Storm, The (15 page)

While there are some parallels between the oil shock and the food shock, there are several big differences. The first and
most obvious is that food is a renewable, not a depletable, raw material. That distinction has to be qualified, since poor
soil management, such as overgrazing, can and does lead to depletion, usually temporary but sometimes permanent, such as is
occurring in semi-arid zones. There are also problems of fish-stock management, where overfishing leads to the threat of extinction,
a problem greatly exacerbated by the fact that ocean fish stocks are not nationally owned and require cooperative management.
These qualifications apart, there is nothing comparable to the self-interest of oil producers in restraining production in
order to maximize the long-term value of their resource. In addition, it does not usually require years of project preparation,
assembly of staff and equipment, and exploratory effort in order to produce more food in response to higher prices. As long
as seed is available, the next planting season will suffice. There was a lot of evidence in 2008 of increased planting and,
already, of increased production in the main food surplus economies in response to high prices. World prices have, as a consequence,
receded from their peak. One of the more remarkable political events of 2009 was the re-election by the notoriously volatile
Indian electorate of a Congress-led government in Delhi, and this owed a lot to the decline in food prices. Where animals
are involved (such as cows and pigs) adjustment is necessarily slower for biological reasons. But market adjustment is happening.

Can we therefore relax, knowing that there is no OPEC for food and that food exporters in particular, and farmers in general,
are responding to the price shock by producing more, driving down the price? There are two big reasons why such complacency
is in no way justified. The first is that world food markets are massively distorted by import and export quotas, subsidies,
support prices and other interventions, which are enormously costly and generally (though not always) working to keep food
prices higher than they would otherwise be. It is subsidies to biofuels that, more than any other single factor, have precipitated
the recent food price crisis. The EU Common Agricultural Policy has devoted vast resources to the protection of farmers’ incomes
in the least efficient way, by encouraging overproduction, and latterly by incentivizing them not to produce, while blocking
market access to competitive producers from overseas – at the expense of both those producers and EU consumers. The superficial
attraction to poor countries of having surplus food dumped on them has in practice usually proved illusory, because it has
undermined local small farmers.

The indefensible behaviour of the European Union is well matched elsewhere by the extreme protectionism of Japan and the increasingly
lavish subsidies given to American farmers by the US administration and Congress. One of the few positive by-products of the
recent food price shock is that it created the conditions – high prices for farmers – that should make it easier to dismantle
the panoply of protectionist controls surrounding farming in these countries (and others). In practice, and disastrously,
the effect has been the opposite. New or stronger export controls have been introduced in China, India, Vietnam, Argentina
and Egypt. Much more importantly, the USA, with the complicity of the EU, led by France, and encouraged by the inflexible
attitude of negotiators from developing countries (notably India), made no attempt to rescue the Doha Round of trade negotiations.
Even in the more positive, co-operative spirit of G20 meetings in 2009, there was little appetite for tackling this crucial
but intractable problem. A once-in-a-generation opportunity to make world markets in food work better has been missed. The
price will be paid in food-price instability next time there is a recovery in global growth.

A more fundamental point is that mass hunger in poor countries cannot simply be left to the process of market adjustment.
This is a matter of basic humanity and ethics. Aid agencies understand, from past errors, that the best way to counter starvation
or severe malnutrition is not to shower the poor with food from elsewhere – though properly managed food aid has a role –
but to provide cash for social protection programmes and food-for-work schemes. The World Food Programme and other agencies
are struggling at present to raise sums that are trivial when compared with the subsidies given to farmers in rich countries.
There is a need for help with long-term investment, especially in rain-fed, developing-country agriculture, with technology
comparable to that of the green revolution (which may include genetic modification). But the problem of malnutrition is not
an easy one to resolve. It reaches into healthcare and education, both in general
and specifically in relation to diet and hygiene, and requires the provision of advice, credit and comprehensive schemes for
distributing seeds and fertilizers to hundreds of millions of small peasant farmers in order to raise their productivity.
If this knot of interconnected problems is not tackled successfully, Malthus will be able to claim some belated, posthumous
vindication. And while the developed world wrestles with its banking crisis and recession, this bigger, deeper issue will
not go away.

The storm has blown up at the point at which economic boom turned to bust: boom witnessed in the surge in oil, food and other
commodity prices; and bust in the credit crunch, the consequence of a collapse in financial markets and the global banking
crisis, linked in turn to a bursting bubble in major residential property markets. I have emphasized that these changes reflect
longstanding cyclical fluctuations which have now come together in a spectacularly powerful and damaging way. But cycles alone
do not explain what has occurred without reference to major structural change in the world economy, and in particular the
growth of China and other major emerging economies.

