Chrystia Freeland

The American blogosphere lit up this week with discussion of a report from the International Monetary Fund that, by some measures, the Chinese economy will be bigger than the U.S. economy by 2016.

It makes a great headline, but that story was, of course, old news: Given China’s size, and the speed with which it is growing, simple arithmetic tells you that its economy will one day be bigger than that of the United States. The only question is when.

The bigger surprise is the huge affection U.S. capitalists have for Communist China.

“When I go to China, I find more people in government who are interested in learning about the things that private equity can do to help an economy and help companies than you often do in Washington,” David Rubenstein, co-founder and managing director of Carlyle Group, one of the world’s largest private equity firms, said in an interview this week.

“Washington, for a number of reasons, is not as focused on the joys of private equity,” Rubenstein explained. “So very often, you have to defend yourself when you’re talking to a member of Congress.”

Economic policy isn’t just a domestic issue anymore. That is the conclusion we should draw from the market volatility this week, including the shift by Standard & Poor’s to a negative outlook for U.S. government debt, and the meeting last weekend of the International Monetary Fund and World Bank.

This is a familiar fact for smaller countries. The emerging market nations have long understood that judgments made on Wall Street or at the IMF headquarters in Washington often had more power to shape their economic policy than the proposals of their own ministers of finance and central bankers. More recently, that is a lesson that fiscally weak Western countries like Greece, Ireland and Portugal have been learning, too.

Now, as the relative power of the United States in the global economy declines, it is a fact of life that Americans need to get used to, too. That is one of the important messages of the S&P decision at the beginning of this week to put the United States on a negative outlook – essentially a warning that the ratings agency is no longer certain the United States will maintain its AAA rating.

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.

Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated.

The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

What are the lessons the world’s dictators are drawing from the uprisings in North Africa and the Middle East? The most obvious and the most depressing is to shoot first and ask questions later. As in Tiananmen in 1989, and Tehran in 2009, the lesson of Bahrain and Syria — at least so far — is that regimes that have the will and the political unity to crack down on protesters can stay in power. (That bitter conclusion, by the way, is one reason the battle in Libya is so important: if Col. Muammar el-Qaddafi’s brutal repression of his own people works, autocrats around the world will have more evidence of the efficacy of massacre.)

Robert B. Zoellick, the president of the World Bank, is urging us all to learn something quite different and more cheering from a political transformation he believes is as profound as the 1848 “springtime of nations.” In a powerful speech he delivered in Washington this week and in an interview afterward with me and my colleague Lesley Wroughton, Zoellick argued that even dictators must empower their citizens — or risk facing their wrath in their local Tahrir Squares.

“Let’s take it to the ground in the Middle East and North Africa,” Zoellick said. “If you’re a transition leader or somebody that is going to be trying to run for election in Tunisia or Egypt, doesn’t it make sense to try to figure out, ‘How can I engage these people that were in the street? How can I connect them to the development process?”’

At 2:15 p.m. tomorrow, on Wednesday, April 6, Chrystia Freeland will interview World Bank President Robert Zoellick in Washington, D.C. In this video, Reuters Financial Blogger Felix Salmon and Reuters Editor-at-Large Chrystia Freeland discuss what they think the World Bank's role should be in the uprisings in the Middle East and in supporting countries run by dictatorships versus helping the poor in undeveloped countries.

Below are Mohamed El-Erian’s responses to questions asked by readers during the March 31 Reuters Newsmaker interview with Global Editor at Large Chrystia Freeland. An earlier set of questions and answers can be found here.

Would you give us your views on how Egypt shall grow economically and socially?

It is important to remember that Egypt is still in the midst of its revolution whose objective is greater democracy and individual freedoms. In the process, it is navigating a complex set of economic and social transitions, as well as a political one.

The economic component must deliver the conditions for sustained and inclusive economic growth, curtail rent seeking activities, and re-establish financial stability. Importantly, this speaks to both policies and institutions.

Conventional wisdom has it that the Internet is dumbing us down and making politics more partisan. Sound bites are more effective than substance. The punditocracy that shapes these truisms is, needless to say, pretty certain they apply most powerfully to people in the hinterland, especially those with a history of voting for the right.

That is why the election of Naheed Nenshi, a 39-year-old former business school professor, as mayor of Calgary, was a watershed event that should be of interest far beyond Canada, where he has already become a political superstar.

When Mr. Nenshi earned his upset victory last October, the first flutter of outside enthusiasm was about the fact that an Ismaili Muslim son of South Asian immigrants who moved to Canada from Tanzania had been chosen to lead the capital of the country’s conservative heartland.

Below are Mohamed El-Erian's responses to questions asked by readers during the March 31 Reuters Newsmaker interview with Global Editor at Large Chrystia Freeland.

Are the current "mixed signals" by the various markets similar to the ones you said were being transmitted before the financial crisis, and do you think that the current stock market trading activity signals caution, confidence or complacency? (from i8emallup)

The most striking aspect of the "mixed signals" is the contrast between corporate (bottom up) indicators and macro (top down) developments.