wednesday, September 23, 2009. While the management of the global economy has changed, the structure used for its management remains intact and could stand in the way of progress of current and future deliberations of the G-20.
Maintaining A Steady Line
As the largest economy in the world, the USA will play an important role in helping the global economy to emerge from the current slump. If President Obama gets his way, that role was likely to be different from what the world was accustomed to. However, it is not evident that the USA is willing to cede control of the global financial institutions, the functioning of which is under question by some of the members of the G-20. Right now, the USA is focused on getting its own mix of domestic monetary and fiscal policies right that could stimulate job growth and loosen credit markets.
While the stimulus package that was passed by the US Congress earlier this year takes hold, the Federal Reserve decided this week to maintain a steady line on monetary policy and on the use of the emergency measures that it deployed at the height of the crisis. This position is based on the economic signs that are emerging.
The Federal Reserve continued to see a favourable outlook for the US economy at the end of its two-day meeting earlier this week. At the conclusion of the Federal Open Market Committee (FOMC) meeting, the organization declared that economic activity in the USA was on the rise. It cited improvements in the financial markets, an upswing in housing construction and a better alignment of inventory with sales by the business sector in support of its position. In the view of the Federal Reserve, this more hopeful view of the US economy was strong enough to overshadow the seemingly intractable problems of job losses, reduced home equity and tight credit that continue to impact individuals and families directly.
Calming Effect
The positive sentiments about economic recovery are not confined to the USA alone. The United Nations Conference on Trade and Development (UNCTAD) expects Asia to do even better than the USA. It forecasts that China will grow by over seven percent and India by as much as five percent this year. The favourable growth by these two countries are expected to have a calming effect on the economic crisis and help the economies of Asia to see growth above 3 percent by the end of this year. China and India are expected to grow at even higher rates in 2010 and give them a special place in the recovery efforts.
China, though, is getting most of the attention. The importance of China to the global recovery is underscored by the insistent call by the US for China to modify its growth strategy. This is a key shift in US policy and one that reflects accommodation and the new realities in global economic management. For several decades, China has pursued an export-led strategy of economic development. That strategy allowed it to exploit successfully the aggressive consumption habits of US consumers and their appetite for borrowing. That behaviour of US consumers contributed to the near collapse of the global financial system. Fearing that American consumers might return to living beyond their means, President Obama has asked China to redirect more of its output to its own domestic market. This call by the President for China to modify its growth strategy forms part of “a new era of engagement”.
Another element of this policy is the unwillingness of the US to accept a global economy that does not work for all nations. That is a laudable objective that is also pragmatic. It recognizes the increased interdependence of countries and the importance of all countries doing well. How this objective is to achieve is anyone’s guess. When combined, these two elements of the new engagement policy mean that the USA is not prepared to be the sole engine of the world’s economic growth and is not ready to encourage its citizens to over indulge, once again, on the output of the rest of the world.
Dampening Effect
For Guyana, the favourable economic health of the global economy contains good news. As global demand for goods and services picks up, exports can rise. The economic situation could be helped with the relatively high prices that Guyana is getting for some of its exports. However, Guyana sends a large percentage of its exports to the US market. If the US market is unwilling to increase its purchases as it did before the economic crisis, then that could have a dampening effect on the growth prospects of Guyana.
