I have a feeling we are not in Kansas anymore
As Joe Hockey’s latest budget illustrates, it’s a lot easier for politicians to talk about economic reform than it is to actually implement it.
And when they do talk, it’s in terms of tweaking the existing fiscal arrangements with the perfect ‘reform’ being one that leaves nobody worse off.
However, in the taxonomy of politicians we occasionally see a rare variety, one you might have thought to be extinct, thrown up.
This is not the tweaking reformer, but the transformative reformer. While it is difficult to identify any individual in the Australian parliament who might warrant the description of “transformative”, we have the most unusual situation internationally with no less than three political leaders demonstrating the necessary credentials.
They are China’s President Xi Jinping, Japan’s Prime Minister Shinzo Abe and India’s Prime Minister Narendra Modi.
Each of these has proved capable of exercising the activist leadership required to address the legacy of mismanagement left by their predecessors.
All are confronted by the headwinds of unsustainable debt, demography, urbanisation, technology, globalisation and unemployment.
Each of these economies is so large that any economic or political action taken by one is likely to have spillover implications for the other two.
Since taking office, Narendra Modi has sought to transform India’s relationship with China. In fact, he’s just completed a tour of China, which was quite successful in a public relations sense – lots of picture opportunities and friendly captions.
However, as Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Centre for Policy Research, points out, “China and India have a fraught relationship, characterised by festering disputes, deep mistrust, and a shared ambivalence about political cooperation.”
“Booming bilateral trade, far from helping to turn the page on old rifts, has been accompanied by increasing border incidents, military tensions and geopolitical rivalry, as well as disagreements on riparian and maritime issues.”
The ongoing friction between the two countries can be illustrated by myriad examples, but the simple fact that China is the only major power that has not backed India’s bid to become a permanent member of the Security Council says it all.
The Silk Road to power in Asia
Under Xi Jinping’s leadership China has been increasing its geopolitical and eco political reach with the inference that he wants China to be seen and accepted as the dominant Asian power.
His ambitious One Road One Belt (OBOR) initiative to build a new Silk Road and the Maritime Silk Road has effectively become the centerpiece of Xi Jinping’s foreign policy and international economic strategy.
Details released by Chinese media outlets show the “Belt” as a planned network of overland road and rail routes; oil and natural gas pipelines; and other infrastructure projects that will stretch from Xi’an in central China, through Central Asia, and ultimately reach as far as Moscow, Rotterdam, and Venice.
Under Obama, the United States has taken a pivot towards Asia. Under Xi Jinping, China is taking a pivot towards Europe.
The “Road” is the maritime equivalent of the “Belt”. It will be a network of planned port and other coastal infrastructure projects that dot the map from South and Southeast Asia to East Africa and the northern Mediterranean Sea. Imagine what the Indians think of that.
They are already alarmed at increased Chinese investment in Sri Lanka which they regard as part of their backyard. Moscow, on the other hand, is concerned about the initiative translating into increased Chinese influence in Central Asia, an area it has long viewed as within its sphere of influence.
The plans go beyond infrastructure construction.
The program will also promote financial integration and use of the Renminbi (RMB) by foreign countries and create an “Information Silk Road” that links regional information and communications technology networks.
According to George Magnus, formerly the chief economist for UBS, who critiqued the OBOR on his website, the plan will inevitably require China to project its growing naval power further afield.
According to Magnus, OBOR has sprung to life alongside other important initiatives in which China has sought to raise the profile of its global financial diplomacy.
China’s other home-grown initiatives
At home, it has acted incrementally and cautiously to open up its capital account and encourage a wider use of the RMB in world trade and in capital markets.
Magnus says, “This is important, because otherwise, China’s new global financial diplomacy would be based on the US dollar, which is precisely what the government does not want.”
Xi Jinping first floated his OBOR idea in Kazakhstan in 2013. It was an odd location to make such an important announcement. Initially, it was treated as a thought bubble.
However, there were solid domestic and political issues that kept it alive. China has accepted for some time that it has to rebalance its economy away from urban investment and exports.
But in 2008 when it began to tackle this imperative, along came the global financial crisis. China acted expansively by implementing a $500 billion stimulus package.
That kept the global financial crisis at bay, but the job of rebalancing the economy was pigeonholed. Much the same happened with a second, though smaller, stimulus package in 2012.
Between 2007 and 2014, China’s total debt quadrupled from US $ 7 trillion (158 per cent of GDP) to US $28 trillion (282 per cent of GDP).
According to the World Bank, almost all of China’s growth since 2008 has come from “government-influenced expenditure”.
Experience tells us that debt growth of the speed and magnitude we have seen in China is unsustainable. Debt expansion in Japan in the late 1980s, South Korea in the 1990s and the US and UK in the early 2000s all resulted in serious financial crises.
The latest China economic data for April carries the inference that China’s turn has come, that a significant cyclical downturn now appears to be under way.
A paper on the Belt and Road from the Centre for Strategic and International Studies in Washington points out that many of the infrastructure projects identified run through some of the poorest and least developed regions. Belt and Road could provide stimulus to help cushion the effects of the deepening slowdown. Funds could also be directed to relocate industrial overcapacity.
One Road One Belt could be a game changer—though not necessarily for the ultimate good.