In terms of economic performance and trends in standard of living over the past ten years or so, there couldn’t be two more contrasting cases than those of China and Greece. One was a roaring giant and the other a failing Lilliput. Over about two and a half decades China has taken tens of millions of people out of absolute poverty. In just about ten years the middle classes in Greece have been decimated and tens of thousands of people have been the victims of terrible austerity measures imposed over their country.
2015 has proved to be a watershed year for both countries as the sustainability of their existing mode of operations has come under pressure from both internal contradictions and the evolving external economic environment.
In the case of Greece the result has been the implosion of the economic system, with banks having to close down for weeks as the very rudiments of the system stopped functioning. Although it is also faced with a set of internal systemic contradictions coupled with a changing global economic environment, the story for China is totally different for two reasons.
The first has to do with size and the initial conditions which were prevailing before the “bubble” burst; for example, the colossal foreign exchange reserves, in US dollars to boot, and the tight control that the Communist Party still exercises on the national economy of the country. The second reason is with regard to the consequences which a crisis in China will have on the growth prospects of the global economy.
The jury is still out concerning what will happen in China. In the optimistic scenario – the so-called soft landing – the prediction is that the country’s GDP growth will slow down to as “low” as 6 or 6.5% by the end of 2017. The other view is that China is looking more and more likely to go the Japanese way – that it is on the verge of entering into a long period of stagnation and deflation similar to what is described in financial literature as Japan’s “lost decade.”
Greece: A failing state
The causes of the crisis in the Hellenic Republic are indisputably partly self-inflicted. There was a general tolerance of a populist impulse to take maximum benefit of the initial “largesses” of the European Union once the country had joined the league of “rich nations”. Meanwhile, the political and business leaders of the country were busy making the most of the situation by transferring public funds to private kitties through what has been described as a systematic network of corruption.
This process, which lasted for some time, bore all the characteristics of a failing state, in which institutions fail to perform their roles and private interests take precedence over general interest. The continuously widening gap between the standard of living and the real productive capacity of the country could clearly not last forever. When the music stopped and the harsh reality dawned upon the nation, the harm had already been done. The price to pay was to be extremely harsh for the most vulnerable sections of society, such as pensioners, as also for the middle classes in general.
The first lesson to be learnt is that indeed there is no such thing as a free lunch. After several governments from the traditional political parties had come and gone without any success in denting the downward spiral of the Greek economy, the people of Greece finally turned to a radical leftist party which was spectacularly voted to power in 2013 for the first time. The Syriza government, under the leadership of its young leader Tsipras – but inspired by the Finance Minister Varoufakis -, set out on a daunting battle to find a “way out” by proposing an economic reform programme which essentially aimed at spreading the burden of efforts and sacrifice fairly on different sections of society while protecting the most vulnerable.
This was immediately met by a formidable opposition from the infamous Troika consisting of the IMF, the European Union and the European Central Bank representing essentially the interest of the “money men” of Europe. After a long drawn out battle when Varoufakis threw the gauntlet the fight was predictably over, with a clear win of the financial “logic” imposing an austerity programme which even moderate economists describe as insane.
The IMF has belatedly agreed that Greece was insolvent and since its debt is unsustainable there could be no realistic and sustainable way out of the crisis without debt restructuring in which the creditors would have to carry their share of the burden. This has been forcefully rejected by the Europeans, led by Germany. The programme that has been finally “imposed” on Greece (Tsipras spoke of signing the deal with a knife to this throat) is one which makes little if any economic sense. The whole threat about Grexit (throwing Greece out of the Union) was an ideologically driven move to teach the peoples of Europe that you either toe the line or you are ‘exited” from the Club.
China: Talk of vision and radical change!
One may agree or disagree with them but the reforms introduced in China under the leadership of Deng Xiao Ping (Paramount leader of the Popular Republic of China from 1978-92) have laid the foundations of the rise of China as a major economic player in the global economy over the past nearly fifty years.
Deng Xiao Ping’s rallying cry of Four Modernizations based on the development of Industry, Agriculture, Defense and Science and Technology was the basis of the radical changes which he introduced in the existing system. His pragmatic approach was summed up in his statement that “it does not matter whether the cat is black or white so long as it catches the mouse.” Thus the PRC embarked on an interesting experience of “market socialism” quite reminiscent of Lenin’s New Economic Programme in the USSR after the 1917 Socialist Revolution.
The results of this new approach have been there for all to see and, in spite of the fall from favour of Deng Xiao Ping after his handling of the Tiananmen Square demonstrations, the reforms have not been repudiated. Almost half of a century into this experiment the first cracks have started to appear since the beginning of this year although no one would take the risk of a definitive judgement at this stage.
The central question which is being asked is of course related to the systemic risk posed by the contradiction between a Communist Party dominated political system and an increasingly market dominated economic infrastructure. The economic decision-making process, which remains opaque, coupled with the permanent power struggle along ideological lines between the “conservatives” and the more “liberal” strands in the Party, makes it very difficult to predict how this contradiction will be resolved in the medium and longer terms. What is certain is that the outcome one way or the other will have a serious impact on how the global economy will fare in the next decade or so.