The World Economic Forum of 2014: Trapped in the Past
The mood at last week’s World Economic Forum, held annually in Davos, Switzerland, as reported in the media was one of cautious optimism about the prospects for international economic growth. ‘Cautious optimism’ can mean many things, including ‘We know what’s round the corner but we’re really in the dark about several corners away.’ The prospects for international economic upswing in the short-term look good, the prospects for the long-term are mired in uncertainty.
There appears to be consensus that it is too soon to reverse the recovery-boosting expansionary economic policies despite encouraging signs of growth in some economies, notably America’s but also - lower down the index of significance for the international economy, the United Kingdom’s (we’re still united but Scotland may change that happy state in the not too distant future!).
There are some worrying signs that economic growth is not yet a global phenomenon. There are indications of slowdown in emerging markets. In particular a peso crisis in Argentina revives memories of the emerging markets financial crises of 1997-2000. China’s growth has definitely slowed because of rising wages, a stronger renminbi, and the calculation elsewhere that all things considered it’s cheaper and better to produce at home. And France, supposedly a core nation of the Eurozone, is rapidly becoming its sick man. The European monetary union used to be allegorized as a French-made automobile with a German-made engine. The engine still works well, but the rust-covered body of the car has seen better days.
Nevertheless, these indicators will likely serve to keep economic policies looser for longer than otherwise would probably have been the case. The Federal Reserve appears likely to de-accelerate the withdrawal of its monetary stimulus in the USA. The Bank of Japan could very well enhance its quantitative easing programme – though the increasingly vituperative stand-off with China over off-shore islands is not good for Japanese business confidence. The European Central Bank has little option but to continue its anti-deflation policy. Germany is in reasonably good economic health, but France is not. Moreover, the periphery nations of the monetary union are still grappling with the fall-out from the financial crisis. There is far better news for the UK where growth forecasts have been revised upwards after a recent employment surge.
In the long-term, however, the entire global economic model looks wobbly. Growth still relies fundamentally on debt and leverage. Growing economic inequality in many advanced nations – the US and UK are prime examples, but not Germany – raises doubt whether the international economy can ever recover its pre-crisis bounce. Al Gore, present at Davos, warns that global warming is now a more pressing issue than before the financial crisis – the consequent slowdown has done nothing to reverse it. There appears to be no alternative in the thinking of economic leaders to an economic growth that produces higher CO2 emissions. The price of this could well be a rise in global temperatures by 4-5 degrees centigrade by the end of this century.
The economic glitterati at Davos showed no inclination to think seriously about such deeply embedded problems that have taken second-place to the immediate needs of recovery from the 2007-09 meltdown. The talk was of improving the current economic model with a view to recreating the kind of growth that it delivered in the quarter-century from 1982 to 2007. This is a path-dependency approach that ignores problems the old model helped to create and cannot cure. What’s needed is not a rebooting of the late-twentieth and early-twentyfirst century model in the optimistic hope of recreating the past but a new economic model that addresses the needs of the future. Demanding an immediate focus on ending the Great Depression rather than worrying about the possibly adverse consequences of stimulus in the future, John Maynard Keynes famously remarked, ‘In the long run we are all dead.’ This is not an aphorism applicable to the here and now of the early twenty-first century.
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