There are many pressing challenges in the global economy, but, to me, the central defining challenge is accommodating the growth of developing economies and completing the convergence process that began after World War II. This holds the promise not just of massive poverty reduction, but also of expanding the opportunity for healthy, productive and creative lives among the 85pc of the world’s population that has experienced significant economic growth for the first time in the postwar period.
This massive expansion of inclusiveness has the potential to be the defining characteristic of the century. But making it happen it is easier said than done.
Inclusiveness will require changes in mind-sets, policy responses and institutions -international and domestic. The goal is to make the rise of the developing world as comprehensively beneficial as possible, even as major transitions compel shifts in relative prices, dramatic changes in economic structure in both advanced and developing economies and changes in the distribution of income and wealth.
The convergence process, if successful, will triple the size of the global economy in the next 25 to 30 years – by a much larger multiple if our baseline is the start of the convergence process, 1950, instead of today. Attempting this journey without adjusting the world’s use of natural resources will result either in growth grinding slowly to a halt or, worse, in catastrophic failure after an environmental or ecological tipping point. Environmental sustainability is essential to accommodate the rise of the developing world.
All economies rest on a foundation of tangible and intangible assets. It is often possible to sustain growth for some time while under-investing and allowing these assets to run down or at least remain flat, but this cannot continue indefinitely.
We are learning that natural capital is an important subclass of assets that underpin the global economy. Under-investment in natural capital will not only diminish the quality of growth, but will eventually undermine it or even push it into negative territory. That is why the current work on measuring natural capital is one important step in moving towards globally sustainable growth patterns.
Of course, there are distributional issues. In advanced economies, technological and global market forces are reducing or eliminating an expanding array of jobs via automation, elimination of the middleman and offshoring in evolving global supply chains. Because this is happening so quickly, labour markets are off balance – human capital is poorly matched to the shifting demand side of the global economy.
Accelerating a return towards equilibrium is a high priority for growth and fair distribution pretty much everywhere. And even if this were to occur faster than it is now, inequalities would remain.
At present, there is no consensus about how to deal with the various forms of inequality that exist. Some believe we should focus on poverty and let market outcomes decide the rest. Others worry about absolute losers – unemployed youth for example – and burden sharing, especially after large economic shocks of the type recently experienced.
Still, others focus on absolute versus relative gains and losses, and emphasise the absolute ones. Despite these differences, most societies, advanced and developing, share a desire for intergenerational upward mobility. Here the trends vary across countries and are worrisome in many.
If the labour-saving, skill-biased and capital-saving digital technologies are as powerful as many of us believe, they will dramatically increase productivity. It is not obvious, at least not in high-income countries, that the resulting “surplus” should be deployed to produce and consume ever more goods and services.
Perhaps it should be used to expand leisure. And maybe the workweek will – or should – become shorter on average.
If so, we will need more comprehensive measures of welfare than the total value of goods and services acquired in recordable market transactions. This evolution would not work if the employment model remains the same, with the majority working full time in the conventional sense and a growing minority unemployed.
Turning to stability and international coordination of economic policy, it would be unfair to characterise this as an area of failure. The General Agreement on Tariffs & Trade (GATT) had a material role in opening the global economy, levelling the playing field and enabling growth in developing economies. Governments and central banks do cooperate in crisis conditions, making crucial positive contributions.
International financial institutions have contributed much to poverty reduction and economic stability in emerging economies, and displayed flexibility with respect to policy in light of growing understanding of the behaviour of the global economy and financial systems.
But governance reform in these institutions is slowing the changing relative size and influence of major emerging economies. That undermines credibility and authority, and hence the ability to coordinate policy. Particularly in the area of finance and monetary policy, spillovers are largely neglected by major national policy-setting entities, whose mandates call for a domestic focus. Policymakers seem to be regulating the hubs in individual networks without regard for those decisions’ broader effects and feedback loops.
Effective supranational governance is at best a work in progress. One need only look at the Eurozone to catch a glimpse of the challenges of bringing regulation and macroeconomic management in line with the rising networked interdependence of the global economy, or parts of it. The underlying issues are sovereignty, identity and democratic self-determination.
Our children and grandchildren are set to live in a global economy that is much larger, more interconnected and fairly distributed in terms of economic mass and power, and heterogeneous with respect to income levels, stages of development and cultures. Learning how to make this journey sustainable, stable and fair is the great economic challenge for all countries – whether their economies are advanced or developing – and their citizens.
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