Final Words

Ursula von der Leyen April Fools’ Day “reputational damage”, two-state solution no longer viable and U.S. must reconcile with China, purchasing power parity exchange rates show US far behind.

Dec 07, 2023

UPDATE: Measures that show the opposite have absurd implications and dangerous policy prescriptions. Ultimately, bad comparisons foster bad decisions — that’s why the economics profession invented purchasing power parity exchange rates.

European Union’s super bureaucrat Ursula von der Leyen chose April Fools’ Day last year to threaten China that it would suffer “reputational damage” in the world community for backing Russia’s Ukraine war. Being a civilisational state, China let pass that arrogant, presumptuous, egotistic remark, however!

In one of the final interviews before he died, the famous statesman said the two-state solution was no longer viable and that the U.S. must reconcile with China. “I think if they wanted to do it they could do it. Hezbollah has tens of thousands of missiles on the northern border of Israel. That adds up to a dangerous combination.”

Sorry USA, China has a bigger economy than you

By Chris Giles (FT.com)

Measures that show the opposite have absurd implications and dangerous policy prescriptions. Ultimately, bad comparisons foster bad decisions — that’s why the economics profession invented purchasing power parity exchange rates.

You might have seen sober and accurate Financial Times reporting of the US economy’s remarkable annualised growth rate of 5.2 per cent in the third quarter of this year. Let me give you an advanced sight of what happened in November. Forget talk of rapid growth or soft landings, the US economy shrank at an annualised rate of around 30 per cent in that month alone. It is so large, President Joe Biden must be toast and it probably spells the end of the American dream.

Don’t worry. I have not lost my marbles. The calculation above is true, but it is not fair. I have taken the US economic performance in November — assumed to have not done much — and calculated that in euros or renminbi after converting US GDP using market exchange rates. Then I annualised the result. The thing that drove the result was the near 3 per cent fall in the US dollar’s value during the month.

You would be right to think this is an absurd way to compare economies, but it is deeply fashionable among people who should know better. Take Mark Carney, former governor of the Bank of England, who said that before the Brexit referendum, the UK economy was 90 per cent the size of the German economy but it had declined to 70 per cent by late 2022. That change was caused by the relative decline in sterling.

Remember European angst spread by the European Council on Foreign Relations that the EU had a bigger economy than the US in 2008 and now the US was a third larger? That was simply a rise in the US dollar from a low base.

The list goes on. On these silly market exchange rate comparisons, many news organisations have reported that Japan will lose its spot as the world’s third-largest economy to Germany this year. And, apparently, the US is still the world’s largest economy with China’s economy failing to catch up.

A basic requirement for international comparisons is that domestic data and international data give similar results. This is why the economics profession invented purchasing power parity exchange rates, allowing (imperfect) comparisons to be made based on the goods and services that money can buy. This matters for economic size and even military power. Remember, China funds the People’s Liberation Army using renminbi. It does not source from the US.

Measured at PPP, the latest IMF data shows China’s GDP exceeded that in the US around the time Donald Trump was “making America great again”. It is now 22 per cent larger. The figures make sense when you look at corroborating evidence. China’s electricity generation, for example, overtook that in the US in 2010. And during the 2016-22 period when China’s economy was supposedly making no progress compared with the US, its generation grew 45 per cent, while it was broadly flat in America.

It comforts both the US and China not to acknowledge the changing shift in global economic power. Coming from the UK, which lost its top economic dog status in the late 19th century but still has some delusions of grandeur, I can understand American denialism. For China, it is also easier to avoid responsibilities for climate change, debt relief and other global goods if it can still maintain its minnow status. In Europe, it is convenient for those wanting economic reforms to highlight a sense of falling behind because that can make change appear more urgent.

But ultimately, bad comparisons foster bad decisions. It would be easy for the EU economy once again to become the world’s largest at market exchange rates. All the European Central Bank would need to do is raise interest rates enough to push the euro up to the sufficient threshold. That might make Europe temporarily feel better, until it recognised it was suffering the mother of all recessions.

House of Saud no “reputational damage”

By M. K. Bhadrakumar

The concept reeks of neo-colonial mentality. Saudi Arabia’s tryst with reputational damage has been of a different kind. The Kingdom has had spectacular success in overcoming the reputational damage related to the killing of the ex-CIA asset Jamal Khashoggi. It makes a worthy case study for India, which also is haunted by the spectre of reputational damage for allegedly committing trans-border crimes.

