DannyQuah

Making large things visible to the human eye

Category Archives: Asia

Global Tensions from a Rising East

Will the East slow before it counts? Is the East only big enough to be culpable but not mature enough to be responsible?


[TEDxLSE - Danny Quah - Global Tensions from a Rising East, 17 March 2012]

Today I want to talk to you about the rise of the East, the shifting global economy. Most of us, at different levels, are aware of such changes going on around us. We might have heard about how all iPhones, while lovingly designed in California, are actually manufactured in Shenzhen China. We might have heard about how the Eurozone looked East for rescue on its sovereign-debt problems. We might have read newspaper editorials reflect on how the decade since 9/11 has been one where the three most important words for the US have emerged to be, no, not “major terrorist attack” but “Made in China”.

The questions I want to explore with you are two: Will the East slow down before the East can matter for the world? In the current economic crises that have haunted the world since the mid-2000s, that some have blamed on Asian Thrift and the resulting global imbalances, is the East only large enough to be culpable but not mature enough to be responsible?

The fact is undisputed that the developed economies continue to hold the world’s primary spheres of political influence: Thus, the reasoning goes, if the rise of the emerging economies — the Great Shift East — challenges anything in the global order, that challenge can be only apparent and its perception only transient. The emerging economies’ fast growth is nothing more than their picking low-hanging fruit, i.e., doing the easy things that allow economic development. Emerging economies will slow long before they count. After all, with the export-oriented development strategies that so many emerging economies have undertaken, if the developed countries were to stop consuming and importing, surely growth in the emerging economies would grind to a halt.

In this presentation, I will address two broad sets of issues. First, what are the already-extant contours of the Great Shift East, and what is the likelihood of their reversal? I will conclude that those changes are more pronounced and more entrenched — and thus less reversible — than might at first appear and certainly so when compared to other recent historical episodes. This holds enormous promise for improving the lot of humanity: the Great Shift East will continue to lift out of deep absolute poverty hundreds of millions of the world’s very poorest people.

These changes, however, take nothing away from how it is the developed countries that will remain the centre of global political influence. As a result the Great Shift East will produce massive global economic and political misalignment: the world’s economic and political centres of gravity will separate and drift further apart. And that, in turn, will raise staggering challenges: these latter comprise the other focus of my presentation. How will the global political system adjust to these ongoing economic changes on the scale that have already occurred and will almost surely continue?

How we miss the Great Shift East

Many well-known facts are, in actuality, false. One such is how the Great Wall of China is humanity’s only construction visible from outer space.  Another is how Marie Antoinette said, “Let them eat cake.”

The Great Shift East, 1980-2050

The Great Shift East, 1980-2050

Conversely, many facts actually true are obscure and misunderstood. For some of these facts, that fate is perhaps well-deserved, as a number of scientific truths cannot even be stated in everyday language. Certain other facts that nearly everyone considers obvious or well-known have boundaries that are indistinct and, as a result, unhelpfully permit both hyperbole and scepticism. One of the goals of research should be to map out those boundaries, so that both intellectual understanding and policy debate can be based on evidence rather than speculation.

The Rise of The East is one of those well-known but misunderstood facts. Sufficiently many books, newspaper articles, and TV programs have carried this meme to where hardly anyone can now plead ignorance of it. But enough ambiguity remains, so observers are free to project onto the idea both their best hopes and their worst fears. Not helpful in this regard is where characterizations of this Great Shift East — caricature, stylized, divorced from hard empirical evidence, insufficiently accurate — impersonate as fact. These simultaneously fan alarm, invite ridicule, and risk credibility.

A concrete and straightforward illustration of the Great Shift East is, therefore, both helpful and needed. “The Global Economy’s Shifting Centre of Gravity” provided just that in the clearest and most direct way I could write down. I am pleased that others — on a panel of scholars and practitioners both — think I have done a good job with the idea.
GPPN Best Article Prize

Considerable previous research had, of course, already been published on the empirics of economic growth. However, that more traditional research focused on countries’ per capita incomes—because that’s what theoretical models of growth sought to explain—and eschewed location, co-movement, and national identity, in favor of anonymized subscripts in a statistical cross section. By maintaining a discipline of empirical research only when driven by theory, arguably, economics took its eye off what really mattered in the shifting global economy, leaving that big picture instead to political scientists, international relations scholars, and investment bankers.

In some of my earlier work on the cross section of country growth, I was even told to take out economies like China or Singapore, because they were obviously outliers and unrepresentative. But being outliers and unrepresentative, it struck me, was exactly why they were interesting. While “The Global Economy’s Shifting Centre of Gravity” had a simple goal, it also got to bring back in all these other considerations of why the global economy needs to be understood as an entirety, not just as a bunch of economies taken in isolation. Otherwise, it was like trying to understand cloud formation by studying water molecules.

We now know that in a rush, the world went from being centred on the Transatlantic Axis, with BRICs merely a catchphrase, to where the BRICs conceit became a primary organizing principle for high-level international policy making, multi-trillion dollar portfolio investment, and geopolitical analysis. But, caught in that same rush, the 2008 Global Financial Crisis, significant although it already was on its own, provided tabula rasa for revisionist interpretation: The 2008 Financial Crisis morphed to be merely Transatlantic, rather than Global. The 2008 Financial Crisis reflected the Decline of The West, simultaneous with the Rise of The East. The 2008 Financial Crisis was caused by global imbalances resulting from Asian Thrift, i.e., East Asians’ newly endowed with the financial clout but not the political maturity to be responsible in their management of international trade.

