Archive for the ‘American “decline”’ Category

“Government spending has continued to balloon in recent years”

13/09/2016

A piece discusses the Chinese economy, “Since the end of 2013, Chongqing — a city of 33 million people in China’s southwest known for its spicy food and political scandals— has been quietly selling off equity in city-owned companies at a time when state-sector reform, announced to much fanfare by President Xi Jinping three years ago, had otherwise seemed to have stalled amid bureaucratic infighting. In a country that often trials economic reforms at a local or regional level before rolling them out nationwide, that suggests there might be hope for Xi’s reform agenda. Equally as important, Chongqing’s experience also suggests a solution to one of China’s other intractable economic problems: local government debt”.

It goes on to point out that “China’s state-owned companies are the laggards of the economy. They areabout a third as efficient as private-sector companies — as measured by return on assets — despite being supported with a host of subsidies and other perks. State companies account for only about a quarter of economic output, but they dominate some of the most important industries, like telecommunications and banking. In November 2013, Xi called for what he termed “mixed-ownership” reform that would lift the efficiency and effectiveness of state-owned companies by diluting government holdings. Governments would sell down their shares to other state companies, pension funds, private equity investors, as well as private and foreign companies in the hope that a greater range of shareholders would unleash companies’ entrepreneurial spirits. If anything, however, reform has gone backward. In June, Beijing ruled that the Chinese Communist Party must have a say in all major business decisions taken by state companies. Meanwhile, Beijing seems to be moving in the opposite direction: In December 2015, it mergedtwo of its shipping giants, followed shortly by its two leading train makers, creating even bigger national champions.”

The article mentions that “What Chongqing is doing is found at the other end of the strategic spectrum. Chongqing would gain little, if anything, from retaining ownership over the type of companies it’s been selling. Equity in fun parks and baijiu distribution companies have been put on the block. Some companies have been big — being sold for billions of yuan — and some small, but regardless of size they haven’t occupied the economy’s commanding heights. As to whether Chongqing’s equity sales have resulted in more efficient companies, there’s no way of telling as of yet. But it may do wonders for the city’s finances. Despite repeated efforts by Beijing to rein in debt, local government spending has continued to balloon in recent years. According to data compiled by China Business News based on disclosures by local governments, China’s provinces — including Chongqing, a municipality with the administrative rank of a province — on average saw a 47 percent increase in debt between mid-2013 (the last time there was a nationwide audit) and the end of 2015. The increase varied widely, with the far western region of Ningxia posting a 127 percent increase, while its neighbour Gansu increased by only 40 percent. Chongqing saw its debt burden decline by 4.6 percent, or about $2.4 billion on debts of about $52.6 billion, making it one of only two provinces that reduced its deficit. That’s all the more significant given that Chongqing has the fastest-growing provincial economy in China, expanding 11 percent in 2015 compared with 6.9 percent for the country as a whole. None of the usual economic indicators explain how it has managed this twin feat of record growth and reduced debt. It hasn’t changed its growth model: The city is heavily dependent on investment, with fixed-asset investment (money spent on capital goods like machinery and buildings) growing by more than 17 percent in 2015. The most important tool available to local governments to fund investment and pay down debt is selling land, but Chongqing’s land sales fell 7 percent in 2015. Local governments also are trying to encourage private investment in infrastructure, thereby lessening the state’s funding burden, but Chongqing has arranged only a handful of so-called public-private partnerships, far less than most provinces. That leaves state-owned equity sales. In his 2016 annual work report — a kind of State of the City address — Mayor Huang Qifan, the city’s second in command, said that in the course of pursuing mixed-ownership reform, Chongqing sold about $10.6 billion worth of equity in state companies the previous year. In his 2015 report, he said the city sold $17.4 billion worth of equity in 2014. That’s equivalent to 44 percent of land sales in 2015 and 68 percent a year earlier”.

Interestingly it notes how “Nationwide, local governments own about 100,000 companies, with assets that could be worth about $7.5 trillion. Chongqing alone has $375.4 billion worth of state-owned assets, seven times its debt. The difficulty has always been that meaningfully large assets sales were off-limits. Chongqing’s efforts seem to have really kicked into gear in the second half of 2014, when the Chongqing State-owned Assets Supervision and Administration Commission (SASAC) — the agency responsible for regulating state companies — posted on its website a spreadsheet of 110 state companies, assets, and projects in which it was willing to sell equity and included contact names and phone numbers for the SASAC officials responsible for selling them. If you were interested in Locajoy, which was valued at about $300 million, you could contact Luo Rui, who would also entertain joint venture and leasing offers. It was an eclectic list that included eight live-aboard riverboats that cruise the Three Gorges, a popular tourist destination; a 10,000-ton electrolytic copper converter; and an iron-ore mine in western Australia — just the sort of companies a provincial government has little business being involved in”.

