Dec 09, 2014
EYE ON THE ECONOMY
In a globalised era of "mutually assured economic destruction", talk of countries rising and falling is pointless
By Michael Cox, For The Straits Times
IT HAS become the new truth of the early 21st century that the West is fast losing its pre-eminence in the world - to be replaced by a new international system shaped by either the so-called Brics (Brazil, Russia, India, China and South Africa), the "rest" , a rising China or even by that very broadly defined geographical entity known as Asia.
It is difficult to dispute some self-evident economic facts about the changing balance of economic power. Visit booming Singapore, walk around downtown Kuala Lumpur, or spend time in Beijing, and you can just see and feel the buzz. As influential economics journalist Martin Wolf recently observed in his new bestselling book (The Shifts And The Shocks): If before the 2008 financial crash the West felt that it was the master of the universe, afterwards it very much looked as if the baton had been passed to a new generation of upwardly mobile international players.
But why should we be so surprised? After all, change has been going on since the beginning of time. And even the most sceptical of Western pundits would have to concede that huge economic strides have been made - not just in China or India, but in other booming economies like Turkey and Mexico.
Even economies in some parts of sub-Saharan Africa are booming, while high-end retailers around the world are drooling as they survey a new world which, by 2020, will be home to a cash-rich, consumer-savvy global middle class numbering just over three billion people.
Who first spotted this shift remains unclear. But perhaps one individual can lay claim to having been intellectually present at the creation: Jim O'Neill of Goldman Sachs who, back in 2001, predicted a major turn away from the old economies to Asia, energy-rich Russia and the equally commodity-rich country of Brazil.
Indeed, Mr O'Neill invented the acronym, the Brics. Born when the United States was riding high, and viewed with utter indifference by more orthodox thinkers, his prediction looked faintly absurd. Ten years on and his central claim - that the world economy was changing fast and would demand new forms of governance - had almost become the new wisdom of the age.
Notable Singapore academic Kishore Mahbubani was another significant voice in this debate. However, according to Professor Mahbubani, it would not be the big four as such that could lay claim to the future. Rather it would be Asia more generally.
What Prof Mahbubani defined as an "irresistible" shift eastwards was underway, one that would not only turn the world upside down, but would, in his view, return the global order back to where it had been before the West had momentarily taken over in the late 17th century. The Western moment was fast coming to an end, he opined. Prof Mahbubani was characteristically forthright. The world was not just shifting from one place to another, in many ways it was also returning to where it rightfully, almost naturally, belonged - to Asia.
Too early to get carried away
BEFORE we get carried away, though, we need to take stock. First, while we should be aware of what is obviously changing in the world, what has not changed quite so much is the still enormous structural advantages still enjoyed by the US and its Western allies. Let us not forget that, taken together, the Americans and the Europeans still account for around 50 per cent of world GDP, well over 70 per cent of its military spending, most of its foreign direct investment, 80 per cent of its top corporations and nearly 90 per cent of its best universities. The US and the European Union also happen to print two of the world's leading currencies.
Indeed, the US dollar still figures in 60 per cent of all global economic transactions. While people might like to talk up the new international role of a fully convertible yuan, I suspect they will still be talking about it in 20 years - unless China does what it has so far refused to do - open up its highly protected, state-owned economy to global competition.
Second, while it is true that many new states are assuming a bigger role, their rise needs to be looked at more carefully than it has been so far.
In fact, a careful look at the Brics as a whole reveals something crucial. Each faces some very big problems. Russia is in the midst of an economic crisis caused by its poor relationship with the West. Some analysts are now even predicting a deepening Russian economic crisis over the next few months - especially if oil prices continue to stagnate.
Brazil, meanwhile, is facing an uphill struggle to maintain its previous rates of growth. India is mired down by poor infrastructure, corruption and mass poverty. And China faces an uncertain future precisely because it can no longer grow at the rate it has been for the past 25 years.
Furthermore, China's rise has set off a series of tremors which bodes ill for the future stability of the region. Making claims to the whole of the South China Sea and confronting Japan over those islands might play well to a domestic audience. And no doubt China has the muscle to impose its will over weaker neighbours. But if the current situation continues or gets worse, then it will undermine China's position in a region that it has been assiduously wooing since the beginning of the century. It will also lead to the opposite of what China wants - an even greater US presence.
Basic problem of emerging economies
MORE generally, the emerging economies all face a basic problem: Their rise has in large part been dependent on conditions that cannot endure forever. One of these is a constant rise in commodity prices; the other is the economic rise of China itself.
But as The Straits Times recently reported, China and Chinese manufacturing are now at a six-month low and look like remaining low for some time to come, unless of course the government takes the economically risky decision of rebooting the economy once again.
It is not just China that faces some tough decisions. The world economy overall looks anything but dynamic and healthy as we move towards 2015. Japan's three-year dash for growth has shuddered to a halt. The EU, meantime, shows no sign of recovering any time soon.
Meanwhile, the US looks set to make a series of big decisions that could cause problems for other countries. Indeed, if the Federal Reserve in Washington cuts back on quantitative easing and then does what orthodox economists have been prodding it to do for ages - raise interest rates - this could send shockwaves around a world that for the last six years has been doing very well because the US has been flooding it with liquidity at almost zero rates.
Take away this life-support machine and the rising "rest", the Brics and indeed Asia as a region could be in for some very rough times.
Finally, we would all do well to remember that we are all in the same boat together.
Take China. There are many reasons why it has been successful economically. But even its much discussed (and sometimes exaggerated) rise would not have been possible without a stable region, included within which are several key US allies, and a willingness on the part of the US - and the EU - to open their markets to Chinese goods. China may not like to be reminded of the fact. But the truth is that its prosperity depends on that same Western-led economic order it now seems intent on challenging.
By the same measure, the West also needs a prosperous China, not to mention a peaceful and economically dynamic Asia. This, after all, is what globalisation is all about; and why globalisation renders all talk of one part of the world rising while others fall, pointless and dangerous.
We all sink or swim together in an era of what I term "mutually assured economic destruction"; an era defined by close interdependency, in which decline and disorder in one part of the international system can only make matters worse for those living in others.
A failure to understand this simple truth could be catastrophic.
Indeed, a failure to appreciate this most basic of facts means there is at least a chance in these increasingly uncertain times that the enormous economic strides we have all made together since the end of the Cold War could be squandered forever. There is a world to lose.
The writer is professor of international relations at the London School of Economics and Political Science. He was in Singapore to give a public lecture on Nov 20 for the Singapore Institute of Management's 50th anniversary celebrations.
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