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The Great Fall of China

http://www.latimes.com/news/opinion/sunday/commentary/la-op-mead30dec30,0,1035099.story?coll=la-sunday-commentary

From the Los Angeles Times

The great fall of China

Revised GDP calculations show that Beijing isn't the giant we thought it was.

By Walter Russell Mead

December 30, 2007

The most important story to come out of Washington recently had nothing to do with the endless presidential campaign. And although the media largely ignored it, the story changes the world.

The story's unlikely source was the staid World Bank, which published updated statistics on the economic output of 146 countries. China's economy, said the bank, is smaller than it thought.

About 40% smaller.

China, it turns out, isn't a $10-trillion economy on the brink of catching up with the United States. It is a $6-trillion economy, less than half our size. For the foreseeable future, China will have far less money to spend on its military and will face much deeper social and economic problems at home than experts previously believed.

What happened to $4 trillion in Chinese gross domestic product?

Statistics. When economists calculate a country's gross domestic product, they add up the prices of the goods and services its economy produces and get a total -- in dollars for the United States, euros for such countries as Germany and France and yuan for China. To compare countries' GDP, they typically convert each country's product into dollars.

The simplest way to do this is to use exchange rates. In 2006, the World Bank calculated that China produced 21 trillion yuan worth of goods and services. Using the market exchange rate of 7.8 yuan to the dollar, the bank pegged China's GDP at $2.7 trillion.

That number is too low. For one thing, like many countries, China artificially manipulates the value of its currency. For another, many goods in less developed economies such as China and Mexico are much cheaper than they are in countries such as the United States.

To take these factors into account, economists compare prices from one economy to another and compute an adjusted GDP figure based on "purchasing-power parity." The idea is that a country's GDP adjusted for purchasing-power parity provides a more realistic measure of relative economic strength and of living standards than the unadjusted GDP numbers.

Unfortunately, comparing hundreds and even thousands of prices in almost 150 economies all over the world is a difficult thing to do. Concerned that its purchasing-power-parity numbers were out of whack, the World Bank went back to the drawing board and, with help from such countries as India and China, reviewed the data behind its GDP adjustments.

It learned that there is less difference between China's domestic prices and those in such countries as the United States than previously thought. So the new purchasing-power-parity adjustment is smaller than the old one -- and $4 trillion in Chinese GDP melts into air.

The political consequences will be felt far and wide. To begin with, the U.S. will remain the world's largest economy well into the future. Given that fact, fears that China will challenge the U.S. for global political leadership seem overblown. Under the old figures, China was predicted to pass the United States as the world's largest economy in 2012. That isn't going to happen.

Also, the difference in U.S. and Chinese living standards is much larger than previously thought. Average income per Chinese is less than one-tenth the U.S. level. With its people this poor, China will have a hard time raising enough revenue for the vast military buildup needed to challenge the United States.

The balance of power in Asia looks more secure. Japan's economy was not affected by the World Bank revisions. China's economy has shrunk by 40% compared with Japan too. And although India's economy was downgraded by 40%, the United States, Japan and India will be more than capable of balancing China's military power in Asia for a very long time to come.

But don't pop the champagne corks. It is bad news that billions of people are significantly poorer than we thought. China and India are not the only countries whose GDP has been revised downward. The World Bank figures show sub-Saharan Africa's economy to be 25% smaller. One consequence is that the ambitious campaign to reduce world poverty by 2015 through the United Nations Millennium Development Goals will surely fail. We have underestimated the size of the world's poverty problem, and we have overestimated our progress in attacking it. This is not good.

There is more bad news. U.S. businesses and entrepreneurs hoping to crack the Chinese and Indian markets must come to terms with a middle class that is significantly smaller than thought. Investors in overseas stocks should take note. Companies with growth plans tied to the Indian and Chinese markets could face disappointing results, and the high prices of many emerging-market stocks depend on buzz and psychology. Investor sentiment on China and India may now be significantly more vulnerable to future bad news.

China's political stability may be more fragile than thought. The country faces huge domestic challenges -- an aging population lacking any form of social security, wholesale problems in the financial system that dwarf those revealed in the U.S. sub-prime loan mess and the breakdown of its health system. These problems are as big as ever, but China has fewer resources to meet them than we thought.

And there is the environment. With poor air quality, acute water shortages, massive pollution in major watersheds and many other environmental problems, China needs to make enormous investments in the environment to avoid major disasters. Globally, it will be much harder to get China -- and India -- to make any sacrifices to address problems such as global warming.

For Americans, the new numbers from the World Bank bring good news and bad. On the plus side, U.S. leadership in the global system seems more secure and more likely to endure through the next generation. On the other hand, the world we are called on to lead is poorer and more troubled than we anticipated.

Maybe the old Chinese curse says it best: We seem to be headed for interesting times.

