The Great Reset - the crisis as an opportunity

Consider the macroeconomic trends facing developed countries. Public debt is nearing historic high levels and clearly unsustainable. Thanks to the pandemic, fiscal deficits have risen sharply. Inflation is rising and there are no signs of reversing. Globalisation has slowed and protectionism is on the rise. The Chinese growth engine may be on the rearview mirror.  

The debate on inflation comes even as the world economy is grappling with fears of recession with a stagflation, deglobalisation and protectionism, and re-shoring and friend-shoring of supply chains. Given that a crisis is an opportunity, all these trends may not be as bad as being made out. There is an opportunity for a Reset.

For example, to the extent that labour market tightness is conferring greater bargaining power to labour over capital, wage increases as the primary driver of inflation in the US is not a bad thing. The ultra-low interest rates of recent decades also ended up penalising savers and encouraging borrowers. Further, a higher inflation rate, like in the fifties and part of sixties, can help governments ride down their current high public debts. Finally, after having been entrapped near the zero-lower bound for over a decade, a dose of inflation is perhaps the right trigger to help breakout of the trap. 

There are other markers for a Great Reset. Here are some.

1. The all pervading search for efficiency in business practices and management must be replaced with an approach which marries efficiency and resilience. This requirement is cross-cutting and runs as a thread through most of the important trends of our times - good jobs against temporary jobs, automation to replace labour, concentrate suppliers, minimise inventories, exorbitant executive compensation, . 

2. Globalisation and financial liberalisation have gone too far as to be creating more bad than good at the margins. They manifest most commonly in the form of trade liberalisation and financialisation. The beneficial effects of  comparative advantage and financial market engineering articulated in orthodox theories fail to match up with realities. It was one thing to deregulate and liberalise thirty (or even ten) years back, but an altogether different case to be doing so even today. Finance has to become less innovative and more boring. 

3. Businesses have to rebuild their business models around local sourcing, diversified value chains, higher inventories, higher wages, and greater commitment to their local communities. As a corollary, consumers have to accommodate the resultant higher prices. All apparent free lunches come with paybacks. After all one of the greatest periods of modern economic history was the post-war era of high economic growth without anything remotely close to the current levels of globalisation and liberalisation. 

4. Arguably the most disturbing feature of our times is the trend of widening inequality which disproportionately concentrates wealth and incomes with a tiny sliver of people. There should be some proportionality between the compensation of executives and that of the median employees. An important contributor to this is the near complete loss of labour's bargaining power and the overwhelming dominance of capital interests. This has to be recalibrated. The pervasive stigmatisation and busting of unions should give way to some form of collaboration. 

5. Finally, some of the walls that separated business and government which have broken down should be urgently rebuilt. Practices like revolving doors whereby businessmen enter governments and vice-versa, excessive intimacy between business and government, consultants embedded within governments, regulatory capture etc have reached unhealthy levels and must be reversed immediately. 

What for developing countries? I can think of three imperatives to correct the excesses of recent decades:

1. Developing countries should avoid both imitating and/or being sucked into the western (read American) economic model. They need to adapt capitalism to their unique contexts and requirements.

2. Developing countries should calibrate their external market integration, both on trade and financial markets. There should be nothing ideological about liberalisation and financialisation. Such decisions should be evaluated on case-by-case basis. 

3. Developing countries should strive to develop a robust social and political compact which is able to blunt the sharper edges of the existing economic system.

In conclusion, for developing countries, the development of a productive domestic economy and conditions which support sustainable growth should be the sole objective, and free-market capitalism, liberalisation and external integration should be assessed from this perspective.