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Wednesday, November 16, 2005


ceding asia

roubini global macro collects a number of articles this week analyzing the rise of china in the westernized anglophone global power structure now under a decaying american stewardship and examines the likely shift in power and its possible effects. particularly interesting i found was this paper prepared for the imf by the institute of international economics which examines the increasing ineffectiveness and illegitimacy of the western g-7 (which has for decades functioned essentially a proxy for american political and economic power) in steering the global economy through its proxies (the united nations, the international monetary fund and the world bank).

The ineffectiveness of the G-7 stems in turn from two fundamental causes. The chief problem is substantive. The large high-income countries have essentially adopted a mutual non-aggression pact under which, facilitated by a global regime of flexible exchange rates and huge international capital flows that enable them to ignore external criticism of their policies, they simply eschew making such criticisms or at least pursuing any serious attempts to alter the behavior of others. The United States rejects all foreign critiques of its excessive tax cuts and unsustainable budget deficits. Europe resists external advice on both structural changes and expansionary macroeconomic policies that would strengthen its growth. Japan took more than a decade to revamp its banking system and thus restore a foundation for expansion, despite atypically aggressive foreign criticism (notably from the United States), and exacerbated the problem along the way with a series of major macroeconomic policy errors. The G-7 has little credibility in counseling other countries to adopt responsible fiscal and exchange rate policies when it permits huge budget imbalances and massively misaligned currencies to persist in its midst without any serious effort to correct or even address them.

In earlier periods, the G-7 and its predecessors adopted coordinated and effective responses to very similar problems. In the 1960s, the G-10 more-or-less successfully resolved a series of exchange rate crises (centered mainly on sterling but also including the dollar and several others) and created SDRs in an effort to shore up the Bretton Woods system. In the late 1970s, the Bonn summit worked out a global recovery program with very precise national commitments that was well on its way to success before the second oil shock again derailed the world economy. In the 1980s, the Plaza and Louvre Accords prevented both a US relapse into system-threatening protectionism and a free fall of the dollar. There were failures during these earlier decades too: the G-10, for example, was unable to prevent the breakdown of the Bretton Woods exchange rate regime in the early 1970s. But no such cooperative adjustment program has even been seriously contemplated, let alone adopted, during the present onset of problems that are not only distressingly similar to these earlier episodes but much larger and potentially even more dangerous. A meeting of high officials and academics that I recently attended to discuss these issues reached the profoundly depressing conclusion that there is virtually universal agreement on the diagnosis of the current problem but virtually no possibility of governmental action until the inevitable crisis hits.
it cites by way of example the inability of the united states (through the g-7 and its agent, the imf) to impose a solution to the argentinian debt default and to coerce a desired paradigm for international trade in the doha round of wto talks. but most interestingly, it notes the rise of a powerful new economic bloc that operates outside western hegemony. the point of the paper is, in light of such a momentous event, to call for a new steering committee for the imf -- no longer should it be a proxy for only the core western powers and the vision of globalization/economic empire that serves them.

In particular, East Asian countries are actively negotiating a series of subregional and bilateral agreements in the areas of both money (i.e., the network of swap agreements under the Chiang Mai Initiative) and trade (e.g., China-ASEAN and Japan-Korea). ... In the short run, it will be essential to assure that these new regional and subregional entities are compatible with the existing global rules and institutional arrangements and/or that those rules and institutions are amended to encompass the newcomers in an agreed and harmonious manner. The longer run significance could be even greater. Successful realization of these regional aspirations—especially in Asia, where until recently they have lagged far behind Europe and even the Western Hemisphere—could lead to the emergence of a tripolar world economic structure. Such a construct would encompass the European Union and its neighboring associates, a Free Trade Area of the Americas (or perhaps a NAFTA and expanded Mercosur that were loosely linked) and an East Asia Free Trade Area/Asian Monetary Fund. In such a world, a global steering committee that included the key players from each of the three regions—including China and Korea as well as Japan in East Asia, Brazil and perhaps Argentina in South America—would be of cardinal importance in managing relations among the regions, which would in turn be central for global harmony and stability.

