Obama, an economic unilateralist

By Spengler

The silliest thing that clever people are saying about the world economic crisis is that the United States will lose its position as the dominant world superpower in consequence. On the contrary: the crisis strengthens the relative position of the United States and exposes the far graver weaknesses of all prospective competitors. It makes the debt of the American government the world's most desirable asset. America may deserve to decline, but as Clint Eastwood said in another context, "deserve's got nothing to do with it". President Barack Obama may turn out to be the most egregious unilateralist in American history.

America's supposed decline dominates the glossy magazines. Last September, Germany's Finance Minister Peer Steinbruck intoned, "One thing seems probable to me. As a result of the
crisis, the United States will lose its status as the superpower of the global financial system." The German official is quoted by Professor Richard Florida in the March 2009 Atlantic Monthly, who adds, "You don't have to strain too hard to see the financial crisis as the death knell for a debt-ridden, overconsuming and underproducing American empire - the fall long prophesied by [British historian] Paul Kennedy and others." (Florida's views are more nuanced).

And the ubiquitous Professor Niall Ferguson told a Vanity Fair interviewer on January 20 that America would crumble like Great Britain in the 1970s. "It certainly will be extremely painful ... Half the federal debt is held by foreigners. And if the US either defaults on debt or allows the dollar to depreciate, the rest of the world is going to say, 'Wait a second, you just screwed us.' And that's, I think, the moment at which the United States experiences the British experience - when, in the dark days of the 60s and 70s, Britain fundamentally lost its credibility and ceased to be a financial great power."

But is this true? In fact, the rest of the world has queued up to lend America as much money as it might wish to borrow in order to get its consumers to spend again, and buy the manufactures and raw materials of the rest of the world. It won't work, but that is another matter. As I wrote last October, the world isn't flat, contrary to New York Times pundit Thomas Friedman's vision of a level global playing field. It's flattened. (see The world isn't flat, it's flattened, Asia Times Online, October 28, 2008).

Here's a thought-experiment to gauge the merits of different national markets as a safe haven. Close your eyes and try to imagine what Germany, Japan and China will look like 30 years from now, that is, when a newly-issued long-term bond will mature. Citing Pope Benedict XVI's critique of economics, I argued recently that the market cannot form accurate long-term expectations; it only can imagine future states of the world. (See Benedict XVI is magnificently right, Asia Times Online, December 9, 2008). Let us see what imagination tells us about the world's largest capital markets. The conclusions of this exercise, I will show later, reinforce the founding premises of "supply-side economics", the theory that guided America out of the 1979-1983 mini-depression.

Imagination fails in the case of Europe and Japan. One out of every four Germans today is older than 60, and in 30 years the proportion will rise to two-fifths. Japan is even worse: 30% of Japanese today are above 60, and in 30 years the number will be almost half. What does a national economy look like when the demographics are so skewed to pensioners?

We never have seen anything like this before in all of history. Pension and health costs projected forward will crush these economies a generation from now. Taxes will suffocate the dwindling population of young workers. A straight-line projection of present trends takes us to the cusp of national failure. We do not know whether present trends will continue in a straight line, to be sure. The race is not to the swift, nor the battle to the strong, as Damon Runyon said, but that's the way to bet.

Children are the wealth of nations, provided that their nations can put tools in their hands and the rule of law at their back. Countries that lack children are poor. Aging Germans do not have young people to whom to lend. That is why they lent their savings to Americans, through the subprime market, and why European banks are if anything worse off than American banks.

Imagination also fails in the case of China, not because extrapolation of present trends is so frightening, but rather because economic growth cannot possibly continue at the pace of the past 10 years. China is a different country than it was 30 years ago, and it will be a different country in another 30 years. It is in the midst of the largest migration of peoples in the history of the world, the fastest rate of urbanization and the greatest economic expansion of which we know. Its political system and social structure will change so radically that it is impossible to form a clear picture of the country in 2040.

Great opportunities are attended by enormous dangers. China has more young people than any other country in the world, more than all of Europe put together, but too many of them are trapped in rural poverty, uneducated and untrained.

That is why Chinese save half their income, more than anyone else in the world. Part of China's steroidal savings rate can be explained by the one-child policy. People whose children will not care for them in old age require financial assets. What economists call precautionary savings, saving for a rainy day, explains a great deal of the Chinese demand for savings. The sun has shone on the Chinese economy for a generation, but when it rains, who is to say how hard it will rain? Extreme uncertainty about the future explains China's savings rate.

But America's future is not hard to visualize in 2040. In fact, America in 1979 was not much different from America in 2009. Minor adjustments await Americans over the next generation compared with the great changes affecting its prospective competitors.

China may offer greater prospective returns than America - a billion Chinese will make the transition from a low-productivity rural environment into a high-productivity urban environment during the next generation - but it also requires a greater appetite for risk. Nothing can compete with the United States as a safe-haven investment for the long term. German petulance about America's domination of world markets rises in inverse proportion to the German birth rate. The German finance minister should know better.

The Chinese have no such illusions. Luo Ping, a director general at the China Bank Regulatory Commission, told an American audience, "We hate you guys. Once you start issuing $1 trillion-$2 trillion ... we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do." (Financial Times, December 12, 2008.)

A fearful world is buying trillions of dollars of securities from the US Treasury. Of all the cash flows in the world, nothing is more reliable than the tax revenues of the American state, the longest-lasting government on Earth presiding over the world's largest economy.

During the 1960s, a young Canadian economist, Robert Mundell, argued that an increase in US government debt might represent a true increase in wealth under certain circumstances. It is relatively easy to capitalize corporate income streams through bonds, Mundell observed, but much harder to capitalize household income streams. If the government cuts taxes and issues bonds to replace the lost revenue, the increase in the float of the government bonds outstanding will represent an increase in wealth, provided that the tax increase stimulates growth, and the resulting growth brings in enough taxes to pay the interest on the bonds.

From this insight emerged the economic program of president Ronald Reagan. Drastic tax cuts, reducing the marginal tax rate from 70% to 40%, vastly increased the US budget deficit during the early 1980s. But the increase in revenues from a recovering economy more than paid the interest on the additional bonds, and the increase in government debt represented an increase in wealth. Mundell went on to win the Nobel Prize for Economics in 1999, for work in a different area.

America's economic crisis in 2009 bears little resemblance to the mini-depression of 1979. Then, the baby boomers were in their 20s and 30s; now they are in their 50s and 60s. As I wrote in my year-end essay, the Reagan administration made it easier for homeowners and businesses to obtain leverage (see Waking from Lever-Lever Land, Asia Times Online, December 25, 2008). Young people need leverage to start families; old people need savings. The medicine that cured the economy in the early 1980s turned into an addiction during the 2000s.

But there is a perverse parallel between the Treasury market of 1979 and 2009. In both cases, the market is willing to absorb an enormous increase in the float of US government securities. Looking into the future, no cash flows in the world are more secure than the tax revenues of the American Treasury.

The greater the uncertainty attached to all other cash flows, the greater the demand for US Treasury securities. America does not have to throw its political weight around to persuade the world to fund between $1.5 trillion and $2 trillion of new debt issuance; its political weight stems from the fact that the world needs the United States as a safe haven for its money.

The difference, of course, is that the increased issuance of Treasury securities during the Reagan years represented an absolute increase in wealth, capitalizing the recovery prospects of the US economy. All the other economies of the free world benefited. The Obama administration's multi-trillion dollar borrowing requirement constitutes a shift in relative wealth. Less capital will be available for other economies. The relative position of the United States will strengthen radically, which is to say that the position of many other parts of the world will weaken radically.
Obama isn't entirely to blame for this sorry state of affairs, to be sure, given that these trends were in place before he took office. Still, it is incongruous that the liberal consensus welcomed the multilateralist Obama and bade good riddance to the unilateralist Republicans. A radical shift in economic power in favor of the United States makes Obama the moral equivalent of a unilateralist, to a degree that Reagan never could have imagined.

To overpay unionized construction workers to build bridges, and bail out the bloated budgets of American states, the Obama administration will flood the world with so much Treasury debt that capital will flow out of the poorest countries to buy it. Rather than protest this outrageously unilateralist action, the rest of the world encourages him to do so, hoping that somehow the Obama stimulus package will get American consumers to buy their goods once again.

