As the first decade of the 21st century comes to a close, leaving the steady growth of last century's second half a distant memory, what does the future hold for the global economy?
For the next several years, we can expect exceptional turbulence as the waning days of the global economic order we have known plays out chaotically, possibly destructively. For the longer term, say, 10 years from now, a more promising picture awaits as a new set of international economic arrangements gains support from governments, business and civil society, and as a wave of exceptional innovation bears fruit. The transition will be a treacherous ride that no government would rationally choose to take. Yet the die seems cast.
The old order had to die because the United States - its creator, rule enforcer, market of last resort and chief cheerleader, now racked by deficits, debts, and a polarised and inward-looking political system - can no longer shoulder the burden of these roles. No one country is remotely capable of replacing America, and effective collective leadership is nowhere in sight.
These factors have been dramatically aggravated by the global credit crisis of 2008-2009 and subsequent recession in the West. While an impressive international effort to bail out financial institutions and stimulate economies with government spending stopped the disaster from reaching 1930s proportions, the debacle revealed a number of fault lines that may be worsening. The major global trade and financial imbalances that helped cause the financial implosion show no signs of narrowing.
In addition, gaping holes in the regulatory structure for banking still exist, including the absence of rules to wind up global banks, and scant international supervision of the shadow banking system.
The aftermath of the credit implosion may, in fact, be leading to another set of crises less susceptible to a concerted bailout. The severe sovereign-debt and banking problems in Europe may just be gathering steam, as financial pressures careen from Greece and Ireland to Portugal and Spain. While so much attention has focused on consumer and industrial demand in the US and China, the deflationary policies enveloping the EU, the world's largest economic unit, could badly undermine global economic growth.
In theory, we could see a major effort by key governments to develop domestic policies to take into serious account the global problems we face. But world politics are moving in a different direction. After all, there has not been a currency accord since the 1985 Plaza Agreement or a successful global trade negotiation since the Uruguay Round in 1995. More recently, the Copenhagen Climate Change talks failed a year ago, and the Group of Twenty Summit in Seoul concluded with no progress just last month.
It's hard to imagine how this go-it-alone trend will change in the next few years, primarily because of the massive domestic preoccupations. As the old economic order withers, the financial markets - and not governments - will be the arbiters of how capital and trade move, and how severe government adjustment policies need to be. This situation will be accompanied by more than one major financial crisis and more difficulty for global traders and investors moving across the world.
This chaos could, however, provoke a shock effect that compels an elevated level of cooperation among key governments. They could work more closely with their globally integrated firms, to advance a design of a new order. That could encompass new currency arrangements, a strengthened World Trade Organization, an International Monetary Fund with enforcement capabilities, a high authority with serious oversight for global financial regulation. A new order could involve a G-20 that has a vision and some clout. Most importantly, it could be characterised by a mindset among governments that takes account of the interconnections among national economies.
Some hope for optimism lays in the possibility that by the end of this decade, many domestic hurdles, such as US fiscal problems and European debt pressures, will be on a sounder trajectory. Also, by then, a new generation of leadership could emerge, weary of failed policies of the previous 10 years and much wiser for it. These men and women are likely to be willing to move ahead with the many new ideas that are sure to evolve during a period of chaos and instability.
On top of that, we should not lose sight of the unprecedented possibilities that modern communications have created to tap into and amplify the innovative capacities of people in every corner of the world. Never in world history has there been such capacity to link new ideas, great talent and huge pools of money in support of progress. Nor should we forget that some of the trends now emerging, such as the hyper-urbanisation of the planet, could produce unprecedented innovations in energy, transport, health care and more as the creativity produced by urban clusters is unleashed. And of course, we are on the verge of several new global industries wrought by the confluence of massive computer power, biotechnology and nanotechnology - all of which could well transform the globe for the better.
The great challenge facing our leaders is to shorten the time and blunt the pain between the chaos and its much more positive aftermath. It's a tall order.
Jeffrey E Garten is the Juan Trippe professor of international trade and finance at the Yale School of ManagementŠ Yale Centre for the Study of Globalisation