By John Richardson
Similarly, many of the ten solutions suggested in the study are in line with what we think needs to be done.
The problem is short-termism from companies which are only concerned about the next few quarterly financial reports.
Politicians are in a similar dilemma as Jean-Claude Juncker, prime minister of Luxembourg and president of the Euro Group highlighted in November, when he said: “We all know what to do, we just don’t know how to get re-elected after we have done it.”
But as we go over the edge of the demographic cliff, a new consensus must emerge if we are to avoid a repeat of the 1930s social and political environment in Europe.
Right, now, though we are in limbo because of increased policy uncertainty, illustrated by the above BCG slide. Uncertainty over policy reflects a wider uncertainty among all of us over whether we are on the right path to recovery, which feeds through to greater volatility in oil and petrochemicals pricing.
The BCG study recommends that we need to:
1. Deal with the debt overhang. The critical starting point is to accept the fact that many of today’s debts will never be repaid and to embrace debt restructuring and defaults. Current policies, designed to avoid that outcome, only postpone the ultimate resolution of the crisis and will result in even bigger losses down the road. Better to move quickly and act now, despite the likelihood of considerable near-term pain.
2. Reduce unfunded liabilities. Once debt restructuring is under way and the broader public sees that wealthy owners of financial assets are contributing to the necessary cleanup, it should be easier for politicians to take another painful step: addressing openly and directly the trillions in unfunded liabilities, including OECD pensions, that are weighing down budgets and balance sheets across the developed world. It will require a combination of several measures to bring these unfunded liabilities under control. This will require raising the retirement age, reducing social-insurance payments and making healthcare provision more efficient.
3. Increase the efficiency of government. A smaller government sector does not necessarily mean a weaker government. By defining the right “rules of the road” for society and business, governments can set the tone and priorities for development in a more effective as well as a more efficient way.
4. Prepare for labour scarcity. People will have to work longer, the elderly will need to become a bigger component of the labour force, participation of women in the workforce will have to increase and birth rates in developed economies must be increased.
5. Develop smart immigration policy. With the oldest native population and an immigrant population close to zero, Japan faces the most severe challenge. But Germany also struggles to attract well-educated immigrants because of the language barrier. US immigration policy has become far more regressive post 9/11, but there is now a growing consensus that reform is needed.
6. Invest in education. Education has to play a significant role in the future growth potential of the developed economies. Quality education will be the decisive factor in protecting and increasing GDP per capita. It is also the foundation of social mobility and a precondition to fully utilising the innovative capabilities and entrepreneurial talent of a society’s members. For both reasons, it needs to be another key target of social investment.
7. Reinvest in the asset base. For more than a decade, the developed economies have reduced investments in public infrastructure and productive assets. World-class infrastructure is an important precondition for economic development and national competitiveness. Over the past few decades, Western multinationals have used their free cash flow mainly to invest in developing economies. Now that these investments are paying off, it is time for them to reinvest in the efficiency of production sites in their home markets and work off the investment backlog. Governments need to encourage private investment.
8. Increase raw-material efficiency. Pursue alternative-energy technologies. Although almost half of new power capacity added worldwide in 2011 was in renewables, fossil fuels still contribute around 80% to the total power generated.55 And with the discovery of new techniques for exploiting fossil fuels–take, for example, the shale-gas boom, which may turn the US into a net exporter of energy–it will be tempting to slow the transition to renewables. But such solutions will only be temporary.
9. Cooperate on a global basis. There is a risk of descending into vicious circle of beggar-thy-neighbour economic policies leading to much lower growth and slower improvement of living conditions worldwide.
This will involve supporting economic restructuring in the developed world. The creditors have to help the debtors pay back their debts. This will require the deficit countries to run a trade surplus and the former surplus countries to run a deficit. The emerging economies need to adjust their business model, focusing less on export-based growth and more on domestic consumption. These countries might also support economic adjustment in the developed economies by participating in efforts to reduce the debt overhang in an orderly way through restructurings and redemption funds.
10. Boost innovation. It must be made easier for a growing and highly productive workforce and for engineers and technologists to innovate, and for entrepreneurs to start new businesses.