What this article discusses is not so much the ten certainties as the ten constraints that run through the next decade. In economic planning, the optimal solution is determined by the objective function and constraints
Text | Shao Yu Chen Dafei
Edited | Su Qi
The chaos caused by the COVID-19 pandemic has caused companies to "no longer move towards the light at the end of the tunnel, but grope in the fog to find a way out"
——European Union Chamber of Commerce in China "Entrepreneur Confidence Survey 2020-2021"
The 2008 financial crisis triggered an endogenous repair mechanism for global economic rebalancing, and the level of globalization measured in terms of the size of trade and capital flows (relative to GDP) began to contract. In response to the impact of the financial crisis, countries have adopted unconventional monetary policies and active fiscal policies. The United States has led the recovery process in the post-crisis era. The EU has withstood the crisis of the european union, the euro has turned the risk into a disaster, the imbalances in the internal structure of the euro area have been effectively alleviated, the balance of payments deficit and fiscal deficit of the peripheral countries have converged significantly, and the euro area has shown the characteristics of "Germanization". China's basket of measures to stabilize growth has also made a positive contribution to the global recovery. Although the global economy has been saved from the Great Depression, it has not been able to break free from the quagmire of "secular stagnation". The accumulation of debt has become a long-term factor that suppresses interest rates, prices and aggregate demand.
In 2016, with the Brexit referendum and Trump's election as US president, political forces took advantage of the trend and became the second most important force for deglobalization and economic rebalancing. Multilateralism is in crisis, bilateralism is in its place, and populism is rife. The United States positioned China as a "strategic competitor" and labeled China as "revisionism" and "state capitalism", from trade to finance to system and ideology, the Sino-US conflict is constantly becoming apparent, the wider the scope, the deeper the degree, wandering on the edge of the "new Cold War". The EU's diplomatic stance toward China has also shifted from moderate to tough, positioning China as a "systemic competitor", placing greater emphasis on the principle of "reciprocity" in its economic and trade relations with China, and changing its previous position of political and ideological neutrality. With supply-side structural reform as the main line, China has achieved a balance between achieving a "soft landing" in the economy and preventing and resolving financial risks by expanding opening up to resolve Sino-US conflicts and responding to the adverse currents of globalization.
At the beginning of 2020, the new coronavirus fell from the sky, and the peak of the fourth wave of the global epidemic spread has not yet arrived. The launch of the vaccine and the election of Biden are the double benefits of the fight against the epidemic, and the fourth wave may be the "final battle". However, its impact will be far-reaching: de-globalization will suffer a third impact; the characteristics of regionalization and decentralization of value chains will become more obvious; the problems of the gap between the rich and the poor and class antagonism will become more severe; and it will even become the last straw to crush "neoliberalism". The U.S. stance on China will not change because the Democratic Party is in power. Brexit has left regrets for European integration, but it has not hindered the belief of "EU 2.0" to build a Europe, and the ability and efficiency of member states to act in unison have been strengthened; in comprehensively considering the internal laws of economic development, the reform goals and tasks of the new era, and also to cope with changes in the external environment, China has established a new development pattern of double circulation with "domestic cycle as the main body and domestic and international dual cycles promoting each other". Enhancing innovation drive and unleashing domestic demand potential will be two major base points that will help China and help rebalance the global economy.
We are always in an era of certainty and chaos, but some people see "certainty" and some people see "chaos". It depends on the observer's view of history. The history is long enough for the future to look like a straight line. 10 certainties will shape the basic contours of the 2020s.
First, the world faces the challenge of the "Kindleberg Trap," similar to the public goods and security asset gap that remained during world wars. China may play a more important role, but this will inevitably correspond to the balance of payments deficit.