As historical reality unfolded, so too grew fear, uncertainty, doubt, and pushback.  The German Marshall Foundation’s 2011 Transatlantic Trends survey found the majority of Americans reckoning Asia more important than Europe to their national interests, with the proportion rising as high as 70% among Americans aged 18-34. But the same survey also found that 63% of Americans viewed China as an economic threat, i.e., double the number who considered China an economic opportunity.

Dinner with Foreigners

Asians themselves remain sharply divided on the Great Shift East. On the one hand, thinkers like Kishore Mahbubani have long argued that the world’s policy-making has unhelpfully lagged a reality where the East is rapidly growing in importance. On the other hand, Eastern decision-makers have continued to look West for all levels of engagement. Powerful Eastern sovereign wealth funds remain enamoured of investment in locations around the Transatlantic Axis even as Western governments look back at them with suspicion. I know smart, articulate Singaporeans who turned down Ivy League universities to go instead to Beida, but a majority of Asians still more highly value education in the West, whether for the liberal arts training or the business and social connections. At a much lower level of financial commitment, the Wall Street Journal just this month described a dating agency that charged Chinese women US$600 to meet Western men who got to sign up for free (the ad actually said “Foreigner”, but few people I spoke to thought that included Indonesian or Filipino men). What Great Shift East when all the exports are just one way?

The political scientist and international relations scholar Joseph Nye speaks of nations having “soft power”, in contrast to the hard power of obvious economic or military strength. “Soft power” is the ability to convince others to want the same thing you want, without buying them off or threatening to shoot them. While economic power has indeed moved, the important tokens of soft power, and thus of geopolitical balance, remain firmly moored and continue to attract. Soon the economic center of the world will be 10 timezones east of where its political center remains. This misalignment is historically never propitious, whether geopolitical in the sense of Paul Kennedy’s Rise and Fall of Great Powers, or within countries where it often manifests in conflict between ethnic or religious groups.

The Great Shift East, therefore, is even more than usual a work in progress. Measuring it — making a large fact visible to the human eye — is just a first item of business.

OFA – Be a little foolish, be a little different

PFS to celebrate its 200th year

PFS to celebrate its 200th year – from The Star newspaper

When I left Penang for university in the US, I also left Penang Free School before the school year ended. I felt I did so without disrupting much the life of the School: I wasn’t editor of the School magazine. I wasn’t Break Monitor, Class Monitor, Traffic Warden, House Prefect, or School Prefect. I didn’t captain any School sports team. In some subjects, I would usually get close to failing marks — ok, not in “some subjects” but in Art, specifically. Fellow students who were my seniors would routinely reject my writing submissions to school publications for my being too flippant (I had to look up what “flippant” meant the first time I heard back from one editor). School teachers would openly warn me in class for being disruptive, every so often. Fellow students who were my seniors and who trained with me in gymnastics would ask me why I kept coming back as I never seemed to get any stronger, faster, or better.

At PFS I hadn’t failed at everything. But I wasn’t a remarkable student at PFS. In the eyes of people in charge, I was in the middle of the pack. That felt about right to me as that’s where most people are, generally. Where I’d not done well at School, I figured perhaps those things didn’t matter.

I’m now Professor of Economics at the LSE. My CV makes plain what that involves. But compared to when I was a PFS student, I have also had to do a few things where I have felt a little more exposed — no longer so much middle of the pack — and that are less obviously associated with my job but perhaps more interesting. These are not typically things that come with being a Professor. So I undertake added risks when I take them on.

Before thousands of graduating university students and their families, for three years as Head of Department for Economics at LSE, I announced the names of fresh graduates and congratulated them as they undertook the last of their university rites. Over decades of teaching and travelling, I lectured to tens of thousands of people — in New Zealand, Beijing, Southeast Asia, the Gulf, and nations in between all the way through to North and South America. CNN, Reuters, Bloomberg, and the BBC tell me they broadcast to hundreds of millions of people worldwide — so I could potentially have spoken to some reasonable fraction of that many people each time I’ve appeared on TV or radio from London.

My research has, over the years, varied from the extremely mathematical and obscure on the one hand, to the politically more visible on the other. As a consequence, I’ve gotten feedback on what I do from many different segments of society. Some of my writings have been translated into 18 different languages. What I work on now, the rise of the East in the global economy, gets more than usually varied reactions. Some tell me to hide away this work:

‘Americans, as is, are already paranoid enough, just short of trumping up a shooting war with China. Can you please tone down your “research”, and better yet file it in your basement and wait for 50 years before publishing them? Please let the world be a more peaceful place.’

counts among the gentler of messages I regularly receive. Other feedback can be slightly more encouraging.

Not that I think I have to be ready for my own shooting war, but I also train regularly in taekwon-do, now as a second-dan blackbelt. Five years after I started taekwon-do here in the UK, I managed to fight my way to being runner-up in sparring at the British championships and I managed to become British champion in patterns.

When I correlate the things I do now that draw for me the greatest sense of achievement with what I’d previously done well at PFS, I’m struck by how orthogonal these two sets of attributes are. At PFS I’d excelled in mathematics and science, but that is now only a small part of what I need to do to be a productive contributing member of the community. What matters more instead? A good sense of of what is artistically compelling and linguistically convincing. A political awareness of what ought to matter to people in international society. Articulatenesss in writing and speaking, and an ability to debate effectively. Physical acuity and a feeling of confidence and security in my own skin.

What is strange is that those characteristics I now find most valuable are the same as those where PFS had challenged me most and found me most wanting, exactly those areas I’d been most dismissive of when I’d been at PFS (they were only “soft skills”).

