Long-term prospects instead of short-term fiscal figures should be the focus going forward as the world has seen economic systems broken down due to short-sighted measures, said a renowned economist.
Prominent international economist Prof Jeffrey Sachs pointed out that it was dangerous to merely concentrate on short-term growth as it was not sustainable for the whole economic system.
Sachs said this when delivering the Tan Sri Lim Goh Tong Public Lecture 2012 on “Macroeconomic Challenges in the US, Europe and China”.
Commenting on the Keynesian theory which proposed the idea of increasing government deficits to stimulate a sluggish economy, he said: “I don't think it would work and I don't think it has worked.
“We should make our economic policies with a 10-year horizon, not a three-month horizon we should ask ourselves what kind of investment, education and environmental management do we want. Then, we will end up closer to where we want to be.”
Sachs said longer-term economic objectives would be neglected when much time was spent worrying about the financial numbers for the next month or quarter.
“It's not that you do both, you actually lose track of the longer-term (goals) which are much more important than the short-term.”
He said short-term financial stimulus was dangerous because “the overhang of bad debt is unpayable”.
Sachs also said the “global” economic crisis was largely due to the woes in the high-income nations which had high fiscal debts.
“We don't have a global crisis; we have a world that is operating at these two speeds; slow in the high-income world and rather fast in the developing countries,” he said.
“It means that the poor countries are narrowing the income gap with the richer countries.”
While Sachs believed that it would be a bumpy road towards convergence, the adjustments in the United States and Europe to this reality have not been smooth on the whole.
“This is the legacy of tax cuts, social spending cuts, lack of investment in infrastructure, (human capital) training and regulation,” he said.
On one of the trends he observed 10 years ago, he said: “My interpretation is that, in response to slow growth, the central bank in the United States and the federal government created the housing bubble which temporarily created job opportunities.
“This is because construction is one of the sectors where they can absorb high school graduates with pretty good pay.”
Sachs went on and explained: “However, a bubble like that could only last three to four years. It crashed in 2007. Since then, our unemployment situation has been miserable.
“The federal has put and interest rate to zero again. We tried stimulus but none of it works. The only thing we haven't tried is the structural look at our situation.”
He said a review into the structure would require policy makers to invest more developing human capital.
“It would require raising taxes to pay for new government programmes,” he said, adding that access to quality to education is the ticket for the lower and middle-income classes to move upwards.
Sachs emphasised that widening inequalities was one of the issues to be addressed.
“The situation in Europe is much more complicated because on top of everything that I have described, it a shared currency without an underlying supporting institution to manage the single currency,” he said.
The fiscal crisis is due to the outflow of monies from the country to avoid tax which lead to a plummet in revenue in those countries, he added.
Meanwhile, Sachs noted that Northern Europe was doing well as the high income taxes collected were reinvested into the countries' social development.
On China, he opined that the Asian giant would grow financially in the next 20 years, adding that its biggest crisis was environmental, not financial.
Sachs said the North Atlantic that dominated the world economy for almost two centuries was a historical anomaly that was gradually coming to an end.
“The rise of East Asia and South-East Asia will be the most pertinent, especially the catching up of China because of its size is certainly the most pertinent aspect of the global macroeconomy,” he said.
He noted that the slowdown of growth in China was due to the “massive catch up” which started a few decades ago.
“No country at the frontier has a supercharge growth,” Sachs said.