DannyQuah

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Category Archives: global_economy

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.)

The East grows only because the West consumes. Bitch please.

An abiding belief held by many about the global economy is that the East is one gigantic Foxconn-shaped, steroid-boosted manufacturing facility, pumping out iPhones, shoes, clothing, refrigerators, air-conditioners, and defective toys that its own people could never afford. In this narrative, the only reason that measured Eastern GDP shows any kind of life is because the Western consumer steps into the breach to buy up these manufactures.

The confirming natural experiment would then be what was sure  to occur post-2008, when Western imports collapsed. Here is what actually happened:

Top 10 contributions to world growth: 2007-2012.  GDP evaluated at market exchange rates

Top 10 contributions to world growth: 2007-2012. GDP evaluated at market exchange rates (Source: IMF World Economic Outlook, April 2012)

China became the single largest contributor to world economic growth, adding to the global economy 3 times what the US did. Since this chart shows GDP at market exchange rates, those who have long argued China’s RMB is undervalued must be standing up now to say that China’s real contribution is likely even larger.  Sure, China undertook a massive fiscal expansion beginning November 2008.  But, hey, everyone fiscal-expanded.

In number two position among the contributors to global growth is Japan. Yes, “Lost Decades” Japan helped stabilize the global economy more than did the US. Among the other top 10 contributors are the other BRIC economies, and Indonesia.

How is East Asian or emerging economy growth merely derivative when they had nothing among Western economies from which to derive?

Here’s the other interesting fact:

German exports to the rest of the world

German exports to the rest of the world (Source: IMF Direction of Trade Statistics, 2011)

This chart addresses the question: How has Germany remained a successful export-oriented growing economy when its domestic demand is weak, the Eurozone is buying hardly anything these days, and German exports to the US have collapsed in the wake of the 2008 Global Financial Crisis? The chart shows that today Germany exports 30% more to Developing Asia than it does to the US. And this is not just a China effect: German exports to China account for just two-thirds of exports to Developing Asia overall. Also notice how as late as 2005, German exports to the US were still double those to Developing Asia.

The East grows only because the West consumes. Bitch please.

I'm on top of the world!  Bitch please.

I’m on top of the world! Bitch please.


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UK austerity and growth: Winter is coming

Policy debate in the current recession is often portrayed to be an irreconcilable political battle, pitting those pushing austerity against those advocating growth.  Indeed, substantive real differences do separate groups having different views on what different policies can achieve.  But, equally, uncertainty on the state of the economy clouds judgment on what appropriate policies should be, especially so in times of economic crisis.  This article examines that uncertainty.  By studying one example — UK policy options at the beginning of 2010 — it argues we need to understand better the implications of different measurements on an economy.

“You’re for me or against me. Choose.”

No one wants to live in a stagnant economy. Even those who don’t believe higher incomes make people happier can’t bear to see their honest, hardworking neighbours unable to make monthly rent or mortgage payment, or having to choose uncomfortably between new clothes and shoes for the kids or food for the table.  No one wants to see masses of unemployed on the streets.  Everyone is for growth.

But, at the same time, even the most diehard pro-growth proponents must acknowledge that government efforts to further  increase growth cannot always be appropriate.  If an economy were already close to full employment or were in any other way overheated, then it is right for fiscal and monetary stimulus to withdraw.  Raising tax revenues and lowering government spending — putting the government’s finances to order and restoring to health the nation’s balance sheets — all have a place in sensible, responsible policy-making.

Standing for growth does not mean constant and unwavering support for always high government spending and expansionary monetary policy.  By the same token, backing policies to lower debt and deficits does not mean wanting economic life to be wretched.  Even when the final goal is the same — to have a healthy, prosperous, inclusive economy — depending on circumstances there is a time and place for different approaches to government policy.

A debate on UK growth versus austerity is on one level a debate about what policy transmission mechanisms are most effective for bringing about long-run sustainable economic growth:  People disagree about what works.  But equally important the debate is one about the current state of the economy. Only after the fact will it become obvious what the right policy actions should have been.  Moreover, because of lags in their effectiveness, policy actions need to anticipate:  Will expansionary effects kick in only after the bottom of the economic cycle has already passed, and thus overheat an already healthy economy?

