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A CENTURY OF PROFESSIONALISM
Future risk Social and economic challenges for tomorrowCentenary Future Risk Series: Report 2
2 Future risk: Social and economic challenges for tomorrow
contentsContents
3 Foreword
4 1. Introduction
4 Aboutthisreport
5 2. Executive summary
6 3. Past trends and possible futures
6 Theglobaleconomy
9 Patternsofconflict
10 4. Future socioeconomic risks: what the experts say
10 Living with a shift in global economic powerDavidSmith,EconomicsEditor,TheSundayTimes
15 Global longevity trends and their potential economic and social implications GeorgeMagnus,SeniorEconomicAdviser,UBS
20 The Long-term economic outlook for the US and its international implicationsDrUriDadush,Director,CarnegieEndowmentforInternationalPeace
26 Is the Renminbi the new Dollar? Chinese monetary policy and the global reserve currency systemAndrewLeung,IndependentConsultantandChinaSpecialist
33 The shifting balance between “risk” and “uncertainty” in a globalised world systemLaurenceWhitehead,adviseronmacroriskatOxfordAnalytica
40 5. The three scenarios
41Upside:dynamicAsiaandareboundingwest
42Cental:westernstagflation
43Downside:1930sstyledepression
45 6. The importance of insurance
48 7. Conclusion
3 Future risk: Social and economic challenges for tomorrow
foreword
ForewordThisyeartheCharteredInsuranceInstitutecelebratesitscentenaryyearasacharteredprofessional
body.Tomarkthisachievement,wearepublishingaseriesofreports,eachofwhichexploressomeof
therisksandopportunitiesthatmightfaceusinthedecadestocome,drawingontheassessmentof
commentatorsacrossvariousfieldsofexpertise.
Whilst‘futuregazing’doesn’talwaysleadtoaccuratepredictions,itisanimportantexerciseforthe
insuranceindustrytoundertakeasunderstandingandassessingpotentialrisksisattheheartofwhat
wedo.Indeed,centraltotheroleofinsuranceistheabilitytomakeinformed,professionaljudgments
abouttherelativerisksofvarioushazardsoccurringoveraparticularperiodoftime.Byplanningforthe
long-termandchallengingassumptionsaboutwhatthefuturemightlooklike,theprofessionwillbe
wellplacedtoprovideexpertiseandinsightontherisksthatlieahead.
Thisreportisthesecondinourcentenaryseriesandfocusesonpossiblesocioeconomicfutures.
Withinthereport,fiveleadingexpertsprovidetheirviewsaboutfuturerisksinthisarea.Usingthe
expertanalysis,thereportseekstooutlinethreepossiblesocioeconomicscenariosandtheirpotential
implicationsfortheinsurancesector.
Stuart Reid
Chair,CIIInsuranceBrokingFaculty
4 Future risk: Social and economic challenges for tomorrow
1. introduction1. Introduction Theworldfacesavastarrayofglobaleconomicandpoliticalchallenges.Thefinancialcrisisand
eurozonesovereigndebtproblems,aswellasthepoliticalparalysisovertheUSdebtceiling,suggest
weareonthevergeofaseismicchangeinthenatureoftheglobaleconomyandinternationalrelations.
Similarly,continuingincreasesinpopulationsizeandlifeexpectancy,andchangesinpatternsof
migrationthrowuptheirownvastarrayofpoliticalheadachesandeconomictrade-offswhichneed
carefulmanagementandstrongcollaborativeleadership.Eachpresentstheirownsetofopportunities
andthreats,someofwhicharefamiliarandsomeofwhicharenot.
Crucially,theinsuranceandfinancialservicesindustrymustbeonestepaheadinordertoprovide
comprehensiveinsightintothechangingnatureofthesechallenges,andtorecommendcredible
coursesofactioninthefaceofthem.Withthisinmindandtocoincidewithourcentenaryyear,overthe
courseof2012wearepublishingaseriesofreportswhichreflectonthegreatchallengesofthepast
andexplorewhatthefuturemighthold.
About this report InearlyFebruarywepublishedthefirstinthecentenaryseries–Future Risk: Learning from history.It
setthescenefortheCIIFutureRiskseriesbyreflectingonsomeofthemostdynamictrendsofthepast
andtheirpotentialimplicationsaswellasdiscussingsomeinitialfindingsfromaglobalsurveyintothe
riskperceptionsofmembersofthepublicfromacrosstheglobe.
Acentralpointmadebythereportwasthatinsucharapidlychanginginternationalenvironment,it
isvitallyimportanttoquestionunderlyingassumptionsabouttheworldaroundusandre-evaluate
prevailingwisdom.Wequalifiedthisstatementbynotingthatwhilstahealthylevelofscepticismabout
prevailingwisdomandfutureforecastingisagoodthing,itshouldnotpreventusfromdeveloping
somescenariosonthelong-termtohelpusprepareforsomeoftheopportunitiesandrisksthatlie
ahead.Rather,itshouldensurethatwedonotbecomeoverlyconfidentanddependentuponanysingle
story.Inthiscontext,thesecondinourseriesofreportslooksatsomepossiblesocioeconomicfutures
andtheirimplicationsfortheinsurancesectorandsocietyasawhole.Cruciallyitalsoseekstoidentify
whatroletheindustrycanplayindeliveringamoreprosperousworld.
5 Future risk: Social and economic challenges for tomorrow
2. executive summ
ary2. Executive summaryThereportbeginsbypresentinganumberofspecially commissioned essaysonfuturesocioeconomic
risksfromleadingexpertsinthefield.Theauthorsandtheirtopicsinclude:
• David SmithoftheSundayTimesconsidershowtheUKcanmaintainacomparativeadvantageina
shiftingglobaleconomicorder.
• George MagnusofUBSfocusesontheeconomicimplicationsofgloballongevitytrendsatatimeof
continuingeconomicstrife.
• Dr Uri DadushoftheCarnegieEndowmentforInternationalPeacediscussesthelong-termeconomic
outlookfortheUSanditsinternationalimplications.
• Andrew Leung,IndependentConsultantandChinaSpecialistlooksatthefuturedirectionofChinese
monetarypolicyandthepossibilityofcontinuingexchangerateinterventions.
• Laurence WhiteheadofOxfordAnalyticaconsidershowtocopewithuncertaintyinanincreasingly
globalisedandriskaverseworld.
Takentogethertheseessaysrepresentcompellinglyarguedvisionsofthefuturewhichcanprovidethe
basisfortheconstructionofthreeillustrativescenarios–allofwhichhaveimportantimplications for the
insurance sector.
Inourupside scenariotheworldischaracterisedbyaresurgentWestandathrivingEastwhere
countriesactcollaborativelyinordertosolvesomeoftheworld’sbiggestsocioeconomicproblems.
Inthisenvironment,Westerninsurersarelikelytoremainhighlycompetitivethoughtherewillbe
increasingpressurefromAsianproviders.
Inourcentral scenariotheworldischaracterisedbyrobustAsiangrowthsetagainstWestern
stagflation.AstheUSretreatsfromitspositionasglobalhegemon,countriesincreasinglyactasisolated
regionalblocksinordertosolveglobalsocioeconomicproblems.Inthisenvironment,theinsurersmost
likelytoprosperwillbetheonesthatareabletotapintoemergingmarketsthoughtheymayfacea
toughandrelativelyineffectiveglobalregulatoryenvironment.
Inthedownside scenariotheWestisplungedintoa1930sstyledepressionfollowinganuglyeurozone
implosionandafailuretorebalancetheglobaleconomy.Severecurrencywarsand‘beggarthyneighbour’
economicpoliciesreturntoprovidethesubtextforheightenedgeopoliticaltensionandcivilunrest.
Crucially,theinsurancesectorcanplayakeyroleindeterminingwhichfutureitfaces.Historically the
sector has helped drive economic growth, ensure sustainable public finances and mitigate political
risks in emerging markets.Tomaximiseitseffectivenessintheyearsahead,thesectormustcontinueto
dothethingsithasdonewellinthepast,evenbetterinthefuture.
Being part of a professionwillbeimportantinthisregard.Inthenewworld,likelytoberifewith
uncertaintiesandcomplex,interlinkedrisks,acommitmenttohighlevelsofcompetenceandethical
practicewillbevital–notjustforprovidingappropriateadviceandadequatelyunderwritingrisks–but
also,andperhapsmostimportantly,formaintainingthetrustandconfidenceoftheconsumersand
societiesitwillserve.
6 Future risk: Social and economic challenges for tomorrow
3. Past trends and possible futuresOuranalysisofsocioeconomictrendsfromthefirstreportwithinourcentenaryseriesidentifieda
numberofkeylessonsfromthepastwithpotentialimplicationsforfuturerisksrelatedtotheglobal
economy,internationalconflictandpolitics.1Inthisopeningsection,webrieflyrevisitsomeofthese
lessonswhilstoutliningthekindsofinsightsthatourexpertauthorsprovide.Thisanalysisandthe
essaysthatfollow,actasthebuildingblocksforsomesimplesocioeconomicscenariossetoutlater
inthisreport.
The global economy Onekeyconclusiondrawnfromourfirstreportwasthat,whilstincreasingratesofgrowthandeconomic
integrationmaybefamiliar,theyarebynomeanstheonlyimportanteconomicnarrativesfromrecent
history.Prosperityhasoftenebbedandflowed,permeatedbysomeofthegreatpoliticalandsocial
eventsofourtime.Indeedwearguedthatwhilst‘beggarthyneighbour’economicpoliciesaregenerally
thoughttobearelicofthepre-WWIIera,akeyriskisthattheycouldreturn,particularlyattimesof
significanteconomicandpoliticalstress.
Figure 1. Levels of integration: Merchandise exports as proportion of GDP
Western Europe Latin America Africa
Western Offshoots Asia World
Eastern Europe & former USSR
0
5
10
15
20
25
30
35
40
1870 1913 1950 1973 1998
% o
f GD
P
Source:OECD(2006),The World Economy: A Millennial Perspective
ThepossibilityofareturntoprotectionisteconomicpoliciesisconsideredbyDr Uri Dadush, Senior
Associate and Director at the Carnegie Endowment for International Peace.DrDadush’sessayoutlines
twofuturescenariosfortheUSeconomyandtheirpotentialglobalimplications.Inthebadscenario,
progressontradereform,financialandmonetarysystemreform,andglobalgovernancegrindstoahalt
followingUSwithdrawalfromtheworldstageafteraprolongedrecession.Eveninthegoodscenario,
USpowerissubstantiallydiminishedthoughitisstillabletohelpleadinternationaleffortsontrade,
governanceandclimatechange.
1 Foranindepthanalysisofpastsocioeconomictrendspleasereadourfirstcentenaryreport,Future Risk: Learning from history, Centenaryfutureriskseries:report1(Feb2012)
3. past trends and possible futures
7 Future risk: Social and economic challenges for tomorrow
InDadush’sview,policymakersinWashingtonandBrusselsmusttakerobustactionnowinorder
toavoidtheworstcase.However,evenifthedownsidescenarioisavoided,andlevelsofeconomic
integrationincrease,thisstillmaynotensuregrowthandprosperity.Ashighlightedinourlastreport,
therecentfinancialcrisisshowedthatanimportantriskassociatedwithhighlevelsofintegration
isthatitactuallyincreasesthechancesandseverityofcriseswhichcouldinturnreducelong-term
prospectsforgrowth.Similarly,therecentfinancialcrisisaswellastheAsiancrisisofthemidtolate
1990s,highlightthepossibilitythattherisksassociatedwithdeeplyintegratedandcomplicatedglobal
economicsystemsmaybeimpossibletoadequatelymanageorunderstand.
Laurence Whitehead, Adviser on macro risk at Oxford Analytica and Official Fellow in Politics at
Nuffield College, Oxford,describesthecurrentretreatfrommeasuringriskintheprevailingfinancial
environment.Hemakestheobservationthattheacutefinancialuncertaintiesofthe1930sthatwere
relegatedtothemarginsofriskanalysisbefore2008,havereturnedintheeurozoneandpotentially
morewidely.Tosupporthisargument,WhiteheadprovidestheexamplesofItaly–aleadingcapitalist
countrywhichmayultimatelyproveunabletopaybackitsdebts,andthedollar,whichuntilthefinancial
crisiswasconsideredavirtuallyriskfreecurrency.Inresponsetosuchuncertaintieswhichthreaten
tocauseparalysisindecisionmaking,Whiteheadrecommendsgoingbacktobasicriskmanagement
principlesandensuringstrongmechanismsfortransparencyandpublicaccountability.Withoutsuch
mechanisms,publictrustinkeydecisionmakersandinstitutionscouldbeunderminedwhenmistakes
aremade.
George Magnus, Senior Economic Adviser at UBS Bank,isalsoconcernedwiththechallengesposedby
thefinancialandsovereigndebtcrises.Hisessay,however,ismorefocusedontherisksposedbythe
combinedeffectofincreasinginternationallongevityagainstthebackdropofmacroeconomicturmoil.In
thiscontext,Magnusnotestheworryingwayinwhichincreasinglifeexpectancyis‘colluding’withthe
crisisovereconomicgrowthtocreateseriousshortcomingsintheadequacyofretirementincomes,and
howgrowingfiscaldeficitsmakesolvingthechallengeofagerelatedspendingevenmorepertinent.In
response,Magnusoutlinessomeactionsthatfinancialservicesandgovernmentsmighttaketominimise
theriskofpoorreturnsinoldageandrisingpublicspending.
AshighlightedbybothWhitehead’sandMagnus’sessays,thesustainabilityofWesterneconomieshas
recentlycomeintoquestion,asdebt(bothprivateandpublic)asaproportionofGDPhassubstantially
risenacrossEuropeandNorthAmerica.IncontrasttotheWest’sindebtednessandpersistentcurrent
accountdeficits,anumberofmiddleincomedevelopingcountries2likeChina,continuetorunlarge
currentaccountsurpluseswhilstexperiencingbreakneckeconomicgrowth.Asaresultofthese
contrastingtrends,manyagreethattheglobaleconomyhasbeen,andindeedremains,dangerously
unbalanced,withaconsumerdrivenindebtedWestontheonehand,andanoverlyexportintensivehigh
savingsEastontheother.SomefearthiswillresultinalastingdeclineincompetitivenessfortheWest.
2 IntermsofGrossNationalIncomepercapita
3. past trends and possible futures
8 Future risk: Social and economic challenges for tomorrow
Figure 2. Map of current account balances
2748-7336 -500 0 500
Source:IMFWorld Economic Outlook Database2009.
Graphicalrepresentationavailablefrom:http://en.wikipedia.org/wiki/File:Cumulative_Current_Account_Balance.png
TheshiftingglobaleconomicorderisthefocusofanessayfromDavid Smith – Economics Editor,
Sunday Times.HisessaydiscussestheimplicationsfortheUKofunprecedentedeconomicgrowth
acrossthedevelopingworldandarguesthatthefuturedoesnothavetobebleak–pointingtothe
absoluteimprovementinUKlivingstandardssincetheriseofAmericainthe20thCenturywhichusurped
theUKastheworld’sdominanteconomicforce.However,crucialtomaintainingUKcompetitiveness,
arguesSmith,isforittoreconfiguretradewiththeEast–whichheadmitsisabigchallenge.In
response,SmithhighlightsanumberofkeyindustriesthattheUKcouldbuildasubstantialcomparative
advantagein,includingadvancedmanufacturing,pharmaceuticals,aerospaceandfinancialservices.
ThecontinuedriseofAsiaisnot,however,aninevitability.China,forexample,whichDadushpredicts
willovertaketheUSeconomyinthenextdecade,currentlyfacesaneconomicpredicamentofitsown:
“...fast growth has fired up the country’s economic engines, but it has also led to stubbornly high
inflation, which threatens to overheat the economy and undermine the long-running boom”.Thekey
concernisthat;“soaring asset prices could eventually tumble, leading to a wave of non-performing
loans at the big state owned banks”derailinggrowth.3TheimplicationsofChina,theworld’sleading
creditor,facingitsownfinancialcrisiswouldbedisastrous–somuchso,thatitisthetopglobalrisk
identifiedbyOxfordAnalytica.4
Inthiscontext,Andrew Leung, International and Independent China Specialist,focusesonmonetary
policyinChinaanditspotentialimplications.HearguesthatanydrasticappreciationoftheRenminbi
(RMB)islikelytocausecatastrophicjoblossesandsocialinstabilityinthecountry.Asaconsequence,
LeungarguesthatChinamustretainanindependentRMBexchangerate,allowingforonlygradualand
measuredappreciation.HealsoarguesthatChinashouldretaintheprotectionofanon-convertible
capitalaccountgivenAsia’spastexperiencewithcapitalflight.Leungdoes,however,thinkthatChinais
readytoliberaliseitsfinancialservicessector.
3 DavidBarboza(April2011),Fast Growth and Inflation Threaten to Overheat Chinese Economy,articleintheNewYorkTimes
4 OxfordAnalytica(Jan2012),Global Risk Monitorhttp://www.oxan.com/Analysis/GlobalRiskMonitor/#risk1(lastaccessed,28Feb2012)
3. past trends and possible futures
9 Future risk: Social and economic challenges for tomorrow
Patterns of conflict Alongsideconsideringglobaleconomictrends,ourfirstreportintheseriesalsolookedatinternational
relationsandpatternsofconflict.Inparticular,itnotedthatsincethe1960s,instancesofconflict
between stateshavebeenrarewithcivilwarandactsofterrorism,thekeysecuritythreatsnowfacing
manynationsacrosstheworldtoday.Thereasonsforadeclineinthefrequencyofsocalledinterstate
conflict,is,however,relativelyunclearandmuchdebated.Theconceptofnucleardeterrenceishighly
controversial,whilstthesocalleddemocraticpeaceisonlyrelevantforexplainingthelackofconflict
betweensetsofdemocraticnations.Weconcludedthattheriskofinterstateconflict,particularly
betweendemocraticandnon-democraticcountries,istherefore,veryreal,particularlyatatimeof
seriousmacroeconomicinstability.
Figure 3. Conflict by type 1945–2000
0
10
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
20
30
40
50
60
Internationalised internalInternalInterstateExtrastate
Source:Gleditschetal(2002) Armed Conflict 1946–2001: A New Dataset,JournalofPeaceResearch,Vol39,No.5pp.615-637
Inthisregard,Laurence Whitehead’sessaynotesthattherearesubstantialuncertaingeopolitical
implicationsofthe‘riseofChina’,theresettingofUS-Russianrelations,andthepotentiallydisorderly
weakeningoftheEuropeanUnion.However,forWhitehead,thegreatestsourceofgeopolitical
uncertaintyliesintheMiddleEast,whereturbulenceconcerningcountriessuchasIsrael,Iran,Egypt
andSyria,preventsthepossibilityofreliablelong-termplanning.Inresponsetothisissue,Whitehead
recommendsscalingbackrelianceonpredictivemodelsandembracingqualitativeevidence,interpretive
theorisingandwell-honedjudgement.
