Tag Archives: china

BRIC building: the future of Brazil, Russia, India and China

Summary: Today we have a follow-up by Paul Schulte to Does corruption limit China’s growth, or pose a threat to its existence? He looks at the leading emerging nations, comparing them to the US and UK at similar point in their evolution to greatness.

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BRIC building: the future of Brazil, Russia, India and China

By Paul Schulte
Institutional Investor magazine, in press
Republished here with his generous permission.

The challenge of the BRICs

The November/December 2012 edition of Foreign Affairs Magazine had an article called “How the BRICS Are Crumbling” by Ruchir Sharma (head of Emerging Markets at Morgan Stanley). The tone of the article seems off the mark. The BRICs {Brazil, Russia, India, China} are slowing because they are trying to slow credit growth due to the links of their currencies to the US dollar. They are trying to slow down credit growth while the West desperately uses zero interest rates to accelerate credit growth. So, the West and the BRICs are operating at cross purposes.

The BRICs countries have dollar-linked currencies, so when interest rates are zero in the West and high in BRICs countries they will be bombarded with capital seeking a higher return. This causes their currencies to appreciate, jeopardizing growth. Or, the BRICs countries must intervene domestically to force banks to slow credit growth as these banks fill with cash. Either way they encounter forces which cause their currencies to rise and credit growth to accelerate. This is a classic cocktail for a real estate bubble and accelerating inflation.

Brazil and China are experiencing the same phenomenon now. Both are essentially trying to slow down their respective economies, although China has been more successful.

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Does corruption limit China’s growth, or pose a threat to its existence?

Summary:   Critics of China often cite its high level of corruption as a limiting factor to its growth, or a possible cause of its fall — or even disintegration. Like so many of American’s views about China, it’s false. Probably a way to diffuse awareness that a powerful rival has emerged on the world stage.  Here we compare China’s corruption to that of America’s past — and present.

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Contents

  1. China today
  2. Late 19th century America
  3. America today
  4. For More Information

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(1)  China today

Is Corruption in China ‘Out of Control’? A Comparison with the U.S. In Historical Perspective“, Carlos D. Ramirez (Assoc Prof Economics, George Mason U), 4 December 2012 — Abstract:

This paper compares corruption in China over the past 15 years with corruption in the U.S. between 1870 and 1930, periods that are roughly comparable in terms of real income per capita. Corruption indicators for both countries and both periods are constructed by tracking corruption news in prominent U.S. newspapers. Several robustness checks confirm the reliability of the constructed corruption indices for both countries.

The comparison indicates that corruption in the U.S. in the early 1870s — when it’s real income per capita was about $2,800 (in 2005 dollars) — was 7 to 9 times higher than China’s corruption level in 1996, the corresponding year in terms of income per capita. By the time the U.S. reached $7,500 in 1928 — approximately equivalent to China’s real income per capita in 2009 — corruption was similar in both countries.

The findings imply that, while corruption in China is an issue that merits attention, it is not at alarmingly high levels, compared to the U.S. historical experience. The paper further argues that the corruption and development experiences of both the U.S. and China appear to be consistent with the “life-cycle” theory of corruption — rising at the early stages of development, and declining after modernization has taken place. Hence, as China continues its development process, corruption will likely decline.

(2)  Late 19th century America

This unflattering comparison of modern China with late 19th century America should not surprise us. Post-civil war America (especially the Gilded Age) America was a horror show. Public and private force was used to suppress Blacks, American Indians, Asians, and workers (see the Wikipedia entry, also for the 1892 Homestead Strike and the 1894 Pullman Strike).  When the cavalry arrived, it was often to help the bad guys (or one of the groups of dueling bad guys, as in the Lincoln County War).

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Why does the US government seek a hotter conflict with China?

Summary:   The long-simmering trade conflicts with China have taken a turn for the worse. Romney’s foreign policy team contains some extreme hawks eager for some form of war with China.  DoD, desperate for threats to justify its existence, has fired a propaganda barrage at us about the cyber-threat with China. And some national security agencies, having exhausted the specious domestic threat from jihadists, turn to China as the only game left to justify their jobs.  The US might single-handed insure that peace does not reign in the 21st century.

Contents

  1. Cyber-threat inflation
  2. Brewing up a Trade War
  3. Looking ahead to the Romney doctrine
  4. Other articles about inciting conflict with China
  5. Other posts about China

(1)  Cyber-threat inflation

The context to these articles hyping China’s cyber capabilities is quite delusional. The US government draws on the world’s largest and most advanced pool of information technology talent, and has almost certainly far outspent any other nation on cyberwar (with so many agencies seeing this as a source of preeminence in the 21st century).  The US (with Israel) have launched the world’s first cyberwar, against Iran (Stuxnet and follow-up rounds). None of these facts interfere with the carefully constructed narrative of US inferiority and victimhood propagated by the government’s engines of propaganda.

