China at the Wheel of the World: Sissy or Superpower?

The Chinese may be helping the States, but can they help themselves? The view from Beijing is a tea party hell-bent on global leadership, but if the government can't give up its moribund socialist movement, America might be riding solo well after Obama.

By: Thomas P.M. Barnett

[Ed. Note: Welcome to "The World War Room," contributing editor and global-security expert Thomas P.M. Barnett's weekly column for Esquire.com. Read his breakdown of Robert Gates and Iran, then subscribe to Esquire's RSS feed for in-depth analysis on a new hotspot every Thursday.]

BEIJING — China is in a foul mood, according to the appropriately titled Unhappy China, a white-hot bestseller that is as controversial here as I've found it to be accurate in a week-long canvassing of this country's increasingly important growing pains. It's a collection of essays from five overtly nationalist writers who want China to stand up and assume the global leadership that, in their opinion, naturally falls to their country once America's profound bankruptcy has been revealed. The book has triggered an intense debate across China's vast sea of netizens, with the bulk of commentary as scathingly critical of the authors' long-term vision of China's superpower-dom as the book is of American leadership.

Taken as a whole, one can easily get the impression that China is deeply distressed by Team USA's recent streak as globalization's guns-a-blazing Leviathan, but equally reluctant to replace. Having survived Mao Zedong's murderous insanities, China's version of Boomers are truly careful what they wish for.

But if the Chinese are unhappy with America's government, there's even more dissatisfaction with their own. Between the milk scandal, a poor response to the massive Sichuan quake, and pervasive corruption of officials, China's ruling capitalist party finds itself wading nervously through a series of anniversaries: twenty years of Tiananmen Square memories, thirty since Deng Xiaoping's world-shaking reforms, and the sixty for the People's Republic itself.

With that kind of ideological crossroads, it's little wonder that China's confused about what it wants to be when it's all grown-up.

Still, some of this anger from the Chinese is rather petty: The Olympics were a massive coming-out party last year, and not everyone on the planet gave the regime a thumbs-up, being so rude as to complain about situations like Tibet, Darfur, and Myanmar. But if China's going to get all pissy over some Hollywood blowback, then how's it going to handle the kind of widespread enmity that comes with being king of the hill? Being a superpower ain't for sissies.

It's almost as if Chinese people expect the world to withhold its political opinions in the same manner as they're commanded by the Party. Then again, maybe that's why Unhappy China has triggered such a cathartic social debate. With President Hu Jintao standing front and center at G-20 photo-ops and Premier Wen Jiabao publicly calling out America for sabotaging the global economy, why should China take any of this sanctimonious guff from the West?

Unprepared for Takeover, In Need of a Makeover

Honestly, I agree with Unhappy China's primary prescriptions: China needs to lead the world in discovering new ways to use natural resources more intelligently (necessity being the mother of invention), and step up to some serious global policing (how about some Asian blood for Asian oil?), and navigate its way toward true democracy (Deng's own long-term prediction).

If getting mad at America is what it takes to fire up the Chinese people, that just proves a little social anger goes a long way to push governments for better answers. So bring on da' noise (populism) if you wanna bring on da' funk (progressivism). And then get yourself a bevy of Teddy Roosevelts, Upton Sinclairs, and suitably self-righteous civic groups to drive the much-needed makeover.

Right now China and globalization at large are suffering from the same growing pains that plagued "rising" America in the latter decades of the 19th century: too much income inequality, too much despoiling of the commons, too little regulation of a rapacious capitalism desperately in need of taming. So I might ask, If not China, then who? And if not now, then when? Europe's too busy getting old, and America's too busy paying off its second mortgage (plus Afghanistan).

Speaking of Hu and Wen, my sense is that this global crisis caught China's tight-lipped leadership about a decade too early. Beijing's current ruling generation consists of homebodies who never took their junior years abroad. The next generations, teed-up for rule in 2012 and 2022 respectively, earned plenty of graduate degrees from the West's top universities. But today's leaders were trapped at a young age by the Cultural Revolution — a formative experience that left them risk-averse.

So just when this financial meltdown tempts China to grab globalization's steering wheel, we get guys whose entire lives prepared them to pull the parking brake and little else.

Heads in the Sand, Missed Chances for the Future

I've spent the past couple days lecturing at China's version of Harvard — Beijing's prestigious Tsinghua University, where I found no shortage of best-and-brightest material among the school's small army of Ph.D. candidates in International Relations. There is a glorious naïveté about these young students, none of whom can remember a time when China wasn't on the rise. They truly believe that if we all just play nice with one another, there'll be nothing to kill for, nothing to die for, and no extremists either.

