Dameisha Forum/Forum Opinions/Time to Shift Gears? International Policy Cooperation to Revamp the Global Economy
Time to Shift Gears? International Policy Cooperation to Revamp the Global Economy
Author： Source： Date：2017-09-01
Professor Wen, ladies and gentlemen, good morning. What a wonderful event! Let me start by congratulating the third Dameisha China Innovation Forum for putting together such a stimulating and interesting event. I am impressed that despite the fantastic weather out there, the sunshine, the blue sky, we still have a full room here with people very interested and very engaged. So thank you very much for being here.
I am a frequent visitor to China. And this is my seventh visit this year. And every time I come here, I learn something new, and I see something new. And it has been very exciting. Today and yesterday, the conversations here, the presentation, all somehow help to cement the view that China is now at the turning point. 2016 is a turning point for China in its long-term process of reforms that started more than over thirty years ago here in Shenzhen. The next phase of reform would be, I believe, the most difficult one, because, as we heard from many presentations, it would imply opening up the domestic market, and reform the banks and financial system. So it is a very steep road ahead of China; but there will be more to come, and it is very exciting to share this view with you.
Shenzhen is very important, I must say. I share with you my first impression when I came to Shenzhen years ago. To me it was like a Marco Polo moment when I actually understood the meaning of reform and I really had the sense, the real sense of the size and scope of reforms here in China. As I said, everything started in Shenzhen incidentally and now is less the case. But just few years ago, back in Europe, if you mention Shenzhen, not many people were able to locate the city on the map or even had an idea of how big Shenzhen is. I still talked to people back in London, I said “oh yeah Shenzhen”, “yeah, it used to be 2000 people thirty years ago. And now you know how big it is.” So Shenzhen is important and it’s the continuation of this reform. I have a further reason to be very happy to be here with you because my book on China has just come out, just been published this week. It is actually on the RMB, the people’s money and how China is building a global currency; and again it is all about the reforms and the role of China in the global economy. So my presentation today will be something different, not on my book but building on the part I am developing in the book that China reforms happen, happened, and is going to continue to happen in the context of global economy. In particularly in the last five years, the development of the RMB, effectively this policy started in 2010, happened against a particularly difficult global economic and financial outlook, which makes the road for China even steeper.
So what I am going to do now is just to look at the global economy through the lenses of international policy cooperation. My presentation is also a way to reflect on China’s G20 presidency which is going to end at the end of this month, and China will hand over to Germany. China has played an important role. If we look at all over China, at the global economy, not only as the second largest economy by GDP and the first exporter, but also in terms of what we call economic governance, there has been a substantial revolution of China from 2009 at the time of the G20 Summit in London so soon after the global financial crisis, where the key issue was how to cooperate to resolve the crisis, to respond to the crisis. China was a reluctant player at that time. It is really interesting to see how much China has become more involved in this international policy cooperation throughout the years in the G20, and in particularly this year. So my thought will look at the global economy. The global economy remains vulnerable and the risk of geopolitical terrorism has increased compared to 2008. Therefore the key challenge now is to manage the global economy in the low growth, low rate era. I quote this from the title of the Global Economic Outlook published by the IMF in the last month. The reason of this discussion and China was very reactive at the G20 level to look at the instrument among economic policies.
Monetary policy
So over the last eight years, monetary policy has been playing a very relevant role. There has been a lot of criticism recently about whether the monetary policy should continue to play this role, or should we need a more integrated approach which takes into account all the other instruments. So the point is, a lot of people will say, well, monetary policy is not effective, and actually there are a lot of contradictory signals—the monetary policy has been increased since 2000. But what has been blurred is the ability to provide for what guide us. The key point in this low growth, low rate era is that domestic politics becomes much more complex and creates problems for managing the global economy and finding some kind of consensus in doing international policy cooperation. My final point is to shift gears and to look exactly to different instrument. This will come out of the G20 this year that we need to move to more active fiscal policy, although how to coordinate the shift remains difficult and probably an intractable question.
So the title of this session, one of the questions that we are asked to develop here is, the global economy, and to forecast actually what we need becomes so complex. The global economy is so complex for a number of reasons that is very difficult to forecast. What we did here, we look at the forecast provided by the IMF over since of the global financial crisis. What you can see is that, immediately after the financial crisis up to 2013, the forecast tended to air on the side of pessimism because immediately after the crisis it was really difficult to try to put down numbers in somehow forecast GDP growth. After that, the forecast has been airing on the side of optimism. So all the forecast we could see has been constantly revived and actually the actual growth is the black line. Also it is difficult to forecast and to provide the forward guidance. Again you can see the expected policy rate and being a constant adjustment of expectations, but the bottom line is that the global real rates remain on the downward trend. And these expectations are affected by the, we will say, low growth in the global economy.
