Last week’s post-election press conferences from the President, Senate Majority Leader Reid, and House Speaker Boehner offered some hope of a bipartisan deal to mitigate the budget bombshell of tax increases and spending cuts known as the fiscal cliff, due to hit on January 1, 2013. The status quo election outcome is likely to result in a deal in the lame duck session, but this is not assured given the gridlocked Congress. Last year’s August breakdown between these same parties over an increase to the debt ceiling is not encouraging. The battle is likely to result in a compromise that averts the worst-case outcome, but the negotiations themselves, coming on the heels of hard-fought election battles, may drive market swings in the days and weeks ahead.
While there were no televised attack ads or public debates, the second-largest economy in the world after the United States is also experiencing a political transition and faces some tough challenges ahead. The Chinese Communist Party’s 18th Congress, a week-long transition of power that started last Thursday and is set to end this Wednesday, is the most important political meeting in China in at least a decade. A new generation of leaders, headed by Xi Jinping, is replacing the current top bureaucrats and their chief Hu Jintao.
In his departing speech last week, President Hu Jintao cited many of the challenges China faces: a wide gap between the rich and the poor, imbalanced development between the wealthy cities of the east, and the struggling farms of the western countryside. Rather than redistribution, the departing head of the Communist party’s remedy was faster growth. He announced a commitment by the government to a doubling of China’s Gross Domestic Product (GDP) this decade, a goal that would bring China to two-thirds the size of the U.S. economy, a tall order given recent slowing trends.
China’s “Fiscal Cliff”
Much like in the United States, China’s political transition is taking place amid a looming crisis. China is experiencing its own version of a “fiscal cliff.” China’s growth rate has declined dramatically from double-digit rates to an official, and “politically-adjusted,” 7.4% – although externally verifiable measures of economic activity in the third quarter appeared to slow even more sharply. Inflation has weakened China’s competitive position in many product categories with other emerging market Asian nations. And China continues to sacrifice domestic consumption for the benefit of export growth, which is very weak, given soft demand from key customers due to the European recession and below-average U.S. growth.
As in the United States, factions within China have competing visions for how to combat these challenges. One party does not mean one vision. China’s new leadership must address the country’s economic problems, but there is no agreement on the path to take. Some constituencies want to reverse some of the decentralization that they argue has contributed to wasteful spending and re-establish central control over the economy. Others want to further westernize China’s version of communism, but that would lead to some still antithetical outcomes, like bankruptcies and unemployment, and risking social order that Chinese hold above all else.
With the power transitions taking place last week, it has become apparent that gridlock is now a global phenomenon:
In the United States, the two parties with two different visions on how to mitigate the fiscal cliff control different sides of Capitol Hill.
There is a lack of a consensus on action in Europe, with Northern Europe struggling with Southern Europe on how to best manage budgets and emerge from recession as the downturn deepens. Even Germany is increasingly feeling the downward pull on growth.
The Chinese Communist Party seeks to always create a consensus, but different constituencies that control different parts of the economy have conflicting visions on how to reverse the country’s slowing economic momentum, which risks paralysis.
The political systems of all three of the world’s major governments are finding it difficult to make decisions vital to economic growth.
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