The Shift in Economic Power

Interesting stats from The Economist's Daily Chart.

Since the end of 2007 the developing world has grown by 20 per cent, while the developed world* has failed to get back to where it was. This has accelerated the shift in economic power towards the developing world.

But note the crossover is still a forecast.

*definition of developed economies based on 1990 data: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States.

Another chart shows just how bad this recession has been in the US compared to previous recessions ... 

All the more reason why the US needs to be less concerned about debt right now and more concerned about growth and employment.

China's Global Ambitions

For students of 2016IBA and others:

See

For China, Will Money Bring Power?


By PIERS BRENDON

Published: August 21, 2010

This article captures in a nutshell many of the important themes of the course!!
 
Brendon reports that:

As the media have breathlessly reported, China has just overtaken Japan as the world’s second largest economy, and bids fair to knock the United States from the top spot within 20 years. Ever since Deng Xiaoping embarked on his “second revolution” in 1978, introducing free market reforms and opening up to the outside world, China’s economy has grown by almost 10 percent a year — one of the most sustained expansions in history.  ...

The crucial question is: how will China use its new-found wealth?

The traditional answer is that rich countries tend to equip themselves with the sinews of war in order to enhance their position at the expense of rivals. According to the dominant economic philosophy of the 18th century — mercantilism — wealth and power are interchangeable, each helping in the acquisition of the other.

Thus Britain used its economic predominance after the Industrial Revolution to establish global hegemony. Protected by the fleet, its multiplying colonies supplied the mother country with raw materials and bought her manufactured goods. But by 1914 Germany was easily out-producing Britain, and Kaiser Wilhelm’s challenge to the Royal Navy’s supremacy did much to precipitate the First World War.

However, history does offer alternative answers — and the case of America is particularly pertinent. The economy of the United States overtook that of Britain in the 1870s, and by 1914 it was nearly three times as large. A small island making steam engines by hand inevitably fell behind a bountiful continent that mass-produced motor cars on assembly lines.

Brendon's expertise on the British Empire. The major question is whether China's rise will be more like Germany's or the United States' challenge to Great Britain.

It also seemed inevitable that the United States, particularly under the internationalist leadership of Presidents William McKinley and Theodore Roosevelt, would mount its own challenge to the British Empire by translating its economic strength into military might. Uncle Sam did arm, of course, during the conflict with Spain and World War I, creating an outstanding Navy.

But for the most part, the nation’s business was business. In the 1890s it was suggested that the State Department should close down because it had so little to do. And during the isolationist period between the two world wars, when at its peak America was responsible for nearly 40 percent of the world’s manufacturing output, the United States Army was around the 17th-largest on the planet.

In other words, the military of the world’s richest nation amounted to hardly more than a border constabulary armed with obsolete equipment like 1903 Springfield rifles. During the Depression, cash was so tight that its best officer, a bald-headed major named Dwight D. Eisenhower, had to make a requisition for his streetcar fare between the War Department building and the Capitol.

Needless to say, Axis aggression transformed the United States into a military-industrial colossus. It so galvanized a depressed economy that the historian Niall Ferguson of Harvard has been moved to dwell on “the benefits of militarism.”

Brendon then canvasses the liberal view that peace promotes prosperity and vice versa - opposed to the realist (mercantilist) idea about power and plenty.

Market forces act in the moral world, said the 19th-century British politician Richard Cobden, like “the principle of gravitation in the universe — drawing men together and thrusting aside the antagonism of race, and creed, and language.” Certainly this is an ideal to which China has at least paid lip service since the end of the cold war, asserting that globalization fosters international cooperation.

Recall that at the start of the new millennium, a consensus existed among China-watchers that the Red Menace was as much of a mare’s-nest as the Yellow Peril. Like the United States before Pearl Harbor, China would concentrate on butter not guns, harmonizing its interests with those of its competitors through the peaceful mechanism of the open market. There was much talk of an entente between China and Japan, even of a Chinese-American alliance to maintain stability, fight poverty, tackle global warming and so on.

No doubt much of this was wishful thinking. Indeed, such soft soap may well have been part of a charm offensive by China, culminating in the Beijing Olympics of 2008, designed to mask the true character of a monstrous tyranny that was made manifest on Tiananmen Square in 1989.

Whatever the truth, informed opinion is now divided about Chinese intentions. Some pundits maintain that the fundamental assumption of China’s leaders is that conflict is part of the human condition, the only way of resolving differences in a perilous world. A recent comprehensive survey of Chinese authors revealed that most anticipate a repeat of the “warring states era in Chinese history.” Is not hostility toward “foreign barbarians” China’s default state?

There are, at any rate, obvious signs that the awakened dragon is flexing its muscles. China’s defense budget rose to be the second highest in the world in 2008, and its naval (particularly submarine) buildup has, in the opinion of the American journalist Robert D. Kaplan, caused “the loss of the Pacific Ocean as an American lake.” In search of markets and natural resources, China is expanding its influence aggressively in Asia, the Middle East, Africa and South America.

On the other hand, China’s 6.6 percent share of global expenditure on arms is dwarfed by America’s 46.5 percent. And, like the United States during and after the reconstruction era, modern China is preoccupied by the problems associated with rapid growth: pollution, corruption, rural poverty, urban overcrowding and troubled labor relations.Above all, its leaders have to keep the lid on the simmering political and ethnic cauldron, while at the same time preventing the economic bubble from bursting — as Japan’s did.

China may well keep its promise, for the moment at least, to follow the path of peaceful development. We can’t know, of course. But doom-merchants predicting that China will topple America from its pre-eminence should recognize that history is not necessarily on their side.

