The recovery growth on the global market, being presently observed, does not exclude new financial convulsions, and their risks are still relatively high. That was the main conclusion announced at the 7th International Risk Management Conference traditionally held in April of the current year in Almaty.
The conference which is annually organized by the Insurance Company Eurasia is likely to be called one of the most democratic economic discussion events, distinguished as that having no bias among those conducted in Kazakhstan. This time more than three hundred delegates from the countries of the CIS, Middle East, Europe and North America took part in it. During the two days of the conference participants discussed risks and outlooks of the global economy, trying to find optimum solutions for solving acute problems. In our overview we make a stop on the speeches of authoritative foreign economists, whose participation in the event was of great importance.
A report of the Director of the Institute of Economics of the Russian Academy of Sciences, Ruslan Grinberg, was found to be one of the most interesting reports on the first conference day, where he focused on the analysis of global challenges and threats. In the first place, centralization and concentration of capital through merging and amalgamation is now being observed. Secondly, the economic cycles are returning. “We forgot about them, since we had been living in the condition of economic growth throughout a long period of time. So, it appeared to us that those cycles had disappeared, but they are here again”.
The other trend is the strengthening of the government’s role in the economy. The government itself appeared not to be on the helping side in the crisis condition, but a system player. “This makes the issue of control of the government’s bureaucracy an acute one. This means that, on one side, the return of the government into the economy is caused by reasonable grounds; on the other side, the necessity to control this process appears”, – the expert emphasized; he added also that there are two ways of responding to this trend. This can be either through dictatorship, or democratic control. Currently, a “bad phase of development” is being observed in Russia, which is characterized by such aspects as “God bless that no official repressions occur”, but “unfortunately, no democratic control is in action”. In such vacuum bureaucracy becomes the “best type of business”.
The fourth trend, according to the scientist, appears in oligopoliticization and regionalization of the world’s economy; the cause of that was globalization. “In this period, the countries understood that there are many problems. Weak states compete with strong ones. Somehow or other, the rules set by the strong countries forces the weaker ones to open. It is clear that the need to gather into a group occurred to the latter ones. The vividexample of that is the European Union. Many want to follow that example, but not all succeed in that”.
Mr. Grinberg pinned big hopes on the economic uniting of Belarus, Kazakhstan and Russia. He hopes that the arrangements about the setting up of such a union are not a sort of “ritual incantation” and “something real can occur from this”. Otherwise, in 5–7 years when the economic facilities that had been created in the times of the Soviet Union will be completely worn out, our countries will finally turn into the raw material sources for other states.
Further, he paid attention to the trend of a shift of the economic power from the West to the East and to a potential conflict between the Western countries and the PRC for the influence in the global financial structures. “Officially China’s economy ranks second in the world, and all this creates a serious tension, since only the Euro-Atlantic nations are ruling in the international financial institutions now. It is clear that they do not wish to cede their ruling right. With the growth of the economic power of Asia, in the first place, that of China, the redistribution of the votes in decision-making is necessary, but this creates a serious conflict potential”.
Making a focus on the increasing power of China, Mr. Grinberg at the same time did not agree with the opinion that this century will be exclusively the one of China. “I am sure that in the 21st century three major powers will be ruling: the USA, China and the EU, which will have to somehow synchronize their ambitions”. In such a situation for Russia there is “no any other alternative than to create a single post-Soviet area – the Eurasian Union”.
Professor of the Russian Economic School, Konstantin Sonin, did not deepen into global issues in his speech, just limiting to the analysis of negative effect of the raw material resources on the quality of public administration in the developing countries. In his opinion, the petroleum resources and income from their exports “spoil the institutions”. This means that it is not advantageous for the politicians to reform public administration and public agencies in those countries which are endowed with raw material resources. “The reason for this is that the political institutions which are more transparent and under control of the society become a serious obstacle on the way of misappropriation of the natural rent by some officials”.
It is not difficult to guess whom he meant in his report, since Mr. Sonin was mainly speaking about Russia and Kazakhstan. With this, the anti-recession measures of the raw material producing states, which had used billions of dollars from the stabilization funds moneys, and so had more possibilities to withstand the global recession, compared to the countries which have no such resources, did not impress the Russian expert much. “Despite the petroleum resources, the economic recession in Russia turned out to be deeper than in other large countries, while the recession consequences turned out to be more severe”.
