Politics is rarely dull. In the UK, we wish it was duller. But a year dominated by Brexit and Donald Trump tells us something simple: without a new vision, a new plan and a revolution in the world's economic governance, there is a very real risk that globalisation as we know it, goes into reverse.
• In China, you’re now adjusting to what you call the ‘new normal’ of growth rates of 6% - well down on the 10% of years gone by.
• Worldwide, we confront what some call the ‘new mediocre’; global growth rates which are much lower than we forecast just a few years ago.
• At home, each of us confront the new inequality, which is triggering such a backlash against a world of free trade and freer movement of people.
This combination of low growth and high inequality is super-dangerous because it comes at a time of two further seminal shifts: a rapidly ageing world population and technological changes so sweeping that some call it the fourth industrial revolution. This creates a huge challenge for politicians seeking to offer security for the old - and opportunity for the young.
Today, older workers can look forward to 20 years of retirement - much more than the 4-5 years of the post-war years. Yet long retirements in a world of rock bottom interest rates, means workers must save 100 times more than in the past if they want to enjoy a decent standard of living in their golden years.
Equally, ‘the rise of the robots’, widespread automation of routine jobs - plus more older workers staying in work - creates huge new pressures on young people trying to get their feet on the first rungs of the jobs ladder, risking ever rising rates of youth unemployment.
This is probably the defining political challenge of our times: Get on the wrong side of the old, and you lose elections. But get on the wrong side of the young, and you can lose control of the streets - as many discovered to their cost in the Arab Spring.
Now we should never undersell the advances of the last 35 years since the Berlin Wall came down. Life expectancy up by 20 years; hundreds of millions lifted from poverty; 4.5 billion
connections as the World Wide Web spread the earth. Thanks to NAFTA, the doubling in size of the EU, and the admission of China to the World Trade Organisation, we've created a global marketplace connecting over 6 billion of the world's 7 billion people.
So the challenge for the West is this: we know how to globalise. But we don't know how to make globalisation work for the majority of voters. Quite simply, we lack the institutions needed to ensure we spread the prizes to those who feel they pay the price of a world that's interconnected together. So the growth we have today is too unequal, too unstable - and too unsustainable.
So the growth we have today is too unequal, too unstable - and too unsustainable. The bottom line for voters is that the world seems appears to be moving forward ever faster - leaving them behind - faster than ever. Hence, the global insurgency against globalisation: from Brexit to the rise of Donald Trump, to the surge of Islamism in the Middle East. This institutional failure to manage globalisation well, has left us with three enormous challenges:
- When the top 1% of the world’s population controls more wealth than the bottom 50% I think we can conclude that inequality is out of control; quite simply, we have not found good ways of sharing the wealth;
- Second, we haven’t yet mastered the best ways of mobilising savings - especially in surplus countries - into new investment in development and jobs. As Larry Summers amongst others has argued the result is a glut of savings over investment - while investment in good new industries and new jobs is stalling;
- Third, governments are losing the control of the ability to tax the new wealth we’re collectively creating. Too much of the new of wealth of nations isn’t in any nation at all - it's hidden offshore in tax havens. Some $6 trillion is now stashed in tax havens - $5 trillion of which has never been taxed hurting the ability of governments to do good things like build infrastructure, or boost education, or pay down debt.
Let’s start with the five key tasks that lie ahead. They are, I’m afraid, large in size. First, I think its pretty obvious that fiscal policy will have to take more of the strain driving demand in the years to come. Loose monetary policy hurts countries like China, which owns so many US Treasury bills - but it also hurts ageing continents like Europe, which is home to millions of retired citizens - and retiring - citizens. A world of rock bottom interest rates is a disaster for a rapidly ageing global population which relies on fixed incomes for its standard of living. And as we learned all too well in the financial crash, historically the ‘hunt for yield’ tends to have disastrous consequences for financial speculation.
But: in a world where western governments are weighed down by high debt to GDP ratios, fiscal policy has limited scope. That is why, concerted action on tax evasion and avoidance is so desperately important to strengthen the fiscal base and the financial firepower of finance ministries around the world. Here’s one simple illustration to make the point. Around 1 trillion euros of European money is hidden in tax shelters - that is more than the combined deficits of European governments. Our inability to collect taxes is hampering our ability to use fiscal policy to promote growth.
