China Comment

Energy, Environment, and Economy

Futurecast (Part II): Russia and India

In this continuation of my review of Robert Shapiro’s Futurecast, I analyze his discussion on why Russia, India, and other countries will fail to achieve China and United States’ levels of growth in the coming ten to twenty years.

SHOULD THE WORLD BE CONCERNED ABOUT RUSSIA AND INDIA?

Shapiro discusses why Russia and India will not be able to match the United States or China in relative successfulness. He points out India is ranked 118th in the world for literacy.

Additionally, the Indian economy is still greatly underdeveloped. 60% of Indian labor is based in agriculture, and 20% is centered in extremely small, often one-person-businesses due to a regulatory culture with restrictive land policies and subsidies to miniature businesses that impedes business consolidation (101).

In comparison, a little less than 1% of the US’s economy is based in highly productive agriculture, and 43% of China’s workers serve in agricultural fields, all according to the CIA’s World Factbook. 

In 2004, partially due to restrictive government policies, India received only $5.3 billion (2.3%) of the world’s FDI that was sent to developing countries; China received $60.6 billion (over 20%) (162). While this indicates India has potential to grow; the changes in regulatory environment need to come much quicker to encourage such growth.

India’s Democratic society is far less likely to sanction the painful changes than China’s semi-autocratic government permitted to increase efficiency and development. China ended many state pensions, reduced health benefits, and evicted thousands from their homes. Shapiro does not believe India has the political will to carry through similar needed reforms.

Shapiro does not discuss, but it bears mentioning that India also faces a military challenge. With unrest and instability increasing in Pakistan, the chances for an armed confrontation over Jammu-Kashmir and other disputed regions may increase.

Muslim-led terrorist attacks, such as a 2006 train bombing by extremists that killed over 170, have been significant in recent years (See the Jamestown Foundation’s Terrorism Monitor and the CFR report on Indian terrorism for more information; an Indian think tank discusses terrorist violence in India  and points out that the number of yearly deaths have declined from 2002 to 2006, but still over “2,765 people died in terrorism-related violence in India during year 2006.” [Important to note: some violence involved other groups such as the Naxalites])

Shapiro also avoids in-depth discussion of possible China/India and China/United States confrontation in the near future. China and India have been working hard to resolve border disputes, but all disputed land is not yet resolved. Additionally, both have interests in Southeast Asia, and their expanding navies could come into a conflict over operational spaces. A naval confrontation over bottlenecks such as the Strait of Malacca, however, will not be likely until both countries develop their militaries to become true regional powers- something that will elude China until the mid to late 2010s, and which India may not achieve until the 2020s.

RUSSIA

Shapiro argues Russia’s demographic decline (its aging and population decrease) will contribute to a drop in productivity that will be exacerbated by a murky legal environment that could discourage foreign investment and development. Considering how Russia is currently benefitting from $135 a barrel oil, it is becoming much more flush with cash.

But extra cash does not necessarily equate to extra power. Mexico, Saudi Arabia, Nigeria, and other Middle Eastern states have squandered huge oil windfalls in the past without managing to pull their countries out of poverty and into fully sustainable modern economies.

Shapiro’s analysis of Russia could have benefitted from an indepth discussion of the effect that increasing linkages between China and Russia might have in spurring Moscow to faster development.

China/Russia trade was $50 billion in 2007, and Russia is China’s 8th largest trade partner. Chinese FDI in Russia is estimated at only $3 billion in 2006, “less than 5% of total FDI stock in Russia,” according to a report in the China and Eurasia Forum Quarterly. However, that amount of Chinese FDI sent abroad still accounts for the 6th highest Chinese foreign FDI received by any country in 2006 (excluding tax havens).

Russia may have the largest FDI ODI (Outward Directed Investments) of the BRIC (Brazil, Russia, India, and China) countries– valued at $50 billion+ in 2007, but its FDI has yet to have a large positive effect on foreign countries. Russia’s largest investment targets are located in Cyprus (receiving 37.5%), Luxembourg (26.7%), and the United States (6.7%). Of Russia’s allies in the CIS (Commonwealth of Independent States), Armenia and Belarus receive the most investment according to Deutsche Bank, but it would be difficult to argue that either of those countries has become an economic success due to Russian development.

