| 13 April 2004 | Tuesday | 22 Safar 1425 |
Now an Iraqi intifada
The mess is getting messier
For the first time in human history a country that will remain "developing" for many decades to come has become the world's premier economy. This was the theme of the article in this space last week. What will be the impact of this development on the rest of the world? In particular, how will the developing world be affected by the rise of China's economic power?
These important questions don't have easy answers since what is happening in China and what China is doing to the world outside its borders doesn't have many historical parallels. This is why the situation we are dealing with is such a puzzle - in fact not one puzzle but several.
To begin with, this is not the first time in history that a country, in terms of the size of its economy, has caught up with those that were in the lead. The United States overtook Britain to become the world's largest economy in the closing years of the 19th century.
Although it has remained in that position since then, in the 1960s Japan began to close the gap with America and within a decade became the world's second largest economy.
In spite of very sluggish growth for more than a decade, Japan has remained in that position. A couple of decades after Japan did its catching up, a number of small economies of East Asia acquired all the attributes of developed economies. This was another "catching-up" period in the global economic system and it too had considerable consequences for the global economy.
In the case of China, however, the economy that is engaged in catching up will not be developed or fully industrialized for decades to come. It will remain developing for many years.
I use the word "developing" in the sense of how far behind a country's income per head is compared to those in the developed parts of the world. As I indicated last week, China in 2003 crossed a threshold of sorts.
This happened some time in the second half of 2003, when the income per head of the population, as estimated in yuans, the Chinese currency, and converted into US dollars at the official rate of exchange, crossed the $1,000 dollar mark.
Not only is China's impact on the world puzzling, there are also a number of questions pertaining to the economic and political role of the state. I doubt whether the Chinese themselves know how the state will - or should - evolve over time.
The ultimate role of the Chinese state will be of consequence not only for the country's large citizenry. It will also affect how China relates to the rest of the world.
In this context, the state's role in four areas should be of considerable interest for the world outside China: how it manages external finance including the exchange rate, how it improves its economic statistical base, how it overcomes the physical constraints the economy is now running out and how it reforms state-owned enterprises.
Let us begin with the exchange rate issue. That the exchange rate has remained unchanged at 8.62 yuan to a dollar for more than a decade has become a contentious issue between Washington and Beijing.
The Americans maintain that China, by keeping the value of its currency depressed with respect to the dollar, has managed to penetrate their markets with relatively cheap manufactures.
They want Beijing to float the currency. If that is not possible since it would result in a serious shock to some parts of the Chinese system, the Americans want the authorities to at least devalue the yuan.
If the Chinese allowed their currency to float as is done by several developing countries - Argentina, Brazil, India and Pakistan, to give a few examples - there is little doubt that the yuan will appreciate considerably.
Some financial experts believe that the country's currency is undervalued by anywhere between 20 to 35 per cent. Letting it find its own value in the market will bring it to between 6.5 to 7.0 yuan to a dollar.
At that rate of exchange, China's GDP of 12.3 trillion yuan would not measure at $1.43 trillion but would be anywhere between $1.75 trillion and $2.00 trillion. With these reworked numbers, per capita income would not be just $1,000 but between $1300 and $1500.
These are the tricks evaluations of economies in terms of fixed exchange rates can play. But accurately estimating China's per capita income is not the reason for the western interest in the rate of exchange.
The main reason is that an upward valuation of the Chinese currency will make the country's products more expensive in the markets overseas and, possibly, save manufacturing jobs in America and several European countries.
Also, knowing with greater accuracy Chinese per capita income and hence the purchasing power of the country's citizens would be helpful to those who are interested in selling goods to China.
The exchange rate issue reflects on another problem with the Chinese economy: its statistical base. What we know is that the Chinese economy is big and has been growing rapidly at rates much faster than the rates of GDP increase of all other major economies in the world.
However, given the way various estimates are made, it is not easy to be precise about a number of important measures: exactly how large is the economy; what is the average income of a Chinese citizen; what is the distribution of the GDP among different sectors of the economy; how fast is the rate of growth from quarter to quarter of the economy and its various components.
