Great Decisions 2012 Preview: The New Global Economy

The Great Decisions briefing book and television series on PBS take a closer look at the future of the global economy. What trends will define the next chapter in the global economy, what rules will govern the new economic order, and can another crisis be avoided? For more in-depth analysis, order the 2012 briefing book and DVD.

 

Current Situation

A few years after the global financial crisis of 2008, which caused widespread panic and forced governments to take drastic measures to stave off depression, the world’s economies continue to struggle to get back on track. Perhaps paradoxically, the post-crisis period has been marked by an interesting trend: while advanced economies fight high unemployment and low growth, many emerging market economies have returned, more or less, to pre-crisis levels. In the past years, how have governments responded to the financial crisis, and how have different responses affected current growth rates? Even with a deal to raise the debt ceiling, the U.S. faces credit downgrading and long-term challenges to spending, while the European Union addresses Greece’s default and growing concerns over the financial stability of all member states. Is the global economy shifting towards emerging markets, and if so, will they be sufficient to drive international fiscal recovery? What is the future of the global economy?

 

History

 The credit crisis of 2007-2008 was the result of decades of poorly enforced, or non-existent, financial regulation- what had become the standard among the world’s top economies. When the bubble imploded, major banks were forced to default, collapsing a precarious international network. The U.S. responded with a $700 billion government bailout of banks, insurance agencies and automobile industries. Yet despite Wall Street’s triumphant return, unemployment remains higher than ever, growth rates are nearly stagnant, and the U.S. could barely pass a deal to cut government spending by $1 trillion, raise the debt ceiling, and avoid an economic and political catastrophe. The U.S. now faces the reality of its credit downgrade. In Europe, union members struggle to manage the woes of sovereign debt and increased austerity measures. Greece’s default and subsequent political instability resulted in the resignation of Prime Minister George Papandreou and fears of losing EU membership. Italy faces the challenges of its own rapid regime change, Ireland and Portugal struggle with bailouts, and Spain is addressing debt downgrade. Meanwhile, BRIC countries (Brazil, Russia, India, and China), and other emerging markets like Indonesia, are growing at impressive rates. Massive urbanization in India and China has increased both production and consumption, while traditional commodity-export countries like Brazil and Russia have turned towards catering to their expanding middle class, attracting large banks and investors. Indonesia is being called the “second India” because of its potential to become a new counterweight to China. Traditional top economies appear stagnant in comparison.

 

 

Challenges

The greatest challenge to advanced economies will be lowering public debt. The aging “baby boomers” across the top economies means an increase in healthcare and pension costs- antithetical to mounting government debt and an unemployed youth. Meanwhile, unprecedented low interest rates in the U.S., U.K., and eurozone do not aid matters. Many feel U.S. policy-makers failed to address central issues in the most recent round of debt talks, including revenue-increasing measures, Social Security and Medicaid, and long-term government spending. If emerging markets have become the new economic power-houses, most economists and politicians concur that these countries lack both the experience and political stability to really drive the global economy. Moreover, so long as European countries teeter towards default, even growing economies will be at risk. As expert Michael Spence notes, emerging markets can “generate enough incremental demand to sustain their own growth, but not enough to make up for a large drop in advanced-country demand.” However, as it is clear that emerging economies will only become increasingly important in the future, advanced countries must shift their traditional outlook, policy, and economic models. The results of refused adaptation could be disastrous.

 

Opportunities

These shifts in the global economy necessitate parallel changes from governments and the global community. International policy coordination must be improved in order to address the interconnectedness of current economies, and thus the mutual necessity of reversing sovereign debt and increasing growth. Steps have been taken on this front. Agreements at Basel III to increase bank capital requirements after the crisis and the 2010 G-20 Summit are examples of positive international cooperation to address problems in the global financial system. The E.U. worked cooperatively to bail out Greece and avoid further depletion of the euro. Emergency summits appear to be managing daily-evolving crises. However, the test in the coming years will be how well can top economies and emerging markets work together to address their changing roles.

 

Key Questions

  • How have government’s responded to the financial crisis? What has worked, what hasn’t worked?
  • What is the current state of the global economy? Where are there pockets of growth?
  • Are emerging economies sufficient to spur growth without the U.S. and Europe?
  • Where does the fault lie concerning debt in the U.S. and Europe? What is the greatest priority for the future of these top economies?
  • How have new financial regulations fared? What has been the role of G-20 and other international institutions?
  • Should rising economies have a larger seat at the table at the IMF and other global organizations?
  • What do these changes mean for U.S. economic leadership?
     

This Great Decisions 2012 Brief was written by Sarah Marion Shore


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