IN the article last week, I discussed how the United States is responding to the challenge posed by China to a small sector of its economy — the textile sector. Some of the actions America is threatening to take against China serve the narrow interests of small but influential groups. The textile producers of the two Carolinas wield enough political power to force action from Washington that is likely to seriously and adversely impact the delicate balance that was achieved in the global economic system following the end of the Second World War.

The immediate provocation for America was the sharp increase in the import of some garment items from China. That China could inundate the US market with goods it could produce cheaply became possible after the end of the intricate system of quotas that had controlled trade in textiles for decades. The developing world, including China, had waited for decades for this system to end and for free trade in textiles to be restored. Now that that has happened there is the possibility that quotas might reemerge once again in a different guise.

It is not only the US that is bothered by the sharp increase in the penetration of Chinese clothing items. There are reports that the European Union has also begun investigations into the huge influx of cheap Chinese textiles and apparel with the intention of duplicating the American action by imposing quotas of its own. These two economic mega-powers are working to contain China by taking — or threatening — actions outside the framework of the institutional system that was set up some 60 years ago and has evolved over time precisely to deal with such situations.

One of the positive features of the global economic system that began to take shape after the end of the Second World War was the understanding that economic relations among major centres of economic power would be conducted within multilateral economic and trading frameworks. That way large countries would be obliged to subsume the pursuit of their narrow interests to the welfare of the global economic system. It was this understanding that led to the establishment of the Bretton Woods system with the International Monetary Fund and the International Bank for the Reconstruction and Development (today’s World Bank) as the two anchor institutions.

There were two guiding principles behind the establishment of these organizations. One, countries forced to defend themselves against developments over which they had no control could produce contagion and infect other economies. This had happened in the 1930s and had resulted in the Great Depression.

The new system’s architects believed that they had built enough safeguards to prevent the recurrence of such an economic catastrophe. Two, serious efforts had to be made to reconstruct the war-torn economies and help develop those countries that were gaining independence after shedding colonial control. Without these efforts the international economic system would remain unstable. (This was one of the lessons learned from Germany reconstruction after the First World War).

The IMF’s initial mandate was to provide short term capital in order to help countries to adjust if they were buffeted by extraordinary exogenous developments. This could happen, for example, if there was a sudden and adverse change in a given country’s terms of trade or if a major importer ran into some problem and stopped importing from the given country that relied heavily on its market. Developments such as these could cause extreme economic distress and result in the adoption of policies by the affected country that could harm the entire global system.

The IBRD was established to tap international capital markets on behalf of the countries denied access to them on account of their poor credit ratings. The terms on which this institution was able to raise funds were much better than those that were available to post-war Germany, Italy and Japan. For a number of years, the IBRD was actively and successfully involved in the reconstruction of these countries. Later, it turned its attention to the development of countries such as India and Pakistan that had emerged from colonial rule but did not have resources of their own to accelerate the pace of economic development. However, the IBRD soon discovered that these countries had only a limited capability to absorb funds for which they had to pay near-market prices.

This realization led to the establishment of the International Development Association as an IBRD affiliate. The IDA was financed by donations by rich countries and funds were passed on to poor countries for long term and without interest. Initially, the United States was the largest IDA donor. Over time, its share declined as the contributions from such new economic powers as Germany and Japan picked up.

After having been in existence for more than four decades some of the credits advanced by IDA have matured and are being paid back. These “reflows” now account for a major share of IDA’s new credits. The association’s clientele has also changed significantly since its founding in 1961. Whereas India and Pakistan were the largest recipients of IDA credits in the early years, sub-Saharan Africa is now the largest beneficiary.

The international economic system as originally conceived in the shadow of the Second World War was supposed to have a third leg: an institution that would oversee the conduct of world trade. That did not happen since the major economic powers of the late 1940s were not prepared to surrender national sovereignty to an international organization. Instead, they chose to create an organization that provided essentially secretarial services for the conduct of multilateral trade negotiations. A series of these discussions, while lowering tariffs on trade among developed countries, did very little to provide a level playing field for poor countries.

