The Midwesterner: Blogging the Global Midwest

A Chinese Plan for the Global Economy

For the rest of the world, the most interesting question about China's rise is what that country will do with the world economy when it gets its hands on it. A dramatic speech in Chicago recently by a well-connected Chinese economist indicated that Beijing has been asking the same question and has some interesting answers.

Most China-watchers had assumed that once China takes its place as the world's richest nation, it will approach the existing global economic institutions -- the International Monetary Fund, the World Bank, the World Trade Organization and the rest -- in one of two ways:

• It will use its economic power to shut them down, and set up new institutions answering to its needs. After all, the institutions were originally created by the U.S. and its Western allies, which had the economic power at that time, to answer their needs, so it's only logical that China would do the same.
• It will keep those institutions functioning as they do now. After all, China has risen to economic power within the existing Western-created system, has pretty much played by the existing rules and would see no reason to change a structure that has served it so well.

Wrong both times, according to Xu Hongcai, a Chinese economist, a veteran officer in both Chinese companies and government, and now with the China Center for International Economic Exchanges, which deals with China's position in the world economy. Xu came here recently to speak to a conference at Northwestern University pegged to summits, like the G8 and NATO summits in May, and their impact.

According to Xu, China favors keeping the IMF, World Bank and other institutions. But it wants to make them much more powerful and give them more control over the global economy: for instance, the IMF would become the world's central bank. In addition, the big emerging countries -- especially China -- would play a bigger role, have a bigger vote and wield more power within the institutions.

In other words, China expects to use the institutions created by the West to reduce Western power and increase its own clout.

(As you've seen, most of this blog is about Chinese thinking, not about the Midwest. But every Midwesterner knows by now that what China does can affect local economies. If China has plans to reform the global economy, it behooves everyone, from London to Sao Paulo to Des Moines, to pay attention.)  

It's possible that Hu was only using his Chicago platform to do a little free-lance theorizing, pushing his own agenda, not that of the Chinese leadership. Hu told me that his ideas are not official policy yet but reflect the trend of thought in Beijing. Other, non-Chinese, China experts confirmed this.

Xu didn't talk about the United Nations and its agencies, also postwar creations of a Western-dominated world. But it's reasonable to assume that his plans for these bodies may be the same. 

Xu began by talking about the G20, the group of 20 leading economies -- the U.S. and the rest of the G8, plus China, India and the other emerging countries. The G20, which is to hold its own summit in Mexico in June, was originally seen as a worthy and useful successor to the G8 as the forum where the economically important nations meet.

Xu didn't agree. The G20, he said, has become a talk shop -- he compared it to the U.N. -- with too many members, not all of whom belong there, and low efficiency.

A true purpose for the G20, he said, would be to reform the global monetary system. He suggested the G20 set up a full office inside the IMF and reform it from within.

The IMF would become the world's central bank, Xu said. Since central banks traditionally oversee a nation's currency, control its money supply, set its interest rates and act as lender of last resort, this would mean a vastly expanded role for the Washington-based Fund. Originally set up to help stabilize currency exchange rates and help nations overcome currency crises, it now operates more as a global think tank, encouraging certain economic policies but lacking much power to enforce its advice.

If the IMF were to become the world's central bank, as Xu suggested, that implies a single world currency. As the European Union has discovered, a group of nations using a single currency need a unified fiscal policy, if not a single government.

Xu's thinking seems to be halfway there. The single currency would be the Special Drawing Right, or SDR, which exists now but has limited use. The SDR's value reflects a "basket" of national currencies. The U.S. dollar carries the most weight in the current "basket," followed by the euro, the Japanese yen, and British pound. The Chinese yuan isn't included.

There's no such thing as a SDR that you can put in your pocket. Rather, it's an accounting unit that can be used internationally to settle debts across borders, often between governments. International economists know all about it but, at the moment, nobody else needs to.

Xu said a new SDR should reflect a new basket containing the dollar, euro and yuan, but also the currencies of other emerging nations. He said the SDR should be used more widely, but didn't say whether it should be a normal, every-day currency.

