One of the biggest challenges facing the world today is one that ties into many of the other discussions taking place in Davos. The migration crisis, inequality, the gender gap, sustainable development and how to transition to a low-carbon economy – they will all be near impossible to achieve without robust economic growth.
“Growth in China is slowing, growth in Europe is near zero, and the world as a whole is now in recession in dollar terms. At the same time, income inequality is rising all over the world, and political instability is going up, too. Could a return to economic growth be the cure for these ills? And if so, how do we achieve it?”
“The year 2015 was a hard one all around. Brazil fell into recession. China’s economy experienced its first serious bumps after almost four decades of breakneck growth. The eurozone managed to avoid a meltdown over Greece, but its near-stagnation has continued, contributing to what surely will be viewed as a lost decade. For the United States, 2015 was supposed to be the year that finally closed the book on the Great Recession that began back in 2008; instead, the US recovery has been middling…
“In early 2010, I warned in my book Freefall, which describes the events leading up to the Great Recession, that without the appropriate responses, the world risked sliding into what I called a Great Malaise. Unfortunately, I was right: We didn’t do what was needed, and we have ended up precisely where I feared we would.”
On the subject of Nobel economists, four of them have shared with us their biggest economic challenges for 2016. How to manage risk, sluggish productivity, deteriorating patterns of growth, relocating refugees all featured. What else keeps leading economists up at night?
Meanwhile, Enda Kenny, Taoiseach of Ireland and also a panel member, laid out his 3-point plan to manage Ireland’s recovery. The Celtic nation has come a long way since the dramatic shocks of 2010, and is now the fastest growing economy in Europe. Can it keep going?
What about emerging markets?
The first question is for Brazil’s Finance Minister, Nelson Henrique Barbosa-Filho. With Brazil forecast to contract again, is contraction the new normal?
No, says Barbosa-Filho. What we are witnessing now is just a transitional phase. Brazil, like many emerging nations, is merely adjusting to a global situation. Brazil benefited from a global commodities boom which reduced poverty and improved productivity. This stage has passed, and we need to prepare for a new phase for the global economy.
China is also in a period of transformation. Fifteen percent of global economic output comes from China, is this something we should be worried about? Zhang Xin says she is concerned, but not because the Chinese economy is in danger of collapsing, but because of the transition from fast to slower growth.
To many countries, China’s growth of 6.9% for 2015 would be considered “very nice,” but the world’s second largest economy is different, says Zhang. Basically, it’s used to it being higher.
The state of the global economy
Austerity measures in Europe, and the small doses of it in the US, are a major contributing factor to the weak global economy, says Stiglitz. The underlying problem, however, is a lack of aggregate demand, a lack of global demand. What’s are the factors contributing to this?
Growing inequality is one. Those at the top don’t have to spend as much of their income as those at the bottom, who are spending 100% of their income just getting through their daily life.
Meanwhile, countries all over the world are undergoing a structural transformation. This is a hard process, and it almost never happens smoothly.
Another cause of weak growth is the situation in China, Stiglitz adds. “Part of this has been the huge demand for natural resources, which many countries benefited from,” he says. “It should have been obvious that this demand was not going to continue, but markets are always short-sighted. They don’t see the inevitable, and China had to make the move from quantity to quality of growth.”
What about Europe?
Ireland’s growth was around 7% in the third quarter last year, a remarkable turnaround. “Five years ago we were under the hammer of a troika,” says Kenny. “We had to make very difficult decisions to avoid more boom and bust.”
Kenny says his country should be the model for how others can emerge from a desperate economic situation. Part of this is giving young people hope.
Is GDP a reliable measure of growth?
Not according to Joseph Stiglitz.
Why is it important to acknowledge this? Because, Stiglitz adds, “what we measure informs what we do. And if we’re measuring the wrong thing, we’re going to do the wrong thing.”
GDP fails as a measure in other areas, too. For example, if we have a planet that is being polluted to the point that our lives are at risk, then what good is GDP?
And while GDP has increased every year in the US since 2009, most Americans are worse off than they were a third of a century ago. The benefits are going to the top while wages at the bottom are lower than they were 60 years ago (adjusted for inflation).
Barbosa-Filho agrees with Stiglitz’s point about inequality:
What is the outlook for oil producing nations?
“There is a phenomena called the ‘natural resources curse’”, says Stiglitz. Having them doesn’t necessarily guarantee success. Indeed, some countries with a lot of natural resources are not doing well, while others who don’t have any, like Switzerland, are flourishing because they are diversifying and strengthening human resources.
How can governments catalyse growth?
It’s about investing in people, says Kenny. “An economy is an engine,” he adds, “and it’s an engine that can provide resources to invest in people." But countries do have to manage their public finances prudently, allowing them to make better decisions.
The circumstances in each country are different, says Stiglitz, but in the US reforming the tax system would be a good start. The current system is regressive, he says, while the US has also underinvested in infrastructure for far too long. The US can borrow at almost no cost, so why doesn't it do it? The social returns could be enormous.
The government also has to take a leading role in promoting technology. Virtually all the important innovations we benefit from, such as the web browser, were based on government research.
China, meanwhile, is very different. “We’re actually calling for the government to do less,” says Zhang. It’s a country where the government owns half the economy, and it needs to reduce its involvement.
What is the role of technology?
In China, says Zhang, the days or finishing your degree and working for an established company are half gone. Now many people are starting their own business or joining a start-up.
But while innovations are exciting, says Stiglitz, the rate of productivity has slowed down, despite advances in tech. If those people who lose their jobs in the Fourth Industrial Revolution can find a new one, then it may be a smooth transition. But without the government, it won’t necessarily lead to more jobs.
Is greater taxation the answer?
Stiglitz agrees “100%” with the suggestion that we need to deal with people and companies that aren’t paying enough tax. “The most important social responsibility is to pay your taxes,” he believes.
Every downturn will eventually end, concludes Stiglitz. The question is, how many broken bones will there be?