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Scenario 2025: New Deal

Scenario 2025: New Deal

Capital markets show extremely long-term fluctuations in the value which they put on tangible assets. The figure shows the way in which long-term swings in sentiment have affected market valuation since the Great Depression. It also shows the extent to which the market surge of the 1990s tended to overvalued securities. Historical trends would have valued the Dow Jones Index at around 4500 at a time when it stood at over 10,000. This bubble burst in 2001, and asset prices tended to fall for the five years which followed. Particular issues of the times - such as the prevalent lack of confidence in governance in general, and in business management in particular - created a wave of investment-related realism. The huge burden of non-performing investments, the debt left by ill-considered mergers and the persistent failure of new technologies to generate sustainable rates of return in the marketplace led to weak expectation and, in some countries, to deflation.

The over-valuation of capital markets was at its most pronounced in English-speaking areas, and in technology and communication-related stocks. It is therefore ironic that the negative economic affects of this period were at their most acute in Japan and Germany, where institutional, social and economic issues intertwined with demographics; and also in the older industry sectors, which had often failed to adapt themselves to new realities. European nations with major latent demographic problems - and in particular, France and Italy - also suffered considerable market downgrading.

Three forces affected the particular circumstances of the US economy.

First, despite the obvious overvaluation of its capital markets, The United States was seen as the least bad of the options open to investors.

Second, corporate scandals had enforced a period of ultra-accountability and transparency on major corporations, which suffered a corresponding decline in their propensity to borrow for dubious projects. Their exposure to devastating, vast class actions for supposed sources of harm - selling fatty foods, alcohol or high speed vehicles for example - also served to reduce corporate entrepreneurialism.

Third, therefore, a period of small-scale and often technology-driven entrepreneurialism developed both as a way around this near-paralysis, and also to take advantage of the flood of cheap capital. Capital markets came increasing to trade in these smaller-scale assets. (The few hundred major corporations which made up the bulk of US capital markets in 2002 represented less than a fifth of US book assets. Small firms were either not public or were simply too much effort to trade individually.) Intelligent IT, transparent reporting and non-financial reporting in a form accessible to automatic assessment all played a role in bringing about this revolution in asset pricing. Assets - money, people, IPR, networks - were increasing delivered where they could be proved to be needed. This proved to be a major stimulus to the eventual upturn in sentiment.

The main positive adjustments to changing times were, however, less to be found on the economic front than the socio-political scene. The ailing economies - and areas in which the sunset industries were casting a rust-red glow - were all feeling the pinch of low growth, poor past savings and high current demand for welfare. This was particularly pronounced in areas where demographic issues made pensions and support in retirement matters of mass public concern. Nations such as Italy, in which a few tens of percent of the population were expected permanently to support all of the rest, and which were to do so without the benefit of much past saving, now saw considerable cuts in expectations, in delivery and in consequent economic liberties. The weak political centre of the 1995-2005 period began to re-polarise in these concerns.

A voting majority of retired people appeared in ward after political ward, demanding yet more expenditure and resisting all attempts to cut back costs. Populist voices began to speak loudly on their behalf. Such measures were resisted by many policy makers, by the wealth-generating cadres in society and by the dwindling pool of the young. A myriad of highly articulate, IT-wielding, legalistic activists formed up in more or less formal solidarity to engage with local and national issues, doing so in ways which set out to prevent closure. Public decision-taking became increasing difficult in continental Europe and, to a lesser extent, in Japan. Similar trends were evident in the English-speaking world, but the facts of less extreme demographics, much better saving and a less collectivist tradition made it possible to maintain a degree of clarity in the debate.

