My Blog

January 30, 2008

There is a longish and much-discussed article in this Sunday’s New York Times (“Waving goodbye to hegemony”) by Parag Khanna, a senior research fellow in the American Strategy Program of the New America Foundation, which strikes me as a sort of compendium of a lot of fashionable and muddled thinking about the evolving geopolitical order.  The main thesis is that we are moving away from US hegemony (what? again?) towards a new world order to be dominated by China, Europe and the US.

After stating this thesis Khanna then makes a number of suggestions about how the US should prepare itself for this new world – some commonsense, some irrelevant.  Most of his evidence in favor of his thesis is not based on aggregate numbers but rather on the sort of anecdotal and often meaningless examples with which journalists love to exemplify an assertion (“But there are statistics, and there are trends,” he says in explaining why he prefers symbolic anecdotes to data). For example, he points out that Tata is trying to buy Jaguar, London has (had actually) more IPOs than New York, developing countries have more reserves than the US, etc.  But the examples are purely symbolic and contain no substance, especially the point about reserves – regular readers of my blog know how much it irks me when people confuse reserves with wealth, especially when dealing with China, where growing reserves are a symptom of serious domestic problems, not rude good health.  Anyway when it comes to the hugely symbolic acts of rising powers, I think Japan in the 1980s blows out all of the current contenders – although perhaps Khanna is not old enough to remember.

Khanna supports his analysis by pointing out that in the past two years he has visited forty countries around the world, but at the risk of sounding like a world-weary snob, this does not impress me much – in fact I am a little worried by the Starbucks school of comparative politics.  It reminds me of something a Canadian China scholar once told me – for him the biggest difference between China experts who have never visited China and those that visit twice a year is that it is sometimes possible to convince the former when they are mistaken.  I would be much more impressed with Khanna’s article if he had a little more sense of history.  His comments about Hugo Chavez, for example, suggest he knows little about a very common thread in Latin American history – the very difficult history of what my Latin American friends call fiscal-surplus populism.  His claim that Russia will eventually choose to be swallowed up either by Europe or by China, as what he calls a petro-vassal, certainly violates everything I thought I knew about Russian history.

But I have a more fundamental problem with his thesis.  I know this is a very contrarian position, but not only do I personally not think we are moving towards a China-Europe-US great power world in my lifetime, I think a very plausible case can be made that the US will be even more dominant by the middle of this century than it is today (and that Europe will be far less).  I say this not with pride or glee – I actually think the supremacy the US has enjoyed during the past few decades is bad for the US and may have caused us to undermine some of our strongest values, as President Bush has already demonstrated.  To me an increase in US relative power is almost certainly a bad thing for the US, but nonetheless I think it is more likely than the alternative.

With all the recent hype about US decline it may seem a little hard to think otherwise, but breathless predictions of US decline have been made often enough in the past that they have become a little stale.  By some accounts the US has been in a state of permanent decline since at least the end of the 19th Century, when some English wit claimed that the US had already passed directly from youth into senility without having gone through a period of maturity.  Certainly since the first big recession after WW1 (I believe it was 1919-1921) or at least since the beginning of the Great Depression, it has never been hard to find very serious American and foreign scholars announcing the imminent end of relative US power.  More to the point, during my life time the current period of Chinese dominance is only the latest of at least three periods of unstoppable US decline.

The first one was during the 1970s, and that seemed to be a very plausible prediction at the time. The US faced a real set of problems unlike any it faces today, combining the geopolitical (the defeat in Vietnam, the humiliation of Iran, widespread anti-Americanism and the seeming collapse of US foreign policy in general), the political (the Watergate scandal), the cultural (hippies!) and the economic (inflation, stagnation, and a collapse in consumer confidence).  At the time you could buy entire blocks of New York City for a few thousand dollars and crime was rising inexorably and shockingly – talk about symbolism.

In those days it was pretty clear to any unbiased viewer that the US decline was all but irreversible, and I spent most of my college years learning that this was pretty much a given and we had all better get used to it.  Standing against US decline were the still powerful Soviet Union, which seemed all but impregnable, and the rapid rise of the fabulously wealthy OPEC Arabs (in a world of ever-rising oil prices as far out as the eye could see), who in the popular imagination were rich, secretive economic and political geniuses who were slowly and surely taking over the world with their growing foreign currency reserves.

Only a few years later the OPEC Arabs were all but forgotten and the Soviet Union seemed on the point of collapse, but there was a new, even more terrible threat that promised the end of US domination, and that, of course, was Japan.  As well-known as the story is it is still sometimes hard to remember how difficult it was back then for anyone to be taken seriously who doubted the inevitability of Japan’s rise to top-dog status.  Japan was truly a miracle economic and political story whose technological prowess, at the time, seemed likely to pose a real and insurmountable challenge to US supremacy.

Today China has replaced Japan, and in spite of the much larger Chinese population, I find the prospect even less likely.  Let me qualify that: There is no question in my mind of China’s relative rise, but the relative rise of China will be slower than many think.  More importantly, its rise would require the relative decline of the US only if there were no more than two countries in the world.  As it is there are more than two, and it is perfectly possible for both China and the US to rise in relative terms at the expense of other countries.  In fact I think this is actually a far more plausible explanation of what is likely to happen.  I would argue that the rise of China (and India) will be more than fully accommodated by the decline of Europe, Japan and Russia.

There are several reasons for this but the main reason is demographic.  If we assume that the six great or potential powers of the world are China, Europe, India, Japan, Russia and the US, it seems that all of them with the exception of India and the US have very serious demographic problems that will seriously undermine their future growth.  Take Europe for example.  I don’t have the figures in front of me, but today Europe’s population is, I think, about 15% greater than the US.  By the middle of the century it will be about 15% smaller, and its median age will have risen from a couple of years more than the US to about 12-16 years more.  Projecting the differential per capita growth rates over the past few decades into the future (I know, I know, but what is a more plausible alternative?), Europe’s GDP, which is today larger than that of the US, is likely to be only two-thirds or less than that of the US – and when I ran these projections a few years ago I did them on a per-capita basis, not on a per-worker basis, which would have been much worse..

