Winning Countries Will Be Stable Ones

By Peter Lindfield, published in the Telegraph-Journal 10th August 2012

We read again and again that the world economy faces considerable uncertainty in the short term. Will the United States be able not only to forge a path to renewed growth but also create prosperity for a majority of its citizens? Can the eurozone not merely avert disaster but emerge to be attractive to business in this generation and the next? Can emerging economies maintain fiscal stability through the economic slowdown without imploding?

Answers to questions such as these will determine how national economies will evolve over the coming decade, but longer-term, more ominous challenges are also beginning to emerge. Increasingly there are concerns that the world may experience a slowdown in economic growth greater than any period since the end of the Second World War.

Regardless of how advanced economies handle their current difficulties, many will continue to be plagued with high debt, low growth rates and fractious internal politics. Europe will need enormous energy, focus and discipline to rebuild its tattered union. In the U.S., increasingly strident political battles between Democrats and Republicans will continue to paralyze economic policy until well beyond the outcome of the November elections.

In advanced economies, increasing levels of inequality and aging demographics will fuel political discontent in the form of unemployment raising regional inequality. As aging nations increasingly focus on domestic challenges, they will become less involved internationally. They will also be less willing to support multilateral arrangements that they perceive as damaging to their interests. This will make it more difficult to reach multilateral agreements on environmental, security, intellectual property and human rights issues.

This global arena will be corrosive to consistent growth. It also increases the likelihood that there will emerge deep disparities in economic performance among nations because some will be much more adversely affected than others. Picking winners and losers will continue to be difficult, but nations that will be more successful will share three characteristics.

First, they will not be encumbered by high levels of public debt. Not only is high government debt a serious drag on government’s role in underwriting economic growth, but it also paralyzes fiscal policy and inevitably leads to severe distortions in the financial system. Governments distracted by debt-reduction measures are disinclined to make the critical investments required for long-term structural adjustment. Some emerging economies have begun to manage their public debt, but their private sectors have borrowed heavily. Since large-enough private debts tend to become public liabilities, prudent government fiscal management may not provide a sufficient buffer.

Second, successful nations will not be over-reliant on the global economy. Their engines of economic growth instead will rely on a balance of domestic and export-led demand. Countries that rely excessively on export markets and global finance to fuel their economic growth will be at a disadvantage. That means countries that are able to combine a reliable domestic market and a prosperous and stable middle class with powerful export-led industries will have an important advantage.

Third, successful nations will be democracies with healthy political institutions and robust social contracts. Democracies with historically strong social contracts will outperform authoritarian regimes because they possess established and legitimate systems of conflict management. These systems provide platforms for consultation and co-operation among opposing social groups that are essential in times of turmoil and uncertainty.

Tomorrow’s winners will be those countries that today are in a position to make public and private investments to fund infrastructure and social assets. These countries will emerge from the current slow-growth period with strengthened international trade advantages that can underpin strong domestic growth. Placing these investments on tomorrow’s opportunities are shrewd decisions today.

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Filed under Fiscal Policy, Globalization, Social contract

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