To assess the impact of the Trump tax cut on the US economy it is necessary to analyse the interrelation of two processes:
Determinants of US growth
In order to analyse the fundamental factors determining US economic growth in both the short and the medium/long term the correlations between the key structural features of the US economy and the US growth rate are shown in Table 1. This Table shows a clear pattern:
The short-term position of the US business cycle
Analysing first short-term trends in the US economy this is greatly simplified by the fact that US medium/long term growth rate is among the world’s most predictable. Table 1 shows that over a 5-year period US annual average growth is 2.2%, over a 7-year period 2.1%, and over a 20-year period 2.2%. Only a 10-year period shows significantly different growth, at 1.4%, and this is simply a statistical effect of the huge impact of the international financial crisis of 2008. Given all these measures coincide therefore, annual average US GDP growth over the medium/long term may be taken as slightly above 2%. Given this stable medium/long term growth rate short term US business cycle trends simply show oscillations above and below this medium/long term average.
Turning to the present situation of short-term shifts in the US business cycle, Figure 1 confirms that US economic growth in 2016 was extremely slow – only 1.5% for the year as a whole and falling to 1.2% in the second quarter. Given that the US growth rate in 2016 was substantially below its medium/long term average of slightly above 2%, a recovery of US growth was to be expected in 2017 for purely statistical reasons. This has duly occurred, with US year on year growth in the 3rd quarter of 2017 being 2.3% - marginally above the long-term US average.
The Trump tax cut is therefore being injected into an economy which is already recovering from its cyclical downturn in 2016. As the Trump tax cut is not accompanied by any equivalent reduction in US government spending it will therefore significantly increase the US budget deficit - estimates of the final effect of this are that the US budget deficit will increase by at least $1 trillion. A tax reduction which increases the budget deficit, that is which increases US government borrowing, may well increase a short-term recovery which is already occurring.
However, this increased budget deficit, other things being equal, will reduce US total savings – i.e. the sum of household, company and government savings. In the purely short term this fall in the US savings rate will not reduce US growth because, as was already shown, in the short term, i.e. one or two years, net saving and net investment are not closely correlated with US economic growth. Therefore, in the short term, the effect of extra spending arising from increased government borrowing, i.e. extra money flowing to corporations and consumers, may well lead to extra spending boosting already recovering US growth. For this reason, as already noted, in the short term, in 2018, the combination of the cyclical recovery and tax cuts is likely to lead to increase ‘short term gain’.
The medium/long term
However, in the medium/long term, as already noted, key structural features of the US economy, in particular net fixed investment, are extremely highly correlated with US growth. This, therefore, means that over the medium/long term analysing the trend in US net fixed investment gives an extremely clear guide to US economic growth performance.
Necessarily the effect of a greater US budget deficit is to reduce US total savings – other things being equal. As Figure 2 shows the US already passed into almost permanent US budget deficit and government borrowing from the late 1960s onwards – with only a short period of budget surpluses under Clinton. By 2017, although it had recovered from the depths of the international financial crisis, US government borrowing was still 4.0% of GDP even before the Trump tax cut kicks in.
The household and company sectors
In theory, as US total saving is the sum of government, household and company saving, increases in US household and/or company savings could offset a fall in total US saving caused by an increased budget deficit – for example theoretically companies and households benefitting from the tax cut would save their extra income. However, Figure 3 shows, however, that no increase in these other potential sources of US savings was in practice sufficient to overcome the effect of increased US government borrowing resulting from US Federal budget deficits. The result of substantially increased US government borrowing, not offset by trends in the household or company sectors, was therefore to produce a sustained fall in US total savings – that is in US capital creation. US net savings, which had been 13.1% of US Gross National Income (GNI) in the late 1960s, by 2017 had fallen to 1.7% of GNI.
Saving and investment
Turning to the relation between US savings/capital creation and the key chief structural determinant of US economic growth, net fixed investment, it should be recalled that total investment is necessarily equal to total savings. Investment may, however, be financed by either US sources or by borrowing from abroad. Therefore, a reduction in US savings, caused by an increase in the budget deficit due to the tax cuts, necessarily means that US total investment must fall unless an equal foreign source of savings can be found.
US presidents from Reagan to Obama were indeed prepared to use foreign borrowing to offset the decline in US savings - as Figure 4 shows. In the 3rd quarter of 1979, shortly before Regan came to office, the US was actually a net international lender of 1.0% of GNI. However, under Reagan the US embarked on massive international borrowing, this reaching a peak of 3.3% of GNI during his presidency. After a brief decline under George H W Bush, US foreign borrowing then expanded further under Clinton and George W Bush - reaching a peak of 6.1% of GNI in 2005. The shock of the international financial crisis then forced a reduction in US international borrowing, but it still stood at 2.6% of GNI in 2017.
Nevertheless. despite this very large increase in US foreign borrowing Figure 5 shows that this insufficient to entirely offset the decline in US savings and maintain the previous US level of net fixed investment. US net fixed investment fell from 10.5% of GDP in 1978, shortly before Reagan came to office, to a low of 1.7% of GDP in 2010 immediately following the onset of the international financial crisis. US net fixed investment has since recovered to 3.9% of GDP but this remains far below its previous peak level.
Given the extremely strong correlation between US net fixed investment and US economic growth which was already analysed this sharp fall of US net fixed investment necessarily greatly reduces US economic growth.
The slowdown in US growth
Given the close correlation of US net fixed investment with the US growth rate, the necessary result of this sharp fall in US net fixed investment was therefore also a progressive slowdown in the US economy shown in Figure 6.
