DannyQuah

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Tag Archives: 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.)

Who are you and what have you done with my billion-people economy?

Pessimism on China’s continuing economic growth emerges from, among other reasons on offer, that billion-people economy’s aversion to institutional reform.  In this view, China’s governance structures remain irresponsibly distant from liberal democracy; as a result, they hobble economic and political progress. China’s current institutions of governance allow an extractive elite to benefit themselves and to thwart meritocracy, thus crushing the social good.

Shopping in Louis Vuitton store, downtown Shanghai, 07 September 2012.  Reuters/Carlos Barria

Shopping in Louis Vuitton store, downtown Shanghai, 07 September 2012. Reuters/Carlos Barria

[Personally, I like the alternative perspective given in Unz (2012) but at this point Unz’s views constitute still only exactly that, an alternative perspective criticizing conventional thinking.]

Indeed to confirm this conventional view, the popular consciousness can now recount incident after incident of the excesses of those elites.  This month alone there was the high-flying businessman Mr X killed in a confrontation involving armed guards outside a luxury house. The case involved influence over political constituencies covering hundreds of millions of people, the convergence of money and political power, corruption, meal contracts to provide for impoverished school-kids, an ex chief of police, …, and then the final lethal confrontation.

“Some businesses need BlackBerrys; some businesses need guards,” observers remarked wryly.

Mr X “was among the class of businessmen who symbolized the nexus between money and political power. He exerted influence in four regions, home to roughly 200 million people, where he had been awarded monopoly control over the wholesale liquor business and held the contract to provide millions of daily midday meals to poor schoolchildren.”

Critics would say Mr X “bought his influence with bribes, though such charges were never proved”.  A former chief of police noted, “It’s a sad reflection on the state of the nation’s politics that a man like him could wield so much clout. He used money power to great advantage.”

In February of this year, Mr X might have finally fallen from grace but although tax inspectors raided his offices, the investigation went nowhere. Finally, Saturday 17 November 2012, Mr X and his rival, accompanied by police officers from the Punjab, squared off and …

Wait.  The Punjab?  This isn’t about China, the world’s largest non-democracy.  The passages in quotes come from the New York Times. The case is that of Gurdeep Singh Chadha, a businessman from India.  The world’s largest democracy.


I cited:

Master, F. (2012). “China’s Corruption Crackdown Takes Shine Off Luxury Boom.” Reuters, September 24. http://in.reuters.com/article/2012/09/24/china-luxury-prada-burberry-idINDEE88N01O20120924.

Unz, R. (2012). China’s Rise, America’s Fall. The American Conservative, 17 April. Retrieved from http://www.theamericanconservative.com/blog/chinas-rise-americas-fall/

Yardley, J. (2012, November 18). Killing of a Top Magnate, Reportedly by His Brother, Stuns India. The New York Times. New York. Retrieved from http://www.nytimes.com/2012/11/19/world/asia/killing-of-businessman-gurdeep-singh-chadha-stuns-india.html

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)

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.

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

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

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

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

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

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

Regional incomes in China

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

China's regional consumption

Figure 2a China’s regional consumption

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

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

China’s regional investment

Figure 2b China’s regional investment

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

China's  per capita investment

Figure 3 China’s per capita investment

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

Finally, Figure 4:

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

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

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

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

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


Also:

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Also:

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

Clash at ERC: The UK and the Eurozone in the Shifting Global Economy

The UK’s Economic Research Council invited me to represent LSE in a panel discussion on near-term prospects for the UK economy. Lord Norman Lamont, 1990-1993 Chancellor of the Exchequer, chaired. The other panelists were Prof John Muellbauer from Oxford and Prof Hashem Pesaran from Cambridge. The venue? The Royal Institution of Great Britain’s Faraday Lecture Theatre, where in 1825 the first of the Royal Institution Christmas Lectures were delivered.

I argued the following.

First, the economic difficulties in the UK or the Eurozone cannot be usefully analysed without looking at these economies’ positions in the world. Second, the UK and the Eurozone have an immediate problem with debt and an ongoing problem with productivity. It is unlikely that Keynesian aggregate demand management alone will lead to long-run sustained growth.

What are the facts on the UK and the Eurozone in the global economy? Time was, the night-time sky was lit up pretty much just by the Transatlantic Axis.

The Transatlantic axis in the night time sky (via NASA)

The Transatlantic axis in the night time sky (via NASA)

But that was 30 years ago, and the global economy has moved on. By 2010 the world’s economic centre had shifted 5,000 km — three-quarters of the Earth’s radius — from the rise of the east, notably India and China.

World's Economic Centre of Gravity, 1980-2050

The Great Shift East

As a consequence, hundreds of millions of Asians have been lifted out of grinding poverty; soon these people will be the world’s middle income class.

That figure of the Great Shift East takes in grubby calculations with thousands of datapoints. But its point can be appreciated in many different ways, some more vivid than others (e.g., view from the US).

