World economy in 2011: Fragile and seeking miracles

Dr Jayati Ghosh

Global capitalism is not in good shape.

Despite the premature euphoria about the supposedly 'V-shaped' recovery, the world economy in fact has not really recovered from the 2008 Great Recession, since none of the fundamental contradictions that led to the previous crisis were adequately addressed.

Now even significant establishment voices like the Chief Economist at the IMF, Olivier Blanchard, are recognising that recovery is at a standstill in the advanced economies and 2012 may see even worse economic conditions than 2008.

Output growth in Japan has already turned negative once again in the most recent quarters, while it is sluggish in the US and likely to become much worse in the euro area given the inability to resolve the internal problems of the eurozone.

Part of the problem is that unless private expectations are 'managed' better by decisive government policies, negative expectations will become self-fulfilling. But it is harder for governments to 'manage expectations', because private investors themselves are schizophrenic about government deficits and economic growth.

Financial markets effectively appear to demand fiscal consolidation by putting very high spreads on the bonds of governments with high ratios of public debt to GDP or fiscal deficit to GDP. And then investors in these markets are very surprised (and react adversely) when attempts at fiscal austerity reduce economic activity and growth prospects. Global finance has been biting the hands of the governments that fed it so generously during the crisis, but in the process it is creating further problems both for itself and for the real economy.

This is of major concern not just in itself, but because even the period of recovery was already not associated with much improvement in labour market conditions.

In the three major advanced economic regions of US, Europe and Japan, open unemployment rates increased during the Great Recession, and since then have remained at these high levels despite subsequent increases in incomes and economic activity.

In many emerging markets for which data are available, unemployment rates fell in 2010 but since then have started rising again.

A September 2011 report from the ILO (International Labour Organisation) to the G20 found that in the first quarter of 2011, only a handful of countries (notably, Argentina, Brazil, Turkey and Indonesia) had absolute employment levels that were above the levels of the first quarter of 2008, before the eruption of the global crisis.

In some countries both output and employment were still below their earlier levels (including the developed world: European Union, the US and Japan) while in others like South Africa, output had recovered but employment was still lower than in early 2008.

So, the weakening prospects for the world economy come at a time when labour-market conditions are already very fragile across the world.

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