Remediating the crisis

A lost decade could be in the making for the global economy,” said the World Bank’s Chief Economist and Senior Vice President for Development Economics, referring to the dismal economic condition of the current decade. It is feared that the global economy’s “speed limit” — the maximum long-term rate at which it can grow without sparking inflation — is set to slump to a three-decade low by 2030. An ambitious policy push is needed to boost productivity and labour supply, ramp up investment and trade, and harness the potential of the services sector, a new World Bank report shows. It offers the first comprehensive assessment of long-term potential output growth rates in the aftermath of the COVID-19 pandemic and the Russian invasion of Ukraine.

UNICEF has also cautioned the world about a looming lost decade for children. COVID-19 is the biggest crisis for children, reversing the hard-won progress. Without action, the world faces a lost decade for children, leaving the fulfilment of Sustainable Development Goals an impossible dream, fears UNICEF. In less than two years, 100 million more children have fallen into poverty, a 10 per cent increase since 2019.

The term ‘lost decade’ became prevalent in the 1980s. It may be recalled that the increase in oil prices by the Organisation of the Petroleum Exporting Countries (OPEC) in 1979 triggered the Latin American debt crisis of the 1980s. Debt went from being 30 percent of gross domestic product (GDP) in 1979 to nearly 50 per cent in 1982 for the larger Latin American countries. This ended up with Mexico’s default in 1982, followed soon by the default of other countries in the region which led to what is known as the lost decade.

The lost decade for Japan was a period of economic stagnation caused by the collapse of the asset price bubble in late 1991. Japan’s economic performance since the early 1990s has been disappointing, both in relation to its own history and relative to the record of other major industrial countries. From 1991 to 2003, the Japanese economy, as measured by GDP, grew only 1.14 per cent annually while the average real growth rate between 2000 and 2010 was about 1 per cent, both well below other industrialised nations. Debt levels continued to rise in response to the Great Recession in 2008, Tōhoku earthquake, tsunami, Fukushima nuclear disaster in 2011, and then the COVID-19 pandemic. The subsequent recession in 2020 further damaged the Japanese economy. The economic effect of the lost decades is well established for the period of 1995-2007, and Japanese policymakers still continue to grapple with its consequences.

Genesis of a lost decade

M Ayhan Kose and Fransiska Ohnsorge — the editors of a forthcoming book, ‘Falling Long-Term Growth Prospects: Trends, Expectations, and Policies’ — made a few grim observations in the text of the advance edition, released by the World Bank, in March 2023. Inspired by Kaushik Basu — the World Bank Group’s Chief Economist at the time — the editors undertook a study in 2015 to assess the long-term growth prospects of emerging markets and developing economies (EMDEs). The research question they framed was: ‘Slowdown in Emerging Markets: Rough Patch or Prolonged Weakness?’ Now, at the end of over seven years of research, and after analysing a comprehensive database of the most commonly used estimates of potential output growth for the largest available country sample of 173 economies (37 advanced economies and 136 EMDEs) over 1981-2021, they have arrived at a conclusion that these economies are in the midst of a prolonged period of weakness.

The report argues that the weakness in growth will likely extend for the remainder of the 2020s. It could be even more pronounced if financial crises erupt in major economies and, especially, if they trigger a global recession. Thus, a lost decade is in the making. The other major observations of the study are:

* Nearly all the forces that have powered growth and prosperity since the early 1990s have weakened. As a result, between 2022 and 2030, average global potential GDP growth is expected to decline by roughly a third from the rate that prevailed in the first decade of this century—to 2.2 per cent a year.

* The growth rates of investment and total factor productivity are declining. The global labour force is aging and expanding more slowly.

* International trade growth is much weaker now than it was in the early 2000s. The slowdown could be even more pronounced if financial crises erupt in major economies and spread to other countries, as these types of episodes often lead to lasting damage to potential growth.

* A persistent and broad-based decline in long-term growth prospects imperils the ability of emerging markets and developing economies (EMDEs) to combat poverty, tackle climate change, and meet other key development objectives. These challenges call for an ambitious policy response at the national and global levels.

* The slowdown can be reversed by the end of the 2020s if all countries replicate some of their best policy efforts of recent decades, and accompany them with a major investment push grounded in robust macroeconomic frameworks.

* Boosting human capital and labour force participation, and making sound climate-related investments can also make a measurable difference in lifting growth prospects.

* Bold policy actions at the national level will need to be supported by increased cross-border cooperation and substantial financing from the global community.

* For promoting long-term growth prospects, the report suggested to: align monetary, fiscal, and financial frameworks; ramp up investment; cut trade costs; capitalise on services; and increase labour force participation

Rising inequality of income and wealth across the globe is likely to cause a prolonged recession. Before the financial crisis of 2008, income inequality in 2005 had reached a peak not seen since 1928 — the year before the kickstarting of the Great Depression, reported Forbes. An Oxfam report reveals that the richest 1 per cent grabbed nearly two-thirds of all new wealth, worth USD 42 trillion created since 2020, which is almost twice as much money as the bottom 99 per cent of the world’s population held. During the past decade, the richest 1 per cent had captured around half of all new wealth. Rising wealth inequality drives excessive borrowing and then recession. Widening inequality also has significant implications for growth and macroeconomic stability; it can concentrate political and decision-making power in the hands of a few, lead to suboptimal use of human resources, cause investment-reducing political and economic instability, and raise crisis risk.

