Sunday , February 25 2024
Weiner's readable account of tectonic shifts in global economic power is a must-read for anyone wondering why America's economic might is eroding.

Book Review: The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World by Eric J. Weiner

We once feared Japan. In the late 80s and early 90s it seemed as if Japan would rule the world. Now Japan is in crisis. If there is any absolute law of global politics, it is this: there are no absolutes in politics. All things change because the fundamentals of power change. The current object of geopolitical anxiety is China because of its spectacular economic ascent. Only recently the Chinese economy has surpassed Japan in terms of absolute GDP. But China’s ascent is shaky and its staying power in question.

To skeptics, therefore, Eric J. Weiner’s book, The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Secretly Dominate the World will sound like any number of similar warnings issued in previous moments of geopolitical anxiety. While China’s ascent to the top of the heap is an open question, as skeptics maintain, it is undeniably true, as Weiner richly demonstrates with anecdotes, numbers and examples, that the global economic balance of power has been shifting, and this is the strength of this well-researched book.

For example, Weiner cites a study that projects that the wealth of the shadow market will grow by 2013 to s tunning $18 trillion, that’s more than the size of the U.S. economy. Further, the BRIC nations (Brazil, Russia, India, and China) are projected to exceed, in the lifetime of many readers, in wealth, as measured by their combined GDP, the G7 by a stunning 25 percent. Currently the G7 are 20 percent wealthier than the BRIC nations. Changing balance of economic forces has political implications. Liquidity is influence, as Weiner demonstrates by following China’s money trail across the globe.

The period following the end of WW 2 was defined by America’s wealth. Both it and the Soviet Union wrote a lot of checks during the Cold War. Then the Soviet Union couldn’t write anymore checks and that left America as the lone superpower, but now the United States is no longer able to write checks either. China can. And it has been writing a great deal of them, spreading its influence across the globe, a few billion dollars at a time. It has also been punishing nations that contradict it on points near and dear to China’s agenda — when France supported Tibet, China’s trade mission ignored it until France repented.

No wonder that Pentagon strategists are worried enough to have been war gaming various trade and currency war scenarios, according to Weiner. The results are not encouraging. According to one such exercise conducted at the Johns Hopkins University Warfare Analytics Laboratory, the U.S. loses to China in the race for global dominance, no matter how the scenarios are played. America loses because of its enormous national debt.

Theoretically, China could cause capital flight from the U.S. if it induced economic and political instability in the country by making fractional sales of its dollar assents, driving down the value of the dollar.

Though Weiner mentions a number of nations on the rise as being part of the shadow market — Brazil, Russia, India, and the Oil States of the Gulf — the real power at the center of the shadow market is China. No other nation in history, for example, has amassed as vast currency reserves as China had. At over $2 trillion, China is now wealthier than any other power in history. Weiner shows us through anecdotes of behind-the-scenes power politics played by China just how much political power all that money buys. For example, China treats the United States and other nations as a subordinate, often making demands instead of listening.

But nations often eagerly swallow a little humiliation along with the sweet morsels of China’s cash. Indeed, China is investing billions across the globe, and it does not much care about the record these new “partners” have with the world community. China even invests in nations that are at odds with the West, such as Iran, where it dropped a cool $60 billion. Liquidity, as Weiner rightly argues, is indeed king, for Iran has been a thorn in the side of the U.S. for some time, but one that the U.S. has been able to do nothing about as Iran hides behind China’s growing clout. And this clout is bigger than America’s.

The power of China as America’s banker is formidable indeed. China has all but to threaten to sell a fraction of its dollar assets to cause financial problems for the U.S. economy. But China’s power is even more all-encompassing to the point where China really has to do nothing to cause problems. It’s so much a magnet for capital, for example, that most of the shadow market players are investing in China, rather than the U.S.

Indeed, part of the reason why banks in the U.S. have not been investing in the American economy during the Great Recession has been that a great deal of money is flowing into China. It’s a Wild West in the East, and everyone wants to get in on the action. While America’s economy is hyperventilating, China is investing a trillion dollars into a national high-speed rail system.

But the Chinese are also anxious — all their wealth depends on the continued good health of the dollar. While they can threaten to sell a trickle of their vast holdings of U.S. debt and currency, in the end they would end up hurting themselves as fractional selling off of the assets could trigger a panic, one they might not be able to control. China recognizes this vulnerability and has been calling, along with Russia and others, for a move away from the Dollar as world’s reserve currency.

