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Archive for the ‘American and International Economies’ Category

US-China Confrontation Will Define Global Order

Friday, May 8th, 2020

China is the source of COVID-19 that is presently destroying our world. China is America’s most serious enemy both economically and militarily. Somehow, after the VIRUS are gone, we will need to deal with the Chinese. Victor Davis Hanson lays out some interesting ideas.

Victor Davis Hanson: US-China Confrontation Will Define Global Order

Monday, May 20, 2019

Hoover Institution, Stanford University

The United States is at a crossroads with an increasingly aggressive China, which could define America’s security and the international order for decades to come, Hoover scholar Victor Davis Hanson says.

Hanson, the Martin and Illie Anderson Senior Fellow at the Hoover Institution, studies military history and the classics. Last year, Hanson won the Edmund Burke Award, which honors people who have made major contributions to the defense of Western civilization. He is the author of the 2019 book The Case for Trump, and 2017’s The Second World Wars. He was recently interviewed on US policy toward China:

What is the Trump strategy behind these tariffs, short term and long term?

Hanson: Short term, Trump feels that he can take the hit of reciprocal Chinese tariffs, given that quietly his opposition, the Democrats, have been raging about Chinese cheating for decades, and, second, that the US economy is so huge and diverse that China simply cannot cause serious damage.

Remember the United States is a country one-third the size of China that produces over double China’s annual gross domestic product and fields a military far more formidable with far more allies—while enjoying a far more influential global culture and a far more sophisticated system of higher education and technological innovation. China’s Asian neighbors and our own European Union allies quietly are hoping Trump can check and roll back Chinese mercantilism, while publicly and pro forma chiding or even condemning Trump’s brinksmanship and his resort to fossilized strategies such as tariffs and loud jawboning.

Long term, Trump believes that if present trends are not reversed, China could in theory catch and surpass the US. And as an authoritarian, anti-democratic superpower, China’s global dominance would not be analogous to the American-led postwar order, but would be one in which China follows one set of rules and imposes a quite different set on everyone else—perhaps one day similar to the system imposed on its own people within China.

Is China a more formidable rival now than Russia was during the Cold War, and if so, why?

Hanson: Yes. Its population is five times greater than that of even the old Soviet Empire’s. Its economy is well over twenty times larger, and over a million Chinese students and business people are in European and American universities and colleges and posted abroad with Chinese companies. So, unlike the old Soviet Union, China is integrated within the West, culturally, economically, and politically. The Soviets—like Maoist China—never leased Western ports, or battled Hollywood over   unflattering pictures, or posed as credible defenders of Asian values or owned large shares of Western companies or piled up huge trade surpluses with Western nations. Soviet propaganda and espionage were crude compared to current Chinese efforts.

What is China doing in terms of cheating on trade and intellectual property as the Trump administration says, and how can the United States stop this behavior? 

Hanson: China does not honor patents and copyright laws. It still exports knock-off and counterfeit products. It steals research and development investment through a vast array of espionage rings. It manipulates its currency.

Its government companies export goods at below the cost of production to grab market share. It requires foreign companies to hand over technology as a price of doing business in China. And, most importantly, it assumes, even demands, that Western nations do not emulate its own international roguery—or else.

The result is a strange paradox in which the United States and Europe assume that China is an international commercial outlaw, but the remedy is deemed worse than the disease. So, many Western firms make enormous profits in China through joint projects, and so many academic institutions depend on China students, and so many financial institutions are invested in China, that to question its mercantilism is to be derided as a quaint nationalist, or a dangerous protectionist, or a veritable racist. China is an astute student of the Western science of victimology and always poses as a  target of Western vindictiveness, racism, or puerile jealousy.

Remedies? First, we must give up the 40-year fantasies that the richer China gets, the more Western and liberal it will become; or that the more China becomes familiar with the West, the greater its admiration and respect for Western values; or that China has so many internal problems that it cannot possibly pose a threat to the West; or that Western magnanimity in foreign policy and trade relations will be appreciated and returned in kind. Instead, the better paradigm is imperial Japan between 1930 and 1941, when Tokyo absorbed Asian allies; had sent a quarter-million students and attachés to the West to learn or steal technology and doctrine; rapidly Westernized; declared Western colonial powers and the US as tired and spent, and without any legitimate business in the Pacific; and considered its own authoritarianism a far better partner to free market capitalism than the supposedly messy and clumsy democracies of the West.

How is China able now to leverage its arguably less powerful military to confront the United States globally?

Hanson: Global naval dominance is not in the Chinese near future. Its naval strategy is more reminiscent of the German Kriegsmarine of 1939 to 1941, which sought to deny the vastly superior Royal Navy access at strategic points without matching its global reach. China is carving out areas where shore batteries and coastal fleets can send showers of missiles to take out a multibillion-dollar American carrier. And its leasing of 50 and more strategically located ports might serve in times of global tensions as transit foci for armed merchant ships. But for now they do not have the capabilities of the American carrier or submarine fleet or expeditionary Marine forces—so the point is to deny America reach, not to emulate its extent.

Why are the current administration policies different than those in the past in confronting China on many different fronts and levels?

Hanson: Trump believes that economic power is the key to global influence and clout. Without it, a military wilts on the vine. A country with GDP growth at a 3 percent annual clip, energy independence, full employment, and increasing labor productivity and trade symmetry can renegotiate Chinese mercantilism and reassure China’s Asian neighbors that they need not appease its aggression. Past administrations might have agreed that China violated copyright and patent laws, dumped subsidized goods, appropriated technology, and ran a massive global espionage apparatus, but they considered remedies either impossible or dangerous and so essentially negotiated a slowing of the supposed predestined Chinese global hegemony. Trump was willing to confront China to achieve fair rather than free trade and take the ensuing heat that he was some sort of tariff-slapping Neanderthal.

Any other thoughts?

