It's A Good Thing That Our Geopolitical Rivals Are So Incompetent

Many on the right have been getting mileage lately from bashing the incompetent foreign policy of outgoing President Obama.  The guiding theme of Obama's worldview has long seemed to be that we just need to be nice to our geopolitical rivals, and then of course they will be nice back.  Next thing you know, Russia is invading Ukraine and sending bombers to aid Assad in Syria; Iran is controlling Iraq behind the scenes and backing Hamas in its attacks on Israel; and China is building new islands to claim jurisdiction over the South China Sea.

But before you conclude that incoming President Trump needs to take drastic steps to rein in these three world bad guys, it is useful to look at their situations with a somewhat broader perspective.  The fact is that none of Russia, Iran or China is currently in a very good position to be more than a marginal player on the world stage, and the only one of the three that might become a much bigger player any time soon is China.  

Let's consider them one at a time.

Russia.  When I was a kid going to high school in the 1960s, it was the Soviet Union.  In the mid-60s the Soviet Union had around 230 million people, compared to about 190 million for the United States.   And that was before including the population of all the satellite countries in Eastern Europe, like East Germany, Poland, Hungary, Czechoslovakia, Romania and so forth -- not to mention then-comrade-in-arms Communist China.  The economy of the Soviet Union at that time was said to be about 60% the size of the economy of the United States, and they were putting out fake statistics claiming that their economy was growing at a rate about double ours.  If you believed it, that meant that their economy would overtake ours in as little as 10 years, 20 at most.  Their military was about double the size of ours, with thousands of nuclear missiles, and equal thousands of tanks lined up at the East/West barrier then known as the "Iron Curtain."  Now that was a geopolitical rival to reckon with!

Compare that to Russia today.  About half of the population went away in the breakup of the Soviet Union, and even the population of the remaining Russian state has shrunk from about 148 million in the mid-90s to about 143 million today.  That's because their birthrate is so low, and also because nobody immigrates into Russia.  (Population of the U.S. today is more than 320 million.)  

For its economy, Russia has gone the route of crony capitalism on steroids, with the head guy passing out the plum economic prizes to his friends.  The economy is completely dominated by the oil and gas sector.  The best that can be said for this form of economic management is that it is better than Stalinist totalitarianism.  Without much diversification or entrepreneurialism, Russia is at the mercy of swings in the international oil and gas market.  As of 2013, as oil prices were riding high, the economy of Russia seemed to be doing OK, with GDP about $2.2 trillion, or about $15,000 per capita.  (By comparison, U.S. GDP today is about $18.5 trillion, or about $57,000 per capita.)  Then came international sanctions in early 2014, followed by the bottom dropping out from under oil prices in the second half of that year.  The Trading Economics web site estimates that by 2015 the GDP of Russia had declined to $1.326 trillion, an astonishing decline of about 40% from the 2013 peak; and TE's estimate for 2016 is for only a small increase from that.  That's less than $10,000 per capita.

Meanwhile, Russia has lost most of its former friends.  Almost all of the former Eastern European satellites have joined NATO.  So have Estonia, Latvia, and Lithuania, which were part of the Soviet Union proper, albeit with only about 6 million people among the three of them. Then a few years ago, the very largest non-Russian member state of the former Soviet Union -- Ukraine, with about 50 million people -- was threatening to join NATO.  Russia headed that off with the invasion of Crimea and some incursions into Eastern Ukraine.  Ukraine today has not joined NATO, but it's certainly no friend of Russia.  And elsewhere among the former Soviet states, there are plenty that are also none too friendly.  Georgia comes to mind.

Russia does have an unusually large military for a country with such a small GDP, including a substantial nuclear arsenal; but the small economy really limits its abilities.  The U.S. Defense Department budget, at around $600 billion per year, is almost half the size of Russia's entire economy!

Russian President Vladimir Putin likes to get his kicks by throwing around such military weight as he has, and by tweaking Western leaders in his speeches.  But fundamentally, based on the size of his population and his economy, he is playing a very weak hand.  If Russia wanted to grow its geopolitical power and status, it would need to open up its economy to private capital and entrepreneurs.  But that doesn't seem to be Putin's way.

