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New world disorder

By David Walker | 1 March 2011


In a globalised world, the only certainty is uncertainty. Economic dogma is being swept aside, as nation states follow their own disparate routes to recovery and growth. So why is the UK government sticking to the old script?


The first months of 2011 have probably prefigured the decade ahead. It’s not quite war, pestilence and famine on a biblical scale, but the world has already witnessed insurrection, financial contagion and a toxic mix of commodity price inflation, shortages of cereal and oil staples, and dramatic weather patterns.

Consultants, such as KPMG, are pushing out brochures to their clients saying that ‘complexity’ is the latest thing. Brokers are frightening their clients with stories of vertiginous geopolitical risk. Only a few weeks ago they were rating Egypt as a safer place to invest in than Portugal.

Zeitgeist surfers are sniffing for the next Big Theme, but if the recent World Economic Forum in Davos is any guide, confusion and contradiction are in the air. And not just in the UK. Painters of the big picture are asking whether we are on the crest of a Kondratieff wave or whether, instead, the world faces decades of capital shortage, rising interest rates and stagflation. Hedge your bets, because experts will back both outcomes.

No such hesitation in Downing Street. When Chancellor George Osborne took the mountain air in Davos, he stuck stolidly to the line of no alternative: UK economic growth would pick up as the public balance sheet shed its lines in red ink. Growth figures for the last quarter of 2010 dismayed Sir Richard Lambert of the CBI, but not Treasury ministers. Danny Alexander, the chief secretary, maintains the optimistic line he expressed in his Public Finance interview in the January issue.

In recent weeks, a new alignment has sprung up between London’s coalition and Berlin’s. The Treasury likes to cite German Chancellor Angela Merkel’s strictures on deficit reduction. She, in turn, deeply appreciated Prime Minister David Cameron’s speech at the Munich security conference in February, backing her tougher line on integrating ethnic and religious (meaning Muslim) minorities.

Cameron’s spin doctor Andy Coulson has departed Number 10, but the official media machine still rigorously ensures minister after minister reprises the line that stringent and speedy deficit reduction is necessary because Labour did not just leave the cupboard empty but also plundered the kitchen. But increasingly, the government’s line sounds oddly isolationist. In the US, the Obama administration is continuing, albeit under pressure, with fiscal stimulus. Cuts in federal spending are coming, but not yet. No ‘Washington Consensus’ there. Beyond Westminster, pluralism rules when it comes to tax, spend and the appropriate ratio of debt to GDP. Look at China.

In a new book, Red Capitalism, Carl Walter and Fraser Howie estimate Chinese public sector debt was 76% of GDP at the end of 2009 and is increasing. But how can China prosper with such high debt levels when the UK Treasury says this country’s net debt at 60% of GDP is a growth killer? China keeps defying the norms of the neo-liberal consensus (along with India and Brazil, in their different ways), and has just over-taken Japan as the second-biggest economy. No wonder an increasingly vociferous chorus is saying the norms themselves look less and less valid.

Naïve, pre-crash faith in the idea that globalisation was both benign and inexorable has given way to dark acceptance of the fact – but not the spirit – of ­transnational movements of money, goods, messages and, even less appealing to domestic populations in the West, migrants. Stark reminders abound that history is not some Whiggish progress to the sunlit uplands. How can it be that the US, Europe and Japan have produced comparable amounts of wealth over the long term despite having such different labour markets, corporate governance, competition roles, welfare states and financial systems? The answer coming from academics and pundits with growing conviction is that you get to heaven and hell in different ways; institutions and policies vary tremendously, and no one pattern is demonstrably ‘better’.

Could the nation state, long derided as past it, be making its comeback? In Beijing and Delhi and Brasilia it never went away. In Europe, Germans talk openly about national interests coming first; liberated from their past, they might now seek to create a ‘two-speed’ ­European Union.

In the recession the market god failed, and with it the sense so ardently propagated by the Labour governments of Tony Blair and Gordon Brown that globalisation is a one-way bet. Now, all the old certainties are open to question. Previously the World Bank underwrote the Washington Consensus, which said the only reliable recipe for growth was a small state and big, unfettered markets. But now, in an extraordinary turnaround, Gobind Nankani, a World Bank vice-president, opines that: ‘There is no unique universal set of rules. We need to get away from formulae and the search for elusive “best practices”.’ Like former US Federal Reserve chair Alan Greenspan – made an honorary knight by Gordon Brown – who admitted to markets being ‘flawed’, the IMF is starting to own up to error. A new report condemns ‘groupthink’ for its hesitant and incredulous response to the financial crisis.

Maybe the gingerly approach of western governments to the uprisings in Tunis and Cairo indicated a similar avoidance of dogma. It did not come solely from a fear of Islamic extremism but also a more deep-seated uncertainty about the formula that might successfully combine rights, civil peace, social progress and economic growth. Maybe there is none.

