Participants agreed that this year has been particularly complicated for the world economy. Risks are popping up in new places and the key role played in the past by the BRICS has faded to some extent. Geopolitical insecurity abounds in Europe (given the Brexit referendum, elections in Spain, difficulties in Greece, conflict in Ukraine, etc.) and the big question mark hanging over the American elections is also a source of instability. Turning these changes into opportunities requires reviewing the cards on the table and shuffling the deck.
The global economy changed over the past two decades as China and other emerging economies became increasingly powerful, relevant, and cohesive. It is now going through a new tumultuous phase as the BRICS either slow down towards a new normal (China in particular) or fail to overcome recession (Brazil and Russia, but also South Africa). The situation is clearly different depending on the specific country and region and we need to look at the interactions between drivers of change with broader political, business and finance dynamics.
Chances are high that China will maintain medium-run growth at 7%, which is obviously lower than in the roaring 2000s, but still represents an enviable outcome. There is additional pressure to innovate and this in turn makes strengthening macro- and micro-level institutions a top priority. Enfranchisement of the middle class is another challenge: so far, progress has been impressive (25-fold increase in income per capita) but expectations are very high and a lot should be done to unleash existing talents. Leadership is not only committed to these objectives, but also consistent in its Weltanschauung.
India is different, it is a noisy democracy, decision-making is much more difficult than in China, it lacks a clear national strategy and there are cultural obstacles to economic modernization – but India also presents exciting opportunities. Technology is being socialized and entrepreneurial spirits find a fertile ground as unnecessary regulations are removed.
This “new normal” presents challenges (China accounts for a quarter of global growth) but also opens up opportunities for the rest of Asia and, indeed, in emerging economies. These countries now need to build a second pillar – the domestic market – alongside their export route. The One Belt, One Road initiative is promising, as is the launch of the Asian Infrastructure Investment Bank. Another new trend is the emergence of “second/third generation” engines of regional growth (G20 countries such as Mexico, Indonesia, and Turkey, but also Iran, Nigeria and Vietnam).
In Latin America, in particular, after a cycle of Bolivarian, left-leaning populist experiments, a new season of pragmatism seems to be starting, in particular in Argentina (although Venezuela is a different story). The previous experiences proved not-so-successful: growth was sustained as long as the commodity super-cycle lasted and it did indeed allow tens of millions of citizens to join the consuming middle class, but they are now leaving behind a legacy of deindustrialization, poor education, feeble productivity levels and growth, mostly dysfunctional institutions and widening macro-economic imbalances.
The Macri administration took office in Argentina only a few months ago and has made impressive progress, especially in reaching a final agreement on the debt with the so-called hold-outs and finalizing a record bond issue. Polls show his support is at high levels; if he manages to terminate his mandate it will be the first time a non-Peronist achieves this apparently non-controversial goal. The lingering question is whether this time the maturing of Argentinean politics is for real. There are definitely many obstacles on the horizon: opposition remains strong, inflation is already pretty high, and Pope Francis maintains a very high profile expressing anti-liberalism views (in the economic sense) which carry considerable political weight.
Another major development is the opening of Iran, a country with an immense potential but that risks remaining largely unfulfilled unless new conditions emerge. The struggle between pragmatists and those acting on principle will continue for a long time. The paradox is that the country is the most Islamist in terms of politics but the least so when it comes to societal preferences. External actors will also influence the medium-term scenario: giving away too much to Tehran before all conditions for removing sanctions are met may be inappropriate, but resuming normal international financial relations is necessary if Rohani is to maintain the support of Iranians.
Against this backdrop of changing global economic geography, global governance is also experiencing transformational changes. Global order was based on the West’s ability to produce global (and relatively well-distributed) growth and this assumption is increasingly under attack. At the center of the new architecture (especially this year at the G20) stands China – an authoritarian state that remains paranoid about relinquishing any control. It may prove difficult to live harmoniously with the rest of the world, but – after all – China already enjoys veto powers over international decisions, from trade to climate change. Furthermore, the growing possibility (or at least decreasing impossibility) of a “disastrous Trump victory” also hints at the risk of an isolationist retreat in the United States. The attitude towards free trade may change and the fate of mega-regional agreements is a major question mark, due to growing disaffection with trade liberalization.