Philip Mohr
Introduction
In the wake of the 2008-2009 global crisis there has been much speculation about its possible impact on the politico-economic systems and broad eco-nomic policy strategies, particularly in developing countries. A widely-held view is that since China has apparently been affected less by the crisis than the major Western economies, there will be a tendency for developing coun-tries to adopt all or part of the ‘Chinese model’ of market authoritarianism, instead of pursuing market fundamentalism in a democratic political envi-ronment. Some observers prefer to focus on a broader range of developing countries, particularly the BRIC countries (Brazil, Russia, India and China), and to try to distil lessons and guidelines from their perceived success.
In discussing the possible demonstration effect of the variable impact of the crisis it is necessary to first look at some key aspects of economic systems and economic performance to avoid the danger of becoming embroiled in pe-ripheral issues, while neglecting or overlooking the fundamental ones. Also, a distinction should always be drawn between the impact of sustained high economic growth and the possible impact of the crisis as such. It could be ar-gued, for example, that China already warranted extraordinary attention on account of its sustained growth performance irrespective of the crisis, which probably had only a marginal impact on the attractiveness of the Chinese model. In addition, there is also a need to differentiate between the impact of the crisis on advanced and developing countries. In contrast to other recent international economic crises, the latest crisis had its origin in the advanced economies. Moreover, the level of financial development and integration in the more advanced economies made them much more vulnerable to the crisis than developing countries with less developed financial sectors. As a result, the crisis has been labelled a rich world’s crisis. The focus in this chapter, however, is on developing rather than developed countries.
Economic growth in recent years
Table 1 shows the annual rates of economic growth in selected countries prior to and during the crisis. The first two columns indicate average annual growth rates over a decade or so and the last two show the rates for 2008 and 2009 respectively, with the latter reflecting the impact of the recession.
Table 1: Economic growth in selected countries prior to and during the crisis
Country Annual percentage change in real GDP 1990 – 2000 2000 – 2008 2008 2009
Germany 1,8 1,2 1,3 -4,9
Japan 1,1 1,6 -1,2 -5,2
United Kingdom 2,8 2,5 0,5 -4,9 United States 3,5 2,4 0,4 -2,4
Australia 3,6 3,3 3,7 1,3 South Korea 5,8 4,5 2,3 0,2
Brazil 2,7 3,6 5.1 -0,2
Russia -4,7 6,7 5,6 -7,9
India 5,9 7,9 5,1 7,7
China 10,6 10,4 9,6 9,1
Greece 2,2 4,2 2,0 -2,0
Ireland 7,4 5,0 -3,0 -6,0
Poland 4,7 4,4 5,0 1,7
Angola 1,6 13,5 13,2 0,2
Mozambique 6,1 8,0 6,7 6,3
Uganda 7,1 7,5 8,7 7,1
Venezuela 1,6 5,2 4,8 -3,3
South Africa 2,1 4,3 3,7 -1,8 Sources: IMF, OECD, World Bank
The first four countries in the Table are well established developed econo-mies. Like most other advanced economies, each country in this group expe-rienced significant economic decline in 2009. Note that all four, especially Germany and Japan, had not fared particularly well (on average) during the two decades prior to the crisis. Germany was struggling with the economic
impact of unification, while Japan had become a mature economy with an ageing population after decades of comparatively rapid economic growth. In the 1960s the Japanese economy grew at an average annual rate of 10%, much like China today and South Korea in the 1970s and 1980s, but by the end of the 1980s growth had become lacklustre. Numerous subsequent efforts to revive the Japanese economy have proved singularly unsuccessful. Nowa-days many observers regard the ‘Japanese model’ of stagnation and deflation as highly relevant for other advanced economies. They analyse the Japanese experience in detail in an attempt to ascertain what to do to avoid a similar experience. A fundamental question, however, is whether or not the mature advanced economies still have the potential to grow at rates approaching those experienced in the past. It may be argued, for example, that Japan’s demographics, especially its ageing population and declining labour force, is the main cause of the country’s economic woes.
