The Global Economy and Great Power Competition in the New Era of Stagflation

In search of ways to respond to the complex challenge of slowing growth and high inflation, decision-makers are turning to the history of the global economy, especially the transition from the stagflation in the 1970s to the period of high growth in the 1990s. They are finding answers in the successful fiscal policies of that time. These included the construction of major infrastructure projects, reducing general public or social welfare expenditure, large-scale tax cuts, the promotion of exports, the increasing of competition in what had been monopolistic industries, and the encouraging of technological innovation and entrepreneurship.

Not your father’s stagflation

But the world faces circumstances today that are totally different from the past. Except for the construction of major engineering projects, fiscal policy may not be so effective for certain reasons: First, the aging demographics of major economies requires high social-welfare spending. Second, given the premise that industrial structures are not fundamentally changing, capital investment and spending on infrastructure projects could simply lead to excess capacity. Third, geopolitical and technological (geo-technological) competition is fragmenting international markets and supply chains. The game of the great powers is indirectly supporting and amplifying the role of protected enterprises, curbing technological innovation and entrepreneurship.   

Complicating matters further are factors constraining the ability of monetary authorities to rein in inflation. These include the Russia-Ukraine conflict, the mounting food and energy crises as a result, the ongoing pandemic, and climate change, which are all driving up inflationary pressure around the world. 

In the coming five years, the world could see unemployment and inflation rise, while already slow growth rates decline further. This will prompt consumption to fall and the gap between the rich and the poor to widen, heightening the risk of social unrest. Policymakers will then be under pressure to take measures to promote industrial restructuring and regional integration and essential collaboration to meet all the complex challenges.

The primary task is to adjust industrial structures. This essentially means a wholesale digital and green industry transformation. But in relevant frontier areas of high tech such as hydrogen energy and quantum computing, critical breakthrough thresholds or tipping points have not yet been reached. This means that the energy sector structures in the US, the European Union (EU) and China will not change substantially in the short term. 

Meanwhile, trending technologies such as digital collections (online databases of digital objects), Web 3.0 (the third generation of the World Wide Web) and the Metaverse – the interconnected network of virtual spaces – cannot yet drive a long industrial value chain. The reality is that these revolutionary technologies will not enter the mainstream for several years still. Almost all economies are actively shaping their legal, tax and financial frameworks to be conducive to the development of new industries and to encourage entrepreneurship in them. Global venture capital investors are allowing their patience to be stretched, adjusting their strategies to accept longer periods before seeing returns on their money. 

The commercialization of the new wave of technologies will take at least three or five years so they have no choice. With global digital giants shrinking, many highly competitive smaller tech enterprises will emerge, providing fresh booster fuel for the battered global economy, which looks to be stalling in most places.

Regional integration through recoupling

This implies that policymakers around the world should apply their efforts at structural economic reform to another important task: the need to promote regional integration. Despite what seems to be a prevailing preference for decoupling and strategic competition, regionalization will have to be the fundamental characteristic of the globalization narrative over the next decade. 

Meanwhile, China has been promoting domestic regional integration in the Guangdong-Hong Kong-Macau Greater Bay Area, the Yangtze River Delta, the Beijing-Tianjin-Hebei region, and the Chengdu-Chongqing Economic Circle. It has also intensified efforts to build connections with economies along the two Belt and Road Initiative (BRI) routes, the maritime path involving key ASEAN and South Asian economies. 

Across the Indo-Pacific region and the BRI footprint, integration efforts require national, regional and municipal decision-makers to focus simultaneously on three critical areas – traditional infrastructure, digital infrastructure and institutional infrastructure or architecture. This means that policy planners and both public and private players in key markets have to work together to plan and design, raise investment for, construct and jointly operate the hard and soft infrastructure required to support the new value-chain networks (smart-city clusters across the great Eurasian continent) to support the emergent industries.

The energy and information technology sectors will be the key drivers of economic development, requiring a shift to distributed or decentralized systems or networks as the basis for the large-scale regional integration needed to support and accelerate the next phase of the global technological revolution. The economic and geopolitical implications are enormous, as this will speed up the cross-regional flow of production factors such as people, materials, data and capital. This is a practical strategy, too, as it mitigates the risk of social unrest stemming from tougher economic conditions especially with heightened inflation and the persistent gap between the rich and the poor. 

Vision interrupted?

It is fair to question the feasibility of the vision that I have outlined, given that the next decade if not longer will likely be marked by continued and even more intense great power competition. But I would argue that it is still possible to be optimistic about our expectations for progress in promoting open, inclusive and innovative environments for economic development in China, the US and Europe. Yet, there are reasons to worry. 

Middle players such as ASEAN have been calling for the great powers to cool the heated rhetoric and retreat from their trade war and decoupling maneuvers to create more friendly business environments to foster the commercialization of key new technologies and promote good governance of pressing global challenges. But the fact is that the recoupling efforts – the regionalization trends and the bifurcation of security arrangements – are well underway. The seemingly never-ending great power game will only intensify and geo-technological rivalry in semiconductors, information and communications technology, quantum computing, rare-earth trade and deep space exploration, among other arenas, will continue for a long time. 

It is also becoming clearer that the global economy has entered a new unsettling period of stagflation, which is sapping the vitality of global markets. Business leaders around the world must tap their wisdom and logic to work with government leaders to develop a more pragmatic approach to create an open and integrated environment for planning, investing in, constructing and operating the hard and soft infrastructure that is so essential to harnessing the booster power of emerging technologies. The goal of achieving a new technological industrial revolution is within sight but to get there requires greater not less regional and global economic and governance cooperation. The great power competition may continue to be waged, but should be directed towards benign mutual benefit. This is essential not just for global business but for the peace and stability of the world.