Fix problems as a team: Economist

Updated: 2013-05-03 11:25

By Chen Weihua in Washington (China Daily)

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World Bank chief economist Kaushik Basu said the current world economic crisis will last at least another two years.

Countries have bought time with measures such as injecting liquidity into the system, but haven't solved anything, Basu told a seminar at the Brookings Institution on Thursday.

Stimulation packages introduced by both developed and developing countries have " not cured problems," Basu said.

For its part, China launched a 4 trillion yuan ($640 billion) stimulus plan in 2009 to propel economic growth during the financial crisis.

The world is now seeing many industrialized countries stagnate while developing countries grow, but inflate, Basu said. He believes more stimulus will only exacerbate inflation.

Countries need to work together to help the world economy stabilize, Basu said.

"In today's world, the need for macroeconomic policy coordination is greater than ever before," he told the seminar.

Although people often talk about barriers between countries, globalization means the world operates like a single economy, where capital and labor flow easily, he said. However, each country's central bank makes its own plans, Basu said. "You have one economy but lots of central banks."

That's why massive injections of liquidity by advanced-country central banks fail to jump-start economies and create more jobs, the economist said.

In an op-ed piece on Project Syndicate website last week, Basu wrote that in a globalized economy, "much of this liquidity spills across political boundaries, giving rise to inflationary pressures in distant lands and precipitating the risk of currency wars, while unemployment at home remains dangerously high, threatening to erode workers' skills. The long-run damage could be devastating."

On Thursday, Basu said, "We do need more policy coordination." Besides examining central bank policies, he called on the world to address labor policies, since the wage share in GDP has been shrinking.

Industrialized countries, where wages are higher, will be the first to feel the declining demand for labor, Basu said. This shrinking demand for labor is partly due to liquidity injections and lower interest rates causing capital costs to be lower than labor costs, he said.

The 12 percent unemployment rate in Europe and the 7.7 percent unemployment rate in the United States, including more long-term unemployment, have painted a gloomy picture. Basu called the labor situation "quite dire", attributing it to both the changing global structure of the labor force and to adopted policies.

One solution, he said, is to channel liquidity injections partly toward countering factor-cost asymmetry. "Thus, for every $100 of the new liquidity, we could use $60 to purchase assets and the remainder to give firms a marginal job-creation subsidy, which could be especially effective in economies with flexible markets that enable short-term hiring," Basu said.

The labor policy needs to be addressed with coordination and policy intervention to create greater employment, he said.

While Basu was pessimistic about the short-term prospects for emerging markets in the next two years, he was optimistic about their medium- and long-term prospects.

In an op-ed piece a few months ago, he wrote: "For emerging economies, the medium- to long-term prospects are bright. Countries that are saving a substantial amount, investing in human capital, and providing a modicum of good governance should resume their previous rapid growth."

Sheng Laiyun, spokesman of the National Bureau of Statistics, expressed confidence two weeks ago that China would hit its targeted 7.5 percent economic growth target this year.

chenweihua@chinadailyusa.com

(China Daily 05/03/2013 page10)

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