The natural American reaction would be to “contain” China—and that would be a mistake.
SOFT POWER For America, the best response to China is to put our own
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Without
fanfare—indeed, with some misgivings about its new status — China has
just overtaken the United States as the world’s largest economy. This
is, and should be, a wake-up call—but not the kind most Americans might
imagine.
by Prof Joseph E. Stiglitz - Coluimbia Business School
When the history of 2014 is written, it will take note of a large fact
that has received little attention: 2014 was the last year in which the
United States could claim to be the world’s largest economic power.
China enters 2015 in the top position, where it will likely remain for a
very long time, if not forever. In doing so, it returns to the position
it held through most of human history.
Comparing the gross domestic product of different economies is very
difficult. Technical committees come up with estimates, based on the
best judgments possible, of what are called “purchasing-power parities,”
which enable the comparison of incomes in various countries. These
shouldn’t be taken as precise numbers, but they do provide a good basis
for assessing the relative size of different economies. Early in 2014,
the body that conducts these international assessments—the World Bank’s
International Comparison Program—came out with new numbers. (The
complexity of the task is such that there have been only three reports
in 20 years.) The latest assessment, released last spring, was more
contentious and, in some ways, more momentous than those in previous
years. It was more contentious precisely because it was more momentous:
the new numbers showed that China would become the world’s largest
economy far sooner than anyone had expected—it was on track to do so
before the end of 2014.
The source of contention would surprise many Americans, and it says a
lot about the differences between China and the U.S.—and about the
dangers of projecting onto the Chinese some of our own attitudes.
Americans want very much to be No. 1—we enjoy having that status. In
contrast, China is not so eager. According to some reports, the Chinese
participants even threatened to walk out of the technical discussions.
For one thing, China did not want to stick its head above the
parapet—being No. 1 comes with a cost. It means paying more to support
international bodies such as the United Nations. It could bring pressure
to take an enlightened leadership role on issues such as climate
change. It might very well prompt ordinary Chinese to wonder if more of
the country’s wealth should be spent on them. (The news about China’s
change in status was in fact blacked out at home.) There was one more
concern, and it was a big one: China understands full well America’s
psychological preoccupation with being No. 1—and was deeply worried
about what our reaction would be when we no longer were.
Of course, in many ways—for instance, in terms of exports and household
savings—China long ago surpassed the United States. With savings and
investment making up close to 50 percent of G.D.P., the Chinese worry
about having too much savings, just as Americans worry about having too
little. In other areas, such as manufacturing, the Chinese overtook the
U.S. only within the past several years. They still trail America when
it comes to the number of patents awarded, but they are closing the gap.
The areas where the United States remains competitive with China are not
always ones we’d most want to call attention to. The two countries have
comparable levels of inequality. (Ours is the highest in the developed
world.) China outpaces America in the number of people executed every
year, but the U.S. is far ahead when it comes to the proportion of the
population in prison (more than 700 per 100,000 people). China overtook
the U.S. in 2007 as the world’s largest polluter, by total volume,
though on a per capita basis we continue to hold the lead. The United
States remains the largest military power, spending more on our armed
forces than the next top 10 nations combined (not that we have always
used our military power wisely). But the bedrock strength of the U.S.
has always rested less on hard military power than on “soft power,” most
notably its economic influence. That is an essential point to remember.
Tectonic shifts in global economic power have obviously occurred before,
and as a result we know something about what happens when they do. Two
hundred years ago, in the aftermath of the Napoleonic Wars, Great
Britain emerged as the world’s dominant power. Its empire spanned a
quarter of the globe. Its currency, the pound sterling, became the
global reserve currency—as sound as gold itself. Britain, sometimes
working in concert with its allies, imposed its own trade rules. It
could discriminate against importation of Indian textiles and force
India to buy British cloth. Britain and its allies could also insist
that China keep its markets open to opium, and when China, knowing the
drug’s devastating effect, tried to close its borders, the allies twice
went to war to maintain the free flow of this product.
