IN THE shadow of the euro crisis and the US’s fiscal cliff, it is easy to ignore the global economy’s long-term problems. But, while we focus on immediate concerns, they continue to fester and we overlook them at our peril.
The most serious is global warming. While the global economy’s weak performance has led to a corresponding slowdown in the increase in carbon emissions, it amounts to only a short respite. And we are far behind the curve: because we have been so slow to respond to climate change, achieving the targeted limit of a 2°C rise in global temperature will require sharp reductions in emissions in the future.
Some suggest that, given the economic slowdown, we should put global warming on the back burner. On the contrary, retrofitting the global economy for climate change would help to restore demand and growth. At the same time, the pace of technological progress and globalisation necessitates rapid structural changes in developed and developing countries alike. Such changes can be traumatic, and markets often do not handle them well.
Just as the Great Depression arose in part from the difficulties in moving from a rural, agrarian economy to an urban, manufacturing one, so today’s problems arise partly from the need to move from manufacturing to services. New firms must be created and modern financial markets are better at speculation and exploitation than they are at providing funds for new enterprises.
Making the transition requires investments in human capital that individuals often cannot afford. Among the services people want are health and education, two sectors in which government plays an important role.
Before the 2008 crisis, there was much talk of global imbalances and the need for the trade-surplus countries, such as Germany and China, to increase their consumption.
That issue has not gone away; Germany’s failure to address its chronic external surplus is part and parcel of the euro crisis. China’s surplus, as a percentage of gross domestic product, has fallen, but the long-term implications have yet to play out.
The US’s overall trade deficit will not disappear without an increase in domestic savings and a more fundamental change in global monetary arrangements. The former would worsen the country’s slowdown, and neither change is on the cards. As China increases its consumption, it will not necessarily buy more goods from the US. In fact, it is more likely to increase consumption of nontraded goods — such as healthcare and education — resulting in profound disturbances to the global supply chain, especially in countries that had been supplying the inputs to China’s manufacturers.
Finally, there is a worldwide crisis of inequality. The problem is not only that the top income groups are getting a larger share of the economic pie, but also that those in the middle are not sharing in economic growth, while poverty is increasing in many countries. In the US, equality of opportunity has been exposed as a myth.
While the Great Recession has worsened these trends, they were apparent long before its onset. Growing inequality is one of the reasons for the economic slowdown and is partly a consequence of the global economy’s deep, structural changes.
An economic and political system that does not deliver for most citizens is one that is not sustainable in the long run. Eventually, faith in democracy and the market economy will erode, and the legitimacy of existing institutions will be called into question.
The good news is that the gap between the emerging and advanced countries has narrowed in the past 30 years. Nonetheless, hundreds of millions remain in poverty and there has been little progress in reducing the gap between the least developed countries and the rest. Here, unfair trade agreements have played a role. Developed countries have not lived up to their promise in Doha in 2001 to create a prodevelopment trade regime, or to their pledge at the Group of Eight in Gleneagles in 2005 to provide more assistance to the poorest countries.
The market will not, on its own, solve any of these problems. Global warming is a quintessential "public goods" problem. To make the structural transitions the world needs, we need governments to take a more active role — at a time when demands for cutbacks are increasing.
As we struggle with today’s crises, we should ask whether we are responding in ways that worsen our long-term problems. The path marked out by the deficit hawks and austerity advocates weakens the economy today and undermines future prospects. The irony is that, with insufficient demand, there is an alternative: invest in our future in ways that help us to address the problems of global warming, global inequality and poverty, and the necessity of structural change.
© Project Syndicate, 2013. www.project-syndicate.org
• Stiglitz is a Nobel laureate in economics.