The world: What lies ahead in 2011?

By JOSEPH STIGLITZ

The answer is bleak, with little upside potential and a lot of downside risk.


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THE global economy ends 2010 more divided than it was at the beginning of the year.

On one side, emerging-market countries like India, China, and the South-East Asian economies, are experiencing robust growth. On the other side, Europe and the United States face stagnation indeed, a Japanese-style malaise and stubbornly high unemployment. The problem in the advanced countries is not a jobless recovery, but an anaemic recovery or worse, the possibility of a double-dip recession.

This two-track world poses some unusual risks. While Asia's economic output is too small to pull up growth in the rest of the world, it may be enough to push up commodity prices.

Meanwhile, US efforts to stimulate its economy through the Federal Reserve's policy of “quantitative easing” may backfire. After all, in globalised financial markets, money looks for the best prospects around the world, and these prospects are in Asia, not the United States. So the money won't go where it's needed, and much of it will wind up where it's not wanted causing further increases in asset and commodity prices, especially in emerging markets.

Given the high levels of excess capacity and unemployment in Europe and America, quantitative easing is unlikely to trigger a bout of inflation. It could, however, increase anxieties about future inflation, leading to higher long-term interest rates precisely the opposite of the Fed's goal.

This is not the only, or even the most important, downside risk facing the global economy. The gravest threat comes from the wave of austerity sweeping the world, as governments, particularly in Europe, confront the large deficits brought on by the Great Recession, and as anxieties about some countries' ability to meet their debt payments contributes to financial market instability.

The outcome of premature fiscal consolidation is all but foretold: growth will slow, tax revenues will diminish, and the reduction in deficits will be disappointing. And, in our globally integrated world, the slowdown in Europe will exacerbate the slowdown in the United States, and vice versa.
With the United States able to borrow at record-low interest rates, and with the promise of high returns on public investments after a decade of neglect, it is clear what it should do.

A large-scale public investment programme would stimulate employment in the short term, and growth in the long term, leading in the end to a lower national debt. But financial markets demonstrated their shortsightedness in the years preceding the crisis, and are doing so once again, by applying pressure for spending cuts, even if that implies reducing badly needed public investments.

Moreover, political gridlock will ensure that little is done about the other festering problems confronting the American economy: mortgage foreclosures are likely to continue unabated (legal complications aside); small and medium-sized enterprises are likely to continue to be starved of funds; and the small and medium-sized banks that traditionally provide them with credit are likely to continue to struggle to survive.

In Europe, meanwhile, matters are unlikely to be any better. Europe has finally managed to come to the rescue of Greece and Ireland. In the run up to the crisis, both were governed by right-wing governments marked by crony capitalism or worse, demonstrating once again that free-market economics didn't work in Europe any better than it did in the United States.

In Greece, as in the United States, a new government was left to clean up the mess. The Irish government that encouraged reckless bank lending and the creation of a property bubble was, perhaps not surprisingly, no more adept in managing the economy after the crisis that it was before.

Politics aside, property bubbles leave in their wake a legacy of debt and excess capacity in real estate that is not easily rectified especially when politically connected banks resist restructuring mortgages.

To me, attempting to discern the economic prospects for 2011 is not a particularly interesting question: the answer is bleak, with little upside potential and a lot of downside risk. More importantly, how long will it take Europe and America to recover, and can Asia's seemingly export-dependent economies continue to grow if their historical markets languish?

My best bet is that these countries will maintain rapid growth as they shift their economic focus to their vast and untapped domestic markets. This will require considerable restructuring of their economies, but China and India are both dynamic, and proved their resilience in their response to the Great Recession.

I am not so bullish on Europe and America. In both cases, the underlying problem is insufficient aggregate demand. The ultimate irony is that there are simultaneously excess capacity and vast unmet needs and policies that could restore growth by using the former to address the latter.


Both the United States and Europe, for instance, must retrofit their economies to address the challenges of global warming. There are feasible policies that would work within long-term budget constraints.

The problem is politics: in the United States, the Republican Party would rather see President Barack Obama fail than the economy succeed. In Europe, 27 countries with different interests and perspectives are pulling in different directions, without enough solidarity to compensate. The bailout packages are, in this light, impressive achievements.

In both Europe and America, the free-market ideology that allowed asset bubbles to grow unfettered markets always know best, so government must not intervene now ties policymakers' hands in designing effective responses to the crisis. One might have thought that the crisis itself would undermine confidence in that ideology. Instead, it has resurfaced to drag governments and economies down the sinkhole of austerity.

If politics is the problem in Europe and America, only political changes are likely to restore them to growth. Or else they can wait until the overhang of excess capacity diminishes, capital goods become obsolete, and the economy's internal restorative forces work their gradual magic. Either way, victory is not around the corner. Project Syndicate, 2010

Joseph E. Stiglitz is a professor at Columbia University and a Nobel laureate in Economics. His latest book, Freefall: Free Markets and the Sinking of the Global Economy, is now available in French, German, Japanese and Spanish.

Dream house no more?

By DANIEL GROS

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The dream of homeownership is very much alive in the emerging world.

