Great (economic) Expectations

What would you say if the economy grew at 5.3 percent? I bet you would say that is fantastic, right? Well, it all depends. It depends on the geographic area where this number is touted. In India, the 5.3 percent growth is described as "dismal":

The Indian economy grew by 5.3 per cent in the third quarter, the slowest quarterly growth this fiscal, pulled down by contraction in manufacturing and farm production even as some services showed robust expansion.

What a contrast to the downwardly revised GDP numbers for the US that shows a nastier recession than previously estimated! Anyway, the good thing in this case: India is a democratic society with elections a few weeks away. So, depending on the mood of the electorate, there might be a change in the government--but, not anything chaotic.

That is not the story with China, Russia, Venezuela, ... where the regimes have a contract with the people. The contract is that people give up their political and human rights, and the government in return gives them high economic returns. Thomas Friedman likened the Chinese contract to the movie "Speed"--that the regime will not run into problems as long as a rapid economic growth rate is maintained. Robert Skidelsky writes that:

Deepening economic recession is bound to catalyze political change. The Western democracies will survive with only modest changes. But strongmen who rely on the secret police and a controlled media to maintain their rule will be quaking in their shoes. Even Venezuela’s Hugo Chávez, who built his power on populist anti-Americanism, must be praying for the success of US President Barack Obama’s stimulus package to lift his falling oil revenues.

The big countries with the highest political risk are Russia and China. The legitimacy of their autocratic systems is almost entirely dependent on their success in delivering rapid economic growth. When growth falters, or goes into reverse, there is no one to blame but “the system.”

Igor Yurgens, one of Russia’s most creative political analysts, has been quick to draw the moral: “the social contract consisted of limiting civil rights in exchange for economic well-being. At the current moment, economic well-being is shrinking. Correspondingly, civil rights should expand. It’s just simple logic.” The rulers in Moscow and Beijing would do well to heed this warning.

Harvard's Dani Rodrik writes that we are on the verge of designing a Capitalism version 3.0.

When Chinese-style capitalism met American-style capitalism, with few safety valves in place, it gave rise to an explosive mix. There were no protective mechanisms to prevent a global liquidity glut from developing, and then, in combination with US regulatory failings, from producing a spectacular housing boom and crash. Nor were there any international roadblocks to prevent the crisis from spreading from its epicenter.

The lesson is not that capitalism is dead. It is that we need to reinvent it for a new century in which the forces of economic globalization are much more powerful than before. Just as Smith’s minimal capitalism was transformed into Keynes’ mixed economy, we need to contemplate a transition from the national version of the mixed economy to its global counterpart.

This means imagining a better balance between markets and their supporting institutions at the global level . Sometimes, this will require extending institutions outward from nation states and strengthening global governance. At other times, it will mean preventing markets from expanding beyond the reach of institutions that must remain national. The right approach will differ across country groupings and among issue areas.

Designing the next capitalism will not be easy. But we do have history on our side: capitalism’s saving grace is that it is almost infinitely malleable.

It looks like a fitting ending to this post will be from Dickens--not the opening lines from Great Expectations though. Instead, it is from A Tale of Two Cities:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way