President Barack Obama and President Hu Jintao of China attend a meeting with business leaders in the Eisenhower Executive Office Building, Jan. 19, 2011.

President Barack Obama and President Hu Jintao of China attend a meeting with business leaders in the Eisenhower Executive Office Building, Jan. 19, 2011.

Last week Federal Reserve Chairman Ben Bernanke dismissed complaints by China and others that U.S. policies were driving up the global prices of goods and energy. Instead he blamed these increases largely on “ the very strong demand from fast-growing emerging market economies….” One of these markets is China, which is now the world’s second largest economy and the main driver of global growth. Some worry China’s gain is America’s loss. A look at global economics and world politics in the aftermath of the great recession. Why a group of emerging markets weathered the crisis better than advanced economies.

Guests

  • Gideon Rachman chief foreign affairs columnist for the Financial Times and author of "Zero-Sum Future: American Power in an Age of Anxiety."
  • Eswar Prasad Senior Fellow, Brookings Institution; Tolani Senior Professor of Trade Policy, Cornell University; author of "Emerging Markets: Resilience and Growth Amid Global Turmoil."

Transcript

  • 11:06:55

    MS. DIANE REHMThanks for joining us, I'm Diane Rehm. Before his first trip to China, President Obama said, power does not need to be a zero-sum game. The U.S. and China are now the world's largest economies. China is one of the emerging markets to have weathered the global recession better than advanced economies. Joining me in the studio to talk about reasons for this and what it means to the U.S., Gideon Rachman. He's author of, "Zero-Sum Future: American Power in an Age of Anxiety" and Eswar Prasad, he's co-author of, "Emerging Markets: Resilience and Growth Amid Global Turmoil." Feel free to join us, call us on 800-433-8850, send us your e-mail to drshow@wamu.org. Feel free to join us on Facebook or send us a tweet. Good morning to both of you.

  • 11:08:09

    MR. GIDEON RACHMANGood morning.

  • 11:08:10

    MR. ESWAR PRASADGood morning, Diane.

  • 11:08:11

    REHMGideon Rachman, if I could start with you, what exactly did the president mean when he said, power does not need to be a zero-sum game?

  • 11:08:22

    RACHMANWell, I think the message he was sending is that the U.S. is comfortable with the rise of China, the U.S. isn't frightened by the rise of China. That a richer China can mean a richer America and in that sense, he was really in line with all the previous presidents before him. Clinton, George W. Bush, they all said the same thing. However, it's the argument in my book that actually, that premise is beginning to be questioned on both sides of the Pacific, that the U.S. actually, whatever President Obama says in public for diplomatic consumption, is increasingly concerned by its relationship with China, that a more powerful China, in some sense, is seen as challenging the United States.

  • 11:09:00

    RACHMANAnd also the economic relationship is less healthy than it was in the pre-2008 period when globalization seemed to be working pretty well. Now, as he mentioned, you know, U.S. unemployment is very high. The deficit is high and America is worried about its economic relationship with China. And actually, the book also goes into other examples of how zero-sum logic is damaging international relations in my own part of the world, whether the European Union's in turmoil or in efforts of global governance where we're finding ourselves stuck on a whole range of issues from nuclear proliferation to climate change. But I think the U.S./Chinese relationship's absolutely the center of it because they're the two biggest economies in the world now.

  • 11:09:35

    REHMHow do you see the zero-sum game, Eswar Prasad?

  • 11:09:42

    PRASADTo make things interesting, Diane, let me take a difference perspective than Gideon. I think the way to characterize it, really, is a zero-sum present, but a positive-sum future. In the short term, it is true that as Gideon pointed out, there are difficulties in terms of how these two economies are going to get along. And it is certainly true that in the long run, the U.S. cannot quite have its way, the way it used to in the past, because China is becoming a much bigger power. It is flaunting its economic and political power both in the region and abroad.

  • 11:10:09

    PRASADBut in the short term, the real issue is an economic one and the economic problem in both countries is jobs. China is not generating that many jobs and whatever job growth it gets comes from its export sector. The U.S. is counting on increasing job growth. President Obama has argued that we should double exports in the next five years. That's largely to increase export growth. And here there is a problem because if both countries are trying to increase exports, in fact, as the rest of the world is trying to do as well, that's going to make things difficult.

  • 11:10:38

    REHMWhat I don't quite understand is why we continue to call China an emerging market?

  • 11:10:46

    PRASADNow, it's an emerging market in one sense, in the sense that it doesn't have a very high level of per capita income yet. In fact, I couldn't find any historical (word?) where you had a country that was so large in absolute size, but so far behind in per capita income relative to the larger economies. The U.S. per capita income right now is about $47,000. China's per capita income is about $4,200. The U.S. has much more developed financial markets, China doesn't. So China has an entirely different set of development challenges, both in financial markets and in terms of its own development.

  • 11:11:20

    REHMAnd Gideon, what does it mean that China today announced an increase in interest rates?

  • 11:11:28

    RACHMANWell, I mean, there have been big concerns that the Chinese economy is, as they say, overheating, that they've got a rampant inflation problem. And I think it's interesting the way that now when China announces an interest rate, the world reacts in the way that it used to only react perhaps when the Fed or the European Central Bank announced a rise in interest rates. That's how central they are to the world economy.

