And Pray, Sir, What Does Italy have to Offer?

What has not been said about President Obama’s failure to deal with Pyonjang and its ballistic missiles? That he did not have what it takes. That he was hesitant. That he was unsure of himself. That he was weak, weak, weak. Too weak for this particular job, too weak for holding the presidency in general.

After January 20th 2017, we were told, all that would change. A new and decisive, albeit mentally somewhat disturbed, president would take over in the oval office. He would not allow his hands to be tied by political correctness. To provide advice, he would surround himself not by nancy-pancy Department of State types but by tough, no-nonsense, former generals (including one who had been nicknamed “Mad Dog” by his fellows). He would disregard diplomatic niceties. He would call a spade a spade, and a punk a punk. And he would take action, decisive action. Including, if nothing else worked, military action.

Two thirds of a year have passed. Kim-Jong un has continued to “provoke the world” by testing his ballistic missiles. Here it may be worth mentioning, in parenthesis, that there is really no reason why North Korea, a sovereign state that has long been under siege, should not own and do what other states, the U.S included, have owned and done for several decades. Also that, for a small state like North Korea, virtually the only way to defend itself against the great bully, the U.S, is to acquire nuclear weapons and their delivery vehicles.

After each test headlines were broadcast or printed, screaming that “a crisis” was at hand. Each time “top level” conferences were hurriedly organized and held. The armed forces of several countries were put on alert, and militarily units made to maneuver as close to the demilitarized zone separating the two Koreas as safety would allow. And then, nothing except, earlier this month, yet another round of sanctions that everyone knows will achieve nothing.

The immediate reason why so little has happened, of course, is North Korea’s armed forces. By using his conventional artillery Kim-Jong il could inflict enormous damage on Seoul. By using his ballistic missiles, assuming they carry nuclear warheads, he could inflict much greater damage still on South Korea as well as Japan, a key U.S ally, and perhaps at least parts of the U.S as well.

Faced with nuclear weapons in particular, no wonder President Trump, for all his professed love for grabbing women by the genitals, has found himself castrated. A fate that often overcome many other rulers, both American and foreign, over the last seventy-two years. And one which, almost regardless of any developments that may still take place in the field of anti-ballistic missile defense, is likely to be shared by many future ones as well.

In- and out of the administration, quite some people put their hope in China. Beijing, they say, has what it takes to bring its troublesome client to heel. By applying serious economic sanctions such as North Korea, which has few other major trading partners, could hardly survive. Or massing troops on the border and make them engage in maneuvers. Or even launching a limited strike (limited it would have to be, or else it might lead to a nuclear exchange). Briefly, anything that might pull Washington D.C’s chestnuts out of the fire for it.

Sounds nice. But what could the U.S offer China in return? Several options exist. Perhaps a withdrawal, partial or complete, of its troops from South Korea. Or perhaps a loosening of ties with Taiwan (instead of selling it weapons, as Trump has recently announced he would do). Or making concessions in the South China Sea, an area which China, not without some reason, sees as historically its own and strategically vital to its future development.

So why doesn’t the U.S, with Trump at is head, pursue this option? Presumably there are many reasons; presumably one of them is that Trump, as a self-declared He-man, cannot afford the damage to the image of himself he has tried so hard to cultivate.

All this reminds me of an old story told about another self-declared he-man, Benito Mussolini. In November 1922 the newly appointed, young—he was just 39 years old—Italian prime minister went to Territet, near Montreux in Switzerland. There he, the son of a small-town blacksmith, one time day laborer, agitator, and recent goon-in-chief met with British foreign secretary Lord Curzon, 24 years his senior. As ancient, as well-heeled, as courteous, and as flinty a representative of Britain’s ruling aristocracy as there used to be.

Mussolini opened by discussion by announcing that he had come up with “a new principle in diplomacy: nothing for nothing.” “Very interesting, very interesting,” Curzon is supposed to have answered. “And pray, Sir, what does Italy have to offer?”

Guest Article: Where China Is Headed

by

Iliya Atanasov*

India on the Rise?

The trend is your friend, but all trends come to an end. China’s resurgence is no exception to this time-tested maxim. Rising powers tend to get mired in multi-decade crises, often never to re-emerge. Such is the nature of the world and of human hubris. Yet, the consensus – including much of China’s own political and intellectual elite – gleefully extrapolates from the country’s meteoric rise. Just about everyone appears certain that within a decade or two China will surpass the US economically and mount a credible challenge to American military dominance in the Pacific. Reality and history, however, beg to differ. The foreseeable future is obvious: China’s current path ends in India.

