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China's COVID lockdowns made its people depressed and hurt its economy
China’s economy keeps slowing down, and that could be a problem for the rest of the world.
On GZERO World, Shaun Rein, founder and managing director of the China Market Research Group, sits down with Ian Bremmer to explain why he’s become bearish on China’s economic outlook.
2023 was supposed to be the year China’s economy came roaring back after almost three years of brutal zero-COVID lockdowns that ground domestic spending and production to a halt. But Rein points to a few reasons why China’s rebound hasn’t exploded the way some economists predicted.
“I think people underestimated how much the lingering effects, not just economically but physiologically, that [zero-COVID] would have on China,” Rein says, pointing out that 50% of people in Shanghai suffer from anxiety and depression, according to the government.
Rein argues that because income levels in 2022 stayed so low, with millions of Chinese locked down and furloughed from their jobs, the revenge spending expected after zero-COVID ended never materialized. He also says that an increasingly hostile geopolitical environment under the Biden administration has made COVID recovery even more challenging.
Watch the GZERO World episode: China’s economy in trouble
And watch GZERO World with Ian Bremmer every week on gzeromedia.com/gzeroworld and on US public television. Check local listings.
Podcast: China's great economic slowdown
Listen: China is undoubtedly the biggest economic success story of our lifetime.
Between 1978 and 2017, China averaged almost 10% year-over-year GDP growth. Decades of pro-investment policies transformed China from a closed, centrally-planned economy to an economic powerhouse that could rival the US.
But in the last decade, Chinese President Xi Jinping has been moving the country back to its socialist roots, with major crackdowns in tech, real estate, and foreign investment. Xi’s vision is one of almost total state control, where businesses conform to the goals of the Chinese Communist Party, not the other way around.
Can communist ideology mixed with capitalist ambition sustain growth into the future? Is Xi setting up China for another four decades of economic success? And what do China’s citizens make of its return to socialist roots?
To discuss all that and more on the GZERO World podcast, Ian Bremmer sits down with Shaun Rein, Founder and Managing Director of the China Market Research Group, based in Shanghai.
TRANSCRIPT: China's great economic slowdown
Shaun Rein:
The Chinese people and the Chinese government feel that Joe Biden and the Biden administration are trying to contain China's growth, destabilize the Party and maybe push for regime change.
Ian Bremmer:
Hello and welcome to the GZERO World Podcast. This is where you'll find extended versions of my interviews on public television. I'm Ian Bremmer, and today we are looking at China's post Covid recovery and its economic path forward.
China is the biggest economic success story of our lifetimes, but how long can that last? Decades of infrastructure investment have local governments drowning in debt. Almost three years of Zero Covid policies have sapped domestic spending and production and youth unemployment is at record highs. At the same time. President Xi Jinping is moving China away from the pro investment policies that fueled the last 40 years of almost 10% annual GDP growth in favor of ideological and national security priorities. So is President Xi setting up China for another four decades of runaway economic success or does what goes up have to eventually come down? And what did China's citizens make of its return to socialist roots? Joining me today for the perspective from inside China is Shaun Rein, founder and managing director of the China Market Research Group. Let's get to it.
Announcer:
The GZERO World Podcast is brought to you by our lead sponsor Prologis. Prologis helps businesses across the globe scale their supply chains with an expansive portfolio of logistics real estate, and the only end-to-end solutions platform addressing the critical initiatives of global logistics today. Learn more at prologis.com.
Ian Bremmer:
Shaun Rein, thanks so much for joining us.
Shaun Rein:
Thanks for having me, Ian, on my first trip back to the United States in four years.
Ian Bremmer:
In four years, and you've lived in China now for some 25 years.
Shaun Rein:
For most of the last 25 years I've been living in China. I'm actually born and raised in Concord, New Hampshire, but around the mid-nineties, I went to China to study at Nankai University and I found that I loved what was happening on the ground. There was this electric optimism when I was interviewing and happenings there that wasn't properly being reflected in the New York Times and in the Wall Street Journal. So I thought I wanted to go to graduate school, focus on Chinese studies and learn as much as I could about the country from a sociological or anthropological view, and then I ended up just living there the last 25 years.
Ian Bremmer:
We want to talk a lot about China, but I first want to ask because it's going to come up. So Bloomberg has banned you, right? But yet CNBC, no problem. You've had a book of yours not published in China. How do you navigate someone who's from the US, living now for a long time in China, dealing with an incredibly politicized environment?
Shaun Rein:
That's a great question, Ian. So actually I've written three books on China and all three of them have been banned for sale in China. Yet at the same time, many Western media outlets think that I am a tool of the Chinese government, and so they ban me. So as you said, Bloomberg has officially banned me because they said I'm too pro-China in my analysis. But I actually don't think I am. So I think I'm fairly balanced. If you look at all of my writings, I will say what's good about China. So for instance, the Chinese government has uplifted eight hundred million people out of poverty over the last 40 years, and they've done a really good job at I think, empowering females, which is why you see females are the ones who are leading a lot of the sales in China for companies like Starbucks or Louis Vuitton. But at the same time, I'm willing to be critical.
Ian Bremmer:
Think about one of the books that you wrote. When you're writing one of these books, do you think to yourself, I know that because I'm writing this, this is not going to get published in China?
Shaun Rein:
Yeah, absolutely.
Ian Bremmer:
Give me an example.
Shaun Rein:
So my first book, The End of Cheap China, I talked about how there was a lot of local government corruption that was protecting the Red Light district. And so there was a lot of prostitution in China in the late 1990s, two thousands. I think it was very hard to get a good job. It was really hard, especially for females so they were selling their bodies. And so I wrote about this and I said, even though the central government is trying to crack down on this, and even though the government is trying to empower females, it's not happening right now because of local government corruption. Now that's a no-no. You can't say anything like that.
