China announced on Thursday that its GDP in 2010 grew an astounding 10.3%. It’s just yet another sign (if we needed one) of how the global economy has actually become two, with each part heading in vastly different directions. One, the developed world, primarily in North America and Western Europe, with an occasional outpost elsewhere (Japan), is stagnating with low growth, joblessness and debt. The other, in the emerging world, has shrugged off the Great Recession and is powering on to new heights, driven increasingly by its own sources of demand and becoming detached (or “decoupled”) from the developed economies. The Great Recession may have accelerated this shift of economic authority from West to East, or maybe just made it more obvious. Even after the developed part of the world recovers, which it inevitably will at some point, this dynamic is not going to change. The emerging world is catching up, and there’s not much Washington, London and Tokyo can do about it.
I’ve been thinking about this historic transfer of economic power a lot these days, as I’ve watched Chinese President Hu Jintao’s visit to Washington – the meeting of the developed world’s superpower with the emerging world’s superpower. What happens at such a summit impacts every corner of the planet. The course of the 21st century will be determined by the nature of the U.S.-China relationship. Will the U.S. and China become partners in the new world economic order, or contestants? Will we see a new stage of globalization supported by both Washington and Beijing that benefits all, or a renewed Cold War, with different economic and ideological forces contending for world supremacy?
The U.S.-China relationship is representative of the greater one between the developed and developing worlds overall. A lot depends on whether or not these two economies find a way of adjusting to the new normal. Will the rich West try to resist the irresistible and defend its dominance, or see the new wealth of the emerging countries as a new opportunity? Will the leaders of the developing world attempt to reorder the rules and institutions of the global economy as they wish, or work cooperatively on reform? Will the two parts of the world economy forge closer links through free trade and financial integration, or will they resort to dangerous protectionism and currency wars?
The adjustment is my opinion will be much more drastic in the West. The sense I get – admittedly from afar out in Hong Kong – is that the average American or German or Spanish is only now beginning to wrap their minds around the global transformation we’re witnessing. For more than 200 years, the West has called the world’s shots, almost uncontested. In the 19th century, large swaths of the East were under direct or indirect control of the imperialist empires of the West. The West controlled the latest technology; its ideas on economics, political systems and human rights became near universal; and its institutions shaped the way the world worked. The West lived in lavish luxury; the East in desperate poverty. Investors dealt in pounds and dollars, not rupees or yuan. The best and brightest flocked to Wall Street or Oxford or Silicon Valley.
But this was an abnormal situation, one that inevitably would have to change. Civilizations like China and India have historically been heavyweights in world affairs. Now we’re seeing them return to their rightful place. That will alter everything for everyone – who you work for, what currency you carry in your wallet, where you invest your retirement savings, what languages you speak, where you live or study, and who makes the decisions that shape the global society we live in. The world is simply never going to be the same.
What worries me is that the West has no clear idea of how to respond to or accommodate the rise of the East. As Stephen King, chief economist of HSBC told me the other day: “The problem that Western economies have is that they haven’t realized the full effect of the rise of the emerging world,”. As they wake to the new reality, they don’t like what they see. China, India, Brazil and the rest of the emerging world appear an unstoppable force; the West is simply ill-equipped to compete and thus is doomed. This sentiment is feeding into a more general feeling of hopelessness in the U.S. and Europe, that the problems of the West are beyond repair, or that its political systems are broken and can no longer solve them, while a more energetic China and India relentlessly take over the world. Such sentiment is dangerous for two important reasons. First, it saps the spirit the West needs to confront its many challenges – and there are many, from deteriorating public finances and competitiveness to deteriorating infrastructure and education systems — and find a path to future prosperity. Secondly, it fosters an anger towards the emerging world that manifests itself in damaging policy. Since, many Americans believe, the Chinese and Indians are “stealing” their jobs with “unfair” practices, the answer, then, has to be to take action to stop them. That’s how a bill threatening to punish China for controlling its currency can make its way through the U.S. Congress – even though it will in all likelihood start a trade war with China that helps no one. Rhetoric on both sides fuels this type of unproductive behavior. China has become a popular target in American politics for those looking to blame someone else for America’s problems. The Chinese only feed these fears by making statements that signal that the more power they get, the more they’ll want to change the U.S.-led world system in their own image. Thus when President Hu says that the dollar-dominated global financial system is a “product of the past,” as he told The Wall Street Journal the other day, he seems to be confirming the fears of Americans about the rise of China.
Thus this week’s summit between Hu and U.S. President Barack Obama takes on a touch of the aura of the old U.S.-Soviet summits of the Cold War. There’s that sense of heavy foreboding, the tension just beneath the plastic smiles, the feeling that the results of the powwow can change history. Such an atmosphere is unfortunate but understandable. The U.S. and China are not only representing the two parts of the world economy, but also two ideological views of the world, the former rooted in democracy, free enterprise and the notion of universal human rights, the latter believing economic progress is not inherently linked to political or economic openness. But today’s U.S.-China relationship is also very, very different than the one between the U.S.and USSR. During the Cold War, the competing blocs had no significant economic ties. The U.S. and USSR-dominated political spheres existed as generally independent economic spheres as well. Just the opposite is true today with the U.S. and China. The two economies are inextricably linked. China is America’s largest foreign creditor; U.S. investment is a crucial course of jobs and technology for China; American consumers are important customers for Chinese companies; Chinese consumers are becoming more and more important for American companies.
And there lies the opportunity to avoid a new disastrous Cold War. Hopefully, the U.S. and China – and for that matter, the developed and developing worlds in general – will see that they gain a lot more by accommodating the interests of the other than fighting over those interests. Listening to the speeches and comments of Hu and Obama in Washington – all that lofty talk of the need for cooperation to solve the world’s problems – our leaders seem to understand that. We should all pray that they’re not just empty words. If so, the new world economic order will become pretty disorderly for everybody.