my long paper (fwd)

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

               ANDRE    GUNDER      FRANK

Senior Fellow                                      Residence
World History Center                    One Longfellow Place
Northeastern University                            Apt. 3411
270 Holmes Hall                         Boston, MA 02114 USA
Boston, MA 02115 USA                    Tel:    617-948 2315
Tel: 617 - 373 4060                     Fax:    617-948 2316
Web-page:csf.colorado.edu/agfrank/     e-mail:franka@fiu.edu

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


---------- Forwarded message ----------
Date: Tue, 11 Feb 2003 15:35:45 -0500 (EST)
From: Andre Gunder Frank <franka@fiu.edu>
To: franka@fiu.edu
Subject: my long paper


This is a revised version of the long essay I sent the other day.
If you have not read the previous version, discard it and use THIS one.
I have
- cut out the first historical paragraph written for other purposes
- reversed the order of presentation, putting the Us first and China
second
- added an important paragraph near the end of the now first US section
on oil and the dollar. I did not learn of the Iraq Euro pricing till last
night.
- made a few other small editorial and substantive revisions
- put on a TITLE

cheers 
Gunder

    ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

               ANDRE    GUNDER      FRANK

Senior Fellow                                      Residence
World History Center                    One Longfellow Place
Northeastern University                            Apt. 3411
270 Holmes Hall                         Boston, MA 02114 USA
Boston, MA 02115 USA                    Tel:    617-948 2315
Tel: 617 - 373 4060                     Fax:    617-948 2316
Web-page:csf.colorado.edu/agfrank/     e-mail:franka@fiu.edu

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

PAPER TIGER  AND    FIREY DRAGON
                        BY
                Andre Gunder  Frank

With the end of the cold war in 1989 and the subsequent decline of Russia
as a serious immediate contender, as well as the decline during the 1990s
of the hype of  JAPAN AS # 1 [Vogt 19xx] , two other regions, states and
powers came into contention, rising Asia and particularly China,  and the
United States  whose fortunes and prospects seemed to have declined after
1970 but recovered in the 1990s.  In global terms, we could regard this as
a process of continued shift of the world center of gravity west-ward
around the globe, from  East Asia/China to Western Europe, then across the
Atlantic to the United States, and there then from the eastern to the
western seaboard, and now onwards across the Pacific back to East Asia, as
observed in my "Around the World in Eighty Years" [Frank  2000].  Let us
inquire further into the so far last part of this historical process.


PAPER TIGER  -  THE UNITED STATES IN THE WORLD

What is the basis and security of  the United States position and power in
the world?  The answer is the twin pillars of the Dollar and the
Pentagon. The dollar is a paper tiger - literally so, much more than when
Mao applied this term to the US.  The Pentagon's strength and mobility is
dependent on the dollar, and in turn supports it.  But the two supporting
towers of the US are also its two Achilles heels. Through them, like the
twin towers of the World Trade Center in New York,  the entire US edifice
can come crashing down in one morning - not by terrorism but through the
operation of the world economy and  the foolish policies of the United
States government itself.
 
 The US still has the world's largest economy, which  saw boom times
during much of the 1990s, and its has unrivalled military power exceeding
the total of  the next  dozen or more military powers combined.  Moreover,
the present Bush administration  makes use of both of them in unilateral
policies to impose its will on the rest of the world, friend and foe
alike, to all of which Bush threw down the gauntlet of ''you are either
with us or against us." With means you do as we say, and against  means
you are under threat to be destroyed economically and politically, as well
as militarily if we wish.  In  case there be any doubt about our
intentions and capabilities, Russia and Argentina are prime examples on
the economic front as are  Iraq through the boycott, Serbia and
Afghanistan are so on the military front as well. The latter - but really
both - are what President Bush father called THE NEW WORLD ORDER when he
bombed Iraq in 1991. I termed it THIRD WORLD WAR  in two senses,  one that
it takes place in THE THIRD WORLD and secondly that this war against the
Third  World constitutes a THIRD World War [Frank 1991].

