Dealing with the economic challenges of our times
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.