War of Words in Economy

The war of words between the new US administration, China and Russia on the state of the global economy at this juncture is rather unfortunate.

The new US Treasury Secretary, Timothy Geithner, fired the first salvo by accusing China of manipulating its currency during his confirmation hearing on January 22. The Chinese Premier Wen Jiabao used the Davos Summit as a venue to mount a sweeping attack on the US economic system by accusing it of being unstable and characterised by excessive consumerism, prolonged low saving rates and excessive expansion of financial institutions. Russian Prime Minister Vladimir Putin joined Premier Wen with his characteristic bluntness, taking a scathing swipe at the US dollar’s reserve currency status.

The global economy is barely breathing. According to the IMF, global economic growth would be 0.5 per cent. Advanced economies are expected to contract while developing countries will be crawling at a snail’s pace. Over three decades of globalisation has woven deep interlinkages between all the countries except a few like North Korea, which has decided to stay out of the global trading system. The global economy can be restored only by cooperation, especially among large trading nations.

China’s accusation of excessive consumerism by Americans is like the pot calling the kettle black. For over a decade China has not only manufactured cheap products to feed the insatiable appetite of US consumers but also financed the Americans to buy its product. It is equally responsible for the glut of liquidity in the system, which went to inflate asset price bubbles around the world.

One can also question the export-led economic development strategy of China. It might have enabled China to amass over $2 trillion in reserves, but with Chinese exporters shredding millions of jobs, the ordinary Chinese are left in the lurch.

Russia’s worry about the dollar is understandable. The greenback has been volatile in recent years and Russia’s main exports – oil and gas – are priced in dollars. But inherent weakness of the dollar had little role in the on-going crisis in Russia. The Russian banks and the oligarchs have tapped government for bailouts and the ruble has fallen by more than 20 per cent against the dollar. Moreover, the world has begun diversifying away from the dollar. The Euro now makes up about 27 per cent of all the official foreign exchange reserves held globally up from 17 per cent in 1999.

The world is looking up to these economic powers to coordinate the economic recovery not confrontation. The crisis is global in nature and the response should also be similar. America must show the leadership by allowing the world to participate in its huge public spending plan.