The prosperity and welfare of the American people rests primarily on its
position in the world  today as  Britain's did in the nineteenth
century. That observation is fundamentally different from the political
and media hype about the sources of American  exceptionalism that are
supposedly in its genious, morality, productivity, and other
characteristics that allegedly differentiate America from the rest of the
world. On the contrary,  America rests on two - maybe three-  pillars:
1.The DOLLAR as the world currency whose monopoly privilege the US has to
print  at will, and 2. The PENTAGON with its unrivalled military
capacities. 3. A third pillar perhaps is the government, educational and
media fed IDEOLOGY that obscures these simple facts from public
view.  Moreover each supports the other: It costs dollars to maintain the
Pentagon, its bases in 80 countries around the world, and the deployment
of its military forces around the globe.  Military expenditures are the
prime causes of the twin American deficits, in the federal budget and in
the balance of trade.  Conversely,  Pentagon strength  helps sustain
global confidence in the  dollar.

But this same mutual reliance for strength therefore also constitute two
mutually related American Achilles heels.  The dollar is literally a Paper
Tiger in that it is printed on paper whose value is based only on its
acceptance and confidence in the same around the world.  That confidence
can decline or be withdrawn altogether almost from one day to the next and
cause the dollar to lose half or more of its value.  Apart from  cutting
American consumption and investment as well as dollar-denominated wealth,
any decline in the value of the dollar would also compromise US ability to
maintain and deploy its military apparatus.  Conversely, any military
disaster would weaken  confidence in and thereby the value of the
dollar. Indeed,  at the 2003 World Economic Forum in Davos,  the assembled
world political and business elites expressed very serious fears that the
mere deployment of the US military, e.g. against Iraq, would  bring on a
world depression.  TIME Magazine this week reports on a comprehensive
study of the US airline industry, which concludes that a war against Iraq
would drive half of it into immediate bankruptcy. If so, what of still
weaker non-American airlines?  The insecurity that comes with military
saber rattling  and threats undermine confidence in the dollar and put
brakes on investment. And no amount of ideology is sufficient completely
to obscure that economic situation. 

In fact, the world already is in depression, from which so far only the
United States is substantially and Canada and Western Europe partially
exempt.  And the latter is so, because of the privileged position of
especially the American economy within the global one, from whose
mis-fortune Americans have been deriving the benefits of that position,
which to repeat is essentially derived from the privilege of printing the
world currency with which Americans can first buy up the production of the
rest of the world at depressed deflationary prices  and then have the same
dollars be returned from abroad to be invested in Wall Street and US
Treasury certificates  for safe-keeping
and/or higher earnings than are  available elsewhere.

In the mid 1980s James Tobin [the inventor of the Tobin tax on financial
transactions] and I  were to my knowledge the only ones already to
published predictions of  DE-flation as the coming world economic
danger.  Economic  policy makers however ignored these warnings and  this
risk [not really risk, but necessary consequence] while continuing their
policies designed to fight IN-flation. Nonetheless, since then commodity
prices have fallen sharply and consistently and more recently industrial
prices have fallen as well. Moreover in WORLD economic terms, high
inflation in terms of their national currencies [pesos,  rubles,  etc.]
and their sharp DEVALUATION against the DOLLAR world  currency has been an
effective de facto major DE-flation in the rest of the world.  That has
reduced their prices and made their exports cheaper to those who buy their
currencies with dollars, primarily of course
consumers, producers and investors in - and from ! - the United
States. These additionally, which is hardly ever mentioned!, can and do
buy up the rest of the world with dollars that ''cost'' only their
printing and distribution, which for Americans have virtually no
cost. [The $ 100 dollar bill is the world's most used cash currency on
which runs the entire Russian economy, and there are two to now three
times as many of them circulating outside as inside the US]. The American
boom and welfare and then ''balanced'' federal budget 1992-2000 Clinton
administration, contrary to its populist claims, only happened to coincide
with this boom. The also same 8 year long prosperity of the United States
was entirely built on the backs of the terrible depression, deflation and
thus generated marked increase in poverty in the rest of the
world.  During this one decade, production declined by over half in Russia
and Eastern Europe and life expectancy in Russia declined by 10 - ten -
years, infant  mortality, drunkenness, crime and suicide increased as
never before in peacetime. Since 1997, income in Indonesia declined by
half and generated its ongoing political crisis.  That is dissipation of
entropy generated in the US and its export abroad to those who are obliged
to absorb it in ever greater DISorder. It would be difficult to find
better examples - except the destruction of the entire society in
Argentina, Rwanda, Congo, Sierra Leone, previously prosperous and stable
Ivory Coast - not to mention the countries that have been visited by
destruction through American military power

