Economies need to get back basics – education, access to capital, rule of law, and labor mobility. Slowing growth in China and India makes clear that consumers are the key to prosperity.
In April 2007, New Century Financial Corporation filed for what was then a little noticed bankruptcy protection. Their mortgage-backed securities had become worthless and by summer Bear Stearns began liquidating hedge funds. Come the autumn, Britain’s fifth largest mortgage lender Northern Rock was on the ropes propped up by the Bank of England. The rest is well known history.
Five years on, after bank failures and bailouts, foreclosures, and rising unemployment, the crisis that started as an obscure financial scheme has led to an unusual triple failure in all three of the world’s traditional growth engines, the United States, Europe and Japan. Though boom-bust cycles are nothing new, they tended to peak and trough at different times. Germany’s early 20th century malaise was paired with America’s roaring twenties. Japan’s first lost decade of the 1990’s coincided with a western tech-driven high.
Now, industrialized nations are facing their greatest economic threat in nearly a century – a troubled middle class losing its purchasing power to drive world growth. If current trends aren’t reversed, and soon, 2012 may be the year the middle fails and a century of economic modernization grinds to a halt.
The upwardly mobile middle class is a relatively new phenomenon. For most of history, the wealthy stayed rich and most everyone else never had a chance. Over the last sixty years, the U.S. as world consumer of first resort created a golden age of opportunity along with a strengthening Europe and Japan. The new middle class that emerged bought homes, cars and appliances powering mass-market adoption of every major innovation of the time – from electricity and the telephone to medical technology and the Internet.
Without this purchasing power, investing in innovation loses its main appeal – the ability to profit from new products and ways of doing things sold into a mass market that can afford to buy them. Notice the shift already underway. Companies like Proctor and Gamble are diversifying their product mix to appeal to budget consumers and premium brand buyers, while the middle market shrinks. They’ve introduced low-priced dish detergent and expensive replacement razor blades while their laundry brand Tide has become so expensive it has attracted thieves that sell it on the black market or trade it for drugs.
Contrary to the decline of the West, rise of the rest narrative in vogue these days, even fast growth economies like China, India, Russia and Brazil can’t pick up the slack. Burdened with years of lax planning and excessive state ownership of diverse industries from banks to airlines and steel mills, the BRIC’s middle class purchasing power remains weak. Even overly optimistic forecasts of a new Asian century routinely use unsustainable growth rates that are already beginning to slow. Note China’s revision to a more modest 7.5 percent growth target and India’s struggle to keep growth alive.
A shift is now underway, risky but necessary for developing economies that looked to industrialized nations for demand. When Chinese President Hu Jintao addressed the National People’s Congress last month, he emphasized the need to re-direct the economy towards more domestic consumption. The World Bank in a recent report warned that China faces increasing risks of a hard landing if policies changing the role of government in the economy aren’t enacted soon. Several leading economists believe that day has already come. Growth fueled by investment and infrastructure spending has done little for small and medium sized enterprises, the core job creators, a social safety net or healthcare.
A triumphant Vladimir Putin in his election victory speech declared a shift in growth away from Russia’s state-owned enterprises and towards more free market reforms. Burma has started to free up its state owned economy after decades of dictatorship. Hotels in Rangoon are filled with businesspeople eager to get in early to the unveiling of a relatively untouched Southeast Asian gem. Here, too, state capitalism appears on its way out, not up.
Unfortunately, reorienting growth towards the middle is much easier said than done, more like changing the direction of an ocean liner than a speed boat. Russia’s great wealth has flowed to powerful oligarchies. China’s income gaps are widening into chasms and social unrest is on the rise. India’s companies are hampered by excessive government intervention, frequent power outages and corruption. Even Brazil’s rapid, but thin growth is based heavily on natural resources.
In the end, there has been no greater engine of growth than the power of the consumer. Both developed and developing economies need to get back basics – education, access to capital, rule of law, and labor mobility. Without them growth stalls, inequality worsens, and political instability rises. Absent change, our collective futures look surprisingly like a not so distant past. That was feudalism, and it’s making a comeback as well.
The great age of opportunity that was a hallmark of the 20th century can last well into the next if countries focus on winning the race back to the middle – and not to the destructive financial top.
Brian P. Klein is a macroeconomic and geopolitical strategist and former U.S. diplomat. His articles and op-eds have appeared in Foreign Affairs, the New York Times, Newsweek Japan, the International Herald Tribune and South China Morning Post, among others. He’s at work on his first book about the rise and fall of the global middle class and blogs at www.brianpklein.com
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Alan P.
You point out that India's economy is overburdened with government bureaucracy, interference, and corruption, but you fail to notice that there is such a thing as too little government oversight of the economy. Lack of proper oversight is largely what caused the crash that wracked the US economy in 2007/2008.
