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Thursday, May 15, 2014

The Long Goodbye? China, the World Bank, and the American Century

Brian Birdnow

Last week a World Bank report that compares something called purchasing power parity claimed that, based on the purchasing power statistics, the Chinese economy has reached a point of rough equality with the United States, or, could actually have moved slightly ahead of the USA, based on the incomplete figures of economic growth over the last three years. This announcement, which confirms the fact of China’s explosive economic development, and the anemic American recovery after the Great Recession of 2008-2010, has caused quite a stir in a number of quarters. The Chinese, usually quick to tout great achievements, have been generally quiet about this one, and their official response has been to state that they have “…a long way to go, yet.” The response in the American financial sector has been rather understated, as well, with the major brokerage firm spokespeople stating that this confirms the correctness of the advice given to investors at the beginning of the new millennium, to wit, the fact that there was money to be made in China. The same brokerage firms are now talking about the unexpected opportunities available in Sub-Saharan Africa, so the world might be seeing another tectonic shift in commercial priorities and capital allocation.

The real response to the report came from the deep thinkers in the geopolitical sphere, namely the think tanks, government, and academia. There, this turned out to be startling news, not necessarily that the Chinese are catching up with the USA, but the surprising contention that they might already be tied with the United States in the economic pennant race. This statement brought forth a flood of meditations on the Chinese rise and the American decline, and what this means to the world. Some of the professoriate pointed to Brooks Adams and his 1895 classic “The Law of Civilization and Decay” wherein he contended that the power in the world was shifting westward, that New York would surpass London as the world financial center (which did take place in 1915) and that the American republic would be to the twentieth century what Britain had been to the nineteenth century. If one updates Adams to 2014, he can see civilization continuing its westward push across the Pacific and to China today. Other commentators cited Oswald Spengler and his 1918 tome, “The Decline of the West”. Spengler, whose work is favored by Henry Kissinger and other certified members of the Deep Thinkers Inc. club, contended during the closing years of the Great War that Western Civilization was in terminal decline. What would replace this was unclear, but the times were changing quickly. Still other commentators cited Arnold Toynbee, Fernand Braudel, and Sir Halford Mackinder as strategic thinkers whose works might illuminate the supposed Chinese rise, and corresponding American decline.

The academic and quasi-governmental elites who weighed in on this topic seemed to be more interested in congratulating themselves for their prescience than in assessing the data in a detached fashion. In any event, it would be wise to keep this in perspective. We have heard all of this before, not only in relation to the Chinese challenge, but as far back as the Cold War. In the 1950s many of the people who are paid to make these types of predictions stated with certainty that the Soviet Union was catching up with the United States, and would soon surpass us as the world’s leading economic power. They pointed out the supposed superiority of the Soviet schools, and cited the success of Uncle Joe Stalin’s five year plans as evidence of the efficiency of central economic planning. This contention was given a veneer of plausibility when the Russians “beat” us into space in the autumn of 1957. Growing concern over our lost competitive edge launched the national career of a theretofore playboy senator from Massachusetts who argued that he would “…get this country moving again!” The Soviet economic challenge was as much of a myth as their strategic and military challenges were grim realities, but all of this found its own level when Ronald Reagan took charge in Washington.

Still, the scaremongers conjured up a new bogeyman in the late 80s in the form of the Japanese menace. We were told that Japan was buying up the United States, with the intention of turning the USA into a vassal state, if not a colony. A number of short “academic” studies penned by American economists and some remarkably surly short works penned by influential Japanese public figures fed this fire. We were told that we would all be speaking Japanese by the year 2000, and what did we fight World War II for, anyway? Even before this great fear reached its highest point Japan slipped into an economic downturn, which became a twenty year slump. This illustrated the limits of Japanese power and effectively put an end to the idea that the twenty-first century belonged to the Land of the Rising Sun.

