Features » February 16, 2007

Eyes Off the Prize

As Iraq dominates U.S. attention, China, India and Iran are emerging as the next world powers

By Jehangir Pocha

About 30 years ago, U.S. diplomats famously dismissed the civil war raging in the jungles of Cambodia as a “sideshow” to the Cold War. Callous as that was, the uncomfortable fact remains that the diplomats were probably right. As bloody and heartrending as the situation in Cambodia got by 1977, in the end it appears to have had only a limited bearing on the wider historical forces at work in the world, adding a further dimension of sheer meaninglessness to the tragedy and trauma that still haunts millions of Cambodians.

Today, headlines are fixated on the gore and chaos unfolding in Iraq. The conflict there has been shaping the outcome of the elections in many Western nations, and is certain to be the most contentious foreign policy issue in the 2008 U.S. presidential election. Yet this unrelenting focus on Iraq obscures the reality that in another 30 years the Bush administration’s adventure there will probably look like the Cold War-era face-off in Cambodia does now—a tragic mistake fuelled by hubris that cost countless innocent lives and billions of dollars, but which ultimately had only a limited effect.

Instead, the principal dynamic shaping life in the year 2037 will be the re-emergence of three ancient nations: China, India and Iran. Their powerful economies, muscular militaries, ambitious politicians, nationalistic populaces and resurgent cultures will irrevocably alter the lives of the 2.9 billion people who will then be living within their borders. But beyond that, these three countries will radically alter the balance of power in the world and give people and nations everywhere a new impetus to recreate their own societies.

That this will happen is certain. What’s up for grabs is what it will mean for the United States and the world. Yet the United States and most other countries seem to be only marginally prepared to deal with this nascent new world order.

China is the nation whose resurgence is best understood in the West. But despite the media hype around China, the country is only of marginal interest to the average American citizen and policymaker, as illustrated by the fact that when Chinese President Hu Jintao visited Washington earlier this year President Bush didn’t even offer him a state dinner, dismissing him with just a hurried lunch. India, for all the ferment and change it is experiencing, receives hardly any diplomatic or media attention. Both official and general perceptions of this complex and contradictory country generally revolve around banal sound bites of it being a “software superpower.” And, because official and public views of Iran are so dogged by miscomprehension and prejudice, the entire country is seen almost exclusively through a political lens, even though Western diplomats themselves tell us the Islamists ruling Tehran are almost totally out of step with the rest of the country.

The relatively few editors, businessmen, academics and officials committed to studying China, India and Iran provide us with invaluable insights into these countries. But they still generally label what we are seeing in these three ancient civilizations as “amazing change.” In reality, it is much more: not just change or evolution, but a paradigmatic shift that will challenge the basic framework of the post-WWII world.

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As with any new idea, the world is trying to cope with the changing dynamics in China, India and Iran by squeezing them into existing structures and processes. But the national ambitions of the rising East and the sheer scale of their change will force a major, if not complete, re-thinking of the global system.

Just as the turn of the last century saw Germany, Japan and Italy demand (but so misguidedly pursue) their own place in the sun, China, India and Iran will soon demand that the global system that currently protects the United State’s interests adapt to accommodate their own economic and strategy ambitions. The most immediate impact will be on the three pillars of U.S. dominance: the global financial system that has the U.S. dollar at its center, the global oil and gas trade which the United States currently controls, and America’s “soft power,” or its ability to win friends and arguments based on the popularity of its culture and values.

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Today’s global financial system is based around an informal but effective agreement labeled Bretton Woods II, which revolves around the idea that, de facto, the world is following a regime of fixed global exchange rates just like the original Bretton Woods regime maintained de jure from 1945 to 1973. While the original Bretton-Woods was a formal system that fixed nations’ currency rates to their gold reserves, Bretton Woods II is an informal arrangement that pegs exchange rates to the U.S. dollar.