Taking a 20-year moving average, to eliminate any short-term effects of business cycles, US annual average economic growth has fallen from 4.4% in 1969, to 4.1% in 1978, to 3.5% in 2003, to 2.2% in 2017. The extremely close correlation of the percentage of US net fixed investment in GDP with the US medium/long term growth rates already analysed means that the Trump administration cannot significantly accelerate US economic growth without increasing the percentage of net fixed investment in US GDP.
The choices tracing TrumpThe fundamental determinants of US economic growth therefore clearly show the choices facing the Trump administration which result from the tax cut.
By carrying out a tax cut unaccompanied by any government expenditure reductions the Trump administrations is lowering the level of US domestic savings. This in turn necessarily means a reduction in US investment unless an alternative source of savings can be found.
As previously analysed previous US presidents from Reagan to Obama partially offset this decline in US savings by large scale foreign borrowing. But this large scale foreign borrowing necessarily has consequences for the US balance of payments and therefore for Trump’s pledge to reduce the US trade deficit.
Contradictions of Trump’s policyIt is therefore clear that by its tax cut the Trump administration therefore places itself in an internally contradictory position in which it is impossible to simultaneously meet two of its stated goals:
While the above analysis is made in terms of analysing the fundamental determinants of US growth it is also worth considering other analyses.
The IMF arrives at a fundamentally similar analysis to the above in its latest international projections – predicting a short-term increase in US growth in 2017-2018 but without any medium/long term increase in the US growth rate. Figure 7 shows more precisely that the IMF projects US 2.2% GDP growth in 2017, and 2.3% in 2018, before a decline to 1.9% in 2019, 1.8% in 2020, and 1.7% in 2021 and 2022. Overall the IMF projects annual average US growth in 2016-2022 of 1.9% - which is actually marginally below the average annual medium/long term US growth rate of slightly above 2%. Given the stability of US medium/long term growth, therefore, while the present author would agree with the IMF’s projected general pattern for the US economy, i.e. higher growth in 2017-2018 followed by a slowdown, he considers that US growth will possibly be slightly higher than the 1.9% annual average indicated by the IMF.
Gavyn Davies, former chief economist of Goldman Sachs, who runs one of the world’s most sophisticated ‘now casting models’, similarly concludes that while the pattern of faster US growth in 2017-2018 followed by slowdown is correct he predicts average US growth remaining just above 2%.
Lawrence Summers former US Treasury secretary has the same analysis. He characterises the increase in US growth in 2017-2018 as a ‘sugar high’ – the equivalent of the purely temporary short-term boost in human energy caused by taking a large dose of sugar. His analysis, given the self-explanatory title the: ‘US economy faces a painful comedown from its “sugar high”’ is that: ‘The tax-cut legislation now in committee on Capitol Hill exacerbates every important problem it claims to address, most importantly by leaving the federal government with an entirely inadequate revenue base. The bipartisan Simpson-Bowles budget commission concluded that the federal government needed a revenue base equal to 21 per cent of gross domestic product. In contrast, the tax cut legislation now under consideration would leave the federal government with a revenue basis of 17 per cent of GDP — a difference that works out to $1tn a year within the budget window.
‘This will further starve already inadequate levels of public investment in infrastructure, human capital and science. It will probably mean further cuts in safety net programmes, causing more people to fall behind. And because it will also mean higher deficits and capital costs, it will probably crowd out as much private investment as it stimulates.’
Finally, while the focus of this article is the economic prospects for the US, it is worth noting certain key US domestic and geopolitical trends which follow from this.
Under normal circumstances it would be expected that the relatively more rapid growth of the US economy to be expected in 2017-2018 would lead to favourable approval ratings for a US President. However, in addition to other purely political factors, opinion polls in the US show strong popular disapproval of the proposed tax cuts due to their being considered to be particularly favourable to the rich – polls show up to 58% of the US population disapproving of the tax proposals with only 37% approval. Overall a survey of US opinion polls on 16 December found 58% of US voters disapproving of Trump’s record as President and only 36% approving. It remains to be seen if the economic recovery likely to continue in 2018 will increase President Trump’s approval rating before the fact that the US medium/long term growth rate has not accelerated becomes clear. However, it is clear that a situation of continuing low US medium/long term growth will continue the present situation of instability in US domestic politics.
The reduction of the US savings level due to the increased budget deficit due to the tax cuts also has geopolitical implications. If the Trump administration turns to large scale foreign borrowing to try to increase US investment levels, and therefore accelerate growth, this will necessarily lead to a larger trade deficit. As this would clearly be contrary to one of Trump’s central campaign pledges it will lead to temptations to blame other countries for what are in fact difficulties created by the consequences of the tax cut – China may be a target of this. If, however, the US does not turn to foreign borrowing to boost investment and growth levels then US economic growth will not increase – which may also lead to seeking foreign scapegoats. In summary, the fact that the tax cut will not produce a significant acceleration in US growth, other than in the purely short term recovery in 2017-2018, may increase the temptation of the US to inaccurately blame other countries for what are in fact self-created economic problems exacerbated by the increase in the budget deficit.
In conclusion, the consequences of the US tax cut are therefore clear. They may be easily understood both in terms of the economic fundamentals considered and by those of other analysts including the IMF. The tax cut, by increasing the US budget deficit, will produce a ‘short term gain and long-term pain’, a ‘sugar high’ to use the term of Lawrence Summers. It will further boost a US recovery which is already taking place for statistical reasons in 2017-2018 but at the expense of undermining the US savings level and therefore the ability of the US economy to finance the investment which the data shows to be crucial for any significant increase in the US growth rate.