Khanna will argue (and nearly does) that Europe has an almost unlimited supply of countries eager to join and, by adding them to the European stew willy-nilly Europe can keep its population and economy growing for a long time.  This would require that Europe keep adding North African and Asian states to the European Union without domestic opposition, fully integrating them immediately in the Europe political and economic system, and without in any way diluting the cohesiveness and decision-making ability of the European elite.  Khanna may have spent several months of those two Starbucks years visiting European countries, but I was born in Spain of a French mother and grew up primarily in Europe, and I think this is, to put it politely, highly implausible.

All the demographic problems facing Europe of course are as true, or even truer, of Japan, with the difference that Japan cannot annex neighboring countries as quickly as Khanna believes Europe can.  So Japan, I guess, is out of the running.  On the other hand my own unsubstantiated claim is that there will be an economic and military resurgence of Japan soon enough, so perhaps I wouldn’t count Japan out too quickly.

China also faces a serious demographic problem.  It has reached the limits of its population size while the US population keeps growing, driving the relative size of the two countries down from 4:1 currently to less than 3:1 by 2050 (and maybe substantially less).  More ominously, today China is younger than the US, but by the middle of the century I believe it may be even older than Europe, so the relative change in its working population will be even sharper than that of the overall population.  Since the mid-1970s China has benefited from a dramatic improvement in its dependency ratio as the one-child policy wiped out the bottom end of the dependents, but as China ages, the reverse impact of the one-child policy kicks in, so that beginning in 2010-2011 China’s dependency ration begins deteriorating just as dramatically as it improved. 

It is a little difficult to say what an equilibrium growth rate for China would be given current demographic conditions, but when the dependency ratio shifts sharply from improvement to deterioration, the new equilibrium growth rate must be substantially lower.  For comparison’s sake I once saw a World Bank study that argued that 30% of the growth of the Asian Tigers was accounted for by the improvement in their dependency rations (which have not improved as dramatically as China’s).  This suggests to me that nearly all estimates of China’s future growth rates are overly optimistic, even if you believe current levels are sustainable, which I don’t, for a variety of reasons I have discussed elsewhere.  By the way, for the curious, I remember reading that the US dependency ratio has actually improved slightly over the past few decades and is expected to continue doing so through the next few decades – although I don’t remember the actual numbers.

The problems China faces are not only demographic, of course.  It faces huge environmental, water, and social challenges that make any prediction very tentative and subject to lots of downward revision.  Most of all its political structure makes any of the current set of predictions extremely dependent on an unlikely set of political developments.

There are also geopolitical considerations.  When it comes to geopolitical conflicts the US is in a great neighborhood and largely unchallenged.  However all the rest of the potential powers are neighbors, with long histories of conflict and rivalry, and all with exception of Japan (maybe) nuclear-armed.  This hardly suggests to me an environment conducive to relative rise.  In my own view of the world, in the East China, Japan Russia and India will all conspire to keep any one of them from achieving dominant status, whereas in the West Europe will struggle with the problems of immigration and integration.  None of these predictions can be proven except by time, of course, but I think they are at least as plausible as the alternatives.

In another post I will discuss some of the issues facing China’s long term economic growth.  I believe that China will certainly grow relative to the rest of the world – from less than 5% of global GDP today to 15-20% in the next few decades – but I am very skeptical about claims that it will become the world’s largest economy in the next few decades.  The problems facing are huge.  Surprisingly enough this view, which should be seen as astonishingly optimistic, actually makes me in the eyes of much of the world a ferocious pessimist about China, which suggests perhaps how over-hyped China has become.  Still, for those of us who were around in the 1980s and remember the Japan hype, this is not exactly unprecedented.

Comments (34) for "The new China-Europe-US worl...

With regard to your thesis of "US being more dominant in the middle of the century", I think you forget one word: terrorism. What happens, God forbid, if there is another terrorist attack with WMD(s)? I agree with most of your analysis on challenges facing Europe, China, but somehow your stance on US geopolitical environment seems too optimistic to me. I do not think US government or its citizen has found a solution, nor do I believe it will ever do. But to quote Nassim Taleb, "absence of evidence does not equate evidence of absence". And if such "black swan" event does occur, boy, what happens next your guess is as good as mine. By anonymous - 1/29/2008 4:14 PM

Dear Prof. Pettis: I enjoy your blog. Thanks very much for all the insightful comments and analysis. I agree with your analysis. I think the key to the success-longevity of the US is it has the best (not perfect) political-economic system in the world. Most current analysis on the world also lack your historical perspectives. Please keep writing. Your blog is the first one I read everyday. Thanks. By Cirrus G - 1/29/2008 4:15 PM

What do you think about the fertility differences between European countries? I have read that in Nordic countries and France, fertility is much higher, and this reflects a basket of policies that support mothers in the workplace, among other things. If there are policies that work to address the demographic problem, is it too much to expect that other E.U. countries would adopt these policies, and this problem overall would be mitigated? The E.U. is rich enough to move in this direction. Very good blog, btw. By dissent - 1/29/2008 4:16 PM

@Cirrus G It is funny that you attribute the success of the US system to its "best (not perfect) system," as it is evidence of the effectiveness of decades of American propaganda that has been bred into the American people. The fact is that the US owes its dominant position to some structural advantages that it received after WWII, and these have been slowly eroding as the rest of the world adjusts and the US fails to truly capitalize those advantages. More specifically, the US was able to establish itself in a dominant position in most governing world bodies and institute its currency as the reserve currency of the world, and the currency by which all commodities are (still) traded. This allowed it disproportionate influence and virtually unlimited wealth due to the tremendous demand for its currency, the US was able to print money quite freely. It spent this primarily on building a massive military with the intention of protecting and expanding its markets, and perpetuating its dominance. However, this system is in fact unraveling. What Prof. Pettis ignores is the possibility that each of the periods of decline that he cites are part of the same ongoing process of the global rebalancing that is now occurring at a heightened pace (thanks to the unique stupidity of George W. Bush). Yes, the states will continue to be an important player in the world, but it will be much diminished as the dollar continues to fall, the world loses faith in the greenback, and it is no longer able to sustain its massive national deficits. Some questions for Prof. Pettis: You seem to argue that the US will continue to be dominant simply as a matter of demographic destiny. Is there any irrevocable connection between the dependency ration and economic prosperity? In your argument, you take demographic projection that are made ceteris paribus and draw far-reaching geopolitical conclusions on that basis. Have there been instances in history wherein economic prosperity did not follow the demographic trends you site, and likewise, have there been such demographic trends that reversed themselves as a matter of social, economic, or policy changes, wars, disease, or other phenomena? By psyloh - 1/29/2008 4:16 PM