He emphasized in his speech that at the peak of the economic recession at the end 2008, the Russian government “was gathering experts almost every day”, asking to explain what sort of consequences could be expected in case oil prices fell to $20. However, with stabilization of the situation and an increase of oil prices, the officials more rarely applied for help to the group of experts.
Still, to be fair, Mr. Sonin announced that Russia and Kazakhstan learnt a few lessons and avoided those mistakes which could have strengthened the “Dutch disease”. This concerns the macroeconomic policy: The policies of the Russian and Kazakhstan governments were relatively conservative. However, this had been happening in Russia until 2007, after which Russia seemed to start forgetting the lessons learnt”.
Also, he paid attention to the “excessive influence” of the state on some sectors of the Russian industry. Similar processes, in his opinion, started taking place in Kazakhstan. Here there are more minuses than pluses, since the low quality of public administration negatively affects the economy diversification.
Comparing the indicators of the raw material exports and non-raw material ones in 2005 and 2009, the scientist came to a conclusion that the dependency of Kazakhstan’s and Russia’s economies upon oil is not reducing, while the percentages remain “almost the same as they were earlier”. With this, the situation in Kazakhstan looks worse than that in Russia, since “throughout the period of the oil boom the processing industry’s share in the GDP of Kazakhstan was steadily reducing”.
In the opinion of Mr. Sonin, for the countries rich in mineral resources there are two ways of carrying our diversification: either through the application of “vertical” or “horizontal policies”. The distinction of these methods is in the extent of participation of the state in the economy, although both of them are directed at the increase of investments into the processing sector. The first method provides for the direct interference of public agencies into the operation of companies and sectors and, thus, has many minuses, since in most cases the state cannot make an absolutely right choice and define criteria which could become the objective basis for investments”. Thus, the expert gives his preference to the “vertical policies”, aimed at providing indirect help to the processing industries through the investment in the human capital assets and infrastructure, also through the quicker development of the financial sector.
However, his statement that those developing countries which are richly endowed with raw material resources do not only have stimuli for carrying out structural reforms, but moreover, their resources are the ground for degradation of the political institutions and curtailing of positive undertakings, was the most interesting one deserving attention. “Bad institutions are advantageous for the systems where the influence of corruption is enormous and where there is just a little interest, for example, in independent courts or law enforcement bodies, the latter meant not allowing to illicitly outflowing the assets from the country”.
Using the qualitative criteria, Mr. Sonin came to a sad conclusion that following the dissolution of the USSR the institutions in the post-Soviet raw material producing countries were not developing in the positive direction; on the contrary, their quality was more and more deteriorating. In his opinion, this produced a negative influence on the diversification possibilities in those states.
On the second conference day the highlight of the day was a lecture of Nouriel Roubini, Professor of Economy at the New York University's Stern School of Business, one of those few well-known economists who had predicted the recession. In his speech he outlined the main positive and negative trends in the world economy, comparing them with a glass of water, which is only half full today, and only owing to large-scale pumping up of the national economies with liquidity.
However, despite the large financial “injections”, bad news is still more numerous in number than good news. Mr. Roubini preferred to start his speech with the overview of positive changes in the economy. “Despite the deep recession that started in 2008, the global economy is showing a recovery and positive growth in the last two years. China and the USA, some countries of the EU and even Japan were demonstrating positive growth”.
A second positive factor is in the “residue nature” of deflation risks in some developed countries and in the two-valued inflation on the developing markets. “These risks, although they are not zero ones, have still lesser probability than in the last year. Now we have to focus more on inflation risks than deflation ones”.
The economist called positive income and loss statements of leading corporations and financial institutions one more plus, although this was partially caused by the policies of the companies aimed at personnel layoff and wages reduction. In general, the corporate sector is in the good form. “The largest American corporations alone earned $2 trillion during the recovery period. Thus, the assuredness appears that they will be spending more on their personnel and creation of new jobs, also on merger and takeover transactions. So, this means that the corporate sector still remains in a positive condition, and this serves as the indicator that the global economy is moving towards its recovery”.
A fourth positive factor is the economic growth in the developing countries, in the first place, in Brazil, Russia, India and China. “A positive trend in the global economy occurs from those economic markets which are used to being called the markets in transition. Thus, here we will be able to see many locomotives in the future, which will appear on the global economic scene. I donot mean only the BRIC countries. If we see countries all over the world, many markets in transition are currently demonstrating a very good and impressive economic growth, and the most important thing is that this growth can remain in the future”.