Ian Bremmer:
Even though you're saying nice things about the central government,
Shaun Rein:
You can't say anything negative about China sometimes when you're writing. And so I was saying that local government corruption was a problem. I'll give another example. I recently went out and did a film documentary with Xinhua News, and I went to Tibet, which is a Chinese state media outlet, and I interviewed this probably about a 30-year-old Tibetan. And he said to me, "Shaun, my life when I was young was terrible. I couldn't get food. I couldn't buy good products. But now life is great because of the Party." And he actually said, "Because of the Party, life is good. I can now buy Adidas sports apparel and I can eat whatever I want." That scene was cut from the Xinhua newsroom.
Ian Bremmer:
Because?
Shaun Rein:
Why? Because they said in the 1990s he was saying Tibet was poor. And at that point, Tibet had already become part of mainland China under Communist Party rule, and some of the censors were scared that it would reflect badly on leaders from the 1990s saying Tibet was too poor at the time.
Ian Bremmer:
So it's funny, I did a show recently talking with a former congresswoman Jane Harman about how too many things in the United States get classified because the sensors themselves, people that want to put top secret classifications in the US are overzealous. What I'm hearing from you is that sensors in China are massively overzealous.
Shaun Rein:
And I think it tends to be very often not directed by the senior government officials. It's often done by mid-level bureaucrats who are scared of their jobs. So back to The End of Cheap China, I actually gave that book to a lot of senior leaders in Zhongnanhai, they loved the book because it was telling the truth about China. It was saying that there is local government corruption, but the central government's doing a good job.
What I found, the more senior you go in China, the more they want the truth. They want the unvarnished state of what's happening. Now, my book was banned from probably some mid-level bureaucrat who is petrified of losing his job if he approved the book and it turned into a scandal and he would be held accountable. So that's one of the problems that goes on in China because of the one Party system is that the bureaucracy is scared about making mistakes. So they often are ultra conservative. They play the safe game, and so things don't always move in the right direction.
Ian Bremmer:
Let's think about Zero Covid, right? So you had Zero Covid and then suddenly you went to, everyone gets Covid for a short period of time. At that point, once it came from on high, that Zero Covid we're done with that, was it then okay for you to criticize Zero Covid or not? Inside China.
Shaun Rein:
You're still not supposed to criticize Zero Covid. So the way to get around that is by criticizing the implementation of Zero Covid. So you can say Xi Jinping and the Communist Party did a great job with Zero Covid. It saved lives, okay? People didn't die like you saw the numbers in India or in the United States, and it became a real ideological battle. You saw the state owned media in 2020 and 2021 said "A communist system is far superior to a democracy at stopping a pandemic." But the way to make a criticism is to say you're respectful of the government, but the implementation of Zero Covid wasn't good and blame that on local government officials. So last year I was locked down for three months in my home in Shanghai and the first two -
Ian Bremmer:
And we saw a lot of videos from Shanghai. People were really fed up of this.
Shaun Rein:
People were angry. I mean, I couldn't buy food for the first two, three weeks of the lockdown. And so a lot of Shanghainese would say, "Okay, if you want to lock us down to protect the greater good and not have Covid spread throughout the country, we accept that, but you have to be able to get food for us. What happens if we get sick?" And there's all kinds of instances of Shanghainese getting a heart attack or some other illness, and they're unable to get to a hospital on time because they didn't have-
Ian Bremmer:
This is the wealthiest city in China. This is the shining jewel. If you could do it anywhere you could do in China.
Shaun Rein:
It's the most international city. Shanghainese have always been proud that this is the greatest city in the world. This is how Shanghainese view it. And last year people were dying because they couldn't get to the doctors. So how do you criticize? You can say local government officials are doing a bad job and they need to be held accountable. And then you say, please, Beijing, you petition Beijing, you go on video and you say, Beijing, please step in and help us. And that's what people did. They said, "Vice Premier Sun Chunlan, please come to Shanghai and solve everything." And so she came and things did get better. So you're allowed to criticize you just can't try to criticize the central government too much and push for an overthrow of the Communist Party.
Ian Bremmer:
That's not surprising in an authoritarian state. Now, on the other side, Bloomberg banning you, CNBC, fine. I don't usually think of those two as politically different in the United States or in the West. Do you have any understanding or views or have you heard from them why one decided to keep you on and the other didn't?
Shaun Rein:
Bloomberg used to be the gold standard. So I actually started my writing career at Business Week, which was acquired by Bloomberg, and I was quoted by Bloomberg Monthly for over a decade. And I was even talking with Bloomberg West about having a weekly appearance, and then suddenly I stopped getting calls. And so I asked some of my friends who had been quoting me for years, and they said that they had a new editor for Asia who said that I was considered too pro-China. And so I think over the last five, six years, Bloomberg has become less nuanced in their analysis of China. Frankly, as somebody who lives in China, I feel that a lot of their reporters don't speak the language, are not based in China, and they've taken a fairly negative view of China over the last five, six years. CNBC, on the other hand, A, they like that Bloomberg has banned me because they have my voice and they feel that I'm more objective because I'm not a partisan.
I'm not a member of the Communist Party. I'm not a Republican, I'm not a Democrat. I'm just a businessman who's using data to make analysis of what's happening in the economy. And I think CNBC welcomes that. Ty Matheson, one of the anchors for CNBC heard that I was in the United States. He called me up and he goes, "We need to bring you over because we want to hear a different view of what's happening on the ground in China than maybe what we're getting from China experts based in the United States."
Ian Bremmer:
That's so interesting. I mean, it could be the equivalent of your local censors in the sense that, I mean, Mike Bloomberg goes to China all the time. He's considered one of the more pro-engagement figures out there. The New Economy Forum, I mean, I was there when they had it in Beijing, all this kind of stuff. So it was really interesting to me when I found out, given who you are and what you do, that of the two, that Bloomberg was the one that decided to take you off.
Shaun Rein:
It was surprising to me. But I also think that over the last five, six years, Bloomberg has had less access in China, and some of the state-owned banks are not using their terminals as much. I think they got into some political trouble because they wrote about corruption of some of the big elite families, and that came out, I can't remember the exact date, but about six, seven years ago. And after that, they started to get more political pressure while CNBC really has a very small footprint on mainland China actually. So most of their stuff is done from Hong Kong and Singapore.
