America was once known around the world for its pragmatic attitude in getting things done and looking toward the future. Now we've been overtaken by partisanship, political gridlock
and short-termism.
Today it is the non-ideological pragmatism and long-term political horizons of the emerging economies, notably China, that are showing the way. Nobel laureate Michael Spence, chairman of the independent Commission on Growth and Development associated with the World Bank, thinks there are lessons to be learned from their resilient bounce back after the financial crisis.
I spoke with him last week in Italy.
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Nathan Gardels: In your report on "post-crisis growth" you noted the "resilience" of China, which has bounced back to high growth after the Wall St. crash and is now officially the second-largest economy in the world.
What are the key factors of China's resilience? Will China be able to keep bouncing back, or might the recessionary winds from across the Pacific cool things down?
Michael Spence: China -- along with India and Brazil -- is going to get through this crisis pretty well and will be able to sustain its growth in the years ahead.
China, in particular, is capable of sustained growth if it can properly manage structural change in several dimensions.
First, China is going through a "middle-income transition" in parts of the country as earlier "growth drivers" in the export sector, notably low-wage manufacturing along the coast, die off and must be replaced with other drivers such as services. The domestic consumer will have to become more important so there is a better match between the productive potential of the economy and domestic demand.
Second, China is going to have to get quite a bit more income into the hands of the household sector in order to drive growth from within the domestic market. That means getting away from the very high levels of investment in the corporate and public sector where the marginal return on investment is declining.
Disposable income as a percent of GDP is low, and the savings rate is high, around 40 percent of GDP.
Third, they have to get their current account surplus down in the global economy or they will get a bad reaction from outside, for example protectionism.
If they can get the surplus down, that will help the global economy, but it will also help build domestic demand and household income.
This is a complicated set of changes to navigate, but I believe the Chinese leadership is up to it. I've been able to listen in and participate in some of their internal discussions, and I think they are going in the right direction. Certainly there are interests that want to block these changes. But the same qualities that have enabled China's resilience so far -- a long-term horizon, decisive policy-making and consistent follow-through by a generally competent government -- bode well for the future.
Because of their long time horizon there is a high level of understanding by the leadership that the economy has to evolve. Looking out at where they want China to be in 10 or 20 years, they know that an advanced economy cannot be based, as China is today, on labor-intensive process manufacturing for export.
They have seen how South Korea has managed the middle-income transition. I'm sure they are intensively studying that experience.
Gardels: With a nearly 9 percent annualized growth rate, Germany has picked up as the bright spot, a saver and strong exporter among the indebted consumer democracies of the West.
Yet, some say this so-called "German miracle" is really "the Chinese miracle" since their dramatic recovery is mostly due to high-end exports to China.
Are we seeing a "German miracle" from which rest of the West could learn? Or is it mainly due to a kind of "reverse coupling" where China is pulling Germany out of the doldrums?
Spence: Germany is doing well for two related reasons. First, the export sector is very healthy. And that is the result of the fact that over the last decade Germany has gone through a major restructuring of its economy in which workers traded some income for more job security, greater flexibility of hiring and firing was allowed, and work-sharing (kurzarbeit) instead of layoffs during the downturn has enabled key companies to retain skilled workers so they can get back on track quickly as demand rises. All of these reforms have put German companies in a more competitive position.
Second, as we've discussed, major emerging markets from China to Brazil have not only restored growth but are sustaining it. Germany's export sector is in a strong position to take advantage of that.
So, the "German miracle" is what has enabled that country to benefit from the "Chinese miracle."
Gardels: Where do you come down on the global debate between whether it is time to cut back and move toward austerity vs. continuing stimulus spending by governments?
Spence: There are such large differences among countries that it is hard to come down on any one position. There is a difficult balance between maintaining enough support to avoid a deflationary downward spiral on the one hand, and the longer-term costs of high debts and deficits on the other.
It is not surprising there is lively debate about this because there are good arguments on both sides.
