LOSING CONTROL (28 page)

NATO is, thus, a military club for like-minded democracies with market economies.
China doesn’t qualify.
This immediately creates room for tensions.
If, for example, NATO can operate in Afghanistan, perhaps it will also operate in Sudan or other African ‘rogue states’ accused of harbouring terrorists.
If so, what happens to China’s economic interests in Africa, which have expanded so rapidly over the last twenty years as China’s appetite for raw materials has expanded at an exponential pace?

We are in danger of returning to the political games of the late nineteenth century, focused on the ‘enabling resources’ of land and fuel.
The spike in food prices in 2007 and 2008 led some Asian countries – including China, South Korea and India – to strike deals with leaders of African states to provide access to agricultural land, typically in return for promises regarding the development of infrastructure and logistics, both of which are severely lacking in many African nations.
Whether these deals work for all involved – most obviously the local smallholders with poorly defined property rights – is another matter.
Nevertheless, they can be regarded as a mechanism to safeguard food supplies for rapidly advancing Asian nations which, themselves, are facing increasing problems associated with growing water shortages and shifting dietary preferences.

Even though these deals are routinely described as land grabs, they are, in reality, no more than a minor version of the activities pursued by European nations before the twentieth century.
They reveal, however, an underlying truth about twenty-first-century economic development.
Countries will continue to prosper only if they can gain access to food and fuel supplies.
Increasingly, nations are beginning to believe that the market, alone, cannot safeguard ongoing prosperity.
Bilateral deals are becoming commonplace, creating for some countries
privileged access to resources which may, as a consequence, be in short supply for others.
If this is a new colonialism, it comes as no surprise: it’s merely a response to economies bumping into domestic resource constraints.
It also suggests we can expect an increase in non-market outcomes when it comes to the allocation of scarce resources.
Adam Smith’s invisible hand may no longer be acceptable.

Of course, it’s quite possible that bilateral deals will lead to productivity advances which, in turn, will have a hugely positive effect on, for example, agricultural production, boosting supplies to such a degree that food prices will fall rather than rise.
In those circumstances, worries about food security would surely begin to fade.
Equally, technologies which, in the past, were seen as too closely linked to Dr Frankenstein may be rehabilitated if food prices rise too far.
Genetically modified crops will, I suspect, become increasingly acceptable in the same way that nuclear energy is now seen as an increasingly effective antidote to climate change.
Nevertheless, the language with regard to food supplies is changing for the worse.
Countries increasingly talk about the need for food ‘self-sufficiency’.
Although this debate is sometimes bundled together with concerns regarding the environment – it’s better to grow food locally than to fly it in from the other side of the world – it’s increasingly clear that securing food supplies has become, for many governments, a strategic security issue.

Thus we may be heading towards a world outlined in Chapter 7 full of smoke-filled rooms and questionable deals behind closed doors.
Marking a departure from the international free-market principles that have dominated economic life since the 1980s, this world would surely represent the renewed rise of economic nationalism and, possibly, a return to the economic values that dominated the interwar period.

One counter-argument is that the US and China are now so dependent on one another economically that it is impossible to imagine a breakdown in relations without severely damaging consequences
for both sides and, indeed, for the rest of the world.
But we know from history – and from Keynes’s English gentleman – that arrangements of mutual economic benefit all too often hang from gossamer threads, ready to snap at any moment.
In fact, I suspect China would emerge from any collapsed Sino–US relationship in a relatively stronger position.

It is commonly assumed that China’s exports have grown in line with US consumer spending and that China, therefore, is ultimately a satellite of the US economy.
The annual rate of growth of China’s exports has, in fact, been three times faster than the growth rate of US consumer spending.
The revolution in economic affairs that has taken place since the 1980s has not been driven by the demands of US consumers but rather by the increased efficiency of the Chinese and other emerging economic producers.
Their enhanced production capacities are one of the key reasons why Asia’s share of global output – and, hence, global demand – is set to rise so rapidly in the years ahead.

In a world of bilateral deals, Asia’s voice will, therefore, become much louder.
Why should Russia sell its gas only to Europe when it will also benefit from a rapidly expanding market to its east?
Why should Brazil worry too much about US demand for its metals when the key marginal consumers will be coming not from the North Atlantic but on the other side of the Pacific?
How will the US continue to exert influence in the Middle East if some of the key players – such as Iran – are able to become increasingly cosy with China, Russia and other countries to the East, for example by means of the Shanghai Cooperation Organization?
For much of the twentieth century, countries have had to define themselves economically primarily in terms of their relationship with the US or Europe.
That may no longer be true in the twenty-first century.
Indeed, there are already signs of change.
Brazil is now far more dependent on China as a destination for its exports.
Russia is much more interested in
trade with Europe, the Near East, Central Asia and China and has no strong link with the US.
India and China still depend on the US but they now increasingly trade with each other.
The US still dominates, but, as a trading partner, it is facing relative decline.
European nations are already in decline.

