Is the world economy safer in 2014 than it was before the 2008 financial crisis? “From an economic standpoint, we are entering an era of diminished expectations and increased uncertainty. In terms of growth, the world will have to live with less,” says Klaus Schwab, founder and executive chairman of World Economic Forum. For a perspective, if the global economy grew at its pre-crisis pace (more than 5% annually), its size would double in less than 15 years; but at 3%, it would take about 25 years.
The world’s four largest economies are now undergoing major transitions. The US is striving to boost growth in a fractured political environment; China is moving from a growth model based on exports to internal demand; Europe is still struggling to sustain its common currency; and Japan is combating two decades of deflation with aggressive monetary policies.
The volatility in emerging markets (EM) set off by the Federal Reserve’s talk in early 2013 of tapering its quantitative easing stimulus highlighted the vulnerability of EMs to hot money inflows.
Surveys released on Monday underscored a still uneven pace of global growth and suggested the easing measures of central banks are unlikely to wind down anytime soon. Service industry growth slowed sharply in China as 2013 drew to a close but picked up across most of Europe, while US firms hired more workers despite slower growth in activity last month.
Indeed, most signs point to improving US growth. But here is the problem. In 1998, the eurozone did not exist and the Chinese economy was only 11% of the size of the US. Today, the eurozone and China represent 74% and 51% of the US economy, respectively. But the global financial system still relies too heavily on US financial markets.
The fundamental problem haunting the global economy in 2013 remained a lack of global aggregate demand, says Nobel laureate Joseph Stiglitz. But is there an absence of real needs? An estimated one-third of global food production is wasted, around 1.3bn tonnes every year, according to the UN Food and Agriculture Organisation. But one in every seven people in the world goes to bed hungry and more than 20,000 children under the age of 5 die daily from hunger.
Amid all the talks of recovery and growth-reviving measures, celebrated economists have also dwelt upon the widening rich-poor divide: barely increasing incomes for a large proportion of citizens in advanced economies and the growing number of people living under the poverty line in the least developed countries.
And here is the fallout: the Occupy Wall Street movement in the US to the emergence of alternative political formations in Europe; instability in Arab Spring countries to the resurgence of violent religious extremism in Africa; social unrest in Brazil to the gate-crashing entry of the Aam Aadmi (Common Man) Party into India’s main stream politics.
Ultimately, the path to sustained growth requires not just new policies, but also a new mindset, says Schwab. Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. But for longer-term sustainability, each society must become more entrepreneurial, based on social equality and inclusion as well as gender parity.