As far as the United States is concerned, I would be on the conservative side at the moment. On the fiscal stimulus side, we've done about as much as we can do. I'm very much in favor of extending long-term unemployment benefits because they are essential to protect people while at the same time providing a stimulus. If you are going to spend limited resources, this is a good place to do it.
But, beyond that, the U.S. is in for a period of painful restructuring of balance sheets to deleverage decades of overspending by borrowing. That will take time to work through. I don't think you can accelerate the recovery by further government spending. It just won't yield much benefit.
America has clearly not yet come to terms with the fact that a healthy long-term future depends on suffering short-term pain. As much as we might wish it, there is no painless recovery after such a long bout of overleveraging.
That pain must involve both tax increases, partly to increase public-sector investment in infrastructure that has been way too low, and budget cuts in some government services to help further finance those same infrastructure investments. Tax cuts, only if they stimulate job creation, must also surely be part of the mix.
What worries me most is that as we -- so far unsuccessfully -- try to gather the political consensus to take decisive action, opportunities for the younger generation are shrinking. They are going to pay a high price in the short and medium term.
Gardels: Fifty years ago, California made the kind of massive public investments -- in a world-class university system, a vast road grid and canals to bring water from north to south -- that China is making today, from the world's fastest trains to the cutting edge of clean-energy technologies.
Yet, as we speak, California, like the U.S. as a whole, is mired in debt and political gridlock.
In your final Commission report, you write with China in mind that "Experience suggests that strong, technocratic teams focused on long-term growth can provide some institutional memory and continuity of policy" -- in short, effective government. "Leadership," your report says, "requires patience, a long planning horizon and an unwavering focus on the goal of inclusive growth."
Perhaps the Western consumer democracies, where the feedback signals of politics, the media and the market all tend to steer society toward immediate gratification, could learn something these days from China?
Spence: Yes, we could especially learn from the way they think about the evolution of the economy over the long term and then, in a pragmatic, non-ideological way, set about getting things done.
Democracy makes it a much more complicated and time-consuming process to get from A to B, to build consensus, invest in and support those things that sustain long-term growth. It is not impossible to do that in democracies today, of course. Brazil has turned itself around, and India seems to be doing so. So there is something to learn from them as well.
And, as you point out in the example of California, we were able to do that at one time in the U.S.
But we've forgotten what it takes. Too often in some parts of the American political culture there is a narrative that simply says that "the government should provide stability and the private sector will take care of everything else."
It doesn't work that way. And it never has, even in the U.S. It takes a commitment of resources and a long-term perspective. It is a bit like the way venture capital works. You don't know exactly how things will unfold, but you have to have a portfolio of projects to try to create and capture emerging opportunities.
In the developing countries that are successful, they think more in terms of a complementary relationship between the public and private sector.
Gardels: Is there a cultural issue here? Do societies dominated by a consumer mentality have the political gumption anymore to save and sacrifice for the longer term?
Spence: I'm not sure I understand the underlying forces that have led us to short-termism and underinvestment. But I do know changing that is above all a political process of building consensus for responsible governance. Those who think all you need to do is cut taxes and everything else will fall in place are wrong.
For a country of our level of income and wealth, the state of the infrastructure has become an embarrassment. Why can't we set a goal in America of having first-class infrastructure in 15 years?
Gardels: You said recently, "I have this gnawing feeling about the future of America. When people lose their sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine." You mentioned the Tea Party movement as one example.
What can be done to prevent the U.S. from becoming like Latin America?
Spence: I don't know how to get there politically. But I imagine there is still a non-ideological middle in America that is patriotic but not overly nationalistic. We were once a very pragmatic nation with the ability to compromise to move things forward.
If we believe what we say -- that America is the land of opportunity for all and that is why people want to come here -- then we need the policies that will make that actually true.
Many are worried about the stubbornly high U.S. unemployment rate, but believe we will get back to normal after the recession is over. But going back to where we were is not realistic.
