„Decades of economic change: The world economy in 1991/2001/2011-and 2021„

20 Years Vienna Agreement „ Decades of economic change: The world economy in 1991/2001/2011-and 2021„ Univ.Prof. Dr. Dr. h.c. Werner Clement Professor at the Vienna University of Economics and Business Administration and 4C foresee consulting 3 rd and 4 th November 2011 Vienna | Austria Hosted by Austrian Standards in co-operation with

1) Introduction /1 Clement, Economic Change
Purpose of the presentation (given at a time of serious turmoil):
Overview of the economic environment over a longer time period
Likely impact of the economic framework conditions (economic order)on norms
How governance and social behaviour affects and changes norms is an old issue for debate,(e.g. cf. Habermas, J. (1992/1997). Between facts and norms). This entails:
Beware of deriving apparent objective standards from their normative background/value-system.
Consider: ./.

1) Introduction/2 Clement, Economic Change
Consider:
Norms are subject to the political, technical, economic etc. environment in which they operate
(The German, French, Greek, Russian, Chinese, American economic value-systems and framework regulations differ a lot!)
As the term „norm“ indicates, norms are not value-free but rather the result of conventions, agreements; so are economic indicators
Even the basis of all economic indicators, the SNA (Standardized System of National Accounts) is based on Keynesian macroeconomics and the result of several international agreements (UN, OECD)
Norms (as well as the interpretation of economic developments) are influenced by the „perceptility problem“ (Recall the famous quote from Franz Kafka‘s diary, August 2nd 1914:“Germany declares war on Russia—in the afternoon, swimming lessons”.

1) Introduction/3 Clement, Economic Change Overview of the presentation : The period up until 2008 The crisis 2008 Short term outlook The longer term

Clement, Economic Change 2) A bird’s eye view on the last decades up until 2008 a. Societal background b. The trends and cycles c. Structural shifts i. Sectoral ii. Global economies iii. Distribution of income and wealth

The so-called „laws of economics“ are determined by socio-political developments. Remember: Glasnost гла́сность: Political openness and its unintended consequences: rise of nationalism, freedoms generated under glasnost enabled contact between Soviet citizens and the western world, US. Perestroika перестройка (“Restructuring”)1987 Deng Xiao Ping Chinese economic reform : 改革开放 ; Second stage of reform, in the late 1980s and 1990s, involved the privatization and contracting our of much state-owned industry, the lifting of price controls, protectionist policies, and regulations.

Upsurge of capitalist market economics F. Fukuyama, author of The End of History and the Last Man : The progression of human history as a struggle between ideologies is largely at an end, with the world settling on liberal democracy after the end of the Cold War and the fall of the Berlin Wall in 1989. Fukuyama predicted the eventual global triumph of political and economic liberalism: 1992 2002 Introduction of the Euro – a political decision! 2007 Subprime crisis 2008 Finance crisis 2011 Arab spring

Long term global average trend around 4% GDP-growth
Yet: Economic areas are growing apart!

Downward trend of GDP-growth of advanced economies
Cyclical downturns become more pronounced

2000, Deepest downturn cycle (before 2008): Dotcom bubble, “WWW would create the “New Economy”

What do we regulate? Products and production processes, software, finance? What growth? Deindustrialization, Hollowing out, towards the service economy?

The development trends of Chinese and Indian GDP (1950-2003 ).

Advanced technologies of China alter the pattern of international trade

US: Who gains? From 1997-2008, average incomes grew by $2,700. All of these gains went to the richest 10%. The incomes of the other 90% declined

Clement, Economic Change
3)The 2008 crisis and the present
a)Facts
b)Understanding the twin financial and sovereign crisis

All business cycle indicators show a similar pattern for the 2008 recession EU-27 Industrial output (trend) for total industry and the main industrial groupings 2000-2010, Source: Eurostat US GDP GDP Indicator Russia Strong job losses in 2008 recession (US )

Clement, Economic Change
3)The 2008 crisis and the present
a)Facts
b)Understanding the twin financial and sovereign crisis

A vicious circle: Liberalisation of banks leads to sky-rocketing expansion of finance sectors with toxic investments  banks accept ever greater portion of sovereign debt in their portfolios  sovereign debts explode  downgrading of sovereign debt induces banking crisis  recapitalizing stumbling banks with taxpayer‘s money increase public debts or lead to „ quantitative easing“ of central banks

Welcome to Argentina: How America Borrowed Its Way into a Debt Crisis The magnitude of the fiscal and external deficits the United States experienced over the last decade are displayed in figure below. (The structural budget balance as of October 2010 is depicted here). Figure : Federal budget balance (blue) and current account balance (red), both as a share of GDP, seasonally adjusted. Source: BEA Massive Federal dissaving in the early to mid-2000’s led, with a lag, to widening current account deficits in the mid to late-2000’s. Just like in the 1980’s.