You also point out that the World Bank warns that China needs to change the role of government in its economy or face a "hard landing". This is no surprise coming from the World Bank, which is the world's largest propagator of Friedmanist, neoliberal, free-market economics. They are _always_ warning that countries need to reduce the role of government in their economies or face "hard landings". In the case of the World Bank, and the IMF, this warning is part threat, because they are not above using economic warfare to get their way. This is something Naomi Klein covered in her book /The Shock Doctrine/, which is excellent, and highly recommended reading.
The bottom line is that in every case around the world in which pure Friedmanist economic theory has been put into practice the result has been an unmitigated disaster for everyone in that society except for a tiny handful of wealthy elite at the very top.
Is this the way forward for China? No. Behind the scenes, China has already been putting Friedmanist theory into practice for a decade, at least, and they even had Milton Friedman over there to consult on his economic theory back in the late 1990's. Just like everywhere else his theory has been put into practice, China's wealth gap is widening, and its middle class is going away, and the result is an unmitigated economic disaster for everyone except a tiny handful of wealthy elite at the very top.
ha
Whatever all you engrish speakers.
The west will come out of this just fine like we have for 2000 years and the east will continue to pull its lip over its head and swallow.
Your leaders are corrupt and greedy and you were lobbing each others heads off 100 years ago and in 100 years you will be right back at it.
Horst G Ludwig
1)John Chan is pretty much right but discussion should start at another level. Why shall we listen to all that crap experts of a done and destructive economic system in the first place? Non of the mind masters getting to the bottom of the criminal “demand and credit” economy promoted by bankers printing and lending the money for ages by now. How many crisis and human / planet violation got to take place until we get to the point and forget about rediculess political discussion of systems which basic condition is in the hand of greed and speculation?
2) consequently our war is with the deep root of finance system and than economies will prosper natural in a healthy way never seen before. Until than ANY economic system is a CONSEQUENCE no matter which political verbiage you may attach. So stop defendinmg useless and failed systems of any human history and start our venture of selfsustainable capitalism here and now. Welcome to 2012 which in fact is 8000 something in comparable history.
3) if we dont get to the toxic root we are testimonies to the biggest war on fiancial, economic, civil and commerce ever seen and all those guilty proceeding with the promotion of a done system having infested China as much as the other 185 IMF members.
John Chan
The author talked about the malaise of global economic and the cause of such malaise is lack of consumer spending. But his diehard neo capitalism cannot make him to suggest solution outside the failed ideology, greedy capitalism.
The solution of global economic malaise is flattening the wealth distribution, and reverse the trend of wealth concentration; get rid of that 1% rich and spread their wealth to the rest of the 99% is the only way to boast consumer spending and stop the return of feudalism.
Tao Lao
China’s CCP story is very much like the story of the Animal Farm by George Orwell.
Animal Farm-George Orwell-Full Length Animated Movie (enjoy the movie everyone!)
http://www.youtube.com/watch?v=6MKXgrF9IRc
China’s rich & poor gap is so wide, and let’s hopes the China story will be ended just like the Animal Farm one.
http://www.newsy.com/videos/chinese-political-gathering-shows-gap-between-rich-and-poor/
John Chan
@Tao Lao,
What make you think the nations in the so called western democracies are not the Animal Farm by George Orwell? 1% rich vs 99% poor is the world of western democracies, scam the poor to enrich the rich is the world of the western democracies, and above all the western democracies use election to lock the 99% in the same misery and exploited debt serfdom without redressing courses.
Why is every pitfall in China a sign of tyranny of the Animal Farm by George Orwell, yet the same pitfall in any other nation is a sign of freedom in democracy? Have you asked yourself the question or have asked yourself why did you have such bias view?
Joe
The ’1%’ are more like the farmer. The pigs are more like their ‘for your own good’ Soviet replacements. Especially, the Stalin school of thought.
a_canadian_observer
@John Chan: It’s deception when using the 1% rich, 99% poor number. Doesn’t that exist in china as well? The difference is, the standard of the so-called 99% poor in the US is still a drea for most of china’s citizens. BTW, another evidence: china’s people are finding evry way to get to the US (and the West), be it legal or illigal.
Worry01
Thank you for your Maoist rant. Are we to expect a “Great Leap Forward” proposal from you next?
John Chan
@Worry01,
What is wrong with the idea of equitable society? Why should 1% of the people who have so much that they are living in a wasteful and decadent life that is detached from 99% of the poor that has to scrap by everyday?
Are human being supposed to be equal and free? Or are you supporting a caste society that the poor is deserved to suffer because they have done something wrong in their previous lives?
