Leading economists had mixed views today about whether a recession could spread around the world.
At the World Economic Forum in Davos, economists from Asia and the United States and government ministers from India and China said the US economy remained on a downward course, but they were divided about whether US ties with other countries could drag them into a recession.
“If there is a tremendous slowdown in the US economy, then we must be worried about it,” said Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, as concern grew over market turmoil and a possible US recession.
He said China was in a position to weather any slowdown because of its growth, and its position as a top emerging market that has expanded its trade with countries other than the United States.
Stephen Roach, chairman of investment bank Morgan Stanley in Asia, pointed out that while the US is the largest economy, its links to world markets were indisputable, and that could have ramifications for other nations.
“The rest of the world is not as resilient,” he said.
Nouriel Roubini, chairman of New York-based Roubini Global Economics, cited the maxim that if the US economy sneezes, the rest of the world catches a cold, but said this time the diagnosis in the US was worse.
“In this case the US is going to have a protracted case of pneumonia,” he said.
The impact of the sluggish US economy, and what it may mean for other nations, hung over the event, even after the US Federal Reserve Bank cut its benchmark refinancing rate to 3.5 percent from 4.25 percent in response to the latest in the global market meltdown.
Economists also split along two lines over the role of central banks in bringing the world to the brink of recession, and whether institutions like the Fed were equipped to steer the global economy out of danger.
John Snow, the former US Treasury secretary, said central banks have performed remarkably over the last two decades and continue to make the necessary adjustments.
“The issue of whether central banks are capable of vigorous action, bold action, was answered yesterday,” he said, referring to the Fed’s interest rate cuts. “They can’t see the world ahead perfectly, but who can?”
But Joseph Stiglitz, the 2001 Nobel Prize winner for economics and a critic of free market champions, and billionaire philanthropist George Soros disagreed.
“What we have now are the foreseeable consequences of bad economic management,” Mr Stiglitz said.
Lawrence Summers, former Harvard University president and Treasury secretary under US President Bill Clinton, also said central banks have lost their way.
“I think it’s hard to give central banks a very high grade over the last couple of years on recognition of ... bubbles and the ability to address them,” he said. “I think it’s hard to give a high grade over the last six months when the bubbles have been bursting and (the banks) have been behind the grade.”
The Forum, now in its 38th year, will touch on other issues affecting the world in 2008 and beyond, including stemming terrorism, pursuing a workable peace process in the Middle East and focusing on how technology is ushering in a new age of social networking that knows no borders.
A year ago, Davos delegates predicted that the economy would move ahead with confidence. But after the credit crisis brought on by massive exposure to subprime mortgage securities, the prevailing mood instead is one of caution.