Dr DadushalsoconsidersgeopoliticalrisksstemmingfromasubstantialdemiseinUSpower.Heargues
thatshouldtheUSretreatasaglobalplayer,alargepowervacuumwouldmaterialisewhichwouldin
turnleadtoaweakenedinternationalcommunity.Asaresult,vitalaideffortstothepoorestpartsofthe
developingworldwoulddramaticallyfallincreasingthechancesofgrievanceandperipheralconflict.
Inshortthen,ourexpertauthorsidentifyanumberofsignificantandinterrelatedsocioeconomicrisks,
whichcouldhavesubstantialimplicationsforlong-termpeaceandprosperity.Crucially,anumberof
theexpertauthorsarguethateffectiveactionmustnotbedeferred–whatpolicymakersandbusiness
leadersdonowwillhaveimportantimplicationsforourlong-termfuture.Inlaterchapterswewilluse
thisexpertanalysistoformthebasisforsomesocioeconomicscenarios.
3. past trends and possible futures
10 Future risk: Social and economic challenges for tomorrow
4. Future socioeconomic risks: what the experts say
Living with a shift in global economic powerDavid Smith, Economics Editor, The Sunday Times
Inaperiodofeconomicuncertainty,itiseasytolosesightofthebigpicture.Thebigpictureatthe
moment,ifweliftourheadsabovetheuncertaintyoftheglobalfinancialcrisisandeventsinthe
eurozone,isaprofoundshiftintheaxisofworldeconomicpower.
In2001JimO’Neill,aneconomistwithGoldmanSachs,ensuredimmortalitybycomingupwiththe
acronymBRICs,forBrazil,Russia,IndiaandChina.Backedupwithsomelong-termprojectionsof
wheretheseeconomieswereheading,andthelikelysupplantingoftheWestasthedriveroftheworld
economybytheBRICsandotheremergingcountries,O’Neillandhiscolleaguesputdownamarkerfor
thefuture.
Giventhevagariesofeconomicforecasting,andchangesineconomicfashion,manysuchmarkershave
beenputdownovertheyears.Mostofthemarequicklyforgottenwhentheyprovetobeinaccurate.
But,morethanadecadeon,theBRICshavestuckand,indeed,havebeenjoinedbyothergroupings,
includingtheCivets(Colombia,Indonesia,Vietnam,Egypt,TurkeyandSouthAfrica),the“7percent
club”(economiesthathaveconsistentlyachievedgrowthratesatorabovethatrate)andtheNext11
(Bangladesh,Egypt,Indonesia,Iran,Mexico,Nigeria,Pakistan,Philippines,SouthKorea,
TurkeyandVietnam).
What was a pioneering idea just over a decade ago is now commonplace. Emerging economies are driving the global economy.
Whatallthesegroupingshaveincommon–andthereissomeoverlap–isthattheyreflecttheriseof
emergingeconomies.Whatwasapioneeringideajustoveradecadeagoisnowcommonplace.Emerging
economiesaredrivingtheglobaleconomy.
TheInternationalMonetaryFund’snumberscaptureitwell.In2009,theworstyearfortheglobal
economysincetheSecondWorldWar,advancedeconomiesshrankby3.7percent,averysevere
recession,whiletheemergingworldgrewby2.8percent.WhileAmericasuffereda3.5percentfallin
grossdomesticproduct,andtheEuropeanUnionshrankby4.2percent,Chinaachieved9.2percent
growthandIndia6.8percent.
In2010,ayearofrecovery,advancedcountriesbouncedback,growingby3.1percentbuttheemerging
worldsawa7.1percentboost.In2011,accordingtotheIMF’sestimates,thecontrastgrew,advanced
economiesgrowingbyjust1.6percent,comparedwith6.4percentemerging-economygrowth,a
pictureitexpectstopersist,despitealltheuncertainty,in2012.
Itwasnotalwaysthisway.Thoughitwaspossibletopointintheearly2000stoundoubtedstarssuch
asChina,withanaveragegrowthratethenofnearly9.5percentsince1978(aratethathasstuck),its
performancewasnottypicaloftheemergingworld.
Thoughemergingeconomieshavealotofcatchinguptodowhichcanonlybeachievedbygrowingmore
rapidlythantheold,advancedcountries,foralongtimetheyfailedtodoso.
4. what the experts say
11 Future risk: Social and economic challenges for tomorrow
Asrecentlyasthelate1990s,emergingeconomiestakentogetherdidnotoutperformtheadvanced
world.ThoughtherewereundoubtedstarssuchasChina,theaveragewasdraggeddownbypoor
performanceinAfrica,LatinAmericaandotherregions.
Theresultwasthattheworldwasdrivenbyadvancedeconomies;America,Japan,Britainandtherestof
WesternEurope,Canadaandsoon.Thesecountriesaccountedfortwo-thirdsofglobaleconomicgrowth
andpulledtheemergingworldalongwiththem.
Nowitistheotherwayaround.Two-thirdsofglobalgrowthisfromemergingeconomies,whilethe
advancedworldisstrugglingtoprovidetheotherthird.Itisnothardtoseewhy.AmericaandEurope
aresufferingundertheweightoftheirtwinhangovers:thehangoverofadamagedandweakened
bankingsectorandthefiscalhangoverofgapingbudgetdeficitsandrisingpublicsectordebtthat
havetobetackled.
America and Europe are suffering under the weight of their twin hangovers: the hangover of a damaged and weakened banking sector and the fiscal hangover of gaping budget deficits and rising public sector debt that have to be tackled.
Emergingeconomieshaveshownthemselvescapableofgrowingeveninthedirestcircumstancesforthe
worldeconomy,aswesawin2009.Throughthickandthin,goodtimesandbad,emergingeconomies
willoutperformtheiradvanced-countrycounterparts.
ThisisnotjustbecausetheyhavefeweroftheproblemsofexcesswhicharebedevillingtheWest,
orbecausetheyhaveplentyofcatching-uptodo,thoughbothareimportant.Itisalsobecausethe
emergingworldisincreasinglytradingwithitself.TradewithinAsiabouncedbacksharplyaftertheworst
phaseoftheglobalfinancialcrisisthreeyearsago.
Growthinsomeemergingeconomies,moreover,isgeneratinggrowthinothers.Theemergingworldis
wheretheactionis.AfewyearsagoAfrica’sbesthopeappearedtoliewithaidanddebtrelieffromthe
West.Nowthereisanewprosperitydrivenbycommoditydemand,particularlyfromChina.
Theotherbigshiftistowardsdomestically-generatedgrowth.Emergingeconomieshavecometorealise
theycannotrelyexclusivelyonAmericanorEuropeanconsumers.Domestically-generatedgrowth
reducedrelianceontheWestandispoliticallynecessary:sharingthebenefitsofgrowthamongthe
widerpopulation.China’s2011–15five-yearplan,forexample,explicitlyhasthisaim.
WhatdoesallthismeanforBritain?Asnotedearlier,thisisaperiodofconsiderableeconomic
uncertainty.Theglobalfinancialcrisiswhichbeganinthesummerof2007,reacheditsmostserious
phaseintheautumnof2008beforereturningwithavengeancetotheeurozoneduring2011,has
affectedusall.
Itbrokealongsequenceofrisingprosperity–the16yearsofgrowththatprecededthecrisisbroke
recordsforthemodernera–andledtoanunusuallysharpdropinlivingstandards.
It [the crisis] broke a long sequence of rising prosperity – the 16 years of growth [in the UK] that preceded the crisis broke records for the modern era – and led to an unusually sharp drop in living standards.
4. what the experts say
12 Future risk: Social and economic challenges for tomorrow
Oneeasywayofthinkingofthecrisis’simpactisbyreferencetotheprojectionstheOfficeforBudget
Responsibility(OBR)presentedalongsideGeorgeOsborne’smostrecentAutumnStatement.Itsaidthat
Britain’seconomyin2016willbe13percentsmallerthanitwouldhavebeenhadTreasuryprojections
ofthe“trend”ornormalrateofgrowthmadein2008beenachieved.
Putanotherway,theOBR’scalculationsforrealhouseholdincomessuggesteditwilltakeuntil2014or
2015togetbackto2008–9levels.TheInstituteforFiscalStudieswentfurther,talkingofa“lostdecade”
formedianrealhouseholdincomes.Notuntil2016,itsaid,wouldhouseholdsgetbacktowherethey
werein2006.
Allthis,asnoted,ishighlyunusual.SirMervynKingpointedoutquiteearlyonthatyouhavetogoback
tothe1920s,inotherwordsbeforetheDepressionyears,foraperiodofdepressedrealincomesaslong
asthis.TheNationalInstituteofEconomicandSocialResearchsaysthat,onpresentevidence,thiswill
bealongerperiodof“depression”,whichitdefinesasthetimetakentogetbacktothepreviouspeak
forgrossdomesticproduct,thanthe1930s.
WhenwelookatBritain’sneighboursandcompetitors,thepictureisdepressinglysimilar.Thestruggle
foreurozoneeconomiesoftryingtoholdthesinglecurrencytogetherisbothcompoundedbyand
hascontributedtotheireconomicweakness.Thatweakness,givenBritain’stradelinkswitheurozone
economies,transmitsitselfdirectlyacrosstheEnglishChannel.
Soshouldweviewtheriseoftheemergingworldwithdespair?Doesitmarkapassingoftheeconomic
batonfromWesttoEastinawaythatwillpermanentlyimpoverishus?Somecommentators,afterall,
arguethatthefallinlivingstandardsinBritainnowistheshapeofthingstocome.Dowehavetoaccept
theendofrisingprosperity?
Theanswertothatisno,thoughIwillqualifyitinamoment.Thebiggestconfusionpeoplegetintoon
thissubjectistomuddleabsoluteprosperityandrelativeprosperity.Theeasiestwaytothinkofthisis
withtheexampleofAmerica’sriseduringthe20thcentury.
DidtheriseoftheUnitedStatesmakeBritainrelativelypoorerinthelastcentury?Itmostdefinitelydid.
Britain’sdisplacementbyAmericaasaneconomicsuperpowersawUSlivingstandardscatchupwith
thencomfortablyoverhaulthoseintheUK.ButdiditmakepeopleinBritainabsolutelypoorer?Itmost
definitelydidnot.
Bytheendofthe20thcenturyUKlivingstandardswerefarhigherthanatthestart.Inthesecondhalfof
the20thcenturytheydoubledroughlyevery25years.Historytellsusthatitiswrongtoregardtherise
ofneweconomicpowersaspurelyathreat.Theyrepresentaconsiderableopportunityaswell.Growthin
theworld,whereveritis,generatesprosperityelsewhere.
History tells us that it is wrong to regard the rise of new economic powers as purely a threat. They represent a considerable opportunity as well. Growth in the world, wherever it is, generates prosperity elsewhere.
Thereare,asnotedabove,oneortwocaveats.Onefeatureoftheriseoftheemergingworldhasbeen
muchhighercommodityprices.Oilpricesdidnotbreakdecisivelyabove$40abarreluntilasrecentlyas
2004.Morerecently,energyandcommoditypriceshavebeenpushedtorecordlevels.
4. what the experts say
13 Future risk: Social and economic challenges for tomorrow
Thisisbecauseemergingeconomiesarecommodity-hungry.Theirgrowthinvolvesalotmoreenergyuse
and,aslivingstandardsrise,abigincreaseincommodityuse,puttingupwardpressureonprices.Sothe
normalpost-recessionexperiencefortheWest,ofmanyyearsinwhichinflationisdepressed,hasnotbeen
repeatedthistime.Hencewehavehadthephenomenonofthesqueezeonrealincomes.Itseemslikely
thatcommoditypriceswillbeindefinitelyhigherthaninthepastalthoughtheyarebytheirnaturevolatile.
ThesecondgeneralpointisthatcountrieslikeBritainhavetolooktotheirlaurels.“Theworlddoesnot
oweusaliving”isaphrasebelovedofpoliticiansbutthatdoesnotmeanitisnottrue.
Inparticular,thechallengesthatweretherebeforethefinancialcrisisremainand,ifanything,the
urgencyofdealingwiththemhasincreased.TherearemanyofthesebutIshallconcentrateonjusttwo.
Thechallengeofprovidingforanageingpopulationinawaythatdoesnotdestroytheproductivepart
oftheeconomyisaliveone.Politiciansarestartingtorespondbyincreasingthestatepensionageand
reformingpublicsectorpensionsbutmayonlyhavescratchedthesurfaceand,inareaslikelong-term
careprovision,arenotfarbeyondfirstbase.
Theissueissimplystated.Thecountrieswhichwilldrivetheglobaleconomyinthecomingdecades
aremainlyyoung–Chinaisthebigexception–withyouthfulpopulations.Halfthepopulationof
Indiaisundertheageof25andthree-quartersarebelow35.ThoughBritainisrelativelywell-placed
demographicallyamongadvancedeconomies,theriskofbeingaweak“old”economyisarealone.
Though Britain is relatively well-placed demographically among advanced economies, the risk of being a weak “old” economy is a real one.
Totakeanotherchallenge,wehavetoensurethattheemergingworlddoesnotdecideitcandowithout
us.TradebetweenChinaandIndiaisincreasingatafarfasterratethanbetweeneitherofthemandthe
West.Britain’sshareofglobalexportsfellfrom5.3to4.1percentbetween2000and2010.TheUKsells
10timesasmuchtotheeurozoneastoBrazil,Russia,IndiaandChinacombined.IndiaisonlyBritain’s
18thlargestexportmarket.
Sothereisahugetaskinre-orientatingBritain’sexportstowardsthesefast-growingeconomiesandto
buildingupthesectorsinwhichtheeconomyhascomparativeadvantage,andingoodsandservices
thatareindemand.Theyinclude,clearly,advancedmanufacturing,pharmaceuticals,aerospace,and
financial,businessandprofessionalservices.Theyalsoincludeknowledge-basedsectorswhichhaveso
farbarelymadeitoutofthelaboratory.Stayingaheadinthesewillperhapsbethebiggestchallengein
thisrapidlychangingworld.
...there is a huge task in re-orientating Britain’s exports towards these fast-growing economies and to building up the sectors in which the economy has comparative advantage, and in goods and services that are in demand.
4. what the experts say
14 Future risk: Social and economic challenges for tomorrow
Itispossibletobeoptimistic.IstartedthispiecewithGoldmanSachsandIshallenditwiththem.Ina
paperpublishedinDecember2011,theinvestmentbanksaidthatonlytheUnitedStatesandCanada
wouldhavehigherlevelsofGDPpercapitathanBritainin2050.
ThoughBritainwouldslipto10thplaceintheleagueofglobaleconomiesbysize,itwouldstillbeahead
ofemergingeconomiesinpercapitaincomelevels,aswellasfaringbetterthantherestofEurope,
becauseimmigrationwouldcontinuetoeasethedemographicchallengeofanageingpopulationand
becauseofhigherlevelsofprojectinvestment.
“Lookingforward,wethinktheUKiscapableofholdingitsownandinfactmovingaheadofsomeofthe
otherdevelopedeconomies,”itsaid.Letushope,aswiththeBRICs,GoldmanSachsisright.
4. what the experts say
15 Future risk: Social and economic challenges for tomorrow
Global longevity trends and their potential economic and social implications5 George Magnus, Senior Economic Adviser, UBS and author of the “Age of Aging” (2008)6, and “Uprising: will emerging markets shape or shake the global economy?” (2010)
AccordingtotheGlobalAgingreport2010fromratingagency,StandardandPoors’,“Nootherforce
islikelytoshapethefutureofnationaleconomichealth,publicfinances,andnationalpoliciesasthe
irreversiblerateatwhichtheworld’spopulationisgrowingolder”.
Noonedisagreesglobalagingishaving,andwillcontinuetohaveprofoundconsequences,as
suggested.But‘nootherforce’seemsalittleoverthetop.Theglobalsystem,andoursocietiesare
facingtheirbiggestchallengesinpeacetimeperhapssincetheIndustrialRevolutionasaresultof
theriseofChinaandotheremerginganddevelopingcountries.Andtheprotractedandfractious
consequencesofthefinancialcrisisfortheeconomic,socialandregulatoryenvironmentcertainlyqualify
as‘game-changers’.WhoknowsforhowlongWesterncountriesaregoingtohavetodeleveragetheir
economies,orwhatthemulti-yearconsequenceswillbe?AndhowcanwepredictwhatEuropeisgoing
tolooklikeinthenextfewmonths,letaloneinthelonger-term?Thesephenomenawillshapethefuture
too,butwithevenlesscertainty,andmuchlesspredictableconsequences,thanglobalaging,itself.
Demographic dynamicsInadvancedeconomies,thecrossoverbetweenthenumberofpeopleagedover60andthoseaged
under14asashareofthepopulationwasreachedabout10yearsago.By2050,therewillbetwiceas
manyoldercitizensastherearechildren.Bycontrast,inemergingcountries,therearestillthreetimes
asmanychildrenasthereareoldercitizensandthecrossoverisnotpredictedtohappenuntil2040.
Therearesomenotableexceptions,whereagestructureischangingextremelyrapidly,almostonapar
withtheWest,includinginChina,RussiaandEasternEurope.
By2050,thenumberofover60sinadvancednationsisexpectedtoriseby2.5timestoaround
418million,andthenumberofover80swillrise6timestoover120million.Intheemergingworld,the
numberofover60swillgrowbymorethan3timesto1.4billion,andthisincludesa6-foldincreasein
theexpectedpopulationofthoseagedover80,to262million.Altogether,theover60swillrisefrom
759millionto2billion,equivalenttoariseintheirshareofthepopulationfrom22percentto33per
centinadvancednations,andfrom9percentto20percentinemergingnations.
Themostastoundingfeatureofglobalagingnowadaysisitsspeed.IttookFranceoveracenturyfor
theover60stodoublefrom7percentto14percentofthepopulation.Inmostotherdeveloped
countriesithastakenoristakingbetween40–80years.Butmostemergingnationswillaccomplishthis
shiftinroughly20years,withChinaalreadythefastestagingcountryonEarth.Itspopulationofover
60swillgrowfrom144millionor11percentofthepopulation,to438millionor31percentby2050.
Somecities,forexample,Shanghai,alreadyhaveanagestructuresimilartothatofJapan,whichisthe
oldestWesterncountry.
The most astounding feature of global aging nowadays is its speed. It took France over a century for the over 60s to double from 7 per cent to 14 per cent of the population…but most emerging nations will accomplish this shift in roughly 20 years.
