Monday, November 24, 2014

The New Global Economy’s (Relative) Winners

CAMBRIDGE – The world economy faces considerable uncertainty in the short term. Will the eurozone manage to sort out its problems and avert a breakup? Will the United States engineer a path to renewed growth? Will China find a way to reverse its economic slowdown?

The answers to these questions will determine how the global economy evolves over the next few years. But, regardless of how these immediate challenges are resolved, it is clear that the world economy is entering a difficult new longer-term phase as well – one that will be substantially less hospitable to economic growth than possibly any other period since the end of World War II.

Regardless of how they handle their current difficulties, Europe and America will emerge with high debt, low growth rates, and contentious domestic politics. Even in the best-case scenario, in which the euro remains intact, Europe will be bogged down with the demanding task of rebuilding its frayed union. And, in the US, ideological polarization between Democrats and Republicans will continue to paralyze economic policy.

Indeed, in virtually all advanced economies, high levels of inequality, strains on the middle class, and aging populations will fuel political strife in a context of unemployment and scarce fiscal resources. As these old democracies increasingly turn inward, they will become less helpful partners internationally – less willing to sustain the multilateral trading system and more ready to respond unilaterally to economic policies elsewhere that they perceive as damaging to their interests.

Meanwhile, large emerging markets such as China, India, and Brazil are unlikely to fill the void, as they will remain keen to protect their national sovereignty and room to maneuver. As a result, the possibilities for global cooperation on economic and other matters will recede further.

This is the kind of global environment that diminishes every country’s potential growth. The safe bet is that we will not see a return to the kind of growth that the world – especially the developing world – experienced in the two decades before the financial crisis. It is an environment that will produce deep disparities in economic performance around the world. Some countries will be much more adversely affected than others.

Those that do relatively better will share three characteristics. First, they will not be weighed down by high levels of public debt. Second, they will not be overly reliant on the world economy, and their engine of economic growth will be internal rather than external. Finally, they will be robust democracies.

Having low to moderate levels of public debt is important, because debt levels that reach 80-90% of GDP become a serious drag on economic growth. They immobilize fiscal policy, lead to serious distortions in the financial system, trigger political fights over taxation, and incite costly distributional conflicts. Governments preoccupied with reducing debt are unlikely to undertake the investments needed for long-term structural change. With few exceptions (such as Australia and New Zealand), the vast majority of the world’s advanced economies are or will soon be in this category.

Many emerging-market economies, such as Brazil and Turkey, have managed to rein in the growth of public debt this time around. But they have not prevented a borrowing binge in their private sectors. Since private debts have a way of turning into public liabilities, a low government-debt burden might not, in fact, provide these countries with the cushion that they think they have.

Countries that rely excessively on world markets and global finance to fuel their economic growth will also be at a disadvantage. A fragile world economy will not be hospitable to large net foreign borrowers (or large net foreign lenders). Countries with large current-account deficits (such as Turkey) will remain hostage to skittish market sentiment. Those with large surpluses (such as China) will be under increasing pressure – including the threat of retaliation – to rein in their “mercantilist” policies.

Domestic demand-led growth will be a more reliable strategy than export-led growth. That means that countries with a large domestic market and a prosperous middle class will have an important advantage.

Finally, democracies will do better because they have the institutionalized mechanisms of conflict management that authoritarian regimes lack. Democracies such as India may seem at times to move too slowly and be prone to paralysis. But they provide the arenas of consultation, cooperation, and give-and-take among opposing social groups that are crucial in times of turbulence and shocks.

In the absence of such institutions, distributive conflict can easily spill over into protests, riots, and civil disorder. This is where democratic India and South Africa have the upper hand over China or Russia. Countries that have fallen into the grip of autocratic leaders – for example, Argentina and Turkey – are also increasingly at a disadvantage.

An important indicator of the magnitude of the new global economy’s challenges is that so few countries satisfy all three requirements. Indeed, some of the most spectacular economic success stories of our time – China in particular – fail to meet more than one. It will be a difficult time for all. But some – think Brazil, India, and South Korea – will be in a better position than the rest.

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    1. CommentedZsolt Hermann

      I think the key to the question the article tries to answer is in the understanding what a global, interdependent world means.
      Can we talk about individual nations, countries succeeding, or losing independently from others in an integral, interdependent system?
      Today we exist in such a tightly interlocked network that our fate is totally tied together.
      The three characteristics mentioned in the article do not work in this system.
      Due to the excessive overproduction/over consumption economic, that fully relies on credit, everybody, individuals and nations alike are already in debt or are heading that way.
      Our finances, economies and other human institutions are so much interdependent, globalization is so deep that there is no country that would not be dependent on world economy, nobody is capable of being independent, sustaining itself today.
      Regarding "democracies" we also learn that western style democracy is also basically serving a small dominant minority, probably in a less obvious way than other governing structures, but still causing the same or even bigger social inequality than other structures inevitably leading to tensions, breaking points within society.
      As many times mentioned these days, we are all sitting on the same boat. Either we all figure out what caused this global crisis and how we all need to change, working together, each element supporting the others and the whole system corresponding to the laws of integral systems, or we are all going to sink deeper into crisis until the intolerable suffering will force us to start changing ourselves.

    2. CommentedMoctar Aboubacar

      This point looks like it could use a little more support. What specifically about recent changes in the global economy makes democracy a critical factor in determining which countries will do relatively better down the road?

      Are distributive conflicts that much more intense? And if so, are democratic processes currently showing good results in curbing these conflicts and civil disorder?

      Are the spaces of discussion that strong democracies provide crucial... in overcoming turbulence and shocks?

      I have a hard time seeing on one hand, countries with democratic traditions using them to overcome the current financial crisis, and also, that same space managing to play a crucial role in recovery from crises. In the South Korean case it seems that the rapid recovery from crisis 15 years ago was done in large part at the expense of principles of consultation and cooperation. I wish nothing more than to be convinced.

    3. CommentedPaul A. Myers

      I disagree with the "three characteristics" hypothesis. Rather the relative winners tomorrow will be those countries that are able to borrow today publicly and privately to fund infrastructure and social investments in tomorrow's international comparative advantages for their countries. These countries will come out of this slow growth period with tremendously strengthened international trade advantages that can power strong domestic growth.

      Today is a time when shrewd countries will place down large investments on tomorrow's opportunities.

      Which countries "see" their opportunities and how they invest in them will be fascinating to watch.

      Yes, countries mired down in high levels of public consumption will wallow around and fall behind. One can guess who they will be. But who will win? Much harder to discern.

        CommentedDaniel Samsic

        Interesting point, I totally agree with Mr. Myers:

        'Today is a time when shrewd countries will place down large investments on tomorrow's opportunities.
        Which countries "see" their opportunities and how they invest in them will be fascinating to watch.'

        By risking a lot of boo-ing from the P-S audience because all the economists have learned in the university the principle of the "big bang for the buck" NOW, not tomorrow or next generation, by contrary, a "sustainable development" (sorry to use this cliché hated by the economists) is based on another principle: "a half buck for the bang now and a half buck tomorrow or next generation".

        The good news is that addressing the long-term "sustainable" problems would actually help to solve the short-term economic problems.
        Indeed... 'Which countries "see" their opportunities and how they invest in them will be fascinating to watch'.