During the Reagan years, the rest of the world had the right to grumble about the dominance of the American economy. Now that American policy has become a millstone around the necks of most of the world's economies, the rest of the world's leaders flatter Obama while he beats them. No Republican president ever had it so good.

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Author: By Spengler
Original Source: Asia Times
Date Published: Feb 18, 2009
Web Source: http://www.atimes.com/atimes/Global_Economy/KB18Dj05.html
Date Accessed Online: 2009-02-18

Economic Lessons From Lenin’s Seer

NIKOLAI KONDRATIEFF was not exactly a faceless bureaucrat in post-revolutionary Russia. He had held an important economic post in the last, short-lived government of Alexander Kerensky before the Bolsheviks took charge; then he founded an influential research organization, the Institute of Conjecture, and became an important theorist of the New Economic Policy under Lenin.

But he would long ago have been consigned to the dustbin of history had it not been for his quirky academic passion, which he pursued in a series of books and papers through the 1920s. Reviewing economic history since the late 18th century, Kondratieff came to a startling, doomsday conclusion: that capitalist economies were fated to go through regular and predictable cycles of around 50 years, inevitably culminating in a depression.

Despite having become a committed Communist and the author of a theory of inevitable if periodic capitalist collapses, Kondratieff was executed in 1938, a victim of the Stalinist purges. Apparently, he had raised too-trenchant questions about the government’s newfound enthusiasm for heavy industry and agricultural collectives. After spending eight years in the gulag, he left behind a final letter to his daughter, poignantly urging her to be “a clever and good girl” and “not to forget about me.”

It was a fitting epitaph, for whenever it seems Kondratieff is about to be forgotten, the economy nosedives. And once again, perhaps the most dismal of the dismal science’s practitioners is back in the news, which his disciples try to fit into the cycles, or “Kondratieff waves,” that he described.

Kondratieff and his disciples — among whom was Joseph Schumpeter, who wrote about capitalism’s “creative destruction” — identified four stages in each cycle, corresponding to the seasons. After spurting ahead in the spring phase, they said, the economy cruises through the summer, experiences a scary drop as autumn sets in, and then — despite the TARPs, TALFs and whatever else governments do — descends into a winter phase that can last up to 20 years.

In case you hadn’t noticed, it has been getting quite chilly lately.

Over the years, Kondratieff’s appeal has waxed and waned in counterpoint to the economy, falling out of favor in good times but charging back when things look bleak. But his theory has never been accepted by mainstream economists, who consider it an occult hall of mirrors in which any sort of pattern can be discerned by shifting starting dates and definitions.

Kondratieff’s adepts have cried depression before, for example in 1982. Reporting on the buzz his theory was getting during that downturn, a New York Times correspondent, Paul Lewis, wrote: “According to Kondratieffian analysis, the world is caught in the fourth great economic downswing since the 1790’s, a period of global recession that will probably last until near the end of the century when a new age of prosperity will begin — and there is little anyone can do about it.”

Today, Kondratieff’s disciples (a dwindling band, by the way) are just as certain that the bad times began in 2000, with that year’s stock market crash. That was followed by the autumn phase of the Bush years, characterized by an enormous (Kondratieff would say desperate) expansion of debt and leverage in an attempt to maintain the prosperity of the spring and summer years.

Evidently, Kondratieff waves tend to be in the eye of the beholder, and whatever value they have is descriptive, rather than predictive. After all, the American economy ultimately shrugged off several market drops like that of 2000, allowing the 25 years that followed 1982 to be a period of largely uninterrupted growth. But in the last decade of that period, the United States’s growth was driven by debt in a desperate attempt to maintain an unsustainable level of consumption, a stage that Kondratieff’s theory quite accurately describes.

“The people who do the predicting are usually not central within the discussion of economics,” said David Colander, an economic historian at Middlebury College, and an expert in the discipline’s crank theorists. But economies do “have this tendency to exceed” that Kondratieff and others have grasped, he added, and that is largely lost in modern economic theory.

He offers the Austrian School as a possible rival to Kondratieff’s line of thought. Austrian economists tend to emphasize a laissez-faire approach and entrepreneurship (not the most popular policies at this moment) and strict limits on money supply growth, usually by hitching the currency to the gold standard.

While considered outside the mainstream, the Austrian School is far more respectable, counting in its ranks two Nobel Prize winners, Friedrich Hayek and James Buchanan. Peter Schiff of Euro Pacific Capital — an adviser to the libertarian presidential candidate Ron Paul and one of the most prominent doomsayers in the current collapse — also subscribes to its theories.

Hayek is said to have successfully predicted the Great Depression and some Austrian School devotees are taking credit for calling this one. “The financial meltdown the economists of the Austrian School predicted has arrived,” Mr. Paul wrote in September, 11 days after Lehman Brothers filed for bankruptcy.

In the 1930s, John Maynard Keynes displaced Hayek and the Austrian School in intellectual popularity, establishing his “general theory” as the economic bible of the postwar decades. The Austrian line of thought made something of a comeback in the Reagan years, but never quite gained acceptance in the economic fraternity, Mr. Colander says.

“It probably should,” he says.

“A good profession should take its outsiders more seriously,” Mr. Colander says. “They make you look at things in different ways. The worst thing for policy makers is to think they are right.”

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Author: KYLE CRICHTON
Original Source: New York Times
Date Published: February 15, 2009
Web Source: http://www.nytimes.com/2009/02/15/weekinreview/15crichton.html
Date Accessed Online: 2009-02-15

China to the Rescue? Not!

Hong Kong.

I had no idea that many of those oil paintings that hang in hotel rooms and starter homes across America are actually produced by just one Chinese village, Dafen, north of Hong Kong. And I had no idea that Dafen’s artist colony — the world’s leading center for mass-produced artwork and knockoffs of masterpieces — had been devastated by the bursting of the U.S. housing bubble. I should have, though.

“American property owners and hotels were usually the biggest consumers of Dafen’s works,” Zhou Xiaohong, deputy head of the Art Industry Association of Dafen, told Hong Kong’s Sunday Morning Post. “The more houses built in the United States, the more walls that needed our paintings. Now our business has frozen following the crash of the Western property market.”

Dafen is just one of a million Chinese and American enterprises that constitute the most important economic engine in the world today — what historian Niall Ferguson calls “Chimerica,” the de facto partnership between Chinese savers and producers and U.S. spenders and borrowers. That 30-year-old partnership is about to undergo a radical restructuring as a result of the current economic crisis, and the global economy will be highly impacted by the outcome.

After all, it was China’s willingness to hold the dollars and Treasury bills it had earned from exporting to America that helped keep U.S. interest rates low, giving Americans the money they needed to keep buying shoes, flat-screen TVs and paintings from China, as well as homes in America. Americans then borrowed against those homes to consume even more — one reason we enjoyed rising wealth without rising incomes.

This division of labor not only nourished our respective economies, but also shaped our politics. It enabled China’s ruling Communist Party to say to its people: “We will guarantee you ever-higher standards of living and in return you will stay out of politics and let us rule.” So China’s leaders could enjoy double-digit growth without political reform. And it enabled successive U.S. administrations, particularly the current one, to tell Americans: “You can have guns and butter — subprime mortgages with nothing down and nothing to pay for two years, ever-higher consumption and two wars, without tax increases!”

It all worked — until it didn’t.

With unemployment now soaring across the U.S., said Stephen Roach, the chairman of Morgan Stanley Asia, Americans — “the most over-extended consumer in world history” — can no longer buy so many Chinese exports. We need to save more, invest more, consume less and throw out most of our credit cards to bail ourselves out of this crisis.

But as that happens, we need China to take our discarded credit cards and distribute them to its own people so they can buy more of what China produces and more imports from the rest of the world. That’s the only way Beijing can sustain the minimum 8 percent growth it needs to maintain the political bargain between China’s leaders and led — not to mention pick up some of the slack in the global economy from America’s slowdown.

However, if I’ve learned one thing here, it’s just how hard doing that will be. China’s whole system and culture nourish saving, not spending, and changing that will require a huge “cultural and structural” shift, said Fred Hu, chairman for Greater China for Goldman Sachs.

In China, for instance, to buy a home you have to put at least 20 percent down, and the average is 40 percent. If you try to walk away from the mortgage, the bank will come after your personal assets. Moreover, China can’t just shift production from the U.S. market to its own consumers. Not many Chinese villagers want to buy $400 tennis shoes or Christmas tree ornaments.