The emerging economies are going to be more than 50 percent of global GDP in the not-too-distant future. It is a changing world. We can't afford to stand still and settle for endless political gridlock.
I think the U.S. can change, but, to be honest, I just don't see the political will at the moment.
© GLOBAL VIEWPOINT NETWORK/TRIBUNE MEDIA SERVICES
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Wonder how they will change when credit cards come their way
Seems as though their last concern is building a good product.
Their only thinking seems to be to put up an idea on a computer then look for funds to build.
I wonder when the last time was a company actually built a prototype and then looked for investors.
You can bet the the companies that supply the US war machine have not since WWII
Rural disposable income quadruples in the past 15 years, but because there’s a lot of other things going on in the economy . . . oh, no! It’s a smaller percent of GDP !
Sheesh.
“. . .and, the savings rate is high, at around 40 percent of GDP.”
Gosh. If that’s weren’t 20% corporate savings, and 20% household savings it might be something to think about.
“Third, they have to get their current account surplus down in the global economy or they will get a bad reaction from outside, for example protectionism.”
OK, this one I can buy, since there isn’t a chance in a million that the US is about to suddenly start living within its means.
Much easier just to blame it on the Chinese.
Clearly, someone is asleep at the wheel: The size of the Chinese and Japanese economies is roughly HALF that of the US, not one tenth! The Chinese and Japanese GNPs or GDPs are somewhere around $6 trillion, not $1 trillion. Perhaps the writers/editors are confusing quarterly and annual GDP. Either way, the impression one gets is one of ignorance and carelessness.
Tom Kando
http://european-americanblog.blogspot.com/
The World Bank, the International Monetary Fund, the Asian Development Bank and the United Nations (just off the top of my head) all say kandotom is wrong, and that the numbers on China and Japan are right.
Who would of thought that?
World Bank: 2009: US GDP: 14 trillion; Japan: 5 trillion; China: 5 trillion
IMF: 2009: US GDP: 14 trillion; Japan: 5 trillion; China: 5 trillion
I did exaggerate: Last year, the Chinese and Japanese economies were only 36% that of ours, not half. But meanwhile, China's has surpassed Japan's, growing by 10% annually, while ours is just about stagnant. So China's GDP is now 40% that of the US.
As I said, the media’s numbers are wrong. US GDP is NOT 10 times larger than China’s and Japan’s, but closer to 3 or 2 times.
As you might phrase it: Whose ignorent?
Terrified of a world in which they are rendered irrelevant, the conservative cancer that grips us now has turned its back on progress, and embraces an ethos wherein the very word "progressive" is a pejorative.
Who can wonder, then, that American innovation and progress has stalled, while the nations who emulated what was best about the USA - heavy investment in education and infrastructure, for example - are leaving us in their dust.
For anyone with eyes to see - conservatism offers NOTHING to our nation - and is damaging our prospects...
A country like China is increasingly making education and training available to her people. They are also able to self-finance many of their own projects. That is why foreign companies feel it necessary to have a presence there. With outside influence and investment further development of both manufacturing and service industry in China occurs. My opinion is that there is further development (and growth) in China still to be made.
As far as the United States is concerned, I would be on the conservative side at the moment. On the fiscal stimulus side, we've done about as much as we can do. I'm very much in favor of extending long-term unemployment benefits because they are essential to protect people while at the same time providing a stimulus. If you are going to spend limited resources, this is a good place to do it.
"But, beyond that, the U.S. is in for a period of painful restructuring of balance sheets to deleverage decades of overspending by borrowing. That will take time to work through. I don't think you can accelerate the recovery by further government spending. It just won't yield much benefit.
America has clearly not yet come to terms with the fact that a healthy long-term future depends on suffering short-term pain. As much as we might wish it, there is no painless recovery after such a long bout of overleveraging.
