The Untold Realities of Pakistan: Kaiser Bengali

 

Imran Khan alone is not to blame

Pervez Hoodbhoy in The Dawn

PAKISTAN’S mad rush towards the cliff edge and its evident proclivity for collective suicide deserves a diagnosis, followed by therapy. Contrary to what some may want to believe, this pathological condition is not one man’s fault and it didn’t develop suddenly. To help comprehend this, for a moment imagine the state as a vehicle with passengers. It is equipped with a steering mechanism, outer body, wheels, engine and fuel tank.

Politics is the steering mechanism. Whoever sits behind the wheel can choose the destination, speed up, or slow down. Choosing a driver from among the occupants requires civility, particularly when traveling along a dangerous ravine’s edge. If the language turns foul, and respect is replaced with anger and venom, animal emotions take over.

Imran Khan started the rot in 2014 when, perched atop his container, he hurled loaded abuse upon his political opponents. Following the Panama exposé of 2016, he accused them — quite plausibly in my opinion — of using their official positions for self-enrichment. How else could they explain their immense wealth? For years, he has had no names for them except chor and daku.

But the shoe is now on the other foot and Khan’s enemies have turned out no less vindictive, abusive and unprincipled. They have recorded and made public his recent intimate conversations with a young female, dragged in the matter of his out-of-wedlock daughter, and exposed the shenanigans of his close supporters.

More seriously, they have presented plausible evidence that Mr Clean swindled billions in the Al Qadir and Toshakhana cases. Which is blacker: the pot or the kettle? Take your pick.

Everyone knows politics is dirty business everywhere. Just look at the antics of Silvio Berlusconi, Italy’s corrupt former prime minister. But if a vehicle’s occupants include calm, trustworthy adjudicators, the worst is still avoidable. Sadly Pakistan is not so blessed; its higher judiciary has split along partisan lines.

The outer body is the army, made for shielding occupants from what lies outside. But it has repeatedly intruded into the vehicle’s interior, seeking to pick the driver. Free-and-fair elections are not acceptable. Last November, months after the Army-Khan romance soured, outgoing army chief General Qamar Javed Bajwa confessed that for seven decades the army had “unconstitutionally interfered in politics”.

But a simple mea culpa isn’t enough. Running the economy or making DHAs is also not the army’s job. Officers are not trained for running airlines, sugar mills, fertiliser factories, or insurance and advertising companies. Special exemptions and loopholes have legalised tax evasion and put civilian competitors at a disadvantage.

A decisive role in national politics, whether covert or overt, was sought for personal enrichment of individuals. It had nothing to do with national security.

While Khan has focused solely on the army’s efforts to dislodge him, his violent supporters supplement these accusations by disputing its unearned privileges. When they stormed the GHQ in Rawalpindi, attacked an ISI facility in Pindi, and set ablaze the corps commander’s house in Lahore, they did the unimaginable. But, piquing everyone’s curiosity, no tanks confronted the enraged mobs. No self-defence was visible on social media videos. The bemused Baloch ask, ‘What if an army facility had been attacked in Quetta or Gwadar?’ Would there be carpet bombing? Artillery barrages?

The wheels that keep any economy going are business and trade. Pakistanis are generally very good at this. Their keen sense for profits leads them to excel in real-estate development, mining, retailing, hoteliering, and franchising fast-food chains. But this cleverness carries over to evading taxes, and so Pakistan has the lowest tax-to-GDP ratio among South Asian countries.

The law appears powerless to change this. When a trader routinely falsifies his income tax return, all guilt is quickly expiated by donating a dollop of cash to a madressah, mosque, or hospital. In February, the pious men of Markazi Tanzeem Tajiran (Central Organisation of Traders) threatened a countrywide protest movement to forestall any attempt to collect taxes. The government backed off.

The engine, of course, is what makes the wheels of an economy turn. Developing countries use available technologies for import substitution and for producing some exportables. A strong engine can climb mountains, pull through natural disasters such as the 2022 monster flood, or survive Covid-19 and events like the Ukraine war. A weak one relies on friends in the neighbourhood — China, Saudi Arabia, and UAE — to push it up the hill. By dialling three letters — I/M/F — it can summon a tow-truck company.

The weakness of the Pakistani engine is normally explained away by various excuses — inadequate infrastructure, insufficient investment, state-heavy enterprises, excessive bureaucracy, fiscal mismanagement, or whatever. But if truth be told, the poverty of our human resources is what really matters.

For proof, look at China in the 1980s, which had more problems than Pakistan but which had an educated, hard-working citizenry. Economists say that these qualities, especially within the Chinese diaspora of the 1990s, fuelled the Chinese miracle.

The fuel, finally, is the human brain. When appropriately educated and trained, it is voraciously consumed by every economic engine. Pakistan is at its very weakest here. Small resource allocation for education is just a tenth of the problem.

More importantly, draconian social control through schools and an ideology-centred curriculum cripples young minds at the very outset, crushing independent thought and reasoning abilities. Leaders of both PTI and PDM agree that this must never change. Hence Pakistani children have — and will continue to have — inferior skills and poorer learning attitudes compared to kids in China, Korea, or even India.

The prognosis: it is hard to see much good coming out of a screeching catfight between rapacious rivals thirsting for power and revenge. None have a positive agenda for the country.

While the much-feared second breakup of Pakistan is not going to happen, the downward descent will accelerate as the poor starve, cities become increasingly unlivable, and the rich flee westwards. Whether or not elections happen in October and Khan rises from the ashes doesn’t matter. To fix what has gone wrong over 75 years is what’s important.

1 A new economic era: is inflation coming back for good?

 Chris Giles in The FT 

The December meeting of the Federal Reserve’s most important economic committee was routine. Policymakers agreed that the economy could cope with rising levels of spending “without any strong general upward pressure on prices”. 

Although prices of a few raw materials were rising sharply, “finished goods have not been subject to pervasive upward cost pressures”. 

Generalised inflation, the committee concluded, was not a serious concern. 

This meeting of the Federal Open Market Committee was held on December 15 1964, just two weeks before the start of a 17-year period the Fed now dubs The Great Inflation. Inflation: 

Turning points in price trends tend to occur just at the moment when the authorities and expert opinion dismiss the risks. The current consensus is that price rises in commodities and goods markets have clear pandemic-related explanations and that the risks of a resurgence in global inflation remains remote. 