All this has among others the following consequences: in the US. it can
export inflation that would otherwise be generated by this high supply of
currency at home, whose low rate of inflation in the 1990s was therefore
no miracle result of domestic ''appropriate'' Fed monetary policy. The US
has been able to cover its twin balance of trade and budget deficits with
cheap money and goods from abroad.  The US trade deficit is now running at
approximately 400 billion dollars a year and still growing. Of that, 100
billion are covered by Japanese investment of their own savings in the US
that saves nothing and  which the Japanese  may soon have to repatriate to
manage their own banking  and economic crisis - especially if an  American
war against Iraq causes a n even temporary spike the price of oil on whose
import Japan is so dependent.  Another $ 100 billion
comes from Europe in the form of various kinds of investment, including
direct real investment,  which could dry up as the European recession
continues, the Europeans become exasperated with American policy, or they
have any number of other reasons to reduce their dollar reserves and put
them into their own Euro currency instead. A third 100 billion is supplied
by China, which first sells the US its cheap manufactures for dollars and
then accumulates those dollars as foreign exchange reserves - thus in
effect giving away its poor producers' goods to rich Americans. China does
this to keep its exports flowing and its industries going, but if it
decided to devote these goods to expanding its own internal market more,
its people would gain in income and wealth, and the United States would be
out of luck. The remaining $ 100 billion of deficit are covered by other
capital flows, including debt service from the poor Latin Americans and
Africans who have paid off the principal of their debts already several
times over and yet keep increasing the total amount owed by rolling it
over at higher rates of interest.  The idea of declaring  US  chapter 11
or 9 type insolvency is however finally catching on. 
  
Thus,  deflation / devaluation elsewhere in the world has like a magnet
attracted speculative financial capital from the
rest of the world - both American owned and foreign owned - into  US
Treasury certificates [ stopping up the US budget deficit] and into Wall
Street. That is what  fed  and supported  its 1990s bull market, which in
turn has increased, supported and spread wider a speculative and illusory
in increase in wealth for American and other stock holders and  through
this also illusory ''wealth effect'' has supported higher consumption and
investment. The subsequent and present bear market decline in stock prices
nonetheless is a still a profit boon for enterprises who issued and sold
their stocks at bull market high and rising stock prices. For they  are
now  buying back their OWN stocks at what for them are bargain basement
low prices, which represent an enormous profit for them at the expense of
small stock holders who are now selling these stocks at low and declining
prices. The US ''prosperity'' now rests on the knife edge also  of an
unstable enormous domestic corporate and consumer [credit card, mortgage
and other] debt.  

Moreover, the US is also vastly over-indebted to foreign owners of US
Treasury certificates, Wall Street stock and other assets, which can be
called in by foreign central banks who have been keeping reserves in US
dollars and other foreign owners of US debt. Indeed, it is the very US
policy  that has contributed so much to destabilization elsewhere in the
world [e.g. through the destabilization of Southeast Asia that undermined
the Japanese economy and financial system even more than it would
otherwise have been] that now threatens and now soon makes much more
likely that especially Japanese and European holders of US debt must cash
it in to shore up their own ever more unstable instable economic and
financial systems.  The liabilities of the US to foreigners now equal two
thirds of annual US GNP - and therefore can and will never be paid
off. However any hick in rolling this debt over and over, can result in
foreign attempts to get out as much money as they can - resulting in a
crash of the dollar. 

Another major consequence is that the US - and world! - economy is now in
a bind from which it most probably can NOT extricate itself by resorting
to Keynesian pump priming and much less to full scale macro-economic
policy and support of the Us and Western/Japanese economy, as the Carter
and Reagan administrations did.  Military Keynesianism,  disguised as
Friedman/Volker Monetarism and Laffer Curve Supply-Sideism, was begun by
Carter in 1977 and put into high gear in 1979, when Carter the Fed was run
by Carter appointee Paul Volker, who in October 1979 switched Fed monetary
policy from high money creation / low interest price thereof to attempted
low money creation / high interest [ to 20 percent monetary! ] to rescue
the dollar from its 1970s tumble and attract foreign capital to the poor
US. At the same time, Carter began Military Keynesianism  in June 1979.,
which was then escalated further by President Reagan In that they then
succeeded..

