DannyQuah

Making large things visible to the human eye

Tag Archives: Global governance

It Is Not Easy Being Leader Of The World

Some days it’s just plain stressful when the world keeps looking to you to solve its problems, to be global hegemon.

(As always, by “hegemon” I mean not evil imperialistic power, but instead what historians mean from their study of the Delian League in Ancient Greece: “benevolent leader”.  A hegemon provides public goods, whether that is the defense of small Greek city states against the Persian Empire, being lender or consumer of last resort across nations, stabilising and regulating international financial markets, ensuring safety of international shipping routes, and so on.  The critical point is that hegemon implies benevolence; “benevolent hegemon” is redundant. If it were otherwise then, among other things, the evocative phrase “Hegemony or Empire” would be just a meaningless and empty contrast.)

Following the 2008 Global Financial Crisis, proponents of hegemonic stability theory (HST) – the idea that the world economy is most stable when some nation is powerful enough to assert its position as global hegemon – looked to the US to return with a roar to the world stage. Those proponents drew inspiration from Charles Kindleberger’s studies of the 1930s world recovery from the Great Depression. Then it was the US that led the way to global prosperity; so too now only when the US is restored as global hegemon will the world economy recover and global stability return.

In this view, as global hegemon the US cannot help but be benevolent.  The US provides global public goods on which the rest of the world either shirks responsibility or cannot afford. Under HST, the world looks with respect and admiration at its hegemon. The US’s soft power is complete: what the US wants is automatically what the rest of the world wants.

But HST proponents will find it difficult reconciling their view of what the US can do with what the US actually does. Matthew Klein in February 2014 described how the US Federal Reserve needed to base its actions only on what was happening in the US economy, not on any risks of potentially destabilizing other economies:

“the turmoil in certain emerging markets wouldn’t affect the policy decisions of the U.S. central bank. […] Monetary policy is hard enough without having to worry about the spillover effects to other countries that should take care of themselves.”

So, the Fed was not going to change its plans just because some emerging markets might be at risk.

Right before this Fed reassertion of its position, Raguhram Rajan, the highly-respected Governor of the Reserve Bank of India, had drawn attention to how, in contrast to the crisis days of late 2008, by early 2014 international monetary cooperation had broken down. Rajan noted how emerging markets had powered global economic recovery from the depths of early 2009 while the advanced economies remained moribund. But by January 2014 when those same emerging markets needed greater international cooperation with the advanced economies, the industrial countries were instead saying, “we’ll do what we need to, you do the adjustment”.

In Rajan’s view and experience (and those of many other observers), the global economy had become ever more inter-connected, to where one might think sensible policy-makers ought to believe:

“We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country.”

The industrial countries, led by the US, would not play by these implicit rules of the game.

Rajan’s statements together with a growing clamour from other emerging economies elicited a US response with four distinct lines of reasoning. First, there was fallback to how, within the rules of Federal Reserve System operations, the US central bank could not, by law, take into account the well-being of any party except the US economy when charting its actions. Thus, US global hegemony, i.e., US provision of global public goods, would run foul of US law.

Second, some observers in the US claimed that the world economy was not really as inter-connected as Rajan and others might think. Given the coordination that all policy-makers had embarked on to save the global economy in late 2008, this claim rings both false and self-servingly hypocritical. Third, some observers in the US suggested that if any foreign economy was adversely affected by US monetary policy, it was only because those economies ran “high current-account deficits, high fiscal deficits and relatively high inflation”. So, really, “the challenge is brought on by their own domestic policies [and] it’s unfair to say it’s all the Fed’s fault.”  And, finally, that old saw: What is good for the US is, ultimately, good for the world.

It must be tough to be global hegemon, being constantly reminded that stability of the world economy is your responsibility. No one could fault a diverse group of domestic observers and policy-makers for statements that are appropriate and sensible in difficult local circumstances, but when viewed from an international perspective are instead jarring and inconsistent with a modern, enlightened take on global policy-making.

The problem is, world leadership demands high standards. Soft power is hard to earn but easy to lose. In world leadership, whatever the reality, it is perception that matters. Suppose that instead of the US suggesting monetary policy was hard enough without having to worry about spillovers onto other countries, it was China responding to the charge that its exchange rate policy and savings behaviour were causing global imbalance: “Bringing hundreds of millions of my people out of poverty is hard enough without my having to worry about your trade deficits too”.

Suppose that economies adversely affected by US monetary policy were thus affected because those economies ran high current-account deficits and high fiscal deficits.  Then those countries adversely affected by the savings outflow from Asian Thrift?  They were thus affected because they were countries prone to high current-account deficits and high fiscal deficits anyway.  Indeed, the US itself would be an example of that.

The-Amazing-Spider-Man-movie-wide

If the US is to draw on the approbation of its domestic lawmakers before it can conduct economic policy that might turn out to be good for others, then the US really should not be lecturing Germany on how with great economic power comes great responsibility. how in the Eurozone Debt Crisis, Germany should be helping other nations at its own expense.

Finally, it almost surely remains true – as it has been for decades – that what is good for the US economy is good for the global economy.  But then so too what is good for India, China, Brazil, and Indonesia is directly good for over a third of humanity, and indirectly good for likely yet another third of humanity in the economies that trade with them.  The argument on US centrality in the global economy was literally true when the world’s economic centre of gravity hovered just off the eastern seaboard, somewhere in the Atlantic Ocean.  But in the last three decades that centre of gravity has already moved 5,000km east, drawn by the rise of China and the rest of East Asia.  Soon perhaps even more than what is good for the US economy, it will actually be what is good for the East that is good for the global economy.

Yes, HST is almost surely right that the connected global economy needs a global hegemon. The question is, are we looking for our hero where we should or just where we’ve come to out of laziness and habit?  When will we need to agree the US can no longer be global hegemon?

A globalised renminbi can transform both China and London

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Expanding earlier post.)

Global hegemony. In one picture.

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

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

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.)

China’s Journey to the West

China – You have a serious public relations challenge.

Journey_to_the_west-Stuart_Ng

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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