A stagnating West, including the USA, the EU and Japan, is the subject of much economic conjecture.
Secular stagnation, as suffered by Japan since 1990 is beginning to infect the rest of the developed world. Conventional economists and other commentators have shown signs of becoming panicky at the slowdown in the Chinese economy. Markets in shares over the past 6 months have fluctuated wildly, as investors showed their ignorance of what was happening in China.
China is near the end of its twelfth 5 year plan. In that plan it committed to reducing GDP growth from a 30 year average of 10% to 7.5%. It committed to have its currency trading freely on global money markets by 2016. It committed to introducing environmental regulation which would lead to a massive reduction in particulate pollution in its largest cities. It began to experiment with carbon trading, and plans to introduce a nationwide trading scheme in the 2016/7 timeframe. It further committed to change the way wealth was created, from an over dependence on capital investment to a more consumer orientated economy. The softer side of change is also evident in President Xi Jinping’s determined stance against corruption, everywhere and at once.
Only a foolish person would bet against China achieving what it has set out to do. It has learned the lessons from the path the West took to clean up industrial pollution, and intends to go further, faster to ban smoky coal, to clean up wounded rivers, and to return ecosystems to something like what existed before industrialisation.
But just as China has learned from the West, I believe a study of how China is going about its economic growth is of preeminent importance to us, here in the developed world. There is much to learn. There is some evidence that the Chinese lessons are being learned, at least in the UK. The Chancellor of the Exchequer, George Osborne, is quoted as saying that “I’ve always been able to see the problems with Government. Now I understand the power of Government to drive incredible positive change.” He should tell this to his friends in the Republican Party in the USA. If government doesn’t lead and legislate, then the vested interests rule without interruption. And that surely is one contributor to secular stagnation.
China still needs to build roads and other transport infrastructure, carbon free electricity generating plants, forests to mop up carbon dioxide, and houses. It needs to further extend its network of cities to allow for the migration of people from the countryside as agricultural productivity increases. It does all this according to a vision of bettering the lot of its people. This is an uninterrupted vision that has driven the government there since 1978.
Following a Chinese path
How could secular stagnation in the West be happening with so much needed to build a green electricity infrastructure in response to global warming? Some 4 million megawatts of carbon free electricity generation plant has to be built in the West to keep global warming to within a 2 degree temperature rise. Many times this capacity has to be built in emerging markets to allow these populations to enjoy even minimum standards of living.
There is something gravely mistaken at the core of western economic thinking. Part of this is surely the dogma that most economic growth must come from consumer spending. Although China is moving in this direction it still employs 48 million people rebuilding its forests. It also will install 23000MW of new solar PV this year. Economic dogma there is dictated by societal need. We are looking at a restatement and an actuation of Adam Smith’s concept of the common good.
Another mistaken Western proposition is that the economic imperative of capitalism, that of getting rich, is by itself capable of driving global society in an appropriate direction. We see vast sums being accumulated by the leading industrial brands, who can do nothing more inventive with it than buy back their own shares. We have seen the banking system brought to its knees by officially allowed, even encouraged, greed. The Reagan’ite assumption that self-interest would cause bankers in particular, to invest in good projects stands debunked. It took untold hardship in every global society, and especially that experienced by the less well off in those societies to prove that “light regulation” was an ugly farce.
There is no substitute for policy driven growth. Public policy based on objective analysis, science, and taking into account technological advances is needed if we are to overcome secular stagnation.
Demographic analysis shows us that the global population, currently standing at 7 thousand million will get to 9 thousand million by mid-century. Most of this growth is occurring in less developed countries. Is it any wonder that people living in these societies look northward to our relatively huge standard of living? Some take great personal and family risks to try and get here. We can accommodate a tiny minority of these people but the best course of action is to help these societies create wealth from within. The allocation of development capital from developed markets to emerging markets makes sense. Many impact funds in the West already earmark investment capital for emerging markets. Are western governments doing enough? Why not use the taxation system to increase capital flows to poorer countries? We know that here in the West, we have a massive pension burden heading our way. With secular stagnation there is no way of accumulating enough cash reserves to meet these pension related liabilities. Do Governments not have a duty to invest in emerging markets where the potential for growth is almost infinite?
Science tells us that CO2, H2O and CH4 absorb radiation. We now are capturing the extra energy equivalent of 4 Hiroshima bombs every second in our atmosphere. Extra, that is, compared to pre-industrial times, when the CO2 content of our atmosphere was 275PPMV, as compared to 400+ now. The fact that the coal lobby, and some of the oil majors deny this doesn’t alter the radiation absorption properties of these gases. If we don’t deal with CO2 release, by public policy, we will put most of Florida, most of Manhattan, much of London, Dublin, Bangladesh, and indeed almost every coastal city in the world under water by 2100. The private sector, if public policy makes it worthwhile, will provide most of the investment capital. But without political direction the private sector will continue to live in its well-insulated western cave.
The message is simple: this inward looking Western economic model is broken. Secular stagnation is a fact. Economists are in complete disarray as to how to fix it. China proves that building or rebuilding infrastructure is a way of increasing wealth. Emerging markets need Western investments to help them grow. The western private sector can do much more if public policy is appropriate. And finally, a huge component of all wealth creation will be delivered through dealing with global warming, both in the developed world and more especially in emerging markets.