Britain’s dominance was to last a hundred years and continued even after
the U.S. surpassed Britain economically, in the 1870s. There’s always a
lag (as there will be with the U.S. and China). The transitional event
was World War I, when Britain achieved victory over Germany only with
the assistance of the United States. After the war, America was as
reluctant to accept its potential new responsibilities as Britain was to
voluntarily give up its role. Woodrow Wilson did what he could to
construct a postwar world that would make another global conflict less
likely, but isolationism at home meant that the U.S. never joined the
League of Nations. In the economic sphere, America insisted on going its
own way—passing the Smoot-Hawley tariffs and bringing to an end an era
that had seen a worldwide boom in trade. Britain maintained its empire,
but gradually the pound sterling gave way to the dollar: in the end,
economic realities dominate. Many American firms became global
enterprises, and American culture was clearly ascendant.
World War II was the next defining event. Devastated by the conflict,
Britain would soon lose virtually all of its colonies. This time the
U.S. did assume the mantle of leadership. It was central in creating the
United Nations and in fashioning the Bretton Woods agreements, which
would underlie the new political and economic order. Even so, the record
was uneven. Rather than creating a global reserve currency, which would
have contributed so much to worldwide economic stability—as John
Maynard Keynes had rightly argued—the U.S. put its own short-term
self-interest first, foolishly thinking it would gain by having the
dollar become the world’s reserve currency. The dollar’s status is a
mixed blessing: it enables the U.S. to borrow at a low interest rate, as
others demand dollars to put into their reserves, but at the same time
the value of the dollar rises (above what it otherwise would have been),
creating or exacerbating a trade deficit and weakening the economy.
For 45 years after World War II, global politics was dominated by two
superpowers, the U.S. and the U.S.S.R., representing two very different
visions both of how to organize and govern an economy and a society and
of the relative importance of political and economic rights.
Ultimately, the Soviet system was to fail, as much because of internal
corruption, unchecked by democratic processes, as anything else. Its
military power had been formidable; its soft power was increasingly a
joke. The world was now dominated by a single superpower, one that
continued to invest heavily in its military. That said, the U.S. was a
superpower not just militarily but also economically.
The United States then made two critical mistakes. First, it inferred
that its triumph meant a triumph for everything it stood for. But in
much of the Third World, concerns about poverty—and the economic rights
that had long been advocated by the left—remained paramount. The second
mistake was to use the short period of its unilateral dominance, between
the fall of the Berlin Wall and the fall of Lehman Brothers, to pursue
its own narrow economic interests—or, more accurately, the economic
interests of its multi-nationals, including its big banks—rather than to
create a new, stable world order. The trade regime the U.S. pushed
through in 1994, creating the World Trade Organization, was so
unbalanced that, five years later, when another trade agreement was in
the offing, the prospect led to riots in Seattle. Talking about free and
fair trade, while insisting (for instance) on subsidies for its rich
farmers, has cast the U.S. as hypocritical and self-serving.
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And Washington never fully grasped the consequences of so many of its
shortsighted actions—intended to extend and strengthen its dominance but
in fact diminishing its long-term position. During the East Asia
crisis, in the 1990s, the U.S. Treasury worked hard to undermine the
so-called Miyazawa Initiative, Japan’s generous offer of $100 billion to
help jump-start economies that were sinking into recession and
depression. The policies the U.S. pushed on these countries—austerity
and high interest rates, with no bailouts for banks in trouble—were just
the opposite of those that these same Treasury officials advocated for
the U.S. after the meltdown of 2008. Even today, a decade and a half
after the East Asia crisis, the mere mention of the U.S. role can prompt
angry accusations and charges of hypocrisy in Asian capitals.
Now China is the world’s No. 1 economic power. Why should we care? On
one level, we actually shouldn’t. The world economy is not a zero-sum
game, where China’s growth must necessarily come at the expense of ours.
In fact, its growth is complementary to ours. If it grows faster, it
will buy more of our goods, and we will prosper. There has always, to be
sure, been a little hype in such claims—just ask workers who have lost
their manufacturing jobs to China. But that reality has as much to do
with our own economic policies at home as it does with the rise of some
other country.
On another level, the emergence of China into the top spot matters a
great deal, and we need to be aware of the implications.
