Hamish McRae: Forget grandstanding, dear leaders, and just learn from your G8 friends

Economic View

G8 meetings ain't what they used to be. The first so-called economic summit took place in 1975 at the château at Rambouillet in France at the invitation of President Valéry Giscard d'Estaing.

The idea was to co-ordinate economic policy to counter what was then the worst recession since the Second World War. In economic terms we are pretty much at the same point in the cycle now in that things are probably no longer going down, or at least not by much, but the recovery is very uncertain.

But if the point of the cycle is similar, the players are very different. The original six nations (France, US, UK, Germany, Italy and Japan) were/are all developed countries with broadly similar economic policies and objectives. Canada, which joined later, is too. But Russia, number eight, is utterly different and its membership was a recognition of its political importance rather than a shared economic vision.

Now, however, as the G8 no longer reflected where power in the world economy really lay, it has been supplemented by a parallel meeting of a G5, made up of the most important emerging economies: Brazil, India, China, Mexico and South Africa. The global ranking of world economies as projected for next year by Goldman Sachs, shows how China will clearly have passed Japan to become the world's second-largest economy – it has probably passed Japan in size round about now. The others are still much smaller relative to the "old" developed economies, but the rankings are changing fast. For example, it looks as though India will pass the UK within 10 years and it seems likely to move into the number three slot behind China and the US within 20 years.

That shift of power has speeded up during the downturn. If you have the Chinese economy growing at about 7 per cent this year and Japan shrinking at about 5 per cent it does not take long for their relative positions to flip. But the huge issue is how has China (and indeed India) managed to come through this downturn in so much better shape than the rest of us. An economic summit between the major economies ought to be about learning from each other. I do not, at least from the stuff that has emerged, have much sensation that this sort of issue is even being talked about.

China's exports have been hit just as hard as everyone else's. They have been running negative right through this year, a much worse outcome than during the early 2000s dip. But China has gone on growing. How?

The simple answer is that it has been able to switch from export to domestic demand. In the first half of this year, for the first time ever, more cars were sold in China than in the US. There has been a boom in rolling out 3G telecom networks. Building has been boosted by releasing more land for homes and increasing lending for property development. In fact, the fiscal and monetary boost the Chinese authorities have pumped in is proportionately much more than that of the US or, indeed, as far as I can see (figures are opaque), any developed country.

We have to ask: how have they managed to do this? The answer comes in two halves. The first part is that they had a lot of leeway in the economy that enabled them to do so. The second is that this is still a command economy, not a pure market one.

China can boost consumer demand because demand was low to start with. Consumption has been bounding upwards, at least in the more developed parts of the country – the disparity between coast and centre, between east and west, is part of the reason why social tensions have been so strong. The central command is terrified by such unrest, witness the early return of China's President Hu Jintao from the summit before it even began. For politics-watchers, the summit has become a touch of Hamlet without the prince. But for economy-watchers, what will happen to Chinese growth in the months ahead is a bigger story. You see, Chinese consumption is only about 40 per cent of GDP; it is 70 per cent in the US, a little lower in Europe. So all the authorities have to do is figure out a way of persuading Chinese people to spend more. In the developed world, governments don't have that authority. In China there are enough levers to pull.

That is the second point. The banks can be urged to lend directly to consumers to enable them to buy products, and to companies to fund their expansion. The banks have, by and large, avoided the world's sub-prime meltdown. Local authorities own much of the land, so they can release more for development. And the state can fund big infrastructure projects, such as the expansion of the 3G networks.

This leads to two huge questions that other summit nations should surely be asking. One is whether there are elements of Chinese economic management that carry lessons for the rest of us. The other is whether the Chinese programme is sustainable.

I cannot pretend to have satisfactory answers to either. But on the first, it is worth noting that one of the reasons why China has been able to boost demand is because it has been a society that saves. If families have a habit of saving, which they have to do partly because social provision is poor, then they have the option of increasing their spending without having to borrow: they can simply save a little less. I would not for one moment suggest that the West thinks of returning to a command economy; that would be absurd. Nor am I suggesting we seek to cut consumption to 40 per cent of GDP. But maybe we have something to learn from the savings habit of Chinese families, the sense that people have a duty to provide for their own futures and, when they borrow, should do so for things like homes rather than services such as holidays.

And will it work? Well, so far it seems to have done so. It is impossible without travelling round China to get much feel for the distress that some parts of the country are undoubtedly experiencing, and you have to be very cautious about any figures that come out. But if China does come through this downturn without losing much of its economic momentum then the rest of us have some hard questions to ask about our economic management.

You see, this is what economic summits used to be about. They were not for political grandstanding or for announcing "initiatives" that could just as well be done via normal diplomatic interchange. They were for leaders to talk quietly and thoughtfully about whether they could manage the world economy more effectively. What could they learn from each other? Nothing much will come out of this event, I am afraid, that would not have happened anyway. We all know that. The most useful thing would be for Western leaders to learn a little from the leaders of countries doing rather better than their own. Is it too optimistic to hope that maybe something will rub off?

A slimmed-down General Motors offers hope as well as a warning

On Friday General Motors emerged from Chapter 11 bankruptcy, with the US government owning some 61 per cent of the company, the Canadian government the union's health care trust, and the bondholders owning the rest. But the project will work only if the company really does reorganise itself to be more competitive. And, in any case, there are serious losers from what has happened.

The losers include the shareholders of course, but also the workers who will lose their jobs, many of the dealers, some of the companies that entered into contracts with the old GM, and possibly the US taxpayer – though that will depend on how quickly the company can be floated off, as is the intention, and at what price.

We don't know yet what will happen to the Opel/Vauxhall division of GM, but two and possibly three bidders are still in negotiation to buy it, so it will certainly be sold. Ultimately, what will determine the success or failure of the operation will be what happens to GM in North America. Four main brands survive – Chevrolet, Cadillac, Buick and GMC – while other famous names including Pontiac now die.

The company plans to close around a third of its plants and lose about a quarter of its staff. It is savage stuff, but cutting bits that don't work is a necessary, but insufficient, condition of a return to secure profitability. The product line-up has not altered as a result of the financial reconstruction and we will have to see if the new and slimmed-down management can make the right choices over the next three years or so to rebuild the group.

I find three things astounding here. First, the pace of decline. Yes, people have been bad-mouthing GM for years, but two years ago it was still the largest car manufacturer in the world. Second, how narrow the gap is between success and failure: Fiat, about to go under five or six years ago, is now is strong enough to become the major owner of Chrysler.

And third? It is how firms in trouble often go back to a trusted oldie. Bob Lutz, 77, is not retiring after all. He's to take charge of "all creative elements of products and customer relationships". There is hope for us all.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent