Emerging Economies Question Time @Battle of Ideas

Panellists at this session were:

• John Dovey – acting president, UK Corporates BT Global Services
• Jim O’Neill – MD Global Economic Research, Goldman Sachs, creator of the acronym BRICS
• Stuart Simpson – Financial Analyst and journalist
• Dr Linda Yueh – Oxford University, author of Macroeconomics and globalisation and economic growth in China
• Professor Slavo Redosovich, LSE
  

Main arguments:
What will be the foreign policy consequences of the crisis for China and India?

• Linda: India and China are grappling with the potential foreign policy consequences of the global downturn. China sees itself as an emerging economy, focusing primarily on the growth of its own economy.
• Jim: Next week France will formally propose that the G7 be expanded to include the BRICs. This is long overdue, especially in view of the crisis. It’s going to be important that the Chinese economy be led by internal consumption rather than export, as there won’t be a US economy to export to .
• Stuart: We need to differentiate between China entering the world stage, and China as a global manager. China is not yet a rich country.
  

Why so much talk about China and India, why so little attention to Brazil and Russia?

• Jim: India has 1.1 bn people; China has 1.3 bn. Russian and Brazilian populations are small in comparison. With urbanisation a key driver for both China and India, the scale of their potential is of a different order. It is wrong to focus on India and China though. Brazil and Russia are much more powerful economically than in the past. Brazil keeps good macroeconomic stability, and in 30 years time could be one of the biggest 7-8 economies of the world. Brazil has handled itself very well in the crisis to date. Russia is far too dependent on oil. It needs to reduce this dependency to reach its potential.
  Traditionally economic downturns have impacted the developing world disproportionately. Is this still true?
• Stuart: The decoupling issue. China et al are becoming more self-reliant. Unless some solutions are arrived at, though, some countries will really suffer. Some countries can’t rely on national banks, foreign exchange reserves, i.e. those mechanisms currently being widely used across the globe to deal with the crisis.
• Jim: The BRIC economies are still developing in the classical sense. Now they’re an integral part of the world economy with their own multinationals and so on. The consensus is that the BRICs will continue to grow in the next 30 years.
• John: The world is a lot more complex. The average price in Chinese designer shops is a lot higher than in the Western equivalents. And most of the shoppers there are Chinese not tourists. So there’s a significant middle-class emerging.
• Linda: Are they themselves in financial crisis? All markets are interlinked. One potential problem is protectionism. The view that opening the borders for trade isn’t helpful is a bit dated. Brazil has brought actions against US and Europe and won. Virtually no country in the world truly has free trade and open borders. In the NGO world, protectionism will be strongly under consideration. The IMF will have to provide bail-out packages for Pakistan, but they shouldn’t be telling them how to run their own country. The IMF is weaker than it was 10 years ago, in any case.
• Jim: There is a difference between modest protection for countries in an emergent phase and the aggressive protectionism of the 1930s. Germany has been sustained over the past 2 years by exports to China and Russia. IMF seems strongly pro-international trade at the moment. The Norman Foster partnership, with 1400 employees the biggest employer in Wandsworth, is almost entirely dependent on China.
  

Could international institutions like the World Bank and the IMF become obsolete?

• Linda: IMF has just appointed its first Chief Economist from an emerging economy – China. So it’s trying to reinvent itself although it may be too slow.
• Slavo: World Bank started this process earlier with its “Learning from the 90s” document. It’s trying to fashion itself as a developing agency.
• Stuart: The IMF doesn’t have the resources to perform the same role as before. Partly because of BRIC growth - the reserves of China dwarf IMF reserves. Years ago, South Korea needed IMF help. So the IMF came in and dictated how South Korea was to be run. China saw this and decided the same would never happen to him,a nd built its foreign exchange reserves.
• Jim: The world has blown up. This is a very powerful and scary crisis. Without powerful responses by multiple countries, it would be a lot worse. The IMF is currently back in business because a couple of developing countries have been very irresponsible. But the IMF and the World Bank need to become institutions reflecting the complexity of the modern world. So Western nations need to agree to substantial structural changes. The IMF and World Bank are currently well past their sell-by date.

To what extent is the crisis due to under-consumption in China?

• John: Are the financial sectors of the West clearly at fault? Complex financial derivatives have produced a classic bubble.
• Jim: Indirectly, part of the crisis is caused by China saving so much. The global savings glut has led indirectly to the overheating of the US property market.
• Linda: In macroeconomics, these are just identities, rather than causes and effects. Americans were consuming too much way before China started saving too much. China needs to look internally and determine why is its consumption so low. Culturally, they have fears of catastrophic health events, and worry about their children’s education. It’s not a blame thing.
• Jim: Global economic crises happen. Human behaviour goes between greed and fear. The Chinese authorities wanted the decade to be dominated by an export strategy, and only now do we see that it was unsustainable.
• Stuart: US consumes 72% of its GDP. [Jim: This is way too much.] A lot of capital goes to the US in the form of debt, with China buying US Treasury bonds. There’s a lot of saving in the Chinese corporate sector as well. US business didn’t take advantage of the cheap credits. The money didn’t go into production. Why not?
• Linda: Usually, if there are low savings, it should be expensive to borrow.
• Jim: This is not a static environment right now. This year US’s current account deficit is starting to disappear. US is selling more cars abroad than it is importing. Surpluses in the emerging economies are slowing down – Russia, India and Brazil now have deficits. Countries will no longer be able to depend on exporting to the US.
• Jim: The current situation feels bad. But it is reality. Global growth is forecast at 3%. Last year it was 3.2%, so it isn’t the end of the world. Price mechanisms work themselves through – both sides of the US election are committed to exploring alternative forms of energy. China has done more for globalisation than the US in the past decade. Countries like Nigeria are intellectually very energised by the example of China and how they’ve raised themselves from poverty without behaving like the US.
• Stuart: There is much more political freedom for developing countries now with China in the picture.
• Linda: 56% of the Chinese population is still rural. We should be wary of learning too much from a country whose path is not yet set.
• Jim: The last decade shows that international trade is one of the few win-win games that exist. Global inequalities are no declining rapidly. In the next 30 years, there will be an additional 30 billion new members of the middle class.
  

But in Africa, aren’t some countries still undeveloped?

• Stuart: Development since the industrial revolution has been characterised by divergence between developed and developing countries. Only with China has that changed. China shows the way out of poverty – with massive infrastructural projects and engagement with the global economy, rather than the small-scale projects proposed by NGOs.
• Linda: Political reform is happening in China, but in a quiet slow way because the Chinese government wants to be responsive and stay in power. So it does it by focus groups etc. but rejects the Western model.
• Stuart? Yes! It’s following the anti-democratic practices of Western political forces like New Labour!