Wednesday, September 7, 2011

End of US hegemony, rise of developing Asia

Sep 7, 2011


Past decade's vital developments took place not on the battlefield, but in the financial system, with China's rise

By Lionel Barber

ON THE morning of Sept 11, 2001, America's prospects appeared as bright as the clear blue sky over Lower Manhattan. The price of Brent crude oil was US$28 a barrel, the Federal government was running a budget surplus, the United States economy was turning (albeit imperceptibly) after the crash. The most powerful nation on earth was at peace.

Ten years on, the oil price hovers around US$115 a barrel, the US is projected to run a budget deficit of US$1.58 trillion (S$1.9 trillion) for this year, the largest in its history; the economy remains deeply troubled after the financial crash of 2008; and America's military and intelligence services remain at war, battling insurgency and radical Islamic terrorism, from Afghanistan and Pakistan to Niger and Yemen.

Admiral Mike Mullen, outgoing chairman of the Joint Chiefs of Staff, has described the national debt as the greatest threat to US national security. Standard & Poor's recent downgrade of America's credit rating appears to confirm the superpower's steady slippage. And while there is no linear narrative from the September 2001 attacks to America's present economic plight, the inflation-adjusted cost of the ensuing 'global war on terror' at more than US$2 trillion amounts to twice the cost of the Vietnam war.

Then President George W. Bush's response to the assault on the Twin Towers and the Pentagon was to launch two wars of choice against Afghanistan and Iraq, a pugnacious unilateralism at the expense of alliances and international law, and a near evangelical promotion of liberal democracy in the Middle East. His administration's hard-edged policies fractured alliances in Europe and triggered a sharp fall in America's standing abroad.

On the positive side of the ledger, America has so far escaped another terrorist attack on its own soil. Others have not been so fortunate. The bombings in Bali (2002), Madrid (2004) and London (2005) did not match the scale of Sept 11, but they claimed several hundred victims. Al-Qaeda is down but not entirely out. Dozens of computer disks recovered from Osama bin Laden's hideout in Abbottabad, Pakistan, suggest the Al-Qaeda leader, killed in May during a daring raid by US Navy Seals, was planning another spectacular outrage, perhaps to coincide with the Sept 11 anniversary this weekend.

Moreover, this year's Arab awakening has dispelled the notion that the Middle East - with the exception of Israel - is congenitally incapable of embracing democracy. One by one, the region's autocrats, from Zine El Abidine Ben Ali in Tunisia to Hosni Mubarak in Egypt, have been toppled by protesters demanding dignity, freedom and jobs. True, the fall of Colonel Muammar Gaddafi in Libya was precipitated by armed rebellions assisted by Nato warplanes, while President Bashar al-Assad of Syria may be the next leader to feel the hot breath of the Arab street.

The question is whether the much-maligned Mr Bush was correct in arguing that the autocratic status quo in the Middle East created an incubator for radical Islamic terrorism and consequently, a clear and present danger to the US. If the answer is 'yes', then his administration's failings were due less to a flawed diagnosis and more to a matter of execution.

A second related question is whether the administration's military response to Sept 11 amounted to a costly and disproportionate diversion of attention and resources at a time when the world was being reshaped by the rise of powerful new actors, notably China?

In the aftermath of the attack on the Twin Towers, a geopolitical re-alignment comparable to those of 1815, 1945 or 1989 appeared to take shape. The US mustered a coalition against terrorism that included rivals such as Russia and China, as well as one-time pariahs such as Cuba, Iran and Sudan.

The military response was equally effective. Having identified the perpetrators, the US staged a brilliant improvised campaign to topple the Taleban in Afghanistan. US special forces combined with warlords and overwhelming air power to break the Kabul regime within weeks. Although the leaders, notably Mullah Omar and his proxy Osama, slipped away, the Al-Qaeda network was relentlessly targeted and disrupted.

Within a year, the US had lost the moral high ground. Mr Bush's error was to make clear that regime change in Iraq was only one step for dealing with what he described as an 'axis of evil' including Iran, North Korea and potentially other adversaries suspected of harbouring or sponsoring terrorists. Overnight, the US was cast as a rogue nation.

Concerns rose with the publication of a revised national security doctrine in 2002, which ditched Cold War concepts of containment and deterrence. In their place came a 'forward-leaning' strategy of pre-emptive military action, regime change and a new kind of warfare that justified torture and denied the rights of the Geneva Convention to suspected terrorists.

Thus, the Iraq war was fought without the support of traditional allies such as Canada, France and Germany; without the backing of the United Nations Security Council; and without conclusive evidence that Iraqi leader Saddam Hussein possessed weapons of mass destruction posing an immediate threat to the US. As for allies, then British Prime Minister Tony Blair provided loyal political cover, though then US Defence Secretary Donald Rumsfeld declared witheringly that British forces were redundant in military terms.

Nato, having for the first time invoked Article 5 to commit all members to collective defence, was similarly sidelined. Washington's motto was 'the mission determines the coalition'. But selective alliances work both ways. By the end of the decade, European allies were using caveats to opt out of military operations in Afghanistan, Iraq and Libya. Hence, former US defence secretary Robert Gates' warning this year that Nato was fast becoming irrelevant.

Europe, too, emerged much diminished - and not just during the Libyan conflict where Germany opted out and Britain and France ran short of munitions within weeks. At the beginning of the new century, flush with the success of launching a new monetary union, Europe's leaders agreed on plans to make the European Union the most competitive economic zone in the world. In retrospect, the much-vaunted Lisbon agenda marked the summit of ambitions coinciding with the bursting of the bubble.