Great post! @ anonymous Professor Pettis does address terrorism, albeit indirectly, when he writes that US power has increased over the last couple decades and we are in a secure geopolitical position. If the rest of the world starts experiencing increasing instability our strong military and two vast oceans will protect us from turmoil. And, notice that Europe, Northern Africa, and the Middle East bear the brunt of terrorist attacks, and this must have a lot to do with their geographic proximity. But, while this strength will allow us to wreak havoc abroad upon the alleged terrorist groups we will see our liberties at home decline. Military power and internal security will keep us fat & happy while possible battlefields will be the soil of foreign nations. The last time that there was massive turmoil abroad, 1939-45, the US came out on top of the world because our own infrastructure was untouched. Our powerful air defense systems (nothing comes close) should insure the same if conflict again erupts across the oceans. Whether or not the erosion of our personal liberties is a good thing, is another matter. And, don't forget that the Roman Empire didn't fall until 1453, around 1,000 years after abandoning its most distant possessions and turning its military and security apparatuses inwards (sure the Rome-U.S. thing is overplayed, but for good reason). By Will Lewis - 1/29/2008 4:17 PM

For geopolitical matters, China is already in a much better shape compared with our recent history. Russia and India can largely be written off. Japan has its own demographic problems and is just a minion of U.S. Taiwan is the most single largest chip in U.S. leverage. The weak link is China's domestic problems. Our advantage is that we discarded the ideology-centred foreign policies long time ago. The noise in international media about China, positive or negative, should and can be largely ignored. By fatbrick - 1/29/2008 4:17 PM

Excellent post. My friends often ask me why I am bearish on the US and I reply housing, banking, etc, but I it seems to me that world is becoming even more dependent on the US then ever before. More people should ask why China has so many reserves and the answer is because it is caught in economic trap that is scared to death to ever let change. By Shrek - 1/29/2008 4:18 PM

I wonder how your best students react to your argument. The conclusion can be hard to accept for some, I guess. By Tishop - 1/29/2008 4:18 PM

"More people should ask why China has so many reserves and the answer is because it is caught in economic trap that is scared to death to ever let change." It is because China needs the export market demand to meet the increasing labor supply. The China still mostly specialized in low end manufacturing is the reason of low wage and low domestic consumption. It will change, with more R&D investment and more higher-end manufacturing share. Then the wage can increase and people have more money to spend. This is the only path for a big developing country to choose to pull its people out of poverty. No offense, your version sounds like a fairy tale. By fatbrick - 1/29/2008 4:19 PM

@ fatbrick You give too much credit to financial planners. China has the T-Bill reserves not because of a plan to fortify the export markets, but because the PBOC was making a healthy profit by issuing its own bonds and raking in the difference between the high interest rates of the T-Bills and the low interest rates of the PBOC issued bonds. Now they're in trouble because US interest rates are decreasing and China is experiencing inflation, which decreases the difference in yield from the two bonds. Also, China has plenty of high manufacturing. Check out who manufactures the iPhone, or the computer you're typing on, or Chery, or the JV between Embraer & AVIC II... The path for a big developing country is not fancier manufacturing because that is just more of the same. The path for a big developing country is two-fold, creating a domestic market for the goods it manufactures through policies that encourage spending, and the development of homegrown companies that commission the manufacturing. This grows wealth within the country. By Will Lewis - 1/29/2008 4:20 PM

Will , The profit of PBOC is not that important, since it is not a commercial bank. Remember, with China's economic growth, its currency is bound to appreciate against other currencies sooner or later. Its FX reserve will take a loss no matter what they do. CIC is just an attempt to minimize the loss, not to earn profit. As Fed, the monetary policy of PBOC is to control inflation and fight unemployment. I also believe that the definition of low-end and high-end manufacturing have to change. Assembling iPhone/PC differs little from making socks. Chery is pretty low end compared with BMW. Patents, brands, and core capital goods manufacturing...all these are the backbones of an independent big economy. Without a large scale of competitive high end manufacturing sector, I cannot see how China's growth is driven by domestic consumption. By fatbrick - 1/29/2008 4:20 PM

Although I definitly agree that China has a very serious demographic problem which will prevent them from becoming anywhere near dominant on the world stage; I disagree with the grim outlook on Europe. The E.U., which now as a population of more then 500 million against 300 million in the U.S. (more like 66% more population, instead of 15%), will recapture its dominance on the global stage soon. This all depends on two developments: - Further integration of the member states; cooperation on foreign policy and military cooperation. Democratization of the European Commission. This will take a generation to complete, as conservative elements frustrate the evolution of the union. But surely on the long run the benefits of increased cooperation will prevail. - Incorporation of resource rich Russia and Ukraine. The nightmare of every American (and this is exactly why it will happen). Russians are European of culture, more then 70% of its population live in the European part of the country. As more Slavic countries (like Poland, Serbia, Croatia, Czech Republic, etc.) join the E.U., so will Russia. Especially if the U.S. continues to behave bullish. Integration of immigrants remains an issue; but it has been an issue in any country which has suddenly seen a large influx of immigrants appear. Integration takes time, it started in the 60's, it will continue to about 2030 after which the process will have completed. Im very curious to see the calculations that would make the EU's economy (at its current size) 2/3rds of the U.S. economy especially with the benefits of seeing its newer members integrating and developping taken into account. By all means, I'm probably an optimist. Share your thoughts on the E.U.s prospects with me! By evt - 1/29/2008 4:21 PM