To be sure, a quarter-century of breakneck economic growth has made China the envy of the world. Some half a billion people found new homes in its mushrooming cities. From skyscrapers and bullet trains to satellites and fighter jets, China quickly adopted just about every advanced technology. The country seemingly sailed through the global financial crisis of 2008-2009 as if it was happening on a different planet. More trillions of dollars of foreign ‘investment’ poured in at the tail end of a multi-decade industrial and real-estate boom. Invincible China’s omniscient leaders could make no misstep.

This mythic ascent to global pre-eminence has been just that – a myth. The reality is much less lustrous. Since the late 1980s, the state-controlled banking system has undergone several wholesale bailouts. China’s rulers blazed new ground in mathematics and statistics as the total of provincial GDPs quite often surpassed the central government’s nationwide figure. In leaked diplomatic cables, then-future Premier Li Keqiang was quoted as smiling that GDP numbers are ‘for reference only’. Yes, China’s economy has grown spectacularly, but probably much less so than widespread perceptions. And it happened on the wings of the most epic debt binge in human history. Years and decades of uncorrected malinvestment have inflated colossal bubbles in stocks, real estate and industrial capacity.

As the facts become too loud to ignore, the mainstream groupthink has struggled to find a counter-narrative. Chinese apparatchiks and foreign pundits peddled ‘soft landing’ as a substitute for the unravelling myth of economic miracle. But years of empty talk about rebalancing the economy have only added up to more – much more – of the same. China’s growth story was mostly based on debt-funded fixed investment: plants, real estate and infrastructure.

By 2014, fixed capital formation remained stubbornly anchored at about 45% of GDP, according to the government’s own statistics. In 2015, China still accounted for 57% of global cement output. The much-touted shift away from investment did not materialize. The country produced 30% more cement in the past three years than the US did in the past 116 years

Here is the problem. Any ‘rebalancing’ would require the instantaneous transmutation of tens of millions of semi-literate factory workers into computer programmers. Or laying them off. Neither is feasible, so Beijing has had to backtrack sheepishly every time real reform was attempted.

Every move to put the brakes on the rabid debt inflation that keeps China’s multiple bubbles from imploding has sent shockwaves through its banking system and the global economy. After housing showed signs of slowing, Beijing ushered in a stock bubble by allowing mom-and- pop day traders to lever up to the hilt. When that bubble burst, the prospect of social unrest forced a ham-fisted government takeover of the securities markets. Reports have surfaced that the authorities are busy inflating still other bubbles – this time in venture capital and commodities. Meanwhile, official statistics say fixed investment grew over 10% last year. Some rebalancing indeed.

Historically, explosive growth has invariably led up to a protracted and painful crisis period to correct for its excesses. China today is deeper in debt than the US at the outset of the Great Depression. Some recent data put Chinese bank ‘assets’ alone at 367% of GDP, up from 196% in 2007. A bank’s asset typically is someone else’s debt. And it is anybody’s guess how much more unserviceable debt festers on the balance sheets of local governments, state-owned enterprises and the shadow-banking sector, which collectively financed much of the fixed-investment rampage. The People’s Bank of China tallied new ‘total social financing’ at a neat $1 trillion just in the first quarter of 2016. Japan, with its measly 450% debt-to- GDP ratio, must have long been left in the dust by all-conquering China.

What China is experiencing is neither a rebalancing nor a landing, hard or soft; it is a crash. If American experience is any guide, the peak-to- trough contraction in China could easily reach 40% of GDP. It took the US stock market a quarter-century, a world war and a baby boom to recover to its 1929 levels.

Large-scale economic collapse, like market crashes, is not a singular event but a process that unfolds over many years. China’s economy has long been precisely this kind of slow-motion train wreck. And the 2015 stock-market plunge dealt a fatal blow to the soft-landing narrative. Hot money – foreign and domestic – rushed for the exits. Amid plummeting foreign trade, Beijing imposed ever more stringent currency controls while devaluing the yuan, thereby feeding an all-too- familiar vicious circle of capital flight.