Also, China has no real Social Security, health insurance or unemployment insurance. Without that social safety net, it’s hard to see how Chinese don’t end up saving most of their stimulus. “You open up the newspaper every day and you hear about this factory shutting down or that supplier going belly up,” said Willie Fung, whose company, Top Form International, is the world’s leading bra maker. “You can never be too careful in this financial climate.”

As such, “the world should not have a false hope that China can cushion the global downturn,” by stimulating its domestic demand in a big way, said Frank Gong, head of China research for JPMorgan Chase. “The best thing China can do is keep its own economy stable.”

It’s good advice. China is not going to rescue us or the world economy. We’re going to have to get out of this crisis the old-fashioned way: by digging inside ourselves and getting back to basics — improving U.S. productivity, saving more, studying harder and inventing more stuff to export. The days of phony prosperity — I borrow cheap money from China to build a house and then borrow on that house to buy cheap paintings from China to decorate my walls and everybody is a winner — are over.

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Author: THOMAS L. FRIEDMAN
Original Source: New York Times
Date Published: December 21, 2008
Web Source: http://www.nytimes.com/2008/12/21/opinion/21friedman.html
Date Accessed Online: 2008-12-27

After 30 Years, Economic Perils on China’s Path

SHENZHEN, China — The ruling Communist Party threw itself a big party on Thursday. The country’s leadership marked the 30th anniversary of the reform era that transformed China into a global economic power and, in doing so, changed the world.

At a triumphant ceremony at the Great Hall of the People in Beijing, President Hu Jintao invoked Deng Xiaoping, who consolidated power in 1978 and began “reform and opening.” Mr. Hu emphasized the party’s unwavering focus on economic development. “Only development makes sense,” said Mr. Hu, quoting Deng.

But beyond the oratory, Mr. Hu and other Chinese leaders are now facing a new era in which Deng’s export-led economic model, as well as his iron-fisted political control, face unprecedented challenges. Global demand for Chinese goods has slumped, unrest is on the rise in the industrial heartland, and China is scrambling for a new formula to preserve stability and ensure growth.

The downturn is so swift — exports fell last month for the first time in seven years — that Beijing is being forced to abruptly shift priorities. Until recently, Mr. Hu had been trying to curb excesses like rampant pollution and income inequality that posed environmental and social challenges to long-term development. Now, those priorities seem eclipsed.

Instead, leaders are restoring tax breaks for exporters and pushing down the value of China’s currency to encourage exports. At the same time, they are casting about for ways to spur domestic demand and wean China’s economy off its dependence on foreign markets swept up in the global financial crisis.

Politically, Chinese reformers had hoped the symbolic weight of the anniversary and the nation’s post-Olympic glow might propel some measure of political reform to address official corruption and help defuse rising social tensions.

But as Beijing worries about strikes and mass layoffs even in some of its most prosperous areas, official tolerance of political dissent has seemingly narrowed. This month, a prominent dissident was detained after writing an open letter calling for greater democracy. An editor at one of the country’s leading newspapers was reassigned after publishing articles deemed too politically provocative. “We must draw on the benefits of humankind’s political civilization,” Mr. Hu said in his Thursday speech, according to Reuters. “But we will never copy the model of the Western political system.”

If any place symbolizes China’s reform era, it is Shenzhen, a city conceived from Deng’s imagination — and one now in the cross hairs of the economic downturn. Thursday’s celebration was timed to a 1978 political meeting, the Third Plenum, which anointed Deng as China’s leader and introduced “reform and opening.” Two years later, Deng pointed at a sleepy fishing village in coastal southern China, near Hong Kong, and ordained it the country’s first “special economic zone” to experiment with foreign investment and export manufacturing. Today, Shenzhen is a city of more than 10 million people ringed by thousands of factories.

A factory district just outside Shenzhen, Fuqiao Industrial Park, is a snapshot of the economic troubles rippling through the region. Several small factories in the park have closed in recent months. At Wang Jinda Industries, the lettering had been scraped off the entrance after the owner closed last week. Two customers had arrived for a shipment of goods only to find an empty factory.

Meanwhile, some factories that remained open were struggling. Workers at a large printing factory said the owners had stopped recruiting new workers in September while many others had quit. Several workers said wages had dropped significantly as the owners were reducing the length of shifts. A few workers accused owners of deliberately trying to drive down wages to force workers to quit. “Everybody is worried,” said Lin Baozeng, 26, a cashier at a canteen inside the industrial park. Her daily lunch crowd has dwindled to about 100 migrant workers from 500.

“If the economy is bad,” Ms. Lin added as her 3-year-old daughter played nearby, “how can I afford to raise my child?”

As yet, gauging the scale of factory closings remains difficult in Shenzhen and surrounding Guangdong Province, the country’s main export engine. Guangdong was already making a concerted effort to move up the manufacturing value chain at a time when rising labor costs and greater government regulations were making some smaller, cheaper exporters unprofitable. But the recent export slowdown is having an unanticipated impact. More than 7,000 small- and medium-sized factories have closed in recent months. Shenzhen’s mayor said 50,000 people in the city alone had lost their jobs in the last few months.

And there are mounting signs that the problems could be far broader. Over all, China’s economy will continue to expand next year, but some economists say the rate of growth could fall as low as 5 or 6 percent, far slower than the double-digit pace of the preceding several years.

State media have reported that 4.85 million migrant workers have returned to the countryside early before next month’s annual Lunar New Year holiday. Some inland provinces have already announced subsidies for unemployed returnees. On Thursday, the country’s official news agency, Xinhua, reported that 6.5 million migrant workers may be jobless next year.

Beijing has recently restored some export subsidies that had been repealed as part of earlier efforts to rebalance the economy toward domestic demand. Huang Yasheng, a management professor at the Massachusetts Institute of Technology, said such subsidies made short-term political sense, given the huge numbers of jobs provided by factories, but did not address China’s long-term economic challenges. “I see the export supports as a crisis measure,” Mr. Huang said. “They really have no other way to maintain employment.”

Mr. Huang said the government’s focus on exports and expanding the role of state-owned corporations since the 1990s had meant too little of the country’s wealth had trickled down to ordinary people. He said household incomes had lagged well behind overall growth, meaning that hundreds of millions of ordinary people still had relatively little spending money — a major problem when the government is trying to rapidly increase domestic consumption. “It’s a huge challenge,” said Mr. Huang, author of a recent book, “Capitalism with Chinese Characteristics.”

China’s immediate answer is a stimulus program focused on infrastructure like railways and ports. State-owned banks are being ordered to make credit easily available, and business taxes on real estate sales were waived this week. Such steps may be crucial to buttressing the Chinese economy and preventing a deeper global recession. Yet some Chinese officials are wary of the potential impact of another phase of state-led industrial development.

The government stimulus program enacted in response to the 1997-98 Asian financial crisis enabled China to avoid the recessions suffered by neighboring nations. Yet it also propelled the enormous investment in heavy industry that is a major reason China is now the world’s largest emitter of greenhouse gases.

In an opinion article in the online edition of People’s Daily, Pan Yue, the outspoken vice minister of the Ministry of Environment, blamed Western excess for the global crisis and warned that China risked ruin if it blindly pursued Western industrial models.

“China’s reform and opening has achieved in 30 years the economic gains of more than 100 years in the West — yet more than 100 years of environmental pollution in the West have materialized in 30 years in China,” Mr. Pan wrote. “The present global economic crisis shows that if China continues down the old road of Western industrial civilization, it will only come to a dead end.”

China is a far more open and dynamic place than the country Deng first unleashed three decades ago. Much of that change has come from ordinary people pushing for more space in society, just as much of China’s economic success has come from the entrepreneurial energy and hard work of its work force. Yet Communist Party leaders have been careful to hoard political power: independent unions and political opposition remain illegal.

Earlier this year, Shenzhen’s leaders seemed eager to position the city as a pioneer of political reform. Shenzhen officials published a reform plan that advocated some local elections and greater leeway for local legislatures and courts to make decisions. But those plans, later tempered by provincial leaders, now seem derailed as officials are focused on maintaining social stability.

Some influential Chinese say more should be done. Yu Keping, a scholar at a leading Communist Party research institute who has advised top leaders, published essays this week in leading Chinese newspapers about the need for greater democratization to combat corruption.