A later analysis will examine the Russian/China energy trade, but the data for Russia/China business and resource trade, according to Deutsche Bank and a China-Eurasia Forum Quarterly report by Libor Krkoska and Yevgenia Korniyenko, indicates Russia’s culture of bureaucratic inertia will disrupt development. Also, Russia’s corrupt business practices have gotten worse, according to Freedom House, which might stunt further development. 

Russia has a long way to go before it can become a viable partner for China, and historical tensions between the countries might yet preclude strong agreement and alliances in the next five to ten years.

RECIPE FOR SUCCESS?

Shapiro lauds slashing corporate tax rates [as was done to good effect in Sweden and Ireland] (33) and convincing workers that “their interest lies in accepting fewer benefits and less economic security from their governments” (32), since “the American and Chinese approaches can sustain themselves over the next generation, while Japan and Europe’s systems cannot” (34).

Shapiro points out that from 1990 to 2006 “the global market share of European manufacturers shrank from 18.5% to just over 14%, while the global market held by American companies rose from 21 to 23%” (183). He cites that the key to growth– he gives Ireland as an example [especially due to its IT and Pharmaceutical industry successes] (201)– is to “open its economy to foreign competition and investment.”

“In 2006, Europe’s major countries accounted for just 10% of world GDP, less than 1/2 of what America produced that year” (176).

Shapiro spends the rest of the book discussing challenges in health care, energy, and the environment, lamenting a possible doomsday-scenario of economic collapse in China coming on $150 a barrel oil. We’ll see how that plays out. China’s Oil Price Freeze discussed some of the tensions threatening to emerge in response to China’s insistence on keeping energy prices stuck at November 2007 levels, and Consequences of China’s Oil Price Hike discussed tensions that might emerge now that China has raised some energy prices.

CONCLUSION

Futurecast offers little new specific for China-watchers and makes a few slightly dubious surface-assertions in regards to Chinese strengths and weaknesses, but that has to be expected from a broad overview. The book is easy to read, and doesn’t make any glaring errors.

If one is reading for a broad and ambitious look at future geopolitics two to ten years down the line, this book is a good read. I would recommend it to a person who is generally interested in China, or anyone who wants to feel happy about the United States’ place in the world community since this book does an excellent job of Pro-America cheerleading.

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24 June, 2008 Posted by | Book Review, China Diplomacy, China Future | , , , , , , , , , , , | 1 Comment

Off The Shelf: Futurecast 2020 (Part I)

Futurecast: 2020 argues that only the United States and China will be considered great economic and political powers in 10 to 20 years. Its author, Robert Shapiro (a former Clinton Administration advisor) reaches this conclusion primarily by arguments based on demographics (aging in countries), obligations (European social safety nets will drain their coffers and ability to produce), innovation (Shapiro argues America can uniquely benefit), and business development (Shapiro argues both China and the United States possess good capabilities and regulatory environments).

I will discuss Shapiro’s most provocative statements in an analysis of what the future holds for China and the United States in relation to the rest of the world.

MILITARY

* Shapiro gives a possible warning of future confrontation between China and the US. “Even deep economic relationships do not preclude wars between the parties, once they’re each other’s near peers in military power.” (20) For example, in the “calm” before WWI, world trade was at an all-time high. and yet that trade led to war, and an arms race rather than peace.

China’s military spending budget has increased by double [percentage] digits for 20 consecutive years, this year rising nearly 18% to at least $59.6 billion (There are many estimates of the precise amount of spending since China does not calculate its military spending the same way that other countries tend to calculate theirs; but the important thing is that China is spending AT LEAST this much.)

However, it is unlikely, even given current levels of assumed spending, that China will be able to challenge the US even on a regional scale until around the year 2020 (Zalmay Khalizad discusses it HERE; but Mulvenon, Cordesman of the CSIS, and others have discussed China’s military force at length in full-length books).

