“The global economy in the past three years has been the strongest I’ve ever seen in my lifetime. There is high economic growth, liquidity and low inflation. These are the overriding factors,” Paulson said at a press conference at the IDB meeting in Guatemala.
This rosy picture is contradicted by international bankers. Bill Rhodes, vice-chairman of Citigroup, told Emerging Markets that the risks lurking beneath the surface of the “global goldilocks” economy are substantial.
“It’s important that lenders and investors are prudent at this point in the cycle and don’t relax standards,” he said. Rhodes pointed out that the fallout on the US economy from the sub-prime market debacle is still unclear. “There’s definite risk there,” he said.
Paulson’s former colleagues are also voicing concern. Gerry Corrigan, managing director at Goldman Sachs & Co, said: “The statistical probabilities of major financial shocks are lower, but the corollary to that argument is that the potential damage those shocks can make is a hell of a lot greater. The central issue is evaluating the probabilities of damage.”
There are concerns that the US economy could be heading toward a slowdown in the second half of 2007. The debate is on how important the downturn will be. The Institute of International Finance (IIF) predicts that the US economy will grow by 2.7% in 2007, down from 3.3% last year.
Corrigan said: “Our collective capacity to anticipate [global financial] shocks, in particular their timing and trigger, is virtually nil. If we could anticipate them, they would not happen.”
Paulson said that he expects Latin America to continue growing at sustained rate, but said it is necessary for economic growth to begin reducing poverty and social injustice. He said that there need to be economic opportunities for this to happen.
Opponents in civil society say they too want to see sustained growth, but they argue that the prevailing economic structures in the region do allow this to go beyond the top echelon.
Gustavo Hernandez, of the Collective for Applied Studies of Social Development, said: “The government is only focused on macroeconomic numbers. There is little concern if growth makes it down to the poor.”
Paulson said that one of the Bush administration’s principal strategies in the region involves pushing free trade, particularly securing approval of agreements that have been signed by not approved by the US Congress. “I am a strong supporter of free-trade agreements that allow for economic growth and increased trade,” he said.