In an interview with The New York Times, Mr. Yu called for “breakthrough reform.” But he also said that change must come incrementally, given the need for social stability, with an initial emphasis on better governing and rule of law. “We need to promote democratization in China,” Mr. Yu said. “On the other hand, we need to promote social stability. If we had an election right now, we might end up like Thailand.”

In fact, the limited momentum toward modest political change could well be sidelined by economic problems, some experts say. “A real huge question is how the economic downturn is going to affect any sort of political reform,” said Joseph Fewsmith, a Boston University professor who studies Chinese politics. He said officials might deliberately slow efforts to carry out a new rural land reform law approved this fall to grant farmers the ability to transfer their land rights.

“People worried about social stability are going to proceed very, very slowly,” Mr. Fewsmith said.

Zhang Jing and Huang Yuanxi contributed research.

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Author: JIM YARDLEY
Original Source: New York Times
Date Published: December 19, 2008
Web Source: http://www.nytimes.com/2008/12/19/world/asia/19china.html
Date Accessed Online: 2008-12-20

Ins and outs of a China courtship

Among United States-led like-minded alliances, a nascent China policy position has been formulated based on the idea of "international socialization" [1]. The idea is to enmesh states in a compound network structured by international organizations, conventions and norms. Accordingly, the process of socialization will push China to comply with the normative values of the international society.

For countries like the United States, an "internationally socialized" China has become a necessity for at least two reasons. First, international norms constraining any potential irrational behavior of this rising power will ease the threat perceptions emanating from its rise. Second, engaging China - rather than isolating it - in the near term may be more constructive and plausible to ensure greater transparency of a regional hegemony. The propositions reflect, undeniably, the universal anxieties over China's emerging threats and the uncertainty that its rise poses to regional and international regimes.

This "taming China's rise" strategy, however, overlooks the People's Republic of China's (PRC) "agency" of influencing world politics. Even though China evinces its appreciation of multilateralism, what really concerns China is not the matter of its "internationalization" to the status quo, but ways to improve Beijing's international reputation while securing its national interests. Beijing has been more practical in making strategic arrangements with partners and more flexible in attracting international supporters [2]. New policy initiatives such as "smile diplomacy" (weisiao waijiaou), "public diplomacy" (gonggong waijiaou), and "good neighbor diplomacy" (mulin waijiaou) have been instrumental in Beijing's pursuit of a benign hegemony. These initiatives have one thing in common: a sophisticated use of soft power resources.

Take China-Association of Southeast Asian Nations (ASEAN) relations, for instance: China and ASEAN established official links since 1991. For China, ASEAN is a close neighbor and encompasses a strategically important region for China's national security. ASEAN also serves as an ideal platform for China's participation in East Asian international politics, while China provides ASEAN states' an option to hedge its dependence on the United States and Japan [3]. This relationship had all the trappings of a win-win partnership.

Although ASEAN has been long aware of the possibility for China's potential dominance over regional issues, most of its members believe that a regional socialization process is capable of regulating this rising power [4]. Following the 1997-98 Asian financial crisis, however, it has become increasingly difficult for ASEAN states to resist China's overwhelming influence in economic assistance and soft power. Moreover, in recent years, most ASEAN states have been assuaged by Beijing's assertion of "peaceful ascendancy" and its image as an amiable supporter [5].

Soft power strategies
Soft power is an art of persuasion - and Chinese wielding of soft power has expanded its Western definition as well as extended its scope. Since the 1990s, China had advanced its relations with ASEAN states in fields of foreign aid, trade, finance, infrastructure, business, labor, environment, development as well as tourism. China's strategies for soft power diplomacy are intricate and comprehensive.

Beijing's soft power diplomacy can be broken up in three levels: first, establish solid political and fiscal connections with Southeast Asian governments via increasing foreign aid; second, explore a comprehensive cooperative framework through FTA-plus plans; third, enhance cultural attractiveness and promote pro-China understanding among ASEAN states through quasi-governmental projects. Foreign aid, comprehensive economic networking and cultural transmission form the core of its soft power resources.

China's transformation from a development aid recipient to a bilateral donor is a recent development and a significant mark of accomplishment for a nation of 1.3 billion people. According to Chinese official statistics, its annual aid figure is US$970 million, but the real number is probably more [6]. In Southeast Asia, the sum of Chinese foreign aid has surpassed the amount of the United States. For example, in 2002, China's aid to Indonesia was double that of the United States. In 2006, China's aid to the Philippines was four times that of the United States, while the amount to Laos was three times the US aid [7].

Most of this financial assistance contributes to local infrastructure and capacity-building programs. More recently, Beijing provided over $10 million to the government of Burma to assist regional reconstruction in areas that were devastated by Cyclone Nargis in 2008 [8]. Through foreign aid, China has set itself up as a reliable partner of its Southeast Asian neighbors. On the other hand, this government aid has facilitated Chinese state-owned-enterprises (SOEs) in commercial navigation within Southeast Asia, such as the exploration of Indonesian natural gas reserves, the investing in infrastructure in the Philippines, and the establishment of transportation links through Cambodia and Thailand to Singapore [9]. Ostensibly, these projects, based on Beijing's guideline of "going out", seem to align with local economic and developmental needs, but the lack of transparency casts a cloud over China's underlying motives as its geo-political and geo-economic interests expand.

Co-prosperity or economic mercantilism? A comprehensive economic network is another soft power resource of China since the substance of China-ASEAN relations is mainly based on trade. For ASEAN states, China is regarded not only as the center of economic gravity but a potential market with business opportunities as well. Therefore, China leverages its comparative advantage by employing economic diplomacy with soft power resources to formulate a multilateral framework based on free-trade agreements.

Beijing attempts to chart a win-win partnership based on the China-ASEAN Free Trade Area (FTA) for the purpose of easing regional anxieties about the intensified competition in the export market (ie high-valued manufacturing goods) [10], and foreign direct investments. In 2007, the GDP of the China-ASEAN FTA has exceeded $2 trillion while its total trade figure was more than $200 billion. According to China's official statistics, from January to September 2008, bilateral trade between China and ASEAN has reached $180 billion, an increase of 23% compared to last year. These large numbers are used by Beijing to demonstrate China's crucial role in regional integration.

China's economic diplomacy toward ASEAN is highly sophisticated. It straddles business investment, tourism and new development initiatives. Within the business realm, expanding China's business network is correspondent to Beijing's economic and strategic interests in Southeast Asia. In October 2008, China held the 5th China-ASEAN Expo and China-ASEAN Business & Investment Summit, fruitfully inviting 1,154 ASEAN-based companies to participate in the exhibition, signing 1,372 investment agreements, and attracting a turnover of $1.6 billion. Meanwhile, people-to-people interactions among young leaders and business elites from ASEAN and China are conducted through 16 different forums and meetings.

Strategically, this annual China-ASEAN Expo promotes various business links with the goal of helping Chinese SOEs and small and medium enterprises invest in and cooperate with the Southeast Asian business community. This expo, as with other PRC government backed initiatives, is very important for Beijing's soft power diplomacy. By linking with local business in Southeast Asia, these bottom-up efforts have successfully drawn more attention from ASEAN states, promoted China as a window of commercial opportunities and expanded Beijing's sphere of economic influence in the ASEAN markets.

Besides business and investment, promoting tourism is another way to bolster Chinese soft power. In the 1980s, there were only tens of thousands of Chinese (per year) traveling to Southeast Asia. However, China's rapid economic growth has resulted in more than 15 million arrivals/per year in the ASEAN region (especially in Thailand, Singapore and Malaysia) during the 2000s. Over the last decade this figure has experienced an annual growth of 30%. In 2007, there were 3.4 million Chinese tourists visiting the ASEAN region, a number that, for the first time, has surpassed the amount of Japanese tourists [11].

Although such a rapid influx of Chinese tourists has created problems for ASEAN, the increasing amount of voyagers represent capital flows which have become important income sources to the region. Moreover, a flourishing tourist industry will provide a sound basis for ongoing projects such as the Open Sky Initiative, ASEAN Common Area, and ASEAN Cruise Tourism. For China, its activism in tourism cooperation seems to create a win-win situation of co-development.

