Reshaping the global economy
By Shahid Javed Burki
Monday, 25 May, 2009
THIS is a bad time for the world economy and an even worse time for the western financial system. But this is a good time for speculating about the future shape of the global economic system.
Some economic historians have identified catch up periods in the world economy when some of the national economies that had lagged behind joined the leader, some time even overtaking it.
In the 18th century France caught up with Britain, the country that had launched the industrial revolution. A quarter century later, Germany joined the two leading economies of Europe and became one of them. In the late 19th century it was the turn of the United States. It not only joined Europe’s leading economies but by the time of the start of the First World War it had overtaken most European economies in terms of the size of its economy and income per head of its population.
The 20th century saw more catch up periods. After the Second World War that saw the defeat and devastation of Germany and Japan, the Americans helped the defeated “axis powers” to recover. It did this by launching the Marshal Plan, an unusual response by the victor towards the countries it had defeated Not only did Japan recover, it joined the leading world economies in terms of the structure of economy and income per capita of its population. The pace and style of Japanese economic development caught the eyes of many academics, including Ezra Vogel, the sociologist at Harvard University who wrote a bestselling book titled Japan as Number One.
He saw the dynamism of the Japanese economy so impressive that it could, he thought, overtake the United States within the foreseeable future. Had that happened that would have been a spectacular case of an overtake. Japan with one-half of the US population would have had to double its income per head to overtake America.
The next period of closing the gap took place between 1975 and 1995 when a number of East Asian economies – the World Bank called them the “miracle economies” in a celebrated study of East Asia – achieved rates of economic growth unprecedented in economic history.
Within these two decades four East Asian states – South Korea, Taiwan, Hong Kong and Singapore – saw a remarkable transformation of their economies. Although they did not approach the income levels of Japan and the western economies, they became industrial powerhouses. Even though there was a brief interruption in their progress by what came to be called the Asian Financial Crisis of 1996-97, they resumed economic development at about the pace of the pre-crisis period.
Before the start of the global economic crisis in the summer of 2007, there was much speculation that a new group of “catch up” economies had appeared on the global economic scene. Brazil, Russia, India and China got their own name, the BRICs. They were likely to become major economic players.
Given the large sizes of their populations, some analysts believed that the centre of global economic activity would move to these countries. There was also a consensus emerging in academic circles that we were witnessing another significant change in the structure of the global economy.
“Decoupling” was occurring in the global economy and the BRICs, along with some other large emerging economies, would no longer be affected by the cycles to which the more developed economies were subject. That was not to be so.
As the crisis that began in the United States in the summer of 2007, when it reached other shores, it did not spare the BRICs or other parts of the globe. “The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default” wrote Martin Wolf, chief economics commentator of Financial Times for a special issue of the newspaper.
“Confidence in local and global elites, in the market and even in the possibility of material progress will weaken, with devastating social and political consequences. Helping emerging economies through a crisis for which most have no responsibility whatsoever is a necessity.” It is hard to accept this grim conclusion. Some countries in the emerging world will be hurt no doubt, and many of them need the as sistance of the international community. Several, however, will emerge stronger from this experience and continue to participate in the reshaping of the global economic structure. Among those that will benefit and thus lead are several Asian economies. To make this point it might be useful to briefly visit the changes that have occurred in economic thought in the last few decades, especially after the conclusion of the Second World War.
The last half century divides itself neatly into two periods – neat in the sense of the attention given by policymakers the world over for certain ideologies concerning economic management. Several influential world lead ers did not see the war as a triumph of the United States and its allies in Western Europe. They saw it as the victory of socialism and statism over the market place.
The remarkable economic growth of the Soviet Union and the growth of its military might were seen as vindication of the way it had managed its affairs. The admirers of the Soviet Union were not confined to the leaders of what came to be called the Third World – leaders such as Jawaharlal Nehru of India, Gamal Nasser of Egypt, Julius Nyrere of Tanzania, Kwame Nkrumah of Ghana and Soekarno of Indonesia.
Even in the victorious Britain, the voters sent home Winston Churchill and his Conservative party in favour of the Labour party and its leader Clement Attlee. The model these leaders favoured was that of the mixed economy. In John Maynard Keynes, they had their own philosopher for this approach. The man who gave the clearest substance to this line of thought in the Third World was India’s Nehru under whom the state was placed on the “commanding heights” of the economy.
A reaction set in to this approach with the election of Ronald Reagan in the United States in 1980 and the ascent to the British prime ministership of Margaret Thatcher the year before. Other events also contributed to the development of a new approach in which private enterprise was to be left alone to its own devices. These included the shift in China from the plan to the market under Deng Xiaoping and the dismantling of the ‘”licence raj” in India starting in 1991 under the stewardship of then finance minister Manmohan Singh.
“Government,” proclaimed Reagan, “was not the solution to the problem but itself a problem”. The man who gave real substance to this philosophy was Alan Greenspan who served for 18 years as the Chairman of the US Federal Reserve Bank, the country’s central bank.
The fervour with which this economic ideology was supported has been replaced by the fervour with which it is now being condemned.There is now consensus that the state has a large role to play in the management of the economy. Even if it is not placed on the economy’s commanding heights, it must watch over it with great care and diligence.
The countries that will do better in this respect are those that did not dismantle the state as an economic overseer and most of those are in the emerging world. For this reason alone, I find it hard to accept that the entire emerging world has been thrown back almost to the start of the economic race as a result of the economic crisis of 2007-10. Many in this part of the world will recover stronger than the weakened economies of the West.