Friday, November 28, 2014

The Global Growth Quest

NEWPORT BEACH – What is the most urgent economic priority shared by countries as diverse as Brazil, China, Cyprus, France, Greece, Iceland, Ireland, Korea, Portugal, the United Kingdom, and the United States?

It is not debt and deficits; and it is not dealing with the aftermath of irresponsible lending and borrowing. Yes, these are relevant and, in a handful of cases, urgent. But the number one challenge facing these countries is to develop growth models that can provide more ample, well-paid, and secure jobs amid a secular re-alignment of the global economy.

For both theoretical and practical reasons, this is a challenge that will not be met easily or quickly. And, when it is met, the process will most likely be partial and uneven, accentuating differences and posing tricky coordination issues at the national, regional, and global levels.

The last few years have highlighted the declining potency of long-standing growth models. Some countries (for example, Greece and Portugal) relied on debt-financed government spending to fuel economy activity. Others (think Cyprus, Iceland, Ireland, the UK, and the US) resorted to unsustainable surges in leverage among financial institutions to fund private-sector activities, sometimes almost irrespective of underlying fundamentals. Still others (China and Korea) exploited seemingly limitless globalization and buoyant international trade to capture growing market shares. And a final group rode China’s coattails.

Recent data from the International Monetary Fund highlight these models’ simultaneous loss of effectiveness. Global growth averaged only 2.9% in the most recent five-year period, well below the level for virtually any such multi-year period going back to 1971. While emerging economies have out-performed developed countries, both have slowed. Growth has been virtually flat in developed economies and, at 5.6% in the emerging world, is well below the 7.6% average in the previous five-year period.

Highly leveraged systems in finance-dependent economies were the first to hit a wall, surprising many who had uncritically bought into the “Great Moderation” – the idea that macroeconomic and asset-market volatility had eased permanently. The bold policy action that countered the initial disorder prevented a global depression, but it encumbered public-sector balance sheets.

As a result, highly indebted governments were the next to hit the wall. Some were pushed there by the high cost of containing the damage from banks’ irresponsible behavior. Facing immediate credit rationing and large output contractions, they could be stabilized only by exceptional official financing from abroad, and, in some extreme cases, by defaulting on past commitments (including to bondholders and, most recently, bank depositors).

For other countries, including the US, medium-term issues came to the fore. But, rather than catalyzing sensible policy discussions, these issues played into polarized and polarizing politics, creating new and more immediate headwinds to economic growth.

Meanwhile, a highly interdependent and (now) less dynamic world economy has been limiting the scope for external growth drivers. Accordingly, even countries with sound balance sheets and manageable leverage have experienced a growth slowdown.

The consequences have become painfully clear, especially in Western countries. With insufficient growth to deleverage safely, social costs have been considerable. Alarmingly high youth unemployment, shrinking social safety nets, and under-investment in infrastructure and human capital are burdening current generations and, in a growing number of cases, will adversely affect future generations as well.

In the process, inequality has risen further. And yet, despite the urgent need for major policy adaptations at the national level, and much better regional and global coordination, progress has been disappointing.

With the political context undermining the right mix of short- and longer-term measures, national policymaking has stumbled into partial approaches and unusual experimentation. The focus has been on buying time, rather than on implementing a sensible transition to a sustainable policy stance. And potential national outcomes would be less uncertain if excessive inequality were not treated as an afterthought.

The regional and multilateral dimensions are similarly inadequate. The absence of well-articulated common analyses and policy coordination has accentuated legitimacy deficits, encouraging leaders and publics to opt for partial narratives and eroding confidence in existing institutional structures.

Given these trends, the search for more robust growth models will take much longer and be more complicated than many recognize – especially as the world economy pivots away from unfettered globalization and high levels of leverage.

We should expect countries like the US to benefit from dynamic bottom-up entrepreneurship and traditional cyclical economic healing. Notwithstanding a dysfunctional Congress, the private sector will increasingly convert a paralyzing uncertainty premium, which impedes much investment, into a less disruptive risk premium. But, without a short-term economic turbo-charger, the recovery in growth and jobs will remain gradual, vulnerable to political and policy risks, and disproportionately beneficial to those with favorable initial endowments of wealth and globalized talents.

Governments’ role will be different in countries like China, where officials will guide a shift from dependence on external sources of growth to more balanced demand. As this requires some fundamental domestic re-alignments, the rebalancing will be both gradual and non-linear at times.

The outlook for other economies is more uncertain. Undermined by a lack of policy flexibility, it will take a long time for countries like Cyprus to overcome the immediate shock of crisis and revamp their growth models.