For a long time the developing world was prepared to go along with this arrangement since many of them had erected high walls of protection behind which they developed their own economies. That changed with the emergence of the East Asian “tiger economies” that used exports mostly to the developed world to fuel growth. China is the latest entrant in this league of states but the difference is that while Hong Kong, Singapore, South Korea and Taiwan on account of their relative small size, produced only ripples in the global system, China’s rise has created a virtual tsunami — a tidal wave that has engulfed many parts of the global economic system. How to deal with China’s rise without wrecking the global system is now an important question. How the world’s major economic powers deal with a surging China will define the future of the global economy.

The problems the United States and the European Union are attempting to address are more rooted in their own economic systems than caused by China. The United States under President George W. Bush has been extraordinarily profligate. It has followed a fiscal policy that would have attracted considerable criticism and pressure for change had the country been subjected to the discipline of the IMF. During the first Bush term, the US managed to turn a large fiscal surplus into an equally large deficit. It managed to do this by granting a large tax relief to the rich and by launching two costly wars — one in Afghanistan and the other in Iraq — and by instituting an expensive programme for securing the homeland against terrorism.

An extremely accommodating fiscal policy was pursued at the time that the Federal Reserve Bank, the US central bank, was pumping the economic system with cheap money. Fed determined short-term interest rates reached levels not experienced for many decades. The result of all this was the fuelling of domestic demand that inevitably spilled into imports.

These developments in the United States took place while the global economy was being restructured. China was fast becoming the world’s industrial backyard, producing all kinds of goods in large demand in the United States and Europe. The range of Chinese products was quite extraordinary — from Ipods that downloaded and stored music to men’s underwear. Its domination of the global market was the product of large, well trained and disciplined work force and the decision by thousands of transnational corporations to relocate their production facilities in China.

China’s demand for American products did not increase at the same rate as the American need for its products. A large trade imbalance was the natural consequence and China began to accumulate a mountain of American treasury bonds. The Chinese are prepared to accumulate American bonds for as long as their access to the US market is not constrained.

It is clear that the global economy is out of balance and there is an urgent need to restore it. This could be done by curbing the US demand for imports by restoring fiscal balance. That, in turn, would require raising taxes on wealthy individuals, controlling expenditure on wars in Afghanistan and Iraq, and encouraging the American population to save more. The Europeans, with their economies stuck on a low growth trajectory, need to reform their labour markets, bring under control the burgeoning expenditure on social programmes, and allow greater immigration to compensate for the sharp decline in population growth.

However, the recent threat of action by Washington and Brussels is shifting the burden of adjustment on to Chinese shoulders. It is politically more difficult and relatively more painful to restore fiscal balance in the United States and to adjust social and immigration policies in Europe than to press China to put a limit on its exports and to revalue its currency. Politicians always in search for easy solutions find it attractive to place the blame on another country than to make adjustments at home. This was precisely the approach that was discarded by the founding fathers of the global economic system following the conclusion of the Second World War.

This is not to suggest that China does not need to make adjustments particularly in its rate of exchange and the way it prices its products for export. Cheap Chinese exports are hurting the developing countries’ production system much more than is the case with the industries in rich countries. China’s rise as a global export power has provided more benefits to rich nations by lowering prices and thus increasing the purchasing power and real incomes of the relatively less well-to-do people.

For the developing world, the real pressure has been on the wages of the poor in particular those engaged in industries in which China at the present rate of exchange has a clear comparative advantage. Countries such as Pakistan have had to make painful adjustments to China’s rise. They would be able to compete if the Chinese exchange rate was determined by the market.

That notwithstanding, the adjustments China is being asked to make should be handled within the context of the multilateral financial, development and trading systems that are in place. Adjustments should include actions by rich countries as well, and should be motivated not by the need to serve small politically powerful groups in America and Europe but to promote economic welfare across the globe.

