Dark Clouds Ahead
Eight years ago this month, a bank collapsed, Wall Street went into meltdown and the world economy plunged into crisis. Trillions were lost in output ($22tn in the US, within just five years), millions of workers were made redundant (8.8 million in America’s great recession, 1.2 million in the UK) and thousands of promises were made by politicians and policymakers – everyone from Barack Obama and Gordon Brown to David Cameron and Christine Lagarde – that things would change. Yet, nearly a decade later, what is most striking is how little has changed. In the US, the UK and the rest of the developed world, policymakers talk of the “new mediocre”, so tepid is economic performance. And in the developing world things look even worse.
Such is the message from two of the world’s leading economic thinktanks, the Organisation for Economic Cooperation and Development (OECD) and the UN Conference on Trade and Development (Unctad). Both their reports on Wednesday were thick with cloud and short on silver lining. Yes, the OECD believes that Brexit Britain will have a slightly easier time this year – but that will be followed by a far choppier 2017. And the Unctad report is even more troubling. The biggest single warning it makes is that the world is on the verge of “entering a third phase of the financial crisis”. What began in the US subprime housing market before roiling Europe’s governments is likely to rear its head again – this time in Latin America, Africa and other poor countries. What will do for them, believe the Unctad researchers, is what also did for America and Europe: debt.
Much of the cheap money created by the US Federal Reserve, the Bank of England and the European Central Bank has been pushed by financial speculators into the higher-yielding markets of South Africa, Brazil and India, among others. Economists at the Bank for International Settlements, the central banks’ central bank, reckon that $9.8tn was pumped out in foreign bank loans and bonds in the first half-decade after the Lehman Brothers collapse. Unctad calculates that around $7tn of that was pushed through to emerging markets.
By any standards, that is a flood of credit – one that was encouraged by panicky policymakers. Wasn’t it the turn of China and the rest to pick up the slack in the global economy? Except now developing countries are lumbered with a gigantic private debt mountain to pay down. The private, non-financial sector across the developing world has debt service obligations worth nearly 150% of its income. The comparable figure for the developed world, by contrast, is just above 80%. And now developing countries are hobbling along rather than sprinting ahead, while commodity prices have tanked.
To make matters worse, companies will typically have borrowed in US dollars and invested in their local currencies – but the strength of the dollar will make those loans all the harder to repay. This won’t necessarily produce an all-out crisis, although Unctad isn’t the only organisation sounding the alarm. But at the very least it will cause big problems and starve poor countries of much-needed investment. Cash used to pay off loans cannot be put towards new premises, kit, staff. And as the subprime and eurozone debacles have shown, private-sector debts that really can’t be repaid have a nasty habit of ending up on the public balance sheet.
The subprime crisis and the eurozone meltdown were both spun as morality tales: foolish borrowers buying houses they had no right to live in, feckless countries wasting euros on empty airports. Not much was said about the lenders. Doubtless it will be the same this time around. But what is really at fault here is an inadequate, unfair, ultimately self-defeating model of globalisation. For decades, the share of GDP going to workers across rich countries has been falling. Rich nations have hacked back social entitlements and public services in order to pay for tax cuts. And, notably in the US and the UK, executives have showered shareholders with dividends and stock buybacks, even while starving their businesses of investment.
This same model has been urged on poor countries – and the result in both the global north and the global south has turned out to be big debt and disappointing growth. In the short term, America and Europe will need to do more to right the global economy, through fiscal stimulus and driving up wages – even if that causes financiers to protest. In the long run, this failed globalisation needs to be turned into something more sustainable and more inclusive, built on higher wages, robust tax systems and strong public safety nets.