A few weeks ago in this column I spoke of a report based on UN and other international studies that held that, despite the distressful events and conditions we see in the world, from abject poverty to warfare, human beings are better off than ever before in all aspects of life. While most of what the study mentioned was true, a closer scrutiny of the figures reveals that a large proportion of this progress took place in two countries: India and China, with a combined population of about 2.5 billion or nearly a third of the world's population. China, which alone has 1,376 million people, has become a pillar of the global economy with a GDP of over $18 trillion, when adjusted by purchasing power parity (PPP), or slightly larger than that of the US, or a GDP of more than $11 trillion without that adjustment, which places China squarely as the second largest economy in the world. All this is great news for the millions of people who have emerged from the straits of extreme poverty and destitution to pastures of comfort and security. However, such happy news can sometimes become a burden when an enormous quantity of wealth becomes subject to the financial and fiscal policies of a sovereign state. In a globalised world this means that the Chinese people are not the only ones who are affected by the decisions of their government. The entire world is affected, inclusive of the millions of disadvantaged who are unable to sustain the consequences of unsound decisions taken in Beijing. This is what happened on that “black Monday” of 24 August when the Shanghai Stock Exchange took a nine per cent plunge, causing all other exchanges in the world to teeter and shake. The world watched with bated breath until the Chinese Central Bank stepped in to enable the stock market in China to recover and, with it, markets elsewhere around the world. It was an unprecedented experience. Still, the fact that those markets recovered their losses does not solve the dilemma of the world economy. It remains unpredictable and prone to sudden fluctuations. The problem, quite simply, is that while China has become an important part of the global economy, it is not part of the global fiscal order. The Chinese yuan is not listed among the “free” currencies whose value is determined by international market forces. Rather its rate is set by decisions taken by the government in Beijing. When we consider the many reasons behind China's modern economic surge one stands out: the policy of sustaining an artificially low exchange rate for the yuan with respect to the dollar. This had two consequences. First, Chinese exports cost less than those of their competitors and were thus better able to penetrate foreign markets and drive out rivals. Second, it was relatively cheap to invest in China, which became a Mecca for international investment. Exports and foreign investments enabled China to accumulate hard currency reserves worth some $4 trillion, which, in turn, put it in a position to manipulate the entire global economy. This is not just economic power: it is political power, and it is anyone's guess as to when China will begin to flex this muscle. What China did is not new in the history of the world economy. The Japanese economic miracle, too, was made possible by sustaining an artificially low exchange rate for the yen, which had remained fixed at 360 yen to the dollar from the end of World War II to the beginning of the 1970s. By means of that “American pinning” of the yen, Japanese export trade and foreign investment in Japan not only generated the “economic miracle”, Japan was poised to take the helm of the international economy. The phenomenon led some to ask who actually won the Second World War in the end. I am not an economist. Perhaps some of the information in this article is not as precise as it should be. But it seems very clear that the world is in a state of turmoil with powerful shocks occurring quite regularly every decade (the bursting of the Japanese economic bubble in 1992, followed by the Asian crisis in 1998, the global financial crisis of 2008 and, now, the collapse of international stock markets and their rise again in August 2015). Was that stock market plunge one day and recovery the next just a coincidence or a computer error, as some sources speculated? Or was it training in economic muscle flexing? Or was it because an unwise ruling clique in a country that is still communist controls the price of the currency of one of the most important capitalist economies of today's world? The turmoil is not just a product of the decisions taken in China with regard to the yuan. It extends to oil prices, which stood at $115 per barrel in June 2014 and plummeted to $40 per barrel by February 2015. Then, contrary to predictions that the prices would continue to decline, they rose to $63 in June, only to drop again suddenly to $40 in tandem with the recent financial crisis, after which they rose once more as stock markets recovered. Such swings are not justified by the laws of supply and demand. Of course, the state of turmoil extends beyond the global economy. In fact, it is perhaps more acute in the world of politics where the political environment has been in upheaval from youth revolutions, through the rise of Islamist organisations with a past, such as the Muslim Brotherhood, to the proliferation of terrorist groups and movements and their interweaving beneath such umbrella organisations as Al-Qaeda and, then, suddenly the outbreak of numerous wars, not least of which is that between Al-Qaeda, which has declared it allegiance to the Taliban's “emirate of the faithful”, and IS and its self-declared “caliphate”. All of this, which is only a drop in the larger ocean of confusion, is difficult to grasp. Undoubtedly, this is because societies have come to move so fast, as have technologies as well as transnational and transcontinental developments, whether in trade, investment and currency prices, or organised crime, or ideas and ideologies, some of which propel us toward madness while others could provide us with wisdom. Is this just how the world is at the outset of 21st century, and countries, groups and individuals simply have to get used to it and deal with it? If so, fine. But how? That is the question. The writer is chairman of the board, CEO, and director of the Regional Centre for Strategic Studies.