Second, we will need better ways of recycling savings into investment, into the world's $2 trillion worth of needed infrastructure - but also the sort of ‘patient capital’ we need to create the
industries and jobs of the future. When Larry Fink, CEO of the world’s largest asset manager Black Rock declares “More and more corporate leaders have responded with actions that can deliver immediate returns to shareholders, such as buybacks or dividend increases, while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth”, then I think we know we have a problem. In the US and Europe, we are bedevilled by boards - and shareholders - who think short term, while in China you struggle with too many State Owned Enterprises which are destroying, not creating value. Fixing this will require a new dialogue focused on reform of pension fund rules, trustee fiduciary duties and best practice in corporate governance to incentivise higher quality, longer term investment in the future.
If we get it right we could unlock not just new investment into new industries - but new infrastructure; new infrastructure with the potential to help the world keep temperature rises down.
As Brooking’s Amar Bhattacharya highlighted at this conference, the infrastructure investment of the next 20 years could well be bigger than the combined investment in infrastructure of the world to date. That offers us an extraordinary opportunity to shift the world onto low carbon systems.
Third, we need a new debate about how we foster the entrepreneurs of the future. In China, what I’ve called a ‘red tech revolution is beginning to transform your private sector. But in the West, an $8 trillion merger wave has created a new super-league of companies, bigger than countries, dominating sector after sector, driving down costs - and wages - failing to invest in new jobs, and multiplying rewards for the richest.
The antidote to this is not simply to ‘beat up the capitalist’. The answer is to bring forward new capitalists to challenge the incumbents.
Fourth, we need to recognise that much of the growth of the years to come, may in fact be driven not by trade, but by innovation. Between 2012 and 2013, world trade grew by less than 3.0% per annum - well below the pre-crisis average of 7.1% annual growth (1987-2007). There is now great political scepticism that the big trade mega-deals on the table will ever get signed. In Europe, both President Hollande and Chancellor Merkel are throwing cold water on the chances of TTIP - while many American commentators, like former Ambassador Winston Lord argue bluntly that TPP will ‘is not going to get through our Congress’.
Now the G20 has got the potential to stop this getting worse. China’s idea of a new G20 Trade and Investment Working Group (TIWG) needs to be used forensically and strategically. We do need new impetus for Free Trade Agreements; and we need new flexibilities in trade negotiations and plurilateral agreements. We can never give up on free trade that’s fair. But in the long run, innovation drives some three-quarters of economic growth, and as the UK’s Royal Society puts it: ‘unless we grow smarter, we will grow poorer’. In its new 5 Year Plan, China has taken this lesson to heart. By 2019, China will become, according to the OECD, the world’s largest science spender. You are increasing science spending in China, seventeen times faster than us in the UK, every single year. That alone should provoke us into asking: what more can we do together? Yet today, the mechanisms for sharing innovation between Europe and China aren't not especially strong. Fifth, we all needs better policies for more inclusive growth in the countries we serve. Both the OECD and the World Economic Forum now have extensive research work in hand.
What has been remarkable about this conference is the consensus that the old modes of global governance are out of date - and aren’t fit for the 21st century. In the west, where, as they say ‘all politics is local’, there is always risk that we neglect to think about the things we need to deliver together in the world.
Now some warn that innovating in global governance, brings with it the risk of what Chatham House called “The danger…that the new economic powers will… create their own institutions and their own frameworks of governance, aligned with their own interests, which could lead to a fragmented international system” That is a risk. But unfortunately the old multilateral system simply doesn’t have the capacity to deal with the challenges we confront today. The problems are too big. So we need more governance - not more of the same governance. So what are the priorities for change?
We should begin with the work to modernise the old multilateralism we invented after World War II: the UN, the IMF, and the World Bank. When we created the global institutions of the post-war world, the United States made up around half of world wealth. By 2030, emerging economies may make up some 70-80% of global growth. In the years to come, Europe therefore may need to help lead the argument for giving emerging economies a fair share of the business of running international organisations. The recent review of IMF quotas was a stark warning. For instance, in December 2010, the IMF’s 14th General Review of Quotas increased China’s voting share in the IMF from 3.8 percent to six.
