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Asia in the global economic disorder

Jayati Ghosh

Capitalism is all about growth, its essence is accumulation. Therefore, in terms of its own logic, the essential criterion of success has to be the expansion of aggregate incomes. This is what makes recent tendencies significant, because it is now beyond doubt that we are in a period of global capitalist stagnation and instability. Over the past decade, the world economy expanded at an estimated average of 3.3 per cent per annum over the past ten years, compared to 4.5 per cent in the period 2000 to 2007 (IMF World Economic Outlook October 2018). The years since 2014 have seen virtual stagnation, with more volatility accompanied by increasing inequality. What is more, the much-vaunted “recovery” that has been much touted by various international organisations is limited, fragile and unsteady.

The last decade has also demolished another myth that was widely perpetrated during the earlier boom: that of “decoupling”, or the divergence of growth in some major emerging markets (such as China, India and Brazil) from that of the advanced economies. This over-optimistic perception derived from only a very short period in the 2000s, essentially from 2002 to 2008. Over this period, advanced economies expanded by around 2 per cent per annum, while the emerging market and developing countries grew faster and at accelerating rates. But the Global Financial Crisis put paid to that, and this brief divergence turned out to be an aberration from the longer historical trend. Both the global crisis and the subsequent period have unfortunately confirmed the continued economic dependence of the periphery on the capitalist core of the world economy. This unfolding of the global crisis was perhaps the most striking example of this: while it originated in the United States and then spread to Europe, it immediately affected the emerging markets in the developing world, even those with current account surpluses and other signs of economic strength, by impacting on cross-border capital flows. Since then, GDP growth rates of these two categories of economies have generally moved together. Indeed, because emerging and developing countries had higher growth rates earlier, they have experienced sharper slowdowns subsequently.

Nevertheless, this is supposed to be “the Asian century”. The spectacular rise of China and the overall dynamism of the Asian region created the widespread perception that Western capitalism is stagnant and moribund, unlike Asian capitalism that will show rapid growth and create a new geo-economic balance. Developments in the wake of the Global Financial Crisis appeared to confirm this: while growth rates in Asia (and in the largest economies of China and India) dipped in 2009 just as they did in most of the world, the recovery was rapid and subsequent rates of growth remained higher than elsewhere.

But the optimistic view of the new emerging growth pole in the East missed the evidence that the greater dynamism of Asia was mostly due to a tiny set of countries: first Japan and South Korea until the late 1980s, and China in the current century. And Chinese exceptionalism has been just that – exceptional, based on the astute use of heterodox economic policies by a heavily centralised and controlling state. More to the point, since the global crisis, the recovery and expansion in almost all the major economies of Asia have been heavily based on debt. Even in China, debt to GDP ratios have more than doubled since before the crisis, and in many other Asian economies, certain forms of debt (especially in housing and personal finance as well as corporate loans) have reached alarming proportions. In Asia – perhaps even more than in the advanced economies – the strategy of inducing recovery through credit expansion has increased fragilities (like asset price inflation and debt-driven cycles) that could generate another crisis in future. This is already evident in India, where the overhang of bad corporate loans has become a drag on bank lending and on private investment, leading to absolute reductions in investment over the past few years.

One of the most widely remarked features of recent world trade has been the dramatic emergence of China as a substantial player in global trade, not only because its exports have penetrated nearly all countries’ markets, but because it had become a major destination for developing country exports, for both raw material and intermediate exports in particular. Rapid export-led growth in China was the most significant factor behind the growth acceleration in large parts of the developing world from 2002 onwards. By generating a wide set of global value chains that drew in raw materials and intermediate goods imports from large parts of the developing world across hemispheres to enable processing for export to the developed countries, China played something of the role of the lead goose in the much-discussed “flying geese model”. For developing countries, this affected both volumes and values of merchandise exports. China’s demand drove up the prices of many primary products, leading to terms of trade improvements that contributed hugely to increased incomes in primary exporting countries.

