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Who is in charge?

2020-08-16T01:55:00.650Z


The US and China are splitting the world. Alliances, economic models and value chains will change


Tomás Ondarra

Memory is short and we forget that about 10 years ago we were at a time when the system crashed. As then, the economic crisis derived from this health tragedy blatantly shows the failures of the capitalism and society model and, something that includes, entangles and complicates the above, the power of China. The United States, the leader of the Western world, wants to retreat at home without losing its foreign power with what some call the Trump doctrine. At the same time, the Empire of the Center is determined to occupy the space left by the leader in the global economy. Meanwhile, in Europe, it is expected that the recent agreements can remedy the Brexit fractures and, above all, the pandemic. But, almost inevitably, the voiceless continent is moving away from the center.

What made it possible to get out of the global financial crisis of 2008? Above all, dialogue and coordinated action. In search of a solution, President Bush summoned the G20 heads of state and for the first time the North and the South met as partners and, since then, the equivalent of the Western countries, the G7, has not been heard. But the global American initiatives did not last long. At the same time, the South took the opportunity to launch various proposals for dialogue. On the one hand, Brazil, Russia, India, China and South Africa formed the first group not supervised by Western countries, the BRICS, with a spirit of collaboration and ambition for global influence. A little later, in 2013, China, wanting to mark territory of influence, launched the new Silk Road. Although initially limited to integrating its natural market countries in Asia, the initiative has managed to attract 141 states.

Other indicators soon showed us the leadership of Beijing. During the crisis, while the United States contracted its GDP -2.5%, and only started to grow as of 2010, China remained very solid, growing between 9% and 10%. It was also then that it became the leading manufacturing power, while Western growth has been disappointing instead.

The Chinese character of the crisis is also interpreted as opportunity. And that was the moment when Chinese companies took advantage of their international expansion. The initial intention was to ensure the supply of raw materials: Brazilian iron ore, Chilean and Peruvian copper, Venezuelan oil ... (or Brazilian, Iraqi, Angolan and Saudi Arabian, when Venezuela entered its serious crisis). At the same time, it accelerated the purchase of American treasury bonds.

At the same time, Chinese multinationals began to compete in technology products and services with leading American companies, which had dominated the business world since World War II. This change in roles is evidenced in the Global 500 ranking by Fortune magazine, where there are currently 121 American companies and a similar number of Chinese companies (119), dominating industries such as banking, large construction, engineering or smartphones. In the latter market, only the American Apple remains, with its iPhones, among the five largest companies by sales. In the middle of the trade war, Huawei has gained its market share from Apple and is the second largest in the world, mainly due to the fall in iPhone sales in China. At this stage, China also demonstrated its know-how in large infrastructure projects, replicating its domestic successes: highways in Sri Lanka, the train from Addis Ababa to Djibouti or the construction of a dam in Argentina, to name just a few examples.

In addition to military force, power is measured by economic growth and, in particular, by innovation. Another characteristic of the exit from the 2008 crisis is that the countries bet on innovation, so that spending on R & D & I began to grow above GDP growth. According to the Global Innovation Index, the private sector saw the need to think long-term, and the great technological achievements of the last decade are clear: the penetration of mobile telecommunications, Internet coverage and, not always for the better, the power of big technology: the American companies Microsoft, Amazon, Facebook, Alphabet and Apple, and the Chinese companies Baidu, Alibaba, or Tencent, whose dominance on a planetary scale is unquestionable, both in terms of their valuations on the stock market and in our lives.

In terms of economic models, while the West continued with the little questioned dogma of increasing shareholder value, Chinese companies focused on medium and long-term value, and on keeping the cost structure tightly controlled in all its operations. major components: salaries, cost of electricity, gasoline ... Even at the highest level, the average salary of the CEOs of the 500 largest American companies is 13 million dollars, while that of the Chinese does not reach the middle million.

We continue to demand that the Chinese economy bend to the dictates of liberal capitalism, but what incentive does it have to change when its success is evident? The battle for the new economic model is probably not going to be fought in the West, but in other emerging markets where much remains to be done. Latin America had no choice but to follow the doctrines of the Washington consensus that the World Bank and IMF imposed after the debt crisis. The pre and post pandemic results have left much to be desired.

At the same time, the coronavirus has encircled doctrines, and now all governments are intervening in the economy with very expansive fiscal packages, aid to those who need it most, and protection for companies. As The Economist comments in one of its latest issues, while in 2008 the principles of liberal economics were maintained, the pandemic has made us heretics of them. In addition, emerging countries have started to use for the first time a tool that is already common in Europe and the United States: Quantitative Easing, that is, the prerogative of the country's central bank to print local currency to buy debt from its corresponding government. Two countries as far away as Indonesia and Colombia have been pioneers and it is likely that, in the difficult situation in which we find ourselves, other southern countries will follow suit.

As we contemplate the various initiatives to alleviate the current crisis, we see that, unlike in 2008, dialogue does not exist this time, but rather that "for himself who can" prevails in the West. Although there was a G20 meeting in April under the presidency of Saudi Arabia, the noise of the techno-trade war between the United States and China largely dominates the consensus. From the boycott of Huawei promoted by President Trump to the closing of consulates, we are facing a battle that does not cease and that will dominate the next decade. Likewise, investment in innovation does not seem to be on the agenda of Western governments, who, overwhelmed by the pandemic, compete to see who launches the largest fiscal package, but more on the defensive than thinking in the long term. Thus, when consensus and collaboration would be needed more than ever, dispersion persists and the I command and impose. Fragmentation is seen not only between the North and South, but also within the West and within countries.

As this happens, the millions of infections continue to increase. And, surprisingly (or not), the Chinese economy grew 3.2% in the second quarter. And Beijing re-commits its investment in 5G networks, electric vehicles, artificial intelligence and facial recognition. The exit now more than then requires collaboration in multilateral organizations and courageous bets within a world more digital than ever.

But the controversy ignites the media without allowing a glimpse of the end of the crisis. Between globalization and deglobalization, the dollar and the renminbi, two leaders are splitting the world. Alliances, economic models and value chains will change. The data already point to a possible winner.

Lourdes Casanova is a professor and director of the Emerging Markets Institute. Cornell SC Johnson College of Business, Cornell University.

Source: elparis

All business articles on 2020-08-16

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