What strategy best revives economies and the market? Spencer Platt/Getty Images/AFP
What strategy best revives economies and the market? Spencer Platt/Getty Images/AFP
What strategy best revives economies and the market? Spencer Platt/Getty Images/AFP
What strategy best revives economies and the market? Spencer Platt/Getty Images/AFP

Cut debt or improve growth - the choice facing industrial democracies


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With the world's industrial democracies in crisis, two competing narratives of its sources - and appropriate remedies - are emerging.

The first, better-known diagnosis is that demand has collapsed because of high debt accumulated before the crisis. Households - and countries - that were most prone to spend cannot borrow any more.

To revive growth, others must be encouraged to spend - governments that can still borrow should run larger deficits, and rock-bottom interest rates should discourage thrifty households from saving.

Under these circumstances, budgetary recklessness is a virtue, at least in the short term. In the medium term, once growth revives, debt can be reduced and the financial sector curbed so that it does not inflict another crisis on the world.

This narrative - the standard Keynesian line, modified for a debt crisis - is the one to which many governments, central banks and economists have subscribed. It needs little elaboration. Its virtue is that it gives policymakers something clear to do. Unfortunately, despite past stimulus, growth is still tepid, and it is increasingly difficult to find sensible new spending that can pay off in the short run.

Attention is therefore shifting to the second narrative, which suggests that the advanced economies' fundamental capacity to grow by making useful things has been declining for decades, a trend that was masked by debt-fuelled spending.

More such spending will not return these countries to sustainable growth. Instead, they must improve the environment for growth.

The second narrative starts with the 1950s and 1960s, an era of rapid growth in the West and Japan.

Several factors - including postwar reconstruction, the resurgence of trade after the protectionist 1930s, the introduction of new technologies in power, transport and communications across countries, and expansion of educational attainment - underpinned the long boom.

But, as Tyler Cowen has argued in his book The Great Stagnation, once these "low-hanging fruit" were plucked, it became much harder to propel growth from the 1970s onwards.

Meanwhile, as Wolfgang Streeck writes persuasively in New Left Review, democratic governments, facing what seemed, in the 1960s, to be an endless vista of innovation and growth, were quick to expand the welfare state. But, when growth faltered, this meant that government spending expanded, even as state resources shrank. For a while, central banks accommodated that spending. The resulting high inflation created widespread discontent, especially because little growth resulted. Faith in Keynesian stimulus diminished, though high inflation did reduce public-debt levels.

Central banks then began to focus on low and stable inflation as their primary objective, and became more independent of their political masters.

However, deficit spending by governments continued apace, and public debt as a share of GDP in industrial countries climbed steadily from the late 1970s, this time without inflation to reduce its real value.

Recognising the need to find new sources of growth, the US in the 1980s deregulated industry and the financial sector, as did Britain. Productivity growth increased substantially in these countries over time, which persuaded continental Europe to do likewise.

Yet this growth was not enough, given previous governments' generous promises of health care and pensions - promises made even less tenable by rising life expectancy and falling birth rates. Public debt continued to grow. And the incomes of the moderately educated middle class failed to benefit from deregulation-led growth - although it improved their lot as consumers.

The most recent phase of the advanced economies' frenzied search for growth took different forms. In some countries, most notable among them the US, a private-sector credit boom created jobs in low-skill industries and precipitated a consumption boom as people borrowed against overvalued homes. In other countries, a government-led hiring spree created secure jobs for the moderately educated.

Three powerful forces, one hopes, will help to create more productive jobs: better use of information and communications technology (and new ways to make it pay), lower-cost energy as alternative sources are harnessed, and sharply rising demand in emerging markets for higher-value-added goods.

The advanced countries have a choice. They can act as if all is well, or they can treat the crisis as a wake-up call to fix what debt has papered over in the past few decades.

For better or worse, the narrative that persuades these countries' governments and publics will determine their future - and that of the global economy.