Sovereign debt becomes costly Interest -spread of government bonds, maturity 10 years (in %)

Does debt-financing and quantitative easing lead to inflation? Not yet. Fear induces reticence in private consumption and investment , hence private demand slows down, wage cost tend to stabilize  measured inflation retreated

Regulation and „Packages with „Firepower“ to calm the Markets
US:
July 2010: Dodd-Frank Act including the
Volcker Rules (Deposit-taking banks would be banned from proprietary
trading = Soft Version of the Glass-Steagall Act of 1930):
recognition of shadow banking system as a source of systemic risk,
Provision of better regulatory tools
EUROZONE: Results of the EU Summit 26 10 2011
Haircut for Greece debt 50% by banks (= 100 billion euro)
Fiscal consolidation of all member states of the € area,
reduction of sovereign debt
Recapitalizing Banks First Tier 9% (= 106 billion)
EFSF: Leverage up to 1 billion through risk insurance to private
investors and Special Purpose Vehicles, facilities to attract international
(China, Brazil..) investment
Structural reforms for growth
A report on how to implement the agreed measures
will be finalised by March 2012.

Clement, Economic Change 4)A glance into the crystal ball: Outlook and scenarios a) Short term b) Long term

Clement, Economic Change 4)A glance into the crystal ball: Outlook and scenarios a) Short term or: “The era of deleveraging?” b) Long term

Source:IMF Sept 2011 In the short term real GDP is still growing (moderately)

ECRI's recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes, including the U.S. Long Leading Index. In the US leading indicators suggest a downturn in 2012

http://www.outsights.co.uk/library/18/FutureEconomyScenarios Traditional forecasts falter ahead of unprecedented uncertainty

http:// www.economy.com/home/products/samples/Economic-Scenario-Generator.pdf Moody‘s Analytics How useful are simulations? Inflation in the €-zone

“ The global economy is in a dangerous new phase. Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing. Against a backdrop of unresolved structural fragilities, a barrage of shocks hit the international economy this year…. At the same time, the handover from public to private demand in the U.S. economy stalled, the euro area encountered major financial turbulence, global markets suffered a major sell-off of risky assets, and there are growing signs of spillovers to the real economy. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion. Prospects for emerging market economies have become more uncertain again, although growth is expected to remain fairly robust, especially in economies that can counter the effect on output of weaker foreign demand with less policy tightening.“ September 2011 ©2011 International Monetary Fund Gloomy outlook by the recent IMF Forecast

Deleveraging is inevitable – but how?

The necessary deleveraging of sovereign debt and exposure of banks: A task both for Hercules and the Oracle of Delphi

The core of the problem: The decoupling of the financial sector from the real economy Index 1962 = 100 Real economy (nominal GDP): 2007= 4000 Financial Sector: 2007 = 12000

US (2008): Share of Manufacturing: 11,48% of GDP Financial Sector (Finance, Insurance, Real Estate, Rental, and Leasing): 20% of GDP! (Services: 68,2% of Source: The core of the problem: The decoupling of the financial sector from the real economy

Deleveraging: American Style

http://www.cbo.gov/ftpdocs/120xx/doc12039/01-26_fy2011outlook.pdf CONGRESS OF THE UNITED STATES CONGRESSIONAL BUDGET OFFICE The Budget and Economic Outlook: Fiscal Years 2011 to 2021 But what other choice has he got?

http://www.freitag.de/wochenthema/1142-machtlos-am-abgrund Deleveraging: European Style ?

What kind of umbrella – rescue package would these economic forefathers have designed?

The Rescue Fund and the ESM

And the consequences? Inflation lurking? Or: Deflation fears? In any case: Revival of Glass-Steagall act, viz. Volcker Rules to realign the financial sector Separation of commercial bank activities from purely speculative investment banking activities

Understanding the Second Great Contraction: Kenneth Rogoff We are working through a recession, linked to a deep financial crisis—a powerful amplifying mechanism with long-lasting effects

Is the worst yet to come ?
Greek Referendum threatens Bailout, a week after euro-zone leaders agreed
on a "comprehensive package" at European Summit
Surprise Referendum planned for January 2012
Possible Consequences
“ a defeat in the referendum could propel their country out of the euro zone
and would bring down the government and cut off international funding for
Greece, leaving the country facing a financial meltdown
could spark a financial-market panic that would particularly affect Italy
could undermine the effort to preserve the euro
But: "The actual meaning of the referendum is a choice between the euro
and the drachma“
Quote: WSJ

Clement, Economic Change 4)A glance into the crystal ball: Outlook and scenarios a) Short term b) Long term

Since we have never experienced an economic development like this before, economists and future trend-analysts engage in „ Scenario drawing“ The annoying fact is: These scenarios are extremely contradictory

Projection or wishful forecast?