Currently, more than 30 nations, including China and Saudi Arabia, have their exchange rates pegged to the dollar in one form or another, allowing them to export their goods into the United States and maintain huge trade and current account surpluses. This arrangement works as long as this surplus is used to purchase U.S. dollar-denominated debt, including the U.S. national debt. With this money coming from China, Saudi Arabia and other countries, the United States can then finance its $8 trillion budget deficit. This allows the U.S. Federal Reserve to produce enough money to stimulate spending by U.S. consumers, who will then buy Chinese-made clothes and home theatre systems (or Saudi oil) via the “fixed” exchange rate. The Asian countries then invest their profits into U.S. T-bills—in other words, lending it back to the United States so the cycle can repeat itself over and over again.

This system has worked well until now. China is an exporting juggernaut and has about $1 trillion in foreign reserves, most of which is used to buy U.S. debt, including $350 billion in U.S. T-bills. This has allowed Americans to live beyond their means on someone else’s money, while also allowing the United States to raise its huge debt in its own currency, thereby neutralizing any currency risk.

This can happen because international loans are mostly denominated in dollars and when a country borrows too much its own currency depreciates, thus making it more expensive for the borrowing country to pay back its dollar-denominated debts. So, for example, if India borrowed $1 billion from the World Bank in January 2006 when the exchange rate was 10 rupees to the dollar, that means in rupee terms India borrowed 10 billion rupees. If India borrows another $1 billion in 2007 and investors deem that excessive, the value of the rupee will fall to, say, 12 rupees to a dollar, which means it will now cost India 12 billion rupees to pay back the original $1 billion it borrowed.

Because the United States borrows in its own currency, it is immune from this currency exchange trap. The $1 billion the United States borrows remains $1 billion even if the dollar devalues globally. In fact, it is the lenders who bear the cost of the devaluation, as the $1 billion they get back will be worth less vis-à-vis their own and other currencies.

What policy makers should now begin to grapple with, according to former U.S. Treasury Secretary Lawrence Summers, is that the rationale for China to buy U.S. debt is slowly fading. Beijing’s huge stock of dollars is threatening its own economy with inflation and the United States’ mammoth debt is making China and other countries wonder if U.S. dollars are truly a wise investment. In the last year alone, China, the United Arab Emirates, Russia, Italy, Switzerland, Qatar and New Zealand have all said they will reduce their U.S. dollar holdings and buy more gold and Euros.

China also realizes its dollars are subsidizing U.S. growth when they could be used on domestic development projects and/or lent to other Asian nations with whom it wants to buy influence at the expense of the United States. Though Chinese officials are generally deferential to the United States in their public comments, many say privately that they realize that China is lending money to the United States, which in turn is lending dollars to global institutions such as the International Monetary Fund (IMF) and thereby acquiring greater clout over the global financial system, particularly over the countries dependent on the IMF for loans.

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• Reader Comments

  US Empire heading for the final fall. HOORAY !!!!!!

  Posted by blondemike on Feb 16, 2007 at 6:16 PM

  Leftover hubris from Manifest Destiny, industrial and commercial economic “miracles”, as well as fighting fascistic and socialistic militants to a stand-still (most of the pivotal events taking place within only a little more than a century), could be argued to have helped the US overreach itself recently, to the extent that it has actually done so (which is arguable). The author implies that this includes the overselling of secular democratic republicanism. It may be so. Many civilizations have fallen into the trap of thinking themselves to be eternal, incapable of failure, destined to lead the world, etc. No reason (at all!) to think the Americans are immune from this sort of self-mythologization.

  Actually, we’re pretty mired in it.

  I still have a pretty strong attachment to the ideals underlying secular democratic republicanism, but considering my cultural background and the historical period I grew up in, it’s not a surprise.

  The caveats that came to my mind about China, Iran, and India when I read the article include:

  China: Blistering fast growth may foster some pretty precipitous market corrections, i.e. recessions. If severe enough, I wonder if it could trigger some sort of neo-Maoist backlash, if the differential between the quality-of-life for upwardly mobile urban minorities and the hundreds of millions of peasants in the hinterlands widens. The Chinese tradition (incl. their “communist” incarnation) of unopposable authority also gives me pause. I tend to associate the overweaning thirst for control with decision-making trends that provoke dissatisfaction, anger, subversion, disruption of economic and social systems, etc.