I felt like such a cynic, then, telling them that China is better off sticking with the whole "peaceful rise" mantra and leaving the Leviathan work to a greater power. Unless, of course, they could foresee a day when the People's Liberation Army leads the U.N.-sanctioned coalition force into some shoot-'em-up with seriously bad actors.

Moreover, I told them that China can't possibly lead the world until it evolves past single-party rule. As smart and as sophisticated as the upcoming generations of Chinese leaders are, they'll never be able to match America's tolerance for strategic risk — the essence of genuine leadership. The United States has the political confidence to lead because, in the event of great failure, it can change ruling parties with a lag time that's four years at worse and sometimes as quick as two. There is no "throw-the-bums-out" option in China, and when face cannot be lost, it'll remain masked by diplomacy.

And that's what I mean by history catching China too early: Leadership here is still based on authority rather than legitimacy — it's not about how you gained power that counts but how you wield it. Beijing's bosses have long based their authority on being able to deliver strong economic growth, the implied grand strategy being nothing more than restoring China to its rightful place in the world.

But like the dog chasing the car and eventually acquiring its target, China has little idea of what comes next.

Instead, China purposefully dithers when it could be decisive. Afraid of arousing America's lingering suspicions but too proud to be its junior partner, China has avoided comprehensive strategic cooperation by insisting that the Taiwan issue "must be settled," as if Hillary Clinton could snap her fingers and make that happen. Yet China's military build-up remains based primarily around this scenario, leaving the force rather useless for actual global policing.

Imagine an American political system obsessed with reunification with Cuba, or a U.S. military designed primarily for that conflict scenario. Would anybody in the world take us seriously as a global superpower?

What's most telling is China's avoidance of any real regional leadership on North Korea: China's party chiefs can't bear the thought that Kim's fall would reflect badly on their perceived legitimacy as a socialist state, and so they prop up his criminal regime while facetiously mumbling about "peaceful resolution."

My advice, again: give Washington a call when you're serious about leading the world instead of the moribund world socialist movement. Hell, on the basis of Medicare and Social Security alone, I'd give the U.S. a higher score than China on the socialism scale.

On the Bright Side, a Chance to Lead

Nonetheless, I've come away deeply impressed with Tsinghua's students and faculty. They strike me as deeply aware of China's many strengths and weaknesses, and completely committed to building not just a better China but even a better world.

And, no, I ultimately don't want to disabuse these bright minds of the notion that trade and connectivity and globalization are all pacifying and therefore good. Because they are. I just want them to understand that something that good is worth defending with more than just words.

So I remain optimistic about China's future, and this trip has only reinforced my confidence. The country and government and people are all strenuously progressing through a long list of social and economic transformations at a stunningly fast rate. Yes, with that magnitude of change comes plenty of social friction, but when those are eventually resolved with more competitive domestic politics, I fully expect China will become happier with itself and the world — and thus capable of truly visionary global leadership.

I just hope China hurries up and gets its act together, because our superpower — even after these first hundred days — could use some competition.

Esquire contributing editor Thomas P.M. Barnett is the author of Great Powers: America and the World After Bush.

Posted: Friday, April 24, 2009 1:12 PM
Filed Under: Islamabad, Pakistan
By NBC News’ Carol Grisanti and Mushtaq Yusufzai
ISLAMABAD – After weeks of consolidating their control over large areas of the Northwest Frontier Province, the Taliban are in retreat.

On Friday, Maulana Fazullah, the firebrand Taliban boss in the Swat Valley, ordered his most trusted military chief, Commander Fateh, to leave Buner, a neighboring valley that Fateh seized on Monday.

The Pakistani authorities warned the militants on Thursday that they were ready to remove them by force if they did not lay down their arms and abide by a peace agreement hammered out in February.

Mohammad Sajjad / AP
Taliban militants hold their weapons outside a mosque in Daggar, Buner's main town on Thursday.

According to the deal, the government ceded power to the Taliban in the Swat Valley and allowed them to impose Islamic law in the area in return for a cease-fire – ending two years of on and off military operations there.
But last weekend at a large gathering of supporters in the valley, the Taliban announced they would not lay down their arms and openly challenged the state. They declared that democracy was un-Islamic and called for harsh Islamic laws, known as sharia, to replace Pakistan’s constitution.

The next day, they began their advance into Buner. That valley’s proximity to the capital, Islamabad, just 70 miles and a five-hour drive away, sounded alarm bells in Washington.

A step too far
"The Taliban finally made a grave error," said Javed Siddiq, editor of the influential Urdu language daily Nawa-e-Waqt. "Once they challenged Pakistan’s constitution as un-Islamic, Islamic scholars and the Pakistani people no longer saw them as the self-styled defenders of Islam against western infidels – but infidels themselves who want to dismantle the Pakistani state."

