from Global Economy in Crisis

A ’Pretty Slow Recovery’

Despite early signs of a global economic recovery, CFR Steven Dunaway says it’s too early to determine how lasting the rebound might be. "The world economy is not out of the woods yet," he says.

September 9, 2009

Interview
To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

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Ahead of the upcoming G-20 meeting in Pittsburgh, finance ministers met on September 5 and expressed cautious optimism that financial markets were stabilizing and the global economy improving. But CFR Adjunct Senior Fellow Steven Dunaway, who agrees there are some small indications that the global economy is recovering, says the scope of the recovery remains uncertain. He says G-20 members have "worked reasonably well" on tackling the financial crisis "but it hasn’t been as good as everyone had anticipated when they first came together in November of last year." Overall he says not to expect any major developments out of the G-20 meeting. However, he does note that a period of slow growth could prompt many countries to take necessary policy actions to improve their medium-and long-term growth prospects.

G-20 finance ministers met on September 5. There seems to be cautious optimism that financial markets were stabilizing and the global economy improving. Is the global economy out of recession and are there concrete signs things are getting better?

The key sign that things are getting better, in the context of the United States, is that they’re not getting worse. For some of the other major economies, particularly in Asia, the second-quarter numbers, you saw some positive growth in a lot of the countries. And Germany and a couple of the other European countries also posted some positive growth. It’s good news, but it’s not necessarily a clear indication that you’re entirely out of the woods. It’s good news that the rates at which earlier in the year and late last year economies were actually declining, that’s all slowed down. You could be getting near that turning point in the cycle where you would start to move out of recession.

What would be an indicator for you?

Economic data run significantly behind actual events. The key numbers that you need to know run one to two quarters behind in terms of when they’re actually reported. So, to know for sure, you’re going to have to see positive GDP [gross domestic product] numbers. But this is always the problem when you get near the turning point. The big question now, to me at least, [is] to look at what kind of a recovery you’re going to face. If you look at basic indicators of trends, the expectation would be that it’s going to be a pretty slow recovery.

How well have G-20 countries worked together on the financial crisis so far? And what collectively still needs to be accomplished?

They’ve worked reasonably well but it hasn’t been as good as everyone had anticipated when they first came together in November of last year. There was a lot of talk about how they could coordinate actions, but what we’ve seen over most of the past year, there’s a lot of disagreement on exactly how to tackle the problems, particularly between the United States and Europe. The United States has a view that you needed to throw more stimulus measures at the recession to make sure that things not drop as far as at one point it looked like potentially they could, where the Europeans were much more cautious in their approach to it. The Europeans were also early to start talking about exit strategies to move away from stimulus when it still wasn’t clear that the economy was turning around. I haven’t been surprised that in terms of this kind of coordination, the coordination’s probably been as good as it’s ever been--but it’s never been very good anyway.

"The coordination’s probably been as good as it’s ever been--but it’s never been very good anyway."

G-20 financial ministers suggested that stimulus pledges already made be swiftly implemented to build on what’s been achieved. Is what’s been pledged enough? What’s the consensus on more stimulus packages going forward?

At this point it’s reasonably clear that what’s been put in place has probably done a pretty good job and there is still some stimulus left in the pipeline. The talk about additional measures has died down, and there’s no clear reason right now that you need to do much in a way of additional stimulus. The key thing is that they follow through on what’s been committed and that in particular on the monetary policy side that countries, or economic blocs as in the case of the euro, don’t move too quickly to withdraw stimulus because things look like the recovery is starting. The world economy is not out of the woods yet.

One of the things on the table is reforming international financial institutions. Are countries in sync on financial reform?

Oh no, they’re not even close. One of the biggest issues with reform of the international financial institutions, particularly the IMF [International Monetary Fund], is the terms of the voting rights within the institutions. And there’s been a push for quite a while now. It began back in 2005 and 2006 to raise the voting rights of the major developing countries, countries like China, India, Brazil, in institutions and also their representation on the boards of directors of the major institutions. There were some minor things done in 2006 but not much has been done since then. That’s probably the biggest area of contention, particularly between the large developing countries--the United States and Europe--because the Europeans in particular would lose the most influence in these institutions if you had full reform that went through. You have tremendous overrepresentation of particularly the smaller European countries on the boards of the institutions, and they haven’t succeeded in trying to find a way to solve that problem.

