What is the biggest problem facing the global economy in the coming years? The answer is important for us Canadians because we are a part of an increasingly globalized economy. We are affected very much by what happens elsewhere.
As the International Monetary Fund reminds us in its latest World Economic Outlook, the world economy today is extraordinarily fragile.
It is taking much longer than expected to recover from the Great Recession of 2008-09 and we are not back to normalcy yet.
Even Canada, which was not as hard hit, has experienced only modest growth and poor job creation since. If the rest of the world is not doing well, it is hard for Canada to do well. Moreover, we may be in for a long period of slow growth with more inequality and less ability for governments to sustain or improve well-being.
To get some clarity on the big problems we and others must address, the IMF and World Bank recently asked five winners of the Nobel Prize in economics to each identify what they saw as the biggest problem facing the global economy.
George Akerlof pointed to climate change.
For Paul Krugman it was the lack of demand in the economy, which meant underinvestment and weak job creation.
Robert Solow feared we face a prolonged period of slow growth — secular stagnation — in part driven by a slower pace of innovation and productivity growth and in part by an aging society.
For Michael Spence, the biggest challenge is to accommodate the growth of emerging economies such as China and India and the big need for change in our own societies as a result.
And for Joseph Stiglitz, the biggest challenge is growing inequality of incomes.
Each of these challenges is real. But those identified by Spence and Akerlof may be the most disruptive and difficult.
As Spence argues, the growth in incomes and competitiveness in the emerging market economies will lead to “dramatic changes” in the structure of both advanced and developing economies and the distribution of income and wealth.
In advanced economies such as Canada “technological and global market forces are reducing or eliminating an expanding array of jobs via automation, elimination of the middleman, and offshoring of global supply chains,” Spence says. Because of this, we have too few people with the right skills and too many with the wrong skills.
Correcting this huge mismatch has to be a top priority.
But there will also be a big need for the world to adjust the way it uses natural resources, Spence argues.
Failure to adjust the world’s use of natural resources “will result either in growth grinding to a halt or, worse, in catastrophic failure after an environmental or ecological tipping point. Environmental sustainability is essential to accommodate the rise of the developing world.”
This is where Akerlof, who sees climate change as the biggest problem, comes in.
The world’s high and growing use of coal, oil and natural gas is driving climate change, which is making the world’s average climate warmer, to the point where, if not addressed, will cause huge and costly problems for the world economy and make life on this planet far less comfortable.
Akerlof accepts that the science on climate change is pretty clear while “the economics of global warming is as well understood as any economic problem could be.” Likewise, he contends, “the best way to fight it (but not without considerable expense) is to place a uniform tax on carbon emissions; that tax should escalate until emissions fall to desirable levels.”
Governments would also need to subsidize research into ways to reduce emissions. The taxes and subsidies should be global, Akerlof says, because we are all in this together. What’s missing is action.
What Spence, Akerlof and the other Nobel winners essentially underline though is that we live in an increasingly global economy and that there is no hiding from this reality. Increasingly what were once domestic problems are becoming global problems.
To be sure, we can take actions at home that improve lives, such as making sure our education, innovation, health care and pension systems work as well as they can. But ultimately, we will have to find new ways to ensure globalization works for all. This means accepting shared responsibility and new forms of global governance to sustain a decent way of life. But we are not there yet.
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at firstname.lastname@example.org.