Ian Bremmer:
Over the course of the last few years, you have gone from being one of the most noteworthy bulls on China and their expectations for economic growth to frankly one of the more pessimistic viewers of where China is going economically. Why the pivot?
Shaun Rein:
So I think there are a couple of things. I mean, we've known each other for about 10 years now, and I've always been one of China's biggest bulls for 25 years. But starting really early March of 2022, I started to become more negative on the economy.
Ian Bremmer:
It's the middle of Covid.
Shaun Rein:
Middle of Covid, right when Shanghai locked down. I think people underestimated how much the lingering effects not just economically, but psychologically that lockdown would have on China, and I was right. So right now, about 50% of Shanghainese, according to the Chinese government, are suffering from anxiety and depression. So that's hurting consumer confidence. That's why you see there wasn't the revenge shopping in January and February after China opened its borders and ended Zero Covid. So Goldman Sachs, JP Morgan, they were very critical of me because they said China's going to have revenge spending.
Ian Bremmer:
Well, they've been bullish of what they expect coming out of the pandemic, really a strong V-shaped recovery for China.
Shaun Rein:
They said a V-shaped, and I said, there wouldn't be, and they were critical of me. And there are three reasons why I thought China's economy was weak and why I'm a bear right now. The first is the income levels in 2022 were low. So many Chinese, if not most Chinese actually had their salaries cut. There was a lot of unpaid furloughs. There were times where three, four hundred million Chinese were actually locked down in their homes because of Zero Covid. So no business was done.
So after the borders opened and after we were allowed to go outside again, a lot of consumers said, "We don't have money. We haven't had the stimulus the United States had over the previous three years." China's government really didn't loosen monetary policy. So they said, "Let's save for what rainy day." But there's two bigger issues, Ian. The second issue is geopolitics. I think at the end of the day, the Chinese people and the Chinese government feel that Joe Biden and the Biden administration, I think some people in China will call it the regime, are trying to contain China's growth, destabilize the Party, and maybe push for regime change.
Ian Bremmer:
Here you're talking about semiconductors, cloud computing, 5G, that sort of thing.
Shaun Rein:
Exactly. So when the Chinese get good at something, so when the Chinese get good at 5G and Telecom, like they were with Huawei, all of a sudden the United States says, "This is a national security risk. We need to ban Huawei from," not just the United States, but they need to coerce European nations like the United Kingdom or the Dutch or the Australians, not to use Huawei Telecom equipment. When the Chinese get good in mobile apps like Temu or Shine or TikTok, which is really popular in the United States, members of Congress try to ban that and say it's a national security risk.
Ian Bremmer:
When you say that. Now of course, American social media apps like Facebook and Twitter can't have access to China. I mean, the Chinese don't see that as reciprocity in some way?
Shaun Rein:
Not really, because there's a slight difference, and it's very fine line. So Facebook and Twitter could have been allowed in China is what the Chinese government says if they followed Chinese government rules and house all of the data in China and allowed the Chinese government access as needed. And so that's why LinkedIn until very recently was fully allowed in China and was very active. And actually Microsoft made the decision to close LinkedIn in China. It wasn't from the Chinese government. When it comes to TikTok. It's no matter what TikTok does, simply because it's Chinese, simply because China is run by the Communist Party, it's automatically guilty until proven innocent.
Ian Bremmer:
And yet it's like the most popular app still among American teenagers right now in the social space.
Shaun Rein:
Yes because-
Ian Bremmer:
It's rhetoric but they're still making a lot of money.
Shaun Rein:
They're making a lot of money but the question is that there's a Sword of Damocles that's hanging over TikTok and all Chinese apps, and so they're saying, "Do we actually want to invest in the United States right now?" The reality is not. If you look at it, the investment from China into the US has dropped about 95% over the last five years.
Ian Bremmer:
So what I'm hearing from you is not so much that the United States is unfair in its treatment to China as much as there is no trust in this relationship. Because for everything you just said, the Americans would say that for them, the Sword of Damocles is hanging over them because they don't have access to an independent judiciary and Minth Group would suddenly get raided, or Bain would suddenly get raided or they can suddenly be shut down. So it feels to me like there's literally no trust in this relationship between the two most important economies of the world.
Shaun Rein:
Yeah, there's no trust and there's very little communication right now. So I mean, I was talking to one of my good friends who was a deputy secretary, and he's very pro-China in many ways, an American one, and he was a former US ambassador. And he said, "The problem right now, Shaun, is I don't know who to talk to in China, and I don't even know if I can get access to that type of person." So I think over the last five years you had a fraying of relations. There was a lack of people exchanges and just no trust starting from the Trump administration but then it really went downhill under Biden. I think part of that was accelerated by Covid because of Zero Covid -
Ian Bremmer:
No connections, no travel, nothing.
Shaun Rein:
None of the top seven members of the Standing Committee of the Politburo of China left for three full years. Han Zheng, who's now the vice president, he left basically the day Zero Covid ended, and China has been doing a charm offensive over the last six months. So after Xi Jinping was named chairman for a third term, his first meeting was with the president of Vietnam. He also met with the president of Pakistan, and he actually traveled to Saudi Arabia for the GCC to try to improve relations with the Middle East. So what you've seen is China has launched a massive, massive charm offensive to Europe, to the Middle East, to Asia and Africa, and really focused on the global south over the last six months. But they've been very hesitant to try to forge relations with the United States again, and that's one of the reasons why consumer confidence, why business confidence is so low right now in China and while the economy is really in a very negative state.
Ian Bremmer:
So you talked about Chinese consumption not rebounding as quickly as we expected. We talked about geopolitics at the high level, particularly the US, the G7, advanced industrial economies being problematic headwinds there. You said there were three, what's the third?
Shaun Rein:
The third one is a little bit more sensitive. I think part of the problem is people have trusted the Chinese government to do the right thing. It was almost, they were invincible. For the first 25 years of my life in China, whenever there was a problem, the everyday peasant would say, "Don't worry, the Party will fix things."
