to balance the global economy, recalibrate democracy
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 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.