Where is the world economy headed?

| by Dr. Ruwantissa Abeyratne

( June 08, 2012, Montreal, Sri Lanka Guardian) China is going to be the biggest economy in the world in 2016. In 1950, the western world had 20 percent of the global population. Now it has only 10 percent. The key decisions to be made over the next 20 years are going to be made in the East and not in the West. The rest is going to be stronger than the West in the years to come. There will be a shift in thinking on many issues including the economic future of air transport – one of the most powerful drivers of the world economy. It will be only a matter of time before market economies of the East dominate the world.

The Eurozone is in crisis, with Greece threatening to pull out and Ireland and Spain with their arms outstretched, waiting for hand-outs. Portugal is s fairing no better. Germany is still pulling for austerity and France, with its newly elected President, is favoring a growth-spurred Euro economy. The United States is seemingly in recovery mode, unemployment being at 8.1, down from 8.7 in November 2011 but still needing an impetus in growth and innovation with a gloomy projection of a static 2.5% growth in 2012. On the other hand, China, Taiwan, South Korea and some other major Asian countries such as Singapore and Malaysia are thriving with robust growth rates. India, which had continuously shown a staggering annual growth rate of 9.3% until the economic crisis in 2008, showed a rate of 5.3% in the first quarter of 2012, the decrease being largely due to a falling currency and a rise in inflation. The much vaunted BRICS nations (Brazil, Russia, India, China and South Africa) are already beginning to show signs of a decline in growth as a corollary to the Eurozone debt crisis.

Environmentalists are preparing to attend, on 17 June 2012, a conference in Rio de Janeiro called Rio 20 (held 20 years after the first Rio conference on the environment called The Earth Summit). Rio 20 is on the theme “good business for a sustainable future”. Currently, the buzzwords in the commercial world for “good business” are Corporate Social Responsibility (CSR). The Economist has divided these three buzzwords into three sub components that collectively make up CSR. They are “sustainability”, “innovation” and “sharing”. As for sustainability, it is reported that the concept fits well with lean production and tight supply chain management. Innovation is being coined with sustainability to introduce “sustainable and business innovative units” in the corporate environment. An example cited by The Economist is Nike which is making more clothes out of polyester from recycled bottles and an athletic shoe with its “upper” knitted from a single thread. “Sharing” is seen in instances where rival and competitive firms were getting together to achieve common sustainability in their products, an example cited being Starbucks which held a “coffee cup summit” in the Massachusetts Institute of Technology focusing on reducing the environmental impact of disposable coffee cups .

In world economics, unnecessary tragedies such as the depression of the 1930s occur from time to time. For example, in the late 1990s Asian giants who produced 25% of the global output and housed over 630 million people suddenly plunged into an economic morass. The acute economic crisis in 2008 was a grim repetition. In the midst of all these, winds of political change swept across two giants of socialism, China and the Soviet Union. The first to change was China in 1978 where Deng Xiaoping piloted the country from socialism to a capitalist based market structure. The Soviet socialist regime, which was barely chugging along succumbed to the same trend in the 1990s. Latin American countries went through similar negative trends until the early 1990s when saner counsel prevailed and a trend f privatization of public utilities and instrumentalities, along with the lifting of import bans and other restrictions followed. Inflation was tightly controlled and budget deficits were trimmed. Overall, India, Russia and China grew between 4.3% and 9% and Brazil, as a country identified with the acronym BRICS (Brazil, Russia, India, China and South Africa) improved its terms of trade by 25% in the decade spanning 2000-2010.

Historically, economic development has followed a directional path that would even be applicable today. If we go back to the 1950s and 1960s these decades were conducive to rapid economic growth in both the Western world and Japan. Such factors as the revitalization of trade after the depression; expansion of education; the introduction of modern technologies in areas such as energy and rapid post-war reconstruction provided a massive boost to economic growth. However, this trend did not last forever and increasingly, States found it harder to maintain that growth, particularly in the 1970s with the oil price hike introduced by the OPEC countries. The slowing pace of economic growth was aggravated by increased government deficit spending, ballooning inflation and unemployment rates. Although the central banks tried to mitigate this downward trend, the deficit spending which continued caused the public debt in many developed countries to climb as a share of their GDP. The only way to go was deregulation which happened first under the Carter administration and then under the Reagan administration in the USA in the energy sector, aviation, trucking and finance sectors. The United Kingdom followed this trend of deregulation under the Thatcher Tory administration.