Anonymous, for a lot of people terrorism is the great Achilles heel of US power, but I find this to be unlikely as a serious threat. First of all I think the threat of terrorism in the US may have been exaggerated, and I say this as a hard-core New York who ran to a local hospital in the morning of 9/11 and spent the whole day there helping out (actually it turned out we weren’t able to help much because there were so few wounded). But even if the threat hasn’t been exaggerated, many wealthy, well-functioning countries with credible political systems have experienced long periods of terrorism, and I can’t think of any that was seriously destabilized by terrorism. Countries do learn to function with low levels of terrorism. This may seem counterintuitive but much of the trauma of 9/11 had to do with its novelty. The last major terrorist attack in the US, the 1920 Wall Street bombing, provoked nearly as much fear and worry but except for a misguided Red Scare and a frankly un-Constitutional targeting and rounding-up of suspects, it had no lasting impact on the US economy or social structure. More to the point, I grew up in Spain, a country that has suffered over several decades a much heavier toll of terrorism than has the US, and I am pretty convinced that were terrorism to step up in the US, like in Spain it would lose its ability to shock the social, political and economic systems, which would learn to function around it. We might have to accept giving up some of our freedoms, but we would cope. England, I guess, is another case in point of a society that learns to live with low levels of terrorism. But perhaps the main point about terrorism I would make is that for all our US-centricity, terrorism is much less a US problem than it is for any of the other major countries save Japan. Nihilistic Islamic fundamentalism is more naturally aimed at countries like China, Russia and India, where there are serious conflicts between Muslim minorities and non-Muslim majorities (and where, not to take sides, it is not always clear to me that the Muslim minorities are the ones most in the wrong). In Europe there has been a nearly complete failure to integrate Muslim minorities socially or politically, unlike in the US, where second-generation Muslim immigrants are fairly well-integrated and actually earn slightly more per capita than the average American. My repeated visits to my home in Spain and to see relatives and friends in France and elsewhere in Europe leave me with the impression that attitudes on both sides in Europe are hardening. Americans hear a lot about terrorism in the US, but in truth there are far more terrorist attacks and attempted attacks in Europe and the other major countries. More generally I think there is no fundamental reason for extreme Islamic terrorism to target the US except in and because of its role of global policeman. Actually one of my biggest fears concerning terrorism is that Americans are increasingly aware that it is largely this role, and unconditional US support for Israel, that has made it a target, and that, especially if there is another big attack on US soil, the US will turn increasingly isolationist. US isolationism would be bad for the world for many reasons I think – for example, no one else seems willing to take as serious a role in the campaign against nuclear proliferation even though I think it is far more likely that the first terrorist nuclear explosion will take place in China, India, Russia or even Europe rather than in the US. Still, isolationism might in the short term reduce US vulnerability to terrorism and so may become an attractive option for the American electorate. So although terrorism is awful and highly destructive, I do not take it seriously as the Achilles heel of the US for at least three reasons: First, there is little evidence that terrorism can seriously undermine a country like the US – much higher levels of terrorism have not done so to Spain or the UK; second, it is at least as much and probably much more of a threat to the other great powers (only Japan seems unthreatened); and third, the US threat can be more easily defused by a rise in isolationism, which I think is unfortunately already in the cards. By Michael Pettis - 1/29/2008 4:55 PM

Dissent, it is not easy to repair demographic shifts in the short term especially as they may in some ways be self-reinforcing. For example I haven’t seen comprehensive numbers but in at least two European countries, Germany and the Netherlands, emigration is at among its highest levels since WW2. Germans and Dutch are leaving in larger numbers and emigrating, primarily to the US, Canada, Australia and New Zealand because, presumably, they believe they have better long-term prospects. What is worse (for Europe – but good for the recipient countries), these emigrants tend disproportionately to be couples with young children. It seems that as demographic prospects in Europe deteriorate, parents with young children, who are the ones most likely to bear the brunt of the adjustment, are responding by leaving. This can only make matters worse for Europe and is likely to be self-reinforcing since the more who leave, the worse the future adjustment, so the more who leave. I suspect that the process is not fully captured in current demographic projections. Psyloh, I am afraid you are simply assuming your conclusion. It is true that if the world continuously and increasingly loses faith in the greenback, by definition the US will have declined. My point is that neither is a foregone conclusion, and I think neither is very plausible. By the way one point I didn’t make is that one of the most likely ways Europe and Japan (and China and Russia) will have to pay for their demographic adjustments will be to liquidate their investments abroad as they run current account deficits – high dependency ratios imply that at least for a while consumption will exceed production. If one doesn’t begin with the assumption that the US economy will have collapsed by then, it would be reasonable to argue that the large trade deficits the US is running today are the natural outcome of the need for countries like Europe, Japan and China to save in order to pay for their future demographic adjustments, and that the US trade deficit will necessarily be reversed beginning in the next five to ten years as the brunt of the adjustment begins to take place.. Please note that I am not saying this absolutely MUST happen. I am saying that this prediction is at least as plausible as the claim that the US will continue to run massive deficits until it collapses. You ask if there is “any irrevocable connection between the dependency ratio and economic prosperity”, and the answer – very obviously given the way the question is put – must of course be: No, of course not, there are never irrevocable connections in history between such complex sets of variables. But in general demographic changes do matter a lot – in fact one often hears people say “demography is destiny,” although that too is an exaggeration. Really my main point is that all the claims we have been hearing in the recent past about the inevitability of US decline in the next few decades and its replacement by either China or by the triumvirate that Khanna proposes are nonsense. These predictions are much too difficult to make with any degree of confidence, and the fact that they have been foolishly proposed with even greater confidence in the past should at least give us pause. More importantly, given that there is a far more plausible argument, at least to me, that suggest the opposite story, I would argue that to propose that the US engage in a major revision of its strategic policy-making based on this thesis, which is what Khanna proposes, is at best wrongheaded. Tishop, I suspect the story of US decline is far more popular in the US than anywhere else in the world, and not taken quite so seriously here in China. I also suspect that this sort of paranoia, which is very typically American, may actually be one of the strengths of the US. For example living in China and having taught in the top two universities in China I find the US paranoia that in science and technology China will soon catch up with and surpass the US (or any of a dozen other countries) a little funny. My students here are fairly sober and seem to consider the idea of a collapse in US power a lot more bizarre than my argument that US power is more likely to rise in relative terms. By Michael Pettis - 1/29/2008 5:58 PM