Shanghaier
The key word here is ‘growth’. Why do we need growth? And which kind of growth do we need? Do we really need the middle class’ constantly buying of increasingly useless items that just reside in garages once they have been used one or a few times? Do we need growth from the high class’ fifth Ferrari sitting in the garage or 117th LV bag residing somewhere most of the time?
Or do we need growth from low income peoples first bicycle or car, that is used everyday?
Joe
Growth at the low end ensures a stable society.
Growth at the middle part ensures a stable economy.
Growth at the top end ensures technological progress.
Think of it as a triangle. If you’ve played Sim City (original, not the ‘Sims’), then you would see something like the Residential-Commercial-Industrial concept but with levels of income instead of city zoning.
Rich: The rich need the poor to make products cheaply and the middle class to buy them. Too many poor=cheap products but few sales. Too many middle class=Plenty of buyers but expensive to manufacture. Since you multiply the margin on each sale by the number of sales, a balance is desirable from a rich person’s POV. Note that ‘rich’ doesn’t mean a lack of debt or being a billionaire! Your local gas(fuel/petroleum) station or real estate agent are technically ‘rich’ but may be in debt. It might be better to say ‘businessperson’ than rich.
Poor: The poor need jobs provided by everyone else. Without jobs, they have to rely more and more on social services. Without an education, they can only rarely reach the middle income levels.
Middle: They need higher-paying jobs and the education or experience to get them. Services such as mechanics, doctors, police, computer programmers and so on are generally considered to be in the middle so far as income levels go.
Gongli
@Joe,
Interesting explanation. Can you explain this?
Ghost City – China
http://www.youtube.com/watch?v=wm7rOKT151Y&feature=endscreen&NR=1
EAM
The point that a prosperous middle class is required to determine growth will have few dissenters. However, there might be more to it than that. I am not aware of any state that has developed without a high degree of state intervention including the United States. Names such as Alexander Hamilton may not be familiar to average Americans but his view of protecting infant industries was widely accepted in the US in his day. It is easy to forget that Lincoln campaigned on the basis of protecting US industry and not on abolishing slavery – and that is what got him elected.
That path is the same path that India has followed – and China as well in effect through a closed Leninist economy under which it developed its industrial base. It may indeed be the case that the point in time where are now are is that China and India begin to find that they no longer need protection and will benefit more from free trade to place their goods in Western and other markers and it is the West that begins to rediscover protection. There seems to be little doubt that there is a rise in protectionist sentiment in the US and elsewhere. If the historical precedent is anything to go by, protecting middle class consumers may depend on rediscovering the story of how the US developed in the first place – and reading up on Alexander Hamilton. The Chinese and Indians should be condemned for wanting free trade – and equally no one should complain if we take steps to protect our middle classes and industries (or what is left of them).
The other big “if” in all of this is whether the resources that are available globally are enough to support a model of middle class demand as a mainstay for everyone in the world. From what is set out above, P&G might be voting with its feet and saying no. However, I would be less game to make a call on this one because what one can never predict is the possibilities that technological change opens up. It is indeed striking that Adam Smith in his writings which even today remain a cornerstone for economists (whether they agree with him or not), there is no mention of the steam engine which was around when he lived. Even Smith did not grasp the transformative potential of it when he was writing.
I do not think that attacking China either or blaming China is helpful. The Chinese as much as us are entitled to what they aspire to as consumers. Their huge efforts in R&D (such as the fission reactor in Chengdu) stand to benefit everyone – just as the steam engine eventually established itself everywhere.
We would be much better off finding areas in which we can collaborate with the Chinese. My friends in the academic world are off the China (or India) almost every month to sign up a collaboration agreement. It seems to work well for them – and their counterparts in Asia.
EAM
“The Chinese and Indians should be condemned for wanting free trade” should read “not condemned”.
John Chan
Free trade and free market capitalism never work in practice; it takes too long to get results. Managed trade and capitalism is the only way for the world growing into peace and prosperity.
Unfortunately the West sees free market capitalism as the symbol of their culture superiority, they forget the purpose of any ideology is for the common good, any idea benefits the common good should be adopted, and any idea hurts the common good should be discarded. In the nutshell, the West are lost, they insist on symbolism regardless the cost.
Free market capitalism has been morphed by the West into a symbol of too many unrelated ideologies, such as democracy, human rights, etc, it become a cult. Any cult is suppressive, regressive, totalitarian, and harmful to humanity. The current world disorder and suffering are the results of free market capitalism cult.
jared
Free trade is slow but efficient.
Managed trade is fast but wasteful.
This is well documented and logical. It’s impossible to say that either is better. Both work in certain circumstances.
