Economic restructuring needed

The following comment by me appeared in the latest Fund Strategy (29 June).

Last week’s World Bank forecast on the global economy was enough to bring misery to anyone looking for “green shoots”.

The international financial organisation is expecting a 2.9% fall in global output this year. That is appalling. It is rare for global output growth to dip below zero.

Usually, a recession in one area is offset by stronger growth elsewhere. A nearly 3% fall on a global scale means misery for billions.

The detailed figures are as bad as the headline ones. Global trade looks set to fall by 10%, while private capital flows will plummet.

An Economic Outlook published by the Organisation for Economic Co-operation and Development was almost as downbeat with a forecast of 2.2% growth this year. However, it is slightly more optimistic about the prospects for global recovery.

Several lessons can be drawn from these figures. Most obviously, economic recovery is still a long way off. Although some indicators have improved, it is only to be expected given the massive scale of financial and monetary stimulus. Overall, the world economy remains in a dire state.

It also raises awkward questions about the likely nature of the recovery. Although a recovery of sorts will come, it looks set to be anaemic. But most importantly, it raises the need for economic restructuring. The world’s economic authorities have generally been fairly successful if measured by the relatively narrow goal of maintaining stability. The financial system has not collapsed, despite teetering on the edge at points. But restructuring the economy to allow for dynamic growth is another matter.

A cultural shift in the way economics is viewed is necessary for restructuring to be successful. It means ditching the dogma of environmentalism and “sustainability”. Such ideas are essentially about placing limits on economic growth. Yet what is needed is the exact opposite: unleashing growth so it can achieve its full creative power.

It is also necessary to let weak businesses go under. Rather than maintain clapped-out companies for the sake of stability, the emphasis should be on encouraging new, more dynamic sectors of the economy.

Strong economic growth is enormously beneficial to the whole of society. But achieving it means being prepared to encourage a fundamental cultural and economic shift.