Hanson: I think Secretary of State Mike Pompeo’s State Department is the first to openly question the idea that China will eventually rule the world and has offered a strategic plan to check its trade and political agendas. In this regard, a number of Hoover Institution scholars, currently working with Hoover fellow Kiron Skinner, director of policy planning at the US Department of State, are offering alternatives to orthodox American approaches of the past, with the caveat that the most dangerous era in interstate relations is the transition from de facto appeasement to symmetry—given that the abnormalities of the  past had become considered “normal,” and the quite normal efforts of a nation to recalibrate to a balanced relationship are damned as dangerously “abnormal.”

Victor Davis Hanson is also the chairman of the Role of Military History in Contemporary Conflict Working Group at the Hoover Institution. 
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The “New Normal”: Thoughts about the Shape of Things to Come in the Post-Pandemic World

Sunday, May 3rd, 2020

Here is a very interesting and insightful essay on what the future now holds after COVID – 19. It is disturbing, but certainly quite possible.

 

The “New Normal”: Thoughts about the Shape of Things to Come in the Post-Pandemic World

by Nicholas Eberstadt

April 18, 2020

 Nicholas Eberstadt

Nicholas Eberstadt holds the Henry Wendt Chair at the American Enterprise Institute in Washington, D.C., and is a Senior Advisor to the National Bureau of Asian Research.He is Senior Advisor, The National Bureau of Asian Researc        Nicholas Eberstadt offers insights into the challenges to U.S. leadership in a post-pandemic world. This is the inaugural essay in the series “The New Normal in Asia,” which explores ways in which the Covid-19 pandemic might adjust, shape, or reorder the world across multiple dimensions.

Though we are as yet barely weeks into the Covid-19 pandemic, what should already be apparent is that it has precipitated the deepest and most fundamental crisis for Pax Americana that this set of global economic and security arrangements has faced in the past three postwar generations.

We are still very much in the “fog of war” phase of the calamity. The novel coronavirus and its worldwide carnage have come as a strategic surprise to thought leaders and political decision-makers alike. Indeed, it appears to be the intellectual equivalent of an unexpected asteroid strike for almost all who must cope in these unfamiliar new surroundings. Few had seriously considered the contingency that the world economy might be shaken to its foundations by a communicable disease. And even now that this has happened, many remain trapped in the mental coordinates of a world that no longer exists.

Such “prewar” thinking is evident everywhere right now in the earliest phase of what may turn out to be a grave and protracted crisis. Here in the United States, we watch, week by week, as highly regarded financial analysts from Wall Street and economists from the academy misestimate the depths of the damage we can expect—always erring on the side of optimism.

After the March lockdown of the country to “flatten the curve,” the boldest voices dared to venture that the United States might hit 10% unemployment before the worst was over. Four weekly jobless claims reports and 22 million unemployment insurance applications later, U.S. unemployment is already above the 15% mark: north of 1931 levels, in other words. By the end of April, we could well reach or break the 20% threshold, bringing us to 1935 levels, and 1933 levels (25%) no longer sound fantastical. Even so, political and financial leaders talk of a rapid “V-shaped recovery” commencing in the summer, bringing us back to economic normalcy within months. This is prewar thinking, and it is looking increasingly like the economic equivalent of talk in earlier times about how “the boys will be home by Christmas.”

This is moreover a global crisis, and vision has not yet focused on the new realities in other leading powers and major economies. If we try to take an unflinching measure of the impact globally, we can see both good news and bad news—although the two are by no means equally balanced.

The good news is that policymakers the world over have learned from the prewar Great Depression and are unlikely to repeat its exact mistakes. Instead of reducing the money supply and forcing bank collapses, the U.S. Federal Reserve this time is flooding the world with liquidity. Likewise, U.S. fiscal policy, far from attempting to impose further austerity on an already imploding economy through balancing budgets, is embracing Keynesianism with an abandon that might have startled Keynes himself. Given the “stimulus” packages already passed in the last month, this year’s U.S. budget deficit to GDP ratio is already certain to be of World War II scale. And, at least so far, no emanations of Smoot-Hawley-like impulses are on the policy horizon. Last time around, protectionism had devastating reverberations on an already severely stressed international trade and financial system. Confidence in U.S. and international economic management of the current crisis, at least for the time being, is reflected inter alia in the surprisingly sanguine valuations of the stock indices both in the United States and abroad.

The bad news, on the other hand, lies in the nature of the virus itself and in its implications for human life and socioeconomic arrangements. Covid-19 is an extremely contagious virus with high lethality for those exposed to it, and it can be transmitted by asymptomatic “super spreaders.” Further, since this disease is zoonotic (contracted from another species) and novel (our species has no preexisting immunity), the pandemic will roam the world in search of human quarry until an effective vaccine is invented and mass-produced—or until so many people are infected that herd immunity is conferred.

A Darwinian experiment to invite global herd immunity is unthinkable because it could entail untold millions of deaths. New vaccines, for their part, typically take many years to develop. Barring some miracle, even a crash program to perfect a vaccine is currently expected to take at least a year, and it could be a year and a half or longer before a serviceable serum is generally available to the public. Reports now emanating from South Korea, moreover, suggest that survivors might also be susceptible to reinfection. If so, the quest to come up with a lasting inoculation against Covid-19 may be all that much more daunting.

Consequently, societies the world over face the prospect of rolling lockdowns and quarantines until such time as a technological breakthrough rescues them from this condition. This would seem to mean that not just a single national lockdown of a country’s population and economy is in store to fend off mass contagion but rather quite possibly a succession of them—not just one mother-of-all-economic-shocks but an ongoing crisis that presses economic performance severely in countries all around the world simultaneously.

The potential downside of this crisis looks dire enough for affluent societies: even with excellent economic management, they may be in for gruesome recessions, both painful and prolonged. But the situation for the populations of low-income countries—and for least-developed, fragile states—could prove positively catastrophic. Not only are governments in these locales much less capable of responding to pandemics, but malnourished and health-compromised people are much more likely to succumb to them. Even apart from the humanitarian disasters that may result directly from raging outbreaks in poor countries, terrible indirect consequences may also lie in wait for these vulnerable societies. The collapse of economic activity, including demand for commodities, such as minerals and energy, will mean that export earnings and international remittances to poor countries are set to crash in the months ahead and remain low for an indefinite period. Entirely apart from contagion and lockdowns, this can only mean an unavoidable explosion of desperate need—and under governments least equipped to deal with this. While we can hope for the best, the worst could be much, much worse than most observers currently imagine.

