What does the future hold for the global economy? A treacherous ride that no government would rationally choose to take.
As the first decade of the 21st century comes to a close, leaving the steady growth of last century’s second half a distant memory, what does the future hold for the global economy? For the next several years, we can expect exceptional turbulence as the waning days of the global economic order we have known plays out chaotically, possibly destructively. For the longer term, say, 10 years from now, a more promising picture awaits as a new set of international economic arrangements gains support from governments, business and civil society, and as a wave of exceptional innovation bears fruit. The transition will be a treacherous ride that no government would rationally choose to take. Yet the die seems cast.
It was inevitable that the Bretton Woods system could not last indefinitely, even after its adaptation from fixed to floating-exchange rates in the early 1970s. After all, the world economy has changed beyond recognition. Since 1990, global GDP increased from about $20 trillion to nearly $60 trillion, world trade has increased 1½ times faster, foreign direct investment three times faster, and foreign exchange trading almost 100 times faster, according to McKinsey & Co.
Over the same period, businesses have expanded across borders at breakneck pace. In 1990 the US S&P 100 earned about 25 percent of its revenues abroad, while 20 years later the figure topped 53 percent, based on calculations done by Credit Suisse. This kind of interdependent growth has outstripped the rules made for another era. It has revealed the impossibility and even illegitimacy of governance arrangements revolving around a handful of rich western industrial countries and Japan. And it has created the need for new theories, still under debate, about how the world economy operates, including the ways shocks are transmitted across borders.
The old order had to die also because the United States – its creator, rule enforcer, market of last resort and chief cheerleader, now racked by deficits, debts, and a polarized and inward-looking political system – can no longer shoulder the burden of these roles. No one country is remotely capable of replacing America, and effective collective leadership is nowhere in sight.
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Source: Jeffrey E. Garten | YaleGlobal Online