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Global Economic Trends May - June 2011 Workbook Facilitated by Sandra Gordon The views expressed in this workbook are not necessarily reflective of the official views of Fasset. Global Economic Trends - May to June 2011 1 GLOBAL ECONOMIC TRENDS CONTENTS ACRONYMS AND ABBREVIATIONS .................................................................................... 3 INTRODUCTION ..................................................................................................................... 4 SESSION ONE: GLOBAL RECESSION ................................................................................ 4 America and China introduce extraordinary stimulus measures: ....................................... 4 Global economic recovery gathers momentum .................................................................. 4 Lessons from the past ....................................................................................................... 5 The Anglo-Saxon growth model: ....................................................................................... 6 South Africa adopts the Anglo-Saxon growth model .......................................................... 7 SESSION TWO: GLOBAL INSTABILITY ............................................................................... 9 The year of the (black) swans ............................................................................................ 9 Additional threats to the global recovery: ......................................................................... 10 Unwinding the excess...................................................................................................... 13 South Africa amidst the global turmoil ............................................................................. 13 SESSION THREE: FUTURE VALUE ................................................................................... 14 Demographics – growing demand ................................................................................... 14 Resources – limited supply .............................................................................................. 14 Water: ............................................................................................................................. 14 Food ................................................................................................................................ 15 Consumption-led growth.................................................................................................. 15 The rise (and rise) of China ............................................................................................. 15 Decline of the American empire....................................................................................... 16 Demise of the dollar ........................................................................................................ 16 The return of gold ............................................................................................................ 16 Redefining value.............................................................................................................. 17 Growth and prosperity ..................................................................................................... 17 Importance of inequality .................................................................................................. 17 Pursuit of happiness ........................................................................................................ 18 CONCLUSION ...................................................................................................................... 19 Global Economic Trends - May to June 2011 2 Acronyms and Abbreviations GDP Gross Domestic Product GNH Gross National Happiness GWB General Wellbeing HDI Human Development Index IMF International Monetary Fund MENA Middle East and North Africa NCA National Credit Act PIGS Portugal, Ireland, Greece and Spain S&P Standard and Poor’s TARP Troubled Asset Relief Programme UN United Nations US United States WW2 World War 2 Global Economic Trends - May to June 2011 3 Introduction The world economy is currently emerging from the most severe recession since the Great Depression. While in many respects it seems that the world has returned to “business as usual” in the post-recession environment, in reality the recent financial crisis has exposed several fundamental weaknesses in the dominant economic growth model. Looking ahead, the world economy faces two crucial, conflicting challenges of a burgeoning global population and limited resources. In order to navigate a sustainable growth path between insatiable demand and scarce resources is going to require a fundamental re-evaluation of our current perceptions of value. Session one: Global Recession The world economy is currently emerging from the most severe recession since the Great Depression. Indeed it was only the unprecedented level of co-operation among global leaders as well as extreme measures of fiscal and monetary stimulus introduced by numbers countries that averted a total meltdown of the global financial system. America and China introduce extraordinary stimulus measures: After considerable political debate, President Obama passed a $787bn stimulus plan in early 2009. An important element of the government’s measures to address the crisis was the Troubled Asset Relief