DannyQuah

Making large things visible to the human eye

Tag Archives: Asia

Economics, Democracy, and the New World Order

Some of us wake up every morning to find ourselves living in a society where economic opportunity is unfairly distributed, where a narrow social elite is given everything while many others endure harsh deprivation. If we live in such a society, every morning our soul yearns for a system better than that we’re in.

We might live in a society where discrimination is rife, where government cronies are handed plum benefits, where extractive elites plunder national wealth.

We say we want out of that system. We ask only for a level playing field, for a system that is fair, open, and transparent, a system that practices meritocracy.

The Way the World Went

If what I’ve just described resonates with you, the good news is the world has your back. The world wants for you what you want for yourself, and indeed more and more of the world has been on that delivery run for a quarter of a century now. Twenty five years ago the Soviet Union collapsed, bringing on what some observers announced as The End of History. The wisdom that emerged was that only liberal democracy and free-market economics remained viable as ways successfully to organize society. What could be fairer, more open, and more transparent than a political system that declared all people equal in the process of selecting a leader – one person, one vote? What could be more meritocratic than a system where whether you succeed or fail is decided by a free market blind to social status, not some prejudiced official checking out your family connections?

Liberal democracy and free-market economics are both structures that appeal to technologists and designers. In theory they have an apparent emergent intelligence that will seem magical to some: You install rules in the system; you turn on the system; you stand back, and you watch it execute to the best outcome possible for the system. If a disturbance perturbs the system, the rules in place allow innovation, flexibility, and adaption, and the system self-stabilizes to a new best outcome.

The US, the UK, and other economies on both sides of the Atlantic to varying degree practice these principles. Indeed, many observers consider that TransAtlantic Axis to be where such principles are held safe, to be passed on to others. Thus, even though membership in the club of successful economies would be open to all, it was there, the TransAtlantic Axis, from which success would unfurl. And, indeed, that happened big-time: while, by one reckoning, world democracies numbered only 45 in 1970, their number ballooned to 115 by 2010.

Then the World Changed Again

But then history decided it wasn’t quite finished with humanity. First, the 2008 Global Financial Crisis struck: from exactly the TransAtlantic Axis, waves of financial collapse lashed outwards until 12 months afterwards, in the wreckage, world financial markets had fallen by US$26tn (half of annual world GDP), an estimated additional 34mn had been thrown into unemployment, and it looked like the world financial system was on the brink still of collapse. Free-market economic orthodoxy transformed into a witch-hunt for those who dared still to suggest that market competition might produce anything other than banks too big to fail (and therefore just too big) or grotesquely unfair distributions of well-being across citizens.  All the good things that free-market economics brings with it – the rich variety of consumer goods, competition that lowers prices, innovation that improves the lives of people – seem to have been forgotten or are in danger of being unjustly dismissed.

But then, for the purposes of this narrative, something even worse happened:

China poised to pass US as world's largest economic power this year.  Financial Times, 30 April 2014

China, the world’s largest one-party autocracy, far outside the orbit of the TransAtlantic Axis, will imminently become the world’s largest economy almost surely, overtaking the US which had held that position for over 140 years. Not only that but over the last three decades China had lifted over 600mn people out of extreme poverty, while inequality in the West had gotten so bad, the income share of the population’s top 1% has recently reached heights not seen for almost a century.

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)

Over the course of the Global Financial Crisis many observers had remarked how in their view China grew only because the West imported and therefore when the West underwent austerity the effect on China would be devastating. Yet between 2007 and 2012 it was China that added most to the resuscitation of the global economy, more than 3 times the contribution of the US.

German exports to the rest of the world

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

Germany, Europe’s most successful economy in this time, continued to grow — even with the collapse of its exports to its European neighbours and to the US, historically its largest export market outside of Europe — precisely by selling to China and the rest of Developing Asia.

The Great Shift East, 1980-2050

The Great Shift East, 1980-2050. Source: Quah, Danny. 2011. “The Global Economy’s Shifting Centre of Gravity.” Global Policy 2 (1) (January): 3–9

In the last 30 years the rise of the East, not just China, has pulled the world’s economic centre of gravity 5000km out of its 1980s TransAtlantic moorings, into the Persian Gulf. If growth trajectories continue in the 700 points on Earth used for this calculation then the world’s economic centre will soon come to rest on the boundary between India and China, 10 timezones east of the world’s traditional pole of economic power.

None of this was supposed to happen. Twenty years ago this year, soon after the collapse of the Soviet Union, the world’s most influential economist wrote:

“From the perspective of year 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years.”

Yes, by 2010 those economic trends were indeed found to have given inaccurate extrapolation, not from their having been too optimistic, but instead the opposite.  They have been too modest.

