Mari Pangestu: The Champion of Free Trade - The President Post

A6
July 12, 2010
The President Post
www.thepresidentpost.com
The World
GLOBAL ECONOMIC PROSPECTS:
Cloud Over Europe’s Debt Crisis
By Atmono Suryo
CLOUDS IN THE SKY
Towards the end of
2009, the world
community, including
Asia, expected
that the
global economy
would be out of the woods and
come out of the dark tunnel and
be on the road to recovery. It also
hoped global recession would recede
in many parts of the world,
especially in Asia, with China
and India in the lead.
The expectations for an upturn
were quite strong. The world has
been warned, however, that the
recovery could be a subdued recovery
and risks would remain,
that world demand would continue
to be weak, and unemployment
would remain and inflation
rising.
Now that we are in the middle
of 2010, somewhere in the west,
namely in Europe, the alarm bell
is beginning to ring again. In its
latest assessment, the World Bank
has called for world attention that
clouds are gathering in the financial
sky on account of Europe’s
debt crisis triggered by Greece’s
fiscal position.
These events show that serious
challenges have remained, as admitted
by the recent G20 Toronto
meeting: the world’s financial
system needs repair and reform.
We must be reminded again that
the world financial system is the
freest of all systems and that it
is still strongly defended by ad-
figure 1: THE GLOBAL OUTLOOK
vanced countries. It is increasingly
recognized, however, that the
liberalization of international finance
has gone too far.
The world trade system, which
aims at a multilateral free trade
system, has become a complex
system with its many WTO regulations
and standards.
Europe’s Debt Crisis
Market nervousness happened
in Europe as a result of the debt
positions of several high income
countries as of May 2010. An
aid package of nearly $1 trillion
2008 2009 2010 2011 2012
Real GDP growth 1.7 -2.1 3.3 3.3 3.6
High income
OECD Countries
Euro Area
Japan
United States
Non-OECD countries
Developing Countries
East Asia and Pacific
China
Indonesia
Thailand
South Asia
India
Pakistan
Bangladesh
Latin America and Caribbean
Brazil
Mexico
Argentina
0.4
0.3
0.4
-1.2
0.4
3.0
5.7
8.5
9.6
6.0
2.5
4.9
5.1
2.0
6.2
4.1
5.1
1.8
7.0
-3.3
-3.4
-4.1
-5.2
-2.4
-1.7
1.7
7.1
8.7
4.6
-2.3
6.3
6.8
3.7
5.7
-2.3
-0.2
-6.5
-1.2
World Trade Volume (GNFS) 3.2 -11.8 11.2 6.7 7.3
Commodity Prices (USD terms)
Non-oil commodities 0.0 -21.6 16.8 -4.0 -5.4
Oil Price (US$ per barrel)
Oil price (percent change)
97.0
36.4
61.8
-36.3
2.3
2.2
0.7
2.5
3.3
4.2
6.1
8.7
9.5
5.6
6.2
7.3
8.0
3.0
5.5
4.5
6.4
4.3
4.8
78.1
26.4
2.4
2.3
1.3
2.1
2.9
4.2
5.9
7.8
8.5
6.2
4.0
7.8
8.5
4.0
5.8
4.1
4.5
4.0
3.4
74..6
-4.5
Manufactures 5.9 -4.9 0.0 -3.7 0.0
Source: World Bank
2.6
2.6
1.8
2.2
3.0
4.5
6.1
8.1
8.7
6.0
5.0
7.5
8.0
4.5
6.1
4.2
4.1
4.2
4.4
73.9
-0.9
was needed from the European
Union and the IMF to cope with
the European debt crisis.
As can be seen from afar the
Euro financial situation seems to
be a complex one. The contagion
effect would in the first place affect
the other soft countries such
as Portugal and Spain.
So far the contagion effect
has been limited although there
has been a sharp decline in
stock markets worldwide, affecting
also Asia, including Indonesia.
The European Central Bank
warned that the debt crisis could
figure 2: International capital flows to developing countries
subject the region’s banks to some
rounds of losses.