Three decades after the authorities in advanced economies managed to suppress the beast, they remain confident they are in control. The mantra of the moment is summed up by Andrew Bailey, Bank of England governor, who likes to say he is watching inflation “extremely carefully” but not worrying. 

This view is still the mainstream but it is losing supporters. One notable recent defector is Roger Bootle, author of the book The Death of Inflation, who spotted the coming decline in price rises in the mid 1990s. He is now worried. “Financial markets are going to have to get used to the return of troublesome issues that had, until recently, seemed long dead,” Bootle wrote in May. 

Central bankers have not had to deal with an inflation problem during their careers. Having averaged around 10 per cent a year in the 1970s and 1980s, global inflation rates fell to an average close to 5 per cent in the 1990s in the rich world countries of the OECD, 3 per cent in the 2000s and 2 per cent in the 2010s. The question today is whether their view is complacent. Is the world entering another inflationary era? 

While many households think the definition of price stability would be an absence of inflation, economists and policymakers favour a gentle annual increase in prices of around 2 per cent. This reduces the risk that an economic crisis could spark a deflationary spiral with spending, prices and wages all falling, raising the real burden of debts and further hitting spending. Holger Schmieding, chief economist of Berenberg Bank, explains that a little inflation also greases the wheels of the economy, allowing declining sectors to fall behind gracefully. 

“Higher inflation eases economic adjustments as it creates more scope for changes in relative wages without a need for an outright fall in wages in sectors under pressure,” he says. 

In most advanced economies — the US, the eurozone and Japan — central banks have fallen short of meeting their targets of inflation of around 2 per cent despite having slashed interest rates to zero and having created trillions of dollars, euros and yen, which has been pumped it into their economies by purchasing government debt. A modest rise in inflation therefore would be welcomed by central banks, which have generally been delegated the task of achieving price stability. 

And until this year, the main economic concern regarding prices was the risk that countries were turning Japanese and might soon emulate the nation’s 30-year struggle with mild deflation. Such was the difficulty of keeping inflation high enough that some economists even began to question the doctrine of Ben Bernanke, former Fed chair, who argued in 2002 that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation”. 

But this view of the world has turned on its head in 2021. A new whatever-it-takes borrowing and spending programme by the Biden administration, enforced savings during the coronavirus crisis giving households additional firepower, bottlenecks in the supply of goods and a reversal of longstanding downward pressures on global wages and prices have rekindled fears of excessive inflation. 

No one is talking about hyperinflation of the sort seen in Weimar Germany in 1923 or Latin America in the 1980s or even the 10 per cent global rate of the 1970s, but a creeping rise to persistent levels of generalised price increases not seen in a generation. When the April rate of US inflation jumped to 4.2 per cent, financial markets swooned. 

The new concern about a return to inflation is not just the result of immediate economic forces but also reflects longer-term, underlying changes in the structure of the global economy. The aggressive economic stimulus is being adopted at the very moment when the global economy is feeling the impact of ageing populations and the maturing of China’s 40-year transition. 

Moreover, history also tells us that neither politicians, economists nor policymakers can guarantee the world will maintain low and stable inflation. As the Fed’s experience from the 1960s demonstrates, turning points in inflation arrive with little warning. Unlike in the US, where there was no fear of inflation after the second world war, concern about inflation was “always rumbling on” following devaluations of sterling and higher import prices in the UK during the full employment years of the 1950s and 1960s, according to Nick Crafts, professor of economic history at Sussex university. 

But it only really took off in the 1970s after the first Opec oil shock and a switch in government policy from austerity to “a massively excessive stimulus, pushing the economy beyond any reasonable estimate of the sustainable level of unemployment”, Crafts adds. 

Research from Luca Benati, professor at Bern university, suggests that the world’s faith in central bankers being able to tame any similar episodes is probably overblown. The UK’s inflationary pressure in the 1970s was so strong, he found, that when he ran history again in multiple simulations assuming an independent central bank is in charge of controlling prices, inflationary forces would have been more powerful than any likely action by a Bank of England with an independent Monetary Policy Committee. In the 1970s, it would have had only a “limited impact” on quelling price rises which reached an annual rate of 26.9 per cent in 1975. 

According to Karen Ward, chief European market strategist at JPMorgan Asset Management, this means the Bernanke doctrine still stands and should not be forgotten. “We’ve always assumed that the structural supply side enhancements such as technology and globalisation are so great that we could never overwhelm them with demand, but it still must be the case that you can overwhelm supply with demand and ultimately generate inflation,” she says. 

It is exactly this fear which is raising inflation rate expectations in the US and Europe at the moment. Alongside a recovery of energy prices to pre-Covid levels, there has been a shortage of microchips, wood products, many metals and even cheese. These have been the proximate causes of higher inflation, but financial markets worry that the ultimate cause has been the pandemic-related fiscal and monetary stimulus which has led to a much faster economic recovery in advanced economies than was thought possible at the end of 2020. 

With economic policy pressing harder on the accelerator than at any time in recent history, spending could exceed the capacity of economies to provide goods and services, especially if the coronavirus crisis and government support have left people less willing to work, creating labour shortages and significant pressure on companies to raise wages. 

Such is the potential imbalance between rampant demand and more constrained supply, especially in the US, some supporters of centre-left policy ideas say that warning lights are flashing. Larry Summers, Treasury secretary in the Clinton administration, thinks policy has become far too lax, repeatedly criticising the “dangerous complacency” over inflation of today’s policymakers in recent weeks. 

While the White House has hit back, saying “a strong economy depends on a solid foundation of public investment, and that investments in workers, families and communities can pay off for decades to come”, even Janet Yellen, current Treasury secretary, has acknowledged the possible need for interest rates to rise “to make sure that our economy doesn’t overheat”. 

The policy shift has come at a point when economists generally accept that some of the big global forces holding prices down are much weaker than they were. In the 1990s and 2000s, globalisation led to a huge transfer of the production of goods from high wage economies to China and eastern Europe, accelerating a decline in the power of workers in advanced economies to force their employers to pay them more, keeping prices low. 

But these forces are at a turning point, according to Charles Goodhart, former chief economist of the Bank of England, and an author of the book The Great Demographic Reversal. The long boom in the size of its workforce has ended and its population is on the verge of falling for the first time in decades. Goodhart says that fewer new workers becoming integrated into the global labour force at a time of shrinking workforces in advanced economies as populations age will raise the pressures on companies to push up wages, increasing underlying inflationary pressures. 

