Lehman crashed. But India, China and later, USA rose from 2008’s debris
The global economic crisis of 2008, triggered by the collapse of Lehman Brothers, gave Asia a chance to rise, and let nationalist leaders, including Donald Trump, emerge.
Every crisis carries an opportunity, and every opportunity a crisis. When economic crises are delivered on a global scale by irresponsible borrowings by governments or captured regulators turning a blind eye to companies’ misbehaviour, it often leads to unintended consequences.
On the eve of the 10th anniversary of the fall of Lehman Brothers, a point that triggered what is now known as the global economic crisis of 2008, this essay examines the two big consequences affecting the international political economy, consequences that we are beginning to take for granted — the emergence of three strong economies and the rise of five strongmen.
Since 15 September 2008, when the Lehman Brothers collapsed, and the world spiralled into an economic crisis, three countries have consolidated their position as growth drivers of the world — India and China have joined the US as the world’s growth engines.
In the nine years to 2017 (the latest comparable GDP at 2010 constant prices data available from the World Bank), while the US added $2.3 trillion to its GDP to touch $17.3 trillion, China added $5.1 trillion — more than double of what the US did — to become a $10.2 trillion economy. By adding $1.2 trillion to become a $2.6 trillion economy, India stood at third place.
Of the total $15.7 trillion additional GDP that the 19 countries comprising the G20 added, China’s share was an overwhelming 41.4%, way ahead of the US’s 18.5%. India’s share followed in third place at 10.1%.
For context, the combined GDP of these 19 countries is 76.9% of the world’s total GDP, while their share in GDP growth stands at 78.6%.
Apart from growth, this period also witnessed change in the economic sweepstakes of the global economy. Again, led by China and India, whose growth was ongoing and the results visible, something cracked during this period that turned this steady trend into a decisive fact.
Of the 19 countries, only five, or about a quarter of the sample, showed an increase in GDP in first post-crisis year, 2009.
China’s GDP rose by $474 billion, India’s by $117 billion, Indonesia by $31 billion, Australia by $21 billion, and South Korea by $7 billion.
Led by a fall of $474 billion in the US’s GDP, the world GDP contracted by $1.1 billion, then the size of the Australian economy.
The year 2009 also witnessed the biggest and irreversible economic event — riding a 9.4% growth that took its GDP of $6.1 trillion, China replaced Japan as the world’s second-largest economy, a position it has retained since. This was a turning point for the world, not just in economic terms but politically too as it coincided with the rise of the multi-designated strongman Xi Jinping.
Xi is General Secretary of the Communist Party of China, President of the People's Republic of China, and Chairman of the Central Military Commission. He is also the country’s ‘paramount’ and ‘core’ leader. The signature of Xi’s multi-designated leadership is hydra-headed — from using economic might to push countries like Sri Lanka and Pakistan towards bankruptcy, to abusing military power to bully and dominate the tiny Bhutan, the hydras are as vicious as they are strong.
From Malaysia to Sri Lanka, Xi’s Belt and Road Initiative is meeting resistance in once country after another. In the face of the strongman from the US (more below), Xi’s challenges are expected to rise.
Following China and the US, the biggest rise in global rankings has come from India. After it crossed Russia to become the world’s tenth-largest economy in 2009, India ousted Canada and took the 9th rank in 2010, where it stayed till 2013. In 2014, it crossed Italy to take the 8th position, in 2017, it beat Brazil to become the 7th largest economy and, on a GDP of $2.6 trillion, while it has crossed France already, all indications point to it becoming the world’s 5th largest economy.
Although the baton of this growth was handed over to the Indian strongman Prime Minister Narendra Modi by his economist predecessor Manmohan Singh, this feat is nothing short of remarkable. Between Singh’s six tumultuous post-crisis years (from 2008 to 2014) and Modi thereafter, India finally seems to be finding its economic mojo.
While Singh was strong on thought but weak in execution, Modi is an executer par excellence.
Using a mix of old policy ideas like the Goods and Services Tax, a three-decade-old idea, or new ones like demonetisation and the Insolvency and Bankruptcy Code, Modi’s signature on the economy is often seen to be controversial but clear and unambiguous. Whether these translate into another political term in 2019 is an open question.
…the US consolidates…
Despite being the epicentre and the cause of the crisis, the US managed to retain its No. 1 slot as the world’s largest economy through the decade.
George Bush oversaw the crisis in his last few months’ tenure, Barack Obama’s two terms rode through it — and since January 2017, the country discovered and elected its own strongman President Donald Trump.
With the power of a $19.5 trillion economy behind him, Trump has unleashed a massive political economy disruption on the world across geographies, from North Korea and Iran to Europe and China. While his sanctions on Iran and Turkey could have select economic implications beyond their boundaries, his trade war against China will definitely impact the world.
Concurrently, he has also been able to deliver high economic growth with low unemployment numbers. You may laugh at his tweets, condemn his shifts, criticise the fact that he is unable to retain a team — but the on-ground results are there for all to see.
Apart from domestic economics, he has reset Asia — a dialogue with North Korea has reduced the power of China, sanctions on Russia and a trade war with China have got the two authoritarian regimes to work together, Iran is on the backfoot, and other countries, including India, concerned.
How this plays out remains to be seen.
…and Turkey and Russia stagnate
The strongman of Turkey, who served as the nation’s Prime Minister between 2003 and 2014, and as President since then, has delivered fair economic growth — but possibly at the cost of freedom for Turkish citizens.
Between 2008 and 2017, its GDP has grown by 5.5% to $1.2 trillion.
But this growth has come with costs on three fronts. First, it has widened its current account deficit to more than 5.5%. Second, its inflation rate stands at more than 17%, the highest in 15 years. And third, the Turkish lira has collapsed by more than 40% since the beginning of 2018.
This strongman will need all his strength to manoeuvre the economy back on track. But with economic freedom under check, and US sanctions doing their bit, chances of that happening are low.
More than the 2008 crisis, it is his actions in 2018 that will decide the course of this nation.
The consolidation of strongman Vladimir Putin, now in his fourth term, and, like his friend across the border, Xi, possibly a President for Life, has not done anything for the Russian economy. Between 2008 and 2017, the economy grew by just $97 billion, or at 0.6% per annum to stand at $1.7 trillion.
What the economy does have is defence capability, a common interest with China — and a common enemy in the US. Even if it were to come out of its two-year-long recession, the Russian economy seems to be going nowhere. Worse, its population is aging, the footprint of the state looms large on the economy and it faces governance and institutional challenges.
Like Erdogan, Putin will face domestic pressures to reform, the lack of which could push the country over the edge of stability.
The economic crisis presented an opportunity through the eastward shift of economic power.
China’s Xi and India’s Singh-Modi combine grabbed that opportunity and ran with it, while Russia’s Putin and Turkey’s Erdogan are standing on thin ice.
In the West, Trump has managed to keep growth on track, no mean feat for an economy of its size. Europe is trying and will likely succeed in remaining above water — but growth will be a difficult venture.
That said, crises will never end.
They are no longer a black swan. They are par for the course.
A new crisis is brewing in the form of trade wars and economic nationalism. Which countries translate this crisis into an opportunity will decide the economic destinies of their nations.
This commentary originally appeared in DailyO.
Gautam Chikermane (Vice-Pt ORF)
25 September 2018