The next few years will be very good ones for us to progress our nation, even if they turn out to be bad ones for some other countries, writes Rod Oram.
In the face of grave concerns over destructive politics and fears of another financial crisis, New Zealand can be a constructive contrarian because we have some semblance of unity about what we need and want to do; and we can attract the human and financial resources to do so.
In contrast, the US, the UK, many other European nations and China are fighting internal and external battles that are deeply thwarting their progress.
This sense of gloom among the business and political elite of the world was widely reported from their annual gathering in Davos, Switzerland this week. The number one worry they identified in a survey was the risk of a global recession, followed by the likes of trade wars and divisive and destructive politics.
One highly influential US investor in particular crystallised their fears. Seth Klarman, who runs the US$27 billion Baupost fund out of Boston, had recently written a 22-page annual letter to his investors which was much bleaker than his previous ones.
“It can’t be business as usual amid constant protests, riots, shutdowns and escalating social tensions,” he wrote. He also expressed surprise that most investors were paying scant attention to the US’s declining role and respect in the world under Donald Trump’s presidency.
“By the time such a crisis hits, it will likely be too late to get our house in order.”
He was equally critical of some European countries which are riven by protests and destructive politics. “Social frictions remain a challenge for democracies around the world, and we wonder when investors might take more notice of this.” He added, “social cohesion is essential for those who have capital to invest.”
On the economic front Klarman expressed grave concern that sovereign debt levels had soared in most developed countries since the Global Financial Crisis, citing the US, Canada, the UK, Spain and France as examples.
“The seeds of the next major financial crisis (or the one after that) may well be found in today’s sovereign debt levels,” he said. “It is not hard to imagine worsening social unrest among a generation that is falling behind economically and feels betrayed by a massive national debt that was incurred without any obvious benefit to them.”
High US debt levels particularly worried him. “There is no way to know how much debt is too much, but America will inevitably reach an inflection point whereupon a suddenly more skeptical debt market will refuse to continue to lend to us at rates we can afford,” he wrote.
“By the time such a crisis hits, it will likely be too late to get our house in order.” Ultimately, the US dollar could lose its status as the world’s reserve currency, which would seriously impact the US economy.
Copies of Klarman’s letter were passed around ahead of Davos by attendees such as Bill Gates, Sheryl Sandberg of Facebook, Angela Merkel, and cultural figures such as Bono, the New York Times reported.
Similar expressions of unease were offered pre-Davos by another high profile investor, Mohamed A. El-Erian, who was CEO and co-chief investment officer of PIMCO, one of the world’s largest bond funds, from 2007-14.
“The World Economic Forum this week in Davos comes amid a dramatic change in the global economic climate over the past year. In just one year, excitement about a widespread pickup in global growth and booming stock markets has given way to concerns about a synchronized slowdown and renewed financial instability, especially with the continuing partial government shutdown in the United States and the slowest Chinese annual growth rate in almost 30 years.”
El-Erian cited two particular causes for the slowdown: the waning of short-term stimuli in economies; and a lack of policies to promote the next generation of productivity growth and technology development.
His remedies, however, were predictable and prosaic, such as the US’s need for “a bipartisan-supported infrastructure program to enable businesses to productively do more.” His analysis was devoid of the deep insight Klarman showed in his understanding of the inter-related and negative economic, social and political forces at work in the world today. Only some fundamentally new thinking would reverse these destructive dynamics, Klarman argued.
Rowing faster in the face of global currents
Yet despite these fierce global currents, we New Zealanders have many factors in our favour. Most importantly, we have a relatively realistic and cohesive sense of who we are as a nation and what we can achieve in the world; our Government and business debt levels are low by international standards, although household indebtedness is uncomfortably high; and our politics, while often timid and petty, can still achieve constructive consensus on some important issues.
Nonetheless, we have a formidable list of things we need and want to do. Our cities and towns urgently need more and affordable housing, heavy investment in schools, amenities, transport and other civic and social infrastructure, and far better environmental performances.
Our productive sectors have to rise to the challenges of fast-changing technologies and the imperatives of deep sustainability. The utterly core concept for that is the Circular Economy, as I wrote in this column last March.
Our primary sector has a powerful leadership role to play in these great transitions here and abroad. In this column in August I described this reinvention that is underway in global foods systems; and in this column in September I wrote about the abundant opportunities for our farmers in the transition to a low emissions economy.
In this column in December I wrote about some of the key ways we can make insightful decisions about which technologies and environmental outcomes we invest in. By far the most crucial legislative framework to help guide this will be the Zero Carbon Act the Government hopes to pass this year with all-party support.
These and all other aspects of the great economic, environmental and social transformations coursing through the world offer us New Zealanders abundant opportunities for progress.
While all of those will hopefully be ultimately rewarding, none of it will be easy. And if global currents become faster and more treacherous, we will need to remind ourselves of a basic lesson we learn from dangerous rivers. If we row just half a knot faster than the current, we make our way to calmer waters. As a small nation, that’s far easier to do than it is for big ones.