Searching for new leadership
First scenario: the stimulus plans work quickly and the world economy recovers by the end of 2009. Second scenario: the stimulus plans do not work and the economy falls into a serious depression until the end of 2010. Third scenario: economic nationalism and trade wars return. Fourth scenario: the global recession lasts an entire decade.
(Madrid) WE HAVE BEEN LIVING in an era of great economic turbulence and crisis ever since the last subprime mortgage bubble burst in August of 2007, and especially after the fall of Lehman Brothers in 2008, which left a debt of 613 billion dollars (six times larger than the debt left by Worldcom in 2002, and ten times larger than that left by Enron in 2001. While some believe that we are looking at just another crisis that will soon pass, others are talking about a total collapse and a change in the cycle.
Before the year is over, no major region of the world will remain unscathed by recession. Indeed, 2009 will go down in history as the first truly global recession of the modern economy. This is the analysis of Stephen Roach, chairman of Morgan Stanley Asia, which he laid out in a piece written for the magazine Foreign Policy. “Although we do not know the course that the world economy is going to take, we have the feeling that this crisis has still not hit rock bottom”
In less than a year, we have seen the price of a barrel of oil jump to 140 dollars, only to drop down to 40 dollars today. Very recently, we were talking about increasing the worldwide supply of food, in light of the stunning demand, as a result of the growth of the middle class in the BRICs. Today we are talking about recession and depression. The world’s most prominent economic journals (The Economist, The Wall Street Journal, Financial Times, Harvard Business review, The McKinsey Quarterly) have dedicated many articles to the incorporation of millions of poor people into the new BRIC middle classes, and unfortunately, today we are once again talking about the growth of poverty. And although we do not know the course that the world economy is going to take, and would prefer to look away, we have the feeling that this crisis has still not hit rock bottom, and rather, that the contrary is true.
WE ARE ALL SOCIALISTS
“After all that has happened in the last year, talking about scenarios more than three months in advance is, frankly, akin to practicing futurology” One of the most significant changes today has to do with the role of the State in the economy, and the relationship between the private sector and the State, and the need for greater regulation.
Newsweek summed it up very well in the front-page article of its February 16, 2009 issue: We Are All Socialists Now. Big government is making a comeback. Who could have thought: the United States must be, at this point, one of the most interventionist countries in the world. In light of the lack of a robust private sector, the American government has to fill the void. This is about more than simply discussing the morality of aiding inept bankers completely out of touch with reality; it entails recognizing that if the financial sector ends up collapsing, the entire economy will go under, says Robert J. Samuelson.
HOW MANY JOBS WILL BE LOST?
In this sense, the big questions are: how long the crisis will last, how many jobs will be lost, and in short, what the dominant trend of the global economy will be in the next three to five years.
After all that has happened in the last year, talking about scenarios more than three months in advance is, frankly, akin to practicing futurology. However, I have here four different scenarios regarding what could happen to the global economy. My analysis is influenced by the McKinsey Quarterly’s latest collection: The Crisis: A New Era in Management. I recommend the analysis (http://www.mckinseyquarterly.com/Leading_through_uncertainty_2263) done by Lowell Bryan, director of the McKinsey office in New York, and Diana Farrell, director of the McKinsey Global Institute.
FIRST SCENARIO: THE MEASURES DO INDEED WORK
The optimistic scenario would be that the measures, such as Barack Obama’s stimulus plan, do indeed work. This would translate into a quick recovery, maintaining globalization, but without changing the structure of global finances and credit.
In this scenario, the global economy would suffer a profound recession that would last until the end of 2009, but public intervention on the part of the American and European governments would be effective and restore growth, and trade would flourish. Some analysts optimistically believe that the United States will continue down this path of unprecedented fiscal and monetary intervention.
SECOND SCENARIO: THE STIMULUS PLAN DOES NOT STIMULATE
“The world would fall into a serious depression until the end of 2010, and growth would remain at a very low level until 2012” In spite of most of the world’s central banks and financial and economic ministers working together to avoid a total collapse, buying toxic assets and nationalizing a rather large portion of the banking system, this route does not work and does not manage to restore confidence within 18 months. And then?
The world would fall into a serious depression until the end of 2010, and growth would remain at a very low level until 2012. Despite the fact that the recession would be the longest of the last 70 years, confidence would be regained through business innovation, the private sector’s dynamism and a new generation of entrepreneurs, and globalization would get back on track.
THIRD SCENARIO: THE TRADE WARS RETURN
“The United States and Europe would turn into closed commercial blocs, which would hurt emerging countries” In the third scenario, the rescue plans would not completely work either, and the global recession would be very significant, but it would affect certain regions more than others, and would deal especially strong blows to the United States and China. The reaction of the countries affected would be to fall back into commercial protectionism and economic nationalism. This would allow for certain countries to recover, but the global economy would be less integrated and the liberalization of trade of the recent decades would be reversed.
The trade wars and economic nationalism would return with full force. Credit would remain expensive and inaccessible, but economic nationalism would start to yield some results in 2012. The entire world would blame globalization, which would see itself greatly weakened.
The United States and Europe would turn into closed commercial blocs, which would hurt emerging countries.
FOURTH SCENARIO: THE LONGEST WINTER
This last scenario would be the worst: the global recession would be extremely profound and would last an entire decade. Economies would plummet the world over. Access to credit would be practically cut off all around the world, and globalization would decline significantly. Social and political instability would prevail everywhere. Globally, this scenario would have brutal consequences.
Even though these may only be four descriptive and very general scenarios, various sub-scenarios could logically emerge from these trends, in accordance with the economy’s industries and sectors.
But regardless of whatever scenario may prevail, what is clear today is that none of the possibilities can be thrown out, neither the most optimistic nor the darkest. And so, political, business, and social leaders: prepare yourselves.