The next two countries in the Table are the only advanced economies in which positive, albeit low, real GDP growth was recorded in 2009. After decades of rapid growth, South Korea joined the ranks of the advanced econ-omies in 1997, ironically at just about the time of the Asian economic crisis.
Following Japan, South Korea also became a more mature economy in recent years and the average annual growth rates of 9% in the 1970s and 8% in the 1980s will not be repeated in coming decades. Australia fared the best of all the advanced economies, largely because of its mineral wealth and close eco-nomic ties with China and other Asian countries.
The next four cases, the BRIC nations, are large countries that potentially constitute an important bloc in international economic and political affairs.
Brazil, Russia, India and China all rank among the top nine countries in the world as far as land area, population and GDP are concerned, the latter on a purchasing power parity (PPP) basis. As a group they accounted for more than 25% of world territory, more than 40% of world population and about 25% of world GDP in 2009 (World Bank, 2009). In 2011 South Africa was invited to join BRIC, which would then become BRICS, but for the purpose of this chapter the focus is on the original BRIC group, as identified by Jim O’Neill of Goldman Sachs in 2001. South Africa was probably invited to join to obtain a foothold in Africa, but from an economic point of view the coun-try is a minnow compared to the other four countries. Moreover, there is nothing particularly interesting about South Africa’s economic performance prior to, during and after the crisis.
Although the BRIC countries are undoubtedly the most important emerg-ing market economies because of their size, they have not all performed par-ticularly well economically. Following the collapse of communism, the Rus-sian economy declined during the 1990s, particularly during the crisis of 1998. It subsequently recovered, mainly due to the country’s oil and gas re-sources, but collapsed again during the latest crisis. Brazil performed
reason-ably steadily albeit not spectacularly, stagnated during the recession and has grown rapidly since then (not indicated in the Table). China and India, how-ever, recorded consistently high economic growth prior to and during the cri-sis and are therefore often regarded as role models for other developing coun-tries to emulate.
It should be emphasised, however, that the BRIC countries are still de-veloping countries, with average living standards and levels of development that are substantially below those in the advanced economies. For example, in the 2010 Human Development Report (UNDP, 2010) Russia was ranked 65th, Brazil 73rd, China 89th and India 119th of the 169 countries for which human development indices were estimated. A similar picture emerges when PPP-adjusted per capita income data are used. The BRIC countries also per-form badly in international rankings of economic freedom, international competitiveness (except China) and corruption. There are also some serious reservations about the quality of economic data in the BRIC countries, espe-cially China.
In the next group in the Table are three European countries. The first two, Greece and Ireland, both members of the euro zone, are under severe fiscal strain and had to be bailed out during 2010. In contrast to most of the other countries in the Table, their economic decline continued into 2010.
Ireland, in particular, suffered a severe economic collapse from 2008 on-wards. After two decades of high growth during which Ireland was labelled the ‘Celtic Tiger’ and was often mooted as an example for other countries to follow, the Irish economy imploded quite spectacularly. The ‘Irish model’ of social pacts, wage moderation, tax cuts, the promotion of foreign direct in-vestment and financial sector development has definitely lost its sheen. Some observers argue that the Irish boom was driven by special circumstances, such as the advantages (including massive subsidies) deriving from the coun-try’s membership of the European Union, rather than by a particular approach to economic policy. The third country, Poland, is the only European country that did not experience negative growth during the crisis. This former com-munist bloc country implemented a big-bang ‘move to the market’ in the 1990s and, although it is still classified as a developing country, its perfor-mance, especially relative to other former command economies, appears to indicate that the market system is not as inherently flawed as supporters of greater government intervention tend to suggest.
Of the four African countries in the Table, the first three serve to remind us that some quite significant growth rates have been recorded in Africa, al-beit off very low bases. In fact, most African countries recorded positive real GDP growth during the crisis, although the reliability of their data can also often be questioned. If the data are taken at face value, the Angolan figures il-lustrate what can be achieved in a resource-rich country once a degree of po-litical stability has been established. South Africa is included since it is by far
the most important and influential economy in Africa, a major commodity-exporting country and a prospective member of BRICS. Although South Africa escaped most of the direct consequences of the financial collapse, its exports suffered as a result of the international meltdown, dragging the econ-omy into its own recession.
