Today, Russia is hosting a summit of the BRICs, the emerging markets that seem to have only one thing in common, namely to have been lumped together by Goldman Sachs in 2001. The countries will discuss the global financial architecture and  their role in it. There’s lots of talk about them in the media. Let me pick up on two articles published in  Business New Europe today (subscription required), of which some abstracts below.

A first article reports on a map that was just developed of the actual global integration (investment, trade and migration) of the BRICs with the rest of the world:

“Consulting company Maplecroft has just produced the Emerging Powers Integration Index (EPII), which tries to go beyond the usual comparisons of GDP growth or trade and assesses just how dependant the rest of the world already is on the BRICs.

Maplecroft is a risk, responsibility and reputation specialist [...]. It produced a series of six indices and maps covering the integration of Brazil, Russia, India, China and South Africa with the global economy that are composites of data on world trade, foreign direct investment (FDI), portfolio investment and migration set against more than 150 countries. The resulting map is painted shades of red where dark red is “extremely integrated with the BRICs” down to the light pink of “low level of integration.”

(…) The first thing that the map shows is how the integration process is still in its early days. The list of countries most integrated with the BRICs is topped by: Angola, Congo, Yemen, Singapore, Kazakhstan, Kyrgyzstan, Mongolia, DR Congo, Malaysia and Liberia. This is not exactly a “Who’s Who” of global power brokers, however, the map also shows that the integration with the BRICs is already on the radar for many developed countries.

Maplecroft’s Rebecca Jackson, who put the map together, says that the importance of each of the BRIC countries has already moved beyond its borders and they already dominate their respective regions. Russia is already a key player in emerging Europe and Central Asia and, unsurprisingly, those countries that lie in the nexus between Russia and China – namely Kazakhstan and Mongolia – are extremely integrated with their two BRIC neighbours. However, going the other way, most of Central Europe, right through to Germany, are also highly integrated with Russia. Trade relations are an obvious dependence, but less well acknowledged is that for the last decade or so Russia has been a net exporter of capital, investing far more in the countries of the “near abroad” than is invested in it by international companies. And, more recently, Russia has been investing further afield – the deal to buy Germany’s Opel carmaker being the most recent example. Like it or not, Russia is already a significant player in the European economy.

Asia is already tightly integrated around China, with Singapore, Mongolia, Malaysia, Thailand and Vietnam listed among China’s 20 most integrated countries. Australia is also “highly integrated” again because of Chinese exports. All these countries have been roped into the Chinese production machine, assembling component parts of manufactured goods, which are then exported to the US and Europe.

But the map also shows that integration has already moved on from them being simply big in their own neighbourhoods. With its rich mineral resources and recognisable problems, Africa has been the first port for both China and Russia after they leave their backyard. Congo, Sudan and Angola are especially advanced where both Russia and China have made big investments. “Resource rich countries and export destinations. Countries all across the globe are being drawn into economic relationships with the BRICs, particularly China and India. The index shows that integration among the BRICs themselves is as yet a smaller trend but an emerging one,” [...]

One of the more surprising features of the map is the fact that the US and UK both have the red of “medium” integration with the BRICs, but the countries of China, India and Brazil are the light pink of “low” integration. “Actually, the USA is ranked as 61st most integrated, while Russia is ranked 79th most integrated,” says Jackson. “That the USA is reasonably integrated reflects various factors. One important one will be the fact that the USA imports a lot from China (and it comprises a significant proportion of USA’s total imports), while it exports a smaller amount to China. Similarly, Russia imports quite a lot from China.”

Another reality that needs to be emphasized is that of all the BRICs, the real riser is China. And this is what Markus Jaeger from DB Research has been highlighting:

The “rise of the BRICs” thesis has received much criticism – some of it deserved, some of it undeserved. There is little doubt that major change is afoot, but the thesis is somewhat misleading, as it discounts what will be the most momentous development of the first half of the 21st century: the rise of China.
years. Over the past decade, real GDP growth averaged 10% in China, 7% in both India and Russia and 3.3% in Brazil; and China will continue to grow faster than its peers. A high savings rate, a low level of urbanisation, low per capita income (considerable “catch-up” potential) and, importantly, a successful export-oriented, manufacturing-based development strategy underpinned by strong investment in infrastructure and education will combine to sustain China’s superior economic performance. China will also soon become the world’s largest economy (by 2025-30). Albert Keidel (until recently at the Carnegie Endowment for International Peace) even projects the Chinese economy to be twice the size of the US economy by the middle of this century! (…)