THE financial crisis that began in 2007 had its roots in excesses in the housing market that remained unresolved in 2010 and that will continue to roil economies in 2011 and beyond.

Everybody now knows about America's dodgy “subprime” mortgages (the term says it all). But it is all too easy to forget that the development of this market was initially welcomed, because it enabled even people who would not normally qualify for a mortgage loan to aspire to homeownership. Subprime mortgages made the American dream come true.

Of course, billions of others around the world share the same dream. But the way housing finance is organised differs enormously from country to country, and these differences explain the recent global imbalances and financial crashes.

In developed economies, construction can add only a relatively small amount each year to the existing stock of housing. With populations stagnating (or declining in many parts of Europe and Japan), the existing stock of housing is exchanged among different parts of the population, and typically bequeathed from old to young.

The situation is different in emerging economies, where the quantity and quality of the existing stock of housing is woefully inadequate. Moreover, most of the existing housing tends to be in rural areas, whereas most of the jobs are in the cities. This is why urbanisation means a huge building boom in emerging economies. China, as usual, is the most extreme example, now accounting for more than one-half of global cement consumption.

The dream of homeownership is thus very much alive and is a powerful economic force in the emerging world. But mortgage markets remain underdeveloped in most emerging economies. This means that young Chinese couples will first have to save a large part of their income as a downpayment for their dream house (typically an apartment in a high-rise).

The absence of “no money down” mortgages might be more important than Confucian ethics in explaining China's high savings rate. One sure way to reduce the savings rate in China would be to develop an American-style mortgage market there.

The Chinese and others should, however, bear in mind that an increase in housing prices does not make a country richer. Of course, every homeowner will feel richer if his property's price goes up. But if the price of all housing goes up, the country as a whole is no better off; after all, people have to live somewhere, so, other things being equal, cashing in on higher house prices would merely mean paying more for one's next home.

Housing booms thus create only an illusion of wealth, though it is compelling enough to induce excessive consumption, as occurred in the United States over the last decade.

Conversely, a crash in house prices does not destroy any real wealth (the houses still stand). On the contrary, a crash makes the dream of ownership more affordable, which benefits first-time buyers typically the young and less well-off.

But, from an economic point of view, the share of homeowners versus tenants is not very important. If the rental market is well developed (as in, say, Germany), most families might elect not to own. But Germans still own indirectly the houses they live in through their investments with life-insurance companies and savings societies, which own and manage a large proportion of the country's housing estates.

By contrast, from an economic point of view, many American households really rent their homes from the Chinese government. They might be proud homeowners on paper, but their mortgage was probably underwritten by quasi-governmental institutions like Fannie Mae and Freddie Mac, which in turn rely heavily on capital from China for their own refinancing.

The real danger arises when everyone is convinced that investing in real estate is the best way to secure one's own future because house prices can only go up. This induces lenders to provide not only NINJA (no income, no job, no assets) mortgages, but also generous loans to real-estate developers to build ever larger mansions and housing estates.

As long as a boom lasts, everybody benefits. But when the bubble bursts, the NINJAs cannot service their debt and builders go into bankruptcy. Lenders find that the collateral (half-finished or empty houses) is worth almost nothing, resulting in huge losses in the banking system (as the United States found out in 2008).

In extreme cases, as in Ireland (one hopes not in Spain), the need to save the banking system can bankrupt an entire country.

Housing booms can last a long time, typically more than a decade. The downside is that housing busts last equally long, because houses are such a durable good. Once too many houses have been built, the existing overhang depresses the market for a very long time, and unemployed construction workers are usually unable to find jobs elsewhere.

The last decade saw the peak of an unprecedented housing boom in most of the rich world. The bust, with its banking problems and unemployment, is likely to last for most of the coming decade, depressing growth in all those countries which looked so strong in 2008.

By contrast, the emerging economies have barely started their own boom, which is underpinned by the spillover of liquidity from the United States. The emerging world's boom might well stretch over the entire next decade, as hundreds of millions of homes are built.

The next bust can be avoided only if emerging markets manage the dream of homeownership better than the United States and Europe. Project Syndicate, 2010

Daniel Gros is director of the Centre for European Policy Studies.

Singaporeans least , Malaysia more among, likely to worry about housing: survey

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Singapore has emerged last in the latest Gallup poll of 128 countries on unaffordable housing, local media reported Friday.

The global survey by polling agency Gallup covered 1,000 or more respondents in each country, and only 1 percent of Singaporeans said there had been times over the past 12 months when they did not have enough money to provide adequate shelter for themselves and their families.

Denmark was the second last at 2 percent.

In contrast, Azebaijan, Liberia and Chad, which were in the top three places, had results of 76, 53 and 51 percent, respectively.

Among other countries in Asia, Malaysia had 14 percent of its population worrying about affordable housing and Japan had 9 percent.

Gallup had conducted the poll by telephone or face-to-face interviews over last year and this year.

Singapore has been known for its policy of relying on government efforts to provide affordable housing for its population. About 80 percent of the population in the small open economy live in homes developed by the government.

Source: Xinhua, Newscribe : get free news in real time