Siddiq said that challenging the constitution was a wrong step and believes it has backfired. Pakistan’s constitution was carefully forged by a board of Islamic scholars in 1973 – every tenet was crafted to make sure it conformed to the principals of Islam.

"Now, all the different sects of the Sunni and Shiite, the religious scholars, the army, the politicians and every Pakistani is against the Taliban," Siddiq said. "They have lost."

The Taliban were quick to sense their blunder and the resulting sea change in the country. "The expansion into Buner was the turning point," said Siddiq.

NBC News
Taliban Commander Fateh in Buner, Pakistan.

‘No ordinary Taliban commander’
It was soon after the Taliban signed the February peace agreement with the Pakistani government that Commander Fateh began to plan the militants’ move into Buner.
"I saw Swat as an opening for us," Fateh told NBC News in a recent interview. "I knew if I planned well, we would be able to advance little by little, hopefully in a peaceful way, and gradually enforce Islam in the valley."

Fateh, a 33-year-old native of Swat, rose up through the ranks of Taliban fighters after almost 15 years of fighting in Afghanistan. The somber-looking commander, who is married with three sons, is considered to be an accomplished military strategist, often brilliant in battle, according to Taliban commanders in the region.

With the bearing of a de-facto prince exacting homage from his subjects, Fateh, whose name means victorious in Urdu, rode into Buner last Monday in the back seat of a black Toyota pick-up truck. Taliban fighters flanked his vehicle and brandished Kalashnikovs at the throngs of locals who had come out to catch a glimpse of him.

Fateh was meticulously turned out in a silky black turban that hung low on his clean, pressed tunic. He wore expensive-looking light brown leather ankle boots, and his long black beard gave off a heady smell of musk-scented oil in the afternoon sun.

"This was no ordinary Taliban commander," said an NBC cameraman, who caught up with Fateh in Buner. "Most of them are scruffy. This guy was different. I wanted to ask him where he got his shoes."

VIDEO: As concern grows over Taliban in Pakistan, Adm. Mike Mullen discusses the threat with NBC's Ann Curry

Blazing a path of fear
Fateh’s plan was to peacefully take Buner with 800 Taliban fighters. After consulting with Fazullah and a council of elders, Fateh and his men drove the 25 miles from Swat to Buner in a convoy of cars, pick-up trucks and mini-buses. Fateh ordered a few hundred men to walk over the mountains and prepare for meeting the Pakistani army along the way, but they encountered no resistance.
"I always try to take control without firing a single shot," Fateh said outside the villa of a wealthy Buner businessman that became his military headquarters just hours after arriving in Buner. "My orders to my men are first and foremost, try not to kill."

Fateh easily forced a truce with the tribal elders and sent home some of his men. He then gave NBC News a tour of the area to show that the local people were with the Taliban.

"We prefer the sharia law that the Taliban have brought to us because it provides speedy justice and no one demands money from us," said Sultan Mehmud, a shopkeeper in Buner.

"Before, we would have to go into debt hiring corrupt government lawyers to defend us, and we never received any justice," he said, albeit haltingly, obviously terrified to say anything against the Taliban.

The Taliban have consistently beheaded those who do not conform to their rules – which include outlawing music and forbidding men to shave their beards – and have torched schools and government buildings in their path.

Less than 1 million people live in Buner, an impoverished valley in the Malakand Division of the Northwest Frontier Province. But Buner has huge strategic importance because it borders seven other districts, enabling the Taliban to easily spread their influence.

The chairman of the Joint Chiefs of Staff, Adm. Mike Mullen told NBC News in an interview broadcast on Friday that he is extremely concerned about indications that the Taliban are moving closer to Islamabad.

Army threat
Pakistan’s army commanders have repeatedly said that the army is ready to go back in to push back the militants – whose numbers in Swat alone are estimated to be close to 10,000. On Friday, they deployed around Buner to secure government installations, but so far they have not received any orders from the civilian government to launch a military operation.

In a strongly worded statement, Pakistan’s army chief, Gen. Ashfaq Kayani, warned Friday that no one should mistake a pause in military operations as a concession to the militants.

"The army is determined to root out the menace of terrorism from the society," Kayani said in the statement. "It will not allow the militants to dictate terms to the government or impose their way of life on the civil society of Pakistan."

A Pakistani army officer, who asked to remain anonymous because he is not authorized to speak to the media, said Kayani’s statement was directed at the politicians who are criticizing the army and at Western voices who are describing a doomsday scenario for Pakistan. "The chief’s statement was basically a ‘shut-up’ call," he said.

NBC News’ Fakhar Rehman in Islamabad contributed to this report.

Al Qaeda in Iraq leader reportedly arrested amid spike in bombings
The arrest is perhaps the greatest blow to the insurgency since Zarqawi was killed in 2006.