All these numbers are difficult to pin down. There is a widespread belief among China scholars that the officials in the country responsible for assembling economic and financial data tend to smooth out economic fluctuations.
As we noted in the earlier article, the official figures put the GDP growth in the fourth quarter of 2003 at 9.1 per cent. However, some experts believe that the rate may have been much higher than that - perhaps as high as 13 per cent.
They have arrived at the higher number by looking at the more reliable data for the consumption of such industrial inputs as steel, cement, coal and electric power. But the Chinese don't just offer a smaller number for the rate of economic growth in order not to give the impression that the economy is overheating. They, the experts believe, do the same when the rate of growth is relatively low.
The official data for the summer months of 2003 is said to be around eight per cent on an annualized rate. Western statisticians believe that it was perhaps 25 per cent lower because of the Sars crisis and its impact on the economy.
Some of these statistical problems are not unique to China; the country shares many of them with other developing countries. What is important is that in talking about the impact of the Chinese economy on other parts of the world, we have to recognize that all analysis must be accompanied with a strong caveat.
As the future is hard to predict; it is even more difficult to be accurate when the statistics on which the projection must be based are subject to considerable errors of estimation.
Another puzzle about the future of the Chinese economy is how the state will perform its role. There are several areas in which the state's role is acquiring great importance. Among them is managing the severe transport bottlenecks that have emerged as a result of the rapid expansion in the economy.
Why should the world be interested in how the Chinese state deals with the logjam for transportation? It is not easily apparent why this should be a major concern outside China unless we look at the peculiarities of the Chinese system of transport.
In fact, a rise in freight costs as a result of congestion should increase the price of the goods from China in external markets and, therefore, reduce the need for revaluing the currency.
But that is not happening for the reason that China effectively has two transport systems, one for exports and the other for imports. It is the only major economy in the world that has organized itself in this way.
Given China's focus on exports, it has invested heavily in the system that moves goods out of the country and not into the system used for bringing commodities into the country.
Exports move mostly in steel containers on trucks travelling on highways in which the Chinese authorities have invested large amounts of resources. Trucks offload containers at special ports that have received considerable investment in recent years, including from foreign firms. But for imported commodities, the story is different.
They pass through old ports and are loaded on railway wagons that travel on a slow and antiquated system that has not received the same sort of investment lavished on highways.
An important consequence of this asymmetrical development is that it has begun to affect world commodity prices in a way that provides protection to China's agriculture.
For instance, shipping rates for grain moving from the Gulf Coast of the United States to China have climbed to $70 a ton from only $18 two years ago. This way nobody outside China really benefits from the significant increases in the country's demand for farm products.
Although China has abandoned socialism as an economic ideology, it has still to make full transition to a market economy. A significant part of the economy is still managed by the state.
This is in part the consequence of state-owned enterprises (SOEs), providing all kinds of social cover to their employees that the government is unable to do. The Chinese are wary that by rapidly privatizing the SOEs, they might have a social problem on their hands.
One area where the Chinese will have to take some quick decisions is in finance where the large banks are still under state control. As has been the case with most state-owned banks, the Chinese institutions have also built large portfolios of non-performing loans. Before 2005, the government will have to reform this part of the economy since at that time, under WTO rules, this sector will be open for foreign entry.
The government has begun to move. A few months ago, it injected $45 billion into the Bank of China and the China Construction Bank to help prepare the ground for their listing in Hong Kong and possibly New York.
The authorities have now laid down targets for the banks that must be reached - 11 per cent return on equity by 2005, 13 per cent by 2007 and return on assets close to the average of the top 100 banks in the world.
The precise effect of the Chinese economy on the rest of the world can only be gauged if we have a good measure of its size, its sector distribution, its per capita income and how the state is going to solve some of the structural problems it must address.
Now an Iraqi intifada
April 9, 2003 was the day Baghdad fell to US forces. One year later, it is rising up against them. Donald Rumsfeld claims that the resistance is just a few "thugs, gangs and terrorists". This is dangerous wishful thinking. The war against the occupation is now being fought out in the open, by regular people defending their homes and neighbourhoods - an Iraqi intifada.
