Sunday, November 23, 2014

Complacency in a Leaderless World

DAVOS – The World Economic Forum’s annual meeting in Davos has lost some of its pre-crisis panache. After all, before the meltdown in 2008, the captains of finance and industry could trumpet the virtues of globalization, technology, and financial liberalization, which supposedly heralded a new era of relentless growth. The benefits would be shared by all, if only they would do “the right thing.”

Those days are gone. But Davos remains a good place to get a sense of the global zeitgeist.

It goes without saying that developing and emerging-market countries no longer look at the advanced countries as they once did. But a remark by one mining company executive from a developing country caught the spirit of change. In response to one development expert’s heartfelt despair that unfair trade treaties and unfulfilled promises of aid have cost the developed countries their moral authority, he retorted: “The West never had any moral authority.” Colonialism, slavery, the splintering of Africa into small countries, and a long history of resource exploitation may be matters of the distant past to the perpetrators, but not so to those who suffered as a result.

If there is a single topic that concerned the assembled leaders the most, it is economic inequality. The shift in the debate from just a year ago seems dramatic: no one even mentions the notion of trickle-down economics anymore, and few are willing to argue that there is a close congruence between social contributions and private rewards.

While the realization that America is not the land of opportunity that it has long claimed to be is as disconcerting to others as it is to Americans, inequality of opportunity at the global scale is even greater. One cannot really claim that the world is “flat” when a typical African receives investment in his or her human capital of a few hundred dollars, while rich Americans get a gift from their parents and society in excess of a half-million dollars.

A high point of the meeting was the speech by Christine Lagarde, the International Monetary Fund’s managing director, who stressed the marked change in her institution, at least at the top: deep concern about women’s rights; renewed emphasis on the link between inequality and instability; and recognition that collective bargaining and minimum wages could play an important role in reducing inequality. If only the IMF programs in Greece and elsewhere fully reflected these sentiments!

The Associated Press organized a sobering session on technology and unemployment: Can countries (particularly in the developed world) create new jobs – especially good jobs – in the face of modern technology that has replaced workers with robots and other machines in any task that can be routinized?

Overall, the private sector in Europe and America has been unable to create many good jobs since the beginning of the current century. Even in China and other parts of the world with growing manufacturing sectors, productivity improvements – often related to job-killing automated processes – account for most of the growth in output. Those suffering the most are the young, whose life prospects will be badly hurt by the extended periods of unemployment that they face today.

But most of those in Davos put aside these problems to celebrate the euro’s survival. The dominant note was one of complacency – or even optimism. The “Draghi put” – the notion that the European Central Bank, with its deep pockets, would and could do whatever necessary to save the euro and each of the crisis countries – seemed to have worked, at least for a while. The temporary calm provided some support for those who claimed that what was required, above all, was a restoration of confidence. The hope was that Draghi’s promises would be a costless way of providing that confidence, because they would never have to be fulfilled.

Critics repeatedly pointed out that the fundamental contradictions had not been resolved, and that if the euro was to survive in the long run, there would have to be a fiscal and banking union, which would require morepolitical unification than most Europeans are willing to accept. But much of what was said in and around the meetings reflected a deep lack of solidarity. One very senior government official of a northern European country did not even put down his fork when interrupted by an earnest dinner companion who pointed out that many Spaniards now eat out of garbage cans. They should have reformed earlier, he replied, as he continued to eat his steak.

IMF growth forecasts released during the Davos meeting highlight the extent to which the world has become decoupled: GDP growth in the advanced industrial countries is expected to be 1.4% this year, while developing countries continue to grow at a robust 5.5% annual rate.

While Western leaders talked about a new emphasis on growth and employment, they offered no concrete policies backing these aspirations. In Europe, there was continued emphasis on austerity, with self-congratulations on the progress made so far, and a reaffirmation of resolve to continue along a course that has now plunged Europe as a whole into recession – and the United Kingdom into a triple-dip downturn.

