Global economist warns of perils of short-termism

Dambisa Moyo is worried that short-term approaches taken in politics and business around the world are hindering the solving of global challenges.

Speaking exclusively to Pensions & Investments ahead of her keynote appearance later this month at the WorldPensionSummit 2018 in The Hague, Netherlands, the New York-based global economist and author said political and business "myopia" are her biggest concerns right now.

"The reason it is particularly problematic is that the people responsible and charged with designing public policy, and the people who are making big, long-term investment decisions — the business leaders — are short-term in their thinking," she said. "And yet almost all the biggest challenges the global economy faces are long-term, deeply structural problems that require a level of pragmatism and long-term thinking."

It's an issue that has come up repeatedly among money managers and institutional investors, with representatives of some of the largest managers, including the $6.3 trillion BlackRock (BLK) Inc. (BLK), and pension funds such as the ¥158.6 trillion ($1.4 trillion) Government Pension Investment Fund, Tokyo, highlighting their concerns over short-term focuses in investment and business.

In an effort to alleviate these concerns, Ms. Moyo alluded to 10 proposals targeted at government, made in her most recent book, "Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth — and How to Fix It."

"Things like extending political terms — instead of elections every two years in the U.S., a model more similar to what you see in Mexico and Brazil where senator terms are up to nine years, closer matching the business cycle," Ms. Moyo said.

She also suggested installing a link between political remuneration and policymakers' performance, citing Singapore and other countries that have this model. There, politicians may be given, for example, a 30% to 40% bonus payment based on output such as better living standards.

"If they don't see those improvements in the economy, in Singapore not only have they not increased the pay, but they claw back compensation. That's one way of forcing politicians to think long term," she said.

For the investment industry, besides worrying about short-termism, Ms. Moyo thinks the biggest issue is regulation.

"In large part the investment industry has been relatively unscathed from regulatory creep, (while banks and other institutions) have been very aggressively managed regarding issues around capital but also compensation. To the extent that asset managers, pension funds and insurers are managing significant assets for society, government reach could become much more aggressive, so it would be required that a proportion of investments would be invested in sectors that will benefit society as a whole," such as infrastructure and education. "Regulation is where I think there could be more change, even in the environment we are in, which tends to be a bit more regulatory-light," Ms. Moyo said.

A global perspective

Ms. Moyo's work as a global economist sees her advise companies, corporate boards, CEOs and management on investment decisions, capital allocation and risk management. She also serves on the boards of Barclays PLC and energy firm Chevron Corp. She studied at Oxford University and Harvard University.

Another issue she's thinking about taps into one of the most talked about concerns and topics right now: globalization. Ms. Moyo has a somewhat different view to those who see a movement away from globalization, observing that the true potential for globalization was never realized in the first place.

"Globalization has four key pillars: defined as trade in goods and services; cross-border capital flows; immigration, the free movement of people; and the global movement of ideas. As a practical matter, globalization has not been implemented to its full tilt. Even before the recent protectionist approach by the current U.S. administration, many countries have imposed tariffs that restrict cross-border flows and trade," Ms. Moyo said.

She added that immigration remains state dependent, with no international organization governing the global movement of people — whereas "the World Trade Organization is charged with overseeing global trade and the International Monetary Fund is responsible for overseeing global capital flows, immigration has remained in the purview of individual countries. In essence, globalization has not been implemented to the level of promise that theory and economic textbooks would suggest."

China's future

A world that is more protectionist does not benefit China, she said.

Ms. Moyo highlighted the country's position as the biggest foreign lender to the U.S.; the largest foreign direct investor in Australia; a significant trading partner with Canada and across Europe; and its work in building infrastructure, fostering trade and investments across large parts of South America, Africa and Asia. She said that while China has about 10% arable land, it also needs to feed more than 1.3 billion people and needs to trade in order to access natural resources and food from around the world.

"China's political class has considerable challenges with notable pockets of poverty and environmental concerns. However, I remain optimistic about China as their policymakers exhibit a clear recognition that a lot of the economic problems require pragmatic long-term solutions. Moreover, China is taking the lead in many sectors such as technology, (artificial intelligence) and (the) environment. As such, it is in the global interest to continue to foster strong relationships with China's political class," Ms. Moyo said.

She also cited a suggestion by Alibaba Group Holding Ltd. Chairman Jack Ma, who has highlighted the fact that "many Western countries have benefited from the globalized system and earned trillions of dollars — however the gains were not invested in infrastructure and education at home, but instead used to fight wars. The problem is not an issue with globalization per se, but that its benefits have been used in a non-beneficial way for society at large," Ms. Moyo said.

Concerns for the U.S.

And while the past 40 years have also brought "enormous gain for the globe," with hundreds of millions of people moving out of poverty, gaining better global communication and health care, Ms. Moyo has concerns for parts of the U.S. in particular.

"However, there remain numerous challenges as wages have declined — infrastructure (such as ports, roads, airports and bridges) are ranked below the standards of many poor emerging countries. Education has also suffered," Ms. Moyo said, citing Organization for Economic Cooperation and Development figures showing that, for the first time in the 242 years since America was declared independent, this generation of Americans will be less educated than the previous one.

Underemployment is also a key policy concern, as is falling life expectancy for some cohorts of people in the U.S. "The challenge that faces us is to reset these long-term generational problems that have been largely ignored over the last several decades," Ms. Moyo said.

Also requiring something of a reset are views about the intersection between politics, central banks and monetary policy — something that has been increasingly on the agenda for investors as interest rates continue to rise in the U.S. and prepare to move in Europe.“We have to separate what is an ideal model from the type of situation that emerges in times of crises. Most economies, of course, would say having an independent central bank whose sole responsibility (is) to focus on inflation and therefore interest rates is ideal. However, the lines have become blurred because the global economy has been in crisis mode and has required unconventional policy responses. There has to be some latitude, some flexibility in our thinking, and some move away from ideal models when we are in the times of crisis,” Ms. Moyo said.