Eventually, of course, we will emerge from the current crisis. Envisioning the post-crisis “new normal” is extraordinarily difficult at this early juncture—not that much less demanding, perhaps, than imagining what the postwar world would look like from the vantage point of, say, autumn 1939. Lacking clairvoyance, we can only peer through the glass darkly at what may be the shape of things to come in the post-pandemic order. Yet it is not too soon to offer one safe prediction about that coming order, and to identify three critical but as yet unanswerable questions, the answers to which promise to shape it decisively.

The safe prediction is that the Indo-Pacific, then as now, will be the locus of global economic, political, and military power—and will remain so for at least the coming generation, possibly much longer. Currently, countries belonging to the Asia-Pacific Economic Cooperation (APEC) account for as much as 60% of the world’s estimated GDP and close to half of global trade. If we add India, which is not an APEC member, to that roster, the economic predominance of the region looks even more overwhelming. APEC plus India likewise accounts for much—perhaps most—of the ongoing knowledge production in the world today. By such necessarily imprecise measures as publications in peer-reviewed scientific journals, authors from the APEC-plus-India region are responsible for about three-fifths of current global output. The only state with truly global military capabilities (the United States) is part of this region, as are the only other two governments entertaining global strategic ambitions (China and Russia). In addition to these countries, India and (alas) North Korea are nuclear weapons states. For the moment, the combined nuclear potential of all nuclear powers outside the APEC-plus-India region (France, Britain, Pakistan, and Israel) is dwarfed by the atomic arsenals within it.

Barring a catastrophe of truly biblical proportion (a formulation that may admittedly seem to be tempting fate, given current circumstances) it is impossible to see what configuration of states or regions could displace the Indo-Pacific as the epicenter of world power anytime soon. Someday Africa might in theory become a contender for geopolitical dominance, but that date looks so distant that such scenarios for now are perhaps best narrated by science fiction writers.

“Will the Covid-19 pandemic bring a brutal end to the second age of globalization that began in 1945, just as World War I heralded the cataclysmic death of the first globalization (1870–1914)?”

As for the questions that stand decisively to shape the coming global order, the first concerns the scope and character of what we have been calling “globalization” in the years and decades ahead. Will the Covid-19 pandemic bring a brutal end to the second age of globalization that began in 1945, just as World War I heralded the cataclysmic death of the first globalization (1870–1914)?

At this early point in the crisis, it would take a brave (or foolish) soul to assert confidently that an end to our current far-reaching arrangements for world economic integration simply could not happen. That said, at least for now, it would look as if a lot of things that have not yet gone wrong would have to go wrong, and at the same time sweep away the foundations (and memory plastic) for the networks of trade, finance, communications, technology, culture, and more that have come to deeply connect societies all around the world today. Not much less than a continuing, cascading, and unabated series of worldwide political blunders—not excluding military adventures—would be required to burn this edifice to the ground.

On the other hand, it is also hard to see how a post-pandemic world will pick itself up and carry on with commerce, finance, and global governance as if nothing much happened around the year 2020. Even under the optimistic assumptions—i.e., the assumptions wherein the second age of globalization survives Covid-19’s heavy blow—much will need to be dramatically different. Until the advent of some biometric, post-privacy future, the more or less free movement of peoples across national borders will be a nonstarter. “Davos” stands to become a quaint word, somewhat like “Esperanto,” as national interests and economic nationalism come roaring back. International supply chains will tend to be resourced domestically, notwithstanding the immediate apparent cost in terms of production and profits. At the same time, today’s crisis may explode and wipe out old inefficient business models that had already outlived their usefulness: the “big box” store and retail malls, the unproductive (but sociologically alluring) office, the law firm (with its Soviet-style valuations of its services on the basis of inputs rather than outputs), perhaps the cartelized, price-fixing university as well, and more.

On the positive side, the creative destruction the crisis will unleash will eventually offer immense opportunities for innovation and dynamic improvements in productivity, so long as resources from inefficient or bankrupt undertakings are reallocated to more promising new purposes. To give just one example, the returns on remote communications will likely be high, incentivizing impressive breakthroughs. Post-pandemic economies around the world will need all the productivity surges they can squeeze out of technological and organizational innovation, too—for they will almost certainly be saddled with a far higher burden of public debt than today. Moreover, given current demographic trends and the prospect of significantly less immigration, the shrinking of labor forces and the pronounced aging of national populations may be characteristic of a growing number of economies in the APEC-plus-India region and the rest of the world, and not just in high-income settings. Japan may become a model here, but not in a good way: avoiding “Japanification” could become a preoccupation of policymakers, pundits, and populaces in an epoch of diminished expectations for globalization.

A second huge question for the post-pandemic world concerns China: more specifically, how will the rest of the international community treat this increasingly powerful but intrinsically problematic state?

The world has yet to conduct the authoritative blue-ribbon scientific inquiry into the origins of the coronavirus pandemic that is obviously and urgently needed. However, there is little doubt that heavy responsibility for the global health and economic crisis we are now coping with falls on the Chinese Communist Party (CCP)—and to a lesser but by no means negligible degree, on China’s collaborators within the World Health Organization. Had the CCP placed its population’s health above its own—had it behaved like an open society or followed international transparency norms—there is no question that the global toll from the Covid-19 pandemic would only be a fraction of what has been exacted to date. Epidemiologists from the University of Southampton in the United Kingdom have suggested that the damage might have been contained to just 5% of what we have thus far suffered with an expeditious (and honest) response to the Wuhan outbreak. If that estimate is overly precise, it nonetheless gives a sense of the price the world has paid for the CCP’s priorities and standard operating procedure. We also already know of the complicity of the World Health Organization at its highest levels in buying time for Beijing as the regime figured out how to spin the story of what happened in Hubei Province.

“…the post-pandemic world will have no choice but to contend at last with a problem long in the making: the awful dilemma of global integration without solidarity.”