China will be facing challenges, ranging from gradually deteriorating demographics and questions about environmental sustainability up to potential international trade frictions. Sooner or later economic growth is set to slow from current levels. But the short and medium-term outlook remains favourable relative to the other BRICs and, of course, even more so relative to the advanced economies. Investment ratios in Brazil remain very low. Russia is overly dependent on hydrocarbons and is facing very adverse demographic developments. India will have to overcome domestic opposition to growth-enhancing and growth-sustaining economic reforms and it is not clear yet that the leap-frogging “services revolution” will turn out to be an economically and politically viable development model. For all these reasons, China will continue to outperform the other BRICs over the next couple of decades.

None of this is meant to suggest that the “rise of the BRICs” is not a significant development. It is, but it pales by comparison with the rise of China. China is the 800-pound “panda” in the room.

On the historical day of Obama’s inauguration as the first African-American and most rhetorically talented US president, the United States braces itself for a one trillion US$ stimulus package and years of excessive government debt, in the name of a Keynesian policy approach to stimulate demand. In this context, the analysis of Finance Professor Michael Pettis comes in very handy. Pettis, who runs a brilliant blog on Chinese finance, is based in Beijing and has written extensively on the global imbalances that have now started destabilizing the world economy. Among others he analyzed the “chimeric” global macroeconomic imbalance based on an excessive current-account surplus supporting China’s export-oriented economy vs. an excessive deficit fuelling the US’s recent consumption and private borrowing binge. In an article in the Financial Times back in December, he warns:

“There are three ways the system can adjust. One way is for the underlying global imbalances to remain in place. (…)”

“The second way is for trade-surplus countries to engineer sharp increases in domestic consumption, most likely though massive fiscal expansion, that match the decline in US household consumption and so reduce the overcapacity problem. (…)”

But he argues that both are either not feasible or not likely. Therefore:

“That leaves one other way to adjust – a sharp decline in global production, with massive factory bankruptcies to end overcapacity. The burden of the adjustment will fall on trade-surplus countries, unless trade-deficit countries are willing to absorb a large part of it.”

Pettis takes his argument further in a longer article in the current edition of the Far Eastern Economic Revue (subscription required). He likens today’s China with the US in the 1930s when the Depression set in. The US was the world’s main supplier of capital, but, as a response to the crisis unleashed in 1929, contracted consumption and sought to support production (i.e. supply), not least through protectionism. This was a recipe for disaster. This is also why Keynes developed the view that in a slump, economies must inject money into the economy to keep demand afloat. But in today’s case in the US, Pettis thinks that:

“This is not what Keynes would have recommended. If declining U.S. private consumption is met with increasing public consumption, the world will simply continue playing the game that has already led into so much trouble. The only difference would be that instead of having one side of the global imbalance accommodated by private overconsumption and rising debt [as has been the case so far], it would be accommodated by public overconsumption and rising debt”.

Pettis fuerther adds:

“Might China and smaller Asian countries repeat the U.S. mistake of the 1930s? Perhaps. Beijing already seems to be in the process of defending its ability to export overcapacity. Although there has been an attempt to boost fiscal spending, most analysts argue that this so far has been too feeble to matter much. On the other hand it has tried to protect an and strengthen its export sector by lowering the financing costs for producers and have little impact on consumers.”

Outlook?

“In order to make the transition [to a more balanced global economy] workable and avoid trade friction, the world’s major economies must engineer a joint program of fiscal expansion”

But:

“The problem is that U.S. (and European) demand contraction is occurring at a shockingly rapid pace. There is a real risk that the adjustment process in China will careen out of control [...] If major economies focus only on domestic adjustment, China will almost certainly choose the path of defending its ability to export overcapacity onto the rest of the world, while the trade-deficit countries [i.e. mainly the US] will discover the expansionary impact of trade constraints [i.e. protectionism]. In that case it is hard to imagine how China and the world can avoid disaster.”