"They stole our playground," an eight-year-old boy in Sadr City told me this week, pointing at six tanks parked in a soccer field, next to a rusty jungle gym. The field is a precious bit of green in an area of Baghdad that is otherwise a swamp of raw sewage and uncollected rubbish.
Sadr City has seen little of Iraq's multibillion-dollar "reconstruction", which is partly why Moqtada al-Sadr and his Mahdi army have so much support here. Before the US occupation chief, Paul Bremer, provoked Sadr into an armed conflict by shutting down his newspaper and arresting and killing his deputies, the Mahdi army was not fighting coalition forces, it was doing their job for them.
After all, in the year it has controlled Baghdad, the Coalition Provisional Authority still hasn't managed to get the traffic lights working or to provide the most basic security for civilians.
So in Sadr City, Sadr's so-called "outlaw militia" can be seen engaged in such subversive activities as directing traffic and guarding factories from looters. In a way, the Mahdi army is as much Bremer's creation as it Sadr's: it was Bremer who created Iraq's security vacuum - Sadr simply filled it.
But as the June 30 "hand-over" to Iraqi control approaches, Bremer now sees Sadr and the Mahdi as a threat that must be taken out - along with the communities that have grown to depend on them. Which is why stolen playgrounds were only the start of what I saw in Sadr City this week.
In al-Thawra hospital, I met Raad Daier, a 36-year-old ambulance driver with a bullet in his lower abdomen, one of 12 shots fired at his ambulance from a US Humvee. According to hospital officials, at the time of the attack, he was carrying six people injured by US forces, including a pregnant woman who had been shot in the stomach and lost her child.
I saw charred cars that dozens of eye-witnesses said had been hit by US missiles, and local hospitals confirmed that their drivers had been burned alive. I also visited Block 37 of Sadr City's Chuadir district, a row of houses where every door was riddled with holes. Residents said US tanks rolled down their street firing into their homes. Five people were killed, including Murtada Muhammad, aged four.
And I saw something that I feared more than any of this: a copy of the Quran with a bullet hole through it. It was lying in the ruins of what was Sadr's headquarters in Sadr City. On April 8, according to witnesses, two US tanks broke down the walls of the centre while two guided missiles pierced its roof, leaving giant craters in the floor and missile debris behind.
The worst damage, however, was done by hand. The clerics at the Sadr office say that US soldiers entered the building and crudely shredded photographs of Grand Ayatollah Ali al-Sistani, the top Shia cleric in Iraq.
When I arrived at the destroyed centre, the floor was covered in torn religious texts, including several copies of the Quran that had been ripped and shot through with bullets. And it did not escape the notice of the Shias here that hours earlier, US soldiers had bombed a Sunni mosque in Falluja.
For months the White House has been making ominous predictions of a civil war breaking out between the majority Shias, who believe it's their turn to rule Iraq, and the minority Sunnis, who want to hold on to the privileges they amassed under Saddam Hussein's regime. But this week the opposite appears to have taken place.
Both Sunni and Shia have seen their neighbourhoods attacked and their religious sites desecrated. Up against a shared enemy, they are beginning to bury ancient rivalries and join forces against the occupation.
Instead of a civil war, they are on the verge of building a common front. You could see it at the mosques in Sadr City on Thursday: thousands of Shias lined up to donate blood, destined for Sunnis hurt in the attacks in Falluja. "We should thank Paul Bremer," Salih Ali told me. "He has finally united Iraq. Against him." - Dawn/ Guardian Service
The mess is getting messier
"Give me liberty or give me death." Patrick Henry gave himself an either-or option. The Iraqis are getting both. As the first anniversary of the capture of Saddam Hussain was marked there was a deafening explosion in Baghdad, a stone's throw away from where Saddam Hussain's statue once stood and which was toppled amidst scenes of celebrations and pictures of this were seen all over the world and like a commercial, repeated ad nauseum.
It was a moment rich in symbolism. "We got him," Paul Bremer, the pro-consul in Iraq had announced much in the way the capture of Al Capone would have been announced.
