Is Pax Americana At Risk?
Mar. 11, 2019 Commentary

Is Pax Americana at Risk?

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Last month, we provided a longer-term perspective of the increasing economic and socio/political risks that may lead to slower overall economic growth as the world moves forward. Today, we continue to address the issue of slowing overall economic growth by looking at long-term trends to determine whether these trends are changing or sustainable.

Over the last couple of years, the seemingly global push toward nationalistic political approaches threatens the “old order,” commonly referred to as “Pax Americana.” The forces of Pax Americana have been in existence since the end of World War II, in which the United States acts as the global guarantor of global peace, and also allows imports of products into our economy, the world’s largest.

In exchange for this, the theory and practice has held that, as smaller, developing countries install democratic, free-market practices in their own economies, global wealth will be created, and the smaller more politically volatile countries will see the benefit of capitalist-based systems, ensuring global peace. The world has benefited dramatically from the Pax Americana arrangement. 

As of the end of 2015, 10 percent of the world’s population lived in “deep poverty” (definition and data from the World Bank). In 1990, 1.9 billion people globally lived in deep poverty. Major strides have been made toward spreading wealth creation globally. For the first time in human history:

  • Obesity is killing more people than starvation. 
  • Old age is killing more people than plagues. 
  • More people have recently died via accidents than from human violence.1

By and large, the tenants of Pax Americana have held for the last 70 years. That is, until recently.

Enter China and Nationalist Biased Movements

China, as a communist country, is becoming the fly in the Pax Americana ointment. For the first 30 years of its existence, communist China struggled economically. From the 1940s, when Mao took over the country, until 1978 and the installation of Deng Xiaoping’s “socialist market economy,” China’s poverty rate was a whopping 88 percent, according to ABC News. From 1981 until 2017, the poverty rate in China fell to 6 percent. China’s people benefited by the installation of free-market, capitalist-based economic reforms. Early in the reform process, when confronted by hardline members of the communist party, Deng was known to say that it doesn’t matter what color the cat, it only needs to catch mice. In the 1970s it became apparent that the Chinese “cat” under communist rule wasn’t catching many mice.

Over the last 40 years, China’s economy has grown to become the world’s second largest when measured by GDP output, only a step behind the U.S. economy. However, the current president, Xi is introducing his own reforms, taking a much more aggressive position toward foreign relations.

Additionally, Xi has made moves to significantly strengthen the control the communist party exercises over the economy and the people of China. It appears the steady march toward a more market-based, and consequently democratic, form of governance is receding in today’s China. This flies in the face of the typical pro-Pax Americana recipe by which the world in general has lived over the last 70 years. 

China – The Pro-Capitalist Nation?

One of the better measures of social wealth creation (not just rich people getting rich, but society as a whole becoming better off) is to study individual worker productivity growth. Think about this measure in this fashion: If a worker only produces enough “value” to cover his or her living expenses, there is nothing left for that worker to save and invest. Apply that rationale to a total economic system. If workers are producing more than they consume, investment is able to occur, driving additional efficiencies and wealth creation within that society. This is the raw stuff of wealth creation on a country-wide basis. 

Prior to Deng Xiaoping’s economic reforms of the late 1970s, which again ushered in more market-based and capitalist-based economic systems, the per-worker productivity growth rate in China was a mere 2.2 percent per year. Since that time, per-worker productivity growth has averaged 5.7 percent per year, more than doubling the growth rate seen over the 26 years from 1952 until 1978. Over this period, China’s poverty rate fell from 88 percent to 6 percent. Reforms that led to the vast improvement in lifestyles in China are now being thrown into question by the communist leaders in that country.2

So, the Pax Americana concept with which the world has functioned over the last 70 years (since the end of WWII) is now being questioned by the communist leaders in the world’s second largest economy. With this in mind, a significant driver of global GDP growth (China) over the last number of decades appears to be breaking from an approach that has worked for a number of other developing economies.

Bringing this Home – 2019 Outlook

China’s true GDP growth rate is a mystery. Officials in Beijing broadcast economic data they want the world to hear, in my opinion. Officially, the Chinese government is saying it expects to see 6.3 percent growth in economic activity this year.3 Rest assured, regardless of what really happens, I believe you will probably see 6 percent growth from China. China’s “real” economic growth rate, however, will probably be much less than its official forecast. 

Our friends at Capital Economics (a well-regarded economics forecasting firm headquartered in London) suggest the actual economic growth rate in China will be 4.5 percent this year. Capital Economics estimated China’s economy grew by 5.3 percent last year, as compared to the “official” data from Beijing of 6.6 percent.4 If the folks at Capital Economics are correct, we should expect growth in China to slow rather significantly this year. We can look at the Purchasing Manager’s Index (PMI) as one recent non-official measure of economic growth in China. China’s manufacturing PMI for February was released recently at a reading of 49.2. Anything below a reading of 50 suggests activity contraction is occurring in China’s manufacturing base. 

Along with slowing growth in China, Europe is also experiencing levels of overall growth deceleration.5 So far this year, I believe the United States stands out from the rest of the world as most economic data continues to suggest slowing, but still positive, economic activity in our home market. 

Moving forward, we will see how, and if, the rest of the world’s economic growth contraction may weigh on our own economic activity. With this in mind, it is wise for investors to understand that, at least in China’s case, the tried-and-true forces of Pax Americana are very much in question. 

 

1World Health Organization
2https://www.abc.net.au/news/2018-12-01/40-years-of-reform-that-transformed-china-into-a-superpower/10573468
3Reuters
4Capital Economics
5https://www.euractiv.com/section/economic-governance/news/uncertainty-dampens-european-growth/

 

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The Purchasing Managers’ Index (PMI) is an indicator of economic health for manufacturing and service sectors. The purpose of the PMI is to provide information about current business conditions to company decision-makers, analysts and purchasing managers.

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