5 Basedonanaddresstothe7thChiefRiskOfficerAssembly,SwissRe,Zurich,16thNovember2011
6 http://georgemagnus.com/books/the-age-of-aging-how-demographics-are-changing-the-global-economy-and-our-world
4. what the experts say
16 Future risk: Social and economic challenges for tomorrow
TheproblemforChinaandotheremergingcountriesisthattheyarestartingtoencounterthelongevity
challengeatlevelsofpercapitaincomeandsocialsecurityprovisionthataresubstantiallylowerthan
wasthecaseforWesternnationswhentheyhadasimilarmedianageandotherdemographicstothose
ofemergingmarketstoday.
Thechallengeofrisinglongevityisadarkerprospectthanthetraditionalperspectivewhichcelebrates
longerlifeexpectancyasself-evidentlygood.Thereasonisbecauseoftheeconomicimplicationsofthe
collapseinandsustainedlowlevelsoffertility.Putanotherway,therearenotenoughbabiesbeingbornto
becometheworkerswhowillsupportandfinancetherisingpopulationofoldercitizens.Inmostadvanced
countries,the3–4workingagepeopleperoldercitizenwillbecome2orlessbythemiddleofthecentury,
whileinChina,forexample,the10workerswhosupporteacholdercitizenwillbecomejust2.5.
Itistheimpliedchangeinagestructure,thatisthesoaringnumbersofoldercitizensinrelationto
workingagepeople,thatistherootoftheproblem,andboilsdowntothefundamentaleconomic
problemofastagnantordiminishinglaboursupply,andskillshortages.Boeing’sseniorvice-president
ofhumanresources,forexample,toldanaudiencein2010thatby2015,40percentoftheaircraft
maker’sworkerswouldbeeligibletoretire.Recruitmentandstaffretentionarebecomingamajor
problemforagrowingnumberofbusinesses,asevidencedinrecenttimesbyannouncementsat
SiemensandBMW,and,therefore,fortheeconomy.IntheUS,about19percentofUSmanufacturing
workersareaged54ormore,whichisroughlythesameasfortheworkforceasawhole.Butonly
7percentofmanufacturingworkersareunder25,whichishalfthatofthetotalworkforce.
With Western countries having already banked their [demographic] dividend, the headwinds to these benefits are going to gather inexorably, unless we can find new coping mechanisms to address the shortfalls in labour supply and skills.
Fromaneconomicperspective,thesignificantchange,then,isonthecomingcrunchintheworkingage
population,andonthepaybackfromwhatdemographerscallthe‘demographicdividend’.Thisisthe
phaseduringwhichchilddependencyisdeclining,andtheworkingagepopulationisexpandingfrom
priorhigherfertilityrates,butbeforerisingoldagedependencykicksin.Itiswhereadvancedcountries
wereformuchofthepost-WW2erauntilafewyearsago,andwheremostemergingcountriesarenow.
Thisdividendisassociatedwithstrongtrendsinincomeandconsumptiongrowth,increasingasset
marketdevelopmentandassetreturns,andeconomicexpansion.WithWesterncountrieshavingalready
bankedtheirdividend,theheadwindstothesebenefitsaregoingtogatherinexorably,unlesswecan
findnewcopingmechanismstoaddresstheshortfallsinlaboursupplyandskills.
The collusion of rising longevity and the financial crisisFromafinancialmarketsstandpoint,thecrisishascementedalowinterestrateenvironment,weaker
equityreturns,andaworryinguncertaintyastowhatconstitutesarisk-freerate,allinthecontextof
morestringentregulation,andincreasinglyoffinancialrepression,thatis,policiesdesignedtoensure
thatdomesticinvestorscontinuetofundgovernmentdeficits.
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17 Future risk: Social and economic challenges for tomorrow
Butdemographicchangedoessomeofthesethingstoo,assuggestedalreadybyJapan’sexperience
withageingoverthelast22years.Afterall,astheagestructureofsocietyrises,moreandmorepeople
moveoutofproductiveworkintoretirement,butarenotbeingreplacedbecauseofweakfertilityrates.
Thistendstoshiftincomedistributionfromcapitaltolabour,underpinningweakerequityreturns.Or,as
now,itcausescompaniestocontinuouslylookforlabourcostsavings,whichinturn,depressaggregate
demandwithsimilarconsequences.Inamacabreway,wecouldarguethatrisinglongevityandother
demographicfactorsarecolludingwiththecrisisovereconomicgrowthtocreateseriousshortcomings
intheadequacyofindividualretirementfundingandofprivatepensionandinsuranceschemes,and
insovereignsolvency,givenbothexistingbudgetaryconditionsandtheunaffordabilityofpublic
age-relatedspending,basedonexistingcommitments.
In a macabre way, we could argue that rising longevity and other demographic factors are colluding with the crisis over economic growth to create serious shortcomings in the adequacy of individual retirement funding.
Itispossiblethatfinancialservicescompaniescouldplayanimportantroleindevelopingnewsavings
andinsuranceproductsthatwillhelpthegrowingnumbersofretireesmeettheirchangingfinancial
needs,andprovidingpensionandrelatedservicesasfinanciallystretchedgovernmentspassfinancial
provisionandcareresponsibilitiesbacktoindividuals.
Financialproductsandservicesdemandedbyindividuals,forexample,willcontinuetoshiftfromthose
thataccumulatesavingsduringworkinglivestothosethatfacilitatetheirdraw-downduringeverlonger
yearsofretirementandoldagecare.Thelongevityphenomenonischangingthestandardlife-cycle
hypothesisthatliesattheheartofthingswehavetakenforgrantedinfinancialservicesforalongtime,
includingpatternsofsavingsbehaviourandlifestylefinancialproducts.Putanotherway,risinglife
expectancy,longeryearsatwork,andperhapsasmuchas20yearsormoreinretirementrequirepeople
toretainatleastsomeexposuretoriskassetsforlongerthanhasbeenthecaseuntilrecently.Evidence
fortheFederalReserve’sfour-yearlySurveyofConsumerFinancesconfirmsthathouseholds,headedby
oldercitizens,continuetohavemoreconservativeassetallocationsthantheiryoungerpeers,butretain
higherlevelsofriskexposurethantheirpredecessors.Assetmanagerswillhavetodevelopproducts
thatmaintainfinancialexposuretoequitiesandotherriskproductsforlonger,whilecontrollingforthe
marketvolatilitythatoldersaversespeciallyneedtoavoid.
Asset managers will have to develop products that maintain financial exposure to equities and other risk products for longer, while controlling for the market volatility that older savers especially need to avoid.
Therearewaysinwhichgovernmentscanalsomitigatetheconsequencesofrisinglongevityforthe
economy.Immigrationisanobviousexample,exceptforthefactthatforthetimebeing,thepolitics
arehostile–andinthecaseofmostEuropeancountriesandJapan,thescaleofimmigrationneeded
tocompensatefortheeffectsofrapidageingisunimaginableinpractice.Othermechanismsareabout
keepingandbringingintoworkpeoplewhoseparticipationratesintheworkforceislow,specifically
olderworkers,andwomen.
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18 Future risk: Social and economic challenges for tomorrow
Keepingolderworkersatworkandenticingmoreintosomeformofworkcannotbeaddressedbyage
discriminationlegislationalone.OtherthaninJapan,wherehigholderworkeremploymentratesare
thenorm(butnotforwomen),thisrequiresgovernmentsandcitizenstotakearealisticviewaboutthe
abilitytoworklonger.Toanextent,thisisalreadyevidentinthespateofpoliciesdesignedtoraisethe
retirementageinstepsoralignitwithlongevity,ortoraiseothereligibleagesforaccesstopensionand
healthcarebenefits.
GovernmentsarenowraisingretirementageseitherbecausetheyareforcedtodosounderIMF
programmesorbecausetheyareself-imposedforreasonsoffinancialduress.Butevenhigher
retirementageswon’tsolvethelongevityproblemtotally.Thiswillrequireacomprehensiveshift
inthinkingaboutthenatureandflexibilityofworkandtheworkplace,theintroductionofphased
retirementschemes,newoccupationalandcompensationstructurestosuitolderworkers,andastrong
commitmenttolife-longskillformationandretraining.
But even higher retirement ages won’t solve the longevity problem totally. This will require a comprehensive shift in thinking about the nature and flexibility of work and the workplace.
Thepositionofwomeninageingsocietieswillbecomeincreasinglysignificant.Itisworthemphasising
thatthedemographicchallengeislessincountriesthathavehigherfertility,anditisnoaccident
thatcountries,suchastheUS,Canada,theUKandSwedenthathavehigherfertilityratesalsohave
thehighestproportionsofwomenatwork.Thisisessentially,ofcourse,aboutaffordableandwidely
availablesystemsofchildcare.Buthigherfemaleparticipationinthelabourforceisalsoaboutsystems
thatbetterprotectyoungerwomen,whoheadupthevastmajorityofsingleparentfamilies,andall
womentotheextentthattheytendtodominateparttimeandlesswellpaidwork,andareatriskfrom
financialpenaltiesassociatedwithcareerbreaks,havingchildrenandgettingdivorced.
Itshouldbenotedalsothatbecauseofgreaterfemalelongevity,thefemaleproportionoftheolder
citizenagegroupisgoingtorise,andwomenaretypicallydisadvantagedcomparedtomen,especially
iftheylivealone,andastheygrowolder.IntheUK,aboutathirdofwomenagedover55haveno
retirementsavingsatall,andofthosethatdo,overhalfhavenowherenearlyadequateprovision.
Inadequacyofretirementsavings,however,isacommonproblem.Theconsequencesoffallinghouse
prices,lowinterestrates,andweakequitymarketsaside,insufficientretirementsavingswereacause
forconcernbeforethefinancialcrisis.IntheUSjustbefore2008,theFederalReservefoundthat60per
centofhouseholdsinthebottomthirdoftheincomedistributionhadinsufficientsavingsforretirement,
andalmost50percentofthemiddlethirdand42percentofthetopthirdwereinasimilarposition.
Thesenumbersareboundtohaverisenwithhigherunemploymentandweakereconomicandstock
marketconditions.
Amassiveissuearisingfromrisinglongevityincurrentcircumstancesispreciselyhowolderworkers
cansaveforretirement,especiallyiftheyarestrugglingwithtoomuchdebtorunaffordablemortgages,
butgenerallywheninterestratesareatgenerationallowsandequityreturnsaremeagreandvolatile.
Thisappliesinparticulartothosenotcoveredbyprivatepensionplans,orrelyingonpay-as-you-go
pensionsystems.Only6countriesaccountedforthevastmajorityofthe$31trillioninpensionassets
attheendof2010.TheyweretheUSwitha63percentshare,theUK(9percent),andCanada,Japan,
theNetherlandsandAustralia(17percent).Somecountries,suchasDenmark,SwitzerlandandFinland,
hadhighpensionassetsasashareoftheirownGDP,asdidChileandKorea.ButinmuchofEurope,
includingSpainandFrance,asindeedinmuchoftheemergingcountryuniverse,pensionassetsare
smallbycomparison.
4. what the experts say
19 Future risk: Social and economic challenges for tomorrow
Publicsectorsavings,orthelackofthem,arenowthefocusofattentiononanunprecedentedscalein
Westerncountries.TheriseintheratioofpublicdebttoGDPtowellover100percentthatwehaveseen
since2008isindeedunprecedentedinpeacetime.Mostgovernmentsfacemanyyearsofdeleveraging,
orrestructuringtheirfiscalbalancesandpolicies,soastostabiliseandthenlowerthepublicdebt
burden.Some,suchasGreece,IrelandandPortugalfaceinsolvencyrisksthathaveshutdowntheir
accesstoprivatemarkets,andforcedthemintoIMFprogrammes.Wecannotknowhowthissovereign
crisisisgoingtoendup,especiallyintheeurozone,notleastbecausesolutionsareheavilydependent
onthepoliticalwillingnessandcapacityofgovernmentsandcitizenstodealwiththeconsequences.
Sufficetosay,thatthescaleofthetaskisenormous.Thenetpresentvalueofage-relatedspendingover
thenext40yearsinadvancednationsisroughly5timestheir2010GDP.
Suffice to say, that the scale of the task is enormous. The net present value of age-related spending over the next 40 years in advanced nations is roughly 5 times their 2010 GDP.
ConclusionRisinglongevityconveysastandardfayreforactuaries,demographersandpensionfundconsultants.
Itonlysoundsthreateninginafinancialsenseforpensionplanprovidersandbeneficiaries.Ina
widercontext,though,itisalsoaboutbroad-basedfinancialsecurityinsocietiesexperiencingan
unprecedentedriseinagestructure.Itisaboutfaultlinesinthewayoureconomieswork.Anditis,
pressingly,aboutthefinancialviabilityandpossiblesolvencyofgovernments,entailingapolitically
fractiousdebateabouttheredrawingofentitlementrightsandresponsibilitiesofcitizensandthestate.
Andthesearejustsomeoftheeconomicconsequences.Therearesocialimplicationstooforpublic
policyasitapplies,forexample,toimmigration,education,andcareinthecommunity,andforfamilies,
asyesterday’stwogenerationfamilystructureswithsiblingsandcousinsbecomemultipleso-called
‘beanpole’families.
After a period in which banks and financial service providers, among others, have been pilloried for their role in creating the crisis, it would be fitting indeed if the industry played a strong role in devising at least some of the answers to the challenges posed by rising longevity.
Wehavetofindnewcopingmechanismsinthecreationofjobs,especiallyforwomenandolderworkers,
inthewaywethinkaboutthenatureofwork,theworkplaceandretirement,andinthesystemsthat
encouragepeopletosavemoreforretirementandallowthemtomanagetheirsavingsforthedecade
ortwoinwhichtheyspendtheirtwilightyears.Thefinancialcrisishascertainlyretardedtheprocess,
andaggravatedtheeconomicconsequencesofrapidsocietalageing.Afteraperiodinwhichbanksand
financialserviceproviders,amongothers,havebeenpilloriedfortheirroleincreatingthecrisis,itwould
befittingindeediftheindustryplayedastrongroleindevisingatleastsomeoftheanswerstothe
challengesposedbyrisinglongevity.
4. what the experts say
20 Future risk: Social and economic challenges for tomorrow
The Long-term economic outlook for the United States and its international implicationsDr Uri Dadush, Senior Associate and Director International Economics Program, Carnegie Endowment for International Peace
ThelongruneconomicsuccessoftheUnitedStateswilldetermineitsabilitytocontinuetoprovide
economicandpoliticalleadershiptotheorderitcreatedintheaftermathofWorldWarII.Thoughthe
USeconomyexhibitssomesalientareasofstrength,therearealsoareasofvulnerability.Thefutureis
uncertain,buthowtheUSeconomyevolveswillcertainlyhaveimplicationsfortherestoftheworld.
A National scorecardTheUnitedStatesispotentiallyamongthebest-placedeconomiestobenefitfromthetwinmodern-day
trendsofglobalisationandtechnology.TypicallyrankinginthetopfiveoftheWorldBank’sDoing
BusinessIndicatorsandtheWorldEconomicForum’sGlobalCompetitivenessIndex,theUnitedStates
remainsnotonlythelargesteconomyintheworldbyafactorofthreeincurrentdollartermsbutalso
amongitsmostopen,innovative,andflexible.Itshighpercapitaincomereflectshighproductivity–the
broadestandsinglebestmeasureofcompetitiveness.Despitebeinghometolessthan5percentof
theworld’spopulation,theUnitedStatesaccountedfor28percentofglobalpatentapplicationsin
2008andishometonearly40percentoftheworld’sbestuniversities.Furthermore,USdemographic
trendsarefavourablecomparedtothoseinotheradvancedcountries.Overthenexttwentyyears,the
UNexpectstheUnitedStates’populationtogrowby17percent,whileprojectingthatoftherestofthe
developedworldwillgrowbyonly1percent.Partofthisstrengthcomesfromhighimmigrantinflows
andthecountry’sunusualabilitytointegratemigrants.
The United States is potentially among the best-placed economies to benefit from the twin modern-day trends of globalisation and technology.
Nevertheless,theUnitedStatesisalsoplaguedbyseriousandgrowingweaknesses.Healthcareis
expensiveandinefficient:publicandprivatehealthspendingis50percenthigherpercapitathanthat
ofthenexthighestOrganizationforEconomicCooperationandDevelopment(OECD)country,buttheUS
infantmortalityrate,at6.7deathsper1,000births,ishigherthaninallOECDcountriesexceptTurkey
andMexico.Moreover,asthepopulationages,healthcarecosts,whichalreadyaccountforabout
17percentofUSGDP,areexpectedtoriserapidly.Secondaryeducationisweak,withfifteen-year-old
Americanstudentsrankingonly31stof65countriesinmathematicstestsand22ndinsciencetestsin
asurveythatincludesmanydevelopingcountries.ThiscouldmeanthatwhilefutureUSworkerswill
layclaimtotheworld’shighestwages,manywillbringonlymediocreskills.Somealsobelievethatthe
UnitedStateshasalargeinfrastructuredeficitrelativetoothercountries,thoughhardevidenceonthis
isdifficulttocomeby.
TheUSincomedistributionisconsiderablymoreunequalthanotheradvancedcountries,andthat
divideisgrowing.Whileincomesofthetop1percentofAmericanshavesoared,medianhousehold
incomeshavedeclinedsince1999.Moreover,theAmericanDreamhasbecomeamythformanypeople:
socialmobilityislowerandrelativepovertyratesarehigherintheUnitedStatesthaninmostother
advancedcountries.
4. what the experts say
21 Future risk: Social and economic challenges for tomorrow
Despiteitshighproductivityandcompetitiveness,theUScumulativecurrentaccountdeficitoverthe
lastthirtyyearsis$8.5trillion,areflectionofextremelylowhouseholdsavingsratesandgovernment
deficits.Dysfunctionaltaxpoliciesarepartlytoblamefortheindebtednessofbothhouseholdsandthe
federalgovernment.TheUStaxsystem–complexandrifewithdistortions–overlyencouragesborrowing,
includingforhousing.Itisalsoanoutlieramongadvancedcountriesinnumerousotherways–for
example,initsveryloweffectivecorporatetaxrate(thoughhighnominalrate),loweffectiveincometaxes
ontherichestAmericans,taxbreaksonlargemortgageswhichareregressive,andlowgasolinetax.
TheUnitedStatesretainsadominantmilitaryapparatus.Forexample,theUnitedStatesowns11of
theworld’s20aircraftcarriers–andItaly’sfleetoftwoisthesecondlargest.Butthisdoesnotcome
cheap.USdefencespendingaccountsfornearly5percentofitsGDP–ashareabouttwicethatofother
developedcountries–andfor40percentofglobaldefencespending.