State borrowing crept up as governments were elected on welfare tickets; and inflation began to re-appear as the concomitant tax increases were fervently resisted. Fiscal expansion was seldom fast enough to meet demand and always thwarted by manpower shortages and consequent increased wages. Inflation and European-wide borrowing made the Euro a chronically weak currency, forced up further interest rates and creating shortfalls in the external account. To meet the labour shortfall, a major cadre of guestworkers appeared in almost all of the demographically-afflicted nation, and particularly in Europe. In the order of one hundred million such visitors were living in the industrial nations by 2010. Trends for the elderly to retire to relatively low-wage areas created major gray 'colonies' in North Africa, Mexico and other safe-seeming, warm places placed tens of millions in the industrialising countries. This voluntary relocation was facilitated by IT nets that focused on the needs of the dispersed elderly. These and peer systems became a major feature of life in the period beyond 2008, and these had political, economic and social ramifications, as well as providing a major medium for care and problem management. In particular, the interaction of these always-on, friendly wall-screen based systems with the politics of dependency - and later, of bitter xenophobia - were pronounced.

Political institutions were crippled by this situation. In essence, special interest, hobby politics and a vast plethora of extreme positions and obfuscation made the path to decision-taking extremely difficult to follow. Clear choices became possible only when the issues were of interest only to a technical cadre, or when the questions had been reduced to the ultimate lowest common denominator.

Disaffection with the US party system was already pronounced by the turn of the millennium. Political parties work when there are sweeping syndromes which polarise a nation. Where the issues are essentially technocratic - on how to deliver education for all, not on whether to do so - then parties are weak vehicles. Each strives for the middle ground, and each differentiates its brand on grounds of personality, presentation or probity. These are hardly firm grounds from which to enthuse a nation, and the political class becomes isolated and self-obsessed. Age differences proved to be the ground on which continental European political parties revived, at least in the large nations, but not in the US, Britain or the smaller industrial nations. The young people of these nations showed unprecedented ignorance of and lack of interest in the political institutions of their countries. US habits of government - and in particular, those of encouraging strife within branches of the civil service - when coupled to its vastly powerful news media made national policy increasingly an area of ineffectual gestures rather than world leadership.

Effective policy was, however, to be found in the smaller nations of the industrial and industrialising world, as well as in some of the more dynamic, sub-national decision-taking forums in the larger states. The characteristic of this was fourfold:

Naturally, some issues were not susceptible to rational analysis and debate, and for reasons of time, complexity or novelty, had to be passed to traditional authority for equally traditional ex cathedra decision-taking.

This is an extremely time-consuming process. It requires huge constituencies to be exposed to new ideas and to find a useful way of talking about them. It required the creation of and maintenance of trust between stakeholders and expert groups. Such trust is easily lost, as between central bankers and the people on whose behalf they manage monetary policy, and so inflation. Such positions are easier to reach in smaller communities, and societies with a tradition of rational community debate. Nevertheless, these habits of the knowledge economy work in companies and other organisations, and they proved to work in a range of nations: in Holland, in Denmark, Singapore, Canada and Eire. The faster-growing states in the US, world cities such as London, the developing but nameless commercial clusters in many nations began to develop and extend these habits of governance. It was clear by 2010 that this was at least one face of the way by which complexity was to be harnessed, and the new orthodoxy began to develop on the back of this.

Pivotal change around 2010

The development and spread of these institutional forms was slow and, in fact, little-noted at the time. What drew much more attention was the gradual and then return to economic prosperity. This began as a US revival, created chiefly as former excesses were finally sweated out of the system. The technology sectors had also grown away from over-capacity and were, by the beginning of the recovery period, were beginning to harness the breathtaking technologies that the previous decade had created. The biotechnology boom began, enabled by legislative and opinion-forming structures which had evolved explicitly to handle issues of trust. The onset of the second business cycle upturn of the millennium, in 2007-8, showed what became a lasting, if gradual and regional capital market revival. This showed what could be done, and the machinery of economic and social growth began to spread in the industrial and the industrialising world. Plainly, some of the worst-afflicted nations were unable to take full advantage of this, and these formed the core of a reactive nucleus which we shall meet again.

This resumption of growth is now seen to have been a pivotal point in the past quarter century of social and economic development. It is worth pausing to review the state of play within the industrial nations of the period. A very new approach to public governance now characterised the economically and socially dynamic parts of the world, being right-sized, consultative, evidence-driven, often specialised, multi-layered and innately networked. One earned a political voice less by being elected as a representative than by being available, interesting and generally regarded as useful in decision-taking.

