The Post-American World

Soon after being industrialized in the closing years of the 19th century, the United States became the most powerful nation on earth since imperial Rome. Though its unprecedented dominance of global economics, politics, science, and culture is still remarkably unrivaled, it cannot efficiently prevent “the rising of the rest”. In fact, the distribution of the power is shifting, moving away from American dominance to Asia, the Middle East, South America and every corner in the World, and the speed of shifting will inevitably increase. Every other country is eager to embrace the coming of the new era, but the question is: “Are Americans ready for the change”?

Although there have always been some skeptics about China’s growth, China has still grown over 9 percent a year for almost 30 years, the fastest rate for a major economy in recorded history. Some scholars have argued that these numbers are fake, and that corruption is rampant, bad debts are huge, regional tensions are mounting, and all these problems will eventually lead to the collapse of both the regime and economy. These predictions have been argued for two decades - since I was still a little child. However, most of them didn’t come true. There is one thing for sure, despite serious internal problems, China and other emerging powers, including India, Russia, Brazil, etc, will play more and more important roles in all kinds of international issues.

It took the author a whole chapter to compare the present situation of the U.S. to Britain’s once unrivaled empire. This may be because of the many contemporary echoes of Britain’s dilemma. Some scholars have pointed out that given its geography, population and resources, it could reasonably be expected to have 3 to 4 percent of Global GDP, but the real number is approximately ten times more than that. After other Western Countries caught up the industrialization, these abnormal imbalances would abate, suggesting that the big empires were bound to decline. Therefore, maybe the wonder is not that Britain declined, but that its dominance lasted as long as it did. Britain managed to maintain its superpower for decades even after it lost its economic dominance. According to the author, the trick is Britain accommodated itself to the rise of America instead of insisting on contesting it.

The main advice given by the author to American is to build broad rule, not narrow interests. The U.S should create a structure of rules, practices, and values by which the world will be bound instead of pushing its own particular interest abroad. In the age of rising new powers, all these rising countries will be eager to gain power and respect, for sure, but within the framework of the current international system. By doing so, American can ensure that the rising of the rest will not turn into a vicious competition, destabilizing the world. Most important of all, American themselves must value and follow the systems they’ve build.

A new era needs a new strategy. Unilateralism led the U.S. to become the only unrivaled superpower in the world, however, with cost of a lack of legitimacy. In this new age, especially in the wake of America’s financial crisis, the lack of legitimacy is a crucial deficiency. If Americans still think manipulating every international issue as much as they can, as they did in the previous century, will help them maintain their omnipotence, than this is just nostalgia, not a strategy.

The Arab World

Whereas Western Europe has made a massive stride towards political and economic union, and Asia has been experiencing a remarkable economic rise, the Arabs are still suffering from all kinds of stagnation and war. Arab glory with their long and proud history has gone, and only dictatorship, violence and diplomatic stalemate with Israel are left.

The image of Arab countries is often linked to all kinds of sufferings. Ruled by authoritarian governments, people rarely have chance to strive for personal freedom. The governments are notorious for their records of suppressing human rights, and the over-powerful internal security forces menacing its own people. Despite their oil, two out of five people in the Arab world still live on less than $2 per day, struggling to survive slightly above the poverty line. And until the conflict with Israel is solved, the fear of war will not stop haunting Arabs.

In the absence of democracy, Arab states rely on the extraordinary degree of suppression in order to stay in power. However, can regimes that are failing their people so clearly hold sway over some 350 million people indefinitely? People have been asking this question for decades, but we still see hardly any sign of change. The speed of democratic progress depends on the Arabs themselves, but the image of democracy has been tainted by George Bush for invading Iraq.

Economic growth, in opinion of many political scholars, is a possible engine to drive democracy development. It will produce an educated and entrepreneurial middle class with a strong demand for controlling their own fate. And as the power of the middle class grows, even the most autocratic governments will be forced to give in. Indeed, according to the “Economist”, economic growth and decreasing fertility in many Arab states have lead to the better education of their people, and demands for a bigger say in economies.