Alas, as with the capture of Al Capone, the streets of Chicago had not been made safer, gangland killing continued and the boot-legging industry continued to flourish and organised crime spread its tentacles and became the largest single industry in the United States, only the manufacturers of weapons and ancillary military hardware was able to match it in turnover.
The upsurge of violence in Iraq last week is being dismissed as the last gasp of the "thugs" and the "die-hards" and the catch-all "remnants of the Saddam regime." And at the same time, we are being assured that "a new dawn is approaching." Hundreds of Iraqis were killed last week in savage reprisals and the Marines were back on the streets, not knocking on doors but knocking down doors.
Winning hearts had been put on a back-burner. The Mission Accomplished had got unaccomplished or unravelled. It is still not accepted that there is an insurgency, as if, there is in the word some hidden and sinister message.
There was in the existence of weapons of mass destruction a massive intelligence failure. That's the best face that is being put on it though there is much dissembling and semantic jugglery. Has there been another intelligence failure about the nature and extent of the resistance?
The Vietcong too were seen as thugs, peasants in pyjamas, as if, this conferred a lowly status and the GIs called them Charlie and "zapping Charlie" was a kind of sport. They were also called "gooks."
Until the Tet Offensive which became a rude awakening though the generals in their safe hide-outs in Saigon kept sending their optimistic reports to Washington DC. The war was being won until it was lost.
No one remembers the Korean War. That war started as a civil war when the North Korean armies crossed the 38th Parallel. Harry Truman, no doubt seeing the hidden hand of the People's Republic of China, jumped in head first and was able to get the United Nation's backing. The Soviet Union on some pretext was boycotting the United States and Taiwan represented China as one of the permanent members on the Security Council.
That war is now remembered in the television comedy MASH. Which I make a point of seeing, clownish surgeons carrying out meat-ball surgery and with hearts of gold. It makes war seem like fun as the wounded are stitched up. That war too went badly and there are still two Koreas, one a member in good standing of the Axis of Evil.
The late president Eisenhower had warned that America should not get involved in land wars in Asia. Instead, "let Asians fight Asians." He had also warned against the military-industry complex, the alliance between the hard-tops and big business, a sharing out of labour, one destroys and the other re-builds and both make a profit.
I heard General Wesley Clark being interviewed by Fox News on the latest violence in Iraq. He was not able to paint a rosy picture despite being on Fox News but he did make the point, in a circuitous way, that with friends like Ahmed Chalabi who needed enemies? A lot of the flawed intelligence was provided by Iraqi exiles and one is surprised that so much store was put on their input.
They are the ones who convinced the Americans and the British that the coalition forces would be received with open arms and with garlands. Though I would imagine that they did not need much convincing.
One is more inclined to believe the counter-terrorist expert Richard Clark that after 9/11, the priority was going after Saddam Hussain and not terrorism. Condoleezza Rice did not shed much light though she airily dismissed it. At Camp David, Paul Wolfowitz did recommend it but George Bush made the war on terrorism the priority. But at the same meeting a contingency plan against Iraq was drawn up.
One would have thought that after 9/11 all minds would have been focused on terrorism. There was no link between Saddam Hussain and Al Qaeda. That much at least the intelligence agencies should have established.
Was it a case of: "My mind is made up. Don't confuse me with the facts?" Condoleezza Rice didn't have anything to say about Iraq. She was testifying about events and activity before 9/11. She wasn't going to spoil her boss's case.
The Commission is looking into the what and how about terrorism. Not about the why. To this day we haven't been able to distinguish between the terrorist and the freedom fighter. More and more we are lumping them together, putting back the chances of fighting terrorism.
On another 9/11 many years ago, the democratically elected government of Chile was violently overthrown and Allende was replaced by Pinochet. There is ample evidence to suggest that not many tears were shed for Allende in Washington DC and other strongholds of democracy.
It was Pinochet who was embraced. There is a similarity in the way he conducted business to Saddam Hussain. But as is so typical, while democracy remains the lofty goal, there are many roads that lead to it. It can get confusing.