It is often said that the governments of the big authoritarian states of the day, namely Russia and China, have struck an informal bargain with their population: economic growth and rising income levels delivered at the price of relinquishing political freedoms. As long as China was growing at double-digit levels and Russia surfing on an unprecedented oil boom, this bargain seems to have worked – when one discounts the rising numbers of riots in rural China in the last years. Now that the Credit Crunch is hitting these markets, the big question marks are not only on these countries’ growth rates next year, but more worryingly on their politics. Optimists would say this crisis is an opportunity for political change and democratization. Pessimists would argue that the regimes will cling to power, even if it is at the price of rolling back market-friendly reforms. How will popular discontent be vented? How will the authorities react? These are the big questions for 2009. Some developments are already in the making:

China. China’s growth prospects for 2008: the IMF has not yet issued an official revised growth forecast for China. Its Managing Director is said to have estimated a growth rate at about 5%, but, according to its External Relations department: “we don’t have a new number for China yet. We will have a new number in January.”  The authorities however have revealed a few symptoms of panic. The sheer size of the fiscal stimulus package proposed by China reveals a psychology of averting excessive immediate damage by throwing money at a more profound problem of legitimacy. The shrill tones by the government as a response to foreign criticism of its policies in Tibet – leading to China cancelling a bilateral summit with the EU because the current holder of the rotating EU Presidency, French President Nicolas Sarkozy, was due to meet the Dalai Lama, can also be interpreted as a sign of excessive nervousness on what comes next politically in China. Such a move can further be seen as a good way of feeding into nationalist sentiment at home in a moment of internal crisis: the earthquake this spring and the recent baby milk scandal in China have fed into the undercurrent of discontent that is making itself felt. Earlier this month, a group of Chinese dissidents and critics signed the Charter 08 document. It is a document calling for nothing less than, I list: “a new constitution”, “separation of powers”, “legislative democracy”, “an independent judiciary”, “public control of public servants”, “guarantee of human rights”, “election of public officials”, “rural–urban equality”, “freedom to form groups”, “freedom to assemble”, “freedom of expression”, “freedom of religion”, “civic education”, “protection of private property”, “financial and tax reform”, “social security”, “protection of the environment”, “a federated republic”, and “truth in reconciliation”. It was signed by several thousand people, often from the intelligentsia, the press, and even some local and party authorities. Several people were arrested for this document that was spread online and often signed online, despite China’s “Great Firewall”. The documents’ main author, Liu Xiaobao is still reported as missing. (see here in English. Here in French). In the meantime, a big return of the state in the economy cannot be ruled out. It looks like 2009 could be make or break time for China.

The same holds for Russia. I recently met Andrei Illiaronov, a former adviser to President Putin, who left office in the aftermath of the Yukos affair and who is now working partly for the US’ libertarian Cato Institute . His comment I requested on current economic policies in Russia was that the authorities are taking advantage of the situation to set up an “economic dictatorship”. Indeed the government has stepped up intervention in the economy as companies being bailed out by Russian reserve money (here more) are also subjected to closer Kremlin scrutiny. Most recently, a jewel of Russia’s industry, Norilsk Nickel, has  a new Kremlin appointee as chairman. But the government is starting to realize that its reserves (initially at almost USD 600bn) might well be depleted soon (200bn have been used already), at a moment when there is no sign that the massive injections have had any positive effect so far. Russian people are set to be badly hurt by the current crisis. According to bne  : “Between October and November some 80,000 Russians suddenly lost their jobs, according to the Russian Ministry of Health, and analysts predict that the dole will surge from 6.1% to 7% of the population by the end of the year. Meanwhile, a recent survey by the Levada Centre found that one-third of Russians have outstanding debts and 11% are trying to pay these debts off just as their household income is falling, thanks to the crisis.” Prospects for 2009 are bleak. An analyst at East Capital publishing on the bne site wrote: “The extremely rapid oil price fluctuations in 2008 make it very difficult to forecast where growth will end up in Russia in 2009. But if one assumes an average oil price around $50 per barrel for 2009, growth should be around zero.”  The number of protests against government measures and the regime has been rising. These were met with blunt repression. Earlier this month, a gathering of opposition groups led to mass arrests. The latest case has been against the raising of import tariffs on cars by the authorities to protect the domestic car industry. The protests have been spreading, while the government fights back. The government has introduced a controversial bill on national treason….

It looks like in 2009 we will not be spared a few nasty developments in the authoritarian emerging markets. How long will the unlikely equation “market economy + political dictatorship = wonderful wealth outcomes for the population” continue to last? Let’s start to brace ourselves for a round of political and economic instability.

The quantity of ink and html-text produced on the current financial crisis is too phenomenal to be mastered.

