Is China the New America?

The Great Depression made the United States the world's unquestioned financial leader. The current crisis can do the same for China.

In the Great Depression, as in the current economic crisis, the downturn was particularly severe because of a lack of leadership in the international order. The dominant financial power of the 19th century, Britain, was financially exhausted by the First World War. The new major creditor, the United States, had emerged as a strong economic player, but did not yet have leadership committed to the maintenance of an open international economic order. The simple diagnosis was that Britain was unable to lead, and the United States unwilling.

If the scenario sounds familiar, it should. The story from the Great Depression has an uncanny echo in current debates about international economic leadership, with the United States playing the role of Britain -- the exhausted debtor economy -- and China taking the place of the United States as the world's largest creditor. But if China is the America of this century, can it do a better job than the United States did in the 1930s? The way in which the emerging superpower takes to this role will determine in large part how the world will emerge from the downturn and the shape of the new global economic order that will follow.

Charles Kindleberger, the late economist, argued that the United States should have acted as a lender of last resort in the early 1930s, continuing to keep its financial markets open to investment and its market open to foreign goods, rather than heading down the path of protectionism. It should also have stimulated the world economy through countercyclical fiscal policy.

But at the time of the Great Depression, there were all kinds of convincing reasons why Americans did not want to take on the burden of a worldwide rescue. Sending more money to Europe was seen as pouring money down the drain, and after all, Europeans had fought the world war that had been the root cause of the financial mess. Economically, helping Europe would have made a great deal of sense from a long-term perspective, but politically it was a non-starter with no short-term payoff.

In the middle of the current financial crisis, a deep-pocketed China faces the same dilemma: swallow its pique and help save the same countries that got us into this situation, or look to its own short-term interests first. Today, there are increasing demands that China contribute more to internationally coordinated rescue packages through a reformed International Monetary Fund (IMF). China is also one of the few economies still growing in 2009, though most economists have reduced their estimates of growth rates. Finally, China and the United States are the only countries that are large enough, and have sufficiently well-ordered government finances, to launch major efforts at fiscal stimulation.

Beijing's leaders might feel like they have already taken their best shot. The initial stages of the credit crunch in 2007 were managed so apparently painlessly because sovereign wealth funds (SWFs) from the Middle East, but above all from China, were willing to step in and recapitalize the debt of U.S. and European institutions. Between November 2007 and March 2008, the SWFs provided $41 billion of the $105 billion injected into major financial institutions. Had this process continued, the events of 2008 would have included problems with U.S. real estate and a severe stock market decline, but no meltdown of financial institutions.

But after March 2008, the availability of funds to prop up the global financial system shriveled up. The pivotal moment in today's events came when the state-owned China Investment Corp. (CIC) was unwilling to go further in its exploration of buying Lehman Brothers. CIC's turning back will be held up in the future as a moment when history could have shifted in a different direction.

Today there may be plenty of reasons why the Chinese will be tempted to pull back from their engagement with the world economy, and the external political logic sounds very much like the U.S. case of 1931. Some of the economic arguments reverberating around Beijing are very reasonable: There is a great deal of uncertainty, and the SWFs have lost a lot of money already and might lose more. China's investments in U.S. securities in 2006 proved to be a huge costly mistake. Clearly the CIC would have initially lost further billions had it tried to rescue Lehman. Other lines of thought are more emotional and political: Might not 2008 be a righteous payback for the U.S. bungling of the 1997-1998 Asian crisis? Trying times tend to heighten paranoia.

There are also many domestic reasons why China might be wary about opening up to the global economy. The Chinese banking system is still quite opaque and might still have to wrestle with the legacy of problems of the 1990s, in particular, bad loans to big state-owned corporations that were the consequence of a political logic of directed credit. China is investing large amounts in education, but it may be more difficult to build a creative and innovative society that replicates the dynamism of the United States in the second half of the 20th century (which was fed in large part by openness, above all openness to immigration). China also faces a problem of aging and even demographic decline after the 2040s as a legacy of its one-child policy, which has also created a potentially destabilizing surplus of young males. With all these threats to stability, an authoritarian though reformist regime may find it harder to respond flexibly to popular demands and may be prone to try to mobilize a reactive nationalism to fend off challenges to its authority.

