Colossus (48 page)

Since the reforms initiated in the late 1970s by Deng Xiaoping, however, China has experienced a startling economic recovery. Unlike the Soviet Union, which sought simultaneously to liberalize its planned economy and to democratize its political system (with the result that both collapsed), the Chinese have concentrated on modifying rather than jettisoning their existing economic institutions, while making only limited political changes.
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The result has been a dramatic increase in the rate of economic growth.
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In the past twenty years the average annual growth rate of real Chinese GDP has been between 8 and 12 percent. Adjusted on the basis of purchasing power parity, China’s share of world output has risen from 4 to 12 percent since 1983.
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Its share of global exports has also soared. According to a study by Goldman Sachs, the Chinese economy could overtake the American economy in size in 2041.
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Small wonder that so many students of international relations have jumped to the conclusion that China is the strategic challenge of the future.
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In narrowly economic terms, at least, it seems a more plausible candidate for the role of counterweight to the United States than the European Union. The great divergence, it seems, is giving way to a “great reconvergence,” which will see China regain its rightful place in the “world system.”
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Renewed historical interest in China’s past achievements, symbolized by the eunuch admiral Cheng Ho’s fifteenth-century voyages of discovery across the Indian Ocean, echo such expectations of the future.

Nevertheless, like the febrile forecasts that the world would “turn Japanese” in the 1980s, such predictions must be treated with caution. For one thing, such runaway growth rates may very well bring instability as well as prosperity to China. The example of tsarist Russia a century ago is instructive. Under Alexander II and his two successors, the Russian empire embarked on a comparable program of industrialization, opening its economy to foreign trade and capital and achieving exceptionally rapid growth by the standards of the time. But the social consequences of this economic boom placed enormous strains on the institutions of the Romanov autocracy, which, when it sought to harness the country’s new wealth for war, fell victim to revolution. A new Chinese revolution is not in the cards; no matter how wide the inequalities, a society does not embark on a new revolution with the memory of not one but two great political upheavals so painfully fresh. Yet there are conceivable scenarios in which some kind of internal cri-
sis could beset Beijing, if only a crisis of the country’s fragile banking and financial system.
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One possibility that cannot be ruled out is that China’s new reliance on free trade and foreign direct investment is nothing more than a return to the Open Door era of a century ago, the political consequences of which were less than happy. Linked to this is a second and more immediate limitation on Chinese power, and that is the growing
interdependence
between it and the United States. Far from being strategic rivals, these two empires have the air of economic partners. The only question is which of the two is the more dependent; which, to be precise, stands to lose more in the event of a crisis in their amicable relationship, now over thirty years old. Today, just as was true a century ago, there is an open door between America and China. But could that door close?

OVERSTRETCH REVISITED

Toppling three tyrannies within four years is no mean achievement by the standards of any past global empire. Since 1999 Slobodan Milošević, the Taliban, and now Saddam Hussein all have been overthrown as a result—admittedly an indirect result in the first case—of American military intervention against their armed forces. What makes this so remarkable is that it comes little more than a decade after a wave of anxiety about American decline. In 1987 Paul Kennedy warned that the United States was running “the risk … of what might roughly be called ‘imperial overstretch.’ ” America, he maintained, was spending too high a proportion of national income on its military commitments. This was already having an impact on the performance of the American economy compared with more or less demilitarized Germany and Japan, which were able to spend much more on civilian research and development. Could the United States hope to preserve its cold war position as a superpower? “The only answer to the question,” wrote Kennedy, “is ‘no.’ ”
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Indeed, Kennedy went further, hinting at the dire domestic political consequences that might ensue from imperial overstretch. Citing the defense-driven growth in the federal debt under President Reagan, he drew a parallel with prerevolutionary France, “the only other example which comes to mind of a Great Power so increasing its indebtedness in
peacetime
.”
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As Keynes once said, when the facts change, one ought to change one’s opinion.
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Writing in September 2002 about America’s subsequent ascent from superpower to “hyperpower,” Kennedy invoked the
deus ex machina
of the “revolution in military affairs” to explain why his predictions of overstretch had not been fulfilled. All that investment in military research and development, of which he had been so disapproving back in the 1980s, had paid an unforeseen dividend.
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Not only did the Soviet Union collapse as it strained to match the Reagan-Weinberger arms extravaganza, but the United States also went on to collect a triple peace dividend in the 1990s: falling defense spending as a share of GDP, accelerating economic growth and a quantum leap in military capability that left other powers far behind.

