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The global economy: who will lead next?

The shifts of economic power have left the world without clear leadership.

Two simple questions.

First, what is a global economy? It might be a true and fair statement, as auditors say, to call it an end to economic geography: a single unified marketplace for all goods, services, people, skills and ideas-- and complete equality of treatment for all economic agents. There would be no such thing as an economic foreigner anywhere in the world. Second, do we live in a global economy? No, at least not as I just defined it. But of course we do live in a world of increasing economic interdependence.

In terms of growth numbers'gross domestic product, real income and trade--the 1950s and 1960s delivered the best the world economy has seen so far. And the world economy was not global then; it was a small world. International travel and international business were still an adventure for most people. No personal computers, no fax machines, no CNN, no 24-hour financial marketplace and virtually no business failures.

Perhaps it is not so surprising the western nostalgia industry does so well with the 1950s and 1960s. The war was over, huge reconstruction and consumer demand had to be addressed and U.S. hegemony provided a stable framework. U.S. Marshall Plan aid put Europe back on its feet. There was the baby boom, with the American dream providing a social driving force. Elvis Presley and Chevrolet provided the popular music and the transportation. And business planners worked happily in stable dollars with upward-sloping trend projections. Those were the days.

The cold war worried many people. But environmental damage wasn't an issue and neither was unemployment, which typically ran at 2.5% to 3% in the Organization for Economic Cooperation and Development (OECD) area. Nor was the world population explosion an issue, although it was about to take place. You could have called this period the small, stable 1960s. But behind the numbers and the headlines things were changing.


The testing of U.S. hegemony started in the 1960s. It was discovered that Japan and a number of European states might be catching up to the United States in economic terms. However, this was offstage when compared with the growing social and economic impact of the Vietnam war in the late 1960s. The 1968 student unrest and the rioting across the metropolitan OECD world caught the older generation almost completely unaware. And in France it led to the exit of General de Gaulle, who was thought until then to be indestructible. President Nixon ended dollar-gold convertibility in 1971, an action that effectively brought an end to the world of fixed exchange rates that had been put in place at the end of World War II.

Then in 1973 the Organization of Petroleum Exporting Countries (OPEC) delivered oil shortage number one, while the Nixon--Kissinger team concluded the war in Vietnam was lost and had to end. We moved swiftly from the small 1960s world of growth and no shocks to a larger 1970s world of shocks and no growth. You couldn't do business planning with stable dollars and up-sloping trend projections anymore.

The 1973 oil shock did more than halt growth in the world economy: It sent tidal waves through the system. The first was a short, sharp wave of business failures, shattering the remarkable stability of the 1950s and 1960s. The second was a wave of inflation, and the third was the infamous wave of petrodollars. The consequences of the inflation were economically disastrous enough to produce a "never again inflation" mentality among policy makers. The consequences of the petrodollars were disastrous in a different way. Massive amounts of money were recycled as loans to developing countries. Many of these countries did not know how to use the funds and perhaps most of the money went into unproductive investments.

While these waves were rolling through the system in the 1970s, Japan was becoming an economic superpower, although it was not fully recognized as such until the 1980s. America's relative economic decline continued and its self-esteem on the world stage was pushed to new lows with the failure of the mission to rescue the hostages in Iran, leading in turn to the downfall of President Carter. Eu* rope saw the growth slowdown in the 1970s that culminated in what was felt so painfully by Europeans as the "Eurosclerosis" of the first half of the 1980s. But this sclerosis in turn helped to produce the reaction that led to an economically resurgent Europe in the second half of the 1980s.

When OPEC gave the world economy oil shock number two in 1979, the never-again mentality on inflation produced a tight policy response that helped to make a bigger OECD recession than might otherwise have been the case. As policy focused on containing and then driving down inflation, European unemployment reached nearly 11%, which meant that 19 million people in Western Europe in the mid-1980s were out of jobs.

Right at the bottom of the recession in 1982, the petrodollar recycling wave hit shore. Mexico couldn't make the repayments on its loans and the third world debt crisis began. It was going to take three years of crisis management to come to grips with the problem and another seven years to get it back under control.

So the small, stable world of the 1950s and 1960s had given way to the bigger shock-waved world of the 1970s, and we were about to enter the deregulated 1980s with its money society values and global finances. But all the while the world economy's growth rate had been slowing. Would the 1980s bring back the growth rate of the 1950s and 1960s?


Reaganomics in the United States and Thatchernomics in parts of Europe were the hallmarks of the 1980s. The soldiers' code of conduct is said to be: If it moves, salute it; if it's standing still, paint it white. Well, in 1980s Anglo-Saxon economics, if it was moving, you cut its taxes; if it was standing still, you deregulated it; and if it was military, you gave it more money.

After the recession of the early 1980s the world economy began to grow again, gathering momentum as the dollar strengthened and the United States sucked in imports. New moods and fashions, and different economic life-styles, were created. Europe came to life economically with its 1992 program for the single unified market.

But the underlying fundamentals were weakening in many economies. The United States began building up big trade and budget deficits. In all leading OECD economies savings ratios were falling and debt-income ratios rising as people were encouraged to borrow more in order to spend more. Corporate debt increased as others began to copy U.S. innovations such as junk bonds and leveraged buyouts. Productivity growth slowed to a crawl and unemployment, which had reached new peaks, refused to come down to where it used to be.

During these years income and wealth gaps widened, both within the rich industrial countries and between the North and South in the world economy. Money market financial engineering became more imaginative and more divorced from reality. The market was king. Leverage was smart, greed was good and champagne and Porsche sales boomed.

