SPENGLER The siege of Baghdad and China's
rise By Spengler
American leaders bring to mind the last
Abbasid Caliph, who made no preparations for the
approach of the Mongols in 1258. What, asked
al-Musta'sim Billah, could Mongol arrows do to the
walls of Baghdad? When the Mongol commander Hulagu
Khan arrived on January 29, though, he had with
him 1,000 Chinese bombardiers, as well as Persian,
Turkish and Georgian auxiliaries.
Historians disagree as to whether the
Mongols used cannon or counterweighted catapults,
but in any case the bombardment breached the
city's walls within three weeks, and they
proceeded to slaughter between 200,000 and a
million of its inhabitants. There are various
accounts of how al-Musta'sim died, some quite
colorful.
Like the Abbasids, Americans
have no idea what is about to hit
them. We are a disruptive,
bottom-up economy driven by entrepreneurship, and
we look with contempt at China's clumsy, top-down
model. The trouble is that we haven't done much
innovation since the 1980s. A new generation of
well-educated and eager Chinese may assimilate our
past innovations and pass us by.
As a
culture, to be sure, the Mongols had no capacity
for technological innovation. They didn't need it.
After they conquered Persia, the source of the
best available siege technology in the 12th
century, the Mongols employed Persian catapults
hurling 100-kilogram missiles to reduce the walls
of Chinese cities. By the time they turned their
attention to Mesopotamia, they commanded Chinese
technology as well. China, of course, was the
great technological innovator of the age. Between
800 and 1200 CE, it invented gunpowder, firearms,
explosive bombs, moveable type, and the magnetic
compass.
China's inventiveness ended after
the Mongol conquest, and the European powers who
began their industrial development with borrowed
Chinese technology humiliated the Middle Kingdom.
China's dirigiste economy remains ill-suited to
innovation. Like the 13th century Mongols, though,
the Chinese don't need to innovate. They simply
need to assimilate available technologies. China's
multi-trillion-dollar bid for foreign technology
is the most important change in world investment
patterns since America's great wave of innovation
of the 1980s.
A case in point is the
transfer of nuclear power plant technology - once
the crown jewel of American engineering - to Japan
with Toshiba's acquisition of Westinghouse, and by
Toshiba's license to China. Toshiba-Westinghouse
and China's State Nuclear Power Technology
Corporation announced a joint venture last year to
develop a state-of-the-art pressurized water
reactor based on Westinghouse technology. China
plans to export the reactors globally.
According to Professor Yiping Huang of
Peking University, writing in the September 2012
issue of East Asia Forum, what we have seen to
date is only the beginning:
Chinese outward direct investment is
a relatively new phenomenon. In 2002, the first
year after China's accession to the World Trade
Organization, China's total ODI [outward direct
investment] was less than US$3 billion. By 2010,
however, it had already increased to more than
20 times this amount. According to forecasts by
economists at the Hong Kong Monetary Authority,
if China does liberalize its capital account,
Chinese ODI stock could rise from US$310 billion
in 2010 to US$5.3 trillion by 2020. If this
prediction turns out to be correct, then China
may well become the world's largest outward
direct investor by this time.
To put
this enormous number in context: US$5.3 trillion
in overseas direct investment by China during the
next seven years is roughly equal to the last
three years' worth of private nonresidential fixed
investment in the United States. Not all of this
will acquire technology, to be sure. There isn't
$5 trillion of tech companies worth buying. A
great deal of China's foreign investment will
reflect portfolio diversification by individual
Chinese, who still cannot acquire foreign assets
directly, and much of it will buy raw materials.
Most American China watchers mistook a
house-cleaning last year for a crisis. China's
economy seemed to stall, with exporters idling
their factories and property prices falling. For a
few months early in 2011 it seemed that Chinese
industrial production might even be shrinking. In
fact, the Chinese Communist Party deliberately cut
off credit to less-efficient private
manufacturers.
Nothing in China is ever
quite private; the dependence of private
entrepreneurs on the state is such that some state
participation is always present. That is an
invitation to corruption and inefficiency, and the
Communist Party decided to concentrate resources
on large state-owned enterprises in order to keep
its friends close and its enemies closer. The
short-lived credit crunch was a kind of
anti-corruption campaign. [1]
Exhibit
1: Chinese state-owned enterprises (in GXC)
outperform Shanghai Composite Index
That explains
why large-capitalization Chinese companies -
almost all of them state-controlled - performed so
much better on the stock market than the aggregate
market index. Shown above is the stock price
performance over the past 12 months of the
Shanghai Composite Index versus the GXC, the
large-cap China exchange-traded fund. The large
cap, state-controlled stocks began to rally in
September while the overall index was still in
decline, and outperformed the overall index by a
wide margin.
China's deep pockets can
source whatever technology the country requires.
Can the Chinese put it to effective use?
In 2008, I observed that 35 million young
Chinese were studying classical piano, not
counting the string players, and almost entirely
with private tuition. "The world's largest
country," I wrote, "is well along the way to
forming an intellectual elite on a scale that the
world has never seen, and against which nothing in
today's world - surely not the overbred products
of the Ivy League puppy mills - can compete. Few
of its piano students will earn a living at the
keyboard, to be sure, but many of the 36 million
will become much better scientists, engineers,
physicians, businessmen and military officers."
