China: Can the CCP Lose its Monopoly?

Chinese Riot Police in Sichuan Province in 2008. Source: AFP

Most communist regimes (most dictatorships for that matter) have been swept away by history, usually when they failed to deliver the goods on economic growth and social welfare.  Democracies contain elaborate rules by which the people can “throw the rascals out” when their leaders fail to deliver.  True, when enough people blame the democratic system itself, rather than just the rascals, democracies have been overturned as well.  Weimar Germany comes to mind.  

In spite of the great sweep of communist regimes into history’s dustpan, the Chinese Communist Party (CCP) has hung on and even prospered.  It has delivered the goods, producing a mindboggling 10% annual growth in GDP on average over the last thirty years.  The Chinese people have acquiesced to the CCP’s continued monopoly of political power, because, well, business has been good.

Yet China’s leaders are nervous.  They are nervous about the global economic crisis.  They are nervous about rising unemployment.  They are nervous about popular protests.  They are nervous about the internet, that discontent can spread like wildfire with the click of a mouse.

Some China analysts have warned, since Deng Xiaoping began liberalizing the economy, of the inherent contradiction of a society with economic diversity and a political monopoly.  Yet years of economic success postponed a resolution of this conflict. 

This is not to say that the day of reckoning is near.  The situation in China right now is not that bad.  The economy is expected to grow between 5-6% this year, below the 8% some economists have argued is needed to absorb the growth in the labor force, but not bad for the middle of the worst global crisis in decades.  Foreign exchange reserves are nearly US$2 trillion and rising, providing plenty of room to stimulate the economy without balance of payments pressures. Likewise, with government debt at around 25% of GDP, there appears to be a lot of room to spend money.

Scratch below the surface and all is not well in the Forbidden City.  Reports indicate some 670,000 factories have closed.  Unemployment, while nationally at a low 4.5% by official reports, may be much higher in rural areas (estimated at 15%), among college graduates (estimated at 12%), and among the migrant workers who man the machines in China’s coastal manufacturing juggernaut (estimated at around 26 million jobless).  The latter two groups, China’s leadership worries, could foment social unrest.  This year, after all, is the twenty-year anniversary of Tiananmen Square. 

Substantial income disparity can exacerbate social tensions in China.  While the country’s per capita income exceeds US$3,000 overall (similar to Tunisia’s and Peru’s), wealthy Shanghai’s income per head is closer to what we find in Chile, Turkey or Malaysia, while the poorest provinces have income levels found in the poorest African nations.  At 46.9, China’s Gini index demonstrates poor income distribution.

The massive macroeconomic stimulus the Chinese are implementing may not durably replace the external demand lost due to the global crisis.  China’s economy is distorted.  Consumers save too much.  Production is directed for export due to the undervalued exchange rate, reducing the supply of low-cost goods for consumption at home.   Ironically, in the planet’s largest socialist nation, the government fails to provide an adequate social safety net, causing consumers to save for health care, housing, education and retirement, thereby postponing consumption.

The stimulus package focuses too much on infrastructure investment in a country where investment represents an excessive 43% of GDP and infrastructure in the coastal cities is already world-class.  With investment rates this high, one wonders if the marginal return on investment could be low or even negative, as some economists argued was the case in Korea as it over-invested in the run-up to the Asian crisis, and in the Soviet Union during its dying days.  The stimulus package contains elements to bolster consumption, but perhaps more should be directed here, providing an effective short-term boost to the economy and fostering the longer-term adjustment needed for a stable domestic source of aggregate demand.  It took an externally-driven crisis to convince China’s leaders to do what the West has counseled for years, namely, stimulate domestic demand.

James McCormack, Head of Asian Sovereign Ratings at Fitch Ratings, in a March 2009 report on China  (www.fitchratings.com), notes that the fiscal stimulus plan “may not adequately address the issue of large-scale unemployment in export-oriented manufacturing.”  He adds:  “Chinese fiscal stimulus and monetary easing can help offset some of the effects of the economic downturn, but they cannot change the course of the economy, especially one in which exports of goods and services were equivalent to 37% of GDP in 2008.”  If the downturn in advanced economies persists, the stimulus package would have to be redirected toward greater household income support.

Another problem with the stimulus package is that it is channeled through public institutions, such as ailing banks and state-owned enterprises, rather than directed toward the dynamic, privately-owned manufacturers.  Moreover, local governments are expected to foot part of the bill, yet they rely on land sales for a large portion of revenues, under pressure from falling real estate prices.  As for the banks, the good news is that they do not need to de-leverage as banks are doing in advanced economies.  According to McCormack’s report, Chinese banks have a modest loan-to-deposit ratio of 66%.  However, Chinese banks, long involved in questionable lending, are weak and sprawling, with assets representing a sizable 128% of GDP.  Although the government’s debt burden is low, it may have a bank cleanup to finance in the coming years.  On orders from the government, Chinese banks are engaged in rapid, indiscriminate lending.  The government, with a low tax intake, may have to expand the tax base in order to support its current policy stance.

Should stagnation persist in the advanced economies, which have been the engines of Chinese growth, then unemployment and social distress in China will increase and the Chinese people will want a change.

