By David Walker | 1 June 2013

According to the IMF, we now live in a 'three speed' world, as developing countries overtake traditional front-runners. With the UK and many other nations stuck in the slow lane, David Walker asks what this tells us about the new shape of the global economy

A factoid from the global economic crisis is that more cranes are mounted above London than in the rest of England put together. You don’t need to count the number of big swinging jibs to see that the UK economy is running at more than one speed. House prices are rising at £27 an hour in the capital’s plush purlieus – the sort of places that accommodated the International Monetary Fund team last month when they came to town to run George Osborne’s numbers through their spreadsheets.

Knightsbridge is, of course, a world away from public sector-dependent Humberside or Lancashire. There, growth prospects are dire and worsening. National divergence is now endemic, says Karel Williams of the Centre for Research on Socio-Cultural Change at Manchester University. ‘This country is a pleasant, prosperous place for some social groups, but it’s a depressed hole of shuttered shops for others. What we’re heading for is a two-speed UK.’

Actually, the gearbox is a bit more complicated than that. Recent robust data from Scotland on jobs and growth suggest relative prosperity is not just a Southeast England phenomenon. But for the UK there’s no question that variable geometry applies, as in other countries – look at the buoyant Basques in Spain, for example. Call it diversification, the end of convergence or, if you like, a demonstration of the nature of spatial inequality in the twenty-first century – for this pattern of pulling apart within nation states shows up in the world economy, too.

In a recent report, the IMF discerned a ­‘three-speed recovery’. China is motoring in top gear, the US is in second, the UK and most of the rest of the European Union are lumbering along in first, with Japan making that dreadful noise you get from a manual gearbox when the cogs aren’t quite engaging.

The IMF categories are not watertight but the differences in speed are glaring. Next year, ­Chinese growth is projected at 8.2% and India’s at 6.2%. Sub-saharan Africa comes in at 6.1%. Russia, Brazil and Mexico are all expected to grow at between 3.5% and 4%.

In the middle lane, the US, with 3% projected for 2014, is grouped with Canada on 2.4% and the other advanced economies outside the eurozone, including Australia, New Zealand and Norway, which together will average 3.4%.

Down among the dead men, the euro area ­projection is 1.1%, with Germany – the strong man of Europe – barely mustering 1.5%. Spain and Italy are recovering from recession but are only just growing at under 1%. Japan should reach 1.4%, just shy of the UK’s 1.5%.

Such large and growing variations in speed pose searching questions about the nature or even existence of a ‘global’ economy. They explain growing tensions around capital flows from the low interest, monetary-eased north (Brazil has imposed capital controls), currencies and trade. Globalisation, perhaps, ends not with a bang but with the baaing of countries sorted into separate pens for sheep and goats.

The economics textbooks are clear that we should all quickly get to the same speed. Recession in one country cuts prices and the logic of markets ramps up its exports and attracts in another country’s capital.

Look, optimists might say, at the interest being shown in the old Royal Albert Dock in east London by Advanced Business Park, a Chinese developer. But the model only works if the ­Chinese appetite for London­-produced services is growing (which doesn’t fit with the ­Chinese economy rebalancing away from low-cost manufacturing). The model breaks down entirely if the ­Chinese don’t revalue their currency, and that’s barely happening.

The path to unified global recovery was never going to be smooth. This is not just because economics textbooks have little to say about diplomacy, military might or great power rivalry. It might be permanently blocked.

 Globalisation was meant to hack away at the obstructions to trade and capital movement, but this spring the institutions carrying ‘world economic governance’ are starting to look careworn and sometimes downright marginal. The IMF’s Christine Lagarde might be stylish and stately, the very opposite of her predecessor, Dominique Strauss-Kahn, but she’s struggling, even if the IMF thinks the world economy will start climbing out of the trough during this year.

A phrase repeated in the IMF World Economic Outlook is ‘different speeds’, and it is paralleled by differences inside the organisation about what is actually happening, and how it should respond. Senior official José Viñals has gone on record with his fears about quantitative easing and cheap money destabilising emerging markets. ‘We are in uncharted territory,’ he says.

Or we’re going back to the future, unwinding globalisation in a world where variation in growth prospects, bringing rivalry and friction, is the new norm.

The IMF’s French contingent are more bullish – which is ironic, given the travails  at home, as President Hollande presides over a disintegrating government and an economy slipping back into recession again. Olivier Blanchard, the chief economist, is convinced there remains room not just for more monetary easing, but more public spending, too.

 He is the man who ticked off George Osborne, telling him the UK was ‘playing with fire’ by refusing to reconsider austerity. Osborne should ease fiscal policy, he said, calculating that by 2015 the Treasury will have cut demand by £76bn more than it planned.

That’s remarkable medicine from the former bastion of neo-liberalism and vanguard of global convergence. But the stands taken by some top IMF people illustrate how the financial and banking crisis is now playing out in economics. It’s losing its discipline and professors are retreating into hardline and semi-partisan positions. Empirical evidence is downgraded. This was the problem in the recent Reinhardt-Rogoff affair, where a dogmatic assertion of a causal relationship between government debt levels and GDP growth was found to be based not just on dodgy data but a narrow reading of the historical record.

Now, at one moment the IMF sounds ­ultra-Keynesian, insisting the ‘multipliers’ linking government spending levels to aggregate demand are higher than others acknowledge, including our own Office for Budget Responsibility. At the next moment, it seems to be taking its cue from William Gladstone, joining the eurozone and European Central Bank in demanding fiscal rectitude from the likes of Greece even at the cost of huge reductions in employment and growth.