Perhaps PFS does this to everyone, although in different ways. PFS is an educational institution of such deep and profound historical achievement, it ferrets out those areas where you the student need most to build, and then it challenges you there. How you respond — do you turn your back and say it’s all meaningless; do you say, let me learn so I can be better — is up to you.

At PFS, as in most of life, you only get one go-round. You can make that one pass-through be everything to you, or you can make it mean much less. On the one hand, this lesson I’ve learnt about PFS as an institution is awesomely frightening: no one there is going to give you easy answers but you can be sure they’ll be there to ask you the hard questions. On the other hand, this realization is staggeringly optimistic: PFS challenges each of us to leave as better people than when we began at the School. And by being a little foolish — admitting we don’t know everything even as we don’t pander to everything old people say they want us to be — we can each indeed end up a little better.

(This appears in FIDELIS, the 200th anniversary commemorative book of the Old Frees Association.)

Take back from those even poorer

What -ism is it when you castigate your top 1%


From: Vanity Fair, May 2011

and try to aid your middle class …

How the US lost out on iPhone work
From: New York Times, 22 January 2012

… by taking back from those even poorer elsewhere in the world.

From: Asia Development Bank: Asia’s Poor. Financial Crisis? Every day.

A small proposal to rebalance the global economy: Just let China grow

Many take as fact that the current pattern of global imbalances — large and persistent trade deficits and surpluses across different parts of the world, eventually unsustainable — is due to China and the rest of East Asia consuming too little and saving too much. Since the global economy is a closed trading system, trade deficits and surpluses across all national economies must sum exactly to zero always. Therefore, that one part of the world saves too much and thereby runs trade surpluses means other parts of the world — notably the US — must be running trade deficits.

However, just because deficits and surpluses are tightly inter-connected does not mean that trade surpluses in China, say, have been responsible for US trade deficits: absent further information, causality could well have flowed in the opposite direction. Moreover, China’s high savings might be dynamically welfare-optimizing for its citizens — for instance, private enterprise in China might find self-accumulation the only way to generate investment funds — and, at the same time, only minimally if at all welfare-reducing for already-rich US citizens. Finally, it might be that global imbalances should best be viewed not as a bilateral (US-China) problem but instead a multi-lateral one.

Be all that as it may, many US policy-makers focusing on US trade deficits and China’s trade surpluses urge policy actions against China to rebalance the global economy. Those policy actions include punitive tariffs against Chinese imports and tagging China a currency-manipulator — and thus moving it yet further from official free-market status. Some observers remark that without such external pressure, China will find it domestically too difficult to shift away from its reliance on export promotion, infrastructure investment, and restrained consumption towards a more balanced growth path (e.g., Michael Pettis, Nouriel Roubini, Martin Wolf).

The problem: To raise China’s domestic aggregate demand, especially consumption. The difficulty: China’s consumption cannot increase quickly enough to compensate for the shortfall in aggregate demand should both investment and exports decline. The danger: a hard landing for China and the global economy.

I want to suggest that such a re-direction need not be that difficult. My proposal: Let China grow rich as quickly as possible. Why might this do the trick?

Regional incomes in China

First, consumption within China is already rising faster than both income and investment, provided that we look at those parts of China where incomes per head exceed US$8,800 (Figures 1 and 2). Of course, China’s current per capita income overall now is only US$2200, less than 6% that of the US. What this suggests, however, is as China’s income grows, its overall savings rate will naturally fall. The right policy is to encourage growth, not adopt punitive actions that might retard that growth.

China's regional consumption

Figure 2a China’s regional consumption

(I took Figures 1-3 from a term paper that Daisy Wang wrote for my course Ec204 The Global Economy at the LSE-PKU Summer School, August 2011. The underlying data are from China’s National Bureau of Statistics.)

Second, as John Ross reminds us, investment too is aggregate demand. But, third, continuing to increase China’s investment in, among other things, infrastructure and transportation can help further as it allows those western, poorer regions in China (again Figure 2) better to integrate both nationally and globally, and thus become richer through raising demand and productivity.

China’s regional investment

Figure 2b China’s regional investment

While many observers make much of China’s high investment to income ratio, it is useful to note that that ratio is high not just because its numerator is being driven up, but also because the denominator remains so low. The right state variable for dynamic analysis in a neoclassical growth model is capital per head, not capital per unit of income. And here (Figure 3):

China's  per capita investment

Figure 3 China’s per capita investment

we see how China still has a long way to go on the upside.

Finally, Figure 4:

“The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

Figure 4: “The Chinese led the way in the rush to the Boxing Day sales, flocking to department stores to grab designer goods”, The Times of London, 27 December 2011

However much anyone might doubt those China statistics I used above, auxiliary evidence shows that rich Chinese consumers have no difficulty increasing consumption.

The evidence I’ve described doesn’t of course say that global imbalances can be easily erased through just more economic growth in China. However, the algebraic signs of the required relations seem to me to point at least in the right direction. Careful work to quantify these effects might end up showing that their magnitudes aren’t large enough. But, as far as I know, that calibration has not been done, which makes me wonder why some observers can be so certain that China’s current growth trajectory can only exacerbate global imbalances.

When China becomes rich, that will also dramatically lower inequality in the world — globally, the difference in incomes per head across nations overwhelms that across individuals within a single country. No one I know arguing for a more egalitarian society also says that that push for equality should stop at their nation’s borders and be kept from applying seamlessly across humanity’s 7 billion.


