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Monday, Aug. 3, 2009

JAPANESE PERSPECTIVES

The Great Recession's five-act drama might end up being a tragedy


"All the world's a stage." So says the Bard, and who are we to argue? The global economy is certainly not short on drama these days.

In fact, it feels very much as though we are living through a play in five acts, the third of which is progressing at this very moment.

But we have yet to determine whether this drama will have a happy ending or conclude in tragedy.

Act One was when finance entered meltdown. Lehman Brothers exited the stage and AIG was adopted by the U.S. government.

In Act Two, production fell off a cliff. Easy money had turned people into shopaholics all over the world, especially in the United States and the United Kingdom. When finance collapsed, so did the shopaholics. Bloated levels of production had to be adjusted as vendors and manufacturers struggled to get rid of the suddenly excessive inventories they found themselves stuck with.

The curtain went up on Act Three around April this year. The opening scene took place in London, where the G20 nations met for the second time since the start of the meltdown to assess the situation and discuss policy responses.

Wishful thinkers would no doubt like to call Act Three "The Green Shoots Act." But that is simply unacceptable. For one thing, those green shoots of economic recovery seem to be withering rather quickly everywhere. But more importantly, the main drama at this point is not about how green they appear or how many shoots there are. It's about whether the world will let them thrive.

"The Three Faces of Global Patriotism" would be a better title for Act Three.

Face number one is patriotic consumption, where "Buy American" is just the most overt example of this type of protectionism. More subtle cajoling by governments is in evidence around the world.

Face number two is patriotic finance. Financial institutions are pulling out of global finance left and right. Having been burned severely in Act One, they have adopted bunker mentalities and are now heading home.

This is quite natural and actually may be a good thing in some instances. Be that as it may, there is still cause for alarm when such discrimination starts distorting financial flows. Things take on a much more sinister tone when governments start telling financial institutions to lend closer to home — "lend American" or "lend Japanese," as the case might be.

It could of course be argued that this too is only natural when the money being lent is actually government money.

If governments are supporting banks with taxpayers' money, they have the right and the obligation to speak out on where that money ought to go. Yet it is a frightening day when governments start breathing down the necks of financial institutions in this fashion.

The third face of global patriotism/protectionism is patriotic employment. Not much more needs to be said on this issue. Foreign workers are being given a hard time everywhere.

With all this going on in Act Three, Act Four is likely to be the point when currency turmoil hits the stage. The rise in protectionism always leads to competitive devaluations. That was the case in the 1930s. Reference was made to this issue at the L'Aquila summit in Italy in July. Which goes to show that heads of state are worried.

What of Act Five? A new dawn? Eternal darkness? If nothing is done to stem the tide of protectionism at this stage, there can be only one ending: We will have to get used to living in the dark. Forever.

Noriko Hama is an economist and a professor at Doshisha University Graduate School of Business.


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