Sunday, December 12, 2010

A (Failing) Global Economic Report Card

What do you see when you look at the global economy? In fact, if I asked you to make a report card for the global economy, how do you think it would score?

You might suppose, as most do, that we're in the final stages of a big, scary--but ultimately transient--financial crisis. Here's what I'd suggest. We're not. We're smack in the middle of a bigger, broader, more enduring global economic failure--and, ultimately, in the incipient stages of a great reconfiguration and reinvention.

I'd like to suggest that we're witnessing a global economy that's failing bothfunctionally and structurally. More precisely, it's failing functionally because it is structurally weak; it is structurally brittle and shaky because 21st century institutions aren't fit for 21st century prosperity.

Here's how I propose to make the case to you. Next time, I'll examine how the global economy's doing structurally. But first, let's examine how it's doing functionally--by informally grading the global economy's most vital markets, and creating the report card I discussed above.

Capital markets. Let's start with the easiest one first. Needless to say, capital markets are, without a shadow of a doubt, deeply dysfunctional. Not only have they failed completely over the last decade to allocate resources to uses of enduring productivity, they're on life support to the tune of hundreds of billions in direct and indirect subsidies by central banks. Without that life support, the explicit argument is that the capital markets would stutter and fail.

That's the developed world. Now consider the rest of the world, for a moment. In the world's most signifiant emerging economy, China, the bulk of decisions about allocation and utilization aren't made by capital markets to begin with--they're made by technocrats, with a deep distrust of markets. To be precise, about 70% of investment in China is directed by the state. Grade? F.

READ THE FULL POST HERE