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Opinions and Analysis | |
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Sunday, April 19, 2020 / 12.57PM / By Capital
Finance International / Header Image Credit: Bloomberg
For the first time in
nearly half a century China's economy has stopped growing. The National Bureau
of Statistics (NBS) reported a 6.8 percent drop in economic output over the
first quarter of the year. Retail sales were down by 19 percent and export
sales shrank by 13 percent. Fixed asset investment is down as well whilst
unemployment jumped to 5.9 percent.
Though the Chinese NBS data usually require a pinch of salt, there is
little doubt that the Chinese economy took a severe hit from the pandemic.
However, in its World Economic Outlook, published earlier this
week, the International Monetary Fund (IMF) predicts China to bounce back
quickly and end the year on a positive note with GDP expanding by a modest 1.2
percent. IMF forecasters expect the country to get its mojo back into working
order next year when the economy may grow by as much as 9.2 percent.
Though the IMF's outlook is peppered with caveats, the fund clearly
continues to view China as the main driver of global growth. As far as the IMF
is concerned, a serious re-evaluation of globalisation is not in the cards. It
is, of course, not the fund's job to consider the political landscape as it
analyses economic performance and distils trends from numbers. In fact, the IMF
enjoys somewhat of a reputation when it comes to steamrolling over the concerns
of politicians, reminding them that nations must, as a rule, live within their
means.
Whilst the advice the institution dispenses is usually quite sound and
sensible, the fund - by its own admittance - never before had to deal with a
global recession of a magnitude comparable to the present crisis which struck
with a speed and ferocity not seen before in living memory. The pandemic has
materially changed political reality, resulting in a paradigm shift in our
collective understanding of economic theory. The spread of a microscopically
small virus has exposed the fragility of the very system that has generated
considerable wealth.
Over the past 40 odd years, globalisation has lifted billions out of
poverty in Asia, Africa, and elsewhere. By leveraging the comparative
advantages of nations, as first codified by the British political economist
David Ricardo at the start of the 19th century, the world entered an
era of almost continued economic growth, interrupted only by relatively small
hiccups as dynamic markets corrected distortions and eliminated pockets of
inefficiency.
China's economic contraction, however brief, may be dismissed as
atypical since it was caused by an unexpected externality and not by some major
flaw of the country's development model. That model has yielded extraordinary
results. In 1976, the year Chairman Mao passed away, the country boasted a per
capita income of $167 - one of the world's lowest. After the Cultural
Revolution had been derailed with the arrest of the Gang of Four, China
embraced the Four Modernisations first proposed in 1963 by Zhou Enlai, then
vice-chairman of the Communist Party, and implemented by the great reformer
Deng Xiaoping in 1977. What happened next constitutes a miracle of sorts. Fast
forward 43 years, the blink of an eye in the course of human history, and China
presides over the world's second largest economy with a per capita income close
to $10,000.
The almost mind-boggling progress of the country took everyone by
surprise. It had been deemed impossible. In 1988, Milton Friedman, the dean of
economic liberalism, proclaimed that China could not possibly hope to attain
any significant measure of prosperity since it lacked the requisite political
freedom that underpins capitalism. "To get rich, China must be free," surmised
the late professor of the University of Chicago who counted US President Ronald
Reagan and UK Prime Minister Margaret Thatcher amongst his disciples.
In fact, Prof Friedman gave this advice to General Secretary of the
Communist Party Zhao Ziyang whilst on a visit to Beijing at the invitation of
Chinese top officials eager to discover the wonders of capitalism. However, Mr
Ziyang did not at all like what he heard from the US professor. After he had
left, China rewrote the textbook and chose its own path to riches - disassembling long-held theories about the crucial link between free markets
and democracy as it rapidly emerged from poverty.
The pandemic currently holding economies hostage all over the world also
forces a rewrite of the economic cookbook. As China has proved, that need not
stall growth. In Europe, and even in the United States, the primacy of the
market is being questioned. Thanks to a senator from Vermont, young Americans
have discovered that unbridled capitalism is not the only choice of offer. As
if an entire generation suffered an epiphany, interest in social democracy has
been sparked. Though this may not lead to immediate demise of the mastodons of
the political establishment, the epithet 'card-carrying liberal' no longer
represents instant dismissal as a swivel-eyed loon belonging to a curious
fringe movement.
In Europe, even staunch liberals such as Dutch Prime Minister Mark Rutte
now seem to take pride in their social democratic roots. During a debate in
parliament, Mr Rutte caused consternation amongst friends and foes alike by
calling the country 'socialist' and considering that trait a blessing in these
troubled times. Across the continent, political and economic thinkers quietly
advocate for a return to wealth creation by all as opposed to wealth extraction
by a few. The very premises of globalisation and the teachings of David Ricardo
are being questioned as are the concepts of small government, deregulation, and
privatisation.
Writing in The New York Times, former US Secretary of the Treasury
Robert Rubin, who served in both Clinton administrations, now pleads for a
massive and structural increase in federal spending. He argues that there is
ample room for extra outlays of cash given that the federal budget represents
only some 16 percent of GDP. That may easily be increased to 20 percent or
more, he says. Mr Rubin also warns that any savings made now will prove to have
been false later on. Allowing the US economy to languish in a long-tailed
recession results in a lower GDP, taking a bite out of federal revenue, and
pushing the debt-to-GDP ratio up considerably. Mr Rubin argues that it is wiser
to put the horse in front of the cart and issue vast amounts of new debt to
keep the economy going.
For all its uncertainties, the post-corona world will want to revisit
previously discarded concepts such as economic resilience. Supply chains will
be shortened as societies awake to the dangers of depending on distant others
for their security. This is bad news for China and a few others with
trade-based growth models such as Germany and The Netherlands. In the medium
term, China will need to spur domestic demand which remained repressed to a
significant degree whilst the country sought to exploit its comparative
advantage as a low wage nation. In northern Europe too, wages and its
corresponding domestic demand have been kept artificially low as part of a mix
of policies to ensure relative competitiveness.
As the pandemic continues to ravage economies, and the direct and
indirect costs of the outbreak mount, individuals and businesses alike will
clamour for ever greater measures of support from the only entity able to
provide the level of succour needed - the state.
After the virus has been contained, that state will look, feel, and behave
differently than before. It will also enjoy a much greater level of
appreciation than before.
That may either open a can of worms or lead to a more benign form of
capitalism and a renewed interest in social democracy which, although much
maligned, did manage to rebuild a continent shot to smithereens by a world war.
Not only that, it did so at a clip comparable to China's speeding down the road
from rags to riches.
End.
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