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Translation - English Translation: English
[Experts Speak]
Has the Global Economy Entered a 'new mediocre' era?
The principles of 'the Banality of Evil' are not only popular in the world of political studies, apparently they have a tendency to spread into the field of economics too. For instance, the term 'new mediocre' has begun to gain popularity.
The term's originator is the International Monetary Fund’s (IMF) Managing Director, Christine Lagarde. Recently at the IMF's autumn annual meeting she called for member nations to adopt bold policies to spur on economic growth and avoid the global economy descending into a new mediocre. Has the world really descended into a new mediocre? Opinions from different circles are not united on the matter, for instance the Financial Times’ chief economics commentator Martin Wolf called for the economic slowdown not to be exaggerated. In fact the gap between many people's opinions on the world economy is growing—there is not a great deal of controversy surrounding the slowdown of emerging economies and Europe's return to recession—the major focus of debate is actually China's slow down and the U.S. recovery.
Let us look first at China. According to the official conclusion of the IMF's International Comparison Programme, in accordance with the Purchasing Power Parity standard, China's economy of scale of 176,000 U.S. dollars has officially made it the world’s leading economy. The U.S. economy of scale has been estimated at 174,000 U.S. dollars. As compared with the popular Japanese lead of the 1980s, the arrival of China's lead appears to be far more controversial, so we must ask whether or not the IMF's conclusion is reasonable? The authority of the source is not in question, and in fact the conclusion is by no means unexpected as there had already been a prognostic report on the matter. The key lies in one of the preconditions upon which the conclusion is founded, that being the belief that the Renminbi's true exchange rate had been undervalued, and following the adjustment of the exchange rate, China consequently emerged as the world’s leading economy.
Even so, the IMF's conclusion still reveals two points. Firstly, though the exchange rate adjustment was only nominal, the symbolic significance of China mounting first place as the world's largest economy remains worth contemplating. This in itself signifies a change in the structure of the world economy. That being, given China's increased magnitude a sustained slowdown in its growth would make it difficult for China to match past contributions to global growth. This in turn would imply a a slowdown in growth for the worlds economy as a whole. In light of Chinese official's declaration that they are willing to tolerate “around 7.5%” in annual growth, it is clear that the large-scale stimulus plans of the past will not recur, and there is therefore very little doubt about a slowdown in the Chinese economy's growth rate.
Secondly, economists always place more importance on changes in per capita income and China's aggregate economy. As for changes in China's per capita income what essential shifts will that actually bring about? This will depend upon whether or not China can traverse the middle-income trap. Should this go smoothly then the growth in China's per capita income may decelerate in the wake of a slowdown in the economy and cyclical changes in the population. However, in future China will draw close to the peak in the rank of middle-income countries.
Looking back, the transition from new normal to new mediocre in fact expresses the people's dwindling patience in the face of slowing growth. The truth of the matter is that if there is not more external stimulus and technological change then the slowdown may last even longer. In the near future the IMF will reduce its prediction for the 2014 global economic growth rate to 3.3%, 3.8% in 2015, and this is not the first such reduction. But in fact, in human economic history growth surpassing 3% is by no means substandard, to be able to avoid stagnation and even a new crisis is the top priority of the global economy. In the last twenty to thirty years we have witnessed far too much creation of wealth and too many economic miracles, thanks to the contributions of all of the new economies growth has virtually come to be seen as a given. However, economic growth also goes through cycles and has absolute boundaries. The economic leap brought about by technological advances absolutely must not become our definition of normal economic conditions. Perhaps the so-called new mediocre or new normal are simply nothing but a return to ordinary rates of growth.
Looking back, the global economic prosperity of the last 30 years was in essence the outcome of a large group of later-developing nations with China at their core joining the tide of globalisation. With China at the core of this process a labour force of billions entered the global industrial labour chain. This not only offered resource rich countries such as Russia, Brazil and Australia a free ride to growth, but also offered nations such as the US to benefit from dividends to the consumer. Therefore if China’s economy were to slow down those affected would certainly not be limited to China itself, it would impact virtually all the nations of the world.
What makes matters worse is that even though the U.S. is considered to be the economy which recovered best amongst western nations, it still bears no comparison with former years of economic prosperity. The key to this is that the U.S. never truly recovered from the economic maladies it accumulated over the last 30 years. For instance, public debt accounts the highest proportion of U.S. GDP since the war and its leverage ratio is hovering close to its highest ever point. Remedying these problems will require reform, market clearing, and technological rejuvenation, as well as time.
For precisely these reasons mediocrity is not the evil of the economy. One of the characteristics of the contemporary credit-economy is fluctuation; the occurrence of financial crises is difficult to avoid and how to reign in the crisis is a far more pressing problem than low-growth. In mid-October global markets fell into instability once again. America’s treasury yields for a ten-year period tumbled to less than 2%, whereas Greece’s standard treasury yields once again rose above 9%. The two are equally uncommon in recent years. Considering this, perhaps the mediocre is a necessity of happy economic life, a placid period within the fluctuating cycle, soberly awaiting the arrival of the next wave of technological advances, followed by a new round of crisis and rejuvenation.
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Bachelor's degree - The School of Oriental and African Studies, University of London
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