The New Globalisation
Martin Wolf’s column today is well worth reading (as ever). It could be fairly retitled “the decline of the west”. His fundamental point is that the global recession has not only effected the financial and economic standing of the West compared to Asia, but also its moral and political standing.
We already know that the earthquake of the past few years has damaged western economies, while leaving those of emerging countries, particularly Asia, standing. It has also destroyed western prestige. The west has dominated the world economically and intellectually for at least two centuries. That epoch is over (see charts). Hitherto, the rulers of emerging countries disliked the west’s pretensions, but respected its competence. This is true no longer. Never again will the west have the sole word. The rise of the Group of 20 leading economies reflects new realities of power and authority.
Yet this is far from the only change in the global landscape. The crisis has revealed deep faults within western economies and the global economy as a whole. We may be unable to avoid further earthquakes.
This fundamental change in the world balance of economic power will have huge political and social ramifications across the globe.
In his book, Prof Rajan points to domestic political stresses within the US. Related stresses are emerging in western Europe. I think of it as the end of “the deal”. What was that deal? It was the post-second-world-war settlement: in the US, the deal centred on full employment and high individual consumption. In Europe, it centred on state-provided welfare.
In the US, soaring inequality and stagnant real incomes have long threatened this deal. Thus, Prof Rajan notes that “of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households”. This is surely stunning.
“The political response to rising inequality … was to expand lending to households, especially low-income ones.” This led to the financial breakdown. As Prof Rajan notes: “[the financial sector’s] failings in the recent crisis include distorted incentives, hubris, envy, misplaced faith and herd behaviour. But the government helped make those risks look more attractive than they should have been and kept the market from exercising discipline.”
The era of easy credit, much of it backed by housing, is now over (see chart). Meanwhile, in all western countries, the state supports the welfare of the individual. But the fiscal consequences of this crisis – a huge rise in deficits – will interact with pressures from ageing, to make fiscal stringency the theme of policy for decades. The long bear market in shares and prospects for a “jobless recovery” add further to these woes.
The fallout from the crash can already be seen in Southern Europe, as Paul Mason reports:
The question now though is how Spain goes forward. As I’ve written before, the social model in Southern Europe has been based on two decades of cheap credit, property speculation and growth. Now that’s over, it’s obvious a country like Greece has to go through a painful adjustment. Here the austerity plans are nowhere near as draconian, and the resistance is also not exactly at Greek pitch.
His BBC colleague Stephanie Flanders has today emphasised what lies ahead for Britain:
The other stand-out figure for me – and perhaps the Bank of England – is the figure for earnings growth. Pay, excluding bonuses, rose by just 1.4% year-on-year in May, the lowest rate since the end of last year. That’s a 2% real pay cut at a time when the annual rate of CPI inflation was 3.4%.
As we know, things have been even tougher for private sector workers. Earnings in that part of the economy rose by just 0.6% year-on-year in May, though the average over the quarter was a bit better.
The Bank has rightly been concerned about rising inflation expectations. But even if people are expecting prices to rise at a higher rate than in the past, there is little evidence in these figures that workers can expect higher pay to compensate.
The bottom line is that UK households are still seeing a significant squeeze in living standards as a result of the financial crisis, even if more people than expected have found paying work.
And, lest we forget, the squeeze from higher taxes and lower public spending has barely begun. (Emphasis added)
This pain in the West, both current and promised, is all set against a world where the centre of economic activity is moving eastwards. Danny Quah, head of economics at the LSE, has an excellent (if unfinished and in draft form) paper on this topic. (“The Shifting Distribution of Global Economic Activity”, link available here) As he writes:
The configuration of economic activity across nations helps determine explicit and
implicit systems of global governance: the international financial architecture,
patterns of cross-country trade, global capital flows, and, not least, effective global
policy-making. But what is known of the dynamics in that global landscape of
economic activity? This paper provides an empirical assessment of the hypothesis
that the world’s spatial distribution of economic activity is secularly drifting from its
20th-century moorings. By considering a range of indicators—the shift in the world’s
economic centre of gravity; the dynamics of global poverty; decoupling and the
emergence of cross-country trade clusters; and the cross-geography relative
contribution to world economic growth—this paper quantifies a profound ongoing
eastwards trend in global economic activity.
In other words, power is shifting east. Perhaps the most vivid illustration of this comes from John Ross.
…for the first time for a century and a half the US had lost its position as the country producing, in gross dollar terms, the greatest amount of finance for investment – i.e savings. The US has been overtaken by China. In short the world’s number one capitalist economy no longer produces the most capital. The New York Times noted this as Newsweek did later.
The fall out from the financial crisis and the speeding up of the movement in financial and economic power eastwards poses huge challenges for the UK and the West in general. The rules of the international economic system will no longer be set on out terms.
And yet discussion of this issue is notable by its absence from most political discourse. Tony Blair touched on in his speech to Trimdon Labour Club during the campaign but didn’t offer anything substantial.
Since leaving office, and spending much time abroad, I can tell you one thing above all else. The characteristics of today’s world are: it is interdependent; it is changing; and power is moving East. And all of this is happening fast, faster than we can easily imagine. Britain’s challenge is not a 20th Century one and its politics cannot afford 20th Century political attitudes. The country has to go forward with energy, drive, determination and above all understanding. Closed minds close off the future. That would mean the challenge is failed, but it would also mean the opportunity is squandered.
Osborne too seemed aware of the issue but offered a glib response.
Borrowing from China so that we can buy the goods they make for us may be Gordon Brown’s idea of the future, but it is not ours.
We want Britain to be selling to China and the world.
The world economy is changing, we can’t rely on cheap credit and cheap imports any longer. The economy needs to be thoroughly rebalanced against a back drop of a large budget deficit and this all needs to be done within the realistic framework of accepting that Britain is, in the global scheme of things, a small economy. I’d like to hear more politicians engaging with this new, emerging phase of globalisation – one where the rules of the game are as likely set in Beijing as Washington and one that will not look like what has come before.
One major difference between the new post-crisis globalisation and it’s pre-crisis relative, is the relationship between the state and capital, especially in the West. As investment strategist Russel Napier has written:
There is a conflict between western governments’ need for finance to sustain living standards and capital’s need to seek out greater growth opportunities in emerging markets. Whatever the long-term benefits in boosting returns on savings, the short-term political necessity of public financing is likely to necessitate slowing capital outflows.
Capital controls seem impossible to many, but when a choice has to be made between economic principle and government bankruptcy, they are a likely response.
In 1931, Keynes, as director of the Independent Investment Trust, refused to sanction a financing arrangement that involved shorting sterling. According to his biographer, this reluctance was due to public interest considerations rather than the shareholders’ interests. Within the month, sterling had left the gold standard and the Trust had missed out on a profit of £2m (in today’s money).
A hedge fund manager with such priorities today would risk big fund outflows and perhaps a civil action.
In the west’s long boom, capital and the public interest were largely aligned. That ended in 2008. Conflict between government and capital is the future of investment.