The dominant mood in liberal economic circles as 2010 drew to a close, in
contrast to the cautiously optimistic forecasts about a sustained recovery at
the end of 2009, was gloom, if not doom. Fiscal hawks have gained the upper
hand in the policy struggle in the United States and Europe, to the alarm of
spending advocates like Nobel laureate Paul Krugman and Financial Times
columnist Martin Wolf who see budgetary tightening as a surefire prescription
for killing the hesitant recovery in the major economies.
But even as the United States and Europe appear to be headed for deeper crisis
in the short term and stagnation in the long term, East Asia and other
developing areas show signs of decoupling
from the Western economies. This trend began in early 2009 on the strength of a
massive Chinese stimulus program, which not only restored China to double-digit
growth but swung several neighboring economies from Singapore to South Korea
from recession to recovery. By 2010, Asia's industrial production had caught up
with its historical trend, "almost as if the Great Recession never happened,"
as The Economist put it.
The United States, Europe, and Asia seem to be going their separate ways. Or
are they?
The triumph of austerity
In the major economies, outrage with the excesses of the financial institutions
that precipitated the economic crisis has given way to concern about the
massive deficits that governments incurred to stabilize the financial system,
arrest the collapse of the real economy, and stave off unemployment.
In the United States, the deficit stands at over 9% of gross domestic product.
This is hardly a runaway deficit, but the American right managed the feat of
making the fear of the deficit and federal debt a greater force in the mind of
the public than the fear of deepening stagnation and rising unemployment. In
Britain and the United States, fiscal conservatives gained a clear electoral
mandate in 2010, while in continental Europe a more assertive Germany put the
rest of the eurozone on notice that it would no longer subsidize the deficits
of the monetary union's weaker southern-tier economies such as Greece, Ireland,
Spain, and Portugal.
In the United States, the logic of reason gave way to the logic of ideology.
The Democrats' impeccable rationale that stimulus spending was necessary to
save and create jobs was no match for the Republicans' heated message that more
stimulus spending added to President Barack Obama's US$787 billion 2009 package
would be one more step towards "socialism" and the "loss of individual
freedom". In Europe, Keynesians argued that fiscal loosening would not only
help the troubled economies of southern Europe and Ireland but also the
powerful German economic machine itself since these economies absorbed German
exports.
As in the United States, solid rationale lost out to provocative image, in this
case, the media-disseminated portrayal of thrifty Germans subsidizing
hedonistic Mediterraneans and spendthrift Irishmen. Germany has grudgingly
approved bailout packages for Greece and Ireland, but only on condition that
the Greeks and Irish are subjected to savage austerity programs that have been
described by no less than two former high-ranking German ministers Frank-Walter
Steinmeier and Peer Steinbrueck, writing in the Financial Times, as having a
degree of social pain "unheard of in modern history".
Decoupling revived
The triumph of austerity in the US and Europe will surely eliminate these two
areas as engines of recovery for the global economy. But is Asia indeed on a
different track, one that would make it bear, like Atlas, the burden of global
growth?
The idea that Asia's economic future had been decoupled from that of the center
economies is not new. It was fashionable before the financial crisis dragged
down the US economy in 2007-2008. But it was shown to be a mirage as the
recession in the United States, on which China and the other East Asian
economies were dependent to absorb their exports, triggered a sudden and sharp
downturn in Asia from late 2008 to mid-2009. This period produced television
images of millions of Chinese migrant workers, laid off in coastal economic
zones, heading back to the countryside.
To counter the contraction, a panicked China launched what Charles Dumas,
author of Globalization Fractures, characterized as a "violent domestic
stimulus" of 4 trillion yuan (US$580 billion). This came to about 13% of gross
domestic product in 2008 and constituted "probably the largest such program in
history, even including wars". The stimulus not only pulled China back to
double-digit growth, it also pushed the East Asian economies that had become
dependent on it to a steep recovery even as Europe and the United States
stagnated. This remarkable reversal led to the renaissance of the decoupling
idea.
The ruling Communist Party of China has reinforced this notion by claiming a
fundamental policy shift to prioritizing domestic consumption over export-led
growth. But this contention is more rhetorical than real. In fact, export-led
growth remains the strategic thrust, thus China's continuing refusal to let the
yuan appreciate in order to keep its exports competitive. China, as Dumas
notes, is "in the process of shifting massively from the beneficial stimulation
of domestic demand to something closely resembling business as usual, circa
2005-07: export-led growth with a bit of overheating".