Elizabeth Economy, Director of Asia Studies at the Council on Foreign Relations, addressing a political salon in New York this week, following a week-long visit to China, said she was encouraged by the lively debate taking place in China today over economic policy.  She noted, however, that the leadership remains reluctant to discuss any substantive political opening.  Chinese leaders worry about rising unemployment, especially among migrant workers and college graduates, because they know that, lacking avenues of popular expression, the people could take to the streets.  Yet instead of building or broadening institutions to channel social action, China’s leaders reach reflexively for the tried and true answer, that is, to give the masses the opiate they desire:  economic growth.

John Thornton, Chair of the Board of the Brookings Institution and a professor in Beijing, discussed signs of democratization in China in an excellent article in Foreign Affairs last year.  He enumerated examples of competitive elections at the local level and greater competition within the CCP itself, as well as improvements in judicial independence and governmental oversight.  Notwithstanding these healthy developments, Elizabeth Economy suggested that democratization in China thus far is more anecdotal than systemic.  Should a sustained downturn produce popular dissatisfaction, one cannot rule out trouble for the CCP or even an up-ending of the regime in the manner we have seen in other communist countries and other dictatorships.

A Concert of Great Powers

President Obama announces his Af-Pak Initiative. Source: CNN

Portrait of Prince Metternich Source: Wikipedia

Keeping nuclear-armed Pakistan out of the hands of radicals should be a central goal of U.S. foreign policy.  Like a nuclear-armed Iran, control of the Pakistani government by believers in a radical ideology would be one of the worst scenarios for U.S. interests and for the safety of the world.  Weapons of mass destruction will proliferate, but ensuring that basically conservative governments (like China’s and Russia’s), regardless of ideology, remain the custodians of these weapons should be on overriding international priority.  In terms of furthering this objective, President Obama’s “Af-Pak” initiative last week, and its focus on preventing Al Qaeda and the Taliban from taking control of Pakistan, should be applauded.

However, what is missing from this initiative is greater emphasis on multilateralism.  The world is fast slipping from America’s “unipolar moment” after the fall of Communism to a dynamic multipolar world of rising and declining powers.  The sooner the U.S. recognizes this and couches almost every foreign policy initiative in terms of getting the great powers to work together to solve global problems, the more likely this power shift will occur peacefully.  The only goal perhaps more important to U.S. interests than preventing WMD proliferation is this peaceful shift to multipolarity.  Such a shift, characterized by consultation and coordination, would provide the best mechanism for solving the world’s problems, including WMD proliferation.  True, you cannot put the brakes on America’s myriad foreign policy initiatives as new institutions of multipolarity are erected, but you can tailor policy with multipolarity in mind and use the bully pulpit to promote reform of the machinery of diplomacy.

In fairness, President Obama’s Af-Pak initiative did include a call for a Contact Group, including NATO, the Central Asian states, Gulf nations, Iran, Russia, India and China.  Yet this was more of an afterthought to a unilateral initiative.  Notwithstanding Movement Obama’s ever-present language of renewal – from the “new politics” and “transformational leadership” of the campaign to recent calls for a “new day” for Afghanistan and Pakistan and a “new partnership” with (as well as a “language of respect” and a “hand of friendship” toward) the Muslim world – Obama’s foreign policy remains much the same as that of his predecessor, the guy he so single-mindedly excoriated. 

The Obama team argues that they will be smarter and more focused than their predecessors, and perhaps the Af-Pak initiative will bear this out.  However, the new thinking required in foreign policy is not yet apparent in this administration (granted, it is still early).  We have thus far been treated to clever rhetoric, including cute, new metaphors, such as the “reset” button on U.S.-Russian relations.  Besides being another backhanded criticism of Bush, the “reset” metaphor fails to acknowledge that the “software” of U.S.-Russian relations remains the same.  Since the end of the Cold War, the West (led by NATO and the EU) has been unable to resist the temptation to extend its influence to Russia’s doorstep.  If Obama’s “reset” constitutes cooperation, not confrontation, discussion, not unilateralism, then he would in fact be installing new software in relations with Russia.  

Still, we need a point of departure in American foreign policy.  Some adjustment of global institutions is under way, including altering voting rights at the IMF, utilizing the G-20 forum instead of the G-7, discussing reform of the U.N. Security Council.  The president should raise the profile of this process, calling for new diplomatic machinery.  He should seek a Concert of Great Powers, similar to the Concert of Europe erected in 1815 by the victorious powers in the Napoleonic Wars.  

The Concert of Europe that included Great Britain, Russia, Prussia and Austria, and after a few years, France, the vanquished aggressor, prevented major wars for forty years and a global conflagration for nearly a hundred.  The Concert involved periodic international congresses and a recognition of the national interests of the great powers and the need for a balance of power.  The vice grip that Wilsonians have had on U.S. foreign policy thinking over the last century has precluded such an approach.  Likewise, neo-conservative unilateralism cast aside any close cooperation with other great powers.  It is time that realists put these ideologies in their proper place.  FDR had proposed something like a Concert of Great Powers after WWII, with his “Four Policemen,”  the U.S., U.K., USSR and China.

