So far, more destruction than creative regeneration in the world economy
By Stephen Klimczuk, Associate Fellow, Saïd Business School, University of Oxford, United Kingdom
Very often when analysts and commentators attend meetings in far-flung capitals, they write about the 'the mood of Beijing' or perhaps 'the pulse of New York.' Having just participated in the inaugural Horasis Annual Meeting in Zurich - which was a fascinating microcosm of the world's economic and business leadership - I felt I was getting a privileged (and very time-efficient) peek into what a representative cross-section of the global business elite is thinking and doing. And their 'mood' was cautious and still worried about where we go from here. That mood is reasonably well-founded, unfortunately.
Thinking of Schumpeter's idea of 'creative destruction,' it seems what we have is lots of destruction and relatively little truly creative response so far - though perhaps parts of Asia may constitute an exception. Sometimes painful crises or other 'wake-up calls' generate new energy and innovation. One participant reminded us of the way in which the launch of the Soviet Union's Sputnik in the late 1950s spurred the United States into action, leading to important new initiatives and ventures in American R&D, education, science and industry. However, in the case of the crisis we are still living through, a sense of emergency (particularly during the market meltdown of late 2008) has not resulted in a continuing productive sense of urgency about what needs to be done, beyond the fiscal and monetary equivalents of ambulance first aid and the injection of pain-killers to stabilize the patient.
The Return of Populism - and fighting excessive leverage with more leverage
Other by-products of the crisis have been the crack-up of the pro-business 'capitalist consensus,' the demonization of bankers and businessmen, and the related return of populist politics - whether of the left or the right. This is perhaps not surprising given how many (and how much) ordinary people have suffered and what they've lost, on the Main Streets and High Streets of the world. In a paradox that may be sowing of the seeds of the next crisis, governments and central banks have staved off collapse and depression and tackled the problem of excessive business and consumer leverage by taking on unprecedented levels of government debt. This is 'fighting fire with fire,' and the policy responses have been as messy the meltdown. These responses have included in the US a monetary easing so massive that some economists worry there will be longer-term inflationary effects (even if inflation remains at zero or even negative for the moment). Populism, by its nature, uses slogans about security and seeks the 'easy solutions,' and rarely thinks hard about the incentives needed to spark (and reward) innovation, productivity gains, ingenuity, technological advances, intelligent risk-taking, hard work, and the other real drivers of growth. A bit of intelligent and far-sighted statesmanship on the government side wouldn't hurt either.
In all this, Asia presents an interesting, and somewhat different, story. It is well known that China and India represented the majority of the world's economy until about 1800, and that their strategic rebound in relative terms is underway. For various reasons, Asian and other emerging markets have been less affected by the crisis than North America and Europe. In fact, their relative position has been strengthened in comparison with the developed world - arguably China above all has gained ground in a relative economic and geo-strategic sense, even if its own health and well-being are tied to the US consumer economy. Japan, however, fits more of the US and European patterns: stagnation combined with a renewed populism in government, with the curious phenomenon of Japanese 'youth culture': young people so daunted or dismayed by the challenges they face that many choose to forgo careers or even lives outside the confines of their bedrooms and Internet connections.
Overcooked on the outside, frozen in the middle
A Chinese participant nonetheless described his economy using the metaphor of a frozen turkey that one cooks ineptly, charring the outside but leaving much of the inside underdone or even still frozen. That may actually be an even better metaphor for many other countries, given the way in which stimulus was applied in the wake of near-collapse. And now many stimulus programs are tapped out, having run their course. The world has to learn (or re-learn) a number of painful lessons. Thinking of the empty office buildings and apartments from Dubai to Las Vegas, we must remember that 'growth is not an industry' - but rather a consequence of innovation, trade and other forms of productive economic activity. Alchemy doesn't work: base metals can't be turned into gold, and neither can low-grade assets be converted into high-grade ones with the wave of a rating agency's wand. To quote from a text familiar to generations of schoolchildren in England: 'We have left undone those things we ought to have done, and we have done those things we ought not to have done.'
Still, there is a reason to be hopeful
Happily, it's not all gloom and doom, and there is one principal reason to be optimistic: the way in which human beings adapt and recover, even from utter devastation, from horrific wars and disasters to chaos and hyperinflation. The twentieth century is a roll-call of very dark years signaling terrible events or low-points: 1914-18, 1929, 1933, 1939-45 - to name just a few. The current global business environment is actually relatively OK by comparison. We bounced back, and the sun shined again - and the pace of technological and commercial innovation resumed. So it will be in the years ahead.