China and the U.S. inextricably linked. Source: NYTimes Magazine
A lot is going on in the Rising Powers at the moment, so why not begin the week with a survey of key developments and important news articles?
On China, there was an excellent article by David Leonhardt in the New York Times Magazine, explaining quite clearly the symbiotic linkages between the economies of China and America and the challenging tasks both governments face to correct the imbalances in trade and finance that have underpinned the current global financial crisis. I applaud Leonhardt’s mentioning Ben Bernanke’s past and present near-blaming of America’s debt-driven trade deficits on China’s savings glut. I first heard Bernanke make this argument at a Merrill Lynch dinner in 2005 where he was keynote speaker and was angling to be Bush’s nominee for Fed chairman. According to Bernanke, then Chairman of the Council of Economic Advisers, America’s twin deficits were not the problem; abysmally low American household savings were not the problem. It was the global savings glut that kept interest rates low in the U.S. Global capital sought the superior returns of U.S. assets. It was up to other countries like China to adjust, not the U.S. The Special of the Day at the Federal Reserve dining room these days is crow.
I disagree with one point made in the Leonhardt article. He quotes China expert Nicholas Lardy saying that China’s massive current account surpluses were accidental; the Chinese “fell into it.” As head of Asian Sovereign Ratings at a global rating agency during the Asian financial crisis of the late 1990s, I recall Chinese officials observing the financial dominos falling all over Asia at that time. They saw governments, from Korea to Thailand, failing to follow a policy of targeting higher foreign exchange reserves. As a result, I believe the Chinese became determined to run up their surpluses and to bank them, so as never to go hat in hand to the IMF like their neighbors had to do.
Also on China, a Foreign Affairs article called “The G-2 Mirage,” penned by Elizabeth Economy and Adam Segal, argues that prospects for the G-2 cooperatively managing world affairs are not great, given conflicting values and goals, even less so now that Obama is in power. I heard Economy argue this point in a political salon I attended. In contrast to Bush, Obama’s team will stress with China reducing greenhouse gases and improving human rights, which could get in the way of coordinating economic policies and solving problems around the world, notwithstanding the best intentions of Tim Geithner.
On an optimistic note regarding China, in a world where relations between (and within) states have been deteriorating (whether it is in Pakistan and Afghanistan, between Russia and NATO, or between Iran and its neighbors), it is encouraging to see China and Taiwan improving relations. An Economist article discusses the announcement in late April by China Mobile that it would buy a Taiwanese mobile operator. Taiwanese capitalists have long invested in the Mainland, but Taiwan has restricted Mainland investment in its economy. With its economy now faltering, Taiwan has liberalized its investment rules vis-a-vis the Mainland. This is part of a mutual thawing of relations since Taiwanese President Ma Ying-jeou of the KMT party, which advocates closer cross-straits relations, replaced the controversial President Chen Shui-bian, of the pro-independence DPP party, last year. Yet the Taipei Times reports that Sunday tens of thousands of protesters took to the streets of two Taiwanese cities to show anger at President Ma’s pro-Beijing policies. Organizers had hoped for hundreds of thousands.
In India, contrary to what most pundits had expected, the incumbent Congress Party did very well in national elections and will easily form the next government. It seems Indians voted for who they believe will run the economy and look after the poor best, not who will take the hardest line on terrorism (the BJP). Likewise India’s smaller and regional parties had a poor showing overall. I argued in an earlier post that an election resulting in political fragmentation, characterized by a surge of support for the smaller parties, could lead to higher government deficits and debt. Let us see if a government dominated by the Congress Party can fulfill its election promises without a deterioration in sovereign creditworthiness. What is clear is that President Singh is now a giant on the Indian political scene, much like Barack Obama; and, with a likely 260 seats, he needs just 12 more from other parties to govern.
Prime Minister Netanyahu of Israel will meet Monday with President Obama in Washington. A must-read ahead of this meeting is a NYTimes op-ed by Jeffrey Goldberg, correspondent for The Atlantic, in which he explains what motivates Netanyahu and the consequent challenges Obama will face in dealing with him. I had extensive meetings with Netanyahu over the years he was finance minister, and there is nothing in Goldberg’s piece that I would disagree with. While it would not be correct to say there has been a deterioration in relations between the U.S. and Israel since the election of Obama in November and Netanyahu in February, the expectation is that they will not see eye-to-eye in the same manner Bush and Olmert did. However, an AP article quotes Defense Minister Barak suggesting that Netanyahu, who has lowered expectations about his appetite for negotiations with the Palestinians, will reaffirm his country’s commitment to a two-state solution. This will be a sort of “gift” to Obama, but will there be a quid pro quo? A commitment to heavier sanctions on Iran on the part of America? How can Obama promise that?
In the presidential election in Iran, reformist candidates have been knocking Ahmadinejad for denying the Holocaust and ruining relations with the West. If there is any hope that a reformist can win in Iran with Khamenei lurking behind the scenes, would this presage a détente with the West? The trouble with this hope is that it may in fact be the case that both reformists and hardliners in Iran are intent on building a nuclear weapon. Perhaps the only way to stop one, therefore, if that is what in fact the West wants to do, is to sharply curtail the country’s access to petroleum markets worldwide, which is a highly unlikely event.
And in Pakistan, the UN estimates one million people have fled their homes, due to fighting between the government and the Taliban. Likewise U.S. targeted killings continue, with criticism, including in this country, mounting. And, a New York Times article on Sunday quoted Admiral Mike Mullen, the chairman of the U.S. Joint Chiefs of Staff, confirming that the government of Pakistan is rapidly expanding its nuclear weapons arsenal.
In Brazil, hundreds of thousands remain homeless after floods ravaged the northeast, and the government is being criticized for not doing enough, reminiscent of criticism of the Bush administration after Hurricane Katrina.
And Friday, Russia and other nations could not agree on a proposal to extend peacekeeping monitors from the Organization for Security and Cooperation in Europe to stay in Georgia beyond June 30.
The world takes one step forward and two steps back…
