Last week’s Economist had a couple of nice articles on China’s National Day on October 1st, when the Chinese showcased their military, including the DF-31 nuclear-tipped ICBM, which can hit any city in America.  Most of these armaments have “Made in China” tags, not unlike all of our clothes and toys.

The Economist leader on the subject lamented this show of militarism, even comparing modern-day China to Prussia/Germany and Japan in the late 19th century.  I recall attending Bastille Day celebrations along the Champs Elysee in Paris in years past, when the glory-obsessed French showcased their military hardware; yet nobody got bent out of shape about French militarism.

Yet the rise of China should rightfully be compared to the rise of powers-past, such as Germany, Japan, Russia and the U.S.  We should consider how status-quo powers such as Britain might have mismanaged some of these rises in the 19th century and how we might avoid such mismanagement with regard to China today.  The blame for German militarism rests largely on the shoulders of Germans, this is true, especially on the fragile shoulders of Kaiser Wilhelm II and his cabal (though even Bismarck shares some of the blame).  Even so, the Western Powers could have better managed Germany’s rise.  They lacked an agenda for providing Wilhelmine Germany with enhanced international privileges to match its rising power.  Matching privileges with power is key to peacefully managing a power’s rise.  And, anchoring a rising power in the institutions of the status quo is likewise critical.

With the Concert of Europe and the Congress system of Metternich dead by the late 19th century, there were no international institutions to anchor Germany.  China, by contrast, is a card-carrying member of the U.N. Security Council, the WTO, the IMF and World Bank, the G-20, G-2, and other institutions.  Furthermore, although China may still feel somewhat dissatisfied because Taiwan and other East Asian assets (such as oil fields in the South China Sea) are not being handed to it on a silver platter, Chinese privileges in the world are being equated step-by-step with Chinese power.  The ”peaceful rise” of the dragon is taking place, at least in part thanks to Western statecraft.

The parallel with Wilhelmine Germany is a nice one, but on one key parameter, China falls short of authoritarian Germany.  Germany of that era was a pluralist, if not a liberal, society.  There was the Reichstag, in which the Social Democratic opposition was well represented.  Sure, the Kaiser and his ministers were not beholden to the German parliament.  Yet the nascent democratic institutions were there, whereas Chinese communism has not provided such vehicles for democratic development.  Likewise, Bismarck had provided Germany of those days with the most progressive social security safety net in Europe, neutralizing in part the appeal of the left.  In China’s Workers’ Paradise, the social safety net is woefully inadequate.

A few months ago, observers worried that the global financial crisis could weaken the Chinese Communist Party’s hold on power.  As long as the CCP delivered economic growth north of 8% a year, few questions were asked by the populace.  But this social contract was seen as at risk.  These days, observers are applauding the resilience of the Chinese economy at weathering the storm.  However, China’s recovery has been driven by a huge fiscal stimulus and a massive state-directed lending boom, which could lead to banking sector weakness in the future.  True, China is much less-leveraged than the US or almost any Western nation, so it has room to be a little profligate.  Nevertheless, an economic shock in China, followed by political turmoil, cannot be ruled out.  Note that China’s leaders told Beijingers earlier this month to stay home in their crowded apartments to watch the National Day Parade on television, instead of thronging over to the Forbidden City, which couldn’t have a more suggestive name.  Since 1989, popular protests are the nightmare of China’s leaders.

Turkish Prime Minister Recep Tayyip Erdogan Source: Google Images

Sovereign risk in Turkey was once talked about in the same breath as Brazil’s.  Not so anymore.  One is going hat in hand to the IMF, likely to get $45 billion in the coming weeks; the other is largely self-financing.  What went wrong in Turkey?  Always keep your eye on the current account deficit, folks, even when Wall St. analysts tell you its nothing to worry about because it’s financed by FDI, or some such Bernanke-esque bunk.  Current account deficits mean borrowing from abroad.  And that means vulnerability.  Turkey went into the global crisis with a 5-6% current account deficit, while Brazil went in with small surpluses.  Keep your eye on America as well and its sovereign credit risk — current account deficits there have been nearly halved to 2-3% from 5-7% a couple of years ago, largely due to the US recession.  But the U.S. still can’t kick its foreign borrowing habit, Obama’s protectionism notwithstanding.  Likewise, watch out for “twin deficits.”  That’s when government deficits move in tandem with current account deficits (the former often driving the latter).  The US has these, as does Turkey (where government deficits are in the range of 5-7% of GDP, versus Brazil’s 3-4%).  Turkey’s overall government debt burden remains modest at under 50%, versus Brazil’s near-70%; however, Brazil’s government debt burden is headed down, while Turkey’s is rising.  Hence, Fitch moved Brazil up to investment grade not long ago, while Turkey languishes at BB-.  They both were BB- only a few years ago.  Sometimes the rating agencies get it right, even though it often takes them some time to do so.