But being directly able to match the US tank for tank may not matter since the Chinese are investing a lot in asymmetrical warfare. The most famous book on China’s asymmetrical and military policy is China Debates the Future Security Environment, by Michael Pillsbury. It’s a little out of date (from 2000), but it’s free on the Internet so it is easy to check out. (A slightly alarmist report on Chinese cyberterror from The Guardian is also available.)

ECONOMIC SUCCESS

Shapiro argues that “demographics and globalization will intensify economic inequality almost everywhere” (22); but that the societies with the greatest inequalities will likely be the richest, like China and the United States, since globalization allows returns on investment to rise (22).

Shapiro discusses how China and the United States are best positioned to take advantage of globalization due to their “freewheeling market capitalism” (16) which allows for innovation and can help the countries escape the burdens of aging and social-welfare systems Shapiro argues will plague Europe and lead to a “geopolitical marginalization” (21)… since “Europe has steadily cut its defense capacities and commitments…[it is] likely to be preoccupied politically with the fierce domestic conflicts certain to erupt when that slow growth collides with the tax hikes and spending cuts requried to keep their pension and health-care systems going (21).

Due to these declines, Shapiro argues, Europe will by necessity grow closer to United States whose military can protect Europe and help ensure its steady flow of raw material resources.

OTHER DEMOGRAPHICS

Shapiro touches on China’s aging; but notes that its large population, if properly educated, can mitigate most of the troublesome effects of a declining workforce. Even if China grays, its population is not expected to begin aging until the late 2010s, and at least through the early 2020s, around 75% of the population will be working-age or younger.

Another factor explaining why China’s aging will not necessarily hobble the country, is that unlike most other aging countries; Japan, the US, and Europe, China has not yet reduced the size of its agricultural industy– it still represents around 43% of their labor force. China still has a long way to go on reducing agricultural employment and retooling that employment into more productive industries. Therefore, in terms of raw productive ability, China will be able to benefit from a continually expanding industrial-production pool as more agricultural workers shift into city employment.

However, Shapiro avoids a detailed discussion on China’s environmental or health problems. Considering how he allots much discussion arguing that China and America are strong countries with strong economies in part because they lack national health care, this is a bit confusing.

China’s environmental problems have gradually worsened; 16 of their cities are listed as the 20 most polluted in the world. The preponderance of pollution will lead to more chronic conditions, and more lost-days at work which can cut into productivity. When I lived in Beijing, every year we suffered a few “purple” level pollution days where the air quality index rated worse than 500 parts particulate matter pollution– the highest level measured.

INFRASTRUCTURE

Shapiro discusses the usual things about China developing massive amounts of infrastructure and still having a long way to grow. As a World Bank Report stated in regards to China’s massive infrastructure investments: “Annual capital expenditures for transport, electricity, piped gas, telecommunications, urban water supply and sanitation increased steadily from US$39 billion in 1994, to US$88 billion in 1998, and to US$123 billion (about 8.7% of GDP) in 2003.”

Infrastructure needs to be constructed rapidly to encourage continual expansion of China’s economy. According to the Economist “logistics costs… amount to 18% of GDP in China compared with 10% in America” and “between 2006 and 2010 $200 billion is expected to be invested in railways alone, four times more than in the previous five years. ” It will be interesting to see if China’s government can maintain those levels of investment, given the current global recession.

DIPLOMACY

Shapiro then explains how China’s growth and increasing relevance in international trade and resource transfers will encourage new diplomatic alignments. Shapiro argues that a China and Europe alliance or a China and Russia alliance could pressure America and cause it and its world financial institutions to alter policies (40).

PART II will discuss Russia and India, Recipies for Success, and Conclusions on the book.

Feel free to sound off in the Comments section of this post for your opinions on the book and my analysis.

Futurecast 2020

by: Robert J. Shapiro (Undersecretary of Commerce 1998-2001, Senior economic advisor to the Clinton, Gore, and Kerry Campaigns, cofounder of SONECON LLC.) 2007.

23 June, 2008 Posted by | Book Review, China Environment/Health, China Future | , , , , , , , , , , | 2 Comments