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.

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 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.

The Iowa Caucuses and the Real Iowa

The Republican caucuses in Iowa will soon be history, not a moment too soon for most of us but especially for Iowans themselves. For months, they have been bombarded with TV ads and swarmed by plagues of politicians. Even worse, they have been diced, sliced, anatomized, psychoanalyzed and socially parsed by teams of visiting journalists and even some local writers, all straining on slow news days to explain to readers and viewers what makes this bellwether state tick, anyway.

As a native Iowan, gone since youth but a frequent visitor in recent years, I may be permitted a voice in this debate, both on the state itself and on how it's being presented, before the spotlight shifts to New Hampshire and leaves Iowa in grateful obscurity for another four years.   

'Tis the Season to Be Blackmailed

If it truly is more blessed to give than receive, the governor of Illinois and the mayor of Chicago have just booked their reservations in heaven.

In the state and the city, the spirit of Christmas seems alive and well. But neither economy is doing so hot, and the two leaders' generosity will only make things worse. 

Gov. Pat Quinn and the Illinois legislature have approved a $371 million tax-break package that includes more than $100 million for Sears Holding Corp. and the Chicago financial exchanges, which had threatened to leave the state unless they got this deal. Mayor Rahm Emanuel has given Sara Lee Corp. between $5 million and $6.5 million, depending on how many jobs they keep, to move part of its headquarters from the suburbs to downtown Chicago.

Even at this time of year, these are some sort of stocking stuffers. But it's a suitable end to a year that has seen Midwestern cities and states, all desperately needing to create new jobs and stimulate new businesses, throwing multi-billion baubles instead at old companies, many of them shrinking, in deals that seldom add one job to the Midwestern economy.

The Midwest Commands American Politics

The Midwest has become the political fulcrum of America. Some Midwesterners, especially the over-politicked citizens of Iowa, might be willing to forego this honor, but the fact remains that Midwestern politics is setting the agenda for the election year to come.

If American politics are becoming more partisan, these Midwestern battles exemplify the split between right and left. With the Republican caucus in Iowa set for Jan. 3, the clout of right-wing Republicans, especially evangelical Christians, is pulling that party's presidential candidates far to the right of many moderate Republicans. In Wisconsin and Ohio, a Democratic backlash against attempts by Republican governors to break public service unions is pushing the Democratic party into a pro-union stance that may not play with the party's national electorate.

The probable Republican presidential candidate, whoever he or she is, is going to leave Iowa with a far-right stance that will be hard to shed in the national campaign ahead. On the Democratic side, President Obama is going to have to come out swinging for public service unions or risk alienating his party's base.

Drifting in the Driftless Area

I spent the last week in Galena, a gem of an old Victorian town, nestled in the hills and forests of the so-called Driftless Area, in northeast Illinois near the Mississippi River Valley. I came away thinking how this area could be more than the beautiful but generally depressed region it is now.

Galena itself seems to be doing fine. It is a tourism and second-home mecca, packed with good restaurants and refugees from Chicago. But the Driftless Area itself is divided between four states and some 25 to 35 counties, depending on where you draw the boundaries. None of these jurisdictions -- not the states nor the counties -- has been able to work with the others to leverage the region's scenic potential and combat the economic distress that, like the scenery, they all share.

Thinking About the Future

It's easy to get that neglected feeling, sitting here in the Midwest, surveying the industrial collapse in our own back yard and wondering if anybody out there really cares. The pre-dawn dustup in Zuccotti Park gets more national air time and ink than the destruction of Midwestern towns and cities, even though the same pathology -- an economy out of control -- underlies both. As Willy Loman's wife said in The Death of a Salesman, "attention must be paid."

That may be changing. In the past few days, at least two nationwide broadcasts have looked at the plight of old industrial cities in the Midwest. Both recognized the economic problems but emphasized positive measures to remedy them.

Company Towns, After the Company Leaves Town

Richard C. Longworth appeared on NPR's Talk of the Nation today with Mayor Chaz Allen of Newton, Iowa, and Mayor Tommy Battle of Huntsville, Alabama, in a segment called "Company Towns, After the Company Leaves Town." Click here to listen to the discussion.