Thursday, 17 February 2011

Gordon Brown and the Transition we Face

For the first time in 200 years Western Europe and the US are being out-produced, out-invested and out-exported. It has been forecasted that the Chinese economy will be the largest in the world in 10 years. This is astounding given that just 20 years ago China was one of the least productive economies. The figures in a paper I was reading for one of my classes yesterday [Hall and Jones 1999] highlight the point - they estimate that China's productivity in 1988 was a mere 6% of that of the US! 

It was this shift in economic power to Asia and the group of countries known as the BRICs (Brazil, Russia, India and China) that the Rt Hon. Gordon Brown addressed when he came to Oxford this week.

The shift poses many problems for the West. How can we compete with these emerging economies? We are no longer a great manufacturer, and our financial services are toxic. It is not just a question of what we can sell but where we will find work; we are going to increasingly face competition for jobs from the increasingly educated global labour market.

On the other hand, with rising production there will be a rise in consumption, and a huge new middle class (about 2bn people), which Gordon believes we can turn to our advantage. Gordon fears, however, that we may face an unnecessary 'lost decade' of low growth and high unemployment. For how can we export our culture (music, wine, film), our medicines, our education and our science (particularly brain surgery and small satellite technology) if we are cutting investment in education, science and the arts? (This is where Gordon condemned the current UK economic policy but he didn't mention they who will not be named once!)

(Sorry for the poor quality - taken on my phone)
Gordon's opinion that the government should continue spending now is controversial. The Conservatives might argue that they will be in a better place to address the global imbalances once they have put "their house in order" (see previous post). Either way, it would be encouraging to hear the current government talk about this issue more. President Obama made it clear in his recent 'sputnik moment' speech that he is aware of these issues. He is preparing a budget to take to congress in order to fund investment in industries that he believes the US has a competitive advantage, namely biotechnology and clean technology.

Two further warnings Gordon gave were that 1) the mistakes which caused the 2008 financial crisis are not being addressed and will be made again, and 2) while we can expect a rising level of living standards in the rising economic powers, there will remain the very poor in Africa and island states that are suffering from climate change. It is striking that Africa is not benefiting from globalisation; whilst it has 15% of the world population, it receives just 1% of the total investment.

The free capital flows which enabled countries like China to grow, and the US to consume so much, have also created an interdependence which means that we can no longer define countries as economic regions. And this leads to Gordon's final point that effective decisions about the economy can be made less and less at the national level. Rather, we will have to use international institutions like the International Monetary Fund (IMF), the World Bank, and the G20. 

We are currently using these institutions as a way to make global decisions in the wake of the 2008 financial crisis. At a meeting with an IMF official earlier this week I was told that, after 10 months, the G20 could still not decide on what indicators, let alone the limits, to use as warning signals for future crises! It is easy to see why people are cycnical that compromises can be made on a global level. They certainly take more time. (We have seen this with climate change too.)

Gordon believes that it is in our interest to make decisions on a global level, and that we can achieve global accord. Perhaps he is being optimistic. Thankfully, though, he is not following some other leaders in Northern Europe who are becoming more nationalistic and presenting xenophobic views. It is understandable to feel insecure as a citizen of a developed economy, but Gordon's message is that the answers lie in looking out, cooperating, and developing imaginative new ways to participate and compete on the world stage. 

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