So has the monetary policy run out so steep? No, not necessarily, as in fact various analyses show that monetary policy has increased its impact since 2000 with two exceptions, one is Japan, which is relevant for the global economy, and less relevant one, Norway. But in other countries, the impact actually has been very substantial. But there have been some very blurred and sort of inconsistent outcome and indicators. So I used to indicate here, one is inflation, and the other one is currencies. And you I think you see two different sets of indicators among the most advanced economies--one is actually the United States, and the United Kingdom, where inflation is actually slowly increasing for a number of reasons and not necessarily, these economies are doing better than Japan, definitely better than Japan, and the Eurozone in relative terms, but also there are other reasons linked to be, in particularly for the UK, to the political situation. In the views of Japan, the situation, the outlook is very similar to some extent. These are two countries that can use this for the Eurozone, where the central country banks came to the unconventional monetary policy, the so-called Quantitative Easing, pretty late in the process of recovering for the crisis; While the U.S and the UK adopted QE early on immediately in the aftermath of the global financial crisis. So the QE certainly for Japan was a way to fight the deflationary pressure. For sometimes, immediately after the 2013, when the QE was launched in Japan, this policy proved to be successful in controlling the deflationary pressures, but less so in more recent times. In the Eurozone, QE was started in 2015.The impact has been quite muted although it can be argued that without QE, perhaps the deflationary pressure could have been much more pronounced in the Eurozone.
The other interesting thing is the world currency. And again that QE has different impacts on monetary policy, so QE is not necessarily a measure which was adopted in order to have an impact on the exchange rate, but has some effect on the exchange rate. I’d like to stress here, that again one of the very difficult topics that G20 and the international policy coordination had to face in 2010 was this spillover impact from the U.S monetary policy to the point that some of emerging markets complained about the so-called “currency war”. But recently the recent episode of QE has actually done, a very different impact to the point that actually the past year, the Japanese Yen has strengthen against the dollar, and the Euro has been pretty steady. So talking about spillover, this is the example of Brazil. Brazil was a country which had to deal with this impact of the QE in the early days of no conventional monetary policy. Moving forward, this is us looking at the policy response, so difficult to manage with the spillover impact. This is why international policy cooperation is a important way to mitigate, if we like, this spillover impact. More recently, so if before, until basically 2015, Brazil was actually affected by the war going on in the rest of the world. More recently, all the promises were domestic and why domestic, because it is very difficult and problematic domestic political situation which led to the impeachment of the president.
So the impacts really come from home. And let me to say that its politics these days that is really creating turbulence in the market and makes more difficult the task of fora, like G20 to try to coordinate. So one thing that I’m absolutely convinced that in 2008, it was easy, relatively easy to provide a coordinated policy response, because politics, domestic politics was less pronounced and definitely not, there was a spirit of collaboration that I do not see these days. These days, domestic politics which is actually some of the issues that been discussed that would make even more difficult to coordinate policy response. So economic policy uncertainty reflects, we can see, in particular is strong in Japan, U.S, and in the EU, and this is really translated into market sensitivity. So what we got to hear, politics, response, we heard it before is still difficult politics, is due to a number of reasons. And again we heard about the globalization, we heard about the reaction to trade, and the fact that, again, the vast economies. Let me get back to the U.S, but particularly to the EU, the fact that the country’s economy growth is low and modest. And again we talk about globally, here is the global picture, but you need also to look at the differences between regions and countries, so there are the countries, they are struggling with growth. So that really leads to a problem of what more can be done to revive economy growth So the answer here is we need to change gear, and this is something as I said earlier on that China really pushed at the G20 level. So we need more active fiscal policy in countries which have fiscal space. So Germany, listen to this, this is particularly true for Europe. And it was very interesting, if you read the communiqué from the Hangzhou Summit, and there is really a call for more policy coordination and synergy among fiscal, monetary structural policies. So the G20 didn’t push far enough to say what needs to be done, but suggested that a well designed and coordinated policy monetarily, fiscally, and structurally are at the heart of this issue of growth. And so, infrastructure spending, and logistic support for capital investment are part of this menu, and again, the international organizations must coordinate these policies with government on the supranational level in order to reduce the level and impact of potential spillover.
