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 the 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 nine percent 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 Obama’s $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.”
The triumph of austerity in the U.S. 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 U.S. 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 ($580 blllion). This came to about 13 percent 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 percent and 30 percent, 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.
So decoupling is not a likely trend since China’s leaders have chosen to stake the future of the Chinese economy on U.S. 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 U.S. undersecretary of commerce under 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-siècle 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.