It is highly unlikely however that analogous policies could succeed again
now. The US would need to invoke  the same re-flationary policy again for
itself and its allies, now. but it can not do so!  
The Fed has already lowered the interest rate so far that it cannot go
much lower and is not likely to stimulate investment by doing so. On the
other hand, raising  the interest rate to continue to attract funds from
abroad would risk choking off all domestic investment and working
capital.  Brazil tried that, admittedly with extravagant monetary interest
rates at 60 percent to attract foreign capital, and ruined its domestic
economy.

The US may [should? must ??] now attempt a repeat performance of the 1980s
to spend itself and its allies [now minus Japan but plus Russia?] out of
the present and much deeper world recession and threatening globe
encompassing depression. The US would then again have to resort  to
massive Keyenesian deficit [ using September 11 as a pretext for probably
military] RE-flationary spending as the locomotive to pull the rest  of
the world out of its economic doledrums.  However,  the US is already the
world consumer of last resort, but it  can be so with the savings,
investments and cheap imports from abroad, which themselves form part of
the global economic problem.

Moreover, to settle its now enormous and ever growing foreign debt, the US
may chose  also to resort to IN-flationary reduction of the burden to
itself of that debt and its also ever growing foreign debt service. But
even the latter could - in contrast to the above summarized previous
period- NOT avoid generating a further SUPER trade balance particularly if
market demand falls further and pressure increases abroad to export to the
US demand/er of last resort.  But this time, there will be NO capital
inflows from abroad to rescue the US economy. On the contrary, the now
downward pressure to devalue the US dollar against other currencies would
spark a
capital flight from the US, both from US Government bonds and from Wall
Street where significant stock price declines generate further price
declines and deflation in world terms even if the US attempts domestic
inflation.

The price of oil is yet another fly in the political economic ointment,
whose dimension and importance is inversely proportional to the health or
illness of the ointment itself. And today that is quite sick and
deteriorating already. The world price of oil has always been a two edged
sword whose double cutting edges can be de-sharpened with the help of
successful alternative economic and price policies. On the one hand, oil
producing economies and states and their interests need a minimum price
floor to produce and sell their oil instead of leaving it underground and
also postponing further oil productive investment while waiting for better
times.  The US is a high cost oil producer. A  high oil price is
economically and politically essential also for important states like
Russia, Iran and especially Saudi Arabia, as well as US oil interests. On
the other hand, a low price of oil is good for oil importing countries,
their consumers including oil consuming producers of other products, and
supports state macro economic policy, eg in the US, where low oil prices
are both good politics and good for the economy. These days, the high/low
price line between the two seems to be around US$ 20 a barrel - at the
present value price of the dollar!  But nobody seems to be able to rig the
price of oil at that level. The present conflict, long since no longer
within OPEC, is primarily between OPEC that now sells only about  30 to 40
percent of the world supply and other producers that supply 60 percent,
today especially Russia but also including the US itself as both a
significant producer and a major market, although that is increasingly
shifting to East Asia. Recession in both and the resultant decline in
demand for oil drags its price downward.   US strategy and wars against
Afghanistan and Iraq. is to gain  as much CONTROL of oil as it can and
for now to share as little of it as it must with Russia in Central Asia,
Caspian Sea and  Persian Gulf regions.  And that control, even if it
cannot control the price of oil,  is to be used as an important
geo-political economic lever to manipulate against US oil import dependent
allies in Europe and Japan and ultimately its strategic enemy in China. 

I 

For US Keynesian spending re-flation as well as in-flation can no longer
put the floor under the price of oil needed today and tomorrow. No policy,
but only recovery generated world market demand I- and/or limitations in
the supply of oil  -can  now provide a floor to   and  prevent a further
fall in the price of oil - and  its deflationary pull on other
prices.  And further deflation in turn will increase the burden of the
already vastly over-indebted US, Russian and  East Asian, not to mention
some European and Third World, economies.

