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BRICs and Mortar

November 27, 2009

The rise of the rest might not look like we think it will

Who killed Uncle Sam?

Has America’s global pre-eminence finally vanished? Many within the international chatterati seem to think so. The financial crisis of 2008 seems, in this reading of the grand sweep of history, was the final blow to US dominance – the irrefutable downfall of the American leviathan. And it its place step up the so-called BRIC countries – the developing economies of Brazil, Russia, India and China. One can almost detect a certain smugness in much of the writing. After the untrammelled hubris of the Bush administration, all the better than the US swallow a dose of humility; all the better that other global powers now can balance against the unashamed hyperpuissance and casino capitalism of the cowboy colossus. But as Yogi Berra famously said, prediction is difficult – especially about the future. Perhaps we should not write off America just yet.

It is true that the balance of world power is changing. China has posted sensational rates of economic growth for two decades now since careful liberalisation in the economic sphere. Its blend of bureaucratic political authoritarianism and managed state capitalism has propelled it from a backwater of the world economy much closer to its rightful place in the economic order. Remember it was China’s incredible wealth that drove European explorers to find a direct route to the riches of the Orient, avoiding the Ottoman middle-men. Economic history tells us that China was richer than Europe even in the early days of industrialisation. Unsurprising then that eternal China should be rocketing upwards. Economic history also tells us that catching-up is relatively easy.

With this growing economic might comes political clout. Many point to the vast holdings of dollar assets – up to a trillion greenbacks – in Chinese reserves. Dumping these on currency markets would be catastrophic for the US economy. China’s military expenditure and indeed demeanour is much more assertive. It’s hard to know the exact figures because the official ones are misleading, but most analysts seem to agree the Chinese spend just under 3 per cent of GDP on defence. That puts them on par with the UK and Japan in relative terms – in absolute dollars, much more.

International macroeconomic policy used to be coordinated through a mechanism known as the G7 (then G8 when Russia joined the club). This body never quite demonstrated the powers ascribed to it by the anti-globalisation movement. Nevertheless it is considered telling that now people talk of not just a G20, but a G2: China and the US. Perhaps now it is only they who matter to the health of the global economy. While America clambers out of the trough of recession, China’s economic growth continues apace – 8.9% per year at last reckoning. The hard facts all seem to suggest a burgeoning challenge to American supremacy.

Intangible assets of US power seem to be declining too. The lure of US thinking, culture and leadership is apparently less appealing. It was not just financial institutions that collapsed in 2008: it was the intellectual hegemony in economics. Elsewhere, efforts to hammer together a coalition against Iran to counter its nuclear programme are flummoxed by Russia and China. US President Barack Obama also failed to secure more material support from his European allies for the military mission in Afghanistan. Neither could the messianic Mr Obama swing the International Olympic Committee vote in favour of his home town, Chicago – the 2016 games were instead awarded to Brazil.

If only it were so simple. Current predictions of the demise of the special standing of the US in world politics all have the same inherent flaw. Crudely put, they assume everything that can go wrong for the US, will, and vice versa for the challengers. Yet progress and ascent is never straightforward – the challengers have yet to confront many problems.

The idea that China somehow has America over a barrel with its dollar holdings is appealing at first. But it is not straightforward. As the adage goes: if you owe the bank a thousand dollars, it owns you. If you owe a million dollars, you own the bank.

And so it is with Beijing and Washington. To start dumping dollar holdings would have a ruinous double effect. As any competent seller knows, you do not flood the market with a commodity if you can help it. Not only would the yuan increase in value compared to the dollar, making Chinese exports less competitive for American consumers; a catastrophic devaluation would also have a devastating effect on the US economy, stunting demand for this Chinese output. Its relentless pursuit of dollar reserves has tied it to the fortune of the currency.