Kissinger has pointed out that balance of power politics without at least some international agreement on values cannot produce stability.   Yet agreement on shared values is difficult to achieve.  To an extent, the Concert of Europe included this component.  The powers agreed that territorial adjustment would only occur through consultation.  The three members of the Holy Alliance – Prussia, Russia and Austria – agreed on the principle of monarchical legitimacy, while France and Britain demurred.  Nevertheless, the governments of the day found enough shared values to make the Concert work for decades. 

There is much that the great powers today – both rising and declining – can agree on.  They all participate with vigor in the global economy.  They are all active members of international organizations and parleys, such as the U.N. and various regional fora.  They are all relatively conservative in that they do not seek substantial territorial aggrandizement and are essentially peace-loving.  None seeks the elimination of any other sovereign state.  Yet there are substantial exceptions and areas of disagreement.  China opposes self-determination for Taiwan; Russia would like a free hand in its near-abroad; America intervenes in local hotspots if certain principles are violated.     

A commitment to working through a Concert of Great Powers would present challenges and ethical quandaries for American policymakers, and would be difficult politically.  The U.S. Congress enjoys grandstanding on moral issues.  The president is required by law to produce public documents on international affairs that sometimes irritate other powers, such as the report on China’s military that was released last week, and the State Department’s Human Rights reports, released in late February.  These reports have a great deal of utility and can encourage ethical behavior in the world.  Nevertheless, cooperating closely with such rising powers as China, Russia, India, Brazil, Mexico, Turkey, Indonesia, Egypt and Saudi Arabia should become at least as high a priority as sermonizing to the rest of the world about ethics.  

This would mean, not giving up our values, but moderating the vehemence of our pursuit of them.  It would mean recognizing that cooperating with other great powers holds out the prospect of solving complex regional problems and maintaining global peace and prosperity, worthy moral objectives as well.  Pursuit of great power accord might be worth the short-term toleration of unfortunate ethical lapses of other powers.  It might require the U.S. to put religious freedom and democracy lower on the list of priorities than coordination with the great powers.  It might mean pushing allies to do things that might seem unfair, in order to solve a conflict that would garner broad international support.  In the end, resolution of local conflicts that attracts the support of the great powers would be eminently more stable than the alternatives.   

The world has a large number of international and regional fora, including the UN (both the General Assembly and the Security Council), NATO, the G-20, the Asia-Pacific Economic Cooperation forum, Organization of American States, Organization of the Islamic Conference, African Union, Arab League, the EU, the Shanghai Cooperation Organization, the IMF, World Bank and regional development banks, and the WTO, among others.  What do we do with all of them? 

These groupings and institutions should not necessarily be replaced by other machinery.  However, a regular forum for the great powers, both rising and declining, to meet and discuss issues, and perhaps in time, to confront aggressors and solve regional problems, is needed.  Whether this could take place through an existing vehicle, say, the G-20, or the U.N. Security Council (revamped to include new members), or even through regular bilateral discussions and ad-hoc parleys, such as the North Korea six-party talks, such diplomatic coordination would be critical to a peaceful transformation of the international system.  

This approach does not preclude the U.S. from giving voice to its values — promoting democracy, human rights, and private enterprise.  It simply suggests that the best way to pursue these ends in the long run is through a peaceful coordination of the interests of the great powers.  Again, sometimes the emotionally-satisfying sermonizing we Americans enjoy can be counterproductive to the very aims we seek.  Though more intensive diplomatically, especially in the near term, this approach over the long term could lift the burden of global stability off the solitary shoulders of the United States.  

It is unclear what the initial steps this administration should take to usher in a multipolar world.  President Obama is traveling to Britain this week for the G-20 summit, not a bad time to launch such a discussion.  Updating the existing machinery, already under way, is not a bad beginning.  Let’s hope that Movement Obama remains true to its rhetoric and seeks renewal in American foreign policy.

                                     

Annual Pentagon Report on China’s Military

Admiral Timothy Keating, head of U.S. Pacific Command. Source: CNN

 

 

Obama Administration: 

Please don’t neglect China because of too much focus on Afghanistan, Iraq, the Middle East and elsewhere, like, uh, your predecessor did…

 

The Pentagon has been required by law since 2000 to report to Congress annually on China’s military.  This year’s report, along with testimony this week before Congress by Admiral Timothy Keating, the head of U.S. Pacific Command, is reported on by CNN.  The full Pentagon report appears on the DoD web site.

 

It appears that the themes stressed in this year’s report are much the same as last year’s: China’s relentless effort to project military power, including across the Taiwan Straits; its continuing difficulty to establish such a capability; and, the ongoing shift of the Asian balance of power in China’s favor.  This year’s Pentagon report appears to emphasize more the lack of transparency about China’s capabilities and intentions.  The latter was exacerbated when direct U.S.-Chinese military-to-military talks were suspended after Washington announced in November 2008 it was selling weapons to Taiwan.  And, the incident over the US surveillance vessel, the Impeccable, caught nearly a 100 miles offshore China earlier this month, has likewise soured relations between the two great powers.  Admiral Keating told Congress he wanted the dialogue with China to resume.