Ten years on, the original design of European monetary union has shown itself to be fundamentally flawed. The enforcement mechanisms for budgetary discipline were ignored by big and smaller members alike, including Germany; peripheral economies in Greece, Ireland, Portugal and Spain, which soared on the back of low interest rates, have been exposed as uncompetitive. Contagion in the bond markets now threatens to spread to Italy, a 'core' euro zone member.

By Mr Bush's second term, abrasive rhetoric gave way to a more tempered approach. As an occupation force in Afghanistan and Iraq, the US became sucked into the nation-building that Mr Rumsfeld had long derided. In a similar confusion, President Barack Obama and British Prime Minister David Cameron declared either one or both of these missions to be militarily vital, and then acted as if they were discretionary by setting a (political) timetable for withdrawal.

The accountants will tot up the collective bill for the Afghan and Iraq ventures at close to US$2 trillion in inflation-adjusted terms, but Mr Robert Zoellick, president of the World Bank and a former deputy US secretary of state, argues that a country as rich as the US can well afford the cost. In 1948, he says, the average gross national product per head in the US was one-quarter of where it stands today. Yet Americans readily supported then President Harry Truman's doctrine to prop up democracies in Europe and counter communism around the world to the tune of billions of dollars.

Whether the seeds of democratic transformation will take root in Iraq is more debatable. The much-vaunted US military 'surge' rescued the country from chaos and possible break-up, but relations between Iraq's ethnic groups - Kurds, Sunnis and the majority Shi'ites - remain precarious. Arguably, the toppling of Saddam has allowed Iran to become the dominant regional power, exerting influence through the Shi'ite government in Baghdad. Meanwhile, Teheran's nuclear ambitions remain unchecked.

Nor did 9/11 boost efforts to tackle the other serious and unresolved threat to regional stability: the Israel-Palestinian conflict. Both Mr Bush and Mr Obama have failed to break the deadlock over the occupied territories of Gaza and the West Bank, and the status of Jerusalem. Successive Israeli prime ministers from Ariel Sharon to Benjamin Netanyahu have turned the war on terror to their own advantage, arguing that concessions jeopardise Israel's security and entities such as Hamas - which easily won elections in Gaza in 2005 - are terrorists masquerading as legitimate representatives of the Palestinians.

Despite the focus on fighting terrorism, the US was still alert to broader geopolitical trends. The most important breakthrough took place between the US and India with the signing in 2008 of the '123' deal on civil nuclear cooperation. The new strategic partnership between Washington and New Delhi not only offers a counterweight to the rise of China, but also to nuclear-armed Pakistan, America's long-time but increasingly unmanageable ally in South Asia.

By contrast, Sino-US relations amount to not much more than an uneasy accommodation. Beijing sees Washington (at best) as 'neither friend nor enemy', while the US has belatedly woken up to China's challenge to its dominance in the Pacific. Beijing has grudgingly applied pressure to its brooding nuclear neighbour in North Korea, but nationalist fervour means the leadership remains neuralgic over Taiwan and acutely sensitive to territorial disputes with Japan, South Korea and Vietnam.

In the final resort, the most significant geopolitical development of the past 10 years took place not on the battlefield but in the financial system. The global banking crisis stemmed from flawed regulation and perverse incentives for banks to sell mortgages to poor Americans with no ability to repay, as well as gigantic leverage in the financial system. These distortions were created, in part, by global imbalances driven by Americans living on cheap credit and Chinese exporters and savers contributing to a vast current account surplus.

Until the Great Crash of 2008, this financial merry-go-round spun regardless. Thanks to cheap labour costs, China exported deflation to the rest of the world. China financed the US current account deficit by recycling its own surplus into US Treasury bonds. Now, three years into the financial crisis, the world economy has been turned upside down. The US is diminished, Europe sidelined, and Asia, for now, in the ascendant.

Consider the broader historical trend. Developing Asia's share of the global economy in purchasing power parity terms has risen steadily from 8 per cent in 1980 to 24 per cent last year. Taken as a whole, Asian stock markets now account for 31 per cent of global market capitalisation, ahead of Europe at 25 per cent and within a whisker of the US at 32 per cent. Last year, China overtook Germany to become the world's largest exporter. Chinese banks now rank among the biggest in the world by market capitalisation.

Import numbers are equally revealing: The developing world is becoming a driver of the global economy. From the consumption of cement to eggs, China leads the world; it has also just overtaken the US to become the world's largest market for cars.

China's voracious appetite for commodities is creating new trade routes, especially with emerging powerhouses such as Brazil. Last year, China surpassed the US as Brazil's biggest trading partner. Latin America, a region once best known for instability, has emerged through the crisis virtually unscathed. Poverty is falling, the middle classes are expanding and asset markets are bubbling.

Dr Condoleezza Rice, Mr Bush's national security adviser and secretary of state, once described multi-polarity as a theory of rivalry, a necessary evil. In economic terms, multi-polarity spells a new order in which interdependence is the norm and the US, while still overwhelmingly powerful, no longer occupies the role of hegemon.

As for the legacy of 9/11, Mr Gerard Lyons, chief economist of Standard Chartered Bank, says the three most important words in the past decade were not 'war on terror' but 'made in China'. On present trends, he adds, the three most important words of this decade will be 'owned by China'.


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