The Rise of Global Feudalism

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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

Comments
27

[...] The Rise of Global Feudalism | The Diplomat [...]

Alan P.
August 21, 2012 at 14:31

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
August 16, 2012 at 05:51

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
April 12, 2012 at 01:35

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.

a_canadian_observer
April 10, 2012 at 01:21

@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.

jared
April 9, 2012 at 20:36

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.

Gongli
April 9, 2012 at 12:29

@Joe,
Interesting explanation. Can you explain this?
Ghost City – China

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