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Global perspective: World economy heading toward decline; avoiding catastrophes vital

Something momentous is going on in the undercurrents of incidents and crises happening one after another. As the Heisei era comes to a close with the upcoming imperial succession, and we mark the 30th anniversary of the end of the Cold War, the world is perhaps entering a period that is quite different from what we have seen so far. Such was the tone that filled editorials and commentaries from major media organizations during the New Year period.

    And what are those undercurrents? The emergence of a "new Cold War," which has been mentioned quite often since last year, is one of them. This subject merits constant attention, and this author has published a number of articles referring to its development. In this essay, I would like to ponder the deeper layers underlying the new Cold Ward in which long-term economic changes that encompass political and technological shifts are likely taking place.

    The three decades since the end of the Cold War have been a period of low growth for Japan. Being in the country during this time tends to make one misperceive that the rest of the world has had the same experience. In reality, the world enjoyed one of the highest growth periods in history.

    At one point, the 1950s through the late 1960s were called the "golden age" of the global economy, with continuous high growth. Japan's rapid expansion was one of the major episodes of this period. However, those benefiting from this economic surge made up only 20 percent of the world population; they were primarily the roughly 540 million people of Europe, the United States and Japan.

    The 1990s to the 2010s brought a new era of massive growth on par with the mid-20th century expansion. It was no wonder, as China and India, each with more than 1 billion people, were growing stronger. As a result, the number of people in extreme poverty -- those scraping by on $1.90 or less per day -- more than halved from about 2 billion in 1990 to 836 million in 2015. During the same period, the world population ballooned from 5.3 billion to 7.3 billion, meaning the ratio of people in poverty dropped substantially.

    However, this era of global high growth seems to be ending. The growth rate in the 2010s has slowed compared to the figure for the previous 20 years. The Chinese economy, which is said to have shored up world growth after the 2008 economic plunge following the collapse of Lehman Brothers, is slowing down. Successive World Economic Outlook reports from the International Monetary Fund have ratcheted down growth projections in recent months.

    The attached chart shows shifts in the growth rate of gross world product per capita from 1950 through 2016 with a trend curve, which appears to be going from stagnation to decline.

    The chart indicates that high economic growth after the end of World War II continued until the mid-1960s, followed by a decline until the mid-1990s. The global trend then turned upward to reach a plateau in the 2010s, and now appears to be sloping down again. In the early 20th century, Russian economist Nikolai Kondratiev posited that the world economy has 40- to 50-year cycles of boom and bust. The world may be heading toward a Kondratiev valley.

    According to later researchers examining long economic cycles, the long waves not only show economic ups and downs, but also involve shifts in comprehensive international order, including technology, economy, politics, and the military. Kondratiev theorized that the long-term trend rises when innovation, entry of new countries into the world economy, and expansion in gold production take place.

    The early 1990s saw former socialist countries such as China become embedded in the world economy in the wake of the Cold War. In the technological sphere, innovation drove the spread of personal computers, the internet, and then mobile devices, changing the way of life for almost all people on Earth.

    Economist Kaname Akamatsu, the original proponent of the flying geese paradigm of economic development, suggested that the rising phase in the Kondratiev cycle is a process in which innovation triggers "differentiation" of industrial structures, and global diffusion of this differentiation by free trade brings about "homogenization." This process was observed with the birth of the IT economy in the U.S. state of California, its global expansion and the resultant establishment of borderless value chains in the 21st century.

    Akamatsu further pointed out that a homogenized world would eventually face a tendency toward overproduction, which would lead to protectionism, trigger a slowdown and stagnation of the global economy, and turn the Kondratiev cycle downward. The world in the late 1970s was awash with home electric appliances and cars, which triggered intense trade conflict between Japan and the United States.

    Moreover, the rising phase of the Kondratiev cycle was said to be a period for emerging countries to catch up with hegemonic states. During the rising phase of the late 19th century, the U.S. and Germany came to the fore, and during the 1950s onward it was the Soviet Union, West Germany and Japan that made the ascent. Meanwhile, the declining phase of the cycle was said to manifest when emerging and hegemonic countries compete for survival. The downturn in the first half of the 20th century saw Germany crushed, and America emerged victorious with its partner Britain. When the cycle went down in the latter half of the same century, the Soviet Union was beaten, and Germany and Japan became American partners.

    Questions we need to focus on going forward are how far protectionism will go, and what shape the competition for global hegemony will take. And the most important challenge for the 21st century, I believe, will be the prevention of catastrophes similar to the ones we experienced during the Kondratiev decline in the first half of the 20th century, which saw two world wars with a great depression in between.

    (By Akihiko Tanaka, President of the National Graduate Institute for Policy Studies)

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