Message From Tokyo
Wednesday, October 24, 2012
www.thesundayleader
Four key messages came out from the IMF-World Bank (WB) annual meetings which concluded in Tokyo last Sunday.
They were that the global economy though still fragile, was however on the road to recovery; the importance of jobs and growth; the importance also of growth with equity, while the fourth was the interconnectivity of global economies, ipso facto from an economic perspective.
The main pivot of the world’s economic recovery hinged over the health of the euro zone economies, with at least four of those countries going through sovereign debt crises and high fiscal deficits, with the possibility of cascading effects to the rest of the region as well, leading to catastrophic results, if those ills were left unattended to. With gradual fiscal consolidation being addressed to by the governments of those troubled euro zone economies, namely Portugal, Ireland, Italy, Greece and Spain (PIIGS), which, ipso facto also naturally leads to a reduction in their debt levels; complemented by the infusion of fresh capital by the IMF and the European Central Bank in order to also act as a fillip for markets to regain confidence in those economies by boosting their liquidity levels, not least their under capitalized banks, coupled with those countries to be subjected to structural reforms in a quid pro quo arrangement, and the move towards a European banking union for better supervision of those banks in the region as the stability of some of those being threatened due to their unwise investments, including in sovereign bonds of those troubled economies, thereby posing a systemic risk in the event of sovereign default.
There however is a tradeoff between fiscal consolidation and growth, with the former impinging on the latter, and possible destabilizing effects on those economies as a result, which are also burdened by high unemployment levels running into double digit figures, especially among its youth, with the risk of spawning social and political instability as well in those countries as a consequence.
The message therefore given by the IMF at these meetings which echoed what the Fund said six months earlier at its spring meetings in Washington, D.C., was to adopt the “Goldilocks” approach of not going too “fast,” nor too “slow,” when implementing those reforms.
As to what “speed” those economies should go when undertaking such reforms was however not spelt out, but what was said was a “commitment” to a 1% GDP cut annually by the governments of those countries in the path to fiscal consolidation, as the way to go.
And the response from the governments of those economies is that they are willing to take that plunge.
What is of particular importance to Sri Lanka regarding the recovery of the euro zone which comprises 17 economies, and the EU as a whole which comprises a total of 27 economies in the region including those 17 countries plus the UK (Sri Lanka’s second largest export market led by garments) is that from a regional perspective the EU is also Sri Lanka’s single biggest export market as well as its single biggest tourism market.
Garments after remittances are the island’s second largest foreign exchange earner, while tourism is its fourth (with tea being the third).
With the end of Sri Lanka’s 26 year old terrorist conflict three years ago in 2009, the Government of Sri Lanka is once more banking heavily on tourism to take the country’s economy forward.
So, the ability of those euro zone economies to come out of their sovereign debt crises successfully may also be the key to the survival and growth of Sri Lanka’s very own economy as well, resonating the fourth message from Tokyo, that no country is an island in this 21st century, emphasizing the global economic interconnectivity of nations as being a fact. This message however may not be something new.
If one looks at history and considers the Great Depression that hit the world 83 years ago in 1929, then too tiny Ceylon (as Sri Lanka was then known) was not spared from its ill effects, with the price of coconuts which before the Depression fetched Rs. 75 for 1,000 nuts; falling rapidly to Rs. 5 per 1,000 nuts after the Depression, making many landowners who had had invested in coconut plantations at that time, destitute as a result, due to those steep price falls. Prior to the opening up of the economy in 1977, tea, rubber and coconut were Sri Lanka’s three largest foreign exchange earners. The story from Tokyo was also that economic recovery was however fragile, with much of the recovery hinging on the shoulders of the people living in those countries. Whether they have the patience and the strength to go through with those steep austerity measures which may once more help to put those economies to get back on track, or whether they will rebel against such measures, thereby causing those countries to once more backslide economically, with catastrophic consequences as a result, is the unanswered question. With those austerity measures taking root, even fissiparous noises are being heard from the euro zone’s fourth largest economy, Spain.