China’s economic policy, and that of other countries, must therefore be prepared both for the ‘short term gain’ of the US tax cut of 2017-2018 and for the ‘long term pain’, that is the low average US growth rate, that will be caused by the increase in the US budget deficit.
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This article originally appeared in Chinese at Sina Finance Opinion Leaders.
In a recent article ’The Arrival of the Century of Chinese Economics’ Justin Yifu Lin argued that the centre of world theoretical economics would pass to China:
‘I also made a prediction... in the 21st century it is quite possible that many master economists will emerge through the study of China’s economy….
‘The importance of a theory depends on the importance of the phenomenon explained by the theory. If the phenomenon to be explained is important then explaining a phenomenon, and revealing the causal logic behind it, makes this an important theory.
‘What is an important phenomenon? Phenomena occurring in important countries are an important ones. Considering the history of the development of modern economics, Adam Smith published the Wealth of Nations established modern economics. From the late eighteenth century until the mid-twentieth century, the centre of world economics, of significant contributions to economics, was the United Kingdom The vast majority of leading scholars were British or foreign economists working in the United Kingdom. After the 1940s and 1950s, the vast majority of economists who made major contributions to economics were American economists who worked in their United States home or were foreign economists working there....
‘After World War I, the centre of the world economy moved to the United States. The most important economic phenomena are the phenomena appearing in the centre of the world economy. With the transfer of the centre of the world economy, the research centre for world economics also followed.
‘In terms of purchasing power parity [PPP], China became the world’s largest economy in 2014. As long as China’s steady development continues, then at market exchange rates it is very likely that China will become the world’s largest economy by 2025. At present, China's accounts for 18% of the world's economy and this will be more than 20% by 2025. By 2050, China's economy is likely to account for between 25% and 50% of the world economy…. China will be the most important centre of the world economy and the centre of world economics may shift from the United States to China. ...
'It is very likely that we are witnessing the arrival of a new era that is of great importance to humankind because China is became a middle-income country, from one of the world’s poorest countries, and it will become In a high-income country. Most of the countries in the world now are developing countries – low income… countries and… middle-income countries. The have the desire to modernize and become high-income countries. It is therefore necessary to summarize the theoretical innovations made in China's economic experience, and develop better ways to test the contribution of these theories.'
Indeed, in order to achieve the fastest sustained growth in a major economy in human history. China has already had to pass through decisive tests of the superiority of its economic thinking. Most fundamentally, from the positive, the ‘socialist market economy’ created by Deng Xiaoping, Chen Yun and their collaborators was unprecedented in human history – an intellectual and theoretical achievement of the highest order. This is analysed at length in my book The Great Chess Game and in a popular fashion in an article whose title is self-explanatory ‘Deng Xiaoping: the World’s Greatest Economist‘.
China’s success was necessarily not merely practical but theoretical because its policies were carried out in clear opposition to dominant orthodox Western economic theory, and with China putting forward its own economic concepts. As Justin Lin Yifu noted:
‘There was a [Western] consensus that the economic results of the gradual and twin-track policy that China carried out would be worse… But now, looking back, China is the fastest-growing and most stable economy in the past four decades. Countries that have undergone a restructuring by Washington's consensus shock therapy have experienced a crisis of economic collapse and stagnation. '
But if China’s theory of the ‘socialist market economy’ was demonstrated to be superior to those in the West ‘from the positive’ by China’s own economic growth it was also shown to be correct ‘from the negative’ not only in developing countries but in particular by application of dominant Western economic theories in the former Soviet Union. The application of these after 1991, in ‘shock therapy’, produced in the Russia the greatest economic collapse in a major economy in peacetime since the Industrial Revolution with a decline of GDP of 39% in a seven-year period. It was entire possible to predict this disaster in advance, as shown in my article written in April 1992 ‘Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe’ This article, originally published in Russian, reflected the fact that from 1992-2000 the present author lived in Moscow attempting to persuade the Russian authorities to adopt the approach of China’s economic reform instead of the disaster of Western economics’ ‘shock therapy’. It may be noted that this article was written entirely from the point of view of economic theory, as at that time I had never visited China, nor did I have direct contact with Chinese economists – although I carefully studied material available in the West of Deng Xiaoping, Chen Yun and works on Chinese economic theory.
My agreement with the views of Justin Yifu Lin on the superiority of China’s economic thinking, and of his assessment of the movement of the centre of global economic thinking to China, is therefore not based on recent events but on more than a quarter century of study of China’s economy theory and practice and comparison of its results with dominant ideas in the West.
The present situation of the world economy
Within the overall historical framework outlined above, the aim of the present article is to make a more fine-grained analysis of the present situation – to show that the present situation of the global economy, more specifically of trends in the G7 economies, makes it more urgent to reinforce and speed up a transition of the centre of international economic thinking to China’s ‘socialist market economy’. This is due to the fact that, as will be shown, what was referred to by IMF Managing Director Christine Lagarde as the ‘new mediocre’ in the Western economies is now characterising an entire period of the world economy. More precisely, it will be shown in detail that while the downturn in the advanced G7 economies after the international financial crisis was not as violent as during the Great Depression after 1929, the extremely slow growth that has resulted from the financial crisis has now produced a situation where overall G7 growth is actually slower than in the Great Depression. This situation necessarily has not only economic but geopolitical and domestic political consequences in the G7 - which are briefly mentioned at the end of this article. In order to avoid misunderstanding it should be made clear that while a number of Chinese writers have studied the general historical shift of the centre of economic thought to China the analysis of the present situation of this trend, in relation to the West’s ‘new mediocre’, does not imply their agreement with this specific analysis.
