DannyQuah

Making large things visible to the human eye

The world needs new leadership not from those whose lives have been easy, but from those whose lives have been hard.

Malaysia finds itself more and more in international news headlines. No one needs to tell ordinary Malaysians how their daily lives fill to overflowing with myriad concerns and challenges. The nation’s political leadership is challenged and changed with lively ongoing debate. Malaysia’s people unite in the face of adversity and national tragedy, and in national sporting triumph. Increased international competition and a global consciousness in its people; finite oil and gas and other rapidly-depleting natural resources; a promise of ever greater national unity that many feel has failed: there is no room for political and economic complacency.

If the world were a democracy, this is where  decisions would be made on matters of global significance.    (Idea from <A HREF="http://techno-anthropology.blogspot.co.uk/2013/05/the-valeriepieris-circle.html">Kenneth Myers, The Valeriepieris Circle, May 2013</A>.)

If the world were a democracy, this is where decisions would be made on matters of global significance. (Idea from Kenneth Myers, The Valeriepieris Circle, May 2013.)

Malaysia’s stock of talented and hardworking people want their economy and their fellow citizens to succeed. But they struggle daily in circumstances they consider unfair and unjust. This is a nation that sees ethnic, religious, and urban-rural fracture. It sees heated parliamentary debate that tests the noble ideals of democracy, at the same time that it witnesses manipulation of the ugliest of populist instincts, and allegations of high-level corruption and wrong-doing.

And Malaysia’s place in the world?  Malaysia today invests more in Africa than does China.  In London commercial real estate, Malaysia is a bigger presence than is China.  Even as China intends US$1tn in trade with ASEAN by 2020, it is Malaysia that remains China’s largest ASEAN trading partner, with bilateral trade continuing to rise 16% a year.

What about incidents such as the MH370 tragedy and their impact on Malaysia’s state relations generally, but with China in particular?  Angela Merkel might have been irritated with the US for its bugging her cellphone, but Germany did not declare Transatlantic war as a result.  The US became global hegemon through building inclusive collaborative state relations with those around it.  So too if China is to become the benevolent leader of nations that is a global hegemon, that will be through China’s continuing to build relations of trust and cooperation with countries like Malaysia.

Malaysia is a full-service, one-stop shop, middle-income level developmental experience.

It is appropriate then that the eyes of the global community are transfixed on what happens here. Malaysia sets an example—good or bad—on how the rest of humanity will need to deal with the great challenges of the coming century.

The rest of the world sees hope in Malaysia, not because life and progress here have been easy, but the opposite, in how Malaysia has met its challenges. Today hundreds of countries around the world face the middle-income trap, a slowdown in economic progress before the country reaches maximum potential: What has made Malaysia believe it is successfully escaping the Middle-Income Trap?

Today nations the world over confront the racial and social tensions from sharp income inequality. What in Malaysia’s political complexion allowed it four decades ago to roll out its national dream, a New Economic Policy that would eradicate poverty regardless of race and that would eliminate the identification of economic function with ethnicity? If Malaysia has lost its way in that struggle, how have its leaders and its people together fought back, to keep alive that national dream?

How has Malaysia continued to succeed following the 2008 Global Financial Crisis, with global financial systems in disarray? In this time Malaysia has kept secure its credit systems, ranked in 2014 first in the world in the World Bank’s Ease of Doing Business survey. Malaysia has simultaneously maintained a no. 6 ranking for well-developed and secure financial markets and a no.8 ranking for low burden of government regulation, both in the 2014 World Economic Forum Global Competitiveness Index. How did Malaysia do this?

In 2013 Transparency International ranked Malaysia worst in 30 countries surveyed for bribery. The same year the Asia-Pacific Fraud Survey Report Series ranked Malaysia worst in the region for corruption and bribery (alongside China, Indonesia, and Vietnam): how will Malaysia’s leadership deal with this challenge?

So, to repeat, why is Malaysia the focus of so much international attention? Because Malaysia has had to confront problems that are in extreme those everyone else needs to deal with as well. The example Malaysia sets is key, not only for its internal political dynamics but also for its external relations.

Emerging economies in general and the East in particular realise they can no longer run unthinkingly on Western models of propriety, policy, and governance. Even the West today does not run on Western models of propriety, policy, and governance.