That pain must involve both tax increases, partly to increase public-sector investment in infrastructure that has been way too low, and budget cuts in some government services to help further finance those same infrastructure investments. Tax cuts, only if they stimulate job creation, must also surely be part of the mix."
Amen! I have been trying to convince liberals of this for years. We need to allow our economy to restructure. We were not as rich as our politicians made us believe.
let's all become a totalitarian communist state!!!!!
You have your history all mixed up. Liberalism came first. along with the Enlightenment, that lead to the Democratic Republics in the USA, then elsewhere.
Conservatism was a reaction against liberalism, democracy, republics and any Enlightenment of the serfs.
100 years later we got socialism and fascism, communism, which are NOT liberalism.
socialism attempts to make everyone equal, and micro manage the entire economy.
Communism eliminates the very concept of ownership
Fascism is the military industrial state and is compatible with a monarchist hierarchical with a controlled population, a very conservative concept. It's the same thing the monarchies did 200 years ago: raise armies and make war, weapons makers stay wealthy and keep the rest of the folks down.
US Founding father type liberals fully support private property.
Liberalism supports a democratic republic of all the citizens.
Liberalism supports educating all of the citizens no matter how poor, which requires room and board: edu-fare, the Scandinavian approach.
The Founding father type Liberals support regulated capitalism, not unfettered capitalism, look up the constitutional powers they gave congress. “
The buzz about economic "miracles" turns out to be pretty mundane when one looks at the actual reasons behind growth. For China, it has been the mobilization of a previously underemployed workforce, and the marshaling of resources: both tasks that command economies perform well. Increasing inputs is easy, but maximizing outputs (i.e., having an educated workforce, a strong innovation sector, and a robust consumer base) is more difficult. It proved impossible for the U.S.S.R., and a major challenge even for Japan.
The authors are eager to lecture about American inequality, but do not mention that China has grown increasingly unequal, as national income grows much more quickly than household income. The high-speed trains and cross-country infrastructure that China has built...are more a testament to how navigable its property laws are, and how insatiable its appetite for construction-driven GDP growth, than it is to a revolution in ingenuity. Unlike the Californian infrastructure of the 1950s, much of China's infrastructure is superfluous: roads that go past houses without running water, much less automobiles, and trains with fares equal to a household's entire monthly income.
The restructuring of the Chinese economy has not really begun. Consumption fell to an abysmal 36% of GDP in 2009. The subsidies that temporally boosted auto consumption are beginning to run out, and will be recouped by hitting the poorer household sector.
when this country is shackled by frivolous politicos acting for their masters and themselves only
"The best case for China's authoritarian system is that it can be more decisive than pluralistic democracies in which interest groups and institutional checks and balances impede government from acting in the national interest. The fact that China recovered first from the global financial crisis while other countries were still debating its causes and remedies suggests that China is "getting something right".
China's rapid and massive stimulus shows that the Chinese Communist Party (CCP) can react decisively in crises for which the remedy is big spending—one thing it does extremely well is pump out credit through the banks to the provincial and municipal officials who have a lot of clout within the party. As many Chinese domestic critics have pointed out, while some of these blank cheques were used to build useful roads and high-speed rail lines, others found their way into urban real estate markets, inflating a property bubble almost as large as Japan's at the end of the 1980s, just before the Japanese economy began its long decline. Local governments have taken on debt (estimated at 22% of GDP) that they have no prospect of repaying.
Without elections, independent non-governmental organisations, or a free press, the CCP is incapable of getting local officials to devote themselves to the welfare of their citizens instead of lining their own pockets and those of their real estate developer friends."
Case in point: "Without elections, independent non-governmental organisations, or a free press, the CCP is incapable of getting local officials to devote themselves to the welfare of their citizens instead of lining their own pockets and those of their real estate developer friends."
The US has elections, NGOs and a free press - and yet we see officials lining the pockets of their Wall St, Big Business and Real Estate friends. And yet people here, whether in the media or otherwise, somehow feel compelled to voice the dogma for fear of being shunned.