The world economy will not recover this year. All qualified observers forecast lower growth, unusually high unemployment levels and continued financial tension. The fearsome “double-dip” recession is a reality. But there is no reason for chronic pessimism.
A new reality characterised by the movement of economic activity -production, consumerism, investment and employment- from the North Atlantic to other areas of the world, especially but not exclusively Asia. But also because we have abandoned the world of cheap money and credit abundance and will be away from it for some time. A structural change that gives rise to an understandable feeling of malaise in developed countries, whose populations refuse to accept that the future will not necessarily always be rosier, that they will have to give up some of what they considered as inalienable rights and reform their welfare states to make them sustainable. Simply because we are witnessing the end of the exceptional condition of the West. Emerging countries now produce more than 50% of the world GDP, but they consume only 30%… a proportion that can only rise and which will undoubtedly improve the standard of living of humanity. However, it is a process that needs to be handled intelligently.
We are facing a historic opportunity that is not exempt from risk. Imperial transitions and changes in the relative power of the different states have always been solved by war. This time, it can and must be different. The price system, macroeconomic coordination, financial globalisation and international institutions are poised to ensure a peaceful transition, which does not mean that there will be no cost or tension. The world managed to avoid protectionism after the dramatic events that followed the burst of the financial bubble in the United States. The commercial world maintained its strength, and general policies for making your neighbour poorer were avoided. Regardless of how virulent its death throes may seem in Europe owing to the fact that it coincides with the questions being asked of the monetary union, it would be a paradox now that we are at the end of the crisis if we were to forget the lessons taught by history.
It will be another year of transition towards the new global balance that is starting to rise. A more multi-polar world, a more diversified economy that is less dependent on one single country (not everything new means China), international economic relations with higher levels of freedom, less vulnerable to asymmetric shocks, including an oil shock. There is no point in insisting on self-supply policies when the successful growth strategies of many countries that are open to the world have shown their effectiveness. However, interdependence comes at a price. We can see it by making a couple of changes to a famous quote: what is good for Hyundai is good for Europe; what is good for Apple is good for China.
In my opinion, the world economy has to face three main challenges this year: the European sovereign debt crisis, the creation of employment, and the normalisation of the Chinese economy. European problems threaten to create another recession. In the short term, we cannot wait for a definitive solution because there are many economic and political uncertainties in the air.
However, we can choose the right road. It is a matter of political will. The technical solutions are relatively simple. The idea is to make Europe look more and more like an optimal monetary area and for the requirements of labour mobility, commercial integration, price and salary flexibility and a common stabilisation fund to be met. It requires the transfer of sovereignty to emerging supranational authorities and a new form of institution. The governments in the euro area are aware and they are taking decisions. There will be tension because the political pace does not always coincide with that of the markets, but we are walking in the right direction. We need patience and perseverance, and both in the same amounts.
THE PROBLEM OF EMPLOYMENT
The creation of employment is a bigger problem, especially in the developed world, to guarantee social stability and the legitimacy of the market economy. But we must not be naive. We need to modify the framework of labour relations to respond to globalisation, which has simply taken value away from unqualified labour. Part of its comparative edge has been lost and recovering it requires a combination of more education and training, more effort and appetite for risk, and more labour flexibility. A complete change of mentality that governments can only suggest and encourage, but whose materialisation corresponds to society. If it does not happen, we will not succeed. Because the new multi-polar world is also a world in which countries compete fundamentally through the talent of their human resources and the quality of their policies.
By Chinese normalisation, I understand the full assumption of its global and systemic responsibilities. China cannot continue as a free-rider because its decisions affect all of us more and more. They affect countries that produce raw materials, where ethical behaviour in terms of human, labour and environmental rights can be a spectacular incentive. They affect the United States and other developed countries because the opening-up and deregulation of the economy of the Central Empire, and a firm drive towards higher levels of consumerism, are the only roads to growth. There is reason to be optimistic, if only because interdependence is mutual.
In short, 2012 is an exciting year, also in terms of the economy. A year of transition towards that new scenario. A year in which crucial decisions will have to be taken. But it will not be a year lost. The economy will not recover, but governments can and must lay down the foundations for that recovery and take the necessary measures. That’s why the international observers I referred to earlier openly say that economic risk this year lies principally in political management.
First published on ideas.ie.edu, the IE Alumni Association News. Written by Fernando Fernandez.