To establish the facts regarding global economic trends, and avoid any suggestion of adopting data excessively favourable to China, the source used for analysis here is the projections for the next five years of the world economy issued twice yearly by the IMF. These indicate essentially the same dynamic for the Western G7 economies as the present author already analysed for the US in 'Why the US Remains Locked in Slow Growth'Why the US remains locked in slow growth' - that is, the IMF predicts there will be a moderate cyclical upturn in the G7 economies 2017-2018 but that this will not turn into a strengthening boom. Instead over a five-year total G7 growth will be low with an economic slowdown in 2019-2020.
Detailed analysis of macro-economic trends confirms that the reasons for the limited scope of the upturn in the G7 economies is the same as in the US. However, detailed presentation of such analysis will be given separately. The aim of the present article is simply to outline the factual predictions of the IMF and to show their implications.
IMF predictionsTurning to trends in the global economy, the IMF’s predictions for the next five years economic growth in the G7 economies are shown in Figure 1. As may be seen, after very low growth in 2016, only 1.4%, the IMF predicts growth in 2017 of 2.0% and in 2018 of 1.9% - a moderate but real upturn. However, G7 growth is then predicted to fall to 1.6% in 2019, and to a poor 1.5% in 2020-2022. The IMF’s projection is therefore a pattern of ‘two good years and then four poor ones’.
The ‘new mediocre’
The cumulative effect of these predictions is that the IMF is projecting that the G7 economies will remain locked in average low growth – the ‘new mediocre’ in Christine Lagarde’s phrase. This ‘mediocre’, low sustained growth, may be particularly clearly seen by taking moving averages for growth of the G7 economies - as such averages focus attention on longer term growth patterns compared to purely cyclical movements. Moving averages for the G7 economies are therefore shown in Figure 2.
Naturally a shorter term five year moving average shows a great cyclical impact of the sharp fall in output during the 2008-2009 international financial crisis, whereas this cyclical effect is almost removed by a long term 20 year moving average, but the fundamental trend of very slow growth, particularly compared to previous performance, is clear whichever period is taken:
In summary, all averages show a severe fall in G7 annual average growth since the beginning of the 21st century and show growth rates of only 1.5%-1.7% in the next five years.
Consequently, the IMF is not projecting that the ‘new mediocre’ was a short-term trend which will be overcome but that it will continue throughout the next five years. The upturn in 2017-2018 is therefore purely cyclical and will not be consolidated into a new longer ‘boom’ - the IMF projects G7 growth will weaken again after two good years.
To take a comparative historical framework to consider present trends it is useful to make a study of present trends in relation to the most well-known of all global economic crises - the ‘Great Depression’ after 1929. Figure 3 therefore shows the yearly development of GDP in the G7 after 1929 and 2007 (i.e. 1930 is one year after 1929, 2008 is one year after 2007 etc). This shows clearly the following key dynamics of the situation after 2007 compared to that after 1929.
To conceptualise this situation whereby overall G7 growth after the international financial crisis will actually be slower than after 1929 then, if the post-1929 situation is referred to as the ‘Great Depression’, then by analogy the new mediocre may perhaps be referred to as the ‘Great Stagnation’.
Economic and geopolitical consequences
Finally, to briefly deal with the economic and geopolitical consequences of these trends, it must first be made quite clear that the above analysis is of the trends in the G7 advanced economies. It is not an analysis of the overall trends in the world economy. Indeed, a key feature of the projections of the IMF is that far faster growth in developing economies than in the G7 will continue as shown in Figure 4.
Therefore, the ‘new mediocre’, is a specific feature of the G7 economies not of other parts of the world economy. In particular while low growth, the ‘new mediocre’, will continue in the G7 economic growth in developing countries will be more rapid - with annual average growth in developing economies in 2016-2022 being projected to be 4.9% compared to only 1.7% in the G7. Furthermore, the IMF projects that 44% of this growth in developing countries, almost half, will be in China itself. China’s key practical international economic projects, such as One Belt One Road, clearly fit within this framework.
Second, the geopolitical and domestic political consequences of this very slow growth in the G7 economies are also clear. The data given above is for total GDP, but annual population growth in the G7 has averaged 0.54% over the last five years. Therefore per capita GDP growth in the G7 is significantly slower than total GDP growth as shown in Figure 5. Over the period 2016-2022 the IMF projections imply annual per capita GDP growth of only 1.1%. Not only is such a growth rate low but it means that any cyclical downturn takes per capita GDP down to extremely low levels. For example, the major political disturbances in 2016, the economically irrational UK vote for Brexit and in particular the election of Trump as President against the opposition of the overwhelming majority of the US political establishment, become readily understandable when it is noted in that year G7 per capita GDP growth fell below 1%. In the US in 2016 year on year per capita GDP growth was only 0.8% and in the second quarter of the year it fell to an extremely low 0.5%.
The evident consequence of such very low economic growth rates in the G7 is therefore that domestic political instability will continue within G7 countries.
Finally, to return directly to the issues dealt with at the beginning of this article, the inability of the G7 ten years after the beginning of the international crisis to overcome these very low growth rates with their destabilising social consequences, and the projection that this will continue for at least a further five years, clearly indicates the inadequacy of dominant Western economic theories. In the 1980s, as Justin Lin Yifu noted, the dominant economic theories in the West, which became the Washington Consensus, produced stagnation in developing economies. But in the 1990s they also produced economic disaster in the former USSR, and since 2007 the inadequacy of dominant Western economic theories has been demonstrated in its failure to be able to solve the problem of the ‘new mediocre’, of the ‘Great Stagnation’, in the Western economies. The IMF’s projections for the next five years merely show that this failure will continue.
The conclusions for China that follow from these international economic trends are both practical and theoretical.