Programme (TARP), which was a programme to purchase assets and equity from financial institutions to strengthen its financial sector. Furthermore, the Federal Reserve slashed interest rates to close to zero. While America took some time to finalise the measures included in its stimulus package, China quickly announced a historic $586bn stimulus package aimed at encouraging growth and domestic consumption in various areas of Chinese society. While China’s stimulus measures had a smaller overall dollar value than the American package, it represented a larger proportion relative to the size of the economy and more importantly, focused less on bailing out companies and individuals overwhelmed by debt and instead encouraged infrastructure investment, environmental protection and disaster rebuilding. As a result, the Chinese stimulus measures had a more pronounced impact on economic activity. Global economic recovery gathers momentum: As a result of the stimulus measures introduced by major economies across the globe, a worldwide economic recovery is Global Economic Trends - May to June 2011 4 emerging. The International Monetary Fund (IMF) is forecasting a healthy global economic growth rate of 4.5% in both 2011 and 2012. However, on closer examination it is clearly a two-speed recovery with growth rates in the emerging economies once again robust (at 6.5%), while growth in the heavily-indebted industrialised countries is expected to remain subdued (at 2.5%). Amidst the relief that the recession has ended and world economic growth has turned positive once more, there is also an acknowledgement that it is important that the causes of the recent crisis should be identified in an attempt to avoid another recession of similar proportions. Economists Carmen Reinhart and Kenneth Rogoff recently released a book titled: “This time is different: Eight centuries of financial folly.” In the book, Reinhart and Rogoffre view all the financial crises and housing collapses over the past 800 years. What their research reveals is disturbing: namely, that the characteristics of all financial crises are identical. Essentially they suggest that if the authorities had studied the examples of previous financial crises, they would have realised that a housing and banking crisis was imminent and thus could (theoretically) have taken steps to avert it. One of the crucial conclusions of their research is that history confirms that debt-financed spending is ultimately unsustainable. This is proving to be an important lesson for the dominant economies of the 21st century. Lessons from the past: In an attempt to understand the factors which contributed to the recent global financial crisis, it is useful to look back to a similar period in history, namely the 1920s. This was a period characterised by deregulated, dominant banks, rising levels of household debt and a hands-off approach by governments in their dealings with the economy. The Great Depression originated in the US, starting with the stock market crash of October 1929. From there it quickly spread to almost every country in the world. The crisis was compounded by government policy responses. Some economies started to recover by the mid-1930s while in many countries the negative effects of the Depression lasted until the start of World War II. In the wake of the Great Depression, the major economies like the US were characterised by low levels of debt, tightly regulated banking sectors and a dominant role for governments in Global Economic Trends - May to June 2011 5 the economy. At this time the distribution of income was relatively equitable and the middle classes prospered. It was a time of robust economic growth. These key characteristics continued to dominate the economic and political landscape until the 1980s, when the appointment of Ronald Reagan as US President resulted in a gradual reversal of these trends. Tax reductions reduced the size of government in the economy, while the gradual deregulation of the banking sector saw a steady increase in household levels of debt. The Anglo-Saxon growth model: In many ways the economic model of the past 20 years commonly referred to as the Anglo-Saxon growth model is similar to the economic policies of the 1920s. The key characteristics of the Anglo-Saxon growth model include: 1. A dominant, deregulated banking sector: In recent years financial sector profits have accounted for a major portion of total corporate profits. Furthermore, the deregulation of the financial sector has been accompanied by higher wages in the financial sector relative to professionals in other sectors. These trends were similarly visible during the 1920s. 2. Debt-financed consumer spending: Consumer spending typically accounts for the bulk of economic activity in an industrialised economy. However, during periods of bank deregulation such as the 1920s and the decades following the 1980s, consumer spending tends to grow in size relative to other sectors of the economy. Of particular concern, this spending is also typically financed by ever-increasingly levels of debt. 3. Infrastructure investment deficit: The final characteristic of the Anglo-Saxon model is a tendency to neglect investment in infrastructure such as roads, harbours and railways. With government typically playing a relatively restricted role in the economy, investment in infrastructure tends to lag other sectors of the economy resulting in a gradual deterioration in the condition of existing infrastructure and failure to invest in new growth areas such as alternative, renewable energy. Looking back at both the 1920s and the post-1980s period it appears that there are three key trends that tend to emerge during periods dominated by the economic policies typical of the Anglo-Saxon growth model, namely: 1. High levels of debt: America is a prime example of the excessive levels of national debt typically associated with the Anglo-Saxon growth model. In recent Global Economic Trends - May to June 2011 6 years, US national debt – measured as a percentage of gross domestic product (GDP) – has risen to levels previously only seen in the wake of World War II. These unsustainable levels of national debt are also evident in other industrialised countries including Britain, Ireland, Spain and Italy. 