The Geopolitics of Economic Decline

The most worrying corollary of the Great Depression of the 20^th century with current events is the dramatic deterioration in global relations occasioned by extreme nationalism. This chauvinism flowed directly from the parlous state of the world economy in the 1930s and of course led to the outbreak of the Second World War.

The ‘Great Depression of the 21^st century’ is only a couple of years old but already, the warning signs are manifest.  Here in the UK, a weak Prime Minister, bowing to pressure from his own party’s right-wing Eurosceptic rump, has set the country on a collision course with the EU.

To anyone with half an eye on domestic affairs in Britain, the tortured antics of Westminster’s finest over Europe should come as no surprise. The Conservative Party has in the past almost destroyed itself over the European question and will doubtless do so again.

Britain in a Global World: Options for a New Beginning discusses the relationship between the UK and the EU; the authors Mark Baimbridge, Philip B Whyman and Brian Burkitt investigate how, since 1961, when the UK first applied for membership, the issue of Europe has been at the forefront of political and economic debate.

The book aims to challenge that idea that full membership is presumed to be “inevitable”. In place of this presumption the book proposes the argument that it could be in Britain’s long-term interest to develop global policy options. The book also highlights the perceived benefits of being able to move outside of the constraints of EU membership policy.

Alternatives to membership of the European Union are mooted, including the nuclear option of UK withdrawal from the EU. This, the authors maintain, would allow the UK to develop relationships on a global scale and distance itself from the EU.

A less drastic option is also presented, in which the UK seeks to create an ‘Associated European Area’, this organisation would allow member states to make distinctive choices about how much integration to a European supranational collaboration they wish.

It is argued that this would be advantageous for the UK as it could select the membership and secure access to the internal EU market, in theory creating the world’s largest and most comprehensive multinational trading area.

The authors challenge the orthodoxy that calls for further EU integration arguing that the differences between the EU and the UK have been underestimated and are more pronounced than ever before.

Throughout this work, UK Sovereignty is consistently highlighted and its maintenance is seen as central to national participation in the European project.  The limits of integration are studied particularly in the context of the onus placed on UK taxpayers by the EU. One aspect of this argument is that innovative tax returns that could potentially have broad social and political benefits are unable to make headway due to the EU constraints.

The underlying message of the book seems to be that the UK would benefit from taking a step away from the EU and seek to develop further relationships and economic ties with Asia and South America.

So as Britain continues to come to terms with its century-old economic and political decline, another world power’s stock continues to rise almost inexorably. The 20^th century may well have been dubbed ‘The American Century’ but the 21^st almost certainly belongs to the Chinese.

World Bank Chief Economist Justin Yifu Lin's new book, Demystifying the Chinese Economy highlights his country's 30 years of transition and tracks the economy's remarkable economic development. He shows how the country declined from its zenith prior to the 18th century;  how it begin its transformative economic programs in late 1978, and “how the path from poverty and backwardness to extraordinary growth was forged.”

The headline figures certainly paint a picture of a burgeoning tiger economy. China's average annual growth rate of GDP exceeded 9% over the 30-year period from 1979. At that early stage in the reform process, the People’s Republic was inward-looking and its trade as a percentage GDP was only 9.5%. Now China is the world’s largest exporter and the third largest importer, with trade contributing around 70% of GDP. Over 30 years, more than 600 million people were pulled out of poverty.

In a work that occasionally borders on the hagiographical, Lin asks the question ‘why didn’t other transition economies perform equally well?’ “China distinguished itself by adopting a pragmatic, gradual, dual-track approach,” according to Lin. “On the one hand, the government continued to provide transitory protection to the non-viable firms in the priority sectors, and on the other hand, it liberalised private enterprises and allowed joint-ventures’ entry to labour-intensive sectors -- areas in which China had comparative advantage, but were repressed before. In this way, China achieved stability and dynamic growth simultaneously.”

Lin also explores China's role in “stabilising and driving the world economy, a dynamic of global importance given weakness in the Euro-Zone, a slump in worldwide demand, and high joblessness in advanced countries”.

What both these publications (Baimbridge et al on Europe and Lin on China) share is a sense of the subject country’s destiny being solely in the hands of that country’s economic and political elite.  In either case, this is a fallacy of misplaced concreteness.

Britain outside the European context is not the great trading nation of 18^th and 19^th century  any more than China’s new role as the workshop of the world is immune from a fall-off in demand for its produce occasioned by the decline of the ‘Old World’.

So while the Eurosceptics of Westminster would have us believe that the nation’s problems would be solved by our withdrawal from the EU, the reality is rather more prosaic.

By the same token, Lin’s portrayal of China as a ‘stabilising influence on the world economy is rather at odds with the highly destabilising effects of cheap money generated by China’s trade surplus on the world money markets in the early 21^st century.

This article was commissioned and written for Investment Week