The world has grown economically and financially unstable because its historical global hegemon has gone missing in action. The US is no longer the fount of legitimacy; it is no longer benevolent builder of inclusive international systems. The US has failed on the world stage, partly from the rise of the East, partly from its domestic political paralysis. But this vacuum in world leadership has not met useful replacement. Instead, in this uncoordinated and leaderless world, political leaders pay mind ever more only to short-term national interests, ignoring how their actions inadvertently destabilize the global economy.

With Malaysia as an important hub, the ASEAN region today faces these same challenges of cooperation and leadership. ASEAN seeks ever greater consolidation towards an ASEAN Economic Community by 2015. ASEAN’s concerns might be regional rather than global, but the problems are identical to those faced by a world economy that is uncoordinated and leaderless. The danger is how the benefits to regional economic integration and cooperation might be sacrificed on the altar of national expediency, as member states attempt to engage with domestic populations showing ever greater political clout, ever more visible political dissatisfaction, and ever greater sensitivity to the need for the benefits to economic growth being distributed equitably.

How has Malaysia dealt with these tensions internally, and how has it remained hopeful for successful development towards a first-world country? How is Malaysia navigating regional relations across groups unified neither by political vision nor ethnic affinity?

Today Malaysia sits on a cauldron of profound, history-changing domestic dynamics. It sits on a hub of critical regionalisation in a period when the world economy is dramatically shifting.

The world needs new political and economic models of success and leadership, not from those whose lives have been easy but from those whose lives have been hard. Malaysia needs to step up to that challenge. Its success will be good for its people and for the world.

(Adapted from the author’s “Malaysia – Why the World Wants In“, The Edge, 17 March 2014)

 

This growth model is just not sustainable in the long run

Memo to: Thomas Alva Edison, Menlo Park
Cc: China, Asia 2013; East Asia, Asia 2013; Singapore, Asia 1995
From: Totally Far-sighted Experts Who Will Turn Out To Be Correct
Date: 29 March 1879

Dear Mr Edison:

Your laboratory is unbalanced and unsustainable. You rely overly on old men in white laboratory coats, doing painstaking experiments on physical materials.  This model of innovation is not sustainable in the long run.Abraham_Archibald_Anderson_-_Thomas_Alva_Edison_-_Google_Art_Project

Your “light bulb”, “phonograph”, and “motion picture camera” projects: Cotton and linen thread. Wooden splints. Tinfoil. Seriously?

You face an imminent middle-level physical-usage trap.

All your projects are materials-based. You think of innovation based on discipline and on working in teams. You think of invention happening in an industrial research laboratory. You think hard work is what makes innovation.  You could not be more wrong.

The future instead is weightless and digital, not physical. Innovation requires freedom from control, from oversight, and from humdrum discipline. Your research trajectory is headed entirely in the wrong direction. The future lies not in New Jersey but on the other coast, Silicon Valley. There, nimble 20-year-olds working alone or in small groups, wearing only white T shirts and cut-off blue jeans, cut software code on gleaming but skinny notebook computers, doing things like “algorithms” and “search” and “big data”. You think you get innovation and invention by driving your large-scale teams hard to produce results. Instead, you should be providing your employees with free pizza and soda, and organising frisbee afternoons—all the while providing lots of unicycles and juggling toys in the workspace. Innovation needs to be free-wheeling, loose, and unstructured. And, please, call that workplace not a laboratory but a “campus”.

Google-blog-send-Street-View

(Editorial note – good gosh, these have all turned out to be correct!  Edison really should have listened and stopped trying to make better light bulbs with that old-fashioned unsustainable model of innovation.)

We urge you to stop tinkering with your innovation methods before your physical materials-based experiments lead to a total collapse of your unbalanced and outmoded research laboratory.

Your innovation model is just not sustainable in the long run.

What did Credit Suisse know? And when did they know it?

Credit Suisse was there when AirAsia was still just a dream for Tony Fernandes

Credit Suisse was there….

Now and then people ask me how the Great Shift East can possibly be real when all the household names they have ever heard of in business are Western.

At those times I like to think about how this 12-foot high poster at London City Airport gently separates those in the know from those not.

Credit Suisse talks itself up by talking up AirAsia and Tony Fernandes.  #Win

PS  It’s true.  I took this image using my Samsung handset, and later wrote the caption as I watched SNSD on my Samsung TV, while sitting next to a Samsung notebook computer displaying shots from Aion 4.0.

A globalised renminbi can transform both China and London

[Reprinted with permission from the Financial Times 18 Oct 2013 (EnglishChinese)]

The Chinese will see how the lifting of controls is linked to economic success.

