How to correct global imbalances?

Big Power rivalry and disruptive technology threaten to push the social inequity imbalance further beyond fragility.

Andrew Sheng

Andrew Sheng

Asia News Network


In 2022, after the Ukraine war shock, the US led interest rate hikes as a result of which, global households lost $8 trillion in net wealth as equity and bond prices tumbled. PHOTO: AFP

June 5, 2023

KUALA LUMPUR – The global economy and planetary system are hugely imbalanced because of climate warming and widening social inequities. Big Power rivalry and disruptive technology threaten to push these imbalances further beyond fragility, towards even collapse. What should we be doing about these existential threats?

The simplest way is not to think about them, or another way is to deny that these problems exist. Another option is to consider that these huge issues are way beyond our pay grade, so it’s really the responsibility of our political leaders or someone else to solve. We can’t solve them individually, so someone else must do the work. We might as well add political and business dysfunctionality to the “what-me-worry” box.

My training as an accountant is to default to the balance sheet, because it should always balance. What is that balance sheet telling us?

McKinsey’s latest update on the global balance sheet, “The future of wealth and growth hangs in the balance,” showed that until recently, the three interlocking balance sheets of the financial sector, liabilities of the non-financial sector and the real economy have been inflating faster than the real GDP growth. Two years ago, their first estimates showed that the global balance sheet basically tripled over the 20 years from 2000 to 2020, mainly due to asset price inflation. Asset price inflation occurred under loose monetary policy and lower interest rates, essentially a short-term action to pump up growth. Since the 2008 global financial crisis, advanced country interest rates have declined to near zero until last year. In 2022, after the Ukraine war shock, the US led the interest rate hikes to deal with higher energy and food inflation, which meant that for the first time, global households lost $8 trillion in net wealth as equity and bond prices tumbled.

McKinsey undertook four long-term scenarios to see how the world balance sheet would evolve – namely, return to past era with higher interest rates and inflation for longer, balance sheet reset, and productivity acceleration. Under the first scenario, with essentially more of the same policies like the past 20 years, we will have weak investment and savings glut plus sluggish growth. In the second, higher interest rates are maintained so that real interest rates are positive, so real growth and investment will be stimulated, but there will be losses in real wealth values. The third scenario is like Japan after its real estate and equity bubble burst in the 1990s, with drawn-out deleveraging and a sharp contraction in asset prices. This could be very painful for many of the rich age-ing economies and bad for the emerging markets, with sharp drops in both equity and real estate markets.

The fourth and ideal scenario is to accelerate productivity, so that economic growth will catch up with the balance sheet, meaning that the global economy gains in income, wealth, and balance sheet health.

This McKinsey scenario building (not forecast) comes out similarly to recent World Bank long-term projections, which showed that the global potential growth rate will fall to a three-decade low over the rest of the 2020s, because all the drivers of growth have weakened, such as growth rates of investment, total factor productivity, an ageing global labour force, and international trade growth.

Add to this the fragmenting global consensus, decoupling supply chains, climate change and disruptive technology plus war, and it’s a small wonder that the outlook is gloomy. McKinsey argued that accelerating productivity growth will require not just policy imagination, but bold investments in youth, empowering those underprivileged groups in terms of education, re-skilling, health and infrastructure.

In short, think and act long-term.

While we recognise that Great Power rivalry stalls global cooperation, this does not mean that many countries, like those in Asean, cannot undertake imaginative policies to enhance productivity domestically and build regional cooperation regimes in trade, investment, education and infrastructure. The ants will still build their nests even while the elephants fight.

Economists and technologists are always puzzled by the missing productivity numbers despite rapid acceleration of computer technology. Specialists often forget that productivity is an ecosystem trait that can only show up when you manage the ecosystem to function as a whole, rather than in parts. In other words, management and organisational skills are key to ensuring that all parts of the system function to deliver productivity as a whole.

Policymakers often wonder why many policy objectives look wonderful in aspiration and inspiration, but their delivery is dull. This is because ecosystem building is for the long-haul and will necessarily take time, so that those who go for “low hanging” fruits find that these are either not sweet or rot too quickly. One of the defects of electoral democracy and free market policies is that both politicians and businesses focus on the short-term election or reporting cycle. The politician needs to meet a four-five year election cycle at the national level, but if you add in local elections, most of them are electioneering every two years or less. The businessman who reports every quarter on profits will focus only on delivering short-term profits at cost of long-term projects.

Short-term gains are always at the cost of long-term growth. How to get everyone to focus on the long-term? Only through deep recession or big mutual pain.

Sad facts from mad politics and bad economics.

Andrew Sheng is a distinguished fellow of Asia Global Institute, University of Hong Kong, and chief adviser to the China Banking Regulatory Commission.

Copyright: Asia News Network

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