The finance ministers and central bank governors of the Group of 20 countries who met in Moscow on July 19-20 issued a communique that said in part, “The global economy remains too weak and its recovery is still fragile and uneven.” What is characteristic about the current world economic situation is that the money that had flowed into emerging economies has started to flow out of them as the United States hints at scaling down its quantitative monetary easing.

The movement of money has caused the devaluation of currencies of emerging economies and stock price falls in them, thus putting the global economy in an unstable condition.

Developed economies need to pay attention to the conditions of emerging economies and provide necessary help and support to them, since these economies are the destination of developed economies’ exports and thus the underpinning of developed economies’ economic growth.

The communique, without mentioning the U.S. by name, stressed the importance of clearly explaining any change in monetary policy to prevent confusion in the world economy. Using a euphemistic expression, it said, “Future changes to monetary policy settings will continue to be carefully calibrated and clearly communicated.”

After the Lehman Brothers shock of 2008, the U.S., Europe and Japan pursued monetary easing to prop up their economies. As a result, a large amount of money flowed into emerging economies. While it helped them grow, it was also a destabilizing factor.

The money started to flow out of these economies after U.S. Federal Reserve Chairman Ben Bernanke hinted in late May at scaling down U.S. quantitative easing. Dissatisfaction in emerging economies is mounting over slower growth and imported inflation caused by cheap currencies. The communique said, “We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability.”

The fear that bad debts will increase in China due to “shadow banking,” coupled with the difficulty in discerning the true state of shadow banking, is also introducing instability to the financial market. The communique particularly said that the G-20 countries will work toward the timely implementation of measures for the oversight and regulation of shadow banking.

Continuing recession in the eurozone and the slowdown of emerging economies’ growth are affecting the prospect of the global economy. The International Monetary Fund in July lowered its outlook for the world economic growth by 0.2 percentage point from April to 3.1 percent. The economic slowdown of China and India greatly contributed to the downward revision.

The scenario supported by the administration of Prime Minister Shinzo Abe and the Bank of Japan is one in which increases in exports prompt an expansion in production and capital investment, thus leading to increased employment and wages.

The communique says, “There are signs of strengthening activity in the U.S. and Japan.” But there is the possibility that this scenario will not work if exports to emerging economies do not increase dramatically. Japan and the other G-20 countries need to work together to reduce risks that could cause a deterioration of the economic conditions in emerging economies.

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