Europe is on the decline. The US has its own problems. Meanwhile, China and India appear strong. But is it too soon pick the next global superpower? In this Q+A, Professor Geoffrey Garrett, CEO of the United States Studies Centre, explains how a complex picture could emerge from the global economic turmoil.
Are we seeing the new global economic order finally taking shape?
It's very hard to see how Western Europe can come back, not only because of today's debt problems but because the demographics in Western Europe just look so bad. The population is aging and Western Europe is not very immigrant friendly. And the debt, demography and immigration challenges in Japan are worse than Europe, so I don't see how the Japanese can come back either.
Let's go to the other end of the spectrum, India. India is 15 years or so behind China. And if you take Goldman Sachs' BRICs (Brazil, Russia, India and China) estimate for when India will pass the US in economic size, it's not until the second half of the century.
So the real action for the next 10-15 years is going to continue to be the US and China.
On the US side, I don't think the US has a fiscal crisis, in the sense of a sovereign debt crisis, at the moment. Its public debt is much lower than the European problem countries and it can still borrow money at very low interest rates, even after the credit downgrade.
The US problem in the short term is it is politically gridlocked and there's a standoff between American companies and American consumers.
The political gridlock we know about: the Tea Party is further to the right than the Republican Party have been for a long time. They believe in the old Ronald Regan mantra, that government is the problem not the solution. If you try to work with them, as Obama and the house speaker John Boehner tried in the debt ceiling crisis, you get burned.
There's no middle ground in American politics and that's terrible. But it's even worse because of the standoff between the American corporate sector and the American consumer.
Corporates are sitting with $US2 trillion or so on their balance sheets that they are not investing in the domestic economy. They are making lots of money off shore and not investing in the US. They will only invest in the US if they think the American consumer will come back. But the American consumer owes a lot of money on his or her house and is worried about their job prospects, so they are not spending. This is a self-reinforcing standoff and I don't know what will break it – perhaps a new round of quantitative easing.
But in the medium term, the US still has two things going for it that we shouldn't underestimate.
The first is that it is still the most innovative economy in the world by a long way and it is still a magnet for the most innovative people — and America remains more immigration-friendly than most western countries. Certainly, more than the Japanese or the Europeans.
Let's go to China. China has been a three decade economic miracle, but more recently the miracle is that the Chinese stimulus in 2009 essentially inoculated export-dependent China from the GFC, with great benefits for Australia. What we are looking at today is a question of whether China can or will do that again if there is a GFC II.
On that question there are two positions.
Position one says: Listen, China shot a lot of bullets in 2009 and it's not clear they have many left. Local and provincial government debt is high, there are lots of nonperforming loans, inflation is high, and there's probably a housing bubble.
But I favour the other position, which is that China will do another big investment infrastructure stimulus if the global economy really turns down because the Chinese government knows its legitimacy is contingent on continuing to deliver high rates of economic growth. So even if it is a stretch for the Chinese government, I think they are going to do it if pushed by negative global conditions.
In the short term, it may look even more like a China-dominated world, certainly in economic terms. But in the medium term, I still think it's far too early to write off the US.
What will the global economic order look like in 20 years?
I think we are probably already in a de-facto G2 (group of two superpowers) world, by default. It's de-facto because neither the US or China will talk about a G2; both prefer the G20. It's by default because Europe and Japan are doing so badly that they are leaving the field to China and the US.
Goldman Sachs talks about the BRICs – Brazil, Russia, India and China. Russia is never again going to be a global economic superpower – it has a lot of natural gas and that's very important in Europe, but it is no global power.
Brazil is doing very well, but largely because of its resource ties with China. It's just a bigger version of Australia in that regard.
So I think we are already in this de-facto G2 and I would expect that to continue for the next 15 years or so.
The Goldman Sachs prediction is that China will pass the US in terms of total GDP at market exchange rates in about 15 years. But even when that happens China will be a much poorer country than the US and I think it will still be a much less powerful country than the US.
How can it still be poorer and less powerful than the US if it has overtaken it economically?
Poor is obvious. The US will have 350 million people and China will have 1.2 billion people, so in per capita terms, the average Chinese will only be a third as rich as the average American.
If it comes to something like spending on the military, it's easier to do that when your country is richer — because bread and butter needs are already being met, so attention can be paid to other things.
Because of the US' technological lead in information and communication technology and the military, it's hard to see how even with the rates of investment China is making in those sectors, that they can catch up to the US anytime soon. China is still relying on adopting and adapting, legally and illegally, American technology for information and communications technology. They are also doing that in aerospace.
The reason China is so hell bent on keeping the growth rates high is that's where their political legitimacy comes from. The prospect of a move toward to democracy is always there in China. There are really only two questions: how long will it take before that happens and how peaceful will the transition be?
In China, inequality is a big story, the environment is a big story. These are profound issues for China.
Is China's astronomical growth holding the world together or tearing the old order apart?
China is going to be the first country on Earth, because of the one child policy, to grow old and develop a Western demographic profile while it's still a poor country. In the short term, China will look like the solution and the saviour to a lot of Australia's problems and the world's problems but in the medium terms China has major challenges.
If you are in Australia, China crops up in every conversation. Australia is in an unusual position in that it benefits from the economic rise of China more than most countries. So I think Australians tend to overestimate China a little.
Regarding the world economy, we actually have three threats at the moment. Most people only see two: the sovereign debt crisis in Europe and a real economy crisis in the US.
The third big question mark is whether the Chinese economic bubble will burst, with either the government letting it happen, or even by causing it to happen—by tighter monetary and fiscal policy.
But I still think the domestic political incentives for the Chinese government to respond to another global slow down by investing more money at home are still overwhelming.
So for Australia, we are already in mining boom mark two but there might be another boom in the next couple of years if Chinese government invests in more infrastructure projects. It needs Australian iron ore and coking coal to make steel for bridges, rails, airports and all the infrastructure development happening at such breakneck speed in China.