Here are some recent samples.

(a) China’s cyberwar“, editorial in the Washington Post, 15 December 2011

(b)  Occupying the Information High Ground: Chinese Capabilities for Computer Network Operations and Cyber Espionage, Prepared for the U.S.-China Economic and Security Review Commission by Northrop Grumman Corp, 7 March 2012 — Executive Summary:

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What you’re not being told about the world economy, but should know!

Summary: The secret key to the FM website’s great forecasting record is that we do only the blindingly obvious, and give no dates. Such as the long forecast of stability for the world economy, to be followed by ugliness. We revisit this again, showing that almost nothing is happening yet in the global economy. All the Sturm und Drang in the news media is exaggerated. There is only one new development, and that has not received sufficient attention.

OECD’s Composite Leading Indicator

Contents

  1. A look at the world using the OECD’s CLI
  2. US unemployment
  3. Europe: slow decline, cohesively
  4. New ECB policy: not a game-changer
  5. New FED policy: not a game-changer
  6. The new element disturbing the global economy
  7. For more information

(1) A look at the world using the OECD’s CLI

The OECD’s Composite Leading Indicators are one of the best economic leading indicators. Perhaps the most reliable, but also reported with the longest lag (yesterday they released the July numbers). It’s been flat since early. During the past 24 months the peak was 101.1 in February 2011. The trough was 100.0 in October 2011; it’s now 100.2.

The July report continues in its boring fashion of late. The tension builds across the globe, but so far remains contained:

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The end of the post-WWII world is not the end of the world

Summary:  Slowly people become aware that the post-WWII economic and geopolitical order dies a little every day.  The transition might be long and difficult.  We can only guess at what lies beyond.  Yet we need not fear these things, as they’re less dangerous than what we survived in the 20th century.  Here we take a broad look at the global situation.

Contents

  1. The old world ends; a new world will be born
  2. Europe
  3. Japan
  4. America
  5. The emerging nations:  China, as an example
  6. No fear

(1)  The old world ends; a new world will be born

We’re in the midst of a transition from the post-WWII era to something new, an evolution in many dimensions.

  1. A the new economic regime:  resolving the excess debt (public and private), managing global capital flows, ending instability in currency valuations.
  2. Geopolitical rebalancing to a multi-polar world of great powers — including emerging nations such as China.
  3. A new energy regime:  navigating thru peak oil to new sources.
  4. A world where 4th generational war becomes the dominant form of armed conflict (e.g., insurgencies, piracy, failed states, al Qaeda & its franchises).
  5. Demographics (the age wave):  aging societies dying gracefully (or not), young societies growing to maturity, and the next fertility collapse following development of a male contraceptive.

How long will it take to complete this transition?  Past ones have been multi-generational (see here for details), and tend to accelerate as they develop.   The last one was painful and took almost 2 generations (1914-1950).  This cycle started (arbitrarily) in 1989 with the fall of Berlin wall (starting global unification, ending the threat of a nuclear firestorm destroying the world), the start of serial US banking crises, and accelerated debt growth.   Guessing, it should be competed by 2040.

The transition will be driven by our responses to the specific crises that are destroying the post-WWII regime.  The choices we make will define the new order.  This post examines only the first two on the list.  For more information:

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Are America and China secret twins? The similarities are striking, but we don’t see them.

Summary:  An oddity of articles about China’s problems is that changing the names often makes them quite applicable to the US.  It’s a weird parallelism between two such different nations.  Even more interesting, China’s critics in America seem unaware of this parallelism (perhaps lost in American self-congratulatory fog), even as they obliviously write about weaknesses America shares with China (magnitudes differ, of course).  Here we see some examples.

Let’s begin with a well-written if conventional critique of China:  “The Myth of Chinese Meritocracy“, Minxin Pei (Professor of Government at Claremont McKenna College), Project Syndicate, 14 May 2012 — Opening:

Political scandals sometimes perform a valuable function in cleansing governments. They destroy the political careers of individuals of dubious character. More importantly, they can debunk political myths central to the legitimacy of some regimes.

That appears to be the case with the Bo Xilai affair in China. One enduring political myth that went down with Bo, the former Communist Party boss of Chongqing municipality, is the notion that the Party’s rule is based on meritocracy.