It concludes “Beijing still has to decide whether Chongqing’s experience is worth rolling out nationwide. Relative to China’s provinces, Chongqing is very small and Beijing regards Huang as a safe pair of hands when it comes to economic reform. Applying this to other provinces is more risky. When the central government published its long awaited state-sector reform blueprint in September, it was notable for just how jittery Beijing is about state assets being sold off too cheaply. That’s what brought state sector reform to a shuddering halt a little more than a decade ago, amid a public backlash against asset stripping and the perception that insiders were getting sweetheart deals. With cash-strapped local governments desperate to pay down their debts, there’s no guarantee that it won’t happen again. Of course, part of the problem is that it’s difficult to set a price for money-losing companies. For Locajoy, that might prove particularly difficult because there isn’t really a market price for performing dolphins, or for the dancing bears at the in-house circus. But the city of Chongqing’s willingness to try to find a price has put the amusement park at the cutting edge of one of China’s most anticipated economic reforms, one that could have a meaningful impact on the nation’s economic health”.

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Brazil after the Olympics

01/09/2016

A piece notes the problems of Brazil after the end of the Olympics, “The Olympic torch was extinguished Sunday night in a carnival of song and dance, the good times rolled. But it is too early to determine whether or not the games were a success or just a muddling through difficult days. Swimming pools turned green. Some 85,000 soldiers and police were mobilised to provide security, but instances of muggings,stray bullets, and petty theft made headlines. The pollution in Guanabara Bay sickened at least one athlete. And, of course, six-time Olympic gold medalist Ryan Lochte and three of his fellow swimmers embarrassedthemselves. But the enthusiasm of many Cariocas — as Rio de Janeiro’s residents are called — partially compensated for the long lines to enter venues, food shortages, and challenging transportation delays. However the games will be remembered, it has at least been a temporary respite for Brazilians from the ongoing political and economic crises that have gripped the nation”.

More importantly it mentions “As the games end, the impeachment of President Dilma Rousseff will move to closure with Aug. 25 cited as the day the last phase of the process will open. Rousseff faces charges of violating budget laws by authorizing credit lines without congressional approval. That is the formal indictment. But there are many other elements involved in the accounting of her very public national downfall. Rousseff, by most accounts, was a terrible politician. Brazil is a multiparty political system, and the only way to get legislation approved is to constantly build short-term coalitions in Congress; instead, she refused and played to her base. Even worse, she was often petty: In particular, she sought to prevent the re-election of Eduardo Cunha as the speaker of the lower house. In retaliation, it is said, he initiated the impeachment process. Many blame her government for the economic and financial crises that now plague the country. By most accounts, she appointed mediocre functionaries to important cabinet posts. And her Workers’ Party (PT) never encountered a welfare program it didn’t like. As a result of massive public sector spending, the economy overheated. Inflation increased, as did unemployment. Foreign direct investment fell”.

It adds importantly, “the hallmark of the current crisis was the discovery that the state oil company, Petrobras, had become a major source of bribes and kickbacks that were used to finance party politics. Most of the country’s major construction companies were involved, and a host of political leaders across the party spectrum have been implicated in the scandal. It did not help Rousseff’s credibility that she served as the minister of mines and energy and chair of Petrobras while many of the crimes were committed. Of course, she denies any knowledge of what occurred. But the scandal is so large as to deem that defense laughable. A new generation of federal prosecutors have arrested or indicted many of the alleged participants of the conspiracy. Dozens of senior politicians and private sector officials sit in jail. Some are involved in plea bargains; most will serve some time in prison. For economic and political elites who believed they could act with impunity, the new reality that crimes will be punished is a shock — but one that will serve Brazil well in the future. The cozy, often crooked ties between the private sector and the huge, inefficient public sector have been dealt a serious blow”.

