Economic Fundamentals
The world is slowly coming to its senses.


Conrad Black

Difficult though current economic and political times are, ineluctable forces of economic arithmetic and national interest are asserting themselves in ways that are, in the circumstances, reassuring. There are a number of particular areas where this phenomenon of irrepressible geopolitical logic is emerging.

Finally, the Chinese miracle, replete with the hallelujah chorus of China marching inexorably to the headship of the world, is starting to appear less a wave of the future than a faddish hope or alarm running out of steam. There is no question that, as a developing country advancing from centuries of backwardness to sharply rising prosperity and industrial capabilities, China has been and is an overwhelming and historic success story. The scale of its industrial awakening, to now having more than eight times the gross steel production of the United States, for example, is indicative of the greatest national industrial flowering of a country since that of the U.S. itself in the 19th century after the Civil War. And then, the U.S. advanced in parallel expansions of settled territory, immigration-fired demographic growth, and accelerating financial and industrial development.

China has turned the sow’s ear of a tanked-out rural command economy much of the way into a silk purse of a sophisticated industrial society that has drawn hundreds of millions of poor people onto the up-escalator of a First World economy. However, it still remains heavily regulated, is hobbled by pandemic corruption and oppressive central planning, and still has hundreds of millions of timeless, benighted, sullen peasants who feel left behind. As a textbook case in how to bootstrap an economy out of ages of decay and misgovernment, it is uplifting. But a fast ticket to world domination is not available and the transition to a credible pursuit of such a prize requires some backing and filling, and much hard slogging.

The latest figures indicate that the world is responding effectively to what has essentially been the dumping of Chinese manufactured goods, and the response has been enhanced competition and attenuated demand, not the old cul-de-sac of protectionism. The People’s Bank of China has also, and Western central banks can easily identify with this, been an overachiever in containing and reducing a dangerous real-estate bubble, to the point that the Chinese real-estate sector is now deflated by 40 percent or more, and land values underpin the entire banking system. The Chinese are, at least implicitly, tackling this by the imaginative method of reducing reserve requirements for lending banks rather than tampering with interest rates, which is a blunderbuss in economic stimulus, as it is in combating inflation. The Chinese move came just hours ahead of a coordinated measure in the same direction by the central banks of the United States, the European Union, Japan, Great Britain, Canada, and Switzerland.

The Chinese are now seesawing, as mature economies do, between inflation and slowing growth. But the almost inevitable message is that the roseate forecasts of racking up endless years of double-digit economic growth are yielding to the brusque realities of Grade Three arithmetic and the revelation that the Chinese, though an immensely formidable nationality, are not a super-race. Investments, in one of history’s greatest acts of economic stimulus, were nearly 50 percent of GDP in 2010, but were largely unproductive, caused an immense increase in the money supply, and have generated inflation in undeflated areas of the economy of at least 10 percent. Like a determined mountain climber, China is finding the going slower and steeper as the summit comes into view. And the countries above it, who got there first, are not bound or inclined to make China’s ascent easier.

India is experiencing similar problems, but as a less authoritarian regime in a less homogeneous country, has had less success than China in capping inflation. These two huge countries, with about 37 percent of the world’s population between them, will continue to grow, but not in an unstoppable flying column to world domination, as some of the more effusive Sinophiles (and Americaphobes) have been screaming from the skyscraper-tops for the past 20 years. (So, before them, did their analogues on behalf of Japan, the Soviet Union, and Nazi Germany, albeit the last two on ideological and geopolitical, rather than economic, grounds.)

As the economic facts are shifting, so are political relations. President Obama had a good visit to the Far East and Australia, and China’s neighbors, with judicious American encouragement, are singularly uninterested in becoming satellized. Old animosities, such as that between the U.S. and Vietnam, no less than long-lived friendships, such as those with the Philippines and Taiwan, are fruitful ground for dissent from China’s surprisingly ham-fisted assertions of proprietary rights over the South China Sea and other international sea-lanes. It all sounds like Mussolini’s risible braggadocio in the Thirties about the Mediterranean being an “Italian lake.” (That is not how it turned out.)