A new power known as the global financial market was created and set loose by deregulation. From smallish numbers in the early 1980s, global foreign exchange turnover grew rapidly to the equivalent of $1 trillion a day this year. This market now has the power to change the exchange rate of any currency in the world for whatever reason be it fashionable or fundamental.


By 1988 and 1989 one sensed that strong growth coupled with weakening fundamentals and excesses in the financial system could not last. The Anglo-Saxon economies were particularly vulnerable but so was Japan's, and Germany was about to change geographically and economically. Just as the money society party of the 1980s was coming to an unhappy end in the Anglo-Saxon world, communism collapsed in the former Soviet Union and in Eastern and Central Europe. And capitalism exclaimed victory at last even though it wasn't in very good shape itself.

The debt-burdened U.S. economy faltered and went into recession in 1991; then the economic superpower Japan began to experience painful withdrawal symptoms from its own version of the money society bubble economy: cheap capital chasing assets and thereby inflating prices. And Europe, which had enjoyed an economic gold rush to 1992, also ran into trouble.

The economic costs of the political triumph of German reunification seemed to be much higher than expected and are now mind-boggling. Tight money policies to keep the lid on inflation were exported from Germany to the rest of Europe via the exchange rate mechanism linking European Community (EC) currencies. The economic timing could not have been worse. Having agreed to effect a massive system change--the Maastricht single currency program--the weaker EC economies were trapped into higher real interest rates and public spending cuts in a cyclical downturn caused by the debt overhang from the 1980s. One could say this was a hugely ironic twist to Keynesian economics.

At the same time, European politicians were caught off guard by negative voter attitudes to the Maastricht Treaty, which represents the next step in an "ever closer union of the peoples of Europe.'' Europe was faltering, eco* nomically and politically.

The United States, Europe and Japan, which represent 75% of the world economy, entered the 1990s in deep economic trouble. In fact, when the International Monetary Fund added up all of the numbers, it showed the world economy as a whole had actually begun the 1990s in recession.

For a time, it looked as if the growth surge of the second half of the 1980s was going to take us back to sound growth rates in the 1990s. But what we had been expericing was just unsustainable, although it fooled many.


So what are we going to call the 1990s, and what should we be looking for? So far it's clearly the hangover decade: too much euphoria and too many excesses in the 1980s. But of course we have more to deal with than just a hangover from a financial party that got out of hand. The 1980s also generated widespread concern for environmental care and maintenance. We know we have to address the issue of sustainable development. And that's not all by far.

The world economy in the 1990s is operating with an entirely different set of systems than those of the 1950s and 1960s. But there was in those days, whether you liked it or not, someone clearly in charge of the systems. There was a responsibility for stability, and the United States assumed that responsibility. In today's multipolar world, there is no clear leadership. No one has the power or the means to assume responsibility for managing the new systems. And we don't seem to be able to do it collectively.

So the global economy of the 1990s is leaderless-and we have plenty of recent and current evidence of this-while at the same time there is a lengthening agenda of issues requiring leadership. The risk is that we will be driven by accident and not by design. So what will we call the 1990s--the no-navigation 1990s? And what lessons can we learn from where we are now and how we got here?

Lesson number one is that international leadership is indispensable but is now in short supply. Vulgar election and cheap-shot referendum campaigns will not help. A leaderless global economy is likely to be highly accident-prone, putting at stake our institutions and our stability.

Lesson number two is to focus on fundamentals, the very simple things that were so often seemingly forgotten in the 1980s. Soul-searching for subtleties is not the task at this point. Productivity is still the source of wealth creation, certainly not inflated asset values and financial engineering. Leverage is not good when it gets out of hand, that is, when it stretches the balance sheets.

Lesson number three is, "Don't believe the market can solve everything." It was only a couple of years ago when we were told there would never again be a shortage of capital; now banks hardly lend money. And in today's economic climate we should not rely on the market's returning to "normal."

We need to be stricter in our attitudes to what we call the market.

We need effective ground rules to limit the excesses. The mistakes have been serious enough to call into question our integrity and our ethics. We ourselves could begin by acting--but definitely not reacting in haste--because the situation is much too complicated. This distinguished and important gathering could assist by providing drive and a commitment to new ground rules, for example, more uniform accounting standards for agents in the global economy, and also greater determination by auditors to agree on harmonized recommendationsto go from words to action.

We need more courage and integrity in management circles to shout when we see an "emperor with no clothes." We've seen so many the last 10 years and very few people have shouted. We need more cooperation with politicians to shape and apply ground rules for limiting excesses in the way our market systems work. You have to have rules for freedom. Freedom without rules is chaos and uncivilized. We could start now with the rules of the game for making the global business community more transparent and sound, reducing some of the uncertainties that could restrict investment, wealth creation and sustained growth.

We have seen the world economic pendulum swing widely in the last 40 years. In fact, some of the swings have been lurches in which balance and harmony were lost and people were left bewildered and struggling.

If one has harmony and balance in mind, it is easier to recognize the lurches--whether they lead to overspending and greed or to exaggerated optimism or pessimism. In the lurch from the 1980s to the 1990s, I feel that pessimism is now prevailing a bit too much and should not be allowed to lead to yet another lurch into something else. Getting the global economy's fundamentals into shape--into harmony and balance--is ultimately the best thing for our local concerns' investment, our job creation our savings rates, our institutions our politics and ourselves.
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Title Annotation:includes Global Perspectives, a Sampling of Commentary from World Congress Speakers
Author:Gyllenhammar, Pehr
Publication:Journal of Accountancy
Date:Jan 1, 1993
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