At the World Economic Forum in Davos this year, geopolitics took center stage, while concerns about the economy faded into the background.
But the global market gyrations of the last two days are a reminder that big economic stories are continuing to play out.
I talked to famed economist Nouriel Roubini to get his take on what’s been going on recently, as well as the big, broader stories.
He described the market events of the past week as a “mini perfect storm” due to the fact that we’re seeing weak data in China, fresh currency market turmoil in Argentina, and a worsening chaotic situation in Ukraine, the combination of which has triggered this market response.
He also touched on one of the other big themes of the year, which was the relationship between technology and inequality. Like others, he fears that without smart policy, the benefits of new technology will go to a very small part of the population, threatening capitalism itself.
Our Q&A is below.
What was the main theme at Davos this year?
Probably the biggest one was the rising tension between China and Japan. People are starting to make comparisons to 1914: You have a rising power facing an existing power, and in the past that has led to war.
Of course, it’s not inevitable, but both the Japanese side and even the Chinese side have made bellicose statements. So I hope diplomacy can succeed but I’d say that that was one of the big stories.
How big of a risk to the world economy are the troubles we’ve seen in emerging markets recently?
I was in a panel in plenary session about emerging markets, and I said that I think what happened last year might repeat itself this year. You still have, on the one side, concerns about the Chinese economic slowdown, there are concerns about how fast the Fed tapers and raises interest rates, commodities prices are becoming softer, many of these countries have not done structural reforms, and many of them have a lot of fragility, have lax monetary credit and fiscal policy.
And now there is a layer of political uncertainty, with the “Fragile Five” having parliamentary or presidential elections: India, Indonesia, Turkey, Brazil, South Africa. There’s also additional political uncertainty coming from other places like Ukraine, places like Argentina, places like Thailand, that affects markets.
So what happened this week was a bit of a mini perfect storm between Chinese PMI of 50, Argentina letting its currency go, noises coming politically from Ukraine, Turkey, and Thailand … so the contagion is not just within emerging markets but also affects advanced economies’ equity markets.
What do policy makers need to address going forward?
They need to have polices that restore stronger growth. There is a risk that if people are unemployed long enough they atrophy, they lose skills, so I think we have not done enough on boosting aggregate demand by using appropriate monetary and fiscal policies or even credit easing.
I think the long-term issues that the tech gurus here all excited about — innovation from IT to energy technology to biotech to new manufacturing technology like robots automation, and so on — the problem with all these great innovations is that they tend to be capital intensive, skill biased, and result in labour savings. We have a structural problem with job creation, so I would think about changing the taxation of labour versus capital, how we invest in better educational systems, vocational schools, and reducing payroll taxes as a way to increase demand for labour. Otherwise you have vicious cycle of little job creation, a rise in the share of profits and GDP, redistributing form those spending to those saving, that further reduces aggregate demand.
So inequality was also a theme. You have here not just the top 1% but the top 0.01%, So between technology, globalization, trade, the winner-take-all superstar effect, inequality is rising. This is not just a “moral” issue but also an issue of too little consumption too little savings that is bad for global growth.
So it becomes vicious cycle. It’s a bit like the old Marxist idea that if profits grow too much compared to wages, there’s not going to be enough consumption, and capitalism is going to self destruct. So I think that insight of Karl Marx is as useful today as it was 100 years ago.