Drop, cover, hold for 100-year shake-out

20:00, Sep 27 2012

It's not every day you get an opportunity to cower under a desk with a globally renowned economist, but that possibility was on offer this week during the nationwide earthquake readiness drill.

In the end, Indian School of Business associate professor Reuben Abraham and I kept talking, but the event made a fitting backdrop for discussion of the increasingly shaky state of the world economy.

Abraham is an optimist. He reckons the United States is in better shape than it was before the global financial crisis, and that the world's most powerful economy will continue to generate disproportionate wealth for its citizens.

That's down to two things. First, unlike Europe, it is federally governed. It can make integrated decisions involving both its central bank and its political decision-makers.

Even if a Republican president is elected, Abraham is confident the US will, as Winston Churchill said, "do the right thing when all other possibilities have been exhausted".

Second, the US technological and inventive capacity is simply streets ahead of anywhere.


"Just spend an hour in Silicon Valley," he says. "You don't get that same sense of astonishment in China or India as when you are at Menlo Park."

Europe, however, is more problematic. With Spanish riot police using rubber bullets on protesters outside Parliament in Madrid this week, he sees Spain heading to a debt default within weeks, with political and economic chaos to ensue.

While he thinks future generations will "doff their caps to the US" for the way it handled the banking bailouts caused by the global financial crisis, "in Europe, there has been a colossal failure of leadership".

The ensuing shake-out could take a century, and at the end of it, Europe will need to have become more like a single nation and less a fragmented group of nation states.

However, when 600,000 march in the streets of Barcelona for Catalan independence, as they did last week, it's clear how hard that will be.

Even if there's not another war of the kind the European Union was established to prevent, there's a risk that various players, including perhaps Germany, will exit from the eurozone.

In Asia, Abraham is more optimistic. India, while chaotically governed and also suffering failures of political leadership, at least shares the federal cohesion of the US.

China, which he says is "run like a company" compared with India, can also be decisive.

India is also at a different stage of development from China.

The Middle Kingdom has passed through a period that Abraham likens to the "opening of the American West".

The Treasury is occupied with the implications of this global backdrop for New Zealand. The country's lead economic policy adviser is engaging with a wide range of economists, sector specialists and other navel-gazers to produce new 40-year fiscal projections. All its working papers are being made public as it proceeds.

The first tranche of papers was released last week, and includes a 60-page assessment by Treasury economist Mario di Maio entitled External Influences on New Zealand's Economic Potential.

In the context of Abraham's high-level view of what's happening in the world, there are some striking points.

First, the paper suggests the world, far from settling down after the global financial crisis, "may be entering a period of greater international economic volatility".

While globalisation has driven higher living standards for hundreds of millions of people in developing economies, that same inter-connectedness has created new global vulnerabilities.

Financial crises will recur, and developed countries like New Zealand will struggle to remain competitive. Di Maio warns that while long-term strong growth is the likely trend for Asian economies, we can't assume it will be a smooth ride. There will be "shocks and reversals" for some countries.

"The speed of development and size of India and China imply that developments in these economies have an increasingly large influence on global markets."

That's what we see now as Asia's slowdown rattles the trans-Tasman economies.

New Zealand's safety valve and protector from the global financial crisis is coming off the boil fast, feeding into the layoffs at Solid Energy, plant closures by Nuplex, and the tough decisions now emerging for Norske Skog at Kawerau, and the Rio Tinto aluminium smelter.

It's not pretty to think that, four years on from the global financial crisis, its delayed impacts are finally reaching our shores. But it's a fact, and one that will shape the economic and political debate for years to come.