The change in demographic pressures have already been around for a decade and are intensifying, Goodhart says. He had been wary of putting a date on the coming inflation, saying that the world is likely so see rising inflationary pressure within five years and “we are fairly sure it would have happened by 2030”. 

That was before Covid struck. Now, he says the underlying pressures, alongside more stimulative policies and Covid-related restrictions in supply, have brought forward the moment. “We tend to think that because of supply constraints in particular, it’s going to be more inflationary in 2021 than central bankers originally thought and it will last longer in 2022 and 2023 because there will be a confluence of the build-up of large monetary balances . . . combined with large continued fiscal expansion.” 

Turning to specific examples of prices he expected to see rise, Goodhart notes how the added demand for holidays in the UK would push up the prices of holiday rentals, hotels and even ice cream this summer. “You’d have to be a saint not to raise your prices,” he says. 

Demographic pressures are not something that can be reversed quickly, nor he argues can the forces of globalisation, which have gone into retreat having become politically unpopular in many advanced economies. Again, this is most acute in the US where economists such as Adam Posen, president of the Peterson Institute for International Economics, urges Americans to “embrace economic change rather than nostalgia” in domestic production, especially in manufacturing, as a means to improving living standards and promoting non-inflationary growth. 

So far, however, although financial market expectations of inflation have risen sharply in 2021, mainstream policymakers are remaining calm. 

There is increasing chatter in the Fed that at some point the current members of the interest-rate setting committee need to think about scaling back the pace of money creation and purchases of government bonds. But the view is that inflation is recovering to more normal levels and the US central bank has pledged to keep policy ultra accommodative until it achieves a more inclusive recovery. 

This is the right approach, says Laurence Boone, chief economist of the OECD in Paris, a view which chimes with similar attitudes in central banks around the world. “It’s too early to ring the alarm bells about inflation,” she says. “That doesn’t mean one doesn’t have to watch what’s happening and we’re seeing frictions with the reopening of demand and supply after the crisis . . . but the right policy is to ease tensions on the supply side more than central bank action [to quell inflationary pressures].” 

In most economies, there remains significant slack in the labour market, she adds, and the big demographic pressures could be eased significantly with later retirement, while other parts of Asia and Africa would be delighted to integrate into the global economy as China did. 

Boone’s view still represents the consensus opinion among economists and there is considerable confidence in central banks that any rise in inflation this year will be temporary and easily tamed without having to tighten policy significantly. 

But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.

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Humanity's 'inexorable' population growth is so rapid that even a global catastrophe wouldn't stop it

Steve Conor in The Independent

The global human population is “locked in” to an inexorable rise this century and will not be easily shifted, even by apocalyptic events such as a third world war or lethal pandemic, a study has found.

There is no “quick fix” to the population time-bomb, because there are now so many people even unimaginable global disasters won't stop growth, scientists have concluded.

Although measures designed to reduce human fertility in the parts of the world where the population growth is fastest will eventually have a long-term impact on numbers, this has to go hand-in-hand with policies aimed at reducing the consumption of natural resources, they said.

Two prominent ecologists, who normally study animal populations in the wild, have concluded that the number of people in the world today will present one of the most daunting problems for sustainable living on the planet in the coming century – even if every country adopts a draconian “one child” policy.

“The inexorable demographic momentum of the global human population is rapidly eroding Earth’s life-support system,” say Professor Corey Bradshaw of the University of Adelaide and Professor Barry Brook of the University of Tasmania in their study, published in the journal Proceedings of the National Academy of Sciences.

“Assuming a continuation of current trends in mortality reduction, even a rapid transition to a worldwide one-child policy leads to a population similar to today’s by 2100,” they say.

“Even a catastrophic mass mortality event of 2bn deaths over a hypothetical window in the mid-21st century would still yield around 8.5bn people by 2100,” they add.

There are currently about 7.1bn people on Earth, and demographers estimate that this number could rise to about 9bn by 2050 - and as many as 25bn by 2100, although this is based on current fertility rates, which are expected to fall over the coming decades.

The number of people in the world today will present one of the most daunting problems for sustainable living on the planet in the coming century (Getty)

Professor Bradshaw told The Independent that the study was designed to look at human numbers with the insight of an ecologist studying natural impacts on animals to determine whether factors such pandemics and world wars could dramatically influence the population projections.

“We basically found that the human population size is so large that it has its own momentum. It’s like a speeding car travelling at 150mph. You can slam on the brakes but it still takes time to stop,” Professor Bradshaw said.

“Global population has risen so fast over the past century that roughly 14 per cent of all the human beings that have ever lived are still alive today – that’s a sobering statistic,” he said.

“We examined various scenarios for global human population change to the year 2100 by adjusting fertility and mortality rates to determine the plausible range of population sizes at the end of the century.

“Even a worldwide one-child policy like China’s, implemented over the coming century, or catastrophic mortality events like global conflict or a disease pandemic, would still likely result in 5bn to 10bn people in 2100,” he added.

The researchers devised nine different scenarios that could influence human numbers this century, ranging from “business as usual” with existing fertility rates, to an unlikely one-child-per-family policy throughout the world, to broad-scale global catastrophes in which billions die.

“We were surprised that a five-year WWIII scenario mimicking the same proportion of people killed in the First World War and Second World War combined, barely registered a blip on the human population trajectory this century,” said Professor Brook.

Measures to control fertility through family planning policies will eventually have an impact on reducing the pressure on limited resources, but not immediately, he said.

“Our great-great-great-great-grandchildren might ultimately benefit from such planning, but people alive today will not,” Professor Brook said.

Simon Ross, the chief executive of the charity Population Matters, said that introducing modern family planning to the developing world would cost less than $4bn – about one third of the UK’s annual aid budget.

“So, while fertility reduction is not a quick fix, it is relatively cheap, reliable, and popular with most, with generally positive side effects. We welcome the recognition of the potential of family planning and reproductive education to alleviate resource availability in the longer term,” Mr Ross said.

Africa's natural resources can be a blessing, not an economic curse

Resource-rich countries have, on average, done poorly but progress is possible if they get economic and political support

People in countries rich in natural resources, such as Tanzania, pictured, can benefit if given the right political and economic support. Photograph: Remi Benali/Corbis

Joseph Stiglitz in The Guardian

New discoveries of natural resources in several African countries – including Ghana, Uganda, Tanzania and Mozambique – raise an important question: will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?

