Challenges to global economic growth continue to dominate every major newspaper headline, and the same was the case today at GFLC.
Raghuram Rajan, Economic Advisor to the Prime Minister of India and a professor at the University of Chicago, spoke about both short and medium concerns for the global economy.
For example, Rajan explained the changing role of emerging economies in providing demand for industrialized nations’ supply:
“Looking forward, people believe that the emerging markets may be the solution. The emerging markets can be a source of growth, and that would be natural for those countries that have relatively low levels of income to pick up the slack. The problem is that emerging markets have never provided demand to the rest of the world without starts and stops, without booms and busts. The last ten years have been good for the emerging markets because someone else provided the demand… Now industrial countries can’t do it anymore. The emerging markets have to do it. Are they up to snuff?”
In addition to the austerity challenges in Greece and Spain, Rajan talked about a country we don’t hear about as often in terms of financial challenges: France:
“France is an issue you should be watching. France could slide into the category of the periphery unless it does something dramatic over the next few months. They’ve taken a first step the last couple of weeks to try to improve the competitiveness of industry, but France is the big penny waiting to drop if it doesn’t do enough.”
Following his remarks, Rajan was joined by a panel of experts to discuss global growth and commerce. John Lipsky, former First Deputy Managing Director of the IMF, Jerry Webman, Chief Economist for Oppenheimer Funds, and Zhou Yuan, Head of Asset Allocation for China Investment Corporation discussed the challenges to all major geographies, concentrating on two key areas: China and the United States.
Rajan led the discussion of two big shifts in China. In terms of demographics, he finds that China is shifting from an era of “cheap” labor growth in part due to its one-child policy. From an economic perspective, as the labor force changes, China is shifting in two ways. First, toward domestic consumption and away from investments and exports; and second, moving quite literally to grow its domestic economy inland. Previous growth has been concentrated in coastal cities.
The panel spent a lot of its discussion debating the implications of growth and the upside for the United States post-resolution of the fiscal cliff. In the short and medium term, all expressed optimism, predicting U.S. inflation five years from now would hover anywhere from 2 to 4 percent.
The discussion also touched on regulatory reform, and how approaching rules might affect the way markets function. On this point Lipsky said the role of uncertainty continues to determine the actions of market participants:
“Without going into great detail, in this room there must be uncertainty about regulatory reform, uncertainty about the different regulatory policies across the globe, and uncertainty about the political process and how this will be allowed to proceed.
“There needs to be a new level of cooperation and coherence. If not, we’re going to continue with growing concern about volatility.”