Voting power in the IMF, like the weighting of the SDR basket, goes to the biggest and strongest economies. Xu clearly sees a much expanded role for China in this new reformed IMF.

This new IMF, he said, should oversee the SDR as a world reserve currency, with some control over other reserve currencies, like the dollar. It should also control bailouts of nations that fall into financial crises: since it already does this in some crises, the implication is that this process would continue, but with increased G20 -- especially Chinese -- oversight.

Under Xu's plan, another world financial institution, the Basel-based Bank for International Settlements, would become an early-warning center for financial risk, signaling when a country is headed for trouble, as the U.S. was during the sub-prime mortgage boom. The BIS now sets rules for international banking: since most financial crises are basically banking crises, the BIS would seem to be well placed to take on this new role.

In sum, what Xu seemed to be saying is this:

China has joined the global economy and the global financial structure, and doesn't like them very much. It will keep the institutions, but reform them. The reform will be aimed at making them work better but, mostly, to increase Chinese power within them.

Chicago’s Morning After

I’ve been asked to speak at a University of Chicago conference on the NATO summit in Chicago that just ended – both on what the summit meant for NATO and how Chicago itself survived and benefitted from its big weekend in the global spotlight. Most of this blog posting deals with my comments on Chicago and how the capital of the Midwest took to a new role as the focus of the world.

Chicago set several goals for itself. First, it knew that the summit would draw protesters, so it was anxious to exorcise the ghosts of the 1968 Democratic convention. It wanted to strut big on the world stage and behave like a global city should behave. Mostly, it wanted to show itself off, on television and elsewhere, and in the process become more of a global tourist destination than it is now. I apologize to non-Chicago readers of this blog for this chauvinistic navel-gazing. But Chicago is in the middle of an historic transformation, from a Midwestern industrial powerhouse to a post-industrial global metropolis. It is paying real attention to the whole world for the first time and is very anxious about how it looks to that world. The decision to hold the summit here was part of that transformation, so it’s important to ask whether it worked.

History Comes to Chicago

Much global history is the product of politics and diplomacy carried along on a subterranean stream of quiet talks and deals that, apart from WikiLeaks, pop into view only when they fail and bad things – crises or wars – happen. But occasionally, international leaders stick their heads above this parapet and we get a look at where they think the world is now. These occasions are called summit meetings.

This is the right way to look at the NATO summit about to take place in Chicago. It’s not a one-shot attempt to solve the world’s problems, a unique chance to take momentous decisions. Rather, it’s a pit stop in history’s marathon, a time to assess where we’ve come since the last summit and where we want to go from here.

The Chicago summit may or may not produce great decisions. But it will force President Obama and his 27 NATO allies to recognize that we are living through a time of rather frightening change and that, if they cannot control this force, they have the responsibility to direct and shape it. 

Globalization -- Not Dead But Doddering

We've been here before, a century ago.

In the early years of the 20th century, the world took its first stab at globalization. Trade, investment, communications and immigration among nations grew to unprecedented levels. They called it the Belle Epoque, but it was Globalization I.  

Then it ended, stopped dead by two world wars and the Great Depression. Not until 1975 did the world achieve that level of economic integration. Then a new burst of globalization took off. A mix of space-age technology, international cooperation, opened borders and, not least, American leadership produced the global economy we know today. Call it Globalization Redux, or Globalization II.

A Frost on Global Markets

Across the farmlands of the Midwest, global warming just got mixed with globalization. The result shapes up as a strange and contentious year with a potential impact on food prices around the globe.

As every Midwesterner knows, we're living through a weird spring. A relatively dry winter was followed by temperatures which soared into the 70s in March and stayed there. In Chicago, trees that stay bare through April sprouted leaves in March. On fruit farms, apricot and other trees flowered three to four weeks ahead of schedule.

For many corn farmers, the balmy climate provided a temptation too strong to resist. Some played it safe, delaying planting until late April, to get past the frequent April frosts. But early planting can extend the growing season and produce a bigger crop later on, so many farmers were in the fields in March, a month ahead of schedule. By mid-April, fully 59 percent of the Illinois corn crop had already been planted, compared to only 10 percent last year and 17 percent in a normal year.