It would be one thing if this crisis were a one-off—dreadful as the tragedy would be. The problem, unfortunately, is that it is not a one-off, and in fact cannot be. At the heart of the tragedy is an uncomfortable but unavoidable truth: the CCP simply does not share the same interests and norms as the international community into which it has been so momentously and thoroughly integrated. Moreover, there is scant evidence that integration into the world economy and global governance has been “reforming” the Chinese regime, in the sense of bringing its politics and behavior into closer alignment with those acceptable to Western populations. Quite the contrary: in the Xi Jinping era, China’s politics have manifestly been moving away from convergence as the regime has concentrated on perfecting a surveillance state policed by “market totalitarianism” (a social credit system powered by big data, artificial intelligence, and more).

Thus, the post-pandemic world will have no choice but to contend at last with a problem long in the making: the awful dilemma of global integration without solidarity. China is deeply interlinked with every APEC-plus-India economy and with those of the rest of the world as well. Chinese interests are likewise deeply embedded in much of the institutional apparatus that has evolved to facilitate international cooperation. How will the rest of the countries in the international community manage to protect their interests (including health security interests, but by no means limited to this alone) in such a world? Will it be possible to accurately identify and carefully isolate all the areas in which win-win transactions with the CCP are genuinely possible and cordon off everything else? Or will the CCP’s authoritarian influence compromise, corrupt, and degrade these same institutions, and likewise constrain or poison opportunities for truly free international economic cooperation and development after the Covid-19 pandemic?

Last, but by no means least important, there is the question of the United States’ disposition in a post-pandemic world.

Even before the Covid-19 crisis, it was not exactly a secret that the United States—which is to say, Americans—was becoming increasingly reluctant to shoulder responsibility for world leadership in the global order that Washington had been instrumental in creating and that U.S. power was indispensable in supporting. The skepticism and disfavor with which American proponents of internationalism were increasingly greeted at home, however, was not entirely explained by the deep historical roots of isolationism in our country. Nor can it be dismissively described as yet another paroxysm of paranoia and anti-intellectualism on the part of the yahoos, as would-be Hofstadters from today’s chattering classes would like to have it.

Such discontent with our nation’s considerable international obligations skews strongly with socioeconomic status. For those in the bottom half of the country, grievances with the status quo (which not so incidentally includes a strong political commitment to Pax Americana) are by no means delusional. Over the past two generations, the American escalator has broken down for many. Just before the Covid-19 crisis, at the supposed peak of a business cycle, work rates for prime-age American men (the 25–54 age group) were slightly lower than they had been in 1939, near the end of the Great Depression. It is hardly reassuring that this alarming situation has attracted relatively little attention from the talking and deciding classes (many of whom are shielded from personal familiarity with how the other half lives by Charles Murray’s famous bubble).

Scarcely less disconcerting than the work rates for American men are the dismal trends in wealth formation for the less well to do. According to estimates by the Federal Reserve, the mean real net worth for the bottom half of households in the United States was lower in 2019 than it had been in 1989 when the Berlin Wall fell. By these estimates, in fact, the net worth of such households was about a third lower in 2019 than it had been three decades before. Voters from these households might be excused if they were prompted to ask what the fabled “end of the Cold War” had done for them. Recall that these same Americans witnessed a decline in net household worth in a period when overall nominal net worth in the United States soared by almost $80 trillion—an average of almost $250,000 for every man, woman, and child in our country today. Since the arrival of Covid-19 on our shores, the net worth of the bottom half of Americans has dropped still further, as their indebtedness has risen and the value of their assets (mainly homes) declined. It could be quite some time before the balance sheets of those homes look as “favorable” as they did in 2019.

In the United States, the constitutional duty to obtain the consent of the governed obtains for the little people, too, even if they happen to comprise a majority of voters. And in a post-pandemic world, it may be even more difficult to convince a working majority that the globalized economy and other international entanglements actually work in their favor.

If U.S. leaders wanted to generate broad-based domestic support for Pax Americana, they need to devise a formula for generating prosperity for all. Such an agenda, of course, would win on its own merits, with or without an eye toward international security. Absent such a credible agenda, popular support for U.S. international leadership could prove increasingly open to question in the post-pandemic United States. The peril that declining domestic U.S. support poses to the current global order should not be minimized. If or when Pax Americana is destroyed, its demise may be due not to threats from without but rather to pressures from within.

Nicholas Eberstadt holds the Henry Wendt Chair at the American Enterprise Institute in Washington, D.C., and is a Senior Advisor to the National Bureau of Asian Research.

 

 

Return to the Blog

Sunday, May 3rd, 2020

After a four-month hiatus, I am coming home to my blog. The hiatus was an attempt to finish, to my own satisfaction, my latest novel, Donovan’s Run. Although my attempt was partially successful, there still remain more to be done. However, given the enormous amount changes that are occurring all our world at this time, I thought it would be appropriate to return to the blog and inject it with some important elements now moving through our lives. So, I will thank in advance the few good friends who will continue to read this material and tell me when it is good, when it is bad, and when it is indifferent.

Liberal Democracies In Retreat

Sunday, December 18th, 2016

The following is a rather gloomy, but likely accurate view of the future of the World order for decades to come and the retreat of the United States as a strong world leader.
Foreign Affairs Magazine
November, 2016
Liberalism in Retreat

The Demise of a Dream

By Robin Niblett

The liberal international order has always depended on the idea of progress. Since 1945, Western policymakers have believed that open markets, democracy, and individual human rights would gradually spread across the entire globe. Today, such hopes seem naive.

In Asia, the rise of China threatens to challenge U.S. military and economic hegemony, as Beijing seeks to draw American allies such as the Philippines and Thailand into its political orbit. In the Middle East, the United States and its European allies have failed to guide the region toward a more liberal and peaceful future in the wake of the Arab Spring and have proved powerless to halt the conflict in Syria. Russia’s geopolitical influence has reached heights unseen since the Cold War, as the country attempts to roll back liberal advances on its periphery.

