Opinion | A Santa Colomba tradition and a global economy at a crossroads

As always, it was a pleasure to return this past month to the rolling hills of Tuscany and the annual Santa Colomba Conference, convened and chaired, as ever, by Nobel economist and my own great guru Robert Mundell. This year’s theme was, “The Global Economy at a Crossroads?”, and the question mark captures perfectly, I believe, the uncertainty hanging over the global political economy at the moment.

Thus, the opening session centred on the “limbo of the three lows”—low economic growth, low interest rates and low inflation. Given the tenets of orthodox economics, this is an implausible trinity: For instance, low interest rates should spur growth (at least in the short run) and cause inflation to ramp up. Yet, our world of ultra-low interest rates in the advanced economies of the United States, Europe and Japan—a creation of “unconventional” monetary policies—has produced tepid to respectable growth, depending on where one looks, and inflation consistently below that which is expected by the central banks.

The obvious question is, with most of the bows in the quiver already fired, will conventional macroeconomic policy—whether fiscal or monetary—have the necessary power to deal with another crisis? Economist John Cochrane has put forward the interesting hypothesis that the next crisis, when it comes, will likely emanate from sovereign debt in emerging economies, and it is not at all clear that either conventional or unconventional monetary policies (which appear to remain the only game in town, with treasury departments loath to deploy fiscal firepower, at least in the advanced economies) will suffice.

Another set of uncomfortable questions arise, questions posed in this column previously (“No exit: unconventional monetary policies”, 26 September 2016): To wit, were unconventional policies a cure worse than the disease? And, is an exit now impossible? Recent developments in the US and Europe suggest a pronounced reluctance to shrink central bank balance sheets, and in the Eurozone there appears to be appetite for a further round of large scale purchases of unconventional assets (popularly known as “quantitative easing”), to keep the punch bowl as close to full as it can be.

A further question arises: In a world in which central banks profess to be the only “game in town”, could they, indeed, become the only game in town? This, in fact, is precisely the question posed by former Reserve Bank of India governor Raghuram Rajan in a celebrated and controversial speech (“Competitive monetary easing: is it yesterday once more?”) at the Brookings Institution in April 2014, which this columnist has visited on a number of previous occasions. The question was prescient then, and remains open today.

If the compendious opening session set the stage, later sessions elaborated on some of the same themes, focussed on specific regions—in particular, the US and the Americas, Europe, and the two key emerging economies of China and India. It is fair to say that the broad consensus among European participants was largely pessimistic on the prospect that Europe would find a way out of its current funk, with a slowing German economy and political fissures opening up all over the continent, quite apart from the unfolding catastrophe of British exit from the European Union (“Brexit”). The American participants seemed, by and large, more optimistic that their country would survive, and even thrive, coming out of its present period of political churn, although a few conference members, including myself, pointed to the potentially severely damaging systemic effects of the abandonment of multilateral, rules-based principles by US President Donald J. Trump.

For the record, this column has not joined the chorus of those so-called liberal voices totemically criticising Trump. As I put it to my fellow delegates, there is legitimate tension between Trump’s use, or putative use, of the US economic might to win concessions from US trading partners—by threatening massive tariffs in retaliation for the failure to play ball—and the role of the US as the global hegemon, the provider of public goods to the global political economy. In asserting the former, Trump is threatening the latter, and this may well be his intention—but the consequences for the world, including the US, of degraded or dysfunctional global institutions, such as the now almost moribund World Trade Organisation, are minatory, at best.

Most interestingly, there was the sharpest disagreement on China, and on whether there is a sequel to its growth miracle. Some delegates argued that the current Chinese leadership, anti-democratic and autocratic though it may be, has the foresight and wherewithal to rebalance the Chinese economy toward a more domestically-driven growth model and, argued, therefore, for the prospect of continued high, if not double-digit, growth.

However, others, most notably those not resident nor with direct ties with China, were much more pessimistic and re-articulated the famous, but so far failed thesis, that the Chinese economy would slow down so rapidly that the political economy would implode, as the social compact between the Communist Party of China (CCP) and the Chinese people would be broken—that deal being that the CCP will retain a monopoly on power, but empower the populace economically in the bargain.

As always, such sharp disagreements were debated in the most civilised fashion during lunch at the palazzo, over a caprese salad and Chianti, as in the best Santa Colomba tradition.

Vivek Dahejia is a Mint columnist