Many observers have firm views, conditioned by sound economic analysis, on the first of these issues, what appropriate growth and austerity policies are.  It strikes me, however, that the second matters much more in extraordinary situations: in those circumstances, knowledge of the current state of the economy necessarily carries far greater uncertainty.  Generally, the range of economic statistics to look at is broad and constantly changing.  External circumstances in a shifting world economy will confound historical regularities.  Economics education in every institution makes students understand mechanisms of how policies affect an economy, but hardly anywhere is there training on how to assess rigorously the state of an economy.  That latter is merely “monitoring”.  Perhaps accurately judging the state of the economy is impossible — but that doesn’t mean zero understanding is where one should stay.

Policy recommendations in a shifting world economy

That this is important is usefully emphasised by looking over a recent turn of events.  In February 2010 twenty economists signed a letter to London’s  Sunday Times supporting a plan to lower steadily the UK structural budget deficit, starting as early as the 2010/11 fiscal year.  (For transparency, I should say here I was one of those 20.)  The letter suggested that failure to do so could, among other things, raise interest rates and undermine UK recovery, given how the economy had entered the recession with a large structural budget deficit.  Not unexpectedly, this proposal was not uniformly accepted, and many distinguished economists suggested instead that such a policy was potentially risky and that the first priority had to be to restore robust growth.  But to bring about growth was never a point of dispute.  So, it might be useful now to look back and assess the balance of risks then extant.

On the one hand, for some observers, there has never been any doubt: “the UK had a depressed economy then, and it still does now.”  (Indeed, that particular writer upon reading that in August 2012 some of the original group of twenty had changed their minds expressed disappointment “to see so many of the prodigal economists asserting that they were responding to changed circumstances rather than admitting that they simply got it wrong.  For circumstances really haven’t changed […].”  (Again, for transparency, I was one of those reported to have changed my mind, and indeed I was reported to have emphasized changed circumstances.)

Did circumstances really remain fixed, and were they really so transparent? Complicating the picture:  Statistics on recessions become available only with a fixed delay — to be in recession, an economy has to have had negative GDP growth over two successive quarters.   So, to be in a double dip recession, well, it’s not enough just to announce one’s beliefs, the data have to come out just so.

What did the world look like in early 2010?

Things look really bad: Major recession

In September 2008, Lehman Brothers had filed for bankruptcy.  In January 2009 the IMF had predicted world growth would fall to 0.5% for the year ahead, only three months later to revise the figure significantly downwards to -1.3%.  The World Bank had forecast in March that the world economy would contract by an even larger  1.7% in 2009:  This would be the first decline in world GDP since the Second World War.  The International Labour Organization estimated that 51mn jobs would be destroyed in 2009, raising world unemployment to 7.1%.  Growth in China had fallen from 9% in 2008 to an annual rate of 6.1% in the first quarter of 2009, the lowest recorded figure since 1992.  Between July 2007 and November 2008 world stock markets had lost US$26.4 trillion in value, more than half of world annual GDP.  In April 2009, Olivier Blanchard, the IMF’s Chief Economist, had written “the crisis appears to be entering yet a new phase, in which a drop in confidence is leading to a drop in demand, and a major recession.”  The UK had been officially in recession mid-2008, with the last two quarters of 2008 suffering declines in GDP.

Things looked grim.

The return to growth?

By the beginning of 2010, the UK recession was already 18 months in train.  In this modern era, advanced economies (like the US) have only had short sharp downturns: the 11 US recessions since 1945 averaged only 11 months in duration, with the four recessions between 1980 and 2001 lasting 6, 16, and then 8 months twice, respectively.  By 2007, the UK had gone 15 years since the end of its last recession, one that lasted just 15 months.  Of course, with hindsight, we now know it is well possible for slumps anywhere in the world to drag on, but set against both the UK’s own experience and against a broader history (that of advanced economies, like the US, towards which the UK had progressively become more similar), it was not unreasonable to think by early 2010 that the UK was about ready to grow again.

No one would have reckoned in early 2010 that the global economy had regained robust health.  But, equally, was it apparent the international situation was dismal?  By the first quarter of 2009, Brazil was reported to be no longer in recession, having grown 2% after the two previous quarters of GDP declines.  The OECD forecast the Eurozone and the US would show positive growth in the last six months of 2009.

Back on track:  Asia’s recovery by mid 2009

Back on track: By mid 2009 Asia’s industrial producation had recovered not just to pre-crisis levels but to its pre-2008 growth trend.