Also:

  1. “A small proposal to rebalance the global economy:  Just let China grow” EconoMonitor, 30 December 2011
  2.  “China’s growth could address imbalance”, China.org.cn, 02 January 2012
  3.  “Just let China grow”, The Edge Malaysia, 09 January 2012, p. 64
  4. 恢复全球经济平衡的一个小建议:让中国尽快变得富有, Blog.Sina, 13 January 2012
  5. Reprinted “A small proposal to rebalance the global economy:  Just let China grow”, Global Policy Journal, 11 October 2012

Prof M. E. Cox on “A new world economic order? Views from the LSE”

At the turn of the millennium in a building overlooking London’s Fleet Street, Jim O’Neill and colleagues at Goldman Sachs sat chewing on BRICs. Was BRIC just a clever catchphrase to explain where global investment prospects looked promising? Did it make good marketing sense to take a stance explicitly on Brazil, Russia, India, and China — with the risk that one’s views might then get obviously challenged by events? Why not simply dust off a variant of some broad generalization, say, “emerging markets”, and be done with it?

However the discussion went, in the event, the decision was to go ahead and proclaim BRICs the new global growth frontier.

In the decade since, the BRIC conceit has gone from strength to strength. It has figured not only in multi-billion dollar financial investments, but also—and perhaps even more importantly—in geopolitical analysis and international policy debate. The BRIC idea is now familiar to school-children worldwide, from Australia to Argentina — young people who were not yet born when the terminology was first hatched. In the reality (rather than just the idea) driven in part by charismatic leadership in different parts of the BRICs and in part by China’s staggering success in economic growth, poverty reduction, and export prowess, BRICs have robbed the US of its 21st-century unipolar moment, rewritten the rules of East-West global engagement, and reshaped the world’s patterns of trade, the world’s distribution of economic activity, and the world’s landscape of poverty.

The Economist newspaper: Asia's Economic Weight, 25 May 2010

The Economist newspaper: Asia's Economic Weight, 25 May 2010

Scholars of International Relations, International History, Global Governance, Management, and World Politics likely saw the coming shape of these new challenges far sooner than did other disciplines. Those scholars had grown up intellectually already familiar with Paul Kennedy and the rise and fall of great powers, with the Cold War struggle between East and West, with the promise of the US’s unipolar moment in global history. Such events and ideas had primed those scholars to grasp quickly the significance of BRICs.

In the guest post that follows, my good friend Professor Michael Cox of LSE’s International Relations Department describes a convergence between international relations, history, management, international development, and economics to help us understand the post-BRIC economic and political state of the world. He shows how putting together rigorous ideas from cross-disciplinary social science — something the LSE seeks to do more than perhaps any other academic institution in the world — we get better insight on the global economy. For me, his essay is more than just a description of what the LSE does; his essay establishes why to understand the new world economic order, it is essential to traverse many different social science disciplines.


“A new world economic order?  Views from the LSE” by Prof. M. E. Cox, December 2011

Memory can often play  tricks on even the most intelligent of  human beings, especially in an age of rapid unexpected change when all the  normal signposts have been removed or simply washed away by the tides of history. Certainly, for those who have grown up over the last ten,  turbulent years, the world today  is a very different looking place to what it was  back at the turn of the century. Indeed, inconceivable though it may seem now, most of us in the developed West were then in the best of moods – riding high on the back of three great revolutions in international affairs.

The first and most important of these  revolutions was of course the  final triumph of the  market in the wake of the global collapse of the centrally planned  alternative at the end of the 1980s and the beginning of the nineties. Initially Poland and Central Europe, then Russia,  and finally even  ‘communist’  China,  discovered that they had no alternative but to   join the only economic club in town – the one run by the West, organized on western principles, and according to critics,  largely designed to further the interests of the West. Nobody liked to say it too loudly at the time for fear of sounding “triumphalist”.  But for many during the heady days of the 1990s it really did seem as if the West was  “best” and would, for this very obvious reason,  remain the axis around which the world would rotate for the foreseeable future.

The second great core assumption – born of a much longer revolution in world affairs – related to the United States, that most ‘indispensable’  of nations which instead of doing what all other great powers had done in the past (that is decline) did quite the opposite. In fact, the core belief  after the end  of the USSR was that we were now living in what Charles Krauthammer called a  “unipolar   moment”,   one which he felt  would endure for a great deal of time:  in part  because the US  could lay claim to  the most efficient economy in the world;  in part because it had constructed   the  greatest military ever known to man;  and in part because none of the other powers in the world   – China included – had any chance of ever catching up with the United States. A new Rome was sitting on the Potomac and hardly anybody, save the oddball and the eccentric,   doubted its capacity to remain the shining city on the hill for many decades to come.

The third important revolution was the one that had changed the face of Europe in 1989 when communism ignominiously collapsed leaving hardly anything behind it  except a lot of pollution, many unwanted tanks, and plenty of useless factories producing things that nobody wanted  to buy. The end of the Cold War was undoubtedly Europe’s great chance,  and its leaders back then – Jacques Delors in particular –  enthusiastically grabbed  at the  historic opportunity. What they created was impressive to say  the least. Indeed, by the beginning of the new century, Europe was becoming a serious point of global  reference  equipped with its own  currency, the largest market in the world, a lot  of  new members (not all of them perfect to be sure),  and the outlines  of a ‘Common Foreign and Security  Policy’ that would soon make it a major  player on the international stage. Even some Americans bought into this new vision, including, significantly,  Charles Kupchan former Director for European Affairs in the Clinton administration. America would not be the dominant  actor in the 21st century he opined. Nor China or the Islamic world. Rather the future belonged to an integrating, dynamic and increasingly prosperous   Europe. The next century was  its  for the taking.