According to consensus estimates, some $800 billion fled China in just a year. Chinese looking to park their money out of the country have caused epic property bubbles in major global cities. China’s debt problem is a threat not merely to its economy but the entire world. Yet, in terms of the country’s long-term prospects as a global power, the debt overhang pales in comparison to the demographic and environmental crises that are already baked in the cake. As a consequence of the one-child policy, ever-smaller cohorts with ever-greater job expectations are entering the workforce. China’s higher-education bubble has produced a generation demanding well-paid desk jobs but with even fewer marketable skills than its American counterpart. Meanwhile, millions of illegal immigrants from neighbours such as Vietnam and Burma already toil in China’s factory towns, as local Chinese become unaffordable for manufacturers to employ. This is Japanization writ large.

And then there is the aforementioned concrete. The permanent smog screen over the industrial heartland is one of the country’s lesser environmental challenges. Life in the cities is prohibitively expensive for many migrant workers. As they age and as industrial growth slows and reverses, millions of unlicensed migrants will have to head back, but may not like what they find at ‘home’. The Chinese have literally cemented over large swaths of what used to be agricultural land mostly populated by subsistence farmers.

There is no telling how much heavy metals and toxic chemicals have been dumped into China’s soils and aquifers. The effects of this yet-unfathomed ecological calamity will unfold for decades, impacting everything from productivity to healthcare costs in an already aging society.

Against this backdrop, expectations that China will inevitably subvert US dominance are premature. Granted, economic troubles are not much of an obstacle for nationalism and militarism. But China’s nationalist resurgence and recent maritime adventures are a sign of weakness rather than strength. Careening away from Maoism and towards Leninism underscores the leadership’s acute awareness that the economic story will not last much longer as a source of legitimacy for one-party rule. Such concerns are behind President Xi’s taking direct command of the army. Chinese elites may well decide to inflate a nationalism bubble, just as they encouraged stock-market speculation to deflect attention from real estate. Nationalism is both cheaper and more sustainable.

But then there is the geopolitical context. On the other side of the Himalayas, another giant is awakening from its stupor. India’s economy is much smaller than China’s and shares many of the same pollution problems. But India has three great strategic advantages in the ‘long game’ that China is playing. India has a much younger population and more than twice the population growth rate. It will surpass China over the next decade or two as the world’s most populous country. In addition, India is much closer to the Persian Gulf, where the planet’s most important energy source is concentrated. When it comes to petroleum, India literally stands in the way of China. It also has a tradition of worryingly friendly relations with Japan, which can be a source of capital if an alliance is pursued more actively. Finally, India’s government and economic system are decentralized. In a decentralized economic system, mistakes are more likely to remain localized and less likely to be perpetuated by large-scale bailouts. This is why India has been developing in fits and starts, but also why its growth will be much more sustainable than China’s.

With relatively low levels of debt, India’s explosive surge is just a matter of when. The talk of China’s economic decline does not even begin to capture the size and scope of the global impact. The sheer scale of economic mismanagement puts to shame all previous bubbles, so it is hard to say whether the world as a whole, not just China, will be able to dig itself from this hole without major war. Yes, China’s odds of recovering 20-30 years down the line are not terrible, but in the meantime the new rising power in Asia is going to be India. Per capita, India’s economy is still in its infancy. But watch out – they grow up fast.

*Iliya Atanasov is founder & CEO of moneyfact.org and senior fellow on finance at the Pioneer Institute for Public Policy Research in Boston, Massachusetts.

Where China Stands

150610-S1609-20-Chinese-Brass-Seat-Guan-Gong-Yu-Warrior-God-font-b-Dragon-b-fontHad I posted this article even as little as eighteen months ago, the answer would have run somewhat as follows. Ever since Deng Xiaoping took over in 1979, China’s star has been on the ascendant. A backward, relatively small, economy has transformed itself. Achieving historically unprecedented growth rates, it is now the second largest in the world (in terms of GDP) and poised to become the first at some time between 2020 and 2030.

As China’s economy expanded, so did its armed forces and its foreign policy objectives. China is developing modern combat aircraft. China has started building a second aircraft carrier. China’s latest cruise missiles have the range to challenge the ability of the American Navy to assist Taiwan if necessary. China is actively seeking to dominate the huge area known as the South China Sea. And so on and so on. Such being the situation, the only question is how to manage Beijing’s spectacular rise; by seeking to “integrate it into the international system” (whatever that may mean) or by actively opposing it by every means short of major war.

A year later, what a change! By the headlines, Chinese economic growth has slowed to “only” 6.9 percent, the lowest in two and a half decades. The stock market is falling. The country’s debts threaten to overwhelm it. Thanks to the (recently abandoned) one child policy, the future of its labor force is in some doubt. China may have reached the point where Japan was back in 1990 (at that time Japan accounted for 10 percent of the world’s GDP; since then its share has been reduced by half). This state of affairs may cause Beijing to slow the pace of armament and moderate its foreign policy. Or else, to the contrary, it may force the leadership to become more belligerent by way of diverting its people’s attention from the country’s internal problems.