2. Extreme levels of inequality: During periods in which the government plays a very restricted role in the economy, both the financial sector - and the overall economy in general - tend to operate in an environment with limited regulation. This deregulated environment is often associated with very high levels of income inequality – with the upper income earners amassing a significant portion of the income generated by economic growth. Again this was a feature clearly evident in both the 1920s and the post-1980s environment in America. 3. Dominant finance sector: As an economy matures there is typically a shift in economic activity from the production of goods to the delivery of services. While this is generally – correctly – regarded as progress, it becomes a cause for concern when activity in the service sector is dominated by the development of increasingly sophisticated products in the financial sector. The contribution of these activities to the long-term prosperity of an economy is the focus of considerable, heated debate. South Africa adopts the Anglo-Saxon growth model: South Africa is typically considered a middle-income economy falling somewhere between the industrialised and emerging market categories. However, the economic policies adopted by South Africa in recent decades are typical of those which have dominated in the industrialised world namely, the Anglo-Saxon growth model. Fortunately, however, our policies have retained some uniquely South African elements and as a result, have enabled our economy to escape some of the excesses typically associated with the Anglo-Saxon growth model. 1. A dominant, deregulated banking sector: Fortunately this was one area in which South Africa bucked the trend evident in the United States of America and Britain– with the banking sector remaining relatively tightly regulated. 2. Debt-financed consumer spending: Consumer spending in South Africa has always accounted for an unusually high level of overall economic activity, given that the economy is still only a middle-income country. Of particular concern, consumer spending in recent years has been increasingly financed through the use of debt, Global Economic Trends - May to June 2011 7 resulting in a slump in household savings to negative territory since 2005. Fortunately for the domestic economy, the introduction of the National Credit Act in 2003 prevented the levels of household debt from rising to more unsustainable levels. 3. Infrastructure investment deficit: The dynamics around infrastructure investment in South Africa in the post-Apartheid environment are clearly unique and cannot be compared to those of other countries that adopted the Anglo-Saxon growth model. Nonetheless, the failure to invest adequately in infrastructure locally was probably at least partially the result of the adoption of the Anglo-Saxon growth model As with other countries dominated by the economic policies typical of the Anglo-Saxon growth model, South Africa has seen the emergence of the three key trends of debt, inequality and the dominant role of finance. 1. High levels of debt: While South Africa differs from other countries that have adopted the Anglo-Saxon growth model in that government debt has remained low relative to GDP, household debt rose to an unsustainably high level of over 80% of disposable income in recent years. 2. Extreme levels of inequality: For historical reasons South Africa has always been characterised by unusually high levels of inequality. While some progress has been made during the past 15 years in addressing the extreme levels of poverty in South Africa, progress in addressing the overall level of inequality has been limited. This has been particularly disappointing, given that the local economy has enjoyed unusually robust growth rates in recent years. 3. Dominant financial sector: While South Africa was able to avoid much of the excess that typically accompanies the Anglo-Saxon growth model, IMF statistics reveal that the local banking sector plays an unusually dominate role in the domestic economy. Global Economic Trends - May to June 2011 8 Session Two: Global Instability The Great Recession of 2007 to 2010 has now come to an end, and the world economy has entered a relatively healthy growth phase. However, recent developments threaten to derail the still fragile global recovery. The year of the (black) swans: In 2007 the philosopher NassimTaleb released the bestseller The Black Swan: The impact of the highly improbable which focused on the extreme impact of certain kinds of rare and unpredictable events (or outliers) and humans’ tendency to find simplistic explanations for these events