We already know that the [financial] earthquake of the past few years has damaged western economies, while leaving those of emerging countries, particularly Asia, standing. It has also destroyed western prestige. The west has dominated the world economically and intellectually for at least two centuries. That epoch is over. Hitherto, the rulers of emerging countries disliked the west’s pretensions, but respected its competence. This is true no longer. Never again will the west have the sole word. The rise of the Group of 20 leading economies reflects new realities of power and authority. ….
We can see two huge threats in front of us. The first is the failure to recognise the strength of the deflationary pressures. The danger that premature fiscal and monetary tightening will end up tipping the world economy back into recession is not small, even if the largest emerging countries should be well able to protect themselves. The second threat is failure to secure the medium-term structural shifts in fiscal positions, in management of the financial sector and in export-dependency that are needed if a sustained and healthy global recovery is to occur.
Martin Wolf, “Three years and new fault lines threaten”, Financial Times, 14 July 2010.
Martin’s column was inspired by Chicago economist Raghuram Rajan’s new book, Fault Lines (Princeton University Press, 2010). Raghuram Rajan (1963-), while Chief Economist at the IMF, provided early warning of the global financial crisis in a 2005 paper, “Has Financial Development Made the World Riskier?”. His answer was “Yes!”.
Rajan’s publisher describes his new book with these words:
In Fault Lines, Rajan demonstrates how unequal access to education and health care in the United States puts us all in deeper financial peril, even as the economic choices of countries like Germany, Japan, and China place an undue burden on America to get its policies right. He outlines the hard choices we need to make to ensure a more stable world economy and restore lasting prosperity.