(Jiemian Yang in conversation with Li Xin)
The rise of China is, for the most part, either overhyped or downplayed, depending on the context and the economic and political opinions of the commentator. Yet fairly infrequently are Chinese experts actually consulted. In this detailed interview, Jiemian Yang delves into the importance of China and other emerging developing economies in the contemporary global context. This is an assessment of China as a major global player, inexorably linked to developed states yet one that needs to modify its existing policies to become a true global player. Professor Yang also makes the bold claim that the current global crisis, rather than undermining globalization, is in fact proving globalization’s importance and in many cases strengthening global governance structures. While acknowledging the severity of the crisis, Yang sees many global political and economic factors—ranging from fiscal interconnectedness to the proliferation of interstate agreements to demographics—that give rise to hope for stability and growth in both the developed and the developing world.
LX: How would you evaluate world economic developments in the past decades since the end of the cold war?
JY: In the first decade of the twenty-first century, the world economy has witnessed the biggest change since the Industrial Revolution. Much different from modern history, a group of developing countries rather than just a few have emerged, including not only big ones such as China, Russia, India, and Brazil (BRIC) but also medium-size economies like Vietnam, Indonesia, Nigeria, Turkey, and others. This represents significant progress in the world economy.
Along with the very fast growth of the emerging economies, the developed Western countries also experienced a quite strong growth period generally since the end of the cold war until 2007; there were some benefits coming from integrating Soviet Bloc countries into the international economic order, but the system remained dominated by the Western countries. The huge new input of relatively cheap labor into the global production chains from China, India, and other developing countries effectively lowered the cost of global manufacturing, allowing predominantly Western consumers to maintain their way of life and access to cheap commodities. The other important contribution of the newly integrated developing economies to the Western market system is their relatively high savings rate, especially in China, with their great pool of foreign exchange reserves to be invested in the developed countries’ bond and capital markets. Such evident money “surplus” effectively lowered the borrowing cost of capital in the developed countries themselves, thus allowing them to finance their own business. Although some people would later accuse the emerging countries of providing too much low-cost lending to the developed countries, and they think this is the main reason for the great financial crisis, I think they are totally wrong and misleading, as the cause of the financial bubble is located entirely in the developed countries.
LX: But the speed of growth was not the same?
JY: You are right. Emerging economies developed much faster than the Western countries. In the globalization context and with the emerging countries reforming their own economic institutions, economic factors like people, goods, money, and technology could move more freely than before. Their economic management level has improved substantially, with more stable macroeconomic policy, transparency, continuity, and stability and improved company governance according to market principles. All these have greatly promoted productivity in the emerging countries. With their huge resources and populations as the multiplier, their economic output has grown in an unprecedented way.
As a result, the balance of economic power between the developing and developed countries became more equal than before. The financial and economic crisis since 2008 has accelerated the process. So, in general, the developing countries are in an unprecedentedly strong position in the world economy.
LX: As you said, the world economy has developed very strongly over the past two decades, and in particular the emerging economies grew impressively. But since the eruption of the subprime debt crisis in the United States, the world economy has been very fragile. With this background, how do you foresee the world economy in the next decade?
JY: It’s true that the world economy is facing the biggest challenge since the end of the cold war. All the major economies need to deal with the challenges cautiously and prudently. For example, in order to regain momentum, the major economies need to restructure their internal and external imbalance, render the distribution of wealth more equally, and so on. If all these preconditions are met, in general we can remain optimistic about the world economy in the next decade for several fundamental reasons. First, the number of middle-income countries has increased quite significantly, which has led to the expansion of the global middle class. As the middle-income population of the world rises in the emerging and developing countries, so will consumer demand commensurately rise. The newly added consumption will offset the weak demand in the developed countries, to become a new engine of the world economy. Second, most of the developing countries and emerging economies are still at the starting period of the process of technological modernization, and their level of urbanization has barely achieved 50 percent. This means that developing countries have a very big potential to tap in terms of utilizing technology diffusion from the developed countries and using infrastructure investment as an important economic development driver. Third, according to a UN forecast, the world population will reach 7.6 billion by 2020 and the share of the active labor force will remain at a stable level. The continuous supply of labor population will provide the world economy with the demographic dividend for another ten years at least. Fourth, because of the huge pressure of resource and energy demand, the innovation activity in the sectors of new energy, new materials, and the biotech industry might accelerate. In purchasing power parity (PPP) terms, in the 1980s, 1990s, and 2000s, the world economy has developed with an annual growth rate of 3.2 percent, 3.1 percent, and 3.5 percent, respectively. However, the rate in the next decade could surpass 4 percent based on the factors mentioned above.
LX: What do you think about the different economic roles of developed countries and developing countries in the next decade within the world system?