  • 11:11:48

    RACHMANAnd I mean, my take on it is that there are a lot of people who say, look, the Chinese economy is really heading for a fall and that the whole thing is going to blow at some stage. It's just growing too fast. I'm a bit cynical about that, I mean, I used to cover the Chinese economy in the mid '90s and they were saying that then and frankly, you know, for all the obvious problems China has in environment and overheating and so on, this is a country that's been growing at nine to 10 percent a year for about 30 years, so it's not some sort of mirage which is going to disappear. There's a lot of momentum there even with the problems.

  • 11:12:18

    REHMGideon Rachman, he's chief foreign affairs columnist for the Financial Times, author of the new book titled, "Zero-Sum Future: American Power in an Age of Anxiety." Eswar Prasad is Senior Fellow at the Brookings Institute. His new book is titled, "Emerging Markets: Resilience and Growth Amid Global Turmoil." Do join us, 800-433-8850. Gideon, are you worried that because of everything the two of you have talked about, that real tensions could arise between these two giant countries?

  • 11:13:08

    RACHMANYeah, I think that is a problem. I mean, I think that, you know, you quoted at the beginning President Obama's thing about power needn't be a zero-sum game. I think most people would agree with that about trade. Trade makes both sides richer, but power? Not -- you know, I think generally the rise of a big, new emerging power is a disruptive event, particularly when it's a country that as different from the United States as China is. Now, will they go to war? I don't think so. I think in a nuclear age, that's pretty well unthinkable. But will there be rising tensions between them? And I think an implicit kind of battle for who's the hegemonic power in the Pacific is already taking shape. The U.S. is the dominant military power, even in China's backyard and I'm not sure that China sees that as a natural state of affairs going forward.

  • 11:13:53

    REHMHow else, other than hegemony, would that kind of tension arise, Eswar?

  • 11:13:59

    PRASADWe are seeing it on the economic front as well. In fact, China has been very assiduously trying to use its economic power in order to increase its political influence both in the region and beyond. So I agree with Gideon that on the political front, it's going to lead to a fairly fraught period ahead when China tries to assert itself. And China really is still trying to find its pitch because it has grown into a large power. It still sees large development challenges. So there is a sort of strategic dissonance in the way the Chinese approach a lot issues.

  • 11:14:27

    PRASADThey know they're big and they want credit for being big and to have their right (word?) in world affairs. But then when it comes to shouldering their burdens in terms of managing some responsibilities on the world scene, they talk about how they have significant development challenges. So I think they're trying to play both sides of the game and they're trying to do it fairly effectively.

  • 11:14:45

    REHMDoes the U.S. have any leverage there?

  • 11:14:50

    PRASADNow, the U.S. has leverage in the sense that China still recognizes that the U.S. is a large power and the U.S., especially if it can bring other countries around to its side on issues like Chinese currency policy, for instance, would be much more effective. Now, the real battle between China and the U.S. is for the hearts of other countries. So for instance, Secretary Geithner is now in Brazil. He's trying to swing Brazil around to the point of view of the U.S. that something should be done about China's currency policy.

  • 11:15:15

    REHMWhereas earlier, Brazil was siding with China, Gideon.

  • 11:15:19

    RACHMANYeah, absolutely, I mean, I think that the Americans have gone backwards and forwards on this. I think initially they a bit naively assumed that all democracies would basically be with the U.S. because democracies kind of shared views. Then you get to something like the Climate Change Talks and they find in a kind of nasty shock that actually, India, Brazil, South Africa, all democracies actually agreed with China and that was a really difficult moment. I think perhaps America's upped its game diplomatically.

  • 11:15:44

    RACHMANAnd in the last year, you've seen a few countries that were tilting towards China, tilting back towards America. Brazil is one example. India has warmed up to the U.S. And actually, Japan which went through a flirtation with China under the previous Prime Minister Hatoyama is now kind of rushing back towards the Americans 'cause they've had a security clash with China. So it's a very interesting kind of arm wrestling match involving two main participants and lots of other people kind of pushing one way or another.

  • 11:16:10

    REHMSo you see this continuing to go on for perhaps at least the next decade?

  • 11:16:18

    PRASADYeah, almost certainly, China is going to continue growing larger economically and they're going to try to increase their influence within the region and as Gideon pointed out, it's making the economies in the Asian region very nervous because they are now very tied into China from an economic point of view both in terms of trade and financial flows. They would like to be politically disassociated from China and have a different power in the region that sort of counterbalances China and India is one that we could look to.

  • 11:16:46

    PRASADBut India is a much smaller economy, about one-third the size of China and India is caught in a difficult position because it's not completely sure about the U.S. intentions. The U.S. has been trying to court India as a bulwark against China, but India is not entirely sure that if push comes to shove, that the U.S. will stand with India.

  • 11:17:04

    RACHMANYeah, I mean, a Singaporean put it to me rather well recently. He said, we want America to stay in the region as a balancer, but we have to remember that China will still be here in a 1,000 years and we're not sure America will still be here in 100 years. So there is...

  • 11:17:16

    REHMThat's quite a statement.

