Looking Forward: The Economic and Trade Environment in the First Decades of the 21st Century

Abstract

It is a cliché to say that the pace of change has accelerated. But the pace of change since the middle of the 1990s has been phenomenal. Somewhere in the mid-1990s, the world economy (and its political economy) seems to have taken a blind curve and started down an uncharted road, leaving analysts and forecasters in the lurch. This has happened before. The Bretton Woods era (after World War II to the early 1970s) was stunningly different from the period between the world wars, which itself was stunningly different from the long boom of the Victorian era (starting around 1870). And lest anyone forget, no forecast during the Bretton Woods era anticipated the shape or quality of the stagflation era from the late 1970s through the early 1990s. It is not just forecasters who are left in the lurch: every such twist in the road that the global economy has taken is marked by the wreckage of investments gone badly wrong. And alongside the investment wreckage are to be found the wrecks of the economic theories that underpinned the worldview on which they were based. Predictability is generally a function of repeating patterns – which is indicative of a given structure cycling through its various states – and the tendency of key parameters to revert to their means (whether these are defined on a static or dynamic basis). The sharp reduction in forward visibility that marked the last half-decade signals therefore a period of significant change that will, in the fullness of time, be seen to have generated stylized facts different from the preceding era – different patterns, different parameters. This paper is developed in two parts. The first part addresses the question of why foresight is so limited at the present time. Put another way, why are we on a blind curve? The second part addresses the question of what we can guess based on the “here and now” concerning the direction the road ahead may take. This includes a look at the short- and medium-term economic prospects, the scope for further expansion of trade and the role that trade liberalization could play in facilitating such an expansion.

Keywords: Economic forecasting, non-linearity, complexity theory, globalization

JEL Classification: F15, F17