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Stimulus versus discipline: Which is the right road?

Publication Date : 09-10-2012


The world's finance ministers face a crucial opportunity when they meet this week. At stake is a sustainable economic recovery, but their weighty task is to find the balance between monetary easing and financial discipline that will deliver it.

The meeting will focus on the budget stand-off in the US and the debt crisis in Europe.

The annual meeting of the International Monetary Fund (IMF) and World Bank this year was timely indeed. The gathering of the world's economic decision-makers came amid one of the lowest global-growth periods in modern history. Yet debates are still raging over what solution will end the depression.

Washington is likely to face a deadlock over its budget during this election season, while the debt crisis in the euro zone is far from over.

Economists are divided on whether the solution is the monetary easing and fiscal stimulus that inject more money into the system, or financial discipline that would curb debts and guard against instability in the system.

Growth prospects in Asia are generally higher than in the US and Europe. This has brought hope that Asian growth could offset the slower demand in the affected euro-zone countries.

Thailand's domestic demand is being driven largely by the post-flood rehabilitation programme and the government's fiscal-stimulus policies.

Neighbours such as Indonesia and Malaysia are also enjoying a boom in spending and investment by their governments and the private sector.

Nonetheless, the World Bank released a report yesterday forecasting that economic growth in East Asia and the Pacific region might slow down by a full percentage point, from 8.2 per cent in 2011 to 7.2 per cent this year, before recovering to 7.6 per cent in 2013.

China's economic slowdown poses a challenge for Thailand since it is now our biggest export market. Next month will bring a change of leadership in Beijing, but this won't be the only factor determining its future economic direction. Slowed growth there will affect demand in the region.

The World Bank reports that, in China, the growth of domestic demand in real terms has dropped and GDP growth in the second quarter fell to only 7.6 per cent compared to levels above 9 per cent in 2011. Investment growth has slowed in particular, driven by last year's measures to rein in investments in real estate, the report says.

The World Bank also notes that Beijing's relaxation of monetary policy earlier this year, along with local and central government stimulus measures, could again reverse this trend in months to come. But any future growth also depends on the nature of the reforms the country undertakes.

This week's meeting of economic leaders takes place amid simmering tension in the Middle East and intensified disputes between Japan and China over islands in the East China Sea. These issues contain threats of international conflict that could obstruct the world's efforts towards sustainable economic growth.

The globe's top policymakers must take the opportunity this week to forge a single direction towards recovery from their countries' diverse political, economic and financial situations.

Thailand has a similar lesson to learn from the downturn. It must find the "middle path" between stimulus and discipline that will lead to sustainable economic growth. The euro-zone debt crisis has shown how overspending by governments can bring chronic economic woes.

The US budget stand-off reveals the necessity for government to inject money into the system to drive growth.

Thai policymakers should take this opportunity to learn from these countries to ensure the country builds a strong defence against the volatile global situation.


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