JY: The next decade could be a very interesting period to observe the changes in the world economy. In general, the world economy will maintain a three-speed growth scenario, with the developed countries growing at a slow pace, the BRICS (Brazil, Russia, India, China, and South Africa) growing more robustly, and the other emerging economies growing at an accelerated speed. The developed countries are still struggling with many challenges, including fiscal difficulties, social reform, aging populations, and falling competitiveness. Though they might be able to recover from the crisis in several years, their growth rate cannot be as high as in the past decade and their share of the world economy growth will decrease to 25 percent. The BRICS have contributed around half of world economic growth in the past decade, but in the next decade, their share will decrease a little, to 40 percent. However, China will still contribute around 30 percent of economic growth to the world every year in the next decade. The so-called N-11 countries ’ annual growth rate might rise from 4.3 percent of last decade to 5.4 percent in the next. If this happens, the landscape of the world economy will witness its biggest power transition since the industrial revolution. In PPP terms, the economic shares of the South and the North have already evolved from 3:7 to 5:5 in the past twenty years. But in next decade this ratio might be further adjusted to 6:4, which suggests that the developing countries as a whole will surpass the developed countries in economic growth by a substantial margin for the first time in modern history.1 This landscape may be more important than anything else in both international economic and political senses.
LX: What are your predictions about developments in international trade and monetary systems in the next ten years?
JY: My general observation is that the dynamics of multipolarization will further deepen from trade and production to currency and investment. In the previous two decades the weight of world trade and production activities has shifted from the North to the East and South. In the next ten years South-South trade led by the BRICS will further expand. Meanwhile the role of emerging and developing countries in international direct investment and the portfolio market will experience a significant rise in the coming years, including their mutual investment. This will greatly weaken the status of Western transnational corporations in monopolizing and dominating international investment and production.
LX: What about the monetary system?
JY: I expect that big changes will occur in the structure of the international monetary system. With the power shift from West to East, the dominant status of the U.S. dollar is expected to continue declining. The role of the Japanese yen and the British pound will also experience a further fall. The euro will probably survive this crisis and sustain its previous status. The status of the renminbi will see a steady and obvious rise in the world economy. This is based on two assumptions. The first is that China will be able to sustain the momentum in its economic performance in the next ten years. The second is on the policy side; China is determined to liberalize its capital accounts regulation and let its currency go out to the world in a progressive way.
China is accelerating its financial sector reform and opening-up process, despite the fact that the leadership change in 2012 meant that the priority for the government was to maintain stability. In future decades China is set to transform from an exporter of merchandise to an exporter of capital. When the world is still stuck in financial and debt crisis, Chinese capital flow is no doubt a stabilizing force for the world economy. Chinese outward FDI (foreign direct investment), which was over $60 billion in 2011, is expected to equal its inward FDI, which was over $110 billion in 2011, in the next five years. This is partly due to its increasing demand for overseas energy and raw materials.
LX: How do you see the trends of global economic governance and the role of emerging economies in it in the next ten years?
JY: The world is in and will continue to endure a period of fragmentation. As a result of the global power diffusion, global economic governance is expected to become more fragmented. Old structures like the G8 will try to maintain their presence, while new ones will emerge. The U.S. National Intelligence Unit projected that the multispeed development of the world economy will lead to a shortage of political willingness to solve mass global issues. For future global governance structures, fragmentation is the most likely scenario, while harmonization and reverse engine at the two extremes are either very difficult or too costly.
LX: So what is in store for us in the area of global governance?
JY: Facing emerging common opportunities and new challenges, both developed and developing countries will establish new functional institutions based on different issues, interests, and positions, so as to increase flexibility and effectiveness in cooperation. Global governance, including on economics, is going to be like the “variable geometry ” which means the participants will choose to cooperate more on specific interests and topics rather than on some ideological principles, suggested by George Yeo, the foreign minister of Singapore.
Due to the low efficiency and effectiveness of global trade and financial initiatives, major countries will have stronger incentives to promote regional or cross-regional integration as substitutes. Competition between traditional and emerging economies will further increase surrounding the regional integration process and institutional frameworks in Asia-Pacific, Africa, and Latin America. Trans-Pacific partnership is an abstract idea, but it is deployed as a strategic initiative to assert the U.S. presence in Asia. This will increase the options for countries but also raise the cost of transactions in international cooperation. My hope is that strategic competition in Asia will make the system better rather than worse in the next ten years.
LX: Are you joining those who say that globalization is over?
JY: No, in fact globalism and multilateralism are not doomed or dead. First, the global economic institutions, especially the IMF (International Monetary Fund) and the World Bank, have been revived and strengthened in this crisis. This indicates increasing demand for global governance and is the major driving force to sustain global multilateralism, though countries become inward-looking and tend to favor regional supply. Second, the rise of emerging economies is also beneficial to global institutions to some extent. One example is that U.S. pressure will encourage China to support multilateralism. As a response to the deadlock of the Doha Round and the U.S. and European demands for more concessions from emerging economies, the BRICS will call for a more important role to be played by the UN Conference on Trade and Development.
Furthermore global economic governance will be further “greened” due to the rise of environmental and climate change issues. The value of environmental sustainability and inclusiveness should be more streamlined into the Bretton Woods system. Knowledge and consciousness is irreversible; the role of nonstate actors will continue rising. Their participation is more active in global development and trade systems; for example, environmental NGOs have got formal representation in the decision-making structure of some climate finance mechanisms.