From an Indian perspective, there are seven “takeaways” from the Saudi experience. First, Saudi Arabia stood its ground; second, it sought no help from third parties to reach out to the power brokers in DC; third, it seized the initiative to set in motion an investigative mechanism of its own which came up with cognitive reasoning in a very short period of time; four, it followed up by sentencing the Saudi perpetrators of Khashoggi’s murder to imprisonment; five, it didn’t allow the “reputational damage” to impede normal life; six, it turned a new page so that “a new normal” became possible, which is resilient and geared for the long haul that is strengthening the Kingdom’s strategic autonomy; and, seven, in the final analysis, the “decoupling” from the US helped the Saudis to shake off the reputational damage.

Needless to say, the last point is the crux of the matter. Saudi Arabia’s assertion of strategic autonomy has taken myriad forms that caught the Biden Administration by surprise. This was not how Saudi Arabia was expected to behave under pressure with its ponderous decision-making process, the statecraft moving at a glacial pace, its comprador class among the elites only too eager to capitulate and the ruling elite’s unipolar predicament and so on.

But the “new normal” also dictated that Saudi Arabia did not get into an acrimonious brawl with the Biden Administration but instead subjected the latter to benign neglect of a kind that was most hurtful for the US’ interests and regional influence and bruised its vanities of being the only game in town in the Middle East.

In reality, Saudis had no alternative, given the profoundly troubling geopolitical reality that Khashoggi was being groomed by the Deep State in the US for a higher political destiny than that of a mere dissident — and that was something Riyadh couldn’t have tolerated, as the stability of the regime was being threatened from America, which was ironically the Kingdom’s provider of security and a strategic ally of several decades.

It takes years or even a decade to lick into shape a mole so that it can perform as a strategic asset like Khashoggi for the US intelligence, and the fury over his untimely murder surged in media attacks on the Saudi regime — targeting Crown Prince Mohammed bin Salman.

However, as months passed, it became more and more difficult to demonise the Crown Prince under whose watchful eyes, the Kingdom embarked on a historic path of reform. Three major achievements through the past 5-year period can be seen as game changers. First, Vision 2030, the transformative and ambitious blueprint to unlock the potential of the people and create a diversified, innovative, and world-leading nation. The reform programme has already begun to show impressive results.

Two, OPEC+ which was the brainchild of Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, has liberated the world oil market from the US’ clutches through the past 5-year period and in turn put the two energy superpowers on the driving seat. The transition is hugely consequential in geopolitical terms. Incredibly enough, the new matrix fine-tuning the global market is taking place independent of American leverage. OPEC+ is working effectively, overcoming all external attempts to undermine it.

Three, Saudi Arabia’s induction as a full member of the BRICS — again, with Russian backing — is expected to carry forward the new impulses of the Kingdom’s independent foreign policy, which in turn is expected to galvanise the creation of a new international trade and financial architecture.

Although a sub-plot in this context becomes the normalisation with Iran, which at one stroke created a paradigm shift in the geopolitics of the Middle East region with the regional states steadily doing away with American midwifery in settling their intra-regional issues. A natural consequence of it has been the sharp decline in the US’ regional influence which has become evident during the current Israel-Palestine conflict.

All in all, the Saudi compass is laying the foundations for an emerging regional power that is destined to contribute to the international system and the world order. The US has understood that it lost the plot and is moving with alacrity to mend fences with Saudi Arabia. Biden’s visit to Saudi Arabia in June last year came tantalisingly close to an act of atonement. That was only to be expected.

A few examples from the last month alone testify to the dynamism of Saudi diplomacy and the total collapse of the US’ strategy to “isolate” the Kingdom — visit by Luiz Inacio Lula da Silva, president of Brazil (a BRICS member state, which is due to join OPEC+ in January); winning the bid in a landslide in secret ballots to host the World Expo 2030 (Saudi Arabia won 119 of the 165 votes, easily defeating South Korea and Italy thanks to the huge backing by the Global South); the $7 bn local currency swap agreement with China’s Central Bank(latest sign of strengthening relations with China and a step toward delinking from the petrodollar); leading by example the OPEC+ decision on voluntary cuts of oil production “to ensure a stable and balanced oil market” (revealing at the grouping’s virtual meeting on November 30 that it would be continuing its 1 million barrels per day reduction, ie., roughly 45 percent of total production cut of 2.2 million bpd envisaged); and, of course, placing itself at the front and centre of high-stakes public diplomacy over the Gaza war, with China again as its preferred partner (while a Saudi-Israeli normalisation, which might have been a major foreign policy win for the Biden Administration, has become politically radioactive for Riyadh.)

