Navigating the Vortex
Navigating the Vortex
Keeping an eye on the fundamentals

Keeping an eye on the fundamentals

On Our Radar, 12 June 2023

Two reports out this week — the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook — paint a picture of slow growth and incremental recovery threatened by persisting economic, political, and environmental risks. Both reports emphasise the importance of sound macro-economic policy, including addressing inflation, responsible debt management, and structural policy reforms that enhance productivity and can sustain longer-term growth.

What it’s about: The prospects of global economic growth remain bleak. Both the World Bank and the OECD project very moderate growth across all regions for 2023 and 2024. The projections are not identical in the last detail of every percentage point, but the underlying message is clear: growth is at best fragile and risks remain significant. Above all, whatever economic growth might be possible is unlikely to be sufficient to create the fiscal space for governments to address a vast number of socio-economic, political, and environmental challenges by simply throwing money at these problems.

Instead, the World Bank and the OECD both point out the need to return to the fundamentals of macro-economic policy making; that is, to move away from a permanent crisis mode that responds to whatever appears as the most pressing issue of the day and ensure that foundations are (re-) built that will enable sustainable long-term growth.

The growth required to deal with the challenges that lie ahead is substantial. Populations are growing globally, but unequally; climate change requires a transition to net-zero and much greener economies than we have today; workforces need to become more diverse and inclusive and will need a whole range of new skills.

Why it matters: This is not the first time that key economic and financial institutions have pointed out that the underlying drivers of economic growth are weak and that the prospects for achieving levels of sustainable growth that would be sufficient to deal with challenges as diverse as climate change, sovereign debt crises, and demographic change are mixed at best.

Is global growth doomed?” was a question that we discussed some two months ago (On Our Radar, 5 April 2023), the problems are deep-seated, the consequences of not addressing them will be negative and long-lasting, and the solutions, while in many ways obvious, difficult to achieve at a time of geoeconomic and geopolitical fragmentation.

In this sense, the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook don’t tell us anything new per se. They identify similar underlying trends — inflationary pressures, the risks to global trade from ‘de-coupling’ and ‘de-risking’, etc. Both note the lasting impact of the COVID-19 pandemic in terms of the unsustainable loosening of fiscal policies. Both point to Russia’s aggression against Ukraine as an exacerbating factor.

Counter to the perennial call for everyone to “think outside the box” to find the solutions, what is important, is the emphasis on “getting back in the box”. That a permanent crisis mode of economic policy making can all too easily become a self-fulfilling prophecy by making the crisis itself permanent. For that reason alone, both reports are important, and their advice needs to be heeded by policy makers around the world.

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Our take: Resilience is at the top, front, and centre of a seemingly never-ending series of global summits, as we covered in our On Our Radar pieces on 22 May and 5 June — “Moving on from Ukraine? China-West relations between Xi'an and Hiroshima” and “Summitry continued: the EU and Central Asia, BRICS and Friends, and the European Political Community”.

And if any further proof of the focus on resilience was needed, the OECD’s 2023 Ministerial Council Meeting, which endorsed the Global Economic Outlook report, was imaginatively titled “Securing a Resilient Future: Shared Values and Global Partnerships”. Its Key Issues paper identified Ukraine, trade, energy, and innovative technologies as key factors in “a world [that] faces economic, social, environmental, political and development challenges on a scale not witnessed for decades” and in which “geopolitical uncertainty grows”.

Yet, many of the prescriptions on how to achieve resilience are driven primarily by geopolitical imperatives around national security concerns. These may be narrow in their intended economic impact as evident, for example, in speeches given by European Commission President Ursula von der Leyen on 30 March 2023, US Treasury Secretary Janet Yellen on 20 April 2023, US National Security Advisor Jake Sullivan on 27 April 2023. However, their broader perception and consequences reinforce exactly the kind of geoeconomic and geopolitical fragmentation that has been repeatedly identified as one of the key risks to sustainable economic growth.

Pointing out the risks of ‘de-risking’ is one thing, offering an alternative is quite another, especially when the risks of an over-reliance, for example on Russian oil and gas, were so obvious to see once they materialised in the context of Moscow’s aggression against its Ukrainian neighbour. The other lesson learned from this, especially in Europe, was that a straightforward decoupling from Russia, though slow and painful initially, was possible.

The challenges of ‘de-risking’ in relation to China are a multiple of what they are in the context of Russia, and crucially they extend beyond trade. True resilience, therefore, needs to be conceptualised beyond supply chains, Chinese access to advanced technologies, and inward and outward investment.

And this is where some of the policy recommendations from the World Bank’s Global Economic Prospects and the OECD’s Global Economic Outlook come in, because they help us refocus on some of the fundamentals of sound economic policy making that goes beyond this crisis or that and, in fact, makes our economies more resilient to future crises. Reigning in public spending and focusing it on both those most in need and on job creation will benefit economies because it will reduce inflationary pressures while protecting the most vulnerable in societies and open opportunities for increasing government revenue. Expanding the workforce both by investing in skills development and by making it more gender-inclusive will have additional growth-generating effects. Stimulating private investment, and supplementing it as needed with public investment, in the transition to a green economy is also likely not only to stimulate growth but also to mitigate the key challenge of climate change. It may not prevent this particular crisis in the future, but it will better equip us to manage it.

These domestic policy measures will need to be flanked with a similar re-focus on the fundamentals of international (economic) relations. This would require strengthening the World Trade Organisation, a global re-commitment to the UN and its specialised agencies, such as the World Food Programme, the Food and Agricultural Organisation, and the World Health Organisation, among others. It will also mean making a success of COP 28, regardless of the misgivings one might have about its President-Designate or the potential participation of Syrian president Bashar al-Assad.

At a time when it is all too easy (and justifiable) to get lost in the flurry of crises from the escalating war in Ukraine to the stand-off in Kosovo and to the civil wars in Afghanistan and Sudan and all too tempting to share in the outrage over Donald Trump and Boris Johnson, we must always look to the lesson that can be gleaned from these, and recognise that these are symptoms of failing institutions and a mix of self-serving and incompetent people within them. Going back to the fundamentals of what sound and responsible policy making used to look like will not fix all of these and other problems but it can restore, and lay, the foundations not just for sustainable future economic growth but for more security and stability in a world that might otherwise be doomed to long-term decline, and not just of the economic kind.


Note: We will be discussing this topic of how we get from crisis to resilience in greater depth on the next episode of the podcast. If there is anything you'd like us to focus on in particular, please email us and let us know.

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Navigating the Vortex
Navigating the Vortex
We live in a complex and ever-changing world. To navigate the vortex we must adapt to change quickly, think critically, and make sound decisions. Lucy Marcus & Stefan Wolff talk about business, politics, society, culture, and what it all means.