Venezuela is included since the ‘Venezuelan model’ of nationalisation and other forms of government intervention is often propagated by politicians in developing countries. The country was, however, hit quite hard by the cri-sis. Venezuela’s economic decline continued into 2010 despite the recovery in the oil market, and at the time of writing the decline was projected to con-tinue into 2011. The Venezuelan model has lost most of its appeal, except for economically uninformed, power-hungry politicians in some developing countries.
Fundamentals
Economic systems can be classified on the basis of the predominant form of ownership (i.e. according to property rights) or on the basis of the predomi-nant coordinating mechanism. Property can be owned collectively or publi-cally (as in socialism) or privately (as in capitalism) and there are fundamen-tally three types of coordinating mechanism: tradition, command and the market. All economic systems are mixed systems, but a particular form of ownership and a particular coordinating mechanism usually dominate (as in market capitalism).
Each form of ownership and each coordinating mechanism has its own particular strengths and weaknesses. There is consensus, for example, that the market system allocates scarce resources efficiently, but tends to generate or exacerbate inequality. Economists of a Keynesian persuasion also believe that market economies tend to be inherently cyclically unstable. In other words, they believe that business cycles (booms and recessions) are part and parcel of the way in which capitalist market economies operate, and that gov-ernment should try to smooth these fluctuations as far as possible. Econo-mists of a Classical persuasion, on the other hand, believe that a private mar-ket economy is inherently stable and that business cycles are caused by inap-propriate government intervention (e.g. to stimulate economic growth). They see no role for anti-cyclical policy and propagate a hands-off approach. The age-old ideological debate between these competing schools of thought is un-likely to ever be settled and should always be borne in mind when consider-ing different views on, or examinconsider-ing different analyses of, the Great Reces-sion.
Economic performance is shaped by a variety of determinants including factor endowment, economic systems, institutions, economic policy and
vari-ous non-economic factors (such as politics, history, geography, culture and attitudes). The first thing to consider when examining the performance of a particular country is its factor endowment. Many differences in economic performance can be explained by considering the quantity and quality (prod-uctivity) of each country’s factors of production (land, labour, capital, entre-preneurship, technology). But other aspects can also be very important. For example, although certain schools of economic thought believe there are uni-versal economic laws that cut through time and space, each country has its own geography, history, institutions and culture that impact on its economic system and performance. These influences are captured in the term ‘path de-pendence’, which refers to the notion that a country’s current and expected performance is shaped by the path it followed to arrive where it is today.
Analysts who emphasise path dependence sometimes trace the roots of cur-rent institutions and performance to ancient history (e.g. Beattie, 2009).
Economic policy can also be very important, but the first priority should be to avoid policy mistakes rather than to try to significantly improve eco-nomic performance. Policy mistakes can be disastrous, while good policies will probably at best only generate marginal improvements in economic per-formance. Classic examples are the populist economic policies implemented from time to time in developing countries and which resulted in harming the very groups whose interests the policies were supposed to serve. Policy mak-ers should always be cognisant that their policies may have unintended con-sequences.
Experiences
China
The most notable feature of Table 1 is the sustained high rates of economic growth in China prior to and during the crisis. One of the themes of this book is that China’s high recorded growth rate during the recession may result in a strong demonstration effect on other developing countries, who may try to emulate the ‘Chinese model’ of authoritarian capitalism. However, to the ex-tent that such a demonstration effect exists, it probably preceded the crisis and the latter possibly only had a marginal impact on the attractiveness of the
‘Chinese model’. Long before the crisis many developing countries were probably already in awe of China’s continued high growth and contemplating ways and means of emulating that performance. The Chinese experience is particularly attractive to those leaders who believe that they too can create a dynamic economy without easing their grip on economic power.