However, what one gathers, very roughly, is this: The initial ingredients were a real estate asset bubble, financial innovation, easy money triggered by abundant mainly Chinese global liquidity and lax monetary policies. Banks bought each other’s new incomprehensible and toxic sub-prime assets. When the bubble burst, banks stopped lending to each other – leading many to reach the bankruptcy tipping-point. Add to this a pinch of heavy speculation, and you’ve got the hell breaking out of the seemingly all-powerful world of finance. All this originated in the US, but now everyone is hit. When banks go bankrupt, the rest of the economy drowns with them, as credit dries out. Now governments are playing firemen and bailing out left, right and centre.

We’ve been living above our means, in a chimerical world of bubbles. The entire financial market is now punishing everyone for previously unsustainable policies. Indeed, whoever has been seriously following news in the international economy is not surprised to see who’s stock markets and who’s banks are failing. UK? A mad real estate bubble. Spain and Ireland? Real estate bubble as well and not much productivity growth. Germany? A rotten banking system criticised by many specialists for long. Russia? Dodgy place, but with growth rates at 7-8% nobody bothered. Iceland? Late vengeance for previous reckless banking policies that already triggered a small crisis in 2006? Who knows? Furthermore: poor China saving unspent trillions and the super-rich US on a borrowing binge? Who cared about the discussions raging in 2006 among a group of grey and boring IMF experts, central bankers and Martin Wolf on so-called Global Imbalances? Making money on the economically impossible? No you have it: this week the IMF forecast a global downturn. Almost every country that matters is reducing its growth forecasts. And everyone is worried about savings, a house, and some already, jobs.

Living a borrowed life based on the chimerical assumption that a party can only last forever?  Beware! Hubris is now followed by nemesis. Or so says Niall Ferguson. Harvard’s iconoclastic and Ferguson is an impressively prolific economic and financial historian who is just about to publish a new financial history book entitled The Ascent of Money. His beautifully written new columns in the FT and his perspectives as a historian (higher form of story-teller…) are an appetizing invitation to go and read his books (one of them, The War of the World is currently on my night table).  What has he said? On the 7th of August, on the risk of spread of the US’ crisis, an article entitled: “How a local squall might become a global tempest“. On the 21st of september: five bold predictions of what might happen in the US:

First, unless the Paulson plan takes immediate effect, there could yet be more bank deaths, whether in the nice form of takeovers or the nasty shape of bankruptcies. (…)

Second, the credit default swaps market may yet break down (…)

Third, what William Gross of Pimco, the bond fund manager, called the “financial tsunami” may continue to spread to hitherto neglected parts of the financial system (…)

Fourth, there will, finally, be a US recession (…)

Fifth, unfortunately the rest of the world will slow down (…)

Sixth, the US presidential election will cease to be the soap opera it became during the party conventions and will become a contest between two brands of economic populism (…)

Not to far off, isn’t he? Today, browsing through his website, I fell upon this quite wonderful piece, on the end of “Chimerica”:

We are living through the end of a phenomenon that Moritz Schularick of Berlin’s Free University and I christened “Chimerica.” In this view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product and somewhere more than half of global economic growth in the past six years.

For a time, this symbiotic relationship seemed almost perfect: One half did the saving, and the other half did the spending (…) This divergence in savings allowed a tremendous explosion of debt in the United States, because the Asian “savings glut” made it much cheaper for households to borrow money. Meanwhile, cheap Chinese labor helped hold down inflation. Needless to say, it was not just the United States that was borrowing, and it was not just the Chinese who were lending. (…) But Chimerica was the real engine of the world economy.

As this tremendous expansion in borrowing — and lending — was taking place, some economists tried to rationalize what was going on. Some argued that this was “Bretton Woods II,” a system of international exchange-rate management akin to the one that linked Western Europe to the United States after World War II. Others called it a “stable disequilibrium” that could be counted on to continue for some time. But then a wave of defaults in the subprime-mortgage market revealed just how unstable Chimerica was.

This book is the result of a fatherly injunction to “write a definite book on India”. Prof Arvind Panagariya’s “India, the Emerging Giant”, definitely is such a book. It will probably be an authoritative reference book for the next few years to come on India’s economy. The talk is of a giant, but India still only represents 1% of world merchandise trade, and 2.7% of its services trade. Yet the book is a very important contribution to the understanding of economic development and the policies that can lead to it – or not. The book traces India’s economic history since its independence and in particular links its growth performance with the policies undertaken by its successive governments. The author identifies four main phases:

1951-1965 – “Takeoff under a liberal regime” – Despite Prime Minister Jawaharlal Nehru’s socialist ideology centered on import-substitution, trade and investment policy was relatively pragmatic and open, especially to foreign investment and technology. The economy took off progressively, not least as a result of its simple liberation from stifling British rule.

