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State of the World Economy, 2011-2012: Whither or Wither?

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On November 18, 2010, the U.S.-Korea Institute at SAIS and the Korea Institute of Finance, sponsored by the Asian Studies Program at SAIS and the JoongAng Ilbo, hosted the one-day conference, “State of the World Economy, 2011-2012: Whither or Wither?” at the Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, DC. This volume contains the speeches and papers that were presented that day and subsequently refined by the authors to reflect discussions during the conference.

BACKGROUND

The ramifications of the global economic crisis are probably the most important set of issues that we will face during this decade, possibly even in the entirety of our professional lives. The interconnectedness of the world’s developed economies with its emerging ones is what will drive global growth forward in the coming years, but it remains uncertain how much pull the various locomotives of global growth will have. Looking beyond the United States and its place in the world economy, the purpose of this conference has been to think about how different centers of economic growth are going to interact with one another to help bring the world out of the crisis.

Events, both political and economic, will ripple from one part of the globe to another: how things happen in Europe will affect how they happen in China, which will affect things in Japan, India, and so forth. The organizers of this conference sought to go beyond simply describing each national situation to understanding the underlying dynamic in each case and aggregating these to gain the insight necessary to ensure that a relatively tepid recovery does not become a relapse.

“Whither or Wither?” was the question we started out with. Given the few months it takes to put these things together, we asked ourselves whether this would be too clever by half, making us look pessimistic in the end and simply out of step with what was going on in the world. But reflecting on the contributions of out panelists, it is our conclusion that while the Great Recession did not become the Great Depression, it has not become the Great Recovery either. Our expectation is that, as we continue to have slow growth in the advanced economies, the real question for the world economy in the years ahead will be just how slow that growth is going to be, and how politically tolerable it will be both in the United States, Western Europe, and Japan. China and South Korea, after sharp initial downturns, have fared far better, but sustainability is not a given, especially when the consuming nations continue to struggle.

Looking at the communiqué released by the G-20 Summit in Seoul in November 2010, it is clear the world’s major economic powers agree on the principle of rebalancing the global economy, but not on the “when” and the “how” of doing it. And we would submit, it is all about the “when” and the “how,” and the resulting political tensions that we believe are inevitable. If we end up moving towards a four or five-year period of very slow growth, with lots of austerity and unemployment here in the United States and in Western Europe, and with the emerging economies slow to allow appreciation of their currencies, the pressures for one form or another of protectionism will not be trivial. The political demand to find an easy way out of the economic doldrums could lead to calls for tariffs and various forms of currency manipulation, and we fear these demands could outrun our collective wisdom favoring cooperation and openness. We are witnessing a series of still unfolding major events. A year from now, we will have better data both on the political and economic consequences of the global downturn and the course of recovery, and perhaps a better sense of just what the long term trajectory will entail. It may be wise to address these sets of questions in one year’s time.