New Rules for the New Global Economy
Insider Interview by Project Syndicate editors and Jim O’Neill
With the BRICS holding their 10th annual summit, this seems to be the right moment to explore just how much the world economy and its governance structures have evolved since you first coined the term. For example, you have long argued that if global economic governance is to be effective, its main institutional structures need to represent economic reality better than they do now. And that means acknowledging the fact that new economic powers have risen since the post-1945 creation of the Bretton Woods institutions. How, specifically, should global governance change?
The recent G7 meeting in Canada demonstrated that we are living under a pretty outmoded form of global governance. The G7, after all, represents the democracies that had the largest and most important economies in the 1970s, when the group was formed. But since the turn of the millennium, and arguably since the mid-1990s Asian financial crisis, most of those countries have not dominated the world economy.
If we want truly representative governance, we need a system that can change and evolve through time, not unlike the system of promotion and relegation in sports leagues. Otherwise, we run the risk of setting up some entity that becomes irrelevant in 20 years.
One of the underlying themes of that G7 summit concerned inclusion – or the lack thereof – with US President Donald Trump calling for Russia’s membership, suspended after the Kremlin’s annexation of Crimea, to be reinstated. You yourself have emphasized the importance of alternative groupings that include China and India, but that are still nimble enough to respond to changing realities.
Yes, one alternative is the G20, which does by and large include most of the world’s important economies – and not only the democracies. The G20 has existed for a while, but it really came to the fore only in 2008 and 2009, when US President George W. Bush and British Prime Minister Gordon Brown were leading the rescue mission after the global financial crisis.
Clearly, the G20 is more representative than the G7. But you’re right about the problem of nimbleness. The G20 actually has more than 20 countries – it comprises 19 countries and the entire European Union – so it may be too cumbersome to tackle critical issues as soon as they arise. As I argued in my recent Project Syndicate piece, the answer may be to establish a new G5 or G7 within the G20.
It is worth remembering that the G7 itself only came about because the United States – and maybe France and Germany – added Italy and Canada to the mix in the 1970s, more or less out of sympathy. And, of course, after the collapse of the Soviet Union, Russia was temporarily added because everyone thought it was going to be a democracy.
But that focus on political systems isn’t a realistic way to run the world. So far this decade, nearly half of global GDP growth has come just from China. So, obviously, if you’re going to do anything affecting governance of the global economy, you have to include China. Here is a country that creates another Italy every two years, and yet Italy is still treated as a dominant economy within the G7. It makes no sense.
A Multipolar World
Countries like China and Russia now seem to be growing impatient and going their own way. China has established new institutions such as the Asian Infrastructure Investment Bank (AIIB) and the Shanghai Cooperation Organization, and Russia has its Eurasian Economic Union, all of which are seen as alternatives to Western-led institutions.
Yes, and that isn’t really surprising. If these guys feel like they’re not welcome at the top table of global governance, they will pursue their own interests through other means. The BRICS (Brazil, Russia, India, China, and South Africa) were formed for the same reason. As it happens, the group’s 10th annual meeting is now taking place. Different arrangements are appearing in different parts of the world. But all of them make the G7 increasingly redundant.
You coined the BRIC acronym back in 2001 to capture the growing economic importance of those countries (with South Africa being added in 2010). Talk about your predictions 17 years ago. You’ve suggested elsewhere that as an asset class, the BRICS are still relevant. What can we expect from this summit, other than more statements of cooperation?
I think the BRICS leaders need to ask themselves whether the group has really done anything to improve individual member states’ growth performance or collective trade and investment performance since they started meeting. That would be my exam question for them at this summit.
After all, South Africa, Brazil, and Russia have each gone through very challenging economic periods in the second decade of my acronym’s existence, after much stronger performance in the first decade, before the BRICS started actually meeting.
That said, the relative and absolute position of the BRICS, with the exception of Russia, is close to what I envisioned in 2001. Despite Brazil’s problems, it is still one of the world’s 10 largest economies. And even if some of the BRICS’ performance hasn’t been particularly impressive this decade, neither has the EU’s.
Moreover, China’s performance has been almost perfectly in line with what we envisioned, such that it can lend weight to the BRICS club, as it does to the AIIB, the New Development Bank, and so on.
In addition to the BRICS, you also created the ‘Next Eleven’ (South Korea, Mexico, Indonesia, Turkey, Iran, Egypt, Nigeria, the Philippines, Pakistan, Bangladesh, and Vietnam) to describe another group of important ’growth economies’. Where do they factor in?
