3.3. Risks and Threats for World Economy and Finance (2010–2019)
At the end of 2009—beginning of 2010 the majority of G20 countries announced that they had overcome the global crisis. However, the post-crisis period had its own new risks. They became threats to steady development and can provoke a new global crisis. Our analysis of systematized risks has revealed new threats to sustainable development.
Rates decrease risks in the development of the world economy.
Our research has shown that during the post-crisis period (2010–2018) average annual growth rates of the world economy were 3.44% (with a range of minimum values from 3.4% in 2015–2016 to the maximum 5.4% in 2010). Substantially, it became the result of long, soft, national, and regional anti-recessionary programs with the offer of money at a low percentage rate and repayment of bank debts. In January 2017, the FED stopped the Quantitative Easing Program (QE) and transferred to a policy of increasing discount rate. In 2018, the ECB also finished the QE (2010–2018) program of redemption of state securities for the sum of €2.6 trillion. In spite of the fact that thanks to QE developed economies reached the level of 2.2% of growth, the effect for the world economy was 3.5%. It reached considerably to the capacious markets of the EU, the USA, and also FDI in the developing economies.
However, the steady growth of the world economy was not reached nor provided with either national or international programs. In 2019–2020, the IMF predicts a decrease in growth rates to 3.3% and, most importantly, a delay of rates in 70% of national economies (Lagarde 2019
Rates of economic growth have several aspects of the analysis and algorithms of actions of the monetary authorities. First, a clear understanding of the nature of the decrease in growth rates and the elimination of the reasons lying on the surface, and components of the current agenda for economic policy is necessary. Secondly, and most importantly, the problem of long-term steady growth connected to factors of the uncertainty and complexity of the solution of civilization problems.
Are the current reasons for delay of growth strengthening tensions in world trade, and toughening, by many countries, financial conditions for business? The solution to these problems lies in the plane of a smooth transition to such monetary policy which will provide only unstable economic development of the world economy in the ranges of 2%–4.5%, the developed countries of 1%–2.5%, and the developing, 3%–5%. Sharp actions of the monetary authorities at the rates of the money market and taxes, most likely, will lead to problems of refinancing and service of the state and corporate debts will enhance volatility (nervousness of the markets and change of trends) of exchange rates and the bid-and-asked quotations of financial stock market instruments.
In emerging markets and softer monetary policy financial terms and conditions for the national capital, FDI can improve state priming of the economy. The outflow of FDI during the period from 2015–2019 began to break the balance of emerging markets that developed as a fruit of the global financial and economic environment and system.
The model of a monetary policy resulted above can provide only unstable growth which is vulnerable in the face of geo-economics conflicts between countries, for example, Brexit for EU and U.K. Sustainable growth is caused by more general factors of uncertainty and the beginning of the solution of civilization problems. Considering factors of uncertainty, we will note, first of all, high level of debt of countries (the number of countries with a state debt of 100%–200%/GDP growth) and the companies with high financial leverage that is making them unstable, and reducing time to a possible default. The tension in world trade increasing after 2010 became another factor of uncertainty: Conflicts, disputes, mutual claims, and sanctions, wars by duties and threats. The system of the WTO, the procedures, rules, agreements of its participants, cannot extinguish a wave of aggravation of trade contradictions. The most important infrastructure institute of the global economic environment does not work.
According to the history of international regulation of world trade since 1947 (GATT and the WTO), the reduced average world sales duties from 55% to 2%–3%, demonstrates that free trade and low trade barriers are a benefit to all countries. Probably, the modern crisis of a global system of trade will be solved on the issues of state subsidies to participants of foreign trade activities, creation of effective systems of protection of intellectual property and confidential data. There are good prospects at digital commerce in terms of fair competition and equality of conditions. There will be a modernization of the major institute of the WTO in its main functions: Negotiation procedures and permission of trade disputes.
