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Davos chinwag reveals looming economic challenges

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Davos chinwag reveals looming economic challenges

It is fashionable to deride the World Economic Forum meeting in Davos as an out-of-touch gathering of plutocrats, assembling in a Swiss ski town to plan how they will perpetuate their dominance of the global economy. And while a share of people there may be considered to fit that description, there are also great swathes of the rest of humanity, including political leaders, entrepreneurs, academics, activists and young people with big plans. Bring a diverse group like this together, and you are bound to get lively discussions and serendipitous connections.

In January 2019 I was among the approximately 3000 people attending. I visited Davos as the Nous Chief Economist to get a handle on what leading thinkers are expecting for the year ahead, and how people from diverse sectors are grappling with the global uncertainty that has become the new normal.

Like everyone at the World Economic Forum, I was spoiled for choice. Sometimes more than 30 sessions were happening in parallel, so by necessity I could only capture a snapshot of the discussions. But from my four days at Davos, I detected several themes that will have profound implications on the world.

An economic hard landing is a real possibility

At the outset of the WEF, the International Monetary Fund announced its second downward revision for global economic growth in just three months. We already knew the global economy was slowing as the US fiscal sugar hit ended, but as the world awaits Brexit and US-China trade tensions, the question is emerging – can our political leaders engineer a soft landing or are we destined for a hard landing that could potentially drive the world into another recession?

On this matter, the mood at Davos was gloomy. Few seemed to have confidence that the current crop of leaders had the maturity or political capital to deliver a soft landing. The US president has proven himself unpredictable, and China is taking a more muscular approach. Furthermore, the desire for cooperative global action appears to be at a low ebb, limiting the prospects for the sort of concerted international actions that jolted the global economy into action following the Global Financial Crisis.

A gap in global governance for collective challenges needs to be filled

The most vexing challenges facing humanity are not ones that can be met within national borders. Instead we need global cooperation, in which nations work with others to identify and enact solutions.

Right now there is a functioning global governance architecture for economic challenges – the Bretton Wood institutions of the International Monetary Fund and World Trade Organisation, and the rich-country clubs the G20 and the OECD. But multilateral institutions are having their foundations tested with the changes in global economic influence. How they will evolve is an open question.

Most in Davos agreed there is a big gap when it comes to other issues. A lack of trust among governments mean they are failing to cooperate on issues such as digital trade and data flows, climate change, and the plastics polluting our oceans (experts say there will soon be more plastics in our waters than fish).

In the past, leadership on those issues had been taken by the United States and/or Europe. But with those places consumed by domestic challenges, and rising power China showing little interest, a vacuum has emerged. Do we need new global organisations that are fit for purpose in meeting big challenges? What will be their mandate, and how will they be funded?

Answering these big questions will not be easy. Clearly many countries have a strong interest in building cooperation on these issues, outside of the strategic rivalry between China and the United States. Perhaps it will be incumbent on countries with a global outlook to take a lead on creating the institutional architecture the world needs.

Inequality is driving the growth in populism and demands creative responses

Populist politics is sweeping the world, and international institutions such as World Economic Forum are often in the sights of those populists. Many in Davos agreed that a failure to share the gains from open markets within countries – the winners have not compensated the losers – has created fertile ground for populism. But there was also recognition that these same open markets have sharply reduced global poverty. So the challenge is to reduce inequality within countries as well as across countries.

Recent evidence is not encouraging; inequality remains stubbornly high within countries, and the convergence that accompanied the rise of developing Asia in the 1990s and 2000 has slowed dramatically. This could, in part, be due to digital technologies reducing the advantages of mass production and bringing manufacturing closer to the destination market.

This trend suggests the Asian model of export-led growth absorbing low-skill workers leaving agriculture might not provide a pathway to industrialisation in Africa. For Africa to reap the demographic dividend of its high population growth, new ways to access markets will be needed. Lots of young people without a chance of a decent livelihood is a recipe for social and economic instability. History suggests growing inequality undermines social stability: the inequality in the wake of the booming 1920s and the Great Depression foreshadowed World War II.

The discussion at Davos included ideas to bridge the income chasm. Some people argued for greater taxes on ‘bads’ such as carbon, which can raise revenue without hiking marginal tax rates for labour and capital. Others made the case for a more sharply progressive taxation system, given the windfall gains enjoyed by people having a skill in short supply are not likely to discourage them from working.

Others made the case for developing labour market opportunities for workers with routinised jobs, given the shrinking market for manual labour; for life-long learning to skill people for the changing needs of the economy; for renewed action toward the sustainable development goals; and for a universal basic income.

Much talk, but little consensus on a way forward.

Digital platforms are challenging the role of governments

Technology has changed our lives in myriad ways. One less obvious way is that it can rival the primacy of governments in establishing the rules for markets. Previously national governments were important to establishing a framework for buyers and sellers to interact, by managing a currency, taxing transactions and offering legal protections. But now online trading platforms are allowing sophisticated transactions to take place with limited visibility and involvement by government.

For example, China’s Alibaba is a commercial eco-system that allows a seller to source suppliers, develop a product, market to consumers, offer credit, and complete the transaction, all on one platform. As more buyers and sellers use platforms like this, the platforms become more powerful and can challenge the role of government in ensuring the smooth operation of the market.

This could have big implications for firms entering developing markets. Where previously they had to operate at the whim of the government of the host country, the new platforms give them a way to connect with consumers that works around government systems rather than through them.

While there are obvious policy risks for online platforms that gain too much power – Facebook and Google can attest to that – there are also interesting opportunities.

 

What does all this mean for Australia? For starters, we need to be prepared for our economy to endure turbulence, as our major trading partners gird themselves for a hard landing. Policy-makers would be wise to keep a steady hand on monetary and fiscal levers.

We can also play a part in filling the gaps in global governance, using creative diplomacy to reach out to a diverse mix of countries that might not otherwise connect to confront problems such as ocean plastics.

Australia has also experienced widening wage and income inequality, and a weakening of the redistributive effect of our tax and transfer system. These trends fuel populism. While other countries can learn a lot from our system, we need to find better ways to give all Australians a good education, access to employment, and health services. As an export-oriented economy, we need to ensure more people benefit from trade; otherwise the backlash will continue.

And our export businesses should consider ways that online platforms are opening opportunities to tap into markets that might previously have seemed impenetrable. With more than 1.4 million Chinese tourists coming to Australia each year, it makes sense for our businesses to better integrate with platforms such as Alibaba.

The four days at Davos reinforced just how interconnected we all are. Nations are not just connected by trade, but also by the flow of ideas, trends and social challenges, including those associated with the movement of people.

With the world changing at such a rapid pace, none of us can afford to stay on the sidelines. Organisations that want to be at the forefront of their sector need to keep a keen eye on global trends and make plans accordingly.

Get in touch to discuss how you can work with Jenny Gordon and the Nous economics team.

Tags: economics