But is there a ‘Chinese model’? What are the real causes of the rapid economic growth in China? Do they lie in the Chinese economic system, the political system, the country’s factor endowment, its stage of economic
de-velopment, Chinese culture, specific policy strategies or something else? And if there is such a model, is all or part of it for export? For background infor-mation on these and similar issues, see the chapters by van Beek and by Han and Lü in this book.
Some observers distinguish between the Washington Consensus, which is often regarded as the policy package emanating from market fundamental-ism, and the Beijing Consensus, a more pragmatic approach to economic de-velopment that is more appropriate to developing countries. The original Washington Consensus was formulated in 1989 by John Williamson to en-capsulate the broad economic policies prescribed to developing countries by the IMF, the World Bank and the US government. The great irony, of course, is that the US itself did not adhere to a number of these policies.
According to Williamson (1989), the Washington Consensus consists of ten elements or policy prescriptions: fiscal discipline, reprioritisation of pub-lic expenditure, tax reform, market-determined positive real interest rates, stable competitive exchange rates, privatisation, deregulation, measures to secure property rights, promotion of trade and promotion of foreign direct in-vestment. On closer examination, these measures do not amount to radical free-market fundamentalism. On the contrary, they would generally be re-garded as necessary elements of any prudent economic policy strategy. The main problem with the Washington Consensus did not lie in its contents, but in the way in which it was thrust upon the developing countries that had been forced to approach one or more of the Washington institutions for financial support. In fact, many elements of the Consensus have been key elements of economic policy in successful developing countries. However, where the free-market approach does feature strongly in the Washington Consensus is in its ahistorical, apolitical, ‘one-size-fits-all’ nature. Not all the elements necessarily apply to the same extent in every situation or at each point in time, and those that do apply need not always have to be implemented to the same degree. In other words, a pragmatic approach is called for.
This is precisely what the Beijing Consensus purports to be. The term was coined by Joshua Cooper Ramo, a former foreign editor of Time. He de-scribed it as a pragmatic commitment to innovation and constant experimen-tation, or “crossing the river by feeling the stones”, as the old Chinese saying goes. In contrast to the Washington Consensus, the Beijing Consensus thus does not consist of a set of rules. The key features are mixed ownership, basic property rights and heavy government intervention. However, in contrast to most other countries, government intervention in China is not primarily aimed at correcting potential market failure (e.g. rising inequality or envi-ronmental problems), providing social security or serving the interests of groups other than the Central Committee of the Chinese Communist Party (CCCCP). Government spending is devoted largely to investment spending to stimulate economic growth, with the ultimate aim of ensuring the legitimacy
of the regime. The pursuit of economic growth is also the goal of local gov-ernments, who behave like private corporations, rather than being involved in matters of redistribution and social development.
An examination of the evolution of economic policy in China since 1978 yields evidence of most, if not all, the elements of the Washington Consen-sus. In fact, if one compares China with the United States there is more evi-dence of it being applied in the former than in the latter. But there was no
‘big bang’. China started from its existing institutional base (unlike the for-mer communist countries in Europe, who started with radically new institu-tions) and applied the various measures in a piecemeal fashion, without an ideological commitment to any of them. This lack of ideology is arguably the main feature of the Beijing Consensus, or the Chinese approach to economic policy. The Chinese are notorious for their lack of respect for patents and copyright. Likewise, they will ‘import’ any element of Western economic policy and adapt it to Chinese circumstances, if necessary. By the same token they are not loath to discard certain elements, or to change direction as condi-tions change. The Chinese approach may therefore perhaps be labelled an ec-lectic approach to free markets. In 1998, for example, China embarked on one of the largest privatisation drives in history by privatising much of the country’s housing stock. This housing reform has been described as “the largest one-time transfer of wealth in the history of the world” (The Econo-mist, 29 May 2010: 76).
But what have been the main drivers of Chinese economic growth? In at-tempting to answer this question, one must always remember that China was
But what have been the main drivers of Chinese economic growth? In at-tempting to answer this question, one must always remember that China was