The pressure to engage in large-scale fiscal stimulation is also likely to alter the balance of China's economic development. The Chinese model of capitalism is very different than that of the United States, and even before the economic crisis, there were two alternative models. The first was the rural, family, and small-business-based boom of the 1980s. But by the 1990s, some of the private-sector growth was being choked off by a rival vision of economic growth built around prestige projects and the large, state-owned enterprise sector. Consider Shanghai, which impressed many commentators as the most modern city in the world: Analysts of the Chinese economy have suggested it is one of the least entrepreneurial cities in China. Yasheng Huang, in his book Capitalism with Chinese Characteristics, described it as a classic industrial-policy state. The new stimulus package is likely to push the balance of Chinese development more decisively in this latter direction, toward state capitalism.

China thus has plenty of reasons why it might want to close itself off to the forces of globalization, as the United States did in the interwar years. This thinking will be reinforced by the structure and character of the international order. Again, an interwar analogy is appropriate. The United States felt uncomfortable with the international institutions of the interwar period, in part because they were aligned with the interests of the old hegemonic power, Britain. The League of Nations looked as if it was an instrument of British power. Similarly, in the modern context China worries about whether it is adequately represented in U.S.-dominated international institutions. Its influence in the IMF and World Trade Organization clearly does not correspond to its real position in the world economy and to the role that China could play in economic stabilization. Reforming international institutions is thus a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and disruptive, or whether a more gradual and peaceful path of adjustment can be achieved.

Just before the Asia-Europe meeting last October, President Hu Jintao stated that China would behave with a sense of responsibility. It remains to be seen what stake China really has in the survival of the global economy. As in 1931, the political arguments are all against a rescue. Only the farsighted will see that the economic case for such an operation is compelling. Much depends on the extent of China's voice in an altered international institutional architecture.

But that voice will make demands that are increasingly difficult for the old world to accommodate, including demands for a guarantee of China's U.S. asset holdings and suggestions for an alteration of the world's reserve management. In proposing a global reserve currency to replace the dollar, the Chinese central bank president recently followed in the footsteps of Charles de Gaulle in the 1960s. But unlike France, China is in a much stronger position to assert its preferences for international monetary reordering.

In other words, the world may be asked to transition from an American to a Chinese model of capitalism, and as in the 1930s, that won't be an easy switch for any of us.



City Hall Fights Back

Mayor José Reyes Ferriz is putting his life on the line to save Ciudad Juárez from drug traffickers.

Ciudad Jurez, Mexico, and El Paso, Texas, sit across a fence from one another, a guarded border crossing allowing movement back and forth. Just a few years ago, Americans looking to spend time in sin city crossed from El Paso to Jurez by the thousands every day. Today, traffic has slowed to a crawl. Jurez's streets lie empty of tourists, vendors, and visitors.

Every day, a man named Jos Reyes Ferriz crosses the border. From his office in the Mexican city, in fact, he can see back to El Paso, his home in exile. One cannot imagine this can be an ordinary border, he says. Not with the largest drug-consuming market just across.

Jurez is embroiled in a war -- 230 people died in the streets in February alone -- and Reyes commands the front line. Rival drug cartels are battling for territorial hegemony in the city, while Mexican police officers and troops try to stop the drug trafficking and tamp down the cartels. Reyes, as Jurez's mayor, has escalated the conflict in an attempt to rout the narcotraficantes and win his city back.

I arrive at town hall to meet Reyes, passing through metal detectors to enter the building; a heavily armed four-person security team guards the mayor's door. As the man entrusted with protecting the town, he's at the very top of the narcogangs' hit list.

I expect to meet a rough-hewn warrior, brave or careless enough to declare war on the cartels and transform Jurez into a slaughterhouse. Instead, I meet a university professor with a public law degree. Reyes, 47, exudes an urbane and learned sensibility. He grew up in a wealthy family, studied at the University of Notre Dame's London campus, and traveled through Europe. At 30, he moved back to Mexico to work at a university, but became fascinated by politics. He decided to follow in the footsteps of his father, Jurez's mayor in the 1970s.