It goes on to point out that “though the sins of an economic giant are being laid bare, the country’s finances are still in great distress. A decade ago, Brazil was seen as a rapidly emerging economy — one of the skyrocketing BRICS (Brazil, Russia, India, China, and South Africa) that would own the future. Those were heady days, especially for Brazil. A sharp increase in demand for Brazilian raw materials and commodities, particularly from China, provided an ever-increasing amount of foreign exchange. Investment flowed in. Brazil was upgraded by all the rating agencies. But the PT didn’t understand that the economy was actually neither productive nor competitive globally. Priorities such as physical infrastructure were overlooked. Rigid labour laws, many on the books since the 1930s, made it difficult to fire unproductive workers and hire new ones. Skills were subpar; both technical training and general education languished. Public health, while universal, was substandard. Social security coverage extended benefits to both public sector employees and the private sector, but deficits ballooned and reform was postponed. Brazil’s tax collection was in disarray — leveed at the union, federal district, state, and municipal level, the burden surpassed 33 percent of the country’s GDP. Meanwhile, government grew bigger and bigger as the PT sought to employ as many of its party members as possible, often with little thought to their competence”.

The author mentions that “The acting president, Michel Temer, if confirmed at the end of August as the new chief executive, apparently wants to undertake a reform program. The first priority is to rein in government spending, cutting pensions and workers’ benefits. As might be imagined, the unions are outraged; there will be massive protests if the government decides to move forward”.

He points out its rising debt, partly due to an aging population, “Compounding the problem of a stable social safety net is Brazil’s profound inequality. There is a tremendous gap between the very rich, a struggling middle class, and the poor. The Olympics captured that disparity: As sweeping aerial shots panned from the beachfront condos of Ipanema to the mountainside favelas, or slums, the media didn’t shy from reports on the inability of the favelados to afford tickets for the events. Many of the favelas lack sanitation — a major cause of the pollution in Guanabara Bay, since raw sewage runs directly into the water. Promises to install processing plants have been on hold for decades. Security was frequently highlighted in the media coverage. While tourists and middle- and upper-class Brazilians cheered in the Maracanã Stadium, the favelas were home to the ongoing drug war between the gangs and the security forces”.

It concludes “As the games end and the impeachment process terminates, probably with the dismissal of Rousseff, the grim questions that mark Brazil’s present predicament will resurface. Can public education and health facilities be reformed to give security and opportunity to those in need? Can a corrupt, inefficient, and immense federal government be downsized? After decades of out-of-control growth, are there too many political interests at play to allow for meaningful reform? Can Brazil reinvigorate industry to provide new export products in a world where commodity prices will probably be flat for some time? The short answer is that changes are possible — but not without government reforms first. Most observers agree that much of the gridlock in Brasília is due to the dysfunctional political party system. Remarkably, ideology isn’t the problem: Politicians move from party to party with little regard for loyalty. But changing the system — creating electoral districts and reducing the number of political parties — will require congressional approval. Few analysts believe that there is a broad enough coalition in Brasília that will forgo perks and patronage to make selfless decisions for the good of the state”.

It ends “Local elections are scheduled for October of this year; the results may provide some insight into the impact of the current situation on the average voter. The expectation is that Rousseff’s PT will do poorly at the expense ofpersonalist parties. National elections will take place at the end of 2018. Temer has already said he will not be a candidate. The PT’s former two-term president, Luiz Inácio Lula da Silva, looks increasingly like a liability — and he may well be indicted as part of the ongoing scandal. Will new reform-minded candidates emerge? That is the hope — but there is no guarantee that fresh faces will be able to successfully address the reform agenda. Some argue that economic growth will begin to return in late 2017 or in 2018. If Temer becomes president after the impeachment, he has promised to work with Congress to approve much needed fiscal reforms. Brazil would also be helped if global commodity and raw material prices recover. Surely, Brazil’s working and lower classes will cheer, but the welcome relief may only delay the inevitable reckoning with the painful realities that need to be addressed”.

 

The end of the BRICS, the US remains

06/08/2016

An important article discusses the end of the BRICS as a threat to the United States, “When analysts and scholars compose their first drafts of the history of the Obama administration’s foreign policy, a chapter will surely address what were once dubbed “rising powers,” a group that included Brazil, Russia, India, China, South Africa, and others. But the optimism of 2008 — when the so-called “BRICS” were ascendant, ready to reshape global economics and politics — has turned to doubt. The impeachment trial of Brazilian President Dilma Rousseff and a Russian doping scandal that only a Soviet could be proud of are just the latest unmistakable signs that a surge of newly powerful nations collectively remaking the world stage is hardly a sure thing. A few years ago, a mortal rupture in Europe would have invited crowing over “the demise of the West and the rise of the Rest.” Now, the picture is more complicated: Europe is in disarray, as are several of the might-have-been beneficiaries of the continent’s turmoil. And as the United States looks ahead to a new administration come January, its approach to shifting global power relations will be ripe for a rethink. Amounting to neither a freshly minted set of trusty democratic allies nor a cohesive counterweight to the Western order, newly powerful nations are proving to be less predictable, more fragmented, and ultimately more reinforcing of U.S. power than even Washington’s own intelligence establishment predicted a decade ago”.