I think the N-11 is very relevant in the context of another issue relating to China: the Belt and Road Initiative of investment and infrastructure projects spanning Eurasia. Many N-11 countries lie in the broader circumference of the BRI, and China will have to engage with them if it wants its bid for regional and global leadership to succeed.
Some N-11 countries are rather excited about being a part of the BRI, so China should be looking for ways to give them a say in how the project proceeds. Vietnam, the Philippines, Pakistan, and – crucially – India (a fellow BRICS country), could each play an important role in the region’s development.
Trump is currently threatening the global trade system. But if these countries were to approach the BRI proactively, the potential impact on Asian – and even global – trade could be so vast as to render Trump’s actions irrelevant. There is a lot that the leaders of the BRICS and the N-11 could be accomplishing if they could commit to using their forums as a force for common economic and social benefit.
The Leadership Challenge
And yet truly global problems still demand collective solutions. With the US and the United Kingdom turning inward, and with the EU divided over issues such as immigration, who will take the lead in reforming global governance?
Well, we’re in a strange era, and it’s a bit like a poker or chess game. To my mind, the International Monetary Fund has a serious obligation at least to come up with ideas to improve the representativeness of multilateral organizations’ boards and voting structures. The fact is that China and India each have more than one billion people, and their working-age demographics and growth trajectories promise to make them the largest economies in the world over the long term.
For the past 100 years, the US has held that position. And before that, the UK did. Brexit notwithstanding, many Britons have gracefully accepted our relative decline. Collectively and individually, the British have benefited from the emergence of other economies around the world. This is the natural progression of things, and so we need a kind of global governance that isn’t beholden to sensitivities about the rise and fall of this or that country.
So, in your view, is the IMF the only institution that has the credibility to take the lead?
Yes, I think it probably is. We don’t need new institutions; we need existing institutions to evolve and adapt. Our problems are not insurmountable, but they will require us to have an open mind.
You seem to have a more positive outlook than, say, Richard Haass of the US Council on Foreign Relations, who seems to have concluded that the liberal international order is dead, and that we need new institutions to move forward.
Many of my new Chatham House colleagues seem to hold a similar view. I try to look at the world differently. And I would say that I do have a positive outlook, because I have spent a lot of time speaking with people from other parts of the world, particularly China, where around 20% of the population is already earning about $40,000 per year. That is similar to the average income in Britain. And that 20% translates into 260 million people – nearly four times the population of the UK.
Clearly, Western policymakers and think tanks, Chatham House included, need to adapt their thinking. Yes, we need credible rules governing global interactions; but we cannot assume that the future of global governance will depend on some new version of the Western liberal order. Westerners in Rome, Berlin, Paris, London, and Washington must understand that people in some of the fastest-growing emerging economies have grown up under very different forms of governance. And they are perfectly happy with the way things are working. We need to create some space for how they think, rather than assuming that we always know the right way.
The China Factor
And, of course, China stands out here. The Chinese economy is slowing as it moves from an export-driven growth model to one fueled by domestic consumption. Walk us through China’s economic-policy reforms. Do they inspire confidence?
Taking a 40,000-foot view, China’s reforms are hugely positive, though many ongoing challenges are visible when you get down into the trenches. Contrary to Trump’s trade-war rhetoric, it is worth noting that China’s current-account surplus probably amounts to less than one percent of GDP, down from 10% a decade ago, at the start of the global financial crisis. That means exports are already playing a significantly smaller role in Chinese economic performance than they were in 2008.
In fact, I sometimes think that the crisis was the best thing that could have happened to China, because it forced the country’s leaders to recognize that they needed to move away from a growth model based on low-value-added exports. In that context, the slowdown in annual GDP growth from 10% to six percent is actually pretty spectacular when considered alongside the reduction in the current-account surplus.
Moreover, when you look at consumption, there are clear signs of amazing growth. We all love to talk about Apple, Google, and Amazon. But global tech investors are increasingly being attracted to domestic service-oriented businesses in China. And this is coinciding with explosive growth for Chinese tech firms such as Tencent and Alibaba, which are nearly as big – and in some cases already bigger – than the iconic Silicon Valley firms. All told, China’s economic adjustment has been far more impressive than what you hear in the Western media.