Not only Western analysts like Dumas have pointed to this return to export-led
growth. Yu Yongding, an influential technocrat who served on the monetary
committee of China's central bank, confirms that it is indeed back to business
as usual: "With China's trade-to-GDP ratio and exports-to-GDP ratio already
respectively exceeding 60% and 30%, the economy cannot continue to depend on
external demand to sustain growth. Unfortunately, with a large export sector
that employs scores of millions of workers, this dependence has become
structural. That means reducing China's trade dependency and trade surplus is
much more than a matter of adjusting macroeconomic policy."
The retreat back to export-led growth, rather than merely a case of structural
dependency, reflects a set of interests from the reform period that, as Yu puts
it, "have morphed into vested interests, which are fighting hard to protect
what they have". The export lobby, which brings together private entrepreneurs,
state enterprise managers, foreign investors, and government technocrats, is
the strongest lobby in Beijing. If the justification for stimulus spending has
been trumped by ideology in the United States, in China the equally impeccable
rationale for domestic-market-centered growth has been trounced by material
interests.
Global deflation
So decoupling is not a likely trend since China's leaders have chosen to stake
the future of the Chinese economy on US and, to some extent, European demand.
But the context has changed ever since the rupture in the pre-crisis
"partnership" between the American consumer and the Chinese producer. Not only
are Americans deep in debt but the budgetary crunch pushed by the fiscal hawks
will squeeze their incomes even further.
Indeed, what analysts like Dumas refer to as China's "reversion to type" as an
export-oriented economy will clash with the efforts of the United States and
Europe to speed recovery by adopting China's own formula: pushing exports while
raising barriers to the inflow of imports. The likely result of the competitive
promotion of this volatile mix of export push and domestic protection by all
three leading sectors of the global economy at a time of stagnant world trade
will not be global expansion but global deflation.
As Jeffrey Garten, former US undersecretary of commerce under president Bill
Clinton, has written: "While so much attention has focused on consumer and
industrial demand in the US and China, the deflationary policies enveloping the
EU, the world's largest economic unit, could badly undermine global economic
growth... The difficulties could cause Europe to redouble its focus on exports
at the same time that the US, Asia, and Latin America are also betting their
economies on selling more abroad, thereby exacerbating already-high currency
tensions. It could lead to a resurgence of state-sponsored industrial policies,
already growing around the world. And together, these factors could ignite the
virulent protectionism that everyone fears."
What is in store for us in 2011 and beyond, Garten warns, is "exceptional
turbulence as the waning days of the global economic order we have known plays
[sic] out chaotically, possibly destructively". He projects a pessimism that is
increasingly capturing sections of a global elite that once heralded
globalization but now sees it disintegrating before its eyes.
This resigned fin-de-siecle mood is not a Western monopoly. Yu Yongding also
claims that China's "growth pattern has now almost exhausted its potential".
The economy that most successfully rode the globalization wave, China "has
reached a crucial juncture: without painful structural adjustments, the
momentum of its economic growth could suddenly be lost. China's rapid growth
has been achieved at an extremely high cost. Only future generations will know
the true price."
In contrast to the apprehension of establishment figures like Garten and Yu,
many progressives see turbulence and conflict as necessary accompaniments of
the birth of a new order. Workers have indeed been on the move in China, where
strikes in selected foreign companies in 2010 resulted in significant wage
gains. Protesters are indeed out in the streets in Ireland, Greece, France, and
Britain.
Unlike in China, however, they are marching to preserve what rights they have
left. And neither in China nor the West nor elsewhere is this resistance
accompanied by an alternative vision to the global capitalist order. A more
far-reaching discussion of alternative economic arrangements should be ongoing
as the global economic crisis enters its fourth year. But the debate continues
to be trapped between the sterile spend-and-stimulate versus cut-the-deficit
positions. The shape of things to come is simply not visible in the embers of
the old. At least, not yet.
Walden Bello is a member of the House of Representatives of the Philippines. He
has written a number of books on global political economy, the latest of which
is Food Wars (London: Verso, 2009). He is a columnist with Foreign
Policy In Focus as well as a senior analyst at the Bangkok-based Focus on the
Global South.
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