A FEW decades after the end of the war that he managed, former defence secretary Robert McNamara told us that the Vietnam War had been a mistake and he apologized. Great. But when, I’d like to know, is he going to apologize for the World Bank?

In the late 1960s, you may remember, McNamara left the Defence Department and — with what looked like relief — went to run the World Bank. After masterminding the most ill-conceived U.S. war (till recent times), he may have seen an opportunity to redeem himself. In the years that followed, he apparently became so involved in the bank’s poverty-fighting mission that he actually cried on a couple of occasions when he delivered the annual report.

But good intentions aren’t everything, and, unfortunately, McNamara brought his penchant for ideologically driven strategies with him.

Before his presidency, the World Bank typically made loans to Third World governments to support transportation, irrigation, education and other basics that were meant to promote economic development. But there was a lot of corruption. For that and other reasons, the loans didn’t always accomplish all that was hoped for.

In the McNamara era, the bank began to make loans on the condition that nations privatize public services and allow foreign money to move in and out of the country with little regulation. The idea was to create a climate in which private investment would lift people out of poverty. For the next 30 years, the World Bank and the International Monetary Fund followed this market-oriented strategy, which came to be known as “the Washington Consensus.”

Before the McNamara years, the poorest people didn’t get much richer. But during the Washington Consensus years, they got poorer and poorer.

I saw how that could be possible when I became a shareholder in the French water company Suez, which took over the water system of Johannesburg, South Africa.

To get ready for privatization, South African communities followed the World Bank/IMF suggestion that water rates be raised so consumers would get used to paying the full cost. The water of many people was cut off when they couldn’t pay their bills. In some places they started taking water from rivers. The result was a cholera epidemic.

Cholera is an extreme result for a development scheme. But then, privatizing water in Africa is an extreme application of the World Bank’s private investment theory. After all, a private company has to have some way of making money.

How is a private water company supposed to recoup the expense of extending pipelines to people who are simply too poor to pay the real cost? If you buy a Third World water company, it’s far easier, you’ll quickly discover, to recoup the investment by siphoning the water out to be bottled and consumed elsewhere.

Even in the First World, it’s often more profitable to siphon off than to “develop.” For a few years, the Suez Co. also owned the water system in Bergen County, N.J. During its stewardship, it sold off land around the reservoir to private builders. Then it turned around and sold the whole water system to another company. We shareholders took the money and ran. Technically that’s called “asset stripping.” And it’s perfectly legal.

A quarter of a century of day-in, day-out asset stripping sponsored by the IMF and the World Bank left millions of poor people poorer. Meanwhile, the unregulated capital flows - another tenet of the Washington Consensus - led to speculative booms and currency crashes that pushed hundreds of millions of people down into dollar-a-day poverty.

But the true believers were unswayed. They knew that private investment must eventually lead to poverty reduction, so they soldiered on.

Finally, a few pragmatists, such as the World Bank’s chief economist, Joseph Stiglitz, had the courage to say, “Hey guys, this should be working, but it’s not.” After Stiglitz spoke out publicly, his resignation was requested and quickly accepted.

But the ideological walls were weakening. Painful as it was, many development economists began to lose faith in a theory that was so often contradicted by the facts.

Then, just as the doyens of development were becoming less dogmatic, George W. Bush got the chance to choose a new president for the World Bank. On Wednesday, his choice, Paul Wolfowitz, makes the move McNamara did — from the Pentagon to the World Bank.

I saw Wolfowitz asked on television about his qualifications for the job. He answered by expressing a commitment to poverty reduction that sounded sincere. He went on, unasked, to say that the most important way to fight poverty — more important, he stressed, than assistance or even access to trade — is “creating an atmosphere in which private investment ... is encouraged.” In that, alas, he sounded even more sincere.

