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Brewing up a model to refresh the economy
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LAO Tzu, an ancient Chinese sage, once famously said that administering a state is comparable to preparing a fish stew.
His point was that governing a state demands the same qualities of patience, balance and moderation required in making a tasty meal.
About 2,500 years later, a modern-day financial official adapted Lao Tzu’s aphorism, with her own take.
At a recent lecture commemorating the 30th anniversary of the founding of Fudan University’s School of Management, Christine Lagarde, managing director of the IMF, used tea making as a metaphor to illustrate what she thinks are the necessary ingredients for developing a better economy in 2015 and beyond.
“We’re still feeling that bitter aftertaste (more than six years after the global financial crisis), a sour taste that you feel when the tea has brewed for too long,” said Lagarde, referring to the lingering legacies of the crisis.
Describing herself as a “tea addict,” she observed that it takes a set of factors to get the world economy back on track — “ingredients,” “discipline,” “timing” and “focus” — exactly the elements required to brew a good, strong cup of tea.
Lagarde says that the world economy has been weighed down a “little bit” by low growth, high debt and high unemployment, which combined to exert pressure on the IMF to lower its forecasts for global economic growth to 3.5 percent for 2015 and 3.7 percent for 2016.
And a host of risks threaten to cast a pall of uncertainty over the economic future. According to Lagarde, the US monetary tightening, the scheduled volume or pace of which was not yet defined, might trigger excessive volatility in global financial markets.
Other risks abound.
A stronger US dollar doesn’t augur well for countries that have borrowed heavily in dollar-denominated loans, which portend debt crises; the “low-low” situation plaguing the eurozone and Japan, meaning low inflation and low growth; geopolitical risks such as conflicts and disasters. They can all affect a nation’s economic prospects, and warrant a strong policy “recipe”.
Lagarde’s recipe
Lagarde’s “recipe” is structural reform, which means different things to different nations.
“For some countries, it could be significant investments in infrastructure; for some it could be pressing ahead with trade liberalization or reforms in education, health care and social security net; for some it could be deregulating the labor or service market,” she said.
She went on, explaining that “the base we have for policy-making — just as Darjeeling was to my mother’s tea — is structural reform.” One needs to look no further than China to realize how important structural reform is for a country’s economic fortunes.
The taste of China’s new cup of economic “tea” will depend on the results of the ongoing structural reform.
For a long time, the ability to “reinvent itself” has been China’s secret to its successful transformation from an inward-looking economy to a much more open economy, Lagarde noted.
Biggest challenge
The biggest challenge for China’s economy, as she saw it, is not to fall into the middle-income trap, since it officially aspires to the status of a middle-income country by 2030.
“This is why China inaugurated key structural reforms to lift incomes and living standards in the long term. This reform will hopefully lead to new norms of slower, safer, and more sustainable growth that is desirable,” she said.
It is against this background that the IMF forecast GDP growth for China this year at 6.8 percent, about half a percentage point less than last year, said Lagarde.
“I think it is OK, because it is good for China and its people, and is good for the world.
“By having an economic cup of tea more slowly, China will end up with a richer taste,” Lagarde told the audience.
A typical example of this tempered growth is the slowing of credit expansion over the past few months, which has helped contain financial vulnerability.
In addition to the ambitious market-oriented reform outlined in the third plenum of the 18th Party Congress, the former French finance minister urges greater competition in sectors such as finance, education, health, telecommunications and logistics.
“Those are sectors where... once the obstacles are being removed, the barrier to entry is low” to young, entrepreneurial minds.
Talking of deepening reform, especially in terms of financial deregulation, Lagarde said maintaining the reform momentum will be “essential,” and this means “taking further steps to liberalize the deposit rates and exchange rates... removing implicit government guarantees, especially for state-owned enterprises... developing a greater tolerance of corporate default, to create more room for healthy companies to thrive and access credit.”
Like those before her, she warned of the danger of embracing growth that comes at a price, namely, worsening environmental damages and rising income inequality.
“This is why China is moving toward a developing model that will generate, hopefully, greener, more inclusive and more widely shared growth,” she said.
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