In explaining the state of chaos in the world during the two world wars and the Great Depression, the economic historian Kindleberg argues that the chaos is rooted in the mismatch between the economic and financial positions of the United States and Britain. On the one hand, with the decline of manufacturing and economic power, Britain's ability to provide financial public goods to the world has declined; on the other hand, at the end of the 19th century, the United States replaced Britain as the world's largest economy and the most important manufacturing power, but financially, the dollar has not yet replaced the pound sterling, New York has not yet replaced London, and the United States has failed to provide financial public goods to the world. Although the dollar replaced the pound sterling as the most important reserve currency as early as 1925, establishing financial hegemony (Ecker Green, 2011), the United States pursued an isolationist foreign policy and a protectionist trade policy, and it was not until After World War II that the financial hegemony of the United States was secured. During the two world wars, Britain was willing but incapable of providing public goods, while the United States was able to do so. Kindleberg argues that the mismatch between power and responsibility between great powers is seen as a source of global disorder during the two world wars. Nye J. calls it the "Kindleberger Trap" to describe the chaos caused by the world's lack of leaders and providers of public goods, with shortages of security assets becoming the norm.
Nye also believes that China's rise may not be a show of strength, but a show of weakness, that is, a reluctance to shoulder the responsibility of providing public goods, thus plunging the world into disorder again, just as Trump has often attacked China's preferential terms of trade as a "developing country". China is already the world's second largest economy and is expected to surpass the United States to become the largest economy in the next 5-10 years (as early as 2014 in terms of purchasing power parity), but the level of RMB internationalization and the openness of financial markets have not reached the level matching the economic strength (Figure 1). This is an explanation for the lack of public goods and security assets in the world.
Figure 1: Economic and financial power asymmetry between the United States and China
Data: OECD, IMF, Orient Securities Wealth Research Center
In recent years, China has significantly accelerated the opening up of its financial services industry, and the positioning of the RMB's internationalization level is also matched by its comprehensive economic strength, which will alleviate global imbalances. In fact, after more than a decade of adjustment, global imbalances have eased significantly, and China's current account surplus as a share of GDP has fallen to about 1%. Morgan Stanley has predicted that China will have a -0.3% deficit (+0.99% in real) for the first time in 2019. And, as China transitions to a consumption-led economy, the size of China's deficit could reach -1.6 percent of GDP and $42 billion by 2030 as the aging population intensifies. In the face of the impact of the new crown pneumonia epidemic, the global recovery cycle is misplaced, and China's current account surplus has soared again, but the situation is unsustainable. The new development pattern of "double circulation" will accelerate the release of domestic demand potential, and the balance of payments will tend to be balanced for a long time, and the deficit will appear from time to time (Figure 2).
Figure 2: China's demographics, savings, and balance of payments
Source: United Nations, CEIC, Orient Securities Wealth Research Center
Second, China and the United States face the challenge of the "Thucydides Trap" politically and the "Samuelson Trap" in economic and trade relations. The two countries compete in economics, finance and technology, as well as debates over governance models, to continue.
Professor Allison of Harvard University proposed the concept of the Thucydides Trap and applied it to the analysis of Sino-US relations. Of the 16 great power struggles it examined, 12 broke out into wars. Although the mainstream view is that a "hot war" between China and the United States is unlikely, or even a "cold war" situation between the United States and the Soviet Union, it is undeniable that the challenge of China's rise to the global order and its discourse power constructed by the United States is real and will exist for a long time.
It is generally believed that the economic and technological competition between China and the United States in the 21st century is highly similar to the competition between the German Empire and the British Empire under Bismarck in the late 19th and early 20th centuries. The conservative powers, which have established both democratic and free-market systems, see themselves challenged by rising state-dominated economies, and have chosen to strike at the latter with counterproductive unilateral tariffs. This, of course, includes more sophisticated instruments such as standard-setting, technical restrictions, financial sanctions and an arms race. Today's China is considered to be the former German Empire, and germany after reunification in 1871 and the new China established in 1949 (especially after the reform and opening up in 1978) also achieved rapid industrialization. From the perspective of long-wave technology, it is currently in the introduction period of the sixth wave of technology (Industry 4.0), and the competition for technical standards such as 5G is a place where major powers must compete, just like the competition between the United Kingdom and Germany in radio communication standards at the beginning of the last century...
There are many similarities between the two periods, but equally, just as many differences can be found. The combination of these similarities and differences may not be a clear guide to the future. But what is certain is that, economically, as China gradually acquires the ability to set rules and has gained a lead in areas where it once had no comparative advantage, it is inevitable that the United States and China will enter the "conflict zone" (Gomorie& Bowmore, 2019). While cooperation is still the optimal solution, the strategy of cooperation is formed in conflict and bargaining. Therefore, although competition is the main aspect of the contradiction, limited cooperation is still worth looking forward to in order to maximize common interests.
