China can save the world from economic crisis

Updated: 2016-06-24 08:42

By Tony Payne(China Daily Europe)

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G20 states have the power to act in unison and begin to boost growth by developing various initiatives

China is often presented in the West as a leading candidate to be the source of a further economic and financial crisis - if its banks fail, or if its economy slows badly, or if its politics turns nasty. But given the fact that it is hosting the next G20 summit, it is probably more accurate to see China as the one major state actor capable of steering the global economy away from such a crisis.

Let's explore this argument. It's clear that the major institutions of global economic governance are concerned that a further global economic crisis might be brewing.

The World Bank warned in January that a perfect storm could be building in the global economy. It was worried by the potential combination of a simultaneous slowing of economic activity across the BRICS nations (Brazil, Russia, India, China and South Africa) and what it euphemistically termed "financial market stress".

China can save the world from economic crisis

The International Monetary Fund followed the same line. In a speech in Germany in April, managing director Christine Lagarde spoke of her fear that the global economy had lost its growth momentum and was stuck in the "new mediocre".

The most recent expression of anxiety came just a couple of weeks ago from the Organization for Economic Cooperation and Development. Its chief economist, Catherine Mann, introduced the publication of its latest economic outlook by identifying the emergence over the eight years since the first crisis of "a self-fulfilling low-growth trap". The resulting risk was that a "negative shock could tip the world back into another deep downturn".

The more pertinent question, however, is whether the technocrats of global governance have actually been able to do anything to head off a second crisis. This takes us to politics and politicians - in this case, the leaders of countries in the G20, the new overarching "steering committee" of global economic governance set up in a hurry, almost a panic, in autumn 2008 to preside over and direct the global economy.

The G20 summit this year will not take place until early September, when leaders will gather in the eastern Chinese city of Hangzhou. Yet two meetings of the G20 finance ministers and central bank governors have already been held - in Shanghai in February and in Washington, DC, in April - and have produced two (almost identikit) communiques of astonishing complacency.

The ministers and governors acknowledged the uneven character of the modest growth that is currently being achieved, but for the rest: they were committed to using all available policy tools (monetary, fiscal and structural); were indeed pressing on with structural reforms; had not taken their eye off the key matter of financial sector reform; and were trying to get countries to work toward a fairer international tax system.

The overall message was clear: things are not perfect in the global economy, but we know what we're doing and are doing a lot to manage the system. There was no sign at all of anxiety about a second crisis. So what's going wrong with global governance? Why can't it do better? Of course, a good part of the problem is that the structure of global governance assembled over the years since the end of World War II is actually very weak.

China can save the world from economic crisis

The IMF and the World Bank have little direct power over countries unless, and until, a country runs into economic problems and needs outside financial help. Most of the time, all the institutions can do is seek to adjust the climate of opinion in which key global political leaders act (for example, issuing the kinds of warnings cited earlier). It's their weakness rather than their strength that surely stands out.

By contrast, the G20 states do have the power to act. Their economies make up the bulk of the global economy. They can deploy a fuller range of economic powers, stop squeezing life out of their economies and begin to address the interface between renewed economic growth and the climate. It's just that they don't.

Admittedly, building any global governance institution is a hard task, and the G20 as an organization is deficient in design and has consequently disappointed in performance over the last few summits. But that's not really the core of it. The central point is that the G20 has so far been dominated politically by a wedge of Western G7 neoliberal states. Other countries with different political positions and traditions have remained - for the moment at least - unwilling to tangle with them too openly.

As a result, the G20 has stalled over the past few years as a political agency capable of directing the global economic institutions. This highlights China's main challenge on this front. At the Hangzhou summit, it can, and must, do more than just put on a good show as organizer.

For the good of the global order as a whole, it needs to bring to bear some of the post-neoliberal lessons about how to mix state and market initiatives that its own highly successful development model illustrates so well.

The author is director of the University of Sheffield's Sheffield Political Economy Research Institute. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 06/24/2016 page12)