Back in December, David Welch had an excellent post, here, on recent Chinese actions in the South China Sea and their possible security implications. What might appear to be aggressive intentions, he argued, may, in fact, be the product of insecurity.
The legitimacy of the Beijing regime depends on its ability to deliver the goods -- in effect, securing the "American Dream" of each generation having more consumption opportunities than the generation that preceded it. Yet, as the forces of convergence kick in, and growth slows, this may be harder to achieve.
Optimists will point out that the remarkable growth achieved over the past quarter century means that lower growth on this huge base still means a big output. That observation is undoubtedly correct. But Chinese GDP per capita remains low despite the impressive progress that has been made over the past two decades. And, if the relevant metric is how the current generation fares relative to previous generations, growth pretty much remains a prerequisite.
As argued in an earlier post, it might be the case that the authorities are relatively sanguine about all this. If there is substitution of higher-vintage technology capital for labour, GDP per capita might then continue to rise. This is the optimistic scenario. It requires a flowering of technological innovation and adoption. A key question is whether the institutions that represent what Berkley’s Brad DeLong refers to as the "secret sauce" of development -- contract enforcement, property rights, rule of law -- will be developed, or, indeed, if they are actually indispensable. If they aren't (developed) and they are (indispensable), hopes for growth of per capita GDP may prove elusive.
In such circumstances, could the regime “change the channel” on its legitimacy from delivering the goods to demonstrations of superpower status?
If the answer to that question is “possibly.” We should heed Brad DeLong who argues:
… there is nothing more dangerous for America's future national security and nothing more destructive to America's future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible. There is little more dangerous to the NATO powers than a Chinese elite whose values and interests are not broadly consonant with those of America. And there is nothing more conducive to aligning the interests of China and its elite with those of the NATO powers than a China which is (a) growing richer, (b) increasingly entranced by the economic and cultural successes of North Atlantic civilization, (c) treated with respect, and (d) incentivized to strive for victory not in negative-sum military power but in positive-sum economic and technological games of international relations.
How best to align those interests?
The starting point is to ensure that the international financial architecture creates the right incentives for continued cooperation in fostering open markets and orderly exchange rate and balance of payments adjustment. The addition of the Renminbi (RMB) to the International Monetary Fund’s Special Drawing Right (SDR) composite currency, while largely symbolic, is an example. Unfortunately, the timing was not particularly propitious. The financial market turbulence that has shaken global investors since the start of the year springs from many sources, as John Authers noted in the Financial Times, one of which is concern over a possible disorderly adjustment of the RMB. The steep decline in foreign exchange reserves held by the Peoples’ Bank of China (PBoC) in recent months reflects a confluence of factors, including the RMB’s shadowing of the U.S. dollar, which has appreciated significantly over the past 18 months or so, continuing weakness in the Eurozone and the partial liberalization of capital flows. In this environment, imposing countervailing tariffs on Chinese exports, as some seeking the Republican Presidential nomination have proposed, would be both bad economics and bad (geo)politics.
Recently, both Barry Eichengreen and Ken Rogoff have argued that China will need to adjust its exchange rate policy. They note that this would have been better done from a position of strength, when the problem was excessive reserve accumulation, but that is water under the bridge. In any event, the IMF can play an important role in providing an external monitoring function certifying that the change, when it comes, is consistent with the commitments members make to eschew efforts to manipulate exchange rates to gain a competitive advantage over others.
At the same time, it would be naïve to think that the international institutions are not without broader objectives: they are, after all, creatures of sovereign states that have interests to protect and advance. In this respect, the challenge will be to accommodate China’s legitimate aspirations for voice commensurate with its growing economic importance. This will, inevitably, require some diminution of American influence.
While difficult to sell in the current political environment in the United States, there are clear risks from failing to recognize new realities in global power structures. Writing of the economic cataclysm that befell the global economy in the 1930s, the late Charles Kindleberger penned what I think are the saddest words of international finance: “in 1929, the Bank of England couldn’t and the Fed wouldn’t [provide the public good of international financial stability].” The Bank of England “couldn’t” because the financial burdens of the Great War had exhausted its financial resources; the Fed “wouldn’t” because as a nascent institution it was reluctant to take on the responsibilities of foreign entanglements. The costs of this failure were enormous, as economic disruption frayed the social fabric and led to political polarization and, eventually, global war.
Yet, if international economic and financial cooperation clears a path for growth and development, it could also remove threats to geopolitical security.