It is a great honour to be invited to give this keynote address to the Knowledge Wave conference, which is such an impressive and prestigious event. It is an especial honour to be allowed to give the address by satellite, for it is extremely generous of the organisers to make allowance for such a potentially subversive, long-distance contribution. I regret deeply that I was unable to travel to New Zealand to give this address in person, but am grateful to be given this alternative method of taking part.

My role today is anyway perhaps one to which this video transmission method is extremely appropriate: it is to act as an outside view. I am going to offer my thoughts on what is the current global context in which New Zealand needs to think about its economic growth potential, and about how that context might evolve in the future. Where, in other words, is the world heading?

To hell in a handbasket, might be one response. When the first Knowledge Wave meeting was conceived and then put together, the world was full of optimism. Optimism about waves of technological change and what they promised to do for productivity and even lifestyles. Optimism about the participation of more and more developing countries in the world market economy—globalisation, in other words—and about the likely resulting rise in economic growth, trade and living standards. Optimism, too, about the chance that, in an always disorderly world, sufficient amounts of peace might prevail to enable most countries to get on with the business of raising their living standards and fighting their many social, political and economic problems.

Now, there is no such feeling. Pessimism stalks much of the globe. It is a pessimism driven first of all, of course, by the fear of war in Iraq and associated political instability that might ensue, and, almost equally, by fear of the possible consequences of North Korea´s very public decision to resume its path towards becoming a nuclear power. It is a pessimism driven also by terrorism and the fear of it, whether in New York, Moscow or Bali, and the fear that technological advance might make terrorism both easier and more destructive.

It is a pessimism also, though, at an economic level. Instability threatens economic growth just at the time when the world´s biggest economies, which are trading hubs for everyone else, are suffering either from the stockmarket crash of 2001-03 or in Japan´s case from the crash of 1990-2003. A world economy where the main bright spots appear to be house prices in a number of countries and the continued economic growth in a nominally communist country, China. A world economy in which high-tech industries suffer from over-capacity, as do the users of high-tech equipment, and in which neither biotechnology nor energy technology look ready to promote widespread economic advancement. A world economy in which the hopes for a rush of capital to the developing countries have been dashed first in the financial crises of 1997-98 in East Asia and Russia, and then in the collapse and default of Argentina last year.

Human moods about the future are notoriously fickle, be they the animal spirits that Maynard Keynes wrote about for entrepreneurs or the broader mood about progress, the environment and the prospects for peace. These swings from optimism to pessimism and back again have been seen many times before. This time, however, the stakes do feel bigger. The pessimistic case this time adds up more compellingly than before to a view that the world may be at a turning point. A point at which, for quite some years, even for a decade or more, the world could go in a new and damaging direction.

The case, it seems to me, rests on three things: the idea that political instability could become so widespread as to lead countries to seek to halt or reverse the process of globalisation; the related idea that this period of instability could bring about a backlash against American leadership in the world, which itself would undermine the process and institutions of globalisation; and finally the idea that the economic slowdown affecting the United States, the European Union and Japan is of a sort not seen in many decades, one in which excessive debt levels and over-investment may produce a prolonged deflationary slump.

On that view, our future could be a bleak one. By definition, such a forecast cannot be refuted. None of us can be sure what the future is going to hold. That is as true of economic forecasting as it is of political forecasting. History shows us, moreover, that many turning points were recognised as such only in hindsight. Even the onset of war in 1914 was not at the time thought to imply the end to the old European world that it actually came to represent. The collapse of the Bretton Woods system of fixed exchange rates and the later oil shock of 1973 were not immediately identified as an alteration to the course of the world economy that lasted for much of the next two decades. And just as the rest of the world was coming to get accustomed to the idea of Japan as the world´s new economic powerhouse and future political powerhouse in the late 1980s, so it was in fact about to enter a decade of stagnation and now marginalisation.

A saying from Japanese politics comes to mind: that an inch ahead is darkness. We cannot, however, leave it at that. Unavoidably, we have to plan for the future on the basis of some sort of judgment about which trends in the present and recent past may prove most influential, and with some sense of the range of risks involved. Such judgments are often rooted in the very short term. I believe, however, that we can more profitably root them in a longer-term view, in a sense of history.

It is in that spirit that I will now offer a more optimistic view of how the world is placed for its future economic growth and political development. Although I cannot refute it, I am not convinced by the pessimistic case. Against it, I can see some strong trends, or strong foundations at least, for a much more optimistic outcome.

That optimism must necessarily begin with politics, for it is politics that is giving rise to the current perception of an unusually high degree of risk in the world, and which in turn is affecting companies´ investment plans. No doubt the effect of concern about a war in Iraq is exaggerated; it may be just a convenient excuse for a more broadly based caution. But still, an element of it is surely genuine. And the prospect of war is keeping oil prices above $30 a barrel, a level that is unusually but also damagingly high during a period of slow world economic growth.