By Girija Pande
The gloating was predictable.
When China’s stock markets crashed and Beijing devalued its currency, Western commentators – who had long resented China’s continuing economic success – could not resist gloating over the country’s economic stumble.
Paul Krugman, the Nobel Prize winner in economics, triumphantly said about China, “…the nation’s rulers have no idea what they’re doing.” Really? Does anyone in the world truly believe that the Chinese leaders are clueless? But the Chinese leaders need not worry about Krugman. He has a near perfect track record of misunderstanding East Asia. Stephen Leeb, writing in Forbes, has described well the unique blindness that Krugman has on Asia. Leeb said, “Back in 1994, Krugman similarly assessed the Singapore economy. “…Singapore is an economic twin of the growth of Stalin’s Soviet Union,” he [Krugman] wrote in Foreign Affairs (Nov./Dec., “The Myth of Asia’s Miracle”). In 1994, remember, the Soviet Union shone chiefly as a massively failed economic experiment. Krugman simultaneously offered duplicate reasoning on the other fast growing Asian economies, Taiwan, Hong Kong and South Korea. The Krugman argument, nearly a generation ago, on the Asian Tigers closely parallels his current reasoning on China. They had expended or were on the verge of consuming their entire available capital and labour resources, he contended, and lacked any signs of future productivity improvement. He wrote that they had already achieved most of their potential, and for Singapore, he wondered only how fast it would fall. Of course, things did not work out that way. Singapore and the other Asian nations have since grown voluminously. By virtually every measure of well-being, in fact, from life expectancy to per capita GDP, Singapore now surpasses America.”
Krugman is not the only Western pundit to misunderstand the Chinese growth model. The Economist, with equal predictability has come out with a gleeful cover story suitably entitled “The Great Fall of China.” A great fall? The reality is more nuanced. As John Wong of NUS wisely summarized, “The critical thing right now is not to misinterpret the fluctuations in the yuan and stock markets, which are just corrections to overvaluations in the past, certainly not a signal that the Chinese economy is about to collapse.”
It has been clear for some time that the fast growing Chinese economy needed to restructure to capture the next phase of growth. The current leadership is well aware of the challenges; and despite short term challenges that inevitably come with such reforms, they are steadfast in their reform plans. The IMF and the World Bank have lauded China’s plans to restructure its financial systems and its unwieldy SOEs as well as its efforts to increase the role of consumption in its growth model. Not many countries would have the tough leadership required to take up such restructuring – yet the Chinese leadership has not backed away from the task. The fluctuations that we see in the Chinese financial markets are but a reflection of determined restructuring at work! Unfortunately, the world at large seems to have misunderstood these plans and much opacity often clouds global views on the Chinese economy.
Nevertheless, The Economist story was valuable as it pointed to another equally important worry. It said that “…emerging markets are vulnerable to a full-blown crisis.” The Economist was right in highlighting this point. Going forward, the emerging markets could rise together and fall together. And if they were to fall, they can no longer expect the big rescue packages of the past. The insecure populations of the European Union (EU) and the U.S. have no appetite to help the rest of the world – and certainly not the larger emerging markets, which are often seen as future threats.
This is why it would be wise for the emerging economies to begin planning for worst-case scenarios. Given the fickleness of modern financial markets – a fickleness exaggerated by computerized trading programs – we can expect to see more gyrations in equity, bond and currency markets. There is no world leader of stature and vision today who is ready to lead a globally coordinated effort to calm global markets. Indeed, the Fed may even proceed with its long-scheduled rate hike, even though it could create global economic turmoil. And why would the Fed do this? Its only mandate is to manage and protect the American economy. Therefore, it has no choice but to put American interests ahead of global interests – despite clear calls from the IMF to the contrary.
Can the emerging economies buy some insurance to protect themselves from greater global economic turmoil? Yes, they can. The leading emerging market economies, especially China and India, should announce that they are engaging in high-level economic dialogue to work towards greater coordination of macroeconomic policies. Put together, they constitute nearly $12 trillion of GDP- two-thirds the size of the current U.S. economy. Moreover, if they continue to grow in the next ten years at a conservative compounded annual growth rate of 6.5%, they would double their GDP to $24 trillion – adding another $12 trillion to the world GDP by 2025.
Such coordination will of course not be easy. The political and economic interests of India and China are not yet aligned as those of the U.S. and Canada and the EU members are. The pressures on the Chinese and Indian economies are also different. China’s economy of $10.36 trillion (2014) is far larger than that of India’s whose GDP is at $2.07 trillion (2014). There will be difficulties as the former is export/manufacturing-led while the latter is consumption/services-led. But there could also be significant gains if they collaborate. India has a $1 trillion infrastructure deficit which needs to be bridged if its fast pace of growth is to continue. China can provide investment and assistance to resolve this deficit more efficiently and cheaply than any other country. Initiatives like this could be clear win-wins for both countries. If high-level economic dialogue leads to bold moves towards significant economic cooperation, the markets will take note. All of this will require visionary long-term leadership.
Psychology also matters much in markets. If the emerging market economies try to deal with global economic turbulence individually, they could be easily buffeted by storms. Even the great Chinese economy has been shaken. But if the emerging market economies, especially China and India, announce a policy of working together, the markets will react differently. They will see greater stability and predictability in emerging markets – especially if the two Asian giants speak with a common voice. In addition to economics, both countries have much to gain by a common voice on global governance issues such as climate change and terrorism.
Cooperation between China and India could also help to accelerate the growing convergence of interests between the two economies. The old Chinese model of exporting to developed markets to fuel growth can no longer work as Western consumers remain nervous and uncertain about the future. Similarly, the old Indian model of providing IT and other back office services to developed markets is under pressure as new restrictions are placed on Indian workers moving to the U.S. and Europe. Moreover, with increased automation in the IT industry, growth rates for Indian IT companies are likely to fall in coming years unless they reinvent themselves.
At the same time, it is also clear that the two countries which will eventually have the largest middle classes will be China and India. In twenty years or less, their combined middle class populations could be nearly 1.5 billion, almost double the current combined population of the EU and the U.S.. If China and India can loop ASEAN into their economic cooperation, they will also add in the third largest middle class population of Asia. These three large middle class populations could combine to form the largest ever middle class population. This will be a great draw for investors into the region. As long-term investors start to place their bets on Asia’s future middle-class populations, the markets will react accordingly.
And when that happens, the gloating of the Western pundits will finally end.
(Girija Pande is the chairman of Apex Avalon Consulting, Singapore, and was the past chairman of Tata Consultancy Services, APAC. He recently co-authored the book “The Silk Road Rediscovered” on building businesses in China and India.
Kishore Mahbubani is the Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, and the author of “The Great Convergence: Asia, the West and the Logic of One World.”)