The irony is that Kennedy’s original thesis of
fiscal
overstretch might yet be vindicated—despite his decision to abandon it. America’s fiscal overstretch is far worse today than anything he envisaged sixteen years ago. The key point—and here the resemblance to Kennedy’s earlier argument ends—is that this overstretch has almost nothing to do with the United States’ overseas military commitments. It is the result of America’s chronically unbalanced
domestic
finances. And the magnitude of the problem is such that most Americans, including those who consider themselves well informed about the nation’s finances, find it quite simply incredible. Indeed, the main reason why America’s fiscal crisis remains latent is precisely that people refuse to believe in its existence.
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And they are able to do this because the United States has imperceptibly come to rely on East Asian capital to stabilize its unbalanced budgets. Many commentators have noted the very muted, even quiescent reaction of China to recent American military intervention.
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Fewer have appreciated the extent to which China now helps underwrite American power.

Like Britain’s liberal empire a century ago, America’s nascent liberal empire is surprisingly inexpensive to run. That is largely because the American economy is so very large. Since 1980 U.S. GDP, measured in current dollar terms, has risen from a low point of just 10 percent of world output to 31 percent in 2002. That makes it two and half times larger than the Japanese economy, eight and a half times larger than the Chinese and thirty
times larger than the Russian. U.S. military expenditure exceeds the combined defense budgets of the EU, China and Russia. Yet the cost of the U.S. military has declined steeply in relative terms, from an average of 10 percent of GDP in the 1950s to just 4 percent in the 1990s and a forecast 3.5 percent in the first half of the present decade.

Many Americans worry about the cost of the American occupation of Iraq. That is in large measure because they were encouraged to imagine that it would cost nothing. In April 2003 some Bush administration spokesmen talked as if the country’s reconstruction would somehow be self-financing. The first Gulf War had been effectively free to Americans because a broadly based coalition, including Germany and Japan, had paid between 80 and 90 percent of its total military costs.
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But in the second Gulf War the United States did more than defeat Iraq; it occupied it. And it did so with the sup port of fewer wealthy allies. For much of 2003 America’s leaders seemed reluctant to confront this reality. “Iraq is a wealthy nation,” the president’s spokesman Ari Fleischer blithely declared. “Iraq will have a huge financial base from within, upon which to draw … because of [its] oil wealth.” The motto of America’s biggest corporation, Wal-Mart, is simple and to the point: “Always Low Prices. Always.” The same principle was initially adopted by the Bush administration after 9/11. Regime change was the policy, but the means allocated to it were small change.