So, the Turkish prime minister shows up hat in hand at the IMF’s doorstep, while President Lula’s Brazil is considered a rising power.  Have a look below at the CreditSuisse report from today on Turkey’s negotiations with the IMF.  Deputy Prime Minister Babacan, whom I met with in the past and perceive as smart and wily, is thankfully in charge of these negotations.

From CreditSuisse:

Turkey
Berna Bayazitoglu
+44 20 7883 3431
berna.bayazitoglu@credit-suisse.com
Prime Minister Erdogan denounced yesterday the claims in the local media that the IMF has offered a sizable financing package to the Turkish government which it cannot turn down. As we reported in the Emerging Markets Economics Daily yesterday, Erdogan told the Wall Street Journal on Monday (5 October) that the Turkish government has resolved one of the sticking points with the IMF, namely the IMF’s request for an independent tax revenue administration, and added that “he would like to see a new IMF program for Turkey agreed soon.” This was the most upbeat assessment that Erdogan has offered on the subject in a long while. Looking for an explanation for the change in Erdogan’s tone about an IMF agreement, the Turkish media claimed yesterday morning that the IMF might have offered a large financing package to Turkey (amounting to $45bn) which Erdogan cannot turn down. However, at a reception later in the day, Erdogan denounced local media stories that the IMF has made a new offer to Turkey.

Nevertheless, Erdogan’s statements in the Wall Street Journal add strength to the possibility that the government might invite an IMF mission to Turkey soon. As we noted in the Emerging Markets Economics Daily yesterday, speaking at various conferences in the last few days at the IMF/World Bank annual meetings in Istanbul and somewhat in contradiction to Erdogan’s statements in the Wall Street Journal, Deputy Prime Minister Babacan (who is the senior policymaker in charge of policy discussions with the IMF) had said that the discussions on the tax revenue administration and local governments’ spending were still continuing and that the IMF was studying the government’s medium-term economic plan and fiscal program.

The Statistics Office will release the industrial production data for August tomorrow. We forecast that industrial production was down 4.7% yoy in August, slowing from a contraction of 9.1% yoy in July. Our forecast is more optimistic than the consensus forecast (according to Bloomberg) of a 5.2% yoy contraction.

Fareed Zakaria interviewed Russian President Dmitry Medvedev about his relationship (or rivalry) with Vladimir Putin, Russia’s ties with the United States, Iran’s nuclear program, politics and the economy. Recently, Medvedev penned a piece arguing that “an inefficient economy, semi-Soviet social sphere, fragile democracy, negative demographic trends, and unstable Caucasus represent very big problems, even for a country such as Russia.”

But despite the critique of Russia’s imperfections, Medvedev still believes Russia is a great power. “In the future, Russia will be an active and respected member of the international community of free nations. It will be strong enough to exert a significant influence on the formulation of decisions that have global implications. It will be able to prevent anyone’s unilateral actions from harming our national interests or adversely affecting our internal affairs, from reducing Russians’ level of income or damaging their security.”

Clip from Fareed Zakaria GPS.

Source: Google Images

An update on a post I did last week on the Obama administration’s swing toward trade protectionism with its action against Chinese tires:  enclosed is this nicely written NYTimes editorial…not an Op-ed, an editorial. 

The Times editorial board understands economics.  American workers in the tire industry, many represented by the United Steelworkers Union, may well lose their jobs with or without the new 35% tariff against Chinese tires.  The reality about trade, the Times points out, is that Americans will likely buy low-cost tires from other countries in any case, perhaps in Latin America, rather than from American factories.  These Latin tires will cost more than the Chinese variety, making American consumers worse off.