Unlike McNamara, Wolfowitz hasn’t apologized for his war yet, and maybe he’ll never have to. OK, so they didn’t welcome us with flowers. OK, we couldn’t pay for it with Iraqi oil. Yes, it cost a little more in lives, money and honour than he expected. Still, the Middle East may yet change in directions that he favours. So Wolfowitz may never feel a need to question his military doctrine. But if, as president of the World Bank, he sticks as rigidly to his economic dogma, he’ll owe the whole world an apology for even more suffering and death. —Dawn/Los Angeles Times Service

HISTORY poses many unsolved questions. One of the questions, in fact an enigma, is the failure of Muslim societies to keep pace with the West in science and technology. The question, as Bernard Lewis puts it, is: ‘Why did the great scientific breakthrough occur in Europe and not, as one might reasonably have expected, in the richer, more advanced and in most respects more enlightened realm of Islam?’

In the vast literature produced by the Muslim and non-Muslim authors on the failure of Muslim societies over a period of about 500 years, no less than seven major causes have been identified: western imperialism that imposed its suffocating stranglehold over the Muslim countries for a long time; Islamic orthodoxy as an obstacle to progress; and its opposite, that is, deviation from the pristine Islamic values and laws as the reason for the fall from the grace; illiteracy that leads to low productivity and low social awareness; fast population growth that nullifies economic growth; relegation of women to an inferior and non-participatory position; and authoritarian mode of governance that stifles thought and innovation.

Let us briefly look at each of these suggested causes to see how valid or relevant they are. First, the European imperialism which, as a possible cause of decline of the Muslims, can be summarily disposed of for the reason that the European powers did not become a paramount power in the Muslim world till the 19th century, whereas the decline of the Muslim societies in science and technology had begun as early as the 16th century, if not earlier. The fact is that the success of the western imperialism was not the cause, but a consequence of an extended failure of Muslim societies to keep pace with the West, or even to keep their own heritage alive after the 15th century.

Next, the two divergent views about Islamic orthodoxy: First, orthodoxy as an obstacle and, second, as a cure. The answer can be found in the history of the truly Islamic state that existed for 31 years from the conquest of Makkah in 630 to the death of the fourth Caliph in 661. The first 14 years, up to the death of the second Caliph, were the years of political consolidation, territorial expansion and social change, while the subsequent 17 years were marked by internal strife and bloodshed, little expansion and hardly any social change. It is obvious, therefore, that an Islamic state is not a prescription for worldly success or failure.

The fourth and the fifth causes (illiteracy and fast population growth) are the two present-day problems that are not relevant to the centuries when Europe was not more literate than the Muslim world, and the population growth rate was not a problem. Fast population growth has been a problem only for about the last 50 years and lower literacy rate for about 150 years. This leaves an unexplained period of about 350 years.

The sixth suggested cause relates to the position of women in Muslim societies. But it is unfair to suggest that women were always worse off in Muslim societies than in the West. In fact, it is a credible proposition that women were better off in Muslim societies in the earlier centuries than in the West where they could be burnt at the stake as witches even up to the 17th century. In the US last trials of witches took place as late as 1692. It is for the Europeans to explain, therefore, how they managed to make that breathtaking progress following the 15th century despite the way they treated their women.

Authoritarian mode of governance, seventh on the list of causes, is one of the more readily acceptable causes of the decline of Muslim societies, especially in modern times. While one does not advocate authoritarian rule, its relevance here is questionable. In the period up to the 18th century European mode of governance was no less authoritarian than the one in the Muslim countries, but Europe did not stagnate as did Muslim societies. In modern times too authoritarianism has not prevented growth of science and technology.

The erstwhile Soviet Union is the best example of it, and an earlier example is that of 19th century Japan. This argument too, therefore, fails to solve the enigma of Muslim failure. What, then, is the answer? The answer is that we have so far avoided looking at the bigger picture.

The bigger picture is that what we consider to be the failure of Muslim societies is, in fact, a collective failure of three great civilizations — the Muslim, the Chinese and the Indian — that had the potential to give birth to modern science or at least to participate in its birth. Since all the three civilizations failed to do what they could at about the same time we had better look for the reasons that would apply to all three of them. While doing so we can assume that those reasons, being common, would be unrelated to religious beliefs, racial characteristics and regional compulsions.

