to balance the global economy, recalibrate democracy

4
FALL 2010 2 2 The “clash of systems” between America—the borrower and consumer—and China — the saver and manufacturing exporter — has generated an imbalance in the global economy that, if not corrected, threatens the peace and prosperity that has so far been achieved through globalization.That correction cannot occur overnight and it cannot be economic alone, but depends ultimately on the recalibration of democ- racy in both West and East. In China’s case, further democratization would include free labor unions and expanded rights for the rapidly growing urban middle class. Less censorship and more robust forms of political accountability would aid the reorientation of its juggernaut from export-led growth toward domestic consumption. Such a shift would enable the household to compete with the factory as a political priority. China might learn from the policies of Asia’s development pioneers—Japan, South Korea or Taiwan—where income became more evenly spread as wages rose to capture productivity increases and a credible safety net was put in place with high and broad levels of investment in education to enable the next gen- eration to move up the value-added ladder.All these neighbors of China managed a middle income transition by establishing the reliable rule of law that made government accountable, freer expression and some sense of social security. In a developing market, confident expectations about how society will work widely stimulates greater consumption. In the US political reform necessarily involves a shift away from the short-term political horizons and cultural habits of consumer democracy.Unless we can find ways to integrate the long-term perspective in governance and insulate it from immediate political pressures, it will be difficult to adopt policies that lead us back to fiscal pru- dence, revived productive employment, replenished savings and a middle class built on rising income instead of debt. Absent such a shift, there is certain to be a backlash against globalization — aimed with populist anger at China. Corrective policies, in other words, must seek to undo the way American and Chinese inequalities have played off of each other—a low wage export-led economy piling up huge reserves from overconsumption by an American middle class that fills To Balance the Global Economy, Recalibrate Democracy COMMENT

Upload: nathan-gardels

Post on 15-Jul-2016

215 views

Category:

Documents


3 download

TRANSCRIPT

FALL 201022

The “clash of systems” between America—the borrower and consumer—and

China—the saver and manufacturing exporter—has generated an imbalance in the

global economy that, if not corrected, threatens the peace and prosperity that has so

far been achieved through globalization.That correction cannot occur overnight and

it cannot be economic alone, but depends ultimately on the recalibration of democ-

racy in both West and East.

In China’s case, further democratization would include free labor unions and

expanded rights for the rapidly growing urban middle class. Less censorship and more

robust forms of political accountability would aid the reorientation of its juggernaut

from export-led growth toward domestic consumption. Such a shift would enable the

household to compete with the factory as a political priority.

China might learn from the policies of Asia’s development pioneers—Japan,

South Korea or Taiwan—where income became more evenly spread as wages rose to

capture productivity increases and a credible safety net was put in place with high and

broad levels of investment in education to enable the next gen-

eration to move up the value-added ladder. All these neighbors

of China managed a middle income transition by establishing

the reliable rule of law that made government accountable, freer expression and some

sense of social security. In a developing market, confident expectations about how

society will work widely stimulates greater consumption.

In the US political reform necessarily involves a shift away from the short-term

political horizons and cultural habits of consumer democracy. Unless we can find ways

to integrate the long-term perspective in governance and insulate it from immediate

political pressures, it will be difficult to adopt policies that lead us back to fiscal pru-

dence, revived productive employment, replenished savings and a middle class built

on rising income instead of debt. Absent such a shift, there is certain to be a backlash

against globalization—aimed with populist anger at China.

Corrective policies, in other words, must seek to undo the way American and

Chinese inequalities have played off of each other—a low wage export-led economy

piling up huge reserves from overconsumption by an American middle class that fills

To Balance the Global Economy,Recalibrate Democracy

C O M M E N T

FALL 2010 33

IN THIS ISSUE . . . we examine the complex political and economic

challenge of rebalancing the global economy.

RAGURHAM G. RAJAN, former chief economist of the IMF, is author of

Fault Lines: How Hidden Fractures Still Threaten the World Economy. MICHAEL SPENCE was awarded

the Nobel Prize in economics in 2001 and heads the World Bank’s Commission of

Global Growth and Development. FAN GANG is director of China’s National

Economic Research Institute. EDMUND S. PHELPS was awarded the Nobel Prize

in economics in 2006. GEORGE PAPANDREOU is the prime minister of Greece.

FANG LI-ZHI, the dissident physicist once known as “China’s Sakharov,” now lives

in exile in the United States.

AZAR NAFISI is author of Reading Lolita in Tehran. AYAAN HIRSI ALI, the Somali-

born feminist, is author of Nomad. REZA ASLAN is author of No god but God.

ALASTAIR CROOKE, a former MI6 operative in the Middle East, runs the Conflicts

Forum in Beirut. ABDULLAH GUL is the president of Turkey. SHIMON PERES is the

president of Israel.

ANTHONY GIDDENS is the former director of the London School of

Economics. BERNARD KOUCHNER is the foreign minister of France. KATSUYA OKADA

is the foreign minister of Japan. CHARLES MICHEL is Belgium’s development minister.

OLIVER STONE’S latest film is Wall Street: Money Never Sleeps.

FALL 20104

FALL 2010 5

the gap in its falling status through borrowing at rates pushed low by flush liquidity

from China and an accommodating Federal Reserve.

Former IMF chief economist Raghuram Rajan has argued that political pressures

to compensate for America’s growing inequality gap over the past 30 years through

eased credit by the US Federal Reserve, abetted by huge Chinese purchases of US

Treasury debt, was a driving dynamic behind the housing bubble.

Since 1975, Rajan points out, the wages of the 90th percentile of the US population

(the top 10 percent) grew 65 percent more than the 10th percentile. In 1975, the top 10

percent earned about 3 times the bottom 90 percent. By 2005 it had risen to 5 times.

In an economy where consumption accounts for 70 percent of GDP, the gap

between the American Dream and the American Reality was bridged by debt. In

short, easy credit, not savings, enabled the demoted American middle class to “keep

up with the Jonses.” By 2007, consumer debt in the US equaled 100 percent of GDP.

Rajan sensibly worries that reigniting growth through encouraging renewed purchases

of houses and cars through further easy credit policies, even if it successfully avoids

deflation, will only lead us back to an unsustainable bubble.

In the US, the proper tax and education policies (because, in an era of technolog-

ical change, education is the key variable of income differentials) as well as policies

that foster infrastructure investment and domestic production would diminish the

rapidly rising inequality Rajan documents. Fairer wage spreads in a developed con-

sumer economy would enable the middle class to once again thrive on earnings and

savings instead of seek to maintain their diminishing status through credit.

Change won’t be easy.Vested interests in China favor export production industries

and the associated political stability of continued rapid job growth that goes along with a

strategy that has worked for decades.Vested interests and cultural inertia in the US favor

a return to the high consumption which has driven growth during that same period.

China, at least, has the political capacity as an authoritarian mandarinate to

change course from the top if the Communist Party is confident enough to heed the

feedback signals of a burgeoning middle class that is demanding a more open society.

Portending change, Premier Wen Jibao has recently said “the people’s wishes and

needs for democracy and freedom are irresistible,” that “freedom of speech is indis-

pensable for any country,” and that “without the safeguard of political reform, the

fruits of economic reform would be lost.”

It seems an equally daunting challenge to convince an open society used to living

off of leverage to mend its ways. But if reality is the mother of fundamental reform in

China, it can be no less so in the United States.

NATHAN GARDELS, editor

If reality is the mother of

fundamental reform in

China, it can be no less so

in the United States.