Currently, several China-ASEAN cooperative programs are proceeding. For example, an ASEAN-China Center for Trade, Investment and Tourism promotion is currently being negotiated and will be established in the near future [12]. This center is expected to work within the current ASEAN+3 track in order to upgrade the quality and collaboration of tourism. Otherwise, initiatives of cultural and eco-tourism are emerging domains of further cooperation. In the region of the Mekong River basin, for instance, China says that it will comply with ASEAN states in the project of ADB-GMS-Xishuangbanna Biodiversity Conservation Corridors. This corridor project will connect nine ecological zones scattered in the Indochina Peninsula to ensure economic, cultural and environmental development in a sustainable manner. Beijing, having abundant economic and political resources in hand, keeps reminding Indochinese states of its importance in shaping the network of the eco-tour complex.

As bilateral relations progress and recession in the advanced economies elongates, ASEAN states will need more Chinese participation in its economic development. Take Singapore for instance: Singapore has worked upon an "eco-city" project with China since 2007. This ongoing project aims to build a modern town in Tianjin based on the idea of ecological sustainability. This new initiative represents an integral plan of economic, environmental and investment collaboration for both sides.

For Singapore, this joint project will both gain considerable profits and consolidate political partnership with China. For Beijing, the Singaporean experience in economic advancement is of particular interest to its enthusiastic investment in sub-regional economic zones. The increasing amount of similar proposals not only accounts for a closer relationship between China and the ASEAN region, but also illustrates China's practice of "economic first" approach which integrates geo-economic strategy and domestic needs.

In 2008, the global financial crisis caused, in part, by the US sub-prime mortgage crisis has resulted in financial and market turmoil in Asia. Leaders from ASEAN states such as Cambodia, Laos, and the Philippines have called upon China to invest more in ASEAN to stabilize the economic growth of the region. Such appeals from ASEAN states signify that a rising China has been regarded as a promising land of many economic opportunities.

Whether Beijing can guide this regional bloc through the global financial tsunami is still in question, but the demand from ASEAN, nevertheless, delineates that one cannot overlook the growing influence of China's soft power in Southeast Asia.

Soft power core
For China, the core of soft power is the promotion of Chinese culture and language. Since 2004, China has built more than 295 "Confucius Institutes" in 78 countries. A total of 500 will be established before 2010. Just in Southeast Asia, there are 21 Confucius Institutes providing language courses. Thirteen of these institutes are located in Thailand, with others scattered throughout Indonesia, Malaysia, Burma, Philippines, and Singapore [13]. These institutes perform as sites for cultural transmission, intercultural exchange, and Chinese learning, thereby enhancing China's soft power capabilities.

Specifically, the overseas Confucius Institutes have at least two purposes. For educational ones, the institute has a function similar to that of Alliance Fran็aise, Goethe-Institute, British Council, and Insituto Cervante, which mainly deal with language and culture learning. Although Beijing carefully heralds that the institute operates as a non-profit and non-governmental organization, its principle and budget are guided and sponsored by "the Office of Chinese Language Council International" affiliated with the PRC's Ministry of Education. Such an orientation would naturally draw the association with the underlying strategic implication of Confucius Institutes, that is, an attempt to promote Chinese culture and thereby increase China's soft power influence. Some thinkers have referred to such a policy as "cultural imperialism" [14].

In terms of cultural imperialism, a great power will both employ its cultural commodity to exploit an economic market, and aim to reconstruct a popular culture in pursuit of ideological hegemony. Undoubtedly, the statement reminds us of the US foreign policy since the 1950s. The US government advocated public diplomacy by the United States Information Agency (USIA). The USIA exerted influence on information sharing and made efforts in broadening dialogues between the US and the rest of the world. Moreover, it has sponsored exchange programs, such as the Fulbright Scholarship, to nurture overseas grantees with American cultures and values.

Thus, public diplomacy and cultural promotion is another mission of the Confucian Institutes. There are at least three kinds of soft power resources employed. First, the very notion of Confucius Institute is to nurture a worldwide cordial atmosphere which favors Chinese learning. Second, this instrumental appeal for language learning will shape a popular culture characterized by Chinese art, cinema, cuisine, fashion and lifestyle. The pop culture itself may forge a sensational pro-China ambiance (ie the fervor with Chinese language learning, with supporting the 2008 Beijing Olympic Games, etc) and reinforce the influence of Chinese soft power.

The institute also provides the "Chinese Bridge Fund," sponsoring the college student exchange program and supporting the research and development of overseas Chinese education. These funding programs and activities will intensify Beijing's international cultural attractiveness and magnify its influence of soft power at the grassroots level. Third, since 2004, China has dispatched more than 2,000 volunteers and teachers in 35 countries to work on Chinese education abroad, inclusive of ASEAN states such as Indonesia, Lao, Philippines, Singapore, Thailand and Vietnam [15]. These "civil diplomats" become vital human resources in wielding cultural and social influence in the region.

Beijing has continually reiterated the politically neutral standing of the Confucius Institutes. However, political and ideological strings continue to remain evident in organizational governance, relevant activities and publications. For example, the grantees of the "Chinese Bridge Fund" may reflect Beijing's strategic consideration based on national interests. In addition, the disposition of 21 Confucius Institutes and hundreds of volunteers in Southeast Asia are also decided in accordance with cultural intimacy and political amity. China has made great efforts to project cultural transmission to its neighbors in Southeast Asia in order to increase China's centrality in this region. It is plausible that the "China Fervor" intensified by the Confucius Institutes and relevant projects will continue to lay the solid foundation for the perception of a "benign China" and foster an even closer relationship between China and ASEAN states.

Conclusion
The discussion above unveils China's sophisticated soft power diplomacy toward Southeast Asia. Beijing's non-military inducement to ASEAN states, encompassing comprehensive cooperation and collaboration between different sectors and policy areas, seems efficacious. By providing foreign aid, Chinese government has maintained its indispensable leadership in cooperating with Indonesia, Philippines, and Laos. In addition to assistance aid, China's economic foreign policy with the help of the Chinese business community has triggered a large scale economic and market integration with ASEAN strengthening China's importance in this region. More critically, the Confucius Institutes and thousands of language teachers demonstrate Beijing's flexible cultural diplomacy of promoting Chinese social and cultural values to its southeast neighbors.

Carefully employing these soft power resources, China will obtain more policy choices to engage with ASEAN and its members, develop more channels of communication with Southeast Asian people, and assiduously participate in various issue-areas of regional affairs without sacrificing its economic and political interests. China is no longer a "clumsy elephant" to its southeast neighbors, but an "agile dragon" in the quest for restoring its regional hegemony.

Notes
1. Alastair Iain Johnston, "Socialization in International Institutions: The ASEAN Way and International Relations Theory," in G. John Ikenberry and Michael Mastanduno, eds., International Relations Theory and the Asia-Pacific (New York: Columbia University Press, 2003), p 110.
2. As Dominic Ziegler argues, the main concern of the Chinese Communist Party (CCP) is to secure peaceful development of China which needs stable relations with its neighbor states. Without achieving these objectives, the legitimacy of CCP will be questioned, see Dominic Ziegler, "Asia's Great Game: ‘Soft' Power Counts for More Than Hard," The Insight Bureau, No. 16 (2007).
3. Herman Joseph S Kraft, "Japan and the United States in ASEAN-China Relations," in Saw Swee-Hock, Sheng Lijun, and Chin Kin Wah, eds, ASEAN-China Relations: Realities and Prospects (Singapore: Institute of Southeast Asian Studies, 2005), pp 90-109.
4. S D Muni, "China's Strategic Engagement with the New ASEAN," IDSS Monoraph, No. 2, (2002), p 17; Alastair Iain Johnston, ibid, p 110.
5. Eric Teo Chu Cheow, "ASEAN+3: The Roles of ASEAN and China," in Saw Swee-Hock, Sheng Lijun, and Chin Kin Wan, eds., ASEAN-China Relations: Realities and Prospects (Singapore: Institute of Southeast Asian Studies, 2005), pp 61-63.
6. Thomas Lum et al, "Comparing Global Influence: China's and US Diplomacy, Foreign Aid, Trade, and Investment in the Developing World," CRS Report for Congress (2008), p 33.
7. Joshua Kurlantzick, "China's Charm: Implications of Chinese Soft Power," Carnegie Endowment for International Peace Policy Brief, No 47 (2006), p 3.
8. Pang Zhongying, "Playing By the Rules? China's Growing Global Role," Asia-Pacific Journal: Japan Focus, (2008).
9. Elizabeth Economy, "China's Rise in Southeast Asia: Implications for Japan and the United States," The Asia-Pacific Journal: Japan Focus, (2005).
10. Rahul Sen and Sanchita Basu Das, "ASEAN's FTA Negotiations with Dialogue Partners Identifying Strengths and Weaknesses in Business Opportunities," in Dennis Hew, ed, Brick by Brick: The Building of an ASEAN Economic Community (Singapore: Institute of Southeast Asian Studies, 2007), pp 186-187.
11. www.aseansec.org/Stat/Table29.pdf (accessed on 2008/11/18).
12. www.aseansec.org/21346.htm (accessed on 2008/11/13).
13. www.hanban.edu.cn/en_hanban/kzxy_list.php (accessed on 2008/11/13). 14. A recent discussion on China's advocacy of Chinese langue, see Sheng Ding and Robert A. Saunders, "Talking Up China: An Analysis of China's Rising Cultural Power and the Global Promotion of the Chinese Language," East Asia: An International Journal, Vol 23, No 2, (2006), pp 3-33.
15. www.hanban.edu.cn/en_hanban/content.php (accessed on 2008/11/13).