The piece add, “In the latter years of the George W. Bush administration and the early part of the Obama years, rising or so-called “emerging” powers seemed to captivate the foreign-policy establishment. Foundations and think tanks proffered rising powers projects, conferences, and white papers. Some were bullish. Analysts, including Princeton’s Anne-Marie Slaughter and John Ikenberry, predicted the rise of a group of new democracies — with Brazil, India, and South Africa topping the list — that would grow into natural allies for the United States. Everyone from John McCain to Madeleine Albright (who promoted the idea nearly a decade before others cottoned on to it) advocated uniting democracies in a global alliance premised on shared values and joint action. On the flip side, other academics and analysts anticipated that the rise of new powers could only herald an American decline. In 2010, University of Wisconsin-Madison professor Alfred L. McCoy predicted “imperial collapse” and “painful daily reminders of what such a loss of power means for Americans in every walk of life.” A detailed study prepared by officials from rising powers and published by Oxford University Press in 2012 explicated the “synergies and complementarities” that had “already catapulted the BRICS into a leadership position” globally. As Autonomous University of Madrid professor Susanne Gratius wrote in 2008: “In recent years a number of emerging nations have been challenging the position of dominance of the old powers, which are dropping down the international pecking order.” The downcast lot predicted that the decline in relative importance of the United States would be matched only by that of Europe, inaugurating what historian Timothy Garton Ash termed “Europessimism,” a creeping sense that the continent was being edged out by the fast-rising states of China, India, Brazil, and Russia”.

Importantly the piece goes on to mention that “The one thing the two sides agreed on was that the shifts wrought by rising powers would be tectonic. In “Mapping the Global Future,” an influential analysis published by the U.S. National Intelligence Council (NIC) in 2004, intelligence experts predicted that the “‘arriviste’ powers—China, India, and perhaps others such as Brazil and Indonesia—have the potential to render obsolete the old categories of East and West, North and South, aligned and nonaligned, developed and developing.” The report made headlines like “2020 Vision: A CIA report predicts that American global dominance could end in 15 years.” Not so fast, as it turned out. Many of the premises undergirding these predictions evaporated in the ensuing decade. The genesis of global focus on rising powers was a 2001 analysis by Goldman Sachs’s Jim O’Neill that forecast faster, more consistent growth rates among emerging economies that would position them to gradually dominate the world stage, eventually leaving only the United States and Japan among the traditional industrial powers still ranking among the top six global economies. The bank focused on Brazil, Russia, India, and China — a group that O’Neill dubbed the “BRICs” and, later, the “BRICS,” after South Africa’s induction. While Goldman’s analysis was full of caveats, policy wonks focused on the breathless expectation of sustained, rapid growth by emerging economies. Goldman’s anointment of the BRICs as the emerging markets “most likely to succeed” prompted a flurry of prognosticators to formulate their own acronym accolades: MIST (Mexico, Indonesia, South Korea, and Turkey — which O’Neill designated as next in line after the BRICs) and SANE (South Africa, Algeria, Nigeria, and Egypt — supposedly the African continent’s leading up-and-comers). Britain’s Telegraph went so far as to publish a full lexicon of the emerging-market alphabet city”.