First, the specific feature of any situation must be understood. As Xi Jinping quoted the Chinese philosopher Mencius: ‘As early as over 2,000 years ago, the Chinese people came to recognise that “it is natural for things to be different.”’ Put in terms of European thought it is the words of the Greek philosopher Heraclitus, also over 2,000 years ago, ‘No man ever steps in the same river twice’ - everything which exists is unique both in time and place. Because the most famous crisis in world economic history, that in 1929, saw an extremely rapid economic decline, whereas after World War II there was for a for prolonged period a boom, this can create the false impression that the economy must either be in a state of rapid decline or it will be in ‘boom,. However, the specific character of the present situation in the G7 economies is neither of these – it is a very long period of slow growth, a ‘new mediocre’.
Second, within this overall situation of very slow average growth business cycles still exist. The extremely low growth of the G7 economies in 2016 is therefore logically followed by faster growth in 2017-2018 – the G7 economies are oscillating around their low growth path. What the ‘new mediocre’ does mean, however, is that such upturns are temporary and do not turn into prolonged strong booms. The IMF’s projection of a new downturn in growth in 2019-2020 is therefore precisely an expression of the ‘new mediocre’.
Third, this ‘new mediocre’ inevitably means both geopolitical instability and domestic social and political instability within G7 countries.
Fourth, errors of dominant Western economic theory, of neo-liberalism, which were already shown in the stagnation produced in developing countries in the 1980s, and in the severe economic decline in the former USSR in the 1990s, are again confirmed in the inability of the G7 economies even after a decade to escape from the ‘new mediocre’. Influence of such provenly false ideas in China is therefore also dangerous for China both from the point of view of economic policy and of social stability.
Fifth, to return to this article’s starting point, the situation of the prolonged ‘new mediocre’ in the G7 economies represents part of the transition of the centre of economic thought to China. China’s rapid post-1978 economic development was created by a new economic theory, which became the ‘socialist market economy’ which had no precedent in any country and which proved its correctness through China’s unprecedented economic growth. The correctness of this economic theory was then further confirmed by the failure of Western economic theory in the ‘Washington Consensus’ for developing countries and of ‘shock therapy’ in Russia and the former USSR. The correctness of China’s concepts deriving from these concepts is now being demonstrated again in comparison to the ‘new mediocre’ resulting from the application of dominant Western economic theories in the G7.
Sixth, the spread of initiatives which follow from China’s ‘socialist market economy’ are widely understood to be increasingly crucial globally – the Belt and Broad Initiative (BRI), the Asian Infrastructure Development Bank and others. This also applies to China’s leading role in the struggle against climate change – particularly since US announcement of withdrawal from the Paris Climate Accord. But these are also part of China’s increasing international ‘thought leadership’ – BRI goes beyond the ‘free trade agreement approach’ of US sponsored post World War II trade deals to take in infrastructure and other investment, China’s increasingly leading role on climate change is an expression of its concept of a ‘community of common destiny’. Naturally such an approach has its greatest mass international impact when articulated by China’s political leaders, as for example in the wide international praise given to Xi Jinping’s speech on globalisation at the Davos World Economic Forum analysed in 'How Xi Jinping’s Marxism Out-thinks the West 'How Xi Jinping’s Marxism out-thinks the West'.
But while economists naturally do not have the same mass impact as state leaders this increasing impact of China’s thinking is also clear the more narrowly defined sphere of economics. ‘Classical’ works of China’s economic policy, of the period of launching of its economic reform, have of course for a long period been readily available outside China. But China’s economic success, and the cumulative impact of this in contrast to very slow growth in the West’s ‘new mediocre’, mean products of China’s contemporary economic thinking are also increasingly regularly translated and known among non-Chinese economists – for example Yu Yongding’s column on the prestigious Project Syndicat has appeared for seven years but he is now is frequently quoted in Western mass media on financial issues, Hu Angang’s books on green growth and related issues are translated, numerous works by Justin Yifu Lin on economic development which led to his Centre for New Structural Economics and Institute of South-South Cooperation are available internationally. I know directly from work in Chongyang Institute for Financial Studies, Renmin University of China the increasing international impact and connections of China’s think tanks. But numerous important Chinese economists are not yet available outside China. The combination of very low growth in the advanced Western economies and continued growth in China, is progressively speeding up overcoming this situation.
The G7 ‘new mediocre’ is therefore not merely important in its practical consequences for the world economy: the increasingly proven inability of Western economic thinking to overcome the ‘new mediocre’ is helping create the shift of the centre of world economic theory and thinking to China. As the G7 is incapable of overcoming this very slow growth, the ‘new mediocre’ in the G7 economies means this shift of the centre of international economic practice and thinking to China will intensify.
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This article was originally published in Chinese at Guancha.cn. A shorter version was published in English by Global Times.
 Xi, J. (2014). Exchanges and Mutual Learning Make Civilizations Richer and More Colorful. In J. Xi, The Governance of China (Kindle Edition) (pp. Location 3797-3909). Beijing: Foreign Languages Press.
The following speech on why China's economic, geopolitical and foreign policy thinking is the world's most advanced, and on certain features of Chinese classical culture and its relation to the modern global order, was given by me to the 7th World Forum on China Studies in Shanghai.
First, thank you very much for the invitation to speak for which I am greatly honoured.
The theme of this session is “China towards 2050: New Era, New Thought, New Journey”. I would like to take as the starting point for examining this a profound speech on the development of human civilization delivered at the headquarter of UNESCO by President Xi Jinping in which he reminded us of the Chinese saying, ‘The ocean is vast because it refuses no rivers.’