This week George Osborne announced steps to make London a global trading hub for China’s currency. If the internationalisation of the renminbi proceeds and the chancellor of the exchequer’s plan succeeds, London will – so it is hoped – again flourish as a leading financial centre. The nature of that flourishing could well differ from what we saw before 2008, but the prosperity will feel the same. Can it happen? Yes. Will it happen? That depends on a number of considerations. Will it be a good thing? Almost surely.

via http://upload.wikimedia.org/wikipedia/commons/2/25/City_of_London_at_night.jpg

City of London at night (via Wikimedia.org Commons)

Too often, when observers say renminbi internationalisation will never happen, what they mean is they cannot imagine the renminbi – with less than 3 per cent share of world official currency reserves – undermining the exorbitant privilege enjoyed by the US dollar as the world’s reserve currency.

But neither internationalisation of China’s currency nor London’s benefiting from it require that to happen. These are both relatively modest undertakings. They hinge on just one thing: the currency simply has to become a force in global currency markets.

True, this will require renminbi use in the financial markets to exceed single-digit shares. By how much? Well, to paraphrase singer Miley Cyrus, no one’s got that memo yet. But already the renminbi’s share is rising on pretty much all measures of world currency use. That is what matters.
To understand whether this will continue, we need to think about the risks and opportunities that arise from world markets accepting the renminbi more widely.

Even without full official convertibility, the currency is already significant. Full convertibility could occur overnight by fiat if the Chinese authorities thought the moment propitious.

Confidence and trust in China’s management of the renminbi are higher than in US management of the dollar or European Central Bank management of the euro. The supposed absence in China of market transparency, government flexibility and the rule of law have little bearing on acceptance of its currency. Only perceptions of risk and return matter – and government dysfunction in the US is doing everything possible to convince the world that dollar risk is significant.

China has a population about four times that of the US and an economy only half its size. It trades as much with the rest of the world as the US does. And the potential for continued economic growth remains strong. There are problems but also solutions. China invests more than many observers think reasonable but its western regions remain poorer than significant parts of Africa, and its capital stock and infrastructure per worker remain low. It no longer has a particularly young workforce – but its 340m elderly people quietly doing tai chi in the park will make for a more stable society than a similar number of young men with poor job prospects. Yes, there is a “middle-income trap” in the developing world, but all the countries that have found sensible ways to escape it had characteristics exactly like China has today.

Since 1980, the nation has steadily pulled the world’s economic centre from west of London to east of the Mediterranean. Through all this, the city’s position as a place worthy of confidence and trust, as an intellectual and cultural centre and a hub for learning and higher education, has remained constant. But, given the shift in global economic performance, it is an anomaly that the renminbi is not yet a significant force in world currency markets: the pressure for it to become one is strong.

Beijing knows it. It has warmed to the idea of making London a renminbi global trading hub. It has also established the Shanghai free-trade zone, where international finance is carried out under liberal global rules, which has the notable support of Premier Li Keqiang.

The Shanghai free-trade zone promises to do for China and global finance what the Shenzhen special economic zone did for China and the global manufacturing supply chain. The rest of the country will see how closely entwined are modern economic success and the lifting of controls on information flows, as well as currency flows – in Shanghai, in London. That will be significant, not just for London’s prosperity but also for pointing to how China itself will change.

[This was first published 18 October 2013 in the Financial Times (English, Chinese)].

The end of US exceptionalism

The phrase “American unipolarity” shows up in many places, but I learnt it most vividly from John Ikenberry’s beautifully-written 2005 article on “Power and liberal order”. There, Ikenberry wrote:

“American global power — military, economic, technological, cultural, political — is one of the great realities of our age. Never before has one country been so powerful or unrivaled. The United States emerged from the Cold War as the world´s only superpower and grew faster than Europe and Japan in the decade that followed. American bases and naval forces encircle the globe. Russia and China remain only regional powers and have ceased to offer ideological challenges to the West. For the first time in the modern age, the world´s most powerful state can operate on the global stage without the fear of counterbalancing competitors. The world has entered the age of American unipolarity.”

“The United States is not just a powerful state operating in a world of anarchy. It is a producer of world order.”

 The morning of 12 October 2013, however, the BBC ran this:

Image

Seriously? Now? Didn’t the world just enter the age of American unipolarity?  Did the BBC not get the memo?

The answer to the question, by the way, is “Yes, political wrangling over US public finances has damaged the country’s global economic standing.”