China and the rest of East Asia of course rely on markets, after a fashion. What they did not do was buy whole-heartedly into the notion that you get economic prosperity only through ballot-box driven electoral democracy. Hugh White, the former senior official in Australia’s Department of Defense, said what many thought when in September 2013 he considered varied foreign policy stances that might be taken by his then-incoming Prime Minister:

“Abbott’s conservatism also inclines him to be uneasy about modern China. Like many people in the West—and not just conservatives—he finds it uncomfortable that China could grow so quickly and become so powerful despite its authoritarian one-party political system. That challenges his deeply held ideas about the ascendency of democratic principles, which had seemed so decisively validated by the collapse of communism elsewhere in the world.”

What Happened?

Wasn’t national success only guaranteed by a mix of liberal democracy and free-market economics? Have both planks of the end of history just fallen away? How have Chinese and other Asian systems been able to innovate and to adapt when others, those arguably the more likely to succeed, instead failed to be as robust?

Make no mistake, China’s system has been truly flexible and adaptive. As Eric Li reminds us, China is a country that has taken on a dramatic range of innovation: radical land collectivization, the Great Leap Forward; the Cultural Revolution; privatization of farmlands; Deng Xiaoping’s market reforms, modernisation, and urbanisation; Jiang Zemin’s opening up Chinese Communist Party membership to private businesspeople. High-level official and party leadership posts previously for life have been replaced by those with term limits and mandatory retirement by 70, a sensibility that not even university professors keep, despite the academic profession’s insistence on ideas always having to be fresh and innovative.

Lessons

Obviously, any serious study on such large issues I’ve described will demand great rigour and considerable detail. Moreover, history from here on out might decide to lurch once again in an unexpected direction. Either way, however, I would shy away from concluding that one system or another is necessarily better than the other. My own hunch is there are multiple pathways to prosperity and success: the evidence, it seems to me, indicates that. Trying to say once and for all that one system is best (or even the least bad) is almost surely foolish. And while it sounds authoritative to pronounce one system or another “not sustainable”, it should be apparent to everyone that, simply as a matter of logic, such a statement can never be proven wrong. No system in history has yet been shown to be indefinitely sustainable.

Where this discussion gets somewhere more concrete is instead the following. Too often, “liberal democracy” and “free markets” become simply code and catch-phrase to stand for all the bright shiny things someone wishes to have but does not.

Democracy has, ultimately, meaning far more noble and important than simply, say, access to the ballot box. Instead, what it should stand for is this: Every government, every ruler must be daily insecure. Every government, every ruler must every day understand their power to be built on the shifting sands of the will of their people. And they must daily strive to advance the well-being of those people.

By this measure the state in China and other officially autocratic economies throughout Asia are already more democratic than many observers might think.  By this same measure many ballot-box electoral democracies fail.  Every time we read yet another account of how China’s leaders desperately need the economy to grow at more than 7% a year, so enough jobs can be generated for their hundreds of millions of new workers, that’s not a creaking oligarchy desperately hanging on to power.  Well, of course, it might be.  But it might also be simply what’s called advancing the well-being of one’s people.

This does not change how Europe will continue to be the liberal anchor of the world, even as the economic centre shifts East.  But it does say alternative internally self-consistent forms of liberalism might emerge in response to different circumstances.

In contrast, however, parts of our current global system carry hypocritical and damaging inconsistencies.  While the TransAtlantic Axis seeks to disseminate democratic ideals throughout the world, today’s system of global governance built on US benevolent hegemony is itself deeply undemocratic. For the last 50 years our world has chosen as its leader from only among the richest and most powerful of nation states. That leader has not only status and wealth beyond those of all others, it wields unrivalled political influence and military superiority beyond imagination. As leader, it operates with effectively no counterbalance on the international stage.

In brief our current world order is built on the leadership by military and economic power; that world order pays no mind to how well that the global leader serves humanity. US hegemony in the current world order is a system of leadership that is truly and deeply undemocratic.

This is why a simple graph of China’s economic overtaking the US or the world’s economic centre of gravity hurtling to ten timezones east of Washington DC might seem so disconcerting to the TransAtlantic political elite. If US hegemony in the current world order will soon have neither economic nor political legitimacy, does that hegemony simply become despotism?  Why should it remain?

More than 50% of humanity lives here.

If the world were a democracy this is where it would make decisions of global significance. From an idea due to Ken Myers.

From a point in the South China Sea, roughly in the same timezone as the world’s economic centre of gravity, draw a circle 4000km in radius. This is a tiny circle, comprising only 25mn sq km of land, only one-sixth of the planet’s land area. Yet, this circle contains more than half of humanity. If we want to construct a new world order with democratic legitimacy and economic strength, let’s begin here, with fresh ideas, and see where that takes us.

(This is an adaptation of the talk I gave at TEDxKL on Saturday 09 August 2014.  It draws on ideas in many debates I have had with Prof M. E. Cox, including that at LSE on Monday 03 August 2014.)

Global hegemony. In one picture.

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

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

Sometimes these two do not coincide.

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

(Graphic is derived from Kenneth Myers. The Valeriepieris Circle. May 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.


Also in:

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)

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.

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.

Follow

Get every new post delivered to your Inbox.

Join 4,382 other followers

%d bloggers like this: