GENEVA – At the dawn of a new year, the world is in the midst of several
epic transitions. Economic growth patterns, the geopolitical landscape, the
social contract that binds people together, and our planet’s ecosystem are all
undergoing radical, simultaneous transformations, generating anxiety and, in
many places, turmoil.
From an economic standpoint, we are entering an era of diminished
expectations and increased uncertainty. In terms of growth, the world will have
to live with less. To understand the implications of this, consider the following:
If the global economy grew at its pre-crisis pace (more than 5% per year) for
the foreseeable future, its size would double in less than 15 years; at 3%,
doubling world GDP would take about 25 years.
This makes a significant difference to the speed at which wealth creation
occurs, with profound effects on expectations. We ignore the power of compound
growth to our detriment.
As for uncertainty, the world’s four largest economies are currently
undergoing major transitions. The US is striving to boost growth in a fractured
political environment. China is moving from a growth model based on investment
and exports to one led by internal demand. Europe is struggling to preserve the
integrity of its common currency while resolving a multitude of complex
institutional issues. And Japan is trying to combat two decades of deflation
with aggressive and unconventional monetary policies.
For each, the formulation and outcome of complex and sensitive policy
decisions implies many “unknowns,” with global interdependence heightening the
risk of large unintended consequences. For example, the US Federal Reserve’s
policy of quantitative easing (QE) has had a major effect on other countries’
currencies, and on capital flows to and from emerging markets.
When QE was launched, it was the least flawed of the available policies,
and it averted a catastrophic global depression. But its downsides are now
apparent, and its abatement in 2014 could fuel further uncertainty.
The Fed’s QE policy, and variants of it elsewhere, have caused the major
central banks’ balance sheets to expand dramatically (from $5-6 trillion prior
to the crisis to almost $20 trillion now), causing financial markets to become
addicted to easy money. This has led, in turn, to a global search for yield,
artificial asset-price inflation, and misallocation of capital
As a result, the longer QE lasts, the greater the collateral damage to the
real economy. The concern now is that when the Fed begins to taper QE and
dollar liquidity drains from global markets, structural problems and imbalances
will resurface. After all, competitiveness-enhancing reforms in many advanced
economies remain far from complete, while the ratio of these countries’ total
public and private debt to GDP is now 30% higher than before the crisis.
This source of uncertainty coincides with weakening performance in many
emerging countries. Back in 2007, emerging-market growth was expected to
outpace that of advanced economies by a wide margin, before converging. Today,
the advanced economies contribute more to global GDP growth than emerging
countries, where growth is forecast to average 4% in the coming years.
Economic
conditions are slowly improving in high-income countries, but a range of
downward pressures may persist for years. The US economy, for example, remains
stuck in a subpar recovery: inflation is too low and unemployment is too high.
Official data have often been better than expected, reflecting how resilient,
adaptive, and innovative the US economy is, but pre-crisis consumer-spending
and growth patterns are unlikely to recur.
Improvements in the eurozone are real but tenuous. The good news is that
the disaster predicted by many pundits has been avoided, and the recession is
coming to an end. But improvement does not mean resurgence: achieving the
robust growth needed to reduce high unemployment, lower the debt/GDP ratio, and
improve the fiscal outlook remains elusive. The greatest risk for the eurozone
in the foreseeable future is not a disorderly exit by some countries, but
rather a prolonged period of stagnant growth and high unemployment.
Meanwhile, the emerging-market slowdown may well persist, particularly in
the largest economies. Over the past 15 years, the BRICs (Brazil, Russia,
India, and China) have achieved remarkable progress, but their reforms –
including new banking regulations and currency regimes – have been among the
least difficult to implement
.
So-called second-generation reforms, which are more structural in nature,
are vital to long-term growth but much more difficult to realize. Elimination
of subsidies, labor market and judicial reforms, and effective anti-corruption
measures are politically charged and often are blocked by powerful vested
interests.
The global growth slowdown is taking place against a backdrop of rising
economic inequality, owing to labor’s declining share of national income – a
worldwide phenomenon, resulting from globalization and technological progress,
that poses a serious challenge to policymakers. Systems that propagate
inequality, or that seem unable to stem its rise, contain the seeds of their
own destruction. But in an interdependent world, there is no obvious solution,
because the high mobility of capital fuels global tax competition.
Even in stronger-performing countries, such as the US or the United
Kingdom, faster GDP growth has yet to boost real incomes. In the US, for
example, median household income has fallen by more than 5% since the recovery
began. More generally, lower growth is fueling popular protest and social
unrest, particularly in countries that were growing rapidly (for example,
Brazil, Turkey, and South Africa), owing to the impact of rising living
standards on expectations.
With most governments facing fiscal constraints, officials are reluctant to
consider projects that might increase public debt. But there is some
low-hanging fruit – productive investments that would boost long-term growth
and therefore pay for themselves. A focus on four areas, in particular –
infrastructure, education, green energy, and sustainable agriculture – could
yield high economic and social returns.
Ultimately, however, the path to sustained growth requires not just new
policies, but also a new mindset. Our societies must become more
entrepreneurial, more focused on establishing gender parity, and more rooted in
social inclusion. There simply is no other way to return the global economy to
a path of strong and sustained growth
