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Global macro & geopolitics from a small economy perspective

Reflections from the World Economic Forum

David Skilling
17 September 2011

This is the latest edition of my fortnightly email series containing reflections on globalisation, policy, and public sector issues. This week I have been at the World Economic Forum’s summer meetings in Dalian, China. And so this edition of the Observer describes my reflections on the issues raised in the various discussions I participated in or observed at these meetings.

The global economy is rotating fast
There was little optimism about the economic prospects of the advanced economies, and quite an amount of concern. Slow and turbulent growth is likely in the US, Europe, and Japan. There is a widely-shared sense that the crisis was not solved, it has just become more complex. There are many issues in the financial sector, the deleveraging process is not far advanced, and the jobs situation in developed countries is challenging. But growth in the emerging markets continues to impress. I have again upped my estimate of the speed of movement of the global centre of economic gravity. Although the advanced countries will remain substantial parts of the global economy for many years, the incremental growth is increasingly coming from Asia, Latin America, and Africa, and this is where companies are investing heavily. And for the first time, I heard the RMB being described as a safe haven currency – the difficulties facing the euro and the USD are likely bringing forward the date at which the RMB becomes a global reserve currency.

This economic rotation has broader implications. China in particular is in a much stronger position. I thought Premier Wen Jiabao’s opening speech was the punchiest I had seen him give. Although mindful of the many challenges facing China, there was real confidence and a desire to invest in the future (e.g. in strategic ‘pillar industries’, and commitments to increase R&D spend to 2.2% of GDP). And there was a strong message for the US and Europe: we are all in this together, but the first priority is for you to “get your house in order”. We will help, but don’t expect China to save the world. And China expects some reciprocity for its help (e.g. market access). It struck me as a creditor’s speech.

Tension between markets and government
I was reminded again of the increasing tension between markets and government. The speed and scale of globalisation is intense, and technology and commercial incentives will continue to power this process. Companies not actively engaged in emerging markets will become marginalised; your position in the market changes if you are growing at 5% a year when your competitors in the emerging markets have growth rates of 50%. Revenue and profit growth is very strong for globally-engaged companies, although wage and employment growth in advanced economies is being kept subdued because of the entry of labour from emerging markets (which is increasingly skilled). The non-tradables parts of the economy – where most people are employed – is not growing as strongly, and tends to have lower wages. And even the non-tradables sector is facing competitive pressure: I heard that it is now possible to do ‘routine’ cardiac surgery in India in world-class facilities with better risk-adjusted outcomes at 2% of the cost of the procedures in the US.

So markets are moving in a way that creates real distributional challenges in the advanced economies. This is not new of course, but the implications of the tectonic shifts are becoming much sharper. Structural change will be required in many countries, as well as sustained investments in education and infrastructure. Governments need to understand the domestic impact of a globalising world, and how best to manage these pressures and how to position their countries for success. There is no such thing as domestic policy any more. This matters for all countries, but perhaps particularly for small countries given their higher level of exposure to the global economy.

Leadership and muddling through
There was much talk of the need for bold, decisive action to address the various crises and statements that muddling through is no longer an option. But of course muddling through is always an option, and indeed is probably the most likely outcome. And my sense is that political leadership is what you talk about when there is no clear sense of what to do. Yes, we need leadership and courage from the government but this doesn’t strike me as the binding constraint on progress. The constraint is the absence of a well-defined substantive agenda in terms of what to do; there are many competing plans, there is deep uncertainty regarding impact, and there are both financial market and political constraints on possible options. Claims that the solution is “leadership” don’t take us very far.

It seems to me that the priority is a more concerted investment to develop solutions. This will clearly require political leadership, both individually as well as collectively through institutions like the G20. But there needs to be a strong focus on developing the ideas and policies, and then putting together a structured agenda for conversation and action. In the meantime, kicking the can down the road is probably better than not kicking it at all.

Global governance
Part of the leadership equation involves global coordination and governance given the interconnected nature of many of the issues and an increasingly global economy. But although there was a clearly expressed preference for global coordination, there was little confidence that global progress was likely on trade or climate change negotiations or that the G20 would deliver real progress. There are significant differences in national interests, and countries are primarily focused on resolving the significant domestic challenges they face. There is a growing gap between a global economic and financial system and a largely national set of rules and institutions.

But there are different views on how to respond. These differences were the subject of an interesting conversation between George Yeo [until recently, the Singapore Foreign Minister] and Gordon Brown. One school of thought argues that that a global system demands global rules, coordination, and action (e.g. a global growth pact, coordinated approaches to financial regulation). Another argument is that governments owe responsibilities primarily to their national populations and that independent nation states (acting cooperatively when they think it is appropriate) are the fundamental unit of analysis. Both as a practical matter, but also normatively, it seems to me that we should be investing in building a system that is based largely on nation states with rules and coordination (global, regional) to guide and facilitate interactions. But either way, a large gap between a globalised world and domestic decision-making is unlikely to be desirable or sustainable, and my sense is that something is likely to give in the next decade.

Failure is the new black
Innovation was a real theme this year; how to encourage new ideas, how to break through intractable issues, and so on. One of the core ideas that came through repeatedly was the tolerance of failure. In a fast-paced, complex and uncertain word, getting things done will likely involve making mistakes and iterating rapidly towards a solution: one quote that stuck with me was “show me the man who has made no mistakes, and I will show you the man who has done nothing”. Examples of this came from start-ups, innovation in larger organisations, social entrepreneurship, and elsewhere. In one company, a standard opening question in performance assessments is “what mistakes have you made this quarter?” – based a belief that people who innovate will make mistakes.

Failure is perhaps a more challenging concept in parts of the public sector, due to the high level of public and media scrutiny as well as the nature of some of the services provided (mistakes in hospitals or prisons may not be appropriate). But creating space for experimentation and a structured process to evaluation (and learning from failure) is a principle that can be applied both in policy and delivery agencies.