Deal­ing with the eco­nomic chal­lenges of our times

Financial Mirror (Cyprus) - - FRONT PAGE -

The other game-chang­ing de­vel­op­ment of our times is the dig­i­tal rev­o­lu­tion which is called by many as the Fourth In­dus­trial Rev­o­lu­tion. Pow­er­ful ad­vances in In­for­ma­tion and Com­mu­ni­ca­tion Tech­nolo­gies are lead­ing to large gains in pro­duc­tiv­ity and ef­fi­ciency and rapid in­no­va­tion in prod­ucts and ser­vices. A large share of those now in high school will prob­a­bly look here for em­ploy­ment and should gear their prepa­ra­tion ac­cord­ingly. But th­ese ad­vances are also cre­at­ing im­por­tant chal­lenges in job re­place­ment, data pro­tec­tion and the dis­tri­bu­tion of the re­sult­ing grow­ing wealth. The key chal­lenge is how to dis­trib­ute fairly the “au­to­ma­tion div­i­dend” which has made in­come in­equal­ity worse. There is also a shift in mar­ket strength: power ac­crues to those who have most data, best al­go­rithms and most ad­vanced com­put­ers. The bet to be won here is how to max­imise the ben­e­fits of the dig­i­tal rev­o­lu­tion while deal­ing ef­fec­tively with chal­lenges.

The fi­nan­cial cri­sis started in the United States about ten years ago. It was a re­mark­able com­bi­na­tion of fail­ings in bank su­per­vi­sion and regulation, greed for profit and lack of at­ten­tion to the po­ten­tial dan­gers of per­sis­tent trade im­bal­ances and huge cap­i­tal in­flows com­ing in from China. The Amer­i­cans dealt with the cri­sis, as they al­ways do, and moved on. But the cri­sis ex­posed se­ri­ous short­com­ings in the func­tion­ing of the world­wide eco­nomic sys­tem and es­pe­cially in the Euro­pean Union and the Eu­ro­zone.

For a thirty-year pe­riod lead­ing up to the re­cent cri­sis, ex­pand­ing in­ter­na­tional trade, free en­ter­prise and mar­ket-based sys­tems, gen­er­ated jobs for al­most ev­ery­body, cre­ated wealth and got mil­lions in all con­ti­nents out of poverty – viewed from afar, a re­mark­able achieve­ment. But viewed from close by, this was an un­sus­tain­able sys­tem.

First, there were grow­ing im­bal­ances, as suc­cess­ful ex­porters like China, other emerg­ing economies and Ger­many ac­cu­mu­lated ex­port earn­ings but did not re­cy­cle them through in­creased de­mand for im­ports. Many other coun­tries with de­clin­ing com­pet­i­tive­ness and low pro­duc­tiv­ity ac­cu­mu­lated large deficits and went into debt. Se­cond, in many coun­tries glob­al­i­sa­tion and tech­nol­ogy left large num­bers of peo­ple be­hind, cre­at­ing po­ten­tial for in­sta­bil­ity.

With re­spect to the Eu­ro­zone there are al­ter­na­tive nar­ra­tives, as to the ori­gins and the man­age­ment of the en­su­ing cri­sis. Th­ese al­ter­na­tives were seen in ac­tion dur­ing the 2015 stand-off be­tween Greece and its cred­i­tors. First, is the nar­ra­tive of na­tional pol­icy fail­ures in terms of heavy pub­lic

its spend­ing and bor­row­ing, and de­clin­ing com­pet­i­tive­ness. The se­cond nar­ra­tive puts em­pha­sis on the de­sign faults of the Mon­e­tary Union: its nar­row em­pha­sis on fis­cal cri­te­ria, the ne­glect of rapid growth in pri­vate sec­tor bor­row­ing and the ab­sence of a bank­ing union and of a fed­eral bud­get. At the same time the fact that sur­plus coun­tries, like Ger­many, do not par­tic­i­pate in the needed cor­rec­tion by ex­pand­ing their im­ports, makes the ad­just­ment for deficit coun­tries much harsher. There is truth in both nar­ra­tives and the chal­lenge go­ing for­ward is to build sys­tems to help avoid na­tional pol­icy er­rors, while fix­ing the ar­chi­tec­ture short­com­ings of the Mon­e­tary Union.

The pres­sure for re­forms is com­ing from the legacy of the cri­sis in Europe. What we now see is slow growth, in­come stag­na­tion, low pro­duc­tiv­ity, high debt and, above all, high un­em­ploy­ment, es­pe­cially among young peo­ple. Some changes like a bank­ing union and a stronger fis­cal pact are hap­pen­ing. But, the key goal of political union that will en­able Europe to deal with crises more ef­fec­tively like the United States, re­mains elu­sive. In fact, we now have sharper North-South and East-West di­vides, fu­elled by eco­nomic dif­fer­ences and large mi­gra­tion flows. All this leads to Euroscep­ti­cism, na­tion­al­ism and xeno­pho­bia, mostly from the right, and pop­ulism from the left.

Be­cause the short­com­ings of the free en­ter­prise sys­tem are rightly seen as hav­ing con­trib­uted to the cri­sis, there is a dan­ger for this pop­ulism to lead to a re­turn to tax-and­spend ap­proaches and a growth of the role state. Th­ese ap­proaches have been tried and failed. That is why it is im­por­tant for all of us to come up with a cred­i­ble middle road that avoids the pit­falls of unchecked mar­ket- based cap­i­tal­ism with­out fall­ing into the in­ef­fi­cien­cies of so­cial­ism. El­e­ments of this ap­proach must in­clude com­bat­ing cor­rup­tion which al­lows those us­ing de­vi­ous meth­ods to ad­vance at the ex­pense of the rest of us; fight­ing tax eva­sion which frus­trates hon­est peo­ple in too many coun­tries; real re­form of the fi­nan­cial sys­tem so that in­no­cent tax pay­ers do not have to pay the bill again; and tack­ling mo­nop­o­lies and vested in­ter­est groups which have cap­tured the political sys­tem and are block­ing re­forms that ben­e­fit the ma­jor­ity. In par­al­lel, this ap­proach would re­fo­cus the wel­fare state on the re­ally needy and use the money saved to in­vest in health and education.

I have touched on some of the chal­lenges of the younger gen­er­a­tion, namely: forg­ing a stronger political union in Europe, re­ha­bil­i­tat­ing a mar­ket-based eco­nomic sys­tem, and tak­ing full ad­van­tage from the dig­i­tal rev­o­lu­tion; but there are oth­ers, like cli­mate change, where the my­opia of the young and the selfish­ness of the older gen­er­a­tions is lead­ing to in­ac­tion. There is also the long-stand­ing chal­lenge of re­duc­ing in­come and wealth in­equal­ity world­wide and elim­i­nat­ing poverty in de­vel­op­ing coun­tries which ought to re­main firmly on our radar screen. Re­ver­sal of the ex­treme in­crease in in­equal­ity that has oc­curred in the last thirty years is a pol­icy choice and must be seen as part and par­cel of the big chal­lenge of our times of re­defin­ing and re­shap­ing our free en­ter­prise eco­nomic sys­tem.

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