This mode of operation was set against the traditional machinery that was (and is) still in place in nations where economic dynamism has been replaced by energetic squabbles over claimancy. As one commentator on Germany has remarked, the period was marked by fury over slicing cakes rather than energy in baking them. The majority of individuals who declared policy activism as their chief civic engagement in the 2010 EU census were over seventy years of age. Similar surveys in Japan showed that only a few percent of the population saw themselves as politically engaged, whilst almost all respondents over 60 were members of a claimants union.

These differences were the source of considerable friction. European, and to a lesser extent, Japanese interests tended to interpret their problems as stemming from the actions of others, notably of the more competitive economies. Their weak position greatly influenced the way in which they wished the world and its rules to evolve. Mercantilist measures that protected domestic markets were initially favoured as socially-responsible steps to reduce "globalization". In fact, most penalised the trade from poorer nations, or blocked measures that would forward domestic productivity. Whilst tariffs were generally deprecated, regulations that set unreachable standards (of cleanliness, of ethical standards, of industrial health and safety) effectively barred markets. Diffuse international supply chains were subject to sharp controls. Later, as elderly populations began to react against fast change as a thing in itself, sources of modernity were themselves addressed: the biology industries, self-aware software, direct experience media and aspects of nanotechnology were all widely banned goods during the 2010-15 period. Concerns about 'cultural pollution' were given extreme prominence, at least in some few nations where populism had reached for a retroactive sense of common identity. Friction between these counties - where industrialised or no, secular or theocratic - and the leaders of economic and social modernisation also became pronounced between 2012-15.

The sharp distinctions in style between the various tendencies in the wealthy world had forced a formalism into international relations. The tendency to negotiate clear positions, and to see these as both important and binding, brought a new strength to international law. The nature of this binding was a mutual set of sanctions, and an agreement to small multilateral sacrifices in order to avoid these. Agencies such as the WTO acted to systematise these agreements, but did not of themselves have any power. Discipline came from fear of what followed failure. This was to have a profound effect on how the world evolved after 2010.

Events beyond the industrial world.

This description has focused on the older industrial nations. It is reasonable that it should do so, as they were then by far the preponderant source of added value, military power, cultural weight, savings, technology and communications. A decade of historically-low performance, and the arrival of a cadre of hundreds of millions of educated people beyond these nations had, however, begun to change this balance.

In the rest of the world, however, slower world economic performance and the absence of a clear paradigm for growth created a pause, within which reflection was not merely possible by necessary. It was self-evident that the industrial world as a whole was in difficulties, but it was far from clear what was causing them or what a solution might be. A certain triumphalism appeared amongst the nations which saw themselves as standing against the West. Ironically China, which had demographic and institutional problems of its own, proved to be a major contributor to and architect of the debate. The habit of debate amongst these more or less peer nations was established, but it soon proved that what was emerging was an orthodoxy of distinctiveness, not an orthodoxy of uniformity. There were many, many ways to "be" a country in the process of industrialisation. There were ground rules about probity, systems management and the social contract between citizen and the state, but there was no best way, only ways that felt right to individual groups and nations.

Trade and economic relations amongst the industrialising and poor nations developed in lieu of complete commitment to the markets of the richer world. The consequence of this, little-recognised at the time, was twofold.

A significant cadre of nations rejected change, whether it be change driven by industrialisation or by socio-political redesign. In doing this, they were forced to propagandise their own people, reduce access to knowledge and education and provide an ever-tighter system of repression and bribery. A few states with access to primary assets - notably, to oil and gas - were able to maintain this with some semblance of openness and consent. Others have become frankly dictatorial, based on the cult of personality or on eschatological promises, whereby those who oppose the creation of a manifest heaven on earth are the reason why this paradise is not yet quite delivered. Such people are therefore devils, to be pursued and eradicated. Such regimes exist in 2025, but they are as tightly encysted by the rest of the world's community, and tolerated where they are necessary evils.