 

The West has been successful thus far in bringing China into its institutions, evidenced above all by China’s becoming a major player in the global economy.  It would be worthwhile, therefore, for tensions over Taiwan and over the multiple national claims in the South China Sea to be reduced.  While national interests will continue to collide, a reduction of uncertainty about intentions and objectives would serve to reduce the frictions.

 

Brain drain…to India this time…

Source: The Economic Times

 

Serious setbacks in U.S. economic performance are convincing highly-trained nationals from such Rising Powers as India and China to return to their countries from the United States.  Many are not even opting to study in the U.S., worried about financial aid, as well as jobs once their studies are finished. 

In three recent articles, this phenomenon is described as it pertains to India.  One article discusses how, to some young Indians, the American Dream is losing its luster.  Another article discusses the reduced demand for lawyers by corporations in developed countries, which has made practicing law in India look more attractive.  And, finally, there is an article on IBM’s job cuts in the U.S., 5000 soon to be announced, which will likely make the technology company’s U.S. workforce lower, for the first time, than its workforce in the BRIC countries, which represent more than a quarter of IBM’s global workforce. 

G-20: Forum of the future

The G-20 is the forum of the future.  See its web site at http://www.g20.org/. When the international system is in transformation because of a significant shift in the relative power of nations, as it may well be now, this shift could take place with violence or with a flurry of effective diplomacy.  Either way, the new, rising powers will take new, important positions in world affairs, with some authority relinquished by the powers in relative decline. 

G-20 Summit, November 2008. Source: Wikipedia

 

In late 1999, the G-7 called for the convening of the G-20, which was to include the 19 largest economies of the world plus a representative of the EU.  More or less this is what it contains today, with some adjustment to reflect population and regional diversity.  G-20 finance ministers and central bank governors have met periodically to discuss and coordinate economic policy, even though the forum is much more unwieldy than the G-7.  The IMF and World Bank attend as well.  Given the increasing importance of the larger, rapidly growing emerging economies included in the G-20, especially to international trade and financial flows, this will be the forum of the future, and the G-7, the traditional rich countries’ club, so prominent in headlines in recent decades, should wither on the vine.  A rotating troika of members manages the agenda of the G-20.  If such rising powers as China, India and Brazil are accorded greater influence in the world through such fora as the G-20, the IMF and other IFIs, the UN, the WTO, and in bilateral relations between states, their rise can occur peacefully.  Likewise, their rise could blaze a path for other rising powers, including Iran, which could eventually be integrated in global institutions that promote peace and prosperity.

The global financial crisis convinced Western leaders to call a summit of the G-20 in November 2008, one which Bush hosted and Obama declined to attend, but which produced an agenda to address the crisis.  On March 14, following a ministerial-level meeting of the G-20, a communiqué and an annex on lending were issued, providing an updated agenda for the next G-20 summit on April 2 in England.  Stay tuned…

 

IMF: Stepping Up

The IMF has been stepping up to help solve the global financial crisis.  Only a few years ago, it was experiencing an identity crisis and was under fire from many corners.  This post addresses the IMF’s changing role and shows a chart detailing its planned redistribution of voting rights that will ensure greater representation of such rising powers as China, India, Korea, Brazil and Mexico.

In the G-20 communiqué of March 14, the IMF committed to implementing the changes in voting rights agreed in April 2008 and to reassess again these rights by 2011.   Likewise, the IMF has provided financing to beleaguered emerging markets, in addition to its research and policy prescriptions.

While the much-maligned IMF has made a few tactical mistakes over the years (including at times calling for fiscal austerity at the wrong times), in my view, it has been engaged in saving the world and helping the planet’s most impoverished people access the global economy. I am an unabashed booster of the IMF, having followed the organization’s work closely for more than a decade as a country risk analyst.  Since its inception in 1944, the IMF has gone from providing balance of payments support to industrialized countries trying to maintain fixed exchange rates, to providing financing attached to economic policy conditions to developing countries, to functioning as a global economic think tank and economic data collection and monitoring authority.    

As any bureaucracy, the IMF seeks to find a useful role for itself in changing circumstances.  A few years ago, when most major emerging market economies were accessing the international capital markets on their own, the IMF and its observers wondered “Whither the IMF?”  What would its future role be in a world of flexible exchange rates (with a reduced need for balance of payments support) and financially-sound emerging markets?  Should it become an official international rating agency?  Should it be a financial crisis early warning authority?  Should it offer policy prescriptions to the advanced economies, given that global imbalances were a trigger for the current crisis?  Was it becoming an anachronism, given the voting power skewed in favor of European countries?

Now, with the current crisis, it has a central role again.  Those emerging market countries with large external imbalances (many in Eastern Europe), glossed over by many analysts during the recent boom, have received IMF loans.  Hungary, Ukraine, Belarus, Latvia, Serbia, Armenia and Iceland all have received IMF financing of late.   With capital flows from advanced to emerging countries drying up, the international financial institutions, led by the IMF, are stepping up.  The crisis points up the need for augmenting the resources of the IMF and the other IFIs.

