Economic Fundamentals

The world is slowly coming to its senses.

Conrad Black
Thursday, December 08, 2011

Difficult though current economic and political times are, ineluctable forces of economic arithmetic and national interest are asserting themselves in ways that are, in the circumstances, reassuring. There are a number of particular areas where this phenomenon of irrepressible geopolitical logic is emerging.

Finally, the Chinese miracle, replete with the hallelujah chorus of China marching inexorably to the headship of the world, is starting to appear less a wave of the future than a faddish hope or alarm running out of steam. There is no question that, as a developing country advancing from centuries of backwardness to sharply rising prosperity and industrial capabilities, China has been and is an overwhelming and historic success story. The scale of its industrial awakening, to now having more than eight times the gross steel production of the United States, for example, is indicative of the greatest national industrial flowering of a country since that of the U.S. itself in the 19th century after the Civil War. And then, the U.S. advanced in parallel expansions of settled territory, immigration-fired demographic growth, and accelerating financial and industrial development.

China has turned the sow’s ear of a tanked-out rural command economy much of the way into a silk purse of a sophisticated industrial society that has drawn hundreds of millions of poor people onto the up-escalator of a First World economy. However, it still remains heavily regulated, is hobbled by pandemic corruption and oppressive central planning, and still has hundreds of millions of timeless, benighted, sullen peasants who feel left behind. As a textbook case in how to bootstrap an economy out of ages of decay and misgovernment, it is uplifting. But a fast ticket to world domination is not available and the transition to a credible pursuit of such a prize requires some backing and filling, and much hard slogging.

The latest figures indicate that the world is responding effectively to what has essentially been the dumping of Chinese manufactured goods, and the response has been enhanced competition and attenuated demand, not the old cul-de-sac of protectionism. The People’s Bank of China has also, and Western central banks can easily identify with this, been an overachiever in containing and reducing a dangerous real-estate bubble, to the point that the Chinese real-estate sector is now deflated by 40 percent or more, and land values underpin the entire banking system. The Chinese are, at least implicitly, tackling this by the imaginative method of reducing reserve requirements for lending banks rather than tampering with interest rates, which is a blunderbuss in economic stimulus, as it is in combating inflation. The Chinese move came just hours ahead of a coordinated measure in the same direction by the central banks of the United States, the European Union, Japan, Great Britain, Canada, and Switzerland.

The Chinese are now seesawing, as mature economies do, between inflation and slowing growth. But the almost inevitable message is that the roseate forecasts of racking up endless years of double-digit economic growth are yielding to the brusque realities of Grade Three arithmetic and the revelation that the Chinese, though an immensely formidable nationality, are not a super-race. Investments, in one of history’s greatest acts of economic stimulus, were nearly 50 percent of GDP in 2010, but were largely unproductive, caused an immense increase in the money supply, and have generated inflation in undeflated areas of the economy of at least 10 percent. Like a determined mountain climber, China is finding the going slower and steeper as the summit comes into view. And the countries above it, who got there first, are not bound or inclined to make China’s ascent easier.

India is experiencing similar problems, but as a less authoritarian regime in a less homogeneous country, has had less success than China in capping inflation. These two huge countries, with about 37 percent of the world’s population between them, will continue to grow, but not in an unstoppable flying column to world domination, as some of the more effusive Sinophiles (and Americaphobes) have been screaming from the skyscraper-tops for the past 20 years. (So, before them, did their analogues on behalf of Japan, the Soviet Union, and Nazi Germany, albeit the last two on ideological and geopolitical, rather than economic, grounds.)

As the economic facts are shifting, so are political relations. President Obama had a good visit to the Far East and Australia, and China’s neighbors, with judicious American encouragement, are singularly uninterested in becoming satellized. Old animosities, such as that between the U.S. and Vietnam, no less than long-lived friendships, such as those with the Philippines and Taiwan, are fruitful ground for dissent from China’s surprisingly ham-fisted assertions of proprietary rights over the South China Sea and other international sea-lanes. It all sounds like Mussolini’s risible braggadocio in the Thirties about the Mediterranean being an “Italian lake.” (That is not how it turned out.)