As Eswar Prasad, author of The Dollar Trap, put it recently, this simply: “hurt US credibility, eroded the IMF’s legitimacy among emerging markets, and provided momentum for China’s efforts to shape a world monetary order more to its liking”. Now, as it happens, we may need to accelerate the debate about the future of international monetary policy coordination. Oxford’s Linda Yueh described the challenge well at the conference: international monetary policy is coming apart at the seams. While the US, has now raised interest rates and begun the exit from QE, the Europeans and Japanese are close to negative rates and driving ahead with ‘QQE’, buying not just gilts but corporate bonds. The rise in the dollar that has followed will pose a challenge for everyone with a dollar-pegged currency, or selling resources in dollars. So surely the debate about a new global currency standard, a sort of Bretton Woods 3.0 or a G3 of the US, China and the Eurozone, needs to advance.
Alongside, the new multilateralism, has got to come a new regionalism - not least to boost the sheer capacity of today’s weak global governance system. Here China has taken a lead. In Europe, we have welcomed the combination of China’s visionary concept of One Belt, One Road (OBOR) and of course, the UK is a founding member of the AIIB. Europe should now think imaginatively about its response to OBOR, perhaps resurrecting the idea of a renewed and refocused Union of the Mediterranean, to provide the old Silk Road with a grand new terminus at its Western end, with coordinated trade, infrastructure and entrepreneurial investment across Europe, the Middle East and the Maghreb. As Europe struggles with the challenge of the biggest movement of people since World War II, and as the Middle East struggles with diversification from oil, we will together need a vision with the ambition of One Belt One Road to re shape the future of civilisation’s oldest trade zone. To this we need to add, specific new region to region ideas for accelerating the shift to innovation based growth. The mechanisms for sharing innovation between Europe and China aren't not especially strong. But there are a few ideas that could make a difference.
First, we should encourage our universities to come together in new research alliances, complete with strong safeguards on the culture of free speech which science needs in order to flourish.
Second, we should be working together to build the shared science infrastructure that will drive forward the breakthroughs of the 21st century. Europe is good at this: think of the Hadron Collider of the European Space Agency. These are big projects which Europe and China should work on together.
Third, we should bring together the brain power in our healthcare sectors to drive forward the fight against anti-microbial resistance, accelerate the shift to precision, personalised healthcare, and step up the fight against chronic disease.
Fourth, if we’re going to create more intellectual property together, we need to protect it better, with much stronger IP protection regimes.
Fifth, we need to learn the lessons of the extraordinary innovation relationship between Israel and the United States, and invest more through a big shared venture capital system, in firms that make technology breakthroughs in small countries but need to sell in big markets.
Let me just finish with a word about the role of Europe and China in the reform that lies ahead. As a former Fulbright Scholar who loves America, I am deeply worried that US policymakers will remain locked in a policy of ‘living with friction’ - and only offer new frustrations not new oil on the wheels. I agree with Robert Zoellick who recently wrote:
“The greatest mistake the US could make is to lose the initiative in shaping a changing international system. The US should be adroit at connecting fresh prospects to the existing order so as to match new needs. This skill, insight and problem-solving capability, earned over many years, is a powerful American diplomatic asset and should not be squandered.”
In Europe, we can’t afford to let the debate about the future of global governance get ensnared in the geo-politics of the Pacific. Because we need to move on. Often Americans seem to us obsessed about China’s transition from a rule-taker, to a rule-maker: when in fact, we need to be rule-shapers together. We all have interests to advance. We will all work hard to build coalitions and alliances to support us. But we have to separate China’s preferences from the actual outcomes likely to emerge from modernised, international institutions. China won’t get everything its own way in the years to come - no more than we will, or the United States. But China deserves a voice commensurate with its role in the global economy - and if we fail to deliver that, we risk the ever faster evaporation of legitimacy of international institutions - especially amongst emerging economies.
Back in 1944, when John Maynard Keynes, then representing HM Treasury, sat in the Bretton Woods Conference, he surveyed the possible results of the agreements on a new world finance and trade system and said:
"We have had to perform at one and the same time the tasks appropriate to the economist, to the financier, to the politician, to the journalist, to the propagandist, to the lawyer, to the statesman - even, I think, to the prophet and to the soothsayer".
Ladies and gentleman, welcome to the new politics of the multi-polar world.