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UPDATED: November 8, 2010 NO. 45 NOVEMBER 11, 2010
Crisis Focus: Long Way to Go

More than two years have passed since the outbreak of the financial meltdown and now one question is on everyone's mind: How much longer will these uncertain times last? Li Yang, Vice President of the Chinese Academy of Social Sciences, shared his opinions on this question and the efforts that must be made to redress the global economic imbalance in a speech at the 2010 social sciences forum held in Beijing in October. Edited excerpts follow:

As history has shown us, it usually takes about a decade for the world to completely recover from any serious economic fallout. That means we're going to have a long way to go before the global economy is fully healed.

The root cause of the crisis was a global economic imbalance. The good news is that many countries are already making efforts to address this problem.

In the past, the imbalance between developed and developing nations was an entrenched ailment. For instance, while the United States was burdened with a load of debt due to years of maintaining a trade deficit, emerging economies had accumulated trade surpluses. Some even became creditors of their developed counterparts.

To lift the world economy out of the current quagmire, efforts are needed to tackle the imbalance. Major developed countries are already taking action in the following four areas.

First is economic rebalancing. Major developed countries' high dependence on debt is related to the current international monetary system, under which the U.S. dollar is the major reserve currency and the euro is the second most used. With the outpouring of their currencies, the U.S. and European economies' development model—depending heavily on debts—could continue.

Many developed countries now aim to raise their domestic savings rate. But that will take time and mount deflationary pressures on the economy.

Second is structural adjustment. Policymakers in the West realized that their service industries, especially the financial sector, were growing too quickly. A number of governments have stepped up constraints on financial industry over-expansion, and handed out incentives to recuperate the manufacturing industry and exports.

Third is financial deleveraging. The overleveraged financial industry ultimately triggered the economic downturn. But the deleveraging process will come at a painful cost as it squeezes sources for financing and casts a shadow over economic growth.

Fourth is fiscal frugality. The developed nations need to cut back on their fiscal expenses and maintain budget sustainability to accelerate the economic recovery.

For China, the biggest question concerns its high investment and low consumption. Simply cutting investment won't solve the problem. China should optimize its investment structure. It should seek the growth of the employment rate that investment can bring, instead of the growth rate of investment itself. More investment should be put into underdeveloped and rural areas.

A transfer of investment from production facilities to social infrastructure should also be realized. And measures should be taken to entice more private investors.

Meanwhile, it is necessary to wean China's reliance on bank lending as the major source of investment capital. Private equity and the capital markets could also be feasible options.

The investment environment also needs to be improved.

During its recovery, China is bound to face a complicated economic situation. The issues of foreign exchange rates and international hot money will continue to stretch the nerves of the policymakers. And behind those issues are still the problems of the global economic imbalance.

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