But the more important threats to the order are internal. For over 50 years, the European Union has seemed to represent the advance guard of a new liberalism in which nations pool sovereignty and cooperate ever more closely with one another. But today, as it reels from one crisis to the next, the EU has stopped expanding. After the British vote to leave the bloc last June, it will probably shrink for the first time in its history.

Across the ocean, the U.S. commitment to global leadership, which until now has sustained the order through good times and bad, looks weaker than at any point since World War II. The Republican president-elect Donald Trump ran on an explicitly “America First” platform, pledged to renegotiate U.S. trade deals, praised Russian President Vladimir Putin, and called into question U.S. commitments to NATO. Meanwhile, President Barack Obama’s “rebalance” to Asia has struggled to take off. Beijing has wasted no time in laying out its own vision for a more integrated Eurasia that may exclude the United States and in which China will play the leading role.

Over the past half century, as other political systems have crumbled, the liberal international order has risen to face its challenges. Yet so long as the economies of its leading members remain fragile and their political institutions divided, the order that they have championed is unlikely to regain the political momentum that helped democracy spread across the globe. Instead, it will evolve into a less ambitious project: a liberal international economic order that encompasses states with diverse domestic political systems. In the short term, this will allow democracies and their illiberal counterparts to find ways to coexist. In the longer term, providing it can adapt, liberal democracy is likely to regain its supremacy.

LIBERALISM ON TOP

In the aftermath of World War II, Western policymakers, especially in the United States and the United Kingdom, set out to build a global system that would ensure that they would never repeat the disastrous failures of international cooperation of the interwar period. The architects of the system sought to promote not just economic development and individual fulfillment but also world peace. The best hope for that, they contended, lay in free markets, individual rights, the rule of law, and elected governments, which would be checked by independent judiciaries, free presses, and vibrant civil societies

Over the past half century, as other political systems have crumbled, the liberal international order has risen to face its challenges.

At the heart of the order were the Bretton Woods institutions—the International Monetary Fund and the World Bank—and the General Agreement on Tariffs and Trade, which became the World Trade Organization in 1995. Underpinning all these institutions was the belief that open and transparent markets with minimal government intervention—the so-called Washington consensus—would lay the foundation for economic growth. Guided by these principles, U.S. economic, military, and diplomatic support helped Germany and the other nations of Western Europe, as well as Japan, recover from the destruction of World War II.

Western policymakers were confident that transitions to open markets would inevitably lead to the spread of democracy. On many occasions, they were proved right. Liberal democracy has gradually expanded across Europe, Asia, Latin America, and sub-Saharan Africa, especially since the end of the Cold War. According to the U.S. nonprofit Freedom House, the number of democratic governments increased from 44 in 1997 to 86 in 2015, accounting for about 68 percent of global GDP and 40 percent of the world’s population.

As the order expanded, a new liberal idea gained ground: that governments that mistreat their populations and foment instability in their neighborhoods forfeit their sovereign right to rule. The International Criminal Court, which encroaches on sovereignty in the name of justice, was established in 1998. One year later, British Prime Minister Tony Blair laid out his doctrine of liberal interventionism in Chicago, declaring that, in a world of growing interdependence, “the principle of non-interference must be qualified in some important respects.” In 2005, the UN General Assembly endorsed the “responsibility to protect,” the concept that when a state fails to prevent atrocities, foreign governments can intervene to do so. In an ascendant liberal international order, the fundamental Westphalian principle that sovereign governments have the right to control their internal affairs—the principle that underlies international law and the UN—increasingly depended on governments’ adhering to Western standards of human rights. The liberal order seemed to be setting the rules for the entire international community.

THINGS FALL APART

But over the past decade, buffeted by financial crises, populist insurgencies, and the resurgence of authoritarian powers, the liberal international order has stumbled. According to the political scientist Larry Diamond, since 2006, the world has entered a “democratic recession”: the spread of individual freedom and democracy has come to a halt, if not retreated.

The greatest danger comes from within. The system’s leading powers are facing sustained domestic political and economic uncertainty. More than 25 years of stagnant median wages in the United States and parts of Europe have eroded the credibility of elites and the appeal of globalization. The opening up of economies to ever more trade, investment, and immigration has increased total national wealth, but it has not translated into local gains for large segments of society. The lax financial regulation that preceded the 2008 financial crisis and the bank bailouts that followed it have shattered people’s faith in government, and the Great Recession undermined their support for open capital markets, which seemed to benefit only a narrow global elite.

Trump’s victory, the decision by a majority of British voters to leave the EU, and the rise of populist parties in both the prosperous north and the poorer south of Europe represent visible symptoms of this deep unease with globalization. So, too, does the collapse in popular support in the United States and the EU for expanding international trade, whether through the Trans-Pacific Partnership in the United States or the Transatlantic Trade and Investment Partnership in Europe. In a 2014 Pew Research survey, 87 percent of respondents in developing economies agreed that trade benefits the economy, whereas around half of all respondents in France, Italy, and the United States said they believed that trade destroys jobs and lowers wages.

Across Europe, resistance to deeper political integration has grown. For the past 60 years, the willingness of the EU’s member states to pool their sovereign power in supranational legal structures provided a benchmark for other countries that sought to cooperate more closely in their regions. As the political scientist Simon Serfaty put it in 2003, Europeans had transformed their systems of political governance from city-states to nation-states to member states. Now, this process has ground to a halt—and it may well reverse.

The British vote to leave the EU will likely prove an outlier: the United Kingdom joined the European Economic Community, the EU’s predecessor, only in 1973, 16 years after its founding; the United Kingdom has a long history of Euroskepticism; and it opted out of the single currency and the Schengen area of open borders. Other countries will probably not follow the United Kingdom out of the EU. But few European leaders appear willing to continue relinquishing their countries’ sovereignty. Many European states have rejected EU requests that they accept a quota of refugees. The richer members of the eurozone are refusing to pool their financial resources in a common deposit insurance scheme to ensure the long-term viability of the single currency. Today, many European politicians are demanding more national sovereign control over the application of existing EU laws and the design of new forms of integration.