The other issues you mentioned (democracy, human rights) are completely unrelated, and the U.S. can (and will, and does) laugh at the rest of the world that lacks such basic ideals. Both of those ideals lend to stability, which China so desires.
Forrest Johnson
The central problem inhibiting economic growth is inequality. The richest citizens in the U.S., and in almost every country, have become extremely skillful at siphoning the benefits of growth into their own pockets, leaving nothing for the consumers. According to the NY Times:
“In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.
“The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.”
http://www.nytimes.com/2012/03/26/opinion/the-rich-get-even-richer.html
Bolsheviks
China’s CCP has been selling its own people’s hard & cheap labours for the low profits margin of exporting goods. Along the way, it destroys the country’s environments and the health of Chinese people. China’s miserable property market is sham.
China is about to get into the trade war which would more suffering for the people in China. A “small wars or local wars” with Vietnam, Philippines, S. Korea or Japan will be the last stroke for CCP and China; hope they would get into any “small wars” as many of nationalists are wishing, so that China’s economy would be finishing off nicely.
The South China Sea is the “neck” between Pacific Ocean and Indian Ocean. It’s the water gateway between Europe and Asia. It’s the main waterway of Japan, South Korea, Russia, etc. to access to Europe, Middle East and Africa, etc. Do you think the World would leave China alone with its SCS & ECS ambitions?
Bogadanov
Bolsheviks – I say this to you – Nyet! You talk some good but you also talk rubbish. I think you are American pest agent on this blog.
John Chan
@Bolsheviks,
Global recession forces China manufacturers move up value chain to squeeze out manufacturers in other nations out of global markets further more.
China property market slam is good for the Chinese public and punishes those speculators; a lot of them are foreigners. Once the property market crashed, ordinary people can afford to buy house, and entrepreneurs can return to the business of creating real wealth and jobs.
Small local wars are the right way to rein in rogue states Japan, Philippines and Vietnam and put Asia into a place of law and order; as well as put the straitjacket on the predatory imperialist Westpac and stop it from making Asia a pig’s breakfast. Then Asia can continue its upward trajectory to prosperity, while leave the predatory imperialist Westpac continue its downward trajectory into abyss of austerity.
Earl
A small war with Japan or the Philippines would instantly bring the United States of American into a full war standing toward China. That is the path to World War 3. Such a war would wreck China, harm the United States, and leave the entire region impoverished for generations.
Nivi
@Earl,
Any war in the SCS will choke China’s economy to a halt. A war between China and Vietnam (2 communist & dictatorial regimes) will be the best solution for the World, with 2 less nasty regimes for their people.
A poorer, less bullying, law ignorant and arrogant BS China will be good for everyone. A war with the US will leave a weaken China for Russia, India and other countries to work on. Taiwan definitely will have a good chance of becoming an independent nation. People of China without CCP will have a real taste of freedom of thoughts, freedom of expression and more importantly, the freedom of speech.
Really hope PLA will kick off the “small wars”, soon.
John Chan
@Earl, Nivi,
Why will a small war with those rogue states Japan, Philippines and Vietnam bring USA into a full war against China? All those nations are free riders feeding on the Americans, and now they even expect the Americans get itself wiped out for them, what is in for the American people by putting their bodies in front of the lines of fires for Japan, Philippines and Vietnam?
On the other hand USA can get a good price by selling Japan, Philippines and Vietnam to China like a salami, one slice (allowing one small war) at a time, because no matter how many times those parasites get sold, they will always return to the USA’s chopping block to be sliced and sold again, it is call Stockholm syndrome.
Ares
John Chan,
Why other peaceful countries are the rouge states while the big, bad, bullying China is not? No country on Earth like China would draw a silly nine-dot line (like a child’s drawing) on the South China Sea map, and then claim it’s theirs. What kind of jungle law is this?
Talking about law and order, China should learn what the laws are, then learn how to respect the rule of laws and following those rules of laws. China and you should learn from Wen Jiabao’s leadership and let’s respect the rules of International Laws. Read the article below and learn something from it, John.
http://www.foreignpolicy.com/articles/2012/03/29/the_revenge_of_wen_jiabao?page=full
Joe
Isn’t international law a contradiction-in-terms? There are treaties that have the force of law but they are in fact not laws according to the common-law definition of laws being passed within a contiguous border. Just because countries A and B agree to not do something doesn’t mean that country C has to cooperate. Think of those fishing boats that stay just barely out of a nation’s waters so they can avoid catch limits. Since they never enter the country with the catch limits to sell them, they’re technically legal. Trying to stop them would be an act of piracy, not law enforcement! The same applies to ‘extreme rendition’ where illegal agents effectively kidnap some fugitive.