Ian Bremmer:
You have 40 years of 10% growth on average, you can say that.
Shaun Rein:
They did a great job. You have to give them credit. But Zero Covid wasn't done well. And so a lot of people, especially those who are from Shanghai, especially the wealthy in Shanghai, suffered the most during Zero Covid. So they're starting to lose some of their support for the Party and certain members because they feel that, A, the government didn't do a good job of implementation. And second, there's also a fear that China is moving towards socialism. So they fear that China's not pro-business like it has been in the last 20 years. They see that Jack Ma is no longer in charge of Alibaba, which is one of the giant internet companies in the country, and was actually kind of forced to split into six different companies.
Ian Bremmer:
He was kind of seen as a hero by a lot of young Chinese.
Shaun Rein:
Oh, he was a rockstar. People in China love Jack Ma. You need to think of him as Elon Musk, Warren Buffett, Bill Gates, and Steve Jobs all wrapped into one. So he was the person that every young person in China wanted to be for the last 20 years. Someone who was able to rise as a peasant, make a lot of money. He's really popular, but he was taken down in large part because his company truthfully became too powerful. It started to pose a lot of systemic threats.
Ian Bremmer:
Who could have been too powerful against the Americans? I mean, you'd think that a confident Chinese leadership with a leader like Xi Jinping who gets rid of term limits, I mean, he is there for life, he's consolidated all of the leaders around him that are loyal. Wouldn't he want someone that could take the fight globally for China, someone that could inspire the Chinese. This is the kind of thing I could do. It doesn't feel like the kind of thing a leader who wants to be a superpower would suddenly go after.
Shaun Rein:
That's a great question, Ian. I think there's two parts to answer that. First, Jack Ma started becoming almost like a foreign minister of his own. And what he was saying publicly wasn't always the same thing that Xi Jinping and Li Keqiang, the prime minister at the time was saying. So for instance, after Trump launched the trade war, which has really crippled China's economy over the last several years, Jack Ma said, "Don't worry. Trump's a good guy. Let's give him time." And when he said that it was almost like he was rivaling statesmanship and he was creating his own policies.
I think that's something that probably upset the Chinese government. But I think even more importantly, as a businessman, I actually support the crackdown on Alibaba in the tech sector because Alibaba controlled too many sectors. He was in insurance, he was in banking, he was in e-commerce, he was in movie ticket buying, he was in transportation, he was in taxis. Basically any business that was profitable, Alibaba or Tencent controlled it. And so it started to stifle fair market competition. It started to stifle innovation and consumer choice. So I think the Chinese government was right to crack down. Their problem is they didn't do a very good job of communicating not just to the Chinese, but to the international investor community what were the underlying reasons and the need for this crackdown? So I think people were scared.
Ian Bremmer:
In part because they took him out.
Shaun Rein:
Well, he still has his shares.
Ian Bremmer:
Well, he sold out.
Shaun Rein:
He still has his money. They haven't put him in jail. They haven't taken his money away.
Ian Bremmer:
He was sort of under house arrest for a period of time, no?
Shaun Rein:
No. I think that was a rumor. I don't know. But some of his closest friends are my close friends, and they said he was fine just laying low, sort of let the political winds go as they are. But I think there's a fear, Ian, in China right now amongst the wealthy that China's making a sharp shift towards socialism. And I think one of the great things about China over the last 40 years was that if you worked hard and you were willing to take a risk, borrow money, pool money with friends, you could get rich like Jack Ma. But the problem is that there was -
Ian Bremmer:
To get rich is patriotic.
Shaun Rein:
It is patriotic, but there became too many haves and have-nots. [inaudible] was too high.
Ian Bremmer:
That was a Chinese communist phrase.
Shaun Rein:
Yeah. And I think it was good, but it also reached the point where some people in the tier one cities especially were just too rich, while the Communist Party was almost neglecting the needs of 850 million people living in the countryside.
And so under Xi Jinping, the government has launched common prosperity, which is an initiative where they're trying to get education access, healthcare access to the 850 million peasants. So if you say to Xi or the Communist Party, "You disagree with the crackdown on education, you disagree with the crackdown on technology," they're going to say, "Oh, you mean you don't want to take care of these poor people?" So that's hard. It's hard to say that you disagree with what they're doing because there's reason, it's not evil intention. They're trying to help the majority, but the real movers and shakers of the country, they've lost that excitement. They've lost that ability to take risks.
So there's a lot of capital flight. A lot of these wealthy Chinese are moving to Singapore. A lot of them are moving to Australia. Some are coming to the United States right now because they're saying, "You know what? I've already made my money. There's a serious crackdown on corruption. We're not sure if the country's moving towards a 1960 socialist type standpoint. Let's just leave or let's just take a wait and see attitude."
Ian Bremmer:
Because profitability in China, efficiency in China has been driven more by the private sector, than by state owned enterprises. So if we see the Chinese government now starting to freeze out some of those people, I mean, you're not going to see 5% growth.
Shaun Rein:
Yeah. And that's the big problem. I mean, the real movement, the real excitement of the last 20, 30 years in China's economy has been from the private sector. But the state-owned enterprises are getting larger, they're getting more important and more critical for the economy. Especially now because actually when you look at it, the government has tried easing monetary policy over the last quarter, but almost no private SMEs have been willing to borrow money because they just don't have the confidence. So actually borrowing by state-owned enterprises went up 8% last quarter year over year.
So it's the SOEs that are pushing the economy, but their goal isn't economic efficiency. Their goal isn't making profits. Their goal is to do what the Chinese government wants them to do as a public good. So SOEs are state-owned enterprises, they're owned by the Chinese government, and they actually report to the Chinese government while SMEs are small medium enterprises that are owned by private entrepreneurs. So for instance, there's about a 20.8% youth unemployment rate right now. So the government is pushing SOEs to hire those people even though they don't need them. So the SOEs are good for the economy on the one hand, but they're also sucking the efficiency and the profit making ability on the other side. And that's why I'm becoming more bearish.
