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When super power changes hands

When super power changes hands
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First Published: Mon, Jan 31 2011. 10 13 PM IST
Updated: Mon, Jan 31 2011. 10 13 PM IST
China has surpassed Japan as the world’s second largest economy in real terms. According to a report from the Peterson Institute for International Economics in Washington, it may even surpass the US as the largest, in purchasing power parity terms. The possibility and implications of such an upheaval in the global pecking order have been debated for long. With “The Frugal Superpower”, political thinker and Johns Hopkins University foreign policy professor Michael Mandelbaum weighs in on what could be the definitive shift of the century.
Mandelbaum says that for much of the last 100 years, the US was the world’s policeman. President Barack Obama admitted this during an address to the West Point military academy last year, when he said it was economic prosperity that had enabled the US to underwrite global security through its role in the two world wars, and in Eastern Europe and the Balkans. While it is possible to have different opinions on the role of US foreign policy, most people would agree that the US has supported the spirit of economic growth and free trade. Seeking to prevent the widespread proliferation of nuclear weapons, guaranteeing safety on the seas, and ensuring minimal disruption to the supply of oil have been important elements of US policy, and these have benefited other nations as well. The historical benefit to world economic growth is estimated to have been half a percentage point.
For much of the past century, there was never a question about whether the US could afford to play this role. Now, Mandelbaum says, things have changed. This is the year when many baby boomers will stop being producers. That will reduce the US’ manufacturing base and shrink tax collections. And as the boomers turn 65 and become the recipients of social security and medicare, the US’ budget will feel the strain. To restore even a semblance of fiscal balance, the government will likely need to cut defence expenditure. Americans have been tolerant over the last 50 years about various foreign policy initiatives that did not directly benefit them, but their tolerance will be tested if such policies affect their entitlements. If they do, the 75 million baby boomers will vote with their feet. So, as defence cuts become more likely, Mandelbaum’s thesis is that this decision will have an impact on the global economy.
Unlike in the last century, changes in the world economic hierarchy are unlikely to be accompanied by dramatic or destabilising political shifts, in part because China has much of its economic interests intertwined with the global economy. Mandelbaum, however, does not rule out a resurgence of localised stresses similar to those during the Cold War. These could translate into closed trading blocs, reduced access to markets, capture of raw materials or market sources, and so on. China watchers must have noted how Beijing imposed restrictions on the export of rare earths, of which China has approximately 97% of the world’s supply. Similarly, the peak of the Cold War in the 1970s was also a period of slow economic growth as political one-upmanship created a sense of uncertainty (though oil shocks played a major role here).
A series of minor political tensions can also take the edge off economic growth, simply by creating doubt in the minds of investors. Mandelbaum is right to point out that persistent fiscal deficits in the US will significantly increase the likelihood of this. The global political climate he describes can affect even countries that now seem destined for several years of high growth. With India’s stock market having dropped nearly 15% from its peak three months ago, Mandelbaum’s views should give pause for reflection.
Govind Sankaranarayanan is chief financial officer and chief operating officer, corporate affairs, Tata Capital. He writes on issues of governance.
Comments are welcome at otherviews@livemint.com
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First Published: Mon, Jan 31 2011. 10 13 PM IST