1965-1981 – “Socialism strikes with a vengeance”. In that period, against a backdrop of external shocks (war with Pakistan, among others) and a macroeconomic crisis, the country was closed to foreign trade and investment. Tight controls and restrictions on foreign investment were introduced. Controls on foreign exchange and trade were systematized. The government nationalized banks, put restrictions on the expansion of big companies and introduced a “scheduling” of “small-scale-industries”. The green revolution was pushed forward, and attempts at agrarian reform continued. In all these policies the focus was on equity and reduction of inequality. In fact it stifled growth, with no effect on reducing poverty. There are arduous pages in this chapter describing the mind-boggling and legendary “license-raj” .

1981-1988 – “Liberalization by stealth” – The governments lift progressively various restriction on business expansion and trade. Growth starts to pick up more seriously.

1988-2006 – “Triumph of liberalization”. The macroeconomic crisis of 1991 was the trigger for a systematic approach to economic reform. “Phase IV began with an unprecedented growth spurt that ended in a balance of payment crisis. The response to the crisis was a major liberalisation on both the domestic and external fromnts. The economy was successfully stabilized, and growth at the higher rate resumed within a short period (..). Though the necessity to borrow from the International Monetary Fund and World Bank has subjected the initial liberalization package to the conditionality of these institutions, the proposed reforms were essentially domestic in origin (…)” . India has done away with the infamous “license raj” and opened up its economy. Panagariya says that formally, India’s economy is now as open China’s.

So, is there still anything wrong with India? Panagariya’s main message is that India has missed the transition to manufacturing. It should “walk on two legs” – continue developing services, but not neglect the factories. Despite its successes in services and IT, India must put its rural paupers to work in factories that will process light manufactures, electronics, toys asf – India should fully embrace its comparative advantage in low-skilled labour. The problem is that India has maintained a highly restrictive labour legislation that has stifled investment into large-scale manufacturing.

Despite this fact, India’s growth has already lifted millions out of poverty. According to official poverty estimates, the proportion of Indians living under the poverty line has declined from 38.2% in 1988 to 26.1% in 2000 (latest available figures in the book). He dismisses many claims made that liberalizing reforms have not reduced poverty, and that such assertions, reflected in the 2004 vote reinstating Congress in government, rather reflect rising expectations. Has inequality risen? Panagariya: “According to the available evidence, rural inequality has remained unchanged and has declined marginally while urban inequality has at worst increased by 10 to 12 percent. Evidence on the rise in the urban-rural inequality and regional equality is more compelling”.

The book ends with chapters on where India still has work to do: from further liberalizing trade to reforming education, health and agriculture. On health and education he starkly underlines the states’ failure to provide those services. The sectos should therefore be opened to private providers. When it comes to pro-poor policies and especially to rendering both health and education affordable to the poor he proposes, in health, direct transfers to female household leaders, and, in education, vouchers. All these should be targeted at the lower 30% of the income-bracket. Agriculture also needs to be deeply reformed, made more competitive, opened up and liberated from subsidies, the public grain procurement and storage system, and tenancy and property rights reformed such as to create the right incentives to produce more and better.

In the financial and macroeconomic sphere Panagariya calls for privatization of the big banks that are still under government control. But he says that on the international front, capital account liberalization should move slowly (but not be ruled out). He defends the general consensus reached after the Asian crisis of 1997 that too speedy capital account liberalization can wreak havoc on domestic economies. Despite a few crises, India has benefited from remarkably stable macroeconomic conditions, and he partly attributes it to its shielding it from faced-paced speculative international flows.

This book is sober, factual, clear and very didactic. Even a non-economist can read it – although with a lot of concentration. Most of the analysis is compelling and hard to dismiss. It is full of detailed and well-summarized analyses of almost every aspect of Indian economic life. At the same time it probably is only a beginning. Panagariya himself stresses that he looks at policies at the central level. In fact many changes occur at the federal state level. And many blocages occur there as well. That story needs to be told in-depth. His proposal to simply move to direct cash transfers to the poor to help them directly without distorting the machine that spurs growth and prosperity is very seductive. The issue is the one of political, and sometimes technical feasability. Caste can complicate matters as well.