On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality – just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, healthcare, development and redistribution.

A large literature in economics and political science has developed to explain this "resource curse", and civil-society groups (such as Revenue Watch and the Extractive Industries Transparency Initiative) have been established to try to counter it. Three of the curse's economic ingredients are well-known:

• Resource-rich countries tend to have strong currencies, which impede other exports

• Because resource extraction often entails little job creation, unemployment rises

• Volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in the downturns (reflecting the time-honoured principle that bankers lend only to those who do not need their money).

Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments above ground, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.

There are well-known antidotes to each of these problems: a low exchange rate, a stabilisation fund, careful investment of resource revenues (including in the country's people), a ban on borrowing, and transparency (so citizens can at least see the money coming in and going out). But there is a growing consensus that these measures, while necessary, are insufficient. Newly enriched countries need to take several more steps in order to increase the likelihood of a "resource blessing".

First, these countries must do more to ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it. Well-designed, competitive, transparent auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent, and should ensure that if prices soar – as they have repeatedly – the windfall gain does not go only to the company.

Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources' value to private foreign companies. But there is a simple answer: renegotiate; if that is impossible, impose a windfall-profit tax.

All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasise the sanctity of contracts, and threaten to leave. But the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.

Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries, such as Bolivia and Venezuela, that renegotiate; developed countries such as Israel and Australia have done so as well. Even the United States has imposed a windfall-profits tax.

Equally important, the money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.

Infrastructure (roads, railroads, and ports) has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.

Real development requires exploring all possible linkages: training local workers, developing small- and medium-size enterprises to provide inputs for mining operations and oil and gas companies, domestic processing, and integrating the natural resources into the country's economic structure. Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries' comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world's most efficient rice grower, but it would still be poor.

Companies will tell Ghana, Uganda, Tanzania, and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. In the meantime, these countries can put in place the institutions, policies, and laws needed to ensure that the resources benefit all of their citizens.

Resources should be a blessing, not a curse. They can be, but it will not happen on its own. And it will not happen easily.

The true costs of Keynes

By Martin Hutchinson

Adolf Hitler, Joseph Stalin and Mao Zedong each killed tens of millions of people, and John Maynard Keynes was a pacifist who never fired a shot in anger. However, economically, when the billions come to be totted up, it may well be the case that Keynes was the most destructive of the four.

He cannot entirely be blamed for mistakes in monetary policy, which he never understood, and even his "stimulus" ideas owed much to those who came before him - for example Arthur Pigou - and after him - for example Joan Robinson. Yet the other value destroyers had their henchmen too, in Heinrich Himmler, Lavrenti Beria and Jiang Qing. Overall, when henchmen are added in, Keynes runs the other value destroyers close, and may in the future surpass them as his value-destructions continue. Truly, persuasive but misguided economic theories can be much more damaging than they appear.

This is not to claim that big government per se is value-destructive (it is, but that's a separate issue.) The right size of government is a matter for legitimate debate, and successful societies such as Sweden and Singapore can be built with very different sizes of government. Personally, I would rather live in Singapore than Sweden, and I would expect Singapore to exhibit markedly faster long-term economic growth than Sweden, but both societies run their finances in a responsible manner and are models of governmental integrity.

Since both Sweden and Singapore currently have modest budget surpluses and have kept control of their currencies and avoided excessive monetary stimulus, they are in the modern debased sense of the term non-Keynesian, even if the managers of Sweden's economy might well describe themselves as Keynesians for the sake of harmony at international gatherings.

The Keynesian fallacy is in essence one of getting something for nothing. By Keynesian fiscal stimulus, normally involving spending more money though occasionally through tax cuts, providing they avoid the annoyingly savings-prone rich, we are supposed to produce additional economic output whenever there is an "output gap" from full employment, that is, in all conditions save those of a raging boom, when resources are scarce.

Keynes himself recommended such stimulus only at the bottom of deep recessions, and suggested that it should be balanced by running budget surpluses in times of boom. Needless to say, his disciples have neglected the disciplines he recommended.

Similarly, the analogous monetary policy (which Keynes personally did not advocate, since he believed that interest rates had no effect on output) pushes down interest rates and indulges in ever-more lavish bouts of monetary "stimulus" in the belief that by doing so the economy can be persuaded to expand more rapidly.

It's fair to claim that monetary stimulus does not derive directly from Keynes (though it is not new - it was a policy advocated by Keynesians in the 1960s Lyndon B Johnson administration, for example.) However fiscal stimulus is a direct product of Keynes' 1936 General Theory and both forms of stimulus derive from Keynes' overall approach of flouting economic orthodoxy and using ingenious paradox to propound unorthodox policies.

Keynes was the origin of the "stimulus" approach; its central idea that by manipulating monetary or fiscal policy we can get a bigger government than we pay for is his. It is thus fair to blame the costs of that approach on him.

Those costs are considerable. In the 1930s, US president Herbert Hoover's reckless expansion of government spending, including loans to cronies through the Reconstruction Finance Corporation, caused further slowdown in the economy, which was exacerbated by his dreadful early 1932 increase in the top marginal rate of tax from 25% to 63%.

Then, as I discussed a few weeks ago, Franklin Roosevelt's New Deal deficit spending, combined with his reckless "set the gold price in my pyjamas" monetary policy prolonged the Great Depression far longer than would naturally have occurred, delaying full recovery from 1934-35 to 1939-40.

In the recent unpleasantness, fiscal stimulus worldwide initially appeared merely ineffective. By diverting resources from the productive private sector to unproductive public sector boondoggles it reduced long-term output. In the US case, the Barack Obama stimulus converted a vigorous recovery into an anemic one; only in the third quarter of 2011, after the effects of stimulus had begun to wear off, did output begin to accelerate and unemployment trend down (in this case we should celebrate public sector job losses and declines in public sector output, since they free up resources for healthy private sector growth!).

However, with the euro crisis it has become clear that fiscal stimulus, if excessive, has an exponentially adverse effect. By increasing deficits to unsustainable levels, it precipitates bond market fears about the state's credit risk. Naturally, that strangles credit availability to almost all entities domiciled in the country concerned.

