America loses the plot

The stock market mania in China discussed in last week’s column is still in full force.

April 8, 2015 22:12
4 minute read.

Shekel money bills. (photo credit: REUTERS)


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The stock market mania in China discussed in last week’s column is still in full force. It will eventually end, as all manias do, with a massive crash – but when the dust settles after the boom and bust, the basic underlying fact will still remain: China has become an economic superpower and, more generally, East and South Asia is the epicenter of economic growth in a slowing, graying world.

This is the result of nearly four decades of very rapid growth, powered by an extraordinary amount of capital investment and fed, of course, by the largest move from agriculture to industry in the history of the world. True, China is now suffering from massive over-investment in buildings and even in infrastructure – and it will pay a huge price for the misallocation of capital and the horrendous destruction of natural resources (i.e. pollution) caused by this investment insanity.

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But even after all the excesses are identified and accounted for, the economic map of the world has changed dramatically and irreversibly over the last several decades. Yet the key global economic and financial institutions – created by the victorious Western powers after the World War II and designed to, on the one hand, spur reconstruction and growth in Western Europe and other Western-oriented countries and, on the other, highlight the gulf between the Atlantic powers and the Soviet bloc – remains unchanged and seemingly impervious to the new global realities.

After the “Great Recession” of 2008/09, there was considerable talk about the need to restructure these institutions – the International Monetary Fund, the World Bank and a series of regional banks, such as the Asian Development Bank – so as to give greater weight and voting power to the emerging economic powers. But, in practice, nothing was done and the cozy arrangements, whereby the head of the World Bank was always an American and that of the IMF a European remained firmly in place.

Entirely predictably, the Chinese tired of this nonsense and, faced with implacable American intransigence to change, have gone their own way. Earlier rumors and reports of a Chinese initiative to found a new institution that would directly rival the ADB crystallized in June 2014, when the Chinese government invited India to join the new institution, which would have paid-up capital of $100 billion and would be designed to help finance the estimate (by the ADB!) that $8 trillion of infrastructure investment is needed in Asia over the current decade.

At the official ceremony establishing the bank, held on October 24 last year in Beijing, 21 Asia countries – from the Philippines to Qatar – participated. Strenuous US diplomatic pressure prevented Australia and South Korea from doing so, but the first quarter of 2015 has seen a total collapse of the American effort and a phenomenal success for Chinese economic diplomacy.

In March the hitherto behind-the-scenes struggle burst into the open, resulting in a spectacular rout of the US by China.


Interestingly, it was Britain – supposedly the strongest and most loyal US ally – that triggered the collapse, but once British chancellor George Osborne announced his country’s involvement, Germany, France, Italy and a slew of other European countries followed suit, as did Israel later in the month.

The general public, in the US, Europe and certainly in Israel, has seen and heard little of this, its attention firmly focused on the manufactured drama surrounding the negotiations with Iran. However, in the wider context of global power, the Chinese success in establishing the AIIB and persuading almost everyone except the US to join, is an epochal event, far transcending the Iranian imbroglio.

In an article for Bloomberg this week, Larry Summers – former treasury secretary (in the Clinton administration) and a strong candidate to succeed Ben Bernanke as Fed chairman (he was apparently considered too hawkish) – lambasted the Obama administration for its “failure of strategy and tactics,” which should “lead to a comprehensive review of the US approach to global economics.”

Summers pulled no punches in assessing the severity of what has occurred: This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.... I can think of no event since Bretton Woods (the 1944 agreement to establish the IMF and World Bank) comparable to the combination of China’s effort to establish a major new institution and the failure of the US to persuade dozens of its traditional allies, starting with Britain, to stay out of it.

Many Israelis believe that Israel has a problem with US President Barack Obama. Others, especially on the political Left, want to believe that Obama has a problem with Israel. The truth is far grimmer. Obama has wrought massive damage to American foreign policy all over the world – not just vis-à-vis Israel, nor just in the Middle East.

But the passing of the Obama era, in less than two years, will not solve the underlying problem, which Larry Summers has the guts to finally state publicly. The political pressures driving the two American political parties to ever more extreme positions have rendered the country dysfunctional. Everyone else, including and especially Israel, has to adjust to that reality and proceed accordingly.

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