Generally, this books feeds into the current positive and optimistic mood surrounding India:

“India grew 6.3 percent per annum during 1988-2006. During 2003-2007, the annual growth rate was 8.6 percent”. [According to the IMF, in 2006 it was 9.7, in 2007, 9.2%.] The possibility that the long-run growth rate of India may have shifted to the levels achieved by the East Asian tigers in the 1960s and 1970s can no longer be ruled out”.

But it does send a very strong warning:

“Yet, even as the economy picks up pace and poverty continued to decrease, there remain doubts about the transformation of India from a primarily agricultural and rural economy to a modern one in the foreseeable future.” Bottom line,again: “unskilled-labor-intensive manufacturing has done poorly in India”; “future reform must focus on removing impediments facing its rapid growth”.

ECIPE will do a presentation at the Chinese Mission to the EU tomorrow. On browsing through various documents to prepare for it, two paragraphs of the Joint Statement released after the recent EU-Chinese Summit struck me in particular for their, well, very diplomatic content:

“Leaders stated that China-EU consultation and coordination on major international and regional issues – in particular Africa, Myanmar, the Korean peninsula, Iran, the Middle East and Kosovo, as well as ASEM – as an important part of the overall China-EU comprehensive strategic partnership, had played an important role in promoting world peace, stability and sustainable development.”

(….oh yeah?)

“The two sides briefed each other on their respective latest developments. China welcomed the new and significant progress made in EU integration, as a result of the EU agreement on a new Reform Treaty, which further strengthens Europe as a global player. The EU welcomed the Seventeenth National Congress of the Chinese Communist Party, and the application of its Scientific Outlook on Development, pursue a win-win strategy of opening up, and follow unswervingly the path of peaceful development. Leaders stated that the current world is now undergoing extensive and profound changes, and that as comprehensive strategic partners, both at a crucial stage of development, China and the EU would, upholding the spirit of democracy, harmony and collaboration for win-win results, continue to work together to promote democracy in international relations, advance a more balanced development of economic globalization to ensure mutual benefit and win-win progress. They would work to promote human civilization, be committed to the peaceful settlement of international disputes, support each other and make concerted efforts to jointly safeguard planet Earth for the benefit of all mankind. “

No, really?

Back in 2004, Martin Wolf wrote, in a chapter dedicated to multinationals in his book on globalisation, :

“It is right to say that transnational companies exploit their Chinese workers in the hope of making profits. It is equally right to say that Chinese workers are exploiting transnationals in the almost universally fulfilled hope of attaining better pay, better training and more opportunities than would otherwise been available to them.”

A forthcoming paper (upload here: acer_messerlinwang_nv6final.pdf) by Patrick Messerlin and Jinghui Wang at Sciences Po gives us a new perspective on China. China is not a monolith. Parts of China will be like the EU in not too long a time. Some provinces have per capita income levels (in purchasing powerparity terms) that have reached those of several EU member countries. Shanghaians are richer than Greeks. The paper highlights 9 provinces, all on the country’s eastern coast that will soon enter the world’s high income bracket: that is roughly 400 000 million people – almost as much as the EU. Unnerved about job losses in low-skilled sectors of the economy? Well: think of all the good jobs a thirsty market almost equivalent in size to the EU will create for Europe! The Chinese story is not static. The country’s economy is progressively climbing up the ladder of more sophisticated production, and it is becoming a new hub for production chains reaching out into South East Asia. This means it is becoming more expensive to produce in China! Of course, at the other end, 13 Chinese provinces are at the level of the world’s most poor countries. Shanghai’s inhabitants are more than ten times richer then Chinese citizens from the country’s poorest province, Guizhou. Yet Luxemburgers are eight times richer than Bulgaria: so lots of work to do here as well….

Please see this table:

I’ve been a bit short and bluntly political lately in my blog.  No time to write longer, more reflective piece these days. Gearing up in a new job swallows lots of energy! But let me try and share what I’ve been trying to keep up with.

Migration and Immigration. A lot is going on here in Europe. France is introducing a restrictive bill on immigration. It will be imposing DNA tests for family members of immigrants who want to join their relatives in France. This is creating a national uproar. There’s enough on this blog about this topic (see this, and this a bit too long post in French)For my French friends: do have a look at Liberation. Alexandre Delaigue has a good post on one of Libe’s blogs too).