Why is the IMF structured that way?

It’s historical accident. It’s a product of history and it’s never been fully reformed. When the institution was founded, the United States and the European countries were the dominant players in the world economy, so they got most of the seats. In the succeeding sixty-some-odd years since the IMF was founded, the world economies changed. There’s never been a concrete mechanism for changing the voting rights, or more automatic mechanism for changing the voting rights within the IMF.

The Financial Stability Board has been asked to bring a set of principles on global financial reform to the G-20 meeting. Bankers have been particularly up in arms about proposals to limit bonuses. What do you expect these principles to look like?

A key portion of the principles are going to focus on issues that the United States has been pushing, particularly in terms of bank capital, although the Europeans are pushing it very strongly, particularly the Germans and the French. This whole issue on pay is a sideshow. It’s a product out of the headlines from the financial crisis, where these chief executive traders with these institutions were paid a lot of money for what turned out to be selling products that created huge losses for their institutions. There need to be changes in pay. But the institutions, the banks on their own, I would anticipate have already learned their lessons and have started to change their pay practices. So it’s very difficult to try to codify exactly what should be the most appropriate pay package. It’s more important to make sure that the institutions are financially sound and that they’re run properly than it is to focus on such a narrow issue as exactly how much top executives in those institutions are paid.

"If you look at basic indicators of trends, the expectation would be that it’s going to be a pretty slow recovery."

What should we expect out of the upcoming G-20 meeting?

Not much, to tell you the truth. None of the G-20 meetings have produced any stunning agreements. You should never expect to get some type of stunning agreement that would mean a major, major change in the world economy. The key purpose behind these meetings is to at least get the world economic leaders talking to each other. Probably more is accomplished in between the meetings where you have the technical people talking with each other to kind of lay the groundwork. And again, probably the most important thing that’s accomplished is that people develop a better understanding of what the needs are among the major countries. Maybe that has some direct and indirect impact on the economic policies that the individual countries follow. So it’s always been this kind of exchange of information and views. It’s very rare and far between that you can get enough consensus within such a large group to actually get a major change.

Earlier this year, you said it’s still a G-1 world, meaning that much of the global economy still relies on U.S. consumption. How should the global economy be structured?

The economy will be structured the way that it evolves, so you can’t necessarily just by decree or by intention change it, because it evolved this way for a reason. Now, I have a [new] working paper talking about the prospects for growth, which is an extension of some of the work I did earlier this year about global imbalances. That paper in essence could be boiled down to saying that it’s still a G-1 world. But the big problem going ahead is that the [United States] is finally getting its act together and going to adjust. That will have a profound impact on the rest of the world and on the pattern of growth during the recovery. In this recovery we’re going to see much slower growth in the world economy than we’ve seen in the past, and the big issue over the coming decade is going to be, "Where is there going to be sufficient demand coming from?"

In your paper, you conclude that the outlook for growth and recovery of the global economy "appears rather gloomy," and that the political will isn’t there for the other major economies to jump in and replace the loss of demand in the United States. What’s going on here and what result will a slower growth in the global economy have?

It’s not a new problem. It’s in essence an extension of the problem that led up to the current crisis. This problem of global imbalances has been around throughout this decade. The United States saves too little, Asia saves too much, Japan and Europe save a lot and also invest very little because of the frigidities in their economies. So for a long time, this whole problem has been discussed, and there’s been this talk about this set of policies that each country could follow that would improve the structure of the economy and improve their growth prospects over the medium term. The problem has always been that a lot of these policies entail potentially some short-term pain, which politically may not be very attractive. The situation’s gotten worse with the recession. It’s easier to bring about adjustments when the economies are growing than when they’re either contracting or growing very slowly. A fortunate thing is that it’s usually a situation in which you’re getting very slow growth that countries then seem to develop this political will to take the policy action. So I don’t know. Maybe in the period ahead, given slow growth, given popular pressure, maybe that will motivate the countries to finally deal with some of these issues that have been lingering around for quite a while now.

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