Raghuram Rajan is a professor of finance at the Booth School of Business in Chicago and the author of Fault Lines: How Hidden Fractures Still Threaten the World Economy

* Project Syndicate

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F1 The Movie

Starring: Brad Pitt, Damson Idris, Kerry Condon, Javier Bardem

Director: Joseph Kosinski

Rating: 4/5

Gothia Cup 2025

4,872 matches 

1,942 teams

116 pitches

76 nations

26 UAE teams

15 Lebanese teams

2 Kuwaiti teams

The specs

Price, base / as tested Dh1,100,000 (est)

Engine 5.2-litre V10

Gearbox seven-speed dual clutch

Power 630bhp @ 8,000rpm

Torque 600Nm @ 6,500rpm

Fuel economy, combined 15.7L / 100km (est) 

WOMAN AND CHILD

Director: Saeed Roustaee

Starring: Parinaz Izadyar, Payman Maadi

Rating: 4/5

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If you go

The flights
Emirates (www.emirates.com) and Etihad (www.etihad.com) both fly direct to Bengaluru, with return fares from Dh 1240. From Bengaluru airport, Coorg is a five-hour drive by car.

The hotels
The Tamara (www.thetamara.com) is located inside a working coffee plantation and offers individual villas with sprawling views of the hills (tariff from Dh1,300, including taxes and breakfast).

When to go
Coorg is an all-year destination, with the peak season for travel extending from the cooler months between October and March.

The specs: 2018 Nissan 370Z Nismo

The specs: 2018 Nissan 370Z Nismo
Price, base / as tested: Dh182,178
Engine: 3.7-litre V6
Power: 350hp @ 7,400rpm
Torque: 374Nm @ 5,200rpm
Transmission: Seven-speed automatic
​​​​​​​Fuel consumption, combined: 10.5L / 100km

UAE currency: the story behind the money in your pockets
Conflict, drought, famine

Estimates of the number of deaths caused by the famine range from 400,000 to 1 million, according to a document prepared for the UK House of Lords in 2024.
It has been claimed that the policies of the Ethiopian government, which took control after deposing Emperor Haile Selassie in a military-led revolution in 1974, contributed to the scale of the famine.
Dr Miriam Bradley, senior lecturer in humanitarian studies at the University of Manchester, has argued that, by the early 1980s, “several government policies combined to cause, rather than prevent, a famine which lasted from 1983 to 1985. Mengistu’s government imposed Stalinist-model agricultural policies involving forced collectivisation and villagisation [relocation of communities into planned villages].
The West became aware of the catastrophe through a series of BBC News reports by journalist Michael Buerk in October 1984 describing a “biblical famine” and containing graphic images of thousands of people, including children, facing starvation.

Band Aid

Bob Geldof, singer with the Irish rock group The Boomtown Rats, formed Band Aid in response to the horrific images shown in the news broadcasts.
With Midge Ure of the band Ultravox, he wrote the hit charity single Do They Know it’s Christmas in December 1984, featuring a string of high-profile musicians.
Following the single’s success, the idea to stage a rock concert evolved.
Live Aid was a series of simultaneous concerts that took place at Wembley Stadium in London, John F Kennedy Stadium in Philadelphia, the US, and at various other venues across the world.
The combined event was broadcast to an estimated worldwide audience of 1.5 billion.

In numbers

Number of Chinese tourists coming to UAE in 2017 was... 1.3m

Alibaba’s new ‘Tech Town’  in Dubai is worth... $600m

China’s investment in the MIddle East in 2016 was... $29.5bn

The world’s most valuable start-up in 2018, TikTok, is valued at... $75bn

Boost to the UAE economy of 5G connectivity will be... $269bn 

Game Changer

Director: Shankar 

Stars: Ram Charan, Kiara Advani, Anjali, S J Suryah, Jayaram

Rating: 2/5

While you're here
If you go

The Flights

Emirates and Etihad fly direct to Johannesburg from Dubai and Abu Dhabi respectively. Economy return tickets cost from Dh2,650, including taxes.

The trip

Worldwide Motorhoming Holidays (worldwidemotorhomingholidays.co.uk) operates fly-drive motorhome holidays in eight destinations, including South Africa. Its 14-day Kruger and the Battlefields itinerary starts from Dh17,500, including campgrounds, excursions, unit hire and flights. Bobo Campers has a range of RVs for hire, including the 4-berth Discoverer 4 from Dh600 per day.

 

 

UAE currency: the story behind the money in your pockets
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