Left to their own devices, these multi-speed dynamics would translate into higher global growth overall, coupled with larger internal and cross-country disparities – often exacerbated by demographics. The question is whether existing governance systems can coordinate effective intervention to counter the resulting tensions.

Simultaneous progress on both substance and process is needed. Parliaments and multilateral institutions must do a better job at facilitating cooperative policy implementation, which will require a willingness to reform outmoded institutions, including political lobbying.

No one should underestimate the growth challenge facing today’s global economy. The stronger sectors (within countries and across them) will continue to recover, but not enough to pull up the global economy whole As a result, weaker sectors risk being surpassed at an ever-faster pace. These trends will become more difficult to reconcile and keep orderly if governance systems fail to adjust.

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    1. CommentedParrain Boursorama

      The best model for expanding Alternative Energies and Environmental Protection globally is through using market equilibrium, whereas governmental subsidies and fiscal stimulus to be just supplementary

    2. CommentedEdward Ponderer

      I am reminded of a tragedy sometime in the late 1960s or early 1970s, with a student at University of California, Berkeley, who was permanently blinded by destroying his retinas. He had lain on his back on the campus grass, for three hours staring straight at the sun. Being on an LSD drug trip, he explained, he believed that he was having a conversation with the sun.

      Grow what? Grow where? To the markets of newly unemployed savings at skyrocketing prices of hyperinflation?

      It is a globe, it is limited, and when swallowed up at an exponential rate without coming off the LSD, we will hit the brick wall very hard indeed.

      Consumerism is quite a drug, but before our retinas are completely trashed, I suggest that we awaken now and start restructuring about reality.

      Entrenched paradigms -- especially ones that special interests feel they can benefit from till the last possible moment -- are very hard to break. But it is critical at this time to look to transforming with the butterfly, lest we die with the caterpillar.

      In this regard, I'd highly recommend a look at

    3. CommentedZsolt Hermann

      From the last paragraph:
      "...No one should underestimate the growth challenge facing today’s global economy..."
      This is not simply a challenge.
      Further quantitative growth, economy with the present framework is simply impossible.
      There is nowhere to grow, humanity in the 21st century exists in a global, fully interconnected, fully interdependent and saturated network.
      Moreover this human network exists within a natural system that is closed, integral and finite.
      The natural laws existing in this vast system, laws that are binding for humans too, do not allow us to continue with our illusorical, artificial adventure which had no natural foundations to begin with.
      All the signs and symptoms the article analyzes, all what leaders and experts are discussing, trying to solve today are simply the result of this "mission impossible".
      Basically we try to behave like God, a "Creator", create something out of nothing. This is what we try to do with our present economy and financial institutions, live on bubbles, live on credit which we have no possibility to repay, we are paying for credit with further credit, and regarding the human and natural resources too we pursue a lifestyle that requires more resources than the system contains. We live in a dream which gradually turns into a nightmare.
      We have to go back to basics, live on, consume what is available, instead of artificially creating, implanting and then fulfilling non-existing, unnatural desires, we should allow ourselves to return to our natural needs and desires.
      Not only we will save ourselves and our environment, but we will also have a much happier, satisfied life since we can only be truly happy when we open up and satisfy our natural desires, when we adapt to the general balance and homeostasis around us.
      Most importantly we do not have a free choice in this, either we do this willingly, in full awareness in a proactive manner, based on solid, scientific information already available, or the natural system around us and its laws will force us to do it in a very unpleasant manner.
      This process has already started years ago, and although we stubbornly try to ignore it and go against the wall with our heads, we simply cannot win.
      The system is not going to change, only we can.

    4. CommentedFrank O'Callaghan

      Inequality is the great key. The wealthy cannot meaningfully consume enough to raise demand and the rest are too poor or frightened.

      Redistribution from the wealthy to the rest is now necessary. This can be through write-downs or directly through taxation.

    5. Commentedarnim holzer

      Thank you Mohamed. While I agree with the well reasoned analysis, I still wonder how much of the economic malaise in which we find ourselves is due to a temporary lull (Temporary can be longer than we are comfortable with- remember Kondratievs?) in innovation that could ressurge soon and how much is due to a simple denial of demographic realities. In either case, I agree that the global political/ economic process will need to transcend its current limitations or we will struggle with the necessary adjustments. A perfect example of this is the violent devaluation of the Yen. The repercussions of this action by the BOJ opens up a bipolar set of outcomes that could be extremely destabilizing and geopolitically unwise. The solution to this prisonner's dilemma of global economic policy lies somewhere between your pragmatism and David Stockman's radicalism...I hope. It is more than ironic that Margaret Thatcher just passed away.