Otaviano Canuto
The state of the global economy is now more troubled than what most pundits had predicted. The great recession of 2007-09 has left permanent scars and the global recovery has lost steam. In the industrialized world, the Eurozone is struggling to save its common currency and avert an even larger debt crisis. Across the Atlantic, although things are looking slightly better, the United States still faces damaged household balance sheets, depressed consumption, and persistent unemployment. In the developing world, the remarkable role that emerging markets have played as alternate engines of global growth is no longer certain. And this is truly worrisome because in the years that followed the recession, developing countries came to the global economy’s partial rescue, helping advanced economies from slipping into an even deeper recession.
In 2010 and 2011, developing countries grew 7.3 and 6 percent respectively, compared to the 3 and 1.6 percent growth of high-income countries, according to the World Bank’s latest Global Economic Prospects. Nevertheless, growth in several major developing countries like Brazil, China and India is significantly slower than earlier in the recovery, mainly reflecting a tightening of monetary policy to combat rising inflationary pressures but also the low-growth path in advanced economies. As a result, developing countries are now expected to grow only 5.4 percent this year.
This is much more than the projected growth of only 1.4 percent for high income countries, yet it may not be enough to carry the global economy, which is only expected to grow by 2.5 percent this year. Policy makers around the world are struggling to restore stability and confidence, but what we really need is to restore prospects for robust global growth worldwide. Otherwise, the likelihood of rapid economic development in poorer countries would be dampened, and the risks to social cohesion could increase, as persistent unemployment and economic hardships persist.
But what can we do about it? What kind of policies can put the world economy back on track? That’s exactly what we set out to find out in a new book launched today, Ascent after Decline: Regrowing Global Economies after the Great Recession, co-edited by Danny M. Leipziger and me. In it, more than a dozen distinguished contributors scan the economic horizon, spell out the new fiscal reality, and highlight the policy choices on which economic regrowth will depend.
One conclusion is that the role of government remains paramount, especially in its role as “investor” in the knowledge economy, and as a “guarantor” of the social contract at a time when coping with the social costs of the crisis and creating jobs must go in tandem with reducing indebtedness. Another is that we must coordinate policies on a multilateral basis, because single-country interventions are insufficient. There is no silver bullet, but all in all, policies to “regrow” growth should include overcoming China-U.S. imbalances, establishing appropriate roles for governments, creating a more domestic growth-led strategy for certain countries, shifting industrial policy in some economies, and reactivating job creation.
Growth in emerging economies – and developing countries in general – has exhibited strong resilience to the downward pull from advanced economies. However, its full potential can only be tapped if all boats are lifted; if advanced economies also find how to ascend after declining.
To access Ascent after Decline: Regrowing Global Economies after the Great Recession, please visit: http://go.worldbank.org/MLY6ZC2E30
First appeared at World Bank Growth and Crisis blog