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Sunday, 2 October 2016

Global economic order under threat

Need to ‘civilise’ capitalism

THE world economy is in a much worse-off shape than even many who know had expected, or what central bankers have come to understand.

Whatever growth there is remains paltry and uneven. Deflation was viewed as a strictly Japanese phenomenon. Now it’s a global threat, being revived and updated by Harvard’s Lawrence Summers as “secular stagnation.” The International Monetary Fund (IMF) says 2016 will be the fifth straight year of global growth below 3.7%, its average for nearly two decades before the recent great recession.

G-20 economies (representing 85% of the world economy, comprising most rich nations and major emerging economies) are expected to again downgrade their forecast to below 3% global expansion this year. They are likely to miss the target they had set for themselves in 2014 to lift their combined output by 2% over the IMF’s then forecast for 2018.

In early September, G-20 leaders met in Hangzhou, China, in the wake of Brexit and the rise of populist politics on both sides of the Atlantic with a strong sense of urgency to placate public discontent. Indeed, they have to “civilise’’ capitalism (Australian Prime Minister) as they seek to revive economic growth and address growing public scepticism about the benefits of free trade and growing backlash against globalisation. “Growth has been too low, for too long, for too few” (IMF chief Christine Lagarde).

Hangzhou consensus

This time G-20 leaders were on the defensive, amid a welter of familiar complaints back home on frustratingly slow growth, rising social inequalities and the surge of corporate tax avoidance. Looking back, the summer of 2016 is viewed not as a period of respite but as the moment it became clear that policy solutions from G-20, IMF and major central banks aren’t working well.

They have proved woefully inadequate. As a result, businesses are pessimistic about growth prospects, as reflected in low expectations for long-term interest rates. Yield on German 10-year notes is negative 0.116% p.a. What’s needed is a new approach. There has to be more growth and growth must be more inclusive.

At Hangzhou, the G-20 list of remedies rivals the world economy in its complexities, running beyond 7,000 words (excluding several lengthy appendices) addressing many issues, including immigration, terrorism, energy and Zika virus. Indeed, it risks looking “like an X’mas tree”. It was preceded by a surprising display of co-operation between China and US, who together ratified the Paris climate change agreement.

A long list of problems was on the table: including overstretched central banks, trade disputes, corporate tax avoidance, inequality and the populist backlash against globalisation and free trade. In the end, the Hangzhou consensus reflected an “innovative, invigorated, interconnected and inclusive” approach towards its main goals. It adopted a wide-ranging package of policies based on “Vision” (of innovative, new drivers of growth); “Integration” (forge synergy among fiscal, monetary and structural reform policies); “Openness” (build an open world economy, rejecting protectionism); and “Inclusiveness” (ensure growth promotes the role of women and youth, and generates quality jobs, addresses inequality and eradicates poverty).

All these won’t be enough to get us out of the rut. The real setback remains one of credibility. G-20’s sprawling agenda is filled with items that have little chance of success. Many stakeholders and opinion-makers are unlikely to take them really seriously. Experience shows that G-20 is better off when it focuses. Better stick with a limited agenda that has a high chance of achieving an outcome. Sometimes, more is done by doing less.

As host, China promoted innovation as the core of the G-20 agenda. This is sensible because: (i) the use of monetary and fiscal policies can only achieve so much. In the longer-run, real progress has to depend on improved productivity – getting more out of existing resources; and (ii) overcoming anxiety arising from the use of technologies and artificial intelligence that threaten jobs. Getting G-20 to think collectively about the downside of innovation and fintech can only help. There is then the endorsement of a set of non-binding principles designed to guide governments in devising cross-border investment policies in an effort to revive cross-border investment, which is sagging along with global growth and trade. The intention is good – there is a need to foster a more open, transparent global environment for investment, and ensure national and international rules remain clear, coherent and consistent. No investment, no trade, no growth.


The Organisation for Economic Co-operation and Development (OECD), i.e. the rich nations’ club, warned last week that growth in world trade is set to lag global growth in 2016, i.e. globalisation as measured by trade intensity has stalled. Other signs are just as worrisome: (i) ratio of world trade to output has been flat since 2008; (ii) volume of world trade stagnated between January 2015 and March 2016; (iii) stock of cross-border financial assets peaked at 57% global GDP in 2007, down by 36% over 2015; and (iv) inflows of foreign direct investment remained well below 3.3% of world GDP reached in 2007.

Indeed, the growing backlash against trade liberalisation as well as recessions in some big commodity producers are adding to the slackening of trade flows and is likely to erode already flagging productivity and ultimately global living standards. All this, at a time of poor economic performance in the rich nations, rising inequality and big shifts in the balance of global power.