  • 11:17:17

    RACHMANYeah, I mean, I think the other big factor is that there's a renewed sense of American weakness around the world because of the economic crisis and people look at the deficit that America is running and they say, look, you know, will they really be able to afford this kind of global hegemony? It's an expensive business. And even Americans, Mike Mullen, the head of the joint chiefs said, you know, the biggest threat to American national security is now the budget deficit.

  • 11:17:39

    REHMSo in addition to how people in this country are faring, you're talking about the economy and how it is seen by other world powers?

  • 11:17:53

    RACHMANYeah, absolutely. I mean, I think that there's reality and there's the perception of what's going on and I think that people react to this sense that, well, you know, is America a bit on the slide? And they begin to position themselves that they have to, they have to look at how they protect their interests best.

  • 11:18:10

    REHMGideon Rachman, chief foreign affairs columnist for the Financial Times. His new book is titled, "Zero-Sum Future: American Power in an Age of Anxiety." Short break and I'll look forward to hearing your calls, reading your e-mail. Stay with us.

  • 11:20:04

    REHMWe have two people with us, each of whom has a new book. Gideon Rachman is author of, "Zero-Sum Future: American Power in an Age of Anxiety." Eswar Prasad is author of, "Emerging Markets: Resilience and Growth Amid Global Turmoil." Here is a first comment posted on Facebook. It's from Steven who says, "We should be looking for ways to align U.S. and Chinese economic growth, not because our interests are inherently compatible, but because we must respect the power of demographics. China has studied history and its latest efforts to modernize have a familiar feeling. They remind me of U.S. growth at the turn of the century. But if China builds a consumer's culture that mirrors our own, it will consume the world in the process. It's like that saying, China's gonna eat our lunch." Gideon.

  • 11:21:19

    RACHMANWell, I mean, this whole question of Chinese consumerism is a very interesting one for us. I mean, I think in some ways, in pure economic terms, it's the hope for getting the win/win relationship back in the economy. Because if China starts importing more from America and from the Western world as a whole, then we look again more positively at the globalization relationship.

  • 11:21:41

    RACHMANBut, as you say, if Western consumption patents are exported around the world, there's enormous strain on the environment, the carbon dioxide emissions, food prices already going up. And we're placed morally in a very tricky position because do we say to the Chinese and the Indians, sorry, you're not allowed to eat as well as us, you're not allowed to have cars and, you know, fridges and so on? And so when we get to something like the Climate Change Talks, we find that our arguments don't go down very well outside the West.

  • 11:22:09

    REHMEswar.

  • 11:22:10

    PRASADYeah, China feels that the U.S. is asking too much of it, that is China, in terms of trying to follow a different development path than the U.S. did and the U.S. hasn't been that serious about dealing with its own environmental problems. So the question that China poses, as getting Gideon pointed out, is why should we block our development? Now, in terms of the longer term future, though, you characterized it as China possibly eating the U.S.'s lunch. I think it's more the question of whether these two groups can really work hard during the day and sit down for the peaceful meal over dinner. And I think that is really the way of thinking about it because it's going to be difficult for these two economies to get their interests merged, but ultimately, their interests are similar.

  • 11:22:45

    PRASADIf Chinese consumers consume more -- right now, their growth is largely driven by investment and exports, that's good for China, it's good for U.S. exports. If there is less instability in the international financial system, if the U.S. borrows less, it's good for the U.S. and it's good for China. So ultimately, their interests are actually very much aligned. The problem again is really going to be whether these short term conflicts, in terms of employment and exports end up pushing off this long run. And it could end up in a situation where these economic and political conflicts arise to a fever pitch and that makes it harder to get to where it's this longer term (word?) of interest.

  • 11:23:19

    PRASADAnd that is my real fear, whether the two -- whether the political dynamics in each country will allow the leaders -- and I think the leaders get it, but the political dynamics have to not be kept under control so that they don't have China bashing here and the U.S. bashing in China. That sort of gets this thing off the rails.

  • 11:23:35

    REHMWell, and it comes right back to the president's statement before the U.S. Chamber of Commerce yesterday, trying to enhance the dialogue to include a partnership that not only helps this country, but helps this country vis-à-vis the rest of the world.

  • 11:23:58

    REHMYeah, absolutely. I mean, I think that America and indeed, you know, the European Union, are much more prepared to take a kind of an accepting attitude to the rise of countries like India and China if we're doing well. You know, when unemployment's at nine or 10 percent, it's a very tough sell and people can say, well, the economics are a bit more complicated. That it's not that your job's been shipped to China, but a lot of people think that. That's how they feel. And I think one of the interesting things is that although protectionism hasn't really broken out, those efforts to impose tariffs on China have been lost in Congress.

  • 11:24:37

    RACHMANI think sentiment is shifting over the long run. And unless, you know, Europe and the U.S. recover their economic confidence and health, I think we will end up in a protectionist place.

  • 11:24:48

    REHMHere's an interesting e-mail from Larry in Goodyear, Ariz. who says, "I recently read an article indicating that in 2009, China nearly doubled the U.S. in investments in renewable energy technologies. How can we possibly hope to win the green energy race when they're outspending us?"