Thus the political economy of oil is likely to add to further deflationary
pressure. That would - indeed already does - again significantly weaken
oil export dependent Russia.  But this time it would also weaken US oil
interests and their partners abroad, especially in Saudi Arabia and the
Persian Gulf. Indeed, the low price of oil during the 1990s has already
transformed the Saudi economy from erstwhile boom to a bust. That has
already generated middle class unemployment and a significant decline in
income that has also already generated widespread dissatisfaction and now
threatens to do so even more at precisely the time when the Saudi monarchy
is already facing destabilizing generational transition problems of its
own. Moreover a low oil price would also make new investment unattractive
and postpone both new oil production and eliminate potential profits from
laying new pipelines in Central Asia.

Indeed, there is an even more immediate urgent need for the US to control
Iraqi oil reserves, the second largest in the region and the most
under-drilled with a large capacity to increase oil production and drive
down prices. But that is not all or even the heart of the matter.  Many
people were surprised when President Bush added Iran and North Korea to
his ''axis of evil." Though they may not be so surprised at American
efforts to promote a coup and change of regime in Venezuela, which
supplies about 15 percent of US imports. So what do these countries have
in common, many people ask. Well, three of them have oil, but not North
Korea. So what is its threat that puts it in Bush's axis. Surely not
geography or alliances [Iraq and Iran were mortal enemies, and North Korea
does not play ball in their league.  The answer is simple and resolves not
only that puzzle but what could otherwise appear as a rather confused and
confusing US foreign policy:  [1.] Iraq changed the pricing of its oil
from dollars to Euros in 2000.  [2] Iran threatens to do so. [3] North
Korea has changed to deal only in Euros. [4] Venezuela has withdrawn some
of its oil from dollar pricing and is instead swapping it for goods with
other third world countries. Besides an old friend of mine, Venezuela's
Fernando Mires at OPEC headquarters in Vienna, proposed that all of OPEC
should switch from pricing its oil in dollars to pricing it in Euros!  
Nothing else, no amount of terrorism, could be more threatening to the US;
for any and all of that would pull all support out from under the dollar
as oil importers would no longer buy dollars but instead Euros to buy
their oil. Indeed they would want also to switch their reserves out of the
dollar and into the Euro.  Iraq already gained about 15 percent with its
switch as the Euro rose against the dollar.  And besides, the Arab oil
states who now sell their oil for paper dollars would be unlikely to
continue turning around and spending them again for US military hardware.  
It is this horrorific scenario that US occupation of Iraq is designed to
prevent, with Iran next in line. Curiously, this oil-dollar-euro
''detail'' is never mentioned by the US government or media.  No wonder
that major European states are opposed to Bush's Iraq policy, which is
supported only by the UK, which is a North Sea oil producer itself. Simple
how one little piece of incidental information can make the other pieces
of the entire jig-saw puzzle fall into place!

All of these present problems and developments now threaten to [will?]
pull the rug out from under US domestic and international political
economy and finance. The only protection still available to the United
States still derives from its long since and still only two pillars of the
''NEW WORLD ORDER'' established by President Bush father after ''Bush's
Gulf War" against Iraq and the dissolution of the Soviet Union in 1991.
President Bush son is now trying to consolidate his father's new world
order [no doubt with the latter still as a power behind the throne]
beginning with the WAR AGAINST AFGHANISTAN and threatening once again
against Iraq, and the Bush-Putin effort now also to construct a US-Russian
Entente - or is it Axis.

The dollar pillar is now threatening to crumble, as it already did after
the Vietnam War but has so far remained standing through three decades of
remedial patch work. But as we have seen, the US is now running out of
further economic remedies to maintain the dollar pillar upright. It's only
protection would be to generate serious inflation in the short run by
printing still more US dollars to service its debt, which would then
undermine its strength and crack the dollar pillar and weaken the support
it affords still more.

