World Economy-Present Scenario and Hope for the Future

Economic growth is a central assumption to political and economic systems. It is the mechanism relied upon for improving living standards, reducing poverty to now solving the problems of over indebted individuals, businesses and nations. All brands of politics and economics assume sustainable, strong economic growth, combined with the belief that governments and central bankers can control the economy to bring this about.

But strong growth is not normal, being a recent phenomenon over the last two centuries. Economic activity and the wealth created have increasingly relied on borrowing money and speculation. It was based upon the profligate use of mispriced natural resources such as oil, water and soil. It relied on allowing unsustainable degradation of the environment. As author Edward Abbey warned, “Growth for the sake of growth is the ideology of a cancer cell.”

Central to the problem is the level of indebtedness. Debt accelerates consumption, as borrowed funds are used to purchase something today against the promise of paying back the money in the future. Spending that would have taken place normally over a period of years is squeezed into a relatively short period because of the availability of cheap borrowing. Business overinvests misreading demand, assuming that the exaggerated growth will continue indefinitely, increasing real asset prices and building significant overcapacity.

Around 85% of the debt incurred over the last 30-35 years funded the purchase of existing assets or consumption rather than being used for creating new businesses or productive purposes which built wealth.

               

Global debt now stands at around $57 trillion (over 280% of the world annual produce), an increase since 2008 when high debt levels brought the world to the brink of collapse.

               

“Hopium” economies cannot mask the problems of excessive leverage forever. The debt will have to be repaid out of future income or proceeds of asset sales, diminishing growth or savaging investment values. If as is likely this debt cannot be repaid, then it will be written off, resulting in an unprecedented loss of wealth for savers.

               

Compounding the problems of debt, resources and environment are challenges of slowing rates of innovation, lower improvements in productivity, demographics, inequality and exclusion.

               

In a Faustian bargain, policy makers sold the future originally for present prosperity and are now reselling it for a precarious and short-lived stability. There is a striking similarity between the problems of the financial systems, irreversible climatic change and shortages of vital resources like food, water and oil. In each area, society borrowed from and pushed problems into the future. Short term profits were pursued at the expense of risks which were not evident immediately and would emerge later. Economic problems feed social and political discontent. The WEF Global Risks Report 2016 includes large scale involuntary migration, irreversible climate change, geo-political uncertainties and the inability to create meaningful employment (jobless growth).

The world is remarkably unprepared for the crisis that is unfolding. During the last half-century each successive crisis has increased in severity, requiring progressively larger measures to ameliorate its effects. Over time, the policies have distorted the economy. The effectiveness of instruments as diminished.

With public finances weakened and interest rates at historic lows, there is now little room for maneuver. Resource constraints and environmental problems are increasingly pressing. A new crisis will be like a virulent infection attacking a body whose immune system is already compromised.

                

All over the world, we can visibly notice a lack of political will to actually implement the brilliant ideas put forward by policy makers. Politicians know that structural reforms are the way to tackle impediments to growth. But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain. As Jean- Claude Junker, then Luxembourg’s PM, said at the height of the Euro crisis, “We all know what to do; we just don’t know how to get reelected after we have done it.” It is a classic storyline of ‘Who will bell the Cat?’

Humanity faces this, its greatest crisis, with, in the words of biologist E.O. Wilson, “Paleolithic emotions”, “medieval institutions” and delusions about its “god-like technology”.

In recent decades, the face of planet earth has been changed forever. The effects of population and economic growth, coupled with rising demands for resources and environmental impacts have left their mark. These trends and their repercussions now raise vitally important questions about the future of the world, and how we can successfully manage and sustain it.

Population growth, economic development and urbanisation have converged to rapidly increase the demand for a wide range of essential resources including energy, fresh water, food, wood and minerals.

The scale of ecosystem degradation means that a mass extinction of animals and plants is gathering momentum. All these changes will ultimately threaten to reverse social gains.

Increased awareness of these fundamental trends has resulted in attempts to find solutions. The solutions are always difficult to implement because of advocacy for the status quo from vested interests, political short-termism, and the corruption that diverts essential resources from environmental and developmental programmes. Fortunately, there is a rich body of data, analysis and examples to show what can be done going forwards.

The future will be shaped by the implementation of the Sustainable Development Goals and the Paris Climate Change Agreement both adopted in 2015. This will require not only new levels of international cooperation, technology, and business models, but also rethinking of economics and political priorities.