Crisis and a post-crisis depression started the deglobalization mechanism and created a trend of leaving the multinational corporations from emerging markets. It is important to carry items favorably still (these are 50% of the World GDP). However, in the system of trade, there are distortions which cause contradictions between countries. These distortions will always arise as a result of the decrease in prime cost in production and logistics. However, trade barriers are not the permission of trade contradictions. Moreover, trade integration stimulates investments into port and trade infrastructure and warehouses, and creates new jobs (WEO 2019, April
). Estimates of the IMF growth of tariffs (this analysis covers tariffs, non-tariff measures, and bilateral agreements about purchases) by 25 percentage points on all goods in trade between the USA and China can lower annual GDP in volume to 0.6% in the USA and 1.5% in China (WEO 2019, April, chp. 4
Drivers of the world economy. The global economy provides no answer to the question of how economy and strata might promote the growth of the world economy. The middle class of the developed countries and emerging markets seems to function as its locomotive. The world economy needs modernization of the global financial system, an introduction of additional regulators, new world reserve currency (Euro, Yuan, CDR, or other currency) and improvement of the risk control system of market derivatives (total derivatives averaged $
659 trillion in the period 2009–2018, with 768% of world GDP) (BIS Statistics
). Exchange-traded derivatives (OTC derivatives)). Thus, from the point of view of micro-economics, the key problems of economic growth have not been solved despite the optimization of business processes and change of business model.
Risks of public debt growth. There was a growth of cumulative state debt/GDP from 78% in 2007 to 118% in 2014 (Lipssky 2010
). In 2016, the global debt made $
164 trillion (225%/World GDP) (IMF 2018, Fiscal Monitor
), which is higher than the national economic safety level.
Chinese economic slump. Delay of growth rates of real GDP of the second economy of the world poses a serious threat to the steady growth of the global economy. Before the global crisis of 2002–2007, growth rates in China were 9%–14%, during the crisis they fell by up to 9.4%, and since 2010, they have consistently decreased by the rate of 1% a year and were, in 2018, 6.6% with the forecast of the IMF for 2024 at 5.5% (IMF WEO 2019
). Historically, a decrease in economic growth in China to 6% might affect the world raw material and capital markets. The national economy is overheated by cheap credit. Loans to private sector in China averaged 9794.11 CNY HML from 2002 until 2019, reaching an all-time high of 46015 CNY HML in January of 2019 (and a record low of −974 CNY HML in October of 2005), i.e., increased by 2.6 times compared to 2010 (20000 CHY HML) (Trading Economics China 2019
). As a result, the economy faced two waves of increase in prices of the supplies (PS): In 2009–2012 and 2016–2017 that demanded monetarist efforts of the People’s Bank of China on their control.
The financial sector of the Chinese economy achieved liquidity, but the real sector failed to demonstrate steady growth. The increase in state expenditure on social programs, maintenance of social stability, innovative programs increased state budget, state debt and tax burden for businesses, might start the inflation flywheel. The economy of China with its limited internal demand, a surplus of liquidity, increasing incomes of business and population, and poor quality of production will face inflation growth, and a decrease in economic growth and competitiveness. The ambition to become a new world economic and technological leader with Yuan, as a new reserve currency, will be postponed for 10–15 years. Therefore, the People’s Bank of China will continue to support the current world reserve currency.
3.4. The Leader for the World Economy in 21st Century
After the global crisis, the processes of dedollarization and deglobalization intensified and raised the question of who will be the leader of the world economy. Will the US maintain its leadership, or will it be replaced by China, the EU, Japan or others? Change of the leader of the world economy means deep re-structuring of all systems of the global economy and finance. We start with a high urgency of this question for 21st century and have carried out comparative analysis of the USA and China, and also other economies by following four key criteria: The size of economy, quality of life, competitiveness, and soundness of currencies.