Lastbutnotleast,anincreasinglypolarizedandevendysfunctionalpoliticalsystemiscontributing
tothefiscalmess,asevidencedbythebrinkmanshipsurroundingthedebtceilingandthefailureof
thecongressional“supercommittee.”PoliticalimmobilityhasalsooftenpreventedtheUnitedStates
fromleadingonthebiginternationalissues–fromclimatechangeandtradenegotiationstoIMF
replenishment,forexample.TheUnitedStatesprovideslessforeignaid,proportionaltoitsGDP,than
anyotheradvancedeconomy.
Some important trendsInJuggernaut: How Emerging Markets are Reshaping Globalisation,WilliamShawandIestimatethat,
by2030,theriseofemergingmarketswilladdapproximatelyabillionpeopletotheworldmiddle
class.Thesenewlyempoweredconsumerswilldemandeducation,entertainment,andproductsand
servicesdrivenbyinformationtechnology–allgoodstheUnitedStatesexcelsatproducing.Atthe
sametime,tradebarriers–whichincludelogisticalcosts–havecomedowninrecentdecadesand,
despitetheprotectionistsentimentstirredbytheGreatRecession,worldtradecontinuestofaroutpace
GDP.Moreover,asaglobaltechnologicalleader,theUnitedStatescouldinthefuturebepropelled
byinnovationsinmedicine,biotechnology,communications,transportation,orenergy.Forexample,
developmentsthatimprovetheefficiencyorextractionofshalenaturalgasandoil–ofwhichtheUnited
Statespossesseslargereserves–willprovidedisproportionatebenefitstotheUnitedStates.
...by 2030, the rise of emerging markets will add approximately a billion people to the world middle class. These newly empowered consumers will demand education, entertainment, and products and services driven by information technology.
However,thesefavourabletrendsmustbeweighedagainstloomingdangers.Afiscaldisaster–caused
byuncheckedhealthcarespending,unwillingnesstoraisetaxes,andrisingdebtintheUnitedStatesin
thecomingyears–couldleadtoasharpeconomiccontractionanddepresseddemandforaprolonged
period.Suchaprocesscouldbeacceleratedbythecollapseoftheeurozone,whichcouldtrigger
anotherworldrecessionandmoreintensescrutinyofsovereigndebtlevels.Thelastfinancialcrisis
exposedprofoundinstitutionalvulnerabilitiesintheUSfinancialsystem.Buttheeconomy’scontinued
“financialization”andafailuretoadequatelytackletherootcausesofthe2008crisisandexcessiverisk
takinginbanksmayleavetheUnitedStatesvulnerabletoanotherfinancialcrisis.Ifleftunaddressed,
povertyandincomeinequality,bothattheirhighestlevelindecades,couldunderminesocialcohesion
andfurtherpolarizenationalpolitics.
4. what the experts say
22 Future risk: Social and economic challenges for tomorrow
...the economy’s continued “financialization” and a failure to adequately tackle the root causes of the 2008 crisis and excessive risk taking in banks may leave the United States vulnerable to another financial crisis.
Someinternationaltrendsarepotentiallyadverseaswell.WhiletheriseofChinaandotheremerging
marketspresentsgreatopportunities,italsoerodestheUnitedStates’relativeeconomicweightand
thatofitstraditionalallies.TheabilityoftheUnitedStatestomanageandindeedaccepttherapidriseof
newglobaleconomicpowers–inotherwords,toworkwiththetrendratherthanagainstit–isunclear.
Theirriseisboundtocausenumerousfrictions,manyofwhicharealreadyvisibletoday–fromglobal
imbalancesandcurrencies,toaidpolicies,tonegotiationsovertradeandfinancialregulation.Howthis
powershiftismanagedisofutmostimportance.
Infewareasisthepotentialforconflictmoreevidentthaninthemitigationofclimatechange,
whereChinaandIndiaandmanyotherrelativelypoorandfast-growingcountriesareverywaryof
committingtoemissiontargetsthatcouldconstraintheirdevelopment.Eventhoughtheworsteffects
ofclimatechangeareunlikelytomaterialisewithinthetwenty-yearhorizonoftheprojection,itsearly
manifestationsmayintensifyasmayawarenessofitsdangers.Thiswillraisethestakesinclimate
changenegotiations,andtheUnitedStatesisill-equippedtohandlethemgivenitslackofinternal
consensusontheissue.
Two storiesInthegoodscenario,mostofthesethreatsareavoided.Relationswithkeyinternationalactorsremain
cautiousbutgenerallypeaceful.Marketsstayopenandtradecontinuestogrowrapidly.TheUnited
Statesaddressesitsfiscaldeficitandsucceedsinstabilisingitsdebt/GDPratiooverthenextdecade.
Theeurozoneremainsintactandnonewmajorfinancialcriseserupt.Andtheworsteffectsofclimate
changeareavoided.
Inthiscase,theUSeconomygrowssteadilyatabout2.7percentayear(seeJuggernautforamore
detaileddiscussion).Thiscompareswith2.5percentoverthelasttwentyyears,whichincludesthe
GreatRecession.USgrowthreflectsbothsolidlaborforcegrowthandtechnologicaladvance,while
capitaldeepeningplaysarelativelysmallrole.Averagelivingstandardscontinuetorise,asrealUS
percapitaGDPincreasesbynearly40percentandthefruitsofeconomicprogressaremoreequally
distributed,relievingsocialtensionsandattenuatingpoliticaldivisions.
ThoughtherelativesizeoftheUSeconomydeclines–fromaboutathirdofG20GDPin2010toabout
aquarterin2030inrealUSdollars–itremainsthelargestintheworldatmarketexchangerates.In
purchasingpowerparity(PPP)terms,however,theUSeconomyiseclipsedbyChina,byaround2016,
andChinais70percentlargerthantheUnitedStatesin2030.TradealsoshiftsEast:theUSshareof
worldtradedipsfromaround12to10percent,whileEastAsia’sshareisexpectedtodoublefrom10to
20percent.Thoughitsgrowthslowsquitesharplybytheendoftheforecasthorizon,Chinabecomesthe
centralplayerinworldtradeandthelargesttradingpartnerofmostcountries.
[In the good scenario] in purchasing power parity (PPP) terms the US economy is eclipsed by China, by around 2016, and China is 70 per cent larger than the United States in 2030. Trade also shifts East: the US share of world trade dips from around 12 to 10 per cent, while East Asia’s share is expected to double from 10 to 20 per cent.
4. what the experts say
23 Future risk: Social and economic challenges for tomorrow
The G20 in 2030
Billion 2005 US dollars, market exchange rates
Billion PPP dollars Average annual real growth rate, 2010–2030
Argentina 527 1,174 4.3
Australia 1,501 1,442 3.2
Brazil 2,440 4,217 4.3
Canada 2,083 2,087 2.8
China 21,479 37,644 9.3
France 3,323 3,025 2.0
Germany 3,593 3,360 1.2
India 5,328 13,321 8.0
Indonesia 1,073 2,446 5.5
Italy 2,197 2,102 1.2
Japan 5,786 5,170 1.2
Korea 2,122 2,510 3.9
Mexico 2,397 3,449 5.1
Russia 2,487 4,611 5.3
SaudiArabia 896 1,401 4.6
SouthAfrica 791 1,150 5.4
Turkey 1,437 2,054 5.1
UnitedKingdom 3,597 3,134 2.2
UnitedStates 22,258 22,258 2.7
Inthebadscenario,theUSeconomyslowssharply.Thebreakupoftheeurozoneleadstoamassive
financialcrisisinEurope,causingUSunemploymentandfiscaldeficitstorisefurther.Withlittle
countercyclicalpolicyspaceleftintheUnitedStates,aslowrecoveryfollowsaftertwotothreeyears
ofdeeprecession.Inthelongerrun,healthcarecostscontinuetoriserapidlyandafailuretobridge
ideologicaldivisionsovertaxincreasesandcutsinsocialspendingcausesthedebt/GDPratioto
continueitssteepascent.Investorconfidencebecomesseverelyeroded,eventuallyleadingtoafiscal
crisisandadeeprecession.Meanwhile,USforeignpolicyishandcuffedbyfiscalconstraints–asis
alreadyevidentintheUSresponsetotheArabSpringandtheeurozonecrisis–andChinaandothersare
increasinglycalledontohelp.
ConcernsaboutitswaninginfluencedetertheUnitedStatesfromreducingitsdefensespending,
causingdefensespendingtoaccelerateinChinaand,inresponse,amongitsAsianrivals.USand
foreigncompaniesshunthefiscallyandgrowth-challengedUnitedStatesasaninvestmentdestination.
OutsourcingintensifiesandgoodjobsintheUnitedStatesarescarce;socialcohesionisundermined
byrisinginequalityanddownwardpressureongovernmentspendingoneducation,infrastructure,and
socialservices.
Distractedbyitsdomesticproblemsandinternaldivisions,aparalysedUnitedStatesacceleratesits
withdrawalfromtheinternationalstage.Themultilateraltradingsystemisstalled,andtradingpartners
eschewbilateralnegotiationswiththeUnitedStatesastheycannotrelyonittodeliveronthedealsit
negotiates.TheUnitedStates’influenceintheIMF,WorldBank,andWTOdeclinesinproportiontoits
economicandfinancialweight.
4. what the experts say
24 Future risk: Social and economic challenges for tomorrow
Distracted by its domestic problems and internal divisions, a paralysed United States accelerates its withdrawal from the international stage. The multilateral trading system is stalled, and trading partners eschew bilateral negotiations.
Inthisbadstory,growthintheUnitedStatesslowstoasnail’space:anaverageof1.5percentayear
through2030.Weakerinternationaltradeandfinancearrangements,aswellasspilloversfromUS
andEuropeandomesticcrises,willslowgrowthinothercountriesbyabout0.5percentayear.Slower
growthholdsdownUSlivingstandards:USpercapitaGDPrisesbyonly18percentovertwentyyears,
halfasmuchasforecastinourbaseline.TheUSroleisconsiderablydiminishedinternationally–the
USshareofG20GDP(measuredinrealdollars)fallstojustunder25percentby2030,whileChina’s
economypassesthatoftheUnitedStatesindollartermsandis85percentlargerinPPPterms.Seen
asacountryonadownslide,theUnitedStatesisbothincapableofleadinganddisinclinedtolead,and
othercountrieslooktoalignthemselveswithascendantpowers.
Global implicationsEveninthegoodscenario,theUnitedStateswillbealessdominanteconomicplayerontheinternational
stage.Thatscenario,however,isunambiguouslybetternotonlyforWashingtonbutalsoforthe
internationalcommunity,whichtheUnitedStatescontinuestoleadonthestrengthofitsinstitutions
andvalues.AreinvigoratedUnitedStatesparticipatesintheconclusionofawatered-downDohaRound
andthenleadsaprocessofWTOreformthatstreamlinesnewnegotiationsandstrengthenstherules
governingtheinternationaltradingsystem.AnambitiousTrans-PacificPartnershipincludingJapan
andChinaisconcluded,asisanimportantbilateralagreementonreducingbehind-the-borderbarriers
withtheEuropeanUnion.IMFresourcesaregreatlyexpanded.Asitrebalancesitsownbooks,the
UnitedStatesstepsupitscontributionstotheWorldBankandembarksonanambitiousdevelopment
initiativeinsupportofamoredemocraticMiddleEast.WorkingcloselywithChinaandIndiaandleading
byexample,theUnitedStatesguidestheG20asittacklesthemostdifficultchallenges,fromclimate
changethroughagriculturalandenergysubsidiestofinancialregulations.
Inthebadscenario,theeurozoneunravels.TheEuropeanUnionstillexists,butasanemptyshellaround
afragmentedcontinentmiredinaprolongeddepression.Sufferingfromanotherglobalcrisis,Japan
remainsensnaredinitsdecades-longslump.WiththeUnitedStatesincreasinglywithdrawn,andfew
countrieswillingtofollowanauthoritarianandmercantilistChina(assumingitdoesnotadaptquickly
toplayingamoreprominentglobalrole),alargeanddangerousglobalpowervacuumiscreated.There
isalsoadearthofvaluesandideas,astheWashingtonConsensusbecomesdiscreditedandtheworld’s
mostsuccessfuleconomy,China,isbuiltonaone-party,state-drivensystem.
With the United States increasingly withdrawn, and few countries willing to follow an authoritarian and mercantilist China (assuming it does not adapt quickly to playing a more prominent global role), a large and dangerous global power vacuum is created.
4. what the experts say
25 Future risk: Social and economic challenges for tomorrow
Progressonclimatechange,tradereform,financialandmonetarysystemreform,andglobalgovernance
grindstoahalt,andthetradingsystemmaybethrownintoreversebyarevivalofprotectionism.
Aweakerandlesssecureinternationalcommunityreducesitsaideffort,leavingimpoverishedor
crisis-strickencountriestofendforthemselvesand,therefore,multiplyingthechancesofgrievanceand
peripheralconflicts.TheUnitedStateslosesitsproportionallygreatestinfluencetoregionalhegemons
–ChinainAsiaandRussiainEasternEuropeandCentralAsia–whileWesternEuropewouldremain
dividedandrudderless.TheMiddleEastfindsitselfrivenbynumerousrivalriesthatoccasionallyerupt
intoopenconflictandoilpriceshocks.Moregenerally,theabsenceofleadershipandconfusionon
valuesmakesthereconciliationofdisputesmoredifficultandtemptsthestrongesttotakerisksthey
wouldnototherwisetake.
Conclusion
The overriding lesson of these two futures is that there is more at stake in current economic policy debates in Washington and Brussels than most people realise.
Whichofthestoriesismorelikelytoberealised?Ibelievethegoodscenarioisthemorelikely,though
manywoulddisagree.Whatisclearisthattheoutcomewilldependcruciallyontoday’sdecisions,and,
ifmistakesaremade,thebadscenariomaywellmaterialise.Theoverridinglessonofthesetwofutures
isthatthereismoreatstakeincurrenteconomicpolicydebatesinWashingtonandBrusselsthanmost
peoplerealise.AreturnoftheUnitedStatesandEuropeaneconomiestohealthoverareasonable
timeframeisvitalforpreservingthecurrentinternationalorderandre-establishingasoundbasefor
continuedprosperityandpeace.
4. what the experts say
26 Future risk: Social and economic challenges for tomorrow
Is the Renminbi the new Dollar? Chinese monetary policy and the global reserve currency systemAndrew Leung, International and Independent China Specialist
IntroductionAmidstglobaleconomicuncertainties,theperceivedproblemofanundervaluationoftheRMBisa
perennialrefrain.AtradewarloomedwiththeUSthreateningtoimposepunitivetariffmechanisms
whichthreatenedtotriggeraglobalcurrencywar.Meanwhile,China’scurrentresource-intensive
manufacturersarealreadytradingatwafer-thinmarginsandanydrasticRMBappreciationislikelyto
causecatastrophicjoblossesandsocialinstability.TheRMBhasinfactappreciatedbysome55per
centsinceChina’sfirstcurrencyreformin1994.LiketheexperienceofappreciationoftheJapaneseyen
followingthePlazaAccord,thismagnitudeofappreciationhasnotreversedChina’sexportsorWestern
imports.GoldsteinandLardyofthePetersenInstitutehavesuggestedathree-stageapproachofhow
Chinacouldmovetoamarket-determinedexchangerateandanopencapitalaccount.However,as
Chinaisaverylargecountryinrapidtransition,anindependentRMBexchangeratepolicyisimportant
tograpplewiththemulti-facedchallengesofsocialdynamicsandgeopolitics.Inanycase,withrising
socialtensions,Chinaischangingcourseinthe12FiveYearPlan(2011–15),towardsahigher-quality,
morebalancedandmoresustainablegrowthmodelgearedtomuchhigherdomesticconsumption.
Thispromisestodiminishhercurrentaccountsurplusandforeigncurrencyreserveovertime.While
ChinaisreadytoliberaliseherfinancialservicesandtoseekarolefortheRMBasitbecomesmore
internationalised,sheislikelytoallowonlygradualandmeasuredcurrencyappreciationintunewiththe
changingtimes.China,however,wouldremainextremelycautiousingivinguptoosoontheprotectionof
anon-convertiblecapitalaccountinanuncertainworld,ifpasttraumaticexperienceisanyguide.
The dynamics of a currency warFollowingsimilarlegislationintroducedduringtheBushAdministration,7aCurrencyManipulationBill
withthreateningpunitivetariffswaspassedonCapitolHillinSeptember2010withalargemajority.
Witharecord-highunemploymentrate,depressedwages,andstrugglingexports,PresidentObama
continuedtoappealtoChina-bashingemotionsinhisStateoftheUnionaddresson24January,2012.
HisseniorofficialshavealsobeenkeepingupthepressureontheChinesecurrencyintherun-uptothe
presidentialelection.
Meanwhile,roundsofquantitativeeasing(QEs)havebeendraggingdownthevalueoftheRMBwhichis
indirectlylinkedtothedollar,makingtheChinesecurrencyseemevenmoreundervalued.
Tosafeguardcompetitiveness,otherexportingcountriessuchasJapanandBrazilhaveintervenedto
keeptheircurrenciesfromrisingtoomuchagainstadepreciatingdollar.AlongwiththeEuropean
CentralBankandtheInternationalMonetaryFund,IndiahasjoinedinthechorusforastrongerRMB.
‘Beggar-thy-neighbour’policiesareinvogue.
China’s response is that it would not be fair for the RMB to appreciate alone while the US is allowing the greenback to plummet.
7 “The Future of China’s Exchange Rate Policy”,PetersenInstituteforInternationalEconomics,WashingtonD.C,July2009,CongressionalCurrencyBillspp.77–81
4. what the experts say
27 Future risk: Social and economic challenges for tomorrow
China’sresponseisthatitwouldnotbefairfortheRMBtoappreciatealonewhiletheUSisallowingthe
greenbacktoplummet.Moreover,ChinaandtheUSareessentiallynotcompetinginthesamekindsof
goodsandservices.EvenifChineseproductswereentirelypricedoutoftheAmericanmarket,notmany
AmericanjobswouldbesavedasUSconsumersarepronetobuyinglow-pricedsubstitutesfromother
developingcountries.8
TheRMBhasappreciatedbysome55percentsinceChina’sfirstcurrencyreformin1994.Thishas
nothelpedUSexportsorreducedChineseimports.Thereisasimilarstoryintheappreciationofthe
JapaneseyenunderthePlazaAccordin1985.
Additionally,agreatdealofChina’sexportshasimbeddedimportedforeignparts,components,
materials,proprietarytechnologiesorservices.RMBappreciationwilllowerthecostsofsuchimports.
SotheRMBwouldhavetoappreciateevenmoredrasticallytohavetheintendedeffect.