The list of such countries can involve Latin American and Central Asian states, among which the economic advisor to the U.S. President called separately Kazakhstan. “I speak not only of Asia, but Latin America also, the economy of which was recovering very well after the recession. Also, the economy of the Central Asian region is okay now. Kazakhstan having a huge potential of natural resources, in particular, oil, can demonstrate in the short run all its good sides from the economic point of view and attract more investments”.
At last, the last positive trend was the decrease of risks on the financial markets and diminishing of probability of the coming of the second circle of recession in the USA. This happened thanks to the actions taken by the monetary control agencies. “The policy of the qualitative mitigation by the Federal Reserve system and the saturation of the markets with liquidity by the European Central Bank all added to improvement of the situation. All this played as a stimulus for assets price increase and reduction in the volume of borrowing capital that leads the global economy to a new development stage”. As a result, the positive changes reduced risks of unfavorable development of the situation in the world economy, while the risks themselves became “more positively” assessed by the investors, Mr. Roubini summarized
However, from further speech of the American economist it became clear that there is more that is negative than positive. Mr. Roubini spent less than 15 minutes to assess the positive trends, while the negative trends occupied all the remaining time of his one-hour speech.
First of all, the recovery growth of the developed countries turned out to be less than had been expected by experts. “In the last two years there was observed the recovery of growth in the USA, Great Britain, European Union countries and Japan. But the recovery pace turned out to be less than that expected, since it was less than 3%. This says that the economy, despite the large-scale inflows of liquidity, is being cleaned from bad indebtedness much slower than was supposed before”.
Another negative factor is the growing sovereign risks. The matter concerns the large budget shortfalls and public debts. “This concerns not only Greece, Portugal, Ireland, Spain and Italy, where active work on solving these problems is being observed, but also Great Britain, USA and Japan, where this work has not started yet”.
In some states of the Eurozone the public debt is more than 100% of the GDP, and it is necessary now to take measures to reduce it. It is necessary as soon as possible to reduce the public debts and budget shortfalls. If we fail to reduce this in the short run, the problem can become uncontrolled, and even the USA along with the EU countries will likely face a fiscal crisis”, – so is the price of delay the economist called.
The problems of the Eurozone get strengthened because of insolvency of some countries not only in the short-term prospect. “Even if Greece implements all recommendations of the ICF, such as budget shortfall reduction and carrying out of the structural reforms, the public debt of the country at best will be at the level of 150% of the GDP. This is the level which points to the country’s insolvency. For example, the default in Russia and Argentina was announced at a time when the country’s public debt was 50% of the GDP. So, earlier or later Greece will have to start restructuring their liabilities. The acuteness of the problem here will depend on how this will be done”. Still, the economist is sure that despite all these problems, both the risk of collapse of the Eurozone and the risk of probability of the public debt default for certain European counties have reduced, compared to the last year.
A fourth negative trend for the global economy comes from the USA. Despite the fact that the last year’s GDP growth was 2.9%, this year it is expected at the level of 2.8%, although at the end of last year experts forecasted it at 3.5%. Moreover, Mr. Roubini does not exclude that because of high oil prices the America’s economy growth will turn out to be even less than 2.8%.
As a “separate serious risk” for the USA the economist called the situation with the federal budget shortfall. This year, according to his estimates, it will exceed the threshold of $15 trillion, or 10% of the GDP. The problem gets more complicated because there is no unity in the economic policy issues among the political elite. If the budget shortfall does not reduce, there is a high probability of interest rates on United States notes.
A fifth negative factor is connected with China and other developing states, where the overheating of the economy and increasing inflation risks are being observed. This factor is closely tied with one more negative trend – the high oil prices, the growth of which is partly stimulated by the events in the Middle East and North Africa. The excessive increase in the “black gold” price can intensify risks of a new wave of recession. “If the oil price comes to $140 per barrel or more, there is high probability that the economic growth will slow down, or even a new recession will occur, in the first place, in the countries of the Eurozone. Finally, this will negatively affect the developing markets and global economy”.
In conclusion, Mr. Roubini answered the question as to what of the above-mentioned problems, in his opinion, are likely to become the main triggers for new perturbations in the economy. In the first place, this is the spreading of the public debt crisis to Spain and other countries of the EU, and in the second place, the uncertainty of the problem of a high budget shortfall in the USA. The main question the world’s economy is facing today is whether the global economic growth will continue after the effect of large-scale money infusions or will come to naught.
Summarizing these and many other speeches that were delivered at the conference, one can come to a conclusion that despite the continued recovery growth on the global markets, still there are fears that the remaining risks and problems can transform into new financial turmoil.