 

The Future of American Power?

The future of US power has been a major topic of discussion recently. The global economic crisis, which for once affected the US as much as any other country in the world and the rise of China and the s

It often seems that 'declinists' mistake one possible future for present reality. Other writers correctly acknowledge that US power remains preponderant, but suggest that the US could soon be rapidly overtaken by China or somewhat peculiarly by something called 'Asia', which assumes some sort of Huntingtonian 'civilizational' assault on the Western and US power.

Others seem to be saying that the US shift to deficits will undermine future US power as taxes need to be raised to drawn down the deficit.

This latter view is evident in a piece by Thomas Barlow in which he argues that the innovative capacities of the US are in danger. The 'self-made man' is under threat! He ignores the fact that US innovation has often been the result of a fairly typical mix of state and private initiative. Think the Internet! Indeed as Fred Block controversially argues the US has long had a "hidden developmental state".

Barlow points out that the US is on top when it comes to the knowledge intensive economy. Californian businesses, he points out spend more money on R&D than Germany. "If US states were countries ... 12 of them would be ranked among the top 25 nations globally by total business R&D expenditures."

My gut feeling is that the US is a long way from being seriously challenged by the great Asian powers and its dominant position will once again become clear in the light of (the albeit) slow recovery.

Contrary to Barlow, I think that if the US ever got its state intervention right by developing a comprehensive public health system and extending educational opportunities across the poorer sections of US society, its strength would be fundamentally renewed. In other words, if the US developed a fairer, more egalitarian society it would become an even more productive economy.

The greatest danger for the US and the world is a shift towards a reactionary aggressive isolationism caused by deepening economic problems and misguided interpretations of their causes.

China and America

A new report from The Economist on US-China relations.

A special report on China and America
A wary respect
Oct 22nd 2009
From The Economist print edition

Miles argues:

The financial crisis has sharpened fears of what Americans often see as another potential threat. China has become the world’s biggest lender to America through its purchase of American Treasury securities, which in theory would allow it to wreck the American economy. These fears ignore the value-destroying (and, for China’s leaders, politically hugely embarrassing) effect that a sell-off of American debt would have on China’s dollar reserves. This special report will explain why China will continue to lend to America, and why the yuan is unlikely to become a reserve currency soon.

Who has the power in this situation, the country that borrows or the country that lends. Most would argue that it is the lender, but when the lender has to keep on lending becaus eof US structural power, then it is not so clear cut. We will also find out over the next few years just how much the lender (China) is dependent on the borrower's (the United States) markets.

The economic crisis briefly slowed the rapid growth, from a small base, of China’s outbound direct investment. Stephen Green of Standard Chartered predicts that this year it could reach about the same level as in 2008 (nearly $56 billion, which was more than twice as much as the year before). Some Americans worry about China’s FDI, just as they once mistakenly did about Japan’s buying sprees, but many will welcome the stability and employment that it provides.

The rest of the world is going to have to get used to Chinese investment, just like they had to get used to Japanese investment in the 1980s. But this doesn't mean that countries like Australia shouldn't continue to review strategic investment by the Chinese state. Anything less would be against Australia's national interest!!

China may have growing financial muscle, but it still lags far behind as a technological innovator and creator of global brands. This special report will argue that the United States may have to get used to a bigger Chinese presence on its own soil, including some of its most hallowed turf, such as the car industry. A Chinese man may even get to the moon before another American. But talk of a G2 is highly misleading. By any measure, China’s power is still dwarfed by America’s.

Authoritarian though China remains, the two countries’ economic philosophies are much closer than they used to be. As Yan Xuetong of Tsinghua University puts it, socialism with Chinese characteristics (as the Chinese call their brand of communism) is looking increasingly like capitalism with American characteristics. In Mr Yan’s view, China’s and America’s common interest in dealing with the financial crisis will draw them closer together strategically too. Global economic integration, he argues with a hint of resentment, has made China “more willing than before to accept America’s dominance”.

The China that many American business and political leaders see is one that appears to support the status quo and is keen to engage peacefully with the outside world. But there is another side to the country. Nationalism is a powerful, growing and potentially disruptive force. Many Chinese—even among those who were educated in America—are suspicious of American intentions and resentful of American power. They are easily persuaded that the West, led by the United States, wants to block China’s rise.

All good points and there is no doubt that it is this relationship that will largely shape the next 20 years.


For a good short review of recent books on US foreign policy see Amy Chua "Where Is U.S. Foreign Policy Headed?"

One book I want to read is by Andrew Bacevic.

Andrew Bacevich’s searing manifesto, “The Limits of Power: The End of American Exceptionalism.” Excoriating American profligacy and delusions of military invincibility, Bacevich calls for a foreign policy rooted in humility and realism. One of Bacevich’s most interesting arguments is that the astronomical costs of the Iraq war — not just unregulated hedge funds and subprime mortgages — contributed directly to the 2008 financial collapse. By 2007, he writes, “the U.S. command in Baghdad was burning through $3 billion per week. That same year, the overall costs of the Iraq war topped the $500 billion mark.” Nor does Bacevich go easy on the Obama administration. He describes Barack Obama’s national security team as “establishment figures, utterly conventional in their outlook.” He sees Obama’s stimulus package and commitment of more troops to Afghanistan as ominous signs of continuing “self-destructive behavior.”


Bacevich, a harsh critic of neoconservatives like Kagan, also favors a return to cold war policies, but in his case to a strategy of “containment.” Bacevich urges the United States to “let Islam be Islam. In the end, Muslims will have to discover for themselves the shortcomings of political Islam, much as Russians discovered the defects of Marxist-Leninism.”