Editor's Pick:

Only short-term gain for real economy

By Mei Xinyu (China Daily) Updated: 2011-05-04 07:58

Osama bin Laden was finally killed in an operation in Pakistan on Sunday after being hunted by the United States for nearly 10 years. The news has had strong repercussions in the financial and commodity markets: The US dollar has risen and commodity prices have dropped. But taking a comprehensive view of the situation as a whole, the death of bin Laden is unlikely to profoundly influence the overall situation of the international economy.

The region where bin Laden was prevailing accounts for only a small share of the global economy and an even smaller share in the output of the real economy. The influence of bin Laden and Al-Qaida was mainly concentrated in countries in the Middle East and North Africa and according to the "World Economic Outlook", issued by the International Monetary Fund in April 2011, these areas account for only about 5 percent of real global GDP.

The effects of bin Laden's death will mainly be concentrated in the financial sector and the virtual economy, rather than the real economy, but if his death affects the fundamentals of the real global economy, Washington should take the opportunity to declare a successful end to the war on terror and reduce its excessive military intervention overseas, so as to avoid depletion of its national power.

In this way, the world and the US economies can get rid of imbalances. The problem is that the moral imperative triggered by the US' status as the world's sole superpower, coupled with years of abusing its military power, have resulted in a powerful interest group, which is trying to keep the US on the same road, regardless of whether its military commitments overseas will overly tax the country's strength.

Looking at the hard-line forces in the US that advocate interference overseas and the many so-called democratic and opposition groups in countries that pin their hopes on the American intervention to help them seize power and which have powerful lobbies in the US, it is easy to understand how powerful these interest groups are in steering Washington's policy.

Even if some in the US leadership have insight and want to reduce the nation's overly expanded front and maintain national strength, interest groups at home and abroad will not allow them to do so. Take Libya for example, though the US leadership initially insisted on non-interference, in the end it had to give way. Though suspicious of the Libyan opposition, the US still provided the rebels with millions of dollars of military assistance.

Even though in the financial markets and the virtual economy, bin Laden's death will not offset the large-scale market downturn, the effects of his death could be amplified a hundredfold if there was a fundamental reversal of US monetary and fiscal policies.

Thus, if the Federal Reserve Board immediately announced the end of loose monetary policy and began raising interest rates, then we could expect to see gains in the commodity market and the US dollar rising.

The problem is the Fed has announced that it will still end its second round of quantitative easing on schedule in June. The current monetary policy will remain stable. When the US monetary policy does start to reverse, the influence of bin Laden's death will have dissipated. So, although the US dollar rose after reports of bin Laden's death, this will only be short-term.

The author is a research scholar with the Chinese Academy of International Trade and Economic Cooperation, with the Ministry of Commerce.

(China Daily 05/04/2011 page9)