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Don't knee-jerk when facing great recession!

Comments on Mario Lamberte “Some positive consequences of the Global Economic Crisis”, 1/06/2009, http://www.eastasiaforum.org/2009/06/01/some-positive-consequences-of-the-global-economic-crisis/

I agree with most of Mario Lamberte's arguments in the following paragraph, to quote:

"The Great Depression challenged mainstream economic thinking in the 1930s and produced revolutionary economic theories and paradigms. If the severity of the current GEC has so far been unmatched since the Great Depression, it is likely to have similar effects on economic thinking and policy making. If there is a fundamental change in the way of economic thinking, global and national institutions, such as the central bank and macroeconomic policies, could change too."

But I think it is likely to be premature to infer too much from these arguments, no matter how useful they are. I think some of Mario Lamberte's prescriptions need careful analysis. They include, especially things how to rebalance composition of GDP, the role of exports and the argument that to avoid future external shocks, Asian countries need to boost domestic demand and rely less on export, export incentives, how fiscal resources should be readdressed, changes in the production structure in favor of non-tradable goods and services, reducing precautionary motive for saving.

What I am concerned is that many people, including policy makers and advisers, have a tendency to overshoot in their responses to the great recession. My view is that an open and free trade international system will still be much more superior than self reliance and autarky. Benefits of trade and economic integration will outweigh the cyclic shocks that can be transmitted through an integrated international system, even though there are short term negative consequences if there are downward external demand pressures from time to time. Knee-jerking in the face of economic difficulties by throwing the baby out with bathwater is hardly ever a prudent strategy.

More specific comments are likely to follow.

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