Whether or not we see a return to bilateral deals, it’s likely that patterns of trade will continue to change, with the US and Europe increasingly squeezed out of the equation.
Asia’s progress reflects both political openness and the benefits of new technologies, without which capital could not swirl around the world in ever-increasing volumes.
Is it too much to suggest that the ease with which capital can cross borders and time zones represents a revolution as great as that triggered by the pioneering explorers who discovered the New World and rounded the Cape of Good Hope, in the process undermining the Silk Road and the economic and political power of Islam?
If so, does the rise of Asia in the twenty-first century mirror the rise of Europe in the sixteenth century and beyond?
And what then happens to the future of Western values?

Can the Western powers manage to maintain control?
Yes, but at a significant price.
The developed world would have to disengage from the emerging world.
The frameworks to do so already exist.
The North American Free Trade Association and the European Union could quite easily become aggressive, inward-looking customs unions, maintaining openness for the privileged few while ignoring relations with the rest of the world.
There is no shortage of supporters.
Congress is full of people with their pet protectionist projects.
And, a few years ago, I was quizzed by a former finance minister from an EU country who wanted to know why Europe bothered to trade with the rest of the world: ‘Surely’, he said, ‘we can
produce all we need here in Europe.’
It’s as if the second half of the twentieth century never happened.
Then again, politicians have always preferred to listen to their constituents than to a group of economists: the Smoot–Hawley tariff contributed to the massive increase in economic nationalism in the 1930s even though it was opposed at the time by, amongst others, 1,028 US economists.

Even today, not all our markets are open, despite the oft-repeated claim that the West supports free trade.
In some industries, we’re still living in a mediaeval world of workers’ guilds protected by metaphorical city walls designed to keep foreigners out.
The European Union’s Common Agricultural Policy is a case in point.
As a result of excessive subsidies, European farmers produce more than the international market can take.
Market prices are forced lower, pushing farmers in poorer parts of the world out of business (in mediaeval times, it was a matter of routine to venture occasionally beyond the city walls to destroy any fledgling cottage industries: modern-day subsidies achieve much the same result).

Trade protectionism is bad enough but, as already noted, there’s also the risk of capital-market protectionism.
Governments could enact legislation to ensure that savings were invested at home rather than abroad.
As with Dubai Ports World, they could refuse to sell assets to ‘untrustworthy’ foreigners.
The rise of state capitalism is an obvious trigger for a newly ‘national’ approach to the balance between savings and investment, thereby reducing the chances of allocating capital efficiently on a global basis.
Another trigger is the 2007/8 credit crunch: if cross-border capital flows are deemed to have disruptive economic effects, either cyclically or because of the burden on future taxpayers, why not restrict banks merely to domestic financial activities, thereby reversing the massive opening of capital flows that has taken place since the 1980s?

Imagine the consequences.
The West wouldn’t so easily be able to invest in the emerging world, which would lead to a reduction in
returns on capital and, thus, lower savings for its pensioners.
Resources wouldn’t be allocated so efficiently, which would reduce global output.
Trade barriers would restrict cross-border specializations.
The price of tradeable goods would rise.
American Treasury yields would spike higher as China and others disengaged from the world’s bond markets.
Economic autarky would replace the freedoms we have grown accustomed to over the last thirty years.
We’d head back to a world last seen in the first half of the twentieth century, when economic and political crises on the grandest of scales occurred with monotonous and frightening regularity.

In the midst of this protectionist endeavour, there would probably be a series of currency crises, offering a repeat of some of the conditions seen in the 1970s.
With the US retreating from the world economy, the rest of the world would surely retreat from the US dollar.
China would push harder to turn the renminbi into a new reserve currency, in the process accepting losses on its holdings of US Treasuries.
Faced with a declining dollar, the US would suffer both an increase in import prices and much higher interest rates.
Retreat from the global economy comes at a very high price.

The rise in economic nationalism would, in all likelihood, be linked to a descent into ethnic rivalry.
The first half of the twentieth century was characterized not just by a collapse of the international economic order but by the growth of racism in parts of the world that had, supposedly, benefited from the peak of Enlightenment thinking.
The
Clash of Civilizations
offers a large-scale threat to a more integrated world.
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The rise of casual racism – growing support for the xenophobic British National Party in the UK is just one example – provides a small-scale threat.
It’s not difficult to imagine Gordon Brown’s promise of ‘British jobs for British workers’ becoming a clarion call for a new anti-immigration and anti-foreigner approach to policymaking.
⁶
With the developed world running out of workers, this would surely create conditions in which
the time bomb of demographic ageing would go off with a particularly big bang.

And then there’s the possibility of war.
As the emerging world becomes economically stronger, so in time it will also become militarily more powerful.
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One possible response from the West is to develop a ‘divide and rule’ strategy, selling weapons and technologies to ‘friendly’ emerging nations to counter aggression coming from more obvious foes.
This, however, can easily backfire, as the US discovered with its backing of Saddam Hussein’s Iraq against Iran in the 1980s.
More generally, the West needs to address awkward questions regarding political ideas and property rights.
As NATO and European Union membership spreads eastwards, will there come a point where the self-determination of individual nations in Eastern Europe and Central Asia clashes with, for example, Russia’s domestic security concerns?
The Crimean War (1853–6) provides a nineteenth-century example.
The war was indirectly the consequence of a dispute between France and Russia about protection of Christians in the Holy Land in the light of the diminishing powers of the Ottoman Empire; but it was ultimately a battle about spheres of influence.