  • 11:25:16

    RACHMANYeah, and, you know, I had a very interesting visit when I was last in Shanghai to actually the G.E. Laboratory in Shanghai, where they're doing a huge amount of research into green technology. So it's more complicated than, you know, China's doing this and the U.S., this is a U.S. company doing a lot of research in China. Although if you were American, you might be rather hoping they'd be doing it in California rather than Shanghai.

  • 11:25:39

    REHMBut what about the politics in this country? What's going on here and how it affects America's place economically in the world? Eswar.

  • 11:25:50

    PRASADYeah, this is actually the real concern for the U.S. because what is happening is that China, which had been exporting cheap plastic goods so far and things of this sort (unintelligible) a bit here, is now moving up what we call the value added chain. They're producing higher-tech products, they're moving into clean energy and new areas of technology. And this is where American firms still have a competitive advantage. It's not in producing manufactured goods, but in producing high-tech goods. And this is where China's actually trying to make significant (word?) through government subsidies and through other types of actions.

  • 11:26:21

    PRASADSo they're doing that on the other side. Let's look at what's happening with our government. We've run up a very large deficit, we don't seem to have the political will here to deal with the deficit problem. As it is, the net debt (word?) ratio is something like 65, 70 percent of GDP. It's projected to increase, plus we haven't factored in problems with the Social Security and Medicare systems. And there doesn't seem to be any real political will to tackle the difficult problems. This is going to make it a lot harder for the U.S. to do the sort of spending that is needed to stay competitive on education, on healthcare and a few other things that are necessary.

  • 11:26:53

    PRASADSo we face a very difficult situation where China's using its government to make sure that it makes progress in terms of these industries. The U.S., on the other hand, is getting its hand increasingly tied in terms of providing government support. Now, maybe government support is not the answer in what the government should be doing. It's providing the right incentives. But at some level, if your infrastructure is crumbling, if you're education system is crumbling, it's going to be very hard for the U.S. to stay competitive.

  • 11:27:18

    REHMAll right. Now, consider what's happening in Egypt, what happened in Tunisia, what's happening in Jordan. How is this unrest linked to what the two of you are talking about in terms of education, infrastructure, way of living, et cetera? Gideon.

  • 11:27:40

    RACHMANWell, I think in numerous ways, but I think, you know, Egypt and the whole North Africa was a bit like a volcano. You knew it would blow, you just didn't know when. It could've been now, it could've been 20 years time. And I think that the interesting thing about that part of the world is it was a part of the world that the benefits of globalization really passed by. We had hoped that they would get sucked into the World Trading System and that they would become more prosperous. That would lead to greater stability.

  • 11:28:04

    RACHMANIn fact, that hasn't really worked. We're now faced, within some ways, a very hopeful moment. You know, if Egypt was to open up to become Democratic, if everything worked out, it would be a healthier society, it would be better for the outside world. But equally obviously there's a risk of upheaval in social, economic, political. And this is, again, another of the burdens that falls on America because the U.S. is still the sole super power. It's the place that everybody looks to, even if the economics no longer entirely reflect, you know, this incredible American dominance. But it's America that's expected to kinda sort it out, possibly to write the checks, at a time when in a sense China gets a free ride on the global security...

  • 11:28:42

    REHMInteresting.

  • 11:28:42

    RACHMAN...provided by America.

  • 11:28:43

    REHMEswar.

  • 11:28:44

    PRASADYou know, Egypt is one of the emerging markets, so they did participate in globalization. The problem was that in Egypt, like in many of the emerging markets, the fruits of globalization have not been shared equally among the population. The super rich are getting very even richer. A lot of people have been pulled out of poverty, but still, there's a large number of people (word?) in poverty. And in addition, the real scourge of many of these emerging markets is corruption, so if you put together corruption as well as rising economic inequality it creates (unintelligible) bottom.

  • 11:29:13

    PRASADAnd I think political freedom is part of the answer, but I don't think it's the entire answer. If you take India, for instance, there have been enormous corruption scandals recently. A lot of band spectrum was auctioned off in a corrupt manner denying the government something like 30 to $40 million of revenue that they really need. And there is a ferment in India as well. So of course data can vent a little bit once in awhile through the elections, but still there is a simmering discontent among the masses who don't see the benefits of globalization filtering down to them. And their aspirations are increasing at the same time.

  • 11:29:43

    PRASADSo I think the challenges of improving the education system, giving people the hope that they can actually get ahead and dealing with corruption, are really a challenge. And I think that's the key message from the streets of Egypt and the Middle East to the emerging markets as far as Asia.

  • 11:29:58

    RACHMANIndeed, including China. I mean, I think one should note that I don't think the Chinese will be entirely comfortable watching what's going on in Cairo. And indeed, they were censoring news of it because some of the themes that are inciting people in Egypt, you see in China. You know, anger about corruption, joblessness among young graduates, environmental problems. These are themes that China also has to suffer with. Of course, it's more -- it's making a lot more progress than Egypt economically, so it's got more than it can try and satisfy people with but the idea that China has solved these problems, absolutely not.

  • 11:30:31

    REHMBut of course, you've got the image, the recollection of Tiananmen Square...

  • 11:30:37

    RACHMANAbsolutely.

  • 11:30:37

    REHM...you've got a military in China totally controlled by the government leadership, whereas in Egypt, you've seen a merging of ideas between the army and the people in the square. Where that is going to go, we still don't know.