First, as noted, America’s real strength lies in its soft power—the
example it provides to others and the influence of its ideas, including
ideas about economic and political life. The rise of China to No. 1
brings new prominence to that country’s political and economic model—and
to its own forms of soft power. The rise of China also shines a harsh
spotlight on the American model. That model has not been delivering for
large portions of its own population. The typical American family is
worse off than it was a quarter-century ago, adjusted for inflation; the
proportion of people in poverty has increased. China, too, is marked by
high levels of inequality, but its economy has been doing some good for
most of its citizens. China moved some 500 million people out of
poverty during the same period that saw America’s middle class enter a
period of stagnation. An economic model that doesn’t serve a majority of
its citizens is not going to provide a role model for others to
emulate. America should see the rise of China as a wake-up call to put
our own house in order.
Second, if we ponder the rise of China and then take actions based on
the idea that the world economy is indeed a zero-sum game—and that we
therefore need to boost our share and reduce China’s—we will erode our
soft power even further. This would be exactly the wrong kind of wake-up
call. If we see China’s gains as coming at our expense, we will strive
for “containment,” taking steps designed to limit China’s influence.
These actions will ultimately prove futile, but will nonetheless
undermine confidence in the U.S. and its position of leadership. U.S.
foreign policy has repeatedly fallen into this trap. Consider the
so-called Trans-Pacific Partnership, a proposed free-trade agreement
among the U.S., Japan, and several other Asian countries—which excludes
China altogether. It is seen by many as a way to tighten the links
between the U.S. and certain Asian countries, at the expense of links
with China. There is a vast and dynamic Asia supply chain, with goods
moving around the region during different stages of production; the
Trans-Pacific Partnership looks like an attempt to cut China out of this
supply chain.
Another example: the U.S. looks askance at China’s incipient efforts to
assume global responsibility in some areas. China wants to take on a
larger role in existing international institutions, but Congress says,
in effect, that the old club doesn’t like active new members: they can
continue taking a backseat, but they can’t have voting rights
commensurate with their role in the global economy. When the other G-20
nations agree that it is time that the leadership of international
economic organizations be determined on the basis of merit, not
nationality, the U.S. insists that the old order is good enough—that the
World Bank, for instance, should continue to be headed by an American.
Yet another example: when China, together with France and other
countries—supported by an International Commission of Experts appointed
by the president of the U.N., which I chaired—suggested that we finish
the work that Keynes had started at Bretton Woods, by creating an
international reserve currency, the U.S. blocked the effort.
And a final example: the U.S. has sought to deter China’s efforts to
channel more assistance to developing countries through newly created
multilateral institutions in which China would have a large, perhaps
dominant role. The need for trillions of dollars of investment in
infrastructure has been widely recognized—and providing that investment
is well beyond the capacity of the World Bank and existing multilateral
institutions. What is needed is not only a more inclusive governance
regime at the World Bank but also more capital. On both scores, the U.S.
Congress has said no. Meanwhile, China is trying to create an Asian
Infrastructure Fund, working with a large number of other countries in
the region. The U.S. is twisting arms so that those countries won’t
join.
The United States is confronted with real foreign-policy challenges that
will prove hard to resolve: militant Islam; the Palestine conflict,
which is now in its seventh decade; an aggressive Russia, insisting on
asserting its power, at least in its own neighborhood; continuing
threats of nuclear proliferation. We will need the cooperation of China
to address many, if not all, of these problems.
We should take this moment, as China becomes the world’s largest
economy, to “pivot” our foreign policy away from containment. The
economic interests of China and the U.S. are intricately intertwined. We
both have an interest in seeing a stable and well-functioning global
political and economic order. Given historical memories and its own
sense of dignity, China won’t be able to accept the global system simply
as it is, with rules that have been set by the West, to benefit the
West and its corporate interests, and that reflect the West’s
perspectives. We will have to cooperate, like it or not—and we should
want to. In the meantime, the most important thing America can do to
maintain the value of its soft power is to address its own systemic
deficiencies—economic and political practices that are corrupt, to put
the matter baldly, and skewed toward the rich and powerful.
A new global political and economic order is emerging, the result of new
economic realities. We cannot change these economic realities. But if
we respond to them in the wrong way, we risk a backlash that will result
in either a dysfunctional global system or a global order that is
distinctly not what we would have wanted.
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