By Tom A. Peter | Correspondent 04.23.09
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AMMAN, JORDAN – Amid reports of two bombings that killed scores, an Iraqi military spokesman announced Thursday that Iraqi forces had arrested the leader of Al Qaeda in Iraq, Abu Omar al-Baghdadi.

“Abu Omar al-Baghdadi was arrested today in Baghdad,” Baghdad security spokesman Maj. Gen. Qasim Atta told Agence France-Presse. “It was Iraqi forces who arrested him based on an intelligence tipoff from someone.”

The arrest, which is perhaps the greatest blow to AQI since its former leader Abu Musab al-Zarqawi was killed in a 2006 US strike, comes amid a recent spike in violence. Some worry that the nation’s security gains may slip as the US scales back its presence.

On Thursday, two separate bomb blasts left at least 60 people dead and more than 110 injured in Baghdad and Muqdadiya, north of the capital city. It remains unclear who was responsible for the attacks, but they resembled Al Qaeda-style tactics.

US officials have emphasized that, despite the recent spike in attacks this month, US and Iraqi forces are making progress in the fight against remaining insurgent and terrorist elements. On President Obama’s recent visit to Iraq, Gen. Raymond Odierno, the top military commander in Iraq, assured him that violence was at 2003 levels.

However, many in Iraq view the escalating attacks as the resurgence of a persistent and unrelenting Al Qaeda in Iraq. The US made significant inroads against AQI by building and funding a Sunni paramilitary group known as the Sons of Iraq (also referred to as the Awakening). But members of the group – which at one point included more than 100,000 members – have become disgruntled in recent months over the arrests of key leaders and a delay in payment from the Iraqi government, which has overseen their activities since late last year.

The Washington Post quoted a tribal leader today as saying that AQI had, in the past two weeks, started “to intensify their efforts to reorganize themselves by convincing Awakening members and the people of the villages to join them, seizing on the frustration and the fear that hit them after the Iraqi government began to chase them.”

APRIL 2, 2009, 4:24 P.M. ET

Oil-Rich Arab State Pushes Nuclear Bid With U.S. Help
By JAY SOLOMON and MARGARET COKER

ABU DHABI -- The mating of the words "nuclear" and "Persian Gulf" normally sets off alarm bells in Washington. Yet this oil-rich Arab state just across the gulf from Iran is on a crash course to develop nuclear power with U.S. backing.

Dozens of American engineers, lawyers and businessmen have converged on Abu Dhabi in recent months to help the United Arab Emirates get the Arab world's first nuclear-power program running by 2017. "I don't know anyone else who has rolled out a nuclear program of this magnitude this fast," says Jeffrey Benjamin, an American engineer who in October was named project manager for Emirates Nuclear Energy Corp., which oversees Abu Dhabi's nuclear program.

Even as the U.S. remains determined to block Iran from developing nuclear weapons, President Barack Obama sees the U.A.E. program as a "model for the world," according to a senior White House official, and by mid-April could move to present a bilateral nuclear-cooperation treaty to Congress for approval. The ability to make electricity through nuclear power is a long way from the ability to build weapons -- and, proponents say, the agreement could make bomb-making harder.

The treaty, signed by former President George W. Bush during his last week in office, would allow American firms to engage in nuclear trade with the U.A.E. To build support, the U.A.E. is agreeing to buy approved nuclear fuel on the international market, rather than enriching uranium or reprocessing plutonium, both of which can be made into weapons-grade material. It will also open its facilities to random international inspections.

The U.A.E.'s push represents a test for nuclear-power advocates who want countries across the globe to go nuclear -- so long as they play by the rules. The U.S. and United Nations officials are championing the U.A.E. as a role model for other developing countries and as a counterexample to Iran. Tehran has repeatedly rebuffed international inspectors, while amassing large quantities of materials that can be used to build bombs. A spokesman at the Iranian mission to the U.N. says Iran's nuclear program is purely for civilian purposes, and says Tehran believes "peaceful nuclear programs" are the right of all signatures to the Nuclear Nonproliferation Treaty.

Some U.S. lawmakers have threatened to block the U.A.E. deal, saying the risks of letting that country split the atom are too large. They cite the U.A.E.'s history as a transit point for sensitive military technologies to Iran, Iraq and Libya. They also make the slippery-slope argument: If one Arab country has nuclear power, others may pile in, and perhaps down the road, seek nuclear weapons as well. Both Saudi Arabia and Egypt have recently announced their desire to develop nuclear-power programs with U.S. assistance.

Western and Asian companies are already salivating at the chance for lucrative contracts with the U.A.E., which has set the end of April as the rough deadline for bids. General Electric Co. and Westinghouse Electric Co. are among the U.S. firms interested in the initial $20 billion in reactor work, say officials familiar with the bidding process. GE and Westinghouse declined to comment.

