West losing its grip on economic power

 

The baton of economic progress is passing to states such as China and India, a new book argues

DID YOU know Chinese ships were bigger and better than their European counterparts in the 1430s, that their navy was led by Zheng He, a seven-foot tall Muslim Mongolian eunuch, who had a fleet of 300 ships, 28,000 sailors, visited 37 countries and probably discovered America before Colombus?

Well I didn’t, at least not until I met Stephen D King.

Like a number of Irish economists, Stephen learned his trade at the British treasury before becoming chief economist at HSBC. He is responsible for their global economic coverage and co-ordinates the research of HSBC economists all over the world.

He was at a symposium in Trinity College Dublin last week to promote his first book Losing Control; the Emerging Threats to Western Prosperity.

One can only imagine the reaction of Zheng He when, shortly afterwards, the Chinese leaders decided to destroy their entire ocean-going fleet, “a symbolic act that was, economically, one of the most costly moments in human history”, according to King.

By closing itself off from the rest of the world, China starved itself of the ideas and innovations (printing presses, steam power and railways) that contributed so much to the productivity gains seen in Europe over the last 500 years.

In 1000 AD, Chinese per-capita income was higher than in Europe; by 1820 they were only half European levels and the gap grew progressively wider until the 1950s. Openness matters.

The Great Leap Forward merely succeeded in stopping the rot. It was the reopening of China to the external world under Deng Xiaoping that led to its remarkable economic growth over the past 30 years and now threatens the prosperity of the western world.

China’s share of world trade has tripled to 15 per cent since 1950. Taken together, the emerging nations are now at least as big as the US and are growing three times faster. Though the book is titled Losing Control, it appears that the western world may have lost it already.

Since the beginning of this century, China has been the single biggest contributor to increased global energy demand. At current growth rates, China would be attempting to consume the equivalent of all the world’s current oil production by the middle of the 21st century.

History, politics and geography matter. Too often, economists end up lost in a mathematical world of esoteric equations which cannot provide answers to the really big questions affecting society. King quotes the response of the UK economics profession when the queen asked why no one had seen the bank crisis coming.

“Your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole”.

This applies, a fortiori, in this country, but that’s another story.

According to King, a simpler conclusion would be to say that they had failed to learn the lessons of history, politics and geography and the unspoken subtext is that we are making the same mistake as regards China and the emerging world. China is not the first Asian country to emerge. For 30 years after 1950, Japanese growth rates outstripped both the US and Europe. South Korea also made remarkable progress.

Japan has a population of 120 million; South Korea 80 million. At last count, China had a population of 1,300 million while India has 1,100 million and will soon overtake China. Together, they account for well over one-third of the world’s population. It is their vast scale that makes them dangerous – no western productivity miracle is likely to be able to cope with this demographic pressure.

The balance of economic power will shift dramatically as it has done before. While the global economy may grow rapidly, the developed world’s share is likely to come under tremendous pressure.

As its bargaining power wanes, it will be confronted by a simple choice: should it grow old gracefully, accepting that the baton of economic progress is being passed to other parts of the world or should it resist, threatening to throw the world as a whole into a new age of protectionism, strife, mutual suspicion and deep instability? King’s views on how things may or should evolve are contained in his book which is published early next month by Yale University Press.

King is careful when it comes to offering views on Ireland. For a country in our situation, as the UK now is, he cites six possible responses.

The first is the theological, ie pray that things will improve. Second, there is austerity, ie throw away the Keynesian textbooks and bite on the bitter pill as we are doing.

Then there is the Japanese approach which is to struggle on with a big deficit, combined with low interest rates – this ultimately results in a disastrous situation. The fourth approach is to inflate your way out of the problem but this is not an option for a member of the euro. Single currency membership also rules out devaluation. Finally, there is the default option, which most people eschew.

King’s view is that Ireland is fortunate in that by trying to do the right thing, we have taken the spotlight off us and avoided the possibility of even greater austerity. Let’s hope it stays that way.