oneworldtalk

Markets are volatile precisely because no one knows for sure which policy responses will work.

The Austrian economist Joseph Schumpeter understood the importance of creative destruction. The end of an economic cycle does not return the economy to where it was at the beginning. During the downturn, firms go bankrupt, people lose jobs, institutions are revamped, governments may be changed. And in the process, resources are reallocated and the old gives way to the new.

If governments try to prevent the repricing of assets and human beings, international markets will force the adjustment on us. A country that is over-leveraged living beyond its means will itself be repriced through its currency. Its currency will be devalued, forcing lower living standards on all its citizens.

Now, while it is true that trade is a positive sum game, the benefits of trade are never equally distributed. We can therefore expect protectionist pressures to grow in many countries.

The West is consuming too much and saving too little while the East is saving too much and consuming too little.
In the meantime, the global economy may suffer a prolonged recession, a global Keynesian paradox of thrift.

Political Repricing

The Western-dominated developed world will have to share significant power with China, India, Russia, Brazil and other countries.

Sharing power is however easier said than done. But without a major restructuring of international institutions, including the Bretton Woods institutions, many problems in global governance cannot be properly managed.

Great Britain could not exercise leadership while the US would not. In between, the global economy fell.

In the coming decades, the key relationship in the world will be that between the US and China. Putting it starkly, the US is China's most important export market while China is the most important buyer of US Treasuries. The core challenge is the peaceful incorporation of China into the global system of governance, which in turn will change the global system itself. This was probably what led Secretary Hillary Clinton to make her first overseas visit to East Asia.

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China’s sense of itself is both a strength and a weakness. It is a strength because it gives Chinese civilization its self-confidence and its tenacity. Chinese leaders often say that while China should learn from the rest of the world, China would have to find its own way to the future.

To be sure, the Chinese have no wish to convert non-Chinese into Chinese-ness. In contrast, the US as a young country, believing its own conception to be novel and exceptional, wants everyone to be American.

China is urbanising at a speed and on a scale never seen before in human history.
Urbanisation on such a colossal scale is reshaping Chinese culture, politics and institutions. The Chinese Communist Party which had its origins in Mao's countryside faces a huge challenge in the management of urban politics. From an urban population of 20% in Mao’s days, China is 40% urban today and, like all developed countries, will become 80-90% urban in a few decades’ time. Already, China has more mobile phones than anybody else and more internet users than the US.

Over the centuries, China has evolved a political culture that enables a continental-size nation to be governed through a bureaucratic elite. In the People’s Republic, the bureaucratic elite is the Communist Party. When working properly, the mandarinate is meritocratic and imbued with a deep sense of responsibility for the whole country.

Although politics in China will change radically as the country urbanises in the coming decades, the core principle of a bureaucratic elite holding the entire country together is not likely to change. Too many state functions affecting the well-being of the country as a whole require central coordination. In its historical memory, a China divided always meant chaos, and chaos could last a long time.

To be sure, China is experimenting with democracy at the lower levels of government because it acts as a useful check against abuse of power. However, at the level of cities and provinces, leaders are chosen from above after carefully canvassing the views of peers and subordinates. As with socialism, China will evolve a form of ‘democracy with Chinese characteristics’ quite different from Western liberal democracy. The current world crisis will convince the Chinese even more that they are right not to give up state control of the commanding heights of the economy.

With the world in turmoil, many developing countries are studying the Chinese system wondering whether it might not offer them lessons on good governance. For the first time in a long time, the Western model has a serious competitor.

The simultaneous re-emergence of India and China, together making up 40% of the world’s population, is endlessly fascinating. Two countries cannot be more different. One is Confucianist and strait-laced, the other is democratic and rambunctious. Or to use Amartya Sen’s words, “The Indian is argumentative”. Yet, in both countries, we can feel an organic vitality changing the lives of huge numbers of people. The re-encounter of these two ancient civilizations is itself another drama.

Through Chinese historical records, the world is aware of the existence of an ancient Buddhist university in India which for centuries drew students from all over Asia. Xuan Zang’s journey to India to bring back Buddhist sutras was such an odyssey, it has long been mythologized in Chinese folklore - Journey to the West. The Indian Government has recently decided to revive this ancient university as a secular university, offering it for international collaboration.

A multi-polar world is a messy world. It means that no particular value system will hold complete sway over others. The current crisis has already caused many people to question the nature of capitalism, socialism and democracy. Chemically-pure capitalism, to use a phrase coined by former French Premier Lionel Jospin, has become a dirty word. In contrast, John Maynard Keynes seems to have been repriced upwards again and all of us have been dusting the old copies of The General Theory that we have on our shelves. A recent Newsweek cover proclaimed that “we are all socialists now”. Even Karl Marx is being re-read.

Without American leadership, multi-polarity can easily lead to global instability. And there is much expectation of what a new Obama Administration, sensitive to cultural nuances, can do to restore order and growth in the world. Unfortunately, there are no quick or easy solutions. We should expect instead a fairly long period of untidiness and confusion. Most importantly, we should be sceptical of absolute or ultimate solutions for these are often the most dangerous.

Inspiration of Needham and Darwin :
Human civilisations learn from one another more than they realise, more than we realise. It was China’s corruption and inability to learn from others in an earlier period that led to its long decline. In a collection of essays published by Needham on the historic dialogue of East and West in 1969, he chose for his title Within the Four Seas. That title was from the Analects of Confucius, who said, "Within the Four Seas, all men are brothers”. In the heyday of Third World solidarity in the 50’s, the Indians had a saying ─ "Hindi-Chini, bhai bhai” ─ Indians and Chinese are brothers. In these confused times, we need to learn from one another on the basis of a deep respect for each other as human beings.