Third, COVID-19 is a social experiment that not only further reveals the fragility of global value chains, but also exposes the imbalances in the economic and social development of American-style capitalism. No matter who is in power, the two parties in the United States need to solve the same problem, and the difference is only in the solution. Biden and his team members have a distinctly progressive tendency to introduce a "Roosevelt-esque" New Deal in the United States.
The COVID-19 pandemic has exposed and reinforced economic, social, and political inequalities in the United States. On the economic front, the low-wage class is significantly more affected than the high-wage class, the former has an unemployment rate of about 3 times that of the latter, and the pace of resuming work and production is also significantly slower; on the social side, whites have the lowest death rate of COVID-19, and African Americans are 3.8 times more likely to be white. Unemployment is higher for people with low levels of education. In terms of politics, epidemic prevention and control has strong political overtones. The study found that the governor's party was the most important predictor of early adoption of social distancing policies, compared to indicators such as the proportion of elderly residents, the proportion of people with college degrees, the health of the economy, or the availability of intensive care beds in hospitals. The pandemic has exposed deficiencies in the U.S. social safety net and reinforced the preference for "big government" and expanding government-backed health care and unemployment insurance programs (Rees-Jones et al., 2020). Therefore, Biden declared in his campaign to govern for all Americans, narrow the gap between rich and poor, end class antagonisms and ideological conflicts, and make it his mission to protect labor rights and expand middle-class groups, and even called foreign policy "middle-class foreign policy." In today's United States, the level of the divide between the rich and the poor has returned to the eve of World War I and is likely to expand further. The U.S. may be facing a "turbulent twenties" (Goldstone & Turchin, 2020).
Fourth, the class antagonisms and political-ideological divides in the United States have reached a level not seen before after World War II, and the two parties do not seem ready to act in unison. If the two parties cannot agree on domestic affairs, Biden's progressive program will be difficult to implement. If the Republican Party re-enters the White House in 2024, it may be a storm for both the United States and the world.
Historically, how much the president can do is not only related to his personal wisdom and resume (whether he has served in Congress, etc.), but more importantly, the comparison of seats between the two parties in Congress and ideological differences. If the president's party has full control of the Senate and House of Representatives, then the governing efficiency is the most efficient, and the greater the seat advantage, the more efficient it is. Typically represented during the Roosevelt Jr. administration, although the Republican Party opposed state intervention in the economy, in both houses of the Senate and the House of Representatives, the Democratic Party had an absolute say. This was an important condition for the great success of Roosevelt's New Deal. Second, if the president's party only partially controls Congress, but the two parties have a high degree of consistency, administrative efficiency will be relatively high. Conversely, if the two parties have a high degree of disagreement, efficiency will be significantly reduced. Third, if Congress is completely in the hands of another party and disagrees, then the president's executive space is only executive orders, and the possibility of passing legislative proposals is extremely low.
Policy continuity is essential to stabilize market expectations. In U.S. bipartisan politics, much depends on how long and to what extent a party controls the apparatus of power. Since Supreme Court justices are tenured, the distribution of power in the White House and Congress is crucial. From 1919 to 1933, the Republican Party completely controlled the White House and Congress; from 1933 to 1947, it was replaced by a Democratic Party; and from 1956 to 1981, the 26 years were a "honeymoon period" between the two parties, and the positions were more consistent. After Reagan, no party had an absolute dominance for more than 8 years. In the past 30 years, the rotation of "sitting on the throne" has become more frequent, the continuity of obtaining absolute discourse power has been worse, and the ideological differences between the two parties have become more obvious. This not only makes policy objectives tend to be short-term, but also makes it difficult for incumbent presidents to balance the demands of both parties. Because, if you compromise excessively, you are likely to be opposed by your own party and it will be difficult to obtain re-election.