after the fact. This theory has since become known as the black swan theory. The year thus far has been characterised by two crucial events that could well be described as black swans, entirely unpredictable but hugely significant events, namely the revolutions in the Middle East and North Africa (MENA) and the earthquake and subsequent tsunami in Japan. The Arab Spring: The turmoil in the MENA region, also known as the Arab Spring, is probably best described as revolutionary wave of demonstrations and protests that have been taking place since late 2010. The crisis was sparked by protests in Tunisia on 18 December 2010 following the self-immolation of Mohamed Bouazizi in protest against police corruption and brutality. The success of the protests in Tunisia triggered a wave of unrest in Algeria, Jordan, Egypt and Yemen. The protests have also triggered similar unrest outside the region. As of April 2011, demonstrations had resulted in the overthrow of the heads of state of Tunisia and Egypt. Social instability continues to plague countries across the region, notably Libya and Syria. Earthquake and tsunami in Japan: On 11 March an earthquake, measuring a massive 8.9 on the Richter scale, hit the north-east coast of Japan. This triggered a tsunami which caused widespread destruction. The Japanese economy was already struggling to emerge from the financial crisis and now the twin natural disasters have set back that recovery process even further. The subsequent crisis at the Fukushima nuclear plant is still causing rolling blackouts, affecting production at some of the country’s largest companies. Japan estimates that rebuilding in the wake of the two natural disasters will cost up to $295bn. Global Economic Trends - May to June 2011 9 While the instability in MENA and the crisis in Japan (the world’s third largest economy) are individually potentially disruptive events, the combined effect of these two factors poses a particularly lethal threat to the emerging global recovery. Firstly, some of the countries caught up in the MENA turmoil are oil producers. As a result, the ongoing instability in the region has the potential to significantly disrupt oil output. Secondly, the nuclear crisis triggered by the Japanese earthquake and tsunami has raised public resistance to nuclear power in countries around the world. Given that nuclear energy was widely regarded as a crucial alternative to carbon fuels, the Japanese meltdown is likely to result in increased demand for oil, coal and gas - at least in the short-term. Thus, as a result of the two “black swan” events seen thus far this year, the potential supply of oil is being disrupted just as demand for oil looks set to rise – both as a result of the emerging global economic recovery and because of concerns surrounding nuclear energy. It is estimated that every $10 rise in the oil price trims global GDP by approximately 0.5% over the next 12 months. As a result, the current surge in world oil prices poses a very real threat to the global economic recovery. Additional threats to the global recovery: Unfortunately, even before the “black swan” events of MENA and Japan hit the unsuspecting world economy this year, there was already a wide array of more fundamental crises that were threatening the sustainability of the global recovery. 1 – European default: In early 2010, fears of a sovereign debt crisis developed concerning some European states - including the so-called PIGS (namely Portugal, Ireland, Greece and Spain). This led to a crisis of confidence as well as the widening of bond yield spreads between these countries and the core Euro members, notably Germany. In 2010 the debt crisis was mostly centred on events in Greece, where there was concern about the rising cost of financing government debt. In May 2010, the Eurozone and the IMF agreed to a €110bn loan for Greece. This was followed by a €85bn rescue package for Ireland in November. This year the debt crisis has re-surfaced, with Portugal now in negotiations with the European Commission, the European Central Bank and the IMF for the Eurozone’s potential third bailout. Investors remain concerned that the crisis could ultimately spread to Spain – the fourth largest regional economy. A bailout for Spain could deplete the region’s emergency reserves and could ultimately threaten the future of the euro. 2 – Anglo-Saxon austerity: The heavily indebted Anglo-Saxon economies are attempting to tackle their increasingly unsustainable levels of debt via a range of austerity measures Global Economic Trends - May to June 2011 10 including tax hikes and harsh cuts in government services. The United Kingdom is leading the way as it is already one year into its own austerity programme as it attempts to tackle its $1.3 trillion debt. But there are concerns among many leading economists who argue that slashing government spending at a time when the economic recovery is still fragile may well derail the recovery before it is able to gather sufficient momentum. In America the austerity debate has become more urgent since the ratings agency Standard & Poor’s (S&P) revised its outlook on America’s long-term sovereign debt to “negative”. S&P argued that relative to its peers, the US has very large budget deficits and government debt is rising. Of particular concern, S&P noted that there is a very real risk that US policymakers will not be able to reach agreement on how to tackle these issues which could ultimately force the agency to downgrade its rating on US sovereign debt. Given that the US is home to the world’s reserve currency, a debt downgrade could have significant repercussions around the globe. 