Facing ambitious timelines set by officials bent on growth, Mr. Benjamin, the American engineer, and his colleagues rarely get far from the Emirates Nuclear Energy headquarters in downtown Abu Dhabi. Many live in an apartment building next to the office and exercise at the same gym. Mr. Benjamin lives three floors above his office.

Surge in Demand
The U.A.E. began exploring nuclear power three years ago as it faced a surge in electricity demand, say Emirati officials. The Persian Gulf country is a federation of seven states, among them Abu Dhabi, the capital, and Dubai. It has among the largest oil reserves in the world. But it's short of the natural gas that is used to fuel power and water-desalination plants, and imports most of its gas from neighboring Qatar.

Abu Dhabi's ruler, Sheik Khalifa bin Zayed al Nahyan, commissioned a white paper that concluded the country's electricity demand would reach 40,000 megawatts by 2020 from around 16,000 megawatts currently. Nonnuclear options, such as coal-fired plants, solar energy or alternative fuels, were seen either as insufficient to meet demand, too expensive or harmful to the environment.

"Nuclear power was seen both as practical and clean," says Hussain al Nowais, an Abu Dhabi industrialist who took part in the study.

The U.A.E.'s foreign minister announced Abu Dhabi's intentions to pursue nuclear power last May. Officials here say they believe the global economic downturn is temporary and are sticking to ambitious growth plans that assume rising electricity demand.

Bush Initiative
The Bush administration quickly emerged as a powerful partner. Former Bush officials say they wanted to tout the U.A.E.'s nuclear approach to developing nations and to pressure Iran to follow suit. Some former officials say they believed nuclear power was inevitably going to spread farther into the Middle East. A deal with Abu Dhabi could also set a precedent by binding a key economic powerhouse to U.S. technologies and international standards.

"This is the kind of counterexample to Iran we need to actively support," says Jackie Wolcott, a former U.S. envoy who helped negotiate the pact Mr. Bush signed in January.

David Scott is one of the Americans helping to build the nuclear program in the U.A.E. Mr. Scott served as the National Security Council's director for the Arabian Peninsula and North Africa during President Bush's first term. In 2006, he became the director of economic affairs for Abu Dhabi's Executive Affairs Authority, which is run by the crown prince.

Frenzied Growth
On a recent morning, Mr. Scott was in a helicopter over Abu Dhabi, pointing out the frenzied growth of skyscrapers and apartment blocks that he hopes will soon be powered by nuclear energy. Mr. Scott, a graduate of Utah's Brigham Young University, has worked for the U.S. military, the State Department and Occidental Petroleum Corp. On weekends, he and his family ride wakeboards on Abu Dhabi's turquoise waters.

Also in the helicopter was Mohamed al Hammadi, the chief executive of the Emirati nuclear company. Mr. Hammadi was tracking the flight path using the global-positioning system on his cellphone. The 33-year-old, a graduate of the Florida Institute of Technology and a native of Abu Dhabi, said he hardly recognized the town he grew up in.

"Most of this was just desert," said Mr. Hammadi. The Louvre and Guggenheim museums are building branches on an island next to Abu Dhabi's downtown waterfront. A Formula One racetrack built on another nearby island will stage its first event later this year. Farther away from the city, one of the world's largest aluminum smelters is under construction.

Mr. Hammadi's job includes choosing sites for the reactors that are in secure locations and away from population centers, but still close to desalination plants and the power grid. He'll also decide which designs the U.A.E. adopts. Plants must withstand sandstorms and summer heat that can reach 120 degrees.

Following the Western model, the U.A.E. has established an independent regulator to monitor nuclear safety. The regulator's first director general is set to be William Travers, a 58-year-old Florida native. In the 1980s, he was dispatched by the U.S.'s Nuclear Regulatory Commission to help clean up America's worst nuclear accident at Three Mile Island in Pennsylvania.

Mr. Travers oversees a staff of 30 American, Emirati and European officials that's expected to grow to more than 100 by 2013. The regulatory office is seeking to put in place licensing requirements so the U.A.E. can begin importing components for its nuclear reactors. Mr. Travers says he plans to retain his independence, which is one reason his offices have been literally walled off from the nuclear-energy company, even though they share the same floor. "What they want from me is a safety call," Mr. Travers says from his spartan office.

Emirati officials say they've started developing homegrown talent to run and maintain the reactors. Khalifa University, Abu Dhabi's largest technical school, is teaming up with European and U.S. colleges to create nuclear science and engineering degrees. The government is offering to retrain engineers already working in the nation's petroleum sector.

'Serve My Country'
"I want to see myself in a stronger position so that I can serve my country," said 30-year-old Fahad al Rumaithi, who's preparing for a degree in nuclear engineering after working for the Abu Dhabi Marine Operating Co. in Malaysia and South Korea. He said he spends his spare time reading engineering books on thermodynamics.