Ian Bremmer:
At the same time as the Indian government is investing very, very heavily in new technology and expanding the private sector, and of course the demographics are much more attractive.
Shaun Rein:
Yeah, you're starting to see a lot of European and American companies especially, they're trying to de-risk from China, and so they're looking to manufacture or source from other nations. So you see a lot of the top companies are saying, you know what? We're not going to leave China. Let's be clear. They're not getting up and moving their operations, but they're not investing into China. So that's why FDI into China only went up 2% in Q1 of this year. What they are doing is looking at India, they're looking at Vietnam, and especially for the American companies, they're moving closer and setting up shop in Mexico. So the Indian economy, I think they're probably the greatest growth opportunity over the next five, 10 years.
Ian Bremmer:
Shaun Rein, thank you so much.
Shaun Rein:
Thanks for having me.
Ian Bremmer:
That's it for today's edition of the GZERO World Podcast. Do you like what you heard? Of course you did. Why don't you check us out at gzeromedia.com and take a moment to sign up for our newsletter, it's called GZERO Daily.
Announcer:
The GZERO World podcast is brought to you by our lead sponsor Prologis. Prologis helps businesses across the globe scale their supply chains with an expansive portfolio of logistics real estate, and the only end-to-end solutions platform addressing the critical initiatives of global logistics today. Learn more at prologis.com.
Subscribe to the GZERO World Podcast on Apple Podcasts, Spotify, Stitcher, or your preferred podcast platform, to receive new episodes as soon as they're published.David Malpass' advice to World Bank successor: time is short
In his final interview as president of the World Bank Group, David Malpass spoke with Ian Bremmer on GZERO World to reflect on his time leading the global development organization and to share his advice for his successor, Ajay Banga.
Malpass became president of the World Bank in 2019 and has seen the world change significantly during his term. He says he’s proud of how the bank handled major global challenges like the COVID-19 pandemic, the war in Ukraine, and the Afghanistan evacuation. He also thinks the bank did a good job raising the alarm about an impending economic crisis: slow growth and skyrocketing global debt.
“We had a core vision that we want people in developing countries to have better lives tomorrow than today,” Malpass says.
When it comes to the insight he’d offer to the next World Bank president, Malpass has three simple words of advice: time is short.
Malpass stresses that now is the moment to really rethink fiscal and monetary policy to create a more equitable global economy, one where all the capital isn’t flowing to a centralized point. According to Malpass, part of the job of the World Bank president is to have tough conversations about the major challenges in the world, like debt and climate, to get advanced economies to take action.
“Who’s going to stand up to the advanced economies and say, ‘You’re taking all the money so there’s not enough left for the rest of the 6 billion people in the world?’”
Watch the episode of GZERO World with Ian Bremmer: World Bank's David Malpass on global debt & economic inequality
Are we entering a post-dollar world?
Are we entering a post-dollar world?
The U.S. dollar reigns supreme among all currencies in global trade and finance.
What does this mean? Only that the dollar is the currency of choice for most economic activities conducted around the world, including those by and between non-U.S. entities. For instance:
- Most commodities and internationally traded goods get priced in dollars
- About half of world trade is invoiced and settled in dollars, far beyond the U.S. economy’s role in global trade
- The dollar is part of nearly all foreign exchange transactions
- Non-U.S. banks lend and take deposits largely in dollars
- Non-U.S. firms predominantly borrow in dollars
- Central banks hold three-fifths of their foreign exchange reserves in dollar-denominated assets, and many choose to peg their own currencies to the dollar
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Whereas most currencies are only used domestically and in cross-border transactions that directly involve the currency’s issuer, only the dollar is widely used outside its issuing country. Its nearest competitor for global currency status, the euro, accounts for 20% of central bank reserves compared to the dollar’s 60%, followed by the Japanese yen at 4%. The Chinese yuan lags far behind at about 2% of foreign exchange reserves.
Share of international revenuesIMF COFER
The dollar’s special role did not originate by chance, force, or decree. For much of the 19th century through the early 20th century, it was the British pound sterling that was the dominant global currency. But after World War II, the American economy became dominant in global output, trade, and finance. At the time, U.S. GDP accounted for roughly half of world output, so it made economic sense for the dollar to be the principal global means of exchange, unit of accounting, and store of value.
America’s economic supremacy has since waned, its share of global output now a fraction of what it was in 1945. This trend has led many over the decades to warn about the imminent end of dollar primacy.
Doomsayers from Wall Street and Silicon Valley to Moscow and Beijing offer numerous reasons for the dollar’s allegedly inevitable demise: China’s meteoric rise to global superpower; America’s stagnant productivity growth, out-of-control fiscal spending, unprecedented monetary stimulus, growing debt burden, record-high inflation, protectionist trade policies, and imperial overreach; challenges from disruptive technologies like crypto-assets; and, most recently, Washington’s weaponization of the dollar against its geopolitical foes.
(To be clear, it’s not obvious that losing dollar dominance would be a bad thing for the United States. In the 1960s, former French president Valery Giscard d’Estaing claimed that being the issuer of the global reserve currency afforded America with an “exorbitant privilege,” allowing it to borrow cheaply from the rest of the world, run chronic trade and budget deficits, and live beyond its means. That’s true, but it’s only half of the story. The oft-neglected downside (or “exorbitant burden”) is that outsized foreign demand for dollars pushes up the currency’s value, making U.S. exports artificially more expensive, harming domestic manufacturers, increasing American unemployment, suppressing American wages, fueling speculative bubbles, and widening inequality. Dollar dominance is a boon for Wall Street. For Main Street, not so much.)
Rumors of the dollar’s death, however, are greatly exaggerated.
Going by most usage measures, the dollar remains incontrovertibly dominant, if a little less so than at its apex. Its share of the world’s $13 trillion currency reserves is nearly twice that of the euro, yen, pound, and yuan combined—the same as it was a decade ago. Even China, in an environment of intensifying geopolitical competition with the U.S. and having just witnessed Washington’s freezing of Russia’s international reserves, has no choice but to continue accumulating dollar-denominated assets.
