Since the global financial and economic crisis, governments around the world have had to acknowledge and address the problem of inadequate consumer demand. As emerging markets appear to be doing a better job of it than advanced economies, economic factors are driving a quicker and potentially more turbulent transition towards a multipolar world than many had anticipated. Could we consequently see a sustained rise in geo-economic and geopolitical tensions?
The main economic problem facing the world after the recent global financial and economic crisis is inadequate consumer demand. The problem has manifested itself in different ways in emerging and advanced economies and their different responses will have far-reaching consequences for the transition to a multipolar world.
The problem of inadequate demand has brought forward China’s long-standing challenge of rebalancing the economy and moving it away from the model which drove development from low-income to middle-income status, namely dependence on investment and exports. With the crisis undermining this model through weakening demand from the West, the task of moving to a new model – in which consumption gains more importance relative to investment, and the services sector relative to construction and manufacturing – has become even more urgent. The creation of a social safety net, to reduce the need for precautionary savings, will boost consumption. And while corporate sector deleveraging will lower growth in the short run, it will help with rebalancing.
Other emerging markets are also showing signs of successfully adapting to this new reality and boosting domestic demand. India’s problems are more structural – rising inflation, inadequate infrastructure, twin deficits and red tape – but government policy is heading in the right direction and, with its young demographic, India could conceivably create strong enough domestic demand to outgrow China over the next decade.
In the United States and – especially – in Europe, however, the outlook is less encouraging. The US recovery, although improving, is still fragile considering seven years have passed since the recession started. The Eurozone is stagnating, despite short-term interest rates that are close to zero and the use of unconventional monetary policy. Ongoing deleveraging is keeping private consumption and investment suppressed, growth weak and under-employment high.
Europe grew faster during the Great Depression, from 1929 to 1936, than it did from 2007 to 2014. In the 1930s, the gold standard made adjustment difficult for deficit countries; now, the euro is imposing similar constraints. There is no scope for currency adjustments and monetary policy appears maxed out, but many Eurozone governments cannot afford fiscal stimulus and there is evidently no policy appetite for it in the countries that could, notably Germany.
Arguably, Europe’s policy-makers have forgotten the lessons of the 1930s, while Asia’s policy-makers, for example, have remembered the lessons of their own, more recent, financial crises in the 1990s. Inadequate demand, weak growth, high unemployment and debt leave Europe vulnerable to small shocks pushing the economy back into recession and to the rising popularity of fringe political parties.
If rising powers respond better to a global lack of demand than the established powers, this will mean the transition towards a multipolar world – where regional powers such as India, China and Russia become more and more influential in their regions – could happen more quickly than anticipated.
Will negative geo-economic tools be used to establish geopolitical power and bolster domestic demand, such as beggar-thy-neighbour and other confrontational trade policies? We are now in an environment where many countries look to exports to drive growth, but one country’s exports are another’s imports – we cannot all export ourselves out of trouble. In Asia in 2014, all the positive contributions exports made to growth were due to weaker currencies. In Germany, suppressed unit labour costs are leading to a current account surplus close to 7.5% of GDP, making it very hard for the rest of Europe to restore its competitiveness.
Could we see more potential flashpoints as rising economic powers exert greater influence in their regions? Recent examples that could be harbingers of a trend include the conflict between Russia and Ukraine and disputes in the South China Sea. Will smaller countries in regions be pressured to take sides?
However, the transition to a new, multipolar world could be smoother than a pessimist might fear, with positives outweighing the negatives. The relative strength of emerging markets presents opportunities as well as risks. The shift to a multipolar world will lead to greater regionalization in trade, investment flows and political cooperation – as seen, for example, in strengthening linkages between the oil-rich Gulf and countries like Jordan and Egypt, and in South-East Asia with the introduction of the ASEAN single market in 2015.
There is also a need to differentiate between different emerging markets. Reforms and policy will be key to boosting middle classes and building economic strength in the coming years, with China, India and Indonesia among those with the greatest potential.
This piece is one of a number of individual perspectives from the Global Strategic Foresight Community of the World Economic Forum for the Annual Meeting 2015. To read more access the full collection.
Author: Marios Maratheftis is an expert on the global economy and financial markets.