(This article first appeared in The Jamestown Foundation. Used with permission.)

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Author: H H Michael Hsiao and Alan Yang
Original Source: Asia Times
Date Published: Dec 4, 2008
Web Source: http://www.atimes.com/atimes/Southeast_Asia/JL04Ae03.html
Date Accessed Online: 2008-12-04

The Housing-Bubble and the American Revolution

When Benjamin Franklin returned to America in 1762, after almost five years in London, he was shocked at the housing prices.

“The expence of living is greatly advanc’d in my absence,” he commented. “Rent of old houses, and value of lands ... are trebled in the past six years.”

Franklin, it seems, had come home to a real estate bubble. It eventually popped — bringing on a credit crunch and deep recession that was the macroeconomic backdrop to the American Revolution.

Sound familiar?

The parallels between the current economy and the one Franklin saw highlight a debate among historians: how big a role did economics, as opposed to ideas, play in fomenting revolution?

“I think there’s reason to doubt the Revolution would have happened as it did if it weren’t for these economic conditions,” said Ronald W. Michener, an economics professor at the University of Virginia, in a radical departure from today’s popular notion that the Revolution was a product primarily of grand ideas about self-government.

Gordon S. Wood, a professor at Brown University and perhaps the pre-eminent living historian on the subject, counters: “There was a great deal of instability, but that is hardly an explanation for the Revolution. I don’t think you can make a strong argument for an economic interpretation of the Revolution.”

Professor Michener and his collaborator, Robert W. Wright, a financial historian at New York University, plan to do just that. The tandem worked for several years on a manuscript arguing that the American Revolution was a direct result of the economic malaise that followed the French and Indian War.

Now they have a built-in marketing hook — the current financial crisis — and the publisher, Yale University Press, is hoping to bring the book out as early as next fall. “What I found was that the monetary difficulties faced by the colonies were not very different from modern macroeconomic problems,” Mr. Michener said.

For the colonists, as for us, first came the boom. During the height of the French and Indian War, which lasted from 1754 until 1763, money flooded into the colonies, especially New York, where the British Army was headquartered. At the same time, the New York Legislature issued large numbers of bills of credit.

All that cash sloshing around resulted in lavish displays of wealth — notably by British officers, whose opulent living was emulated by the locals, especially in New York.

Housing prices soared during the war. But when credit tightened afterward — thanks in no small part to a prohibition on the issuance of paper money by the colonies under the Currency Act of 1764 — real estate owners who could not pay their debts lost their land.

John Morton, a sheriff of Chester County in Pennsylvania who would sign the Declaration of Independence, seized 180 farms between 1766 and 1769.

At the core of the Wright-Michener argument is that this confluence of nasty economic circumstances was what produced the anger that found expression in rebellion against the Stamp Act and other British taxes. In other words, the core economic culprit was a boom-bust cycle; convinced that their future was no longer in their hands, the colonists could summon the ghost of John Locke, setting the stage for the arguments of Tom Paine and the Declaration.

Professor Wood argues, in response, that while an individual’s response to the revolutionary cause was partly related to his economic circumstances, democratic ideas had been percolating for years and came to the fore only after specific actions by the British — for example, the Stamp Act, which is widely considered to have triggered the rebellion. And it wasn’t just immediate economic conditions that were ripe: the colonial population was growing faster than the population in Britain, and Franklin foresaw a day when America would be the center of the British Empire. In addition, because property was more easily acquired in the colonies than in Britain, America had a much larger proportion of common citizens, as opposed to nobles, among those entitled to vote.

Of course, economists acknowledge that ideas play a role in history, just as historians of ideas know the narrative has an economic backdrop. These two professors are trying to take back a larger part of the revolutionary story for large-scale economic events in a time when most recent histories have focused on the ideas. “We’re not trying to replace the ideological view,” Professor Wright said. “We’re saying we have an important piece of the puzzle.”

Fashions in history-telling often swing on a pendulum. In 1913, Charles A. Beard wrote his seminal book, “An Economic Interpretation of the Constitution,” which presented the founders’ economic self-interest as the principal factor in their commitment to revolution. About a half-century later, Bernard Bailyn, of Harvard, wrote “Ideological Origins of the American Revolution,” setting a benchmark for those who consider ideas to have been the main impulse. Along the way, other histories emphasized the exploits of common people, rather than the titans of history.

But matters macroeconomic — as opposed to mere British tax policies — have not been a dominant part of the narrative in recent years. “You walk into Barnes & Noble and there’s all these great big books on Franklin, Jefferson,” said Edward Countryman, a professor of American history at Southern Methodist University and author of “The American Revolution,” which traces the rebellion to a number of transformative developments, rather than one overriding cause. “By and large these authors are discounting any attempt to take into account social experience.”

Of course, even many historians who focus on the founders’ philosophies — including Professor Wood — say economics and social forces played a role. (Professor Countryman tells his students that trying to pin down Professor Wood is like trying to grab “a trout that is covered in olive oil” because he includes elements of both Beard and Bailyn in his books, even if his overarching view tilts toward ideas.)

“The reigning interpretation right now is ideological,” Professor Wood said. “I think the overall picture is pretty clear right now. But there will always be new generations of historians coming along.”

And a continuing argument, no doubt.

As Professors Wright and Michener see things, had British monetary policy been different, and had the recession been short, the United States might have gained independence only gradually, much as Canada did — over the course of more than a century, beginning in the 1860s.

That is a fun game of “what if,” but for those historians more attuned to ideas, the economic forces at play will always be subservient to the words of Jefferson and Madison.

“We are having a very serious crisis right now,” Professor Wood said, “but no one is talking about revolution.”

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Author: TIM ARANGO
Original Source: New York Times
Date Published: November 30, 2008
Web Source: http://www.nytimes.com/2008/11/30/weekinreview/30arango.html
Date Accessed Online: 2008-11-30

A brave new world awaits

WASHINGTON - If nothing else, the latest report of the United States National Intelligence Council (NIC) makes a prophet of Kishore Mahbubani. His book, The New Asian Hemisphere: The Irresistible Shift of Global Power to the East published at the beginning of the year foreshadowed one of the main conclusions of the NIC report released last week. (See Asia pushes, West resists, Asia Times Online, April 19, 2008.)

Among the assessments of the report, Global Trends 2025: A Transformed World, is that "the unprecedented transfer of wealth roughly from West to East now underway will continue for the foreseeable future".

This projection coincides with US president-elect Barack Obama's announcement of an economic team with deep experience of managing international economic crises in the past decade. His string of appointees, including Timothy Geithner as Treasury secretary, may be a strong indication of Obama's awareness of the changing world - as well as how he intends to govern.

Geithner, appointed just days after the release of the Global Trends reports, worked previously at the International Monetary Fund, and was under secretary of the Treasury for international affairs during the administration of Bill Clinton, where he played a key role in dealing with the Asian financial crisis of 1997-8.

Global Trends is the fourth unclassified report prepared by the NIC in recent years that takes a long-term view of the future. Like previous reports, it was prepared to stimulate strategic thinking about the future by identifying key trends, the factors that drive them, where they seem to be headed, and how they might interact.