If prognosticators are right that the dollar’s days are numbered, markets—the ultimate judge, jury, and executioner—have yet to find out. As we’ve seen repeatedly and are witnessing now, every time turmoil roils global markets the dollar strengthens, as investors flock to the most plentiful and liquid safe assets in existence. In fact, despite unprecedented sanctions on Russia and 40-year-high inflation prints, the dollar has strengthened more than 10% year-to-date relative to other major currencies and is currently trading at its highest levels in 20 years.
U.S. dollar strength against other major global currenciesBoard of Governors of the Federal Reserve System
Why has dollar dominance remained so sticky?
In large part, it’s because incumbency is self-reinforcing due to inertia and network effects. People use dollars because other people use dollars. The more the dollar is used, the more useful it becomes, and the more it is used in response. Dollar dominance begets continued dollar dominance.
But it’s not just turtles all the way down. The dollar has inherently desirable features: it is at once highly stable, liquid, safe, and convertible. And U.S. financial markets are by far the largest, deepest, and most liquid in the world, offering a plethora of attractive dollar-denominated assets foreign investors can trade. No other market comes remotely close.
Investors want to hold dollar assets because America’s economic, political, and institutional fundamentals inspire credibility and confidence. The U.S. has the world’s strongest military, the best research universities, the most dynamic and innovative private sector, a general openness to trade and capital flows, relatively stable governing institutions, an independent central bank, sound macroeconomic policies, strong property rights, and a robust rule of law. People all over the world trust the U.S. government to safeguard the value of their assets and honor their rights over them, making the dollar the ultimate safe-haven currency and U.S. government bonds the world’s most valued safe assets.
None of this means that the dollar’s advantage can’t slip. After all, the pound sterling and all the reserve currencies that came before it were dominant until the moment they ceased to be. Yet in all those cases, there was another currency on the sidelines ready to take their place. Today there’s no such challenger.
Of the serious candidates to dethrone “king dollar,” the euro is not a viable alternative because of Europe’s persistent fragmentation. Despite having a sizeable economy, well-developed and deep financial markets, decently free trade and capital openness, and generally robust institutions, Europe lacks a true capital markets, banking, fiscal, and political union.
Ever since the eurozone debt crisis in 2009, European bond markets have been much more fragmented and illiquid than America’s, leaving investors with a dearth of high-quality euro-denominated assets. While the pandemic did push the EU to finally issue common debt to fund recovery efforts, that move alone is not sufficient to boost the euro’s international role, as markets know that even if full fiscal and financial integration was on the horizon—a big if—political integration isn’t.
The Chinese yuan is not a viable alternative because of China’s autocratic and state capitalist proclivities. Xi Jinping’s and the Chinese Communist Party’s domestic policy priorities—economic self-reliance, financial stability, common prosperity, social harmony, and political control of the economy—run directly counter to their global-currency ambitions.
Despite its growing role in the global economy and its long-standing desire to unseat the dollar, China lacks the investor protections, institutional quality, and capital market openness required to internationalize a yuan that is still not even fully convertible overseas. Persistent currency and capital controls, an opaque banking system with too many non-performing loans, spotty contract enforcement, and often arbitrary and draconian regulations will all continue to undermine Beijing’s efforts to elevate the yuan.
Last and most definitely least, so-called cryptocurrencies like Bitcoin are not a viable alternative because they are speculative assets with no intrinsic or legislated value. By contrast, as legal tender, the U.S. dollar is backed by America’s current and future wealth and by the U.S. government’s ability to tax it.
I say “so-called cryptocurrencies” because these digital tulips are not really currencies or money: they are expensive and slow to transact in, they can rarely be used to pay taxes or buy groceries, and they are far too volatile to be useful as means of payment, stores of value, or units of account. Just since the beginning of the year, the price of Bitcoin has fallen by 60% and the market value of all cryptocurrencies has shrunk from over $2 trillion to well under $1 trillion.
The main threat to dollar dominance might actually come not from abroad (Europe, China) or from beyond (the digital space) but from within. The United States is still the world’s superpower, and it will arguably emerge stronger from the pandemic than any other nation on earth. It’s also the most politically divided and dysfunctional of all the major industrial democracies. The single biggest risk to the dollar’s global status is that growing inequality, tribalism, polarization, and gridlock undermine trust in America’s stability and credibility.
But no matter how much the dollar seems to lose its shine, global currency status is about relative—not absolute—advantages. Without a viable challenger, it’s very unlikely that the dollar will lose its special role. You can’t replace something with nothing.
As Margaret Thatcher might have said, there is no alternative.
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Who’s to blame for inflation?
Who’s to blame for inflation?
I posted something on Twitter last Sunday that I didn’t think particularly novel or controversial but that has since gotten a lot of play:
Now, many folks missed the point of the tweet and instead took issue with me calling the U.S. government “left,” which I agree it isn’t really when you consider the policies and worldview President Biden espouses. Looked from, say, Europe, Biden is a centrist or even center-right. In fact, from a global perspective, the entire U.S. political spectrum—including most Democrats—sits on the right.
But of course, that’s not how most Americans see it. If instead I had called the U.S. government a right-wing one, my post would no doubt have been met with more derision. Fox News and elected Republicans say Biden and the Democrats are a bunch of socialists, and even if they wouldn’t go that far, the majority of Americans broadly think of the Democratic Party as being on the left. As far as my argument is concerned, that’s the only thing that matters.
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So what is my argument?
That the multidecade-high inflation that we’re currently experiencing in the United States—and in the United Kingdom, Germany, Canada, Italy, Brazil, and so many others—is a global phenomenon with global, not domestic, origins. It has nothing to do with the specific political parties or leaders in government. It doesn’t matter whether it was Trump or Biden, Johnson or Starmer, Scholz or Laschet, or Bolsonaro or Haddad that got elected—we still would have gotten high inflation globally.
Don’t get me wrong: it's understandable that when something upsetting like high and persistent inflation happens in a country that’s so divided like the U.S., people are going to blame the government in charge. The buck, as they say, stops with the president. But just because the political reaction is understandable, it doesn’t mean that the government is actually to blame. And that’s a difference I want my readers to understand.