The growing weight of China in world trade and investment had major effects globally: China became the biggest source of manufactured goods imports for most countries, whether developed or developing. Its voracious demand for raw materials and intermediate goods to be processed into exports largely meant for Northern markets changed the terms of trade and volume of exports for many primary-product (agricultural and mineral raw materials) producing countries and brought more countries into manufacturing value chains. Even though, simultaneously, cheaper manufactured goods from China did flood markets not only in advanced countries but also across developing nations, affecting their rates and patterns of industrialisation, the overall effect on income growth in developing countries was definitely positive.

In addition, partly because of the ability to channel the foreign exchange surpluses built up through years of positive net exports and significant capital inflows, Chinese capital became a significant player in the ongoing struggle for control over economic territory across the world. Some of these moves on the capital account certainly benefited developing countries, as China’s aid, loans and FDI into emerging markets and developing countries dwarfed the relatively small and declining contributions of advanced economies. A significant part of Chinese foreign aid (described as funds for development co-operation) was directed to infrastructure projects, especially in Southeast Asia, Latin America and Africa, and these had direct and indirect effects on growth prospects in the recipient countries. By 2014 the China Development Bank and the China Eximbank had become among the most active development lenders, dwarfing traditional lenders like the World Bank. Since the mid-2000s, Chinese direct and indirect financing of infrastructure investment in Sub-Saharan Africa has dominated over all other external players, including G7 countries. Unlike the foreign aid and capital flows from the northern advanced economies, Chinese investment, aid and loans have been overwhelmingly directed towards infrastructure expansion, particularly in the transport and energy sectors.

Such a pattern clearly suggests the potential for China to become a significant global economic player. But the hyperbolic accounts of Chinese economic strength risk overstating its current significance. In 2017, China accounted for less than 9 per cent of global output on the basis of market exchange rates at constant 2005 US dollars. Despite dramatic increases in income, its per capita GDP was only around 45 per cent of the global average, and still just a fraction of the average for the major economies of the imperialist core, for example only 15 per cent of US per capita income art market exchange rates.[i] In relative terms, China remains a “poor” country. The sheer size of its population nevertheless means that its potential as both a supplier and a market for goods in global trade is undoubtedly immense.

Also, China is unlikely to play the same role of providing a much-needed demand impetus for developing country exports that it played in the earlier decade, based on incorporation into larger global value chains directed to serving core capitalist economies. The possibility of Asia becoming a viable alternative growth pole for the world economy is thereby undermined unless a completely new strategy can be put in place that actually provides China and other peripheral economies to engage in ways that do not rely on Northern expansion.

Various initiatives, including the regional and plurilateral projects like the New Development Bank of the BRICS countries and the Asia Infrastructure Investment Bank, but most of all through the ambitious Belt and Road Initiative (BRI).  However, while the BRI is extensive in its ambition and geographical coverage, the resources thus far proposed are insufficient to meet the goals, which would require several trillion US dollars’ worth of resources over the next few years. The expectation is that other sources of funding will be mobilised, in the form of Public-Private Partnerships. So other governments of the countries involved in these plans are supposed to be involved through commitments and investment guarantees – after which the investment would still finally depend on the inclinations of private parties, who are notoriously hesitant and fickle with respect to infrastructure investment. All this means that the investments that will fructify will be less significant relative to the size of the host economies. Further, the time period over which these are being envisaged is fairly long and so will the investments would not generate immediate dramatic impacts. In any case, the amount of expected co-financing required in several projects makes them less generous and less affordable for the recipient countries. 

What is perhaps most surprising is that the Chinese BRI strategy appears to have bought into several features of neoliberal globalisation, including deeper financial integration, protection of various kinds for private investors through “investment facilitation” and very extensive trade liberalisation that are proposed for all the partner countries in this initiative. This is unexpected, given that China’s own development success has been based on a much more heterodox and state-controlled approach. So it may generate some growth in partner countries, but it will also accentuate inequalities. And, if such an approach does indeed become the norm, then the BRI and similar strategies spearheaded by China would not be enough to meet the challenge of injecting demand into the world economy in a way that would save global capitalism from itself.



[i] Based on World Bank World Development Indicators online, accessed 12 November 2017.


Asia capitalism China economy neoliberalism