Comparative advantages of the U.S. economy. The USA, being one of the main architects of globalization, has benefited the most. In the 1980s, the USA managed to make its stock market attractive for foreign banks and investors. As a result, the net capital inflow increased from $
19.4 billion in 1980 to $
153 billion in 1987 and $
324.5 billion in 2008 (US Census Bureau 2012
). It strengthened the position of the USA in the global economy, increased the country’s share in the world GDP from 25% to 30% and market capitalization from 30% to 50% ($
12.5 trillion) For the current positions of USA see Table 1
In 2019, the size of the USA GDP (GDP, current prices) was $
19.390 trillion (in China for comparison is $
12.380 trln), that, on the one hand, allows provision of a high quality of life: GDP/per capita $
54.225.56 (in China $
7320.09), with another—stable expenses of the Government of $$
3.21 trillion (Hereinafter Table 1
. Items 2, 9). Rates of economic growth were 3.20%, that corresponds to an average value during the period 1948–2019 (the highest level of 13.40% was in 1950, the lowest during the global crisis of 2009, −3.90%). The economy is not overheated and has the smallest unemployment rate in 49 years at 3.60%. The contribution of various sectors of the economy to the production of GDP reflects its readiness to enter the world of technologies 4.0. The USA manufacturing industry creates 21.1% of the national GDP (in China 46.8%. See Item 3). At the same time, the cost of its products grows due to complicated labor (2019 $
2.2 trillion), and the share in GDP falls. On the contrary, services (information, communications, financial and legal) as a portrait of new technological revolution, promptly grow. In 2019 they created a cost of 12.9 trillion with a contribution to the GDP of the country of 76.7% (in China 43.1%. See. Item 3). The structure of the economy is modern, aimed at mastering the first high-tech. The increase in productivity of labor (without agriculture) in 1Q 2019 (YoY) was 3.40% % (see Item 4), with an output of 3.9%, the index of labor productivity 106.96 with an average for 1950–2019 60.65%. High-quality indicators of labor productivity demonstrate a perception of the economy for new conditions of the economic policy, with a transition to technologies of 4.0 and investment activity of business. The rate of inflation in May 2019 was 1.8% (in China 2.70%. See Item 6), a fall in comparison with 2018, it is significantly less than the average level of 3.26% in 1914–2019 that substantially is a result of the long-term strategy of the FRS of cheap money. At the same time root inflation (the core inflation rate) excluding power and food products was 2.0%. There was a growth of wages per hour to record $
23.38/hour (Item 4) in comparison with the average level of 11.24 USD/hour during the period from 1964–2019. As a result, the AAA sovereign rating was in the first position (2018) on global competitiveness among 140 countries.
The essential weaknesses of economy in 2019 in the form of payment (−134.88 billion USD) and trade (−50.79 billion USD) deficits, budget deficit (−207.77 billion USD), and public debt (exceeding GDP (105.4%) are hedged by USD (as world currency, reserve, steady with small volatility), historical lack of defaults of the state and big reserves of gold (8133.50 tons). At the same time, there is a real threat to a country default to the beginning of each next financial (budgetary, fiscal) year by 1 October 2019 or next year.
The retrospective of these facts is that since 1991, the current account of the balance of payments in the US was in deficit and increased from $
12 billion in 1982 to $
856 billion in 2006, it did not pose a threat to the financial stability of the country (Table 1
). The deficit was covered by foreign investments, mostly from China and oil-producing countries. In 2005, foreign assets of American residents amounted to $
9.6 trillion, while foreign assets in the USA—$
12.5 trillion, with the net foreign investment at $
2.8 trillion. In 2006, FDI into the USA reached $
184 billion, with leading investors being the UK and Germany (USA 2007
Since the 80s the USA has learned and has got accustomed to living on credit. In 1980 loans amounted to $
909 billion (33.3% GDP), and in 2011—$
14.972 trillion (99.7 % GDP) (see Table 1
). This, however, did not affect the investment appeal of the country and its sovereign ratings as the FED and the US Treasury have never declared a default and have been serving its internal and external debts. Besides, if weighing state debt against the market cost of publicly traded securities rather than against the GDP it will account for 87.74%. not 100%. Moreover, the holders of 50% of obligations were non-residents. For example, China, as the second economy of the world, was the main investor in exchequer obligations and in 2006 it held T-bills for the sum of $
801.5 billion. The American stock market remained more profitable than the European (15% annual vs. 12%). In 2011 foreign residents of the USA owned 11% of traded financial assets ($
17 trillion), including credit market instruments, US corp. equities, mutual fund shares, trade receivables (US Census Bureau 2012, Statistical Abstract of the United States
Besides financing the US industrial and public debt, globalization benefits in the period from 1980 to 2011 included the growth of the net value of households (8.3% vs. 2%), gross national product per capita from about $
28 thousand to $
54 thousand (see Table 1
, Item 2) and a decrease in cumulative tax for businesses from 18.2 % GDP to 15.2% (CIA 2012
Comparative advantages of China’s economy. China, whose share in the world GDP in 2013 amounted to 12.22%, after the recession on international commodity markets, re-oriented towards the domestic market. The strategy of two markets (domestic and foreign) yielded a result (see Table 2
). Currently, in 2019, China is still the first nation on population, the extent of the international liquidity, export, trade balance, and the second economy of the world on GDP (GDP constant prices). China is already not just the “factory” of world brands, the Chinese companies led by Huawei have become competitors of the world leaders in high-tech more and more.