Perhaps the most optimistic note came from the emerging markets: while the risk of globalization was that it implied a new interdependence, so that flawed economic policies in the US and Europe could torpedo developing countries’ economies, the more successful emerging markets have managed globalization well enough to sustain growth in the face of failures in the West.

With the US politically paralyzed by the Republicans’ infantile political tantrums, and Europe focused on ensuring the survival of the ill-conceived euro project, the lack of global leadership was a major complaint at Davos. In the last 25 years, we have moved from a world dominated by two superpowers to one dominated by one, and now to a leaderless, multi-polar world. While we may talk about the G-7, or G-8, or G-20, the more apt description is G-0. We will have to learn how to live, and thrive, in this new world.

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    1. Portrait of Pingfan Hong

      CommentedPingfan Hong

      Given the nature of Davos as the club for the rich and famous, one can hardly believe it remains (or has ever been) a good place to get a sense of the global zeitgeist.

      In any case, there is clearly a contradiction between your blame for the dominance of the West in the global leadership in the past and your claim of a leaderless world today: sounding like you still want a superpower to lead the world.

      In a multipolar world, the form of global leadership will also be decentralized and diffused.

    2. CommentedSarchis Dolmanian

      As for a 'leaderless world' .... the easiest way into a crises is to indiscriminately follow a hapless leader or a crowd while the only way out is to start thinking by yourself, even if you do it only to choose your next leader.

    3. CommentedSarchis Dolmanian

      "While the realization that America is not the land of opportunity that it has long claimed to be..."
      How about 'While the realization that America is no LONGER the land of opportunity that it used to be...'
      Maybe we should try to understand what happened between this two moments....

    4. CommentedDavid Crichton

      Perhaps Prof. Stiglitz could expand in a follow-up note on what he means by a "good" job, which would require a view of his opinion as to the essential purpose of a job and permit a conversation on the actions that possibly be taken by governments to create "good" jobs in the developed markets.

    5. Commentedsrinivasan gopalan

      Prof.Stiglitz's piece as is his wont called a spade a spade, sparing none for the extant straits the world economy is in. It is not lack of leadership that is at the root of today's travails as the rot has set in deeper in individual society of nations. The inequality that has been highlighted in the piece is not as if the world had woken up to it now because since times immemorial humanity had been inured to this chasm in fortunes of individuals, just as all the five fingers in a hand are not alike. Squaring up the divide requires enlightened policy impetus from statesmen of standing and not from leaders of today who have feet of clay and a thinking not infused with universal considerations. Nevertheless, one has to give credit to Prof.Stiglitz for recognizing this sombre reality that stares in our face. It is time that instead of lauding institutions such as the IMF which had changed its colour in consonance with the changes of the times, let the leaders of the free world emulate their ancestors who were statesmen and who wrestled with the problems worse than ours in a munificent manner, sinking parochial considerations. We need statesmen who can rescue the world from the abyss of multifarious malaise that plagues it pathetically today. G.Srinivasan, Journalist, New Delhi.

    6. CommentedEdward Ponderer

      "One very senior government official of a northern European country did not even put down his fork when interrupted by an earnest dinner companion who pointed out that many Spaniards now eat out of garbage cans. They should have reformed earlier, he replied, as he continued to eat his steak."

      The parallel with Marie Antoinette's "Let them eat cake" can of course not be lost on anyone. Even if this report is false or exaggerated, the same is assumed to have been the case with the Antoinette story. The point is, its credible.

      Is the danger understood? What happens when people feel that they have nothing to lose but their lives any longer.

      Would that they are gotten rid of by extermination? The Nazi genocide against Jews during WWII largely succeeded only because they were an minority among an unsympathetic majority. -- But when it is the majority? For countless considerations, the unthinkable would result in destruction of ALL Humanity, without protecting any minority in power.

      And of course, the destruction of that minority will eliminate the only ones with the skills and know-how to make any organized system, save gangs, actually function.

      The question is, will the economic and political leadership have the courage of a Mikhail Gorbachev, to peacefully transition from a "consumerist, limitless growth," "power politics," model to one of mutual concern and responsibility in the realistic assessment of limits.

