Jonathan Todd

Given today’s high-profile CBI conference, it seems an opportune moment to ask a fundamental question about the British economy which follows from two basic facts about the current economic situation. These facts are these: First, we have a weak pound, which makes British exports relatively more competitive. Second, the fabled BRIC economies are showing their resilience by leading the charge towards global economic recovery. So, the basic question: How can the British economy take advantage of the weak pound and enjoy a British economic recovery based on strong export growth? What can we produce that the likes of Brazil, Russia, India and China, as well as the developed world economies, want?

The rise of the BRICs means that we need to give new consideration to where exactly our comparative advantage now lies. But the latest figures suggest that the British retain more of an appetite for spending than talents for producing. This brings welcome reassurance that British consumers now feel confident enough to start spending again, but suggests that, in spite of the pick-up which the weak pound provides, we seem set to return to the habits which have had us be amongst the surplus economies in the global imbalances that have been one of the characteristics of recent years. 

Increased British exports would aid prospects for jobs and growth in the UK, while also going some way to correcting for these global imbalances which are one of the underlying drivers of the financial crisis. We need innovative and imaginative solutions to this challenge, which the British economy confronts in the context of a world in which political and economic power is shifting ever more from west to east; from non-BRIC to BRIC. As is so often the case, there are opportunities as well as threats contained in this shift, particularly for the British businesses able to provide the nouveau riche of the BRIC middle classes with the goods to suit their newly affluent and aspirant tastes.

 I have previously asked: Must Europe wither? And now one of the most articulate and leading pro-European voices in the UK, Charles Grant, has had cause to ask: Is Europe doomed to fail as a power? Today seems a particularly sobering day for Europeans to reflect on such questions as the US and China this morning began a two-day “Strategic and Economic Dialogue” in Washington DC, led by Secretary of State Hillary Clinton and Treasury Secretary Tim Geithner and their Chinese counterparts. This illustrates the “obvious danger” identified by Philip Stephens ”that the US and China will bypass Europe by creating a G2″. The New Republic ask: “Which China will be sitting across the table from Clinton and Geithner today?” But Europe is an after thought and tomorrow it may be even more so. Europe needs to much more urgently wake up and smell the coffee than the scant coverage of these debates in the mainstream of European media suggests.

I think I am noticing something of a theme in the Economist of late. On 28 May they noted:

“How times change. When George Bush’s treasury secretaries first visited China, Wall Street was booming, America’s economy was growing and the president’s emissaries routinely lectured their Chinese hosts on the need for freer financial markets and a more flexible yuan. But as Tim Geithner, the current treasury secretary, prepares to make his maiden trip to Beijing on May 31st, Wall Street is synonymous with greed and failure, America’s economy is on its knees and it is the Chinese who have been doing the lecturing. With America’s budget deficit soaring and the Fed’s printing presses running at full speed, China is complaining loudly of the risks that inflation and depreciation pose to its huge stash of dollars, and arguing for an alternative to the greenback as the world’s reserve currency”.

This came after 21 May when the magazine revisited the notion of decoupling: “emerging economies (have) become more resilient to an American recession, thanks to their strong domestic markets and prudent macroeconomic policies”. This was a popular thesis a year ago but lost ground as the global slump hit. However, the Economist argues that the idea may be regaining credibility, with China key to this regained credibility.

“China is exhibit A of this new decoupling: its economy began to accelerate again in the first four months of this year. Fixed investment is growing at its fastest pace since 2006 and consumption is holding up well. Despite debate over the accuracy of China’s GDP figures (see article), most economists agree that output will grow faster than seemed plausible only a few months ago. Growth this year could be close to 8%. Such optimism has fuelled commodity prices which have, in turn, brightened the outlook for Brazil and other commodity exporters”.

Anatole Kaletsky has also noted the significance of economic linkages between China and Brazil, as well as China and South Africa.  

“Commodity-producing countries such as Brazil and South Africa have obviously benefited from China’s overtaking of the US and Europe as the world’s main consumer of raw materials. As long as the Chinese economy keeps growing, Brazil is assured of demand for its iron ore and soya, South Africa for its platinum and coal. Thus the success of the huge fiscal stimulus package announced by the Chinese Government in December has turned out to be much more important for these countries than similar measures in the US or EU”.

So, as Kaletsky puts it, this has meant that America has sneezed but much of the world seems germ-free. The role of China in this trend might suggest that in contrast to decoupling, we are witnessing a coupling of economies to China rather than the US. Kaletsky goes on, however, to make an observation that is more supportive of the decoupling thesis:

“Even more important than the growth of trade with China is that many of the emerging economies, including Brazil and South Africa, have had the financial resources to implement their own independent stimulus packages”.

