By Arvind Subramanian and Josh Felman/Cambridge
For an all-too-brief period between the late 1980s and the late 2000s, the world was characterised by convergence, both ideological and economic. The West and the Rest agreed that an open liberal order was the best way to increase prosperity. Now, however, this ideological order threatens to unravel, with adverse consequences for the world economy.
The two-decade-long “golden age” was one of trade hyper-globalisation, reflected in an unprecedented increase in the ratio of world exports to GDP. It was also an era of economic convergence: for the first time in centuries, living standards in a broad cross-section of developing countries started catching up with advanced-economy indicators. Moreover, globalisation and convergence were handmaidens: open markets enabled developing countries to prosper by building up modern, efficient, export-based industries. And no country benefited more from hyper-globalisation than China.
The liberal order underpinning this era was largely created by the United States. Exactly 75 years ago, when both the economic turmoil of the 1930s and World War II were fresh in the collective consciousness, the US was able and willing to supply three vital global public goods through the postwar institutions created at Bretton Woods. Emergency finance would come from the International Monetary Fund, and long-term lending from the World Bank. Above all, open markets would flourish under the General Agreement on Tariffs and Trade (and its successor, the World Trade Organisation). It was a G1 world, and America was the unchallenged hegemon.
Today, we have neither a G1 world nor ideological convergence. Because of its spectacular growth since 1978, China has become the second dominant economic power alongside the US (Europe is still too decentralised and beset with internal problems to wield strategic influence). And the consensus about what constitutes good economics has broken down.
In the West, and especially the US, a series of negative economic trends – including slower growth, rising inequality, declining mobility, and greater concentration of economic power – have called into question the benefits of globalisation. In addition, the 2008 global financial crisis and its aftermath have undermined faith in American-style capitalism.
China’s rise, and the perceived consequences for America, has also stoked US scepticism about globalisation. A broad swath of US elite and public opinion believes that China has abused America’s largesse, via currency manipulation, intellectual-property theft and espionage, and forced technology transfer. Furthermore, China’s recent tilt toward statism adds to a broader US sense of betrayal, and of an investment in shared prosperity that has gone badly wrong.
This discordant G2 world and the end of ideological convergence now threaten economic convergence, and thus developing countries’ prospects. The “golden age” of convergence had, in any case, already started to face headwinds. First, climate change poses risks to developing countries’ agriculture. Problems in this sector will reverberate throughout these economies, because high and rising agricultural productivity has been the key to successful structural transformations from farming to manufacturing. In addition, the spread of technology-enabled automation is replacing unskilled labour with machines, directly threatening the ability of poorer countries to lift incomes through labour-intensive manufacturing.
But the biggest threat comes from an ideological decoupling between the West and the Rest. The G2 of China and the US, instead of supplying the key global public good of open markets that the economic historian Charles Kindleberger saw as the responsibility of hegemons, is now providing global public “bads.”
As the US and China impose tariffs and trade restrictions on each other’s goods, and as the US undermines multilateral trade rules and institutions, world trade is slowing markedly, threatening developing countries’ export sectors and the viability of their overall development strategies. At the same time, the US and other Western governments are clamping down on migration. As a result, developing countries are boxed in, and will find it increasingly difficult to export their products or their excess labour. American repudiation of the Paris climate agreement does not bode well for the poorer countries who will bear the brunt of the consequences of global warming.
That situation is dire enough. But perhaps the most critical “bads” provided by the US and China are the most subtle. America’s unilateral measures, which flout the global rules that it helped to devise, have begun to damage the Bretton Woods institutions and the associated system of international co-operation. China, meanwhile, is a hobbled hegemon, having become dominant without acquiring genuine international appeal. Undemocratic and repressive, the country lacks the “soft power” that would give it the additional legitimacy to assert its dominance: effective leadership, after all, requires willing followership.
Moreover, hegemons need to provide open markets. Yet China is not offering enough export opportunities for poorer countries, even though it previously benefited greatly from deeper trade links with more advanced economies. The Chinese government’s recent turn toward self-sufficiency and promoting domestic champions is contributing to the rapid decline in the country’s imports.
To be clear, China is entitled to pursue a development strategy that has aided its extraordinary rise. But the country cannot be a benevolent hegemon if it insists on maintaining a protectionist stance that deprives the global system – and other developing countries – of key public goods.
The US-dominated G1 world is long gone, and the G2 system in which the US and China shared hegemonic responsibilities is now fading into memory. Instead, we live in a G-Minus-2 world in which the two hegemons, instead of providing the Kindleberger global public goods of co-operation, are doing exactly the opposite.
Understandably, developing countries have begun to ask some pointed questions. What will happen to the global economic system? Will the current system last long enough to enable us to prosper? How will we weather the next round of global turbulence? And does it even make sense to talk about cooperation when the two leading global protagonists are undermining multilateralism and the institutions that sustain it?
Consumed by their quarrel, the US and China have so far provided no answers to these questions. There is an old African proverb that says “when the elephants fight, it is the grass that suffers.” Right now, the rest of the world is very afraid. – Project Syndicate
* Arvind Subramanian, a former chief economic adviser to the government of India, is a senior fellow at the Peterson Institute for International Economics and a visiting lecturer at Harvard’s Kennedy School of Government. He is the author of Eclipse: Living in the Shadow of China’s Economic Dominance.
* Josh Felman is Director of JH Consulting.
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