The poor nations, carrying the large majority of the planet's population, tended to feel contradictory pressures. Low growth and low commodity prices affected them badly. Trade obstacles also created difficulties. However, the enormous increase in the guest worker market created significant remittance flows, and also returned a cadre of people who had sense a different way to operate. The development of connections and ideas from the industrialising nations into their sphere also had positive and negative consequences. After 2010, however, the internal pressure to renew government, and to put transparent governance into commerce had become intense. Better management led to higher foreign direct investment. Domestic savings and remittances had begun to match capital needs. The stage was set for a phase change, when many nations achieved self-sustaining growth.

Beyond 2010: the four 'zones' of 2025.

As the world began to come together, therefore, it did so with a certain sense of relief. Institutions plainly mattered. Bad institutions could be recognised quite easily. Communications and education meant that neither mystique nor repression counted for very little in the medium term, and poor regimes were quickly swept away. However, what replaced them was a diverse range of community-or economic cluster-focused areas of specialisation, operating in loose collaboration with peers and geographical neighbours. This has led to extremely rapid development in some areas - with labour shortages, institutional burn-out and all of the usual problems of rapid expansion - but also to a body of experience which 'told us how to grow'. Hundreds of laboratory experiments were being proven around the world. What was developing was both much more plural than in the past, but also more informed by a common body of experience. "What to" do was open for debate, but "how to" do it was not. How to get common advantage and how to avoid the zero-sum game were, at last, the fundamental goals of policy in almost all 'player' nations.

The figure shows the general trajectory of events. By 2010, many industrial nations had gone as far as they were going to move rightward on the chart. They had begun to find a new paradigm with which to deal with extraordinary rates of change, of interactions between trends, of exponential increases in connection between things and capabilities which either did not previously exist or which had been wholly separate. There was considerable friction within the industrial world and between aspects of it and the industrialising nations. To manage this, a habit of creating policed agreements had grown up. In the developing world, the former tendency to leapfrog over the West's experience to whatever happened to be the current best practice had been all but halted. Nations had tried to find their own 'way', and many had sought out partners amongst their peers and with poorer nations.

This phase took the world to the far right of the figure. It set the grounds for a more integrated style of operation, which is reflected in the rising trajectory after 2010. Nations and other interest groupings fell in with this trajectory to varying degrees. It is now possible to discern four coherent blocks, one of which is extraordinarily plural and heterodox.

The poor nations tend still to be located at the lowest part of the trajectory, subjected to enforced adaptation in a difficult international environment. They do, however, at least possess a viable paradigm for how to go forward, and the rate of progress has, without question, undergone a radical improvement. This is not to say that poverty has left us in 2025. Nearly five of the nine billion people living are little richer today than their peers a generation ago. Over half of those affected live in cities which grew without design or infrastructure. This said, their minds are better informed and their access to health and education is unprecedented.

The rejectionist nations - and, ironically, their sworn enemies amongst the xenophobic "elderly" of the old industrial world - are locked in the lower right of the figure.

The industrialising countries are scattered along the lower reaches of the rising arm, many following different social and political experiments.

The old, adaptive industrial countries exist close to the tip of the curve, insofar as these can be seen as entities any more, so broad is the spread between subsidiary regions within them. Those regions and cities which have managed to achieve adaptive institutions, and avoided the downward spiral which weak governance creates, both enjoy and create a change-enhancing environment.

Most informed scrutineers would feel that the outlook is good, provided that we do not get caught in any further institutional blind alleys. The fundamental challenges of the next decades are how to accommodate ourselves to billions of educated voices, and how to cope with the stresses which we collectively place on planetary systems.

The wild world is under pressure from a myriad of sources. The world's climate is unstable. Much farm land is in dire need of remediation after generations of misuse. There are technologies in public domain which allow callow people with a grudge, with rudimentary understanding and small funds to cause huge and lasting damage. We are, therefore, all the owners of large toes and we dance our dances with care. It is a small planet and we are a heavy burden to it. At last, however, we realise this in our actions and, for the most part, in our plans.

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