      Will our anonymous Northern European official awaken from his slumber, or keeping dreaming of the limitless plane of resources and markets in a closed, poisoning-faster-than-healing planetary sphere.

      -- On that, dreaming indeed. I hear that on America's death row, most order fast-food for their last meal, because who can think of a good piece of steak at a time like this?

    7. CommentedProcyon Mukherjee

      Sorry, Prof. Stiglitz, instead of G-0 we need to keep including those as leaders who are continually entering the fray for economic development by their sheer will and resolve and they have their share of successes to be proud of while the G-8 transforms into an ensemble of debtor nations who after having pulled too much from the future of their children are now on the lookout for new avenues from where new credit possibilities could be created or staked with visible or invisible collateral, which is perennially in short supply.

    8. CommentedFrank O'Callaghan

      The relative impoverishment of the majority of the populations of what were the industrial democracies is not offset by the absolute enrichment of a small minority of wealthy plutocrats.

      The increase in wealth of the poor in the other countries is the only thing currently propping up the world economy.

      This explosion of inequality is a result of a very coordinated policy across the world.

      The impression of a leaderless world is an attempt of the guilty to evade responsibility for the greatest economic crime in history.

        CommentedVenu Madhav

        Frank, take a look at the prophetic interview of Sir James Goldsmith; I do not remember any body from the so called elite economists' think-tank who has ever made such darn good prediction. Of course, Dr. Stiglitz clinically diagnosed the ill-effects of globalization in his book recently.

    9. CommentedVenu Madhav

      Always been an admirer of Dr. Stiglitz with his enlightening thought process, especially on the subject of globalization.

      What he describes as a leaderless, multi-polar world actually is a good thing to happen, so this transitioning anarchy is a mere transit point owing to the fact that the economics across the globe went wrong and the aiding politics/political affiliations have only done so much to aggravate the situation at best.
      At least today, I am more optimistic about the fact that the centre of gravity as it drifts more into Asia owing to the sheer size of population will drive towards more balanced social/income equality; which of course capitalistic economies will despise but let's face it; you cannot beggar your neighbour to remain rich, the inflection points have to arrive sooner or later by virtue of cycles and so today we are nearing another inflection point which I hope will happen between 2014-2017 primarily due to the following factors:
      i. China has new leadership in place; and they are much more strategic than the previous regime. They are rebuilding their society on principles of less corruption, more social inclusion and equality.
      ii. India will have another round of vote-casting in 2014, which even if it happens to be another relay race tenure with multiple partners, it however will be much different from previous tenures owing to the fact that the greater social inclusion methods adopted by earlier governments may not be fully supported and the financial authorities have to take a ballsy approach to achieve a sustainable rate of growth for accelerating the social inclusion; and for that corruption has to be weeded out.
      That's 2 Billion people economies worth of importance.
      iii. US- The pill could be bitter but alas the patient needs it now than later!!; and despite all of the hype on the stock markets peaking in Jan 2013, huge corrections are inevitable in real estate, financing, interest rates, inflation, stock markets etc. The good news is President Obama has already fired a salvo for deficit limits and sequester with a deadline; secondly he knows very well the sustainable path to recovery at least within shores is only due to employment and so the push will be stronger for more business ties, business creation.
      That's 310 million(MM) people market there.
      iv. Russia- As energy prices fluctuate between highs and lows; Russian oligarchs know they can hold power only so much for so long, thus will not be surprised how the government pushes these oligarchs for embracing wider benefitting methods and position for leveraging in the global markets, as this definitely is their window of opportunity.
      That's another 142MM population there.
      v. Japan- A new reality has already dawned upon the government in terms of understanding how they have to revive their economy, looking outside for now but probably will have a great cultural influence above and beyond the business arena especially as they take to investing at a greater pace outside of Japan in the emerging markets. Time to revisit the widow-maker bonds!
      That's 128MM population right there.
      vi. Eurozone- This is something that will remain like unraveling a nested puzzle as the highs and lows are expected to have fast changing amplitude primarily due to the political concerns in individual countries that need a tying at the top and that's where the concerted will is lacking. Germany will probably think more strategically on how close can they be to Euro and how long. Of course the zone will be happy whether Britain joins or not; or even if they remain fickle forever.
      That's a 333MM population market right there.

