Books: The economic jolts to come

David Smick addresses the shifting patterns of international rivalries and the risk of protectionism. Howard Davies finds insights amid the cheesy presentation.

Last Updated: 31 Aug 2010

We must assume that a major publisher does its homework before deciding how to package a book on the global economy. So Marshall Cavenish must have some grounds for thinking more people will read a chapter on the Chinese economy if it is called 'Tony Soprano Rides the Chinese Dragon'. It beats me, but if as a result it rushes off the shelves at Kennedy airport, I will stand corrected.

That may seem a trivialising point to begin with, but Smick's book is all about the title. Thomas Friedman sold a bunch of copies of The World is Flat, whose title neatly told the story he wanted to relate. The meaning of The World is Curved does not leap off the page quite so fully formed. As near as I can understand it, Smick's thesis is that in financial markets, 'our sightlines are limited... we can't see ahead. We are always being surprised'. There are discontinuities, and unexpected feedback loops. As a result, the world has become a more dangerous place. The credit crisis proves the point. So farewell then, as EJ Thribb invariably and rightly says in Private Eye.

It's fair to point out that below this startling observation lie some useful insights. If we strip away the New Jersey mafia red herring, Smick describes the paradoxes of the Chinese economy and financial system well. His point is that the frontmen we see, such as Governor Zhou of the People's Bank, who talk persuasively about reform and market opening, are not necessarily the ones in control.

The shadowy State Council calls the shots on exchange rates and financial reform, and doing business in China can be more complex and uncertain than many people assume. Smick acknowledges that his judgment may be clouded by the fact that he lost his shirt in a pile of Chinese cement 20 years ago.

His chapter on the great Japanese stagnation of the 1990s and the policy errors that prolonged it is also worth a read. But I think he has bought too uncritically into the Indian economic miracle. He may be right that China is not as good as it looks, but I doubt if India is quite as unproblematic as he imagines.

In one area, though, he is on the button. Forecasting is very hard, especially about the future. His cautionary words on guessing the next Boss Country are wise. He reminds us that Herman Kahn was the great forecasting guru of the 1970s and '80s. Elderly readers may recall his Hudson Institute's 1974 report, The UK in 1980, which said it was all over for us. He nominated France as the country whose economy would dominate the world stage in the 21st century.

I also share Smick's assessment that the greatest long-term threat to the health of the global economy is a return to protectionism, perhaps stimulated by the (correct) perception that the rewards of globalisation have been skewed towards a small number of people.

The boom of the past 20 years, now interrupted for we know not how long, has been accompanied - certainly in the US and the UK - by a big increase in inequality of both income and wealth. Smick sees a risk that this, associated with the economic pain resulting from the collapse of the house price bubble, will provoke a hostile and damaging political and regulatory reaction. Indeed, he believes that 'the use of inflammatory populist rhetoric is already destabilising to financial markets'. He worries about more changes in the US that will overreact to the Wall Street debacle. Another Sarbanes-Oxley may be on the cards, he thinks.

Unfortunately, his proposed solution is extremely vague. US policymakers, he says, must 'devise some creative means of dramatically expanding the financial capital ownership base'. They must 'think big' and 'concentrate on the role of human capital'.

That's all fine and dandy. Hands up those in favour of thinking small and who oppose upskilling the workforce. Obama will need a little more precision to turn this into a workable political platform. So although Smick's heart is in the right place, The World is Curved is ultimately unsatisfying. There is more diagnosis than cure, and some pointless anecdotes thrown in.

For the British reader there is, though, one intriguing curiosity. Smick includes a chapter on the UK's withdrawal from the ERM in 1992, which has very little to do with the argument. He happened to be in London that week and met some of the key players. Sixteen years on, he walks us through his perceptions of an unhappy few days. The description here of the attitudes of the Treasury and the Bank of England is at variance with what I recall. I was director-general of the CBI at the time, with a minor role in the wailing chorus. For this chapter, 'Harry Potter and the Collapse of the Pound' would have been a more apposite title.

The World is Curved: Hidden dangers to the global economy
David M Smick
Marshall Cavendish £18.99

Howard Davies is director of the London School of Economics.

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