IMF vice director lectures on changing world economy

By Wu Jin
0 Comment(s)Print E-mail China.org.cn, October 26, 2012
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At a Beijing lecture, IMF deputy managing director Zhu Min talks of a much more integrated global economy at a recent lecture. [File photo]

Zhu Min, the first Chinese deputy managing director of the International Monetary Fund (IMF), prophesized the coming of a much integrated world at a recent lecture in Beijing.

To a standing-room crowd, Zhu correlated the world through economic indicators, examined shifting growth centers and discussed the global "deleveraging phenomenon," lightening these heavy subjects with his candid sense of humor.

"The world has never transformed so significantly as in the past few years, and the current economic crisis which lasted almost four years resulted in drastic changes inside the global financial structure," Zhu told a corps of students and faculty members from Central University of Finance and Economics last week.

The world saw its fastest growth in three centuries in the past forty years, Zhu explained, with its gross domestic product (GDP) quadrupling under an annual average growth of 3.6 percent and the trade expanding 12-fold, banking 14-fold, and broad money 40 times over.

The position of countries in the global transformation rose and fell largely due to the activity of the financial and trading sectors, rather than the real economy, he said.

Using a series of slides depicting the world map with countries sized by economic indices instead of territory, Zhu explained that in terms of GDP, countries like China appear magnified compared to countries like Russia. But when it comes to cross-border financial transactions, the Chinese mainland occupies a very small portion of the pie compared to European nations.

"[The series of newly-proportioned maps] completely change our views [in regard] to the world's economy," Zhu said. "In accordance with today's economic and financial map, the world can be divided into three major regions after the globalization of the current three to four decades," he said.

According to Zhu, in addition to the region composed of developed countries such as the U.S., Britain and Germany, and the region of countries whose economies largely depend on energy exports such as Russia, Saudi Arabia and Kuwait, the most prominent changes have occurred in a third region based around the supply chain of Asia, which has drawn increasing participation from Latin American countries south of the Panama Canal.

These new "regions" have evolved from previous clusters of countries based around historical regional centers that were the gatekeepers of world trade in a bygone era, Zhu said. Nowadays, when taking a look at the transformed trading map, China is overtaking Japan in its increasingly significant role in Asia, while the U.S. continues to exert substantial influence over Europe and Asia.

Economists are more eager than ever to understand each country's exact role in an increasingly globalized world, including which are still regarded as gatekeepers, especially as a global recession lingers on, Zhu said.

"The structural changes inside the world economy [are still waiting] to be recognized," said Zhu. "We would have never expected Greece, the country, with a GDP less than two percent in the Eurozone and accounting for no more than 0.4 percent in the world, to afflict the global economy with such broad impact [under its sovereign debt crisis]. It profoundly substantiates the meaning of globalization."

Another factor derived from the global economic transformation, Zhu said, is the change of economic growth centers, which are shifting from developed countries with a combined population of one billion residents to emerging economies whose populations total over six billion. These changes will continue in the next five years, as countries like China and India and the rest of the developing world are forecasted to contribute two-thirds of the world's economic growth, he said.

In terms of productivity and consumption, these developing economies are not only more vigorous than their developed counterparts, but are now the major force of demand in the world market, Zhu said.

In addition, most developing countries boast low deficits and debt ratios and the ability to modify their economies with fiscal policy — Vietnam, for example, has consecutively lowered its interest rates by eight percent, whereas in a country like Japan, it is implausible to lower interest rates further, Zhu noted.

The future of six billion people residing in developing countries rests on these countries' efforts to remodel their economies to increase productivity and innovation, consume fewer resources, and develop a comprehensive welfare system and prudent financial controls, Zhu said.

The key element for success for developing countries such as China, Zhu said, is to distribute the fruits yielded from development to all of their peoples. However, this does not mean government redistribution of wealth. "[The market] should [allow] citizens to earn the portion they deserve. That is the reason I highlight the development of the service industry," he said.

If emerging markets can not follow the abovementioned routes, their current state of development will grind to a halt over time, he said.

"The challenge is really huge, as there's no pattern to follow ― because six billion people are surely not suited to [develop] the way that the one billion people used to live…but hope remains."

Another tendency Zhu mentioned is the "deleveraging phenomenon" in the current world economy. The current financial crisis has already lasted 15 months but recuperative signs remain weak. Suffocated by constant escalating debts, whether they are state debts, individual debts or company debts, the world faces a "deleveraging era" which will be marked by negative growth in many countries that suffered during the recession.

"The process [will be] rather long and painful," Zhu said.

The world has experienced dramatic changes since the collapse of the Bretton Woods System in 1977 when the U.S. dollar scrapped its peg to the gold standard. But a new financial system, under which the demand for foreign currency exchanges is diversified, has not yet been established, Zhu said.

To speculate what the future will bring will be amusing, to say the least, Zhu told students. "You're standing at the frontier of a transformational era," he said.

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