When we are all dead, historians will look back on the previous two decades and identify a key process that will distinguish it from all other periods, according to Lawrence Summers, an economic adviser to President Obama. Perhaps surprisingly, it won’t be the end of the cold war, nor the conflict between the modern, industrial world and parts of newly assertive Islamic communities.
Instead, “the story of our times” is the rise of emerging economies, especially those in Asia.
“Between the age of Pericles in 500 BC to the early stages of the industrial revolution in 1800 London, living standards rose by about 50%. For the next century they rose by 50% again each 40 years in industrialising Western nations and then by 50% every generation in the 20th century with the rise of the United States,” Summers told a packed audience at Troika Dialog’s Russia Forum, which was held in Moscow last week.
“But today, China, India and other Asian countries are raising the living standards of their citizens by 50% every 10 years,” he said. It is a highly visible development that is re-shaping the relations between the old countries at the centre and the new nations on the periphery, and it will also have a determining effect on our natural environment.
This bipolar world is defined by the slow growing, demographically aging, but technologically sophisticated older economies, and the rapidly expanding, acquisitive and generally younger emerging economies, he said.
Based on a conservative growth estimate of 7% a year, China’s GDP is doubling every decade, which, if maintained, would extrapolate into a rise in living standards by a factor of 100 during an average lifetime.
Concurrent with this trend has been a declining cost of manufactured goods and hence an increase in spending power for electronics, cars and clothes, despite static incomes in the West. Service industries will dominate Western economies, while an era of higher commodity prices will provide a further challenge for governments.
Curiously, capital is flowing from the emerging to the developed markets, whether into portfolio or direct investments, or into bonds to support the West’s emergency fiscal stimulus policies. This is illogical and unsustainable, said Summers; net flows must eventually, and soon, move from the centre to the periphery.
But, the renaissance of the East and South faces obstacles too. Innovation needs to be encouraged, which means iconoclasm must be permitted, hierarchies need to be challenged and, most importantly (in a not too subtle reference to Russia), entrepreneurs have to be allowed to win.
However, the rebalancing of economic hegemony will not lead to the demise of the US dollar as the world’s reserve currency. Summers used the English language and the type-board as similar examples of a form of inertia based on general usage that will make it hard to replace the dollar, particularly when there is no viable alternative. The yen and euro are both busted flushes, and the renminbi has a long way to go before it can be recognised as a trusted store of value. The currency isn't fully convertible, the Chinese capital markets are not open, and even when China becomes the world’s biggest economy, per capita income in the US will still be 25% higher.
So, “you can’t beat something with nothing”, said Summers.
Indeed, it’s not all decline and misery for the old world. Summers remains optimistic about the recovery in the United States – not least, perhaps, because he claims personal credit for deliberate policy decisions to boost domestic demand. President Obama made the call for his help, and Summers responded.
Positive economic indicators suggest that the US economy could grow by more than the 3% consensus forecast this year, he said. However, it is essential that the US lifts its exports and that it should no longer be the world’s importer of last resort. There needs to be an adjustment to the global imbalances that have built up during the past 15 years, he said.
Summers is less sanguine about the immediate prospects for Europe, where tensions between creditors (mainly Germany) and debtors will take time to resolve.
More broadly, and no doubt mindful of his own legacy, Summers reflected on the global financial crisis. “If the history books in 25 years time don’t refer to it as a seminal event, then we will have succeeded in managing and defeating the crisis,” he said.
Summers, as "perhaps the most important economist of his generation", according to his own mini-biography, and with influential governmental and supranational positions in his resume, has a claim to fame or notoriety. Good or bad will be decided by historians. Meanwhile, he makes circumspect and academic pronouncements as a main speaker at conferences. Maybe, he can shape his own historical legacy.
Many critics blame Summers -- who had a two-year spell as treasury secretary in 1999-2001 -- and his advisory and policymaking colleagues during the Clinton and Bush administrations for sowing the seeds that gave rise to the proliferation of risk in the financial system, by allowing the unrestrained increase in unregulated derivatives and barely controlled leverage by investment banks.
If the crisis is viewed by future historians as a “seminal event”, then Summers himself will likely be a central rather than a peripheral figure. Far better for his reputation that his opinions and actions should have helped create a structural, epoch-making shift within a 2,500-year span of history. Summers will be a hero, not a villain in the story of our times.