The Rise of Populism and the Shift in the World Economic Balance of Power

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Whomever wants to understand the rise of populism cannot ignore the shift in the world economic balance of power.

The center of gravity of the world economy is not in the West anymore, it shifted to the Asia- Pacific region and China overtook the United States in terms of GDP measured in PPP.

China divergence

1000 years ago, China was the largest economy in the world. Its share in world GDP declined gradually until the early 19th century and rapidly since then as a result of internal political problems and having totally missed the Industrial Revolution.

Deng Xiao ping

China divergence

In 1979, Deng Xiao Ping, the “Paramount leader”, visited the US in what Niall Ferguson considers to be the turning point of the last 50 years and immediately after that China adopted a program of economic reforms.That economic strategy was, and continues to be, very idiosyncratic and difficult to replicate in other countries.

China 1Since 1980, China´s economy grew at a breakneck pace, it became the engine of world GDP growth and in only 35 years it overtook the US as the largest economy in the world, although its income per capita is still relatively low. In 2030, China´s economy may be 40% larger than that of the US (using IMF medium term assumptions). This reversal of fortune in such a short period of time has no historical precedent and will have a strong impact in many areas beyond the economy.

Information about China is often poor, biased or a combination of both and there are .

There several myths about China, for example that its prosperity depends excessively on exports. Wrong. China, depends much less on exports than Germany and is the 2nd largest importer in the world. China depends on the rest of the world, but the rest of the world depends on China. Therefore protectionism is not the right way to address China´s rise. To a large extent it is fighting a battle against an army of the past.

China is focused on creating a “new normal” model of “lower but higher quality economic growth”, less dependent on investment and entailing a shift to services and high value added industries from capital and energy intensive industries.

This will be difficult, although it is feasible, because China has a gigantic untapped domestic market, for example did you know that it has 15 cities with more than 8 million people, compared with 2 in the US and 2 in Europe.

The country has world class social equipment, including several of the best airports in the world and the best high speed rail network. Many scientists and a secondary education system much more performant than in the west. Hundreds of millions of consumers.

There are obstacles, among them the following: non performing loans in the banking sector, stranded assets in capital intensive sectors, extremely high, and increasing, real estate prices, poor air quality. Will the country be able to manage these problems? Can it create economic institutions appropriate to support a less capital intensive economic model? It is a difficult task, although it is feasible.

Imagine just for the sake of the argument that China will be successful in its economic transition. Then, the next stage would be to build “soft power”, to create a story and to make it credible. This will be no easy task given China´s culture, political organization and social fabric, however the “one belt one road” is a step in the right direction.

In any case, allowing China to become the champion of globalization and climate change does not make any sense.

It all depends on how we look at things, and not how they are in themselves.

Carl Jung

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