Thursday, December 27, 2007

The Weakness of Giants

2008 is the year of the Beijing Olympics, so it seems quite likely that there will be much discussion of China over the coming year.

Doubtless, there will be much portentous commentary, especially from US commentators, who have always had a fascination with the only country likely to challenge American hegemony at least in the short run. In the end, I think a new sense of balance will emerge.

The supposed threats or challenges of China to the West are also matched by some dramatic weakness. Although the country has become the workshop of the world, the financial system remains astonishingly primitive, and most of all the country's political system dramatically limits its ability to innovate. small and corrupt elites around the intellectually bankrupt Communist party continue to stifle much progress. Increasingly the quality and the cost of Chinese goods are less attractive in the world market. Indeed the United States, after falling back, could be poised to rediscover its own competitive advantage as the devaluation of the US Dollar boosts American exports substantially.

Meanwhile another concern for the West, Russia, also appears to be riding high, as it enters the New Year. Buoyed by high commodity prices, the country has created thousands of millionaires and even billionaires. Increasingly assertive on the world stage, Russia has become an object of great concern as it seems ready to renew the challenge of the first cold war. However, the veneer of wealth masks a much grimmer story. Although Vladimir Putin appears to want to stay in power, by putting his own man- Dimitri Medvedev- into the Presidency, while he himself returns to the Prime Minister's post, in fact a power struggle laps around the Kremlin. More to the point Putin is set to swap another job with Mr. Medvedev- Chairman of Gazprom, and this may be of greater economic significance.

No matter what he does, Putin faces challenges. The fact that a reputed personal fortune of $ 40 billion has been publicised reflects a growing impatience in certain quarters with the division of the cake amongst the siloviki- Putin's own circle of secret policemen. If commodity prices now fall, the economy is dangerously exposed, since the high rouble has crippled the country's ability to compete in manufactured goods. 2008 could be a turbulent time for Russia.

The challenge for the West, as it deals with its own problems in a dramatically less liquid credit market, will be not so much how to handle an assertive Russia or China, but possibly more difficult, how to handle two countries facing significant economic problems and quite likely, political instability.

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