What did cause the global inflation shock?
First was the Covid-19 pandemic, which disrupted labor markets and global supply chains and prompted governments everywhere to try to cushion the fall in incomes by putting cash into people’s wallets. The policy response worked wonders, preventing millions from falling into unemployment, bankruptcy, and poverty. At a time when supply was constrained, though, the flipside of people having enough money to spend was a rise in goods inflation.
Then, just as the United States and Europe were coming out of the pandemic and supply and demand were starting to normalize, China doubled down on its zero-Covid policy in the face of the highly contagious Omicron variant, locking down some of the global economy’s most important manufacturing and shipping hubs and boosting goods inflation further.And then on February 24 Russian President Vladimir Putin decided to launch a war of aggression against Ukraine, triggering Western sanctions and leading to massive dislocations in the global supply of energy, food, and fertilizer. As a consequence, the prices of these critical commodities shot through the roof.
This unprecedented confluence of overlapping shocks naturally led to inflation almost everywhere (China and Japan being the notable exceptions). Frankly, you’d be surprised if it hadn’t.
In hindsight, it’s easy to criticize the U.S. government for doing too much fiscal stimulus—especially in 2020—and the Federal Reserve for failing to tighten monetary policy sooner. Heck, some commentators are making a living out of it.
But hindsight is 20/20 and policymaking is hard. Let’s not forget how much uncertainty and fear we all were shrouded in when the pandemic hit. There was no playbook for how to protect people and businesses from a once-in-a-century pandemic with the potential to cause mass unemployment and poverty (in addition to death).
Policymakers were never going to get it exactly right: really, they were just trying to feel their way in a dark room without breaking too much furniture. Scarred by the timidity of the response to the 2008 financial crisis, which the U.S. took nearly a decade to fully recover from, they erred on the side of too much rather than too little stimulus. Arguably, that was the right call to prevent the most suffering with the limited information they had at the time, leading to the strongest labor market in half a century.
We should also remember that fiscal and monetary relief was one of the very few things that both Democrats and Republicans over the last two administrations agreed on. By the time Biden signed the $1.9 trillion American Rescue Plan into law in March 2021, former President Trump had already approved a total of $3.1 trillion in pandemic-related economic stimulus. And Fed chair Jay Powell was originally nominated to his position by Donald Trump before he was re-appointed by Joe Biden, both times being confirmed in the Senate by a bipartisan vote. So if anything, the fault for overdoing it lies with both parties.
The good news is that inflation will come down, because none of these shocks are permanent in nature. Demand is stabilizing because households have already worked through most of their pandemic savings. Supply chains will become normalized, especially as more Chinese get vaccinated and China’s zero-Covid policy ebbs away over the coming year. Sanctions on Russia will remain for the foreseeable future, but the Europeans will diversify their energy supply sources and lessen their dependence on fossil fuels altogether. All of this means that inflation will prove temporary, even if not short-lived (no, they are not the same thing).
In the meantime, though, inflation poses at least as much of a political problem as it does an economic one. Just ask Jimmy Carter. Voters positively hate inflation and blame the president for it—regardless of what caused it, how long it lasts, or whether there’s anything he can do about it in the near term. They don’t care that there’s little the Fed can do to lower inflation without choking off the labor market (i.e., throwing people out of work), or that presidents have no control over gas and food prices.
source:j John Cole / The Scranton Times Tribune
President Biden can announce a gas tax holiday, lift tariffs on China, or enact new green energy subsidies to make life a little cheaper for the average American, but none of these measures are going to save him and Democrats from a sure defeat in November’s midterm elections.
The biggest danger is that this strong public aversion to inflation will pressure the Fed to induce a recession in order to tamp down inflationary expectations—as economists are now expecting—and leave the U.S. government with little fiscal firepower left to offset it. Given the widespread belief that the current inflation was fueled by excess spending, it’s unlikely that Congress would be able to find a politically palatable consensus on any significant relief policies, putting the U.S. economy at risk of a prolonged stagflation.
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Dispatch from Davos
Dispatch from Davos
Economic Forum (WEF). This is the first time the annual gathering of world leaders, CEOs, and public figures takes place in the spring (no snow boots!), courtesy of Omicron. It’s also the first in-person forum since the pandemic hit in January 2020, and it couldn’t be happening at a more critical moment for the world.
Indeed, the theme of this year’s meeting is “History at a Turning Point,” and what a turning point it is. From Covid-19, climate change, digitalization, and deglobalization to the war in Ukraine, slowing global growth, surging energy prices, and a looming food crisis, this is the most crisis-rich backdrop to a World Economic Forum I’ve ever seen.
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Me moderating a panel titled "Russia: What's Next?"Source: World Economic Forum/Sikarin Fon Thanachaiary.
Why are we seeing so many converging crises at the same time?
Largely, I think it’s because we are in a geopolitical recession—a moment in history when nobody (not the U.S., not the G7, not the G20) is driving the bus—where many of the reigning global institutions are increasingly not aligned with the geopolitical balance of power. The United Nations Security Council, NATO, the World Trade Organization, the World Bank, the International Monetary Fund—all of these institutions were the product of a bipolar world forged atop the ashes of World War II.
The balance of power has shifted since—from the collapse of the Soviet Union and the rise of China to the end of the U.S.-led order—but institutions haven’t adapted. That’s why Germany and Japan, two wealthy, dynamic, free-market democracies with governments strongly committed to multilateralism and the rule of law, don’t have seats at the UN Security Council...while Russia does.
As a result of this vacuum of leadership and growing misalignment, the global architecture is no longer fit for purpose, and instead of global cooperation, we get every nation for itself. That makes crises more likely to emerge and the world less capable of responding to them.
Of all the Davos gatherings I’ve attended—and I’ve been coming since 2008—this is by far the one that is most being driven by geopolitics. Helle Thorning-Schmidt, former Prime Minister of Denmark, echoed this feeling during a Global Stage livestream conversation hosted on Monday by GZERO Media and Microsoft. Business leaders are starting to realize that they have no choice but “to engage in geopolitics,” she rightly noted.
