- PIMCO coined the phrase the 'New Normal' to describe the world's new economic reality
- It forecast advanced economies would face sluggish economic growth, among other problems
- PIMCO said policymaking needed to be pro-active in its response, but this did not happen
- The 'New Normal' is now morphing into a more uncertain and unstable phenomenon
Once again, high-level government officials, thought leaders and CEOs from virtually every corner of the globe will gather in the Swiss Alps for the annual Davos meetings. Once again, the agenda is wide-ranging and interesting. And, once again, those of us witnessing the festivities from afar will hope that this impressive mix of brainpower and personalities can contribute to a better understanding of what ails the world and, importantly, what needs to be done to improve global welfare.
The unifying theme for this year's Davos gathering -- "The Great Transformation" -- is a good one, albeit overdue. It speaks to the set of multi-year global re-alignments which is impacting both advanced and emerging countries. It directs participants to analyze why the world seems so ill-equipped to handle the related changes in the economic, political, social and institutional domains. And, going forward, it holds the promise for implementing better collaborative solutions.
Here at PIMCO we have been thinking about these realignments for awhile. Back in 2009, we came up with a simple term -- the "New Normal" -- to convey the notion that, after the shock of the financial crisis, the global economy would not reset either smoothly or quickly. Instead, the world would witness material transformations that would create strains, challenge conventional wisdom and, critically, require both intellectual and operational agility -- both in the public and private sectors.
Based on our analysis of the underlying drivers, we argued that advanced economies would face an unfortunate mix of unusually sluggish economic growth, persistently high unemployment, and recurrent debt and deficit concerns. Meanwhile, systemically important emerging economies (led by Brazil, China and India) would accelerate their developmental breakout phase. The impact of this would go well beyond the critical objective of lifting millions of citizens out of poverty, and would have implications for the functioning of the global economy.
In light of all this, we stressed the importance of preemptive and proactive changes in policymaking at the national, regional and multilateral levels -- as a means of ensuring orderly and welfare-enhancing transitions. And we noted that this would require a material evolution in both the what and how of policymaking.
Unfortunately, such changes have not been sufficiently forthcoming, especially in advanced economies. Indeed, rather than respond boldly to the new normal, policymakers fell deeper into the trap of "active inertia" -- namely, appearing active yet essentially remaining hostage to outdated mindsets and old (and increasingly ineffective) approaches. Also, matters were made worse by a combination of initial denial, inadequate recognition, and recurrent bickering among key decision makers in both Europe and the U.S.
As a result, the new normal is now morphing into a more uncertain, unstable and challenging phenomenon. And part of the related distribution of potential outcomes is far from reassuring.
Rather than a traditional bell-shaped distribution curve for advanced economies, the world is now increasingly facing what can be best characterized as a bimodal distribution -- one can think of it as like the back of a two-humped camel.
Within the next few years, a tipping to one of the two extremes of the distribution is more likely -- either into the good equilibrium involving the restoration of conditions for sustainable growth, meaningful job creation, and orderly financial rebalancing; or into a nasty one characterized by higher unemployment, debt deflation, financial instability, and even greater income and wealth inequalities.
This morphing, from a bell-shaped curve to a bimodal world, is most apparent in Europe. Its 2011 muddle-through is likely to give way to one of two outcomes -- a very messy fragmentation of the eurozone or its evolution into a smaller, less imperfect and more robust zone of countries with similar initial conditions.
Against this background of a changing distribution of potential global economic and financial outcomes, let us hope that Davos will discuss the world's "great transformation" in the context of what needs to be done to restore the global economy on the path of sustainable growth, job creation and financial stability. It would be particularly important for the impressive list of participants to reach a consensus on six key issues:
• How Europe can transition to an institutional and policy framework that provides for the combination of economic growth, jobs, sovereign debt containment, and a robust financial services sector?
• How the U.S. can overcome paralyzing political dysfunctionality in order to strike the appropriate balance in key areas: Between immediate stimulus and medium-term fiscal improvements, between tax and spending reform, between business incentives and stronger social safety nets, and between the welfare of baby boomers and other generations?
• How the systemically-important emerging economies -- including Brazil, China and India -- can effectively assume their greater global responsibilities while continuing to meet the legitimate aspirations of their citizens?
• How to accelerate the glacial pace of reform of multilateral institutions so that they better reflect the global realities of today, rather than continue in their attempts to legitimize outdated feudal entitlements?
• How all this can be combined with environmental realities, as well as the restoration in the eyes of the majority of people of faith in the fairness and effectiveness of market-based systems?
• How transition countries, including those in the Arab world, can pivot from dismantling discredited systems to building a better future?
This is quite a long and daunting list; and the history of Davos does not provide much reassurance that it will be addressed properly. Yet we must all continue to hope and urge that things will be different this time around. The welfare of billions around the world is at stake.