Tuesday, February 14, 2012

China Ascendant? US Declines? Maybe, Maybe Not.

Long term forecasts are always wrong, almost by definition.  So, when I read that Arvind Subramanian wrote in Foreign Affairs, "China's dominance is a sure thing," I can comfortably feel, "That must be wrong."  It's a clever assertion  because I'm not sure what it really means. Enough semantics, though.

Michael Beckley's article, "China's Century? Why America's Edge Will Endure," provides an interesting framework for discussing this question. He writes that the rise of China is the most read-about news story of the 21st century. 

The Global Language Monitor's survey of 50,000 publications worldwide shows that the China ascendancy story has surpassed 9/11 for total world readership.

U.S. "declinists" see the U.S. as turning benefits of the global reserve currency and globalization into economic hegemony which cannot be sustained.  These authorities believe  either though benevolence or impotence that the U.S. is unable or unwilling to maintain the future international order.  These discussions often use the term, "multi polar world" when producing their dire forecasts. 

The U.S., according to Beckley, spends 25% more in real dollars than it did in 1968 at the height of the Vietnam War.  However, as he rightly points out, the U.S. effectively guarantees the security of some 50 nations worldwide, and those countries, including the wealthy Japanese, get a very valuable free ride. 

Turning to historical comparisons, Beckley notes that spending 4% of GDP on defense is not in the realm that has financially undone hegemonists like the Roman Empire, which ultimately overextended itself and its legions with far flung outposts. 

Looking at GDP comparisons can be misleading, most of all because that number it itself inadequate as a measure of global political power and the ability to project that power.  In a chart, Beckley's article shows that the average Chinese citizen is $17,000 poorer relative to their American counterpart in 2010 compared to 1991. 

As a nation, our politicians and Wall Street are in love with numbers.  Unfortunately, government numbers are modern propaganda and should be treated with disbelief.  Wall Street's numbers are generated by promoters and should be treated wtih skepticism.  So, we are told that Chinese GDP has and will continue to grow at 8% per year. That means it doubles every nine years.

This growth has not come in a sustainable model.  Beckley points out that much of China's investment has been funneled through investment entities connected to local governments, which issue debt.  Taking this local government debt into account, China's debt to GDP ratio goes from the stated 19% to 75-150% . 

Trees don't grow to the sky.  The World Bank wrote in a 2006 study, "...most (80%) of a country’s wealth is captured by what we called intangible capital residual. ... By construction, the intangible capital variable captures all those assets that are unaccounted for in the wealth estimates. These are often intangible assets such as the skills and know-how embodied in the labor force. It also includes social capital, that is, the trust among people in a society and their ability to work together for a common purpose. The residual also includes all those governance elements that boost the productivity of labor. So, for example, if an economy has a very efficient judicial system, clear property rights, and an effective government,the effects will be demonstrated by a higher total wealth and thus a higher intangible capital residual"  

Jack Baranson has written about the experience of Cummins, an American company and worldwide leader in large diesel engines, producing the same engine in Japan and India.  Japanese workers learned quickly and produced the requisite quality product at the projected cost.  This was due to their intangible assets described above.  Indian workers, however, produced "second rate engines" at 3-4x the projected cost.   Indian workers do not have the benefit of their government and society having put those intangible assets into place.

 Our declinists often talk about our aging population.  Beckley writes that the "One Child" policy will leave China "with the most severe aging process in human history."  (that sounds like a long-term forecast to me) The reader will get the point.

Beckley writes that half of China's engineers are auto mechanics or graduates of two-year vocational programs.  The brain drain of the top scientific minds to Western institutions continues.  Even the Chinese government's intentions to create a network of "world class universities" attracting the top students from all over the world seems far fetched.  If money were the issue, every Ivy League university student would have graduated  in Saudi Arabia or Qatar. 

Talking economic statistics, many observers have pointed out a deficiency in current world trade statistics. Over 90% of China's high tech exports are produced by foreign firms from imported components assembled in China, which then records the final good export.

Beckley's conculsion is that the U.S. is "coercive and capable" of maintaining a world order consistent with rebalances of power, but which is not a sunsetting of U.S. hegemony.

Of course, we have no reason to be complacent.  Our society is being alternatively roiled by Wall Street's cycles of financial recklessness and by social engineers and their political enablers.  Our ship may be listing, but it has historically righted itself, and the collection of intangible assets we have don't seem to be duplicated anywhere else. 

Cause for optimism?  Maybe so.

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