Getting Ready for the Recovery: Life After the ‘Great Recession’

Address to the Berne Union Members’ Conference, Istanbul
Graham Hutchings, Managing Editor, Oxford Analytica May 6, 2009

I want to begin my remarks with a question -- a question that is also designed to be a challenge. It is this: Are you ready for the ‘Great Recovery’?

To ask a question like this is to answer another, namely: Will there be a recovery?

The answer, overwhelmingly, is ‘yes’. There is going to be growth, demand, and even credit again – and they might come sooner than everybody in this room expects.

It seems to me to be an open question whether the first unequivocal signs of recovery, those much-desired “green shoots”, are yet visible.

But they are on their way. Their emergence is going to deliver a terrific shot in the arm for confidence in the global economy, and in much else besides.

And I say this despite the alarming threat of a global influenza pandemic, whose outbreak seemed disastrously ill-timed as far as the global economy is concerned.

Louis Pasteur famously said, “Chance favours the prepared mind”. My message today is that we should prepare for the Great Recovery and position ourselves to benefit from it.

This is the spirit in which I have prepared the following, hopefully helpful, remarks.

A Sense of Perspective

I have begun my speech in this upbeat manner because I think that ‘gloom’ about the outlook since the onset of the crisis towards the end of 2007 has been a little overdone.

Let me be clear: the Great Recession of 2007-09 is a very serious matter indeed. The speed, intensity and severity of the contraction in global economic activity have been truly remarkable. And, sure though I am that recovery is coming, I am not yet ready to use the past tense to refer to the Great Recession.

Many problematic ‘lagging indicators/effects’ are working their way through the economic, political and social systems of many countries. They are adding to the pile of ‘combustible’ materials already present in many of them.

These processes inevitably increase the odds that a ‘catalytic’ moment, a ‘tipping point’ of some kind will occur in some countries. It might be marked by the emergence of some demagogic new national leader, some virulent political force, some form of social upheaval that really does prove disruptive and change things.

Even if this does not occur, I am not sanguine about the longer-term consequences of the remedies that governments have pursued during the Great Recession. I refer in particular, to the enormous build up of debt arising from stimulus packages.

Yet, on balance, I think more things are likely to stay the same than to change as a result of the Great Recession.

I believe, as I shall explain, that this is true of the phenomena known as ‘globalisation’.

And I think that some of those things that are going to change were likely to do so anyway, and that the Great Recession has merely hastened processes long underway. Here I refer to the geographical dispersal of global economic power to the ‘south’, (the ‘rise of the rest’) about which I will also say more in a few minutes.

In the light of this you will understand why I do not regard what has happened in the global economy over the past two years as an international catastrophe.

I certainly do not look upon it as the ‘end of capitalism’.

And I do not even regard it as serious a matter as the Great Depression; to my mind analogies with this seminal event of the twentieth century are often interesting but somewhat strained.

Causes and Consequences of the Great Recession

To make my case, I want to remind you of the causes of the Great Recession. Its effects are widespread, but its causes are localised and particular. I believe that many of its consequences will be similarly circumscribed.

The broad context was one in which the huge foreign exchange surpluses amassed by developing countries were recycled in ways that led to hugely inflated asset bubbles in developed countries.

The proximate causes of our current troubles are to be found in a series of distinct practices (malpractices?), concentrated in a particular part of the world (the Anglosphere) and in a particular sector (finance).

(NB: The ‘Anglosphere’ – that sphere in which the policies adopted in Anglo-Saxon countries has been practised)

It is in these parts of the world, in these sectors of the economy, that changes due to the Great Recession will be most apparent.

It is true that changes (as opposed to just effects) will also occur outside of the Anglosphere, but I believe that such changes are likely to be different in scale and in kind.

‘Globalisation’ will survive

Most importantly, there is unlikely to be any major departure from what we have come to call the globalised economy arising from the Great Recession.

This is a bold claim, and not lightly made. How do I justify it?

Let me quote from the Leaders’ Statement following the G20 summit in London in April:

“We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.”

I am not so naïve as to think that because politicians have put their name to a declaration that it will be enforced. I do not even claim that G20 leaders intended to enforce it when they signed it. I am aware of the many examples of creeping protectionism already introduced by politicians under pressure.

But I am more persuaded by the fact that I do not know of, or hear a coherent, popularly acceptable demand for, an alternative to what we have come to understand globalisation when it comes to organising economic life.

When thinking about the relationship between the Great Recession and globalisation we need to distinguish between behaviour, defined for the sake of this example as the pricing of risk, from structure, by which I mean the interconnected nature of global business that we call ‘globalisation’.

