Money makes the world go round? [By Jiao Haiyang/China.org.cn]

People have been spoiled during the last two decades of unprecedented prosperity. So much so, in fact, that everyone gets scared when reports say the world economic growth rate will slow down to almost half the rate it enjoyed from the 1990s to 2008. Those people spoiled during the last twenty years will have to retune their thinking; for it is highly unlikely the world will be heading back to the days of surging corporate profits, low inflation and a low unemployment rate any time soon.

In the beginning of 1990s, when the Soviet Union collapsed, the world, alleviated from the deep concern of a possible nuclear war, shifted its efforts toward economic development. During this time, a hedonistic attitude swept all over advanced economies from North America to the whole of Europe. In contrast, the countries like the four Asian tigers and China enjoyed great productivity due to their large populations and growing technological expertise. With great demand from advanced economies for cheaper consumer products, these countries all seized this chance and developed export-driven economic models. In this near-perfect circle, developing countries supplied cheap products to the developed world, who paid them with hard currency. Western investors also profited from bringing their capital to Asian nations.

The US was a key driving force in the past two decades of prosperity. The deregulation of US markets and low interest rates spurred great enthusiasm for enterprises to prosper. Additionally, the US-driven personal computing and internet boom greatly improved efficiency and production across the globe.

However, under the leadership of Fed chairman Alan Greenspan during the Clinton administration, the US helped unleash the greedy impulses of Wall Street. Wall Street firms invented various types of sophisticated financial products and derivatives, which played a major role in creating a monstrous bubble which in part led to the 2008 global financial crisis.

In the post-crisis era (2009-present), it is now clear that the elements which combined to produce the previous two decades of prosperity are neither applicable to the present global economic situation nor feasible to ensure continued growth.

In emerging countries, former comparative advantages due to cheap labor are edging out. In China, labor costs have been rising in recent years, which in the long term will affect the outflows of cheap goods for export. Economic stagnation in the US and EU, in addition, has forced consumers to limit buying on credit and adopt more thrifty lifestyles, thus reducing the demand for such goods. Similarly, Western governments have been reducing their expenditures.

The current economic climate has also caused countries to rethink trade relations. For example, political pressure due to rising unemployment has led some US policymakers to call for protectionist measures. If such measures are implemented, the consequences for global trade would be dire.

The 2008 financial crisis taught the whole world a tough lesson about the dangers of deregulation. Banking reforms in the US and EU are now trying to keep financial institutions on a tighter leash. However, economists fear that the tight credit market will prove severely limiting to innovation and entrepreneurial ventures in the years to come, resulting in continued stagnation in economic growth.

In China's case, the last two decades of double-digit growth also came at a huge cost — massive consumption of fossil fuels and environmental pollution. In the future this model will not be sustainable, as finite resources diminish and as the health and well-being of China's population suffer.

Many world leaders have touted green technology and clean energy as major sectors of new innovation for the 21st century. Unfortunately, as of yet there have been no major breakthroughs in these areas that could potentially drive a new era of economic prosperity.

Historically, major industry breakthroughs often come at times when markets were loose and credit was readily available. Unless governments create room for innovation to occur, it remains hard for revolutionary technology to emerge.

As the world's major economies continue to recover from the 2008 crisis and try to reinvent themselves in the post-crisis era, they must prepare themselves for the potentially lean times ahead. They shouldn't be so naïve as to think that when winter comes, spring is not far away.

The author is a researcher with the Institute of South and Southeast Asian and Oceanian Studies, China Institutes for Contemporary International Relations. His research interests include the global economy.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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