WEF 2012: How SA can come to terms with the inevitable rise of China

Image: China
Image: China

That the world is in a process of fundamental geopolitical and geo-economic change is obvious.

However, the contours of change and what they portend for South Africa are difficult to discern, particularly in our navel-gazing, domestic politics-obsessed environment. So, for this South African, participating in the World Economic Forum’s recent summit in Davos (25 – 29 January 2012) was illuminating. The geopolitical-economy discussion running throughout the conference centred on three key themes: the future of US power; China’s ascent to power; and the future of the European Union (EU).

That the US is in the early stages of relative decline is not in doubt. But it will remain the number one military power for the foreseeable future, perhaps a generation or more. China, despite its spectacular economic growth, is no match on the military front. Russia is arguably ahead of China in advanced weapons technology, notwithstanding its military decline since the end of the Cold War.

So there are no viable alternatives to US military power. Yet, as Iraq and Afghanistan have shown, it also has its limits. Therefore, in US foreign policy circles, the discussion concerns “balancing” regional power dynamics through balance-of-power politics.

The Persian Gulf situation is an excellent example. Having created a regional power vacuum by withdrawing from Iraq, the US is now most concerned about preventing Iranian domination over the oil-rich Gulf states. The Syrian civil conflict directly reflects this regional posturing. There is a new, gloomy, mood in the air with plenty at stake for the global economy, should there be any missteps on either side. July, when the EU is likely to officially impose oil sanctions on Iran, is when things may come to a head.

China is a key player in this tense regional game. On the face of it, by refusing to sign up for oil sanctions, China appears simultaneously to be the more responsible global power and frustrates US and EU plans, thus increasing its geopolitical influence. It also retains its essential oil imports. Yet this reveals a major strategic vulnerability — its reliance on Iranian oil imports. Meanwhile, and almost unnoticed, the US has become a net energy exporter by virtue of breakthroughs in natural gas exploitation.

China’s economy continues to barrel along at impressive growth rates. At some point in the next two or three decades, Chinese gross domestic product (GDP) will surpass US GDP. It is also likely that in this time frame China will put a man on the moon. So, as Singaporean academic Kishore Mahbubani asked senior US lawmakers, will the US public be prepared for the perception that China has taken over the number one spot?

The answer was an emphatic no. Moreover, the lawmakers wanted to know whether China would play by existing international rules or seek to revise them to suit itself.

These tensions are particularly evident in the trade arena, where a succession of disputes is brewing. Coming on top of the European crisis, and the escalation of protective measures in the developed and developing worlds, this is a cause for concern.

How bad is the European situation, and is a resolution in sight? Economist Nouriel Roubini, or “Dr Doom”, captured the pessimistic mood: his prediction is that the euro zone will not collapse this year, but a “perfect storm” will consume it next year. Unless, as Harvard historian Niall Ferguson told us, German taxpayers are prepared to transfer about 8% of German GDP to the European periphery every year and in effect underwrite a large-scale issuance of eurobonds to make fiscal federalism work. The scale of this transfer suggests they will not.

Nor is it clear that the periphery will be prepared to accept the sacrifices required to remain in the EU. Their prognosis is one of austerity, stagnation, wealth destruction and rising youth unemployment for the foreseeable future. The alternative — exit from the euro zone of peripheral states, or even a euro breakup — is unpalatable to all sides. For the Germans, it would mean returning to a strong currency, hitting export competitiveness. For the periphery, it would mean enduring high inflation and wealth destruction. Europe is truly caught between the Scylla and Charybdis, and its odyssey is uncertain indeed.

So is China the heir apparent? China still has hundreds of millions of poor, mainly rural people. This is reflected politically in rising rural protests and growing tension between the rich coastal regions and the poor interior. Further, the country faces a strategic turning point in the elaboration of its successful, export-driven economic model. Growing pressure from the US, EU, and significant developing countries such as Brazil, over China’s undervalued currency, is testament to this. And their main external markets will be stagnant for the foreseeable future. Therefore, looking inwards to domestic growth and consumption is hard-wired into China’s 12th five-year plan.

img davos nouriel roubini 2012China’s incoming leadership confronts an epic set of challenges in managing a country that size, while its domestic political legitimacy is increasingly uncertain. Many Western Cassandras have predicted that these forces will ultimately unravel China, but they are more likely in the medium term to occupy the leadership’s policy bandwidth, thus inhibiting external engagement.

Image, right: Economist Nouriel Roubini speaking at the 2012 World Economic Forum in Davos. © World Economic Forum/Flickr/CC/swiss-image.ch/Photo by Moritz Hager

China and three of the five other permanent members of the United Nations Security Council will undergo leadership change this year: the US, France, and Russia. This may lead to some dithering in international security matters. Further, with power diffusing in the international system, some commentators argue that we are entering a “G-0” world. The US is no longer capable of dictating events, but its challengers are either mired in troubles or are not ready for leadership and are unlikely to be so for some time.

What does all this mean for SA?

First, relations with the US remain as important as ever. These need to be actively cultivated, not neglected, while retaining freedom of action.

Second, our relations with China need to be recalibrated. We need more freedom of action than has been observable in recent months. China’s economic effect on our labour-intensive industries, in the context of its currency undervaluation, must be subjected to criticism. The currency peg undermines our government’s job-creation targets. Since China needs to reform, such pressure would not be misdirected. This requires being more critical towards China and siding with Brazil on the currency issue.

Third, we need to learn more from other big developing democracies about how they pursue market-based reforms. Attempting to copy the Chinese model of state-owned enterprise management, for example, is highly unlikely to work in our context.

Fourth, since the EU will remain stagnant for the foreseeable future, we need to step up our commercial diplomacy and open up new markets for our exports. China is a key part of this equation, so recalibration will require a delicate balancing act.

Finally, we need to pursue domestic economic reforms much more vigorously. More state investment in the economy is needed in certain areas, but the key is to unlock private-sector investment. This requires sustained constructive dialogue between the government and business over the necessary mechanisms. Ultimately, this probably remains the biggest challenge of all.