Like the old Chinese curse, the not-so-far-distant future looks to be a very interesting time, with both opportunities and perils. And the Asian region is going to be a very big part of it.

Among the report's "relative certainties" is that "a global multipolar system is emerging with the rise of China, India and others". Similarly, among the key "uncertainties" are:
# Whether advances toward democracy occur in China and Russia.
# Whether regional fears about a nuclear-armed Iran trigger an arms race and greater militarization.
# Whether the greater Middle East becomes more stable, especially whether Iraq stabilizes, and whether the Arab-Israeli conflict is resolved peacefully.
# Whether Europe and Japan overcome economic and social challenges caused or compounded by demography.

If the report is correct, the world finds itself in the midst of a transition to a place where the political and economic structure will be markedly different. The report finds that the "international system - as constructed following World War II - will be almost unrecognizable by 2025, owing to the rise of emerging powers, a globalizing economy, an historic transfer of relative wealth and economic power from West to East, and the growing influence of non-state actors. By 2025, the international system will be a global multipolar one with gaps in national power continuing to narrow between developed and developing countries."

And therein lies a danger. The report notes that historically, emerging multipolar systems have been more unstable than bipolar or unipolar ones. While it doesn't predict the destruction of the international order, like the one that led to World War I, it does not rule out a 19th century-like scenario of arms races, territorial expansion and military rivalries.

Economically, in the future when Asia speaks the world will attentively listen. Growth projections for Brazil, Russia, India and China (the BRIC countries) indicate they will collectively match the original Group of Seven's share of global gross domestic product (GDP) by 2040-2050.

Asia will also be the region producing the major share of the future middle class. Over the next several decades, the number of people considered to be in the "global middle class" is projected to swell from 440 million to 1.2 billion - or from 7.6% of the world's population to 16.1%, according to the World Bank. Most of the new entrants will come from China and India.

In a sense, China and India are restoring the positions they held two centuries ago when China produced approximately 30% and India 15% of the world’s wealth.

China is poised to have more impact on the world over the next 20 years than any other country. If current trends persist, by 2025 China will have the world's second largest economy. Both China and India's gross national product (GNP) is expected to exceed that of the US in 2035, but they will continue to lag in per capita income for decades.

But it will not be an Adam Smith-type economy. Generally, China, India and Russia are not following the West's liberal model for self-development, but instead are using a different model, "state capitalism"; the system of economic management that gives a prominent role to the state.

And, if demography is destiny, Asia will also be where the future lies. World population is projected to grow by about 1.2 billion between 2009 and 2025, from 6.8 billion to around 8 billion people. Demographers project that Asia and Africa will account for most of the population growth until 2025, while less than 3% of the growth will occur in the "West".

The largest increase will occur in India, representing about one-fifth of all growth. India's population is projected to climb by around 240 million by 2025, reaching approximately 1.45 billion people. From 2009 to 2025, China, is projected to add more than 100 million to its current population of over 1.3 billion.

That is not to say there won't be problems. Around 2015, the size of China's working-age population will start to decline. The onset of larger proportions of retirees and relatively fewer workers is being accelerated by decades of policies that have limited childbirth and by a tradition of early retirement. By opting to slow population growth dramatically to dampen growing demand for energy, water and food, China is hastening the aging of its population.

By 2025, a large proportion of China's population will be retired or entering retirement. About the same time, due to growth in India's densely populated northern states, its population is projected to overtake China's.

Asia is also projected to be the region where various conflicts might erupt. The report states that over the next 15-20 years, reactions to the decisions Iran makes about its nuclear program could cause a number of regional states to intensify these efforts and consider actively pursuing nuclear weapons.

On the plus side, the report says, "We see a unified Korea as likely by 2025 - if not as a unitary state, than in some form of North-South confederation."

In this future world the United States will find itself as just one of a number of important actors on the world stage, albeit still the most powerful military nation. But advances by others states in science and technology, expanded adoption of irregular warfare tactics by both state and non-state actors, and proliferation of long-range precision weapons, and growing use of cyber warfare attacks increasingly will constrict US freedom of action.

This constrained US role raises questions about how effectively new agenda issues will be addressed. Despite the recent rise in anti-Americanism - which the report now thinks is beginning to wane somewhat - the US probably will continue to be seen as a much-needed regional balancer in the Middle East and Asia.

Other countries still expect the United States to play a significant role in using its military power to counter global terrorism or provide leadership on climate change. Yet the future proliferation of influential actors and distrust of vast power mean less room for the US to call the shots without the support of strong partnerships.

Thus Barack Obama and future US presidents will need to be doing a lot of talking with other national leaders in the future.

David Isenberg is an analyst in national and international security affairs, sento@earthlink.net. He is also a member of the Coalition for a Realistic Foreign Policy, an adjunct scholar with the Cato Institute, contributor to the Straus Military Reform Project, a research fellow at the Independent Institute, and a US Navy veteran. The views expressed are his own.

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Author: David Isenberg
Original Source: Asia Times
Date Published: Nov 26, 2008
Web Source: http://www.atimes.com/atimes/Middle_East/JK26Ak01.html
Date Accessed Online: 2008-11-26

A CHANGE OF BALANCE, Part 2: The party's beginning

The key characteristic of the world imbalances of the past two decades was the lending of capital by high-growth countries to low-growth countries in the guise of currency intervention or savings protection. Thus, the likes of China, Brazil and India recycled their trade or current account surpluses to the purchase of US and European government bonds or those of their agencies instead of investing in their own economies.

Age-old rules set by the International Monetary Fund (IMF) and other idiots were the main reason for this orthodoxy being practiced by the emerging countries. Reeling from a series of foreign investor runs on their banking systems in the 1980s and 1990s, many emerging counties adopted the IMF rules of weakening their currencies, increasing their export focus and reducing their total debt relative to the forced savings of foreign exchange reserves.

Going back to the first part of this article, readers will recall the illustration of two brothers who jointly owned a public bar: "Whenever one wanted a pint of beer, he would pay the other a dollar, who would then pay him back for his own draw of beer. Pursued ad nauseum, this meant that the same dollar could account for unlimited quantities of beer ... the game could continue until the brewery sent its chap around to collect money for all the beer that had been drunk by the brothers."

In effect, emerging market countries became the processors (the brewer in the first example) who depended on the pub owners and beer-consuming brothers for their eventual cash flows from the sale of beer. This vendor's credit clearly created its own wave of working-capital shortages for the emerging market countries that were all too frequently borrowed over the short-term from the very people benefiting from one-dollar beer, namely the pub customers.
The second aspect of the story that is important to understand from the perspective of the brewery, that is a producer of goods such as China and South Korea in the global economy, is the distribution of profit margins. Selling goods at a fraction of their eventual sales price still generated enough profits (or marginal revenues at least) to sustain the production of Chinese and Korean factories over the '90s and later on.

In effect, the pub owners in our starting example were not only grabbing cheap credit from the brewery, they also laid claim to the lion's share of profits generated across the entire chain of value addition. Herein lay the secret of US and European corporate profits for much of the past two decades, namely the ability to generate profits on the strength of brand names, while squeezing the margins and leverage of their suppliers in various Emerging countries.

Tackling the aftermath
As the credit crunch rolls on, the effect on individual and corporate balance sheets across the US and Europe will materially impact the ongoing demand for goods and services from emerging countries. Worries of a complete collapse in such demand have led the stock and bond prices of emerging market corporate entities sharply lower in the past few months, in most cases far worse than what has been witnessed in the case of US and European counterparts on a currency-adjusted basis.

This makes sense from a short-term perspective, but provides logical inconsistencies when considered over the longer term. There are but limited alternatives to the replacement of the current globalization cognate, that is, the provision of cheap goods by emerging market countries to Group of Seven counterparts in the more industrialized world: firstly a change of suppliers from foreign to local and secondly a vast change in the price of products.

President-elect Barack Obama apparently ran on the platform of promising the first alternative but somehow also ensuring that the second alternative becomes more tenable. This is so because the idea of Americans and Europeans producing stuff at lower prices than what Asians can manage is ridiculous at best, but could well create enough administrative traction to change the distribution of profits.