The IMF now pins its hopes on deepening economic and financial co-operation within the eurozone, including a banking union. This aspiration flies in the face of public opinion in most member states – since co-operation comes with a German flag on it.

The IMF isn’t alone in not quite understanding what is going on. For example, the great ­monetarist experiment now taking place in Tokyo as Prime Minister Shinzo Abe unleashes – let’s beware inappropriate metaphors here – gushes of central bank money in an effort to stimulate growth. One result looks like depreciation of the yen, fuelling concern about currency protectionism – something the Chinese have self-evidently practised for years, while the IMF and World Trade Organisation looked the other way.

Lagarde said in New York in April that the IMF is needed precisely because ‘emerging and developing market economies are accelerating and moving fast and advanced economies moving more slowly’. As would-be mechanic of this misfiring engine, she diagnoses ‘customised’ responses appropriate to those doing well, those on the mend and ‘those that will have quite a d­istance to travel’– a suitably diplomatic term for the EU and Japan.

But what if ‘world economic governance’ has a bigger problem ahead with her first group than with the slowcoaches who, by the IMF’s own analysis, could do a lot more to help themselves? How does China avoid ‘financial excess’ when its reserves total $3 trillion and trade, at 53% of GDP, has depended on self-interested exchange rate manipulation. Some commentators say China faces either or both inflation or pernicious and politically destabilising effects on income ­distribution and social peace.

 And how do the middle rankers synchronise trade and currencies (and indebtedness) with both the tigers and the donkeys? Signs are that the US economy is picking up, reporting good data on housing, employment and tax revenues. But a precondition of US export success is diminished Chinese reliance on exports. How is that to be engineered at the same time as the Pacific power balance moves to accommodate Chinese military and diplomatic strength?

Once, the World Trade Organisation, along with the World Bank, IMF and Organisation for Economic Co-operation and Development, were the consensus. They preached an orthodoxy of small government, low taxes, deregulation and privatisation – all necessary conditions for convergence on a growth model that ­delivered, worldwide. Now, things fall apart.

The WTO has just appointed Brazilian Roberto Azevêdo as its new head, prompting some to hail a shift of power to the south and the Brics. But this acronym for Brazil, Russia, India, China is a journalistic phantom. How much does the wheezing Russian economy, utterly dependent on gas and oil exports, have in common with Brazil, whose own recent growth record is distinctly less impressive than China’s? Such disparities, let alone profound differences of national and corporate interest over climate change or the regulation of the internet and digital trade, help explain the WTO’s decline. The Financial Times quotes a WTO official, harking back to the massive 1999 Seattle protests against the organisation’s neo-liberal model, admitting that ‘these days we can’t even incite a good riot’.

In 2012, world trade grew by less than global GDP. Few are hopeful that the Bali trade talks planned for December will see some great new push for trade liberalisation, notably in agriculture. Ahead lies, at best, regional trade deals.

Gary Hufbauer of the Peterson Institute for International Economics in Washington DC warns: ‘The negotiating aspect of the WTO could fade into irrelevance.’

As for the head of the OECD, Angel Gurría, he has started to sound like Richard Murphy, the indefatigable pursuer of tax avoiders and evaders, preaching against havens and urging tax increases to combat inequality. Releasing a report in May that showed income inequality on the increase and the harsh effect of the crisis on the young, Gurría praised welfare states, saying: ‘Policies to boost jobs and growth must be designed to ensure fairness, efficiency and inclusiveness… reforming tax systems is essential to ensure everyone pays their fair share.’ That did not used to be on the globalisation script.  

And the World Bank? The growth of ­developing countries relative to Europe and Japan – they now account for half of global growth – subverts its function. The Brics, under Chinese leadership, are planting their flag on its lawn, launching their own development bank, aimed at Africa. When Jim Yong Kim, the Obama administration’s nominee for its head, says he has ‘no doubt about our continued relevance for a very long time,’ there’s a plaintive note in the air.

What’s missing is the elemental confidence in a global direction of travel that so marked the ‘golden years’ before the crash. The crisis has killed off the end-of-history view once preached by Francis Fukuyama, that global growth was full speed ahead.

Instead, we can predict burgeoning conflict over trade and resources. The chorus of workers and corporate boards calling for protectionism – across stagnant Europe but also in Brazil – is both louder and has new intellectual respectability. And, of course, some economies, notably China and India, never embraced free trade anyway.

The Cassandras argue that another internet and IT boom is not going to come along and rescue US growth. But look at Sweden, Canada and other IMF middle-rankers, and you could take a much more positive view. So how fixed are the differences in environment, resources, policies and culture that create such divergent economic prospects? Hard to say, but there is a growing sense that a multispeed world is here to stay, that ‘speedonomics’ is the new normal.

 Which is bad news for Europe and the UK. Sir Mervyn King, taking a curtain call as governor of the Bank of England, pulled a positive projection out of his hat. The UK economy, he said last month, is set to grow by 0.5% in the second half of this year, giving George Osborne cover to keep on cutting. That’s an also-ran growth rate for 2013 of 0.7%, which is half of Canada’s, a quarter of Brazil’s and a twelfth of China’s. In other words, not much to cheer about for the ­foreseeable future.

David Walker is a writer and commentator on public policy and management