The “Emerging Economies” Today

Jayati Ghosh

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Alejandro Reuss: This is Alejandro Reuss, co-editor of Triple Crisis blog and Dollars & Sense magazine.  Today, we’re speaking with Jayati Ghosh, professor of economics at Jawaharlal Nehru University. Welcome, Jayati.

Jayati Ghosh: Thank you.

Alejandro Reuss: You’ve written about the “retreat” of emerging-market economies, which until recently had been held up as examples of robust growth, in contrast to the stagnant economies of the so-called capitalist “core.” What’s driving the slowdown of economic growth in the emerging economies today?

Jayati Ghosh: The emerging economies are really those that have integrated much more into the global financial system, not just the global trade system. And I think what happened during the period of the economic boom is that many people forgot that their growth was still ultimately driven by what was happening in the North. That is, the engine of demand was still the northern economies. So whether you’re talking about China in particular or the range of emerging economies that was seen as more prominent in the first half of the 2000s, all of them depended on exports to the North and particularly to the United States.

So the U.S. boom, which drew in more and more of the exports from developing countries, when it came to an end—as it inevitably had to—these economies had to look for other sources. Now, there are two ways of looking for other sources of demand.

One is to try and do a domestic demand-driven expansion based on wage and employment growth. And another is the model which unfortunately seems to be the more popular one, which is to have a debt-driven kind of growth, based on both consumption and accumulation that is essentially led by taking on more and more debt. This is, of course, also what the U.S. did in the 2000s, which unraveled in 2007 and 2008. But it’s also what a number of European economies did, and they’re paying the price now. Remarkably, you would have thought that developing countries that don’t need to take this path, and can see all the problems associated with it, they also took this path. So you find that in China there was a doubling of the debt-to-GDP ratio between 2007 and 2014. And it was debt to every single sector, but it was dominantly for investment. In a range of other important developing countries, from Mexico to Indonesia, and Malaysia, South Korea, etc., you had a dramatic expansion of household debt, particularly real-estate debt—housing. And we all know that these real-estate and housing bubbles that are led by taking on more debt, these end in tears. And that’s really what has been happening.

So, all of these economies, we find, financial integration allowed them to actually break the link between productive investments and growth. It fueled a debt-driven pattern of expansion, and this inevitably has to end. It’s ending now. The problem is that it’s ending at a time that demand from the North is slowing dramatically. So you’re really getting a double whammy for these emerging economies. You’re getting a slowdown in northern markets, which really means that China—which had become the major driver of expansion—China can no longer continue to export at the same rate. That means its imports have come down. In the past year. China’s exports fell by 5%, but its imports fell by 20%. And that has affected all the other developing countries. And that’s in combination with this end of the debt-driven expansion model.

Alejandro Reuss: So China clearly looms very large in this. It did, both in terms of its dramatic growth experience until recently and then its role in the world economy today, in this period of instability. A number of economists had pointed out for quite some time that this export-oriented growth model would inevitably reach its limits. Are we seeing it really finally reach an impasse now, and if so is there a prospect for China to make a transition from a low-wage export-oriented model to something other than a debt-driven model—instead to the other scenario that you mentioned which is a domestic-demand driven model of economic development that would necessarily require higher wages?

Jayati Ghosh: I think it’s indisputable that that export-driven model is over for the time being, for sure, certainly for the next five years, probably the next decade. That’s not a bad thing, because one of the problems with that export-driven model is that it persists in seeing wages as costs rather than as sources of internal demand that you can use to your benefit. It allows for a massive, massive degradation of nature and for environmental costs that are now recognized to be completely unsustainable and socially undesirable. And, overall, we know that these can’t last—these export-driven models can’t last.

