Economy
Mapping the world 15 years after Lehman
Summary
The financial crisis is over, but actions taken to tide over it have left the world with new challenges. The global economy is more fragmented and complex than it was in 2008. Here’s a report chart.
In November 2008, leaders of the G20 nations met in Washington D.C. to discuss the global financial crisis that had been triggered by the collapse of Lehman Brothers two months prior. The aim was to build a new international system that would prevent future financial crises. The mood was sombre, but cooperative. Cut to the G20 summit in India, 15 years later. The financial crisis is over, but actions taken to tide over it have left the world with new challenges. At the same time, the world is more fragmented than it was in 2008. The covid-19 pandemic and the Ukraine war have added to overall uncertainty, creating a more complex and volatile world.
1. Debt crisis
Central banks used quantitative easing to stabilize markets after the financial crisis, and again during the pandemic. It resulted in a steep fall in interest rates, which in turn spurred public borrowing, sowing the seeds of a potential debt crisis. Public debt in developing economies—which need relatively more financing—quadrupled from $50 billion in 2010 to $200 billion in 2022. Unfortunately, this meant that after servicing debt, less resources were available for critical services such as healthcare or education. In some countries, the share of external or foreign currency debt increased, but the ability to service it did not keep pace. This had serious consequences in 2022, when the strengthening dollar made it harder to repay dollar debt. About 60% of low-income countries were estimated to be in or at risk of debt distress in 2022. The situation has not improved much: Moody’s reported a record seven sovereign defaults in 2022, and two and counting in 2023.
2. Growth engines
By the time the financial crisis happened, the engines of world growth were already shifting. In 2007, advanced and developing countries became equal contributors to world GDP (on purchasing power parity basis). This shift was only reinforced as emerging economies bounced back stronger from the crisis. Between 2008 and 2022, the share of the Brics economies in global GDP went up from 24% to 32%, while that of the UK, the US and Europe declined. China, which now contributes nearly one-fifth of world GDP, became the undisputed star of the emerging market universe.
Developing economies will remain key to world growth despite China’s slow post-covid recovery. As the West de-risks China by shifting production to other countries, the factories of the world will be more widely distributed. The International Monetary Fund’s forecasts indicate that developing economies will drive about 65-70% of world growth over the next five years, a rate commensurate with pre-pandemic trends.
3. Slowing globalization
The financial crisis ended an age of globalization characterized by increased cross-country flows of goods, services, capital, information and people. Post-crisis, these flows slowed down for various reasons. First, opposition to outsourcing and immigration built up in advanced countries. To allay these concerns, an attempt was made to boost domestic production by raising import tariffs (US) or exiting trade unions (Brexit): both were detrimental to global trade. Second, supply chain disruptions in 2020-2021 brought home the importance of producing domestically (reshoring), nearby (nearshoring) or in allied nations (friendshoring). Global capital has swiftly complied: note the TSMC plant being set up in the US, or the ramp-up of iPhone production in India. Finally, the Ukraine war led to more trade restrictions amid concerns about national security.
Geopolitics has slowed down globalization. However, as the DHL global connectedness index shows, policies can only restrict the movement of people and goods, while global information flows remain as strong as ever.
4. Tech rules
When Lehman Brothers collapsed, the first-generation iPhone was just a year old, and oil companies ruled stock markets. In the years since, data has become the new oil, and technology firms the new stock market sultans. The original tech rulers—Facebook, Amazon, Apple, Microsoft and Google—have been joined by semiconductor chip companies. Chips are so ubiquitous and so important that owning high-end chip fab plants is now viewed as a matter of national security. Demand for sophisticated chipsets is likely to increase exponentially with the rise of generative artificial intelligence and the growing popularity of electric vehicles (EVs).
Going forward, technologies that mitigate climate change will be critical to sustainable growth. The policy environment is supportive: both the Inflation Reduction Act 2022 (USA) and the European Climate Law 2021 provide incentives to reduce emissions and adopt clean energy. Companies in low-carbon tech, clean hydrogen, electric vehicle batteries, or renewable power will become more valuable.
5. Volatile, uncertain, complex, ambiguous (VUCA)
The world is far more complex today than it was in 2008. Before the crisis, free markets, deregulation and globalization were seen as recipes for economic prosperity. The crisis dented these beliefs: nations turned protectionist, policies became populist, alliances are increasingly geopolitical and opportunistic. Each country is now aligned with its own interests. Central banks have a new playbook too. Inflation could earlier be managed simply by tweaking demand, because of the steady supply of cheap goods and labour from developing countries. Now supply chains are being restructured, and governments are forced to step in with fiscal support. The rise of digital assets and cryptocurrency further complicates monetary policy. The Ukraine war has added food and energy shortages to an already uncertain macro environment. Not surprisingly, growth in world GDP has remained relatively high and unstable in the post-crisis years.
The author is an independent writer in economics and finance.