To be clear, what matters is not whether the US will remain, in fact, the world’s largest economy. Arguing about whether China’s growth trend will remain high is almost surely irrelevant here. Despite intense media attention, the exact date when China overtakes the US — and so the US will no longer be no. 1 — will be a massive anti-climax. What will unfold there is not going to be anything like an Olympics race, where the by-a-nose winner gets not just bragging rights but multi-million dollar commercial endorsements. Instead, what will happen is that one day very soon the Chinese economy’s total size will be exactly 50 cents smaller than that of the US; the next milli-second it’ll be $15,897.23 larger. And absolutely nothing will have changed from just before to right after.

Similarly, it will not matter whether right this moment long-term US interest rates are low, nor whether US currency remains strong. It will not matter which national budget item gets put on what line. And, it will not matter why this US government disagreement has emerged now.

Instead what matters will be very basic:  “Your leader can’t put in order his own country. How will you lead the world?”

Particularly damaging is the image that the US is now giving the world on how government works. So many things that so many people hold dear are so beautifully present in the US:

  1. A government cannot ride roughshod over its people’s will; it needs to be responsive to what people want.
  2. A vibrant opposition in democracy is healthy. You can disagree with your government and still be fiercely loyal to the nation.
  3. Lively debate, free speech, and a strong civil society are unalloyed goods.

Now, to the rest of the world, all these seem to have conspired to bring government to a standstill. How will the world now be convinced that these magnificent tenets are immune to subversion by extremism and demagoguery if even the most advanced, developed, and admired of societies has failed so spectacularly with them?

2013-Opinions-on-the-US-Pew-Captioned

Nearly half the world’s countries no longer see US as world’s leading economic power

The American public is divided on whether the US remains world’s leading economic power; but more Southeast Asians continue to think it is than not.

Nearly half the world's countries no longer see US as world's leading economic power

Nearly half the world’s countries no longer see US as world’s leading economic power

Describing matters in terms of No. 1 (No. 2, No. 3, …) is unfortunate and unhelpful. It makes everything a zero-sum game, so one side wins only when another loses. Economic prosperity isn’t like that – everybody gains.

(Expanding earlier post.)

Global hegemony. In one picture.

Global hegemony could, first of all, be about leadership in the world economy: doing the right thing at home, coordinating the actions of your friends, restoring growth to the Transatlantic economies.

Or, alternatively, it could be about representing the world’s peoples, one person one vote as in any electoral democracy — to elevate the sum total of good for humanity:

2013.05.09-Kenneth_Myers-Valeriepieris-Circle

Sometimes these two do not coincide.

Draw a circle 4,000km in radius around Hainan Island in the South China Sea. The land area carved out is only 25 mn sq km, or one-sixth of the world’s total land area.  More people, however, live within that circle than outside.  The world’s median voter?  Here’s where she lives.

(Graphic is from Kenneth Myers. The Valeriepieris Circle. May 2013.)

Is China’s Economy Crashing?

Bearishness on China has gone viral. Two years ago talk was of China’s economy saving the world. Today observers have swung to the opposite extreme, one expressed elegantly by Paul Krugman as “the Chinese model is about to hit its Great Wall, and the only question now is just how bad the crash will be.”

The reasons for pessimism are legion. China’s economy has already seen its annual growth rate fall from 12% in 2010 to 7% in 2013. When the crash comes, it will not be a gradual downturn. It will be sudden. And it will stick around.

In this view China’s undoing rests on multiple missteps. China’s local governments and state-controlled banks have over-extended credit. The resulting debt-fuelled bubble in asset and real estate prices will surely burst, revealing large hidden non-performing loans.

China boosted its economic growth through “unlimited supplies of labour”. (This phrasing was Arthur Lewis’s evocative description of a developing country’s large reserves of low-wage labour.) But no country’s labour reserves are truly unlimited. So when an economy hits its “Lewis turning point”, when labour reserves fall sufficiently that wages start to rise, low wage-reliant economic growth will sputter.

Early on, China reduced risk of imminent mass famine and deep poverty by its one-child policy. This slowed population growth and permitted an economic surplus that could be saved and invested. But that policy has also resulted in a rapidly ageing population, so that economic growth is now threatened both from having so many old and unproductive, and from shedding the demographic dividend (where an economy enjoys a growth boost through having many young, energetic workers).

But not just in its one-child policy does China err for the long run through actions thought beneficial in the short term. China’s investment rate of 50% of GDP boosts economic growth short-term, but piles up excess capacity longer-term. China’s export prowess drives economic growth short-term but exposes China to greater risk from international downturns, longer-term.