Growth rates of the economy of China in 2018 developed twice as high at 6.40% (in USA 3.20%. See Table 2
, Item 1). Average growth rates of GDP during the period 1989–2019 were 9.52% (the highest level of 15.40% was in 1993, the lowest 3.80% in 1990). Substantially, it was the result of the Deng Xiaoping policy of modernization, the effect of globalization and involvement of FDI. However, despite the state support of output and aggregate demand (AD), it is difficult to support during the post-crisis period, high rates which will decrease, first of all, against the background of a trade war with the USA.
The historical background of the economic development of China in the 20th century caused the low level of technological bases of the economy, finally, very low during the period 1960–2019 the GDP per capita (PPP) of $
1662.03. Growth of the important indicator of the quality of life, up to $
7320.09 in 2019 (in the USA $
54225.45. See Table 1
. Item 2), shows the effect of market reforms, a mixed economy and the turn of economic policy towards domestic demand. Nevertheless, the reached level of $
7000 corresponds to only 58% of the average world value. The contribution to GDP of the processing (quite often “smoky”) industry of China makes 34%. It will fall, but slowly because China is a factory of the world economy.
Nevertheless, during 2015–2019, the share of services that already makes 57.59% in GDP of the country is still growing. The unemployment rate of 3.67% (1Q 2019) is not high in comparison with an average value of 4.09% for 2002–2019 and that demonstrates the transfer of focus to the domestic market. In China, during the period 1952–2018, the average nominal salary/month was 1184.76 CHY. In May 2019—8293.32 CHY ($
1196.04), a growth of seven times. Great progress for the modern history of the country, but in comparison with the leading economy of the world, the lag of nominal salary in annual terms is 2.9 times. The rate of inflation in China in 2019 is not high, 2.7%, in comparison with the average level of 5.16% during 1986–2019, a decrease of 1.9 times. This is evidence of the effective work of the People’s Bank of China. In monetary and credit and investment policies, the strategy of liberalization is traced: Consistently the interest rate falls, from 6% (2015) up to 4.35% (2019) (Table 2
. Item 8), the balance sheet total of the banking system ($
465.8 billion), loans to households, the credits to companies grows, FDI grow ($
2019 54.6 billion with the rate of 3.5% per annum).
At the same time, points of weakness of the economy are low, GDP/per capita (58% of the average world level), the low salary, record deficit of the budget due to a decline in income of the state, decrease in profit of enterprises in 14 branches of the economy of all forms of ownership, the 28th place in the list of global competitiveness and a high rate on the company on social taxes (37% vs. 7.65% in the USA). At the moment, China is ahead of the US in export volumes ($
2.14 of trillion, first place in the world export of securities with a share of 11.7%), foreign reserves ($
3.1 of trillion) and total investments, with the positive balance of payments and state debt to GDP ratio 2.3 times less than USA (see Table 2
. Item 8).
Lastly, it is impossible to ignore the demographic factor’s role in economic growth. Despite the absolute advantage of China in population (1395.4 billion people in China vs. 328.950 million people in the USA) and comparable indicators of life expectancy (74.68 years vs. 78.37 years) (UN Stats 2012
) the country will face a serious problem of a reduction in population, including an aging demographic, in the middle of the XXI century (Table 1
, Item 5). The USA, on the contrary, has a relatively young population and, according to the UN forecasts, will have a higher population growth (1.4 times vs. 1 in China) in 2011–2050 and a larger share of young people (20% vs. 17% in China).
