A way out of the dark

China and the US must work together to resurrect global economic growth and build a sustainable framework for development in the future, said US Secretary of the Treasury Timothy Geithner.

In a speech on cooperation and recovery at Peking University, he announced: ‘China and the US, individually and together, are so important in the global economy that what we do has a direct impact on the stability and strength of the international economic system.’ For this reasons he said each nation had a unique obligation to ensure that their actions promote economic health and stability.

Global financial problems could not be solved without proper cooperation between China and the US, he said. The speech was part of a strategy by the US aimed at closer dialogue between the two countries. President Hu Jintao and President Obama agreed in April to establish better discourse on areas of shared economic interest.

“Strengthening domestic demand will also strengthen China's ability to weather fluctuations in global supply and demand.

Geithner warned that the recession would continue to cause pain and that the process of repair and adjustment was going to take time. 'The extent of damage to the financial systems means that the supply of credit will be constrained for some time,' he cautioned. ‘After a long period where financial institutions took on too much risk, we still face the possibility that banks and investors may take too little risk, even as the underlying economic conditions start to improve.’ He also predicted that consumer spending in the US would be constrained for much longer.

Trade between the two superpowers would be critical to the economic fortunes of the rest of the world, he said, adding that to ensure a sustainable global recovery the two countries would have to make broad changes to the structure of their economies.

‘These are necessary adjustments. And they will entail a longer, slower process of recovery, with a very different pattern of future growth across countries than we have seen in the past several recoveries,’ noted Geithner.

“We must not turn our backs on open trade and investment.

US consumerism cannot be as dominant a growth driver as it has been in the past, he said. While in China, sustainable growth will require a shift from external to domestic consumer demand. ‘Strengthening domestic demand will also strengthen China's ability to weather fluctuations in global supply and demand.’

Economic policy in both countries would have to change to facilitate this transition, he said. The US should reduce its public debt by enforcing stricter rules on government spending and handing out fewer tax breaks, but only once the recovery has been firmly established. Obama will also try and increase private saving. Meanwhile, China needs to increase household incomes and strengthen social reforms, he said.

Combined with domestic reform, China and the US need to work together to strengthen international economic cooperation, said Geithner. He highlighted that China and other major emerging economies now play a much bigger role in global financial regulation. International financial institutions, like the IMF, also need to become ‘more representative of the shifting balance of economic and financial activity in the world’.

“We still face the possibility that banks and investors may take too little risk.

‘China is already too important to the global economy not to have a full seat at the international table, helping to define the policies that are critical to the effective functioning of the international financial system,’ noted Geithner.

He also insisted that international institutions need to be equipped with stronger financial capacity to respond to future crises. The US is committed to mobilising an extra $500bn for the IMF, he said, in order to provide an insurance policy for the global financial system.

Geithner also touched on the long-term challenge posed by climate change. ‘There is an urgent need to ensure that each and every country takes meaningful action to deal with this threat.’

He ended his speech by advocating the benefits of globalisation: ‘As economies have become more open and more closely integrated, global economic growth has been stronger and more broad-based, bringing increasing numbers out of poverty, and turning developing nations into major emerging markets.’

‘As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment - for ourselves and for those who have yet to experience the fruits of growth and development.’