But before proceeding further in our search for the answers, let us have a glimpse of Europe in transition after the Dark Ages (500 to 1100) to put things in their global perspective. Things began happening at an accelerating pace in Europe from 12th century onwards when Aristotle was rediscovered (1120), Toledo school of translators started translating Arabic books (1150), and universities were established at Bologna (1158), Oxford (1162), Paris (1170) and Cambridge (1209). Soon Europe was in the midst of the greatest intellectual ferment in history, leading to the beginning of Renaissance in the early 14th century, of exploration and discovery in the 15th, Reformation in the 16th, scientific and technological revolution in the 17th, and the industrial and social revolution in the 18th century.

The Chinese, Indians and Muslims, including the next-door neighbours of Europe, the Ottomans, were almost totally unaware of and unconcerned about the changing face of Europe till as late as the 18th century. The reason for this lack of interest in Europe was the arrogant insularity of the three Asian civilizations. The Indians considered the foreigners as the Mlecchas (non-Indian, barbarians), Chinese too called the foreigners barbarians, and for the Muslims all others were infidels, again a term of contempt with an element of hostility.

The Indians were the first to become insular. Despite their close contact with the Europeans since the 16th century and with the Muslims since earlier times, not a single book in Arabic, Persian or in any European language was ever translated into Sanskrit or any other Indian language. Indians who had made great contribution to mathematics, the queen of sciences, ceased to be creative in science and technology very early on. Bhaskara (12th century) was probably the last Indian to make a contribution to the science of mathematics. India has yet to regain those lost centuries. It has yet to lift 700 million Indians out of poverty and 500 million out of illiteracy.

Next, the Chinese. It is not commonly known that in the early 15th century China was the most enterprizing naval power in the world. It had launched a fleet of 300 ships, each five times longer than the Portuguese ships of that time. The fleet had a crew of 30,000 men and made seven voyages along East Asia, and the east coast of Africa. China was poised to discover the west coast of the New World as the Europeans were gearing up to reach the east coast. At that point there happened an event that remains one of the mysteries of history.

In 1436 there was an imperial edict by which all naval expeditions were suspended, ocean-going ships scuttled, and the navigational maps burnt. ‘China’s heroic age was over; its open door had slammed shut’. The self-imposed insularity to which China had returned in 1436 was not quite breached till after the end of the Cultural Revolution in the 1970s. China is still paying the cost of those lost centuries.

The story of the failure of the Muslim civilization is quite similar. Its failure is essentially a failure of the Ottoman Empire that, for many centuries, occupied a large part of East Europe, Middle East and North Africa and, thus, stood between Europe and the rest of the Muslim world. But it stood like a barrier rather than an interface. European science could not cross that barrier.

This was bad enough made worse by a single act. It is related to the advent of printing press invented by Gutenberg in Germany in 1455. It brought about the first communication revolution in the world. But for the printing revolution Renaissance, Reformation and the rise of modern science were inconceivable.

The Ottomans took notice of this invention in a negative way. By a decree issued in 1485 by the Ottoman sultan, printing was forbidden and remained forbidden till 1727. As a kind of tragi-comedy, as it seems now, the Jews in Empire were allowed to establish printing presses on the condition that they would not publish books in Turkish or Arabic.

Thus, both the Chinese and the Muslims opted out of the great adventure of creating the Modern Age by very specific and conscious decisions. Chinese opted out of the exploration of the physical world and the Ottomans opted out of the exploration of the intellectual world. The lesson for us in the story of the three civilizations is that interaction between different cultures and societies is the most powerful engine of change; the interactive creativity, is the most powerful source of new ideas; and insularity is suicidal.

As early as 1867, after the Meiji Restoration, the Japanese undertook to do what the rest of Asia should have done: industrialization was undertaken; feudalism was abolished; a written constitution and a two-chamber parliament were inaugurated; compulsory education and newspapers were introduced; religious toleration encouraged; and conservative rebellion was suppressed.