The Economist article I attached to the last post included a comment from an analyst suggesting that President Obama, by imposing these tariffs, is shoring up his left flank in order to achieve support for health care reform, that $900 billion budget-buster.  Maybe the linkage is far-fetched, but if true, putting at risk the global trading system in order to expand entitlements, is that what sound economies are built on? 

I hope the president deploys his considerable charm and intellect next week, talking things out with Chinese President Hu Jintao at the G-20 Summit in Pittsburgh in order to avoid a nasty trade war.  That venue would likewise be a fine place for the president to tell the truth to Rust Belt workers, the truth John McCain started telling in Michigan last year:  that the economy is in transition, we cannot artificially protect manufacturing jobs, job training and outplacement will be required.  The higher value-added, knowledge-based economy beckons…

During the Great Depression, international trade contracted by a third, as countries around the world erected barriers to trade, aggravating a sharp decline in output already under way and throwing millions out of work.  Thus far, in the Great Recession of 2008-09, the end of which some observers may have called too soon, the major powers have avoided trade protection.  Enter the Obama administration.

Last year, I published a piece calling for those supporting Democrats in America’s national elections to make sure they keep the Dems honest on trade.  Concerns about Obama’s commitment to free trade, due to his campaign strategy in Midwestern states last year, were dismissed as mere election-year politics.  His commitment to satisfying his friends in America’s trade unions is now abundantly clear, not only because he parrots their unfair accusations about abuses by the Colombian government, but also in the latest action by the Obama administration to raise tariffs against Chinese tires (see NYT imes article).

Trade wars can spiral out of control, even if this is not the original intention of protectionists.   During the 19th century, Britain, the unrivaled power at the time, ensured global prosperity through its commitment to free trade.  The U.S. since 1945 has played this role, through both Democratic and Republican administrations.  Doubts about President Obama’s commitment to free trade, a key pillar of international cooperation and a key strategy for broad-based global prosperity, have re-emerged, a point quite ably discussed in this Economist article.

Photo:  Chinese workers loading tires for export.  Source:  www.financialpost.com

Wu Bangguo, the head of China’s Congress, is enjoying a warm welcome in Washington. He met with President Obama, calling for closer economic ties, and attended a dinner on Thursday evening hosted in his honor. Secretary of State Clinton said, as she has done several times before, that “building a strong relationship with China is a central goal of the Obama administration.”

Putting aside differences (or at least not letting them overshadow the relationship) on human rights and trade, Clinton said, “We are entering a new era in China-US relations.” The United States needs China’s support and China needs America’s. The two powers should work together to curb dangerous actions by North Korea and Iran, and Clinton announced that the countries would be conducting joint talks on counterterrorism this autumn.

“We are two of the world’s three largest economies, two of the world’s largest populations, two of the world’s largest militaries, the world’s largest consumers of energy and producers of carbon emissions. For these reasons and so many more, our respective priorities and policies have a global impact, and therefore we have a responsibility to ourselves and others to work as effectively as we can to meet the threats and seize the opportunities of the 21st century.”

For his part, Mr. Wu emphasized economic, financial, trade and investment policies. He said that China would shift from an economy driven by exports to one more reliant on domestic consumption – rebalancing the economy.

Clip from US State Department.

Washington said that it would accept Tehran’s offer of comprehensive talks, even though Iran continues to refuse to negotiate over its nuclear program. The chess move – a strategy designed to force Iran to talk seriously or encourage rising powers to place greater pressure on Tehran to curb its hostile actions – was announced as Beijing and Moscow both refused to support new sanctions against Iran.

Earlier this week, American intelligence agencies reported that Iran has enough nuclear fuel to make a nuclear weapon. It would be risky to rapidly enrich its uranium to bomb-grade material, but possible.

Photo from president.ir.

It wasn’t Paul Kennedy who first said that great powers who over-extend themselves — either externally or internally — fast-forward the date of their decline, but he wrote about imperial over-extension and decline so convincingly in a best-selling book in the late 80’s.  Political Scientist Robert Gilpin in War and Change in World Politics argued that both internal and external over-extension overburdens a hegemonic power such as the U.S. and results in an early decline. 