Finally, these last three decades China’s command-and-control approach to allocating resources might have successfully guided economic growth. But, in the eyes of critics, that system has also ended up generating steep inequality in opportunity and outcome, so that now the threat of social instability is kept in check only through ever-higher economic growth churning out jobs for China’s people.

The case for a crash in China’s economy does not argue that what is now in progress is a gradual slowdown (in the sense of, say, poor but fast-growing economies slowing as they move towards parity with the rich economies). Instead, the phrasing says exactly what it intends, a crash is imminent. China will be caught and held, bumping up against the ceiling of a Middle Income Trap that it cannot escape.

How compelling is the evidence?

But is the evidential basis for a crash in China’s economy definitive? Banking and financial problems are intricate. Just as many observers found difficult to read, ahead of the 2008 Global Financial Crisis, related problems even in advanced economies, even more difficult it is to assess China’s true financial position. Nonetheless, the weight of evidence appears to support the pessimistic view, that an imminent crash is increasingly likely.

The case for China’s crash, however, is based not on finance alone, but on real-side considerations. On these latter fronts, evidence is mixed. China still has 100mn people living on less than US$1 a day, mostly in the relatively under-developed west. If China’s east coast manufacturing belt now sees rising wages and escalating costs, and pollution and congestion, China’s west in contrast remains massively under-developed. Averaging east and west, China’s per capita income today remains lower than that of nine countries in Africa. Since Beijing, Shanghai, and other parts of the east coast manufacturing belt have better than world middle-class incomes, it is simple arithmetic to deduce that wages in the west remain profoundly low, covering a workforce about as large as that in all of the US or the European Union.

To integrate China’s western workforce into the national or indeed the global economy does not require physically transplanting those workers into China’s east coast factories and urban cities. It suffices that the output that workforce produces can be easily sold elsewhere in China. For that, China’s transportation infrastructure needs to be improved and extended. China needs more government investment, not less. That investment needs to be in infrastructure public goods, an undertaking that private enterprise hardly ever does well.

In the US, the continental economy is joined together by an interstate highway system. This came about through hard-fought Federal and Presidential action, in a sequence of Federal-Aid Highway Acts from 1938 until as late as 1956. In that time many US lawmakers objected to these plans for their unproductively enlarging the role of the federal government. Only by the 1970s did the US, through extended deliberate government policy, come to have the adequate transportation network that it now enjoys. “The interstate system, and the Federal-State partnership that built it, changed the face of America.” China needs the same.

Today, China’s infrastructure remains dismally below that in high-income economies. Its road network is 60% the length of that in the US. Its public airports number 10% that in the US. Despite China’s greater reliance on and the US’s disinterest in rail as a means of transportation, China’s train network today has just 40% the length of the US’s. For all the worries about over-stretched, misdirected finance putting up apartment buildings that then remain empty, China’s residential property per capita today has floor area less than two-fifths that in the US. Inappropriate investment will always be harmful regardless where it occurs, whether in China or anywhere else in the world. But overall does China over-invest? Does China’s investment rate of 50% of GDP indicate, by itself, inappropriate investment resulting in excess capacity? No.

In its export-oriented growth trajectory, China follows many emerging economies that correctly reckoned their internal markets insufficient in size, and thus sought economies of scale by providing for the global marketplace. It might seem peculiar to call inadequate a domestic population in China that numbers over a billion. But marketsize is measured in purchasing power, not number of consumers. Empirical evidence shows it is in rich urban cities where China’s consumption grows most strongly: in Tier 1 cities, increases in consumption outpace even historical growth in national GDP. Therefore, making China a more integrated economy by reducing the inequality in development across east and west will automatically raise domestic demand overall and reduce China’s reliance on the vagaries of international markets.

Thus, it could be self-defeating to seek to force China to reduce its export orientation. This would turn China towards less dynamic sources of economic growth and make China poorer. That, in turn, would reduce domestic spending, making China then depend even more on exports subsequently.

But won’t China grow old before it gets rich? If the demographic dividend effect is indeed operative, then China’s economic growth will slow because of its ageing population. Moreover, Chinese society will need to set aside resources to provide for these unproductive old. But if the Chinese population becomes dominated by old people who will not work, then the economy will also need to generate fewer jobs. It is a strange thing to worry about old people being unproductive because they won’t work and, simultaneously, to fear that social instability will gush forth because an insufficient number of jobs is being created. There are certainly parts of the world that will have more young in the future than they do today, but which will be the more successful economy in 2030? One where 340 million old Chinese peacefully practise taiji in the park; or another where 100 million angry young Arab men take to the streets, unable to find gainful employment?

