Analysis - Despite the party, global policymakers poles apart

DAVOS, Switzerland Sat Jan 29, 2011 1:19pm GMT

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DAVOS, Switzerland (Reuters) - Even after their annual Alpine get-together, global policymakers cannot agree which of the risks facing the world economy are most pressing let alone decide how to tackle them.

While there was broad agreement that the worst of the euro zone debt crisis has passed, countless panel discussions and bilateral meetings at the World Economic Forum in Davos did little to narrow differences of opinion over the threat of inflation to the global recovery and the imbalances associated with deficits and exchange rates.

The financial crisis forced policymakers to look into the abyss and work together to prevent the global economy going into meltdown. The recovery is seeing countries operating more independently.

"At the early stages of the financial crisis, at G20 level, there was a lot of talk of coordination ... I think now everybody is going their own way," Turkish Finance Minister Mehmet Simsek said during one of the Forum's panel discussions.

"That's an issue, that's a problem," he said. "Global imbalances are there, probably to grow."

Turkey is one of a growing number of emerging market nations that have acted to stem "hot money" inflows destabilising their economies. Asian and Latin American nations have done the same, pointing the finger at the United States for flooding the world economy with newly-printed money.

Much of the problem is disagreement over prioritising risks and not just between rich and emerging nations.

Take price pressures: the United States and France are both leading Western economies with low inflation rates -- running at 1.5 percent and 2.0 percent respectively -- and yet they see the threat posed by rising commodity costs very differently.

"I would not put inflation on a global level on the high list of concerns," U.S. Treasury Secretary Timothy Geithner said, instead stressing a need to improve financial oversight. French Economy Minister Christine Lagarde saw things differently: "I think we should all be concerned about the risk of rising inflation as a result of raw materials prices," she told Reuters Insider. "We'd better watch out."

The inflation debate masks deeper divisions about the imbalances in the world economy, centred on a rift between the United States and China.

Washington wants Beijing to let its yuan currency rise, a development Geithner said would help China manage the inflationary challenges that come with rapid growth. Yuan appreciation would also help lift U.S. exports to China.

But China, whose economy continues to zoom, is concerned loose U.S. monetary policy will weaken the dollar, hitting its U.S. Treasury holdings and potentially destabilising its economy by choking back its exports.

"I'm worried about whether China's reserves value will evaporate," said Yu Yongding, a former People's Bank of China adviser and influential economist in the Chinese Academy of Social Sciences, a government think-tank.

"Definitely inflation is the biggest concern for the Chinese economy," he added.

COMMODITY BUBBLES

China's concerns are shared by other fast-growing economies where rising interest rates are drawing in capital from investors hunting for higher-yielding bonds or commodity assets.

Columbia professor of economics Joseph Stiglitz said ultra-loose U.S. policy was throwing the world into imbalance as the Federal Reserve pumps $600 billion (£378 billion) into the U.S. economy.

"The liquidity in the United States isn't going to reignite the American economy," he told Reuters Insider.

"It's looking around the world ... it's going to emerging markets that don't need it and it's fuelling these bubbles. The irony is that it might come back and ricochet on the United States through higher commodity prices," he said.

A weaker currency helps a country's exporters, which is why Washington wants the yuan to appreciate and why some other policymakers have bridled at the U.S. policy, which they see as a means of depressing the dollar to helping U.S. manufacturers.

"The problem is that not everyone can have a weak currency simultaneously," said Niall Ferguson, a Harvard professor who specialises in economic history. "In this game of competitive devaluation, it's very clear that the Chinese are winning."

Policymakers made little progress at a Davos session on redesigning the global monetary system, participants said.

Bank of Israel Governor Stanley Fischer recalled how in the autumn of 2008, at the height of the global financial crisis, it was easy to coordinate policy "because every country agreed to expand fiscal policy."

"Now we're at a stage where some people have, in essence, to forego some growth in order that others may grow a bit faster," he said. "Getting coordination on that is a totally different sort of problem and much harder to solve, and that includes the problem of global imbalances."

French President Nicolas Sarkozy has some lofty goals for his chairmanship of the G20 group this year. Davos suggests he has much work to do.

(Editing by Mike Peacock)

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