It already happened in the past: The very long term view: Global shifts

Probably the best approach comes from the WEF , the World Economic Forum Davos, for its forthcoming January 2012 meeting Quotes:
„ The New Context:
… The contextual change at the top of minds remains the rebalancing and deleveraging that is reshaping the global economy… transformational changes in social values, resource needs and technological advances as never before… the necessary conceptual models do not exist from which to develop a systemic understanding of the great transformations taking place now and in the future… It is an indisputable leadership challenge that ultimately requires new models…
Thus, the Annual Meeting 2012 will convene under the theme, The Great Transformation: Shaping New Models
Thematic Roadmap: The Great Transformation: Shaping New Models
Growth and Employment Models
Leadership and Innovation Models
Sustainability and Resource Models
Social and Technological Models

Besides the WEF, other attempts of scenario-writing include:
Bubble : Creation of a new financial bubble
Default : Collapse of the banking system plus later deflation and then inflation
Austerity : Entering a „Japanese decade“ with stagnant economies
„ New Normality“: including slow growth, reforming the banking system, hope for the role of the emerging economies, alleviating inequalities in income distribution…
Liberal Market forces : Let the market forces work (how??)
Revolutionary changes : As an outcome of basic democratic movements like “occupy wall street or the Arab Spring
“ Social market economy rebooted”: Complete overhaul of the regulatory framework for banks plus revamping reforms of the structure of the real economy
New Economic Order: Decline of the US, EU?, surge of BRIC economies and their systems of governance

To fill the general headings of such scenarios with realistic content, Regional „sub-scenarios“ have to be developed . This is necessary to better understand the differing cultures, value systems and economic behaviour. Will that lead to global forms of governance, socio-economic rules and even norms? History teaches that sovereign defaults are not so rare:

http://www3.weforum.org/docs/WEF_Scenario_ChinaWorld2025_ExecutiveSummary_2010.pdf 3 WEF scenarios for China and the consequences

Impact of the 3 scenarios on China‘s growth

“ According to the 2011 annual survey of U.S. companies conducted by the American Chamber of Commerce in China (Amcham), a majority of U.S. businesses - 71% - said China's licensing process discriminates against foreign companies. And 40% said they thought the "indigenous innovation" policy - in which the Chinese government favors domestic companies over foreign ones in matters of official procurement - would hurt their business. More than one in four - 26% - said that policy already had hurt them. A similar number, 24%, said that economic reforms in China had not improved the business climate for U.S. companies, a steep increase from the 9% who said so a year earlier. unfair business practices affect a wide swath of industries, with banking, insurance, auto manufacturing, telecom and information technology among the most affected.” China‘s growth comes for a price on fair rules of competition

http://www3.weforum.org/docs/WEF_Scenario_RussiaWorld2025_ExecutiveSummary_2010.pdf A similar WEF scenario-building for Russia

The Long March scenario covers a situation in which Russia continues to leverage its natural resources, to the detriment of the full development of other sectors. A gradual transition takes place to a system of governance based on the rule of law. In this scenario, Russia is able to achieve relative prosperity, but a far less benign future is also possible. In Oil’s Curse, a political class bent on its own enrichment is in charge, resulting in slow growth, poor levels of investment in infrastructure, capital flight, increased corruption and a decline in the competitiveness of domestic industries. A radical departure from the past is also possible, in which Russia would gradually achieve real economic and social progress. Vozrozhdenie (“Renaissance” in Russian) foresees initially gradual but eventually wide-reaching governance reforms combined with market reforms leading to strong GDP growth, an increase in real income, and general improvement in the quality of life for the population at large. The Key Questions for the Scenarios Among the many challenges confronting Russia, two questions are key to how Russia will look in the next two decades: • Will Russia be able to develop legitimate and effective governance, based on the rule of law? • How effectively can Russia develop a broad-based economy given its extensive energy resources ?

Impact of the 3 scenarios on Russia’s growth

A NEW book, by Arvind Subramanian of the Peterson Institute for International Economics argues that China’s economic might will overshadow America’s sooner than people think. Mr. Subramanian combines each country’s share of world GDP, trade and foreign investment into an index of economic “dominance”. By 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. A succinct scenario for future global power shift

Source:www.chicagobooth.edu/alumni/clubs/pakistan/docs/next11dream-march%20%2707-goldmansachs.pdf Another projection

Arab Spring Don‘t underestimate the power of democratic movements Occupy Wall Street We Are The 99% and will no longer tolerate the greed and corruption of the 1%.

REBOOT THE SYSTEM? We’re seeing passionate and sometimes violent reactions to the slow pace of institutional change.

I hope the entry in your today’s diary doesn’t read: Long and disturbing presentation – I still don’t know how facts and forecasts interact with rules and norms? And: Who rules the norms? CLOSING REMARK

„Decades of economic change: The world economy in 1991/2001/2011-and 2021„

by Austrian Standards

Accessibility

Categories

Upload Details

Usage Rights

2 Embeds 106

Statistics