Most critics of the program, including some U.S. lawmakers and nonproliferation experts, believe the U.A.E. is unlikely to turn to nuclear weapons. But they have reservations about the country's past role in the flow of sensitive military technologies. The rogue Pakistani scientist Abdul Qadeer Khan used the port of Dubai to transfer centrifuge technologies to countries like Libya, according to American and U.N. officials. Mr. Khan's network grew to include nuclear sales to North Korea and Iran, before American and international investigators shut him down in 2003.

Iran has allegedly obtained materials for its missile program from front companies based in Dubai. Iran and the U.A.E. are trading partners, exchanging more than $5.5 billion in goods in 2007, according to the European Union.

Some American lawmakers have said they want to block the U.S.-U.A.E. deal on the grounds that the U.A.E. hasn't done enough to combat the flow of funds and technology into Iran.

"If this is to be the model for future nuclear cooperation agreements, don't we want to get this right the first time?" asks Rep. Ileana Ros-Lehtinen of Florida, the Republican vice chairman of the House Foreign Affairs Committee. Ms. Ros-Lehtinen wants more assurances that the U.A.E. will support U.S. efforts to confront Iran and that it won't pursue nuclear weapons.

U.A.E. officials say in the past they have been lax in monitoring the flow of sensitive technologies through the ports. But they say they have stepped up enforcement of U.N. sanctions against Iran and tightened business-license regulations for Iranian nationals. They have also signed on to U.S.-led efforts to track air and sea shipments to Iran.

Iranian Crackdown
Over the past three years, U.A.E. officials say, they have shut down 40 Iranian companies operating in Dubai over either export-control violations or lack of proper licenses. In the past six months, Emirati authorities have also blocked more then 10 shipments of goods for potential military use heading to Iran through Dubai, largely from Asia. "We will not allow anyone to use our territory to harm anybody else," said Yacub al-Hosani, a Foreign Ministry official.

The U.A.E. points to Iran's stepped-up rhetoric over Persian Gulf islands that are in dispute between Abu Dhabi and Tehran as evidence that its harder stance isn't going unnoticed.

Emirati officials say their nuclear program won't be derailed by international pressure. The country has already signed a nuclear-cooperation agreement with France, and has tentative deals with Japan and Britain. Companies such as France's Areva SA and Korea Electric Power Co. are preparing to make bids for contracts that could ultimately top $40 billion.

Write to Jay Solomon at jay.solomon@wsj.com and Margaret Coker at margaret.coker@wsj.com

Last Man Standing
by Tyler Cowen

It’s no cause for celebration, but the global financial crisis shows why the United States remains the indispensable nation.

The United States has millions of homes in foreclosure, high unemployment rates, a failing General Motors, numerous insolvent banks, and unprecedented deficits. It is possibly on the brink of a second Great Depression. Yet the U.S. dollar has experienced one of its most rapid appreciations in history. Last summer, when it took about $1.66 to buy a euro, American tourists in Paris gasped at the price of a Coke. Now, a stronger dollar means that a euro can be had for something like $­1.26.

What’s up?

America’s relative decline in global affairs has been foretold many times, but it never quite seems to happen. Today, the rest of the world is looking to the United States to pull it out of a recession (or depression), even though many countries also blame us for having started it. The truth is this: The worse things go for the world as a whole, the more the United States gains in relative power and influence. Maybe that sounds counterintuitive, but it has happened before. After the first and second world wars left many other parts of the world in devastation, the United States rose in relative stature. It fell in standing, at least arguably, during the years between 1989 and 2007, when the world as a whole was enjoying unprecedented prosperity and liberty.

In the terminology of financial economics, the United States is, relatively speaking, a countercyclical asset. It’s not that America profits from bad times or war but that we have a relatively greater capacity to limit our losses and eventually bounce back. We are “built to fail,” so to speak.

Its size is one reason why the United States has such a robust polity and economy. In bad times, international cooperation tends to break down, which increases the relative influence of larger economic and political units. Smaller countries, such as Belgium, are generally more dependent on international trade than the United States. And in truly dire situations, military power counts for more—and the United States accounts for almost half of the world’s defense spending. Even when military power is not wielded directly, it is understood that America cannot be intimidated ­easily.

The United States also has a more favorable demographic position than many other nations. The populations of Japan and many European countries may be cut in half over the next 30 or 40 years, mostly because families in those places, if they form at all, have fewer children. China, with its one- child policy, is in one of the toughest positions of any country. If nothing changes, the unimaginable will happen, and within a few decades China’s population will begin a rapid decline. The United States is not expected to shrink in population, in part because its immigrants are having children at relatively high rates.

