It will be a watershed year, ushering a new world economic order--with the disorder most likely coming first. I just don't have the foggiest idea what this new order will look like.
It will be a time when we will all have to change our tune and have to think out of the box. I for one will worry more about growth in the advanced countries than in the developing world, will be warning against the dangers of protectionism, will be singing the praises of the IMF (if its recent actions and pronouncements are a guide), and will fret about too much state intervention. Changing times require changing lines...
Here are four things that will determine how much doom and gloom is yet to come:
Will the U.S. policy response be “bold” enough? Barack Obama has promised that it will be, echoing at least part of FDR's famous call for “bold, persistent experimentation” at the height of the Great Depression in 1932. In particular, he will need to go beyond Keynesian policies of fiscal stimulus to heal the deep wounds to economic confidence that lie at the root of the present crisis. So far, confidence-building measures have been limited to financial markets, but the needs of Main Street are no less important. Workers who worry about being laid off are unlikely to go on a spending spree regardless of how much money fiscal stimulus puts in their pockets. Just as banks are hoarding cash, households will try to preserve wealth by increasing their saving. To counter this, incentives targeted directly at preserving employment will have to be part of the solution.
Will Europe get its act together? This could have been Europe’s moment. After all, the crisis originated in the U.S. and left American policy focused on its domestic troubles, opening up room for global leadership by others. Instead, the crisis has demonstrated the deep divisions within Europe—on everything from financial regulation to the requisite policy response. Germany has dragged its feet on fiscal stimulus, stymieing what should have been the second leg of a globally-coordinated fiscal action plan. Alas, the best that can be hoped at this stage is that Europe will not undermine the global fiscal stimulus which even the International Monetary Fund—the guardian of fiscal orthodoxy—regards as absolutely essential.
Will China hold together? China is a country of enormous tensions and cleavages beneath the surface, and these will find more occasion to erupt into open conflict in difficult economic times. Experts on China differ in their estimate of the rate of economic growth the country needs to create employment for the millions that flock into its urban areas every year. But it is virtually certain that China will fall short of this threshold in 2009. The question is whether policy actions to date will do enough to stem a socially and politically dangerous slowdown in the economy. Whichever way the Chinese leadership responds, future generations may remember 2009 less for its global economic and financial crisis than for the momentous transformation it will have caused in China.
Will there be enough global economic cooperation? When domestic needs become paramount, global economic cooperation suffers. But the costs of protectionism in trade and finance are especially large at moments like these. So far the International Monetary Fund has reacted with new-found vigor, establishing a much-needed short-term lending facility and warning against too little fiscal stimulus. The World Trade Organization, meanwhile, has wasted valuable time on the irrelevant Doha round. It should have focused its efforts on monitoring and implementing the commitment made by the Group of 20 countries not to raise trade barriers.
Did I say happy new year?