The Outsourcing of Santa Claus

Many Midwestern cities see their post-industrial future in a combination of health care, education and high-end manufacturing. They may be chasing an impossible dream.

This is a conclusion drawn from recent studies that argue that manufacturing -- high-end or not -- isn't coming back, at least as a major source of jobs, while growth in jobs in health care and education is going to slow down or stop, mostly because the governments that fund it are deeply in debt.

For many Midwestern cities, this is like telling them there's no Santa Claus.

A To-Do List for the G8 Summiteers

Here's a modest proposal for the leaders assembling in May at the G8 summit and, a month later, at the G20 summit in Mexico: rethink and reform the global economy.

Somebody has to do it. About 20 years ago, nations -- including the ones at the G8 summit -- controlled their own national economies and made them work for the people who lived within them. It wasn't perfect, but it was as fair as any economic system in history.

Then globalization enabled those economies to go global. The major players and forces -- financial markets, big corporations, trade flows -- escaped national boundaries and sailed off into a global economy, where no national government, nor its rules and regulations, could follow.

In this global economy, the laws that force corporations to be good citizens -- to pay taxes, bargain with employees, respect the environment, support their communities -- too often can no longer be enforced. Any company that wants to avoid these laws has a choice, which is to go somewhere else where these laws don't exist. As we've seen, that's exactly what they've been doing.

A Revival in Middletown

Muncie, Indiana, is an interesting place, for both historical and modern reasons. It became famous in the 1920s as the subject of Middletown, a classic sociological study of a typical American industrial city. Today, it's too often held up as the example of a typical industrial city when the industry goes away.

Now, Muncie is trying to face the future and change its luck. I was there recently to take part in programs centered on the Muncie Action Plan, a long (51 pages) and detailed (47 proposed actions) drawn up over the past two years by many (2,000 people) of Muncie's citizens, all aimed at revitalizing their town.

This is important, for symbolic and other reasons. Muncie really is typical of tattered old Midwestern industrial cities. It has 70,000 people. It's home to a big university, Ball State, that like too many Midwestern colleges and universities, has never played the role in town that it should. It gave birth to some major corporations -- Ball Glass and Borg-Warner, among others. It has lost these corporations, plus the civic leadership they provided, plus the jobs they supported, plus the prosperity they generated and, especially, plus a whole generation of young people who would have worked there and are either unemployed now or long gone to other places with jobs.

In other words, if Muncie can fight back from its post-industrial doldrums, this gives more hope to many other Midwestern cities that are trying to do the same.

Where Are the Happy Places?

You can't buy happiness, we're told. The same, I suspect, holds true for optimism and satisfaction.

But you can find it, according to a new survey by Gallup and summarized in an article by the "creative cities" guru, urbanologist Richard Florida.

The article lists the cities where residents are most and least satisfied with their communities, and most or least optimistic that their towns are getting better. The standings won't make Midwesterners feel either satisfied or optimistic.

A New Map for the Chicago Region

Any astronaut looking down from space at night would spot a solid band of bright light wrapped around the southern end of Lake Michigan. The lights go on somewhere north of Milwaukee, stay on as the band moves south through Kenosha and Racine and turn into the glare of Chicago before sweeping east across northern Indiana, finally fading into the blueberry belt of southwestern Michigan.

What our astronaut is seeing is a megalopolis, a super-city, a midcontinental metro -- a region. From orbit, it looks like one big urban area. He can't see any state lines or town lines, which makes sense, because it's hard to see them even from ground level.

But they're there. Oh boy, are they there, and they keep this Chicago region from acting like the one big city it really is. Down here on the ground, it's not one big region but three states, 21 counties, dozens of towns and a couple thousand townships, school districts and other jurisdictions and taxing bodies, all out for themselves, with little regard for the other state, town or jurisdiction next door.

Obviously, this Chicago region is much less than the sum of its parts. This is the conclusion of anyone who's tried to get these many parts to work together and, more immediately, of a major new study by the very authoritative Paris-based economic body, the Organization for Economic Cooperation and Development.