The most disruptive changes in the global economy and geopolitics are very likely to occur in the current decade, resulting in the end of US dollar’s domination, since World War II, as a global reserve currency. Firstpost reported that the BRICS collective, comprising Brazil, Russia, India, China and South Africa, is working on a common currency in an attempt to ditch the US dollar and push back against America’s dominance. Malaysia has revived the decade-old proposal to form an Asian Monetary Fund to reduce reliance on the US dollar. Most significantly, Japan has started buying Russian gas at a price higher than the cap fixed by the EU and USA. Saudi Arabia and Iran, two most powerful petroleum exporting nations, have agreed to trade with China in their respective home currencies. This shift in the epicentre of global power from the USA to Eurasia is likely to have a long-term destabilising impact on the global economy.

IMF’s World Economic Outlook, April 2023, points to another serious issue. It observes that FDI flows are increasingly concentrated among geopolitically aligned countries, particularly in strategic sectors. Several emerging markets and developing economies are highly vulnerable to FDI relocation, given their reliance on FDI from geopolitically distant countries. In the long term, FDI fragmentation arising from the emergence of geopolitical blocs can generate large output losses, especially for emerging markets and developing economies.

Recent developments have strengthened W Merkel’s thesis (2014) that capitalism is not compatible with democracy. Democracy and capitalism are forcibly married. According to him Capitalism and democracy follow different logics: unequally distributed property rights on the one hand, equal civic and political rights on the other; profit-oriented trade within capitalism in contrast to the search for the common good within a democracy; debate, compromise, and majority decision-making within democratic politics versus hierarchical decision-making by managers and capital owners.

Merkel argues that capitalism is not democratic, and democracy is not capitalist. During the first post-war decades, tensions between the two were moderated through the socio-political embedding of capitalism by an interventionist tax and welfare state. Yet, the financialization of capitalism since the 1980s has broken the precarious capitalist-democratic compromise. Socioeconomic inequality has risen continuously, and has transformed directly into political inequality. The lower third of developed societies has retreated silently from political participation; thus its preferences are less represented in the parliament and government. Deregulated and globalised markets have seriously inhibited the ability of democratic governments to govern. If these challenges are not met with democratic and economic reforms, democracy may slowly transform into an oligarchy, formally legitimised by general elections. It is not the crisis of capitalism that challenges democracy, but its neoliberal triumph, he wrote in 2014.

As breakthroughs in new technologies and the free flow of information via the Internet and social media are creating a more liberal democratic environment, the inherent conflict between capitalism and democracy is getting exposed and creating social and political unrest among the stakeholders.

An alternative model of development

The climate breakdown, the growing gap between the wealthiest and the poorest, the gap between the Global North and South, and the ongoing pandemic have proved that the mainstream growth-based economic model is not fit for purpose. As the flaws in the currently prevailing paradigm of unregulated growth become ever more apparent, de-growth is increasingly regarded as a tangible alternative.

De-growth is a radical economic theory that broadly means shrinking, rather than growing economies, to use less of the world’s dwindling resources. Detractors of de-growth say economic growth has given the world everything from cancer treatments to indoor plumbing. Supporters argue that de-growth doesn’t mean “living in caves with candles” – but just living a bit more simply.

The concept of de-growth and sustainable development is not new. The economic activities of a common man in the Indian subcontinent were very much influenced by the religious teachings of great leaders like Gautama Buddha. Buddhists saw the essence of civilisation not in a multiplication of wants but in the purification of human character. “Right to Livelihood” was one of the requirements of Buddha’s Noble Path. The keynotes of Buddhist’s philosophy were simplicity and non-violence. It was mainly interested in liberation, where consumption was considered merely a means to human well-being. The primary aim was to obtain maximum well-being with minimum of consumption. From the point of view of economics, Buddhist teachings considered the function of work to be at least threefold: (i) to give a man a chance to utilise and develop his faculties; (ii) to enable him to overcome his ego-centeredness by joining with other people in a common task; and (iii) to bring forth the goods and services needed for a becoming existence. These approaches to life and work had led to a sustainable economic model with a small-scale production system based on local resources for meeting, primarily, the local needs of the citizens.

MK Gandhi was immensely influenced by Buddha’s teachings. According to him, the technology of mass production (an outcome of the industrial revolution) is inherently violent, economically damaging, self-defeating in terms of non-renewable resources, and stultifying for the human person. Contrary to this, the technology of production by the masses, making use of the best of modern knowledge

and experience, is conducive to decentralisation, compatible with the laws of ecology, gentle in its use of scarce resources, and designed to serve the human person, instead of making him the servant of machines.

Gandhi realised that human wants are insatiable and natural resources were scarce. He propagated the concepts of ‘swadeshi’ (the principle of the local economy) and ‘aparigraha’ (the principle of minimisation of wants or simplification of material life). The economics of ‘ahimsa’, popularised by Gandhi, stressed on local, decentralised community economies, and economies of needs rather than wants. By deemphasising production for the sake of production, consumption for the sake of consumption, and growth for the sake of growth, it also tackled the thorny issue of how to achieve a basic material level of comfort for all without compromising the viability of future generations.

Like Gandhi, the de-growth movement of activists and researchers advocates for societies that prioritise social and ecological well-being instead of corporate profits, overproduction, and excess consumption. To make this movement successful, radical redistribution of wealth is essential. In a new book, The Future Is De-growth: A Guide to a World Beyond Capitalism, (2022), Schmeizer et al argue that the ideology of growth conceals the rising inequalities and ecological destructions associated with capitalism, and points to a desirable alternative to it.

Conclusion

Though the World Bank fears that the current decade will be a ‘lost decade’, there are reasons to believe that the 2020s may eventually become a ‘loved decade’ which would guide the world to a better path of inclusive development. With a radical redistribution of wealth, decentralised and green production process, liberal democratic institutions, and a multipolar world, the current decade may prove mainstream doomsday economists wrong.

Views expressed are personal