Likewise, the IMF should be applauded for moving ahead with its plan to redistribute voting rights toward emerging economies that have seen their relative size increase dramatically in recent years.  In April 2008, the changes in voting rights shown in the box below were agreed.  Likewise in the G-20 communiqué of March 14, the IMF was encouraged to stay on schedule to review voting rights changes needed to reflect economic realities by January 2011. 

 

 

	IMF:  Changes in Voting Shares
Country	Percentage point change from pre-Singapore to post second round (Share)	Post second round voting share (In percent)
Top 10: Positive Change from pre-Singapore
China	0.88	3.81
Korea	0.61	1.36
India	0.42	2.34
Brazil	0.31	1.72
Mexico	0.27	1.47
Spain	0.22	1.63
Singapore	0.18	0.59
Turkey	0.15	0.61
Ireland	0.13	0.53
Japan	0.12	6.23
Top 10: Negative Change from pre-Singapore
United Kingdom	-0.64	4.29
France	-0.64	4.29
Saudi Arabia	-0.41	2.80
Canada	-0.37	2.56
Russia	-0.35	2.39
Netherlands	-0.30	2.08
United States	-0.29	16.73
Belgium	-0.26	1.86
Switzerland	-0.19	1.40
Australia	-0.18	1.31

Source:  IMF Finance Dept., from March 2008 proposal.

IMF: Review of recent literature on the financial crisis

Dominique Strauss-Kahn, Managing Director, International Monetary Fund, Source: Wikipedia

 

The IMF, in an effort to play a useful role in resolving the current financial crisis, has produced research and commentary on the crisis that is available on its website, www.imf.org.  This important analysis of IMF staff can help policy practitioners and observers cut through the fog of media coverage and the associated tendency toward populism.

On March 6, the IMF produced a quantitative of the impact of fiscal expansion on government debt levels, forecasting a whopping 25% rise in debt/GDP in advanced countries by 2014!  The IMF outlined four general principles of longer-term fiscal solvency — making the stimulus temporary, undertaking medium-term commitments to reducing fiscal deficits, implementing structural reforms to raise GDP growth, and reforming health and pension programs.

In spite of skyrocketing debt levels expected, the IMF argued forcefully in two papers that sizable fiscal stimulus is needed to get the planet out of this mess. In “The Case for Global Fiscal Stimulus,” also released March 6, and “The Size of the Fiscal Expansion: An Analysis for the Largest Countries,” released February 1, the IMF discusses the likely effect of fiscal stimulus on global growth (a positive jolt of up to 2.25% in 2009) and the impact on the largest countries’ debt levels.  China, the US, Canada and the UK have room to undertake substantial stimulus, while there is less such room in Continental Europe, India and Japan, due to already high debt levels.  With the US contemplating the largest fiscal stimulus, appropriate given the deterioration in growth expected and the fact that weakened banks mean lower multipliers, it is likely to have a debt/GDP ratio in excess of other large economies, with the exceptions of Japan and Italy. 

In “Lessons of the Global Crisis for Macroeconomic Policy,” released February 19, the IMF finally argues that monetary policy should not just be geared towards fighting inflation, but also toward preventing asset price speculation.  Asset price booms in the stock market and especially in the real estate market were the proximate cause of the current crisis.  This is somewhat maddening to me because, after following emerging market crises for years, ones that often involved asset price booms, from Mexico to Asia, I came to the conclusion that monetary policy should take into account asset price run-ups and external imbalances (trade deficits).  Yet the prevailing wisdom at central banks throughout the nineties and much of this decade, epitomized in the knighting by Queen Elizabeth of Sir Alan Greenspan, was that monetary policy couldn’t prevent asset price bubbles and must solely confront goods price inflation.  This IMF paper argues that only asset price bubbles financed by debt should be attacked with monetary policy.

In a paper on the lessons of the crisis for financial regulation, released February 4, the IMF calls for expanding regulation to include hedge funds and other institutions, increasing capital requirements in good times, coordinating regulation, and tracking “interconnectedness” to limit systemic risk.

 

In “Initial Lessons of the Crisis for the Global Architecture and the IMF,” released February 18, the IMF bemoans the lack of policy coordination among nations in addressing the crisis, which I would take issue with.  Could coordination be better? Sure.  But, compared to the 1930s Beggar-thy-neighbor policies, the coordination of liquidity injections, fiscal stimulus, and bank rescues this time around seems pretty good so far.  What we must be vigilant about, and the U.S. looks worrying in this respect, is a protectionist reaction.  The IMF also calls for augmenting its resources and those of other IFIs, a sensible objective.  With only $250 billion available (that is, before the latest disbursements), and another $100 billion on offer by Japan, this appears modest relative to the task.

Finally, I point to a paper I have applauded before, “Systemic Banking Crises: A New Database,” from November 2008.  It details banking crises over the last thirty years across the globe and concludes that a targeted recapitalization of banks (i.e., a bank bailout) can limit losses in output.   

