Andy Xie: Why the Global Economy Is Still Stuck

Andy Xie, our renowned Chinese economist, wrote an article in CaixinOnline on the reasons why the global economy is still stuck. The main reason he finds is that the policies in the entire world remain focused on the wrong things, especially speculation.

Andy Xie_Chinese Economist






The leadership failures around the world reflect that the world has changed, but the kind people who lead remain the same, even though the faces may change from time to time. The existing generation of leaders thinks in terms of rising tides lifting all the boats and burying problems underneath. Their instinctive reaction to economic difficulties is to stimulate growth. Unfortunately, such thinking does not apply now. The growth potential of the global economy is substantially lower than before under the best circumstances and, if the problems are not solved, is lower. The current global growth rate, around 2 percent, is likely to remain the norm for years to come. Those who hope for rising tides to solve all the problems expose their economies to crisis again and soon.

Andy remarks:

 Globalization, accelerated by the IT revolution, is severely reducing the effectiveness of demand management. It is no longer just the trade of manufactured goods, one-fifth of the global economy today. Multinationals can locate virtually any type of job anywhere in the world, except a few occupations like making coffee, cooking food or cutting hair. The supply side has effectively become one for the whole global economy. So when a country boosts demand through stimulus, the local supply response would be quite small. The weak feedback makes stimulus ineffective. This is why the massive stimulus in the United States sparked a big emerging market bubble rather than boosting employment at home.

In today’s global economy a country can improve its economy through boosting competitiveness, not demand. The most important elements in the competitiveness calculation are housing, health care and education. Monetary stimulus works the other way. It boosts inflation in non-tradables like housing, health care and education. Traditional macroeconomic policy generates little benefit in the short term and a lot of harm in the long term.

The main impediment to growth in Europe is labor market inflexibility. Europe has an aged labor force. Without flexibility it is likely to suffer declining productivity. Its existing focus on macro management will not solve its difficulties. Until Europe undertakes major labor market reforms, it will continue to stagnate.

The United States needs to boost education quality and decrease health care cost. Despite talks, it has done nothing on either. The actions are in pouring money into stimulus, reviving speculative activities. The resulting wealth increase among speculators gives them the wherewithal to influence the government. That force is trapping the U.S. government into adopting pro-speculation policies in the name of stimulating the economy.

Five years after the global financial crisis, policy formulation continues to be targeting the wrong things. In some cases, the policies are used to support speculation, which shifts wealth from many to a few. The global economy remains unstable as a result.

Read the entire article at CaixinOnline

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