Since the purchasing capacity of the domestic market is considerably lower than the international one, it leads to the consecutive GDP decline. Dynamics of decrease in rates of GDP growth of the country is traced: From 14.2% in 2007 to 6.3% in 2019 (decrease in 2.3 times) (IMF WEO/CHN 2019
). Aggregate demand (AD) in China (as a share in nominal GDP) falls from 47% in 2003 up to 38% in 2015. The dynamics of the decrease in the country’s GDP growth rate are traced. Steady growth, rates reduction began after 2007 (14.2%) and amounted to 6.3% in 2019, i.e., it decreased by 2.3 times (IMF WEO/CHN 2019
). This suggests that in the conditions of declining demand in the global markets after the global crisis, China could not support former growth rates of GDP due to domestic demand. In spite of the fact that from 2011 to 2018 aggregate demand (AD) grew from $
494 billion to $
914 billion, its average annual rates steadily decreased from 18.3% (2012) up to 6.9% (2017).
At the same time, the household saving rate in China is much higher than in developed economies. It was 37.10% in 2018 vs. 6.20% in the USA. Personal household income savings in China averaged 33.48% from 1992 until 2015, reaching an all-time high of 39% in 2010 and a record low of 27.20% in 2002 (Trading Economics China 2019
; Trading Economics United States 2019
China’s household consumption is low, the ratio of consumption to GDP is 37% versus 50% in the developed countries. What are the causes of this phenomenon and statistics? This partially reflects China’s growth model, a high level of saving. The saving rate is 37.1% vs. 6.20% in the United States. From 1980 to 2008 the ratio of private consumption expenditures to GDP decreased 1.5 times from 55% to 36% (Baldacci et al. 2010, p. 4
). To understand the pattern of income distribution between savings and consumption in other countries, we will note that in South Korea, Indonesia, India, Philippines this indicator is 50%–70%. Among the reasons of such model of consumption in China, the IMF in a special research notes high economic growth, a demographic structure with an elderly population, the insignificant number of the public companies (which would pay dividends) vs. state-owned companies (SOC), weak state health programs, higher education, etc. (Baldacci et al. 2010
The level of household savings in China fell slightly to 37.10 percent in 2015 from 38 percent in 2014, as the inflation rate was 2.7% (the average indicator in 1986–2019 was 5.16% with a decrease of 1.9 times). We can confidently predict consumption growth in China due to an increase in household incomes (wages for 1952–2018 grew seven times to 1184.76 yuan). A high level of savings, part of which goes to investments, financing works to increase consumption. The Chinese national economy is based on the special economic zones created in the 1980s when transferred factories formed a «factory of world brands». It is as yet unlikely to become a leader in technology, which requires an innovative economy rather than copying production. In 2013 China produced $9.240 trillion GDP and there is a high risk of recession and an increase in inflation. The Chinese Yuan can be a strong currency for mutual transactions inside BRICS, but it is not strong enough for the global commodity and financial markets.
Other candidates for the role of the leader of the world economy.
Japan, which in 2018 had a contribution to world GDP of 4.1%, Germany (accordingly to 3.2%) and Euro Area (11.4%) cannot compete with the United States (15.2%) and China (18.7%) (IMF WEO 2019
). Japan still tests an echo of recession of the 1990s and the global crisis, EU zone constantly is in 2009–2019 under the blow of various waves of recession, connected in particular to debts of the Mediterranean countries. The slow recession of the European economy turned out to be more painful and difficult than in the US, as countries were attempting to shift to the new technological mode of production. Germany and France are burdened by their obligations to preserve the European Union and maintain the Euro and, thus, cannot become new world economic leaders yet.
It is possible to continue to search for arguments in favor of a particular country. Despite the urgency of the question of leadership, there are also civilizational problems of the Mediterranean countries, a migratory crisis in the EU, Brexit, the populism breaking the architecture of national economies and geo-economy. Their solution is only possible if G20 and international economic organizations take joint actions to create conditions for global financial stability and search for new sources of economic development. In substantiation of the given thesis, we will consider the criteria of leadership in the XXI century and requirements of the leader.