 

Two Thought Exercises in American Foreign Policy

With this post, I launch a discussion of two issues in American foreign policy relevant to the Rising Powers blog.  The first issue deals with two extremes that have driven foreign policy formulation since the early 20^th century – Wilsonian idealism and assertive interventionism.  In today’s post, I open this topic by suggesting an approach that might avoid the policy swings between these two poles we have witnessed over the last hundred years.  The second thought exercise, which I will delve into in a subsequent post, deals with America’s preponderance in economic output, in GDP (over three times the size of the next largest economy – Japan’s), and whether this is an accurate proxy for relative power.  Should we reassess whether America is as mighty an economic giant as we have long assumed? Enough preamble:  let’s get cracking with a discussion of the two opposing tendencies in AFP.

Since its rise to globalism, America has swung almost erratically between two foreign policy extremes – Wilsonian idealism (sometimes known as liberal internationalism) and assertive interventionism (aka neo-conservatism, with the original “neo-con” not from the City University of New York, but rather, Theodore Roosevelt).   The foreign policy debate that began with Wilson and TR has continued up through Carter and Reagan, Bush (43) and Obama.   Self-righteousness and moralizing have characterized both extremes, with muted emphasis on analysis.  True, some American statesmen, including FDR, Nixon-Kissinger and others, sought to adopt realism as the touchstone of American foreign policy, through a careful assessment of American interests and the pursuit of a balance of power.   Yet as a policy principle, realism has been much less emotionally satisfying to the American public than have been the clarion call to arms on the one hand, or the sanctimonious appeal to our better angels on the other.  Like the patient with “borderline personality disorder,” America has swung between two unstable emotional states, instead of maintaining a consistent equilibrium. 

Overstating the argument, you say?  Perhaps.  To an extent, Wilsonians and neo-cons, in spite of their rhetoric, have maintained some policy stability.  Furthermore, there has been fluidity and overlap between the two camps, with neocons sometimes appealing to Wilsonian ideals to justify intervention (e.g. Iraq) and liberal internationalists utilizing brute force to pursue liberal ideals (e.g. Kosovo, Haiti).  Likewise, realism has been pulled off the shelf as needed by practitioners of both schools.  Isolationism, which as a movement in and of itself expired with World War II, has continued to fertilize foreign policy thinking as well. This can be seen in the desire of some to pull out of Iraq and leave the Middle East to its own devices, of others to avoid involvement in Africa where they see limited American interests, or of others to erect protectionist trade barriers.  

Nevertheless, one cannot deny that our two-party system has produced foreign policy volatility, at least in terms of the rhetoric of our leaders.  This confuses the rest of the world and can be ineffective at securing our interests.  Today, Iran’s leaders may very well wonder if the US is an implacable foe that will stop at nothing to prevent an Iranian nuke, or instead a sensitive giant, willing to discuss Iranian grievances, achieve a grand bargain, and perhaps tolerate nuclear-armed mullahs.  Equally, Brazilian leaders may wonder whether America’s free trade overtures represent an attempt at Yankee hegemony or another shot at being a “good neighbor.” And, with the transition to the Democrats, they may wonder about our commitment to free trade itself.

For the Rising Powers, emerging youthful and strong in a multi-power world, it would be useful to understand clearly what America wants and to have this remain relatively consistent over time. 

These two impulses in American foreign policy arise out of America’s unique historical and cultural experience, it is true.  I do not deny that America is different — unopposed on the North American continent, facing little challenge in this hemisphere, with two oceans separating the nation from other major powers, safe to pursue the ideals of the 18^th century Enlightenment, the country’s instinctive crusading spirit, and its inevitable economic expansion. 

Still, the proponents of these two schools disagree philosophically –  about how the world works, about human nature.  According to the Wilsonian view, likeminded, democratic nations practicing open diplomacy are by nature peace-loving.  World opinion and collective security ensure that any would-be aggressor will be stopped.  By contrast, the neo-con world view sees rivals as would-be aggressors that must be stopped early, lest they seek conquest and infringe on American interests. 

My contention is that these two schools should spend less time arguing about human nature and more time engaging in the systematic analysis of the intentions of world leaders and the historical experience, public opinion, and capabilities of nations.  Certain countries at certain historical periods may fit the Wilsonian mold, while others may instead play by Churchillian rules.  It is easy to choose an analysis that fits one’s world view, more difficult to do the analysis and see which world view applies.  It would be worthwhile for American policy makers to undertake such a rigorous analysis of the ten or so Rising Powers on the world stage today.

During the thirties, many leaders in the countries opposing Hitler were animated  by Wilsonianism, to an extent that they sought proof beyond a shadow of a doubt that Hilter’s Germany was bent on conquest. Concerns about German aggression did not warrant other than appeasement, until the invasion of Poland finally proved to these ostrich Wilsonians that Germany’s aim was not German self-determination, but rather, conquest.   A reading of the writings and speeches of the Nazis and an understanding of the deep resentment of the German nation and their experiences of the preceding two decades should have led the rational analyst to reach a Churchillian conclusion. 

By contrast, a similar view of the Soviet Union would have been at odds with a careful analysis.  The Soviet leadership, while following a radical ideology, followed an essentially conservative foreign policy course since the Russian Revolution, determined to win small gains by careful chess moves, rather than bold actions. 