Pointedly he argues “Fifteen years later, several of those BRICS (not to mention MIST or SANE) are crumbling, done in by self-dealing, asset bubbles, stock market swoons, commodities fluctuations, and finite supplies of low-wage workers. In a warning published in January, the World Bank predicted negative growth in Brazil and Russia, just over 1 percent growth in South Africa, steady growth of 7.8 percent in India, and a shortfall from expectations in China topping out at 6.7 percent. As the Financial Times put it: “What had once been the brightest spark in the global economy has now become its big headache.” Late last year, Goldman finally shuttered its BRICS investment fund, which had lost 88 percent of its value since its 2010 peak. The problems aren’t merely economic. Politically, several of the BRICS have proved similarly unstable. The rise of emerging powers was premised on the notion that they were domestically stable, ready and able to consistently project global influence. While some analysts spotlighted corruption, institutional weakness, and political dysfunction as risks, such concerns were often relegated to the footnotes. As the 2020 NIC project put it in its report: “Only an abrupt reversal of the process of globalization or a major upheaval in these countries would prevent their rise.” Yet in South Africa, Brazil, and Russia, corruption and governance failures have proved catastrophic. Whether you think Rousseff is being rightfully targeted or unfairly scapegoated — and no matter what you make of charges that her interim successor is trading favors for the votes to impeach her — none of it augurs well for Brazilian governance. In South Africa, President Jacob Zuma narrowly withstood an impeachment campaign and now clings to office as a lame duck in what is effectively a one-party democracy. While Russia and China continue to project firm centralized authority, their intensifying crackdowns on dissidents, lawyers, and influential cultural figures bespeak regimes nervous that corruption and economic slowdowns could turn their populations restive”.

The author posits that “Back when rising powers were in style, theorists diverged on what to expect from their foreign policies. Some expected the leading democracies to align with Washington, whereas others foresaw a solid political bloc of BRICS holding Western influence in check. Neither vision came true. In their approach to international human rights and humanitarian intervention, rising democracies have been influenced by their post-colonial identities far more than their modern political bedfellows, emphasizing respect for sovereignty over the moral imperative of civilian protection or conflict prevention. Brazil and India abstained on the 2011 U.N. Security Council resolution authorizing the use of force against Libya’s Muammar al-Qaddafi, anxious about the prospect that intervention could lead to regime change. Those two countries and South Africa have taken a reticent approach to handling the civil war in Syria, straddling the middle, but with a tilt more toward Russia and China than the United States and Europe. But while dreams of a powerful “alliance of democracies” have been dashed, the nightmare scenario of a solid BRICS wall has also failed to manifest. While the BRICS do meet periodically as a group, diverse growth rates, population sizes, carbon emissions levels, wealth, and other indicators dictate diverging interests on issues including the global economy and trade, climate change, nuclear proliferation, and conflicts in the Middle East. BRICS countries have come together to form their own development bank, a rebuke to the Western-dominated International Monetary Fund and World Bank system. But the two most powerful and stable nations in the bloc, India and China, are increasingly at odds over terrorism, Beijing’s regional ambitions in the South China Sea and beyond, and New Delhi’s strategy of hedging through strengthened relations with the United States and Japan”.

The writer mentions that “First, the United States’ status as what Madeleine Albright once called the “indispensable nation” remains intact. The United States is far from omnipotent and has bumped up hard against the limits of its diplomatic influence and military capabilities in places like Iraq and Afghanistan. But when it comes to catalyzing global action and providing the decisive voice in whether, and to what degree, a global conflict — Libya, Syria, the Islamic State, Ukraine, climate change, Ebola, take your pick — will be addressed at a global level, no other country’s say comes close to Washington’s. With the exception of Russia (where President Vladimir Putin seems motivated by dual desires to check the United States and perpetuate his own personal power), no other rising power has sought to call the shots nor assumed an obligation to lead outside its region. Second, Europe still matters. The implicit logic of the rising powers was that they would leave the continent a relic of a bygone era of power relations. Despite its economic stagnation, political malaise, refugee crisis, and rising right wing, Europe remains, by far, the United States’ most stable and reliable major ally. While Brexit has dealt a major blow to the European Union, it is likely to further strengthen U.S. relations with Berlin, Paris, and any other European capital that may stand in for London as Washington’s go-to conduit within the union. Just as many Brits belatedly seem to be awakening to just how important the EU is, so Washington may emerge from the crisis with a heightened sense of appreciation for the bloc. Whether on Iran, Ukraine, the Islamic State, or virtually any other issue, European support is the necessary — if no longer sufficient — precondition for U.S. action to enjoy legitimacy”.

He contends that “A third conclusion derived from the uneven rise of new powers is that China’s rise has rendered the United States more, not less, globally important. Rather than becoming the has-been many predicted, the United States, due to China’s surging influence, has become a far more important ally to countries throughout Asia and beyond. As China’s regional neighbors seek to fortify themselves against the behemoth next door, their relationships with the United States have both broadened and deepened. The U.S. pivot to Asia is now being driven as much by local demand for an American presence in the region as it is by Washington’s fear of being edged out. Recent discussions about arms sales and even the possibility of a renewed U.S. military presence in Vietnam are only the latest manifestations of thickening ties between the United States and numerous allies in the region, including South Korea, Japan, the Philippines, Malaysia, and Indonesia”.

