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Network Hubs vs. Emerging Cities of the Global Economy

China_factory111110.jpgThe issue of declinism, specifically the generalized decrease of U.S. dominance over resources of international power, has become one of the most hotly debated topics among observers.  Some lament these shifting balances as though it were Rome in its final years, while others hail the redistribution of influence as an exciting and overdue graduation to a multipolar world.  Most of the rest of us are just seeking to understand how these processes are taking place, and what the practical implications will be for competing interest groups.

Most of the material I have been reading relating to these imagined futures has taken a rather pessimistic tone, prematurely awarding the crowns to the rise of the BRIC nations, while emphasizing an global environment of decreasing support for human rights, international law, institutions, and rule-based expectations.

But as predictably as the media’s pendulum’s swings, a new series of arguments come out urging a more rational assessment of the velocity and depth of these changes between the world’s leading powers and their economies – suggesting that in the end the U.S. is going to continue to remain quite important for some time to come.  I’m not sure I am buying it.

The most recent issue of Foreign Affairs is packed with a number of essays on these subjects, which are best summarized by CFR President Leslie Gelb’s piece titled “GDP Now Matters More than Force.

I took particular notice of Joseph Nye’s contribution to the journal, which argued the following (emphasis mine):

For all the fashionable predictions of China, India, or Brazil surpassing the United States in the next decades, the greater threat may come from modern barbarians and nonstate actors. In an information-based world, power diffusion may pose a bigger danger than  power transition. Conventional wisdom holds that the state with the largest army prevails, but in the information age, the state (or the nonstate actor) with the best story may sometimes win.

Power today is distributed in a pattern that resembles a complex three-dimensional chess game. On the top chessboard, military power is largely unipolar, and the United States is likely to retain primacy for quite some time. On the middle chessboard, economic power has been multipolar for more than a decade, with the United States, Europe, Japan, and China as the major players and others gaining in importance. The bottom chessboard is the realm of transnational relations. It includes nonstate actors as diverse as bankers who electronically transfer funds, terrorists who traffic weapons, hackers who threaten  cybersecurity, and challenges such as pandemics and climate change. On this bottom board, power is widely diffused, and it makes no sense to speak of unipolarity, multipolarity, or hegemony.

In conclusion, Nye’s argument is not that the United States is set to disappear from the world stage at any point soon, but rather this process will be a relative decline, which urgently requires the political leadership to adjust to a broader distribution of power resources to work with others to achieve outcomes, and present “a good story.”

These arguments were immediately called to mind earlier this week upon reading a compelling column by David Brooks in The New York Times on the importance of “network hubs” and knowledge positions which will continue to keep the U.S. in a strong position in a globalized world where creativity and innovation are the new keys to the economy (as pointed out by Nye, Spain owned the 16th century because of its colonies and gold, the Dutch pioneered the 17th century with trade and finance, the French took the 18th century with population and military might, while the British owned the 19th century with the industrial revolution and its navy). 

Brooks writes:

You also observe that America hosts the right kind of networks — ones that are flexible and intense. Study after study suggests that America is one of those societies with high social trust. Americans build large, efficient organizations that are not bound by the circles of kinship and clan. Study after study finds that Americans are not hierarchical. American children are raised to challenge their parents. American underlings are relatively free to challenge their bosses. In this country you’re less likely to have to submit to authority.

From this story you can see that economic power in the 21st century is not going to look like economic power in the 20th century. The crucial fact about the new epoch is that creativity needs hubs. Information networks need junction points. The nation that can make itself the crossroads to the world will have tremendous economic and political power.

I can appreciate many points raised in Brooks’ article, and I think it is a well argued point of optimism in an otherwise gloomy set of predictions of America’s place in the global economy in the decades to come.  However there are just as many reasons to believe that a number of emerging markets will be able to produce this effect of “thickening” their networks to facilitate competition in the creative and innovation economies.  Having worked in a number of these up and coming emerging nations, including Latin America, Africa, and Southeast Asia, I have to say that there are some features that can actually be startlingly efficient – for example in smaller countries to have everything concentrated in one city.  The very best lawyers, bankers, traders, designers, and specialized niche consultants available can often be found within blocks of each other in these new emerging cities – not dispersed across a vast and often confusing – for the foreign investor, at any rate – “network” in the United States.

In fact, there is now the issue of a number of new emerging cities, particularly in China, which may in the future give Brooks’ networks a run for their money.  I was fortunate enough to be provided with a copy of an impressive new report being published by the Economist Intelligence Unit which represents the first, comprehensive study emphasizing the growth potential of a grouping of 20 new cities popping up in China’s interior, nicknamed the “CHAMPS.”

The CHAMPS range from Chongqing, the Yangtze River metropolis, to the coal-powered economy of Pingdingshan, where rapid increases in population, income and infrastructure development are set to outpace the coastal cities in economic growth.  The numbers from EIU are breathtaking:  over the next decade, the population of these 20 cities will grow by about 27% to 85 million people by 2020.  It is also expected that the enormous income gap between the wealthy coastal cities and the interior will shrink down from 42% to 15%, while economic growth is about five points ahead of the established cities and set to take off. 

In as much as Brooks is emphasizing the U.S. potential as a network hub for the creative economy, the EIU report points to the future mega-city of China’s interior:  Zhengzhou, the capital of Henan province, which will have a bigger economy than Sweden, Hong Kong or Israel in just ten years.  Of course all of this hype over growth in China is based on the assumption that the shift to the interior signals the long awaited transition from an export economy to a consumption economy, as these tens of millions of new wage earners begin spending on laptops, mobile phones, and TVs, among other consumer goods. Oh, and of course, all those opportunities also rest upon a little currency discrepancy.

What this all means for the relative (or steep) decline of the U.S. position in the global economy remains an open question.  As argued by Gelb, “China makes perhaps the best case for the primacy of economics. Although it might emerge as a spoiler decades hence, Beijing currently promotes the existing economic order and does not threaten war. Because Beijing has been playing the new economic game at a maestro level — staying out of wars and political confrontations and zeroing in on business — its global influence far exceeds its existing economic strength.

The nature of power politics may be shifting, and while hard military aspect of pax americana may remain intact for quite some time, until policymakers figure out that their economic policy is all that matters any more (and by most assessments, Washington has not grasped this truth), than we shouldn’t be surprised to see the leading innovation coming out of Zhengzhou instead of Silicon Valley.  Right now, the U.S. needs to revise its “story” beyond a simple sense of entitlement.