In the early 1990s two major diversions from regularity influenced the direction of global economics. They were the arrival of the information age through information technology which had started in the 1970s but boomed two decades later, and globalization which happened soon thereafter. Both were direct determinants of the course of air transport’s destiny, which occurred largely with the expansion of the industry through virtual airlines, mergers and acquisitions and the outsourcing of services.

While China has shown positive growth (of around 9%) throughout the past decades , followed by steady South Korean growth over the past 20 years, Europe is teetering despite a second bailout of 130 billion Euro to Greece with 1 trillion bank loans from the European Central Bank. As stated earlier, it is now on the fence between a pull towards austerity from the Germans and a cry for growth by the French – the two major European powers (with Britain rather comfortably out of the Eurozone). A pullout of Greece from the Eurozone could bring to bear a contagion spreading to countries such as Spain, Portugal, Ireland and Italy. Europe needs a firewall against such a contagion, more investment, a more flexible monetary policy, reforms to inflexible market policies and structural reform. Although in 2011 Germany’s exports increased by 34% and it has expectations of achieving 2 million Euro by 2020, its economy shrank n the first quarter of that year and could suffer a setback if there were to be a contagion following a pullout of Greece and perhaps other States mentioned.

Although out of the Eurozone, Britain’s economy was stuttering, where in April 2012 it discovered that in the first quarter of 2012 its GDP had been reduced by 0.2% and that it was still slap bang in a recession. There were palpable drops in household consumption and inflation rose by 3.5%. The World Bank, in its statement in January 2012 stated that developing countries should prepare for further downside risks, as the Euro debt crisis and weakening growth in several big emerging economies were discouraging for global growth prospects.

Despite the encouraging privatization trend in the Western world of the 1970s through the 1990s, the somewhat rash privatization “binge” introduced by Boris Yeltsin in Russia in the 1990s taught that indiscriminate privatization is dangerous to an economy. What is now wildly popular is the Keynesian philosophy of State controlled growth, where economic downturns caused by capitalism and globalization could be mitigated by State support both in the areas of hard infrastructure (such as roads and bridges) and also soft infrastructure involving public and private corporations.

Europe will have to interact with the likes of China, Russia, India, the United States and Latin American countries, not to mention the rest of Asia if it were to spur growth and this prospect would be seriously endangered if there were to be conflict between Europe and these countries on what the latter considers an arrogant measure in the nature of including aviation in the ETS and making it applicable to flight sectors outside the territory of the EU countries.

The 2011 Report of the World Bank stated that the world economy has entered a very difficult phase characterized by significant downside risks and fragility. The financial turmoil generated by the intensification of the fiscal crisis in Europe has spread to both developing and high-income countries, and is generating significant headwinds. Capital flows to developing countries have declined by almost half as compared with last year, Europe appears to have entered recession, and growth in several major developing countries (Brazil, India, and to a lesser extent Russia, South Africa and Turkey) has slowed partly in reaction to domestic policy tightening. As a result, and despite relatively strong activity in the United States and Japan, global growth and world trade have slowed sharply .

This somewhat gloomy picture, however correct it might be, brings to bear an illusory perception which seemingly belies reality in terms of market economics, where development reflects an upward trend. Fareed Zakaria, a respected commentator and leading expert on international affairs and economics says in his book The Post American World - Release 2.0 (Norton:2011): “Over the last two decades, about two billion people have entered the world of markets and trade – a world that was, until recently, the province of a small club of western countries. The expansion was spurred by the movement of western capital to Asia and across the globe. As a result, between 1990 and 2010, the global economy grew from $22.1 trillion to $ 62 trillion, and global trade increased by 270 percent” .

Against this scenario, another distinguished commentator Ruchir Sharma says of the future in his book Breakout Nations – In Pursuit of the Next Economic Miracles (Norton: 2012) : “Over the next decade, growth in the United States, Europe and Japan is likely to slow by a full percentage point compared to the post World war II average, owing to the large debt overhang, but that slowdown will pale in comparison to a 3 to 4 percentage average slowdown in China. “The big story will be that China is too big and too middle-aged to grow so fast. And as it starts buying less from other emerging nations, the average pace of growth in emerging markets is likely to slow from nearly 7 percent over the past decade to the 1950s and 1960s pace of around 5 percent”.

According to Zakaria, the world economy is in post American mode and economies of the rest of the world will rise. They will be “politically stable, economically strong and culturally stable”..