3 – Commodities boom: One of the more extreme measures adopted by several major central banks in the wake of the recent financial crisis was quantitative easing. This measure was used by America, Britain and the Eurozone once they had slashed official rates to, or close to, zero but required additional stimulus for the economy. Essentially the central bank credits its own bank account with money it creates electronically and then uses these funds to buy government bonds or other financial assets from commercial banks and other financial institutions. The intention is to flood the economy with additional funds, thereby reducing longer-term interest rates and encouraging increased lending. This should ultimately encourage increased levels of economic activity. However, one of the unintended consequences of quantitative easing is that, rather than invest in the real economy, investors use the cheap money created by the central banks to purchase other investments, such as shares and commodities. The introduction of quantitative easing measures by the world’s central banks has seen a surge in global commodity prices, resulting in unintended economic hardship around the world as food and oil prices soar. Finally, the lowering of interest rates resulting from quantitative easing also appears to be contributing to asset bubbles in other economies, as investors in the industrialised world seek better returns. 4 – China asset bubbles: In addition to the swift announcement of a large fiscal stimulus package in the wake of the financial crisis, the Chinese authorities also instructed the nation’s banks to increase leading to development companies controlled by local Global Economic Trends - May to June 2011 11 governments. Chinese banks responded by roughly doubling their lending activity in what some analysts have described as a “lend first, clean up the mess later” policy, which has raised concerns among many analysts and bankers that it could lead to a spike in the number of non-performing loans. Analysts and policy makers are also concerned that the surge in bank lending has resulted in asset bubbles developing on both the stock market and in the housing market. Fortunately, the Chinese authorities are well aware of the risks posed to their financial system by the excessive bank lending in the wake of the financial crisis and they have introduced a series of measures in an attempt to bring bank lending back to more sustainable levels. Nonetheless, the prospect that China may be vulnerable to a bursting of either the equity or housing asset bubbles is particularly unnerving to investors, as China is currently providing the primary engine of growth for the global economic recovery. If this growth engine were to falter, the world economic rebound could easily be derailed. 5 –The return of inflation: A further unintended consequence of the massive monetary and fiscal stimulus measures implemented by governments around the world in response to the Great Recession has been the return of inflation. The current surge in global commodity prices reflects both the impact of the excess liquidity created by quantitative easing but also the fact that the current global economic recovery is being driven by Asia, where growth is typically more commodity-intensive. This is particularly true of the world’s current growth engine, China. The pressure is clearest in fast-growing emerging markets, where people spend a large portion of their incomes on food. The resurgence of price pressures in China, now the world’s second largest economy, is of particular concern since if the government’s attempts to fight inflation cause the economy to falter, that would cloud the outlook for the world economy. 6 - Persistent unemployment: One of the key characteristics of the Great Recession has been the unusually high level of unemployment caused by the downturn. This has been true of both the industrialised and emerging economies. However, while many emerging countries have managed to revive their labour markets relatively quickly, unemployment rates in the West remain at uncomfortably elevated levels, despite several quarters of positive growth. The persistence of unemployment in the wake of the Great Recession is contributing to heightened levels of social turmoil worldwide, from public resistance to proposed austerity Global Economic Trends - May to June 2011 12 measures in the West to the social unrest currently surging through the MENA region. The IMF chief recently described persistent unemployment amongst the youth in countries like Egypt and Tunisia as a “ticking time bomb”. However, some countries in Europe, such as Spain, are also struggling with unsustainable high levels of unemployment among their youth. Unwinding the excess: Central bankers around the globe now face the difficult task of unwinding the stimulus measures introduced during the Great Recession, without derailing the still fragile economic recovery. If they move too quickly they run the risk of tipping their economies back into recession, but if they move too slowly they run the risk of unleashing a renewed bout of inflation. In the West, the European Central Bank is leading the way, raising its key short-term benchmark rate from a record low of 1.25% in early April. However, neither