One of the biggest challenges facing the world today is one that is related to many of the other discussions taking place in Davos. The migration crisis, inequality, the gender gap, sustainable development and the transition to a low-carbon economy – all of this will be almost impossible to achieve without strong economic growth.
The obstacles are increasing. China’s growth is slowing (as discussed in another Davos session this morning, which you can watch here), the IMF has cut its global growth forecasts again, and PwC’s annual Global CEO Survey found that just 27% of business leaders think growth will improve this year.
IMF chief Christine Lagarde calls this the “new average,” but could it be worse?
This is a topic that we have explored extensively on the agenda.
Here is an article on 5 trends for the future of economic development, which reads:
“Growth in China is slowing, growth in Europe is close to zero and the whole world is now in a dollar recession. At the same time, income inequality is increasing around the world and political instability is on the rise. Is economic growth a cure for these ills? And if so, how do we get it?”
And when growth picks up again, will it be inclusive and why is that important?
In a recent article published on our site, Nobel Prize economist Joseph Stiglitz, a member of the panel at this session, asked: Is there a cure for the world’s economic malaise? In it he writes:
“The year 2015 was a difficult year all around. Brazil fell into a recession. China’s economy faced serious headwinds for the first time after nearly four decades of tremendous growth. The Eurozone managed to avoid a recession for Greece, but the stagnation continues in what will surely be seen as the Lost Decade. For the United States, 2015 should be the year that finally closed the book on the Great Recession that began in 2008; instead, America’s recovery has been moderate…
“In early 2010, in my book Freefall, which chronicles the events leading up to the Great Recession, I warned that without appropriate responses, the world is headed for a major slump. Unfortunately, I was right: we didn’t do what was necessary, and we ended up exactly what I feared.
As for the Nobel economists, four of them share with us their biggest economic challenges for 2016. How to deal with risk, sluggish productivity, deteriorating growth patterns, shifting refugees, it was all covered. What else are leading economists worried about?
Meanwhile, Ireland’s Taoiseach and a panelist, Enda Kenny, have drawn up their three-point plan to steer 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 this continue?
What about emerging markets?
The first question is for Brazil’s finance minister, Nelson Henrique Barbosa-Filho. Is contraction the new normal as Brazil forecast to contract again?
No, says Barbosa-Filho. What we are seeing now is just a transitional phase. Brazil, like many emerging countries, is simply adapting to a global situation. Brazil benefited from a global commodity boom that reduced poverty and improved productivity. This phase is over and we must prepare for a new phase for the global economy.
China is also in a period of change. Fifteen percent of global economic output comes from China, is this something we should be concerned about? Zhang Xin says he is worried, but not because the Chinese economy is in danger of collapsing, but because of the transition from fast to slow growth.
For many countries, China’s 6.9% growth for 2015 would be considered “very good,” Zhang says, but the world’s second-largest economy wants to think otherwise. Basically it used to be higher.
state of the world economy
Austerity measures in Europe, and small amounts of them in the US, are major contributors to the weak global economy, says Stiglitz. However, the underlying problem is a lack of aggregate demand, a lack of global demand. What are the contributing factors?
Rising inequality is one. Those at the top don’t have to spend as much of their income as those at the bottom, who spend 100% of their income on their daily lives.
Meanwhile, countries around the world are undergoing structural transformation. It’s a difficult process and it almost never goes smoothly.
Another reason for the weak growth is the situation in China, says Stiglitz. “Part of this has been the huge demand for natural resources, which many countries have benefited from,” he says. “It should have been clear that this demand would not last, but markets are always short-sighted. They do not see the inevitable, and China had to move from quantity to quality of development.”
Ireland’s growth rate was around 7% in the third quarter of last year, which is a remarkable turnaround. “Five years ago we were under the hammer of a trio,” says Kenny. “We had to make very tough decisions to avoid more boom and bust.”
Kenny says his country should be a model for how others can get out of desperate economic circumstances. Part of this is giving hope to the youth.
Is there a reliable measure of GDP growth?
Not according to Joseph Stiglitz.
Why is it important to accept it? Because, says Stiglitz, “What we measure determines what we do. And if we measure wrong, we will do the wrong thing.”
Stiglitz also says he admires Bhutan, which he calls “gross national happiness.”
GDP also fails as a benchmark in other areas. For example, if we have a planet that is so polluted that our lives are in danger, what good is GDP?
And while US GDP growth has increased every year since 2009, most Americans are worse off than they were a century ago. Benefits go up at the top while wages at the bottom are lower than they were 60 years ago (adjusted for inflation).
Barbosa-Filho agrees with Stieglitz’s point about inequality:
What is the outlook for oil producing countries?
“There’s a phenomenon called ‘the natural resource curse,'” says Stiglitz. Having it does not guarantee success. Indeed, some countries with many natural resources are not doing well, while others that have none, such as Switzerland, are thriving because they diversify and strengthen human resources.
How can governments catalyze growth?
It’s about investing in people, says Kenny. “An economy is an engine,” he says, “and it’s an engine that can provide resources to invest in people.” But countries need to manage their public finances wisely so that they can make better decisions.
Conditions vary from country to country, says Stiglitz, but reforming the US tax system would be a good place to start. He says the current system is regressive, while the US has also underinvested in infrastructure for a long time. America can borrow almost for free, so why not? The social returns can be enormous.
The government will also have to play a leading role in promoting technology. Virtually all the major innovations we benefit from, such as the web browser, are based on government research.
Meanwhile, China is very different. “We are really asking the government to cut spending,” Zhang says. This is a country where the government owns half of the economy, and it needs to reduce its involvement.
What is the role of technology?
The days of completing his studies in China and working for an established company are halfway, says Zhang. Today, many people start their own businesses or join a start-up.
But while innovations are exciting, productivity has slowed despite technological advancements, says Stiglitz. If people who lost their jobs during the Fourth Industrial Revolution can find new jobs, it could be a smooth transition. But without government, it won’t necessarily create more jobs.
Is higher tax the solution?
Stiglitz “100%” agrees with the suggestion that we should deal with people and companies who don’t pay enough taxes. “The most important social responsibility is paying your taxes,” he says.
Stiglitz concludes that every recession comes to an end. The question is, how many bones would have been broken?