Global Economics and Management

China's Belt and Road Initiative is in Trouble

The Wall Street Journal has a great report on the growing wave of default from international infrastructure projects financed through China's Belt and Road Initiative (BRI). I have three quick observations:

1) It was natural for a country like China, with such a large current account surplus, to want to find international investments to finance with that surplus. The BRI was a way to do that in a way that could also advance China's strategic interests.

2) In a globalized world, it is hard to find projects that the vast global pool of private capital has not found profitable to fund, and to fund them nonetheless with capital channeled by a government rather than a profit-seeking private agent. 

3) As a result, the projects funded through the BRI were bound to involve unusually high default rates. You can call that a form of adverse selection. I have been saying for a long time that the BRI would lead to many defaults - including in the Global Trends class - and now this is indeed happening. 

The same sort of considerations apply to what is known as industrial policy: a policy to direct state resources toward sectors or projects that are deemed of special strategic or economic importance by some set of enlightened bureaucrats. Said bureaucrats should start by asking: what is the reason the private market has not already funded this wonderful sector or project toward which I am about to direct state resources? The reason better be convincing, or the subsidy may end up delivering disappointing results. In my experience, the stated rationales are rarely sound, but one can easily understand the political incentive that led to the misallocation of public funds: bureaucrats get to exert power by extending the reach of their office, they can skim some of the resources off the top for personal use, they can attract the political loyalty of those that they fund, etc. The political economy of industrial policy is that there is too much of it.

Geopolitical Developments

Recently, President Xi and President Putin met in Uzbekistan. The Chinese leader took this opportunity to quietly question Russia's actions in Ukraine. What was left unsaid there is more relevant than what was actually said: it is hard not to see this exchange as an expression of doubt and concern on the part of the Chinese. The Wall Street Journal has the details, which make for a fascinating read.

Then today, Prime Minister Modi of India issued a thinly veiled rebuke to Russia. Reuters reports. India had maintained a position of ambiguity regarding the Ukraine invasion. Indeed India owns a lot of Russian-made armament, and needs to maintain cordial relations with Russia in order to retain access to parts and maintenance, as well as future procurement contracts. India also was looking to import Russian oil at a discount. But if India is seen as being too close to Russia, it could have costs when it comes to its relationship with the West - and in particular the other three powers in the Quad. And if Russia fails in Ukraine, as seems increasingly likely, the reputation of those who stayed too closely aligned with Putin will suffer. You don't want to be seen as backing a loser.

The backdrop of these two developments, of course, is that China and India are themselves long-time strategic rivals. This consideration explains to some degree the hesitant and ambiguous positions that these two rising powers have adopted vis-à-vis Russia's actions in Ukraine. Their positions were always apt to evolve based on the situation on the ground in Ukraine - and it seems that this is indeed happening.

The growing pushback that Russia is feeling from India and China can be attributed directly to the setbacks experienced by Russia in Ukraine in recent weeks. In the WSJ, the great Yaroslav Trofimov describes the likely effects of a Russian defeat in Ukraine. The main effect, of course, is that Vladimir Putin could lose power. A continued decline of Russia's strategic standing in the world could also lead to bad outcomes for Russia - already humiliated by its defeat in the Cold War, the progress of NATO in the years that followed, and now by a possible defeat in Ukraine. If there is regime change in Russia, it will be essential for Western powers to adopt a smart approach: engaging with the new Russia to make sure prosperity returns to this great country, that it can be welcomed back in the concert of nations on the basis of commerce and peace. Russia will need to be more firmly tethered to the world economy, and perhaps receive financial transfers from rich countries to aid in this endeavor - as in the Marshall Plan after WWII. This is, of course, much easier said than done.

Two Geopolitical Updates from Foreign Affairs

The latest issue of Foreign Affairs features two excellent articles providing updates and analysis of some salient geopolitical issues. Both are relevant for our discussion at the next meeting of Global Trends. 