He ends “After 9/11, and once the long-term damage to the United States’ global standing began to recover from the 2003 Iraq War, foreign-policy thinkers started opining about what would come after what Charles Krauthammer once dubbed the country’s “unipolar moment” following the end of the Cold War. Richard Haass of the Council on Foreign Relations projected a nonpolar era, with power widely dispersed. New America’s Sherle Schwenninger and others forecast a multipolar world. The prognostication-defying fate of the BRICS over the last decade, not to mention last week’s Brexit shocker, may point to a more unsettling prospect: an ambipolar world — ambivalent, ambiguous, ambient — where power is diffuse and national fortunes rise and fall to a rhythm too complex for any theory to adequately reflect. So rather than betting heavily on specific winners and losers, the United States should diversify its diplomatic capital, recognizing that predicting the path of the world’s rising powers is an uncertain business at best.

 

“Instead of promoting sound markets, the government twisted them to drive economic growth”

01/06/2016

A report from the Economist writes about the contradiction between state control and problems of the financial system, “IF YOU SCOUR the annual reports of China’s biggest banks, you will find hardly a mention of the Communist Party. There are passing references to the “Party Discipline Office” in descriptions of the banks’ internal structures, and the biographies of a few executives note that they graduated from the “Party School”. But that is about it. Only when you get to Citic Bank, the ninth-largest by assets, is there any suggestion that the party might play an important role. The first four of Citic’s objectives for 2015 read like those of banks anywhere in the world: improve management, increase profits, control risks and boost efficiency. Its fifth and final objective, though, is quite distinctive: “Comprehensively strengthen construction of the party”. In all countries there is a gap between what banks and regulators reveal to the outside world and what happens behind the scenes”.

Crucially it adds, “In China that gap is wider than usual. The party’s unchallenged, spectral position at China’s apex gives it a tight grip on the financial system but also causes many of its ills. The key to understanding the party’s influence is that it does not simply sit atop China’s financial institutions. At the highest levels, it is them. The same people often hold senior roles in both their firms and the party. As far back as 1995 the Chinese government declared that banks were to be commercial entities, focused on making money and responsible for their losses. When the government invited foreign firms to take stakes in the country’s biggest banks in the early 2000s and encouraged them to list on stock exchanges, its ambition was to instil a businesslike mindset. Hard-nosed investors would scrutinise their books and put pressure on them to perform well. Up to a point, this has worked. China’s banks, brokers and insurers have acquired the patina of profit-focused banks. They file regular statements to stock exchanges and publish glossy annual reports. Their results are reviewed by international auditors such as KPMG and PwC. Their risk-control departments stress-test their balance-sheets. Over the years they have become leaner: Agricultural Bank of China, for one, has cut back from 50,000 branches in 2000 to less than half that today. But if considerations of social stability and market efficiency clash, the former almost always wins. When the global financial crisis erupted in late 2008, banks had to toe the party’s line and finance the government’s mammoth stimulus. When the stockmarket crashed last June, state-owned brokers were ordered to buy shares and banks were made to lend to them”.

Interestingly he notes “the party’s hand is visible in bankers’ daily lives. If you step out of the lift on a Chinese bank’s executive floor, you will often see signs pointing to the president’s office in one direction and to the office of the discipline inspection committee (the body in charge of enforcing party rules and rooting out corruption) in the other. In much the same way that Xi Jinping is presented to foreigners as China’s president but described domestically as general secretary of the Communist Party, so bankers wear two hats. The person whom investors know as chairman is also known internally as the bank’s party secretary. Like the heads of other state-owned corporations, China’s titans of finance are moved among institutions whenever the party’s organisation department sees fit. In the first decade of the 2000s at least 43 senior cadres shifted from one top financial firm to another”.

Worryingly he writes “in China the whole point is to fuse the elite together. Regulators and financial firms are meant to work towards the common goal of building a prosperous nation. However, just because the party is in control does not mean that it has things under control. Last summer’s stockmarket crash and the capital flight of recent months are only the latest examples of its frailties. Crudely put, shadow banking has evolved in recent years through firms devising investment products that get around regulations; the government slowly catching on; and the firms responding by finding new loopholes. If the party is so powerful, how can its edicts be so blatantly disregarded? Many in the government now believe the failure lies in the structure of regulation. In the early 2000s China divided its supervisory framework, appointing a banking regulator for banks, an insurance regulator for insurers and a securities regulator for brokers. That worked well enough for a decade, but as the financial system has grown bigger, so have the holes in it. Last year’s stockmarket crash exposed some of them. The securities regulator, looking at margin financing on brokers’ books, saw little danger from investors buying stocks with borrowed cash. The bank regulator, focused on lending, did not watch off-balance-sheet products that brought yet more leverage into the market”.