Paola Subacchi is the director of the International Economics Department at Chatman House. She is an expert on the functioning and governance of the international financial and monetary system, and advise governments, international organizations, non-profits, and corporations.
Speech delivered at the China's Economy and Global Views session during the 3rd Dameisha China Innovation Forum. Opinions expressed here belong to the author, and do not represent the position of SZIDI.
I am a frequent visitor to China. And this is my seventh visit this year. And every time I come here, I learn something new, and I see something new. And it has been very exciting. Today and yesterday, the conversations here, the presentation, all somehow help to cement the view that China is now at the turning point. 2016 is a turning point for China in its long-term process of reforms that started more than over thirty years ago here in Shenzhen. The next phase of reform would be, I believe, the most difficult one, because, as we heard from many presentations, it would imply opening up the domestic market, and reform the banks and financial system. So it is a very steep road ahead of China; but there will be more to come, and it is very exciting to share this view with you.
Shenzhen is very important, I must say. I share with you my first impression when I came to Shenzhen years ago. To me it was like a Marco Polo moment when I actually understood the meaning of reform and I really had the sense, the real sense of the size and scope of reforms here in China. As I said, everything started in Shenzhen incidentally and now is less the case. But just few years ago, back in Europe, if you mention Shenzhen, not many people were able to locate the city on the map or even had an idea of how big Shenzhen is. I still talked to people back in London, I said “oh yeah Shenzhen”, “yeah, it used to be 2000 people thirty years ago. And now you know how big it is.” So Shenzhen is important and it’s the continuation of this reform. I have a further reason to be very happy to be here with you because my book on China has just come out, just been published this week. It is actually on the RMB, the people’s money and how China is building a global currency; and again it is all about the reforms and the role of China in the global economy. So my presentation today will be something different, not on my book but building on the part I am developing in the book that China reforms happen, happened, and is going to continue to happen in the context of global economy. In particularly in the last five years, the development of the RMB, effectively this policy started in 2010, happened against a particularly difficult global economic and financial outlook, which makes the road for China even steeper.
So what I am going to do now is just to look at the global economy through the lenses of international policy cooperation. My presentation is also a way to reflect on China’s G20 presidency which is going to end at the end of this month, and China will hand over to Germany. China has played an important role. If we look at all over China, at the global economy, not only as the second largest economy by GDP and the first exporter, but also in terms of what we call economic governance, there has been a substantial revolution of China from 2009 at the time of the G20 Summit in London so soon after the global financial crisis, where the key issue was how to cooperate to resolve the crisis, to respond to the crisis. China was a reluctant player at that time. It is really interesting to see how much China has become more involved in this international policy cooperation throughout the years in the G20, and in particularly this year. So my thought will look at the global economy. The global economy remains vulnerable and the risk of geopolitical terrorism has increased compared to 2008. Therefore the key challenge now is to manage the global economy in the low growth, low rate era. I quote this from the title of the Global Economic Outlook published by the IMF in the last month. The reason of this discussion and China was very reactive at the G20 level to look at the instrument among economic policies.
Monetary policy
So over the last eight years, monetary policy has been playing a very relevant role. There has been a lot of criticism recently about whether the monetary policy should continue to play this role, or should we need a more integrated approach which takes into account all the other instruments. So the point is, a lot of people will say, well, monetary policy is not effective, and actually there are a lot of contradictory signals—the monetary policy has been increased since 2000. But what has been blurred is the ability to provide for what guide us. The key point in this low growth, low rate era is that domestic politics becomes much more complex and creates problems for managing the global economy and finding some kind of consensus in doing international policy cooperation. My final point is to shift gears and to look exactly to different instrument. This will come out of the G20 this year that we need to move to more active fiscal policy, although how to coordinate the shift remains difficult and probably an intractable question.
So the title of this session, one of the questions that we are asked to develop here is, the global economy, and to forecast actually what we need becomes so complex. The global economy is so complex for a number of reasons that is very difficult to forecast. What we did here, we look at the forecast provided by the IMF over since of the global financial crisis. What you can see is that, immediately after the financial crisis up to 2013, the forecast tended to air on the side of pessimism because immediately after the crisis it was really difficult to try to put down numbers in somehow forecast GDP growth. After that, the forecast has been airing on the side of optimism. So all the forecast we could see has been constantly revived and actually the actual growth is the black line. Also it is difficult to forecast and to provide the forward guidance. Again you can see the expected policy rate and being a constant adjustment of expectations, but the bottom line is that the global real rates remain on the downward trend. And these expectations are affected by the, we will say, low growth in the global economy.