How and why this optimism verging on the hubristic  turned into its opposite in the years between  2000 and 2010 has already been the subject of much feverish analysis and speculation. But at least  three  broad explanations have been advanced to help us think seriously about what Time magazine not long ago  characterized  as the  ‘decade from hell’.

One  explanation,  favoured by most by historians and social theorists,  relates the fall from grace to the much earlier triumph of the West and the extraordinary lack of caution this then seemed to induce amongst  most western policy-makers. Indeed,   having  won so much over such a long period of time stretching right back to the deregulating 1970s through  to  the  hyper-globalizing 1990s,  nothing now looked to be impossible. And  even the impossible now seemed achievable. The liberation of Iraq? No  problem said the all-powerful Americans with their invincible military machine.  Constant economic growth?  Easily achieved on the back  of cheap money  and ever more complex  financial instruments. Everybody a home owner?  Why not,  even if it meant a pile up of  unsustainable debt?  Economic crises? A thing of the past.  And the future?  Not perfect of course. But at least as perfect as it was  ever going to be in an imperfect world. Happy days were here again and nobody was prepared  to listen to naysayers like Dr Doom (aka Nouriel Roubini)   or his foreign  policy counterparts who warned that America’s unnecessary “war of choice” in Iraq would end up costing the US its international standing, a lot of blood,  and  a vast amount of  treasure ($3 trillion so far).

A second large explanation  connects more directly to  changes in the shape of the world  economy. Here,  Goldman Sachs does appear to have got it right back in 2001 when it predicted (against the then prevailing  orthodoxy) that the future belonged to the emerging  BRIC economies – Brazil, Russia, India, and of course,  China.  But what  Goldman  did not predict  however was  the sheer speed with which this shift was to take place and the  main  reasons why it did so. Goldman recall worked on a twenty five,  even a fifty  year time line: it also assumed steady growth for all countries in the international economy. What it did not anticipate  was firstly  the pace of China’s rise and the   impact this then had on the rest of the world economy; and  secondly  what happened  to the international financial system in  2008 when the established western economies suffered  a series of  smashing body blows. It was this ‘Black Swan’ event more than anything else that was to be the real turning-point. Before then the EU  and the US could legitimately claim  that they continued to represent the future. After 2008,  such a claim sounded frankly spurious.

The final reason for the great shift  had  less to do with economic shifts  and  more  with politics and  a  marked change in the capacity of governments to manage the world around them. Whether this happened  because of a decline in quality of the  political class, or because the world was becoming almost impossible to manage anyway,  remains a  moot question.  The fact remains that as the new century wore on it was becoming increasingly clear that  the West in particular was   facing a set of challenges to which it  simply did not have any easy answers. And nowhere was this becoming more apparent than  in that once “steady as she goes”, rather unexciting place,  known as the   European Union. The crisis began slowly but then accelerated most rapidly after 2008 leaving a trail of failed governments  in its wake (at least eight fell between 2008 and 2010). Nor was this all. As governments fell and the crisis deepened,  not only did belief in the European project  begin to ebb,  but  many began to wonder about normal politics itself. The situation was not much better in the United States either. Indeed, having elected a rather impressive man to the White House  in 2008,  three years on ordinary Americans were beginning to lose faith in the political process and  a belief in that very American idea that the future would always be better than the past.

We  live  in other words   not just in ‘interesting times‘,  but  in quite extraordinary times where few in the West  now  appear  to  have much confidence any longer in the notion of the West;  where policy leaders on both sides of the Atlantic realize how limited their options are;  where a once imperial America now talks in  humbling  terms of ‘leading from behind’ and adjusting to a new multi-polar world order;  and where few have any idea at all about what the seismic economic changes now taking place in the world economy  will mean for either global prosperity or international stability.

Time therefore to take time out to reflect on how these multiple and most unexpected changes  will impact on  the global political economy and the  business world. At least five questions need to be answered –  and will be,  we hope, in three innovative  courses to be delivered at the world famous LSE Executive Summer School in June 2012:

  1. Professor Saul Estrin and Professor Danny Quah,  A Shifting World Economy:  Business Strategies to Thrive
  2. Dr Andrew Walter and Dr Jeff Chwieroth,  Global Finance in Crisis: Causes, Consequences, Futures
  3. Dr. Gianluca Benigno and Dr. Keyu Jin (and guest lecturer Nobel Laureate 2010, Prof. Chris Pissarides), Macroeconomic Challenges of Global Imbalances

The first  question  – very much in the LSE tradition of drilling down into core issues – has to do with  the basic cause or causes  of our current crisis. Here one can pick from a variety of explanations –  some broader  ones as  suggested above;  other of a more specific economic character rooted in an out-of-control system  of  deregulated financial markets, global imbalances, cheap money, extensive home ownership, and  growing income inequalities; a world  moreover where  governments  before the crisis either did not seem  to understood what was happening, or  even if they did, did not have the power or the instruments at their disposal  to do much to change  the course of history.

The second question relates to the past, present and the future of the world economy. Here the biggest question of all is to what degree is this particular crisis different to those that have happened at regular intervals since World War II?  And if it is different, then why should this be so? Furthermore, why has it since proven so difficult to reform a system that has caused so much economic dislocation? Why moreover has it has proven so  difficult for  the West to get out of the crisis? Certainly, there seem to be  very few optimists around in the West just now. Indeed, one of the most striking  things about the present crisis is that whereas people can’t stop talking about it in the West, in countries like China and India they wonder what all the fuss is about – at least for the time being.

