The two biggest global economic stories of last week were the free fall in Chinese stocks and anxieties about a Greek exit from the euro. Good news that both storms passed.
But as I discussed with the senior executives in Wharton Executive Education’s Advanced Management Program a couple of weeks ago, both crises are likely to recur because they are symptoms of the two biggest structural challenges facing the global economy in the next decade.
Can China execute a soft landing–politically as well as economically–from the heights of an unprecedented thirty plus years of double digit annual growth to the new normal and merely mortal growth rates closer to 5%?
Can Greece–and the whole the western world–maintain broad based prosperity in the face of the triple whammy of disruptive globalization and technology, ominous demographic demons, and the lodestone of massive government debt?
With growth in China already down to 7%, Xi Jingping’s government spent much of the last year using its economic muscle to juice the local stock market, doubling the market cap of the Shanghai and Shenzhen exchanges.
Xi focused on stocks for two reasons: First, after being the doldrums for a decade, he identified stocks as a new source of stimulus for China’s flagging economy. Second, amid stagnant wages and falling house prices, Xi wanted to put new money into average Chinese pockets.
When the markets panicked last month, no surprise the government went to extraordinary lengths to stabilize prices.
But Xi is playing a game with quickly diminishing returns. He knows the government must reduce its economic role because its state-owned enterprises are bloated and investment rates near 50% of GDP only create more inefficiency and excess capacity.
Doing so, and turning China into a consumption-led market economy, will inevitably and dramatically slow Chinese growth, maybe by about half.
And here’s the political rub. Strong growth with good jobs is the Chinese government’s ultimate, if not only, source of legitimacy. That’s why even relatively small economic hiccups lead to outsize government reactions.
The Chinese government is walking an economic and political tightrope, from investment and export-led towards middle class consumption-led growth in a one party system ill suited to it.
So far, largely so good. But there are many, tortuous acts left in this play.
The same is true in the west. At first blush, Grexit is about Greek profligacy and/or the fatal mismatch between Europe’s currency union and national budgetary autonomy.
But dig deeper, and Greece’s problems are endemic to the west. Greece is just less able than most to deal with them. France, Italy and Spain support the Greeks because they know they could be next. Even in the US, the core social feature of the Greek crisis, i.e. economic anxiety and pessimism, is widespread.
The success story of the west in the last century is well known. Lots of stable middle class jobs plus strong health and pension systems for most people. Not just the American dream, the western dream.
Now the dream is fading. The west is aging fast and having many fewer children. Rising health and pension liabilities are weighing down budgets as there are fewer taxpayers to foot the bill for more retirees with costlier health problems.
At the same time, the one-two punch of globalization and technology is disrupting and destabilizing employment for vast swathes of the middle class, not only in manufacturing but in white collar jobs from law and accounting to radiology and pathology.
Governments can’t respond with more spending because the public debt overhang following the global financial crisis is immense, with near 100% public debt to GDP ratios as far as the eye can see in most countries.
Economists have always believed that disruption, while painful in the short term, is ultimately the best fillip for the economy—Shumpeter’s “creative destruction.” Their faith has been borne out time and again since the industrial revolution nearly two hundred years ago.
Alas, this time it might be different. Technology and globalization have made Apple the most productive company in history. But its corporate work force is tiny. The same is true for most tech companies. A small number of incredibly productive people are thriving. But they are surrounded many more people trying to cobble together “contingent” lives of part time work with few benefits and no guarantees.
No wonder 60% of Greeks voted “no” to more austerity. No wonder inequality is looming as the biggest issue in next year’s American presidential election. No wonder governments seem inept and leadership seems absent in so many western countries.
Just as in China, generating a soft landing with widely shared benefits is challenge number one in the west. Just as in China, the stakes could not be higher, and the skill that will be needed to execute the transition is immense and seems in short supply. Greece is only the tip of the iceberg.
By: Geoffrey Garrett is Dean, Reliance Professor of Management and Private Enterprise, and Professor of Management at the Wharton School of the University of Pennsylvania.