      In summary, between 2014-2017 pivoting on various fronts will occur especially on global financial markets, exchange rates, unemployment, trade balances; and 2013 is already setting the deck for it with the lack of clarity at top echelons of leadership. Time for soul-searching, defined value-based leadership to emerge is arriving soon.

    10. CommentedZsolt Hermann

      These meetings have lost their importance as more and more people realize that the world is aimlessly drifting towards the unknown, like a rudderless ship, and almost nobody pretends any longer they know what they are doing, and that they have any idea what is going to happen even within a year.
      If there is any optimistic, positive point, it is the so called "revelation of evil".
      Instead of the previous pretending, play acting, developed or developing recognize, and openly declare that up to this point we have been living, developing in a totally selfish, exploitative socio-economic system, regardless of the actual governing structure, nationality or culture.
      The American attitude towards the Middle East is a good example "we squeezed as much as possible from the region, so have a good time, we must go...".
      But in today's global, interconnected world system such a thing cannot work, and very soon they will see how much they cannot just leave, as they will be dragged into whatever conflict happens next.
      Or how leaders in Europe pretend that by "balancing the books" they solved the problems, when it does not translate to the street level, and the actual public is sliding, and have no future prospects.
      And when the dominoes start falling even Germany will learn what austerity, unemployment, public unrest is.
      From now on we have two options: Either we continue waiting, pretending, playing games until the crisis forces us on our knees when we desperately start searching for a cure, a total change from within the meltdown, or this much crisis, imminent suffering is enough to initiate a self search, a desire to change ourselves since we understand it is only us that needs change, only selfish, exploitative human nature is the cause of the problems.
      We do not have much more time to make the right choice.

    11. CommentedJohn Brian Shannon

      Hi Joseph,

      Great piece, as always!

      We are at a point in human history where we should now be thinking; "Which is more important, 'the economy', or 'the people'?"

      Thus far, developed countries have preferred to (this is the 'economy' part) invest in making evermore money for corporations -- and that's fine, look at the great progress that has been made.

      However, I think we are near the end of that paradigm, because we have 'topped out' or 'plateaued' if you prefer that term.

      U.S. corporations these days are awash in cash. To wit, the excess liquidity seen in the U.S. over the past few years -- and really, what good is all that money doing anyone, including those corporations which can't invest it -- as there is nothing which pays enough to warrant such massive investment?

      Mountains of money piled up in banks, but nowhere to spend it!

      Not here in North America, as it is cheaper to set-up shop in Asia.

      Not in Asia, as there are few left (here or anywhere) who can afford to buy anything more than the things they already purchase.

      (By which I mean most of the discretionary income in the developed world is already being spent)

      The unemployed, obviously have much less discretionary income AND are a drain on U.S. government coffers.

      And they don't want to be! They would prefer more discretionary income, but for the 22 million people seeking jobs, there are less than 2 million jobs available.

      So, telling 22 million Americans to "just get a job" is disingenuous and haughty. Perhaps evil.

      If we don't have jobs here, then we can't buy products and services made by our corporations -- and that will continue to be the case. This is just as true even when our corporations own those Chinese factories.

      We have shipped millions of jobs overseas, and soon, few in America will work, because most of the jobs will have been shipped over there.

      And soon, the Asian economies will plateau, but for a different reason. There won't be enough purchases (demand) to sustain any more growth (supply).

      The great Asian tigers China and India will no longer grow, when there isn't enough demand from consumers in the developed nations.

      So much for growing the economy, which, I agree is a noble enterprise, but we have done that and look where it has got us. It is not going to get better, in fact, over the long term, it is going to slowly degrade from the place we are today.

      Yes, things may pick up a bit over the next year or two, but when measured over the next 10, 20, 30 or 40 years, the developed nations will slide backwards relative to their present position and relative to the developing nations.

      Time for a reality check.