The combination, cooperating closely, of India, Japan, Indonesia, Vietnam, Malaysia, Singapore, Thailand, the Philippines, Australia, South Korea, and Taiwan will be more than a geopolitical match for China. There is a large but not decisive potential for troublemaking from Putin’s Russia, which, wallowing in its post-Soviet sour grapes, is scavenging the world for places to be disruptive and irritating, like a famished old raccoon in a prosperous North American suburb.

The clearest illustration of this trend is the abrupt dismissal of the Chinese by the unfeasible hermit government of Burma (Myanmar), even at the price of some democratization. It is a little like Anwar Sadat sending the Russians packing from Egypt in the early Seventies, but that was in the context of a Middle Eastern war, and Sadat did not join any stampede to democracy in consequence of it. Last week’s photograph of Secretary Clinton having dinner with the magnificent and courageous Burmese democratic leader Aung San Suu Kyi was, to scale, as astounding as the photograph of Mao Tse-tung welcoming Richard Nixon to his home in 1972.

No one should underestimate China, but to the extent that China thinks that it can shortcut the next and hardest stage of economic development, or assert a sphere of influence over neighbors so venerable and tenacious, and collectively more numerous than itself, it is seeking, and will find, acute disappointment.

In Europe too, finally, reasons of state are reasserting themselves, and a viable compromise between German insistence on a hard currency and the sobering numerical realities of Euro-profligacy and the social safety hammock is emerging. The countries that have, in fact, defaulted — Greece and, perhaps, Portugal — will have to be allowed to default officially. And they and the others in straightened circumstances, especially Italy and Spain, including their private banks, will be eligible for investments of the proceeds of Eurobond issues sold essentially on the basis of Germany’s economic strength, providing those countries raise their retirement ages, make their labor markets flexible, and adopt tax systems that incentivize investment.

This will create a benign cycle of competitive growth economics, and wrench Europe loose from the downward spiral of Herbert Hoover economics. The goal must be to get about 50 percent of Europeans working, up from the present number of about 40 percent (compared with a little over 60 percent in the U.S.). (Much will ultimately depend on an improved birthrate among non-Muslim Europeans, but that cannot be arranged by finance ministers.) The new Eurobond issues will protect the private banking sector’s depositors and creditors from the sovereign defaults, and Europe — with, in policy terms, the already reviving Ireland showing the way — will begin a genuine recovery.

Finally, in this sequence, the United States, despite decades of shilly-shallying and self-indulgence, is, in physical volume, though not yet in dollars, an energy exporter after nearly 60 years in deficit. After the terrible distraction of the giant green canard of global warming, and the nonsense of windmills and elusive (i.e. nonexistent) green jobs, shale and other oil and natural-gas sources, and tighter transport-fuel-consumption rules, are cutting heavily into net energy imports. The U.S. has converted a 3 million-barrel-per-day importation of refined oil products in 2005 into a 600,000 barrel-per-day surplus in the last six months. The U.S. imported 60 percent of its oil in 2005 and 16 percent of its natural gas in 2007, and those numbers are now down to 46 percent and 9 percent, respectively, and falling steadily — causing appropriate discomfort to deserving foreigners, such as Russia’s Gazprom.

These trends will accelerate if a new administration in 2013 facilitates increased domestic oil drilling. In the last decade, the strategic strength of the U.S. has been constrained by having $800 billion annual current-account deficits; almost all its conventional-ground-forces military capability mired in Near Eastern wars; and, for four years, completely unsustainable public-sector-debt levels. The first two of those problems are now abating, complementarily, as the reduction in oil imports shrinks the bankroll of terrorism-supporting states. More than token progress on the public-sector deficit may have to await a change in administration.

Agonizingly slowly, the horizon is brightening.