This capacity of emerging economies to take forward their own stimulus packages appears to be part of a changed world order, with China – twenty years after Tiananmen Square – pivotal to this changed order. Yet, as Martin Jacques, will argue in a new book that he will launch with an event at the RSA on 22 June, “we have barely begun to understand what life will be like when China rules the world”. The blurb on the RSA website about this event goes on to state:

“For well over 200 years, we have lived in a Western-made world, one where the very notion of being modern is inextricably bound up with being Western. The twenty-first century will be different. The rise of China, India and the Asian tiger economies means that, for the first time, modernity will no longer be exclusively Western. The West will be confronted with the fact that its systems, institutions and values are no longer the only ones on offer.

“The central player in this new world will be China. Continental in size and mentality, China is a ‘civilization-state’ whose characteristics, attitudes and values long predate its existence as a nation-state. Although China is clearly influenced by the West, its extraordinary size and history mean that it will remain highly distinct, and as it exercises its rapidly growing power it will change much more than the world’s geopolitics. The nation-state as we understand it will no longer be globally dominant, and the Westphalian state system will be transformed; ideas of race will be redrawn”.

This is why Jacques argues that we are moving into an era of contested modernity. But Kaletsky still frames the rise of China in somewhat western terms by observing:

“The story of South Africa and Brazil in the past decade (has enabled a) transition successfully to pluralistic, liberal free-market democracies.

“Whether China ever manages a similar transition is, of course, the great historical question of the 21st century. But if it forces China to direct economic development towards the needs of its own citizens, rather than the tastes of US consumers, the financial crisis is likely to accelerate China’s evolution into a pluralistic market economy, rather than slowing it down”.

“Car ownership in China – an important badge of middle-class status – is only 2-3 per cent”, as the Financial Times recently observed. The economic development of China will expand this middle-class, which may lead to the kind of transition that Kaletsky envisages. That said; China has already changed massively in the past twenty years but the grip of the Communist Party upon power in China seems more secure now than it did at the time of Tiananmen Square. Why? 

“As a result of the effective combination of governance reforms and co-opting the rich and the middle class”, the Financial Times explains, ”few analysts believe the party will face a serious threat over the next decade”. These governance reforms mean that the Communist Party is a very different beast from what it was twenty years. Change in China is likely to be such that it will face further calls to evolve in coming years. This will lead, claims the Financial Times, to “pressure to introduce deeper political reforms”. But will these reforms lead to China taking the kind of transition to western democratic norms as foreseen by Kaletsky or will they result in the Chinese producing a governance model that takes the “highly distinct” form anticipated by Jacques?

As well as the internal management of the increased power held by China, there are, of course, questions to be asked about the external use of this power. On the eve of Barack Obama’s much heralded speech to the Muslim world, for example, it is interesting to note that the Economist also recently concluded: “If China is at all serious about joining America as a global leader, this is the time for it to shoulder its responsibility by helping to punish Mr Kim”. Mr Kim, of course, is the leader of North Korea. Things which definitely can’t be decoupled are the nuclear ambitions of North Korea and Iran. The ambitions of the later are a key point of context to Obama’s speech. However, the coupling of North Korea and Iran also, in turn, couples together the efforts of the US and China to respond to the ambitions of North Korea and Iran.

This is a profound change to the world order but is to say nothing of the ”neo-colonialist” tendencies that some see in Chinese “land grabs” in Africa. We have grown used to the empire of liberty, as a current Radio 4 series describes the US, dominating a unipolar world order but, perhaps, we should be preparing for another empire, quite possibly with less regard for liberty, as liberty is generally understood in the west, to be a significant player in a multipolar world of contested modernity. Given that we have elections to the European Parliament tomorrow, one wonders what Europe’s role will be in such a world. Sadly, marginalised, I fear, unless we can quickly raise our game very dramatically.

The point of Roger Casale, which I highlighted in my last post, seems all the stronger in light of an observation made by Martin Wolf today.

“The relationship between the US and China will become more central, with India waiting in the wings. The relative economic weight and power of the Asian giants seems sure to rise. Europe, meanwhile, is not having a good crisis. Its economy and financial system have proved far more vulnerable than many expected. Yet how far a set of refurbished and rebalanced institutions for international co-operation will reflect the new realities is, as yet, unknown”.

It is towards global institutions, like the IMF, the World Bank and the UN, that we must first look for the refurbishment that our Chinese century requires. However, Wolf’s comment – along with the criticisms of Charles Clarke, Wolfgang Münchau and Helmut Schmidt that my last post also noted – would seem to suggest that the EU too is also ripe for some refurbishment.