China’s experience, however, is a counter example to the idea that economic growth would inevitably lead to democratic development. In fact, for most of the people, democracy itself is an ambiguous notion; whereas what people really care about is a prosperous, stable and free country that democracy promises to bring. So if a country, such as China, which has brought their people a wealthier life and a certain level of personal as well as political freedom, and with political suppression only targeting a few specific people, then why democracy? In this case, it is quite understandable that people might prefer the political stagnation to the chaos that change might bring, and therefore autocrats can cut the cord between economic growth and democracy. Authoritarian rule in Arab countries is so ingrained that democratic change would be a huge leap. Even if we can expect further economic improvement, the chances of democracy are still impossible to predict.

What Went Wrong with the Economics

In the wake of financial calamity, the reputation of economics as a discipline established over many decades has taken a beating. The notion that free markets would regulate themselves and lead to a prosperous society now seems to be far-fetched. Having established a large number of fancy and esoteric theories, economists still failed to foresee the financial crisis. People can't help but ask: what went wrong with economics?

Modern economics is often criticized for their unrealistic assumption that people are act in rational ways. Stemming from this assumption, the theory of the efficient market has dominated economics for decades. Based on this theory, a large amount of mathematic models were built. Wall Street ransacked the best universities for game theorists, physicists, and statisticians to evaluate different choices. Many new and fashionable economic funds were created, and all kinds of creative new instruments were available in the financial market. People put their money into these funds, though none of them really understood how they work. In fact, this was exactly why these financial economists looked ever more trustworthy.

Every theory comes with skepticism attached. Economists were hardly naïve believers in market efficiency. Concentrating on the irrational action, behavioral economics, a newly prominent field, has gained people's attention quickly and one of its leading proponents has won a Nobel Prize for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” With the help of this theory, people have begun to understand how human beings' irrationality gives limitation to market efficeincy.

There were caveats aplenty. People knew the notion of the efficient markets is imperfect and cannot be completely relied upon. And people have also been aware of ridiculous assumptions of valuing mortgage derivatives on the basis that house prices would always rise. Moreover, some have warned that the incentives may encourage the fund managers to take higher risks. However, putting profit before consceince, those “smart guys” in the Wall Street chose to ignore these glaring warnings. Being too fixated on chasing profit and too cavalier about asset bubbles, they putted aside delicacies and overlooked the impending danger.

No matter how closely resembles physics or other natural sciences, economics, without doubt, is a social science. In physics, lack of due caution may cause failure of an experiment; while in financial markets, it may result in bankruptcies, financial crises, global disasters and human suffering. It might be incomplete and deficient in many areas, but economics did not go wrong. It was people’s greed that twisted the economic rules and left the world in turmoil, and now it is time to pay the price .

A Reexamination of the Free Trade Zone

The integration of regional economies has become increasingly regarded as inevitable. Protests against globalization never stop. None of them, however, can slow down the speed with which free trade agreements are signed. Countries are eager to form economic alliances to increase their strength. Globalization gained ground so quickly that people did not have the opportunity to examine the idea of a free trade zone- until the financial crisis happened. Can the Euro area, the biggest free trade zone in the world, survive this financial tsunami intact?

The formation and growth of the European Union was remarkably smooth. With 27 member states, a population of almost 500 million and a unified currency, the EU has achieved a success which could hardly have been imagined just a few decades ago. They have fufilled their remit to maintain the purchasing power of the euro. In 2008, the EU’s GDP reached $18.394 trillion accounting for 30% of gross world product. No other trading entities can rival them in scope. It is generally believed that the EU has worked fairly well so far. Nevertheless, their determination to unify was not fully examined before this year.

