Stormy Weather
It was, for a few years in the middle of this decade, the trope that you heard all the time. The global economy, it was said, was a "Goldilocks" one. Just like the bowl of porridge that the child in the fairy tale sampled, it was neither too hot, nor too cold. It was — wonderfully, warmly — just right.
It's worth thinking how that analogy might be extended into our times. The global economy, you might say, now resembles the sort of congealed, cold, gray, glutinous bowl of oatmeal, curling up at the edges, that was once to be found in the lesser sort of Scottish boarding houses, with a couple of flies dancing a lazy highland reel on its surface. (See pictures of the global financial crisis.)
It is, in short, not an appetizing sight.
Since the summer of 2007, when nonexperts started to understand that subprime refers not to a U.S. Department of Agriculture grade of steak but a mortgage whose originator had no real prospect of recovering its debt, the world's economic and financial systems have lurched from one astonishing event to another. The mayhem among U.S. commercial and investment banks in the fall of 2007, the Fed's panicky 75-basis-point interest-rate cut of January 2008, the fraud at SocGen, the fire sale of Bear Stearns, the bankruptcy of Lehman Brothers, the rescue of AIG, CDOs, TARP, recapitalization, Madoff, Satyam, Citi, RBS ... and so it goes, until even the most diligent of chroniclers runs out of acronyms and polysyllables and ceases to believe that the story they are telling can possibly have happened. Goldilocks? To describe the travails of the global economy in the past 18 months would require an imagination darker than that of the Brothers Grimm.
But this is a not a fairy tale. It is a story in which figures and financial flows (or rather, the lack of them) translate into reductions in life chances for millions, as jobs, household incomes and retirement savings accounts all disappear. This year, says Stephen Roach, chairman of Morgan Stanley Asia (and one of a handful of economists who can legitimately claim that they had long predicted that an economy built on debt and asset-price bubbles would one day collapse), will be "the worst recession year since 1982," with global growth of just 1%. Roach adds: "The risk is it could be worse." Jim Walker, from the research firm Asianomics, chooses a different comparator as he looks to the global economy this year. "We haven't seen anything like this since the 1930s," he says, guessing that the U.S. economy will contract by anything between 2.5% and 5% of GDP. Matthew Sharratt, an economist at Bank of America in London, predicts a 2.9% drop in GDP for the U.K., "the worst recessionary experience since the 1970s."
If not quite so gloomy, new European Commission forecasts for the Continent's leading economies are nothing to cheer: the Commission expects Germany to contract by 2.3%, Italy and Spain by 2% and France by 1.8%. Japan's economy, too, is expected to shrink this year. Reduced demand in the rich world for goods from newly industrializing nations means that the shocks have spread even to those economies whose turbocharged growth led some to claim, as late as 2008, that the booming nations of the developing world had become decoupled from the slow-growing, mature economies on either side of the Atlantic. Some decoupling; as export markets shrink while Western consumers rebuild their battered household balance sheets, growth in China, according to Goldman Sachs, is expected to slow from 8.9% in 2008 to 6% this year.
Nor is it likely that 2009 will bring an end to the torpor. Economies are naturally cyclical. Changes in asset prices provide buying and selling opportunities for those willing to hazard their fortune. The creative destruction of capitalism means that, much like a flock of vultures, some industries and enterprises will always find nourishment in the misfortunes of others. But the timing of the recovery phase of this cycle, and its strength, is in doubt. Sharratt says it is possible that the U.K. will not see any semblance of a recovery until "later on in 2010." Roach hopes that things will look better by the end of 2009, but warns that "any recovery when it comes will be ... anemic, and not strong enough to prevent the unemployment rate from continuing to rise in much of the world." And that would be a rise from levels that already sting: December's unemployment rate of 7.2% in the U.S. was the highest since 1993.
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Going Up the Mountain
As they gather in Davos, Switzerland, for the annual meeting of the World Economic Forum (WEF) from Jan. 28 to Feb. 1 — a meeting that promises to be the most significant the WEF has ever held — this is the miserable picture that assembled politicians, industrialists, financiers, academics and representatives of NGOs will confront. Some, surely, will be chastened, remembering, in the somber words of Barack Obama's inaugural speech, that the weakened state of the U.S. economy was "a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices." They might even recall his injunction, in the words of Scripture, to "set aside childish things," though one expects that Davos' parties will be as good as ever. But in all the reconstructions of what happened and why that will be discussed at Davos, and all the plans to put things right with which it will be replete, those attending the annual meeting this year will not get far if they do not engage in some solid examination not of balance sheets and national income accounts but of ideas.
For it is in the realm of ideas, and of intellectual inquiry, that true understanding of the present crisis, and any amelioration of it, must be found. We all need to interrogate two profound paradoxes of the era of globalization. First, as Martin Wolf of the Financial Times points out in his wonderful book Fixing Global Finance, a period of sustained global economic growth has also been one of constant financial crisis. From the Latin American debt crises of the 1980s, through the Asian financial implosion of the 1990s to the current worldwide credit crunch, global capital flows — whether because of greed, because of poor institutional structures or for myriad other reasons — have not only fed enterprises around the world, but also created enormous and painful economic dislocation. We need to understand why, and we need to at least try to build the institutions and create the rules that help the first, beneficial role of global finance, while guarding against its second, destructive one.
Another paradox is just as puzzling. Though globalization — or more accurately, the outward-orientation of formerly closed economies — has brought innumerable benefits to millions, poverty remains deeply entrenched in our world, even in those parts of it that, measured by the dry indicia of macroeconomics, have done well. Conventional wisdom has long insisted that if nations got the economic fundamentals right — allowed the market to set prices, were fiscally responsible, established systems of property rights and dispute resolution — the gains would trickle down to the poor. In some nations, that has happened. But as Michael Schuman details in a following story, anyone who has seen the backbreaking poverty that can be found in China and India a mere stone's throw from gleaming factories and call centers knows that is not always the case. Poverty is a misery even in good times. In periods of sustained contraction, such as we now risk experiencing, it can strip the attributes of humanity from millions. Now more than ever, we need to know what policies and institutions can genuinely ameliorate, and eventually eliminate, abject poverty.
These questions are important, because the ideas that have fueled a generation of global capitalism are not God-given. They are not always bound to win the day. In the aftermath of the Wall Street crash in 1929, the U.S. turned its back on the world, erecting tariff walls that guaranteed that the world slump would become deeper than it needed to be. As Peter Gumbel demonstrates in the next story, in an earlier era of globalization — the one that began in the mid-19th century — the inequality with which economic gains were distributed led to political convulsions that eventually cost the lives of untold numbers.
That is why it is ideas — their history and their consequences — that should be the lifeblood of this year's Davos meeting, not the search for comfort in a fairy tale about a little girl, three bears and a bowl of porridge. Time to set aside childish things, indeed.
— with reporting by Michael Schuman/Hong Kong and Adam Smith/London