To be clear, not all Europe needs help in the same way. By the summer of 2011, a distinguished US economist had related to me how he and colleagues were surprised by German economic growth out of the 2008 Global Financial Crisis since, while keeping its traditional high-savings habits, Germany had its export markets — the US, the rest of the EU — mired in ongoing recession. Here, however, might be part of how Germany did it:

Evolution of Germany’s export markets

Evolution of Germany’s export markets

The great bulk of German trade remains, naturally, with the rest of the European Union. But the EU is now deep in recession and likely to remain so for some time. Outside the EU? Germany today exports more to Developing Asia than it does to the US. And that gap continues to rise. Exports to China alone already appear as large as those to the US. Part of this obviously stems from US imports sharply falling right after 2008 — but that is exactly my point. China and Developing Asia continued to grow, continued to import from Germany (and elsewhere), and thus continued to keep parts of the global economy afloat throughout both the global financial and European sovereign debt crises.

The Euro-sterling exchange rate

The Euro-sterling exchange rate

This is not just because Germany enjoyed a cheap currency. Despite the weakness of pound sterling against the Euro, the UK has not re-oriented its exports anywhere as successfully as has Germany:

Evolution of UK’s export markets

Evolution of UK’s export markets

What the UK exports to the US remains double UK exports to Developing Asia, and four times UK exports to China. The UK has simply ended up with most of its exports to economies showing no significant demand growth.

Unpack the numbers further by breaking out the UK’s 50 largest trading partners in 2009: the UK had 56% of its exports go to the 10 slowest-growing economies in that group (growth measured 2000-2008). Across these 50, the correlation between exports and growth was -0.32: the UK systematically exported more to those trading partners growing slower.

The problems faced by the UK, or more broadly, by member states across the entire EU, while different in concentration, are no different in character from those in the 2008 Global Financial Crisis: Large entities owe large amounts of debt and are likely unable to pay it all back. Previously, the entities were financial institutions; now they are sovereign states. Quick fixes that seek to get around repaying this debt will undermine institutions of trust and responsibility, those same institutions the West tells emerging economies they must build if they too want to become developed economies.

When the first round of Quantitative Easing (QE1) happened in the US, output there rose — and to a smaller extent elsewhere in the world as well. With QE2, IMF estimates show the impact multipliers everywhere had diminished sharply.

Now? There are those who hope a rescue will come when the ECB unleashes its own QE on Eurozone sovereign debt. Or some optimistically-ingenious scheme involving different-coloured centrally issued Eurobonds, or where the discrimination occurs across member states using some other indicator might work. With luck perhaps. Longer term, some observers look to a fuller-fledged fiscal union, with Germany transferring likely more than 5% of its GDP to the Eurozone’s lesser-performing periphery member states (link: Gavyn Davies, FT, 06 November 2011 ).

But the connection between this re-organization and member states’ fiscal positions cannot be ignored. While all attention now focuses on deficit/debt figures compared to those originally given in the Maastricht Treaty, pretty much totally neglected is the nearly-contemporaneous Copenhagen criteria for EU accession. That list includes — after requiring member states be democracies that obey the rule of law, respect human rights, and protect minorities — the statement that candidate member states need to be market economies able to deal with “competitive pressure and market forces within the Union”.

I’m sorry but I don’t think receiving a perpetual 5% German GDP transfer strong evidence for that capability. (And this is just for EU accession, not even for Eurozone membership.)

Monetary or other financial rescues are short-term; we need them the same way we need to kickstart an engine. But if that engine is worn out or is leaking fuel or in need of a complete overhaul, I don’t see how we are going to get very far with that machine. We can’t mistake a short-term boom fueled by exigent government actions for sustained long-term growth. Again, isn’t this what the West tells emerging economies?

How would I propose to change matters? My suggestions at the event were general and therefore impractical. But here they are again:

  1. Reboot the UK economy: Take the pain and turn around to engage fully with the emerging economies; do business with them as economic partner — no more, no less. The emerging economies are now the world’s engine of growth: Deal with it.
  2. Unleash our universities and other thoughtful, creative industries. This is NOT to raise government spending, but just to free up extant restrictions on their operations. UK higher education is hugely in demand by the emerging economies. If there’s anything that’s going to help re-balance the global economy, this is it.
  3. Throw out long-standing aesthetics and principles – they’re also called prejudices. Become enamoured of what works — whether it’s guided capitalism under a bit of state control or anything else we previously thought completely nuts (i.e., outside the Washington Consensus). Celebrate the virtues of working hard, raising productivity, saving for the future — not revile them as many do today for Germany or used to do most obviously recently only for China (and yet might come back to doing so again soon).

Also:

  1. “Our exports now go mostly to the slow-growing economies”, British Politics and Policy, 13 December 2011
  2. “The UK and the Eurozone in the shifting global economy”, China.org.cn, 19 December 2011
  3. “The UK and the Eurozone in the shifting global economy”, The Edge Malaysia, 19 December 2011
  4. “The UK and the Eurozone in the shifting global economy”, EconoMonitor, 21 December 2011
  5. “The UK and the Eurozone in the shifting global economy”, The Guardian Newspaper, 13 January 2012
  6. 英国与欧元区:其在变动的世界经济中的位置”, 15 January 2012

The LSE Big Questions Lecture 2011: Organized Common Sense

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

Why did we do this?

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

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

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

1855 Michael Faraday - Royal Institution Christmas Lecture

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

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

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

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

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

Inaugural LSE Big Questions Lecture

The Inaugural LSE Big Questions Lecture begins

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

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

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

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