Commentator Will Hutton recently diagnosed 2011’s ‘intellectual and political vacuum’. The gap in thinking comes from having confronted and survived a profound crisis in institutions and ideas during the past three years without apparently learning much. In Davos, the bankers’ line was summed up by Bob Diamond, chief executive of Barclays. Thanks for the taxpayers’ money that bailed us out, he told the politicians, now get off our backs. What secures maximum agreement, in its effects on our children as much as on us, is the great reorientation now taking place, as the balance of world GDP shifts from Europe and the US to Brazil, China and the other ­so-called emerging economies.

If the index for GDP growth is set at 100 in 2005, five years on, the UK registers 102, the US 105, Brazil 125, India 147 and China 169. In 2000 the West accounted for 63% of world GDP (measured at purchasing power parity). That share is now below 50%.

No wonder gurus say look east, young person, or south. Stop calling Brazil, India, China ‘emerging’. They have already emerged. Their 50% share of world GDP is going to rise to two-thirds over the decade.

So the new globalisation story is about divergence, not convergence. It’s not so new: the proceeds of globalisation are pretty divergent already. Princeton economist Paul Krugman notes that soaring commodity prices are having ‘a brutal impact on the world’s poor, who spend much if not most of their income on basic foodstuffs’.

The evidence, he went on, points to changing global conditions of production. ‘In fact, [it] suggests that what we’re getting now is a first taste of the disruption, economic and political, that we’ll face in a warming world.’ Perhaps climate deterioration is one of the few steadfast global generalisations.

Elsewhere, it seems, models and patterns are out of fashion. One lesson that emerges is that we should avoid over-mighty frameworks and hegemonic ideas. Remember the ‘Pacific Century’? Two decades of impressive growth before the early 1990s led fevered commentators to see in Japan, Singapore and South Korea great laboratories for success. Then they went from miracle to crisis to low-level growth. The Asian tigers became tired moggies.

We just don’t know, says the Harvard development specialist Dani Rodrik. That means leaving space for trial and error. ‘The most successful societies of the future,’ he argues, ‘will leave room for experimentation and allow for further evolution of institutions. A global economy that recognises the need for and value of institutional diversity would foster rather than stifle such experimentation and evolution.’

There’s widespread agreement that the nation state has to be reinvented, in a policy and intellectual sense. After all, how is government to be funded, except through effective national tax regimes? But the bankers are showing how powerful companies working in more than one country can be in blackmailing and pressuring states. Corporation tax might well disappear over the next decade – despite contributing 10% of the total tax take of countries in the Organisation for Economic Co-operation and Development – because of threats to move headquarters, to Switzerland and other tax havens. Nicholas Shaxson’s new book, Treasure Islands, shows just how vulnerable ostensibly independent nations can be to pirates and Ponzi schemes.

A world of resurgent nation states could also lead to autarchy and anarchy. Hutton prescribes at least ‘relative orderliness’ to ensure that the vast flows of trade and capital – and currencies – adapt to the great reorientation. Gordon Brown, building his post-Number 10 reputation as a globalist, describes in his book Beyond the Crash: Overcoming the First Crisis of Globalisation a happy glide path along which the global economy could fly into growth by 2020. He cites the large addition to the global middle classes that prosperity in the emerging economies is bringing. This, he says, ‘will create an enormous market for the global private sector, which will allow revenues to rise and government borrowing to decrease and stabilise’. Provided of course that the nations of the world follow his prescription for reform and alignment of fiscal policies and currencies.

The necessity of international collaboration to ease adjustments and prevent social and fiscal dumping is greater than ever. Chinese trade imbalances and US trade and public accounts deficits simply cannot continue on their pre-crash trajectories. But the mechanisms we have, such as the G7 and G20, seem contingent and weak. The World Trade Organisation is a site of bitter contestation.

In the circumstances, why should we expect UK government ministers to come up with some original formula or insight? Perhaps the Cameron government is wise to avoid the grandstanding and preachiness that characterised the tenure of first Blair, then Brown: as soon as they approached a summit they would hector and cajole, as if the UK had found the elixir of permanent prosperity.

But have Tory and Liberal Democrat ministers gone to the other extreme, emphasising – as they see it – the UK’s unique position? The Financial Times’s Martin Wolf is only one of the voices worrying about the Cameron government’s almost obsessive concern with deficit reduction, at the expense of a wider sense of forward movement for the UK economy. As former US president Bill Clinton might have said: ‘It’s the global economy, stupid.’ But that means thinking hard and long about comparative advantage, the UK’s place in the global division of labour, national champions, even ‘industrial policy’. If the Chinese and Indians are any guide, it could also mean giving government a leading role – a political prospect ministers might find unpalatable.

David Walker is the former managing director of communications at the Audit Commission. The themes in this article will be covered at the CIPFA international conference in London on March 15–17

This feature first appeared in the March edition of Public Finance

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