A colleague on the Global Markets blog and other FPA bloggers have applauded President Obama’s economic policies for rescuing America and the world from an early demise.  The stimulus package was the right thing to do at the right time, I agree, as was the bank rescue, which began under Bush’s watch, spearheaded by Republicans Paulson and Bernanke as well as Democrat Geithner, a year ago, lest we forget.  I wrote about that on my blog, applauding all those involved on both sides of the aisle.  Yes, Paulson was helped along by Democrats Pelosi and Reid and brave Republican Mitch McConnell, whereas the rest of the Republican caucus abdicated all responsibility in the name of free market capitalism.  Like Lenin said, the last capitalist will sell the rope to hang the second-to-last capitalist.  I did hear, nonetheless, from not a few Democrats at that time who opposed the bank bailout, including some so-called New Democrats.

In any case, I applaud President Obama’s continuation of Paulson’s policies (and remember, these were policies backed wholeheartedly by the much-maligned George W. Bush). 

But why health care reform?  Okay, I know why health care reform.  But why now?  Why now, with U.S. General Government Debt set to reach nearly 100% of GDP within two years??!! 

The answer:  because Dems have majorities in Congress and they’re afraid they’ll miss this opportunity to extend entitlements.  The prudent thing to do — the thing leaders of a great power wishing to prolong its great power status would do — is:  tackle health care reform when (and if) the ship of state is not in hock.

An Economist article points out the fine job accomplished last night by the Great Communicator (II).  It also points out that President Obama put a figure on the cost last night — $900 billion, or 5-10% of GDP.  Obama in his speech committed to convening an independent panel of experts to find savings in Medicare and other health schemes and to putting in mandatory cuts if cost restraint doesn’t materialize.  Hats off to the president for including these two commitments in this expansion of the role of the state.  Nevertheless, to those of us worried about the decline of a great power so important to the liberal institutions of the world, this health care reform remains an awful lot of the farm to bet on the Great Communicator’s promises before a joint session of a Democratic Congress.

It was certainly a dramatic and convincing victory, but how much will it really change Japan? In the recent election, the opposition Democratic Party of Japan routed the Liberal Democratic Party, who had been in practically uninterrupted control for the past half century. The landslide triumph is a historic break from the past, but is it enough to stop the economy from sinking?

The election unfolded as the country is nearing the end of essentially two lost decades – Japan’s faltering economy will be a first priority for the new government. Japan is looking to shift – at least partially – from a reliance on exports to greater domestic demand.

What does this mean for US-Japan relations? Well, we don’t know yet. A significant change in Japan’s foreign policies is unlikely, but the DPJ is expected to push for a more equal relationship with Washington.

Moving away from some rhetoric used during the campaign, Japan’s next leader, Yukio Hatoyama, is trying to reassure the United States. On Thursday, he told President Obama that “the Japan-US alliance is the foundation” of Tokyo’s foreign policies.

“The bottom line is that the election is unlikely to resolve Japan’s core economic challenges or fundamentally change the direction of U.S.-Japan relations,” contends Michael Green, a senior advisor and Japan chair at the Center for Strategic and International Studies.

For further analysis, check out this segment on The NewsHour with Jim Lehrer.

Photo from Hiroko Masuike for The New York Times and clip from the PBS NewsHour.

Should America be a great power? If so, can the United States remain a great power? Christian Brose, senior editor at Foreign Policy, and Rachel Kleinfeld, president of the Truman National Security Project, debate the future of the world’s hegemon and rising heavyweights on bloggingheads.tv.

Christian Brose argues that “the greatest advantage that the United States has going forward is that as other countries become more powerful there is always going to be the feeling among their neighbors and among others in the world that they are going to view that apprehensively and I think they are going to look to the United States…to provide you with a security partner.”

“The United States could destroy ourselves if we’re not careful,” warns Rachel Kleinfeld. And she argues that the previous administration in Washington “lost more of America’s power over the last eight years than we’ve ever seen before.”

Video from blogginghead.tv.