Do you think that can continue? Chinese President Xi Jinping, through the ‘Made in China 2025’ program and other efforts, wants to turn China into a global tech leader. But where does one draw the line between politics and economics? How can an authoritarian single-party state that installs its cadres on corporate boards, censors the internet, and surveils its population achieve the entrepreneurial nimbleness and creative freedom that underpins technological dynamism?
This is where one must come down from the 40,000-foot view. The first thing I would say is that realities on the ground are not so black-and-white. There are a lot of different things going on in China, depending on where you look. In some jurisdictions, the central authorities do direct what happens; but elsewhere, they are allowing bottom-up economic activity to drive things. One must be careful not to assume that 50-100 Communist Party officials are hiding in some dark room directing the central state’s every action.
Consider WeChat, the Chinese version of WhatsApp, which is owned by Facebook. From what I can tell, WeChat is about 10 times more sophisticated than WhatsApp, and this is something that came out of the Chinese system. Just because a core group of officials is preserving and promoting the party’s rule doesn’t mean that creativity is being stifled.
Now, obviously there are problems, too. I am not one of those people who thinks China can do no wrong. Something that worries me, in particular, is the hukou residential registration system, which relegates migrant workers in the big cities to what is effectively second-class citizenship. They are not part of the 20% of the population that is earning $40,000 per year.
My suspicion is that in another 15 to 20 years, the authorities will have to abandon this system completely. Otherwise, there will most likely be mass protests or some other form of civil unrest that destabilizes the country. You can’t have a system where, 15 years from now, 40% of the population will earn $40,000 per year, while the rest must make do with no assets at all.
At the same time that the recent G7 summit was descending into chaos, the Shanghai Cooperation Organization was holding its own summit. Afterward, the Global Times gleefully announced that the future of global governance will be rooted in the SCO and other Chinese-led organizations. Do you think that’s true?
No. Just as global governance won’t be rooted in the BRICS summits, nor will it be rooted in those of the SCO. Ultimately, we don’t know what the future of global governance will look like. But, to my mind, there is an obvious de facto G5 that has already emerged: the US, Japan, China, India, and the EU. If it were up to me, we would create something like that within the G20. Though it would upset my fellow Britons, as well as the Russians, the Canadians, and many others, it’s the only sensible solution.
The Trump Economy
In your 2011 book, The Growth Map, you argued that in the coming decades the US, like China, would need to reinvent its economic model, but moving in the opposite direction – toward more exports and investment. As you frequently point out, consumer spending accounts for something like 70% of US GDP. If you had the ear of Trump’s economic advisers, how would you recommend that the US rebalance its economy, given that the dollar’s role as a global reserve currency creates a structural current-account deficit and allows for cheap borrowing to maintain high levels of consumption?
In essence, I think the US needs to turn 180 degrees. After the 2008 crash, I often said that what the world needed was for the US to become a bit more like China, and for China to become a bit more like the US. Well, China has shifted a lot, but the US has not. There was a period three or four years ago when the US economy actually was adjusting slowly in the right direction. But, as you mentioned, consumption is now back up to accounting for around 70% of GDP.
If I were still in the financial world, I would be questioning the optimistic consensus about the US economy, at least relative to others. Regardless of what happens over the next quarter or so, the US is structurally weak. The economy is near or beyond full employment, and we’re starting to see interest rates rise, which will put pressure on those consumers who are driving the economy.
Moreover, the dollar is strengthening, and the Trump administration has embarked on a kind of Reaganesque fiscal expansion, which will invite a tighter monetary policy than otherwise would have been the case. This is not a recipe for the kind of long-term rebalancing that the US needs.
Ironically, Trump says he wants to boost US production and exports, yet he is pushing things in the opposite direction. From a marketing perspective, Trump and his team are very good at promoting themselves. But even with that, I don’t see how they can deliver on what they’ve promised their supporters.
Let’s talk about Trump’s trade policies, then. How damaging will his trade agenda be in the medium and long term – particularly his policies targeting China?
I think it’s a very strange path for Trump to take. If the US needs to boost its global share of exports, it is difficult to see how acting aggressively toward the global trade system, China, and – even more strangely – the EU is going to help.
Trump and his advisers seem to have a very simplistic view of global trade. They do not see trade as something that can help everybody. Instead, they think everyone has to fight for a bigger share of the status quo, which flies in the face of the economic conventional wisdom, which I do share. There is a huge amount of evidence to show that global trade helps everybody, even though it can displace some people in certain regions and industries.
Let’s not forget that we are living through an era in which global inequality has declined more than at any other time in the past few decades, if not centuries. The reason is that China joined the global trade system. Today, it is the world’s largest export market.
