Hamish McRae: An optimism that has drained away

We had better get used to new ideas coming from elsewhere

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It is, from an economic perspective, a sombre end to a sombre year.

There is still no evidence, at least in the official statistics, that the recession has ended. That is in contrast to the recovery that seems to have started elsewhere. As is widely acknowledged there will have to be severe cuts in public spending after the General Election next year – the significant difference between the two main political parties being the timing of the cuts rather than their scale. And more generally there has been a loss of national self-confidence, for the economic model that seemed to be serving us so well until a couple of years ago does not now look so secure.

It is, if you stand back, an astounding contrast to the optimism with which we greeted the Millennium. Even setting aside the political spin of the occasion and the sense of concern that the dot-com boom was getting out of hand, the country seemed set for a successful decade. Yes, there would be downturns in the economic cycle. But we would be robust enough to cope.

And indeed we were – and so too was the rest of the developed world. The 2001-02 recession was for most countries the least serious since the 1960s. For a few countries, including the UK, there was no recession at all: merely a slight slowing of growth from which we swiftly recovered. Had the Noughties ended two years earlier we would have been patting ourselves on the back – and indeed I seem to recall the Chancellor of the Exchequer doing just that. Only in the past months have the weaknesses become clear and we can see that it was a boom built on insecure foundations: the pile of debts that now have to be repaid.

But that is to see the decade from the perspective of a rich developed country, albeit one a little less rich than it thought. From the perspective of the "emerging" nations, the expression that pulls together the rest of the world, it has for most at least been a decade of stunning success.

The most obvious advance has been made by China, which started the decade as the sixth or seventh largest economy and ends it possibly as second only to the US. (It may have passed Japan in the final months of this year.) But to focus on China is to miss the progress elsewhere. India has become an economic giant. Brazil has had its best decade since the Second World War. Indonesia has overcome severe internal tensions to dominate the economy of its region. And sub-Saharan Africa has, despite all the difficulties it faces, done vastly better than it has at any time since 1960. Between then and 2000 it averaged growth of about 1 per cent a year; in the past decade annual growth has been running at more than five times that rate. It is, by the way, currently the fastest-growing market for mobile telephony in the world.

But such progress has come at a price. We have become much more aware of the pressures that growth has put on the planet's resources, particularly oil and other commodities. China this year became the world's largest car manufacturer but it also the largest emitter of carbon dioxide too.

Most of us in the West foresaw very little of this a decade ago. It is true, some of us spotted what was happening in China but we were preoccupied by the development of the dazzling new communications technologies and the opportunities these would bring. They did, in a bumpy sort of way, but in focussing on that, we did not have much space of mind left to see what was happening to the balance of global economic power. This recession, far from checking the shift, has actually speeded it up.

So what might we say now about the coming decade that will, come 2020, not look too off the mark?

From a grand macro-economic perspective we can, I think, be pretty sure that the global economic cycle will continue for the foreseeable future. We don't fully understand why there should be such a cycle, still less are we able to check it. Nevertheless we can be reasonably confident that the present pick-up in the world economy will be sustained for several years. Of course it is quite possible that there will be another dip next year for that often happens at the bottom of severe cycles but once we are through that there is a prospect of several years of reasonable growth.

Unfortunately there is also a reasonable prospect that this growth will peter out some time around 2018, maybe sooner. We cannot see the detail but we do know that the seeds of each recession are sown in the preceding years of growth. Meanwhile all developed countries, not just our own, have a lot of sorting out to do as growth resumes. We have, for a start, to get debts at every level under control. For most of the developed world, this will make for a sombre decade: not terrible, just not huge fun.

For the emerging world the prospect is undoubtedly brighter, but how much brighter? The present pace of growth in China is so stunning that it is hard not to see some sort of bump ahead. We cannot say what or when it will hit it, but we can say that if there is another decade of double-digit growth, the Chinese economy will be closing in on the US in terms of size. It won't pass it – that will at the earliest be around 2025 – but the prospect will be most evident.

It is reasonable too, to expect India to pass the UK in terms of the size of its economy, something again that will change the relationship between the two countries. The other big emerging nations will make similar progress. So we will, a decade from now, be living in a quite different world, one where the West no longer calls the shots.

I really cannot see anything, short of some global catastrophe that does not bear thinking about, that will stop this. So we had better get used to it. We had better get used to Chinese and Indian ideas coming to influence ours: on the environment, on financial services, on corporate governance and so on. We had better get used to great scientific research coming not from Europe or North America but from Asia. We had better get used to ideas about society: on families, welfare systems, even democracy itself, coming from other parts of the world. It will be thrilling but also frightening – and maybe for those of us in the comfortable West, just a little humbling to realise that we don't matter quite as much as we thought.


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