STRENGTHEN global growth, keep it balanced, let currencies adjust and avoid protectionism, write Timothy Geithner, Tharman Shanmugaratnam and Wayne Swan.
The world economy is getting stronger. After a year and a half of positive economic growth, we are putting more distance between us and the depth of the financial crisis. It will take more time to fully repair the damage, but the challenges facing us now are less daunting than those we faced at the worst of the crisis and during the initial period of recovery.
While more manageable, the challenges facing us now are those of working for the common good in a world of widely differing economic conditions. On the eve of the Group of 20 Leaders' Summit in Korea, the world faces two very different transitions to stable growth.
The major developed economies will grow more slowly as they repair the damage of the financial crisis. Recoveries that follow financial crises are always tough and slow. The greater the financial excess, the deeper the hole and the harder it is to climb out of it.
As individuals naturally shift to saving more and paying down debt, spending is slower to recover. As financial institutions reduce leverage and build reserves against losses, the cost of borrowing will be higher for a time. These adjustments slow growth in the short term but are a necessary step to improve the prospects for more sustainable growth over the medium term.
In contrast, the emerging economies have by and large seen sharp recoveries and are growing rapidly. Those economies are in varying stages of what should prove to be a sustained period of rapid growth, with rising productivity, and higher living standards and incomes. After a crisis in which capital fled these economies when trade collapsed and global risk aversion spiked, they now face the opposite challenge: large inflows of capital, driven fundamentally by expectations of relatively rapid economic growth. This is a better problem to have than the alternative, but capital inflows create pressures especially in asset markets that must be managed carefully and with a range of policy tools.
The deep economic challenges left by the crisis in the established economies and the prospect of rapid expansion in emerging economies necessitate a new agenda for international economic cooperation. We are past the point where public policy around the world was directed exclusively to averting an economic depression. We now face diverse transitions to a sustainable path of growth led by the private sector.
This two-track recovery will dominate the global economy for a long time to come. And it brings more varied risks and challenges than those of the past two years of managing crisis.
Four objectives define this new agenda for global cooperation.
First, we must work together to strengthen global economic growth. Rapid growth in emerging economies is pushing up commodity prices, and many of those economies are tightening policy to reduce the risk of domestic inflation. However, these emerging economies, while growing quickly, collectively represent only about a third of global output, and overall growth for the world at large is still not strong enough.
The main risk for the world is not inflation in the advanced economies, where inflation expectations are stable at relatively low levels, but that the advanced economies underachieve on growth. Those economies must look for ways to strengthen underlying foundations of long-term growth, including fostering innovation and developing higher skills in the labor force, removing impediments to market entry, and providing stronger incentives for labor-force participation.
Second, because of this risk, we need to strike a balance on the pattern of growth across countries. Balance matters not for its own sake, but because it is critical to strong and sustained growth globally and to future financial stability. Ultimately we are trying to lift global growth, not just shift itso as to deliver strong, sustainable and balanced growth.
As the major economies that previously ran large deficits deal with the legacy of the crisis, and as the United States continues to increase savings and reduce borrowing, future growth in emerging economies and surplus economies will have to shift away from exports and toward domestic demand, as is now happening in China, Brazil, India and other such economies. To help ease this transition, the G-20 Finance Ministers and Central Bank Governors agreed last month in Gyeongju, Korea to support the shift of demand from deficit to surplus economies and guard against the reemergence of excessive external imbalances that could threaten future growth and stability. This framework must adequately reflect individual country circumstances and practical realities, but can provide a useful early warning system before imbalances destabilize growth.
Third, to help smooth these transitions, we need a new framework for cooperation to allow exchange rates to reflect economic fundamentals and support needed structural reforms. Currency issues were once left to the United States, Europe and Japan, but that will no longer work in the new world economy. The currencies of the major advanced economies are roughly in alignment with each other today. However, just as they must continue working together to promote stability among reserve currencies, so too do the emerging economies need to allow their exchange rates to reflect the substantial growth they have achieved in their economies over the last decade and to respond more flexibly to underlying market forces.
At the G-20 meeting in Gyeongju, all of us committed not to engage in competitive devaluation of our currencies. Economic history suggests that economies that succeed in transforming productivity will see an appreciation in their effective exchange rates over time, supporting the rise in their living standards.
And finally, we need to continue to keep our markets open and work to expand trade and maintain a level playing field across countries. Growth in the emerging economies still depends on access to products and services of the advanced economies. And the more established economies will continue to benefit increasingly from increased demand in the new emerging economies. During the crisis, the G-20 acted effectively to prevent protectionist measures to restrict trade, and we need to reaffirm that commitment this week.
We have made a lot of progress in laying the foundations for a sustained recovery, led by investment and innovation, financed by higher domestic savings, and with a more stable financial system. And we are determined to meet the challenges before us with the same resolve and in the same spirit of partnership. Our countries will continue to work with G-20 partners to build a stronger framework for multilateral cooperation to secure a world of mutual prosperity.
Tim Geithner is US Treasury Secretary. Tharman Shanmugaratnam is Finance Minister of Singapore. Wayne Swan is Australian Treasurer.