It would be useful, to assess the likelihood of China’s imminent crash, to have rigorous studies that evaluate all these considerations jointly, and in sufficient numerical detail so that the necessary tradeoffs can be explicitly weighed, one against the other. Absent such an investigation, however, looking at the empirical evidence as I have just done fails to convince that China’s economy must crash soon.

However, studies are available that measure increased statistical likelihood of a sudden permanent slowdown once developing economies reach a certain level of per capita GDP, regardless of the fine details in the structure of those economies. This “Middle Income Trap” might catch China.

World Bank, 2012: China and the Middle Income Trap

World Bank, 2012. China 2030: Building a Modern, Harmonious, and Creative High-Income Society

Among the most influential of such studies is that by The World Bank and the Development Research Center of China’s State Council, where a simple chart makes the key point: Who has been trapped at a Middle Income level, and who hasn’t?

In this chart each dot is an economy. Economies that have succeeded appear in the upper part of the picture; those that have failed, in the lower. In the chart the 45-degree line through the origin shows economies that by 2008 were only in the same position relative to the US as they had been in 1960. Thus, although those economies grew, they did so only at the same pace as the lead economy; they failed to improve from their initial position. Economies appearing below the 45-degree line did worse — they fell further behind even when starting out relatively poor. The World Bank report argues that if one divides up relative incomes, not unreasonably, into groups of low, middle, and high, then by 2008 only 13 economies had broken out of the Middle Income Trap. The remaining 88 were trapped.

Identifying the key common characteristics of the 13 successes will indicate whether China can evade the Middle Income Trap. In my view that lucky 13 fell into three categories:

  1. Five East Asian, Confucian tradition economies: Hong Kong China, Japan, Korea, Singapore, and Taiwan China;
  2. Four PIGS economies: Portugal, Ireland, Greece, and Spain;
  3. Four varied economies: Equatorial Guinea, Israel, Mauritius, Puerto Rico.

For policy-makers seeking to learn from the Middle Income Trap’s escapees, Group 2, the collection of PIGS economies, is almost surely not where one would go. Those economies had grown through unsustainable credit or debt expansion; they are hardly examples of economic success. Group 3 is varied: US economics and politics figure prominently for Israel and Puerto Rico, but not for the other two, both just small African states.

This leaves only Group 1. These five economies all share characteristics in common with China today. They are all East Asian with a strong Confucian tradition. They are all high-saving economies. They have all grown through export-oriented development, emphasizing manufacturing. None has comparative advantage in natural resources. They all see significant government intervention in their development process. None is what the West would consider a politically successful liberal democracy. They all, early on, leveraged China’s large, disciplined workforce through foreign direct investment, employment, and engagement with specific geographical parts of China. And, these last are, by definition, what China does.

(Hong Kong, Singapore, South Korea, and Taiwan are all of course much smaller than China. But the world has many more small economies than it does large.  Simply as a statistical proposition, for pretty much any criteria, one will typically find more small-ish economies than large ones.  Massive economies, moreover, have the advantage of economies of scale:  For economic growth China is likely, at the margin, to be even more successful than this already successful group of 5.)

Conclusion

The hypothesis that China’s economy will imminently come to a crash is a powerful, persuasively argued proposition. But empirical evidence fails to support that unanimity of vision. China’s economy might indeed crash. Then again, it might not. China’s economy has already surprised its many detractors for three decades. Will this time be different?

China and the Middle-Income Trap: Indiscriminate Tuna Fishing

Like a spectre, the Middle Income Trap stalks China and the rest of the world’s successful emerging economies. This Trap says that no matter how fast-growing initially, all emerging economies will slow.

(In January 2013, Google returned 400,000 references  to the term “Middle-Income Trap”; by July that number had risen to 1.3mn.)

The proposition that fast-growing economies will slow eventually is called “neoclassical convergence” — when capital-deepening has run its course and any further advance in prosperity can come only from technological progress, whether through indigenous innovation or through importing techniques from any economies still running on ahead.

But neoclassical convergence is an old idea. Moreover, its prediction is that slowdown occurs when emerging economies smoothly and gradually catch up with and achieve equality with the advanced ones. In contrast the newer hypothesis of the Middle Income Trap puts forwards two further claims: first, that the slowdown occur with a bang, not a whimper; and second, that the economy in question slows long before it attains parity with rich countries.