LX: What are the main factors that prevent globalization from collapsing?
JY: In short, the continuing crisis. We have seen a more balanced and equitable representation between developed and developing countries in global economic governance structures since this financial crisis. Formally, emerging economies have received more quota and voting rights in the IMF and the World Bank; however, more important at the informal level was the upgrading of the G20 to summit level, signaling an enlarged global leadership. The BRICS as a group are expected to get a veto in IMF and the Bank in the next ten years. A small step today and tomorrow will entail a big step forward in the longer term. But the transition will not be easy to achieve, as we have seen with IMF quota reform.
LX: What do you think are the major risks for world economic development in the next ten years?
JY: World economic development faces great uncertainties and risks, which call for more strategic management and international coordination. First and foremost, increasing strategic competition and political conflicts, if not well managed and controlled, pose the greatest threat to the world economy. One of the key conditions for the world economy to enjoy rapid development in the past two decades was the relative stability of great power relations. There is uncertainty whether this will continue, since the relative decline of Western countries in economic strength has fueled their suspicion and distrust toward emerging powers.
Second, external and internal development imbalances also need to be seriously dealt with. Globally developed countries need to control their sovereign debts and adjust their consumption models, while some other countries need to increase domestic consumption and reduce dependence on investment. With the rise of emerging and middle-income economies, the income gap at the global level is narrowing, while domestic inequality is expanding. Domestic imbalances could produce severer and more destructive political conflicts. Therefore the ability of the developed countries to successfully transform their economic structures will be vital for the sustainable development of the world economy.
Third, we need to be cautious about systematic financial risk. Worldwide fiscal stimulation and monetary relaxation in countering the 2008 global financial crisis could provoke worldwide inflation. The European debt crisis must find an exit, if there is one, through spending more instead of less, as it involves such a high political cost. The European Central Bank is giving up its stability orientation and getting more Fed-like and expansionary. Emerging economies like the BRICS are also following the global trends of relaxation to maintain the momentum of their economies.
Fourth, protectionism is a chronic disease that is difficult to overcome. The world of today is different from that of the Great Depression in that we now have a more complex set of global trade rules. The World Trade Organization has played a very important role in containing protectionist measures, but its role is limited. Countries are designing more complicated or hidden measures, such as controversial technical standards, to close their markets.
Fifth, the limit of resources and the threat of climate change will bring enormous challenges for the world economy. Resource competition in the global market will grow between emerging and developing countries as global power structures shift to the South. Global energy and resource governance need to adapt to this change. Meanwhile the threat of global climate change makes the substitution of fossil fuel a necessity sooner or later. A global top-down push is indispensible for this grand global transformation. Fortunately the global community is still sparing no effort in carrying forward global climate negotiations.
LX: How will China adapt itself in the next decade to strengthen its competitiveness and to make a greater contribution to the world economy?
JY: Thanks to the historical opportunity of a benign external political and economic environment and the prudent policies of the leaders of our country, China’s economy has achieved a miracle in modern world economic history. But we know that the world economic situation has changed, and we need to make some changes in response.
I would like to stress the changes in several aspects. First, we will start our change internally. In the past, we mainly depended on investment and export to drive our economy, with our consumption restrained for a long time. However, I want to clarify one point: although our consumption has not grown as fast as our investment and export, it still grew at quite a fast rate compared to the rate of other countries. The only problem is that consumption growth is lagging behind general GDP growth. The fundamental reason for that is the increasing income gap. Due to many complex factors, mainly the incomplete market economic system, the benefits of economic growth in China have not been evenly distributed in society. As the economies in the West are still weak, our export also faces great challenges. Our own environment and social conditions do not allow us to continue the past growth model any longer either. So our government has determined to transform our economic growth model and improve our income distribution condition in the following years, which is fully reflected in our twelfth Five-Year Program. If these domestic reform measures can be implemented, I believe China will have improved economic fundamentals.
Second, I think we need to restructure our foreign economic strategy, to pay more attention to cooperation with the emerging and developing countries while maintaining our cooperation with the Western countries. As mentioned earlier, the emerging and developing countries now play much bigger roles in the world economy than they did in the past, and they have huge potential to cooperate in many areas. China now has the advantage in capital, construction capacity, manufacturing capability, and some technologies, while many other emerging and developing countries have the advantage in resources, labor, and some industrial sectors. South-South cooperation is facing a historical moment, and we should take every effort to grasp this opportunity and construct win-win results for both sides. For sure, the Western countries will still be our important economic partners. Their markets will remain important for us. Above all, their technology and innovation will stay ahead of us for many years. We still have great complementarities to tap.
Third, China will cooperate with our international partners and friends to cope with the challenges. We need to prevent protectionism from impeding international economic activities; we need to maintain a stable international financial condition in order to ensure the confidence of the markets and guard against other serious financial shocks; we need to further reform the world economic governance system so that it can reflect the changed world economic map and be more relevant and effective. I have quite strong confidence in China’s economy. And I believe our economy will remain open to any economies in the world. Through cooperation with others, we will not only make ourselves better but will also make a greater contribution to the world economy.
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