So the road to global economic recovery is far from being smooth, with several narrow turns yet remaining to be manoeuvred through, before seeing the light at the end of the tunnel or before coming out from the tunnel of darkness in to light.
The local economy is also already feeling the ill effects of the euro zone crisis, with exports plunging and foreign direct investments being reduced to a trickle despite the war end and the attendant ramifications that go with thus.
Another country which is of economic importance to Sri Lanka and which also figured in the meetings in Tokyo was the fiscal cliff that was threatening the world’s largest economy the USA which is also Sri Lanka’s single biggest export market, led by garments.
USA too runs high public debt levels and budget deficits and there is a danger that if there is no consensus between the White House and the Republican dominated Congress, the USA’s debt ceiling will come into effect after January 1 of next year, giving rise to automatic spending cuts and tax increases, thereby resulting in growth being cut by 4% of GDP and plunging the USA which has an 8% unemployment figure, into recession.
Factors that however may prevent such a scenario from taking place by the politicians of the USA are the possible economic and political instability that such an action or inaction may cause to the world’s largest economy. Meanwhile Japan, Sri Lanka’s largest provider of concessional aid too figured in those discussions in Tokyo.
Like the USA and several economies in the euro zone/EU, the world’s third largest economy too runs high public debt levels and fiscal deficits.
But the IMF hailed the steps taken by Japan to raise consumption taxes gradually to 100% by 2015 as a step in the right direction.What however didn’t figure in those talks were the increased political tensions, almost spilling over to being that of military tensions by nature, due to claims being made by both Japan and China over some disputed islands located on the East China Sea.
Both the IMF and the WB however are mainly economic animals and not political, so such tensions, though they may have economic repercussions, may however have to be taken up at a different forum, possibly the UN. Nevertheless the 5th message that came out from Tokyo, though not articulated unlike the other four previous messages is that not only are the global economies interconnected merely from an economic perspective, but that this interconnectedness also takes the form of a political dimension as well. Economics cannot be separated from politics, not only from a country position, but also from a global perspective, that was the 5th, albeit unsaid message, that also emanated from Tokyo, earlier this month.
Wednesday, October 24, 2012
www.thesundayleaderFour key messages came out from the IMF-World Bank (WB) annual meetings which concluded in Tokyo last Sunday.
They were that the global economy though still fragile, was however on the road to recovery; the importance of jobs and growth; the importance also of growth with equity, while the fourth was the interconnectivity of global economies, ipso facto from an economic perspective.
The main pivot of the world’s economic recovery hinged over the health of the euro zone economies, with at least four of those countries going through sovereign debt crises and high fiscal deficits, with the possibility of cascading effects to the rest of the region as well, leading to catastrophic results, if those ills were left unattended to. With gradual fiscal consolidation being addressed to by the governments of those troubled euro zone economies, namely Portugal, Ireland, Italy, Greece and Spain (PIIGS), which, ipso facto also naturally leads to a reduction in their debt levels; complemented by the infusion of fresh capital by the IMF and the European Central Bank in order to also act as a fillip for markets to regain confidence in those economies by boosting their liquidity levels, not least their under capitalized banks, coupled with those countries to be subjected to structural reforms in a quid pro quo arrangement, and the move towards a European banking union for better supervision of those banks in the region as the stability of some of those being threatened due to their unwise investments, including in sovereign bonds of those troubled economies, thereby posing a systemic risk in the event of sovereign default.
There however is a tradeoff between fiscal consolidation and growth, with the former impinging on the latter, and possible destabilizing effects on those economies as a result, which are also burdened by high unemployment levels running into double digit figures, especially among its youth, with the risk of spawning social and political instability as well in those countries as a consequence.
The message therefore given by the IMF at these meetings which echoed what the Fund said six months earlier at its spring meetings in Washington, D.C., was to adopt the “Goldilocks” approach of not going too “fast,” nor too “slow,” when implementing those reforms.
As to what “speed” those economies should go when undertaking such reforms was however not spelt out, but what was said was a “commitment” to a 1% GDP cut annually by the governments of those countries in the path to fiscal consolidation, as the way to go.