For studying the Middle Income Trap, certain evidence is obviously unhelpful.  For example, a sudden slowdown that occurs in a rich country: It matters hugely for economic policy in that country whether that slowdown has occurred because its labour markets have grown sclerotic, or its financial markets have seized up, or the entire economy has become uncompetitive in a globalized world. But such a slowdown is irrelevant as evidence on the Middle Income Trap.

Instead, the evidence that sheds greatest insight on the Middle Income Trap is when reality throws out examples of who has been trapped and who hasn’t. (Otherwise, the Middle Income Trap is just a Trawl — like illegal fishing for sushi that indiscriminately nets both tuna and dolphin.)

ADB - The Middle Income Trap

Asia Development Bank, 2011. Realizing the Asian Century.

The Asian Development Bank provides a dramatic graphic on this.

World Bank, 2012:  China and the Middle Income Trap

World Bank, 2012. China 2030: Building a Modern, Harmonious, and Creative High-Income Society

The World Bank provides another.

This World Bank evidence, of course, is consistent with and elaborates usefully on the ADB example. Here, the 45-degree line shows economies that by 2008 were only in the same position relative to the US as they had been in 1960. Thus, although those economies grew, they did so only at the same pace as the most advanced economy. For these economies, the advantage of backwardness, the picking of low-hanging fruit, the catch up that was supposed to happen — none of these helped.

Economies appearing below the 45-degree line did even worse — they fell even further behind even when starting out relatively poor, i.e., even when they were the ones that could ill afford to do so. The World Bank report says this Figure shows how if one divides up relative incomes, not unreasonably, into groups of low, middle, and high, then by 2008 only 13 economies had managed to break out of the Middle Income Trap, from the 101 already middle-income in 1960.

Stephanie Flanders read between the lines of the World Bank’s report to bring out what the World Bank would not explicitly announce.  This is the chart that sounds the clarion call: China cannot hope to evade the Middle Income Trap without becoming “more like us”.

While considerable evidence continues to accumulate on the Middle Income Trap (e.g., Eichengreen, Park, and Shin, 2013), let me pause to read this chart a little bit more. The 13 successes that have left behind the other Middle Income languishees? This lucky 13 fall into three groups:

  1. Five East Asian, Confucian tradition economies: Hong Kong China, Japan, Korea, Singapore, and Taiwan China;
  2. Four PIGS economies: Portugal, Ireland, Greece, and Spain;
  3. Four quite varied economies: Equatorial Guinea, Israel, Mauritius, Puerto Rico

For the policy-makers seeking to tease valuable lessons out of the escapees: Group 2, the PIGS economies, is almost surely not where one would want to go. Group 3, I hope other observers will be able to find useful commonality; I cannot.

Group 1? Things actually look pretty good for China.

China’s Journey to the West

China – You have a serious public relations challenge.

Journey_to_the_west-Stuart_Ng

Journey to the West – by Stuart Ng (used with permission)

Most of the world finds economic relations with China a complete puzzle. No one really understands “peaceful rise”. Or, worse, they judge it empty rhetoric, inconsistent with many of China’s actions on foreign policy. Many Westerners fret that China’s economic growth endangers their livelihoods. And, even if, compared to the risk to their jobs, the notion of a globalized world is abstract and remote, ordinary citizens everywhere are routinely told that the rise of China has destabilized that thing known as the global economy.

On global imbalance, for instance, no matter how often Chairman Ben Bernanke says “The United States must increase its national saving rate [...while at the same time] surplus countries, including most Asian economies, must act [...] to raise domestic demand”, what grabs attention instead is when Western newspaper headlines shrilly announce “Bernanke says foreign investors fuelled crisis”, or when Niall Ferguson proclaims “The Asian savings glut was thus the underlying cause of the surge in bank lending, bond issuance, [...] new derivative contracts [...], and the hedge-fund population explosion.”

If I were watching all this from within China, my reaction might well be puzzled incomprehension. After all, my first thoughts must be that China is the economy that since 1979 has grown an average of 9% annually; has lifted over 600mn of its people out of extreme poverty—more than 100% of what the world as a whole has done in total; has single-handedly pulled the world’s economic center of gravity 5,000km eastwards, yanking that economic center off its moorings held firm throughout the 1980s in the middle of the Atlantic Ocean and placing it on a trajectory hurtling towards East Asia.