Few European leaders appear willing to continue relinquishing their countries’ sovereignty.

In this context, the hope that the EU might provide a template for liberal regional integration elsewhere seems increasingly lost. The Association of Southeast Asian Nations, South America’s Mercosur, the African Union, and the Gulf Cooperation Council remain mechanisms for only limited political and economic cooperation among governments. China and Russia, meanwhile, have used this period of Western self-doubt to modernize their militaries and assert their regional and geopolitical interests. They have built institutions, including the Eurasian Economic Union and the Shanghai Cooperation Organization, that have helped them coordinate and legitimize a parallel political order that challenges Western norms of democratic governance and that rejects any external interference in support of human rights.

AMERICA IN RETREAT

For the past seven decades, the United States has provided the security umbrella under which the liberal international system has flourished. But today, the United States is more inward-looking than at any point since World War II. After the costly wars in Afghanistan and Iraq and the chaos that followed the intervention in Libya, Obama has recalibrated the United States’ international role, consistently encouraging allies in Europe and the Middle East to take greater responsibility for their own security. In his presidential campaign, Trump twisted this argument into an explicitly transactional bargain: the United States should become a mercenary superpower, protecting only those countries that pay, so that it can focus on making itself great again at home. In so doing, he ignored the hard-won lesson that investing in the security of U.S. allies is the best way to protect the United States’ own security and economic interests. How exactly Trump will govern, however, remains unclear.

Rightly or wrongly, the United States’ allies, from Europe to Asia, now fear that the superpower may no longer be an engaged and committed partner. These fears come at a dangerous time. A Europe hobbled by institutional and economic weakness is more vulnerable to the diverse forms of pressure that Russia is currently applying, including financial support for European populist parties and threatening military maneuvers on NATO’s eastern borders. Despite Russia’s own economic weakness, Putin’s advocacy of a new European order based on cultural and national sovereignty appeals to Europe’s increasingly vocal nationalist parties, from the UK Independence Party to France’s National Front and Hungary’s Fidesz, whose leader, Hungarian Prime Minister Viktor Orban, has publicly advocated building an “illiberal state.”

Many of the United States’ other allies and democratic partners around the world are also on the back foot. Japan and South Korea are struggling to manage the twin challenges of aging populations and economies that are overly dependent on exports, and his-torical antagonisms prevent them from presenting a united front to promote liberal democracy in their region. Large emerging-market democracies, such as Brazil, India, Nigeria, and South Africa, have so far failed to overcome entrenched obstacles to sustainable economic growth and social cohesion. And the perception that U.S. global power is waning and that the Washington consensus does not guarantee economic progress has bolstered strongmen in countries as diverse as the Philippines, Thailand, and Turkey, who have undermined the institutional checks and balances that underpin liberal democracy.

POT, KETTLE

Of course, supporters of the liberal international order have long displayed an inconsistent commitment to its principles. The United States and its allies may have generally promoted respect for the rule of law and liberal governance within their borders, but the dominant objective outside them has been to protect Western security and economic interests, even if doing so damaged the credibility of the liberal international system.

The United States has often acted unilaterally or selectively obeyed the rules of the international order it promotes. It invaded Iraq under a contested legal mandate, and the U.S. Congress has refused to ratify the UN Convention on the Law of the Sea, among numerous other multilateral conventions and treaties. And in 2011, the British, French, and U.S. governments stretched their mandate—granted by UN Security Council Resolution 1973, which authorized all necessary measures to protect civilians in Libya—when they helped overthrow Libya’s leader, Muammar al-Qaddafi. And various Western governments have condemned Russia and Syrian President Bashar al-Assad for indiscriminately shelling civilians in Syria while simultaneously supporting Saudi Arabia’s bloody campaign in Yemen.

The United States’ allies, from Europe to Asia, now fear that the superpower may no longer be an engaged and committed partner.

Small wonder, then, that the West’s opponents have interpreted calls to enlarge the liberal international order as an excuse to expand Western political power. Putin sounded this theme in October, at the annual conference of the Valdai Discussion Club, when he accused the United States of promoting globalization and security “for itself, for the few, but not for all.” It is also unsurprising that the world’s principal multilateral institution, the UN Security Council, remains frozen in the same old standoffs, riven by disagreements between China and Russia, on the one hand, and France, the United Kingdom, and the United States, on the other. As a result, liberal attempts to reform the concept of state sovereignty, such as the introduction of the notion of the responsibility to protect and the establishment of the International Criminal Court, have failed to acquire international legitimacy—take, for instance, the ongoing failure to stem the violence in Syria and the announcements in October by the governments of Burundi, Gambia, and South Africa that they will withdraw from the court. Even the Internet, which promised to foster a more liberal international order by empowering individuals instead of governments, is now increasingly dominated by ideological polarization over national firewalls, surveillance methods, and privacy violations.

KEEPING ORDER

Do these challenges herald the end of the liberal international order? Probably not. Established liberal democracies remain resilient. Whatever domestic challenges they may face, from inequality to unemployment, they approach them from a position of strength compared with emerging-market countries, many of which boast high levels of GDP growth but have yet to make the transition from export- and investment-led growth to consumption- and innovation-driven growth. Western democracies are designed to allow the people to vent their frustrations and refresh their political leadership. Their economies operate in a relatively dynamic, transparent, and open manner, which fosters innovation. These qualities allow their political institutions to recover legitimacy and their economies to regain momentum. On the other hand, centrally controlled or illiberal countries, such as China and Russia, have yet to prove that their political systems will survive the economic transitions they are undertaking.

Still, liberal democracies cannot postpone difficult political decisions any longer. They need to fix themselves first if they are to sustain their liberal international order. They must boost productivity as well as wages, increase work-force participation even as new technologies eliminate old jobs, integrate immigrants while managing aging societies, and, in Europe’s case, evolve from centrally funded welfare states to more locally governed welfare societies, in which regions, cities, and other municipalities control a greater share of tax income and so can tailor the provision of social services to local needs. Liberal governments can rise to these challenges, whether by investing more in education, improving physical and digital infrastructure, or modernizing regulations that stifle entrepreneurship and growth in the service sector. These may seem like modest steps. But the appeal and, indeed, the survival of a liberal inter-national order depend on its ability to deliver returns to the societies within it that are superior to any alternative.

