Tags: Pimco | El | Erian | reforms | Recovery

Pimco’s El-Erian: Short-Sighted Reforms Threaten Recovery

Friday, 27 April 2012 07:57 AM

Short-sighted reforms like central-bank liquidity injections or austerity measures won't rid the world of its economic ills and are actually endangering global economic recovery, says Mohamed El-Erian, CEO at Pimco, which runs the world's largest bond fund.

More sweeping global economic overhaul is needed that includes greater input from emerging-market countries if developed countries want to see better days.

Otherwise, unpleasant surprises will continue, such as the U.K.'s return to recession or disappointing manufacturing data in the U.S.

Editor's Note: Wall Street Insider: The System Is Rigged

"Today, advanced economies no longer live in an overwhelmingly cyclical world. They are navigating major structural and secular changes. They require comprehensive policy responses to overcome the twin problems of too little growth and too much debt; and they must adapt to the rapid developments of emerging economies and their consequences for the functioning of the global system," El-Erian writes in a Foreign Policy piece.

"Until this materializes properly, the private sector's engagement will prove insufficient to provide the powerful creation of jobs that is so desperately needed."

In the U.S., orders for durable goods missed expectations recently, falling 4.2 percent in March, their lowest level in three years, after a revised 1.9 percent gain the February. The figures came in far short of forecasts for a 1.7 percent decline.

In the U.K., the Office of National Statistics confirmed the country double-dipped back into recession, with gross domestic product falling 0.2 percent in the first quarter of 2012 after contracting 0.3 percent in the fourth quarter of last year.

Expect more disappointments if tactical measures — central bank intervention or short-term bailouts — continue.

"Conditions on the ground call for a rapid pivot from tactical to strategic. Realistically and unfortunately, this may well require the sense of another impending crisis before leaders in advanced countries truly grasp the urgency and importance of this transition," El-Erian writes.

"But in one sense, we may already be creating the conditions for just that eventuality — because, in the meantime, what appears tactically smart today may well end up tomorrow looking strategically shortsighted."

Members for the G-20 group of wealthy nations recently allocated $430 billion to the International Monetary Fund in an effort firewall the European debt crisis.

Still, calls on Europe to take bolder policy action to repair its crisis-ridden economy from other nations continue.

"What was really critical in all our minds was to get back to normal growth over the medium term and preferably sooner rather than later, in other words within two to three years," says the head of the IMF's governing panel, Singapore Finance Minister Tharman Shanmugaratnam, according to Reuters.

"If we don't get back to normal growth, if we don't get GDP back to its potential levels, than fiscal sustainability is not possible either."

Editor's Note: Wall Street Insider: The System Is Rigged

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