  India: Population density, and growth rate. It may be so that India can stabilize or at least moderate its population issues in time to NOT devour every good thing that their recently charged-up economy can offer, but prosperous humans don’t demand less from their environment, they demand more. They especially demand more for their children’s generation, as the symbol of the success of their own. If they follow the pattern of having fewer children as they prosper, as other countries have done, perhaps they can reduce this problem (FYI, the current pop. growth rate is 1.38% per year, which if unchanged would double India’s population in a little over 50 years… a lot when you already have 1.2B people).

  Iran: Insofar as the “Islamic democracy” mentioned in the article, the big inhibitor to that will be if there’s any sustained enthusiasm for sharia law across the Muslim world. Sharia is not predicated upon participant-citizens directing society’s moves. It’s basic thrust is obedience to what is perceived/touted to be God’s law (subject, of course, to the ruling cadre telling us what “God’s law” implies, when Quran and Hadiths do not spell this out). If sharia is any different than any other totalitarian system (with all of their weaknesses), I have yet to have it explained to me exactly how it is different. I wonder too about how the Shia and Sunni factions will relate in the future. They’ve hated each other’s guts since long before there was a US, global capitalism, Western cohesion, etc.

  Just a few musings. I’d be provisionally glad to see a more multilateral world evolve, but I think it’s far from certain that the three ancient powers will necessarily retake center stage. If nothing else, I think it’s quite plausible that each would see the others as rivals, as soon as their current perceived rivals to their West decline enough (to the extent that they do). And you know how “great powers” behave when they perceive a rival, eh?

  Posted by Kuya on Feb 19, 2007 at 5:05 AM

  … the principal dynamic shaping life in the year 2037 will be the re-emergence of three ancient nations: China, India and Iran. Their powerful economies, muscular militaries, ambitious politicians, nationalistic populaces and resurgent cultures will irrevocably alter the lives of the 2.9 billion people who will then be living within their borders. 

  Ummm, probably not.  None of their economies are very strong, their militaries are decidedly lacking, Iran, India, and China are fragmented into ethnic and religious constituencies, and their cultures are becoming more Westernized.  Granting that Iran’s and China’s politicians are ambitious (one out of five ain’t bad?), when has this ever served to build a world class economy?  It is more likely a recipe for disaster; think Hitler, Stalin, Mao, Pol Pot, and Saddam.

  Iran’s economy is in terrible shape, due to the mismangement, inefficiency, and corruption of the ruling mullahs.  There is no obvious reason to group Iran with China and India, as Iran is radically different in size (much smaller), ruling philosophy (Jihadist terrorist), and economic capability (near zero, in spite of underutilized and mismanaged oil wealth). 

  The economies of China and India are growing rapidly from a very low base, following years of socialist mismanagement, inefficiency, and corruption.  China and India are the recipients and beneficiaries of Western capitalist and technological expertise, which they have eagerly embraced.  India has long since adopted democracy, but China is trying to avoid democracy, which will present an interesting set of problems: can free-market capitalism coexist within a corrupt totalitarian state? 

  China in particular is refusing the democratic and rule-of-law principles that have made the democratic West strong, and there is no hope of China growing strong while avoiding the most important principles that have made the West the economic and cultural leader of the world.  While Pocha is frothy about the growth of China and India (he is deluded in failing to note that the Irani economy is in long term decline, consonant with reasonable expectations of a rigidly controlled totalitarian economy), there is absolutely no prospect that China will grow to the levels Pocha anticipates. 

  China’s rapid growth superimposed on a corrupt and unstable base will certainly produce economic disruption, probably sufficient to destroy the totalitarian political structure.  China is far and away the largest political entity in history that lacks a political philosophy, since the decay and termination of socialism as a guiding philosophy in China.  Consequently, there is no loyalty to a cause except for the ruling class that is loyal only to the cause of its own advancement. 