Pew surveys show that after the 2008 financial crisis, there was a trend of Democratic party to the left and Republican to the right in the political spectrum of the Two Parties in the United States, and the intersection of the two became smaller and smaller (Figure 3). While the latest results are 2017, the gap is clearly widening during Trump's tenure. The gap in voter support for Trump between the two parties reached its post-World War II peak. Republican voters' approval rating for Trump was 87 percent, second only to President Eisenhower's 88 percent. However, Democratic voters' approval ratings for Trump fell as low as 6 percent, the lowest postwar record (Pew, 2020). This difference in perception is difficult to converge in the short term.
Figure 3: The ideological distribution of the two parties in the United States
Source: Pew, 2017.Orient Securities Wealth Research Center
Although the Democratic Party has won both the 2020 presidential election and the congressional re-election, it is difficult to say that it is overwhelming. Trump still received 46.8 percent of the popular vote, and the Republican Party narrowed the seat gap in the House of Representatives, maintaining the "balance of power" in the Senate (50:50 for senators). If there is a big disagreement, immigration, financial regulation, minimum wage, environmental protection, medical care and other issues need to get 60 votes to legislate, so the Republican Party still has a lot of binding force. What kind of situation will be presented in the 2022 congressional re-election and the 2024 presidential election is unknown. While the COVID-19 pandemic has won Democratic support from centrists and a small group of Republicans have changed their stance, the full convergence of bipartisan ideologies will require more "glue."
Fifth, the gap between rich and poor will continue to exist for a long time and will remain an important factor in suppressing effective demand and hindering economic growth. Economic inequality is both the result of inequality in political power and social status, which in turn leads to political upheaval and social unrest.
In the early 1980s, western countries began to transform from the "great compression" that occurred after World War I to the "great differentiation", and the inequality of income and wealth distribution intensified (Figure 4). Among them, the United States is the most prominent, the current level of rich-poor differentiation is the same as before World War I, the highest 1% of the income accounted for 20% of national income, the highest 10% and the lowest 90% each accounted for half. Inequality in the distribution of wealth is even more acute, with the top 1% of the wealthier accounting for about 40%. This situation has been shaped by a combination of factors such as globalization, financialization and technological progress, and governments have either fueled or resigned themselves to it, or at least with a weaker counterforce. The market naturally widens the divide between the rich and the poor, because the law of the market is close to the "law of the jungle". Two divides between rich and poor in American history were shaped during a period when free-market ideas dominated, one was laissez-faire after the Civil War, and the second was "neoliberalism" after the 1970s. However, we do not believe that the divergence between the rich and the poor is an inevitable result of the market economy. Policies formulated by governments that are surrounded by monopoly capital and elites also play an important role. The U.S. government's policies of encouraging immigration, deregulation, lowering the maximum marginal income tax rate, and low capital gains taxes and inheritance taxes have widened the gap between the rich and the poor.
Figure 4: Beginning in the 1980s, income inequality in western powers began to increase
Source: Piketty, 2020, Orient Securities Wealth Research Center
Based on an examination of the history of inequality in all of humanity, beginning with primitive societies, Scheider argues that violent shocks are a key force in correcting inequality, which can be summarized as the "Four Horsemen": massive mobilization wars, transformative revolutions, national decay, and deadly infectious diseases. The two world wars are a classic example. "The combination of material devastation caused by industrial-age wars, confiscatory taxation, government intervention in the economy, inflation, and disruption of global flows of goods and capital wiped out the wealth of elites and redistributed resources. They also serve as a unique and powerful catalyst for egalitarian policy change, providing a powerful impetus for franchising expansion, unionization, and welfare state expansion. For example, the October Revolution in the former Soviet Union, the decline of the Roman Empire and the Black Death all achieved "great compression".
At present, the United States is facing multiple shocks such as the disintegration of hegemony, economic recession, class conflict and the outbreak of the new crown pneumonia epidemic, and whether Biden can unite the will of the two parties and advance its progressive program will determine where the United States is going. The economic and social problems exposed by the COVID-19 epidemic will consolidate bipartisan consensus in many aspects, such as the importance of the industrial chain to national security and the differentiation between the rich and the poor for social stability. In the post-COVID-19 era, the medical industry chain and social security system may gain the status of the military industry during the world war and the Cold War, and the Democratic Party will inevitably make a big fuss about it. The key question is, what is the continuity of policy?