Walter Russell Mead, a senior fellow at the Council on Foreign Relations, is the author of "God and Gold: Britain, America and the Making of the Modern World."

Noam Chomsky on Mearsheimer and Walt: American support for Israel is based on broad support from political-intellectual class rather than any lobby

I've received many requests to comment on the article by John Mearsheimer and Stephen Walt (henceforth M-W), published in the London Review of Books, which has been circulating extensively on the internet and has elicited a storm of controversy. A few thoughts on the matter follow.

It was, as noted, published in the London Review of Books, which is far more open to discussion on these issues than US journals -- a matter of relevance (to which I'll return) to the alleged influence of what M-W call "the Lobby." An article in the Jewish journal Forward quotes M as saying that the article was commissioned by a US journal, but rejected, and that "the pro-Israel lobby is so powerful that he and co-author Stephen Walt would never have been able to place their report in a American-based scientific publication." But despite the fact that it appeared in England, the M-W article aroused the anticipated hysterical reaction from the usual supporters of state violence here, from the Wall St Journal to Alan Dershowitz, sometimes in ways that would instantly expose the authors to ridicule if they were not lining up (as usual) with power.

M-W deserve credit for taking a position that is sure to elicit tantrums and fanatical lies and denunciations, but it's worth noting that there is nothing unusual about that. Take any topic that has risen to the level of Holy Writ among "the herd of independent minds" (to borrow Harold Rosenberg's famous description of intellectuals): for example, anything having to do with the Balkan wars, which played a huge role in the extraordinary campaigns of self-adulation that disfigured intellectual discourse towards the end of the millennium, going well beyond even historical precedents, which are ugly enough. Naturally, it is of extraordinary importance to the herd to protect that self-image, much of it based on deceit and fabrication. Therefore, any attempt even to bring up plain (undisputed, surely relevant) facts is either ignored (M-W can't be ignored), or sets off most impressive tantrums, slanders, fabrications and deceit, and the other standard reactions. Very easy to demonstrate, and by no means limited to these cases. Those without experience in critical analysis of conventional doctrine can be very seriously misled by the particular case of the Middle East(ME).

But recognizing that M-W took a courageous stand, which merits praise, we still have to ask how convincing their thesis is. Not very, in my opinion. I've reviewed elsewhere what the record (historical and documentary) seems to me to show about the main sources of US ME policy, in books and articles for the past 40 years, and can't try to repeat here. M-W make as good a case as one can, I suppose, for the power of the Lobby, but I don't think it provides any reason to modify what has always seemed to me a more plausible interpretation. Notice incidentally that what is at stake is a rather subtle matter: weighing the impact of several factors which (all agree) interact in determining state policy: in particular, (A) strategic-economic interests of concentrations of domestic power in the tight state-corporate linkage, and (B) the Lobby.

The M-W thesis is that (B) overwhelmingly predominates. To evaluate the thesis, we have to distinguish between two quite different matters, which they tend to conflate: (1) the alleged failures of US ME policy; (2) the role of The Lobby in bringing about these consequences. Insofar as the stands of the Lobby conform to (A), the two factors are very difficult to disentagle. And there is plenty of conformity.

Let's look at (1), and ask the obvious question: for whom has policy been a failure for the past 60 years? The energy corporations? Hardly. They have made "profits beyond the dreams of avarice" (quoting John Blair, who directed the most important government inquiries into the industry, in the '70s), and still do, and the ME is their leading cash cow. Has it been a failure for US grand strategy based on control of what the State Department described 60 years ago as the "stupendous source of strategic power" of ME oil and the immense wealth from this unparalleled "material prize"? Hardly. The US has substantially maintained control -- and the significant reverses, such as the overthrow of the Shah, were not the result of the initiatives of the Lobby. And as noted, the energy corporations prospered. Furthermore, those extraordinary successes had to overcome plenty of barriers: primarily, as elsewhere in the world, what internal documents call "radical nationalism," meaning independent nationalism. As elsewhere in the world, it's been convenient to phrase these concerns in terms of "defense against the USSR," but the pretext usually collapses quickly on inquiry, in the ME as elsewhere. And in fact the claim was conceded to be false, officially, shortly after the fall of the Berlin Wall, when Bush's National Security Strategy (1990) called for maintaining the forces aimed at the ME, where the serious "threats to our interests... could not be laid at the Kremlin's door" -- now lost as a pretext for pursuing about the same policies as before. And the same was true pretty much throughout the world.