If the liberal world can get itself back on track, and does not itself turn to protectionism, it will likely find that the non-Western rising powers, China chief among them, will want to sustain the existing international economic order of relatively open markets and free flows of investment. After all, only through continued integration into the global supply chain of goods, services, people, and knowledge can emerging markets meet the aspirations of their growing middle classes. As the scholar G. John Ikenberry noted in his 2011 book, Liberal Leviathan, the United States and China—the two powers that will most likely determine the future of world order—may both refuse to compromise on their core principles of domestic governance and national security, but they can best coexist and prosper within a liberal international economic order.

It is in the West’s interests, therefore, that China’s economic development continue smoothly. U.S and European markets for goods, services, and infrastructure should remain open to Chinese foreign direct investment, as long as Chinese companies abide by U.S. and European rules on security and transparency and the protection of intellectual property. European countries should take the same approach with Russia, on the condition that Russian companies abide by EU rules. A mutual commitment to the liberal international economic order would help Western governments and their illiberal counterparts keep open other avenues for cooperation on shared challenges, such as terrorism and climate change, much as China and the United States have done over the past several years.

Western democracies are designed to allow the people to vent their frustrations and refresh their political leadership.

Meanwhile, European governments and businesses should take part in the Chinese-led effort to connect Northeast Asia with Europe across the Eurasian continent, a component of a series of regional infrastructure projects known as the Belt and Road Initiative. In 2016, the volume of global trade stagnated for the first quarter and then fell by 0.8 percent in the second. This reflects an ongoing structural decline in the growth rate of trade, as emerging markets, such as China, make more of their own products and developed countries bring some production back onshore. Against this backdrop, ramping up investment in infrastructure that can connect the thriving coastal areas of Asia to its underdeveloped hinterlands and then to Europe could create new opportunities for economic growth in both the liberal and the illiberal worlds. Rather than challenge such initiatives, the United States should support Western-led regional and multilateral financial institutions, such as the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank, as they join forces with the Asian Infrastructure Investment Bank and the New Development Bank (set up by the BRICS countries—Brazil, Russia, India, China, and South Africa) to pursue projects that are in every country’s economic interest while adhering to environmentally and financially sustainable principles.

Similar cooperation will be harder to build with Russia. Russia’s system of centralized and opaque political and economic governance makes deeper integration incompatible with the EU’s market and rules-based system, and NATO members have begun a much-needed upgrading of their military readiness in the face of recent Russian provocations. EU and NATO tensions with Russia will likely persist, even if Trump’s election heralds a change in U.S.-Russian relations. Still, the Chinese initiative to build new ways of connecting the Eurasian economy could provide an alternative way for the United States and Europe to engage with Russia.

The countries that built the liberal international order are weaker today than they have been for three generations. They no longer serve as an example to others of the strength of liberal systems of economic and political governance. Autocratic governments may therefore try to establish an alternative political order, one governed by might rather than by international laws and rules.

But liberal policymakers would be wrong to urge their countries to hunker down or resort to containment. An extended standoff between supporters of a liberal international order and those who contest it may accidentally lead to outright conflict. A better approach would be for liberal countries to prepare themselves for a period of awkward coexistence with illiberal ones, cooperating on some occasions and competing on others. The international political world will remain divided between liberals and statists for the foreseeable future, but both sets of countries will depend on a liberal international economic order for their prosperity and internal security. Time will tell whose form of government is more resilient. If history is any guide, liberal democracy remains the best bet.

The Indigo Economy

Saturday, April 30th, 2016

THE FOLLOWING IS AN INTERESTING, PROVOCATIVE CONCEPT CALLED THE “INDIGO” ECONOMY

As Global Instability Spreads, the “Indigo” Economy Rises
By Mikhail Fridman
April 29, 2016

Something strange is happening to our world. The basic principles, rules and values that have long served as the foundation for our lives are falling apart. Fragility and instability are spreading like a virus, infecting countries and continents. Those who only yesterday were on the margins of European politics are bursting onto center stage. Some are left-leaning, like Syriza in Greece and Podemos in Spain. Some are right-leaning, such as the National Front in France, Fidesz in Hungary or AfD in Germany. But all are populist and anti-establishment. And it is not just Europe that is being shaken up.

The United States of America, which was built on the principles of free markets and openness, is rallying to presidential candidates who are either propagating socialist views or arguing for isolationism. This populist advance reflects an obvious and sad fact: Old and tested truths no longer satisfy modern societies and need to be reviewed and redefined.

The economic outlook is also unstable. Extreme volatility in the markets has become the norm. This instability is usually attributed to two main factors: the sharp decline in the price of natural resources and the slowing of China’s economic growth. These two factors are actually contradictory. Cheaper resources should, in theory, benefit China, the largest importer of natural resources. Western economies, which are the main consumers of Chinese exports, should also be helped by cheap energy, but there is no sign of that either.

Volatility in politics and markets is a sign of a major tectonic shift that is happening before our eyes.

We are entering a disruptive era driven by extraordinary levels of human creativity. A new generation of curious, strong-willed and talented individuals is unhindered by convention or the past. This new “Indigo” generation is now shaping tomorrow’s economy and creating national wealth. I use the term Indigo because it has been used to refer to children with special or unusual abilities. This is an era where abnormally talented individuals and entities are now able to realize new levels of human potential and economic achievement.

How is the Indigo era different?

Over thousands of years, human history has been defined by the struggle for access to natural resources, or to put it simply, for land that contains those resources. Whether it is fertile soil, access to trade routes, gold, minerals, or oil and gas, land has always been a primary source of national wealth. The sanctity of national borders, which is the cornerstone of national identity, is a reflection of that idea. Fear of shortages has created cyclical bubbles in commodity markets and has inspired Hollywood thrillers about the war for oil and gas. It seemed that sooner or later the economy would run out of something essential for its growth. Yet every time these bottlenecks – be they in rubber, Indian spices or conventional oil and gas – were resolved by finding an alternative.

