As prepared for delivery Creating Sustained World Economic Growth
Thank you for that very kind introduction. I have been asked to address a really tough topic. My assignment is to explain in 20 minutes or less how we can transition to a new era of sustained world economic growth from the deepest global recession in 70 years. In all seriousness, the question of how to create sustained economic growth is the question. It transcends all others that have arisen from the ashes of the financial crisis. It is always the transcendent question … after every crisis. And, History is clear on this point: The growth factors prior to the crises, and that actually led to the crises, are almost by definition never the drivers of growth in the aftermath. We have no easy answers at hand. But History is also clear about another point: that we have always figured it out. Here's the thing: Sometimes we figure it out quickly, and sometimes it takes a long time. So, of course we will have sustainable growth over time. The question now is more about how we get there sooner rather than later, how we create the conditions that can lead to a renewed cycle of growth. That's what I want to talk about today. We are still feeling after-shocks from the crisis – and we will, until there is a much more vibrant economic rebound, especially in the U.S. and Europe. There may be some of us who cannot help but wonder whether the economy is gaining enough momentum to escape a double-dip. I believe we are likely to avoid slipping backward. And again, therefore, the most important challenge is to achieve sustained economic growth on a global scale soon, and that is much more difficult. To understand why this is true, let's start by taking stock of where we are. We entered this crisis after an era of almost unprecedented growth with strong emerging market development models and the benefits of globalization. We also had significant global imbalances: high rates of savings in the east funded high rates of consumption in the west. In addition to massive trade deficits, the U.S. especially accumulated significant personal, financial and public debt. Sovereign wealth funds funded the public debt. Moreover, roughly half the financial system in the U.S. was unregulated or lightly regulated – and a large shadow banking system became a huge source of funding for both legitimate and questionable economic purposes. The impact was a severe disconnect between credit creation and GDP growth. The point here is that while U.S. consumption and credit creation were the primary drivers of growth before the crisis, they are unlikely now to be the primary drivers of global economic growth. In the years leading up to the recent economic crisis, credit grew at three times the rate of GDP growth in the U.S. In the future, credit should grow in line with GDP – not as a multiple – and the savings rate must increase. To generate and sustain global prosperity, we need to determine what financial and market forces will fuel new growth for companies and countries. In other words, as the history of crises strongly suggests, the world needs new growth drivers besides U.S. consumption and credit creation. Emerging Markets offer one potentially powerful source. In fact, growth in Emerging Markets is outpacing that of developed countries, and this trend is likely to continue. The other is Globalization. Let me talk about both of these. The growth dynamics we see in the Emerging Markets are largely a self-contained model. That is, they have strong domestic consumption, based on diversified consumer populations. The flow of trade and capital within each emerging market, and among these markets, is likely to grow exponentially. Asian economies are growing two to three times faster than developed markets. Trade volumes in the region reached $9 trillion in 2008. Although the globalization trend has been with us for a long time, in recent years the world economy was far too "long" the U.S. consumer. A big part of global trade and development relied on U.S. consumption. That will change as the emerging markets consumer becomes more active and the U.S. consumer continues to save more. More companies in America will need to export to these new consumers. In general the rise of diversified and strong consumer bases around the world will lead to bigger global capital and trade flows and, in turn, more multinationals and global institutions. Supply and demand chains will become even more global. In this dynamic and complex picture, Citi is a pervasive force in the more than 100 countries where we have a local presence. We are able to observe on the ground, close-up, how economies are evolving in an intensely sensitive interplay with political and social forces. One conundrum is that if the Emerging Markets and 'globalization' forces are really the only sources of growth, they may not be enough to create sufficient sustainable growth in the developed economies for a while. As we know, fiscal and monetary policy is filling the gap today. With developing markets now the locus of growth, the question is whether the western economies can find a sustainable growth model with sufficient long term growth while at the same time dealing with today's structural imbalances. These imbalances are evident in the level of indebtedness of the American consumer. The accumulated impact of the level of imbalances has been an increase in personal indebtedness from under 100 percent of income in 2000 to a peak of about 130 percent of income by 2008. The crisis also required governments to intervene with stimulus packages and support the financial system. As a result, Government debt in some developed countries is projected to be over 100 percent of GDP, with deficits approaching, and in some cases, exceeding 10 percent of GDP. The challenges for State finance in the U.S. are similar. It's hard to imagine any sustainable growth model for the developed markets that does not address these imbalances. At the same time, addressing these imbalances is going to make it more difficult to achieve acceptable growth rates as a substantially higher percentage of national savings is diverted from investment to paying down debt. Another interesting conundrum! There may be a way around this. According to the IMF, the emerging markets are expected to grow at 3 times the growth rate of the developed market. Economic theory would tell you that in completely free markets, GDP-weighted growth should tend to equalize across the world. That is, the very high growth rates in the emerging markets would be exported to the developed markets over time. That requires completely open trade markets, flexible exchange rates, open capital markets and free labor markets. If this were the case, these imbalances would be corrected rather quickly, and the result would be a more broadly distributed sustainable growth rate around the world. Let's be realistic: This is very unlikely to happen. We must find a robust self-help program for the interim. We are back to our conundrum. Some historical models of recovery after crises embraced government investment in infrastructure, creating opportunities for small businesses and the private sector to capitalize on the efficiencies of the new infrastructure. Given the amount of public debt this time around, that's going to be difficult to achieve. We have to find another way. Here I am going to speak about the United States. The US generates 23 percent of global economic activity. Addressing US growth is a necessary starting point for growth in the developed economies. The US economy over the past two centuries has provided a consistent model for addressing growth. Many of us of course are keenly aware that the US model is not immune to periodic excesses, or to disheartening setbacks that impact the lives of millions of people. Yet it remains a viable model for creating economic growth and raising living standards. The US model has repeatedly managed to create a ‘public-private partnership' to connect ‘talented people with opportunities' and ‘capital with entrepreneurs' to drive economic regeneration. If you look at US economic history, every time there is a crisis, there is a breakthrough…of new businesses—new models—new growth…which improve the world for everyone. This has been United States's magic formula. So what does it take to unleash this magic formula in today's environment? What are the conditions required, this time around, to let natural economic forces create growth? Let's look at these. First, Talent: Second, Harness Globalization: Third, Clean Energy: Fourth, Infrastructure: Fifth, Confidence in Financial Markets: Strong and clear regulatory reform can create confidence in the markets and trust in the financial system leading to the availability of risk capital, credit and funding. Let's be clear about what we, at Citi, stand for:
Sixth, for all our children and grand children, Address Fiscal and Savings Imbalances with Discipline. Creativity and entrepreneurship have been hallmarks of the U.S. economy for over 200 years. That's the way it's always worked…creative entrepreneurs come up with great ideas, venture capital firms make many, many investments…and some of those end up to be the Googles. That's exactly what America has been good at. Thousands of people coming up with creative ideas and having capital markets with risk capital finance them. As we debate policies and reinvent the structure and governance of developed market economies, we must take care that this model of growth is preserved and the right conditions are created to let the formula work. Global competition is accelerating, and developed nations, including the U.S. must reinforce our position as leaders in innovation, productivity and individual opportunity. Despite the many challenges we have had to deal with, and despite the challenges in front of us… I suspect that deep down most of us can't help but be optimistic about the future. Isn't that ultimately the formula for sustainable growth? Thank you. |