The third  question concerns governance at both national and international levels.   There are, as all three courses reveal,  many fascinating issues raised by the present economic conjuncture. But one of the most critical  has to do with the way in which world manages – or tries to manage – an increasingly integrated globalized economy where states still matter a lot,  but where  decisions taken  by  ‘markets’  seem to matter a whole lot more. This in turn raises  many more  questions,  not the least important of which is whether or not governments have very much power at all; and in turn whether they are willing  to give up what power they have  to construct some  new financial architecture which is far more in tune with the modern age?

The fourth question relates  to that very simple but all-important issue: who wins and who loses in the new world economic order? The  “rest”  we are told look set to be winners;  and amongst the “rest”,  Asia and China in particular  seem to be especially well placed to take advantage of the new world in the making. Yet there is still a  very long way to go before we can talk of a permanent power shift.  Even rising China it is suggested in these courses has to take care. After all, its prosperity upon which many countries in the international economy now depend,   also depends on the international economy remaining buoyant and economically dynamic too.

Finally, all three courses question the idea that there are  simple explanations of ‘why we are  where we are’  today.  They are also united in insisting that there is no easy way forward. Nor to continue are they  at all   certain that the world will become either a more stable or  a more equal place in the future.  All they can   promise  is  to get those who are trying to make sense of a  rapidly shifting global economy to at least base their thinking and  their decisions – and those of their companies – on rigorous analysis; one which takes as its point of departure the inescapable  fact that while  businesses today are  confronted with very real opportunities, these are  presenting themselves in a  world where the  economic challenges are as real and as serious as anything we have seen since the 1930s.

Professor Michael Cox teaches in the  Department of International Relations at the LSE. He is also  Co-Director of LSE IDEAS and Academic Director of Executive Summer School. His main work more recently has focused on the changes in US foreign policy in an age of globalization and the impact of the financial and economic crisis on the balance of power. His most recent books include Soft Power and US Foreign Policy and  The Global 1989: Continuity and Change in World  Politics, both published in 2010. His next book will be a second edition of  his  co-edited and highly successful Oxford University Press textbook, US Foreign Policy.  This will appear in  2012.

 

Also:

  1. “BRICs have robbed the US of its 21st-century unipolar moment, rewritten the rules of East-West global engagement, and reshaped the world’s patterns of trade, the world’s distribution of economic activity, and the world’s landscape of poverty”, D. Quah, LSE Comment and Opinion, January 2012
  2. “We live in quite extraordinary times where few in the West  now  appear  to  have much confidence any longer in the notion of the West”, M. E. Cox, LSE Comment and Opinion, January 2012

The LSE Big Questions Lecture 2011: Organized Common Sense

In June 2011, I was lucky enough to deliver the inaugural LSE Big Questions Lecture. I chose to lecture on whether the East was taking over the world. I felt these changes in the world matter to everyone, and they are developments with important economic ideas surrounding them. The LSE Big Questions Lecture is targeted at 14 year-old school children in a number of London’s schools — hundreds showed up on the day. The lecture itself was televised for subsequent broadcast. The runup to this lecture involved months working with a production team at LSE: these were months of planning and rehearsing, writing and rewriting, arguing and disagreeing — on analytical content and ideas, on what 14 year-olds might find useful and understandable and memorable, on the best ways to communicate different ideas in economics and facts about the world.

Why did we do this?

As an academic economist, I study growth and distribution. I write about the shifting global economy and the rise of the East. I try to make large things visible to the human eye. I want to be considered a valuable REF contributor to my department and to the LSE.

But I also believe that these are times where economic literacy matters hugely, not least in societies that continue to hold to the ideals of liberal democracies. And there are intriguing large-scale parallels between important events now and those some time ago in history.

In 1825 Michael Faraday — perhaps the world’s greatest ever experimental scientist — initiated (but did not himself give) the first of the Royal Institution of Great Britain’s Christmas Lectures. Faraday went on to deliver 19 series altogether of these annual Lectures, his last in 1860, presenting and explaining to the British public ongoing discoveries in chemistry and electricity and magnetism.

1855 Michael Faraday - Royal Institution Christmas Lecture

The Royal Institution Christmas Lectures have continued to the present, interrupted only by World War 2. They are delivered to a general audience, notably including young people, with the aim to inform and entertain. From their beginning, these lectures proved highly popular despite the limited nature to early 19th century organised education. Since 1966 the Royal Institution Christmas Lectures have been televised. For many British households, the Christmas Lectures constitute a highlight of annual holiday family viewing. The energy and the ingenuity that go into the lectures are impressive, not least when, say, someone like Marcus du Sautoy, in his 2006 lectures, explains abstract number theory to a teenage audience.

These Royal Institution Christmas lectures provide the strongest counter-example I know to the conceit that research ideas are too difficult to explain to and too abstruse to excite the general public. Most of us just don’t work hard enough at it. So getting to deliver something the LSE Big Questions Lecture would be a challenge. But there was more.

In 1825, London had just become the world’s leading city by overtaking Beijing — vividly demonstrating the steady ongoing shift then of the world’s economic centre east to west. That year, the first modern economic crisis in history occurred — modern in the sense of not having been caused by a war. The stock market crash of 1825 took out in England alone six London banks and sixty country banks, with the badly-overextended Bank of England having to be rescued by an injection of gold from France. For students of central banking, this event became enshrined afterwards in Walter Bagehot’s Lombard Street principles for the lender-of-last-resort role in central banking.

In 1825, Faraday’s scientific discoveries were not centre-stage for the Industrial Revolution swirling about him at the time. That first Industrial Revolution — perhaps the most important event in the history of humanity — was driven by iron-making, mechanisation, and steam power, more than by electrification and chemical processing. But chemistry and electricity and magnetism — where Faraday’s contributions were manifold and central — pointed to the then-future. These would go on to provide the more enduring engine of growth for modern economic progress, not least down to what today still powers all digital technologies, significant among them cellphones and the Internet.