  Increasingly Beijing, New Delhi and other Asian nations, including Thailand, are talking about using their surplus dollars to create their own financial institutions, such as an Asian Monetary Fund, that would lend Asian surpluses to Asian borrowers. Not only would this diminish the United States’ ability to dictate economic policy to borrowers, it would cement regional ties by giving Asian nations a vested interest in each other’s development and stability.

  Posted by scorp on Feb 19, 2007 at 5:44 AM

  Pretty dense, Pocha.  The United States economic policy IS “development and stability” for Asia and everywhere.  Why else do you think Nixon went ot China?  Have you been asleep for the last twenty years, like Rip van Winkle? Don’t you have any awareness at all outside you idiotic socialist agenda?

  Yet, as Nye points out in his book, The Paradox of American Power, any U.S. attempt to undermine or contain the emergence of these new powers could backfire just like Britain, France and Russia’s attempts to contain Germany, Japan and Italy backfired a century ago. 

  Ummm, I must have missed that chapter in the history book.  The last I heard, the fascist totalitarian states had been defeated, and had become prosperous peace-loving democracies.  You obviously have later information.  Can you provide a reference?  I would be ever so grateful.

  The real paradox is in means and goals.  Totalitarian states have to bear the cost of imposing controls, making them inefficient and incapable of competing in a global economy.  But when they surrender control, and establish free-market, rule-of-law, capitalistic democracy, prosperity and freedom thrives.  You can see this process in action in Chile, Ireland, and Estonia, all of which have grown substantially in the last few years.  You can also see the process in reverse.  Chavez is wrecking the Venezuelan economy right before your very eyes.

  Posted by scorp on Feb 19, 2007 at 5:45 AM

  Scorpy Doobie AKA Master Bates, from what rock did you just crawl out of ? China has a very strong economy and is still the fastest growing economy in the world. And India is moving up rapidly. Chile has 60% of its people below the poverty line including 40% in Santiago alone. Ireland has developed quite a bit but it started from a low base. The USA is in very serious trouble. Reagan’s #2 at Treasury, Paul Craig Roberts, has a piece titled “Economists In Denial: Blind To Offshoring’s Adverse Impact” in the Feb 6, 2007 Manufacturing and Technology News. Our debt, both governmental and personal is the highest in history and most Americans have ceased to save at all ! Debt driven consumption is exceeding US productive output by over 800 BILLION annually. Most of the investment in US plant has been by foreigners. Foreigners now own 2.7 TRILLION more of the US than the US owns abroad. Right now China is still supporting us but how long can this go on ? Alan Blinder, former Fed Vice-Chair, estimates that 50 MILLION US jobs could be outsourced !  Scorpy Doobie AKA Master Bates, we can’t get McDonald’s built fast enough to replace these jobs. So far Venezuela is doing well and have you noticed, Scorpy Doobie AKA Master Bates, that all of South America is voting in socialists. Colombia is the sole holdout and they are starting to crumble.  The fascist states were authoritarian, not totalitarian, and they remain authoritarian, in Germany you can be imprisoned for thought crimes. Japan’s culture is thoroughly authoritarian and they even have central planning more now than before WW2. Chomsky calls Japan an example of successful Communism, as usual he’s right. By the way, neither India or China started from a low base. India was far better off under the Nehru socialists than as a Brit colony, in fact the Brits largely deindustrialized India during their rule and Mao’s China was about 20 times the GDP of Chiang Kai Chek. The worst threat to world peace has been the US Government since 1898 when they stole Hawaii, Cuba, Puerto Rico, Guam, the Phillipines and other countries through a phony atrocity story campaign against Spain remininiscent of the lies people like Scorpy Doobie Master Bates made up about Saddam Hussein. Carter and Reagan supported Pol Pot,  the Vietnamese Communists overthrew Pol Pot.

  Posted by blondemike on Feb 19, 2007 at 7:12 PM

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