It is worth remembering that as late as September 2003 the Bush administration had still spent relatively little on the reconstruction of Afghanistan, where nation building had supposedly been under way for a year and a half. According to CARE International, the amount per person per year pledged to Afghanistan by that date—by all foreign donors—was no more than a quarter of the amount actually spent on postconflict recovery in Kosovo, despite the fact that Afghanistan’s needs were obviously far more acute. In any case, the Center on International Cooperation calculated in June 2003 that no more than $1.6 billion had actually been “disbursed” for Afghan reconstruction, of which just $947 million had been “activated” (which often meant it had been spent on vehicles and computers for Western “needs assessment” teams). Barely $192 million had been spent on projects that had been completed.
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The future stability in Afghanistan plainly depends on the success of the Interim Administration established in Kabul under President Hamid Karzai. Yet at the time of writing, less
than a fifth of postwar funding had gone to the Afghan government’s designated trust funds; far more had been distributed via international donors. By May 2003 the United States had disbursed a paltry
$5 million
to the main Afghan Interim Administration Fund.
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Such tightfistedness cannot be blamed on the Bush administration alone, however. The decline in America’s foreign aid budget—from its peak in the years after the Second World War, when it averaged close to 1.8 percent of U.S. gross national product, to its present level of barely 0.2 percent
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—is the result of many years of cheeseparing by American legislators. In the early stages of the war in Iraq there was a surreal meeting of House and Senate negotiators to determine how—and where—the $79 billion initially requested by the Bush administration to cover the cost of the war should be spent. By the time they finished, $2.9 billion had been earmarked to bail out American airlines, whose profits have been squeezed by the increased international insecurity since 9/11. Another $275 million had been diverted to workers recently laid off by the airlines. There was even a farcical moment when Senator Patrick J. Leahy of Vermont proposed that $3.3 million of the war budget should be spent on reconstructing a dam near his house in Waterbury. Given the choice between local pork and national security, there are always some members of Congress who can be relied on to opt for the former.

Yet attitudes changed discernibly in the course of 2003; witness the congressional approval of the administration’s request in October of that year for $87 billion to fund the occupation and reconstruction of Iraq and Afghanistan. There is, after all, a difference between aid that is simply disbursed to unreformed foreign states and aid that goes to make a success of an American regime change. And American lawmakers are not blind to the benefits as well as the costs of overthrowing Saddam Hussein.

At substantially less than the requested $79 billion—probably closer to $48 billion—the war itself was relatively cheap.
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Moreover, as economists at the University of Chicago pointed out, the United States might even have made a saving by getting rid of Saddam since it was costing around $13 billion a year just to contain the military threat he posed.
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No doubt $87 billion sounds like a great deal of money to most Americans. But it is equivalent to just 0.8 percent of U.S. GDP, and given the impossibility of forecasting how much failure in Iraq would cost, it seems a reasonably low
price to pay to establish a stable and friendly system of government in that country—if one assumes this can be achieved. Admittedly, most of the $87 billion will be absorbed by the purely military costs of the U.S. presence. Just over $20 billion has been earmarked for reconstruction, a quarter of which will go on modernizing the Iraqi security forces.
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Repairs to the dilapidated oil wells, pipelines and refineries alone could cost over $5 billion; overhauling the electricity system, more than twice that. Still, $20 billion is still a large sum in relation to Iraq’s miserably low GDP; it is proportionately a far bigger stimulus than Marshall Plan aid was to West Germany in the late 1940s, since the German economy never collapsed as completely under Hitler as Iraq’s has under Saddam.
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Moreover, international donors have already offered around $13 billion toward the cost of postwar reconstruction.

Why should the expenditure of up to $100 billion on security and reconstruction not suffice to bring about an Iraqi recovery? After all, the country has the second-largest oil reserves in the world. Before they were plunged into poverty by Saddam’s despotism, the average Iraqi’s income was between a quarter and a half of his American counterpart, depending on the method of calculation used. By 1999, however, two decades of war, state control, state theft and sanctions had reduced the average Iraqi’s income to three-quarters of 1 percent of the average American’s.
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Twenty years are not long enough to eradicate the collective memory of how a market economy works; the experiences of Poland and Russia in the 1990s make it clear that even forty-five years do not suffice, though after seventy-five years the slate has largely been wiped clean. Under the right circumstances, then, Iraq could bounce back quite rapidly to pre-1979 standards of living. For economic recovery to begin, of course, three things are urgently needed: the effective imposition of law and order, the repair and restoration of basic infrastructure (in particular, water and electricity) and substantial expenditure on reconstruction to modernize the dilapidated oil fields and stimulate economic activity in other sectors. But these things can be achieved, provided the occupation is not prematurely terminated and stable economic and legal institutions are given time to take root.