Sixth, quantitative easing is more difficult to exit in the short term, the zero interest rate/low interest rate environment will remain, and the government's path dependence on low-cost debt financing will be difficult to get rid of. Central banks' interest rate curve control and massive purchases of Treasuries are considered applications of modern monetary theory (MMT). The low-inflation environment of the past 10 years or so has been the "fertile ground" for MMT. In the next decade, possible reflation will compress the MMT space and drive long-end interest rates upwards.
It's been 12 years since the 2008 financial crisis, but the economy seems to be in a long post-crisis recovery phase. The impact of covid-19 has been exacerbated. One of the long-term effects of the financial crisis has been that unconventional quantitative easing has gradually become the norm, and government financing from central banks (or markets) at negative or zero interest rates has become the norm. The balance sheet size and government debt leverage ratio of the world's major central banks such as the Federal Reserve have reached unprecedented heights (Figure 5). The size of government debt (as a share of GDP) peaked after World War II (Figure 6). Negative interest rate bond issuance entered the "fast lane" in 2014, contracted in 2016-2019, and began to grow again in the second half of 2019, and after the new crown epidemic, issuance has increased sharply, and has now exceeded $18 trillion, exceeding the previous peak. Nominal GDP growth above the cost of debt financing is a condition for absorbing debt and reducing leverage. Since the demand side is suppressed by the gap between the rich and the poor, the driving effect of the new wave on the supply side in the short term, and the way to meet this condition can only rely more on the regulation of the interest rate curve by monetary policy.
Figure 5: Balance sheets of central banks in major Western countries (1900-2018, % GDP)
Figure 6: Changes in public debt in major Western countries (1850-2018, % GDP)
For the outlook for interest rates, in general, the left shift of the aggregate demand curve is greater than the right shift of the supply curve will keep the neutral interest rate low; the global savings surplus will be difficult to improve in the short term, which will continue to suppress the interest rates provided by core assets and form a feedback effect on the world; risk aversion will exacerbate the safe asset shortage, and the safe asset yield will be difficult to improve; inflation expectations, inflation volatility and term premiums may continue to remain low in the "long peace" era; capital excess and safe asset shortage seem to be a pair of twin phenomena The accumulation of government debt and the increase in financing needs form a hard constraint on the upward movement of interest rates. The advent of digital technologies and a cashless society also provides the feasibility of breaking through the lower zero boundary of nominal interest rates. In the short term, low or zero interest rates on the short end may continue. In the medium to long term, rising inflation expectations will steepen the yield curve and create upward "traction" on short-term interest rates, making it more difficult for central banks to control the yield curve and provide low-cost financing to governments.
Seventh, globally, the inflection point of demographics has emerged (Figure 7), and labor shortages may become a long-term constraint on the supply side.
Since the 2008 financial crisis, there has been a "great reversal" in the population structure of major countries and the world :(1) The post-war "baby boom" (1946-1964) of western developed countries represented by the United States began to enter the aging stage, which lasted until about 2025, while Japan has already entered an aging society in the late 90s; (2) China has seen a Lewis inflection point as early as 2005-2010, and the rural transfer labor force has changed from excess to insufficient. Around 2012, the aging process began, the producer/consumer ratio peaked and then fell rapidly, and the new working-age population began to turn negative. Since the two structural inflection points occurred almost at the same time, and because of the long-term constraints of the family planning policy, China's economic growth will be more negatively affected by the population. After the Lewis inflection point, China's labor costs have risen significantly and rapidly, which is a negative cost impact for the world. In other words, in terms of demographics alone, China has shifted from an exporter of deflation to a producer of inflation; (3) the room for improvement in the high age group and women's labor force participation rate has narrowed and has basically reached the upper limit. India and Africa will become the reserve armies of the global new labor force, but the former will be difficult to make up for the negative impact of developed countries and China because of class and other reasons, and the latter because of geographical divisions.