China’s economy is export-oriented: indeed, domestic consumption is deliberately suppressed by the overvaluing of the currency, the yuan (incidentally, a major cause of the global economic imbalances that contributed to the 2008 crisis). China is the twenty-first century workshop of the world, but it is not a workshop for Chinese markets. Very little of what is produced in the special zones is bought inside China. But this is all part of the regime’s ‘mandate from heaven’: Beijing gets away with limiting consumers because it can provide a tangible improvement in its citizens’ welfare. It has, impressively, lifted millions out of poverty with this programme. But it is dependent on foreign demand, and in particular, America’s.

This unearths another point which relates to all the BRIC countries, but in particular China. Of the four states, only one – India – is what can fully be considered a mature democracy. But rule of law and voting are no guarantors of international might. Brazil is a leader in Latin America, but is still only really a regional power. Beyond winning the Olympics and leading a very loose coalition of the ‘Global South’, it has not really many chips to play.

And India has not made the requisite investments in infrastructure – both physical and intellectual – necessary to assert itself. Indian civil servants on exchange programmes in the UK, for example, will readily profess their amazement at the efficiency of Whitehall (no doubt to raised eyebrows). Quality of bureaucracy matters, though it is hard to measure. The country is also hampered by levels of poverty unimaginable in any Western country and real problem with corruption of the kind that doesn’t make a highway more expensive; it stops it from being built. Despite India’s problems, however, it enjoys a vibrant, pluralistic political scene. Governments that get things wrong can be voted out. Changes can be made through people power in an ordered fashion. In other words, discontent with the system can be vented.

So the real question mark is China. As noted, its regime relies on a social compact that swaps political and economic freedom for growth and development. I would not be so foolish as to assume that this is a recipe for catastrophe, but it does raise some worries. And worries they are – an unstable China is good for no one. How long with the deal hold out? Authoritarian regimes can last while times are good. It is more difficult when the lean years come. There is some indication that all is not rosy with the dragon.

The yuan is eventually going to have to rise in value and Beijing let the exchange rates be determined more freely. Already, speculative funds are flowing into China; investors believe they can buy cheap yuan now and make a windfall when it is allowed to appreciate in value. Apart from the bubble this may be causing now, this will make Chinese exports more expensive for foreign buyers. Bad news for an economy where domestic consumption is constricted to 35 per cent of GDP.

The good news is that the government recognises this need for a structural adjustment. The better news for the rest of the world is that a China that is both getting richer and increasing the size of its domestic consumption will start to have a more balanced trading relationship. German, American and Japanese goods and services will – hopefully – start flowing into China.

The problem is that the cost of adjustment will be high. The longer China waits to do something about this economic distortion, the bigger the cost.

Leaving aside China’s political future, there’s also the matter of the accounting trick BRIC advocates use. Simply put, BRIC is not a bloc. Unlike the West, which despite internal disagreements shares a common cultural heritage and basic values, there is little to unite Brazil, Russia, India and China beyond simply being challengers to the US hegemony. And it is hard to see Brazil having fundamentally more in common with Orthodox Russia rather than, say, Catholic Europe. Or, ultimately, the other great American immigrant nation:  the US.

We can go further. Watchers of Asian security will have noticed the increasing tensions between India and China of late. While their trading relationship is strong – worth many billions of dollars – there is unfinished business between the two states. And if you’ve been following the Indian media, you wouldn’t be mistaken for picking up a hint of hysteria with regards to its northern neighbour.

None of this is to say that these rising states are doomed to failure and will never challenge US power. This is patently untrue: China is already a major power with weight on the world stage. Nevertheless, benign trajectories should never be assumed. Germany squandered its might in two ruinous wars that ultimately saw it divided, and Germans ejected from ancestral homes all across Europe. Even today, it has a meek foreign policy, more concerned with gas imports than the management of world affairs.

America might not have the same relative power that it once had, but does this matter? It has a system that has survived worse economic crises than this; survived more coherent ideological challenges; and weathered the storm of the first industrial war – and then gone on to win two more. Given this track record, and its ability to reinvent itself despite the sometimes bizarre spectacle of its partisan political divide, we should not be too hasty in writing the US off.

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