Moreover,ever-lower‘Chinaprices’demandedbyglobalmerchandiserslikeWalmarthavedepressed
profitmarginsofChineseproductstowafer-thinlevels,oftenwellbelow5percent.DrasticRMB
appreciationwilldrivemanyChinesemanufacturersoutofbusiness,resultinginmassiveunemployment
andsocialinstability.ThiswillbeacatastrophenotonlyforChina,butalsofortheworld’sconsumers,
suppliersanddistributors.
The workings of China’s currency and monetary regime PriortoChina’sopen-doorpolicyin1978,theRMBwaskeptextremelyhigh,atRMB1.86tothedollar,
designedtosupport‘import-substitution’.AfterChinaswitchedtoanexport-orientedeconomy,the
exchangeratedroppedtoRMB5.8tothedollarby5July1986.
From1994to2001,theRMBappreciatedagainstthedollarbyatotalof18percentatanaverageof
3percentannually,withoutunderminingexportcompetitiveness.OnJuly21,2005Chinaendedthe
fixedRMB-dollarpeg,switchingtolinkagewithabasketofcurrencies,includingtheUSdollar(mainly),
theEuro,theJapaneseyen,andtheKoreanwon.
BetweenJuly2005totheendof2008,theRMBwasallowedtoappreciateagainby21percentagainst
thedollar.However,duringthisperiod,China’scurrentaccountsurpluscontinuedtosurge.
OnJune19,2010,theRMBrevertedtoamanagedfloatingexchangerateregimewithreferencetoa
basketofcurrencies.Underthisregime,theRMBspotexchangeratecanmoveintra-day+/-0.5percent
fromcentralparity.
Theoretically,anundervaluedcurrencyleadstoanever-increasingcurrentaccountsurplusandforeign
exchangereserve.Theexcessliquidityrequiresregularsterilizationviathesaleofcentralbankbillsand
increasesincommercialbanks’reserveratiorequirements.Thisactsasataxonthesebanks.Toprop
uptheircommercialviability,themarginabovethedepositratehastobekeptwide.Aslowlending
ratesareneededtospureconomicgrowth,thedepositratehastobekeptevenlowerunderamandated
interestrateregime.AsspeculationonupwardadjustmentoftheRMBbecameaone-waybet,thereisa
greatdealofcautioninraisinginterestratesasitoftenattractsdifficult-to-sterilizedisguisedspeculative
capitalinflows.
8 China’s exchange rate policy: a yuan-sided argument,TheEconomist,19November,2009,athttp://www.economist.com/node/14921327(accessedon26February,2011)
4. what the experts say
28 Future risk: Social and economic challenges for tomorrow
...when China’s global current account surplus stood at 3 per cent of GDP, the estimated RMB undervaluation was 15–20 per cent. By 2007, when China’s global current account surplus reached 11 per cent of GDP, the undervaluation was ‘conservatively’ estimated at 30–40 per cent.
AnanalysisbyMorrisGoldsteinandNicholasLardyofthePetersenInstituteforInternationalEconomics9
findsthatin2003,whenChina’sglobalcurrentaccountsurplusstoodat3percentofGDP,theestimated
RMBundervaluationwas15–20percent.By2007,whenChina’sglobalcurrentaccountsurplusreached
11percentofGDP,theundervaluationwas‘conservatively’estimatedat30–40percent.
AccordingtoGoldsteinandLardy,theexistingcurrencyregimehasanumberofeconomic
disadvantages,suchas:
(a) monetarypolicyinflexibility;
(b) eschewedinvestmentdecisionstowardsmanufacturingattheexpenseofservices;
(c) hinderedtransitiontoamoreconsumption-driveneconomy;
(d) reducedhouseholdincome(ofwhichinterestreceiptsareanimportantcomponentinChina),
impedingprogresstowardsatrulycommercialbankingsystem;and
(e) monetarydisequilibrium,perpetuatingChina’sexternalimbalance.
Thetwoauthorsrecommendagradualthree-stageapproachtomovetoafree-floatingexchangerate
system–duringaglobalrecession;followingglobalrecovery;andafterChina’scurrentaccountsurplus
hasdrasticallyshrunk.
Initially,duringaglobalrecession,Chinashouldavoidcompetitivedevaluationandanytaxrebatesfor
resource-intensiveexports;increaseexpenditureonphysicalinfrastructure;andexpandsocialoutlaysin
education,healthandpensions.TheRMBshouldcontinuetoappreciateby4–5percentayearwhilethe
dailyexchangeratefluctuationlimitshouldberaisedto1or1.5percent.
Duringthesubsequentstages,theRMBshouldappreciatesufficientlyrapidlytoeliminatelargecurrent
accountsurplusesin3–4years.Thegovernmentshouldreduceexchangeinterventionandsterilization;
graduallyallowdualcapitalflows;initiateinterestrateliberalisation;andsupportcentralbank
independencewithaninflationtargetingmandate.
ItisevidentthatChina’sownapproachsofarhasalreadyembodiedvirtuallyalltheingredientsofthe
firststageoftheGoldstein-Lardyrecipe.However,itisbynomeanscertainthatChinawillnecessarily
followtheothermoredrasticprescriptionsinthewayrecommendedforthesubsequentstages.
China jealously guards her monetary and exchange-rate flexibility as a powerful tool for social stability.
First,Chinajealouslyguardshermonetaryandexchange-rateflexibilityasapowerfultoolforsocial
stability.Second,whileaninflation-targetingmonetarypolicymayservetocounteractboom-and-bust
cycles10,arigidinflationtargetingapproachisnowsubjecttoseriousdebatefollowingEurope’s
mountingsovereigndebtcrisis.Third,learningfrombitterdomesticandinternationalexperience,China
remainsscepticalaboutanyone-size-fits-allrecipeforproblemsolving.Asamarketeconomyinrapid
transition,Chinaismoreweddedto‘groping for stepping stones in crossing a river’.
9 “The Future of China’s Exchange Rate Policy”,MorrisGoldsteinandNicholasLardy,PetersenInstituteforInternationalEconomics,WashingtonD.C,July2009,pp.87–96
10 “What Monetary Policy Does China Need?”,MarvinGoodfriend,ProfessorattheTepperSchoolofBusinessatCarnegie-MellonUniversityandEswarPrasad,andChiefoftheFinancialStudiesDivisionintheIMF’sResearchDepartment,postedonGlobalVision,aglobalmarketsandpovertyalleviationwebsiterunbyMercyCorps,19July,2007,athttp://www.globalenvision.org/library/3/1692(accessedon27February,2011)
4. what the experts say
29 Future risk: Social and economic challenges for tomorrow
The economy is more than economics IntheNovember2010issueofChinaAnalysis,apublicationoftheEuropeanCouncilonForeign
Relations,FrancoisGodementet al.11revealedapanoplyofgeopoliticalconsiderationsadvancedby
leadingChineseacademics.WhilethereisagreementontheneedforRMBinternationalisation,some
viewthisasameanstoescapeperceivedcurrencymanipulationbytheUnitedStatesastheissuerofthe
world’smostpreferredinternationalreservecurrency.
Forbackground,anApril,2005articleOur Currency, Your ProblemfortheHooverInstitutionpenned
byNiallFerguson12isinstructive.HereckonedthattheBushadministration’staxcutsandaglobalwar
onterrorwerefinancedbyamultibillion-dollaroverdraftfacilityatthePeople’sBankofChina(through
China’smassivepurchaseofTreasurybills),whichhecalled“aChinesetributetotheAmericanEmpire’.
InApril,2009,PaulKrugman,aNewYorkTimesOp-edcolumnistandNovelPrizelaureate,calledthis
China’s‘Dollar Trap’.13
AsGodementpointsout,‘since1944,thedollarhaslost97percentofitsvalueagainstgold…inthe
serviceofitsowneconomicinterests’.Nowonderon13March,2009,PremierWenJiabaoopenlyaired
hisworriesaboutChina’strillion-dollarinvestmentinUSTreasuries.14
The idea that the RMB exchange rate, a vital tool for economic and social stability, should be left entirely to a Western-dominated global marketplace in accordance with some academic criteria is regarded by some in China as a Western myth of quantitative economics.
ItmaybeasignofChina’srisingeconomicnationalismbutUSmonetarypolicyisseenbysomeinChina
as‘a mechanism for plunder’underaUS‘economic hegemony’.15TheideathattheRMBexchange
rate,avitaltoolforeconomicandsocialstability,shouldbeleftentirelytoaWestern-dominatedglobal
marketplaceinaccordancewithsomeacademiccriteriaisregardedbysomeinChinaasaWesternmyth
ofquantitativeeconomics.
RMB internationalisation barring immediate capital account convertibilityAgainstthisbackground,itmakesperfectstrategicsenseforChinatointernationalisetheRMB.The
followingregionalandinternationaldevelopmentsarebeginningtounfold:
(a)WithChinaasthecentreofAsia’sregionalproductionandsupplychain,theuseofRMBfor
internationalsettlementswithChina’stradepartnersworldwideisgatheringpaceasChina’s
economyisgrowingtobecometheworld’slargest,probablybytheendofthisdecade.
(b)Asof13March2012,JapanannouncedaplantoacquireUS$10.3billionworthofChina’streasury
bondsaspartofitsforeigncurrencyreserve,followingMalaysiaandChile.Asthegreenbackis
perceivedtocontinuetolosevalue,thetrendofincludingRMB-denominatedChinesetreasuries
inforeigncurrencyreserveswillprobablyaccelerate.Thisoptionmaybecomeincreasingly
attractivetoenergyexportingcountriessuchasRussiaandtheMiddleEast.
11 “Redbacks for Greenbacks: The Internationalization of the renminbi”,FrancoisGodementetal.,ChinaAnalysis,EuropeanCouncilonForeignRelationsandAsiaCentre,November2010
12 “Our currency, Your Problem”,NiallFerguson,HooverInstitution,StandfordUniversity,30April,2005athttp://www.hoover.org/publications/hoover-digest/article/6386(accessedon27April,2011)
13 “China’s Dollar Trap”,PaulKrugman,NewYorkTimes,2April,2009athttp://www.nytimes.com/2009/04/03/opinion/03krugman.html?_r=1&em(accessedon27February,2011)
14 “China’s Leader Says he is ‘Worried’ Over US Treasuries”,NewYorkTimes,13March2009,athttp://www.nytimes.com/2009/03/14/business/worldbusiness/14china.html(accessedon27February,2011)
15 SeeMichaelHudson’scontroversialbook,“Super Imperialism - The Economic Strategy of American Empire”,PlutoPress,NewEditionMarch2003,whichoffersano-holds-barredelucidationofaplausible“AmericanGrandDesign”toruletheworldthroughcalculated“MonetaryImperialism”
4. what the experts say
30 Future risk: Social and economic challenges for tomorrow
(c)WithsupportfromBeijing,HongKongisbeingdevelopedasthepremieroffshorefinancial
centreforRMBinternationalisation,includingtheissuanceof“dimsum”bondsandother
RMB-denominatedfinancialinstruments.RMBbankdepositsinHongKonghavebeenrising
rapidlytoRMB627billioninMarch2012.Itisexpectedtojumptosixtrillionby2020,much
morethanthedepositbaseoftheHongKongDollar,withimplicationsforHongKong’scurrent
USdollarpeg.
(d)SingaporeispositioningitselfasaregionaloffshorefinancialcentrefortheRMB.SoisLondon.
ThiswouldfurthersupporttheinternationalisationoftheChinesecurrency.
(e)ContinuousdiversificationofChina’soutboundsurpluscapitalisleadingtomore
Chinesemergersandacquisitionsofassetsacrosstheglobe,expandingRMBcommercial
relationshipsinternationally.
(f)Chinaisontracktocontinuetoliberaliseherfinancialsector,suchasthequalifiedforeign
institutionalinvestor(QFII)andthequalifieddomesticinstitutionalinvestor(QDII)schemes,16
allowingforafreerinflowandoutflowofRMBfundsforinvestmentpurposes.
...China is quietly extracting herself from the ‘Dollar Trap’ by creating an international monetary zone of her own.
Thisway,Chinaisquietlyextractingherselffromthe‘DollarTrap’bycreatinganinternationalmonetary
zoneofherown.
However,China’scapitalaccountnon-convertibilityhasproveditsusefulnessduringrecentglobal
financialcriseswhenitshieldedChinafrommuchofthecross-borderfinancialtsunami.Inthelightof
increasinginternationalfinancialuncertainty,Chinaisunlikelytobeinahurrytodiscardthisprotection.
Global reserve currency systemOntheotherhand,Chinaisbecominganxiousforamorestableinternationalcurrencysystem.The
clarioncallwasfirstsoundedbyZhouXiaochuan,theGovernorofthePeople’sBankofChinaon
23March,2009,17referringtotheneedtoaddresstheso-called‘TriffinDilemma’.18Zhouproposedusing
SpecialDrawingRights(SDR)oftheIMFtoreplacetheUSdollarasaprimaryreservecurrency.
WhileitisdebatablewhethertheSDRistheidealsolution,thehistoricAmericancredit-rating
downgradeandthedoubtfulfutureofthedollarasastablelong-termstorageofvaluearelikelytorevive
thisdebate.AsChina’seconomyisslatedtoovertaketheUSeconomyby2018(TheEconomist)or2027
(GoldmanSachs),19thedaywhentheRMBemergesasatleastoneoftheworld’sreservecurrenciesno
longerseemstoofaraway.
16 SeeagooddescriptionoftheseschemesonWikipedia:QualifiedDomesticInstitutionalInvestorathttp://en.wikipedia.org/wiki/Qualified_Domestic_Institutional_InvestorandQualifiedForeignInstitutionalInvestorathttp://en.wikipedia.org/wiki/Qualified_Foreign_Institutional_Investor
17 ZhouXiaochuan’s“Statement on Reforming the International Monetary System”,CouncilonForeignRelations,athttp://www.cfr.org/china/zhou-xiaochuans-statement-reforming-international-monetary-system/p18916(accessedon27February,2011)
18 Inthe1960s,aBelgian-AmericaneconomistRobertTriffinoutlinedthepotentialconflictofinterestbetweenwhatisdesirableforthereserve-currencyissuingcountryandwhatisbestformaintainingglobalcurrencystability.Thisisknownasthe“TriffinDilemma”
19 “Jim O’Neill: China could overtake US economy by 2027 ”,TheTelegraph,16March2012reiteratesthedateof2027asassessedbyGoldmanSachsearlier.Seehttp://www.telegraph.co.uk/finance/economics/8901828/Jim-ONeill-China-could-overtake-US-economy-by-2027.html(accessedon16March,2012)
4. what the experts say
31 Future risk: Social and economic challenges for tomorrow
Global economic imbalance Underlyingtheabovediscourseistherootcauseofmanyoftheworld’scrisesandconflicts–asystemic
globaleconomicimbalance.Wellbeforethefinancialcrisis,Asianexportingcountries’mounting
surpluseswerefedintotheWest’sfinancialsystemthroughinvestmentinUSTreasuries,supporting
perenniallylowinterestratesandeasycredit.Thelatterhasbeenexotically-leveragedunderthe
imperativeoffinancialinnovationtofeedanunbridledconsumptionerabuiltonaninflatedhousing
bubble.ThisinturnpushedupAsiancountries’exportsandsurpluses,withtheresultthatmorewas
investedinUSTreasuriestofundevenmoredebt-drivenconsumption.Inshort,theWest,particularly
theUS,isover-consumingwhileChinaandsomeothersurpluscountriesareover-saving.
...China has been rebalancing her economy towards domestic consumption. Studies ... have highlighted the burgeoning consumer market in China and how it will account for a lion’s share of global consumer growth in the coming decades.
Meanwhile,Chinahasbeenrebalancinghereconomytowardsdomesticconsumption.StudiesbyCredit
SuisseandMckinseyhavehighlightedtheburgeoningconsumermarketinChinaandhowitwillaccount
foralion’sshareofglobalconsumergrowthinthecomingdecades.20By2025,China’sconsumermarket
willbedrivenby350millionmoreurbanitesin221newcities,accordingtoaMcKinseystudy.21
Concurrently,notwithstandingquantitativeeasing,Americansarenowbeginningtosavemoreas
peopleprefertopaydowntheirdebtratherthanburningtheirfingersagainwithrecklessdebt-driven
consumption.Soaglobalrebalancingmayalreadybetakingplace,accordingtoStephenRoach,
ChairmanofMorganStanleyAsia.22
ConclusionAccordingtoChina’sRichList2010,therearemorethan550,000householdswithprivatewealthmore
than100millionRMB.Yet,Chinaisstillaverypoorcountry,withpercapitaincomerankingamongst
someofthepoorestcountriesinAfrica.Some170millionChinesepeoplestillremainatorbelowthe
povertylineof$1.25aday.
Inthiseconomicdivide,thereisrisingdiscontentduetogallopingfoodprices,irregularlandgrabs,
labourdisputes,pollution,corruption,inequality,andsocialinjustice.Withamoreeducatedand
internet-savvymiddleclass,smoulderinggrievancesmaythreatentoigniteafire,aswhathasbeen
happeningacrosstheMiddleEast.
ChinaisbeginningtoswitchtoamoreequitableandsustainabledevelopmentmodelinthenewFive
YearPlan(2011–15).Ifrealised,thetransformationwilldiminishChina’scurrentaccountsurplus,
moderateherforeigncurrencyreserve,andreduceincessantpressuresforRMBappreciation.
To promote consumption and investments of a growing middle class, China stands to benefit from gradual currency appreciation, financial system liberalisation, a more flexible interest rate regime, and freer outward and inward capital flows.
20 Forexample:Jf.Garner,“The Rise of the Chinese Consumer: Theory and Evidence”,JohnWiley&Sons,2005and“TheValueofChina’sEmergingMiddleClass”intheMcKinseyQuarterly,2006.
21 “Preparing for China’s Urban Billion”,McKinseyGlobalInstitute,March,2008
22 StephenRoach,“Next Asia: Opportunities and Challenges for a New Globalisation”,Wiley,2010
4. what the experts say
32 Future risk: Social and economic challenges for tomorrow
Itisnocoincidencethataraftofreformmeasuresisproposedinarecent468pagestudyreportjointly
compiledbytheWorldBankandtheDevelopmentResearchCenter(DRC)oftheStateCouncil.Manyof
thesemeasuresaredesignedtoimprovetheefficiency,equity,andsustainabilityofChina’ssystemof
allocationofresources,echoingthespiritifnottheletteroftheGoldsteinandLardystudiesmentioned
above.ThesereformmeasuresareessentialifChinaistoescapethe“MiddleIncomeTrap”23andto
becomea“Modern, Harmonious, and Creative High-Income Society”by2030.24
Nevertheless,astheexistingworldorderisnowbeingchallengedwitharisingChina,thewatersahead
remainuncharted.Moreover,withanageingpopulationprofile,Chinaislikelytogrowoldgettingrich.