And, said an imperial edict: ‘Knowledge shall be sought throughout the world’.

E-mail: tvo@isb.comsats.net.pk

FOR the French to say no to Europe is like the English saying no to beef or the Russians saying no to vodka. Or perhaps like the heart saying no to the body. On Sunday, the French did not just say no to a particular, cumbersome constitutional treaty, despite the fact that its main architect was a Frenchman. They said no to what the EU has become since the fall of the Berlin Wall. No to a much-enlarged EU where France is no longer in the driving seat. No to the prospect of Turkish membership. No to Anglo-Saxon-style economic reform: deregulation, free-market liberalism, Thatcherism imported via Brussels. And, of course, no to lupine Jacques Chirac, and the Parisian governments and elites they feel have failed them.

This was a no of fear. Fear of losing your job to the now proverbial Polish plumber. Fear of immigration. Fear of change. The noes of the communists and the far-right were quite different, but they had this one thing in common: fear.

Will future historians record May 29, 2005, as the beginning of the end of the EU? It would be foolish to reject out of hand that possibility. All earlier attempts to unite Europe, starting with the Roman empire, have failed. Why should this one be the exception? Unlike all those earlier empires, the post-modern empire of the EU is ultimately built on the consent of the people. Not just in France, the peoples of Europe increasingly feel that the EU is not answerable to them.

In eurospeak, this is called the “democratic deficit”. Yet the French referendum result shows that the European project is finally answerable to them. If their consent is withdrawn, it fails.

At the other extreme, you may today hear reassuring voices telling you that is just another setback on the pilgrim’s road to Union city. The EU, they will say, has always advanced by taking “two steps forward, one step back”. After a period of confusion, our leaders will come up with a treaty-lite, preserving most of the key institutional changes designed to make a union of 25 and more member states workable, and to give it a stronger voice in the world.

Optimists suggest the ratification process can continue to its planned conclusion next autumn — as Chirac seemed to imply in his first reaction on Sunday night. The countries that have said no may even be asked to reconsider. Super-optimists suggest that, perhaps with some changes and reassurance from European leaders, the noes might be turned into yeses, like water into wine.

I don’t believe it. On the spectrum between apocalypse and teething-problem, I would put this crisis roughly halfway. A French no will give powerful encouragement to a Dutch no this Wednesday. If two founding members of the EU have rejected the treaty, Danish and Polish voters will hardly feel obliged to turn out to approve it this autumn. And those dominoes could go on falling.

Either we then continue for another year or at some point EU leaders will have to face up to the reality. That point may come during the British presidency of the EU, which begins in July. Here is probably the last big thing that Tony Blair can do, before handing over to Gordon Brown. He came to power in 1997 promising to resolve Britain’s historical ambiguity over Europe. In that, he has so far failed. Now he has to confront something much larger: Europe’s ambiguity about itself.

In this re-launch of the European project, Blair could have some unexpected allies. A weakened Chirac may have to call on Downing Street’s favourite Frenchman, Nicolas Sarkozy, to take the post of prime minister. An embattled Gerhard Schroder seems likely to lose his election this autumn to Angela Merkel, who, like Mr Blair, is both pro-European and pro-American. But it will still be a very tall order.

Mr Chirac and others may try to blame the defeat on Britain. Economic reform, European budget talks and the opening to Turkey could all be stalled. One of the EU’s biggest problems is that people in different countries object to it for such diverse and incompatible reasons that if you move to satisfy one segment you further offend another. And some deeper sources of discontent lie beyond our control, for example in the way rising China and India are taking jobs out of Europe.

The last time the French rejected a major European project was more than half a century ago, when the proposed European Defence Community was voted down in the French parliament. British diplomacy then cobbled together a substitute called the Western European Union. It wasn’t half as good, but it was better than nothing. On Sunday, the French once again kicked the ball across the Channel, into Downing Street. — Dawn/The Guardian News Service