So, yes, it has ended. It does mean that the Chinese government and authorities have to look for an alternative. Many of us have been arguing that that alternative necessarily requires much more emphasis on increasing consumption, not through debt, but by increasing real incomes. And that means encouraging more employment of a desirable type—“decent work” as it’s been called—and improving wages, increasing wages. Now, this doesn’t mean that the rates of growth will continue as high as they have been, but that doesn’t matter. The obsession with GDP growth is becoming a real negative now in the search for alternatives. Because the Chinese authorities, like all the financial analysts across the world that are constantly looking at China, are obsessed with GDP: Is it going to be 6.5 [percent]? Is it going to be 6.1 [percent]? Is it going to fall below 6 percent? As if that’s all that matters. What they should really be looking at is the incomes of let us say the bottom 50 or 60 percent. Are these growing? If these are growing at about 4 or 5 percent, that’s fantastic. That’s wonderful. And that’s really what the economy needs in a sustainable way. If these are growing in combination with patterns of production and consumption that are more sustainable, that are environmentally friendly, that are less carbon emitting, them that’s of course even more desirable.

But that means the focus has to shift away from GDP growth, and away from just pushing up GDP by any means whatsoever—to one which looks at how you improve the real incomes and the quality of life of the majority of the citizens. Unfortunately, the Chinese government doesn’t seem to be choosing that path just yet. There have been some moves—in terms of increasing health spending, in terms of some attempts to increase wages in certain sectors—but overall the focus is still once again on more accumulation, on more investment, usually driven by more debt.

Alejandro Reuss: Is it possible that that kind of transition is not really going to be seen in China until we see the development of a really robust labor movement in China that’s capable of winning a higher share of the national income in the form of wages, and pushing up mass consumption in that way?

Jayati Ghosh: I do believe that there is much greater public concern than is often depicted in the media, certainly in the Chinese media, but even abroad. We know that there are thousands, literally, tens of thousands of protests in China—often about land grabs and so on in the peasantry, but also many, many workers’ protests, and many other protests by citizens about environmental conditions. They have been suppressed. I don’t think you can keep on suppressing these.

I do believe the Chinese elite has recognized that there are a couple of things that are becoming very important for them to maintain their political legitimacy: One was, of course, inequality and, associated with that, the corruption. That is why the anti-corruption drive of President Xi retains a lot of popularity. Then, there is the fact of the environmental unsustainability. I mean, India and China—we have created monstrosities in urban areas, in terms of the pollution, congestion, degradation, which are really making many of our cities unlivable, There is widespread protest about that, and about the pollution of the water sources, of atmosphere of course, of land quality. And there is real concern that ordinary Chinese citizens are not experiencing the better life that they have grown accustomed to expect.

So I think, even without a very large-scale social mobilization, there is awareness—there’s growing awareness in China, among officialdom, as well—that they can’t carry on. I do believe there’s a bit of a tussle at the very higher echelons of the leadership and in the Communist Party, between those who are arguing for the slower but more sustainable and more wage-led path, and those who just want to keep propping up growth by more financial liberalization, by encouraging somehow investors to jump up and invest even in projects that are unlikely to continue—but somehow keep that GDP growth going. It’s a political tussle and of course that will determine the direction of the economy as well.

Alejandro Reuss: So in the midst of this period of stagnation of the very high-income capitalist economies, and a resulting slowdown of growth in those so-called emerging economies that had experienced a high degree of growth centered on manufactured exports to those high-income economies, we also have an effect on countries that had primarily remained primary-product exporters. That had been the linchpin for the recent economic growth of many economies worldwide. Is that, too, that boom or high-price phase in terms of commodities exports now also over for the foreseeable future, and you have those many other economies in a position of having to reinvent their economic development model?

Jayati Ghosh: I think that the period of the boom is really a bit of an aberration. When you look at it since the early 20th century, these periods of relatively high commodity prices have always been outliers, and they don’t last very long—they last for about five, six, maybe eight years at most, and then they you come back to this more depressed, relative to other prices, situation. I have a feeling this is now going to continue, and that boom is, for the time being, over. It definitely means that the manna from heaven that many countries experienced—that has reduced, and therefore you have to think of other ways of diversifying your economies. Many countries tried but, you know, when you’re getting so much income from the primary product exports it’s very hard to diversify. It’s actually easier to diversify when primary-product prices are lower. So, once again, I think it’s important for these countries to stop thinking of this as a huge loss, and start thinking of it as an opportunity—as an opportunity to use cheap primary commodities as a means of industrializing for domestic and regional markets. So it means a different strategy. The export-led obsession has to end. Without that, we’re not going to get viable and sustainable strategies.