The financial crisis, without a doubt, is the biggest test to date for the Euro zone. It has reawakened worries about the imblance that has built up inside the Eurozone. Germany’s huge current-account surplus, matched by big deficits elsewhere, shows that they are suffering losses by using the Euro. Hidden protectionism is emerging everywhere, weakening people’s belief in free trading. Moreover, facing the biggest deficit in history, weaker countries in the Euro area are more likely to default than before, since the single currency removes the option of unilateral inflation.

It seems that the EU has survived well in the crisis so far. But it is just the beginning of the test. A sudden disaster may help people to unite even more closely. But the real test will come with the long-term fallout from huge deficits, economic stagnation and imbalance among countries. In the prosperous periods, people are willing to share benefit with each other. When the world faces an economic decline, can every country show the same level of willingness to partly sacrifice themselves for the benefit of the whole Union?

The world is paying close attention to what the EU’s next step will be. Will the crisis spur economic reform? Will the need for larger markets attract more countries to join? Or, conversely, will some of them start thinking about leaving? These questions all remain open.

SDRs

Having been the world's most wildly held reserve currency for decades, the US dollar's dominance in the international monetary system is now being questioned. Zhou Xiaochaun, the governor of the People's Bank of China, argued that the dollar-dominant system caused the exacerbation of global economic imbalance, and it is time to end America's financially privileged status.

Under Mr. Zhou's plan, the amount of “Special Drawing Rights” (SDRs) should be hugely increased. Also, he suggested that the IMF should form an SDR-denominated fund, and that dollar reserves should be freely transferrable to the SDRs. By doing so, SDR assets can be used as foreign exchange reserves, and governments can reduce their risk of dollar exposure.

SDRs are potential claims on the freely usable currencies of IMF members. The SDR, in fact, is not a currency, but rather an IMF unit of account, or fictitious paper assets. For example, when the German government needs Japanese Yen, they could exchange their SDR holdings for it. This transaction would increase the amount of the SDR in the Japanese current account, while decreasing it in Germany's.

Created in 1996, the SDR system aimed to cope with the US dollar crisis brought by the Bretton Wood international monetary system. Before Bretton Wood, the gold played a key role in international monetary transactions. At that time, each currency was backed by a strict gold standard. The quantity of gold worldwide is relatively fixed; while the economies of all participating IMF members as an aggregate are growing. This created an eventual lack of international liquidity. Seeking a way out of this difficult position, the Bretton Wood system was established in 1944 and the era of dollar came. To bolster faith in the dollar, the U.S. agreed to link the dollar to gold at the fixed rate of $35 per ounce of gold. By adapting the US dollor as the international currency, countries avoid liquidity problems and also eliminate the logistical and security problems of shipping gold back and forth across borders to settle national accounts.

There was a fatal, and even ridiculous, paradox called the Triffin dilemma for this system. In this system, the U.S. had to maintain current account surplus to maintain confidence in US dollars. At the same time, U.S. also had to maintain current account deficit in order to meet the need for international liquidity. This dilemma soon caused a disaster in 1969. America's huge current account deficit led to the US government having difficulty in exchanging dollars for gold. Loss of faith in the dollar pushed IMF members to look for an alternative. SDRs were born.

After U.S. unilaterally refused to fulfill their commitment to exchange the dollars into gold in 1973, the Bretton Woods monetary system eventually broke down. However, until today, the U.S. dollar still accounts for 65% of world’s foreign exchange reserves, while the SDR only accounts for less than 1%. In an essay written in March of this year, Mr. Zhou claimed this is the root cause of the current economic disorder, and proposed strengthening existing global currency controls, through the IMF, as a solution. This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs as a gobal currency reserve.

In fact, the SDR is unlikely to become a reserve currency in the foreseeable future. It would take years to develop SDR money market that is liquid enough to be a reserve asset. Also, the SDR is only backed by agreement, rather than actual assets. Moreover, IMF requires 85% support of their members to strengthen the power of the SDR, and America, with nearly 17% of the votes in the IMF and benefiting most from the dollar-dominant system, will never approve it. In other words, when Uncle Sam says “no”, there is no need for further discussion.