               

Global trends increasingly seek increased automation. As automation gathers pace, cheap labor will cease to matter and high skills will become vital. New technology will constantly destroy old jobs and create new ones. The amount of work available will be infinite. However, workers of the future will need high skills, flexibility and adaptability. India must move up the value chain, relying increasingly on cheap skills and not cheap labor.

                 

We don’t want technology simply because it is dazzling. We want it, create it and support it because it improves people’s lives. It is not clear how new smartphones and connectivity that feed cheap narcissism will address the urgent problems of the world. Innovation enriches a few people who control or finance the technology at the expense of the vast majority of the population, entrenching and increasing inequality.  Progress on crucial problems like improving crop yields, cheap clean energy and its storage is slow.

McKinsey global institute lists 12 technologies that are ‘potentially economically disruptive’. These include: mobile internet, cloud technology, internet of things, renewable energy, energy storage, advanced robotics, automation of knowledge work, advanced materials, next-gen genomics, advanced oil and gas exploration and recovery, autonomous and near autonomous vehicles and 3-D printing.

The annual meeting of the World Economic Forum, Davos (2016) had its theme as ‘Mastering the fourth industrial revolution’. This is the fusion of technologies that blur lines between the physical, digital and biological spheres. Industrial revolutions have come a long way. From the first industrial revolution (when muscle was sought to be replaced with machine) to the second industrial revolution (which revolved around division of labor, electricity and mass production) and the third industrial revolution (characterized by developments of digital systems, automated production and communication technology).  The benefits of the first three industrial revolutions have not fully benefited the world as yet. With almost 1.3 billion people still lacking access to electricity, the second industrial revolution has yet to be experienced by 17% of the world. The third industrial revolution was also incomplete, with roughly 4 billion people lacking internet access. The fourth industrial revolution is today in a nascent stage and its pace of change is rapid and disruptive to business and society.

               

There is another solution to the economic dilemma we are confronting. Can we consider adopting a different economic model? Maybe, if we consider reviewing economics from a moral basis. This economics should start and end with a premise about human morality and not necessarily on economic efficiency or maximizing economic growth. It should not have excessive consumption and needless exploitation as its central themes. Remember Gandhiji? He once said that the world had enough to support everyone’s need, but not everyone’s greed. If everyone had a standard of living as in the west, we would require 5 times as many resources as this one earth. M. K. Gandhi’s trusteeship doctrine flows from this philosophy,” Supposing I have come by a fair amount of wealth…, I must know that all that wealth does not belong to me; what belongs to me is the right to an honorable livelihood, no better than that enjoyed by millions of others. The rest of my wealth belongs to the community and must be used for the welfare of the community. Gandhiji was not against the use of machinery (technology) as such. But he was a determined foe of all machinery that was designed for exploitation of people, environmental degradation and displacement of the poor. Industrialization, according to him, will turn out to be a curse for mankind. Industrialization depends entirely on one’s capacity to exploit, on foreign markets being open to you, anon the absence of competitors. He felt that India should not take to industrialization after the manner of the west.

Gandhi’s economics had a moral basis, which is why we cannot slot him alongside conventional economists like Adam Smith, Alfred Marshall or Karl Marx. But, it must be said that Adam Smith (author of ‘Wealth of Nations’ and the father of market-oriented capitalism), also wrote a book called ‘Theory of Moral Sentiments’.

               

Almost every one of us has been raised up in life by our parents, guardians and teachers in a morally appropriate manner. Now, it is our duty to make sure we practice what has been taught to us. Be the change you would like to see in this world. Human morality should be at the center of one’s thoughts and actions and the welfare of fellow humans and society should be the goal.

              

Also, what direction should the Indian economy choose to follow? It should not blindly imitate American or Chinese economic models. Considering India’s macro-economic outlook, we believe that domestic consumption, not export, will drive India's growth. The economy will be services-led and not manufacturing-led. Small businesses will lead rather than large corporations. World trade may be shrinking and barriers may be emerging between nations. India, with its vast unified market, youthful labor force and growing digital platform-backed service alone is poised to build a new power economy.

(Note: Ideas in this paper have been borrowed from various articles written by Satyajit Das, Nandan Nilekani, Ajit Ranade, N. K. Singh and Dr. Tony Juniper.)