Asian nations in the ‘catch-up game’
By Shahid Javed Burki
Monday, 08 Mar, 2010
AS the Planning Commission continues to work on preparing the Five Year Plan 2010-15, it would do well to carefully study the changes in the global economy, in particular how the chairs are being rearranged on the Asian economic deck.
Two developments are particularly worthy of note: one, the reemergence of the state as an important economic player and, two, the emergence of China as the most significant Asian economy. The planners must reflect on both in designing Pakistan’s economic future.
Two developments, the first decades old and the second very recent, have reshaped – and are reshaping – the global economic landscape. The first is the process of globalisation that reduced the distance among different economies in the world, not in the physical sense, but in the sense of the easy flow of capital, trade, information and technology.
Globalisation has produced a global economy the like of which the world has never known and the process will continue to move forward with enormous consequences. The second development is what economists and people of finance call the Great Recession of 2007-09 to distinguish it from the Great Depression that took such a heavy toll in the 1930s.
What was “great” about this particular downturn in economic activity was that its origins did not lie in the normal working of the large economies that produce trade cycles with some frequency. The slow down that seems to be winding down was great for three reasons. The ferocity with which it struck; it took the form of an economic tsunami not many had predicted. It was caused not by the normal ups and downs in economic activity but by misplaced faith in the rationality of the markets. And it is likely to change dramatically the structure of the global economy. It is the third aspect of the Great Recession that I will explore.
Going back to the analysis of “catch-up” offered by Alexander Gerschenkron, the premier economic historian of the 20th century, the role the state plays in the process acquires special significance. There is the need to put considerable stress on what governments can do to better the lives of their citizens. The government’s role as an economic player was relegated to the back benches in the 1980s by the economic philosophy that accompanied Ronald Reagan to the White House.
Called The Washington Consensus, this view left the private sector to its own devices, even to regulate itself. Forced on the back-bench, that’s where the state remained until it was called upon to act again to save the world economy from collapsing in 2008. Summoned back, the state acted impressively in both developed and developing countries. China was at the forefront of this move closely followed by the United States.
It is interesting that even the Chinese had succumbed for a while to a weaker version of the Washington Consensus. Pakistan during the period of President Musharraf adopted this approach as well. With the state having roared back to life, what will it do to shape the economies of the developing world? In this context what role should be assigned to the state by the planners? One answer to the second question is to be found by looking at the reshaping of the global economy that is currently under way.
Taking cue from those who have studied various episodes of “catch up” in economic history when some of the economies that had lagged behind caught up with the leader, it is hard to escape the fact that China is currently involved in this process. China, which some time in 2010 will become the second largest economy in the world, overtaking Japan that held that position for several decades, will have enormous influence on the developing world, particularly countries such as Pakistan that it borders. This is a particularly relevant occurrence for Asia not because one Asian economy is replacing another. What makes it significant is that the structure of the Chinese economy and the way that structure is changing will matter enormously for the rest of Asia.
While Japan is from Asia, when its economy became “developed” it joined the ranks of those that were similarly placed. Japan’s linkages with Asia were weak; those of China are becoming strong. One good indication of this is the inauguration of the China-Asean Free Trade Area in January 2010 that will have profound consequences for the economies on its periphery.
Unlike some of the earlier catch up incidents, China, having almost overtaken Japan and may in the next several decades bypass the United States as well, will remain a relatively poor country dependent on the rich for markets and technology. This introduces an entirely new dimension in the “catch up” game.
For many decades to come, the global economy will be dominated by two economies that will not compete as much – as Britain and France did during the first catch up episode a couple of centuries ago – but complement one another.
Notwithstanding the current exchange of difficult words between Beijing and Washington, I believe that the global economic architecture will neatly arrange itself into three tiers: the United States and China at the top (the G2), a number of secondary powers in the middle (the G20), and the rest of the world forming the base of the pyramid.
Those who believe that such a system dominated by two economies will not be stable derive the wrong lesson from the Cold War when for four decades the United States and the Soviet Union confronted one another, sometimes with murderous intent. It was only the mutually assured destruction made possible by the possession of thousands of nuclear weapons by the two sides that prevented the globe from being reduced to a giant mushroom cloud. It is not necessary that a great power must always beat back competition and seek total domination. When competing powers need each other as do the Americans and the Chinese, they will learn to work with another. This is likely to happen within the context of the global architecture for economic management that is being put in place.
While mutual dependence is likely to create equilibrium in the global economy – and also keep the political system in balance – could the same be expected in Asia? The continent has not one, not two but three great economic powers.
While Japan seems not concerned with the second rank it is soon likely to assume in the continent in terms of the size of the economy, would India be content to be the third? More important will it be prepared to be relegated to the second tier in the hierarchical structure I see emerging to manage global economic affairs?
I would like to emphasise that for India to gain the economic and political stature it desires, it will need to achieve a number of things: tranquility around its borders, an economic system that delivers to the less advantaged segments of the population, particularly in terms of education and skill development, development of physical infrastructure that can support a rapidly growing and modernising economy, and an economy that is more outwardly oriented so that it can take full advantage of the rapidly changing systems of trade and production. If it is able to do most of these things there is no reason why some time in the future the system’s apex can’t expand from the G2 to the G3.