At EU level a lot is happeing on migration these days as well (an excellent FT article gives an overview): EU trends on integration are being assessed by the Migration Integration Policy Index. Do have a look! The country that scores best on everything from non-discrimination to access to nationality of immigrants is Sweden. While the Nordics tend to score well in general, when browsing the maps on the website, Denmark clearly stands out as the black sheep. Eastern European countries will need to make some efforts. I was surprised to learn that Germany makes access to its nationality easier than France. The index is managed by the Migration Policy Group in Brussels. In terms of relatively constrictive approaches to immigration, there have been moves this summer by Spain to allow for legal but managed immigration of workers from Africa. The EU Commission is set to launch a “blue card” for skilled migrants next week, so the FT. More background here and here. A very far way off what others propose: see Dolado and Legrain.

International trade. The US is growing more protectionist (see this post). Ben Muse posted Hillary Clinton’s proposals on trade policy as candidate for the US presidency. Trade Diversion has something on how much trade protection has actually cost the US. The EU is going to be sued because its recent decision to raise tariffs on energy efficient lightbulbs from China (how deliciously ironic!). The WTO ruled against the US’s cotton subsidies: efforts on reducing them are insufficient. Oxfam is campaigning in the US against agricultural subsidies (courtesy of the Econoclastes and Trade Diversion).

China. The annual Communist Party Congress usually leads to a flurry of media coverage on already extremely media-covered China. Two pieces I recommend: the recent Analysis by Richard McGregor in the FT, A piece in Die Zeit. China is growing richer and climbing up the value-added ladder. It is now starting to tackle its huge challenges: growing inequality and the environment.

No, no, there is none.

Richard McGregor has a fascinating piece on how China’s ruling party is currently tightening its grip over the country. Among many other interesting things, I learned The Party has indeed no website!

Certainly, the party makes no pretence of transparency. In a country that has embraced the internet and mobile telephony (China had 162m estimated internet users by the end of June and about 450m mobile phone accounts), the party does not even have a website.

[A teacher in a] party school – in Yan’an, an old revolutionary base – dismisses an internet presence as redundant. “All the important media are owned by the party, so we have no need to set up a website,” he says.

This week, Japan’s Prime Minister is visiting India, after a short stop in Indonesia to deepen ties with the South-East Asian democracy. In this context, let’s start with a quote from the FT in an article published yesterday:

“Japan has until recently been the missing link in India’s post-1991 engagement with the world. Now, however, relations that plunged into a deep freeze after New Delhi’s 1998 nuclear weapons test are being revived by a shared concern at the implications of a rising China.

To judge by the number of times Mr Abe’s speeches mention India, the world’s biggest democracy looms larger than ever in Tokyo’s strategic thinking. A frequent visitor to India, Mr Abe likes to talk about the countries’ “shared values” of democracy and respect for human rights as the basis for a “new Asian order” that pointedly sidelines China”.

Three questions come to mind:

1) When will Asia’s new economic might concretely translate into more political-military power generally (If one assumes that there is an automatic spill-over from one to the other – which is not obvious)

2) Will China be the trigger?

3) Should China emerge as a military power with major capabilities, what is the future for the current liberal world order based on the spread of democracy and the market economy?

Since the emergence of Japan in the 1980s there has been talk in the West of the Asian surge on the world scene. In US circles the rise of the “Pacific century” was subject to heated debates in the 1990s. Japan is now one of the established world economic powerhouses, but not a notable military power. Its military capability is in fact high – it spends now a bit more than 1% on defence (which is an enormous amount in absolute terms) and its technological level and human capital would allow it to play a major role if it allowed itself to. India, the world’s second most populous country after China, despite having acquired the atomic bomb in 1998, cannot be considered a major military world power either. This because the economics and politics behind it are not ready, and because its security outlook and projections remain regional. The Bomb was a result of the decades-old bilateral conflict with Pakistan. The other Asian tigers (South Korea, Thailand, Malaysia, Indonesia namely) cannot even be considered real part of the discussion.

But here comes China. Massive (1.3 billion inhabitants), with double-digit economic growth-rates that just don’t seem to be abating, and with clear signs that its military aspirations are on the rise. But the worst fears are raised by the fact that China is still a one-party dictatorship. If Japan and India haven’t set themselves the goal of unsettling the regional and global military order this is also due to the fact that they are democracies – which tend to avoid military conflict and adventurism [unless some crazy neo-cons set the agenda with a badly elected US president…]. One shouldn’t forget that China also possesses the A-Bomb.