Thus while a mild fiscal stimulus in a country that before recession was running a surplus might be mildly beneficial (because the differential between private sector savings rates and the 100% stimulus spending rate outweighed the inefficiency effect of diverting resources to the public sector), a large fiscal stimulus, or one incurred in a country like Greece or the 2009 US that was already dangerously in deficit, will cause economic damage rising to many times the value of the stimulus itself, persisting for years or even decades to come.

Monetary stimulus is similarly damaging. As Walter Bagehot remarked over a century ago, the correct response to financial crisis is to lend on top quality security at very high interest rates. This was notably not done in 2008; instead the injection of liquidity to favored companies was accompanied by pushing interest rates far below inflation. Repeating the monetary stimulus in 2010 and again in 2011, when in the United States at least the financial crisis was over, was inexcusable.

Monetary stimulus causes structural damage to the economy in the following ways:

Normally, as was the case in 1965-79, it causes accelerating inflation. Since 1995, this has not been the case, because the West has benefited from an enormous deflationary force from the Internet and modern telecommunications, which has enabled massive outsourcing of goods and services to locations with much cheaper wage rates. That effect is now ending, while in some countries, notably Britain, the monetary stimulus has been increased to Weimar Republic-like proportions of 40% of public spending. We can expect the inflationary effect to strike with massively multiplied force compared with the gentle zephyr of 1965-79 when it finally arrives. As discussed in this column a few months back, by making capital artificially cheap, monetary stimulus encourages employers to substitute capital for labor to an artificial extent, thus raising the equilibrium level of unemployment. In current circumstances, this substitution takes the form of outsourcing production to emerging markets, thus depressing US and European labor markets further. By allowing banks to make artificial profits from "gapping" - borrowing short-term and investing in fixed rate long term bonds and mortgages - it suppresses lending to small business, thus further increasing unemployment. It must be noted that the true level of U.S. unemployment is far higher than the officially admitted 8.6%, as many workers have become discouraged and left the workforce. Ultra-low interest rates suppress savings (which receive negative real returns on their money), thereby de-capitalizing the economy. Finally if, as happened in 2008, monetary stimulus is directed only at favored banks and finance houses, it destroys the integrity of the market. Beneficiary banks have been shown by the recent Fed audit to have benefited to the tune of $13 billion by profits made on emergency Federal Reserve loans. Had that money been lent at appropriate penalty rates, this profit would have been captured for taxpayers. It was in essence a gigantic subsidy to Wall Street bonus recipients by the corrupt Federal Reserve. Needless to say, damaging cronyism has thereby been encouraged. As recent events have overwhelmingly demonstrated, both fiscal and monetary stimulus are highly addictive, since they appear to provide something for nothing and the cost of reversing them appears unpleasant to the Keynesians who control the levers of policy. As to their cost, the current Congressional Budget Office projections suggest that there is at present a 5% output gap below full employment, and that the output gap will disappear only in 2016. The cost of current Keynesian policies over 2009-16 can thus be conservatively estimated at about 15% of GDP, or $2.2 trillion in today's dollars. To that we can add very roughly 50% of one year's 1929 GDP, for the output lost through Keynesian policies in 1932-40, or another $500 billion, for a very conservative total of $2.7 trillion all-told in the United States alone. That may not sound sufficient to counterbalance the tyrants' depredations, but consider: 1930s Germany, 1940s Russia and 1950s China were all much poorer countries than the modern United States. Very roughly, Germany's 1936 GDP and the Soviet Union's 1940 GDP were both about $500 billion modern dollars, while China's 1955 GDP was about $1,500 billion. Thus Hitler and Stalin could have destroyed their entire output for more than five years, and Mao for almost two years, before doing as much economic damage as Maynard Keynes has wreaked in one country. It's a rough calculation, but illuminating - and while Hitler, Stalin and Mao are long gone, Keynes' depredations continue. Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

Why Is Economic Growth So Popular?

By Ugo Bardi

26 November, 2011
Cassandra's legacy

When the new Italian Prime Minister, Mr. Mario Monti, gave his acceptance speech to the Senate, a few days ago, he used 28 times the term "growth" and not even once terms such as "natural resources" or "energy". He is not alone in neglecting the physical basis of the world's economy: the chorus of economic pundits everywhere in the world is all revolving around this magic world, "growth". But why? What is that makes this single parameter so special and so beloved?

 

During the past few years, the financial system gave to the world a clear signal when the prices of all natural commodities spiked up to levels never seen before. If prices are high, then there is a supply problem. Since most of the commodities we use are non-renewable - crude oil, for instance - it is at least reasonable to suppose that we have a depletion problem. Yet, the reaction of leaders, decision makers, and economic pundits of all kinds was - and still is - to ignore the physical basis of the economic system and promote economic growth as the solution to all our problems; the more, the better. But, if depletion is the real problem, it should be obvious that growth can only make it worse. After all, if we grow we consume more resources and that will accelerate depletion. So, why are our leaders so fixated on growth? Can't they understand that it is a colossal mistake? Are they stupid or what?

Things are not so simple, as usual. One of the most common mistakes that we can make in life is to assume that people who don't agree with our ideas are stupid. No, there holds the rule that for everything that exists, there is a reason. So, there has to be a reason why growth is touted as the universal cure for all problems. And, if we go in depth into the matter, we may find the reason in the fact that people (leaders as well as everybody else) tend to privilege short term gains to long term ones. Let me try to explain.

Let's start with observing that the world's economy is an immense, multiple-path reaction driven by the thermodynamic potentials of the natural resources it uses. Mainly, these resources are non-renewable fossil fuels that we burn in order to power the whole system. We have good models that describe the process; the earliest ones go back to the 1970s with the first version of "The Limits to Growth" study. These models are based on the method known as "system dynamics" and consider highly aggregated stocks of resources (that is, averaged over many different kinds). Already in 1972, the models showed that the gradual depletion of high grade ores and the increase of persistent pollution would cause the economy to stop growing and then decline; most likely during the first decades of the 21st century. Later studies of the same kind generated similar results. The present crisis seems to vindicate these predictions.

So, these models tell us that depletion and pollution are at the root of the problems we have, but they tell us little about the financial turmoil that we are seeing. They don't contain a stock called "money" and they make no attempt to describe how the crisis will affect different regions of the world and different social categories. Given the nature of the problem, that is the only possible choice to make modelling manageable, but it is also a limitation. The models can't tell us, for instance, how policy makers should act in order to avoid the bankruptcy of entire states. However, the models can be understood in the context of the forces that move the system. The fact that the world's economic system is complex doesn't mean that it doesn't follow the laws of physics. On the contrary, it is by looking at these laws that we can gain insight on what's happening and how we could act on the system.