Without going into a discussion of whether or not we should have gone to war in Iraq, I will say that, while it was clear that Saddam Hussein was bent on the acquisition of the tools of power, including WMD, a psychological assessment of this dictator might have yielded an understanding of his defiance, the kind of defiance that led him to irrationally indicate to the world that he possessed WMD, weapons he did not have and which caused the U.S. to invade.  Moreover, the dismantling of the Iraqi army and the de-Baathification undertaken by the Bush administration was an example of Wilsonianism infusing a neo-con world view. 

Today, the analysis of the beliefs, intentions, and capabilities of leaders, as well as the historical experience, current state of public opinion, and constraints of nations should be undertaken with regard to the Rising Powers.  It would certainly behoove the foreign policy establishment to undertake this work with respect to Iran.  Questions include:  Are the mullahs basically conservative or radical, or in other words, are they Nazis or Soviets?  Does the system promote realists?  What is the narrative the nation has come to believe and what does this mean for how far the leadership could go?  Does the Iranian government and nation simply require a recognition of past wrongs, respect on the international stage, and a good ego-massaging?  Does Iran desire conquest or satellites?  Would the leaders really contemplate an attempt to “wipe Israel off the map?”  Answers to these questions, while not easy to arrive at, should drive strategy – whether Iran should be opposed with sanctions and military force or be invited to the table to work out a bargain.

And, let us not neglect doing the same exercise with regard to China and Russia, and others.  It is one thing to call for a “reset” — very cute, very up-to-date language.  It is another to analyze Putin and his country, to understand why they attacked Georgia, what they feel the West has done wrong since the fall of Gorbachev, and how a great nation must rise again.   

I am not saying that no one in the halls of power has been doing this work at all. I am simply arguing that we should tamp down the Wilsonian and/or neo-con rhetoric, get these tendencies under control, and take the Rising Powers one by one, figuring out who and what we are dealing with. 

Brazil: President Lula’s Coattails

President Lula and his choice to succeed him, Dilma Rousseff. Source: O Globo

 

How long are they?  His coattails, that is.  He’s at 84% approval, largely due to the perception that Brazil is doing better than most in this global financial crisis, and it is.  His pick for his successor is his chief of staff, Dilma Rousseff, a stalwart in the PT (Lula’s leftist Workers Party), who could become Brazil’s first female president in the 2010 elections.  Yet in the polls, she is well behind the colorless Jose Serra, governor of Brazil’s largest state and co-founder of the PSDB (Brazil’s Social Democratic Party), who lost to Lula in 2002.  Aecio Neves, grandson of a former president and also a PSDB governor, bests Dilma as well in opinion polls.  One scenario is that Neves switches parties to run against Serra.

Political analysts point out that there is little room for ideology in Brazilian politics these days.  Since the Real Plan (the great achievement of the last PSDB president, Fernando Henrique Cardoso), which tamed hyperinflation, everyone in Brazil agrees on macro policies that keep inflation low.  Hyperinflation was the great scam against the poor, Lula’s key constituency, the only ones who could not index.  This is what is meant by “little room for ideology.”

But there is room for ideology, ideology about such questions as whether to maintain substantial government intervention in the economy or to expand the market economy.  Yet political fragmentation hinders ideological groupings, and the country’s recent strong economic performance (up until the fourth quarter of 2008) masks its nagging weaknesses.

As I have pointed out in previous blogs, Brazil’s 1988 Constitution, coming on the heels of many years of military rule, has resulted in political fragmentation and gridlock, allowing a multitude of personality-based parties and requiring hard-to-assemble majorities to pass reforms.  Again, I’ll plug Barry Ames’s work, The Deadlock of Democracy in Brazil, for a discussion of Brazil’s unwieldy political system.  Political reform that would reduce the number of parties in Congress, diminish party switching, strengthen party leaders over state governors, and lower the threshold to pass reform would be well worth the trouble, but remains unlikely.

With such political reform, perhaps we would see the coalescing of political groupings on the right and left.  The leftist PT could merge with the PMDB (the Democratic Movement Party), which currently sits in Lula’s government and holds the leadership of Congress.  The PMDB, once the official opposition to military rule, has become a massive non-ideological party, representing a nation-wide system of patronage.  The center-right PSDB could merge with the Democrats (formerly the PFL, heir to the party of the military government, variously described as liberal in the European sense and an adherent to Christian Democracy).  However, this merger could take time, as these two parties, given their history, make strange bedfellows.  Due to a lack of leadership talent, neither the PFL nor the PMDB has been able to field a viable presidential candidate in recent elections.  There is some speculation that Aecio Neves could become the PMDB’s presidential candidate in a stop-Serra movement that could include President Lula, if he abandons Dilma should her campaign falter.

Lula’s charisma enabled the PT to supplant the PSDB in its preferred position on the center-left.  The PSDB was envisioned by its founders, including Cardoso and Serra, as a traditional Social Democratic party, seeking mixed solutions (market and government) to the plight of the poor.  Yet under Cardoso, the PSDB became so involved in macro stabilization, it has since been identified with the right.  The PT, for a time opposed to market economics, cleverly adopted the PSDB’s macro framework, because Lula, to his credit, realized that inflation was the bogeyman of the poor.  Having pushed the PSDB uncomfortably to the right, Lula transformed himself into the “anti-Lula,” and the PT took over where the PSDB left off.  At the same time, the PT lost its ideological edge, and with it, its militants.  Thus, the PT and PSDB currently occupy an overlapping political space; yet these parties have been too competitive in elections to permit cooperation.