Not all rivers are the same size of course. Of those that have flowed into the ocean of human civilization China’s is certainly one of the largest. But, as China itself states, its river has not flowed at all times with the same strength.
As everyone here knows, from the fifth decade of the 19th century the river of China encountered many blockages and problems. At that time, therefore, the flow of China’s river into the ocean of human civilization was also weakened. Today, thanks to immense sacrifices by the Chinese people and the leadership of the Communist Party of China, that river is again running very strongly through China’s own territory. But therefore, as will be discussed here, it is flowing increasingly powerfully into the general ocean of human civilization.
This reality means China’s national rejuvenation and its contribution to humanity are not counterposed, but inextricably linked. As President Xi Jinping put it in his first press conference as General Secretary of the CPC regarding China’s people: ‘Throughout 5,000 years of development, the Chinese nation has made significant contributions to the progress of human civilization… Our responsibility is… to pursue the goal of the rejuvenation of the Chinese nation, so that China can stand firmer and stronger among the world’s nations, and make new and greater contributions to mankind.’
Because I know I am speaking in front of many distinguished Chinese and international experts on China I would like to divide my speech assessing some aspects of this into two parts.
The first part is my specific area of professional competence - economics. This is not only the great impact of China on the global economy but a simple considered statement – that China’s economic thinking is already the most advanced in the world. The second, as someone who came to be interested in Chinese culture 52 years ago not through economics but through Chinese poetry, I hope to make a few brief non-professional, but I hope intelligent, comments on the reasons why the global impact of Chinese culture and philosophy will also greatly increase. I hope by doing so also to justify another considered statement - that China’s geopolitics and foreign policy thinking is the most advanced in the world. Finally, I hope to show why these aspects are interrelated.
China’s economic thinking is the most advanced in the world. First, to deal with the obvious impact of China, and its ‘New Era, New Thought, New Journey’, let us note the significance of the regrettable fact that I have to deliver this speech in English – for which, as there are many foreigners at this conference who speak fluent Chinese I have to deeply apologise! But this reality also shows the enormously growing impact of China.
For many years the Chinese economy was an object of study outside China only for specialists – whose first skill was precisely their knowledge of the Chinese language. These specialists were naturally varied in their output. Some produced extremely valuable books. Some regrettably are still active today ‘bad mouthing’ China and predicting disaster in the Chinese economy despite the fact that China has produced the greatest economic growth over a sustained period in the whole of human history. But they shared a common feature that the study of China’s economy outside China was not part of the mainstream of economics.
If I may recall a personal experience, I vividly remember in 1992 publishing an article in English and Russian ‘Why the Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe’. This was based on careful study of Deng Xiaoping, Chen Yun and available material outside China on China’s economic reform. The reaction of the most people in the West was ‘why are you so interested in China? It is a poor country, it is not a very big economy.’ And in 1992 those latter remarks were true.
My answer was simple: ‘because study shows China’s economic theory is correct and more advanced than anything in the West. And because China’s economic theory is correct the actions based on this will produce economic success, whereas because the West’s economic theories on these issues are wrong they will produce a disaster in Russia and the former USSR’. As I summarised this later in an article with the deliberately self-explanatory title ‘Deng Xiaoping, the world’s greatest economist’: ‘Deng Xiaoping was above all a great leader of the Chinese people. Through pursuit of his country's national revival… he also made an unparalleled contribution to humanity's overall well-being. But if that were not enough, Deng Xiaoping had another achievement. By far the greatest economist of the 20th century was not Keynes, Hayek or Friedman but Deng Xiaoping.’
Facts proved which of these analyses was correct. China, developing the theory of a ‘socialist market economy’ underwent the greatest sustained economic growth in a major country in human history. Russia, under the influence of Western economic theories which were counterposed to China’s, underwent the greatest economic collapse in a major economy in peacetime since the Industrial Revolution – with a decline of GDP of 39% in seven years.
The theory of economics does not recognise national boundaries nor is it the monopoly of any one language. To accurately predict what would happen it was possible to make up for very poor knowledge of the Chinese language with good economics!
Twenty-five years later of course no economist considers it strange to study China’s economy. Hundreds of articles appear every day in the media outside China about China’s economy. Numerous major economists write about China. A subject which 25 years ago was considered a ‘niche’ one outside China is now totally mainstream.
China’s achievements are too great to need exaggeration. I have no romantic concept, and neither should any serious scholar, that ‘China is the best in the world at everything’. If you are a physicist, for example, top prize is still held by a German, Einstein, and a Britain, Newton. But in the field of economics it should be stated bluntly that China’s unparalleled economic development, China’s ability to avoid the disaster produced in the former Soviet Union by Western economic ideas in ‘shock therapy’, and China’s ability to come through the international financial crisis without any setback comparable to that in the major Western economies confirms that China’s economic thinking is already the most advanced in the world. I will also outline later why the same applies to foreign policy and geopolitics.
But before going on to other issues, the reasons for this advanced character of China’s economic thinking was well stated not in my words but in those of one of China’s most important economists, Justin Yifu Lin.
‘Adam Smith's ‘Wealth of Nations’ marked the birth of modern economics. From Adam Smith up to the year 1930, most master-economists were British or foreigners working in the UK. This trend changed during the 1930s, when the United States started to become home to great economists. This phenomenon has something to do with the nature of economics. Only when an economist lives in an important economy can he or she have a good command of real social and economic variables key to better illustrate cause/result relationship... It is inevitable, then, that the research center of economics will move eastward to China.’
In short, it is the tremendous success of China’s economy that has taken study of China’s economy from being a niche speciality to being one of the most important and mainstream issues in economics. The same process is going to take progressively take place in other subjects – I am just able to follow it most closely in economics.