Finally, while Europeans and Asians commonly think of the United States as a kind of “baby state,” in reality we have one of the oldest and most durable nation-states. With the possible exception of the Civil War period, the United States has a continuous and consistent governmental history running back to 1789 or, by some accounts, to the colonial governments of the 17th century. American political and economic institutions have been time- tested in a way that few other countries can claim. If you doubt this, compare America’s multicentury record with the discontinuous and tumultuous political history of France, China, or Russia.

Amid the flood of alarming commentary, it’s easy to lose sight of the fact that the financial crisis has underscored the continuing strength of American global influence. Although the United States has been the epicenter of some of the economic problems, it has exhibited enviable economic and political stability, at least compared with Ireland, Spain, and most of Asia, to name just a few examples. The dollar’s appeal as one of the world’s safe havens has been redoubled by the recognition that the flexibility of the U.S. economy gives it a greater capacity than many others to adapt to shocks.

It has become increasingly clear that the problems in European governance are severe— and I am referring to the wealthier nations, not Bosnia and Albania. The European nations are tied to each other through the European Union and the euro, but they don’t have a good method for making collective decisions in contentious ­times.

Consider Germany. In January, its industrial production plummeted at an annualized rate of about 7.5 percent. Could Germany now be the financial savior of Europe? When Germany joined the Eurozone, the 16-nation bloc that embraces the euro as its sole currency, the country’s politicians promised voters that they would never have to pay for the profligate policies of the “less responsible” member nations. And for almost 20 years, Germans have been paying higher taxes to reconstruct eastern Germany and ease the transition from communism. It’s not a citizenry looking to fund more bailouts, especially in a major recession.

But now German citizens are told that they may have to bail out the Austrian banking system and possibly the government of Ireland, while paying additional subsidies to Hungary and perhaps to other eastern European nations as well. Further down the line, Spain, Italy, and Greece, which have all lost their premier AAA credit rating, may require some form of financial aid. The Germans might look to spread this burden around Europe, but there are few places to turn. France and the Netherlands could chip in, but the hat cannot be passed very widely. The United Kingdom had one of Europe’s leading economies, but now it is one of the most financially vulnerable na tions. You can think of London as a large hedge fund based on Europe, specializing in speculative financing of major European projects. After finance, the two next-biggest British exports—pharmaceuticals and tourism— are solid but hardly economically impressive.

Part of the problem for Europe is that its biggest banks are very large relative to the economies of their host nations—in other words, its component national economies are too small. The major Austrian banks, for instance, have loans to eastern Europe equal to as much as 70 percent of their country’s gross domestic product. The two largest Swiss banks, taken together, have assets four times larger than Switzerland’s GDP. Even in the relatively large economy of Germany, the liabilities of Deutsche Bank have been measured at 80 percent of German GDP. These banks have grown too large to be handled or bailed out by their national governments. In the United States we talk about institutions that are “too big to fail,” but in many parts of Europe it might be more apt to speak of those “too big to be saved.”

In the United States, with its relatively unified system of governance, the Federal Reserve can simply print money to fund bailouts, and even if that is an ugly alternative, the government’s ability to act underpins the credibility of the system as a whole. The European Central Bank (ECB) is explicitly banned from creating more euros for the purpose of bailing out national banks. The Swiss central bank could print money for financial bailouts, but the prospect of the resulting inflation and rapid depreciation of the Swiss franc makes this a very unappealing choice, especially for a country that has marketed itself as a haven of financial solidity. And a weaker franc would only make it harder for Switzerland’s big banks to meet their obligations, many of which they must pay in other currencies.

Ideally, the ECB should take on a stronger role as lender of last resort in Europe, but the EU does not make such decisions easily. Fundamental alterations would be needed in the bank’s charter, which was written precisely to make change very difficult, in part because Germany, with its historically rooted dread of inflation, insisted on biasing the ECB toward conservatism and inaction. Even if the bank’s charter were amended, the member countries would surely impede any action by bickering over who would pay the bills for new initiatives. If the ECB is going to run bailouts, decision making will have to become a lot more fluid, and that would require Germany to give up control and the bank to move away from price stability as its sole objective. Since the EU member states have not been able to agree on a reform of the Union constitution, it’s not obvious they will be able to agree on changing the bank’s charter. They’ve had time— and good reason— to do so, yet have taken no serious action.

It’s not impossible that the ECB could at some point simply assume emergency powers and run a bail out on very short notice and without legal authorization. Recall that the Bear Stearns and AIG emergency deals were done by the Fed over weekends. At that point the question would be whether other EU procedural safeguards would maintain their credibility, or whether skeptics within the EU, such as Denmark, would feel that their precious veto rights were no longer being protected.