the Fed nor the Bank of England is expected to raise interest rates any time soon. In China, the authorities have raised interest rates repeatedly in an attempt to prevent the economy from overheating. Investors are watching the central bankers closely, as the risks they decisions pose to the global economic recovery remain high. South Africa amidst the global turmoil: The South African authorities successfully implemented a range of measures aimed at stimulating the local economy in the wake of the Great Recession and local economic activity has clearly entered a recovery phase. Local interest rates have reached a lower turning point, and analysts expect the Monetary Policy Committee to announce the first interest rate hike towards the end of the year. However, despite the success in reviving economic growth, the government continues to face a far more serious challenge, unemployment. Unemployment in South Africa was already very high before the crisis – with overall unemployment at 24% and youth unemployment at around 50%. However, the job losses during the Great Recession have made an already dire situation much worse. The IMF notes that although South Africa did not have a financial crisis and suffered a relatively mild recession during 2008/09, the country lost proportionally as many formal sector jobs (one million) as those countries at the centre of the global crisis. Given that the head of the IMF has described the high levels of inequality and joblessness in Egypt and Tunisia as a “ticking time bomb”, the fact that South Africa is making little progress on both these fronts is a source of serious concern. Global Economic Trends - May to June 2011 13 Session Three: Future Value Even as the effects of the worst recession since the Great Depression fade, it seems that the world economy is approaching a critical turning point, one which may well require a reevaluation of the way in which the earth’s limited resources are currently allocated among the world’s burgeoning population. Demographics – growing demand: The UN Population Division calculates that sometime in late 2011 the world’s population will reach seven billion. And, although the population explosion is slowing, it is far from over. Not only are people living longer, but with 1.8 million women now in their childbearing years, the global population will keep growing for another few decades at least, even though each woman is having fewer children than she would have had a generation ago. But 2050 the total population could reach 10.5 billion or it could stop at eight. The difference is about one child per woman. The middle road is the UN’s best estimate and that estimate puts the world’s population at nine billion by 2045. Resources – limited supply: With the population still growing by about 80 million a year, how the world’s limited resources will be distributed amongst the world’s population is an increasingly important issue. Amidst growing evidence of environmental degradation and with close to a billion people going hungry each day, the fact that there will probably be two billion more mouths to feed in a few decades from now is pushing the issue of how to correctly value and utilise the existing natural capital up the global agenda. If the billions of poor attempt to lift themselves out of poverty and adopt the growth path adopted by wealthy countries, clearing forests, burning coal and oil and freely scattering fertilizers and pesticides, the pressure exerted on the world’s natural resources will be severe. Water: Fresh water is essential for life, but has no substitute. Although it is mostly unpriced, it is probably the most valuable commodity in the world. Nature has decreed that the supply of water is fixed, but demand is steadily rising as the world’s population increases and grows richer. Homes, factories and offices are consuming ever greater quantities. However, it is the planet’s growing need for food and the water consumed in the production of crops and meat that matters most. Thus far the world has been spared a true water war. But with over 60% of the world’s population living in a river basin shared by two or more countries, the scope for conflict is clear. Global Economic Trends - May to June 2011 14 Food: The world’s food system is in crisis. Prices have rocketed and are now higher in real terms than at any time since 1984. Food has played a role in the uprising in the Middle East and is adding millions to the number who go hungry each day. This is the second price spike in less than four years. The main reasons for the current spike in prices are temporary: droughts in Russia and Argentina, floods in Canada and Pakistan and export bans by countries wishing to protect their own supplies. Influences outside agriculture make matter worse, such as the soaring oil price, which has pushed up the cost of inputs. But in the longer-term, the global food system faces a more fundamental problem. It is estimated that food production will have to rise by 70% by 2050 to keep pace with population growth and the changes in diet that wealth and urbanisation bring. However, raising production from current levels will be harder to achieve than in the past because there is little unfarmed land to bring into production, no more water and in some places little to be gained from the use of more fertiliser. Climate change may well exacerbate these problems. Consumption-led growth: As already noted, the world’s dominant economic growth