Every minute, South Korea’s household debt rises by an estimated US$100,000 (RM427,930) as projected from Bank of Korea 2019 figures, amounting to a whopping US$1.7tril (RM7.27tril) today. Every day, more than 100 South Koreans are declared bankrupt. In response to the Covid-19 pandemic, the country’s government debt has skyrocketed to 840.2tril won (RM2.96tril), an increase of 111tril won in just six months.
Debt is not only a Korean problem, of course. In fact, according to stock market index S&P and the Organisation for Economic Co-operation and Development (OECD), the debt of all nations reached US$53tril (RM226.7tril) in the first quarter of 2020; of that, 34 of the world’s richest nations borrowed US$11.4tril (RM48.7tril). Corporate debt at the end of 2019 reached an all-time high of US$13.5tril (RM57.7tril).
These figures are massive. But what’s even more alarming is the repayment potential of these heavy borrowers. The national growth of the world’s richest nations over the past 10 years has been dismal. What answer then do these countries have for the debt piling up when their economy is not growing?
It’s quantitative easing (QE). What was once unconventional monetary policy started becoming the new norm after the financial crisis of 2008. The central bank buys government bonds and other financial assets through the printing of money. As more money circulates in the economy, people’s spending power increases. For an economy that is growing, this is fine. But if not, this can lead to economic ruin. Despite this, many countries will proceed with QE measures in response to the disruptions of the Covid-19 pandemic.
The world has been slowing down since its recovery from the 2008 financial crisis, hovering between 3.5% and 3.9% of real GDP growth before dipping to 2.9% in 2019; this is expected to dip further to -3% in 2020. To jolt economic growth back to life, countries embarked on massive global infrastructure spending (estimated to increase to US$94tril – or RM402.1tril – by 2040) to boost production capacity and increase global GDP growth.
Unfortunately, little has changed. Why is the economy still slowing down? Why do these massive investments lead to only marginal increases in productivity?
Here are three explanations.
1) Widening wealth gap: When we have 1% of the population owning half of the world’s wealth, we have a problem.
In the OECD, 99% of all businesses are small and medium enterprises (SMEs), with almost one out of three people working in a micro firm. In Asean, SMEs represent 95%-99% of all businesses, generating around 97% of all employment. That’s a pretty steep number. This means that only 1%-5% of businesses have the financial power to create a deep economic impact. And only 1% of the population have the privilege to fund new creations and explore different frontiers because they can afford to do so.
Most people can only afford to survive and produce just enough to pay back their debts. Creativity for them remains in the realm of the mind. Indonesia, for example, has an active work force of around 130 million. Yet, until today, Indonesia’s fiscal space still depends largely on energy and commodity sectors (around 70%) and the country is unable to develop other innovative industries effectively because a significant number of its population is part of the struggling working class and stuck in poverty.
This is the same story in many countries in Asia and Africa. No amount of education investment will ever change this situation because people are focused on surviving, not creating.
2) 4IR powered by a 2IR engine: The discovery of fossil fuels in the mid 19th century powered the Second Industrial Revolution (2IR), vastly changing the landscape of energy, technology and infrastructure in the global economy. This gave birth to petrol-powered vehicles which we are still using today. It’s 2020. How can we even conceive of 4IR (Fourth Industrial Revolution) globally when we still depend on fossil fuels for our transportation and industrial production?
A huge number of countries are still stuck in a 2IR economy, some are struggling up to 3IR (the digital age), and we have a saturated fossil fuel market. Why then do we still invest in 2IR infrastructure and expect exponential productivity?
3) Aggregate efficiency: This term denotes the efficient use of energy in transforming a commodity up the value chain. At the height of 2IR in 1905, the aggregate efficiency of production was around 3%, which means that 97% of energy used was lost in the process. We are now currently at 20% aggregate efficiency. Hence, we still need to use vast amounts of energy to produce a disproportionately smaller output – and we cause massive pollution in the process.
For example, it takes almost 4kg of feed to create just half a kilo of beef (or 8lbs of feed for 1lb of beef). That’s massive wastage. Therefore, no amount of market or labour reform will meaningfully change productivity unless we change the engine of growth.
All these are interrelated factors. We cannot diversify our fiscal space as long as the vast majority of our people cannot effectively innovate. And they cannot innovate when the structure of our economies only favour the 1%, and we depend on that 1% to create miracles for the economy. The masses cannot innovate because they are struggling and are preoccupied with basic survival.
Datuk Seri Nazir Razak, former chairman of the CIMB Group, once said in 2016 that one of Asean’s biggest obstacles to progress is the linkage between governments and big corporations. Indeed, this linkage is what stifles creativity and efficiency in economic distribution. It enriches only the top layer of society, leaving the other parts to fend for itself.
This linkage is what perpetuates 2IR infrastructure. Coal, fossil fuels, petrol vehicles – no wonder we are stuck in 20th century productivity because there is vested interest in maintaining the status quo and a hesitance to move into new frontiers.
The good news is things are changing. Europe is investing heavily in renewable energy, and China is working on achieving power grid parity between renewables and fossil fuels. But for the world to really stand a chance to curb environmental disaster as well as move away from 20th century productivity, this should be a global commitment at all levels.
Technology today helps us increase aggregate efficiency. It has given birth to big data which is utilised by artificial intelligence and IoT (Internet of Things) technologies, enabling us to greatly enhance our production systems and achieve near zero marginal cost. This incentivises people to produce and share things with fellow human beings for free, creating a truly global sharing economy.
This is not a new dream. In 1999, Napster was the first experiment of a sharing economy. And then Wikipedia came. Who would have thought that we could create an active global encyclopedia for absolutely free? Wikipedia has kicked the doors to knowledge wide open for everyone, not just the rich, but for everyone, everywhere in the world. The great equaliser of knowledge is already here.
On the job front, creative disruption will step up in the next 10 years. Massive job loss due to automation will be followed equally by the creation of new jobs. But what is certain is the death of wage slavery, which is a feature of the 20th century, as those gruelling jobs will be taken over by robots.
So what jobs are left? As marginal cost plunges towards zero, people do not require big fat salaries to afford things anymore. Entrepreneurship will be a thing of the past, as the creation of value will be the work of robots. The sector of the future will be that of the humanities – those that preserve our humanity in a highly digitalised world such as nursing homes, nurseries and interfaith institutions.
And perhaps by that time the mass majority will finally be emancipated and contribute value to the next frontier of human civilisation.
FAZIL IRWAN SOM
Executive director, International Strategy Institute (ISI)
Note: ISI is a not-for-profit organisation that helps connect governments and businesses across Asia.