This process, I believe, also explains what a foreigner can contribute to one of China’s most important new think tanks, Chongyang Institute for Financial Studies, Renmin University of China – where I work. Obviously, as I have been writing on the issue for 25 years, I have by Western standards a good knowledge of China’s domestic economy, but I would immediately state that many Chinese economists have a more detailed knowledge of its domestic economy than any foreigner. The areas where a foreigner can particularly contribute are on the relation of China and the international economy and on issues of economic theory.
Foreign policy and geopolitics.For the second part of my speech, I hope I may be permitted to make a few non-professional, but I hope intelligent, observations on other issues and why I believe they relate to more professional issues of foreign policy and geopolitics.
As I stated my own intellectual engagement with China did not begin with economics, it began 52 years ago with poetry. At university I read in translation Li Bai and Du Fu and was fascinated by their reflection of Chinese culture and by certain key ideas which were different to own European ones. Only more than 40 years later, aided by the impact of living in China, could I work out clearly why.
China is unique in that it is the only one of the powerful civilizations that is not founded on a religion. All the others – Christianity, Islam, Hinduism, Buddhism, Judaism – are religions. Confucianism is not. It is a system of social values.
This interacts deeply with China’s current reality and aids China’s role in another field in which China has the most advanced ideas – foreign policy and geopolitics. No one here with specific religious values should be insulted, but it is clear a truly global system of organisation cannot be based on a religion – because there is a disagreement as to which religion is correct and there are a large number of people who are not religious. Therefore, a global order must itself be based on social values not on a religion. This fact that China is uniquely the one great civilization based on social values and not a religion gives it an advantage in thinking about a global order.
Xi Jinping has put forward as the central concept for developing foreign policy and geopolitics a ‘community of common destiny’. In developing this his book The Governance of China is full of references to classical Chinese authors. For example fundamental to his vision of global order, quoting The Mencius, is: ‘As early as over 2, 000 years ago, the Chinese people came to recognize that “it is natural for things to be different.” civilizations are equal, and such equality has made exchanges and mutual learning among civilizations possible….all have their respective strengths and weaknesses. No civilization is perfect on the planet. Nor is it devoid of merit.’
In short, China’s fundamental concept of foreign policy and geopolitics is simultaneously of equality and diversity. This is fundamentally different to the hierarchical concept of ‘one nation superior to others’ of, for example, the US neo-cons – who, because of this concept of a hierarchy, also aim at uniformity in which all nations should aspire to a single model, namely their own. It could be demonstrated that this formula of ‘equality and diversity’ is also present in European philosophy – for example in Spinoza, Leibniz and Hegel. But Xi Jinping shows the deep roots of this concept in classical Chinese thought.
But this ancient thought of China is also deeply related to economic theory. The opening sentence of the first chapter of the founding work of modern economics, Adam Smith’s The Wealth of Nations, from which the whole of the rest of it flows is clear:
'The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is directed, or applied, seem to have been the effect of the division of labour.'
But the advantage of division of labour is precisely that of the difference of the different parts of the economic system – not of their similarity. Advantage of division of labour is not of similarity but of difference. If every part of the economic system were the same there would be no advantage from division of labour, it is the fact that the different parts are not the same, that creates the advantage of the division of labour. It is this which also explains why it is a ‘community of common destiny’. No single part, and therefore no single country, of the modern global economic order could achieve the advanced levels of productivity, and therefore of human well-being, which differentiated division of labour makes possible. The well being of each part of the world depends on the well being of others. That is precisely why it is a ‘community of common destiny.’
The concepts of China’s traditional philosophy and morality therefore integrate with economics in a way no other countries does. This is why, from a fundamental point of view, the attempt to integrate Confucianism and modern reality is not artificial.
It is therefore in these areas – of economics, foreign policy and geopolitics – that China’s thinking is already the most advanced in the world. For reasons outlined China’s classic thinking is not an obstacle to this but an aid. It reflects what I believe is a profound reality – that China is simultaneously the oldest country in the world and the most modern.
Finally, what does this mean for the place of China’s river flowing into the ocean of human civilization? It means precisely what Xi Jinping said: ‘Throughout 5,000 years of development, the Chinese nation has made significant contributions to the progress of human civilization… Our responsibility is… to pursue the goal of the rejuvenation of the Chinese nation, so that China can stand firmer and stronger among the world’s nations, and make new and greater contributions to mankind.’
But these words can also be seen from another angle – inevitably so by someone who is a member of humanity but not Chinese.
The great German Philosopher Hegel noted that at a particular moment in history the general progress of humanity becomes determined by a specific country. This meant that the pursuit of the progress of a particular country is decisive for the progress of the whole of humanity.
To take an historical process, in Europe, at the end of the 16th century, Holland carried out the first successful anti-feudal revolution in history. Holland was a tiny country, but so progressive and so great was the impact of this event that it inspired writers and other struggles for centuries. In 1776 the launching of the US struggle for independence was the first break with the British Empire and created what became the world’s most powerful state. At the end of 18th century the French Revolution created a struggle for liberty which shook Europe to its foundations. In 1917 a revolution took place in Russia that was not only one of the greatest events in world history but hastened the fall of all colonial Empires - and had a decisive effect on China itself.
Today, in equal measure, the greatest step that can be taken not only for China but for all humanity can only be taken by Chinese people, on Chinese soil, and in pursuing a Chinese Dream.
10 December 2017
Elias Jabbour and Alexis Dantas, two economists in Brazil, have published an important study of China's economic reform 'The political economy of reforms and the present Chinese transition'. In general this refutes many myths on China's economic reform in analysing the relation of the state and the market in China's 'socialist market economy'. It is a good introduction for economists to the processes during China's economic 'reform and opening up'.