There are good reasons based in thermodynamics that cause economies to consume resources at the fastest possible rate and at the highest possible efficiency (see this paper by Arto Annila and Stanley Salthe). So, the industrial system will try to exploit first the resources which provide the largest return. For energy producing resources (such as crude oil) the return can be measured in terms of energy return for energy invested (EROEI). Actually, decisions within the system are taken not in terms of energy but in terms of monetary profit, but the two concepts can be considered to coincide as a first approximation. Now, what happens as non-renewable resources are consumed is that the EROEI of what is left dwindles and the system becomes less efficient; that is, profits go down. The economy tends to shrink while the system tries to concentrate the flow of resources where they can be processed at the highest degree of efficiency and provide the highest profits; something that usually is related to economies of scale. In practice, the contraction of the economy is not the same everywhere: peripheral sections of the system, both in geographical and social terms, cannot process resources with sufficient efficiency; they tend to be cut off from the resource flow, shrink, and eventually disappear. An economic system facing a reduction in the inflow of natural resources is like a man dying of cold: extremities are the first to freeze and die off.

Then, what's the role of the financial system - aka, simply "money"? Money is not a physical entity, it is not a natural resource. It has, however, a fundamental role in the system as a catalyst. In a chemical reaction, a catalyst doesn't change the chemical potentials that drive the reaction, but it can speed it up and change the preferred pathway of the reactants. For the economic system, money doesn't change the availability of resources or their energy yield but it can direct the flow of natural resources to the areas where they are exploited faster and most efficiently. This allocation of the flow usually generates more money and, therefore, we have a typical positive (or "enhancing") feedback. As a result, all the effects described before go faster. Depletion can be can be temporarily masked although, usually, at the expense of more pollution. Then, we may see the abrupt collapse of entire regions as it may be the case of Spain, Italy, Greece and others. This effect can spread to other regions as the depletion of non renewable resources continues and the cost of pollution increases.

We can't go against thermodynamics, but we could at least avoid some of the most unpleasant effects that come from attempting to overcome the limits to the natural resources. This point was examined already in 1972 by the authors of the first "Limits to Growth" study on the basis of their models but, eventually, it is just a question of common sense. To avoid, or at least mitigate collapse, we must stop growth; in this way non renewable resources will last longer and we can use them to develop and use renewable resources. The problem is that curbing growth does not provide profits and that, at present, renewables don't yet provide profits as large as those of the remaining fossil fuels. So, the system doesn't like to go in that direction - it tends, rather, to go towards the highest short term yields, with the financial system easing the way. That is, the system tends to keep using non renewable resources, even at the cost of destroying itself. Forcing the system to change direction could be obtained only by means of some centralized control but that, obviously, is complex, expensive, and unpopular. No wonder that our leaders don't seem to be enthusiastic about this strategy.

Let's see, instead, another possible option for leaders: that of "stimulating growth". What does that mean, exactly? In general, it seems to mean to use the taxation system to transfer financial resources to the industrial system. With more money, industries can afford higher prices for natural resources. As a consequence, the extractive industry can maintain its profits, actually increase them, and keep extracting even from expensive resources. But money, as we said, is not a physical entity; in this case it only catalyzes the transfer human and material resources to the extractive system at the expense of subsystems as social security, health care, instruction, etc. That's not painless, of course, but it may give to the public the impression that the problems are being solved. It may improve economic indicators and it may keep resource flows large enough to prevent the complete collapse of peripheral regions, at least for a while. But the real attraction of stimulating growth is that it is the easy way: it pushes the system in the direction where it wants to go. The system is geared to exploit natural resources at the fastest possible rate, this strategy gives it fresh resources to do exactly that. Our leaders may not understand exactly what they are doing, but surely they are not stupid - they are not going against the grain.

The problem is that the growth stimulating strategy only buys time (and buys it at a high price). Nothing that governments or financial traders do can change the thermodynamics of the world system - all what they can do is to shuffle resources from here to there and that doesn't change the hard reality of depletion and pollution. So, pushing economic growth is only a short term solution that worsens the problem in the long run. It can postpone collapse but at the price of making it more abrupt in the form known as the Seneca Cliff. Unfortunately, it seems that we are headed exactly that way.

[This post was inspired by an excellent post on the financial situation written by Antonio Turiel with the title "Before the Wave" (in Spanish). ]

Ugo Bardi is a professor of Chemistry at the Department of Chemistry of the University of Firenze, Italy. He also has a more general interest in energy question and is the founder and president of ASPO Italia.

 

Climate Justice Requires A New Paradigm

By Vandana Shiva

02 December, 2011
Newleftproject.org

Twenty Years ago, at the Earth Summit, the world’s Governments signed the UN Framework Convention on Climate Change to create a legally binding framework to address the challenge of climate change.

Today, the Green House Gas emissions that contribute to climate change have increased not reduced.

The Climate Treaty is weaker not stronger.

The failure to reduce green house gases is linked to following the flawed route of carbon trading and emissions trading as the main objective of the Kyoto Protocol to the Climate Convention.

The Kyoto Protocol allows industrialized countries to trade their allocation of carbon emissions among themselves (Article 17). It also allows an “investor” in an industrialized country (industry or government) to invest in an eligible carbon mitigation project in a developing country in exchange for Certified Emission Reduction Units that can be used to meet obligation to reduce greenhouse gas emissions. This is referred to as the Clean Development Mechanism (CDM) under Article 12 of the Kyoto Protocol. The Kyoto Protocol gave 38 industrialized countries that are the worst historical polluter’s emissions rights. The European Union Emissions Trading Scheme (ETS) rewarded 11,428 industrial installations with carbon dioxide emissions rights. Through emissions trading Larry Lohmann observes, “rights to the earth’s carbon cycling capacity are gravitating into the hands of those who have the most power to appropriate them and the most financial interest to do so”. That such schemes are more about privatizing the atmosphere than preventing climate change is made clear by the fact that the rights given away in the Kyoto Protocol were several times higher than the levels needed to prevent a 2°C rise in global temperatures.

Climate activists focused exclusively on getting the Kyoto Protocol implemented in the first phase. They thus, innocently, played along with the polluters.