Weiner’s book is a treasure trove of information about the secret world of high finance and the hidden fundamentals of global political power. Though the data he presents is not so secret, most Americans seem blithely unaware of it and will therefore find the book a good review of the events behind the news of the last fifteen years or so.

The shadow market is, according to Weiner, “an invisible and ever-shifting global nexus where money mixes with geopolitical power…a collection of unaffiliated, extremely wealthy nations and interests that effectively run the international economy through their prodigious holdings of stocks, bonds, real estate, currencies and other financial instruments, which they keep in largely unregulated financial vehicles such as hedge funds, private equity funds, and government run sovereign wealth funds, as well as vast government-owned holding companies.” The players of the shadow market do not involve themselves in global matters but focus on protecting their own interests, forming what Weiner calls wealthy neighborhoods. They cooperate within these loose neighborhoods more readily than across the globe. In 2008, for instance, China rebuffed efforts by the Bush administration to support the U.S. financially, saying, in essence, China can’t save the world. The same refrain was heard by U.S. envoy in the other wealthy neighborhoods.

Another aspect of the shadow market is the nations that comprise it — these are, for the most part, not free politically or economically, though they’ve played the game of capitalism well. In nations like China, money earned belongs to the government, not the enterprises or the shareholders. The wealth such a nation control often becomes a weapon in a geopolitical agenda. China’s careful investments — a billion here, a billion there — including U.S. banks such as Morgan Stanley and private equity funds is aimed at economic return and political influence as well. As owners of 10 percent of Morgan Stanley, the Chinese now have subtle influence in Washington. Liquidity is power. For America the problem is that its creditors are not its allies, Weiner warns.

Does Weiner make the case that the shadow market is a truly new force in global politics? He presents an engrossing and remarkably lucid account of the changes in the global economy and paints a stunning, at times troubling picture of China’s growth and its growing political clout. But China could ultimately fail. To the extent that China is the biggest component of the shadow market, that market is vulnerable to fast dissipation. While Weiner focuses on China and dramatically narrates the shift of economic power East, he does not deal much with the other parts of the shadow market all that much. It’s mostly all bout China. 

Yes, China is growing in power, and it does own a great deal of U.S. debt, but the devil is in the details. China has fundamental problems that bar its further rise, for one thing. Weiner acknowledges the uncertainties by quoting one serious skeptic, Simon Johnson, who argues that China has not been able to innovate so far.

And it is not certain that it ever will, because it is essentially a command economy based entirely on government-owned companies, a fact that few have paid attention to because of the spectacular success China has had so far. But the cause of their success so far has been simple: China has leveraged its enormous, cheap workforce to produce goods that are inexpensive, comparatively speaking. And it has done this, according to some, through what amounts to currency manipulation. (Weiner also documents China’s other sins: dumping and even bribery.) The Chinese currency is estimated by the IMF and the World Bank to be as much as 25 percent undervalued. China’s economy is therefore highly vulnerable, for if the Chinese currency were appreciated, China’s exports would fall and the Chinese miracle economic would be over. That is why China resists any mention of currency appreciation.

China is also vulnerable on a more fundamental point — it has the kind of command economy that most economists have been advising the East European nations after the fall of the Soviet Union to reform as quickly as possible because it was unworkable. In a twist of truly cosmic irony, the very same economists who advocated privatization in nations of Eastern Europe are oddly mum about privatization in China.

But command economies are fundamentally disadvantaged, something that will become an increasing problem for China. Command economies cannot innovate. And for this reason a Chinese Steve Jobs is impossible. Without becoming innovators, Chinese are locked into being imitators. Playing second suit is not where economic growth happens — at some point China will have to change its currency policy and then its growth model will collapse.

The bottom line is that China has yet to compete on its own strengths in the global economy, to innovate and produce goods at true cost rather than at artificially lower prices. China’s growth model is fundamentally distorted and ultimately unsustainable. But innovation requires a free culture: one where people are free to think and to do business. China is all about control and its business environment is well described by Weiner as “byzantine.” Foreign companies face numerous obstacles to doing business there. Whether China will be able to transform itself into a free country and actually have a free market is in doubt and so it’s future as a world power is in question.

About A. Jurek

A Jurek is a Blogcritics contributor.

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