  • 11:31:00

    RACHMANYeah, absolutely. I mean, in all of these situations, the key question often comes down is, will the army obey orders? And in Tiananmen Square in 1989, it did. In Egypt, well, we're not yet clear.

  • 11:31:10

    REHMYeah.

  • 11:31:11

    RACHMANBut it looks (unintelligible) like we will avoid that kind of terrible crackdown moment with mass bloodshed in the main square.

  • 11:31:18

    REHMAnd what about Western Europe? What about the countries of Germany and Austria and Switzerland and Sweden and their economies, how they are looking at what's happening between China and the U.S., Eswar.

  • 11:31:39

    PRASADGermany is doing great. In fact, that's a problem for the rest of Europe because the core country in Europe is doing very well and the countries in the periphery are not quite able to keep up because they have relatively bloated social safety nets, they have labor laws that make it very difficult to get some sort of flexibility in the labor market. So countries like Greece and Portugal, as we've seen, and a few of the peripheral countries like Spain and Portugal are also at risk.

  • 11:32:03

    PRASADAnd how the European project is going to be resolved in a way that these countries are going to be pulled along without just being financed by countries like Germany and France, is going to be a very important question. On the battle between the U.S. and China, they're sort of stuck in the middle because on the one hand, they are running a fairly large trade deficit as a group against China. They would like China to change its currency policy, but their firms, just like American firms, also see the future in the Chinese market, so they don't want to shut off access to China.

  • 11:32:33

    REHMEswar Prasad, he's co-author of the new book titled, "Emerging Markets: Resilience and Growth Amid Global Turmoil." And you're listening to "The Diane Rehm Show." We have many callers. We'll open the phones now. First to Miami, Fla. Good morning, Mary, you're on the air.

  • 11:32:57

    MARYWell, good morning, good morning. Thank you for taking my call.

  • 11:33:00

    REHMSurely.

  • 11:33:00

    MARYI have two questions for the gentlemen. You mentioned earlier in the beginning of the show that China was the second largest economy and you came up with the $4,000 per capita. I was just wondering in real numbers what is that -- what does -- how does that relate to the United States? Because they have -- 300 million people. And my other question is, you also said that our income is 45 or $47,000 per capita and I'd like to know, taking into account the current unemployment rate that we have, because, for example, my husband had to take a job going from 45,000 to $25,000. So I was just wondering how these numbers come up with -- you know, how they come up with these numbers?

  • 11:33:44

    REHMAll right. Eswar.

  • 11:33:46

    PRASADYeah, these are average numbers and averages certainly hide a lot. It is true that in the U.S., per capita incomes have been rising very gradually and the number of $47,000 I quoted is the total amount of income produced in the U.S. divided by the total number of people we have here. And it is true that in the U.S., inequality has been rising and as I mentioned about the emerging markets, it is true that in the U.S. as well, the top one percent of income distribution has been getting an increasingly large share. So I empathize completely with the caller's concern about how this reflects because the people at the bottom have not been doing well.

  • 11:34:19

    REHMIndeed. To Philadelphia, good morning Shawn. Shawn, are you there?

  • 11:34:27

    SHAWNYes, I am. Thank you for taking my call. Going back to the guest's position on the fact that our interests at the end of the day are aligned with China, I have a comment. And that is, that I would categorically reject that, frankly. I think that my optic view on the demand side of this equation is what can really get us into trouble. It does not factor in at all the supply side of the equation. At the end of the day, we are going to be competing with 1.3, 1.5 billion Chinese for the resources of the planet. So we cannot completely align. Our interests are categorically, diabolically opposed to one another.

  • 11:35:19

    REHMHow do you see it, Gideon?

  • 11:35:21

    RACHMANWell, it comes back to something we were discussing earlier. I mean, just in conventional economic terms, if you factor out things like environment resources, which obviously, you can't, but in terms of demand, you could argue yeah, this is a mutually beneficial relationship even now. But I think if you look ahead and you assume finite resources, including the ability to put carbon dioxide in the atmosphere.

  • 11:35:44

    RACHMANBut also with food production, which is, at the moment, not going up as fast as demand is going up and mineral resources where you see this commodity -- surge and commodity prices driven by China and India which is feeding through inflation in the West, these are the zero-sum aspects that I write about in the book where it does seem, at least for a while, unless we come up with some fantastic technological fix which solves all these issues, it does seem that actually this is not always a mutually beneficial relationship.

  • 11:36:15

    REHMWell, and he, Shawn in Philadelphia, is talking about the population in this country versus the 1.3 billion people in China.

  • 11:36:28

    PRASADThat's 1.3 trillion. If only it was million. It is -- I'm sorry, 1.3 billion.

  • 11:36:34

    REHMThank you.

  • 11:36:35

    PRASADI keep thinking about the (unintelligible) ...

  • 11:36:36

    REHMYeah, I know, I know.

  • 11:36:37

    PRASAD...in terms of trillions. The reality is that -- I mean, let's take a company like Microsoft. They were very big, they were commanding the computer market. Apple came along. This is certainly not a good thing for Microsoft by itself, but ultimately led to these two companies becoming much stronger because they compete with each other. The market grows, there are new products introduced. I think the same thing happens when you think about two countries trading with each other. Now, it is true that at some level, there is some degree of competition and ultimately, you're trying to think about which technologies dominated. But I think if you have the two countries working together, you can actually make a lot more progress and their interests are going to be aligned.