Fatbrick and Will, I do think China will change from its export orientation to domestic consumption, which is a very good and necessary thing for China, but I suspect it won’t be because of intelligent government polices. On the contrary I think government policy has locked China into its unsustainable export mode. What has happened in other countries, for example the US in the late 18th and early 19th centuries, when an export-related crisis threw the US into sharp contraction and forced it to shift from its earlier export-orientation towards focusing on the development of its domestic economy, is that financial crises force the necessary adjustment, and I suspect the same thing will happen in China. The main issue I think is how Chinese policy-makers react to a crisis and how quickly the econ0m is allowed to adjust. By Michael Pettis - 1/29/2008 6:00 PM

One thing I do not agree is "government policy has locked China into its unsustainable export mode. " I will argue the pressure of employment, limited advanced education and still weak R&D ability, all these factors force the government to stick to the export orientation policies. The room for stance adjusting is increasing but not large enough IMO. By fatbrick - 1/29/2008 9:17 PM

While I do not have the benefit of your experience, I do think there is a problem with the simplified framework for viewing the world as country versus country as you mention in your posting today. (Unfortunately, I think this is a theme that we see too often with Condoleezza Rice.) To me, this seems to be a legacy of earlier days when, for example, more Americans looked to the government, their church and their employers for answers and leadership. It occurs to me that the advances in the world that have opened up education and great job opportunities, coupled with communication technology, have created an environment that enables a more inclusive ability to live Emerson’s “self- reliant” life. As such it is not India buying Jaguar, it is a better more successful, individually run company buying a brand from a tired, nepotistic company. Along these lines, I suspect Putin has recognized that America’s might is built on global, world leading businesses. Perhaps surveying Russia’s positions he took the view to try to cobble a comparable company in the energy space. While there are many faults with the approach, the result, you can argue, is a world leading energy company that has power akin to the power of other dominant companies. Bottom line, it is my view that individuals with appropriate incentives build and develop world leading businesses that happen to provide the externality of national power to their home countries. By Jean-Paul St.Germain - 1/29/2008 10:58 PM

Prof. Pettis, What an outstanding column. I have become a huge fan of yours over the past year. Your contrarian thinking and informed perspective on China really are refreshing. I am so tired of US businessmen who get insta-hardons from the Pudong skyline, get carted around in Audis for a week, and return to spread the Good News that "omgomgomfgchinaisgonnatakeovertheworldanysecondnow". The herd instinct ... The information spectrum needs to hear you much more than it currently does. By E. Cartman - 1/30/2008 12:35 AM

I'm actually rather optimistic about the United States for several reasons: 1) immigration - The United States still is the first destination for immigrates around the world because the United States has a reputation for integrating immigrants into its power structures more readily than most other nations. Immigration seems the population pyramid young, provides a lot of cheap labor, and also most importantly provides the US with a lot of global expertise. If a US company wants to do business in Ecuador or Namibia, it can without too much effort find an American with relatives in Ecuador or Namibia that can serve as a bridge. This is not as likely to happen in China, Japan, or Europe. 2) constitutional systems - People talk about how stupid American politicians are, but the US political system is more able to get something done with stupid and incompetent politicians than most systems in the world. 3) institutional infrastructure - The US has excellent schools, a wonderful financial system, and a very, very strong military. These things can be duplicated, but it will take decades of sustained effort. Also, one problem in these discussions is that harsh criticism can be misleading. In discussions about the Chinese economy or the US political system, I can come up with about fifty things that need to be fixed, and whenever you spend most of your time talking about what's wrong about a system, it gives the misleading impression that everything is awful and totally hopeless. It's actually quite the opposite, I wouldn't be wasting my time arguing about what's wrong, if I didn't think that the system works well enough to take things criticisms and fix them. By Twofish - 1/30/2008 1:50 AM

Fatbrick: Russia and India can largely be written off. I don't think so. One of the nice things about looking at history is that you see that things that look totally hopeless can be fixed. Russia and India are better off than China was in 1975, and if something as totally messed up as China-1975 (or New York City-1975) can be fixed then there really is hope for the hopeless. Also if your neighbors house is on fire, then bad things are going to happen to yours, so that its in China's interest that Russia and India have very good economies. A bad economy leads to extremist leaders, and having crazy people in charge of neighboring countries with nukes is not a good thing. Also, I don't think that terrorism is really that much of an issue for the United States. One reason is that the United States is very good at integrating new immigrants, and Muslim immigrants are much more interested trying to getting their kids into Harvard and becoming investment bankers than trying to become suicide bombers. One thing about all of the terrorist plots that have been foiled in the United States is that the people involved in them have not been particularly intelligent. Anyone with a drop of talent or competence is going to end up trying to build up the US rather tear it down, which means that you are much, much more likely to see a devout Muslim immigrant become an FBI agent than a terrorist. By Twofish - 1/30/2008 2:02 AM