From day one, Reyes recognized corruption and the narcotraficantes as his top challenge. It was obvious that the main problem was corruption within the police ranks reaching unacceptable levels, he says. The armed forces did not trust us, kept checking policemen, and throwing them in jail when they found drugs in patrol cars.

Last summer, Reyes started Operacin Limpieza (Operation Cleanup) to flush compromised officers out of the system. The crux of the program was a reliability screening test administered by federal agents from Mexico City using interrogations and lie detector tests. Out of 1,600 police officers, 220 quit when asked to be screened, 150 did not bring the appropriate documentation, and 334 failed the test. It was an earthquake, Reyes says. The narcotraficantes had nearly half of the city's police force on their payroll or under their influence.

So, he and his newly appointed police chief -- Roberto Ordua Cruz, a former Army major with an impeccable record -- started a new enlistment program in June 2008. Now, the mayor says, our police today are trusted by the local population. It's not totally clean, of course. There are still people that should not be there. Way less, though.

He describes cleaning out the police force as if he were failing 10 students at an exam session. Yet the anticorruption program was a near-suicidal decision for Reyes.

He started rooting out corruption without military backup; he felt abandoned he says. This is a city where the local government has way less money than the narcos. And when 'El Chapo' Guzmn from Sinaloa -- billionaire Joaqun Guzmn Loera, the most infamous drug lord in Mexico -- attacked the Jurez cartel, the city was overwhelmed. We could do nothing about it.

The escalating violence between the two cartels had deeply affected the city, with the mayor and his allies in the drug lords' cross hairs. First came the threats against the chief of police, Roberto Ordua Cruz. A handwritten sign appeared on a wall downtown: If you do not resign we will kill a cop every 48 hours. Ordua did not resign, and the narcotraficantes kept their promise. Within a day, they killed his second in command and three other policemen. Next, two more cops died in a hailstorm of bullets, outside their homes.

I thought, the mayor says, it was pure terrorism. But nevertheless, I asked Ordua Cruz not to give up.

The police chief felt wracked with guilt over the mortal threat against his officers. Word reached the mayor's office that the police were ready to mutiny if Ordua did not resign. I didn't want to give up, Reyes says. But Ordua Cruz told me, 'If the policemen are no longer with us, the narcotraficantes will win. But if we strategically withdraw, without leaving the terrain, we will win in the end, ' speaking like the Army major he once was. I thought about it. There was just one way out: to accept his resignation and ask the central government to directly appoint the new police chief without territorial connections.

So, Reyes accepted Ordua's resignation. Like the mayor, the former police chief moved across the border, to El Paso, to protect his family. And the police force kept working, despite increasing violence. Police officers continued to be gunned down in the streets. Three heads appeared along a downtown street. Twelve corpses showed up on the grass in front of a school in east Jurez. The cartels killed and crucified a young man, putting a pig mask over his face.

And the danger to the mayor's own life has only increased. Recently, the cartels placed a sign, written in the same style as the one threatening the police chief, in downtown Jurez. It told Jos Reyes Ferriz to give up his initiatives, or else he and his family would be beheaded -- even across the border.

The mayor held strong. He increased his security detail but continued to open new roads, attend funerals, and make plans for the city's development. It's his way of telling the drug traffickers they have not won.

Of course I feel the weight of the limitations imposed on my family, he admits; drug cartels infamously have executed the families of those who dare to challenge them. But he remains upbeat. Most of all, I dream of walking freely with [my family] on the streets of my town.

I ask him how his family feels about being targets of Mexico's most murderous gang. He smiles and says: I fly small planes as a hobby. When the situation was different, I usually left home on a plane with my family for the weekend. One Sunday, we were returning home. We hit a storm, and, to make matters worse, we were also preparing for landing. I was really scared. I was totally focused on my maneuvers, and I felt guilty and responsible for bringing my family in such a dangerous situation.

I was tormented; I couldn't even speak. I was able to turn in the cockpit and look at them only when I was rolling on the tarmac. They were all sleeping! He smiles at me again. They always trust me.

Ronaldo Schemidt/AFP/Getty Images