After seven years of extraordinary governmental stimulus, the world needs a shift from exceptional monetary policies to private sector-led growth. The US Federal Reserve’s increase in interest rates sounded the clarion call. China’s market tribulations highlight deepening global uncertainties and the need for new approaches. Three possible ways to generate growth stand out for 2016.
First, Lawrence Summers warns of the threat of “secular stagnation” posed by a world lacking demand, and grafts decades of globalisation on to a theory developed in the late 1930s. The former US Treasury secretary fears emerging markets face sluggish global demand, capital outflows, weaker investment prospects and depreciating exchange rates. Without new demand, emerging markets will weigh down developed ones, which will in turn further depress developing countries.
According to this theory China, long the rising source of growth, faces a difficult conversion from a heavy industrial to a services economy. In circumscribed global economic conditions, policy-makers will weaken currencies to lure limited demand, provoking protectionist countermoves. The solution is big government spending, especially on infrastructure, financed by borrowing at extremely low interest rates.