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Restructuring the World Economy - a modest aim

“Restructuring of the Global Economy”, the title of a conference being held in Oxford later this year is ambiguous: it isn’t clear whether it will record current trends of ongoing global economic restructuring or advocate solutions to problems that require the world economy to be restructured.

The desired focus of papers being called for by the Academy of Business & Retail Management (ABMR) can be assumed to be on business and retail themes or solutions: issues of management, logistics, supply lines, online shopping etc. rather than the financial backdrop that might be said to create the environment in which business and retail prosper or not.

But is improving supply side structure is enough to resolve current business and retail problems? Or are the underlying monetary, financial, economic and perhaps most pertinently, demand dynamics, as, or more influential in determining where the global economy goes from here?

Primark shopping

Massive leveraged investment preceded the 2007 financial crisis. Borrowing to invest fed on itself by disproportionately inflating asset prices thus encouraging a circle of credit expansion and investment. And central bankers and politicians said it was good as businesses and retailers appeared to flourish in the supposed “wealth effect” generated in that synthetic atmosphere.

But the built and half-built houses and blocks of flats from China to Spain to Ireland to Florida lying empty; piles of unsold $2 pair of denim jeans and the rise of Primark shopping testify to overcapacity. The supply of production capacity was massively expanded by credit extended on the assumption that the demand for goods was insatiable and the means to pay for the goods fathomless.

Choking production

The current downturn, described by some as secular stagnation, will prevail until that overproduction is choked off. Collapsing demand and tumbling commodity prices are a barometer for future industrial demand. Secular stagnation seems likely to be followed by a period of secular contraction or secular destruction.

Fiscal and monetary policies adopted in response to the financial crisis have, so far, failed to rebalance leverage, despite the increased capital requirements imposed on banks. The consequence has been a continued surfeit of capital. The constraints on its deployment have resulted in the boosting of asset prices and a boom in emerging market borrowing.

The absence of a sea change in retail or innovation on the scale of the computer or the internet seems unlikely to revive business and retail. The promise of “helicopter money” dropped by central banks seems to be more likely to exacerbate the problems than resolve them.

While historical parallels are dangerous we did see an extraordinary period of innovation with the development of such things as the car and the spread of electricity and things that ran on electricity in the 1920s. That wave of innovation might be said to have “run out of steam” by 1929when mass unemployment bore testimony to overproduction.

Calling for papers on the restructuring of the global economy is admirable as there is currently a great shortage of ideas of how to resolve global economic problems. However ambitious, the conference must be wished success in determining how the current momentum can avoid policy pitfalls that plagued the past.

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