model, the Anglo-Saxon growth model, depends fundamentally on debt-financed consumer spending as the primary engine of growth. Even as the consumption-led growth path appears to have run its course in the industrialised countries, there is increasing evidence that its influence is shifting East. It has been calculated that the resources of approximately three and a half Earth’s would be required to allow the entire world population to adopt the consumption patterns of the average American. It is thus clear that it is not feasible for the populous emerging nations of the East to adopt the Anglo-Saxon growth model in its current form. The rise (and rise) of China: China has risen from Communist isolation to an emerging superpower in just three decades. China led the world out of the Great Recession with an economy that is more than 90 times bigger than when the authorities adopted free-market reforms in 1978. China overtook the US in 2009 as the bigger automobile market and Germany as the largest exporter. The nation is the world’s number one buyer of iron ore and copper and the second-biggest importer of crude oil. Four of the world’s top 10 companies by market capitalisation are from China while the nation is home to four of the world’s 10 biggest banks by market share. Since introducing free-market policies, China has lifted 300 million citizens out of poverty. However, the country remains a developing nation, with its per capita gross national income ranked just 127th in the world, behind Angola and Azerbaijan. Global Economic Trends - May to June 2011 15 Japan’s economy was worth $5.5 trillion at the end of 2010, while China’s was closer to $5.8 trillion in the same period, officially making China the world’s second largest economy after America. Japan has been hit by a drop in exports and consumer demand, a slump which has been compounded by the recent earthquake and tsunami. In contrast, China has enjoyed a manufacturing boom in the wake of the Great Recession. At its current rate of growth, analysts expect China to replace the US as the world’s largest economy in about a decade. The US economy is currently almost three times the size of the Chinese economy in dollar terms. Decline of the American empire: Recent economic, financial and geopolitical events have prompted historians and analysts to suggest that the decline of the American empire has started. After the collapse of the Soviet Union there was a brief period where the world switched from a bipolar balance of two superpowers to a unipolar world with one economic, financial and geostrategic superpower i.e. the United States. But now three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire has started. Firstly the US squandered its power by relaying excessively on its hard military power in the wars of Iraq and Afghanistan and its unilateralist foreign policy, rather than relying more on its soft power of diplomacy and multilateralist approaches to global policy issues. Secondly, regardless of mistaken US policies the rise of other economic and financial powers, the rise of China, the integration in the European Union, the emergence of India and the rise of other regional powers such as Brazil and Iran, implies that the relative economic, financial and geopolitical power of the US will be reduced over time. Finally, the US has squandered its economic and financial power by adopting reckless and unsustainable economic policies. Demise of the dollar: The dollar is currently the world’s reserve currency. It is estimated that 85% of foreign exchange transactions worldwide are trades of other currencies for dollars. OPEC sets the price of oil in dollars and the dollar is the currency of denomination of half of all international debt securities. More than 60% of the foreign reserves of the world’s central banks and governments are in dollars. However, with the so-called American empire in decline, it appears that the dollar’s reign is now coming to an end. Analysts suggest that during the next decade, there is likely to be a profound shift towards a world in which several currencies compete for dominance. The return of gold: Gold has rallied strongly this year, extending a decade-long advance the best run in bullion since at least 1920. The primary factor behind gold’s rally appears to Global Economic Trends - May to June 2011 16 be investors’ fear over the dollar’s decline. As long as the US keeps interest rates at current record lows, investors will keep buying gold. In fact gold advanced to a record high in later April after the Federal Reserve pledged to keep interest rates near zero to bolster the recovery. It seems the prospect of currency debasement and accelerating inflation are fuelling investor demand. Turmoil in the MENA region and sovereign debt turmoil in Europe have also contributed to the rally this year. Redefining value: In the years after World War 2 (WW2), gross domestic product (GDP) became established as the main tool for evaluation national economic strength. But in the 1990s, the inherent limitations of GDP as a measure of progress and prosperity became apparent, including its failure to reflect the distribution of income or environmental costs. As a result a range of international organisations started developing composite indices to measure development. Growth and prosperity: One of the first attempts to measure prosperity – i.e. to measure progress beyond the growth recorded by GDP, was Nobel Prize laureate Amartya