By the time the Copenhagen Summit took place, the polluters were even better organised and subverted a legally building outcome by having President Obama push the Copenhagen Accord.

Copenhagen and Beyond : The agenda for Earth Democracy

The UN Climate Summit in Copenhagen was probably the largest gathering of citizens and governments [ever? To do with what?]. The numbers were huge because the issue is urgent. Climate chaos is already costing millions of lives and billions of dollars. The world had gathered to get legally binding cuts in emissions by the rich North in the post Kyoto phase i.e. after 2010. Science tells us that to keep temperature rise within 2°C, an 80% cut is needed by 2020. Without a legally binding treaty, emissions of greenhouse gases will not be cut, the polluters will continue to pollute, and life on earth will be increasingly threatened.

There were multiple contests at Copenhagen, reflecting multiple dimensions of climate wars. These contests included those:

>> Between the earth’s ecological limits and limitless growth (with its associated limitless pollution and limitless resource exploitation).

>> Between the need for legally binding commitments and the U.S led initiative to dismantle the international framework of legally binding obligations to reduce greenhouse gas emissions.

>> Between the economically powerful historical polluters of the North and economically weak southern countries who are the victims of climate change, with the BASIC countries (Brazil, South Africa, India, China) negotiating with the South but finally signing the Copenhagen Accord with the U.S.

>> Between corporate rule based on greed and profits and military power, and Earth Democracy based on sustainability, justice and peace.

The hundreds of thousands of people who gathered at Klimaforum and on the streets of Copenhagen came as earth citizens. Danes and Africans, Americans and Latin Americans, Canadians and Indian were one in their care for the earth, for climate justice, for the rights of the poor and the vulnerable, and for the rights of future generations.

Never before has there been such a large presence of citizens at a UN Conference. Never before have climate negotiations seen such a large people’s participation. People came to Copenhagen because they are fully aware of the seriousness of the climate crisis, and deeply committed to taking action to change production and consumption patterns.

Ever since the Earth Summit in 1992 in Rio de Janeiro the U.S has been unwilling to be part of the UN framework of international law. It never signed the Kyoto Protocol. During his trip to China, President Obama with Prime Minster Rasmussen of Denmark had already announced that there would only be a political declaration in Copenhagen, not a legally binding outcome.

And this is exactly what the world got – a non-binding Copenhagen Accord, initially signed by five countries, the US and the Basic Four, and then supported by 26 others – with the rest of the 192 UN member states left out of the process. Most countries came to know that an “accord” had been reached when President Obama announced the accord to the U.S Press Corp. Most excluded countries refused to sign the accord. It remained an agreement between those countries that chose to declare their adherence. But it nevertheless showed the willingness of the US and others to disregard the needs of those in the global South. Arguing against the accord, Sudan’s Ambassador Lumumba Di Aping said the 2°C increase accepted in the document would result in a 3 to 5 degree rise in temperature in Africa. He saw the pact as a suicide pact to maintain the economic dominance of a few countries.

As Jeffrey Sachs noted in his article “Obama undermines UN Climate Process”:

“Obama’s decision to declare a phoney negotiating victory undermines the UN process by signaling that rich countries will do what they want and must no longer listen to the “pesky” concerns of many smaller and poorer countries – International Law, as complicated as it is, has been replaced by the insincere, inconsistent, and unconvincing word of a few powers, notably the U.S. America has insisted that others sign on to its terms – leaving the UN process hanging by a thread.”[1]

Even though the intention of the award was to dismantle the UN process, the reports of the two ad-hoc working groups on the Kyoto Protocol (AWG-KP) and the long term cooperative action (AWG-LCA) which have been negotiating for four years and two years were adopted in the closing plenary.

The Copenhagen Accord will undoubtedly interfere with the official UNFCC process in future negotiations as it did in Copenhagen. Like the earth’s future, the future of the UN now hangs in balance. There has been repeated reference to the emergence of a new world order in Copenhagen. But this is the world order shaped by corporate globalization and the WTO, not by the UN Climate Treaty. It is a world order based on the outsourcing of pollution from the rich industrialized North to countries like China and India. It is a world order based on the rights of polluters.

Climate change today is global in cause and global in effect. Globalisation of the economy has outsourced energy-intensive production to countries like China, which is flooding the shelves of supermarkets with cheap products. The corporations of the North and the consumers of the North thus bear responsibility for the increased emissions in the countries of the South.

In fact, the rural poor in China and India are losing their land and livelihood to make way for an energy-intensive industrialization. To count them as polluters would be doubly criminal; corporations, not nations, are the appropriate basis for regulations atmospheric pollution in a globalised economy.

Twelve years after citizens movements and African governments shut down the WTO Ministerial in Seattle, the same contest between corporate power and citizens power, between limitless profits and growth and the limits of a fragile earth was played out in Copenhagen. The only difference was that in trade negotiations the commercial interests of corporation’s stands naked, whereas in climate negotiations corporate power hides behind corporate states. The Copenhagen Accord is in reality the accord of global corporations to continue to pollute globally by attempting to dismantling the UN Climate Treaty. It should be called the “Right to Pollute Accord”. It has no legally binding emission targets.

The COP 15 talks in Copenhagen and COP 16 in Cancun did not show much promise of an outcome that would reduce Green House Gas Emissions and avoid catastrophic climate change. And the deadlock is caused by an outmoded growth paradigm. There are series of false assumptions driving the negotiations, or rather, blocking them.

>> False assumption No. 1: GNP measures Quality of Life

>> False assumption No. 2: Growth in GNP and improvement in Quality of Life is based on increased use of Fossil Fuel

>> False assumption No. 3: Growth and Fossil Fuel use have no limits

>> False assumption No. 4: Polluters have no responsibility, only rights.

These false assumptions are stated ad nauseum by corporations, governments and the media. As stated in an article in the Times of India, “Emissions are directly related to the quality of life and industrial production, and hence economic growth also has a direct link with it”.

Assumption No. 1 is false because even as India’s GNP has risen, the number of hungry people in India have grown. In fact, India is now the capital of hunger. The growth in GNP has in fact undermined the quality of life of the poor in India. And it has concentrated wealth in the hands of a few 100 billionaires now control 25% of India’s economy.

Assumption No. 2 is false because there are alternatives to fossil fuels such as renewable energy. Further, reduction in fossil fuel use can actually improve the quality of food and quality of life. Industrial agriculture based on fossil fuels uses ten units of energy to produce one unit of food. Ecological systems based on internal inputs produce 2 to 3 units out of every unit of energy used. We can therefore produce more and better quality of food by reducing fossil fuel use.