What is it going to be? No one knows. So here are some factors which will determine the outcome:

  1. China’s economic growth may no longer be as fast as it used to be. But it still maintains a pace that should be the envy of practically any other country on earth. Partly perhaps as a result, there are currently no signs that the Communist Party’s hold on power is weakening or that a revolutionary situation is being formed.
  2. China’s national debt is equal to 64 percent of GDP. Less than that of Germany (73 percent), the UK (82 percent), the US (104 percent), and Japan (216 per cent). In other words, among the world’s five largest economies China is the least indebted one.
  3. Unlike Japan in 1990, China is far from being a “mature” economy. As of 2014, 54 percent of its population lived on the land. That figure is comparable to those of backward countries such as Albania, Azerbaijan, Cameroon, and, towards the end of the alphabet, Syria. In other words, there still is plenty of room for expanding the industrial labor force, should growth resume.
  4. China has more or less active border disputes with every one of its immediate neighbors. This makes it hard for the leadership to focus on a single opponent and direct the country’s military policy accordingly. The more so because, over the last few years, fear of China has caused a growing number of its neighbors to strengthen their ties with each other as well as with Washington DC.
  5. China’s economic development is absolutely dependent on imported energy and raw materials. But for them, the country would very quickly revert to its pre-1979 state. However, geography has placed China in a position where it is separated from the Pacific by a chain whose links are formed by Korea, Japan, Taiwan and the Philippines. To make things worse still, its only access to the Indian Ocean leads through the Straits of Malacca. Cutting off the sea lanes in question would be relatively easy.
  6. Given these circumstances, in any major future armed conflict designed to prevent China from changing from a regional power into a global one the country’s navy would have to play a major role. However, though China has one aircraft carrier and has started work on another, both are, in reality, only half carriers. Even when the second one is completed the two together will not represent much of a challenge to the US Navy, which has eleven full size ones.
  7. A factor which is hardly ever mentioned in this context, but whose importance in  shaping the future will be critical, is the nuclear balance. At the moment, China’s nuclear forces, as measured in terms of the number of missiles and delivery vehicles, are no match for those of the US. This is very likely to remain so in the foreseeable future. But no matter. Unless someone in Beijing, or Washington DC, goes completely bonkers, fear of escalation, which may end in nuclear escalation, will prevail—just as, among nuclear countries, it has invariably done over the last seventy years.
  8. The same logic will govern China’s relations with its two nuclear neighbors, Russia and India. The former has the ability to wipe China off the map. The latter can tear off an arm (to use the old French phrase). Border incidents with both countries have taken place in the past and may well do so again. But large scale war? Hardly.

Final prognosis: Current talk of China’s economic decline seems to be exaggerated. Growth will resume, though probably not at the rates all of us have become familiar with over the last thirty-five years. Partly building on its economic power and partly moved by the need to sustain that power, China, like any other country throughout history, will continue to seek to realize its foreign policy objectives and build up its armed forces. It will not, however, risk large sale war either with its most important neighbors or with the US.

Arms and the Men

The annual report of the Stockholm International Peace Research Institute—which in spite of its name, is a strategic studies think-tank much like the rest—makes fascinating reading. Between 1991 and 1998 global defense expenditure fell. Since then it has been rising slowly but steadily; until, calculated as a percentage of global output, it is now as high as it was during the last years of the Cold War. Much the greatest single spender is the U.S with $ 682 billion in 2013. Next come China (166 billion), Russia (91 billion), the UK (61 billion), Japan ($ 59 billion), France ($ 59 billion), Saudi Arabia (58 billion), India (46 billion), Germany (46 billion) and Italy (34 billion). Together these ten countries account for three quarters out of the global total of $ 1,756 billion. The rest is shared by the remaining 184.

Qualitatively speaking, the US remains in the lead. Outspending China 4.1:1, it is the only global power, unique in its ability to intervene anywhere it wants. America’s air force, navy, and network of command, control and communications are unrivalled. So are its capabilities in such critically important fields as intelligence, space warfare, electronic warfare, and cyberwarfare. However, there are problems. First, a considerable part of the US defense budget—as much as $ 100 billion in 2013 alone—has been wasted fighting useless, hopeless, wars in Iraq and Afghanistan. Second, as the national debt balloons, the budget is expected to shrink. These factors have caused US official doctrine to plan for just one regional war at a time, rather than two as used to be the case during the Clinton years. Judging by the recent refusal of Congress and people to intervene in Syria, indeed, it seems that America has lost its appetite for waging any war at all. By contrast, Chinese military spending has been rising and is expected to rise further still. Already today, calculating in terms of parity purchasing power, the difference between it and the U.S shrinks to 1:2.9.