But I do believe—I’d like to make one other point, though, about the slowdown of China and the impact on developing countries—which is that it’s also going to affect manufacturing exporters. What had happened is that China had become the center of a global production chain that was heavily exporting to the North but was drawing in more and more raw material and intermediate products from other developing countries. So almost every country had China as their main trade partner in both imports and exports. Many of these manufacturing economies are now going to face, once again, a double whammy. They will face a reduction, from China, in terms of Chinese imports of raw materials and intermediate goods for final export, and they’re going to face greater competition from China in terms of their own export markets and their own domestic markets. Because China is now—still minor—but it is devaluing its currency. It is looking to cheapen its exports even further, and this will definitely impact on both export markets and internal markets in developing countries.

So I think both primary exporters and manufacturing exporters are in for a bit of a bad time. They need to think of creative ways of dealing with the situation. It is not helped by believing that integration into global value chains is the only option. Because these global value chains basically reduce the incomes of the actual producers. If you look at it, the emergence of global value chains and the associated trade treaties—not just the WTO but the proliferation of regional trading agreements and things like TPP—what they do is they increase competition and they reduce the value of the producing part of all commodities and goods, and they increase the pre-production and post-production. That is, all of the things that are driven by intellectual property—that value increases. So whether it is design elements or it is the marketing and branding and all of that—all of those, the intellectual property of which are retained in the North—all of those actually are getting more and more value. And the actual production is getting less.

Developing countries that are seeking to get out of this really have to think of alternative arrangements, possibly regional arrangements, more reliance on domestic demand and South-South trade, which is more possible today than it has ever been–and moving away from a system which allows global and northern-led multinationals to capture all the rents and most of the profits of production everywhere.

Alejandro Reuss: So, in the course of this discussion, I think two major questions emerge about what is really the way forward in so-called developing economies. On one front is the question about how to square the objectives of economic development—however one may define those, whether it’s in “human development” terms, whether it’s in terms of raising the mass standards of living—and squaring those with the objectives of environmental sustainability. But then you also raised questions about economic development going forward in a way that the economic development of some developing countries isn’t at odds with, or in competition with, economic development in others. Are there prospects of mutually fostering directions of development—and of sustainable development—across the developing countries widely speaking?

Jayati Ghosh: Yes, I think we need to really move away from the traditional way of looking at growth and development, which is ultimately still based on GDP. And as long as we do that, we’re going to be caught in this trap. We have to be focusing much more on quality of life and ensuring what we would call the basic needs or, you know, the minimum requirements for a civilized life among all the citizenry. If we do that, then we’re less in competition with one another and we’re less obsessed with having to be the cheapest show in town. We then see wages and employment growth as a means of expansion of economic activity. We see social policies as delivering not just in terms of better welfare for the people but also more employment, and therefore better quality of life. And so we see—if we look for regional trading arrangements that recognize this, if we look to increase the value of domestic economic activity by encouraging the things that matter for ordinary people, especially, let’s say, the bottom half of the population, if we focus on new technologies that are adapted to specific local requirements, in terms of being more green, more environmentally sustainable, as well as recognizing the specific availability of labor in these economies—I think we can do a lot more. It may be slower in terms of GDP growth, but really that doesn’t mean anything. So we have to move away from GDP growth as the basic indicator of what is desirable. I think that’s the ultimate and most essential issue.

Alejandro Reuss: Well, Jayati Ghosh, thank you so very much for talking with us today. This has been wonderful.

Jayati Ghosh: Thank you. It was a pleasure.

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