The World Economy

The world has seen novel approaches to stimulating economies since the crash of almost a decade ago and yet there seems little to show for it. The initial approach was to reduce interest rates as being the traditional way to stimulate growth. In some countries this monetary easing was accompanied, and to a degree offset, by fiscal austerity to reduce budget deficits. When this did not have the desired effect, and with interest rates already very low, quantitative easing (QE) was introduced, being the purchase of bonds by governments. As the measures were still not seen to be working sufficiently QE was increased and interest rates reduced to zero or below. The hope that doing more of the same would have a different result fitted nicely with Einstein’s definition of insanity. What was happening was that the massive cash injections were not being used for productive purposes but served rather as a prop to asset prices or were invested wherever some sort of yield could be obtained, including in developing countries who then found their currencies appreciating for other than good fundamental reasons.

Nouriel Roubini has recently given his views on this situation. Roubini was famous for his dire predictions (aka Dr Doom) but by predicting the sub-prime housing mortgage crisis his stock rose immeasurably. He now believes that the actions taken by the authorities while possibly staving off a recession had unintended consequences, in particular by interrupting the normal self corrections after a bubble bursts which are that businesses go bankrupt, unemployment increases and wages and prices fall (creative destruction), preparing the ground for new entrepreneurs to come and pick up the pieces. The policies that were adopted held up asset prices, companies were rescued and unemployment kept in check but subsequent growth has been limited. In the meantime central banks and others hold their breath, fearful that their armoury has been depleted with little else they can do if growth reverses and indeed that does seem the case with interest rates as low as they can go and a reduced supply of bonds to buy. Roubini believes that fiscal measures, outside central bankers’ remit, are now required which in effect reverses the austerity measures which some adopted. This could include government spending on infrastructure which has been neglected in many countries and has become a little more possible as budget deficits have reduced. He points out that Canada and Japan are moving onto that path and the UK has abandoned the deficit elimination target. However he still believes that a bout of creative destruction is needed to prepare the ground for the new businesses and investment projects though I have not seen him calling for a reversal of the monetary easing.

Even if Roubini is right the world still seems to be in a difficult place with monetary policy pushed to its limits, money not taken up for investment even at almost the lowest possible rates and budget deficits liable to be sharply increased. At that point the limit of remotely conventional monetary and fiscal measures will have been reached which won’t do much for investor confidence and without that investment will still not take place. That could set the scene for a bout of creative destruction far more severe than the one that even Roubini is looking for.

Overlaid on all this are each economy’s own problems. The Financial Times’ Martin Wolf, with the help of the OECD, the Centre for European Reform and Conference Board data, lists those of the UK as being zero productivity growth in the last nine years, inadequate basic education, a distorted housing market, over centralisation of government, and business concerned overmuch with short term share price movements. Thus when compared to the EU-15 countries, and despite being less regulated than average, even pre-Brexit, productivity is poor, wages are low and the current account deficit is very high leading to his conclusion that the UK has basically only been good at creating low paid jobs and thus low unemployment. [This seems to ignore the widely admired skills of the City of London, but that then reflects even worse on the provinces – hence a suggestion I made a while ago that the City must at least dream of breaking away from the rest of the country as a regional Singapore.]

In looking at South Africa however, the UK is a beacon of enlightened policies. Whereas in the UK it is possibly a case of policies not being forged to promote growth, in South Africa it almost as though actions are designed to limit it. When good policies are suggested, as with the National Development Plan, they are used as a smokescreen for what is happening in practice. Frequently, even worse, there are no policies in place while bad policy is being thought through and on top of everything is the dead hand of corruption everywhere and deployment of people for other than their competencies. It remains a mystery why the ratings agencies were prepared to wait rather than downrating at the midyear reviews, when per capita GDP is declining, ministers are fighting among themselves, the tax collection and security agencies are in open warfare with the finance minister and ministers are openly given orders, or even appointed, by politically favoured people outside government. Yet the country must have potential. It seems ludicrous that we here can consistently come out top (against all odds) on rankings of financial regulation, banking, audit excellence etc and yet close to the bottom on education, labour relations and Gini coefficient inequality.

 

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