The moral of the story — especially for countries like India — is that firmness tempered with tact and patience pays. The Saudi secret lies in avoiding nasty confrontation but instead quietly, systematically shaking off the critical dependence on the US by diversifying the Kingdom’s external relations.

The mother of all ironies in all this is that the US not only assassinated a senior Iranian general in a third country and the then president in the White House even bragged about it. Equally, the US took revenge on Osama bin Laden and dumped his corpse in the high seas.

It has kidnapped dozens of Russian nationals travelling abroad and locked them up in prisons in an attempt to persuade them to work for the US intelligence. Now, in June, with a similar objective, the US intelligence kidnapped an Indian transiting through Prague. Evidently, the US intelligence was stalking him on Indian soil.

It is a frightening thought that the Five Eyes may have penetrated the core of the Indian security establishment. Yet, state secretary Blinken vows not to let go India, the US’ indispensable partner for the undoing of China. It almost seems as if he knows something about Indian statecraft that we do not. Indian diplomacy has truly tied itself in knots.

Dying Words of Henry Kissinger

In one of the final interviews before he died, the famous statesman said the two-state solution was no longer viable and that the U.S. must reconcile with China.

I think if they wanted to do it they could do it. Hezbollah has tens of thousands of missiles on the northern border of Israel. That adds up to a dangerous combination.

Is there the possibility for Russia to show greater involvement in the Middle East, partly as an attempt to divert attention from their problems in Ukraine?

Before the Ukrainian war, Russia was generally in favor of Israel in the confrontation with Arabs. If Russia now would intervene, it has two options: to engage on the side of the Arabs or to appear as a mediator in the crisis — which would be strange in light of the Ukrainian war.

Does the current crisis create the opportunity for the Chinese to attack Taiwan? Things have been awfully quiet there in the last weeks.

In my opinion, China is not ready for such a conflict. It’s a theoretical opportunity. China, in my view, has the capacity to establish a relationship with the United States. But we have to pay attention that on our side the attitude that has developed may not make it impossible.

So then what should the U.S. stance be towards China?

The U.S. should reconcile with China.

One of the great achievements of the Nixon-Kissinger years was to squeeze the Soviet Union out of the Middle East. You are more celebrated for the rapprochement with China than you are for squeezing out the Soviets from the Middle East. Do we need to squeeze Russia and or China out of the Middle East today? Is it a good idea or can they play a constructive role somehow, including in the current crisis?

The ability to squeeze these powers out of the Middle East, or to encourage them to play a positive role depends fundamentally on China-American relationships. And those are not improving. Right now, the greatest difficulty with respect to Russia is that we have not heard what their thinking is, because there is no dialogue with Russia at all.

The decades between 1990 and 2020 were geopolitically relatively calm. Why didn’t we use this time of opening and friendship to create a more peaceful world?

Who should make the world peaceful? In the Middle East: If Egypt, Saudi Arabia and the other Arab states were willing to put pressure on the radicals and impose a peaceful solution that would be the best outcome. But I fear that the events of the past weeks will force them into a more radical stance and that would lead to a situation in which the United States will have to balance the equation.

There is a crisis of leadership in our world, a crisis of leadership in the United States, in Israel, in Russia. When you think about the leaders of the future, what are some of the qualities they should possess?

The leaders of the world have failed. They have failed to master the overriding concepts, the fundamentals and the day-to-day tactics. Societies have to find a way to solve their problems without continuously having a series of conflicts. That is the challenge. We have been facing a period of constant conflict resulting in a major wars destroying much of the civilization that has been built.

Dr. Kissinger, you are 100 years young. How do you stay so sharp? What is your secret?

I chose my parents well. I have inherited good genes as a result.

What are your plans?

I have no future plan except to be engaged in matters that are important and to which I can make a small contribution.

CORRECTION: This story has been updated to reflect the fact that the questions came from multiple questioners.

Long Mekong

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