| By William Choong, Senior Writer |
Sketching a sombre economic picture, the deputy chairman and executive director of the Government of Singapore Investment Corporation said there was a growing potential for more 'severe economic dislocations' that could lead to stress and conflicts.
Speaking to 400 participants at Global Strategic Review (GSR) 2008, a conference organised by the London-based International Institute for Strategic Studies, Dr Tan noted that global macroeconomic conditions in the past 25 years had been benign, thanks to falling inflation and rising economic growth.Major political transitions - such as the fall of communism, the integration of Eastern Europe with the West, and the formation of the World Trade Organisation - had reinforced such positive trends.
Looking to the future, Dr Tan presented a near-term scenario and two possible outcomes, each dependent on how global policymakers manage a slew of challenges.
In the near term, he said debt deflation and de-leveraging in the United States and other major developed economies would exert downward pressure on growth in many economies.
'Policy responses so far have tried to minimise the likelihood of a Japan-like deflationary spiral, but the adjustment could take a couple of years and be very painful,' said Dr Tan.
At the same time, growth in emerging markets will remain relatively robust. This has several implications, he added. Global growth will become more dependent on emerging economies, which will displace the G-7 as the world's largest economies in the next 20 to 30 years.
Economic growth will lead to the rapid expansion of the 'middle class' in these countries that will demand more goods and services. This will likely put upward pressure on commodity prices and strain the world's store of natural resources and the environment.
If policymakers manage such 'issues and tensions' effectively, Dr Tan noted, a benign scenario could emerge. This would be marked by robust economic growth, led by emerging markets, and moderate inflation.
On the flip side, if major policy challenges are not addressed, a deeper debt deflation and de-leveraging in the US and major European economies could weaken the global financial system further, leading to 'Japan-like' stagnation, Dr Tan noted.
'A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue. With weaker employment and income growth, protectionism could rise medium term, especially in the US and Europe,' he said.
Such a scenario is now more likely than ever, he added, with a growing majority in developed countries disenchanted with stagnating real wages and growing income inequality.
Another significant risk would be the return of inflation, said Dr Tan.
Global tensions could rise as countries compete for natural resources, especially food, energy and water, he added.
Countries like Venezuela, Iran or Russia could use the supply of energy as diplomatic weapons, as the world has seen 'vividly in recent weeks', he said.
Unless international frameworks for cooperation and global management of food, energy and water resources are developed, the potential for conflict and instability will rise, Dr Tan warned.
The GSR is an annual meeting held to discuss pressing geopolitical issues. This year, participants - who included World Bank president Robert Zoellick and Iraqi Foreign Minister Hoshyar Zebari - discussed issues such as Russia's re-emergence, climate change and the revolution in military affairs.
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By Shamim Adam
Sept. 15 (Bloomberg) -- The world may face ``Japan-like'' economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.
Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.
``Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,'' Tan said. ``Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.''
An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world's second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.
The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world's largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.
`More Severe'
``If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,'' Tan said. ``A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.''
Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm's plans.
Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.
Emerging Markets
Japan's economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.
Emerging markets will account for more than half of the world's growth in the next decade, from about a fifth in 2000, Tan predicts.
``Growth in emerging markets can be expected to remain relatively robust,'' he said. ``Emerging economies will displace the G-7 as the world's largest economies over the next two to three decades.''
A rising ``middle-class'' in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.
Natural Resources
``International tensions could rise as countries compete for natural resources, especially food, energy and water,'' Tan said. ``Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.''
Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.
Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.
``Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,'' Tan said.
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