1) The first article is on US-China relations, by Jessica Chen Weiss. This article seems to me to carry the voice of reason. It calls for a more measured and intelligent approach, on the part of the US foreign policy leadership, to its relationship with China. US policy is too reflexively anti-China. China-US economic relations are characterized by much interdependence - most of it for the good of both countries. China-US strategic relations feature numerous points of contention that could degenerate into conflict and will require consultation and discussion. Placing the US in a mode of systematic opposition to China carries dangers from the perspective of its own national security - and economic prosperity. The US needs to tread carefully - and of course, so does China. The article provides a great opportunity to learn about the myriad issues that characterize the most important bilateral relationship in today's world.

2) The second article is on the status of the Russia-Ukraine conflict, by Dara Massicot. The article highlights the difficulties faced by the Russian military as it tries to advance in Eastern and Southeastern Ukraine. I am sure people will disagree on the extent of the challenges faced by Russia, given the fog of war. And I have yet to see a similar assessment of the difficulties faced by the Ukrainians. What seems increasingly clear, however, is that this conflict is likely to drag on for many more months, if not years. Time will tell if both sides have the stomach for such a protracted conflict.

The Coming War in Taiwan?

This is the first of several posts I plan to write on the themes of Part III of Global Trends. The first module of this part of the course concerns the rise of new powers, and the concurrent geopolitical uncertainties that will result. In the past, we discussed China's territorial claims in the South China Sea as an example of the growing clout of new powers. Last February, I switched the case to the Russia-Ukraine conflict, for obvious reasons. Right now, that conflict is still very much in the news as Ukraine launches a counteroffensive. But the issue of a possible invasion of Taiwan by mainland China is at the forefront of observers' concerns. 

Is China likely to make a move on Taiwan anytime soon? A pair of articles in the WSJ and in Bloomberg make the case for alternative points of view. In the WSJ, Hal Brands and Michael Beckley, two academics, argue in the affirmative in the journal's latest Saturday Essay. They point to the urgency of making plans for the worst - in particular to help Taiwan build up its military capabilities, to prepare for a war involving the US in the Pacific, and to start designing economic sanctions against China in case of an attack. 

Over at Bloomberg, Admiral James Stavridis, a former supreme allied commander of NATO, thinks instead that we are years away from a conflict involving Taiwan. He goes through five major reasons for why this is the case. 

These two articles illustrates the old Latin adage "si vis pacem, para bellum": if you want peace, prepare for war. They both agree that aggressive contingency planning needs to occur now to deter a conflict. They agree that a reunification with Taiwan is resolutely part of China's ambitions. They agree that if such a reunification occurs through conflict, it will be an immensely costly affair for China, for the US and for the world. Their disagreement is mostly over the timing of a possible attack, and over the urgency of the situation. However your views align, there is no doubt that this issue should be a major source of concern for the months and years to come.

The State of Things

As I gear up to teach Global Trends again this summer, what better way to introduce some of the themes we will be discussing in class than to link to Niall Ferguson's excellent new column in Blomberg?

America, China, Russia and the Avalanche of History.

Recommended - including the ending!

China's Falling Birth Rate

Some of the trends we study in class are very much at the forefront of public discourse: the rise of populism, the increase in inequality, the emergence of new technologies. Some trends, however, are more hidden. Nonetheless, they are often no less important than the visible ones. The example of China's falling birth rates is a case in point. Indeed, the situation with birth rates in China is a huge source of concern for the future of that country. As we will study in more detail in Module 9, the rapid ageing of the Chinese population and the eventual decline of its working-age population will put a lid on long-run growth there. A recent article over at Bloomberg contains details and numbers. This chart says it all:

The situation is so dire that population growth in China in 2021 was basically zero.

Why did this happen? Here is my quick take. Explosive birth rates in China following the Second World War led to the imposition of the One-Child Policy in 1980. The policy was enforced very stringently, and so, with a small lag, it led to a dramatic decline in births as seen in the chart above. In 2015 the policy was relaxed, but that did not lead to more births. On the contrary, the downward trend continued. It did so in part for cultural reasons: the one-child policy had lasting effects on family's fertility norms. The socially acceptable norm became to have fewer children. This was likely the result of social contagion and imitation. Growing levels of per capita income and education in China also contributed: birth rates tend to fall across the board when countries rise up in the income and education ladder. Then the COVID pandemic did not help: China is not the only example of plummeting birth rates as a result of the pandemic.

