| The Impoverishment of Nations |
| By Leigh Skene, Profile Books, 2009, 256 pages, £15. |
| The Impoverishment of Nations explores the critical economic issues facing the developed world today. It warns that the confluence of long-term demographic and natural resource constraints, together with the continuing fallout from the credit crisis, will result in subdued growth in developed nations over the next decade or so – and a high risk of deflation. Governments naturally will be reluctant to relinquish the influence that they have developed in the aftermath of the crisis. But crowding out by the public sector will only worsen the problem of under-investment which threatens to go hand-in-hand with shrinking popula-tions in the west. |
| Worse, developed countries cannot look to the emerging economies to provide help. The author argues that the shift of economic power from west to east, alongside increasingly scarce resources, will threaten increasing conflict in trade. Over time emerging countries will face similar demographic problems to the developed countries, limiting the opportunity for the west to compensate for weak domestic demand by exporting more. |
| What will be the impact of these trends on financial markets? Skene’s prediction last year that the relief rally in risk assets would prove temporary has been validated so far this year. As far as the author is concerned the consequences of correcting the imbalances that triggered the crisis, as well as the impact of policy intervention, will be far-reaching. It will be a long time before a true bull market can emerge once again, and he anticipates permanently lower returns for the financial services industry. In addition, the need for growing domestic savings means that the near three-decade downward cycle in interest rates is over and rates are likely to be on a structural uptrend (presumably in real terms, if the assumption of deflation holds true). The author examines how to return to the automatic stabilisers inherent in the Gold Standard, arguing that restoring an efficient financial system requires a radical overhaul of the current monetary framework. |
| Skene’s warnings about the increasing burden of government debt are very topical, with market risk aversion having intensified in early 2010 on precisely these concerns. The theme of the damaging influence of government runs through the book – nevertheless, the author acknowledges that there is a risk in governments correcting debt levels too quickly. |
| The concluding chapter returns to the topic of demographics and natural resource constraints, this time arguing that population explosion – from a global perspective – is a problem as it risks accelerating the potentially devastating problems associated with shortage of water and, by implication, food. But, aside from the fact that predictions on demo-graphic trends and resource availability are notoriously difficult to get right, the book downplays the fact that more efficient use of labour and more innovative use of raw material inputs has provided an important impetus for growth in the past century, and is likely to continue to do so. The change to savings behaviour that will be necessary to support investment is already happening in many developed countries, and expectations about the length of working lives are also evolving. |
| Nevertheless, Leigh Skene’s book provides a timely reminder of the problems that could derail economic recovery in the next few years as well as alerting us to the potentially more devastating trends that may need to be tackled in coming decades. |
Sarah Hewin
Standard Chartered |