INTERNATIONAL AFFAIRS by Patrick J. ByrneNews Weekly
Should we fear China and Russia in the global economy?
, June 6, 2015
As the economies of China and Russia expand and integrate into the global economy, both are extending their economic and diplomatic influence with new multi-lateral organisations.
BRICS’ leaders (from left):
Russia’s Vladimir Putin,
India’s Narendra Modi,
Brazil’s Dilma Rousseff,
China’s Xi Jinping
and South Africa’s Jacob Zuma.
Are these new organisations a threat to the post-World Ware II Western alliance, or are will they bring greater global economic and political stability?
Phillip Y. Lipscy recently analysed this debate in Foreign Affairs (May 7, 2015), the journal of the US Council on Foreign Relations. Lipscy is the Thomas Rohlen Center Fellow, Shorenstein Asia-Pacific Research Center
Freeman Spogli Institute for International Studies
at Stanford University.
The history of China and Russia as communist states means many in the West view their growing role in global affairs with suspicion.
Russia is viewed with distrust because of President Putin’s autocratic control of his country and Russian aggression in the Crimea.
China is a paradox. It remains an authoritarian “communist” state, yet it has embraced capitalism “on steroids” and become the hub of global manufacturing, with the aid of the West’s major multinationals.
China’s new infrastructure bank
The debate over the place of China and Russia in the post-Cold War world, and in the wake of the global economic crisis, has heated up with China’s initiative for an Asian Infrastructure Investment Bank (AIIB) and Russia’s new multi-lateral currency reserve fund.
China’s proposed AIIB is a $100 billion fund to boost badly needed infrastructure in the Asia, the fastest growing region of the world and home to the greater proportion of the world’s population. It is part of China’s wider “new Silk Road” initiative to deepen trade and investment in Asia and the wider world, according to Barclays Bank.
The Obama administration’s opposition to China’s AIIB has become an embarrassment for the U.S. President. His lobbying efforts to persuade Western nations not to join the project have failed.
Not only have many European nations announced their support for the AIIB, but some of Washington’s closest allies are supporting China’s new bank including Britain, South Korea and Australia.
Even Japan has warmed to the new infrastructure bank, and now Taiwan has applied to join the AIIB. Historically, China has been Taiwan’s great enemy and the U.S. its greatest ally.
Meanwhile, Russia has initiated the formation of the $100 billion reserve currency fund for the BRICS nations (Brazil, Russia, India, China and South Africa).
The project creates a reserve currency fund on which member nations can draw to protect their economies against volatility in the global markets, according to Sergey Ivanov, deputy head of the Russian Federal Council Committee for Budget and Financial Market.
The agreement for the currency reserve was signed in Brazil last July.
Russia has a particular interest in the fund. It has suffered from huge currency fluctuations as a result of Western sanctions over Russia’s annexation of Crimea. Also, its economy collapsed in the 1990s from the radical free-market policies that it adopted, on U.S. advice, after the end of communism in 1989.
President Vladimir Putin wants an alternative fund on which to rely instead of seeking aid from the International Monetary Fund and the World Bank. Both are dominated by the U.S.
The BRICS countries account for 40 per cent of the world’s population, and about 20 per cent of the world’s gross domestic product, according to the International Business Times (May 4, 2015).
At the same time, Russia is offering cut-price nuclear energy deals to European Union states to shore up long-term alliances in a broad range of countries in the Middle and Far East, Southern and East Asia, and even Brazil.
For example, Russia has agreed to a €10 billion ($14.2 billion) loan to expand Hungary’s nuclear industry over 10 years.
The 80 million people of Hungary, Bulgaria, Slovakia, the Czech Republic and Ukraine rely on Russian nuclear fuel for 42 per cent of their electricity.
Lili Bayer, Eurasia analyst for global intelligence firm Stratfor, argues that the Hungarian plant is one example of Russia’s distinct strategy to maintain in Europe energy dependence on Russia.
“This is both a commercial and political strategy,” Bayer told Newsweek magazine (April 28, 2015). “Russia is really pushing for projects like the one in Hungary because they will be providing 80 per cent of the financing and it gives the Kremlin long-term leverage until Hungary pays the money back,” she said.
These initiatives by China and Russia have been controversial, particularly in the U.S.
Phillip Y, Lipscy’s discussion about the controversy over China’s AIIB is illustrative of the debate over the expanding role of both China and Russia, as they and their regional neighbours become major forces in the world economy and global politics.
The fact that China would create a new regional infrastructure bank from scratch instead of joining the existing institutions has raised fears that the AIIB may overshadow and undermine the International Monetary Fund (IMF) and World bank, which are based in Washington and reflect US interests. There are also concerns that it reflects a determination to undermine the post-World War II international architecture.
Lipscy argues that “both sets of concerns are largely misplaced”, that the “AIIB is highly unlikely to undermine existing aid organisations”, and that on balance, the U.S. and other Western nations “have more to gain from joining the AIIB and shaping its future than seeking to exert influence as bystanders”.
He says that the debate has been polarised. “Realist international relations scholars have predicted that China and the United States face inevitable conflict based on the idea that power transitions create turbulence as rising powers seek to assert their newfound authority and status quo powers resist.”
On the other hand, there is an optimistic alternative based on the liberal tradition. Liberals argue that “the pacifying effects of economic interdependence, international institutions and norms, and, perhaps one day, democracy will push Beijing and Washington towards cooperation rather than conflict.”
However, between these two poles is a third possibility: “the renegotiation of the world order”, Lipscy says.
“To some degree, contestation over international institutions replicates the functions performed by military clashes in prior eras. It shapes geopolitical and economic outcomes, provides markers for relative status among states, and integrates states into groupings that share common values and purposes.”
Lipscy cites Japan as an example.
In the early 1990s, some strategic analysts were predicting that Japan’s military would grow in strength, leading to a confrontation with the U.S.
Instead, Japan worked closely with the U.S. and focused its debates over the direction of economic policy in the forums provided by the World Bank and the IMF.
In these forums Japan sought recognition for a different economic approach to that of the U.S., particularly as it wanted “greater state intervention and a focus on basic infrastructure”.
“Japan also sought to create regional institutions through which it could exercise influence, such as the ADB [Asian Development Bank] and the failed Asian Monetary Fund.”
Lipscy says that while there are many differences between China and Japan, Beijing’s proposal for the AIIB should be analysed in this light.
“The upshot is that the influence and prestige of contemporary international institutions give countries a new avenue through which to gently contest the contours of the world order. There is less of a need to resort to coercion or military conflict.
“The AIIB … poses very little risk to U.S. and Japanese interests, since it enters a crowded, competitive field of multilateral development agencies.
“The United States thus has every incentive to encourage, not discourage, Chinese foreign policy initiatives such as the AIIB …
“The heart of the matter is this: does the United States prefer a world in which China seeks to establish its influence and international prestige by building multilateral development banks or one in which it seeks to do so by building aircraft carriers?” Lipscy asks.
Perhaps China will build both, but the more it builds banks the less likely it will need aircraft carriers.
Patrick J. Byrne is national vice-president of the National Civic Council.