In search of ways to respond to the complex challenge of slowing growth and high inflation, decision-makers are turning to the history of the global economy, especially the transition from the stagflation in the 1970s to the period of high growth in the 1990s. They are finding answers in the successful fiscal policies of that time. These included the construction of major infrastructure projects, reducing general public or social welfare expenditure, large-scale tax cuts, the promotion of exports, the increasing of competition in what had been monopolistic industries, and the encouraging of technological innovation and entrepreneurship.
Not your father’s stagflation
But the world faces circumstances today that are totally different from the past. Except for the construction of major engineering projects, fiscal policy may not be so effective for certain reasons: First, the aging demographics of major economies requires high social-welfare spending. Second, given the premise that industrial structures are not fundamentally changing, capital investment and spending on infrastructure projects could simply lead to excess capacity. Third, geopolitical and technological (geo-technological) competition is fragmenting international markets and supply chains. The game of the great powers is indirectly supporting and amplifying the role of protected enterprises, curbing technological innovation and entrepreneurship.
Complicating matters further are factors constraining the ability of monetary authorities to rein in inflation. These include the Russia-Ukraine conflict, the mounting food and energy crises as a result, the ongoing pandemic, and climate change, which are all driving up inflationary pressure around the world.
In the coming five years, the world could see unemployment and inflation rise, while already slow growth rates decline further. This will prompt consumption to fall and the gap between the rich and the poor to widen, heightening the risk of social unrest. Policymakers will then be under pressure to take measures to promote industrial restructuring and regional integration and essential collaboration to meet all the complex challenges.
The primary task is to adjust industrial structures. This essentially means a wholesale digital and green industry transformation. But in relevant frontier areas of high tech such as hydrogen energy and quantum computing, critical breakthrough thresholds or tipping points have not yet been reached. This means that the energy sector structures in the US, the European Union (EU) and China will not change substantially in the short term.
Meanwhile, trending technologies such as digital collections (online databases of digital objects), Web 3.0 (the third generation of the World Wide Web) and the Metaverse – the interconnected network of virtual spaces – cannot yet drive a long industrial value chain. The reality is that these revolutionary technologies will not enter the mainstream for several years still. Almost all economies are actively shaping their legal, tax and financial frameworks to be conducive to the development of new industries and to encourage entrepreneurship in them. Global venture capital investors are allowing their patience to be stretched, adjusting their strategies to accept longer periods before seeing returns on their money.
The commercialization of the new wave of technologies will take at least three or five years so they have no choice. With global digital giants shrinking, many highly competitive smaller tech enterprises will emerge, providing fresh booster fuel for the battered global economy, which looks to be stalling in most places.
Regional integration through recoupling
This implies that policymakers around the world should apply their efforts at structural economic reform to another important task: the need to promote regional integration. Despite what seems to be a prevailing preference for decoupling and strategic competition, regionalization will have to be the fundamental characteristic of the globalization narrative over the next decade.