As noted in the preceding paragraphs, Asian countries secured large volumes but low profits on their sales of goods to Group of Seven (G-7) countries. With demand falling in those countries the current imperative across emerging countries is to cut costs even further in order to remain competitive.

Emerging countries such as China have to invest proportionately less in their banking systems to keep financial flows stable. In contrast, the series of interventionist actions by the US and European governments will raise taxes and reduce efficiency over the longer term. This shifts the balance of economic power to emerging markets, rather than away from them as the stock markets appear to have concluded a tad too hastily.

The second route that is being opened now, especially by the likes of China and India, is to increase economic spending by the government. While this smacks of the same Keynesian thinking as the G-7 countries, the key differences arise from the consideration of profit potential and demographic advantages.

China not only has the ability to produce goods far cheaper than G-7 countries could manage, it also has to spend less on saving its banking system and on the overall generation of consumption expenditure in the country. Similarly for India, despite the current account deficits of late, the overall profit potential of the economy remains strong, while the high levels of deposits relative to loans help to shield banks from the kind of excesses witnessed in the US and elsewhere.

It heartens me to note that the Chinese government has prioritized infrastructure spending over mere welfare checks as part of its stimulus package. This is the right way to go, as the short-term employment benefits of such spending also lead to longer-term competitive advantages in the production and shipping of various products across China, Asia and the rest of the world.

Going into this weekend's Washington summit, Asian countries will be well served by reminding G-7 members and other representatives about the longer-term economic potential of their countries.

In the first part of this article, I laid out the outline of the argument against Keynesian spending in G-7 countries. Simply put, the recuperation of G-7 balance sheets must be to the advantage of Asian countries, as investors pursue higher growth alternatives to their own moribund economies. This will help plug the financing hole of production-oriented Asian economies.

Much the same logic of investing in these higher-value producers should permeate the thinking of commodity producing countries such as Russia and Middle Eastern nations.

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Author: Chan Akya
Original Source: Asia Times
Date Published: Nov 15, 2008
Web Source: http://www.atimes.com/atimes/Global_Economy/JK15Dj01.html
Date Accessed Online: 2008-11-15

US's road to recovery runs through Beijing

English author G K Chesterton rhymed about "the night we went to Bannockburn by way of Brighton Pier", and it may seem no less whimsical to argue that the United States' road to recovery, as well as Barack Obama's path to presidential greatness, run through China.

In the rush to prop up America's financial institutions, foreign economic policy seems remote from Washington's agenda. America wants to revive the mortgage market and consumer spending. The effort is doomed to failure. For a quarter of a century the American consumer has been the locomotive of the world economy, and now the locomotive has derailed and taken the rest of the world economy with it.

Recovery requires a great change in direction of capital flows. For the past decade, poor people in the developing world have financed the consumption of rich people in America. America has borrowed nearly $1 trillion a year, mostly from the developing world, and used these funds to import consumer goods and buy homes at low interest rates. The result is a solvency crisis of the American household, which shows up as a solvency crisis for financial institutions. If we reckon the retirement needs of households as a liability, the household sector is as good as bankrupt.

No recovery is possible unless American households can save, and they cannot save in an economic contraction when incomes spiral downwards. To save, Americans must sell goods and services to someone else, and a glance at the globe makes clear who that must be: nearly half the world's population, and most of the world's capacity for economic growth, is concentrated in China and the Pacific Littoral.

China's economic problem is the inverse of America's: China has achieved fast rates of growth at the expense of huge disparities between the prosperous coast and the backward interior, as well as excessive dependence on foreign markets. China's policy response to the economic crisis is far more radical than Washington's. Rather than attempting to patch up the situation and restore the status quo ante, China plans to spend nearly a fifth of its gross domestic product on an internal stimulus focused on infrastructure in its interior. Severe execution risk attends the Chinese proposal, and markets remain to be convinced.

China can reduce the execution risk of its great economic shift towards home consumption, and America can solve its savings problem, through a grand partnership. This partnership need not be exclusive to America and China, but it must be founded on America and China, two of the world's largest economies. India and the other Asian economies should be encouraged to join this partnership. A great deal has been written about prospective conflict between China and the United States, but very little explanation is offered as to what issues might arise between China and the United States. China and America have far more to gain from cooperation than from conflict.

America's objection to Chinese foreign policy center on China's pursuit of commercial interest with countries (Iran, Sudan) whose behavior America considers unacceptable. America stands to gain an ally in questions of rogue-state behavior, terrorism, nuclear proliferation and other matters of national interest, in return for helping China achieve its legitimate goals.

The goals of the partnership should be to:
# Support China's internal development by re-orienting export flows towards China and other emerging economies from the United States and other industrial countries.
# Transfer technologies and other expertise to the emerging economies.
# Make the emerging economies partners in the recovery of American asset prices.

Fear and risk-aversion rather than trust and optimism conditioned the two-way capital flow between emerging markets and the United States during the past 10 years. After the 1997 Asia financial crisis, and the 1998 Russian bankruptcy, investors in emerging markets lent their savings to the American government or its quasi-governmental agencies to diversify their portfolios into safe assets, while Westerners invested in local emerging market currencies for higher returns.

As one of the authors reported recently at this site (See Who will finance America’s deficit? David P Goldman, Asia Times Online, November 13, 2008), global financing of the US government deficit drew on leverage in emerging markets. De-leveraging of the world financial system sharply curtails the availability of overseas financing for the Treasury deficit.

America's economy model is broken. The tape cannot be run in reverse: America can't rescue an economy based on rising consumer debt and zero savings. America must become a technology exporter. Throwing more money into consumer stimulus, bailouts for the automobile sector, and so forth will fail miserably. America should recognize that the deformation of its economy is the inverse of the deformation of the Chinese economy (as well as other emerging economies), and that their common problem has a common cure.

The trouble in the world economy has been that a rich Chinese won't lend money to a poor Chinese, unless the poor Chinese first moves to America. China bought American mortgages, including poor-quality assets dressed up as high-quality assets, because China does not have the financial, legal and administrative capacity as well as the trust to write sufficient mortgage business at home. China's efforts to spend a fifth of its GDP on infrastructure face enormous problems of governance. In the United States, voters most approve most public spending at the local level, and the federal system provides checks and balances against abuse of public funds. Emerging economies must rely on the probity of a small number of officials with enormous power, a far less effective check against corruption.

China can use America's help in shifting its economy towards the internal market. Ironically, American officials have been trying to persuade China to import the American financial model for years, and the collapse of the American model has made the prospect less attractive. But it is a very good moment for China to bring in American banks, and start up a consumer lending market. The failures of the American consumer market do not wipe out a century of banking experience in evaluating and securitizing consumer loans. To help import the American model, China should be given the opportunity to purchase major American institutions in return. Citicorp, for example, could be bought today for about $50 billion or Capital One for $13 billion.

America remains the most technologically advanced economy in the world. China needs American high technology. In many instances, America restricts the sale of technology to China due to security concerns.

The United States should offer China a general reduction in restrictions on imports of American technology and acquisition of American companies, in return for a treaty linking Chinese and American security interests. The treaty would include:
# A system of royalties for technology transfers and guarantees against pirating.
# Freedom for Chinese companies to acquire American companies, including financial institutions.
# Agreement on a common stance towards rogue states, nuclear arms proliferation, terrorism and other issues of mutual concern, covering such issues as Pakistan, Sudan, Iran and other areas of past diplomatic conflict.
# An agreement on strategic arms deployment in Asia.
# A roadmap for China's democratization.
# Environmental and energy-efficiency goals.
# Stabilization of China’s yuan against the dollar to support free capital flows between the US and China.

There are close to 2 billion people in China and the countries in its immediate periphery, and a further 1.1 billion people in India. Half the world's population lives in emerging Asia, and its productivity could triple in a generation. Out of the present crisis, the world might enjoy one of the longest and fastest economic booms in history - or it might remain in an economic mire for a decade. The incoming American administration might be remembered as one of the worst, or one of the best, in American history.

David P Goldman was global head of fixed-income research for Banc of America Securities and global head of credit strategy at Credit Suisse.

Francesco Sisci, Asia Editor of La Stampa.

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Author: Francesco Sisci and David P Goldman
Original Source: Asia Times
Date Published: Nov 15, 2008
Web Source: http://www.atimes.com/atimes/China/JK15Ad01.html
Date Accessed Online: 2008-11-13