Figure 7: The global demographic dividend is gradually drifting away, and major developed countries and China have inflection points
Figures: United Nations, CEIC, Orient Securities Wealth Research Center
From a global perspective, the producer/consumer ratio has also reached an inflection point in 2015, and the downward trend of labor supply will be difficult to reverse. However, labor shortage does not ensure that the voice of labor factors in income distribution will increase, because the "second machine revolution" (Brian Jofferson et al., 2019) can not only make up for the shortage of unskilled labor, but also replace some skilled labor. If the government fails to adjust the income distribution mechanism and improve the social safety net system, the situation of capital suppressing labor will continue. The more advanced the technology, the more the demand side is depressed. A fictional dialogue is the best interpretation. The CEO of Ford said to the union president, "How are you going to get those machines to pay your union's dues?" Who do the trade unions represent for the right to collective bargaining? The union president replied, "How are you going to get these machines to buy your car?" "It is difficult for dispersed workers to act together, and the government needs to balance on behalf of the vulnerable, rather than adapting to the demands of the stronger groups."
Eighth, the division of labor in the value chain has changed from globalization to regionalization, and the "three-legged standing" pattern has been formed. The central countries in Asia, the Americas and Europe are China, the United States and Germany (Figure 8). The signing of the United States-Mexico-Canada Agreement (UAMCA) and the Regional Comprehensive Economic Partnership (RCEP), as well as the EU's "nirvana rebirth", will further enhance the stickiness of the regional division of labor system. At the same time, it is worth noting that the innovation of a new generation of digital technologies will significantly increase the proportion of trade in services, and in the near future, it may replace trade in goods and become the main body.
Since the 21st century, the division of labor and trade based on global value chains has undergone profound changes. On the one hand, although trade in goods is still the mainstay, trade in services (such as ICT, intellectual property, finance, etc.) and digital products are becoming more and more important. According to McKinsey's statistics, if digital services, services incidental to commodity trade, and intangible assets of multinational subsidiaries are included in the statistics of services, the total added value of global trade in services in 2017 has exceeded the total value added of commodity trade; on the other hand, the regionalization trend of the value chain pattern is more obvious, and a prominent change is that China's position in the division of labor in the global value chain has been significantly improved, and it has replaced Japan as an Asian trade center.
Figure 8: The "three-legged" pattern of global value chains
Source: Meng et al., 2018; WTO and OECD et al., 2019, GLOBAL VALUE CHAIN DEVELOPMENT REPORT 2019
After the 2008 financial crisis, cross-border direct investment slowed. The COVID-19 pandemic in 2020 has further highlighted the fragility of a single value chain layout. The wave of new technologies will make up for the labor shortage in developed countries. In addition to comparative advantage and efficiency, dimensions such as national security and intellectual property protection will have a stronger impact on value chains. Therefore, the return of manufacturing industry and the decentralized layout of the value chain will become long-term themes.
Ninth, the decline and convergence of global inflation over the past 30 to 40 years (Figure 9) is the result of a combination of factors such as the end of the Cold War, globalization, trade in value chains, technological progress, and demographic changes. The low inflationary environment that followed the 2008 financial crisis was closely linked to the poverty-rich divide that suppressed private sector demand and will continue to play a role in the future. However, in the past decade or so, the factors that once led to the downward trend of inflation have taken important turns, or become a driving force for long-term reflation.
Figure 9: Changes in core inflation rates in OECD and Non-OECD countries
Data: OECD, Orient Securities Wealth Research Center
Globalization, built on the credit standard of the dollar, is the context for understanding inflation. The globalization of trade in intermediate goods within the industry, the decline in the price of capital factors, the increase in the supply of labor and changes in the rules of monetary policy are all important reasons for explaining the global de-inflation and flattening of the Phillips curve. However, globalization has reversed in 2008, the downward price of capital factors is facing zero interest rate constraints, the global demographic dividend is gradually drifting away, the burden of an aging society is getting heavier, and monetary policy has quietly reduced the weight of stable inflation, and monetary authorities are not only facing more complex trade-offs, but also need to carefully maintain their independence. These factors are all forces calling for a return to inflation and the "resurrection" of the Phillips curve.