For the moment, hysterical fears expressed here and there in the West seem to be overblown (see the recent piece by the The Economist). China hasn’t the technical and human capability yet to seriously challenge world peace. And there is no sign that it is intending to. Sceptics would say: not intending, yet, but probably in the future. Optimists say: with growing integration into the world economy, China’s incentives to wage war will be even more diminished. Whatever the future, China is at this very moment concentrating on getting rich by doing business with the rest of the world, and trying to get itself sorted out internally (regional disparities are growing and a source of growing unrest, environmental challenges need to be tackled too). In the last weeks and months, trade and monetary conflicts with its economic partners have represented more urgent matters. China today, despite its increasing military might and relatively weak sounds of sabre-rattling, is probably much less of a threat to its neighbours than, for instance, back in 1962 when it attacked India in the context of a border conflict. This was at the height of Maoist social and political adventurism. Pragmatism – if ruthless – is the name of China’s game.

Yet China’s neighbours are right to be worried. Asia is a hot cauldron with deep-rooted conflicts that could degenerate and end very badly if the lid is lifted. Take Taiwan, or India-Pakistan. North Korea is a black hole. All these conflicts involve China in some form or another. The main parties concerned – Japan and India notably – rely on their strategic partnership with the United States, the world’s main military power (which however is currently seriously battered by a catastrophic war in Iraq.). Given the current Asian configuration, they will not want to jeopardize their relation with the US. The worries of the likes of Japan and India are not translating into co-ordinated Asian action. The current rapprochements are still tentative. Nobody wants to provoke China either. For the moment there is no sign that the political balance in Asia and Asia’s military standing in the world are substantially shifting. It will probably not be possible to have a mighty political and military Asia setting the tone on the world stage until the deep-rooted inter-Asian political problems are solved. Again, this will very much depend on China. So, if the 21^st Century is definitely becoming Asia’s economic century, when, if ever, will it become Asia’s “political” century? By 2040?

For the speculative minds appreciating economic papers with many shortcuts and assumptions, here is a recent paper by the Nobel-laureate Robert W. Fogel on “Capitalism and Democracy in 2040. Forecasts and Speculations”. (needs to be purchased, but it’s only 5$, cheap when one has Euros or GBP). Despite the highly speculative nature of the paper, the results of the research are powerful. One of his most striking forecasts is the following:

“in 2040, the Chinese economy will reach $123 trillion, or nearly 3 times the output of the entire globe in the year 2000. Moreover, the per capita income of China will reach $85,000 more than twice the forecast for the European Union (EU15) and also much higher than India and Japan. In other words, China is forecasted to go from a poor country in 2000 to a superrich country in 2040, although it will not have overtaken the U.S.”

Given the economic growth and political development occurring in the region, the responsibility for sustaining the world’s liberal world order (a broad consensus around democracy + markets, or the other way round) will lie mainly with the Asian nations.

“The Future of Liberal Democracy (…). [R]icher countries that were the chief bastions of liberal democracy during the second half of the twentieth century – the EU15, the U.S., and Japan – will decline in relative importance by 2040. In year 2000, these groups represented 51 percent of global GDP, but by 2040 their combined share is projected to decline to 21 percent. Most worrisome is the projected decline in the EU15 from 21 percent to just 5 percent of the global share of GDP. Given Western Europe’s role during the past several centuries as the cradle of liberal democracy, exporting it to the New World, Oceania, and other continents, who will take up the slack during the next generation?

My answer is Asia. Liberal democracy is thriving in India and has become rooted in four of the SE6 (Taiwan, South Korea, Indonesia, and Singapore), but is more fragile in Thailand and Malaysia. The U.S. is an influential Pacific power that is helping to promote liberal democracy throughout Asia and Oceania. On this account, nations representing 45 percent of global GDP in 2040 (the U.S., the EU15, India, Japan, and the SE6) will be promoters of liberal democracy (…).”

To add a few comments that are beyond the scope of Fogel’s paper: Will these nations actually take their responsibilities? Will anybody be bothering about democracy is yet another question, especially if still undemocratic China really turns out by then to be the world’s richest country after the US? Dear folks, the five centuries of Western domination are clearly nearing their end…Power will ultimately lie where the people are: almost half of humanity is in Asia. And power will be in the hands of those who will have used Western tools: the market economy, and probably even democracy