Early 2010 was six months past when incomes in China and the rest of emerging Asia had already recovered.  Industrial production was not just back to pre-2008 heights, but to its extrapolated pre-2008 growth trend.  The second quarter of 2009 saw a string of astounding figures from across Asia: all at annual rates, the South Korean economy grew by 2.3%, its fastest expansion in over five years; the Chinese economy grew 7.9%; the Malaysian economy expanded by 4.8%; the Thai economy grew 2.3%; both Japan and Hong Kong were showing rising incomes again, after four successive quarters of GDP declines.  Singapore announced its emergence from recession, big-time, with annualized GDP growth of 20% that quarter.

Sure, China’s government had announced in November 2008 a US$600bn (CNY4,000bn) fiscal stimulus package: that by itself was impressive enough, but also most observers at the time believed growth in export-oriented China and Asia occurred primarily from Western demand. The East was growing again.  Surely the West must be demanding.  It was natural to think that, somewhere somehow, the West must have recovered.

Stimulus is an aircraft carrier

That “somewhere, somehow” was not unreasonable to hypothesize in the slew of policy actions undertaken in all the world’s major economies between late 2007 and early 2010.  In September 2008 the US Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada, and the Swiss National Bank, in concert, added US$180bn of liquidity to international money money markets.  By November 2008, in the space of just four months, the US Federal Reserve had pumped US$592bn into the US$ monetary base, increasing that monetary base by 70%.  In October 2008, US lawmakers approved a US$700bn rescue package to purchase bad debt from US banks; the UK government unveiled a reform package. amounting to £400bn (i.e., again US$700bn) to provide funds to UK financial institutions; the Japanese government announced a US$270bn fiscal stimulus package targeted at families and small businesses.  The following month saw China’s fiscal stimulus of US$600bn (already-mentioned) and the European Commission’s US$260bn recovery plan.  Further add into the mix Japan’s April 2009 stimulus package of US$98.5bn or 2% of that country’s GDP, and we’re talking significant fiscal stimulus in all the world’s major economies.

It wasn’t all just fiscal expansion either.  From a value of 6.25% in early August 2007, the US Federal Reserve discount rate was reduced to 5.75% later that month, to 4.75% the month after, and then again to 4.5% the month after that.  In January 2008 the Fed cut interest rates by 0.75 percentage points, the largest single reduction in over a quarter of a century.  In October 2008, just one month after their concerted action on international money market liquidity, six of the world’s most important central banks coordinated a simultaneous interest rate reduction of 0.5 percentage points.  By the end of October, the US Federal Reserve had again slashed interest rates, this time down to 1%, the lowest level since 2004.  The following month, the European Central Bank cut interest rates by 0.75 percentage points, its largest ever single reduction; Sweden’s Riksbank, by a record 1.75 percentage points; the Bank of Korea by a record 1 percentage point; the Bank of Canada lowered its benchmark rate to 1.5%, the lowest since 1958.  In December, the US Federal Reserve’s discount rate had gotten down to between 0 and 0.25%; Japan’s, 0.1%; China cut interest rates for the fifth time in four months.  The following month, January 2009, the Bank of England reduced its interest rate to 1.5%, the lowest setting in over 300 years of the Bank’s operation.

Monetary stimulus had by then become not just a matter of reducing interest rates.  After all, interest rates were already effectively zero.  In November 2008, the US Federal Reserve injected US$800bn into the economy, buying US$600bn of mortgage-backed securities and applying the remainder to unclog consumer credit channels.  The Bank of England similarly engaged in quantitative easing, buying securities with newly-printed money (£75bn in March 2008, and then £50bn in May and then again in August 2009) to reach a total outlay of £175bn (US$294bn) by the end of 2009.  The European Central Bank, in June 2009, pumped US$628bn in one-year loans into the Eurozone’s banking system.

In the current Eurozone crisis, one hears talk of the troika (the European Central Bank, the European Union, and the IMF) taking a bazooka to the sovereign debt problem.  If so, the collection of 2008-2009 policy actions might seem more akin to sending in an entire aircraft carrier.

The second quarter of 2009 recorded the official end of recessions not just in the East, as described earlier, but also in the two largest Eurozone economies France and Germany, both seeing positive growth again after four consecutive quarters of GDP declines.  Financial institutions reported profits:  notably Goldman Sachs, JP Morgan Chase (profits up 36% from the previous year), Deutsche Bank (up 67% over the same period in 2008), Barclays, RBS, Italy’s largest bank UniCredito, and the Dutch financial services group ING.  By September 2009, the FTSE 100 had again breached the 5,000-point threshold, recovering completely all losses since October 2008.