Duringthenation’schallengingdevelopmenttrajectory,whilesheissettoredoubleeffortstoboostthe
RMB’sstatusasaninternationalcurrency,liberaliseherfinancialsystemandredressthesocio-economic
andecologicalimbalanceofhereconomy,Chinaislikelytoremainextremelycautiousinnotgivingup
toosoonthefinancialprotectionofanon-convertiblecapitalaccount.
23 InhisOpeningRemarkson3September2011attheConference on China’s Challenges for 2030inBeijing,RobertB.Zoellick,WorldBankGroupPresident,wantedtounderstandhowChinacouldavoidtheso-called“MiddleIncomeTrap”–thatstagewhenmanycountriesinSouthEastAsiaandLatinAmericawhenreachingabout$3,000to$8,000percapitaincomeseemtostallinproductivityandincomegrowth.
24 “China 2030 – Building a Modern, Harmonious, and Creative High-Income Society”,astudyjointlyundertakenbyTheWorldBankandtheDevelopmentResearchCenteroftheStateCouncil,thePeople’sRepublicofChina.Thereportwasreleasedon27February,2012.Aconferenceeditionmaybeaccessedathttp://www.worldbank.org/content/dam/Worldbank/document/China-2030-complete.pdf
4. what the experts say
33 Future risk: Social and economic challenges for tomorrow
The shifting balance between “risk” and “uncertainty” in a globalised world systemLaurence Whitehead, adviser on macro risk at Oxford Analytica, and Official Fellow in Politics at Nuffield College, Oxford.
Environmental,financial,geopoliticalandsecuritysurprisesofrecentyearsallunderscorethe
inadequaciesofrecentlyfashionable“riskmetrics”,whichaimtotameuncertaintybyattaching
numericallyprecisestatisticalprobabilitiestocontingentevents.Thetheoreticalfoundationsofthis
“bellcurve”or“standarddeviation”approachtoriskmeasurementrequiretheeventsinquestiontobe
separable,recurrentandreasonablyhomogeneous.Thishasprovedapowerfulanalyticaltoolforthe
managementofawiderangeofinsurancerisks(roadaccidents,epidemiologicalincidenceandsoforth),
anditcanalsobefruitfullyappliedtosomeenvironmentalissues(forinstancehurricanefrequenciesand
intensities)andtosomemajoraspectsoffinancialbehaviour(suchasindividualstockselection,asset
allocationandsoforth).
Ithasnowbecomeoverextended,havingbeenappliedtomacro-contingencies(suchascivilwars)
wherecasesareinfrequentandfarfromhomogenous.Andithasbeenappliedtoeventsthatarenot
fullyseparable,butthatbelonginlongerchainsofcausationwheretheparametersofinteractionare
inherentlyunstableoruncertain(theso-called“butterflyeffect”isinvokedbychaostheoriststoillustrate
suchpossibilities).Italsorequirespatternsofbehaviourtoberecurrent,therebyrulingoutantagonistic
strategicgamechanges,nottomentiontheinterventionof“unknownunknowns”(or“blackswans”).It
worksbestwhenthecausalconnectionsunderconsiderationaretightandlinear,butmostofthemajor
issuesfacingcontemporarypolicymakersrequirebothmulti-causalandnon-linearformsofanalysis.
ForthefirsttwodecadesaftertheendoftheColdWarthisconfidenceintheever-widerapplicabilityof
statisticallybasedriskmanagementtechniqueswassteadilyextendedintoprogressivelymoredubious
domains.Itchangedbehaviour,ashithertoscepticalandcautiouspolicymakersweredisplacedby
moreconfidentandaggressivestrategicmaximisers,whosereputationsforsuccessderivedfromtheir
willingnesstopresssuchriskmetricstotheverylimitsoftheirplausibility–andthenbeyond.
For the first two decades after the end of the Cold War this confidence in the ever-wider applicability of statistically based risk management techniques was steadily extended into progressively more dubious domains.
The1998collapseoflong-termcapitalmanagementprovidedanearlywarningofwherethiscycleof
behaviouralchangewaslikelytolead.Whenthiswarningwasnotheededthe2008“suddenstop”to
liberalisedfinancialflowsprovidedastarkerandmoreseverecorrective.By2011thelessonwasmore
widelyassimilated.Theoverconfidenceinsuchriskmetricsthatcharacterisedthepreviousdecades
wasfollowedbyasevereswitchbacktowardsultra-defensivebehaviourandacuteriskaversion.This
isespeciallyapparentinthemajorliberalisedinternationalfinancialmarkets,butitisalsobeginning
topromptparalleldefensiveshiftsinkeygeopoliticalarenas.AnexampleofthisisGermanpublic
aversiontobearingSouthernEuropeaneconomicrisks.Similarly,thesuccessfulalQaidaprojecttofly
commercialplanesintotheTwinTowershasstimulatedachainreactionofsecurityprecautionsever
sinceSeptember2001.The2011nuclearaccidentatFukushimahasproducedacomparablereversal
ofriskappetitesintheglobalnuclearpowersector,withmajorconsequentialimpactonbroaderglobal
energysecurityconcerns.
4. what the experts say
34 Future risk: Social and economic challenges for tomorrow
The current retreat from “risk” and rise of uncertainties financial sectorOneofthemosttellingconfirmationsthattheoldintellectualconsensushasfailedconcernstheedifice
ofnumericalbeliefsitconstructedaroundthenotionofa“riskfree”classoffinancialasset.According
toorthodoxfinancialtheorythiswassupposedtobeUnitedStatesTreasurybills.Neithermonetary
theorynorfinancialhistoryactuallyprovidedmuchofajustificationforthisassumption.Afterall,within
livingmemorytheUnitedStatesgovernmenthadendedtheconvertibilityofthedollarintogold,and
throughoutthefirstdecadeofthetwenty-firstcenturyfirstthePresident,thentheCongress,andthen
theFederalReservehaddedicatedtheireffortstounderminingthefiscalandmonetaryfoundations
ofthegreenback.BythetimeoftheLehmancollapsein2008therewasanevidentlynon-negligible
possibilityofanotherlegallyenforcedsuspensionofnormalcommercialbanking,andinAugust2011
Standard&Poor’sdroppedtheUSgovernment’stripleArating.Intheabsenceofanunquestionably
“risk-free”financialyardstick,alltheelaboratelystructuredhierarchyofhigherriskassetslosttheir
fundamentalmoorings.WiththeFederalReservecurrentlypromisingnegligibleinterestrateson
treasurybillsandbondsforanextended(ie,multi-year)periodoftime,itisofferingnofinancialreward
forholdingliquidity.Thiscanfeedvolatilityandcapitalflight.
Thishighlightsthebroaderprocessoftheretreatofmeasurableriskanditssubstitutionbyuncertainty.
Theuncertaintyarisesfromthefactthatshort-termmoneymanagersnolongerhaveahighlycalibrated
structureofincentivesto“lock-up”theircashfordeterminateperiodsoftime.Intheabsenceofsuch
traditionalconstraintsandincentives,theymightbemoreproneto“herdbehaviour”whichcouldtake
theformofextremelyrapidandmassiveredeploymentsoffundsfromonedepositbasistoanother,
perhapspromptedbynothingmorethanfalserumoursoranticipatorydefensiverepositioning.As
financialintermediationhasacceleratedoverthepasttwodecadesofeconomicglobalisationand
financialliberalisation,thestockofliabilitiesaccumulatedwithinboththeformalandthe“shadow”
bankingsystemshasrisentoaneverhighermultipleofthegoodsandservices(“real”)sideofworld
economicoutput.Thestabilityoftheseliabilitiesrestsonatrustworthystructureofcounterparty
interactionandarbitration,andinthelastresortonalegallyenforceabledisputeresolution,liquidation,
anddebtsettlementsystem.Thus,financialconfidencecannotultimatelybedetachedfromtheexercise
ofsovereignpower.But“toobigtosave”banksareunderpinnedbyhostgovernmentsreliantontax
basesthatinturnaredependentupontheoutputlevelsofnationaleconomicsystems.
Since2008,illusionsofsupranationalauthoritycapableofbackingup,orevenover-riding,these
sovereignstateprerogativeshavebeenshattered.IcelandandnowGreecebothprovethatnational
fiscalauthoritiescanassumecontingentliabilitiestoprivatefinancialcorporationssolargethattheir
ownsovereigncredit-worthinesscanbejeopardised.Theideathatsomehigherlevelauthority–the
ECB,theIMFortheFederalReserve–willalwaysbeavailabletoreinforcesovereignsinfiscaldistress
cannolongerbetakenforgranted.
The idea that some higher level authority – the ECB, the IMF or the Federal Reserve – will always be available to reinforce sovereigns in fiscal distress can no longer be taken for granted.
Infactitisnowbecomingapparentthatnotonlyafewover-extendedperipheralstates,butevenleading
advancedcapitalistnations(suchasItaly)may,inextremis,proveunabletopay.Ifso,statepowerwill
beusedtodisruptmarketoutcomes.TheacutefinancialuncertaintiesthathaddestabilisedEuropeand
theworldinthe1930swererelegatedtothemarginsofriskanalysisbefore2008,butarenowresurgent
intheeurozoneandpotentiallymorewidely.
4. what the experts say
35 Future risk: Social and economic challenges for tomorrow
Environmental sectorAlthoughthemostspectacularshiftfromriskbacktouncertaintycanbeobservedinthedomainof
finance,therearealsoparalleltrendsinevidenceelsewhere.Forexample,inthedomainofglobal
climatechangemodellingandmanagement,thedominantassumptionfromthefoundingoftheUN
IPCCtothe2010conferencetoupgradetheKyotoTreatywasthatasmoreaccuratescientificevidence
wasaccumulated,therangeofuncertaintieswouldbenarrowed,andarationalcost-benefitstrategyfor
mitigationofcarbonemissionswouldconsequentlyemerge.Thepeakofthisriskassessmentoptimism
wasprovidedbytheSternReport.Evenatitsapex,thisstillrequiredaleveloftrustthatwentbeyond
whatwaswarrantedbythehardevidence.
Overthepastcoupleofyearstheobjectivityofthescience,thereliabilityofthedata,andthe
trustworthinessoftheprocessforriskmanagingglobalwarminghaveallcomeundersustained
pressure.Whilethereisnolongermuchseriousdoubtabouttheimportanceofanthropogenic
climatechange,thisgeneratesmoreuncertaintythanconsensusonthenecessaryandfeasible
stepsrequiredforeffectivedamagelimitation.Theuncertaintiesaremultipleandoverlapping;some
concerntimeframes,othersconcerncosts,whileothersconcerntheriskofunintendedsideeffects.
Inaddition,thereareimponderablesconcerningtherespectiveresponsibilitiesofthenumerousand
heterogeneousdecision-makers.
Collectiveactionandagencydifficultiescompoundtheotheruncertainties.Confidencethattheserisks
canbeaccuratelyassessedandthenappropriatelymitigatedhasbeenthrownintoreverse.Asaresult
(compoundedbythefinancialcrisis)thiscategoryofriskanduncertaintyhassimplyslippedfardown
thepolicyagenda.Whereasariskmanagementphilosophywouldfocusonthegreatestdangers,a
switchtoundifferentiateduncertaintycancauseacrucialissuetosimplybecomeshelvedastoohardto
tackle(untiltheneglectgeneratesanunmistakablecompulsiontoreact).
Security sectorSimilarconsiderationsmaybeoperatinginthesecurityrealm.TheWest’sunexpectedlycomprehensive
victoryintheColdWardismantledtheSovietUnion,whichwasonelongstandingandrigidstructureof
securityrisks.Foradecadeorsodefencespendingwasreduced,anditseemedthatprogressmightbe
madeintamingtheremainingrisks.Butsincetheunexpectedlytraumaticandeffectiveasymmetricwar
techniqueusedbyalQaidainSeptember2001theproliferationofnewsecuritydangershasoverturned
anysuchoptimism.
In addition to “terrorism” ... these dangers include accelerated nuclear proliferation between antagonistic states; intensified vulnerability of advanced economies to cyber-attack; and various forms of biological and chemical warfare that may be operated either by non-state as well as state actors.
Inadditionto“terrorism”nurturedin“ungovernedspaces”,thesedangersincludeacceleratednuclear
proliferationbetweenantagonisticstates;intensifiedvulnerabilityofadvancedeconomiestocyber-
attack;andvariousformsofbiologicalandchemicalwarfarethatmaybeoperatedeitherbynon-state
aswellasstateactors.Inresponsetothisharshersecurityenvironment,thedominantwesternpowers
haveattemptedtomaintaintheirascendancy,andtomitigaterisk,byacceleratingtheproductionof
newmilitaryandsecuritytechnologies.CurrentlyWashingtoniscomingtodependmoreon“drone”
attacks,andtheassociatedwarfarecapabilities,topoliceremoteenemyhavens,andtoeconomiseon
increasinglylessexpendablenationalmanpower.
4. what the experts say
36 Future risk: Social and economic challenges for tomorrow
4. what the experts say
This,andother,innovationsmayseemtodefenceplannerstobeeffectiveinstrumentsofriskmanagement,
buttheyarerelativelyuntriedandmaycarrywiththemgraveunintendedconsequences.Forexample,
dronesdiscreditafoundationalprincipleofnationalsovereignty–citizensobeythelawinajurisdiction
inturnforanassuranceofbasicsecurity.Itisuncertainwhethercurrentwesternmilitarydoctrineand
practicewillproveasuccessfulinstrumentofriskmitigation,orapotentengineofdelegitimisationin
countrieswherethebeneficiariesofanarchythemselveswillturnouttobethemselvesanintensified
sourceofdanger.Whereasthelogicofcooperationmayhelptostabiliseinsecuritiesinthefinancial
domain(everyonesuffersifcooperationfails)inthesecuritydomainitisthelogicofconflictthat
necessarilystructuresbehaviour.Thus,everyriskmitigationstrategyhastobeassesseddialectically–
ie,byconsideringhowanopponentwillreacttoexploititsassociatedvulnerabilities.
Geopolitical realmFinally,globalisationhasproducedprofoundlong-termgeopoliticalshiftsinpowerandresources.
Suchshiftsarestillon-goingataveryrapidpace,andtosomeextenttheirdynamicscanbeassessed
andplannedfor.However,thesuccessfulmanagementofsuchtectonicadjustmentsrequiressolid
institutional,securityandfinancialbasis.Asnotedabove,therehasbeenariseofuncertaintyandthe
displacementofmeasurablerisksinthesevariousdomains.Thatcanmakethesteeringandcontainment
ofgeopoliticaltensionsmoreproblematic,moreshort-termandmorecrisis-prone.Thisismuch
discussedinrelationtothe“riseofChina”andthe“reset”ofUS-Russianrelations.Italsoariseswith
theassociatedandpotentiallydisorderlyweakeningoftheEuropeanUnion.Butperhapsthebestwayto
illustratethebroaderuncertaintiesthatcanariseistoconsidertheGreaterMiddleEast.
Thisregionremainsthemostcrucialreserveofglobaloilandgassupplies.Itisalsothemostheavily
committedtoextravagantdefenceprocurementpoliciesfundedeitherfromoilrentsorviaforeignaid.
TheinvasionandoverthrowoftheSaddamHusseindictatorshipwasimaginedasafirststeptowardthe
creationofamorestableanddemocraticMiddleEastbetteralignedwiththeinterestsofthedominant
powersinthe“internationalcommunity”.Butthetensionsanduncertaintiesthathavearisenthroughout
theregioninthewakeofthatinterventionhaveproducedrepercussionsthatarehardtocalibrate
andextremelydifficultfortheauthorsoftheoperationtomanage.Perhapstherecentinterventionin
LibyaandthecurrentconflictinSyriawillprovesideeventsalongtheroutetotheintendedoverall
restructuringoftheMiddleEast’spoliticalprofile.Buttheuncertainties(concerningIran,Israel,the
electoraloutcomeinEgypt,andsoforth)stillseemtodwarfthepredictabilities.TheMiddleEastremains
amajorpivotofgeopoliticalturbulencewhichlacksmuchreliablebasisforlong-termstrategicplanning.
...the uncertainties (concerning Iran, Israel, the electoral outcome in Egypt, and so forth) still seem to dwarf the predictabilities. The Middle East remains a major pivot of geopolitical turbulence which lacks much reliable basis for long-term strategic planning.
Insummary,riskmanagementhasweakened,anduncertaintyhasreturnedwithavengeanceoverthe
lastfewyears.Uncertaintyhasbecomemorecentraltofinancial,securityandgeopoliticalassessments.
Riskmanagementoftheorderlyandrationalvarietyderivedfrommicro-analysisofinsurableeventshas
notprovedsoextendableintothesemacro-domainsaswasexpectedafewyearsback.So,howshould
responsibleanalystsandglobalpolicymakersrespondtothisemergingpanoramaofchallenges?
37 Future risk: Social and economic challenges for tomorrow
Some principles for coping with macro uncertaintyDerivingprescriptiveconclusionsfromsuchanopen-endedglobalanalysisastheprecedingdependson
whattimescales,policydomainsandintereststandpointsareinquestion.Thissectionstandsbackfrom
thoseissues,andsuggestssomeverybroadandgeneralprinciples:
Alertness and sceptical monitoringThegreatdrawbacktoexcessiverelianceonquantitativeriskmanagementtechniquesisthatthey
canlulltheunsuspectinguserintoafalsesenseofsecurityanddullalertnesstocontraryindicators.
Inalltheexamplesoutlinedabove,itwaspossibletodetectsignsthatsomethingwasmissingfrom
themainstreamanalysis.Butthisrequiredscepticismconcerningthepredictivereliabilityofthemost
fashionablemanagementtools,andawillingnesstoincurthe–oftennotinconsiderable–costsof
challengingprevailing“groupthink”.Acomparativeandhistoricalperspectivecouldoftenprovidethe
foundationfordiscordantquestioning.But,ofnecessity,thedoubtermightfindhimorherselfalonefor
anextendedperiodoftime.And,giventheuncertaintiesunderconsiderationmanyscepticswouldnever
bevindicatedbytheeventualturnout.Organisations,therefore,needtocreateinstitutionalstructures
andproceduresthatshelterwell-informedandsincerelyheldminorityviewpoints.Evenwhenasceptical
stanceisnotborneoutbyexperience,itcanimproveanalyticalcapabilitiesbystimulatingalertness.
