More than ten years after the big eruption of the global financial crisis, today’s global economy is beset by low growth and rising inequality. There is no denial that the recent years monetary policy has been the rich world’s main, and often only, tool to support growth. One of the world’s most influential economic thinkers and the New York Times and Wall Street Journal bestselling author of The only Game In Town, Mohamed El-Erain, pointed out that central banks’ unconventional approach of unprecedented, hyperactive experimental intervention has a much larger impact on financial markets than on the real economy, asset prices had surged to levels that by most measures were higher than what would be warranted by underlying economic and corporate conditions. The larger this decoupling got, the heavier the associate stress and strain on social cohesion, political coherence, and multilateral coordination.
He argues that central banks’ ability to effect systemic and lasting changes is limited without a critical four sets of necessary measures implemented simultaneously: a pro-growth structure reform, better composition and level of aggregate demand, lifting of debt overhangs, and progress in completing Europe’s regional integration project. He outlined ten key issues, whose detrimental consequences are multifaceted and worrisomely. Time is of the essence. The longer we wait, the harder it gets. It cannot stressed enough that the well-being of current and future generations depends on successful addressing of these ten big issues:
Issue#1.The Quest of a Generation: Sustaining Inclusive Growth -Repeatedly inadequate and unbalanced economic expansion, reflecting cyclical/secular structural headwinds, highlights the extent to which many advanced economies still lack proper growth models/engine. Many economies have gotten deeply hooded on an unsustainable approach that substituted financial engineering and credit entitlement for proper drivers of growth. To make things worse, rather than spur efforts to do better, the persistent recent underperformance has made it harder to secure the consensus needed to revamp growth engines in a fundamental and durable fashion.
Some countries (for example, Greece and Portugal) relied on debt-financed government spending to fuel economic activity. Others (think Cyprus, Iceland, Ireland, the U.K. and the U.S.) resorted to unsustainable surges in leverage among financial institutions to fund certain private-sector activities (e.g., housing), 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.
It takes time to reset and recalibrate all these growth impulses in ways consistent with today’s global realities. In many cases, it is about a fundamental restructuring of the model, or a transition to a new one altogether. These including countries like Greece, where prosperity has little chance of returning without a deep-rooted redefinition of how growth will be attained and shared, and that assuming a significantly eased debt burden. The longer our global economy lacks sufficient individual growth engines, the greater the temptation (and the higher the likelihood) that individual countries will seek to “steal” growth from others rather than create incremental expansion. So, like the old days, quite a few will resort toe exchange rates as the primary means to do so.
Given that this currency approach is (under most conditions) a zero-sum game – indeed, some have called it a stealth currency war – and given the limited successes that the advanced world has had (individually and collectively) in engineering an economic “liftoff,” adjustment and reform fatigue has tended to set in. As a result, and understandably, some governments have been tempted to go back to old, exhausted growth approaches of depreciating their currency (like Brazil), notwithstanding their limited effectiveness and their potential collateral damage and unintended consequences. This is a particularly acute problem for countries that are still trying to overcome enormous debt burdens. For example in Greece, the struggles of the last nine years have wiped out all of the progress that its poor had achieved in the previous twenty-eight.
Some worrisome phenomenon can explained this “new mediocre”: from the difficulties of escaping a liquidity trap and the challenging aspects of balance sheet recessions to a change in productivity trends, lack of infrastructure investment, the effects of debt overhangs, demography, and “the race against the machines.” These are all factors that first, hold actual growth below the potential of the economy, and second, act to pull down future potential growth. Then the difficulties that individual economies faced domestically were accentuated by global interactions, including difficulties in reconciling different national circumstances and approaches.
Overall, the U.S. did succeed in surging ahead of most of the rest of the world. But its breakout was not sufficient to act as a locomotive for the global economy as a whole. Subsequently, with other countries trying to do to the U.S. what the U.S. did to them (that is, de facto use of the exchange rate as a policy instrument), the growth gap narrowed. All along, however, the world’s economic system did not resolve in a way that could restore global prosperity and financial stability.
The advanced economies’ failure to grow nominal GDP has made life a lot more difficult for emerging countries – a phenomenon that accentuates not only their internal challenges but also the trails of navigating a global financial system that is inevitably distorted by the pursuit of unconventional policies and is periodically subject to discomforting bouts of financial instability. Th3 resulting fluctuations in capital inflows and outflows have tended to overwhelm financial markets in the emerging world. The flows are more the product of credit factories in the advanced world and central bank policies there. To my knowledge, no emerging economy has as yet found a robust policy approach for dealing with this challenge.
In sum, the elusive advanced-economy quest for growth has morphed into a generalized growth deficit for the world as a whole. In the process, the search for new growth engines has become harder, the stakes have gotten bigger, and the consequences have extended beyond economic and financial. They now also have important social, political, institutional, and geopolitical dimensions.
Issue#2. Reducing the Risk of The Unemployed Becoming Unemployable – Unemployment remains too high in far too many advanced countries; and it is getting more deeply embedded in the structure of these economies and, therefore, will become that much harder to solve. If worrisomely high youth joblessness persists, this group of young people risk going from being unemployed to becoming unemployable. It increases the threat that Europe may not be looking at just a “lost decade” but also at the even more alarming prospect of a “lost generation,” which in turn threatens not only social cohesion but the ability of democracies to function well. Long term unemployment makes it harder for individuals, and society as a whole, to overcome debt burdens – thus the persistent debt overhangs in parts of Europe and the increasing worries about student loans in the U.S., among other things. Together with growing inequality (issue #3), it is a factor that badly eats away at social integrity and the well-being of society. It also complicates the geopolitical and national political landscapes, giving rise to alienation and fueling extreme and single item political platforms whose likelihood to disrupt societies can tend to be greater than their potential to responsibly govern them, at least initially.
Issue#3. The Inequality Trifecta – Fueled by an unusual combination of cyclical secular, and structural factors, the worsening of income and wealth inequality has been so pronounced within countries that it now also undermines opportunities.
President of European Central Bank , Mario Draghi commented on the bouts of Qunatatiave Ease and interest rate cut, “because the use of these new instruments can have different consequences than conventional monetary policy, in particular with respect to the distribution of wealth and the allocation of resources, it has become more important that those consequences are identified, weighted, and where necessary mitigated.” There s growing realization that the effects of inequality may well have evolved beyond questions of fairness, and beyond the threats it poses to social, geopolitical, and political well-being: inequality also creates adverse economic feedback loops that make it much harder for the advanced countries to emerge from their generalized economic malaise. We have discussed about this issue on Neoliberalism and its far-reaching effects on culture and inequality Article1, Article2, Article3.
to be continued …