The Royal Institution Christmas Lectures matter in British science for providing the public knowledge into the most important exciting intellectual developments of the time. They gave the British public insight into what was new. Historians who study why a 14th-century Chinese Industrial Revolution did not occur, despite China’s more advanced science centuries prior to that in 1780 Britain, point to how science in England had always immediately connected to commercial application and public interest. This is exactly the same kind of connection that the Royal Institution Christmas Lectures make. By contrast, in China, science and technology were tightly controlled by a scholarly elite, who saw no reason to disseminate their discoveries. During the 18th-century Industrial Revolution, James Watt and Matthew Boulton had announced the English public “steam-mad”, whereas in Sung Dynasty China, time itself was considered the sole property of the Emperor.

Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

I am under no mad illusion that what I do as an academic is even remotely comparable to the achievements by these giants of scientific and technical progress from 1825. But I don’t think I’m half-bad as a lecturer. I don’t shuffle my lecture notes and lose my place in them [I don't use lecture notes]. I don’t mumble into my beard so that the audience has no idea what I just said [I'm ethnic Chinese and we don't grow beards easily]. I don’t put up Powerpoint slides crammed full with text and then just read them out word-for-word [almost all my slides are just colourful pictures].

I believe, as first told to me by my PhD advisor, economics is just “organized common sense”. I’m passionate about explaining ideas in economic policy to any audience that might remotely be able to influence our national and global conversations on improving the state of the world.

So, when asked, I gave the LSE Big Questions Lecture a go.

Guest Post – The Inaugural LSE Big Questions Lecture – by Emily May

(The original host service for this post is no longer available, but its author Emily May kindly agreed that her writeup might appear on this blog.)
5 July 2011
Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

LSE Global Governance co-director Professor Danny Quah gave a special Big Questions lecture to Year 9 students on how the world’s economy is shifting eastwards, with countries such as India and China becoming wealthier and more powerful than ever before.

With Who Wants to be a Millionaire?-style voting clickers, tug of war, jumbo pound coins and in-jokes about video games, this was never going to be your usual LSE lecture. Following a lively warm-up and introductions from a rather bashful film crew, Professor Quah took us on a whirlwind tour of the global economy – how trade works, the benefits of economic development for a country, and how economics provides a useful way to interpret the world.

Part of the audience at the Inaugural LSE Big Questions Lecture

“Did he actually just say ‘Spartans respawning - the mathematics are determinate’?”

Enlisting the help of some brave youngsters plucked from the audience, Professor Quah engagingly demonstrated how the East’s economic power is accelerating and what this means for the West. ‘The Chinese economy is growing at a rate of 10 per cent every year,’ he said, ‘which means it’s doubling in size every seven years. At this rate, our volunteer here would be 10ft tall by the time he enrols at LSE.’

We witnessed, via a striking world map on the big screen (plus a game of tug of war, just for good measure), how the emergence of the East in the last 30 years has pulled the world’s economic centre of gravity nearly 5000km from its 1980 mid-Atlantic location towards India and China.

But what does that mean for us? Well, we get an awful lot of ‘cheap stuff’. We watched a time-lapse video of a day in the life of a teenager called Charlie, who sped between his X-box (£220), PC (£330), and kicking his football (£10). All of these products were made in China. Then we learned just how much more expensive they would cost if they had been made in the UK: a whopping £3,200 for a PC, £1,760 for an Xbox, and £80 for a football.

So, the East might be making a lot more ‘cheap stuff’ than the UK, but we are getting pretty good at using innovation expertise and global collaboration to create our own products. To prove this point, award-winning entrepreneur Michael George took to the stage to describe how his new product – ‘the first ecological designer light bulb’ – was designed by his company in the UK but manufactured in China with US technology.

Despite the East’s rapid growth, its vast population – there are 50 people in East Asia for each person in the UK – means it has some catching up to do in respect of personal prosperity, as the average individual income remains at the same level as Namibia and Azerbaijan, with many people living on just 70p a day. Nevertheless, Professor Quah concluded that asking  ‘East beats West?’ is the wrong question, as the rise of the East has led to ‘the world being immeasurably better off. We need economics to help improve the lot of humanity. That is what economics is about.’

Read Professor Quah’s article ‘The Great Shift East‘.

The global economy’s shifting centre of gravity

Define the global economy’s centre of gravity to be the average location of economic activity across geographies on Earth. If you go grab incomes and geographical location data across nearly 700 identifiable places on the planet (World Development Indicators Online, Asian Development Bank, Google Earth, Brinkhoff; Grether and Mathys) you will see that in 1980 the global economy’s centre of gravity was mid-Atlantic. You will also see that by 2008, from the continuing rise of China and the rest of East Asia, that centre of gravity has drifted to a location east of Helsinki and Bucharest. Extrapolating growth in almost 700 locations across Earth, gives you the world’s economic centre of gravity shifting by 2050 to literally between India and China. Observed from Earth’s surface, that economic centre of gravity will move from its 1980 location 9300 km or 1.5 times the radius of the planet.