Of course, in some respects globalisation will, and already has, come under strain:

  • There have, and will be, apparent defeats at the margins (from higher tariffs to competitive devaluations).
  • There has been a sharp contraction in FDI as money ‘goes home’
  • There will certainly be a need for more expansive definitions of globalisation (benefits for ‘all’).
  • It will have to be cast in a more ‘inclusive’ mould (greater respect for such issues as sustainability and the environment, and a bigger role for corporate responsibility).

Yet the maxim, once championed by a certain British prime minister seems to me to holds force: ‘there is no alternative’.

We have a substantial body of trade law thanks to the WTO.

And we have well entrenched global production chains.

Changing Times

So much for what will not change, or at least will not change out of recognition.

What, then, will change?

We need to know something about this if we are to position ourselves to benefit from the Great Recovery. And it is clear that adjustments will need to be made; that businesses will have to acquaint themselves with the post-Crisis landscape if they are to prosper.

Let me say something briefly about five broad areas in which significant change is already underway or will soon be so. They are:

  • the realm of ideas;
  • the role of the state;
  • popular opinion;
  • the future of finance and the shape of the firm; and
  • the global balance of power.

1. Orthodoxy Dethroned

Thanks to the Great Recession we have witnessed the demise/eclipse (at least for a while) of ‘neo-liberalism’, the ‘Washington Consensus’, the ‘efficient markets’ hypothesis in economic theory and practice. This, as you know, is the idea that state has no proper business in the economy; that there should be only light touch regulation; and that ‘liberalism’ should prevail in everything, including the capital account.

For the best part of 30 years, this orthodoxy has captured the financial sector, the framework of national policy-making, and much of mainstream academic economic life throughout – and even beyond -- the Anglosphere.

Presidents and prime ministers have championed it. So have most media.

The educated public have by and large demurred.

Yet this orthodoxy rules no more. The ideational standing of those countries and leaders that championed this cause has been damaged. As a result, they have lost something – perhaps much -- of their moral authority, or their ‘soft power’.

This is a particularly serious matter insofar as these economic policies were deemed to be closely linked (causally and otherwise) with liberal democracy, as practised in the ‘West’.

What will replace this discredited orthodoxy?

It is interesting that the G20 Leaders’ Statement said nothing about ‘democracy’. Can the academy (the Western academy) come up with an alternative to discredited neo-liberalism?

Is ‘China’ an alternative? Is ‘France’? How about ‘Rhineland capitalism? Will ‘statists’ of one kind or another win the day by default?

This is an important issue as far as the future of the global economy is concerned. The state can ‘rescue’ key national assets (as we have seen during the Great Recession). But it is not everywhere in a good position to ‘rejuvenate’ national economies; to allocate capital ‘appropriately’; to innovate.

2. The State is ‘Back’

Let us dwell a moment more on the significance of the re-emergence of the state in the economic life of the Anglosphere countries.

The scale of liquidity injected into the global economy is truly astonishing. We are bequeathing an extraordinarily heavy burden of debt to our successors. How will we/they ever re-pay it?

Certain things are already plain:

  • The redistributive impulse has gained popular momentum, and will be embraced by many politicians out of moral desire and economic necessity.
  • Firms can look forward to higher corporation taxes, and high earners can expect to take home less. Tax havens and tax loopholes will be harder to find.
  • This, in turn, will focus attention on the efficiency (or otherwise) of revenue collection and government expenditure, a particularly problematic issue in the United States.

Here we ought to recall the saying: “He who pays the piper, calls the tune”.

This sentiment will be apparent in the variety of responses of the state in various countries. It will range from tighter regulation through to direct management and on to outright ownership/control.

We don’t know yet how big a ‘brother’ the state will be, nor what its attitude will be to those ‘outside of the family’. The competitive environment will be murky in certain sectors of the economy.

3. Public Opinion

Many of the changes referred to so far will stem from a certain consequence of the Great Recession: what we might call an ‘agitated’ public.

In responding to the Great Recession and its effects, policymakers must wrestle with public opinion as well as grim economic realities. In many parts of the world, public opinion is exercised, as well as affected, by what has happened to global economy. They want to identify – and punish – those they believe are ‘responsible’ for it.

This is the mirror of the turmoil in the world of ideas that we discussed earlier.

Public anger over the perceived greed and incompetence of bankers may soon pass. Dismay over job losses and the destruction of asset values will prove longer-lasting -- and more damaging.

Much here depends on how long the Great Recession goes on. In certain countries, political extremism, whether of the Left or the Right, may gain some traction, though I think this threat can for the most part be contained.