For specialists I particularly found extremely valuable, collecting together much information, the section on the decisive role played by agriculture during the launching of China's reform in 1978 - I knew the process in general but this provides much detailed information I had not seen elsewhere.
Strongly recommended. The paper is freely available in English at http://www.rep.org.br/PDF/149-8.PDF
On 1 December President Xi Jinping delivered a speech to the Conference of the ‘CPC in Dialogue with World Political Parties High-Level Meeting’. With over 200 political parties from 120 countries represented this was certainly the largest such international meeting of political parties for decades. Also striking was the very wide range of political viewpoints represented - from the Treasurer of the Republican National Committee of the US to the Communist Party of Bangladesh (Marxist Leninist), and taking in numerous social democratic, conservative, religious, nationalist, labour and other parties. As the name suggests the representation at the conference was on a very high level with numerous former or serving prime ministers, speakers of national parliaments and those holding similar positions.
As I was at the speech it was of course extremely interesting to hear China’s President speak in person, but even more striking was the speech’s content. It gave a clear framework for foreign policy and was simultaneously profound intellectually and explained why such a wide range of opinion was represented at the conference.
The fundamental concepts in the speech, with its self-explanatory title, ‘Work Together to Build a Better World’, took up ideas already outlined in Xi Jinping’s book ‘The Governance of China’ but developed them further. Although President Xi Jinping was presenting a positive framework, and therefore did not polemicize with other views, alternative frameworks the speech was counterposed to will be briefly mentioned at the end of this article. The official English translation of the speech has not yet been published so the following excerpts have been translated from the Chinese but must not be taken as the official translation.
Community of common destiny
The central point of the speech, as of China’s foreign policy, was the concept of the ‘community of common destiny’, resulting from the fact the world is increasingly interconnected. The speech emphasised: ‘China has always striven for the view that "the world is a big family"… People in the world are living under the same sky, share one home, and should be one family despite the fact they have differences.’
Therefore, ‘The community of human destiny, as its name implies, is that the future and destiny of every nation and every country is closely linked’
And more precisely regarding human civilization: ‘The prosperity of civilization and the progress of humankind cannot be separated from seeking common ground while differences will remain. It is open and inclusive. It cannot be separated from cultural exchanges and from learning from each other. History calls for human civilization to shine in its splendour, and different civilizations should live in harmony and complement each other. We should uphold the view that the world is rich and colourful, and civilizations are diverse, so that all the kinds of civilizations created by humankind enhance each other’s beauty and weave beautiful and gorgeous pictures.’
These points clearly developed further President Xi Jinping’s speech, also with the self-explanatory title ‘Exchanges and Mutual Learning Make Civilizations Richer and More Colourful’, made at the headquarters of UNESCO in March 2014 in which he stated: ‘civilizations are equal, and such equality has made exchanges and mutual learning among civilizations possible. All human civilizations… have their respective strengths and weaknesses. No civilization is perfect on the planet. Nor is it devoid of merit. No single civilization can be judged superior to another.’
Classical Chinese and Western thought
The roots in China of this understanding that civilizations are equal but different was noted earlier by President Xi Jinping quoting the classical Chinese text The Mencius: ‘As early as over 2, 000 years ago, the Chinese people came to recognize that “it is natural for things to be different.”
Although, as Xi Jinping is China’s President he naturally cited classical Chinese sources, these ideas were equally formulated by, and could also be expressed in the language of, the most important Western philosophers. The fact that everything which exists differs was first formulated in Western thought by the Greek philosopher Heraclitus 2,000 years ago in his famous statement ‘no man ever steps in the same river twice’, it was proved by the Western philosophers Spinoza and Leibniz, while the concept of the combination of difference and equality was formulated by Hegel - and was also known to the CPC via Marx.
This fact that that the same conclusion is arrived at by different civilizations, which had no substantial intellectual connection with each when other such ideas were formulated, is a fundamental expression of the fact that although there are many starting points there is only one truth on such issues – which is therefore arrived at no matter how much these starting points differ.
From the interconnectedness of nations, the practical foreign policy conclusion Xi Jinping stated is popularly expressed as ‘win-win’ and more formally as the ‘community of common destiny’. This means that while naturally there are differences and conflicts between countries this is less important in the long run than their common interests. This is the key guideline for foreign policy.
The alternative framework
Although President Xi Jinping naturally did not engage in polemics it is clear the concept of certain major figures in the US is directly counterposed to this. For example, US National Security Adviser McMaster and Director of the US National Economic Council Cohn jointly authored a Wall Street Journal article arguing: ‘the world is not a “global community” but an arena where nations, nongovernmental actors and businesses engage and compete for advantage.’ Or as they put it drawing the practical conclusion. ‘America First signals the restoration of American leadership.’
To summarise, in the concept expressed in Xi Jinping’s speech countries are different but equal, and need to cooperate for common interests. In the alternative concept countries are unequal, with one ‘leader’ and the others therefore necessarily ‘followers’, engaged in a primarily competitive struggle for advantage.
As not merely China but other countries will never accept that they are inferior to other countries, Xi Jinping’s concept of equality and difference, which expresses the most advanced ideas of both classical Chinese and Western thought, is therefore of far greater interest to countries throughout the world than the idea that they should be ‘followers’ of a single other country.
It was because of China’s fundamental concepts of the relations between countries that not merely was there such a large attendance at the ‘CPC in Dialogue with World Political Parties High-Level Meeting’, but President Xi Jinping’s speech was so well received.
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An edited shorter version of this article appeared at China.org.cn.