Hallo Some remarks. 1. Hypothesis: Thesis of Khannan is wrong “The main thesis is that we are moving away from US hegemony (what? again?) towards a new world order to be dominated by China, Europe and the US. ..” 2. base a. “There are several reasons for this but the main reason is demographic - Exampels China, Europe, Japan, China commentary: It would be good, to have also arguments for those, who don’t count very much in the Hokus-Pokus of the numbers/models of the demographs. (I have disastrous memories) b. “There are also geopolitical considerations” - Exampels: - “When it comes to geopolitical conflicts the US is in a great neighborhood and largely unchallenged. ..)..” Commentary: Yes. But it depends: if the unthinkable situation will happen, that a constellation of China, India and Russia threaten with the bombs, than things may become somewhat more ‘nervous’. But: there is no country, that has the power (and the intention) to go in a conflict with US (because: normally nobody wants to commit suicide). “- However all the rest of the potential powers are neighbors, with long histories of conflict and rivalry, and all with exception of Japan (maybe) nuclear-armed. This hardly suggests to me an environment conducive to relative rise. Commentary: This depends. There is the experience of Western-Europe: 45 years (till 89: Berlin-wall) under the atomic-bomb-shield (umbrella) has brought Western-Europe to big wealth and prosperity. -“ In my own view of the world, …in the East China, Japan Russia and India will all conspire to keep any one of them from achieving dominant status, whereas …” Commentary: Yes. And for all the small neighbors of big-states: all of them have had bad times with the fat neighbor; so they have the “natural feeling”: we don’t like much the fat, but –because we all are hanging at the breast of it- we take, what we can and make no trouble. But in a serious crisis, when the behaviour of the fat is really ugly and “threat to their security” , they will be against the fat. “…in the West Europe will struggle with the problems of immigration and integration Commentary: Yes. But this is a detail: they will find ways. (the globalization will lead the way: Work-place, sleep-place, health-/accident-/pension-insurance,..) “… predictions … at least as plausible as the alternatives.” Commentary: This all (US, India long term up EU,RU China down) is based mainly on the base of demographics. (What is –if it stands alone- never a very credible measure). And the geopolical points are not convincing. I have more the impression, you just want to show, that there are other ways in to the future than just the decline of US. This is always possible. But if we don’t look too far in the future (and with thin arguments) and look at the things that are going on right now, we see the relative go-down of US and a steady rise in China- and EU-power. “…China’s long term economic growth. . …from less than 5% of global GDP today to 15-20% in the next few decades …but I am very skeptical about claims that it will become the world’s largest economy in the next few decades. … The problems facing are huge. .how over-hyped China has become. Still, for those of us who were around in the 1980s and remember the Japan hype, this is not exactly unprecedented…” Commentary: Yes. China has big problems. The country with most 1$/day-people. But China is developing upwards: US is developing downwards. the cause "value" “I actually think the supremacy the US has enjoyed during the past few decades is bad for the US and may have caused us to undermine some of our strongest values, … Commentary: We should not speak about “values”; no meaning, just decoration, food for voters and mass media shows, who needs it, to not talk about facts.. The country of Guantanamo and Abu Graibh has lost all values. The derangement of the US citizen in his function of controlling the government is complete. I thought, the mayfaire-people went to America, - because of the pressure and terror from bishops and priest in religious things - because of the pressure and terror from Ducs, Lords, Barrons and Kings in political things - because of the pressure and terror from bad circumstances: war, job, …: bad expectations. I thought, they went to America and built there the new “jerusalem”: a society, where they are -free from such pressures and -free for a future, that will bring wealth for everybody And now look at the US-history: http://en.wikipedia.org/wiki/List_of_United_States_military_history_events And now: look what is actual a. Their harsh refuse of the government has turned: now the government –uncontrolled by the citizens- is eating the citizens: -the gov. deceives their citizens by lying. (the function of the medias: to control the gov., has made place to a loud, substanceless machine of production of garbage: it seems to be the right stuff for the shadows of the us Citizen. - the gov. controles the citizens like the former DDR: security - the new lords and barons and knights and their aureoles and courts: the big companies and trust, that overtook the government and organize the flow of power and money in their interest. - .. (b. Their harsh refuse of the controlled religion (at that time in Europe) has guided them to their own institutions: -a brainless theology (John Milbank aus wikipedia: "..his view of the relationship between Theology and the social sciences. He argues that the social sciences are a product of the modern ethos of secularism, which stems from an ontology of violence. Theology, therefore, should not seek to make constructive use of social theory, for theology itself offers a comprehensive vision of all reality, extending to the social and political without the need for social theory. .." - and strange spectacles in their ritus and cultus. In such nonsense has vanished the rational part of US citizens. Where has been the religion voices against the lies, the desceptions, .. of the citizens of US and of “New Jerusalem”? Der Neofundamentalismus der Gegenwart sei bloss «ein intellektuell unredliches Dekadenzphänomen», geprägt von «kapitalistischer und nationalistischer Verbalapokalyptik und intellektueller Leere». http://www.nzz.ch/nachrichten/kultur/aktuell/im_land_der_unbegrenzten_schwarmgeisterei_1.653785.html http://en.wikipedia.org/wiki/Intelligent_design Superstition, simplicity, enthusiasme, and idiotic manners. It is a disaster, a complete and total and universal destruction of the “values”. Out. Death. Finito. A fiasco totale. What ever will be, but a country in such condition will never be the accepted world leader. The more rational part of the world-spectators will never stop denouncing this ridicule popanz. So: your thesis (the thesis that US will be leader and EU, China, Japan, Russia will have a bad future) is as possible as the thesis of Khannan. That might be. But we should be more concentrated on the facts; and evidence from demographics and somewhat “strange” geopolical thoughts can not be token as real evidence. So: your thesis maybe ok, but the evidences are totally unconvincing because they are not compatible with to ongoing actuallity. But maybe you want just find some word of comfort and console for the strongly beaten Us citizens in desolate conditions. globumedes By globumedes - 1/30/2008 3:32 AM

Twofish, Looking at history, India never was a threat to China. Given my understanding of their system, it will not be a threat to China in any foreseeable future. Russia might make some noise on fareast part. But it is not China that humiliated Russia. With its natural resources and demographic features, I do not see why it wants to brace exetremism. By fatbrick - 1/30/2008 8:14 AM