But what is certain is that new ground is opening up for previously relatively quiescent groups. I have in mind:

  • pro- and anti-business lobbies;
  • trade unions;
  • ‘greens’;
  • consumer advocates; activist pension funds;
  • CSR groups; and
  • NGOs generally.

Such forces will be empowered by popular demands for greater influence over decision-making so that there is not recurrence of the Great Recession.

4. Finance and the firm

The fourth area of business life in which we can expect some change again, mainly in the Anglosphere, is that of finance and the firm, especially the large firm.

The financial sector will be most affected because it was the most infected – particularly in the Anglosphere.

Winston Churchill famously said (having disastrously returned the British economy to the Gold Standard in 1925 ) that he:

“…would rather see Finance less proud and Industry more content".

We will certainly see something of the former – that is, a less proud financial sector:

  • Banking as whole will be as chastened as bankers themselves.
  • The close relationship between finance and politics will be weakened, with implications for Wall Street and the City.
  • The notion that a talented elite should monopolise decision-making has come under strain. Such elites may not have it so good in future.

This will probably apply to large firms more broadly.

A minority of ‘talented’ people have had a disproportionate say in the future of companies and the allocation of their fruits. They were not held to account. They did not have to listen to anyone else. The reluctance to grant such plenipotentiary power to the ‘brilliant few’ has a number of implications. It may mean that:

  • risk aversion increases;
  • ‘shareholder value’ will not be regarded as the sole criterion of corporate health; and
  • managers and employees are deemed to matter, even when they are not the ‘owners’.

5. The ‘New-ish’ World Order

And so I come to the last of the five changes that I think we need to understand as we prepare for the recovery. Arguably it is the most important of all.

It is the way in which the Great Recession has accelerated what is sometimes referred to as the “Decline of the West” but might more accurately be called the “Rise of the Rest”.

As indicated, this process is not new. But it is fundamental. It is irreversible. And it will shape the lives and the children’s lives of everyone in this room.

The G20 Leaders’ Summit in many ways constituted a powerful testament of our times:

  • Note that it was ‘G20’, not G7/8.
  • True, some commentators have talked of the need for a “G2” – ie the United States and China – but that in my view is a non-starter, for several reasons.
  • The world has got ‘bigger’ (in terms of numbers of decisonmakers) at the same time it has got ‘smaller’, thanks to the revolution in communications.

Look carefully at the G20 Leaders’ Statement and you will gain a glimpse of the new reality of geopolitics. The document:

  • calls for the establishment of a new Financial Stability Board, including all G20 countries plus some others;
  • extends regulation and oversight to “all systematically important financial institutions, instruments and markets…” including hedge funds;
  • commits the parties to undertake IMF quota and voice reforms, as well as reforms of the World Bank; and
  • opens the senior leadership of these international financial institutions to an “open, transparent and merit-based selection process.”

Welcome to the new world -- if you had not woken up to it already.

This new world will take some getting used to, whichever part of it we come from or operate in. Multiple power centres makes for more complexity and, very often, competing interests.

Established international institutions – including, as we have seen, the World Bank and the IMF -- are struggling to catch up with the new reality.

The same is true even of the world’s reserve currency: the day of the dollar is far from over but the merits and duration of its primacy are subject daily to close and critical questioning.

Indeed, the emerging architecture of global power raises far more questions than answers:

  • Is G20 likely to be a functional institution of power?
  • Is it an “institution” at all? Can it only do ‘crisis management’ or will it emerge as an embryonic ‘world government’?
  • Can it fill the glaring gap that arises from the fact that we live in a global economy but lack effective global political institutions to manage it and must have recourse to ‘concerted’ actions on the part of the national authorities?
  • And what of China, perhaps the pivotal country in shaping the new world order?
  • What does China want?
  • Does China know what it wants?

Conclusion

These are big questions, well worth thinking about. Perhaps you would like to invite me back next year to discuss them?

It is often tempting to try and capture the zeitgeist of our era in a catchy, illuminating phrase of the kind beloved of historians. The old fallback of course is the one that suits almost every age: “The Era of Uncertainty”!

I think we can do a little better than that.

I currently favour identifying the period 2003-2009 as “The Era of Shattered Illusions”. The chief illusion being that “returns” -- especially, but not only, financial returns -- could depart so fundamentally from the pace at which the real economy expanded.

I am sure that you have your own versions of how best to characterise our era for the benefit of posterity.

For my part I want to close this opening session of your conference on the positive note on which I began.

The Great Recession of 2007-2009/10 will soon come to an end.

It has spawned a number of changes and accelerated others.

But the Great Recovery is about to begin. We had all better get ready for it.