In absence of such refurbishment – or at least an improved claim upon output legitimacy – Europe can expect to drift ever further from the real crucible of global politics as this century progresses. The seeming addiction of Europe’s body politic to navel-gazing and nation-centric politics – exemplified by the current EU elections in which anything other than EU issues are being discussed - is corrosive in its inability to rise to the bigger global picture as set out by Casale. The longer Europe persists with this inward-looking, complacent, arrogant attitude the more likely this global picture is to take a form that is displeasing to European values and interests.

China is ascendant and hardly seems to have an excessive respect for the Copenhagen criteria. India may be closer to satisfying such criteria but Russia and Iran seem likely to increasingly feature amongst the global picture and the stuff of the Copenhagen criteria are as much of a joke to them as the idea, pace Francis Fukuyama, that history has ended.    

History moves on. But the EU seems increasingly left behind, as its poor response to the economic crisis well illustrates. The Copenhagen criteria embody the kind of values with which Fukuyama presumed that history had ended and so, in this sense, they seem more univeral than European values. Nonetheless, the way that history has developed since Fukuyama made this claim would suggest that, perhaps, these values are not necessarily quite so universal after all – at least not yet. The EU needs to raise its game if these values are not to become not so much universal as the preserve of Europe and north America.

Newsnight’s “Ethical Man”, Justin Rowlett, spent one year doing all that he could to reduce the carbon footprint of his family. He went to more considerable lengths to do so than, I think, the overwhelming majority of people in this country would even contemplate, as he discusses in the video below.

The end result of all of this sacrifice? A 20 percent reduction in his total carbon footprint. So, a gain, but enough of a gain to justify all of the pain? There was certainly more pain involved than, I fear, the average Brit could tolerate. Some might shrug their shoulders in the face of this and say: “What the UK does doesn’t matter anyways, as the key to averting climate change is what happens in China”. 

It’s certainly true that it would be possible for everyone in the UK to go through the pain of Ethical Man and for all of the consequent gains to be more than cancelled out by legion upon legion of dirty power plants and similar in China. However, it’s also true that China is less likely to cut back on its emissions while it continues to feel that the west is not making serious attempts to do so, as Ed Miliband recently said:

“China used to think the developed world is not serious. That’s what they were saying [at UN talks] in December. But now they know the US is on the pitch and ready to engage with them. It has made a real difference to what China is saying”.

President Obama seems to be changing the terms of engagement. He’ll only be able to continue to do so, however, if he is able to begin to deliver reductions in US emissions. China will doubtless judge him by his actions as well as his words. How will he deliver such action?

He might expect every American to ape Ethical Man tomorrow or he might think that his government’s decisions are at the crux of things. As Gavin Esler says in the introduction to the video below: Ethical Man’s “experience raises profound questions about how far individuals really can do much and how far government decisions on coal, carbon taxes, plastic bags and the like really are the key.”

Matthew Taylor has discussed government-centric and citizen-centric models of change. Ethical Man, obviously, offers a citizen-centric model but if Obama decides that every American is unlikely to ape Ethical Man, he will prefer a government-centric model. Certainly, there is much that governments can achieve on “coal, carbon taxes, plastic bags and the like” but, equally, citizens live in communities.

What might Ethical Man have achieved if he had attempted his experiment on the scale of a community? The village of Ashton Hayes, Cheshire, has actually attempted something similar; so, the notion isn’t an entirely fanciful one. Ethical Man’s reduction in his direct carbon footprint was a more impressive 37 percent. The difference between 20 and 37 percent is explained by the carbon contained in services that he used – schools, hospitals, etc - which he did not directly control. But, collectively, his community probably did control, at least to some extent, many of these carbon emissions that weren’t under Ethical Man’s direct control.

Surely Ethical Man’s total reduction in his carbon footprint would have exceeded 20 percent if he could have convinced his community to change their behaviour in certain respects? Citizen-centric models of change can’t simply mean the lonely endurance of pain but must also encompass an attempt to change the behaviour of those around you. That, ultimately, must lead to greater gain. It makes me wonder what the citizens of East Dulwich, the part of London where I live, might achieve if they worked together.

If communities across the west did this, then it would be that much easier for the likes of Obama and Miliband to make the case to China. That’s not to say, however, that our leaders won’t need to make some tough choices on “coal, carbon taxes, plastic bags and the like”. It’s simply to say that the pain of being ethical will be minimised and the gain of being ethical will be maximised if citizens can make their communities, rather than simply their households, ethical. Be the change that you want to see, as Obama didn’t quite say.