China's Tantrum

What in samhell is China thinking?

China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of those materials to the United States and Europe, three industry officials said on Tuesday.

The Chinese action, involving rare earth minerals that are crucial to manufacturing many advanced products, seems certain to further intensify already rising trade and currency tensions with the West. Until recently, China typically sought quick and quiet accommodations on trade issues. But the interruption in rare earth supplies is the latest sign from Beijing that Chinese leaders are willing to use their growing economic muscle.

Willing to use their economic muscle? Perhaps... but if so that muscle is about as big as my pectorals. (Read: practically non-existent.) "Rare earth minerals" aren't all that rare (there are large deposits in California, Brazil, India, and many other places, and the minerals can also be gleaned from recycled electronics), and China's going to lose when this hits the WTO. This is at most a minor annoyance to the U.S., Europe, and Japan, but it makes China look like a spoilt child who's refusing to eat his vegetables.

Unlike Krugman, I don't think the answer is to argue with the child. Better to let him sit at his place until the veggies are eaten. In other words, if China wants to be a major power in global politics, it needs to learn what that entails. Lashing out like a four year-old isn't how it's done. (Neither is responding in kind, as Krugman evidently wants.)

I assume that this move is an attempt to signal to some domestic audience, but I don't know enough about China's internal politics to know what that intention might be. I'd appreciate any pointers in that direction. In the meantime, this is further evidence that China is simply not as mature of a global power as many think.

Are Resources Good or Bad for Afghanistan?

Alex posted last night about the rich mineral deposits in Afghanistan, and what implications that could have for political stability and economic development in Afghanistan. Since his post, it has come out that this is not exactly a new find (it's been known since at least 2007), and the timing of the NY Times article is a bit suspect. All of which is true, but doesn't really change what the important questions are, such as what effect will these resources have on Afghanistan's political and economic development? Alex highlighted many of them, as did Andrew Exum:

I have been reading Paul Collier's The Bottom Billion in between editing chapters of my dissertation (which is tough enough to do when my local coffee shop has the World Cup on all its televisions), and Collier describes the characteristics that "trap" countries in cycles of civil conflict: low income, slow growth, and dependence on primary commodity exports. I don't need to tell you Afghanistan has the first and third characteristics in spades, and you may have noticed that Afghanistan has already been in a pretty miserable cycle of civil conflict since the PDPA coup in 1978. Does this resource find make civil war more or less likely? The statistics, I'm afraid, suggest the former.

Somewhat ironically, Collier's research methods are exactly those that Exum disapproved of in our dispute from a few months back. But I'm glad that Exum is broadening his horizons in this case, and even though I don't think Collier's book is perfect, there are still a lot of lessons to be learned from it.

The wild card in Collier's work, and in this particular case of Afghanistan, is the presence of an external military in the state with resources. Collier argues in later chapters of his book that the presence of an outside intervener can change the "trap" dynamics that many poor countries find themselves in. (In fact, he's been criticized fairly strongly for this "colonialist" aspect of his work, and for the statistical methods he uses to reach his conclusions. I told you it was ironic that Exum was praising it, given his previous stances.) So while the combination of "ethnic/tribal/ideological rivalries + poverty + natural resources = conflict + economic stagnation" most of the time, adding "external intervention" to the left-hand side of the equation can, in some circumstances, change the right-hand side quite dramatically.

It's impossible to know from Collier's work alone whether that can happen in Afghanistan's case or not. But given that these resources are in Afghanistan no matter what the U.S. does, it's probably better for Afghans that we're there. Of course, if that's true than it also true that it would be disastrous for the U.S. to withdraw from Afghanistan any time soon.

There Is No Resource Curse

So says Adam Martin, guest-blogging at Aid Watch:

New research argues that empirical work on the Curse suffers from two interrelated problems. First, it uses dependence (the share of GDP from that resource) and calls it abundance (the stock of a resource in the ground). But dependence in turn depends on institutional quality—if you have sound institutions, natural resources take their place along other industries. If not, natural resources will by default constitute a large share of GDP because poor institutions stifle an advanced division of labor. When you look at cross-sectional data using dependence as a proxy for abundance, it will look like natural resources compromise institutional quality.

That reliance on cross-sectional data is the second major problem. The Curse story does not claim that Nigeria is Britain plus oil, but rather that Nigeria is less democratic than Nigeria would be in the absence of oil. One way to get around this problem is to test whether oil makes country X less democratic using panel data with fixed country effects. That’s fancy econometric speak for taking into account other factors that might make country X more or less democratic—its history, institutions, culture, etc. Fixed effects also allow testing a corollary of the Curse known as the “First Law of Petropolitics”: as oil prices go up, oil-rich autocrats crack down on democracy even more.

Martin highlights, and links to, some of that new research at the link.

There are still fundamental questions at play: if poor institutions are to blame (as alleged by some of that new research and much old research too), that still doesn't tell us why some places have poorer institutional development than others. IR theory offers a few potential explanations:

1. Structural factors make conflict more likely in some places than others. Sometimes this leads to actual conflict, other times the potential for conflict retards the development of a more institutionalized, liberal social order that can encourage more division of labor. Either way, the kinds of institutions that can facilitate development never take root, so development is perpetually stunted.

2. The notion of dependence immediately raises the specter of "dependency theory," according to which LDCs become dependent on their natural resources. Not on the resources themselves, but rather on the technology needed to procure and commoditize those resources. This technology comes from richer states, in whose interests it is to keep LDCs in a downtrodden state and thus keep profiting from them. So LDCs cannot improve their status by participating in the global economy until they are somewhat self-sufficient. These theories were much in vogue in the mid-20th century, but fell out of favor following the rapid development of export-biased economies in Asia and elsewhere and the continued stagnation of isolated economies.

3. Good, old-fashioned, power politics. Those who have it tend to keep it by taking control of lucrative industries, using the proceeds to enrich and insulate themselves from political competition.

Emmanuel recently discussed some of these issues in the context of Nigeria. My take? There is still a lot of work to be done in understanding institutional development and if/how the international community can encourage it.

US Dominance - Fading away?

The US National Intelligence Council just released its latest Global Trends report, and the analysis is far grimmer for the United States then its 2004 report.

According to the Intelligence Report, the world is moving towards multipolarity, with China, India, and Russia in line to challenge US dominance by 2025.  The dollar will continue to decline in prominence as power shifts eastward.

Interestingly, the report finds the worlds biggest security threats will stem from economic concerns - trade and investment disputes, competition for natural resources especially water and energy resources, and strategic technology development.

Now, there is considerable criticism about the track record of NIC report accuracy, especially regarding previous assessments of Japan and Russia.  However, the assessment is interesting in its pessimism.  Multipolarity upsetting the stabilizing effect of US hegemony, nuclear weapons deployed by rogue groups, the inadequacy of the US military in combating irregular warfare methods - seems like the current financial crisis is the least of our worries.

So, all you policy wonks, get to work crafting exit strategies - or at least start trying to find a way to get an EU passport . . . . .