Contour analysis and scenario planningTheriseofuncertaintyandthedeclineofstatisticallyreliableriskmeasurementdonotmeanthat
allcontingenciesareequallyplausible,orthatfuturedevelopmentsareentirelyunknowable.Tothe
contrary,scalingbackrelianceonspuriouslyaccuratepredictivemodelscanopenthewaytomore
helpfulandrealisticevaluationsofprospectivetrendsbasedonqualitativeevidence,interpretative
theorisingandwell-honedjudgement.Thestartingpointforsuchevaluationsistorecognisethat
differentanalyticaltechniquesarerequiredfordifferentissuedomainsandpolicydebates.Afirststep
mustthereforebetoassesstherelativeweighttoattachtotightcausalpredictionasopposedtolooser
andmoresubjectivecontourmappingandscenarioplanning,whenaddressingthespecificproblemarea
underconsideration.
Contouranalysisinvolvesmappingtheoverall“lieoftheland”onwhichspecificcontingent
developmentswillplayout.Forexample,althoughthenatureandeffectivenessoftheGaddafiregime’s
responsetotheArabuprisingswashardtopredict(notleastgiventhecentralisationofpowerandthe
eccentricpersonalityoftheruler)therewereunderlyingstructuralcharacteristicsofLibya’spolitical
andsocialgeographyanditseconomicstructurethatcouldbestudiedwithmorereliabilityandthat
wouldbesuretocontributeconstraintsandreservestoshapetheresultingregimechange.Similarly,
eventhoughthefullconsequencesofadoublingofatmosphericCO2maybehighlyuncertain,thereare
moredefiniteelementsthatcanbestudiedandtakenintoconsideration;forexample,ifoneconsiders
thesealevelriseassociatedwiththemeltingofpolaricesheets.Whendirectmeasurementstoriskare
unreliableitmayneverthelessbepossibletotrackmajorcomponentsoftheunknowabletotalthrougha
systematiccontouranalysisapproach.
When direct measurements to risk are unreliable it may nevertheless be possible to track major components of the unknowable total through a systematic contour analysis approach.
4. what the experts say
38 Future risk: Social and economic challenges for tomorrow
Scenarioplanningcanalsoprovideaconstructivesubstituteformisleadinglyrigorouspredictive
forecastingtechniques.Atthetimeofwritingthereisverylittlereliablebasisforpredictingthenear-
termoutcomeofthecurrenteurozonefinancialcrisis.Thealternativepossibilitiesarestarklyat
variance,theinevitabilityofaforkintheroadisapparent,butguessingwhichoptionwillprevailisa
highlysubjectiveandbasicallyquitearbitraryexercise,atleastfornow.Insteadofattachinguntenably
precisequantitativeprobabilitiestothevariousalternatives,ascenarioplannerwouldconcentrate
onsharpeningthelogicalstructureofthecontrastingtrajectories,andhighlightingthedriversand
obstaclesatworkineachcase.Thisisamodellingprocedurethatinevitablyoversimplifiesand
stylisestherivalscenarios(inpracticeoutcomesarealmostalwayssomemessyhybridoftheoptions
considered).But,ifconductedwithjudgementandinsight,itcanprovidemorehelptodecision-makers
whoneedtoanticipatefuturetrendsthananyoverlymechanisticprojectionorextrapolation.
“Navigating” contingencies rather than “controlling” variablesThenumericalprecisionofstandardriskmanagementtechniquescancreatetheillusionthatdecision-
makersarefullyincontrolofalltherelevantvariables.Whilethatmightbeareasonableapproximation
torealityinsomepolicydomains(salesvolumewillfallbyXpercentiftobaccotaxisraisedbyYper
cent)itcanbeasourceoferroranddangerifunthinkinglyextendedtosuchmacro-domainsashave
beenconsideredabove.Policymakerswholiquidatebanksorlaunchdroneattacks,orclosenuclear
powerstationsneedtobehelpedtorecognisethelimitsoftheirabilitytoforeseealltheconsequences
oftheiractions,letalonetocontrolalltherelevantvariables.Theymaywellbecomeprisonersofthe
dynamictheyhaveunleashed,nolongerincontrolbutrathercontrolledbyforcestheycouldnotfully
anticipate.Evenso,therearemanysituationsinwhichpolicymakersmustactonewayortheother,or
accepttheconsequencesoftheirinaction.Thecourseofwisdommaybetomaptherelevantcontours,
toreviewthealternativescenarios,tocarefullyconsiderdiscordantvoices,andthenifnecessarytotake
thecriticaldecision,infullknowledgethatwhatthenfollowsmaywellbecontingentanduncertain.
The course of wisdom may be to map the relevant contours, to review the alternative scenarios, to carefully consider discordant voices, and then if necessary to take the critical decision, in full knowledge that what then follows may well be contingent and uncertain.
Themetaphorof“navigation”isrelevanthere.Eventhemostpowerfulofpolitical,economic,business
orscientificleaderswilloftenbeunabletomeasureinadvancethecostsorreturnsoftheirstrategic
choices.Onceapolicyissetinmotionitmaybepossibletoevaluatetheout-turnbycomparisonwith
initialexpectations.Butwhenlargescaleandcomplexproblemsrequirefull-scaleengagement,itcan
benoeasymatterforpowerfulleaderstoobtainindependentandobjectivefeedbackonhowwellthey
havebeenchosen.Therewillbepowerfulvestedinterestsinpresentingafavourableinterpretationof
theresults,and(ifnecessary)ingeneratingalibisorcounterfactualjustificationstocoverupfailures.
Complexdynamicprocesseslikeeurozonereform,orfinancialmarketintervention,seldomproduce
short-termclear-cutandfinalresults.Insteadtheyunfoldstochastically,witheachnewstagepresenting
furtherdecisionpoints,andchangingtheparametersoftheinitialchoiceset.Insteadoflaunchinga
rockettothemoon,thepolicymakerismorelikelytohaveembarkedonasailboatacrosstheAtlantic.
Eveniftheeventualdestinationisfairlyreliablyknown,theinterveningstormsandcurrents,andother
possiblesurprisesbothonboardandenroute,canmeanthatthetimeofarrivalanddetoursduringthe
voyagesremainunpredictablecontingencies.Recognitionofsuchimponderables,andpreparednessfor
theunexpected,constitutethefoundationsofwisdomwhencontemplatinganysuchundertaking.
4. what the experts say
39 Future risk: Social and economic challenges for tomorrow
Adherence to basic principles
If reaction times have become more volatile, if interaction effects have become more complex, and if key actors have lost trust in one another and become more short-term and defensive, then Fordist-style management techniques may no longer deliver as expected.
Ifstatisticallyrobusttoolsofriskmanagementwerereliablyavailablethenthetaskofthedecision
makerwouldbegreatlysimplified.Allthatwouldberequiredisforthedesiredoutcometobe
identified,followedbyatechnicalexercisetoensurethatthemeanschosentoachieveitwerethe
mostefficient/reliable/cost-effectiveavailable.ThisisroughlyhowtheSternReportconceptualised
globalstrategytolimitanthropogenicclimatechange,howtheFederalReservehasapproached
“quantitativeeasing”,anditmaybehowthePentagonoperatesitsdronesprogramme.Butdespite
theoperationalappealofthismodelofdecision-making,thepost-2008worldsystemisprovingmore
uncertain,unstableandunreliablethanthisapproachassumes.Ifreactiontimeshavebecomemore
volatile,ifinteractioneffectshavebecomemorecomplex,andifkeyactorshavelosttrustinoneanother
andbecomemoreshort-termanddefensive,thenFordist-stylemanagementtechniquesmaynolonger
deliverasexpected.Yetglobalmacro-problemsofgreaturgencyandcomplexitymustnevertheless
beaddressed.Decision-makersfacedwithsuchadverseconditionsmaydeserveoursympathyand
encouragement,buttheyalsoneedpubliclegitimacy.Theiractions(oromissions)canbeexpectedto
inflictbigcostsonsome,aswellasconferringlargebenefitsonothers.Ifthetruthisthattheyarenot
fullyincontrolofalltheconsequencesoftheirchoices,thentheywillriskprovokingresistanceand
non-cooperation.Somepragmaticmid-causecorrectionsareboundtobenecessary,butthebigdanger
isthattheholdersofpublicofficecouldappeartobezigzaggingexpedientlymerelytoservethenarrow
interestsoftheirinnercircles,andtoconcealtheirmisjudgementsfromthewiderpublic.
A final prescriptive conclusion, therefore, is that in such uncertain conditions it becomes even more important for policymakers to keep in mind some basic principles of probity and public interest.
Afinalprescriptiveconclusion,therefore,isthatinsuchuncertainconditionsitbecomesevenmore
importantforpolicymakerstokeepinmindsomebasicprinciplesofprobityandpublicinterest.Even
iftheyarenotabletoachievelegitimacybydeliveringdesiredresults,theycantrytomaintaintrust
throughtheobservanceofcorrectproceduresandthemaintenanceofstrongaccountability.
4. what the experts say
40 Future risk: Social and economic challenges for tomorrow
5. the three scenarios 5. The three scenarios Intheprevioussection,anumberofpre-eminentauthorsidentifiedsignificantandinterrelated
socioeconomicrisks,whichcouldhavesevereimplicationsforlong-termpeaceandprosperity.By
pullingtogethersomeoftheirkeyconclusions,itispossibletooutlineafewsimple,socioeconomic
futuresfacingtheworld.
Inthiscontext,threescenariosaresetoutbelow;anupside,whichrepresentsabestcase,adownside,
whichrepresentsaworstcase,andacentralscenariowhichrepresentssomethinginbetween.Each
scenarioreflectsonhowthedecisionsandactionstakenbypolicymakersintheshortrun(boththosein
governmentandelsewhere)canplayakeyroleindeterminingwhichlong-termfuturetheworldfaces.
Wethenrelateeachscenariotopossibleimplicationsforthefutureofinsuranceandfinancialservices.
Acoupleofcaveatsbeforedelvingintothesescenarios:ineach,weassumethat;1)Asian,andin
particularChinesegrowthisrelativelyrobustand2)whilstexperiencingrobustgrowth,China,will not
playaleadingroleinensuringglobalstabilitythroughinternationallycoordinatedaction.Crucially,both
assumptionsmaynotholdinpractice.
Forexample,asmentionedearlierinthisreport,Chinafacesaneconomicpredicamentofitsownlinked
toartificiallyhighassetprices–particularlyrelatedtothehousingmarket.Theriskisthattheseasset
pricescouldtumblederailingChineseeconomicgrowth25withadverseimplicationsfortheglobal
economy.ThereisalsothepossibilitythateconomicliberalisationinChinawillultimatelytriggera
transitiontoademocraticsystemofgovernmentbyunleashingtheforcesofanincreasinglylarge,
welleducatedandarticulatemiddleclass.WhilstademocraticChinawouldbewelcomedbymany,the
transitionprocessmaybepainful.
Regardingthesecondassumption,ithasbeensuggestedthatChina’srecentpurchasesofEuroswas
motivatedbyadesiretoseeareturntostabilityinEurope26–akeyregionalsourceofdemandfor
Chineseexports.Inthelastquarterof2011,duetodecreasingEUdemand,Chineseexportsfellway
belowmarketexpectations27negativelyaffectingthepositionofitscurrentaccount.Ensuringaglobal
frameworkforeconomicstabilityandcooperationisthereforeofvitalimportanceforChina’scontinuing
success,sothereisthepossibilitythatChinawilltakeonaleadingglobalrolesoonerthanisgenerally
believed.Thedynamicsofwhatthismightlooklike,though,arehighlyuncertain.
Insummarythen,thebelowscenariosaredeliberatelysimpleandnecessarilyexcludemanypossible
permutationsandinteractioneffectsthatcouldleadtofuturescompletelydifferenttotheones
envisagedhere.Therefore,ratherthanbeingusedasconcreteforecastsforfutureplanning,these
scenariosshouldinsteadhelpguidedecisionmakersintoconsideringhowtheymightreactasdifferent
possiblefuturesunfold.
25 DavidBarboza(April2011),Fast Growth and Inflation Threaten to Overheat Chinese Economy,articleintheNewYorkTimes
26 ChenMan-NungandStaffReporter(July2011)China buying euro debt for political reasons: academics,WantChinaTimes:http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20110708000044&cid=1502(lastaccessed,28February)
27 SimonRabinovitch(Nov2011)China export growth dips as EU slows,articlefortheFinancialTimeshttp://www.ft.com/cms/s/0/fce7b050-0b4a-11e1-ae56-00144feabdc0.html#axzz1ngo9vlIQ(lastaccessed,28Feb2012)
41 Future risk: Social and economic challenges for tomorrow
Scenario 1Upside: dynamic Asia and a rebounding westInthisscenario,AsiadrivesglobaleconomicgrowthbutitdoesnotleavetheWestbehind.
Acomprehensiveresolutiontotheeurozonecrisis,anendtoUSpoliticalparalysisanda
reconfigurationoftradewiththeEasthelpsensurethattheWestremainscompetitiveinthe
newworldorder.ThisreconfigurationoftradeisaidedbyChinaembarkingonapolicyof
gradualliberalisationofitseconomyandanappreciationofitscurrency.Notonlydoesthis
policyhelprebalancetheglobaleconomy,butitalsohastheeffectofimprovingpercapita
incomeinChina,easingtheriskofcivilunrest.
Inthisscenario,governmentsarealsoabletogettogripswithrisinglongevitybyensuring
easiermovementoflabouracrossborders,andbyinstitutingworkplacereformstoallowfor
moreflexibleworkinginoldage.Andcrucially,decisionmakers(ingovernmentandfinancial
institutions)maintainstrongmechanismsfortransparencyandpublicaccountabilityhelping
toensurepublictrustattimesofuncertainty.
BuoyedbyaresurgentUS,andathrivingChina,internationalinstitutionsliketheIMFand
G20helptoensurecooperationbetweencountriesinmeetingglobalchallengesrelatedto
financialregulationandabsolutepoverty.Inturn,theinternationalsystemischaracterised
byrelativelypeacefulrelationsbetweenstatesandlimitedincidencesofcivilwarandother
formsofpoliticalunrest.
Implications for insurersInthismacroeconomicscenario,Westernfinancialservicesprovidersarelikelytoremain
highlycompetitivethoughtherewillbesubstantialcompetitionfromAsia.
Whilstlifeinsurerscontinuetofacethestrainofrisinglongevity,thiswillbeeasedsomewhat
byincreasedpremiumsaspersonalincomeandlevelsoftrustintheindustryremainstrong
stimulatingdemand.ThelifesectorwillalsobenefitfromGovernmentreformswhichare
effectiveatincentivisingpeopletoworkforlongerhelpingtoreducepensionfunddeficits.
Inthisenvironment,generalinsurersarelikelytobenefitfromincreasedpremiums,
especiallythosethatareabletotapintogrowingdemandforfinancialservicesfrom
emergingmarkets.Ahealthyglobaleconomywillalsohelpensurestrongassetprices
therebyimprovingoverallinvestmentincome.
Coordinatedinternationalregulationislikelytoleadtoincreasedconsolidationinthemarket.
Itcouldalsoleadtoconvergenceinbusinesspractices–whichmay,conversely,increase
thepotentialseverityofafuturefinancialshock.However,withwellcoordinatedaction,
theinternationalcommunityislikelytobeabletoeffectivelyforeseeandmitigateagainst
sucharisk.
5. the three scenarios
42 Future risk: Social and economic challenges for tomorrow
Scenario 2 Central: western stagflationInthecentralscenario,AsiadrivesglobaleconomicgrowthbuttheWeststagnatesleading
toloweroverallgrowthratesthanintheupside.Theafter-effectsoftheglobalfinancialcrisis
andeurozonesovereigndebtcrisiscontinuetohangovertheWestforyearstocome,which,
compoundedbythefailureoftheWesttoreconfiguretradewiththeEast,depressesreal
incomesandaggregatedemand.Chinagraduallyopensupitseconomybutthisonlyhasthe
effectofincreasingconsumptionofdomesticallyproducedgoodsandservices.
Duringthisperiod,governmentsalsostruggletofaceuptothechallengeofrising
longevity.Theyinstitutesomereformstoprovideformoreflexibleworkingbutdonottake
necessarymeasurestoencouragefreemovementoflabour.Despitesubstantialattempts
atdeleveragingthen,Westerngovernmentsremainheavilyindebted,pulleddownbythe
burdenofanaging,andunproductivepopulation.Somekeydecisionmakersinbusinessand
publicofficedoensurefulltransparencyandaccountability,whilstothersfailtoputsuch
mechanismsinplace,which,whencombinedwiththechallengingmacroenvironment,leads
toanincreasingproportionofcitizensfeelingdisaffectedwithbusinessandpolitics.
InternationalinstitutionsliketheIMFandG20continuetorumbleonbutarecharacterised
morebydeadlockthancollaborativeaction.Regionalblocks,generallyactinginisolation,
identifysolutionstoissueslikefinancialmarketregulationandpoverty.Someprogressis
made,buteffortsarenotwellcoordinatedcontributingtooccasionalfinancialandpolitical
shocks–(ie,incidencesoffinancialturmoilandoutbreaksofviolentconflictbetweenand
withinstates).
Implications for insurersInthisscenario,Westernfinancialservicesprovidersmaystruggletoremaincompetitive
whilstlargeAsianfirms,buoyedbyincomeearnedthroughadomesticallyburgeoningmiddle
class,penetrateWesternmarkets.
Whilstgovernmentactionhelpseasesomeoftheburdenofincreasinglongevity,Western
basedlifeinsurersstillexperiencerisingliabilities,anditremainsarealchallengeto
growpremiumincomeathome,aspersonalincomeandlevelsoftrustinfinancialservices
remainsubdued.
Inthisenvironment,generalinsurersmayalsofindittoughtogenerateincreasedpremium
andinvestmentincome.And,continuallylowinterestrateswillactasafurthersqueezeon
returnsforthesector.
Suchanenvironmentwilllikelynecessitateashiftofbusinesstoregionsoftheworld
wheredemandisgreater.However,regionalregulationleadstoanincreaseincostsfor
internationalfirmscomplyingwithdifferentrulesacrossmultiplejurisdictions.
5. the three scenarios
43 Future risk: Social and economic challenges for tomorrow
Scenario 3 Downside: 1930s style depressionInthedownsidescenario,Asiastrugglestodriveglobaleconomicgrowth,constrainedas
theWestsuffersasevereandprolongedrecession.Theeurozone’suglyimplosionleadsto
anumberofcountriesdefaultingontheircurrenciesandasecond,largerfinancialcrisis.The
resultingcreditcrunchpreventstheWestfrominvestinginthetypesofindustriesthatwill
helpmaintaininternationalcompetitivenessandfiscaldeficitsswellacrossmajorWestern
powers.ThefailureoftheWesttoreconfiguretradewiththeEastislockedin,asChina
continuestofixanartificiallylowexchangerate.Byfailingtoallowforanappreciation,China
alsofailstostimulatedomesticconsumptionandinvestment.Chinesepercapitaincomewill,
therefore,remainsubduedpotentiallyincreasingtheriskofcivilunrest.