That would leave only the US military pillar to support US political
economy and society. But it and reliance on it also entails dangers of its
own. Visibly, that is the case for such as Iraq, Yugoslavia, and
Afghanistan and of course all others who are thereby deliberately put on
notice to play ball by US rules in its new world order on pain of
eliciting the same fate for themselves. But the political blackmail to
participate in the new world order on US terms also extends to US -
especially NATO - allies and Japan. It was so exercised in the Gulf War
[other states paid US expenses so that the US made a net profit from that
war], the US war against Yugoslavia in which NATO and its member states
were cajoled to participate, and then by the War against Afghanistan as
part of President Bush's  new policy pronouncement. He  used the early
Cold WAR terminology of John Foster Dulles] that ''You Are Either With Us
Or Against Us"] But US reliance on this, the then only remaining, strategy
of military political blackmail can also lead the US to bankruptcy as the
failing dollar pillar fails to support it as well; and it can come also
to entail US ''OVERSTREETCH'' in Paul Kennedy terms and ''BLOWBACK''
in CIA and Chalmers Johnson terms.

In summary and plain English, the US has only two assets left to rely on,
both admittedly of world importance, but perhaps even so
insufficient. They are the dollar and its military political assets. For
the first, the economic chickens in the US Ponzi scheme pyramid of cards
are now coming home to roost even in the United States itself.

The second pillar is now in use to prop up the new order the world
over. Most importantly perhaps is the now proposed US/Russia entente
against China instead of [or to achieve?] a US defense against a
Russia/China[and India?] entente. The NATO War against Yugoslavia
generated moves toward the latter, and the US War against Afghanistan
promotes the former]. God/Allah forbid that any of these nor their Holy
War against Islam blow us all up or provoke others to do so.

However that may be,  US  imperial political military blackmail may still
blowback on the United States also, thus not out of strength but out of
the weakness of a truly Paper Tiger. So who shows any strength?  The
Chinese Dragon!

FIREY DRAGON:- CHINA IN EAST ASIA

that process,  a financial and economic crisis erupted in East Asia in
1997 and  brought evident relief to many observers in the West.  As a
result and mis-led by day-to-day press media reports and short term
business and government analysis and policy, even "informed" public
opinion in the West changed again. Now the former "East Asian Miracle"  is
said to have  been no more than a mirage, a dream for some and a nightmare
for others.  The previously supposed kxplanations and sure-fire strategies
of success are being abandoned  again as quickly as they had come into
fashion.  We hear less about Asian values or  guarantees from  the magic
of the market and no more security from state capitalism . So much the
better I would say, since these  supposed explanations and correct
policies were never more than ideological  shams anyway. 

 
The historical evidence presented in this book shows that no one
particular institutional form or political economic policy offers or
accounts for success [nor failure!]  in the competitive and ever changing
world market. The contemporary evidence shows the same. In that respect,
Deng Xiaoping's famous aphorism is correct. The question is not whether
cats are institutionally, let alone ideologically, black or white; the
real world issue is whether or not they catch economic mice in competition
with others in the world market. And that depends much less on the
institutional color of the cat than it does on its opportune position in
the world economy at each particular place and time. And since the
obstacles and opportunities in the competitive world market change over
time and in place, to succeed  the  economic cat, no matter what its
color, must adapt to these changes  or fail to catch any mice at
all.  Among these different institutional forms including relations among
state-finance- productive and sales organizations, perhaps the most
attention and positive evaluation has been devoted  abroad   to those of
Korea and then of Japan but also of Greater China including its vast
network of overseas Chinese.  But the very fact that they differ, and in
Taiwan, Singapore, Malaysia, Indonesia and elsewhere as well, should
already forewarn us against privileging one institutional form over all
others. 

At best and that is already very much, the evidence is that none of these
institutional forms is necessarily an impediment or insurmountable
obstacle to success on the domestic, regional and world market.  Most
noteworthy perhaps in view of the widespread Western propaganda about its
own alleged virtues is the demonstrated  fact that  no Western  model need
or should be followed by Asians in Asia or even elsewhere.

The significance of position and  flexible response in the world economy
is particularly  important during periods of economic crisis B phase  that
is in Chinese of [negative] danger and [positive] opportunity.  In the
present economic crisis so far, the focus has been far too predominantly
on its undoubtedly serious negative consequences. But  the opportunities
it poses have received insufficient  attention, except perhaps in the
United States and China, both of which are seeking to reap competitive
advantages from the political economic problems  and alleged meltdown of
Japan, Korea, and Southeast Asia. 