Iran.  Iran is a much poorer country than even Russia, with GDP per capita at around $6000.  (And fewer than 80 million people.)  And their economic policy in recent years seems to have been designed to keep the economy small.  At least in Russia the oil and gas sector is mostly in the hands of nominally private entities like Rosneft, Gazprom and Lukoil.  Iran has instead gone for full-socialist public ownership of its national company, the National Iranian Oil Company.  And here is a 2015 description of some other Iranian economic policies in recent years from a website called Al Monitor ("The Pulse of the Middle East"):

[T]he nominal exchange rate was fixed at around 10,000 rials for every dollar during 2006-2011. During this same period, Iran’s annual inflation rate was on average 16% above the global average, and as a result, Iranian goods gradually lost competitiveness with foreign goods. Thus, there was a flow of imported goods into the Iranian market. Because of the aforementioned policies, many of Iran’s industries were closed down; during  2011-2016 more than 2,500 industrial firms were shuttered and there was a reduction of more than 500,000 workers in the industrial sector. Most important, during this period, the net total of created jobs in Iran was equal to zero. The only main exports, besides crude oil, were condensate as well as oil and gas derivatives, including oil and petrochemical products.  On the other hand, the growth of the monetary base (with an annual average of more than 26%) — a major cause of which was the Central Bank’s purchase of oil revenues — led to macroeconomic instability and persistently high inflation rates of above 20%.

According to Trading Economics, Iran's GDP reached a peak of $592 billion in 2011, and began a steady decline after that, despite high oil prices into 2014.  And of course, when your only significant export product is completely government-controlled and is the government's main source of revenue, you are setting yourself up for disaster when the price of that product declines -- as the price of oil did in mid-2014.  By the time 2014 was over, Iran's GDP was down to $425 billion, where it remains today according to the TE estimate.  That's down more than 25% from the peak five years ago.  And the U.S. frackers look set to keep a lid on the price of oil at around $50 - 60 per barrel for the foreseeable future. 

As you can see, Iran was not exactly negotiating from a position of strength when it did its deal with President Obama in 2015.  Yes, they are getting back some of the assets frozen back in the 70s and 80s.  How long will that one-time bounty last?  

China.  By comparison to Russia and Iran, China's economic management looks almost competent.  After a couple of decades of rapid growth, China now has the second largest GDP in the world! -- it's around $11 trillion, if you believe their numbers.  But let's not get ahead of ourselves.  They have about 1.36 billion people, which makes their per capita GDP only about $8,000.  That's well less than Russia.  For that matter, it's behind places like Mexico, Kazakhstan, and Panama -- and, indeed, behind the world average per capita GDP of about $10,000 according to the tabulations of all of the IMF, World Bank and CIA as presented here.   

Sure China has not made the same fundamental mistake as Russia and Iran, going all in on one industry that is subject to wild cyclical swings.  But don't kid yourself by thinking that its economy represents real capitalism -- a system where everybody gets to participate on equal terms in a grand game of trial-and-error to see who can come up with the next big thing.  Instead, China's economy is directed by state-owned banks who invest in state- and crony-owned companies that have privileged status to expand endlessly and cannot fail.  Look around for reports on the state of China's economy, and the word that you see again and again is "overcapacity."  For example, this from the Cheung Kong Graduate School of Business in June 2016, "Solving the Prickly Issue of Overcapacity in China":  

Having delayed serious structural reforms, China faces eye-watering overcapacity in heavy industries.  Steel production volume is more than double that of the next four leading producers combined: Japan, India, the United States and Russia.  Aluminum production capacity reached 40 million tons last year, exceeding global consumption by 9 million tons, according to Chinese think tank Antaike.  Most remarkably, between 2011 and 2013 China produced more cement than the US did during the entire 20th century -- 6.6 gigatons, compared to the US's 4.5 -- according to data from China's National Bureau of Statistics and the US Geological Survey.       

Without doubt, China just counts all of this (and other) excess production as a full addition to GDP, as if nothing was wrong.  Its economic statistics are completely phony -- and all of that just to pretend that its per capita GDP is only a little below the world average.  In any real economy, there would have been a massive shake-out long ago, with a good half or two-thirds of the heavy-industry producers forced out of business so that the resources could be put to other uses.  What is China's real per capita GDP, honestly measured?  $5000?  $4000?  And do they think that enough free government credit can postpone the inevitable shake-out forever?  Good luck with that!

In its favor, China does have those 1.36 million people, many of whom are highly intelligent, creative and entrepreneurial.  If it just opened up its credit system and turned its people free, it could shortly have a world-beating economy.  But that would require having the current oligarchy open itself up to rivals for its power.  Also, it would require going through a severe recession, the likes of which the world has probably never seen, and then restarting from a new much lower base.  Oh, the loss of face!  

I don't foresee this any time soon.  Indeed, I think that China will do everything in its power to keep the economic charade going, potentially for decades.  Its economy will languish.

Meanwhile, the United States, even with completely incompetent foreign policy (not to mention almost equally incompetent domestic policy), continues to race further ahead of its geopolitical rivals.  Imagine what we could do with competent foreign policy!