Industrial Countries 'Need to Adjust to New Reality'
Industrial countries’ economic policies must acknowledge the structural changes in their economies that the crisis wrought. Otherwise the global economy will suffer, warned Mohamed El-Erian, chief executive of PIMCO, the world’s largest bond investor, in an October 10 lecture sponsored by the Per Jacobsson Foundation at the 2010 IMF–World Bank Annual Meetings.
He told the audience that industrial countries were on a “bumpy journey to a new normal.” A major national and global realignment means there will be no return to business as usual.
The “sudden stop” suffered by the international monetary system two years ago is still being felt by millions of people around the world. Industrial countries were especially hard hit, El-Erian noted; they now face low growth, high unemployment, and welfare losses together with sagging social safety nets.
Strong response to crisis
The global economic crisis was the result of many years of balance sheet excesses and payments imbalances combined with overconsumption of innovative financial products that lowered the barriers to investment, including in the housing market, El-Erian said.
National authorities acted boldly to address cascading failures and did so in a globally orchestrated fashion, averting a multiyear economic depression and suffering by billions around the world. El-Erian described the international reaction to the crisis as “global coordination at its best.”
Bumpy road; new destination
But industrial countries, having “won the war,” now risk “losing the peace,” El-Erian warned, as the policy convergence formed in the midst of the crisis gives way to fragmentation and excessive political brinksmanship. “A once-promising global response has been replaced by inadequately coordinated national economic policies and growing frictions among countries.”
The world faces a protracted and complex recovery process, El-Erian noted. The challenges are the result of massive structural imbalances—illustrated by excessive consumption, asset bubbles, inadequate risk management, and misunderstood financial products—combined with balance sheet destruction.
El-Erian: “A once-promising global response has been replaced by inadequately coordinated national economic policies and growing frictions” (IMF photo)
The result so far has been dampened economic...
To continue reading
Request your trial