In the long run, the world economy appears to have good prospects. Productivity growth accelerated in the 1990s and has remained historically high. Going forward, there is reason to expect growth to remain high. The information technology and biotechnology sectors continue to innovate, leading to productivity gains and new market opportunities. In addition, policymakers appear to be doing many things right. In large emerging markets, governments have embraced market oriented reforms, low inflation, fiscal probity, and freer trade. In developed economies, the process of integration and deregulation continues — albeit with considerable exceptions.

On the other hand, substantial risks remain, the largest of which is the huge imbalance in the global economy. The fundamental problem is that one country, the US, is consuming far more than it produces. This vast demand stimulates output in the rest of the world — which produces more than it consumes. Such an imbalance would be okay if the transfer of resources took place voluntarily by private investors. Yet that is no longer the case. Instead governments have, in effect, conspired to prolong this situation rather than face the costs of adjusting to a smaller imbalance. Asian governments have prolonged the situation by lending the US the money to finance its largesse. The US government has prolonged the situation by living beyond its means and borrowing from foreign governments to make up the difference. This failure to accept reality will only postpone the adjustment and, ultimately, make it more costly. 

The challenge for businesses and governments will be to manage the substantial risks that must be navigated along the path to a better future. Risks include volatility in currency, commodity, and financial markets. In addition, short term economic growth will be at risk owing to the costs of adjusting to smaller imbalances in the global economy. Growth will also be at risk owing to the political ramifications from adjustment, such as greater protectionist pressure or increasing regulation.

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