      "If we keep on doing what we have been doing, we are going to keep on getting what we have been getting." -- Jackie B. Cooper

      We tried it one way, and it worked extremely well for a long period of time, that period is now drawing to a close.

      Focusing on the economy was a great way to grow America.

      But now, I suggest we focus on 'the people'.

      Making their lives better by promoting and creating better employment opportunities, education and health-care.

      1) A very high Employment rate would do wonders for the economy of the U.S. and our suppliers in other countries.

      2) A higher universal standard of education for all, especially for workers, will empower U.S. corporations, their workers and citizens all over America, and again give the U.S. the competitive edge it needs in the world.

      Educated people invent and build better products and services, and can enhance a corporation in other ways -- leaving a large percentage of the population out of the education equation just doesn't make sense.

      3) And a healthy population will be more productive when they do work, more willing to look for work when they are unemployed, and workers will miss less workdays with sick children or partners.

      Up till now, putting most of the emphasis on growing 'the economy' has served 'the people' well, but now, after plateauing, if we start to put huge emphasis on 'the people' directly, I suggest we may reap even larger dividends for 'the economy'.

      Firing on all cylinders, is what America needs to do now.

      (Of course, I'm thinking cylindrical bar charts, to show different demographics. Finding out what needs to be done to bring the largest possible majority to a high employment level, a minimum college or certified tradesperson education level and a high universal health standard)

      This will allow America to fire on all cylinders!

      What would it take to bring this vision to fruition? Probably less than we are wasting now.

      Best regards, and again, nice article! JBS

    12. CommentedPaul Schaafsma

      Your leadership and that of a growing number of outspoken economists is important. If our governments don't listen, many of their citizens do.
      Your voice has helped educate and inspire many of us. So too Saez and Picketty, Pollin and Kuttner, Wiesenthal and Reich, economists from both parties, from business and academia, from the EPI to the IMF to UNCTAD...and of course the fearless Paul Krugman...
      It may fall on citizens to agree on their own agenda. Unlikely as that may sound, your work makes it more possible.

    13. CommentedSikiru Salami

      Prof, this is a wonderful piece! It's indeed becoming a leaderless world. Just you as alluded to, the depth of inqualityis making the claim of globalization more fictional than real.

      American and European companies can continue doll out jobs to the emerging market for want of cheap; this is a international reallocation of wealth. If you like, you may say this is law of karma in economics.
      A real flat world in the making you may

      The truth is, the rest of us in the emerging markets(nigeria in particular) don't have to wait for americans and europeans to get back to work. Afterall, all their aid pledges have always been mere promises.

    14. CommentedG. A. Pakela

      With respect to the "gift" bestowed upon Americans by their parents and government, that is the result of our culture allowing inequality to express itself in relentless competition, success and failure.

      Economic theory indirectly confirms "trickle down" economics because in the U.S. we can afford to pay our least able citizens far more than what a citizen of a less developed country can hope to make. Moreover, we can afford to provide subsidies for housing, food, medical care, disability and retirement income for our poor and not so poor citizens at a level that is far more egalitarian than even the most communist of communist countries in the entire history of communism!

    15. Commenteddonna jorgo

      professor i remmeber 2010-2011- WEF was the SAME ..tell me what change? if you believe the EU economy will grow ..good for you.. (but i don't )
      I HAVE Q IMF grow 10.4 % in this bad situation how is possible?
      thank you

    16. CommentedShane Beck

      About the only growth at the moment is a growing arms race in NE Asia and SE Asia......

    17. CommentedVirgil Bierschwale

      I believe all of this is happening because we have ignored the simplest of questions while chasing a bird in the bush versus a bird in the hand that we already had.

      The question is very simply, who are my best customers.

      Recently the following picture came across my desk showing the countries that consumed the most, meaning Europe and America sending their jobs to the countries that need our purchases to provide jobs for their people.

      When we put our best customers out of work, meaning american and european, we also put our suppliers out of work as well.

      Where is the sense in this?

      Perhaps we should be thinking "Keep America and Europe At Work so that we can Keep The World At Work?"