One statistic that I love to quote – including in the UK, because it shows how simplistic the Brexit debate has become – is that China became Germany’s biggest trading partner at the end of 2016. Even with the European single market, Germany now exports more to China than it does to Italy. And Japan has been exporting more to China than to any other market for years, despite the two countries’ historic animosities.
You wouldn’t think it listening to Trump, but China is America’s third-largest export market today. This shows just how weak Trump’s strategy really is, even if it does succeed in extracting some concessions out of people. What bugs me the most about it is the embedded assumption that the US dominates global trade in the same way that it did in the 1970s and 1980s. It doesn’t.
In addition to the rise of China, there is also the growth of what some call South-South trade. For at least a decade, South-South trade has made up a larger share of global trade than North-North trade. Even if we have to suffer through a year of rising tariffs, China will continue down the path it is already on with the BRI, and one can imagine a future with even more free trade – not with the US, but among everyone else. It’s not obvious to me why the US would want to preside over such an arrangement, given that it would be the ultimate loser.
And, of course, we’re already seeing iconic American companies like General Motors, Apple, and Harley-Davidson complaining about the introduction of tariffs.
It’s not surprising. Just look at my old industry, finance, where many US-based firms have been looking to enter the Chinese and Indian markets. Globally, the growth in financial services is in these and other countries. This fact is often lost in debates about trade, owing to the singular focus on goods. But do people really think that China is going to let the US become a serious player in its domestic financial-services sector at the same time that the US is restricting opportunities for Chinese firms in the US?
Makers and Takers
According to the IMF, labor’s share of income in advanced economies fell from 55% to 51% between 1970 and 2015, owing to automation, offshoring, and other factors. You’ve called on political leaders to address this trend by changing, ‘the rules of the game’ through taxation and other interventions. Why has that become necessary?
The statistics you just quoted indicate a fundamental impairment of the market economic system. In theory, if profits as a share of GDP continue to rise, new entrants should be attracted to the market, and the increase in competition should erode the profits of individual players. But that hasn’t happened.
One reason is that major corporations have gamed the system – not illegally, but by playing around with the rules. Consider taxation. In the UK today, many iconic multinational companies are selling products that consumers seem to love; and yet these companies pay almost no UK taxes. Does that make sense? Having come from the financial industry, I sometimes wonder what these companies’ leaders are thinking. Surely they must realize that corporate tax avoidance and related issues is at least one factor behind all the fury and envy that gave us Brexit and Trump.
A second problem is share buybacks, which I learned more about while chairing the UK government’s Review on Antimicrobial Resistance (AMR), where I looked closely at the pharmaceutical industry. I don’t think it’s a stretch to say that the single largest source of purchases of publicly traded equities this millennium has been companies buying their own stock, which has the effect of boosting earnings per share in quarterly earnings reports.
The increased frequency of this practice has coincided with a weakening of investment spending across most Western countries. Needless to say, low investment leads to slower growth in productivity and wages. From a business standpoint, this is neither rational nor sustainable.
Looking ahead, I want Chatham House to be at the forefront of promoting ‘enlightened self-interest’ in the business world. Corporations need to get past the obsession with quarterly earnings and return to thinking like the genuine risk-taking pioneers of yesteryear.
It seems like a lot of the issues we’ve discussed relate to productivity growth and its deceleration across Western economies over the past few decades. Where do you stand in the ‘great productivity debate’? Do standard economic measures need to be updated to capture the effects of new technologies, or is something else going on?
It’s a complex issue, but at the heart of it are two relatively straightforward observations. First, there is clearly a measurement problem. It’s become increasingly hard to capture a lot of modern services in conventional measures such as GDP.
Take social media. Some academics have already tried to quiz Facebook users on the notional value they ascribe to using the platform. The idea is to take that data and include it in nominal GDP estimates. Of course, the implication of this approach is that people might end up having to pay to use Facebook at some point in the future. At any rate, I do think statisticians should continue to look for new ways to measure activity in the digital economy.
The second overarching issue is one we touched on earlier: We need to change risk-reward incentives in the corporate sector. In today’s economy, are we compensating genuine risk-takers, or are we rewarding people for being good balance-sheet managers? If it is the latter, then we are not going to get the investments that we need to create rewarding jobs across the economy. All of the talk these days about automation is largely a distraction. The underlying restraints on risk-taking and investment are what really matter.