Duringthisperiod,theWestislargelypowerlesstocounteractrisinglongevity.Effortsto
improvetheflowoflabourarefruitlessandonlyresultinanoutflowofyoungandable
workerstoAsia.Effortstoincreaseprovisionforflexibleworkingresultinthecrowdingoutof
thejobmarketandincreasingyouthunemploymentwhichactstounderminesocialcohesion.
Policymakersareparalysedbyuncertainty,resultinginreducedtrustinofficials,business
andultimatelystateinstitutions.
SincetheUSispreoccupiedatgettingitsownhouseinorder,theWashingtonConsensus
collapsesandwithit,institutionsliketheIMFandG20.And,withtheUSconcernedby
risingunemploymentandlowexports,itislikelytoinstituteprotectionisteconomicpolicies
triggeringafullblowncurrencywarwithChina.Inthefaceoftheensuingglobaleconomic
turmoilandlackofinternationalgovernance,countriesreturntothekindsof‘beggarthy
neighbour’policieslastseeninthe1930s.Economicproblemssoonboiloverintoresentment
betweennationsandagainstgovernments.Duringthisperiod,thethreatofgeopolitical
conflictsbetweenmajorworldpowersbecomeveryreal,andactsofterrorism,civilwarand
otherformsofpoliticalunrestarecommonplace.
Implications for insurersIntheshortrun,Westernfinancialservicesproviders(andparticularlybanks)facesignificant
liquiditychallengesascurrencydefaultsandthesubsequentfinancialcrisisreducestheability
offirmstorollovertheirdebts.Insurersarealsolikelytotakeanimmediateandsignificanthit
intheeventofconsiderablesovereigndebtright-downsgiventheirexposurestogovernment
andbanksecurities.
Inthelongrun,duetofallingdemandandcompoundedbylowlevelsofpublictrustin
financialservices,insurersarelikelytosufferfromfallingpremiumincome.Theeffectof
aprolongedrecessionwillalsocauseassetpricestotumbleleadingtoafurtherdecline
ininvestmentincome.Theneteffectcouldbesignificantyearonyearlossesand,insome
cases,insolvenciesmayresult.Justtosurvive,manywillhavetotryandredirecttheirefforts
toemergingmarkets.
However,duetoariseinprotectionistpolicies,exportingservicestonewmarketswillbe
tough.Andthereisalsothethreatofpoliticalturmoil–particularlycivilwaramongstso
called“periphery”countries.
5. the three scenarios
44 Future risk: Social and economic challenges for tomorrow
Reflecting on the three scenariosAccordingtotheabovescenarioanalysis,theworldcouldlookverydifferentdependingontheactions
takenbykeypolicymakersingovernmentandelsewherebothintheshortandlongterm.Crucially,
thescenarioshavemadetheassumptionthattheinsuranceindustryislargelyexogenoustothe
outcomes–effortsanddecisionstakenbythesectordonotaffectthemacroeconomicenvironment.
Asournextchapterwillshow,thisisunlikelytobethecaseinreality.Infact,thesectorhasakeyrole
toplayindrivinggrowth,ensuringsustainablepublicfinancesandmitigatingpoliticalrisksinthe
decadestocome.
5. the three scenarios
45 Future risk: Social and economic challenges for tomorrow
6. the importance of insurance
6. The importance of insurance Whilsttheworld’sfuturedirectionwilldependonamultitudeoffactorsandstakeholders,theinsurance
industrycanplayitspartintryingtodeliveramoreprosperousworld.Criticaltosuccess,isforthe
industrytodothethingsithasdonewellinthepast,evenbetterintheyearsaheadandthiscanonly
beenhancedbytheprogressthatisbeingmadetodevelopasaprofession.
Promoting growth and developmentTheindustrycanplayakeyroleindrivinggrowthinnewindustries,therebyensuringthecomparative
advantageofmaturedevelopedeconomiesliketheUK.Itcanalsohelpinstrengtheningthefinancial
capabilitiesofmanylivinginthedevelopingworld,helpingtobreakviciouspovertytraps.
In2010,theglobalinsuranceindustryaccountedfor$4.3trillionintotalwrittenpremiumsand
$24.6trillionintotalmanagedfunds.28Italsoemployedasignificantnumberofpeopleworldwide.
IntheUK,forexample,insuranceemployednearly350,000people,whilstinJapanitemployedover
450,000people.29AswellasaccountingforasignificantproportionofGDPandemploymentinits
ownright,theinsurancesectorcanalsostimulateeconomicgrowthoutsideoffinancialservicesin
anumberofwaysincluding,amongstothers;facilitatingtradeandcommerce,mobilisingdomestic
savings,allowingdifferentriskstobemanagedmoreefficiently,encouragingtheaccumulationofnew
capitalandhelpingtoreduceormitigatelosses.30
Robustempiricalevidencesupportsthisclaim.Forexample,astudyfromtheWorldBankfoundthatin
the1976–2004period,bothlifeandnon-lifeinsurancehadapositiveandsignificanteffectoneconomic
growth.Lifeinsurancehadaparticularlypositiveeffectinhighincomecountries,whilstnonlifehada
positiveeffectinbothhighandlowincomecountries.31
Insurancecanalsohelptheworld’spoorest.Ithasbeenarguedthatso-called‘micro-insurance’–which
referstoinsurancewithrelativelysmalltransactioncostsandlowpremiums–canhelpalleviatepoverty
strickenareaswherethereislittleconventionalinsurancepenetration.Qualitativeevidenceimpliesthat,
whencombinedwithmicro-saving,thesocialvalueofmicro-insurance“couldbeamajorsteptoward
improvingthewell-beingoftheworld’spoor”.32SwissReestimatesthatupto4billionpeoplecould
ultimatelybenefitfromsuchactivities.33Themicro-financeindustryhasseentenfoldgrowthin10years
andmicrocreditnowservesover150millioncustomers.34
Ensuring sustainable public spendingSocialinsurancehashistoricallyplayedakeyroleinprovidingsecurityandprotectiontothoseatthe
marginsofsociety.Thishasincludedtheprovisionofsimplewelfarebenefitsliketheprovisionofabasic
statepension,orprotectionincaseofdisabilityorunemployment.Whilstthishasalwaysbeentherole
ofthestate,theprivatesectorcanhelpalleviatesomeoftheburdenswhichfallonthetaxpayer.
Governmentsaretryingtoencouragesuchashiftrightnow.IntheUK,forexample,insteadoffocusing
onwaystoincreasestateprovisionforthoseinretirement,thegovernmentistryingtofindwaysto
stimulatedemandforprivatepensionsaving.Thegovernment’sflagshippolicy,automaticenrolment,is
aimedat‘nudging’millionsofpeopleintolong-termsavingforthefirsttimethroughadefaultworkplace
pensionschemeknownasNEST.
28 TheCityUK(Dec2011)Insurance,FinancialMarketSeries.http://www.thecityuk.com/research/our-work/reports-list/insurance-2011/(accessed20March)
29 OECDdataavailablefrom:http://stats.oecd.org/Index.aspx?DatasetCode=INSIND(accessed20March)
30 WorldBankPolicyResearch,(Dec2006)Does Insurance Market Activity Promote Economic Growth? A Cross-Country Study for Industrialized and Developing Countries,WorkingPaper4098
31 Ibid
32 J.Morduch(Nov2002)Micro-insurance: the next revolution?WorkingPaperforNewYorkUniversity
33 SwissRe(Nov2010)Micro-insurance: Risk Protection for 4 billion people, Sigma SeriesNo6/2010
34 A.Kuper(Nov2008)From Micro-finance to Micro-insurance,ForbesMagazinehttp://www.forbes.com/2008/11/26/aig-insurance-zurich-pf-ii-in_ak_1126soapbox_inl.html(accessed20March)
46 Future risk: Social and economic challenges for tomorrow
IntheviewofABIDirectorGeneralOttoThorensen,thefuturewelfarestatemustbuildonthe‘nudge’
schoolofbehaviouraleconomics.Hearguesthat“...ifthestate’swelfareandtaxsystemsrewardand
encouragethosewhoprotectthemselvesmore,thensocietybenefitsandtheindividualischannelled
intherightdirection.Thiscouldbeviamatchedbenefits,taxreliefs,greaterconditionalityinbenefit
paymentsoranyothernumberofmechanisms”.Theresult,hearguescouldbeasimplerandsmaller
statewitha“clearinterestinpromotingcertainoutcomesandbehaviours”.35
Crucially,however,shiftingtheprovisionofwelfaretotheprivatesectorwillnotjustbedownto
governmentincentives.Thepublicmust,inturn,beconvincedoftheneedtobuyprotectionandsave
forthefuture.Currently,eveninregionsoftheworldwhereinsurancepenetrationishigh,asignificant
proportionofthepopulationisunderinsured.Inthedecadestocomethen,insurers,incollaboration
withgovernment,mustfindwaysofconnectingwiththisgrouptoclosethesocalledsavingsand
protectiongap.
TherecentsuccessesintheUKofsimplesavingsproductslikeISAs36demonstratesthatevenina
challengingeconomicenvironment,peoplearepreparedtoputmoneyasideforthefuture–particularly
whenthevehicleiseasytounderstandandprovidessomeflexibility.Thisisnottosaythatthis
particularformofsavingissomekindofmagicbullet,butthatthedesignanddistributionofsavings
productswillbecrucialtoincreasingthelevelofsavingsintheyearstocome.
Thereiseveryreasontobelievethatthelifeinsurancesectorcanmeetthischallenge.Thesectorhas
proventobehighlyinnovativesinceJamesDodsonfirstdevelopedascientificselectionratingthatbased
premiumsonageandlifeexpectancyinthe17thCentury.Today,thesectorcoversamultitudeoflong
termrisksincluding,amongstothers;helpingtoprovideincomeforthoseinretirement,supporting
peoplewithlifethreateningillnessesandhelpingtofundthecostsassociatedwithlongtermcare.The
sectorisalsointheprocessoffashioningnewproductstoexploreemergingnichemarkets.Hybrid
products,forexample,combinedifferenttypesofcoversuchasincorporatingalong-termcarebenefit
intoalifeorannuityproduct.37
Distributionwillalsobeimportantincapturingtheunderinsured,andheretoothesectoriscontinuing
toinnovate.Forexample,onthegeneralinsuranceside,theGermanfirmFriendsuranceisattracting
attentionforitsuseofsocialnetworkingtoencourageuserstotakeupcoverandtocreateaninsurance
networkamongstfriends.38ResearchfromDeloittehasindicatedthatbuyersacrossallagesegments,
andparticularlytheyoung,areveryinterestedinhavingmultiplepointsofinteraction(ie,facetoface,
phone,internetsocialmediaandmobiletechnology)withtheirinsurer.39
Mitigating political risks Theindustry’scontinuingeffortstounderwritepoliticalriskscanalsoplayanimportantroleinhelping
toshapeoursocioeconomicfuture.Anumberoffirmscoverpoliticalriskssuchaswar,revolution,
terrorismandcivilunrest.Suchinsurancenotonlyhelpsprotectcompaniesandinvestmentswithlinks
toemergingmarkets,butalsohelpsbroadenourgeneralunderstandingsofpoliticalrisksandhowto
takeeffectiveactioninthefaceofthem.
35 O.Thorensen(2012)From guarantor to enabler: the future of the state,essayforReformseries,“TheNext10Years”
36 R.Evans(Feb2012)Savers shun ‘complex’ pensions for simplicity of ISAS,TheDailyTelegraph.http://www.telegraph.co.uk/finance/personalfinance/investing/isas/9113471/Savers-shun-complex-pensions-for-simplicity-of-Isas.html(accessed20March)
37 Deloitte(Mar2012)2012 Global Insurance Outlook: Generating growth in a challenging economy takes operational excellence and innovation
38 PostMagazinearticle(Mar2012),Social media-based broker heralded as five years ahead of the game
39 Deloitte(Mar2012)
6. importance of insurance
47 Future risk: Social and economic challenges for tomorrow
Maximising effectiveness through professionalismInshortthen,theinsuranceindustryisalreadydoingmanyofthethingsnecessarytoplayanimportant
roleinhelpingtoshifttheworldtowardsabetterfuture.Theindustryisalsorelativelywellequippedto
facesomeofthestormsthatmaycomeitswayshouldtheworstcasescenarioofaprolongedrecession
materialise,givenitsrelativelystrongcapitalposition.40
However,inordertohelpmaximiseitsimpactintermsofstimulatingeconomicgrowth,alleviating
poverty,takingonsomeoftheburdenforwelfareprovision,andmitigatingpoliticalrisks,itisessential
thattheindustrycontinuestogrowintoaprofession.Bymakingcontinualvoluntaryimprovementsin
professionalstandards,practitionerswillbebetterplacedtoprovideappropriatesolutionstomanyof
thesocioeconomicchallengesofthe21stcentury,andtoinspirenecessaryconfidenceintheindustry.
Somefirmsandpractitionersarealreadymakingsubstantialimprovementsinthisregard,as
demonstratedbythesignificantgrowthinthenumberofCharteredinsurancepractitionersandfirms
overthelastdecadeorsoandthegrowthofprofessionalstandardsinemergingmarkets.Theseefforts
areagreatstepforwardand,asmorepractitionersandfirmsmaketheleap,itshouldhelpengender
greateroveralltrustinthesector.
Researchsupportsthisclaim.A2009pollconductedfortheCIIbyYouGov41foundthat:
• ConsumershavegreatertrustinadvicefromCharteredprofessionalsthanprofessionalsthat
arenotChartered.
• ConsumersbelievethatyoucangenerallytrusttheadviceyougetfromCharteredorganisations.
• ConsumershavemoreconfidenceinthequalityoforganisationsthatusethetermCharteredthan
thosethatarenotChartered.
Itisclearthatinsurancealreadymakesanimportantdifferenceininfluencingthetrajectoryof
economiesandsocieties.Itmustnowpressontoconsolidatethesegainsandtomaximiseits
effectivenessindeterminingthesecurityandprosperityoftheworlditserves.
40 SeeSwissRe(Dec2011),Global insurance review 2011 and outlook 2012/2013.Intheresearchtheyrefertotheimplicationsofa50%haircutonGreek,IrishandPortuguesesovereigndebtfortheinsurancesector.Theyestimatethatlossescanbereadilyabsorbedthroughexistingcapital.AnadditionalhaircutonItalianandSpanishsovereigndebtwould,however,befarmoreproblematic
41 CII(PollingbyYouGov)(2009), Consumer Views of Chartered Status
6. importance of insurance
48 Future risk: Social and economic challenges for tomorrow
7. conclusion 7. ConclusionTherearemanysocioeconomicrisksfacingtheworldwhichhavethepotentialtoshapeourlong
termfuture.Inthisreport,expertauthorshavediscussedsomeoftheseindetail,liketheeconomic
implicationsofUSdecline,theriskstothesolvencyofgovernmentsposedbyrisinglongevityandthe
threattowesterncompetitivenessassociatedwithashiftofeconomicpowertoAsia.
Theseauthorshavealsocarefullyconsideredanumberofrelatedpoliticalriskslikerisinggeopolitical
uncertaintybetweenmajorworldpowersandcontinuingpoliticalunrestinpartsoftheMiddleEast.
Takentogether,itispossibletoenvisageableakfuture,wherestates,isolatedfromoneanotherin
ananarchicinternationalsystem,areunabletomeetthechallengesofthiscentury,condemningtheir
citizenstoalifeofunemployment,povertyandconflict.
Thankfully,suchafutureisfarfromcertain.TheriseoftheEast,forexample,mayleadtoanabsolute
improvementinlivingstandardstheworldover.Similarly,anincreasinglyoldpopulationcouldprovide
importantadvantagesthroughenhancedknowledgeandexperiencealbeitwithdangersofskills
shortagesinspecificareas.
However,inordertodeliverabetterfuture,itisclearthatdecisionmakersingovernmentandelsewhere
musttakeactionnowtoaddresscurrentproblemsliketheeurozonecrisisandUSpoliticalparalysis,
bothofwhichcouldhavesignificantlongtermknockoneffectsforWesterncompetitivenessand
globaleconomicproductivity.Cruciallythough,theinsurancesectorcanplayitsparttooinhelpingto
determinewhichsocioeconomicfutureweultimatelyface.
Insurancehasprovedtobeanimportantengineforgrowth–bothwithrespecttothedevelopedand
developingworld–sothereisnoreasonwhyitcannotperformthesamefunctioninthedecadesto
come.Theindustryisalready,forinstance,helpingsustainthecomparativeadvantageoftheWestby
underwritinginvestmentinnewtechnologies,aswellashelpingtoalleviatepovertyinthedeveloping
worldthroughnewtypesofinsurancelikemicro-insurance.
Inmanywaysthen,keytosuccessisfortheindustryistocontinuedoingthethingsithasdonewell
inthepast,evenbetterinthefuture.Beingpartofaprofessionwillbeveryimportantinthisregard.In
thenewworld,likelytoberifewithuncertaintiesandcomplex,interlinkedrisks,acommitmenttohigh
levelsofcompetenceandethicalpracticewillbevital–notjustforprovidingappropriateadviceand
adequatelyunderwritingrisks–butalso,andperhapsmostimportantly,formaintainingthetrustand
confidenceoftheconsumersandsocietiesitwillserve.
The next reportInournextreportwithinthecentenaryseries,wewilllookatpossibleenvironmentalfutures.Similar
tothisreport,expertswillsetoutdiverseandcompellingnarrativesonwhatthefuturemighthold,and
wewillseektobuildanumberofsimplescenariostosetoutsomeimplicationsfortheinsuranceand
financialservicesindustry.
49 Future risk: Social and economic challenges for tomorrow
CIIBen Franklin
PolicyandResearchCo-ordinator
CharteredInsuranceInstitute
20Aldermanbury
London
EC2V7HY
Email:
About the Chartered Insurance Institute (CII)
Professionalism in practice
TheCIIistheworld’sleadingprofessionalorganisationforinsuranceandfinancialservices,withover
100,000membersin150countries.
Wearecommittedtomaintainingthehigheststandardsoftechnicalexpertiseandethicalconductinthe
professionthroughresearch,educationandaccreditation.
OurCharterremitistoprotectthepublicbyguidingtheprofession.FormoreinformationontheCIIand
itspolicyandpublicaffairsfunction,includingexamplesoftherangeofissuesinfinancialservicesand
insurancethatwecover,pleasesee:
www.cii.co.uk/policy
Who to contactw
ho to contact
The Chartered Insurance Institute 42–48HighRoad,SouthWoodford,LondonE182JPtel:+44 (0)20 8989 8464email:[email protected]:www.cii.co.uk
©TheCharteredInsuranceInstitute2012Ref:CII_socioeconomicLFH(03/12)CII_6414