October 15, 2008
President Zardari’s visits China at a time when the global economic power balance is undergoing a historic shift. “End of US era – now China calls the tune”, declares a headline of Sydney Morning Herald, Australia’s oldest and most respected newspaper. “Can Chinese Cash Save the World’s Banks? “, runs a lead story in Time. “Is this the end of the American era?” is the title of an op-ed by noted historian Paul Kennedy in the UK’s Sunday Times.
Billionaire investor George Soros predicted Oct. 12 that the financial crisis would mean the end of a US-led market system that has dominated the global economy with debt and deregulation since the 1980s. “This is now over. The game is out. It does mean a very serious adjustment for America,” Soros said in a CNN interview. China should lead rescue efforts for the US financial crisis, Mexican tycoon Carlos Slim, one of the world’s richest men, told the press last week. ” China is now the most important country to help responsibly in this crisis,” he said.
“China owns us, lock, stock and barrel, so it’s more important than ever that the US monetary authorities coordinate their monetary policies with China,” Chris Rupkey, New York-based chief financial economist at Bank of Tokyo-Mitsubishi – Japan’s largest – told Bloomberg.
The headlines and stories convey a dawning realization in western capitals that the biggest casualty of the western financial meltdown might be the US dominance of the global financial system, the linchpin of its global power. And that it is China, with over $1.8tr in foreign exchange reserves- growing at a pace of $40bn a month, which holds the key to the financing of the astronomical budget deficit that the US will have to run to finance the bailout of its financial institutions.
The reports of the death of American capitalism may be exaggerated but there is little question that the financial meltdown means the end of its sole super power status in what was described as a unipolar world. Its western allies – Britain, France,Germany, and other European countries have committed over $2tr to rescue the banking system from collapse and will face mounting fiscal deficits to finance them. Meanwhile, in 2009, the GDP of Asia (ex-Japan), on purchasing power parity basis, is likely to reach the level equal to that of the US and Western Europe combined, with China certain to overtake Germany as the world’s third largest economy.
Barack Obama or John McCain will walk into the Oval Office Jan. 20 facing the grimmest economic landscape in decades: perhaps 7-8 percent of the nation’s workforce unemployed, millions more families who have lost more than $12tr of wealth in the values of homes and stocks, a global recession, a crippled banking system, ailing state and local governments – some on the verge of bankruptcy, jittery foreign creditors and a budget deficit near the landmark $1 trillion mark and forecast to cross $2tr in the next twelve months, and $10tr in the federal government debt or 72 per cent of its GDP.
This year, net interest on the federal debt is projected at $244 billion, about $100 billion more than the annual cost of the wars in Iraq and Afghanistan. Even before the meltdown started, it was expected that the US would find an exit strategy from Iraq. Now it looks almost certain that it will have to find an exit strategy from both Iraq and Afghanistan. In any event, the US was not planning to send more troops to Afghanistan till early 2009 with little signs of support from its NATO allies. The US has spent an average of $12.1bn a month on these wars, including $9.8bn in Iraq and $2.3bn and civilian aid.
The Bush administration came under heavy criticism for its handling of the economy in the past year and spending over one trillion dollars on the “War on Terror” in Iraq and Afghanistan since 2001. It is not a coincidence that it recently decided to review its entire strategy in Afghanistan and gave a nod to the Saudis to conduct secret negotiations with the Talibans with the objective of finding a way out of the quagmire. “During the talks, all parties agreed that the only solution to Afghanistan’s conflict is through dialogue, not fighting,” CNN reported Oct. 5.
The so-called terror war will be the biggest casualty of the budget cuts that a financially crippled US government would have to make but axe is also likely to fall on the foreign aid. The US government’s budget for foreign aid was about $20.3bn in 2008. Joe Biden, Democrat vice presidential candidate said on Oct. 2 that the $700 billion bailout might force Barack Obama to reassess his promise to double foreign aid if elected president. “The one thing we might have to slow down is a commitment we made to double foreign assistance. We’ll probably have to slow that down,” Biden said during a debate with his Republican vice-presidential rival, Sarah Palin.
The escalation in the US military campaign on Pakistan’s northern borders can be viewed in the context of its economic crisis. It shows all signs of desperation. It can not help Pakistan yet it wants to “win” the war in Afghanistan. It appears to be using the multilateral lenders to pressure Pakistan to “do more” on the one hand, while conducting a psychological warfare through drone attacks and covert operations inside Pakistan’s borders through its Special Operations Forces, on the other.
The good news for Pakistan is that the US has run out of money to continue its quest for military hegemony in the Middle East and Central Asia. Given its financial meltdown and astronomical debt levels, the US has no option but to forget about its ambitions to be the dominant military power in the region and seek truce with the Talibans, pursue diplomacy to resolve conflicts with Iran, and equally importantly, recognise China’s strategic interests in the region.
After all, China is the largest creditor of the US with nearly one trillion dollar in the holdings of treasury bills and government-guaranteed debt and US cannot finance its gargantuan deficits and service its $10tr debt without a steady flow of funds from China. True, China has a stake in the financial stability of the US but the extraordinary turn of events has given it a leverage that was unthinkable only a year ago. “If the world economy darkens further, China will emerge as the likeliest saviour”, concluded the Economist in a recent issue.
Pakistan enjoys historically close relations with China and the financial meltdown provides it with a rare opportunity to reduce its dependence on western aid, disengage from playing the ‘new great game’ on behalf of the West, and make a bold and decisive shift in its foreign policy that is driven by its own long-term economic and strategic interests.
Pakistan may wish to look beyond the immediate need for financing its external deficit that has bled its foreign exchange reserves. China has a long-term strategic interest in a strong, stable, and economically independent Pakistan. It is the only major power that has both the will and the capacity to exploit Pakistan’s natural resources and help build its infrastructure that is in dire need of huge investments. In contrast to the US, China sees itself, and not India, as the leader of the future Asian century and has a natural interest in a Pakistan which is more than a client state of the West.
But Pakistan may need to do more than just ask for help and talk about the history of Pak-China friendship. It may have to demonstrate through its words and actions that it considers China and – not the US – its best friend. It should address China’s concerns about Pakistan’s support for the Talibans in the past and its spill over effects on its provinces. It may also be expected to demonstrate a stronger commitment with the members of the Shanghai Cooperation Organization (SCO). But all this would require that Pakistan undertake a comprehensive review of its foreign, economic, and defense priorities and policies and build a national consensus to demonstrate that it is indeed ready to enter into a new era of its strategic relationship with China.
The writer is an economist, a former head of Citigroup’s Emerging Markets Investments and author of “The Gathering Storm in Pakistan: Political Economy of a Security State” (Royal Book Co., 2008).