In a substantiation of the given thesis, once again it is reversible to criteria of leadership for the 21st century and to requirements to the leader, but at different level of the analysis. We concretized four criteria of leadership: (1) Size of the economy (GDP), (2) quality of life (GDP/per capita, quality of life index, purchasing power, index security, index of health care, cost of living, real estate price per income, time in traffic, jam pollution index, climate index), (3) global competitiveness (productivity, global innovation index), and (4) currency (weight, SDR basket, share in global payment, volatility). By these criteria, we carried out the analysis on the big sample of the countries.
We were guided by macroeconomic indicators of IMF, WB, BIS as criteria and received following results. Based on the size of the economy (GDP nominal) in 2016, 2020, 2030, and 2050 there are four countries among the leaders—the USA, Japan, China, and India (IMF WEO 2016
). Quality of life is traditionally estimated as GDP per capita with the same leaders of the USA, China, and Japan. If we include such indicators as quality of life, purchasing capacity, safety, health services, life cost, and ecology, then it would be Denmark, Switzerland, and Australia. If global competitiveness of the national economy depends on the competitiveness of businesses, quality of corporate government, production efficiency and management, here the leaders are Switzerland, Singapore, and the USA (WEF 2016
If the major indicator of business competitiveness is labor productivity calculated as GDP (PPP)/per hour, then according to this indicator, the leaders are Norway, Luxembourg, and the USA.
The world economy in the XXI century will be based on technological innovation. The global innovation index, 2015 shows that in R&D (research and development) the leading countries are South Korea, Israel, Finland, Sweden, Japan. In the innovative production—Switzerland, Ireland, Singapore, Germany, Austria. In the quantity of high-tech companies—Unites States, China, Japan, South Korea, Canada. In higher education – South Korea, Russia, Finland, Israel, Ukraine. Scientific research—Finland, Iceland, Denmark, Israel, Singapore (The Bloomberg Innovation Index 2015
The national currency is a very sensitive indicator of the stability and strength of a national economy. The most significant indicators are the transaction currencies, international liquidity, reserves, and SDR basket. On 1 October 2016 weights of the five currencies in the new SDR basket were: U.S. dollar 41.73%, Euro 30.93%, Chinese Renminbi 10.92%, Japanese yen 8.33%, Pound sterling 8.09%. Compared to the previous period the USD lost in weight from 44% to 41.73%. For the first time CHY was included in the SDR basket and won the third position ahead of the Euro, JPY, and GBP.
Markets value currencies through SWIFT, by carrying out basic calculations on real and financial assets markets. The USD share amounts to 44.64%, Euro—28.30%, GBP—7.92% (Swift 2014
). The major reserved currencies are the USD, Euro, JPY, GBP, and CHF as they are less volatile and more stable according to BIS REER
The research shows a very important result, that today there is no absolute leader in the world economy. Many countries possess comparative advantages (as it can be seen in the comparison between China and the USA), but only in some positions. The age of the absolute domination of one super state is over. The structure of the global economy and finance will not be based on the domination of one country and one currency. International economic and financial organizations will play a major role as global institutes and regulators. We do not exclude the possibility of the establishment of a world government at the end of the XXI century. In the interim period, we might expect an aggregated SDR with a basket formed by 15–20 currencies and the appearance of local currencies on the wave of deglobalization and dedollarization.
Nevertheless, today the USA, EU, Japan, Great Britain, China, Russia, and India perform a special role and responsibility. The world economy might receive a new impulse of growth if the USA overcomes its own financial imbalances caused by the three deficits—budget, balance of payments, and state debt—and becomes «a world workshop» of new high technologies. Japan as the third world economy might repeat its “economic miracle” with the development of high-tech. China, BRICS, and other countries of emerging markets with a high balance of payments surpluses and extensive foreign reserves might become key sources of world economic growth too, if they re-orient production towards domestic demand and consumption. The IMF and the World Bank Group should be focused on maintaining global financial stability, searching and supporting new sources of growth of the world economy and solving the civilizational problems of mankind.