The superposition of multiple factors has undoubtedly increased the upward pressure on inflation, but whether reflation is really achieved depends on their synergy with factors such as the debt trap, the divide between the rich and the poor, and the new technological revolution. The gap between debt and wealth is an important factor in suppressing aggregate demand and nominal interest rates, which in turn has led to the stagnation of the global economy in the past decade, which is difficult to alleviate in the short term; a new generation of technological revolution represented by technologies such as artificial intelligence, the Internet of Things and big data is likely to alleviate the pressure of labor shortage and will also increase labor productivity. These two aspects, from the demand side and the supply side, respectively, suppress prices or wages. Taken together, negative supply shocks – such as continued rises in commodity prices – are more likely to be the driving factor for the upward movement of the inflation hub than positive demand shocks. Considering the special circumstances of this year, the inflation rate may rise in pulse next year and then gradually fall back. However, except for extreme cases such as widespread wars, the probability of inflation above 5% for a long time is still not high.
Tenth, the sixth wave of technology has arrived, but its pulling effect on economic growth remains uncertain. Insufficient effective demand from the private sector is a long-term problem, and the global economy may not return to the "golden age" after World War II.
Judging from the interpretation of the technical long wave ("Kangbo"), around 2010, a new round of industrial revolution may have entered the introduction period. The energy of each round of the technological revolution is different. This depends both on the nature (heavy or light) of the technological revolution itself and on how many countries are able to participate in it. The peak of global economic growth was in the fourth technological revolution after World War II, and the basic industries were petrochemicals, automobiles (starting from the third time), computers, etc. These industries are very "heavy", and at the same time, the devastating blows brought by the two world wars have caused many industrialized countries to undergo a process of "re-industrialization" (except for the United States), and some emerging market countries have also participated. So, to a certain extent, the post-war golden age gathered the fruits of the four industrial revolutions of mankind. The achievements of China's reform and opening up are also due to the absorption of the achievements of the five scientific and technological revolutions. One of our long-wave experiences is that in the process of the rise of the late-developing countries, there is only one chance to achieve high growth that lasts for 20-30 years, because this time it is the result of all the scientific and technological revolutions in history. Neither the developed countries nor China will be able to return to sustained high growth unless there is another tragic and devastating shock.
Figure 10: A new wave of technology has arrived
Every round of scientific and technological revolution is a "technology-economy" paradigm revolution. It works on the economy by creating entirely new industries; destroying traditional industries; and transforming them. National capacity is shaped by the strength of scientific and technological innovation. From a historical point of view, whether the late-developing countries want to overtake in curves or the first-mover countries want to maintain a leading position, the premise is to become the leader of a new round of scientific and technological revolution and innovation wave, which in turn requires it to become the original creator of trunk innovation (also known as basic innovation), not just the redevelopment and application of backbone innovation. In the future, the technological competition between major powers will enter a white-hot stage. The formulation of technical standards and industry rules not only determines which company becomes the leader of the industry, but also determines who can become the center of the world system.
China's long-term strategy of "introduction, digestion, absorption and re-innovation" is a catch-up strategy that helps to give play to the advantages of latecomers, but with the continuous compression of the catch-up space and the strengthening of the control of core technologies by the first-mover countries represented by the United States, China must break the path dependence and make up for the shortcomings in basic science, basic research and development and backbone innovation, in order to grasp the initiative in the new round of scientific and technological revolution.
No prediction is unconditional. Historical inevitability has always been a proposition that cannot be falsified. What has been discussed above is not so much the ten certainties as the ten constraints that run through the next decade. In economic planning, the optimal solution is determined by the objective function and constraints. The former is relatively stable, the latter is not changing, so it is mainly the latter that shapes the future, and it is especially important to pay attention to the inflection point of key variables, or the continuous impact of "black swan" events. Equilibrium can be multiple, and suboptimal equilibrium in The Prisoner's Dilemma is more common in reality.
The 2008 financial crisis was a key turning point in the post-World War II international economic order. More and more people are re-examining neoliberal values, reflecting on the welfare and distributional effects of globalization and financial innovation. Subsequently, de-globalization became a new trend, and Brexit and Trump's election as US president were both outcomes and "accelerators". The COVID-19 pandemic in 2020 significantly affected the outcome of the U.S. election (Baccini, 2020), highlighting the importance of social safety nets. The cognitive impact it produces will affect all aspects of political and economic life and deserve our deep consideration.
2020 sucks, what will happen in the 2020s? Best wishes!
(Shao Yu is the chief economist and assistant to the president of Orient Securities; Chen Dafei is the director of the Wealth Research Center of Orient Securities and a macro researcher.) ）