  • 11:37:13

    PRASADAnd remember, we are talking a lot about the U.S. and China, but there is a much larger group of countries and ultimately, it's going to be held the emerging markets as a group and the advanced economies get a long together.

  • 11:37:23

    REHMEswar Prasad, he's co-author of, "The Emerging Markets." And Gideon Rachman, he's author of "Zero-Sum Future." Short break, we'll be right back.

  • 11:39:54

    REHMAnd we're back. Here's an e-mail from Emil who says, "From this side of the Pacific, it often seems China plays by the rules only when it's convenient to them, whether it's turning a blind eye to pirating American software, direct government funding of American competitors, e.g. Lenovo or currency manipulation, just to name a few. China simply does not seem to be beholden to the same economic policy rules as Western powers." How do you see that?

  • 11:40:38

    PRASADThere's certainly some legitimacy to that notion because all that I said about the benefits of free trade are going to be relevant only if all countries play by the same rules. And increasingly, China's going to recognize the benefits to itself of playing by those rules. But remember, there is a political dimension to this also has been discussing in much of the rest of the world feels that the U.S. is not necessarily playing by the rules, that it is pushing its own interests. Ultimately, each country is trying to advance its interests staying as far within the bounds of the rules as possible and transgressing when needed.

  • 11:41:08

    PRASADI mean, we've been talking about democracy a great deal, now we're very concerned that in Egypt, a democratic movement might actually displace one of our allies and we can see a very mixed reaction in the U.S., so even we don't stay entirely faithful to our principles and the rest of the world sees this. Even in economic policy, there was a big concern in the rest of the world that the U.S. is introducing this policy through the federal reserve of essentially printing money. And the rest the world said, hey, wait a minute. This is going to hurt us. It may or may not benefit you, but we're certainly going to feel the brunt of the burden. And it seemed to the rest of the world like the U.S. was saying, that’s not our problem. We're going to take care of ourselves and then you deal with the consequences.

  • 11:41:46

    REHMGideon.

  • 11:41:48

    RACHMANYeah, now, I think it's certainly the case that American QE, the printing of money, is causing concern, but I think there is an interesting question about Chinese behavior because our assumption has been, certainly in official circles, that as China grew richer, got more integrated with the global economy, it would play by the rules increasingly. Now, there's an argument, actually, that decreasingly, they're playing by the rules as they feel that they're more powerful, they feel less inclined to necessarily, you know, be beholden to us.

  • 11:42:16

    RACHMANSo to give you a concrete example, Western companies now are saying they're getting a much rougher ride in China, that when China was desperate for foreign investment, you'd fly, the mayor would meet you, you'd get a grant of free land. The red carpet was rolled out. Now, they're much tougher and Jeff Immelt, actually, who's now at the head of the Competitiveness Council, was quoted off the record at dinner, but it got into my newspaper, saying, you know, he's not convinced that in the end, the Chinese actually want any foreign company to win, as he put it, in China. So even he's got concerns about it.

  • 11:42:49

    REHMHere's another e-mail. Forgive us, we're having difficulties with our phones. We're trying to get back to them. This from Matt, who says, "I'm curious why we rarely discuss the EU as a whole or at least the Euro Zone as a whole when talking about global economies, particularly China. Seems to me, the EU acts as one economy in terms of global trade and the EU economy is actually bigger than that of the U.S. Isn't the UE/China relationship just as important?"

  • 11:43:40

    RACHMANYeah, I mean, I think that's a good point. The European Union economy taken as a whole is still the largest in the world, but I think one of the reasons we don't often think of the EU as a block that negotiates in trade negotiations as a block. So sometimes it works effectively as a union, but increasingly, actually, it's a very divided union so that you see the Germans doing very well and having one attitude to China, other countries having a different attitude. And also, Sovereign Debt Crisis right across Europe, which is splitting the European Union's interests and causing really quite severe reactions within Europe.

  • 11:44:15

    RACHMANI mean, if you go to European Union Summit these days, it's not a very united place. They're not getting along with each other very well. And I think that's again, one of these kinda zero sum consequences of the economic crisis, even within the European Union. It was a period before 2008 where things were going well economically, everyone got on splendidly. After 2008, with Sovereign Debt Crisis, actually, you see conflicts rising, even within European Union countries.

  • 11:44:41

    PRASADIndeed, Diane, if only it was a case of Europe acted like one and the problem is, they don't. When political issues and economic issues, it is a very driven group of countries. They have, again, long-term common interests and they've tried to pull together, but the reality is that these are countries that have quite different economic systems, they have very different sorts of labor markets...

  • 11:45:03

    REHMExactly, exactly.

  • 11:45:03

    PRASAD...and they have slightly different political interests. Some of them do want to see more power to the European Commission, many others want to remain much more independent. So I think if Europe did act, in fact, as a group, then certainly it would have a lot fewer problems. Now, that's not going to be very easy to solve, but I think that's what Europe perhaps needs, a little more dose of unity.

