January 24, 2020 / 10:42 AM / 24 days ago

Breakingviews - Hadas: Davos-economics faces political puzzles

LONDON (Reuters Breakingviews) - The core of Davos-economics is pretty simple. Most of the powerful people hanging around at the World Economic Forum’s Swiss confab this week would agree that some mix of feisty private sectors, competent but limited governments and ample international trade are crucial ingredients for durable and increasing prosperity. The politics these days are challenging that simple consensus. Consider three important global puzzles – China, the United Kingdom and Ethiopia.

A general view shows a screen with the logo of the World Economic Forum (WEF) at the congress center, venue of the annual meeting, in Davos, Switzerland January 19, 2020.

The political economy of the Middle Kingdom has followed the Davos-preferred model fairly closely. A strong government encouraged a rapidly expanding private sector, which built up technological excellence though extensive cross-border trade. The Davos recipe has cooked up steady, rapid growth: an annual 6.1% per capita rate in the most recent five years, according to International Monetary Fund data.

True, Davos types have not been entirely enthusiastic. A decade of shrinking civil liberties may cause some qualms, but their more serious concerns are intellectual property theft, breakneck credit expansion and excessive investments in basic infrastructure. Now, though, a bigger issue has emerged.

It increasingly looks like strongman Xi Jinping is moving further away from Davos-economics. He wants China to depend less on the rest of the world and to concentrate its trade and investment on economically dependent countries. Domestically, the ruling Communist Party will exercise tighter control on every part of the private sector.

China-watchers still debate the details of Xi-onomics. However, it is reasonable to expect the economic orientation to follow the Communist Party’s increasingly aggressive-paranoid politics. That means China will not follow the Davos orthodoxy, set by South Korea and Taiwan, of letting private enterprise play a more important economic role as prosperity increases.

Davos-economics predicts that such heresy will bring about its own punishment. In the conventional model, ideological control of the private sector will sap entrepreneurial vitality, while limited political freedom will lead to poor government policies. Technology will lag and growth will slow. Corruption and cronyism will worsen, although that might not bother some Davos attendees.

However, the consensus could well be wrong. There are no relevant historical precedents for the development of a modern industrial economy in a country as large as China, even before considering the unknowable effects of the unprecedented decline in the nation’s population of working age, set to shrink by 7% between 2018 and 2030, according to the Economist Intelligence Unit. China may set some new economic rules.

Economists can be more confident when it comes to Britain. They make a strong case that free cross-border trade is good for overall prosperity, but that the government of Prime Minister Boris Johnson does not understand the true nature of trade freedom. The imminent departure from the European Union’s large, well-integrated single market will make UK’s trade substantially less free, even if it signs new agreements with other countries.

The experts are so confident that many of them do not believe Johnson will actually keep one of his many and shifting promises – to move far from EU rules. These cynics expect what is sometimes called BRINO – “Brexit in name only”. That would be a clear pre-emptive victory for Davos-economics.

Suppose, though, Johnson sticks to his most recently acquired principles. Then the Davos crowd could only sit back and watch the face-off between the supposedly liberated British entrepreneurial and diplomatic energy, and the global economy’s actual constraints. Anything less bad than a steady relative British decline would dent Davos-goers’ worldview.

Ethiopia provides a similar test of the conventional wisdom, but in the other direction. Abiy Ahmed, the relatively young prime minister and Nobel Peace Prize winner, seems intent on following global best practice in his quest to pull the country into lower middle-income status by 2025. 

Following the Davos recipe, he proposes large and centrally controlled investments in infrastructure, targeted encouragement of privately owned export industries, and a greater reliance on foreign money and expertise. Naturally enough, the Davos crowd is cheering him on.

The main ingredients seem to be there. Ethiopia’s birth rate has fallen from 6.9 to 4.2 children per woman in the last 20 years. That’s still uncomfortably high for rapid growth, but the trend is helpful. Recent growth sets a helpful base. Annual GDP growth rate per person has compounded at a 7% rate over the last five years, according to the World Bank.

The country seems well placed for what development economist Walt Rostow called “take-off”. It’s a Davos dream. The momentum of economic development becomes so powerful that it brings growth-enhancing social and political changes in its wake.

If Abiy fails, the experts can try blaming the violent internal conflicts, oversized military and rampant corruption which have been disrupting Ethiopian growth since at least the war for Eritrean independence, which started in the 1960s. Still, a false start now would be a blow to the Davos worldview.

Not that the Davos crowd are likely to ask themselves hard questions over their Alpine apres-ski drinks. They were barely shaken by the 2009 financial crisis, which discredited one established branch of standard economic thinking. Outsiders, though, can watch and wonder. Maybe the rich and the powerful do not really understand what is going on.

Breakingviews

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