A New Moment In History
We stand today at a "new moment in history", in the antechamber of a new global economy marked by rapidly shifting circumstances and new modes of thinking. This new economy will be geographically different, driven more by the emerging markets and developing countries. It will also be generationally different, shaped by different values and principles.
The new moment in history requires that we embrace the values of a new era -- more openness and cooperation between nations, more inclusion and solidarity among peoples and stronger accountability of those responsible for the global economy. This was the view articulated by Christine Lagarde, Managing Director of the International Monetary Fund (IMF) at the World Economic Forum now being held in Davos, Switzerland.
Looking to the longer horizon, to the new global economy taking shape before our eyes, Christine Lagarde sees not just a world of challenges but also a world of "resilient dynamism". Reflecting upon some of the mega trends shaping the future, she submitted four pivot points.
* First, a growing demand for individual empowerment, including for women, and a growing sense of a
single global economy.
* Second, a reallocation of political and economic power across the world. By 2025, for example, two-thirds
of the world's population will live in Asia. This can lead to greater cooperation or to greater tension and
* Third, a seismic shift in demographics, as the "youth bulge" in various emerging regions rubs up against
the "graying" population elsewhere. Sixty percent of the population in the Middle East and North Africa
is under 30. It is 70 percent for sub-Saharan Africa. Again, either a great opportunity or a source of
* Fourth, increasing vulnerability from resource scarcity and climate change, with the potential for major
social and economic disruption. This is the real wild card in the pack.
So, how can we successfully navigate our way into this future world? And, where does one begin? The IMF Chief was of the view that it starts with the new generation on the march -- in a world that is flatter, more closer knit, more interconnected than ever before in history.
This new generation thinks differently. It is a generation weaned on immediacy, democracy, and global reach of social media. Consider the scale. Facebook and Twitter have about one billion and 500 million users respectively. If they were countries, they would be the 3rd and 4th largest nations in the world.
She said that we can lay the groundwork for future success by embracing some of the merging values of this new generation, three of these in particular. (1) greater openness; (2) stronger inclusion; (3) better accountability.
This generation is a global generation and an open generation, open to the world, and to the ideas of a common global community. In a sense, this is really an old lesson for a new era -- that when countries transcend the narrow national interest and come together for the global good, everybody wins.
But old instincts die hard. At the first hints of improving sentiment, countries are enticed to retreat to the alluring comforts of their own backyards. They face the perennial temptations to look only at the national interest -- with competitive devaluations, barriers to trade, and a zeal to protect their own financial institutions at the expense of others. This is an anachronistic mindset ill-suited to a modern global economy.
On the contrary, opening up and removing barriers has proven to be more efficient.
For example, Asia is a region that has made tremendous progress in trade integration -- trade within Asia tripled over the past decade, and regional trade among emerging Asian nations grew even faster. But it has lagged behind in financial integration. It is not investing enough of its own savings in its own future. And yet, the advantages of financial integration in Asia are clear. It can lift people by boosting domestic demand and helping small firms get access to credit. It can make economies safer, by providing more insurance against adverse developments. It can reduce inequality, by helping financial inclusion. But destiny beckons through the smoke and the fog.
The second major aspiration of the new generation and the new global economy is stronger inclusion. Our close-knit world is a participatory world. The new generation demands opportunities for all and insists on tolerance, respect, and fairness for all. These demands must be met.
What does it mean for economic policymakers? It means that we need more fairness in economic life, more inclusion. This has numerous dimensions. At its core, it relates to growth but it is no longer enough to focus on growth alone. We need all people to share in rising prosperity -- and, by the same token, share fairly in any economic adjustment needed to achieve or restore prosperity.
As Franklin Roosevelt once said. "The test of our progress is not whether we add more to the abundance of those who have much, it is whether we provide enough for those who have too little".
Inclusive growth must also be job-rich growth. This is really a symbiotic relationship --we need growth for jobs and jobs for growth. Right now, 202 million people are looking for work, and two in five of the jobless are under 24. Relieving this sense of desperation must be the over-riding goal.
Inclusion has other dimensions too. Gender inclusion is critically important, too often neglected by policymakers. It is no longer acceptable to block women from achieving their potential. Think about it, women control 70 percent of global consumer spending. All studies point to the economic benefits of full female participation in the labor force, in the economy, in society. One study estimates that by simply raising women's employment rates to the level of men, GDP would jump significantly -- by 5 % in the United States, 9 % in Japan, 10 % in South Africa, 27 % in India, and 34 % in Egypt. The evidence is clear, as is the message, when women do better, economies do better.
One other point on inclusion: we need a greater sense of solidarity across generations. We need to be cognizant of the legacy we are leaving for those who will come after us. One such legacy is public debt, which now hovers around 110 percent of GDP among the advanced economies -- the highest level since World War II, We owe it to the next generation to reduce this burden on them.
Even more important is the issue of climate change, which, is by far the greatest economic challenge of the 21st century. The science is sobering -- the global temperature in 2012 was among the hottest since records began in 1880. Make no mistake, without concerted action, the very future of our planet is in peril.
So we need growth, but we also need green growth that respects environmental sustainability. Good ecology is good economics. This is one reason, why getting carbon pricing right and removing fossil fuel subsidies are so important. This too is an element of inclusion.
The third and last principle for the new global economy is better accountability. The new generation demands transparency. They demand good governance.
Just look at the role of information technology in forcing change. It was the citizen power of social media that sparked a peoples' transformation in the Middle East, put pressure on U.S. policymakers to compromise on the fiscal cliff, and prompted Chinese policymakers to publish frequent updates of pollution levels. These forces for greater accountability will only get stronger. Of course, governments can try to push back and restrict access to information technology. But this is like King Canute ordering the tide not to come in!
Accountability is really a two-way street -- institutions must be accountable to citizens, but citizens must also have the knowledge, education, and training needed to hold them accountable. It is mutual responsibility. What does this all mean for economic life -- in the public sector, and international institutions too?
Beginning with the public sector, we have learned that good governance is the bedrock of economic success. Without strong institutions, good policies cannot be developed and implemented. Zero tolerance for corruption must be foundational. The state must be the servant rather than the master of the people -- meeting their basic needs and providing an enabling environment for the private sector to thrive.
But the private sector also needs to be accountable. The goal of the private sector cannot be only profit, it must also be to add value, create jobs, develop the new ideas that drive an economy forward. Vested interests and arbitrage typically hinder the accountability principle. The global economic crisis was, in many respects, a governance crisis originating in the financial sector. It had too much activity in murky and dark corners, and put its own short term gain ahead of supporting the real economy.
As Plato said long ago. "Excess generally causes reaction, and produces a change in the opposite direction". Finishing the job of financial sector reform must be a priority. We can already see signs of waning commitment -- dilution of reforms, delays in implementation, inconsistency of approaches. And we can see the risks -- a further weakening in capital and derivatives. We must also move in the direction of more prudent compensation practices.
Ultimately, again, this is all about accountability, we need a financial sector that is accountable to the real economy -- one that adds value, not destroys it.
- Asian Tribune -