  • 11:45:26

    REHMSo this comes back to politics. Tony in Milwaukee, Wis. writes, "The Chinese government is able to make a decision on the economy and infrastructure development and it gets done. In the U.S., it takes months, if not years, to implement these types of programs due to lobby groups and domain lawsuits. And in the meantime, China makes leaps and bounds in its economy."

  • 11:46:01

    PRASADSo it looks like China has a very concerted strategy, but China's political system is also very, very complex. It's not like edicts are handed down from Beijing, they go out to the provinces and everything gets done. The realities of the Provincial Governments are really quite strong and they have a mind of their own. They do many things often which the central government would not like them to do. They are very keen to boost up their bottom line by providing cheap land, trying to boost investment as much as possible because it generates more jobs there. There is a lot of corruption at the local levels.

  • 11:46:32

    PRASADSo overall, China does seem to have had a better strategy, but it is not quite true that they have a unified political system where everything works cleanly and clearly. In fact, they have a lot of complicated issues and every issue is debated a great deal within China as well and we just don't see it out in the open like in the case of the U.S.

  • 11:46:50

    REHMGideon.

  • 11:46:50

    RACHMANI think it comes back to actually the quite basic argument about the virtues of democracy versus authoritarianism. So that, you know, you will get frustration from some people who, say, believe in nuclear energy. He'll say, you know, we can't get a nuclear power plant built anywhere in the U.S. when Europe -- the Chinese have 20 under construction, you know, got everything planned, they're forging ahead and, you know, you can see that as a good thing or a bad thing depending on your temperament. I mean, you know, yes, they may make progress in solving their energy problems faster than we do. On the other hand, if you're the kind of person that doesn't want to have a nuclear power station constructed down the road, you might prefer to be in the U.S.

  • 11:47:25

    REHMLet's go to Rockport, N.Y. Good morning, John, you're on the air.

  • 11:47:28

    JOHNHi.

  • 11:47:32

    REHMHi.

  • 11:47:33

    JOHNHow is everybody?

  • 11:47:33

    REHMFine, thanks. Go right ahead.

  • 11:47:36

    JOHNGood. I just wanted a question -- make a question -- ask a question/comment about this idea of an Age of Anxiety and say that -- and ask that, doesn't, in large part, this Age of Anxiety have its genesis from the conflict between this continued perception of the importance of the sovereignty of nation states and the reality that the individuals and institutions, who in many cases, exert decisive influence over the fate of economies are operation out of an almost borderline amoral paradigm that seems to consider things like civil community solidarity and civic responsibility to be almost quant concepts? And, you know, what more evidence do we need than the fact that so often, a corporation stock price will go shooting up the minute there are massive layoffs or a massive outsourcing of jobs to another country?

  • 11:48:49

    REHMGideon.

  • 11:48:49

    RACHMANYeah, I mean, it think there is -- one of the tensions we've seen emerging in globalization is a gap between the interests of, if you like, a kind of globalized elite. The kind of people who meet at the World Economic Forum in Davos, who are multi-national executives, run investment banks or run countries who kind of have a common dialogue and a way of looking at the world which actually is often increasingly detached from the way of citizens back home. And their interests maybe are detached so that if you're running a big, multi-national firm, you're looking basically at profits, at dividends, at shareholder interests and that may not lead you to invest in your own country, so there is a sort of divergence of interest between companies and citizens, which is, you know, a big tension.

  • 11:49:32

    REHMAll right. To Robert in San Antonio, Texas. Good morning, you're on the air.

  • 11:49:42

    ROBERTThanks. Diane, a couple of weeks ago on Public Television, their program "MotorWeek" announced that Warren Buffett was investing in a Chinese automobile company called BYD, which stands for Build Your Dream. They have a vehicle that will go 250 miles on a single charge with no internal combustion back up. Nissan Leaf, as you know, is advertising their all electric car that will go 100 miles on a single charge and it seems there is a tone deafness among automobile makers in this country.

  • 11:50:13

    ROBERTGeneral Motors has a car that will only go 40 miles on a single charge. It requires an internal combustion back up, it costs between 40 and $50,000. This tone deafness is costing American jobs and I cannot help be concerned about the fact that General Motors already had a 100 percent electric car 15 years ago and they cut it up into little pieces.

  • 11:50:39

    REHMInteresting point, Robert. Eswar.

  • 11:50:44

    PRASADYeah, unfortunately, energy policy in this country is in many ways misguided. I think much of the country has gotten into the drill, baby, drill mentality and I don't think this is serving us well in the long run. If you think about promoting alternative sources of energy, we've gone in subsidized huge amounts of ethanol production which, as we now know, simply doesn't make sense from an environmental or economic point of view. We are not providing as many incentives for clean energy production. Plus, of course, and this is a somewhat sore point, I'm sure, with many of your listeners, I suspect that our taxes on fuel are simply not at the level they will be able to encourage the sale of electric cars because gas is much cheaper in the U.S.

  • 11:51:24

    PRASADI know at right now, it is at a level that it hurts a lot of people, but a way to deal with that, rather than transferring this money to other oil exporters, by keeping our taxes cheapest to increase revenues by raising taxes and perhaps subsidizing those who are at the front lines. If you think about a cab driver who's probably listening to this program, we should think about some way of subsidizing that person's energy consumption without making energy as cheap as it is.

