The Great Recession of 2008–09 badly shook the global market, changing the landscape for finance, trade, and economic growth in some important respects and imposing tremendous costs on average citizens throughout the world. The legacies of the crisis—high unemployment levels, massive excess capacities, low investment and high debt levels, increased income and wealth inequality—reduced the standard of living of millions of people. There is an emerging consensus that global economic governance, as well as national policies, needs to be reformed to better reflect the economic interests and welfare of citizens.
Global recovery is sluggish and the outlook uncertain. The economies of the Eurozone, which may have fallen into a “persistent stagnation trap,” and Japan remain highly vulnerable to deflation and another bout of recession; in the advanced economies that are growing, recovery remains uneven and fragile. Growth in emerging and developing economies is slowing, as a result of tighter global financial conditions, slow growth of world trade, and lower commodity prices. Because consumption and business investment have been tepid in many countries, the gradual global recovery has been too weak to create enough jobs. Official worldwide unemployment climbed to more than 200 million people in 2013, including nearly 75 million people aged 15–24.
Professor Roubini, one of the few economists who predicted the 2008 crisis, has argued that the global economy is like a four-engine jetliner that is operating with only one functioning engine, the “Anglosphere.” The plane can remain in the air, but it needs all four engines (the Anglosphere, the Eurozone, Japan, and emerging economies) to take off and stay clear of storms. He predicts serious challenges, including from rising debt and income inequality.
Relatively slow growth in the advanced economies and potential new barriers to trade over the medium term have significant adverse implications for growth and poverty reduction in many developing countries. Emerging economies, including China and India, that thrived in recent decades in part by engaging extensively in the international economy are at risk of finding lower demand for their output and greater volatility in international financial flows and investments. A combination of weaker domestic currencies against the US dollar and falling commodity prices could adversely affect the private sector in emerging economies that have large dollar-denominated liabilities.
Rising inequality is holding back consumption growth. The ratio of wealth to income, as well as the income shares of the top 1% of income earners, has risen sharply in Europe and the United States since 1980, as Professor Piketty has shown.
The ratio of the share of income earned by the top 10% to the share of income earned by the bottom 90% rose in a majority of OECD countries since 2008, a key factor behind the sluggish growth of their household consumption. During the first three years of the current recovery (2009–12), incomes of the bottom 90% of income earners actually fell in the United States: the top 10%, who tend to have much lower propensity to consume than average earners, captured all the income gains. In developing countries for which data were available for 2006–12, the increase in the income or consumption of the bottom 40% exceeded the country average in 58 of 86 countries, but in 18 countries, including some of the poorest economies, the income or consumption of the bottom 40% actually declined, according to a report by the World Bank and IMF.
Some signs of possible relief may lie ahead. In September 2014, leaders at the G20 summit in Brisbane agreed on measures to increase investment infrastructure, spur international trade and improve competition, boost employment, and adopt country-specific macroeconomic policies to encourage inclusive economic growth. If fully implemented, the measures could add 2.1% to global GDP (more than $2 trillion) by 2018 and create millions of jobs, according to IMF and OECD analysis. (These estimates need to be treated with caution, as the measures that underpin them and their potential impact are uncertain, and the nature and strength of the policy commitments vary considerably across individual country growth strategies.)
Another potential sign of hope is the sharp decline in the prices of energy, a reflection of both weaker global demand and increased supply (particularly of shale oil and gas from the United States). The more than $40 a barrel decline in Brent crude prices is likely to raise consumers’ purchasing power in oil-importing countries in the OECD area and elsewhere and spur growth, albeit at considerable cost (and destabilizing effects) for the more populous and poorer oil exporters. It could also be a harbinger of energy price spikes down the road, as the massive investments needed to ensure adequate supplies of energy may not be forthcoming as a result of their unprofitability at low prices.
Major global challenges have wide-ranging long-term implications for the average citizen. By 2030, the world’s population is projected to reach 8.3 billion people, two-thirds of whom will live in urban areas. Massive changes in the patterns of energy and resource (particularly water) use will be needed to accommodate this 1.3 billion person increase—and the elevation of 2–3 billion people to the middle class.
A citizen-centered policy agenda would need to reform national economies to spur growth and job creation, placing greater reliance on national and regional markets and the sustainable use of resources; emphasize social policies and the economic health of the lower and middle classes; invest in human capital and increase access to clean water, sanitation and quality social services, including a stronger foundation during the early years of life and support for aging with dignity and equity; improve labor market flexibility to employ young people productively; and enhance human rights and the freedom of people to move, internally and internationally. These policies would need to be complemented by policies that use collective action to mitigate risks to the global economy.
To prevent another global crisis, there is an urgent need to strengthen global economic governance, including through global trade agreements that favor the bottom half of income distribution; reform of the international monetary system, including the functioning and governance structure of the international financial institutions; encouragement of inclusive finance; and institution of policies to discourage asset bubbles. To achieve sustainable growth, all countries need to remove fossil fuels and other harmful subsidies and begin pricing carbon and other environmental externalities.
Worldwide surveys show that citizens everywhere are becoming more aware and active in seeking changes in the global norms and rules that could make the global system and the global economy fairer and less environmentally harmful. This sense is highest among the young and better-educated, suggesting that over time it will increase, potentially leading to equitable results for all citizens through better national and international policies.
Headline image: World Map – Abstract Acrylic, by Free Grunge Textures. CC-BY-2.0 via Flickr.