This new Indigo era undermines the hypothesis that depletion of natural resources is imminent. The innovative potential of developed countries has allowed people to find alternatives to any such shortage. This does not mean that the world no longer requires natural resources. But it eliminates the real or imagined shortage of those resources and deprives commodity exporters of what have been super profits. Oil and gas was the last bastion of these bottlenecks and it too has crumbled, thanks to Indigo economies.

The main source of national wealth is not the resource rent but the social infrastructure that allows every person to realize his or her intellectual and creative potential. It is for this reason that Exxon, once the world’s largest company, has been overtaken by Apple and Google. This represents a paradigm shift in which creative, non-linear thinking and random ideas are turned into new scalable services in a short space of time.

Requirements for developing an Indigo economy

World-leading firms such as Apple and Google have introduced revolutionary changes in business through innovation. So let’s call them Indigo companies.

One can see three main interconnected factors that have led to their achievements.

The first requirement is intuitive individual talent and a high level of education. The originator of an idea has to be not only creative but also well-educated and able to form a team of equally educated and gifted people.

Second, to realize an idea, even the brightest innovator needs the cushion of a “cloud,” a sophisticated infrastructure for doing business. This includes a legal system that can protect both physical and intellectual property rights and a competitive environment that allows small companies to turn into giants without fear of being swallowed by larger companies at their initial stages.

The ecosystem of an Indigo economy requires thousands of suppliers and subcontractors that can provide competitive, high-quality services ranging from venture financing to marketing and Web design. This cloud of available services allows users to benefit from all these technologies without the need for deep knowledge or expertise from any of them.

Third, a global digital infrastructure is needed to distribute new products and also to accumulate customer data and new levels of insight. This enables the Indigo generation to understand customer behavior and to create new services even before there is a demonstrated demand.

How easy will it be to replicate this Indigo ecosystem?

The global digital world already exists, and the Internet and cellular networks are reaching the most remote corners of the world.

We know from biology that human intelligence, talent and creativity exist everywhere and are equally distributed among all nations and races. Good education is not available everywhere, but all large developing countries have serious universities. Moreover, people from these countries have a chance to study abroad or take online courses provided by the world’s best universities.

The most problematic area for the functioning of the Indigo economy is the creation of the “cloud” as well as the social and institutional environment that is congenial to innovative companies. The “cloud” cannot be built overnight. It has evolved as a result of a profound social and political development that Western societies have experienced over centuries. A firm legal system, competition rules and a system of checks and balances do not automatically result in the creation of a Silicon Valley. Nonetheless, the West has the best conditions for making breakthroughs in different spheres of human activity, be it biotechnology, robotics, logistics, or transportation. (Full disclosure: I recently invested $200 million in Uber.)

It is also clear that countries lacking Indigo-friendly infrastructures are disadvantaged. The creation of a balanced social system and a competitive, rule-based environment requires some shifts in values and thinking as well as the breaking of stereotypes.

How Indigo will influence the world economy

The past few decades have been characterized by globalization and economic cooperation between the developed world and emerging countries. Emerging nations exported commodities and cheap labor to the developed world and used the proceeds to build roads, airports, cities and logistic centers. This has produced new jobs and attracted foreign investment, which, in turn, boosted the growth of a modern middle class.

Governments typically favored fast physical infrastructure projects at the expense of building institutions, independent legal systems and encouraging competition. These seemed like long and difficult tasks that did not match traditional values and often contradicted the interests of the ruling elite. The most obvious example of this approach was China.

China, where the development of institutions was sacrificed for the sake of building new cities, has already run into difficulties trying to build an Indigo economy. Having realized the scale of problems related to the weakness of its institutions, the government has responded in its usual way: employing its usual tactics of further centralization and repression.

With the possible exception of India, a repeat of China’s economic miracle or another emerging markets boom is unlikely. Economic growth in emerging markets will slow down as a result of shrinking natural resource revenues and a decline in people’s incomes. The chances of these countries pulling themselves out of corruption and protectionism are remote.

This means that the rate of economic growth in emerging markets will increasingly lag behind that of the developed world, further widening the gap in incomes and standards of living. The mutual resentment driven by the inability of emerging markets to catch up with the developed world will increase. Emerging countries are likely to feel increasingly jealous and hostile toward rich countries while rich countries will try to isolate themselves from their poorer and embittered neighbors. This could heighten the tension in international affairs.

A few years ago, globalization contributed to the narrowing of the gap between emerging markets and the Western world. Now it could be used as a channel for selling the products of Indigo economies to the countries that cannot compete in quality or price. Heightened resentment and tension could further empower political populists who exploit the feelings of fear, jealousy and inability to change one’s circumstances to fan hatred toward the more prosperous and successful, and a desire to destroy their riches. These populist politicians are already among us, promising simple solutions to complex problems. It is a dangerous recipe.

But there is also a ray of hope

For two-and-a-half centuries, it has been apparent that successful societies depend on having the rule of law, fair competition, and citizens’ basic rights. The U.S. was formed on this basis. As a student in the Soviet Union, I once explained the benefits of the socialist economy which, in contrast to the chaos of capitalism, could plan precisely how, when and in what quantity any goods had to be produced. The only problem was that these arguments were accompanied by endless lines for fast-disappearing food in shops. As a result, the socialist economic theory did not inspire much confidence in my listeners.

Nonetheless, the short-term economic successes of authoritarian and totalitarian regimes create a longing for a “strong hand,” which can compel people to sacrifice their civil liberties for the benefits of economic security. But even in theory, one cannot build an economy based on the creative energy, free spirit and self-fulfilment of millions of individuals if they are cut off from making the most important decisions about their own society. I hope that the era toward which we are heading will finally end these dangerous misconceptions. The future Indigo economy is an economy of free people. And this means that the world will become more and more free.

Mikhail Fridman is chairman of LetterOne, a privately owned international investment business headquartered in Luxembourg with offices in London (More).


William S. Frankl, MD, All Rights Reserved