I would be thinking that those involved in the study and practice of economic development must know how tough it is to grow even small- or medium-sized economies. But for three decades now China, the world’s most populous economy, has racked up the world’s most rapid growth rates and delivered out of extreme poverty one and half times the population of the US: to paraphrase Kishore Mahbubani, that is like seeing the fattest kid in school just win the 110m hurdles and the marathon.

Sure, there are sceptics, both foreign and domestic. Dramatic changes such as in China since 1979 couldn’t occur without detractors and doubters and unintended dislocations. Naysayers—from Nobel Prize-winners in the West through China’s own very vocal domestic critics through small-town fortune-tellers in the East—forebodingly predict China’s imminent slowdown. They have been doing so every single year for the last three decades. One day, they might even be right.

But naysaying is quite different from actively blaming China’s economic development for global economic instability in general and for one’s economic insecurity in particular. The German Marshall Foundation’s Survey on Transatlantic Trends recently reported that while 76% of Americans aged 18-24 say Asia is the most important region for their national interest, 63% of Americans say that China represents economic threat—double the number who say China is more an economic opportunity. Stop for a moment to think how strange this is: If any nation state had within it a region that was single-handedly reducing national poverty, by itself helping stabilize the nation against economic downturn, and on average accounting for half the nation’s growth, that region would be celebrated for its economic leadership, not viewed with suspicion for distorting and unbalancing the national economy. Yet, change “national” to “global” and “a region” to “China”, and the perspective completely changes.

Even the charge that this is because China artificially keeps its currency under-valued rings hollow when a 2011 IMF study finds that a 20% appreciation of the RMB would lead to a fall in China’s GDP of 2-3% in the short term and of 9% in the medium term, with only about a 0.1% improvement in US or Euro area GDP throughout: A lot of pain, with hardly any gain.

China’s continued economic progress depends not only on China’s correcting its internal imbalances but on China honestly and accurately telling the world what China is about. If not, US lawmakers, appealing to the worst populist sentiment and brandishing global hegemony credentials, will arm-twist international policy institutions into the worst possible protectionist outcome for the world.

China has to convince the world that in the global economy China is committed stakeholder, not innocent bystander. China’s leadership well understands that although the nation invests more than 50% of its GDP—a rate many international critics suggest unsustainable—more than 200mn Chinese citizens, half the population of either the US or the European Union, continue to live in absolute poverty: these people still need technology and machines to become productive.

China’s leadership well understands that China’s income inequality is high because east-west, rural-urban income differences are so large. China’s inequality will fall dramatically when China invests more in transportation infrastructure, bringing the poorest western parts of the country into greater engagement with the global economy and, indeed, with the rest of China. That investment will also relieve the pressures along the east coast of over-crowding, excessively high wages, and pollution; and counter-balance the political strength of east coast manufacturing and exporting interests.

China’s leadership well understands that on the demographic challenge in China’s aging population, having 340mn more pensioners practising taiji in the park is perfectly OK, compared to having 100mn young men unable to find gainful employment, angry at the West and potentially seeking refuge in religious fundamentalism.

China’s leadership well understands that just as US domestic shale gas and oil have now removed any pretence of a US green priority, it will be good for business, good for China, and indeed good for the world, that China powers ahead on its own renewable energy and frugal technology agenda.

But what China’s leadership seems not to grasp fully is that what the world wants from China is not only “peaceful rise” but global leadership. In the eyes of the world the opposite of “peaceful rise” is not “dominating hegemony” but “responsible stakeholder”. So, if the US and the rest of the West practice protectionism against your sovereign wealth funds and those of other eastern nations, driving you away from real investment and towards buying risky government paper, well, raise a stink about it. Appeal to the court of world opinion: You improve your credibility, and others will be grateful for how you help everyone by making sure the global economy remains open and transparent. When Western criticism of your economic policy is misdirected, explain why, don’t just publicly agree but then privately do something else. Continue to show us you are serious on foreign relations by having your nation’s elites communicate openly with the rest of the world, not just provide technocratic, engineering solutions to economic problems. The rigor, care, and orderliness with which you now train and select future generations of your national leaders is unmatched anywhere else, except perhaps in some of the world’s most successful, longest-running institutions: But a strong foreign relations presence in China’s top leadership has not, for decades now, figured prominently, the same way that Western governments frontline a UK Foreign Secretary or a US Secretary of State.

Convince the world that your vision is credible of a peaceful growing world economy, free from global hegemony, open to trade that will benefit all, rich and poor worldwide.

Spend more time telling us, because the world wants to know.

(A Chinese language version of this was published in the International Forum, China People’s Daily, Wednesday 30 January 2013.)

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