In many ways, Bo personified the Chinese concept of “meritocracy” – well-educated, intelligent, sophisticated, and charming (mainly to Western executives). But, after his fall, a very different picture emerged. Aside from his alleged involvement in assorted crimes, Bo was said to be a ruthless apparatchik, endowed with an outsize ego but no real talent. His record as a local administrator was mediocre.

Bo’s rise to power owed much to his pedigree (his father was a vice premier), his political patrons, and his manipulation of the rules of the game. For example, visitors to Chongqing marvel at the soaring skyscrapers and modern infrastructure built during Bo’s tenure there. But do they know that Bo’s administration borrowed the equivalent of more than 50% of local GDP to finance the construction binge, and that a large portion of the debt will go unpaid?

Unfortunately, Bo’s case is not the exception in China, but the rule. Contrary to the prevailing perception in the West (especially among business leaders), the current Chinese government is riddled with clever apparatchiks like Bo who have acquired their positions through cheating, corruption, patronage, and manipulation. …

Compare Minxin Pei’s account with these three articles about America.

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What China Wants Us to Understand about China’s Rise

Summary:  Today we have another guest post by Franz Gayl (Major, USMC, retired), in which he provides perspective on one of the most important developments of the 21st century. Correctly understanding and reacting to this is essential for America, if we are to have a successful grand strategy in the 21st century.

China dragon

Image from Forbes

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Contents

  1. Introduction
  2. What China Wants Us to Understand about China’s Rise
  3. About the author
  4. For more information

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(1)  Introduction by Franz Gayl

On 9 September 2011 the FM website republished Will China become a superpower?, with articles by by Minxin Pei (Prof of Government at Claremont McKenna College; his latest book is China: Trapped Transition) and Young J. Kim (former Captain in the US Army, currently a PhD candidate at Korea University in Seoul).  It’s worth reading in full.

This widely accessed piece has since benefited from extensive expert critique, a discussion that is still on-going in the comments. The discussion has provide an education for me on various aspects of China’s observed course and general historical precedents. I am neither a historian nor an economist, and there is little that I can add to those expert comments.

However, one voice that could be added to the discussion that began in 2011 is a definitive Chinese government position on China’s rise. During my development of a wider-ranging ICAF research paper in 2005 – 2006, I was permitted to interview Consular Jia Xiudong at the Embassy of the People’s Republic of China in Washington, D.C. where he then served. The paper in which the interview is nested has been posted on the FM website. Unfortunately, the length of my paper was as a major flaw, and the interview was effectively buried within it out of sight. Yet, Consular Jia’s observations in that interview would appear critical for the balance of FM’s China discussions today.

The interview is certainly dated in that it was conducted six years ago. This will be seen as many of the contemporary events discussed from that period have evolved or changed in quantitative scope. One cannot assume exactly what the Chinese would say today without conducting another interview in 2012. At the same, looking at the contents and given consistency-focused Chinese government strategic communications, it is unlikely a 2012 interview would yield much different positions, especially on critical themes.

My questions were wide-ranging and submitted to the Embassy almost two months in advance of the interview. Consular Jia was surprisingly candid in his detailed, Chinese Government approved answers to me. The interview was reviewed and approved by the Chinese again after I typed it up my notes so as to constitute a joint understanding of the 2006 interview contents shared by author and the Chinese Government in the published paper. I contend that its contents are overwhelmingly what China wants us to understand about China’s rise even today.

This is especially true when it comes to the topic of Taiwan and its employment by the U.S. defense industry as a justification for increased military expenditures focused on containing China. Taiwan is a salient topic today as industry and military interests are, according to public sources and media reports having significant success in influencing the Congress and Administration decision makers in this regard.


(2)  What China Wants Us to know about its Rise

Excerpt from
Realism and Realpolitik – Setting the Conditions for America’s Survival in the 21st Century

By Franz Gayl (Major, USMC, retired)
His thesis at the National Defense University
Industrial College of the Armed Forces research paper
June 2006

(a) General Introduction

China is committed to peaceful domestic development in the context of globalization, and seeks to contribute internationally as a partner in a multi-polar world. China’s leadership is also faced with great domestic challenges, as the people of China have different concerns and interests throughout society.

On the international front, China is committed to peace and cooperation. In terms of U.S.-Chinese bilateral relations, misunderstandings have arisen that cause Americans to question Chinese intentions, and the implications of her rapid development. Americans ask, is China a partner to be engaged or a threat to be contained. These misunderstandings can best be mitigated through franker bilateral communications on sensitive issues, including perceiving China and the U.S. through the eyes of the Chinese themselves, i.e. standing in the Chinese shoes. It also includes prioritizing the self interests of our nations as core, vital, and important, and finding the commonalities between them, i.e. the purpose of this interview.

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