That at once raises another question about the M-W thesis. What were "the Lobbies" that led to pursuing very similar policies throughout the world? Consider the year 1958, a very critical year in world affairs. In 1958, the Eisenhower administration identified the three leading challenges to the US as the ME, North Africa, and Indonesia -- all oil producers, all Islamic. North Africa was taken care of by Algerian (formal) independence. Indonesia and the were taken care of by Suharto's murderous slaughter (1965) and Israel's destruction of Arab secular nationalism (Nasser, 1967). In the ME, that established the close US-Israeli alliance and confirmed the judgment of US intelligence in 1958 that a "logical corollary" of opposition to "radical nationalism" (meaning, secular independent nationalism) is "support for Israel" as the one reliable US base in the region (along with Turkey, which entered into close relations with Israel in the same year). Suharto's coup aroused virtual euphoria, and he remained "our kind of guy" (as the Clinton administration called him) until he could no longer keep control in 1998, through a hideous record that compares well with Saddam Hussein -- who was also "our kind of guy" until he disobeyed orders in 1990. What was the Indonesia Lobby? The Saddam Lobby? And the question generalizes around the world. Unless these questions are faced, the issue (1) cannot be seriously addressed.

When we do investigate (1), we find that US policies in the ME are quite similar to those pursued elsewhere in the world, and have been a remarkable success, in the face of many difficulties: 60 years is a long time for planning success. It's true that Bush II has weakened the US position, not only in the ME, but that's an entirely separate matter.

That leads to (2). As noted, the US-Israeli alliance was firmed up precisely when Israel performed a huge service to the US-Saudis-Energy corporations by smashing secular Arab nationalism, which threatened to divert resources to domestic needs. That's also when the Lobby takes off (apart from the Christian evangelical component, by far the most numerous and arguably the most influential part, but that's mostly the 90s). And it's also when the intellectual-political class began their love affair with Israel, previously of little interest to them. They are a very influential part of the Lobby because of their role in media, scholarship, etc. From that point on it's hard to distinguish "national interest" (in the usual perverse sense of the phrase) from the effects of the Lobby. I've run through the record of Israeli services to the US, to the present, elsewhere, and won't review it again here.

M-W focus on AIPAC and the evangelicals, but they recognize that the Lobby includes most of the political-intellectual class -- at which point the thesis loses much of its content. They also have a highly selective use of evidence (and much of the evidence is assertion). Take, as one example, arms sales to China, which they bring up as undercutting US interests. But they fail to mention that when the US objected, Israel was compelled to back down: under Clinton in 2000, and again in 2005, in this case with the Washington neocon regime going out of its way to humiliate Israel. Without a peep from The Lobby, in either case, though it was a serious blow to Israel. There's a lot more like that. Take the worst crime in Israel's history, its invasion of Lebanon in 1982 with the goal of destroying the secular nationalist PLO and ending its embarrassing calls for political settlement, and imposing a client Maronite regime. The Reagan administration strongly supported the invasion through its worst atrocities, but a few months later (August), when the atrocities were becoming so severe that even NYT Beirut correspondent Thomas Friedman was complaining about them, and they were beginning to harm the US "national interest," Reagan ordered Israel to call off the invasion, then entered to complete the removal of the PLO from Lebanon, an outcome very welcome to both Israel and the US (and consistent with general US opposition to independent nationalism). The outcome was not entirely what the US-Israel wanted, but the relevant observation here is that the Reaganites supported the aggression and atrocities when that stand was conducive to the "national interest," and terminated them when it no longer was (then entering to finish the main job). That's pretty normal.

Another problem that M-W do not address is the role of the energy corporations. They are hardly marginal in US political life -- transparently in the Bush administration, but in fact always. How can they be so impotent in the face of the Lobby? As ME scholar Stephen Zunes has rightly pointed out, "there are far more powerful interests that have a stake in what happens in the Persian Gulf region than does AIPAC [or the Lobby generally], such as the oil companies, the arms industry and other special interests whose lobbying influence and campaign contributions far surpass that of the much-vaunted Zionist lobby and its allied donors to congressional races."

Do the energy corporations fail to understand their interests, or are they part of the Lobby too? By now, what's the distinction between (1) and (2), apart from the margins?

Also to be explained, again, is why US ME policy is so similar to its policies elsewhere -- to which, incidentally, Israel has made important contributions, e.g., in helping the executive branch to evade congressional barriers to carrying out massive terror in Central America, to evade embargoes against South Africa and Rhodesia, and much else. All of which again makes it even more difficult to separate (2) from (1) -- the latter, pretty much uniform, in essentials, throughout the world.

I won't run through the other arguments, but I don't feel that they have much force, on examination.

The thesis M-W propose does however have plenty of appeal. The reason, I think, is that it leaves the US government untouched on its high pinnacle of nobility, "Wilsonian idealism," etc., merely in the grip of an all-powerful force that it cannot escape. It's rather like attributing the crimes of the past 60 years to "exaggerated Cold War illusions," etc. Convenient, but not too convincing. In either case.

NC