Sen, who established the Human Development Index (HDI). The HDI has since become an important measure of development, as it covers health, education and per-capita income and thus combines measures of both economic and human progress. Then, in the mid-1990s, the World Bank adopted the idea of a Green GDP accounting system to measure the actual national wealth of a nation or region. This system was based on traditional GDP measures, but also factored in the exhaustion of natural resources or environmental damage, thus focusing on balancing economic growth with resources and the environment. Importance of inequality: There is a growing realisation amongst analysts that it is not only the overall level of growth within an economy that matters but equally the distribution of that income amongst the country’s citizens. Research suggests that valuing growth above equality in rich societies results in shorter, unhealthier and unhappier lives. It increases the rate of teenage pregnancy, violence, obesity, imprisonment and addiction. Scatter-graphs reveal a strong correlation between a country’s level of economic inequality and its social outcomes. This has nothing to do with total wealth or even the average per-capita income. America is one of the world’s richest nations yet has the lowest longevity of the developed nations and a level of violence that is off the scale. Of all crimes, those involving violence are most closely related to high levels of inequality, an important statistic for South Africa. It is clear that it is not just the poor, but whole societies that are adversely affected by inequality. Global Economic Trends - May to June 2011 17 Pursuit of happiness: Attempts to measure development in a more comprehensive way has resulted in a new field of research, namely happiness economics. Gross National Happiness (GNH) is one of the experiments in this field. It was first proposed in the early 1970s by the King of Bhutan, who believed that government should aim to create happiness and balance the material and the spiritual. The GNH index identifies four pillars of national development: good governance, economic growth, cultural development and environmental protection. The concept is gaining international recognition. In 2008, French president Sarkozy established a commission, including Nobel laureates Joseph Stiglitz and Amartya Sen, to examine measures of economic performance and social progress. The resulting report advises that methods for measuring national economies be reformed so as to include subjective happiness, quality of life and distribution of income. While preferring the term “wellbeing” to “happiness”, British Prime Minister David Cameron is the latest high profile politician to suggest that the time has come to admit that “there’s more to life than money and it’s time we focused not just on GDP but on GWB – general wellbeing.” Green - a fad or future trend? Before the Great Recession, there was a growing interest amongst governments and investors around the world in the opportunities offered by clean energy technology. However, the slump in global economic activity which accompanied the Great Recession – and the deterioration in government finances in the Western world – resulted in many planned clean technology investments being scrapped or delayed. While many investors suggest that alternative energy is a “nice to have” for rich, developed countries – the persistent interest, and investment, in clean technology still evident in both the Middle East and Asia suggest that this is indeed a growth sector of the future. Growth and investment opportunities: Investors are faced with a difficult task when attempting to select growth sectors amidst the turmoil and uncertainty that currently characterises economies worldwide. However, opportunities do exist in areas as diverse as: - Clean energy technology: Opportunities in this sector would include everything from renewable energy generation - such as solar, wind and wave - to technology to improve energy efficiency – such as housing insulation and electric vehicles. - Infrastructure investment: A by-product of the Anglo-Saxon growth model was a tendency to neglect infrastructure. Thus a revival in infrastructure investment, coupled with the roll-out of the new infrastructure required for the alternative energy sector, suggest that this will be a growth sector in the years ahead. Global Economic Trends - May to June 2011 18 - Resources: With the global economy increasingly dependent on resource-intensive growth in Asia, demand for industrial commodities is likely to intensify. Furthermore, surging global population numbers suggest that demand for resources such as food and water will similarly continue to rise. Finally, growing demand at a time of increasingly limited supply suggests that the recycling of waste – including plastics, rare earths and water – will become an increasingly viable business. Conclusion While nothing appears to have fundamentally changed in the wake of the Great Depression, a closer examination of the underlying economic and political trends suggests that the previously dominant Anglo-Saxon growth model is fundamentally flawed. In an increasingly integrated and resource stressed global economy it seems likely that a new, more sustainable economic growth model will emerge. This new model will require citizens and investors alike to redefine their perceptions of value. Global Economic Trends - May to June 2011 19