The relatively weak nature of the ECB reflects some of the problems of coordinating the actions of a number of smaller countries in difficult times. In the United States, coordination between the Fed and the Treasury Department is taken for granted, and Congress is usually willing to back up those institutions. The Troubled Assets Relief Program bailouts passed in 2008 not because Congress thought they were a good idea, but because Treasury secretary Henry Paulson and Fed chairman Ben Bernanke told the legislators that they had better sign on or the sky would fall. This sort of bossiness won’t solve every problem, but the European nations have no comparable process, and no comparable centralized power base capable of responding quickly and effectively to crises. In the final analysis, no one knows who is responsible for the European economies. If the Chinese are investing in the United States and they have a concern, they can pick up the phone and call Bernanke or the current Treasury secretary, Timothy Geithner, and receive a consistent answer, backed by a single national executive, a single legislature, and, ultimately, the world’s most powerful military. You could say that when it comes to major foreign investors, the United States has a better “customer service department” (we at home call them politicians) than Europe or, for that matter, Asia.

It’s not widely recognized that Europe, because of its systemic weaknesses, already has required implicit bailouts by the United States. European financial institutions are prominent on the list of the bailed- out creditors of AIG, the insurance company that, in effect, was nationalized by the Fed in 2008. Few U.S. financial regulators wish to stress this point, but one reason why the Fed rescued AIG was that it knew that European regulators could not handle the fallout from an AIG collapse.

It’s commonly claimed that the economic future of the world lies in Asia, but that vision too has taken a beating lately. The export- based economies of Japan and Taiwan are contracting more rapidly than those of the United States and Europe. The two countries have not suffered banking crises, but their economies are dependent upon the expectation that global consumers will have more money to spend every year. Their economies are in this manner implicitly leveraged—arguably, more leveraged than the U.S. economy— even apart from whatever explicit levels of debt they hold. The value of Japanese and Taiwanese commercial investments depends on the ability of customers overseas to continue borrowing and spending money— and that doesn’t look like a very good bet right now.

One of the most important economic questions is what will happen with China. The Great Depression of the 1930s came to China last, and that pattern could be repeated today. So far, the country’s economic growth rate has dropped from 12 or 13 percent annually to a measured rate of about six percent. But given that there are doubts about the honesty of the Chinese government in reporting economic data, the true growth rate may be much lower than that. In any case, the Chinese real estate boom has ended, and massive layoffs are occurring in the export sector. Chinese financial and commercial enterprises are not very transparent, double- digit growth allowed many unsound or speculative enterprises to stay afloat (“The recession reveals what the auditor missed” is one version of an old saying), and the economic expectations of the Chinese citizenry have become high. The nation’s leaders fear social unrest. No one knows if Chinese economic and political institutions will hold together in tougher times.

On the positive side, China has the luxury of high savings rates and an immense stock of accumulated foreign assets, especially U.S. government securities. If China survives the current crisis more or less intact, like the United States it will emerge as a large nation with its status and influence enhanced.

In the long run, the fortunes of nations depend on many factors, not just their response to a single financial crisis. Nonetheless, such reactions reflect strengths and weaknesses that show up in other areas of economic and social policy. Despite the separation of powers built into the American political system, U.S. political institutions have, by global standards, proven themselves unusually decisive and effective at critical times. The ability to react swiftly to new challenges is an underlying theme in American history, whether we consider the early missions to the moon, the breakthroughs of the civil rights movement, the pioneering of environmental regulation, or the pro- market Reagan reforms of the 1980s.

It’s a paradox that it’s the large, diverse nations such as the United States that have the greatest ability to maneuver in a crisis and turn on the proverbial dime. That’s good for us, of course, but if a new American Century is about to be born, it’s another sign that the world faces very serious challenges. And that’s not a cause for anyone to cheer.

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Tyler Cowen, who joins the WQ’s Board of Editorial Advisers with this issue, is a professor of economics at George Mason University, where he is director of the Mercatus Center. He is the author most recently of Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist (2007).

Reprinted from Spring 2009 Wilson Quarterly
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The opinions expressed here are solely those of the author and in no way represent the views or opinions of the Woodrow Wilson International Center for Scholars.

China needs less population
Your assertion that rising population is always better is simply unsupportable (see quote below). China being fortunate enough to decrease its population is not only imaginable - its desirable and rightly being pursued.

"The United States also has a more favorable demographic position than many other nations. The populations of Japan and many European countries may be cut in half over the next 30 or 40 years, mostly because families in those places, if they form at all, have fewer children. China, with its one- child policy, is in one of the toughest positions of any country. If nothing changes, the unimaginable will happen, and within a few decades China’s population will begin a rapid decline. The United States is not expected to shrink in population, in part because its immigrants are having children at relatively high rates."

Posted by: David 04/08/2009