Back in 2009, the first or second time I came to Davos, there was a massive sense of crisis, too. But everyone attending at least felt like they understood the playbook, the tools we had to respond to it. This time is different. People know there are massive crises brewing, but they don’t really know what the second- and third-order consequences will be, and they sure don’t know how to deal with them.
At the top of the agenda this year is the war in Ukraine and its many cascading effects. Everyone at Davos is worried about it, and for once, most everyone at Davos (though certainly not globally) is on the same side of the conflict. There’s a lot of consensus around Putin needing to be stopped and Ukrainians deserving all the help we can give them. But that’s where the unity ends. How does the conflict end? Can the Ukrainians actually win? Does that require humiliating the Russians? Or does Putin need to be offered an off-ramp? On those questions, there’s no agreement whatsoever.
Ukrainian President Volodymyr Zelensky addresses Davos via video.Source: World Economic Forum/Sikarin Fon Thanachaiary.
As for the outlook for the conflict, the pessimists (like me, on this one) think the fighting will continue, albeit at lower levels of intensity than we’re seeing now. The optimists think the fighting can stop, albeit not definitively. Either way, everyone agrees on at least three things: (1) a negotiated settlement is a remote possibility, (2) there’s no stable equilibrium in sight, and (3) the United States and its advanced industrial allies are in a cold war with Russia (veering on hot, if you count cyber, disinformation, and espionage).
This decoupled environment is far from the globalist ideal the World Economic Forum has been committed to for 50 years. A case in point is the fact that there are no Russians in attendance at Davos: no business leaders, no delegates, no government officials. The “Russia House,” a building in this mountain town that used to serve as an outpost for Russian oligarchs and officials, has been turned into the “Russian War Crimes House,” an exhibit of images depicting the atrocities committed by Russian forces against Ukrainian civilians.
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An employee of the food delivery service Gorillas cycles through the streets of Berlin.
What We're Watching: Gorillas in the gig economy & work struggles for the "sandwich generation"
Gorilla unicorn to gig goat: a cautionary tale. Last year, a new Berlin-based food delivery company called Gorillas was going bananas. With its minimal branding, pro-biker vibes, and good service, the company became the first German tech “unicorn,” meaning it raised enough capital to be valued at more than a $1 billion dollars. But then the wheels came off as its gig workers, angry about late payments and poor working conditions, tried to organize in protest, and hundreds were fired. The company continues to function, but it recently set up its holding company in the Netherlands. The tale of Gorillas is both an inspiring and cautionary one. Over the past 10 years, gig work, facilitated by new technology platforms — think Uber, Seamless, Fiver, etc — has grown rapidly. Close to 30 million Europeans secure work through digital platforms, and the EU says that could rise to 43 million by 2025. In the US, one in 10 American adults relied primarily on “on demand” work as of 2020. This has vastly expanded opportunities for employment and broadened companies’ ability to source talent and skills on demand. But that flexibility comes at a cost for employees, who lack the workplace protections and benefits normally associated with full- or part-time work. Policymakers are still trying to balance the pros of flexibility with the cons of “precarity.” The EU is leading the legislative charge on this, with a sweeping set of reforms that would force gig platforms to classify their workers as employees and give them more bargaining rights. Supporters say it will boost the gig economy to a fairer footing, while critics worry it will make them less efficient and more expensive.
Is the “sandwich generation” being frozen out? The pandemic has been difficult for people of all demographics, but the costs – and disruptions – have been particularly severe for the “sandwich generation.” Those include people in their 30s, 40s, and early 50s who are trying to balance careers along with caregiving responsibilities for young children and parents. This burden is disproportionately felt by women, who make up 60% of this demographic in the US, according to Pew. Anecdotal evidence in the US, UK, and parts of the European Union, suggests that the pandemic has forced these already-stretched individuals to give up jobs and shed work hours in order to take on the added burden of helping with home-schooling and elder-care responsibilities. There are signs that many of these women have not made their way back into the labor force. While men have mostly recouped their pandemic job losses in the US, women are lagging far behind: there were at least 1 million fewer women in the workforce in January 2022 than two years earlier, according to the Bureau of Labor Statistics. Some experts warn that things are still taxing for older members of the “sandwich generation” because young adults, whose education and work-life have been disrupted for the past two years, are becoming more dependent on their parents for housing and other support. Many businesses are ramping up “return-to-work” programs to help lure women back to work after long absences. But these programs are often limited in scope, and being out of work for extended periods can make it more difficult to secure desirable roles.
A U.S. one dollar banknote is seen next to Turkish lira banknotes.
Turkey's inflation, Chinese loans, Nigerian oil spill, deadly cocaine
49: Turkey recorded an annual inflation rate of almost 49%, a 20-year-high, on Thursday. President Recep Tayyip Erdogan, who has said soaring inflation would be temporary, continues to prioritize exports and remains opposed to interest rate hikes. Turkey’s Central Bank meets on Feb. 17 to discuss interest rates but is not expected to change course.
3 billion: President Imran Khan is visiting China, hoping to secure $3 billion in Chinese loans to help shore up Pakistan’s dwindling foreign reserves. But some analysts say Beijing might be reluctant to cough up because of Islamabad’s failure to make good on earlier loans.
50,000: An oil production vessel carrying 50,000 barrels exploded off the Nigerian coast on Thursday, causing a massive oil spill. The fate of the 10 crew members is not yet known. It is unclear how much oil was spilled or what the environmental impact will be.
20: At least 20 Argentinians died – and dozens were hospitalized – after ingesting cocaine tainted by a poisonous substance. Authorities say it could be a result of turf wars between rival drug traffickers. The Triple Frontier, a junction Argentina shares with Paraguay and Brazil, is one of the world’s most active drug trafficking corridors.CORRECTION: An earlier version of this article said that Argentina shares a border with Panama rather than Paraguay. We regret the error.