The prospect of such a tripartite world, which is quite possible over the next decade or even less, provides a powerful additional rationale for the proposition that a broader grouping should supersede the G-7 as the informal steering committee for the world economy. The G-7 would be even more inadequate for that task in a world where not only its share of the world economy continued to decline substantially but where leaders of key regional arrangements were outside the group.
the end of dollar supremacy, which has been discussed here on a few occasions, is a foregone conclusion at this point and is all but generally accepted knowledge in financial, economic and political circles. it is the inevitable result of a transfer of american economic power to the chinese -- a result, at least in part, of the mismanaged american consumer debt bubble and the concomitant massive current account deficits that have resulted in assigning some $400bn+ in american debt instruments to china. this is an enormous amount that effectively cedes control of american interest rate and currency policy through forex markets to the chinese central committee and hu jintao.

very few people in the mainstream of the american political dialogue seem to grasp what a profound change that is, and what far-reaching consequences it has. the mises institute encapsulated the momentousness of it in this analogy.

International finance is closely intertwined with international politics. While a predominant role in international finance does not come without the basis provided by politics, it is sound finance on which the continuation of the dominant global role will depend later on. Both of these, however, have a more profound basis: it is basically the ethical attitude to the matters of money and finance, the deeply rooted sense for prudence and rectitude, which is required to be maintained in order to keep the privileged position.

Near the end of the Hapsburg Empire, before the outbreak of World War I, Eugen von Böhm-Bawerk wrote in his essay "Our passive trade balance" that all those theories brought forth to explain the persistently negative trade balance of the Austro-Hungarian Empire—such as a surge in industrial strength and its attractiveness for foreign investment—do not stand a more profound analysis. These argument would imply that the "passivity" would be transitory. The persistency of the trade deficits requires that the situation be analyzed beginning with the capital balance, and this way, Böhm-Bawerk pointed out, the negative trade balance had its roots in a lack of domestic savings, the unproductive use of resources and "wasteful consumption".

A "change of mind" had occurred, said Böhm-Bawerk, and the accumulation of massive deficits reflected a "lack of morality": "We slithered from surpluses into a phase of easy-hearted and willing expenditures, and we continued to slither even after the surpluses were long gone."
these issues were not particular to the hapsburg empire -- at the same juncture in history, another global empire mired in its own hubris was lost similarly, though with somewhat less speed and finality. it may be plain that i consider these historical parallels -- indeed the appropriateness of these exact analogies -- to be potentially very meaningful to our current course.

and yet, whatever the sorry economic reality already in place may be, there will be great political resistance to the final concession of such power as china has come to merit -- particularly in the united states, which is gripped in the throes of a tremendously hubristic episode of self-infatuation so well illustrated by the emergence of the patently ridiculous ambitions of neoconservative militarist imperialism. even a multifacted failure -- militarily, economically and politically -- in what should be a relatively minor imperial foray in iraq (which certainly appears to be what is underway) seems to be insufficient to crack the shell of american self-delusion. paranoia about the rise of china as a threat to these cherished grandiose concepts of a global benevolent despotism has already found voice in congress, where china-bashing as insincere scapegoating has become second nature to both managing parties. the political recognition of the loss of american suzerainity, even after the fact of the event, and the resulting wave of national insecurity is likely to spark a deeper sinophobic rage that may even have military consequences. given the demonic volatility of the american imperial establishment unhinged from morality, humility and decency to even small challenges to what is perceived to be an american utopia ordained by an american god, there is reason to fear what may come.

such a response is likely to be vastly more damaging to america than any transgression of mere pride could be. whether or not the united states is mature enough as a national society to accept an economic and political situation of its own making, china and america are bedfellows now -- conflict between them, while not impossible and hardly unprecedented, would be unimaginable and a self-immolation qualifying as an american national suicide -- indeed, as the western gotterdammerung.

one can only instead hope and plead with the american management class to accept the geopolitical straw that they have drawn -- that they themselves in fact cut short, wittingly or not, in their mismanagement of american fiscal and g-7 economic policies. ceding asia to its own fate at the hands of china, india, korea and japan is the good and right adaptation to this new reality. let us hope for the sake of the american people and peoples all over the globe that the imperial presidency has the courage to accept as much.

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