RACE TO THE CORE

Con­firmed: China is now, in real terms, the world’s sin­gle largest econ­omy, hav­ing over­taken the US in 2013 and the EU in 2016 – and keeps grow­ing at an an­nual 6-7% rate, while de­vel­oped coun­tries are usu­ally con­tent with 2-3%. Hun­dreds of mil­lions of peo­ple who used to live in poverty are rapidly im­prov­ing their lot. Yet, this is not just the usual rags-to-riches story – for it her­alds a major shift in the world’s power bal­ance.

Every mar­ket has a ge­o­graphic core where the most pro­duc­tive in­dus­tries con­cen­trate to gain syn­er­gies. High pro­duc­tiv­ity strength­ens the core’s com­pet­i­tive­ness and salaries, whereas pe­riph­ery pro­duc­ers must ex­ploit nat­ural re­sources and/or com­pete on low-wage, low-pro­duc­tiv­ity ac­tiv­i­ties. Con­trol­ling the global core made 19th-cen­tury Britain and 20th-cen­tury Amer­ica pros­per­ous and pow­er­ful. Today, how­ever, at­tracted by China’s mas­sive scale and rapid growth, the core is mov­ing east… thus turn­ing every­one else into pe­riph­ery. The rise of pop­ulisms re­flects cit­i­zens’ grow­ing dis­com­fort with their economies’ pe­riph­er­al­i­sa­tion. Yet, iron­i­cally, the mea­sures they es­pouse (au­thor­i­tar­i­an­ism, iso­la­tion­ism, in­ter­ven­tion­ism, spend­ing profli­gacy and mi­nor­ity de­mon­i­sa­tion) con­sti­tute the per­fect recipe to ac­cel­er­ate their economies’ de­cline.

For China’s great­est weak­ness is pre­cisely its au­thor­i­tar­i­an­ism. Chi­nese en­tre­pre­neurs may be­come mil­lion­aires fast but then, if they fall on the wrong side of po­lit­i­cal power, lose their wealth and free­dom overnight. They there­fore pre­fer to in­vest abroad when pos­si­ble, which cre­ates mas­sive cap­i­tal out­flows to­wards slug­gish-but-safe West­ern economies. This has al­lowed US and EU fi­nan­cial au­thor­i­ties to keep in­ter­est rates un­prece­dent­edly low (even neg­a­tive in the Eu­ro­zone!) and so boost their economies with­out trig­ger­ing in­fla­tion or de­val­u­a­tion. In­deed, the chief “prod­uct” West­ern economies offer (and Asian in­vestors buy) is ar­guably a free, safe, mer­i­to­cratic en­vi­ron­ment – the same, in­ci­den­tally, that keeps highly lib­er­alised economies (Switzer­land, Swe­den, US…) at the global in­no­va­tion fore­front de­spite their high salaries and tax­a­tion.

The West, how­ever, is sick. High pro­duc­tiv­ity and the wel­fare state used to make West­ern so­ci­eties ex­tra­or­di­nar­ily pros­per­ous and sta­ble but, as the core moves east, it puts them under stress – since wel­fare states are ex­pen­sive and only high-pro­duc­tiv­ity economies can sus­tain them. This de­fines two camps. Pop­ulists (e.g. Trump, Salvini, Maduro – left-wing pop­ulists being less suc­cess­ful in rich coun­tries – pro­pose au­thor­i­tar­ian, anti-glob­al­i­sa­tion poli­cies that please their vot­ers but would most likely de­stroy what makes their economies suc­cess­ful in the long run – like fish­er­men sell­ing their boats to pay for a hol­i­day. Con­versely, tech­nocrats (e.g. Obama, Clin­ton, Macron) sup­port glob­al­i­sa­tion and mer­i­toc­racy, but work­ing-class vot­ers sus­pect they would read­ily sac­ri­fice their wel­fare to such causes. Ul­ti­mately, pop­ulists de­fend priv­i­lege (e.g. cit­i­zens’ priv­i­leges over im­mi­grants’) and re­quire the state’s co­er­cion to en­force it, whereas tech­nocrats en­throne the mar­ket as the fun­da­men­tal re­source al­lo­ca­tion en­gine and use in­come re­dis­tri­b­u­tion to en­sure so­cial peace: no won­der tech­nocrats ac­cuse pop­ulists of to­tal­i­tar­i­an­ism while pop­ulists hurl back charges of ul­tra­l­ib­er­al­ism.

Cat­alo­nia, Spain’s largest in­dus­trial and, in many as­pects, most com­pet­i­tive re­gion, stands in a dif­fi­cult spot. De­vel­oped economies, as ex­plained above, be­come pe­riph­eral un­less they lever­age their strengths, but for this they must stop sub­si­dis­ing in­ef­fi­ciency. Yet Spain’s gov­ern­ments often do the op­po­site to curry vot­ers’ favour – and Cata­lans are an un­pop­u­lar mi­nor­ity. Spain there­fore im­poses a dis­pro­por­tion­ate fis­cal deficit on Cat­alo­nia, and spends bil­lions in crowd-pleas­ing, un­eco­nomic pro­jects else­where while let­ting Cat­alo­nia’s overused in­fra­struc­ture col­lapse. Hence, tech­nol­ogy and R&D in­vest­ments dwin­dle, pro­duc­tiv­ity re­mains stag­nant and so com­pet­i­tive­ness must rely on cheap labour – plus the sub­sidy that neg­a­tive Eu­ro­zone in­ter­est rates pro­vide to keep the wel­fare state afloat. One does not need a crys­tal ball to re­alise this is not sus­tain­able… So, watch this space: we may soon live in even more in­ter­est­ing times.

Orig­i­nal title: Race to the core: Cat­alo­nia and the global power strug­gle