[2]
In the meantime we are beginning to
see data about the quality of China's students.
The National Center for Education Statistics
reports that in the Shanghai region of China, more
than 50% of all secondary students scored at level
5 or above on the PISA mathematics proficiency
tests. That compares to just 12.7% for the OECD
average.
Exhibit 2: Percentage of
students performing below Level 2 and above Level
5 on PISA mathematics proficiency tests in
2009 Source: National Center for Education
Statistics
Students in Shanghai, to be
sure, are likely to be better educated than
students from the countryside, but the extremely
strong showing there is indicative of where China
is headed. After the Cultural Revolution, China's
university system was in ruins. In its aftermath,
few doctoral degrees were awarded. Now the rate
has caught up with the United States. We do not
have accurate data on the distribution of degrees
by field, but the vast majority of American
doctorates are in non-STEM (science, technology,
engineering, and mathematics) fields, whereas
China concentrates on STEM.
Exhibit 3:
Number of doctorates awarded in China Source:
Infonomics Society
The quality of
Chinese engineering PhDs also remains to be
tested. But there is no question that the Chinese
labor force of 2012 bears little resemblance to
the largely unskilled labor force of a dozen years
ago. The world has never seen anything like the
present wave of young, educated Chinese entering
the job market.
China does not nurture
disruptive innovators. The brightest and most
engaging Chinese students one meets at American
universities complain about the stultifying
intellectual climate at home. That is beside the
point. America hasn't nurtured much innovation
lately.
In the aftermath of the United
States' response to Sputnik, the US had an
eruption of innovations: the microprocessor
(invented in 1971), the LCD display (1971), the
word processor (1972), video games (1972), laser
printers (1975), the spreadsheet (1978), personal
computers (1981), digital cell phones (1988), the
World Wide Web (1990), among others. These items
are picked from the inventors' timeline page at About.com.
What has America invented since 1991?
Again, according to About.com, the big items are:
the digital answering machine, Web TV, the
gas-powered fuel cell, the hybrid car, and, of
course, Viagra. According to Professor Robert
Gordon of Northwestern University, the world is
simply out of ideas; the digital revolution has
come and gone, and a technological trough is
inevitable.
That ain't necessarily so.
There's no technological trough in Israel, where
innovations like the Iron Dome anti-rocket system
get the full attention of the country's best
minds. That's a matter for a longer discussion on
a different occasion.
There is a simple
way to measure the expected rate of disruptive
innovations from America's high-tech companies.
That is the volatility (rolling standard deviation
of returns) to the information and technology
subindex of the S&P 500 index, versus the
volatility of the index itself.
Exhibit
4: Volatility of Information Technology Index vs
S&P 500 Source: S&P, author's
calculations
During the disruptive
1990s, the volatility of information technology
companies was two to three times that of the
overall index. Since 2007, though, the volatility
of the tech sector has tracked index volatility
with almost no deviation. Companies that offer
disruptive technologies should be more volatile:
their stock prices will rise sharply if they
succeed, or crash if they fail. The fact that
tech-sector volatility has disappeared tells us
that investors no longer expect them to do
anything disruptive.
In short, the United
States does not have a tech sector. It has mature
consumer businesses operating under the technology
label. They walk like mature consumer businesses,
quack like mature consumer businesses, and fly
like mature consumer businesses. They are run by
patent lawyers rather than engineers.
One
might have expected more tongue-wagging after
Israel's Iron Dome system leapfrogged the
contending American entries. The Wall Street
Journal reported on November 26, 2012:
At the direction of a White House
working group headed by then-National Security
Council senior director Dan Shapiro (who today
is the US ambassador to Israel), the Pentagon
sent a team of missile-defense experts to Israel
in September 2009 to re-evaluate Iron Dome. The
decision raised eyebrows in some Pentagon
circles. Iron Dome was still seen as a rival to
the Phalanx system, and previous assessment
teams had deemed Iron Dome inferior.
In
its final report, presented to the White House
in October, the team declared Iron Dome a
success, and in many respects, superior to
Phalanx. Tests showed it was hitting 80% of the
targets, up from the low teens in the earlier US
assessment. "They came in and basically said,
'This looks much more promising ... than our
system,'" said Dennis Ross, who at the time was
one of Mr Obama's top Middle East advisers.
[3]
Israel, with seven million people,
did a better job than the United States in a
critical field of advanced military technology.
That should have prompted hand-wringing and
gnashing of teeth. In 1957, after all, the mighty
Soviet Union got the jump on America by sending
Sputnik into orbit, and the US responded with an
all-out mobilization of resources. Today, Israeli
engineers beat the Pentagon from a standing start
two years ago, and we read it in the jump page of
the Wall Street Journal account.
The
decline of the US is by no means inevitable. But
its first stage is already underway. Unless the
United States manages to create the sense of
national purpose it had when Sputnik went up, it
may become irreversible. The notion that America
can somehow punish China through trade sanctions
is silly. The only way to keep ahead of China is
to innovate. By any other means, resistance is
futile.
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