To simplify greatly a complex argument with many nuances, the rapid growth of these emerging economies, especially China,
has been generating demand for raw materials and food – growing more rapidly than supply and pushing up prices. The dependence
of these countries on export-led growth also supplied the world with cheap manufactures, creating a non-inflationary environment
which made it possible for the USA, the UK and other Western countries to grow so rapidly, without triggering overt inflation,
over the last decade. But it also led to a large accumulation of current account surpluses, and these translated into large
foreign exchange reserves which, combined
with the surpluses and reserves of the raw material exporters, created a vast pool of liquidity which has flowed back into
Western economies. While cheap manufactures created the conditions for low inflation and low short-term interest rates, the
vast accumulation of – mainly – Chinese foreign exchange earnings manifested itself in the purchase of US government bonds,
keeping down long-term interest rates. This liquidity and cheap capital provided the fuel for a credit boom and the massive
expansion of financial markets, and drove up asset prices, especially in housing, to unsustainable levels: hence, in due course,
the crash, and the storm. It is not too far-fetched to say that the ‘nice’ era of non-inflationary growth in Western economies
has been built, mainly, on Chinese labour, and that the sophisticated structures of modern financial capitalism have depended
on the continued cooperation and stability provided by the Chinese Communist Party.

This process of mutual accommodation has to continue if there is to be a successful completion of the historically essential
task of peacefully integrating the major Asian economies into the global economic and political system. We know from the experience
of Germany and Japan in the earlier part of the last century that smooth, peaceful outcomes are not inevitable. The starting
point has to be an understanding and recognition that what is taking place is not a sudden eruption from the economic bowels
of the earth but a long-dormant volcano (or volcanoes) coming to life. Although it appears unfamiliar, even threatening, it
is normal that two countries, China and India, each of which accounts for 20 per cent of the world’s population, should dominate
the world economy. They used to do so. Angus Maddison, drawing on some remarkable scholarship by economic historians, has
shown that, two centuries ago, China accounted for around 35 per cent of the world’s population and almost 30 per cent of
world GDP, and India for 20 per cent of the world’s population and around 16 per cent of GDP. The USA, today’s superpower,
scarcely registered, with
1 per cent of the population and 2 per cent of GDP. France, Britain and Russia were, after China and India, the big economic
powers of the day. Before the nineteenth century, the dominance of the Asian powers was even greater. According to Maddison,
China and India accounted for around 80 per cent of world GDP over the first eighteen centuries of the last two millennia.

Economic historians have long been puzzled as to why China, with its long history of scientific invention and innovative,
sophisticated agricultural technology – which supported a sevenfold increase in population between 1400 and 1950 with no overall
fall in living standards – should not have responded more quickly to the opportunities presented by capitalism and industrialization.
Self-imposed isolation and prolonged upheaval played a big part. The stagnation of India, with its history of caste hierarchy,
foreign rule and discouragement of entrepreneurship, is more easily explained. Both countries consequently missed out on the
first wave of growth through globalization, and their growth and share of world GDP in the nineteenth and early twentieth
centuries shrank to approximately 12 per cent (China) and 7 per cent (India) by 1913, and then down to 6 per cent (China)
and just over 4 per cent (India) in 1950.

What has happened since is a strong rebound in growth, particularly since the emergence of Deng Xiaoping in China after 1978,
and the economic reforms in India attempted hesitantly after 1980 and more decisively after 1990 under the direction of Manmohan
Singh. Since the onset of Chinese reforms, an estimated 200 million fewer Chinese live in absolute poverty. And over the same
period, the proportion of Indians living in absolute poverty has fallen from 60 per cent to 42 per cent (from 456 million
to 420 million, out of a much increased population). Rapid growth has made China the world’s second-biggest economy and India
the fourth (ahead of, respectively, Germany and the UK) in terms of GDP measured on a purchasing power parity basis. There
is much semi-theological debate around the measurement of GDP, but the broad magnitude and direction of change seems
plausible. With India growing in recent years at around 7 per cent per annum, China at 9–10 per cent per annum, and the Western
world at 2–3 per cent per annum before the recession, it is likely that, barring some disaster or political explosion preventing
a continuation of these trends, China will have a bigger economy than the USA well before 2040. By then India will have an
economy the size of Germany, Britain and France combined – with Brazil, Mexico and Russia each also having an economy bigger
than any European country.

There are those who derive some comfort from being members of relatively rich and predominantly (but decreasingly) white societies
that have been able to look down with a mixture of pride and pity on those who are less materially fortunate. They fear that
any fundamental change in the world order will be at their expense: that the global economy is a ‘zero-sum game’, in which
new competitors subtract from the well-being of already developed countries. Just as the arrival of large, boisterous, upwardly
mobile immigrant families in a prosperous neighbourhood creates a shudder of apprehension among the established residents,
the arrival of (mainly Asian) nouveaux riches on the world stage is not universally welcomed. The political and economic implications
of these defensive attitudes will be explained in the next chapter.

For the moment, suffice it to say that, so far at least, the main Western governments have been wise enough to recognize the
opportunities presented by the emerging economies, and the dangers of trying to frustrate their aspiration to higher living
standards. Although the presidency of George W. Bush has been widely derided on account of the war in Iraq, future historians
may judge that through his strategic commitment to working constructively with China – like his father, and Richard Nixon
– he made a more important, positive contribution. The potential engagement of 40 per cent of the world’s population in India
and China (over 80 per cent if we take emerging economies as a whole), as they become integrated into the world economy and
their incomes catch up with those in rich countries, should be a source of celebration – and also of self-interest and opportunity
as hundreds of millions of new consumers spend their incomes on goods and services from the rich world as well as from each
other. But it would be naive to imagine that this process will be free of friction, painful adjustment and big distributional
consequences. And most of these concerns centre on China, which, in this century, has contributed twice as much to global
growth as India, Brazil and Russia combined.