  • 11:51:48

    REHMHere's an e-mail from Fort Wayne, Ind. Suzanne writes, "I think it's interesting that China does seem able to grow enough food for its people. How does that affect economics? Does that mean big Chinese agribusiness around the world on other continents, perhaps in the U.S., or could it mean huge opportunities for the U.S. economy?" Gideon.

  • 11:52:15

    RACHMANWell, potentially and, of course, it's not just a Chinese issue. I mean, I think that there's growing demand for a better diet all over the world. And as a result, you know, that's an economic opportunity for big farm producers like the U.S., like Australia, but it also produces a kind of rush for land. There's a rather strange thing you're seeing in Africa where foreign countries are trying to buy up bits of huge (word?) of Africa so that they can cultivate agriculture for their own people.

  • 11:52:42

    REHMGideon Rachman, his new book is titled, "Zero-Sum Future" and you're listening to "The Diane Rehm Show." To Paul in Cincinnati, Ohio. Good morning, you're on the air.

  • 11:52:57

    PAULGood morning. I have two brief questions.

  • 11:53:00

    REHMSure.

  • 11:53:00

    PAULThe first one, I'm curious how China and the Middle East view each other? And secondly, I'm curious of what the likelihood of China becoming militarily aggressive if they're not able to maintain the political stability they have through their economic growth. Thank you.

  • 11:53:17

    REHMThank you.

  • 11:53:18

    PRASADThe China's growth model is largely built on a very large investment boom. And when much of your growth is coming from investment, you need a lot of commodities, you need a lot of raw materials. So in fact, China would like to maintain pretty good relations with the Middle East so they can make sure they get a continued supply of oil. And in fact, they have been using their economic resources to tie up other sources of commodities around the world. So I think the Middle East is happy with China growing fast because it increases a demand for oil and China is very happy to continue getting a lot of oil from the Middle East, preferably at cheaper prices.

  • 11:53:49

    PRASADNow, in terms of the second question on military aggression, I think the real issue there is whether there are going to be economic pressures in China that the government then tries to deflect by bringing up this notion of nationalism and the Chinese do tend to be very nationalist when it comes to issues like Taiwan or other military issues. And that could be the card that the Chinese play if there are economic problems, but so long as their economic growth is growing well and they can maintain stability, I see a little less of a concern of that.

  • 11:54:17

    REHMGideon.

  • 11:54:17

    RACHMANYeah, I think that that's right, that's the trade off. The legitimacy of the Chinese Communist Party, make no mistake, they're determined to retain control comes from the economic growth. If that growth falters, the only other obvious source of potential legitimacy is nationalism and, you know, if you look at the kind of books that sell well in China, the kind of stuff that's said on the internet, there is strong strain of nationalism. And in fact, I think you could argue that the current Chinese leadership is rather behind their own citizenry.

  • 11:54:45

    REHMAnd one last question from Carol in Oakland County, Mich. Good morning, you're on the air.

  • 11:54:53

    CAROLYes, I was wondering, awhile ago, they were talking about the Euro and I was just thinking when they talk about the European Zone, does it have -- I don't think that includes Britain, does it? When they're talking about -- so when they were talking about its economic power, were they including Britain when they were talking or am I wrong that Britain is no longer on the pound and is on the Euro.

  • 11:55:25

    RACHMANNo, no, you're totally right (laugh). Britain is not a member of the European Single Currency, but it is, confusingly, a member of the European Union and it has many of the same economic issues to deal with as other European countries. So although we are slightly immune from the crisis affecting the management of the currency, we do have big problems controlling a budget deficit, we have growth problems, so some of the kind of European malaise you see in Britain and we're struggling with some of the same issues as our neighbors and, indeed, as the U.S.

  • 11:55:55

    REHMDo you see China exerting any influence in what happens in the Middle East? Eswar.

  • 11:56:03

    PRASADI don't think they have any direct influence. The instability there doesn't serve them well. Again, if oil prices spike because of instability in the Middle East, they're not going to be very happy because they do import a fair amount of oil. Other than that, my sense is that their leverage is quite limited. But as Gideon pointed out earlier, this is not a good thing for their citizenry to be seen because the problems in Egypt are very similar to some of the problems in China. There was some attempted political repression in Egypt, plus you've had a great deal of corruption and inequality, similar problems that China faces. So they would rather keep this under wraps, their troubles in the Middle East, while they try to sort this out in their own way.

  • 11:56:41

    REHMAnd blocking television so that their own citizenry does not see this.

  • 11:56:48

    PRASADThey view controlling the flow of information as a very important way of maintaining their political oppression.

  • 11:56:48

    REHMEswar Prasad, Senior Fellow at the Brookings Institution, co-author of, "Emerging Markets: Resilience and Growth Amid Global Turmoil." Gideon Rachman, chief foreign affairs columnist for the Financial Times, author of, "Zero-Sum Future: American Power in the Age of Anxiety." Thank you both.

  • 11:57:21

    PRASADThank you, Diane.

  • 11:57:21

    RACHMANThank you as well.

  • 11:57:22

    REHMAnd thanks for listening, all. I'm Diane Rehm.

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