NEWPORT BEACH ― What is the most urgent economic priority shared by countries as diverse as Brazil, China, Cyprus, France, Greece, Iceland, Ireland, Korea, Portugal, the United Kingdom, and the United States?
It is not debt and deficits; and it is not dealing with the aftermath of irresponsible lending and borrowing. Yes, these are relevant and, in a handful of cases, urgent. But the number one challenge facing these countries is to develop growth models that can provide more ample, well-paid, and secure jobs amid a secular re-alignment of the global economy.
For both theoretical and practical reasons, this is a challenge that will not be met easily or quickly. And, when it is met, the process will most likely be partial and uneven, accentuating differences and posing tricky coordination issues at the national, regional, and global levels.
The last few years have highlighted the declining potency of long-standing growth models. Some countries (for example, Greece and Portugal) relied on debt-financed government spending to fuel economy activity. Others (think Cyprus, Iceland, Ireland, the UK, and the U.S.) resorted to unsustainable surges in leverage among financial institutions to fund private-sector activities, 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.
Recent data from the International Monetary Fund highlight these models’ simultaneous loss of effectiveness. Global growth averaged only 2.9 percent in the most recent five-year period, well below the level for virtually any such multi-year period going back to 1971. While emerging economies have out-performed developed countries, both have slowed. Growth has been virtually flat in developed economies and, at 5.6% in the emerging world, is well below the 7.6% average in the previous five-year period.
Highly leveraged systems in finance-dependent economies were the first to hit a wall, surprising many who had uncritically bought into the “Great Moderation” ― the idea that macroeconomic and asset-market volatility had eased permanently. The bold policy action that countered the initial disorder prevented a global depression, but it encumbered public-sector balance sheets.
As a result, highly indebted governments were the next to hit the wall. Some were pushed there by the high cost of containing the damage from banks’ irresponsible behavior. Facing immediate credit rationing and large output contractions, they could be stabilized only by exceptional official financing from abroad, and, in some extreme cases, by defaulting on past commitments (including to bondholders and, most recently, bank depositors).
For other countries, including the U.S., medium-term issues came to the fore. But, rather than catalyzing sensible policy discussions, these issues played into polarized and polarizing politics, creating new and more immediate headwinds to economic growth.
Meanwhile, a highly interdependent and (now) less dynamic world economy has been limiting the scope for external growth drivers. Accordingly, even countries with sound balance sheets and manageable leverage have experienced a growth slowdown.
The consequences have become painfully clear, especially in Western countries. With insufficient growth to deleverage safely, social costs have been considerable. Alarmingly high youth unemployment, shrinking social safety nets, and under-investment in infrastructure and human capital are burdening current generations and, in a growing number of cases, will adversely affect future generations as well.
In the process, inequality has risen further. And yet, despite the urgent need for major policy adaptations at the national level, and much better regional and global coordination, progress has been disappointing.
With the political context undermining the right mix of short- and longer-term measures, national policymaking has stumbled into partial approaches and unusual experimentation. The focus has been on buying time, rather than on implementing a sensible transition to a sustainable policy stance. And potential national outcomes would be less uncertain if excessive inequality were not treated as an afterthought.
The regional and multilateral dimensions are similarly inadequate. The absence of well-articulated common analyses and policy coordination has accentuated legitimacy deficits, encouraging leaders and publics to opt for partial narratives and eroding confidence in existing institutional structures.
Given these trends, the search for more robust growth models will take much longer and be more complicated than many recognize ― especially as the world economy pivots away from unfettered globalization and high levels of leverage.
We should expect countries like the U.S. to benefit from dynamic bottom-up entrepreneurship and traditional cyclical economic healing. Notwithstanding a dysfunctional Congress, the private sector will increasingly convert a paralyzing uncertainty premium, which impedes much investment, into a less disruptive risk premium. But, without a short-term economic turbo-charger, the recovery in growth and jobs will remain gradual, vulnerable to political and policy risks, and disproportionately beneficial to those with favorable initial endowments of wealth and globalized talents.
Governments’ role will be different in countries like China, where officials will guide a shift from dependence on external sources of growth to more balanced demand. As this requires some fundamental domestic re-alignments, the rebalancing will be both gradual and non-linear at times.
The outlook for other economies is more uncertain. Undermined by a lack of policy flexibility, it will take a long time for countries like Cyprus to overcome the immediate shock of crisis and revamp their growth models.
Left to their own devices, these multi-speed dynamics would translate into higher global growth overall, coupled with larger internal and cross-country disparities ― often exacerbated by demographics. The question is whether existing governance systems can coordinate effective intervention to counter the resulting tensions.
Simultaneous progress on both substance and process is needed. Parliaments and multilateral institutions must do a better job at facilitating cooperative policy implementation, which will require a willingness to reform outmoded institutions, including political lobbying.
By Mohamed A. El-Erian
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and the author of “When Markets Collide.” ― Ed.
(Project Syndicate)