The piece mentions that “the concentration of power has, if anything, been associated with greater instability in markets and unpredictability in policy. Officials at all levels are more hesitant, afraid of making decisions that go against what Mr Xi might want. Regulatory bodies tried their best to recruit people with experience working for top-flight international firms, but after a few years of low pay and limited influence many have left. Some believe the problem lies in the very nature of party control. Governments have three basic functions in finance: as promoters of healthy market development; as regulators of institutions; and as owners or guarantors of firms, especially at times of trouble. In a stinging report last June, the World Bank said China had mangled all three. Instead of promoting sound markets, the government twisted them to drive economic growth; the state’s ownership of financial firms was too pervasive; and regulations were consistently loosened to suit economic priorities”.

The piece advocates for banks and other businesses to go bust, despite the political consequences, “Even with the best intentions, this transition is bound to be volatile. Government guarantees—sometimes explicit, often implicit—blanket much of the economy. Many in China, from investors to bankers, assume that local governments and state-owned enterprises (SOEs) cannot fail. By fostering cohesion, the party encourages the belief that, if the worst happens, it will keep credit rolling over. Private companies understand the power of this belief. Whereas state-owned banks often hide their party background, their shadow peers play up their government connections, however tenuous. Ezubao, the large peer-to-peer lender that collapsed recently, held its annual meeting last year in the Great Hall of the People in Beijing, the venue for big party gatherings (which is available for hire when not in official use), and advertised in state media. Investors who lost their money have protested, demanding that the government compensate them”.

The piece ends “Yet that can have extreme repercussions. In China’s struggling industrial heartland, the Hebei Financing Investment Guarantee Group, a government-owned company, underwrote vast amounts of loans to small manufacturers over the past decade. Thanks to its support, lenders treated the manufacturers as virtually risk-free. But when they began defaulting, Hebei Financing could not come up with the money. Last year it revealed that 32 billion yuan of loans it had guaranteed were in danger. Soon afterwards, a distraught investor stabbed the CEO of Global Wealth Investment, a fund manager that had lent to companies backed by Hebei Financing. Alarmed at the prospect of unrest, the Hebei provincial government has since scurried to make good on the loan guarantees, at least in part. It set up a re-guarantee company, in effect underwriting the underwriter. That has helped mitigate panic, but the trade-off has been moral hazard: investors will continue to expect the government to bail out state-run companies. Elsewhere the party is taking a harder line. A handful of small state firms have missed bond payments this year. A credit-risk officer with a mid-tier bank says his team no longer assumes that provincial-level SOEs will receive bail-outs. He expects a few bankruptcies of government-backed steel mills and coal miners. But neither he nor almost anyone else thinks China will allow the biggest state firms to default. With so many economic and political levers in its hands, the party still retains plenty of control for now. The rest of the world can only watch and wait”.

“Raise the spectre of a fearsome crash”

30/05/2016

A piece from the Economist argues that China needs to “free up” its financial system in order to “save it”, it opens, “Decades of heady growth had put money into the pockets of Sheyang’s residents. But China’s big banks had little time for the countryside. Farmers who wanted to buy homes or start companies struggled to get loans. Illegal lenders stepped into the gap; they collected cash from those with idle savings and lent it out, often at double-digit interest rates. Business boomed. As locals put it, the lenders sprouted up like bamboo shoots after a spring rain—until a few years ago, when a harsh wind uprooted them. The economy was slowing and investment plans relying on superfast growth fell apart. Borrowers could not pay back what they owed. The unregulated lenders started defaulting on their depositors. Panic spread. In March 2014 it was rumoured that even Sheyang Rural Commercial Bank, which is owned by the government, was low on cash”.

