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Posts Tagged ‘International Political Economy’

Greece Revolts, DOW Jones Plummets; Make Sense?

Greece Passes Austerity Measure

What I’m about to write is probably all screamingly obvious and simplistic, but nevertheless  I would argue the complexity of our system is what’s leading to so much trouble recently (unless you’re someone who appreciates the volatility as something akin to a natural weather system–whereas I would prefer our system worked more predictably like man-made things ought).  It’s funny how irrational our international political economy has become–a small nation like Greece has budget issues, and the DOW Industrials plummets a thousand points. I fully understand all the intervening concerns about a cooling European economy, frozen credit, and the rest, but sometimes you need to look at the larger picture. How removed has the DOW become from the performance of American industry? Europe is a huge market, but this panic underscores how American competitiveness relies on quantity of product and not quality. And how removed is financial investment from productivity? How sound is the political basis of the EU?

It all sort of reminds me of how Archduke Ferdinand is shot in Sarajevo, and suddenly the whole complicated peace in Europe between the great powers collapsed. If the stability (peace) of our economic system can depend so heavily on small events in southeastern Europe, how overly complex is this financial system? It doesn’t have enough redundancy, and the abstractions of dependencies, sort of like the ententes and alliances in pre-WWI Europe, has become over-wrought and prone to failure. If the EU really does collapse, will it ever be possible to stack the pieces of Europe together again, or is the concept fundamentally unsound?

China next to collapse after real estate bubble bursts?

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Mr. Friedman Needs to Pass the Microphone

http://www.nytimes.com/2010/03/03/opinion/03friedman.html?em

Tom Friedman can come across insufferably at times, like a man who, in his private moments, spends time sniffing all the socks in his drawer. He’s monomaniacal, repetitive, and unoriginal to the point of self-parody. However, he is useful in starting conversations

Oh forget it. He’s just too hard to defend. We need someone new to do this pitch job. Where have you gone Billy Mays…

Rather than repeating all the things that I do believe he’s correct about in this editorial (the borrowing money to simply patch existing infrastructure rather invest in new infrastructure, the increasing innovation competitors abroad, the waning power of our institutions) let me say that we need someone other than him sucking up all the oxygen on the subject, because the issues are serious even if he himself long ago passed the point of ridiculousness. America’s declining competitiveness is, in the mainstream conversation right now, purely discussed in terms of our debt with little attention paid to the myriad of other structural issues that threaten prosperity. But since international political economy is in some ways a closed system with known players, debt isn’t the only thing to be talking about when discussing competitiveness. There is our competitors to think of.

I think it is impossible to overstate the significance that China’s growth rate is now independent if not yet immune to softness in America’s consumer market. Besides their increasing ability to be self-sufficient, it means that other developing or developed nations no longer have to purely concern themselves with the American market, but instead will continue to have a very strong alternative in China. Policy makers of the past twenty years have for all intents and purposes coasted on the notion that we need not worry about China’s rise, since China is dependent on American consumer markets so are equally concerned with our economic well-being. They are expected to accommodate our economic needs, just dispatch a Bush or Reagan to wrangle about tariffs or sell a few more treasuries and trade imbalances can just be papered over. Besides, the thinking goes, our innovative and creative capabilities are just too superior. Appalling hubris–disgusting really.

The counter-intuitive notion that America will still be able to dictate from the position of consumer and debtor (nota bene how American consumers are currently dictating terms to insurance companies and big banks) also reminds me a bit of Alexander Hamilton’s concept for a National Bank. Put most simply, in order to make the nation more stable allowing individual Americans to become financially invested in its success would in turn make it a success. I don’t think this concept will work when jumped up to the scale of nation-states; and since China has outgrown the need for any single market and has plenty of regional trading partners to play with there is not much incentive to continue playing nice. Meanwhile, it’s well reported how their influence as a commodities purchaser is spreading in central Asia, Africa, and South America. I think it’s being revealed that the central conceit of this analysis is counter-intuitive not because it is a brilliant, but simply because it’s wrong. What’s more, Chinese policy-makers are probably aware of this ballyhooed arrangement, and if I were they, would be set on preventing it.