So much so, failure to deal with the negative consequences of globalisation has surged into the political agenda of several large nations (including the US) facing forthcoming elections. Worse still, growth is too meagre to generate the jobs that youths expect and to fulfil pension promises for the elderly. Indeed, globalisation has stalled. Does it matter?

Yes it does. Recent history witnessed the first fall in global inequality of household incomes since the early 19th century. Average world real income rose by 120% between 1980 and 2015. The opportunities accorded by global integration should not be dismissed. No man is an island. Globalisation’s failure, however, lies in (a) not ensuring that its gains are not better shared, and (b) just as dismal is failure to assist those adversely affected. But, the net impact on jobs and wages from rising productivity and new technologies has far exceeded rising imports.

Globalisation shouldn’t be made the scapegoat. What’s really needed is better management. I recall Nobel laureate Joseph Stiglitz’s main message in his 2002 book Globalisation and its Discontents: the problem is not globalisation but how the process is being managed. The rules of the game has to include measures to “tame globalisation.” Unfortunately, global management didn’t change. Today, the new discontents are bringing home the same message – only more intensely.


G-20 leaders in Hangzhou were preoccupied with the need to placate public discontent about the unequal distribution of the benefits of free trade and globalisation. Hence, a lot of talk about people. China’s President Xi Jinping set the tone: “Development is for the people. It should be pursued by the people and its outcome should be shared by the people. This is not just a moral responsibility. It also helps unleash immeasurable effective demand.”

In China, Xi said: “We will make the pie bigger and make sure people get a fairer share of it.” The global Gini coefficient – the economist’s measure of inequality, has raced passed (Xi’s) “alarm level of 0.6, and now stood at 0.7” (the closer it approaches 1, the greater the inequality in income distribution). “We need to build a more inclusive world economy.”

Unfortunately, globalisation is today seen naively as a zero-sum-game (I win, you lose), with a US presidential hopeful arguing that China’s rise has come at the expense of US manufacturing heartlands – reflecting a rising disenchantment with the global economic order. It’s spreading. Last week, France publicly called on Brussels to end trade deal talks between US and Europe, citing a globalisation “without rules, where social models are pit against each other and dragged downward, where inequalities grow.”

This “docile of discontent” is best illustrated by Branko Milanovic’s controversial “elephant chart,” which was created (from 196 household surveys worldwide) by ranking world population (from the poorest 10% to the richest 1%) showing growth in income between 1988 and 2008, i.e. from the fall of the Berlin Wall to the fall of Lehman Brothers.

His global chart traced the distribution of growth in real income as first sloping right up, then down sharply and up again steeply, like an elephant raising its trunk: it shows big income gains at the high middle and very top, with the era of globalisation offering very little or nothing for those in between (at the bottom and in the middle and working classes in the rich nations who are poorer than the top 15% but richer than everyone else; this group seemed scarcely better off in 2008 than they were 20 years before).

The stagnant fortunes of these Trumpian and Brexiteer discontents in advanced economies are squeezed between their own countries’ plutocrats and Asia’s rapidly rising middle-class. It is this dangerous sharp dip in the chart to near zero which reflects those who occupy this dangerous docile. Milanovic’s study showed that (a) Chinese middle-class and the world’s 1% rich have gained handsomely in the era of globalisation; (b) lower middle-class in rich countries have fared poorly; and (c) rising income inequality remains a serious problem.

What then, are we to do

Global growth are revised downwards yet again as its traditional engines of trade and investment sputter. OECD now estimates the world economy would muster growth of only 2.9% this year. I consider this to be optimistic. Worse, potential growth has fallen in both advanced and emerging economies. The rise in income and wealth inequalities exacerbates the glut in global savings (reflecting the global investment slump). This can only lead to lower trend growth. Economists call this “hysteresis”: long-term unemployment erodes workers’ skills and human capital; and because innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth. That’s why structural and market reforms are vital to boost potential growth. This has become critical in Asean, especially Malaysia.

There are no politically easy solutions. I know fiscal policy (especially productive public investment that boosts both supply and demand) remains hostage of high debts and misguided austerity. For now, the world is likely to remain as IMF’s new mediocre, or in Summer’s secular stagnation, or China’s new normal.

Make no mistake. There is nothing healthy or normal about rising inequality in the face of continuing slow economic growth. Worse, it leads to rising populist backlash against trade, migration, globalisation, even technological innovation. Following the old road of relying purely on cheap and plentiful money leads to a dead end eventually.

Policymakers’ renewed focus on the need to make capitalism more inclusive is welcome. But rich nations need to ditch austerity in favour of purposeful fiscal support – emphasising structural supply side reforms. There is no other way to unleash effective demand. The tools are already available. Finally, of course, there is innovation.

By Lin See-Yan

Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of “The Global Economy in Turbulent Times” (Wiley, 2015). Feedback is most welcome; email:

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