SPRING is the time for conferences. I was lucky to join two excellent conferences last
week. One was in Singapore organised by the Nanyang Technological University
Para Limes Institute on “Silent Transformations”, followed by another on “Advancing
Asia – Investing for the Future”, organised by the IMF and the Ministry of Finance,
India in New Delhi.
Para Limes is an institute dedicated to complexity studies – the idea that we cannot
see the world from partial analysis, but must take into consideration the
interconnected complex whole.
Professor Geoffrey West, former President of the Sante Fe Institute (the first of the
complexity institutes founded out of the scientists that participated in the Los Alamos
nuclear programme) and a leading thinker on growth, innovation and urban life,
delivered a brilliant view on the sustainability of present growth models.
Modern life and culture is increasingly urban, because the larger the city, the more
efficient the usage of energy and resources, but there are costs in terms of pollution,
crowding and spillovers.
In other words, growth accelerates exponentially until the economy reaches maturity
and slows down, and if there is no longer innovation and change, growth can even
become negative.
Life follows an S-curve (sigmoid for the technically-minded), and therefore growth can
only be sustained with continued innovation and reform – exactly what the Chinese
are attempting.
West’s ideas resonated with me during the “Advancing Asia” conference, where the
future of India became a major theme within the Asian growth story.
India is today one of the youngest (demographic labour force) growth stories, today
the fastest growing and by 2050 the largest population in the world.
Without doubt, the Indians intend to use 21st technology to leapfrog traditional forms
of growth, including development through knowledge and services, and less through
manufacturing, currently dominated by East Asia. In contrast, the Chinese economy,
currently the world’s number 2, is slowing and also aging.
In Beijing, the world sighed with relief as the Chinese Premier Li Keqiang committed
to steady growth, stability in the RMB and continuous reform.
As oil prices seemed to stabilise at around US$40 per barrel and the Fed committed
to slower interest rate adjustments, financial markets actually turned back upwards.
The Delhi conference was marked by extremely high quality debate on the future of
growth models.
The key question before us is whether Asia, as one of the fastest growth regions, can
overcome the global debt deflation. There is an existential question that the West
(advanced countries including Japan) is unwilling to address.
Reserve Bank of India Governor Raghuram Rajan, arguably one of the most
thoughtful of central bank governors, posed the question as the “elephant in the
room” – a big issue that is right in front of us, but none of us want to address.
The basic question is why current growth is slowing and what policies can we adopt
to get out of this debt deflation trap.
The advanced countries refuse to adopt fiscal expansion, because of internal politics
and the growing debt overhang. Increasingly, they use quantitative easing (QE) or
unconventional monetary policy to try and expand aggregate demand.
The trouble is that QE is outliving its usefulness, but has very negative spillovers on
emerging markets, such as volatile capital flows, declining trade and lack of long-term
investments.
The unspoken policy conundrum is that advanced countries refuse to admit that
these spillovers matter.
Firstly, these spillovers are notoriously difficult to measure accurately. Secondly,
central banks owe their allegiance to domestic authorities and would ignore pleas by
neighbours or foreigners.
Thirdly, no one wants to admit that QE basically amounts to currency depreciation,
which then forces emerging markets to also devalue in order to maintain their
competitiveness.
Governor Rajan’s view is that we can no longer ignore the elephant in the room,
either theoretically or practically.
If we continue to do so, the whole system could degenerate into a global deflation or
worse.
Hence, he argued cogently for the beginnings of a conversation on how to grow
stably and sustainably together, namely a consistent and legitimate set of
international monetary rules.
The Delhi conference laid out the fundamental dilemmas in today’s growth trap.
Monetary and fiscal policies are conducted through national agendas, which have
spillovers onto others, but these policies do not add up in a global system.
Both the theoretical and geopolitical framework are partial, interactive and
contradictory, because what is right for a single country can be wrong for the system
as a whole.
Partial views are like blind men trying to describe an elephant. None of them get it
right.
But partial or silo views end up with individual action or non-action that may be
collectively wrong. For example, former Fed Chairman Dr Bernanke famously argued
in 2005 that the US lost monetary control because of excess savings by the emerging
markets.
From a system point of view, this is like an elephant complaining that it has become
fat because the grass is growing too much. The grass grows because the elephant’s
piss and poo fertilises the plain, whereas the gas emitted increases carbon as a
spillover. Indeed, if there is too much liquidity provided, some of the smaller animals
get drowned.
The yuan faces a similar dilemma. If it devalues, temporarily Chinese trade will
recover, but if everyone devalues at the same rate, there will be no advantage.
However, China will have to undergo even more painful deflation with a stable
exchange rate against the US dollar.
Because of China’s size, many of its trading partners could be hurt if China slows
further.
Collectively, the current global monetary rules do not acknowledge a collective action
to help make such adjustments more smoothly.
There is an old African and Asian saying that when elephants fight, the grass gets
trampled.
The grass gets trampled even when elephants are dancing. We need collective and
mutual understanding to get out of the oncoming global deflation.
But leadership and statesmanship are scarce when the dark clouds loom. For the
next year or so, electioneering and partisan views will trump moderation and mutual
understanding.
When bull elephants like Trump trumpet their charge, beware of global
consequences.
Tan Sri Andrew Sheng writes on global issues from Asian perspective.
A version of this article appeared in The Star Online, 5 March 2016
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