So has the monetary policy run out so steep? No, not necessarily, as in fact various analyses show that monetary policy has increased its impact since 2000 with two exceptions, one is Japan, which is relevant for the global economy, and less relevant one, Norway. But in other countries, the impact actually has been very substantial. But there have been some very blurred and sort of inconsistent outcome and indicators. So I used to indicate here, one is inflation, and the other one is currencies. And you I think you see two different sets of indicators among the most advanced economies--one is actually the United States, and the United Kingdom, where inflation is actually slowly increasing for a number of reasons and not necessarily, these economies are doing better than Japan, definitely better than Japan, and the Eurozone in relative terms, but also there are other reasons linked to be, in particularly for the UK, to the political situation. In the views of Japan, the situation, the outlook is very similar to some extent. These are two countries that can use this for the Eurozone, where the central country banks came to the unconventional monetary policy, the so-called Quantitative Easing, pretty late in the process of recovering for the crisis; While the U.S and the UK adopted QE early on immediately in the aftermath of the global financial crisis. So the QE certainly for Japan was a way to fight the deflationary pressure. For sometimes, immediately after the 2013, when the QE was launched in Japan, this policy proved to be successful in controlling the deflationary pressures, but less so in more recent times. In the Eurozone, QE was started in 2015.The impact has been quite muted although it can be argued that without QE, perhaps the deflationary pressure could have been much more pronounced in the Eurozone.
The other interesting thing is the world currency. And again that QE has different impacts on monetary policy, so QE is not necessarily a measure which was adopted in order to have an impact on the exchange rate, but has some effect on the exchange rate. I’d like to stress here, that again one of the very difficult topics that G20 and the international policy coordination had to face in 2010 was this spillover impact from the U.S monetary policy to the point that some of emerging markets complained about the so-called “currency war”. But recently the recent episode of QE has actually done, a very different impact to the point that actually the past year, the Japanese Yen has strengthen against the dollar, and the Euro has been pretty steady. So talking about spillover, this is the example of Brazil. Brazil was a country which had to deal with this impact of the QE in the early days of no conventional monetary policy. Moving forward, this is us looking at the policy response, so difficult to manage with the spillover impact. This is why international policy cooperation is a important way to mitigate, if we like, this spillover impact. More recently, so if before, until basically 2015, Brazil was actually affected by the war going on in the rest of the world. More recently, all the promises were domestic and why domestic, because it is very difficult and problematic domestic political situation which led to the impeachment of the president.
So the impacts really come from home. And let me to say that its politics these days that is really creating turbulence in the market and makes more difficult the task of fora, like G20 to try to coordinate. So one thing that I’m absolutely convinced that in 2008, it was easy, relatively easy to provide a coordinated policy response, because politics, domestic politics was less pronounced and definitely not, there was a spirit of collaboration that I do not see these days. These days, domestic politics which is actually some of the issues that been discussed that would make even more difficult to coordinate policy response. So economic policy uncertainty reflects, we can see, in particular is strong in Japan, U.S, and in the EU, and this is really translated into market sensitivity. So what we got to hear, politics, response, we heard it before is still difficult politics, is due to a number of reasons. And again we heard about the globalization, we heard about the reaction to trade, and the fact that, again, the vast economies. Let me get back to the U.S, but particularly to the EU, the fact that the country’s economy growth is low and modest. And again we talk about globally, here is the global picture, but you need also to look at the differences between regions and countries, so there are the countries, they are struggling with growth. So that really leads to a problem of what more can be done to revive economy growth So the answer here is we need to change gear, and this is something as I said earlier on that China really pushed at the G20 level. So we need more active fiscal policy in countries which have fiscal space. So Germany, listen to this, this is particularly true for Europe. And it was very interesting, if you read the communiqué from the Hangzhou Summit, and there is really a call for more policy coordination and synergy among fiscal, monetary structural policies. So the G20 didn’t push far enough to say what needs to be done, but suggested that a well designed and coordinated policy monetarily, fiscally, and structurally are at the heart of this issue of growth. And so, infrastructure spending, and logistic support for capital investment are part of this menu, and again, the international organizations must coordinate these policies with government on the supranational level in order to reduce the level and impact of potential spillover.
Paola Subacchi is the director of the International Economics Department at Chatman House. She is an expert on the functioning and governance of the international financial and monetary system, and advise governments, international organizations, non-profits, and corporations.
Speech delivered at the China's Economy and Global Views session during the 3rd Dameisha China Innovation Forum. Opinions expressed here belong to the author, and do not represent the position of SZIDI.