We will have a chance to discuss this issue in much more detail later in the class, of course. There are many interesting nuances that I am sure you will be eager to discuss. For instance, might these falling birth rates help the environment? To every coin there are two sides!

A Pair of Articles on the State of American Education

1) Via the excellent Bari Weiss, an article from ProPublica and the New Yorker, on the devastating effects of COVID-related school closures on children, especially the poorest and most vulnerable of them. The effects on US inequality will be profound and will last for decades.

2) From the WSJ, it appears there is now a large gender gap in college-level education.(Hat tip: Ivo Welch; the article is also cited in Bari Weiss's Substack post, linked to above). The figures cited in the article are simply staggering. Combined with other diagnoses of the plight of young men (declining labor supply, increasing time spent playing video-games), the article makes for sobering reading.

Is the situation similar in other countries? I would guess the tendency is there, but less pronounced. China recently cracked down on gaming. Such a dramatic policy would not be feasible in Western democracies. In fact, it is not clear what policy intervention could address the issue effectively.

Ken Rogoff on China's Currency

Over at Nikkei Asia, Professor Rogoff of Harvard (as you know, one of my favorite economists) discusses the growing clout of China in the monetary sphere. It is a wide-ranging interview, full of wisdom. One of the themes that it raises is that the world monetary system is likely to become multipolar - with the RMB dominant in Asia, the Euro in Europe and the US dollar in the Americas. This echoes one of the major themes of part 3 of Global Trends. Yet according to Rogoff, this could be a temporary phenomenon: 

"Unipolar is the usual. Multipolar is usually transitional. It's not a stable equilibrium, because there are networking effects that are very powerful, and that tends to prevail. So, if we see China become as important as Europe is today, I suspect there would be a transition to where someday it became the center."

I recommend reading the whole thing.

The Quad, China and International Realignment

Over at Foreign Affairs, Kevin Rudd, the former Prime Minister of Australia, gives an overview of the history and purpose of the Quad, a new alliance involving India, Australia, Japan and the US. It is a great article, which covers a lot of ground on the most consequential strategic realignment of recent years. The most significant aspect of the Quad is the rapprochement between India and the US. This is the culmination of a process that began after the end of the Cold War. That India and the US would become close strategic allies was inevitable. The growing power of China and the deteriorating relations between Pakistan and the US were prime factors. We will see how it plays out, but as Prime Minister Rudd describes, China seems to be taking the emergence of the Quad quite seriously. Money quote: 

"But the worst-case scenario from Beijing’s perspective is that the Quad could serve as the foundation of a broader global anti-Chinese coalition. If the Quad were to draw other Asian countries, the EU, and NATO into efforts to confront or undermine China’s international ambitions, it could over time swing the collective balance of power definitively against China. The Quad could also lay the groundwork for a broader allied economic, customs, and standards union, which could reshape everything from global infrastructure funding to supply chains to technology standards. The Biden White House’s senior Asia official, Kurt Campbell, has already spoken of the need to provide a “positive economic vision” for the Indo-Pacific; Beijing fears that the Quad could become the fulcrum for such an effort."

As we embark upon our exploration of new geopolitical risks in Global Trends, this article could not come at a better time.

The Return of Industrial Policy?

Over at the Wall Street Journal, Greg Ip has written a fantastic article analyzing the return of industrial policy in many Western countries. Prompted by the economic success of China, governments are increasingly directing resources to favored industries. The WSJ article does a great job at outlining the costs and benefits of such an industrial policy.

My general view is that these efforts rarely deliver the promised results. The success of China is not primarily due to industrial policy but to the set of market-opening policies that China put in place starting in the 1980s. In fact, a good argument could be made that China's efforts to direct resources to certain industries or activities has resulted in huge amounts of waste. The reason is that, as Greg Ip outlines, industrial policy allocates resources on the basis of politicians' perceived "strategic priorities" rather than on the basis of market signals. And politicians are not very good at picking the next big thing. Instead, they subsidize certain industries largely out of political expediency - things like "how many jobs will I get in my district". This can be a recipe for short-run electoral success, but it is rarely a recipe for long-run economic growth.

With that on the table, and with a presumption that many of you will disagree with the preceding paragraph, I am sure we can have a healthy debate in the comments section!