Philippe Legrain, economist and author of Aftershock, on the risks that could further disrupt the global economy
In 2008, the financial crisis brought the global economy to its knees. Today, six years later, the world has still not fully recovered from the impact of the crisis. At the same time, several big structural shifts are reshaping the global economy as we know it. Philippe Legrain, a British economist and author, specializes in economic issues pertaining to the global economy and also Europe specifically. He has authored four books including Open World: The Truth about Globalisation; Immigrants: Your Country Needs Them; Aftershock: Reshaping the World Economy After the Crisis and the most recent European Spring: Why Our Economies and Politics are in a Mess—and How to Put Them Right. Legrain has also been at the heart of Europe’s economic decision making: between 2011 and early 2014, he was Principal Adviser and head of the analysis team at the Bureau of European Policy Advisers to the President of the European Commission.
During a recent visit to Beijing, Legrain sat down for a lively exchange with Liu Jing, Associate Dean and Professor of Accounting and Finance at CKGSB, who is an acclaimed expert on the Chinese economy. Read on further to understand better the big shifts in the global economy, how the European Union and the US are recovering from the crisis, and China’s role on the global stage.
Q. What are the mega-trends that are affecting the world?
A. There are three big trends at the moment. First, there is a cyclical shift this year which is the recovery in the US and to a lesser extent in Europe, with the associated risk of tapering of quantitative easing (QE) in the US, [which may impact] emerging economies, and therefore indirectly China.
Likewise, debts have built up, particularly, at the local government level. But assuming you have a high rate of nominal GDP growth, provided you stop adding to those debts, you can also grow out of them quite quickly. In terms of the financial sector, generally, people have talked about the expansion of shadow banking. Clearly there has been some bad lending and some mistakes. On the other hand, it’s also a natural reflection of the regulation of the state-run banking sector. Many of the things that we are seeing in China exist in the West, too. The development of money market funds came from the regulation of bank deposits in the US, it’s natural we’re seeing that in China too. The risks of a financial crisis in China are greatly overstated. If you have an economy which still has a largely closed capital account, if you have a government whose solvency is unquestioned, and if you have a large foreign exchange reserves which can be brought to bear in the event of problems, China is well-placed to handle this transition. I won’t say this is forever. The bigger challenge is a shift from an economy based on imitation to one based on innovation.
Q. So you seem to be saying the cause of the crisis is actually very similar between the US and the EU: too much risk-taking, too much leverage. To what extent are the two major economic blocs similar?
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]