A graphic illustration of this is given in the Figure. The dots in black are 1980-2007; those dots reduced and in red are for 2010-2049 in an extrapolation. The center of gravity calculations are performed in 3-dimensional space and then projected onto the normal cylinder tangent to the planet at the equator.
2010.08-wm-cg-gdpp-extrap-animated-DQ
My paper with the same name as this post describes more fully the ideas here.
(Thanks to Google Earth for help with this. To transform a 3-dimensional sphere into an unfolded 2-dimensional flat plane, the mapping is not a Hilbert space projection. For one, the tangent normal cylinder is only locally linear; it is therefore not a linear space. I calculated the dynamics using R; I generated the sequence of world maps in python; and I then used gimp and ImageMagick batch-processing to produce the final animation.)

Time to save the world economy through the sheer weight of numbers

Reuters reported yesterday (Thursday 16 July 2009) that with China’s economic activity picking up in 2009Q2, the Chinese full-year 8% growth target might now be achievable.

Will China save the world?

No one can yet be sure how these latest developments will play out. Of course, upon hearing good news of this kind, nay-sayers are quick to relate how a more pessimistic picture is indicated by other numbers. [Power consumption is usually a good fallback for this - although it's not clear to me which fully fleshed-out economic theory says why that is so.]

Or some say that the good news is likely just unsustainable short-term hot money channeling into propping up only temporarily asset markets and bank lending. [Come to think of it, except for long-term trend growth, doesn't every kind of aggregate demand expansion simply prop up asset markets in the short run? And isn't increasing bank lending exactly what we're trying to do elsewhere in the world? Unsuccessfully at that? At the end of it all, any action that releases 4 trillion units of anything - such as that China has undertaken with its fiscal expansion - has got to have some slippage.]

Finally, there’s that portmanteau standby: “I just don’t trust these numbers,” instantly killing all intellectual debate. That one never grows old.

Perhaps the ambiguity in the current numbers is genuine. So look elsewhere: a historical perspective might be useful.

The 1997 Asian Currency Crisis was, up through 2008, perhaps yet the most wrenching financial and economic crisis in East and Southeast (ESE) Asia. In its concentrated impact on the region, 1997 might well have been just as severe as 2008/2009 for ESE Asia. From June 1997 to mid-January 1998 exchange rates against the US dollar of the currencies of Indonesia, South Korea, Malaysia, the Philippines, and Thailand fell by over 50%; that of Singapore, 20%. In Japan and in every single one of these economies, GDP growth turned negative in 1998, with the combined fall in these economies’ 1998 GDP amounting to 2.4% of GDP in ESE Asia the preceding year. Millions of people lost their jobs.

So, if you had been following developments in fast-growing ESE Asia up through before 1997, were then shocked by 1997’s sweep through the region, what should you have expected for how wrenching these losses were and how much they perturbed that region’s growth path? Here’s a graph of the fitted trend line through 1996 of GDP in ESE Asia (excluding Japan), then projected forwards and compared to reality post-1997:

The striking feature in this chart is how little a change in the growth path resulted from what at that time was viewed to be a dramatic downturn. Sure, the accumulated GDP under-performance from 1997 to 2006 was 5.1%. But the same calculation for the world economy overall was 11%, more than double that for ESE Asia, although the world’s pre-1996 growth rate was only 3.7% a year in contrast with ESE Asia’s 7.6%. Even before the 2008 global financial crisis, the world overall had slowed in comparison to the 4 decades before 1997. But ESE Asia, the centre of that period’s financial crisis, emerged far better than one might have expected then.

Or did it? If we exclude not just Japan but also China from ESE Asia, the graph that emerges is quite striking and a little scary:

the accumulated under-performance is then 21%! Through sheer size and economic performance, the significance of China should have been observable even from outer space. This importance of China in aggregate economic performance mirrors its single-handed reduction of the world’s poverty over the last three decades (that I’ve blogged on previously).

To emphasize further this historical point, recall that prior to 2008 the last two times the US economy went into recession was 1991 and 2001: in 1991 US GDP fell $13.7 bn. In 2001 US GDP grew US$74.1 bn. By contrast, ESE Asia generally and China in particular continued to grow throughout. Taking absolute values, and comparing these changes with those elsewhere gives this table:

All data here are in constant 2005 US dollars, evaluated at market exchange rates, not purchasing power parity – so the denomination in this comparison is what the whole world would use to buy wide-body Boeing jets, Nokia cellphones, and Italian fashion design.

True, in this comparison, China’s per capita income now stands at only 1/14th that of the US; in aggregate, the US economy is still one quarter that of the entire world. But even so and even over relatively long stretches of time (2002-2006) China was already contributing more than half of the growth to the world economy that the US was doing. In times of US and world downturns, however, that ratio rises dramatically: China contributed 3 times what the US failed to do in 1991 (again, using the absolute value of the US change in income), nearly one and a half times the US’s contribution in 2001.

Indeed, the rise of China [and to a smaller extent India] since the early 1980s has shifted the world’s economic center of gravity 1800 km – 1/3 of the planet’s radius – deeper into the Earth’s crust, away from the US, and towards the East (previously blogged). This transition accelerated in 1991 and 2001, each time the US was in recession.

So, perhaps this time, it won’t surprise that China leads the world economy out of recession. After all, it’s already done so before, quietly.

Notes: I met John Ross recently, when he and I spoke on a panel on London and the global economic crisis, but hadn’t seen his recent post on China’s dramatically shrinking trade surplus, making a similar and more current point than my own post here. I highly recommend his posting.

All data are from the World Bank’s World Development Indicators 2008. I provide more details on the numbers I’ve described above in my paper, “Post 1990s East Asian economic growth” (October 2008; also Spanish translation in pp. 40-52, Claves de la Economia Mundial 2009, Instituto Espanol de Comercio Exterior, Secretaria de Estado de Comercio, Ministerio de Industria, Espana http://www.icex.es).

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