Time to get ahead of the curve

Arrayed against this monetary and fiscal stimulus worldwide and the evidence of the world economy already growing again (admittedly most strongly in the East), one might conclude that policy-makers ought now cast a cautious eye on government balance sheets.

But that choice for the UK still remained in delicate balance.  In September 2009 the OECD had forecast the UK would be the only G7 economy still to be in recession by year-end, with both the US and the Eurozone predicted to show two quarters of consecutive growth.  Three months earlier, the OECD had suggested the pace of decline among its members was slowing and that the world economy had nearly reached the bottom of its worst post-War recession, but that the UK would continue to show zero growth in 2010. In July 2009 NIESR predicted that UK GDP per capita would not recover pre-recession levels until early 2014.

Effects of policies often only emerge with a lag.  And, generally, government policy-making errs too often by not getting ahead of the curve.  On top of all that, the UK is a small open economy, and its debt and output markets are strongly influenced by international developments.  Was 2010 the right time to start restoring the UK government’s balance sheet?

2010 EU Debts and Deficits

The UK’s debt/GDP ratio was in line with the largest Eurozone economies and therefore larger than Spain’s; its deficit/GDP ratio was worse than all except Ireland’s.

By July 2009, UK government debt had risen to 57% of GDP, the highest ratio since 1974.  That month, the UK’s public sector net borrowing showed its first July deficit in 13 years.  Earlier in the year, Spain had become the first AAA-rated sovereign nation to have its credit rating downgraded since Japan in 2001.  In December 2009, Greece acknowledged sovereign debt exceeding €300bn (US$423bn), the highest in modern history, resulting in a debt/GDP ratio of 113%, nearly double the Eurozone limit.  The chart shows the UK in 2010 right among the pack of the largest European economies (the size of each ball indicates total GDP) in its debt/GDP ratio, i.e., larger than Spain’s, but with a worse deficit/GDP position than all except Ireland.

In February 2010, it didn’t take a lot of imagination to see how, all else equal, UK government borrowing could easily have become just as expensive and as difficult as in the most stressed Eurozone economies.

Backing off from austerity

In retrospect, of course, we know the austerity policy did not work in the UK.  A reversal might well be warranted, because circumstances had changed, not because things were the same.

After the first couple months of 2010, the Eurozone economy went into free fall much faster and much further than one might have expected. This had two effects on the UK fiscal position:  on the one hand, UK debt turned out looking, well, not so bad after all relative to comparable advanced TransAtlantic economies. The fear that UK borrowing would become overly costly had become much less relevant.

Germany trades East

Germany has kept growing exports through a shift in their direction of motion.

On the other hand, the continued inability of both sides of the Atlantic to resume economic growth meant a further dramatic drag on UK economic performance. Unlike, say, Germany, the UK has historically consistently exported mostly to the slowest-growing advanced economies, and so this TransAtlantic slowdown has considerably depressed the UK exports and thus the UK economy. [Germany, by contrast, today exports more to Developing Asia than it does to the US.]

So, the international environment has shifted in such a way that the urgency for UK rapid debt reduction has lessened.

The other large factor is how market perception on the stance of UK monetary policy too has shifted. For most observers now, the Bank of England has made clear how it is willing to put even more resources into monetary easing.

Conclusion

What can one conclude from this?  First, policy-making needs to be sensitive to circumstances, and today in the UK, that means international circumstances especially.  Monitoring and assessing the state of the world economy is needed.  Second, expansionary policies need to be more sharply designed.  While austerity might not, under the current circumstances, any longer command the support it once did, pro-growth proponents need to explain things better. Just throwing money at the problem plainly does not work. Obviously, the world’s expansionary policies over 2008-2009 succeeded out East, but they did nothing to revive the UK economy.  Why will they do so now? How will this time be different?

(Also at Global Policy | Roubini Global Economics EconoMonitor | Blog Sina)

This is what’s going to derail China

Seriously? Elsewhere we have youth unemployment and rioting and looting.  We have an Arab youth uprising, and hundreds of millions of young people across the Middle East, North Africa, and South Asia – angry, frustrated, not knowing what work they’ll be able to take on in life.

China's Achilles Heel - The Economist

China’s Achilles Heel: A comparison with America reveals a deep flaw in China’s model of growth

But too many old people doing taiji in the park – that’s what you’re gonna lead with? 未富先老

Is it because economists are generally shy people?

And just want to be left in peace?

"News of the crisis has not yet reached some economics departments."

“News of the crisis has not yet reached some economics departments.”

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.

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
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