 
But the dismissal of  East Asian and particularly Chinese economic
strengths and prospects may be premature and certainly is based on a
shortsighted neglect of the historical evidence as presented in ReORIENT
and further pursued inthis book and on a  serious misreading of the
contemporary evidence. I believe that this latest  quick dismissal of Asia
is mistaken for the following reasons among others: 

1] Since Asia and especially China was economically powerful in the world
until relatively recently, and new scholarship now dates the decline as
really beginning only in the second half of the nineteenth century, it is
quite possible that it may soon be so again.  Contrary to the Western
mythology of the past century, Asian dominance in the world has so far
been interrupted by an only relatively short  period of only a century or
at most a century and a half.  The oft-alleged half century or more
decline of China is purely mythological.

2] Chinese and other Asian  economic success in the past was not based on
Western ways; and much recent Asian economic success was not based on the
Western model.  Therefore, there is also no good reason why Japanese or
other Asians need or should copy any Western or other model.  Asians  can
manage their  own ways and have no good reason to now  replace them by
Western ones  as the alleged only way to get out of the present economic
crisis. On the contrary,  Asian reliance on other ways is a strength and
not a weakness.  

3]  The fact that the present crisis visibly spread from the financial
sector to the productive one does not mean that the latter is
fundamentally weak. On the contrary, the present crisis of overproduction
and excess capacity is evidence of the underlying strength of the
productive sector, which can recover.  Indeed, it was excess capacity and
productivity leading to over-production for the world market that
initiated the financial crisis to begin with when Asian foreign exchange
earnings on commercial account were no longer able to finance its service
of the speculative short run debt.  

4] Not that economic recessions  will or can be  prevented in the
future. They never have been prevented in the past even under state
planning in China or the Soviet Union.  More significant is that this is
the first time in over a century that a world recession  started not in
the West and then moved eastward,  but that instead it started in  the
East and then moved around the world from there.  And that was precisely
because as per # 3 East Asian and particularly Japanese, Korean and then
Chinese productive and export capacity had grown so MUCH.   This recession
can therefore be read as evidence  not so much of the temporary weakness
as of the growing basic economic strength of  East Asia to which the
center of gravity of the world economy is  now shifting back to where it
had been before the Rise of the West.  

 
5] The recession in the productive sector was short, especially in Korea.,
and so far absent in China.  But it was also severe, especially in
Indonesia.  And the shock-waves from the financial sector to the
productive, consumer and political ones were visibly - and to all but the
totally blind, intentionally - exacerbated by the economic shock policies
imposed on Asian governments by the IMF as usual following the dictates of
the U.S. Treasury, which systematically represents American financial
interests at the expense of popular ones elsewhere around the world.  The
former World Bank Vice-President, member of the US President's Council of
Economic advisers and now Nobel Prize laureate in economics, Joseph
Stiglitz [2002], has given us an insider's view of these intentional
events in his GLOBALIZATION AND ITS DISCONTENTS.

That also permitted Western interests to take advantage of declines in
productive and financial strength in Korea and elsewhere to buy up assets
at bargain-basement  fire-sale prices.  Even so the underlying strength of
the Korean economy was such that the foreigners were even then unable to
alter the financial, productive, ownership and state structure
significantly  to their favor.  The Korean productive and financial
machine soon  recovered again to forge ahead,  but now with a costly
lesson well learned.  The lesson must have been learned elsewhere as well
by comparing how relatively unscathed China and Malaysia [and as already
mentioned for different reasons Korea] emerged from the financial
crisis.  They maintained controls over capital exports, compared to those
countries that succumbed to the IMF and its lethal medicine by permitting
a speculative capital outflow, which  destroyed their productive apparatus
and multiplied unemployment into an unbearable economic, social, and
political problem, especially in Indonesia.

6] That underlying political economic strength also puts East Asia, and
especially China, Japan and Korea  in a much more favorable position  than
the rest of the Third World and even Russia and Eastern Europe  to resist
Western blackmail as it is now  exercised  by the U.S. Treasury Department
through the International Monetary Fund, the World Bank, the  World Trade
Organization, Wall Street and other instruments.  

7] The very act and cost of East Asian concessions to this Western
pressure  during the past  recession makes it politically more likely,
since it is economically possible, that East Asia will take measures,
including especially a new financial  bloc and  banking institutions, that
can prevent a recurrence of the present situation in the future by
escaping from the strangle-hold of Western  controlled capital
markets.  Stiglitz  observes such efforts already in his recent private
discussions with Asian officials as reported in his book. 
 
