Economists
like me are asked a set of recurring questions that might inform the
choices of firms, individuals, and institutions in areas like
investment, education, and jobs, as well as their policy expectations.
In most cases, there is no definitive answer. But, with sufficient
information, one can discern trends, in terms of economies, markets, and
technology, and make reasonable guesses.
In the developed world,
2017 will likely be recalled as a period of stark contrast, with many
economies experiencing growth acceleration, alongside political
fragmentation, polarisation, and tension, both domestically and
internationally. In the long run, it is unlikely that economic
performance will be immune to centrifugal political and social forces.
Yet, so far, markets and economies have shrugged off political disorder,
and the risk of a substantial short-term setback seems relatively
small.
The one exception is the United Kingdom, which now faces a
messy and divisive Brexit process. Elsewhere in Europe, Germany’s
severely weakened chancellor, Angela Merkel, is struggling to forge a
coalition government. None of this is good for the UK or the rest of
Europe, which desperately needs France and Germany to work together to
reform the European Union.
One potential shock that has received much
attention relates to monetary tightening. In view of improving economic
performance in the developed world, a gradual reversal of aggressively
accommodative monetary policy does not appear likely to be a major drag
or shock to asset values. Perhaps the long-awaited upward convergence of
economic fundamentals to validate market valuations is within reach.
In
Asia, Chinese President Xi Jinping is in a stronger position than ever,
suggesting that effective management of imbalances and more
consumption- and innovation-driven growth can be expected. India also
appears set to sustain its growth and reform momentum. As these
economies grow, so will others throughout the region and beyond.
When
it comes to technology, especially digital technology, China and the
United States seem set to dominate for years to come, as they continue
to fund basic research, reaping major benefits when innovations are
commercialised. These two countries are also home to the major platforms
for economic and social interaction, which benefit from network
effects,1closure of informational gaps, and, perhaps most important,
artificial-intelligence capabilities and applications that use and
generate massive sets of valuable data.
Such platforms are not just
lucrative on their own; they also produce a host of related
opportunities for new business models operating in and around them, in,
say, advertising, logistics, and finance. Given this, economies that
lack such platforms, such as the EU, are at a disadvantage. Even Latin
America has a major innovative domestic e-commerce player (Mercado
Libre) and a digital payments system (Mercado Pago).
In mobile online
payments systems, China is in the lead. With much of the country’s
population having shifted directly from cash to mobile online payments –
skipping checks and credit cards – China’s payments systems are robust.
Earlier
last month on Singles’ Day, an annual festival of youth-oriented
consumption that has become the single largest shopping event in the
world, China’s leading online payment platform, Alipay, processed up to
256,000 payments per second, using a robust cloud computing
architecture. There is also impressive scope for expanding financial
services – from credit assessments to asset management and insurance –
on the Alipay platform, and its expansion into other Asian countries via
partnerships is well underway.
In the coming years, developed and
developing economies will also have to work hard to shift toward more
inclusive growth patterns. Here, I anticipate that national governments
may take a back seat to businesses, subnational governments, labour
unions, and educational and non-profit institutions in driving progress,
especially in places hit by political fragmentation and a backlash
against the political establishment.
Such fragmentation is likely to
intensify. Automation is set to sustain, and even accelerate, change on
the demand side of labour markets, in areas ranging from manufacturing
and logistics to medicine and law, while supply-side responses will be
much slower. As a result, even if workers gain stronger support during
structural transitions (in the form of income support and retraining
options), labour-market mismatches are likely to grow, sharpening
inequality and contributing to further political and social
polarisation.
Nonetheless, there are reasons to be cautiously
optimistic. For starters, there remains a broad consensus across the
developed and emerging economies on the desirability of maintaining a
relatively open global economy.
The notable exception is the US,
though it is unclear at this point whether President Donald Trump’s
administration actually intends to retreat from international
co-operation, or is merely positioning itself to renegotiate terms that
are more favourable to the US. What does seem clear, at least for now,
is that the US cannot be counted on to serve as a principal sponsor and
architect of the evolving rules-based global system for fairly managing
interdependence.
The situation is similar with regard to mitigating
climate change. The US is now the only country that is not committed to
the Paris climate agreement, which has held despite the Trump
administration’s withdrawal. Even within the US, cities, states, and
businesses, as well as a host of civil-society organisations, have
signalled a credible commitment to fulfilling America’s climate
obligations, with or without the federal government.
Still, the world
has a long way to go, as its dependence on coal remains high. The
Financial Times reports that peak demand for coal in India will come in
about ten years, with modest growth between now and then. While there is
upside potential in this scenario, depending on more rapid cost
reductions in green energy, the world is still years away from negative
growth in carbon dioxide emissions.
All of this suggests that the
global economy will confront serious challenges in the months and years
ahead. And looming in the background is a mountain of debt that makes
markets nervous and increases the system’s vulnerability to
destabilising shocks. Yet the baseline scenario in the short run seems
to be one of continuity. Economic power and influence will continue to
shift from west to east, without any sudden change in the pattern of
job, income, political, and social polarisation, primarily in the
developed countries, and with no obvious convulsions on the horizon. –
Project Syndicate
* Michael Spence, a Nobel laureate in economics,
is professor of Economics at New York University’s Stern School of
Business and Senior Fellow at the Hoover Institution.