The traditional second argument against overly fretting about China’s potential to supplant American economic dominance has been that its large population is working as a double-edged sword in terms of its economic development. While their increasingly affluent middle-class is expanding and dozens of massive new cities are cropping up employing millions of low skill laborers, that congestion costs, pollution, and a restless peasant class are bound to eventually undercut the stability of their undemocratic system, which would of course also lead to economic turmoil. There is no real reason I can tell that this is likely to occur because China is investing so heavily in education and infrastructure. Their country’s government is not so repressive that it fails to engender true loyalty in its population, or sufficient to scare off  every engineer and scientist who studies in America from returning to China. Quality of life in regions of China are already far surpassing regions in America. China also produces enough high tech workers in its universities that it has no trouble in attracting global companies for investment in R&D. Most developed countries were challenged by the same problems of class strife, congestion, and pollution  at various points in their history, and certainly not all succumbed to strife and self-annihilation. Even in those nations that developed fast and whose power and demographic-weight led irresistibly to militarism (let’s use poor Germany as an example), this did not spell the long term economic doom of the nation. For all its past faults, Germany still stands near the top of the economic heap. Why should we suppose that China will become militaristic or that it should fail to sustain growth, or that it will do anything other than what is doing right now (which is slowly surpassing the US in economic power)?

We cannot see the future, and in lieu of prophecy, we cannot just count on the past repeating itself. To me, this means we should not suppose that the economic freedoms will become political ones or that China’s economic development inequalities will lead to popular uprisings as in some historical Western European examples. We can, however, suppose what is possible from history. In a more cautious, humble tact, aware of the differences from historic precedent, we can recognize that congestion costs have been overcome through more efficient administration and technological advancements (if this was not true NYC would not be one of the most productive urban agglomerations on earth today), so it is possible if not likely to be overcome again. While we know that these problems of congestion and pollution threaten China’s health and therefore its competitiveness, the Chinese government is also aware and so again we cannot simply make our policy decisions based upon the supposition that they will fail. Counting on the incompetence or corruption of your competitor is a good path towards losing.

Making the necessary investments in infrastructure and education that will improve our efficiency as an economy, in order to match or surpass congestion challenged China (and other rapidly rising nations) is complicated by the fact that we must borrow from them in order to do so. IMF and World Bank, under American leadership, usually counseled austerity and restraint in similar circumstances we find ourselves now, with highly contested results. Certainly if there was ever a more pressing time to avoid waste and corruption, this would be it, but allowing our physical infrastructure to fade until America becomes a cheap place for foreign investment I feel is equivalent to pawning the family jewels. It may temporarily pay some bills but it won’t lead to expansion. Unfortunately, what we need is the politically impossible: large cuts in some areas and the raising of revenue from comfortable sectors to make equal, if not larger, expenditures in brand new programs that will cause American investors on the sidelines to rethink their positions and hop on board. Half-measures or half-met promises are only creating uncertainty that is prolonging pain. Our greying boomer demographics are also hurting us (time to loosen immigration policy–another really popular measure in an economic downturn).

The last question is, so what if China grows and surpasses America in economic power? Is this really a problem? You don’t think this is a zero-sum game to be won do you? To these questions I’m not sure I have an answer. While naturally suspicious of the Chinese government oligarchy, I am nothing but admiring for Chinese civilization and glad at the relief of poverty that have matched the economic rise. As an American, I only wish for our government and people to be committed to an economic competition with China. I think such competition will catalyze better performances in the realms of scientific excellence and provision of opportunities and services. My hope is that it will raise the quality of life for both countries, and for the globe as a whole. My wish is not for one nation to “be the best”, but to avoid a steep decline in American fortunes through a combination of arrogance and apathy.