Jose Serra, who was Cardoso’s health minister, has been seen as a supporter of government intervention.  In an election between him and Dilma, little voice would be given to the traditional viewpoint of the right – less government, lower taxes and greater participation of the private sector in solutions to society’s problems.  This vibrant debate is alive and well in other countries, notably in the U.S., though in the current economic climate, the hand of the interventionists has been strengthened.  Brazil, flush with success and foreign exchange reserves, currently lacks any charismatic leadership on the pro-business right.

This is due in part to Lula’s success, through government intervention, at combating one of Brazil’s fundamental economic weaknesses and moral dilemmas, that is, its woeful income distribution.  At 57, Brazil’s Gini coefficient (a World Bank index of income distribution – the higher the figure the worse the income distribution) remains one of the worst on the planet and is certainly worse than in other Rising Powers.  Lula’s Bolsa Familia program has provided income support to millions of poor families and promoted health and education.  Government, not business, is seen as the solution to poverty.  Yet with government debt of around 65% of GDP and the global recession set to hurt tax revenues, the Brazilian government has little room to expand spending and must enlist the private sector to promote economic growth.

Lula’s government has failed to improve the business climate and to effectively promote infrastructure investment.  Government spending is dominated by pensions and salaries, so that Brazil’s public investment program is notoriously under-funded.  To address this, the Lula government set up its Growth Acceleration Program (PAC), centered on using public funds to leverage private investment in infrastructure.  Dilma Rousseff runs the PAC.  Last week, Cardoso, in a thinly-veiled effort to support Serra, called the management of the PAC incompetent.  He said that the Lula government does not have the know-how to implement key projects, such as road construction.  Many analysts agree with this assessment.  By contrast, the PSDB is viewed as having the technocrats required to implement complex programs.

It is early.  National elections take place in October 2010.  Don’t count Dilma (or Lula) out.  She may yet ride his coattails into power.  And, the Aecio Neves factor may keep political uncertainty high.  As for Lula, unlike American presidents with two terms under their belts, Brazilian former presidents can run for a third term, just not consecutively.  So, at 69 in 2014, Lula might have a better shot in a rematch against a President Serra (who will be 71), than in 2018 when his ally Dilma would presumably finish her two terms. 

India’s Rise and Kashmir

Source: BBC

   

Is the conflict over Kashmir hindering India’s rise?  Is an unstable Pakistan, with its religious, regional and political cleavages, likewise a threat to India’s rise?  Is American foreign policy exacerbating tensions in South Asia with its concentration on Al Qaeda, the Taliban and Pakistan’s border with Afghanistan?

In The New Yorker ’s March 2 edition, Steve Coll addresses these important questions.  Coll discusses a “back channel” that exists over Kashmir, whereby India and Pakistan, two nuclear-armed foes, themselves have drawn up outlines of a solution to one of Samuel Huntington’s “civilizational fault line” conflicts.  Given such direct negotiations, perhaps India and Pakistan are further along in solving their fault line conflict than Israel and the Palestinians, who rely on third party mediation, are in solving theirs. Furthermore, unlike the Israeli-Palestinian conflict, Kashmir does not involve an existential threat to either India or Pakistan.

When he was in power, President Musharraf controlled Pakistan’s armed forces, including the intelligence services, long-engaged in mischief-making through their support of Islamist guerrilla groups operating in Kashmir.  Bush bashers faulted W for coddling this dictator in his effort to get Pakistani cooperation in the fight against Al Qaeda and the Taliban.  As a result, little pressure was applied on Pakistan regarding Kashmir.  Rooting out Al Qaeda and the Taliban along the Afghan border is a top priority for Obama, so it seems U.S. pressure over Kashmir will continue to take a back seat.  However, don’t rule out tough guy Richard Holbrooke just yet.

What is becoming clear is that, once again, Pakistan’s democracy is proving too weak to handle its myriad problems.  President  Zardari, in power since September 2008, is having trouble standing up not only to militants along the Afghan border, but also to militants within the Pakistani military, which Musharraf controlled.  While Musharraf himself came to power nearly ten years ago by sowing discord in Kashmir, he came to realize that Pakistan’s survival was more at risk from Islamists than from India, especially after 9/11.  Paranoia over India continues to effervesce within the Pakistani defense establishment, a fact obscured during the Musharraf dictatorship.  India for its part understands that its heady rise could be threatened by any conflict with its arch foe.  Further, the disintegration of Pakistan, caused by either war with India or civil war with the Islamists, is not in the interests of India.   Hence, there are mutual interests in resolving the conflict over Kashmir.   

As for American foreign policy, the Obama administration should not lose sight of the strategic importance of ensuring that the world’s rising powers succeed as peaceful democracies with strong links to the global capitalist system.  Anchoring Brazil, Russia, China, and of course, India in Western institutions represents America’s best chance of success within an emerging multi-polar world.  Surely, any help offered toward resolving India’s quarrel with Pakistan would serve this overriding strategic objective and should be at the top of the list of American priorities.