Just because something didn't happen before, doesn't mean it can't happen in the future. In particular, India has historically been cut off from China by the Himalayas, but long range missiles and nuclear warheads change the geopolitics slightly. Right now Russia and India are in reasonably good economic shape, and economic prosperous nations generally don't have extreme foreign policies. If the prosperity goes, then things get dangerous. One thing that I dislike are "deterministic models." It is impossible to predict what the world will look like in 2050 because what the world will look like in 2050 depends on the decisions of individual human beings, including the decisions of you and me. The reason to talk about possible scenarios is so that we can choose what the future looks like, and once you are able to choose, then complete prediction is impossible. By Twofish - 1/30/2008 4:40 PM

Twofish, Poor does not mean dangerous. Ideology and its product- extremism are dangerous. India has lots of internal problems like China or worse. Idealism is the last thing they want to solve problems. They also have Pakistan to worry about. If you argue India would be dangerous to China. Then, China would have to be a bigger threat to India in the first place. I consider it unlikely to happen. Russia is an european country indeed. If it becomes dangerous, EU is the first to worry. If it is tamed by EU, it is much safer. By fatbrick - 1/30/2008 9:13 PM

Globumedes, most China- or America-related blogs are infested with moronic American and Chinese posturing about which foreign country is the most horrible and who is about the collapse. Usually this blog has managed to avoid that but I see you are bravely taking up the challenge. Please don't get so carried away. The "ongoing actuality", as you put it, hardly suggests the "desolate conditions" of US citizens. Besides being much richer and much more flexible than we Europeans, the serious debate in the US is about whether or not they might have a mild recession, not a permanent economic collapse, and even if it does this is hardly something new in US history. Recessions and financial crises have always been the ways in which flexible and well-functioning economies adjust. Readers of this blog would not be shocked to consider that the very same things might happen here in China, but we may wonder whether China would be able to adjust as quickly as America will. Guantanomo and Abu Grahib do not indicate that America has lost all its values especially since it was American reporters and politicians who discovered, exposed and attacked those terrible things. In China, where much greater abuses occur, it is almost impossible to imagine any Chinese journalist or politican doing the same. That is much greater failure of moral values -- and I admit that even in Europe we are usually not so quick to attack our own many shortcomings as are the Americans. I love China and wish it great success, but let us be reasonable. By Francois L. - 1/31/2008 7:45 PM

EVT do you really believe Europe will one day incorporate Russia, and even more surprisingly, that if it did Europe would have any chance of acting and operating as a single, unified country? Russia has historically been very nationalisitic and very proud of its heritage, and has often seen itself (and been seen by Europe) as an antagonist to Europe. In fact I would argue that the heavy lifting of European integration occured precisely because of fear of Russia. It would be much easier for Europe to absorb the US and Canada, which is probably not high on the list of things to bet on. By Jaime Florida - 1/31/2008 7:51 PM

I should add, Globumedes, that the idea that demography is hocus pocus is not a very convincing one. Didn't China experience significant demographic deterioration from 1950 to the mid-1970s (a large increase in the dependency ratio) followed by a sharp improvement from the mid-1970s to now? If that is so, might not that be at least part of the explanation for China's economic stagnation in the first period and its vitality in the second? By Jaime Florida - 1/31/2008 7:56 PM

You are stealing my thunder, Jaime. In fact it is not widely discussed for some reason, but in fact changes in China's dependency ratio have been highly correlated with Chinese economic performance, although of course that is not the only explanation. China did seem to experience a sharp deterioration in the dependency ratio after 1949, largely because of the explosion of births in the 1950s and early 1960s after years of civil and anti-Japanese war. As the one child-policy kicked in in the late 1970s, China's dependency ratio began improving very dramatically. By 2010-11, however, China will begin to experience a sharp rise in the elderly unmatched by an equivalent number of maturing children. I think today there are about 2-3 workers for every dependent. By 2030 the ratio will be almost 1:1. By Michael Pettis - 1/31/2008 8:09 PM

