Summary:The debate on global economic issues touched on topics as comprehensive as the mandate of the session’s title. Michael Milken commenced the debate, asking the distinguished panelists to identify the pervasive problems in the world’s second largest economy, Japan.
Stagnation was immediately identified as the root of many of the problems in the Japanese economy. Specifically, the panelists noted the stagnation of income and people within the closed Japanese system. Though there are benefits to a closed economy such as little exposure to economic risk internationally, panelists were concerned more with the detriments of such an economy. Japan imports very little from the rest of the world and receives relatively little foreign direct investment. Japan also lends very little to the rest of the world as a result of its banking system, which has resulted in Japanese lenders lending to companies that have no chance of repaying the loan.
Kenneth Arrow further identified the liquidity trap as an issue hurting Japanese investment. During its downturn, Japan experienced high personal savings rates forcing down interest rates, however, the lower interest rates have not stimulated effective investment, foreign or domestic. Arrow recommended that Japanese lenders abandon policies keeping investment in failing domestic companies and lending more money abroad.
Panelists described the response of the Japanese government to the crisis as an additional cause of current stagnation. The Japanese government misidentified the problems plaguing their country initially and implemented a Keynesian program of discretionary fiscal spending to stimulate growth. The projects have been both unproductive in themselves and unproductive in aiding the economy. This policy only accomplished driving the debt-to-GDP ratio to 120 percent, unsustainable for any substantial time. This discussion of the Japanese economy concluded with Milken recommending that Japanese institutions pursue improvements in financial and regulatory technology.
Milken then led the panel to discuss the issues in the world’s third largest economy, Germany, which arose in the 1990s after the fall of the Berlin Wall. Following World War II, West Germany was a paradigm of economic growth and prosperity. Problems arose in the 1990s during the unification process. One source of the economic turn-around was the politically motivated policy of exchanging one East German mark for one West German mark despite unequal exchange values. Another problem that persists in the German economy is the geographical variation in unemployment rates estimated to be 20 percent in former East Germany and only 8 percent in former West Germany. The replacement ratio policy for the unemployed implemented by Germany to equalize income distribution following unification fuels the persistence of geographic variance in unemployment.
The panelists also identified Germany’s recent transition to the euro as a detrimental policy affecting their economy. In this, Germany surrendered power over its banking system to the European Monetary Union central bank in Brussels. The needs of the German economy even at the time of this transition were different than the needs of other economies in Europe. As a result, policies implemented by the central bank were contradictory to policies that would address the needs of the German economy. The European Monetary Union has also curbed the range of fiscal policies that can be pursued by member states. Budget deficits must be kept below 3 percent of GDP. This has prevented Germany from effectively following policies that address the issues within its economy.
Kenneth Arrow briefly dissented to these opinions regarding the depth of the problems in the Germany economy. Adjusted for longer vacations, more leisure time, more medical coverage and more equal income distributions, Germany’s economy is more comparable to that of the United States. The one problem that Arrow did acknowledge is the high unemployment caused by the high replacement ratio.
Continuing the discussion on Europe and the European Monetary Union (EMU), Milken challenged the panelists to discuss the United Kingdom and its hypothetical entry into the EMU. The panel agreed that free trade among the European nations is an advisable and beneficial policy, however, did not recommend the entry of the U.K. into use of the euro. The economies of Europe are too heterogeneous as exemplified by the experience of Germany to allow for effective monetary policy to be implemented universally from Brussels. A flexible exchange rate was recommended by Kenneth Arrow as a way for each country to maintain control over their respective monetary policies. Myron Scholes contended that for a single currency to be appropriate, both labor and capital must be mobile within the single currency region. That is not the case in Europe and the United Kingdom.
The discussion then returned to northeast Asia and the hypothetical unification of the two Koreas. Here the panelists recommended the pursuit of unification. However, the pangs of such a policy would likely be much greater than that of the case of Germany. The panel estimated the income and infrastructure gap between North and South Korea to be ten times greater than that between the former German states. The unification process then would take much longer and be much more difficult than the experience of Germany.
The panel moved to discuss the current growth and growth possibilities of China as a developing market. Panelists remarked that the situation of China is favorable to economic growth, being underdeveloped industrially and having a heterogeneous population. When adjusted for the inefficiencies of state owned enterprises and other negative effects on the Chinese economy, the actual state of their economy is closer to a growth rate of 6-8 percent. The panelists felt confidant that Chinese growth did not take business away from American industry as China mainly competes in low-cost manufacturing and that continued growth in China will affect both world and U.S. GDP positively. Recommending policies of market liberalization and political reform, the panel saw great potential in China for the foreseeable future.
Michael Milken and the Nobel Laureates concluded the panel by exploring trends in the global economy as a whole and recommendations for the future. Growing income and development inequality demands attention both in the U.S. where real purchasing power in poor income brackets is decreasing and internationally, where countries such as those in sub-Saharan Africa continue to fall further behind in social development. In order to improve this situation, social and economic structure must be equalized across borders, while protectionist policies pursued by developed countries especially in agriculture must by abandoned in order to allow advantages to be realized by less developed countries. The panel continually emphasized the importance of education and specialization in achieving goals of an uninhibited international economy.