The defense-related map of the world has also been changing. Throughout the Cold War the most heavily armed region was Europe, the “Central Theater,” as the Americans used to call it. It was there that both NATO and the Warsaw Pact concentrated their armies. The collapse of the Soviet Union ended that situation, causing the percentage of GDP most European countries spend on defense to go down. However, if trouble in Ukraine continues and spreads, then surely NATO’s East-European members will feel threatened. A considerable increase in European defense expenditure, aimed primarily at buying electronics, drones and anti-missile defenses, will become inevitable.

Much worse for Russia (and the world), should the Ukraine be engulfed by the war of all against all, as it well may, then Putin may have no option but to send in his forces. Militarily speaking, so weak is the Ukraine that Russia will have little trouble overrunning it. But what comes next? As the Soviet and American campaigns in Afghanistan and Iraq have shown only too vividly, in the modern world holding on to an occupied country is anything but simple. Just as the failure in Afghanistan contributed mightily to the disintegration of the Soviet Union, so failure to gain a fairly rapid and fairly bloodless victory in the Ukraine might have dramatic, even existential, consequences for Russia.

Another flashpoint is Southeast Asia. For the time being China is enjoying what may be the greatest economic boom in history. Aware that peace is vital for the continuation of that growth, it has been careful not to provoke is neighbors too much. It even seems content to rein in some of the more crazy initiatives of its North-Korean protégé and play down its long-standing conflict with Taiwan. On the other hand, growth has made it much more dependent on international trade. That explains why it has been building up its navy, including two small aircraft carriers. Beijing also has unresolved border disputes with most of the surrounding countries. Including, above all, the question of sovereignty over what it pleases to call the South China Sea and any riches it may contain. The outcome has been a re-shuffling of alliances and a great increase in defense spending all around.

And how about the Middle East? In recent years, the region has been losing some of its importance. The main reason for this is that fact that, thanks to the discovery of vast gas reserves and new methods (“fracking”) for recovering both gas and oil, America’s dependence on the region is diminishing fast. Conversely fear of an American withdrawal explains the enormous Saudi figure. Yet the Saudis’ enemy, Iran, only spends about $ 6.3 billion (2012 figure) on defense. We may perhaps assume that these figures do not include either the Republican Guard or the nuclear program and that real spending is twice as high. Even so, the country is hardly the juggernaut it is often made out to be.

Finally, how about my own country, Israel? The country’s defense expenditure is around $ 16 billion per year. Whether that sum includes some 3 $ billion annually in US aid is not clear. Technologically Israel’s superiority over all its potential enemies is overwhelming. Even more important, over thirty peaceful years have passed since the Camp David Accords. Terrorism in Egypt seems to be under control, more or less. Shifting to Lebanon, Hezbollah was taught a lesson in 2006 and since then has shown little inclination to challenge Israel as it used to. The Syrians continue to butcher each other with the kind of ferocity only Arabs seem able to muster and, for the time being, represent no threat. Jordan resembles Egypt in that it is at peace with Israel and is not as unstable as many people have feared in the past. Iraq no longer exists. For all the bluster of its leaders Iran is much less of a threat than Mr. Netanyahu and others claim—on this, perhaps, in some future article.

All in all, and limited terrorism apart, Israel’s defense seems better assured than at almost any time in the country’s history. Unfortunately, as Israelis and Palestinians continue to hate each other and kill each other on occasion, the prospects for peace do not look good. The Palestinian Authority seems unable to accept an agreement that will not include provisions Israel cannot accept, including, above all, the so-called Right of Return. As for Israel, for almost half a century it has zig-zagged. Whenever things were quiet Jerusalem argued that there was no urgent need to negotiate. Whenever they were not it said that negotiations were impossible.

When, if ever, will the cycle be broken? Not under Netanyahu, whom many in Israel and abroad consider both a liar and a coward. Not under some eventual left-wing government which, barring some miracle, will be weak and ineffective. What is needed is a new Begin a new Sharon, a new Olmert even; but of them, there is no sign.