Not only European countries
but also many countries around
the world have taken various
measures to cope with the situation,
among others and In particular,
by introducing fiscal measures
and by cutting spending.
2010 GLOBAL PROSPECTS
A World Bank June 10 press
release notes that the global economic
recovery continues to advance.
But Europe’s debt crisis
has created new hurdles on
the road to sustainable medium
terms growth.
It is predicted that global GDP
will increase from minus – 2.1%
in 2009 to 3.1% in 2010, 3.3%
in 2011 and expand to 3.6% in
2012 (Figure 1).
DEVELOPING COUNTRIES
Current statistics show that
high income countries (OECD)
2005 2006 2007 2008 2009 2010 2011 2012
Net private and official inflows 501.8 659.8 1222.8 780.5 523.5
Net private inflows (equity+debt) 573.3 732.1 1223.7 752.4 454.0 589.5 670.2 770.8
Net equity inflows
Net FDI inflows
Net portfolio equity inflows
349.9
281.1
68.8
469.0
363.2
105.8
As a percent of GDP (%) 2005 2006 2007 2008 2009 2010 2011 2012
663.8
528.4
135.4
536.5
593.6
-57.1
will be out of the negative growth
(-3.3%) by achieving growth of
2.3% this year. A most significant
development is the growth
of developing countries, which
is predicted to move from 1.7%
growth to 6.1%. This is a most
amazing new development in the
global economy.
It is not only East Asia which is
moving ahead with China, Indonesia
and Thailand as frontrunners
and South Asia with India
and Bangladesh in the lead, but
also Latin America (Brazil, Mexico
and Argentina) and Sub-Saharan
Africa (Nigeria, Kenya and
South Africa) at the forefront
The developing countries’
growth is responsible for the bulk
of global growth. This trend is
expected to continue in the years
and decades to come.
For many developing countries
ODA (official development
assistance) is very important to
445.9
358.3
87.5
Net private and official inflows 5.03 5.59 8.45 4.51 3.09
Net private inflows (equity+debt) 5.74 6.21 8.46 4.35 2.68 3.02 3.05 3.15
Net FDI inflows
Net portfolio equity inflows
Private creditors
Source: World Bank
2.82
0.69
1.5
3.08
0.90
1.6
3.65
0.94
3.9
3.43
-0.33
1.4
2.12
0.52
0.5
497.5
438.0
59.5
2.24
0.30
0.5
564.2
501.0
63.2
2.28
0.29
0.5
652.8
575.0
77.8
2.35
0.32
0.5
stimulate economic growth. Aid
flows, however, have come down
considerably. There is some suggestion
that aid flows have come
down as much as 20% to 25% in
the current crisis. It could take
about a decade for the flows to
recover.
Private capital inflows have
also declined, from $1223 billion
to $454 billion in 2009. It is projected
to recover slowly and reach
$771 billion by 2012 (Figure 2).
G20 SUMMIT IN TORONTO
The G20 summit attention
was mostly focused on global
economic issues, especially in
the area of banking and finance
such as:
• Laying the foundation for
strong, sustainable and balanced
growth.
Building a more resilient fi-
•
nancial system through sector
reform which would rest on
four pillars.
• To cope with international financial
institutions and development.
In addition, the Toronto Summit
dealt with the launching of
the Global Agriculture and Food
Program; an issue which is set to
become more intense.
It should be realized that the
global economy has suffered the
sharpest decline of trade in more
than 70 years. G20 highlights
that it is necessary to keep markets
open and to fight protectionism.
There is the need for the World
Bank and other Multilateral Development
Banks to step up their
capacity to support trade facilitation.
Shaken by the European debt
crisis, one of the key decisions
made at Toronto was to cut deficits
in most industrialized nations
in half by 2013.
It is remarkable to note that
much attention is being given
by the G20 on other issues aside
from finance, among others the
problem of combating corruption.
After Washington, London,
Pittsburgh and Toronto, the next
G2O summit will be held in an
Asian country; namely Seoul,
South Korea, on November 11-
12, 2010.
The writer is retired career
diplomat and former ambassador
to the EU.