And the response from the governments of those economies is that they are willing to take that plunge.
What is of particular importance to Sri Lanka regarding the recovery of the euro zone which comprises 17 economies, and the EU as a whole which comprises a total of 27 economies in the region including those 17 countries plus the UK (Sri Lanka’s second largest export market led by garments) is that from a regional perspective the EU is also Sri Lanka’s single biggest export market as well as its single biggest tourism market.
Garments after remittances are the island’s second largest foreign exchange earner, while tourism is its fourth (with tea being the third).
With the end of Sri Lanka’s 26 year old terrorist conflict three years ago in 2009, the Government of Sri Lanka is once more banking heavily on tourism to take the country’s economy forward.
So, the ability of those euro zone economies to come out of their sovereign debt crises successfully may also be the key to the survival and growth of Sri Lanka’s very own economy as well, resonating the fourth message from Tokyo, that no country is an island in this 21st century, emphasizing the global economic interconnectivity of nations as being a fact. This message however may not be something new.
If one looks at history and considers the Great Depression that hit the world 83 years ago in 1929, then too tiny Ceylon (as Sri Lanka was then known) was not spared from its ill effects, with the price of coconuts which before the Depression fetched Rs. 75 for 1,000 nuts; falling rapidly to Rs. 5 per 1,000 nuts after the Depression, making many landowners who had had invested in coconut plantations at that time, destitute as a result, due to those steep price falls. Prior to the opening up of the economy in 1977, tea, rubber and coconut were Sri Lanka’s three largest foreign exchange earners. The story from Tokyo was also that economic recovery was however fragile, with much of the recovery hinging on the shoulders of the people living in those countries. Whether they have the patience and the strength to go through with those steep austerity measures which may once more help to put those economies to get back on track, or whether they will rebel against such measures, thereby causing those countries to once more backslide economically, with catastrophic consequences as a result, is the unanswered question. With those austerity measures taking root, even fissiparous noises are being heard from the euro zone’s fourth largest economy, Spain.
So the road to global economic recovery is far from being smooth, with several narrow turns yet remaining to be manoeuvred through, before seeing the light at the end of the tunnel or before coming out from the tunnel of darkness in to light.
The local economy is also already feeling the ill effects of the euro zone crisis, with exports plunging and foreign direct investments being reduced to a trickle despite the war end and the attendant ramifications that go with thus.
Another country which is of economic importance to Sri Lanka and which also figured in the meetings in Tokyo was the fiscal cliff that was threatening the world’s largest economy the USA which is also Sri Lanka’s single biggest export market, led by garments.
USA too runs high public debt levels and budget deficits and there is a danger that if there is no consensus between the White House and the Republican dominated Congress, the USA’s debt ceiling will come into effect after January 1 of next year, giving rise to automatic spending cuts and tax increases, thereby resulting in growth being cut by 4% of GDP and plunging the USA which has an 8% unemployment figure, into recession.
Factors that however may prevent such a scenario from taking place by the politicians of the USA are the possible economic and political instability that such an action or inaction may cause to the world’s largest economy. Meanwhile Japan, Sri Lanka’s largest provider of concessional aid too figured in those discussions in Tokyo.
Like the USA and several economies in the euro zone/EU, the world’s third largest economy too runs high public debt levels and fiscal deficits.
But the IMF hailed the steps taken by Japan to raise consumption taxes gradually to 100% by 2015 as a step in the right direction.What however didn’t figure in those talks were the increased political tensions, almost spilling over to being that of military tensions by nature, due to claims being made by both Japan and China over some disputed islands located on the East China Sea.
Both the IMF and the WB however are mainly economic animals and not political, so such tensions, though they may have economic repercussions, may however have to be taken up at a different forum, possibly the UN. Nevertheless the 5th message that came out from Tokyo, though not articulated unlike the other four previous messages is that not only are the global economies interconnected merely from an economic perspective, but that this interconnectedness also takes the form of a political dimension as well. Economics cannot be separated from politics, not only from a country position, but also from a global perspective, that was the 5th, albeit unsaid message, that also emanated from Tokyo, earlier this month.