Hallo Francois L. “Globumedes, most China- or America-related blogs are infested with moronic American and Chinese posturing about which foreign country is the most horrible and who is about the collapse…” Commentary: That might be; I don’t know them. But for sure: there are more morons than non-morons on the planet. For my part, I don’t look and search the horrible or the collapse. I just try, to understand, what is going on; her in reality. “…Usually this blog has managed to avoid that but I see you are bravely taking up the challenge. ..” Commentary: I don’t understand exactly, what you mean: I am not in a fight; I just try to bring a regulation/interpretation into the facts. “… The "ongoing actuality", as you put it, hardly suggests the "desolate conditions" of US citizens. …” Commentary: But for sure; it is falling in the eyes. Take only a look, how the facts are. At the moment we see the “trinity of mysery”: -a. US econ.-citizen: economy under heavy fire (not 20y, only the “foreseeable future”): no next solvent borrower (besides the future money of taxpayer); outlook: trouble -b. US state-citizen: out of control of the actions of the government in military affaires; outlook: there are no signs, that the US citizen will and can get back the control over the gov.; they even don’t see, that there is a problem -c. US private-citizen: the fundament of the society, the families, educate their children in dogmatic religious practices; understanding and reason have left the base of country "..Besides being much richer and much more flexible than we Europeans, -the serious debate in the US is about whether or not they might have a mild recession, not a permanent economic collapse, … Commentary. Yes, I know. US as any other country, as any thing generally: all what is, has more than two sides; it has actually about 6.5bn sides (one for each human). “..and even if it does this is hardly something new in US history. Commentary: Yes; capitalism is the ongoing crisis; up and down. “.. Readers of this blog would not be shocked to consider that the very same things might happen here in China, but we may wonder whether China would be able to adjust as quickly as America will. ..” Commentary: Yes. US seems to be more flexible in adjustments then China. If you are captain of a ship with 300mio or 1’400mio passengers, the change of direction is not easy. (some say: to bring a fat tanker to stop, will take miles and hours) “..Guantanomo and Abu Grahib do not indicate that America has lost all its values ..” Commentary: Two values are shot down: - citizen-control of gov. does not exist anymore (to bring down a country to Neanderthal-level on the fundament of lies and deceptions and in opposition to the rest-world, that is incredible; and the demand of Us citizen for action in blood, steel and thunder is almost macabre). - the deeper fundaments of the society must be in deep disorder; no compass anymore or one in severe troubles "..especially since it was American reporters and politicians who discovered, exposed and attacked those terrible things. Commentary: I think, we all know (now) the role of the mass media in the lost years of president Bush ll. We also know the other voices. “…In China, where much greater abuses occur, it is almost impossible to imagine any Chinese journalist or politican doing the same. That is much greater failure of moral values -- …” Commentary: Yes. But when we look at China, we see that they are developing in a lot of ways. And we can see a developing upwards (in human rights too). And we see, US is developing downwards (trinity of misery) But we have to take US in a different way. US is a western country; and therefore we measure it with western-meters; with our meters (tested in long history) and with harder meters (then for China): we measure by the "liberty of the citizen" (otherwise we can go and beccome directly like a China-man: the gov. takes it all). Because US is by culture our owne culture. So if we see a desaster in US, it hurts in Europe likewise: because it is like a hit, like a damge in our culture or at least a part of it. And it hurts in China too (I don’t think, the Chinese are happy over the condition of US; or Russia,..) “..and I admit that even in Europe we are usually not so quick to attack our own many shortcomings as are the Americans. I love China and wish it great success,.. Commentary: We don’t talk about “shortcomings”. We talk about breaking down International Rules of how the countries act. We talk about the default of the citizen in the world power number 1. We talk about a composition of religious enthusiasm and pseudo-scientific behaviores. We talk about US and their citizens; We talk about our big global disaster: in times, when the world needs US to go on, the US gives the ridicules show: the most enthusiastic man with the razor blade. (~Putin) We are global. We went around the world and saw, that the start point is the end point: there is no “new frontier”, “last frontier” any more. Our fate in 21century is: we have to really understand, that we are global – nothing left. “..but let us be reasonable.” Commentary: Yes. Always stay cool. "I should add,,,,,,, that the idea that demography is hocus pocus is not a very convincing one. Commentary: 1. It is not an idea. I remember in CHF the demographs made in the 60es the prognosis that the population will count 10mio by 1999. (Big discussions in radio, tv, news papers, restaurants, ..) Actual they are 7.3mio . 2. I recommend, not to believe, that every human, who has any meter and has lot of joy with his meter, has an important meter. There are too much meters on the road; we have a meter designed picture of the reality; we have a designer reality. We start to become accustomed to it. Therfore I recommend: back to the facts. “…Didn't China experience significant demographic deterioration from 1950 to the mid-1970s (a large increase in the dependency ratio) followed by a sharp improvement from the mid-1970s to now? If that is so, might not that be at least part of the explanation for China's economic stagnation in the first period and its vitality in the second? Commentrary: I don’t say, that demographic is useless; at the right place, it has its role, function and significance. But not for speculations on the future of the standing in the power game in 2050! globumedes By globumedes - 2/1/2008 1:48 AM

I just love how the US people's view on their country. You lot must be on the high everyday! :D For me, a bigger US is good. Because I recieve my pay in dollars. Unfortunately, even though I hope for it. I can't see the US as a continuing global power in the 22th century. But I can hope. Ps, I'm a Thai citizen working for a french company in Vietnam. By leeyiankun - 2/4/2008 3:18 PM

Thanks Michael for this great article...I was born in Germany, traveled Asia extensively and moved to the US recently. I can subscribe a 100% to your musings/prognosis on the possible future trends for Europe (integration, islam, birth rate, demography -> disaster) Asia (strong optimism, some countries with demographic challenges, but overall a rich history, a vibrant culture, many conflicts possible due to the geopolitical situation) and the US (still an unbelievable free and educated people, no rivaling neighbors, a strong and flexible economy based on personal responsibility - unlike in Europe)... For anyone interested in this topic you have to read Mark Steyn's "America Alone". It will open your eyes... By Lennart - 2/19/2008 10:40 AM

I agreed with twofish. In the long term, the geopolitics tell more than ideologies. Russia and India might bring more problems to China. About the taled US-China cofrontation, it is still taled. Take a globe, see which powers are narrowly crowded: Europe and Asia. Thus, the next world conflict is very likely to come from the interactions of Europeans or Asians. In Europe, we had Germany, AH, France, Britain, Russia, Turkey, Italy and Spain as "players". Now in East Asia, we have China, Russia, Japan, India, Indonesia(400m population now) and Korea (possibly united?). I see a dimmer side in Asia. But about US, I see a dimmer side in domestic affairs. By matc - 2/21/2008 11:53 AM

Globumedes: The US may be in a downturn economically. However, Red China will NEVER realize it's potential if it remains an exporting county only with power and money concentrated in so few citizens. China is a major holder of US debt because, in part, they lack the infrastructure required to build upon. What else will they trade with the US except dollars? By ericinUS - 3/13/2008 4:59 PM

What a fascinating blog, I shall certainly be subscribing. One consideration that is wholly ignored in this article and all the following comments is energy. Regardless of the scientific position you take on climate change and peak oil, as well as other examples of resource depletion and environmental degredation, these factors should be taken into consideration. They can't just be ignored. I think the demographic perspective is interesting, but it can't on its own explain how Americans are going to keep fueling their cars in the next century, or how China are going to keep fueling all those power stations that are springing up on a weekly basis. Energy is the one area in which the US is uniquely vulnerable. No other country is so heavily dependent on the automobile in terms of infrastructure and lifestyle. Simply put, American towns and cities are designed from the ground up around the car. Remove that and suddenly nothing works any more. This is true all over the technologically developed world, but not to the same extent. For example, here in the UK, while the car is the lynchpin of people's lives and the economy, shops are still within walking distance, public transport is still a realistic alternative and high population density limits urban sprawl. The sheer size of America may yet be its downfall. By Philip Conway - 3/23/2008 12:02 AM