Assumption No. 3 is false because the financial collapse of 2008 showed that growth is not limitless, and Peak Oil shows that fossil fuels will increasingly become more difficult to access and will become costlier.

Assumption No. 4 formed the basis of carbon trading and emissions trading under the Kyoto Protocol. This allowed polluters to get paid billions of dollars instead of making the polluter pay. Thus ArcelorMittal has walked away with £1 billion in the form of carbon credits. ArcelorMittal was given the right to emit 90m tonnes of CO2 each year from its plants in EU from 2008 to 2012, while the company only emitted 68m tonnes in 2008.

To protect the planet, to prevent climate catastrophe through continued pollution, we will have to continue to work beyond Copenhagen by building Earth Democracy based on principles of justice and sustainability. The struggle for climate justice and trade justice are one struggle, not two. The climate crisis is a result of an economic model based on fossil fuel energy and resource intensive production and consumption systems. The Copenhagen Accord was designed to extend the life of this obsolete model for living on earth. Earth Democracy can help us build another future for the human species – a future in which we recognize we are members of the earth family that protecting the earth and her living processes is part of our species identity and meaning. The polluters of the world united in Copenhagen to prevent a legally binding accord to cut emissions and prevent disastrous climate change. They extended the climate war. Now citizens of the earth must unite to pressurize governments and corporations to obey the laws of the Earth, the laws of Gaia and make climate peace. And for this we will have to be the change we want to see.

As I have written in Soil Not Oil, food is where we can begin. 40% emissions are produced by fossil fuel based chemical, globalised food and agriculture systems which are also pushing our farmers to suicide and destroying our health. 40% reduction in emissions can take place through biodiverse organic farming, which sequesters carbon while enriching our soils and our diets. The polluters ganged up in Copenhagen for a non-solution. We as Earth Citizens can organize where we are for real solutions.

References

[1] Economic Times, 25th December, 2009

Vandana Shiva is a philosopher, environmental activist, and eco feminist. Shiva, currently based in Delhi, has authored more than 20 books and over 500 papers in leading scientific and technical journals. She was trained as a physicist and received her Ph.D. in physics from the University of Western Ontario, Canada. She was awarded the Right Livelihood Award in 1993. She is the founder of Navdanya

The short, sharp life of 'Chinese century'

By Nick Ottens

If there is to be an Asian century, it won't be China's alone. While it still has hundreds of millions of people living in poverty, the country is losing its cheap labor advantage to East Asian competitors while more industrialized nations in the region are far more receptive to international trade.

The Chinese economy is expected to overtake the United States as the world's largest in sheer size by the middle of this decade but the ruling Communist Party has ample reason to be worried about perpetuating China's impressive growth rates for another generation.

As China's middle class expands in the urban east, it is expecting more than just growth but in the western hinterland, a lack of development and, perhaps even more frustrating to the people there, a lack of political accountability fuels unrest and discontent. The party will be increasingly hard pressed to meet the aspirations of both these peoples. Economic and political openness, as desired in the coastal provinces, would weaken the state's grip on industrial development, which could exacerbate the existing imbalance between cities and countryside.

Chinese labor is already becoming too expensive for some manufacturers who are taking their business to countries as Indonesia and Vietnam while Malaysia, Thailand and Taiwan are more attractive for technology companies that require an educated workforce and a business climate that isn't too burdened by regulatory restrictions and corruption.

Labor laws and tax regimes in the rest of South and Southeast Asia are generally more flexible. These countries welcome international trade and investment whereas China seeks to protect its "infant industries" from free and fair competition on the global market. This policy enables the ruling class in Beijing to build high-speed railways across China but the cost, which is less clear, could be hugely detrimental to its economy in the future.

Foreign investors in China have to cope with laws and regulations that are inconsistently enforced - sometimes arbitrary. The Chinese legal system cannot guarantee the sanctity of contracts, which is vital to a market economy. Capital account transactions are tightly regulated.

This is a system that thrives on cronyism where businesses that are connected with local and state officials prosper and companies that aren't could see their investment go up in smoke when a magistrate determines that factory wages should increase by a third, overnight.

China does attract huge amounts of foreign direct investment. In fact, it takes in every month what India assumes in a year. Yet China grows at a rate just two percentage points faster than India. And even there, corruption is endemic.

At its most recent congress in March of this year, the Communist Party affirmed the need to improve "balanced growth", which should translate into increased welfare spending, including subsidies for farmers and the urban underclass. Western stereotypes notwithstanding, the Chinese state is not sitting on an infinite amount of cash however. It cannot simultaneously build a proper welfare state and allow the subsidizing of companies, especially in real estate, to continue unabated. If it wants to expand social programs and thus prevent civil unrest, it has to challenge vested interest with allies in the party.

With major changes in political leadership expected next year, it may not be until 2013 before a comprehensive social agenda is implemented. That could be two years wasted while necessary economic reforms to further open up China to world markets are delayed.

There is another, less immediate concern that could put a stop to this Chinese century before the world has a chance to recognize that it's living in one.

By the middle of the 21st century, 400 million Chinese will have retired. That's more than America's total projected population by that time. India, which is set to overtake China as the world's most populous nation by 2030, is expected to have nearly 400 million people more in 2050 than China.

How is China going to pay for all these old people? China doesn't have an expansive public pension system, which means that many Chinese in their prime, often without siblings because of their government's "one child" policy, will have to provide not only for their parents but, as life expectancy rises, their grandparents as well. Naturally, wages will have to rise to accommodate this unprecedented level of dependency which can only happen if Chinese labor becomes much more productive and skilled - fast.

The party has to manage this while not only dealing with internal pressure to democratize; it is also expected to finance American and European deficit spending when these continents blame China for its "colonialist" scramble for resources, including water, in Africa and Central Asia - resources it desperately needs to continue to grow; to invest in its future industrial base and to alleviate hundreds of millions of people out of poverty.

If despite this all, China somehow ends as tomorrow's superpower, "owning" the 21st century, that will be quite a feat.

Nick Ottens is an historian from the Netherlands and editor of the transatlantic news and commentary website Atlantic Sentinel. He is also a contributing analyst with the geopolitical and strategic consultancy firm Wikistrat.