It takes something like the North Korean nuclear test, and the subsequent missile firings, to remind us that despite the shift of economic power from West to East, Asia is more politically fragile than North America or Europe. You can see this very simply this week. When the news of the test broke it was the dollar (and to some extent the euro) that shot up on the markets: At times of trouble people look for the safe haven for their cash.
Why the dollar? Well, despite the weaknesses of US banks and despite the huge fiscal deficit being run up by the new administration, the dollar still looks the safest bet. Yet during the downturn, economic power is shifting even more rapidly away from the US and Europe and toward Asia, where the two largest economies, China and India, continue to make progress despite the recession elsewhere.
So we have a world where economic power is shifting from more stable regions to less stable ones. It is a world where the largest emerging economy, China, is piling up dollar balances despite its concerns that these dollars might be worth a lot less in the future. It may be investing those dollars for shorter terms because it is worried about the loss of value but it is still going for dollar assets rather than invest the spare cash at home or in neighboring economies.
It is also a world where the savings are in Asia: More than three-quarters of the world’s total saving is done there. In China, consumption accounts for about 40 percent of national income; in the US it is about 70 percent. China oversaves; America overconsumes. You can explain part of that by the fact that China does not have much of a social security system or proper pension provision, so people have to save for themselves. Chinese people in addition do not have access to credit in the way we have come to accept as normal in the West. But these differences do not explain the entire imbalance. There is something cultural too. Japan, which is at the same stage of economic development as the US, also saves a much higher proportion of its national income.
This matters to all of us because this is not a stable situation. I don’t want to make too much of this North Korean episode; there are plenty of other geopolitical tensions around, including in particular the relationship between Pakistan and India. My point is that the world we have been accustomed to, with the main economic power in two politically stable regions, North America and Europe, is coming to an end. Nothing changes overnight but this downturn is seismic because the pace of the shift of power has suddenly speeded up. If you don’t believe that consider these two facts. China this year probably becomes the world’s second-largest economy. And Chinese banks are now the largest in the world by market capitalization.
This leads to three big questions, the answer to which will determine whether the (more or less) steady increase in world prosperity can continue for another generation. First, will the new economic powers take on political control of their spheres of influence? Second, will they use their economic power to stabilize the world economy as a whole or will they simply act in what they see as their narrow self-interest? And third will we in the West follow more sustainable economic policies, including relying less on savings from Asia to conceal the fact that we don’t save enough ourselves?
THE first goes far beyond economics, so just a quick observation. The world coped with the rise of Japan as an economic giant but a political pigmy because Japan in effect subcontracted its foreign policy and its military protection to the US. China is not going to do that and how. So if China does not take control and apply its authority in a reasonably disinterested way — and in this instance that means curbing errant states such as North Korea — then there will be trouble. It is profoundly in China’s self-interest to join with others to ensure regional stability — but China does not have a track-record in acting in anything other than its narrow national interest. That must be a profound concern.
As far as the new powers’ attitude toward economic stability is concerned, I worry that neither China nor India can quite grasp the scale of the responsibility that they will have to take on. Talk to senior Chinese monetary officials and they will tell you they feel trapped. They have to keep exporting to maintain growth and to do that, they have to hold down the value of their currency. So they pile up the surplus dollars and end up owning vast slabs of US Treasury securities. But they present this argument as victims of a situation, rather than creating an imbalance for which they are in fair measure responsible.
As for India, the main reaction I have met is simply a lack of interest in global economic stability, which is not yet on their radar. Indian companies have been responsible advocates of globalization; for an example of that, look no further than Tata’s acquisition of Jaguar and Land Rover. But the Indian government’s attitude to preserving an open world economy? Well, that is not really something you hear much about.
If China and India will need to learn to become better team players, the US and Europe will need to learn to become less self-indulgent. In the case of the US, it has to stop overconsuming. It is not realistic to expect Asia to continue lending it money. It is not realistic for European governments to run deficits when they ought to be running surpluses to give them some savings to help them support their aging populations.
For the moment, governments in the developed world do have a collective credibility and as economic power shifts to Asia, its leaders will have to help manage the system from which they have done so well. That means making Asia politically less fragile, which in turn means stronger and more disinterested leadership not just from China and India but from the region as a whole.