 
8]. Indeed, one of the present battles,  first by the Japanese and now
also by the Chinese, is to remodel the world financial and trade
institutions that were designed by the United States to work in its
favor. Thus, Japan  wanted to establish an Asian  monetary fund  to
prevent the East Asian recession from deepening as it has thanks to the
International Monetary Fund  based in and subservient to Washington. And
China wishes to join the World Trade Organization but also seeks to have
this Western dominated institution  reformed to its advantage. 

9] A related political economic struggle is  the competition between the
United States and China to displace  Japan, Korea and Southeast Asia  in
the market by taking advantage of their bankruptcies.  American capital
is buying up some East Asian productive facilities at bargain basement
prices, while China is waiting for them either to be squeezed out of the
competitive market altogether, and  if not to engage in joint
operations.  Indeed it had been the devaluation of the Chinese currency
before 1997 that reduced the world market share of other Asian economies
and helped generate the financial crisis itself. Only time will tell which
strategy will be more successful, but the Chinese  and  perhaps also some
Southeast Asians  seem like the better bet over the long term.  Moreover,
no matter how deep the recession in Japan;  it is not for that eliminated
as an economic power, especially in Asia. However, there is evidence that
China is trying to reconstruct the East Asian trade and tribute system at
whose center it was in the eighteenth and that the ern colonial powers
dismantled in the nineteenth century.

10] Equally significant is that India and to recently to a lesser extent
China  have remained substantially immune from the present recession,
thanks in part to the inconvertibility of their  remin ribao and rupee
currencies and the valve in their capital markets that permits the inflow
but controls the outflow of capital. The currency devaluations of China''s
competitors elsewhere in East Asia and the reduced inflow into China of
Overseas Chinese  and Japanese capital that is negatively affected by the
recession in East Asia may oblige China  to devalue again as well to
remain competitive.  Nonetheless and despite  their serious economic
problems,  the Chinese and Japanese economies appear  already to have and
to continue to be able to become  sufficiently productively and
competitively strong  to resist and overcome these problems.  In Southeast
Asia, Malaysia has successfully followed the Chinese model of opening its
capital market to inflows but restricting especially speculative capital
outflows from the same.  Korea did not need such emergency measures, since
it had received relatively little foreign capital to begin with.

 
11] It is noteworthy that the economically most dynamic regions of East
Asia today are also still or again exactly the same ones as before 1800
and which  survived into the nineteenth century.
1. In the South, Lingnan  centered on the Hong Kong - Guangzhou corridor,
2.  Fujian, still centered on Amoy/Xiamen and focusing on the Taiwan
straits and all of Southeast Asia  in  the South China Sea; and  between
them, 3. the Yangtze Valley, centered on Shanghai  and trade with Japan
that is already taking the lead away again from the southern and northern
regions.  

4.  But already then there was also a fourth economic region around the
North China Sea, the quadrangular trade relations  among Manchuria and
elsewhere in Northeast China, Siberia/Russian Far East, [northern?] Japan,
and Korea, but also including Mongolia..  Although the first three
above-named regions are already again undergoing tremendous economic
growth [and political power?] in the absolute sense, the fourth one around
Korea seems to enjoy the greatest relative boom, and within it that of
Korean capital as well.  It is helping to develop resources in the Russian
Far East and  as far west  as Central Asian Khazhakstan.  The Chinese
population  on the Russian side of the Amur River has been estimated
already to exceed 5 million people as a pool of cheap labor.  Probable
political change in the DRNK may well add a new source of cheap labor for
this growing pool of labor in the Northeast Asian Region and for its Far
East Russian also cheap  base of ample metallurgical, forestry,
agricultural and even petroleum resources. Korean and Japanese capital
could make that  a very attractive regional growth pole in itself and a
highly competitive region on the world market. 

All of these in turn were and still  or again increasingly are important
segments of  world trade and of the global economy. In that sense also and
although its story ends in 1800, the examination of the world economy and
of the predominant place in it of the East Asian including Korean
economies points to the most fundamental bases of  contemporary economic
developments  in the region and also presages  important world economic
ones for the foreseeable future.