Now we confront the Chinese challenge, and contemplate the coming Chinese century. The first order of business is to ask the world whether the Chinese statistics concerning economic growth are reliable and/or true. A number of years ago Lester Thurow, the distinguished MIT economist, wrote a very long scholarly article concerning this very subject. Thurow began by using the Chinese government’s own statistics on their economy and productivity in 1992. He took these numbers and then calculated where they would be if China had really been experiencing 10% yearly economic growth. The numbers were off the charts in an unfathomable manner. When certain media agencies asked for a Chinese response they refused to comment, and curtly mentioned that their statistics cannot be questioned, nor could they be expected to conform to simple American mathematical reckonings.

While we are on the subject of statistical reliability we can question the entire premise of the World Bank report. The concept of purchasing power parity is relatively new and concerns the considerably lower cost of living in China, versus the higher cost of living in America. This involves much economic calculation and the figures get murky when talking about converting the Chinese “yuan” into the American dollar. The Chinese have undervalued the yuan for decades, as a way of making Chinese exported goods cheaper in foreign countries, and thus, more competitive. In terms of Gross Domestic Product, the one statistic that really measures national economic might, the American economy is still 40% larger than the Chinese economy. With a GDP that is less than two-thirds that of the perceived Chinese “main enemy”, it is no wonder that the official Chinese response to the news was the laconic reply that they had a lot of work to do!

We can, for the sake of argument, wonder what would be the case if the Chinese contention is true. The Chinese economy is obviously not larger that the still undefeated USA. Certainly, they have closed the gap considerably, and by roughly 2025-30 they will be on the same level, if current growth rate prove sustainable. What, though, do these numbers mean now? They mean that the Chinese people are living better in a material sense, and that is certainly good. The population of China is, however, over five times the size of the American population and, in a relative manner the Chinese experience nothing close to the standard of living that is common in the USA. Also, it is an open question how long the Chinese boom will continue. The Chinese leaders are sitting on a rumbling volcano, and they know it. Due to the national birthrate the Chinese economy must produce twenty million new jobs a year just to accommodate those who are entering the labor force. This explains the “damn the torpedoes, full speed ahead” Chinese approach to economic growth. We are seeing the results right now. There is a huge crime problem in China with burglaries, armed robberies, and assaults rising rapidly. Many Chinese industrial cities resemble nineteenth century English mill towns with vast slums, non-existent sanitation facilities and a permanent pall of smoke and ash over the residential population. The Chinese have refused to sign the Kyoto protocol and have ignored Western requests that they reduce their industrial pollution. The Obama Administration has decided to treat the Chinese with kid gloves on this issue, while they threaten American companies at the same time. Very sad, but certainly not surprising.

Regardless of any of the various “takes” on the situation, the Chinese economic challenge is real, and it is serious. The Chinese have been channeling the overflow and residue from the economic boom into the military. They see this as the gateway to that one elusive variable, namely, world power. It is no coincidence that while China has grown stronger she has grown more aggressive and threatening to her neighbors. Japan, South Korea, Thailand, Burma, Malaysia and the Philippines have all butted heads with the Chinese in recent years. This continued pattern of aggressive behavior is likely to continue as the Chinese grow more powerful.

What should be the American response to growing Chinese economic power? We could simply unleash our own productive capacity, by cutting corporate and personal income taxes and beat the Chinese at their own game. Such a confident and strong Reaganite response is unlikely with a redistributionist welfare statist Administration in charge in Washington, and a defeatist opposition party, to boot. The second possibility is a general paralysis of will, and a resignation that this changing of the guard will happen, and, as Paul Kennedy argued back in 1987 that all we can do is attempt to manage American decline “gracefully”. This seems to be the preferred mode of thinking, in much of official Washington, and of course, in the multinational organizations. The third, and final, and least palatable option is to embrace American decline. We should cede world power to China, we should help them into our former seat of leadership, and allow them to deal with the world’s problems. This idea has drawn qualified approval from conservatives like Pat Buchanan and liberals like Paul Krugman. When then-Senator Barack Obama announced for the Presidency in 2007 he stated a liberal mantra as a campaign slogan: The main problem in the world was the fact that America was too strong. The world was better served when there were contending centers of power largely factoring each other out. The Pax Americana was a dangerous phenomenon, and Obama, as President would oversee its retirement. Which side does a reader believe that Obama is on in the debate over how to respond to the emerging Chinese colossus? Go Figure!

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