It goes on to argue “This was enough to spark China’s first bank run in years. Crowds gathered outside its branches, waiting for hours in the drizzly chill to get their money out. Bank managers stacked up bricks of 100-yuan notes (China’s largest denomination) to show they had sufficient cash. Yet fear travelled like a virus, infecting another nearby bank. On the third day of the panic the China Banking Association, an industry group, entered the fray and declared the rural banks to be healthy—in effect, pledging to stand behind them. That ended the run. It had taken the full weight of the nation’s banks acting in concert to restore calm. One county’s travails might not seem worth making a big fuss about. After all, the deposits at Sheyang Rural Commercial amount to just 13.5 billion yuan ($2.1 billion), barely 0.01% of the total in banks nationwide; and the problems were successfully contained. But the run raised troubling questions. How could the authorities have let so many illegal lenders operate? Why were they suddenly collapsing? If they were in such bad shape, were proper banks safe? Was China on the brink of a financial crisis? Sheyang’s bank run is just one of a series of problems to reveal cracks in the Chinese financial system in recent years. Others include a cash crunch in 2013, a wave of shadow-banking defaults in 2014, a stockmarket collapse in 2015 and a surge of capital flight at the start of 2016. Underlying it all, China has seen a dramatic rise in debt, from 155% of GDP in 2008 to nearly 260% at the end of last year, according to an estimate by The Economist. Few countries have gone on borrowing binges of that magnitude without hitting a crisis”.

The article goes on to argue “The scope for potential trouble in China is immense. Its banking sector is the biggest in the world, with assets of $30 trillion, equivalent to 40% of global GDP. China’s four biggest banks are also the world’s four biggest. Its stockmarkets, even after the crash, together are worth $6 trillion, second only to America’s. And its bond market, at $7.5 trillion, is the world’s third-biggest and growing fast. A cocoon of regulations limits direct foreign involvement in China’s financial system, but connections are deepening by the day. Given its economic heft, serious problems could easily dwarf the global consequences of any previous emerging-markets crisis. Even the mild yuan depreciation at the start of this year (1% against the dollar in one week) sent shock waves around the world, upsetting stocks, currencies and commodities. Just imagine the effects of a big one. Still, it is worth recalling that predictions of financial doom in China have long been wrong. Because of the nature of the system—the state owns both the banks and their biggest borrowers—the government is in a much better position to dictate outcomes than those in most other countries. Until recently the financial system has been very conservative. Plain-vanilla bank lending is the dominant form of credit; exotic products such as securitised loans that caused havoc in rich economies barely exist in China. Moreover, liquidity buffers are strong: residents have historically had little choice but to stuff their cash in banks, and a semi-closed capital account has made it hard for them to send money abroad”.

Yet it notes that “China’s status quo cannot be sustained for ever. Returns on capital are declining. It now takes nearly four yuan of new credit to generate one yuan of additional GDP, up from just over one yuan of credit before the global financial crisis. As the population ages and the economy matures, growth is bound to slow further. At the same time, bad debts from the past decade’s lending binge are catching up with banks. Given slower growth, it will be tougher to clean them up than it was 15 years ago, when the country was booming. Moreover, the edifice of control is getting shakier: shadow finance is eating away at the power of state-owned banks, and the capital account has sprung leaks that regulators are struggling to plug. China has, in other words, reached a level of development where it needs a more sophisticated financial system, one that is better at allocating capital and better suited to the market pressures now bubbling up. The government pays lip service to this, and indeed some reforms point in the right direction: it is deregulating interest rates; the exchange rate, though still managed, is more flexible; defaults are chipping away at the notion that the state will guarantee every investment, no matter how foolish”.

It mentions that “This report will argue that China is faced with two unpalatable options. One is that it moves more boldly to free up its financial system. That would be the right thing to do for the future but would release pent-up perils now; defaults would climb, banks would rack up losses and many shadow lenders would go bust. The other is that China eschews reform and instead tries to patch up its current system. That would be easier in the short term, but the inexorable accumulation of debt would sap the economy’s vigour and raise the spectre of a fearsome crash. In practice, the government has wavered between the two options. In good times, when the economy behaves as it should, it plods ahead with reforms. But at the first whiff of trouble it tends to lose its nerve, building up much bigger problems a few years hence. China needs to move faster, even at the cost of greater turbulence today”.

It ends “Some good at least came of the Sheyang bank panic. China introduced nationwide deposit insurance last year, trying to reassure savers that their money is safe, no matter what happens to their bank. Banks have also raised their game, as demonstrated by the car giveaway at Sheyang Rural Commercial Bank. People again line up at its doors, only this time to put their cash in the bank, not take it out. But financial fragility is surfacing nearby. Grass encroaches on the lot of a textile company that defaulted on a bond last year. And on the county’s outskirts, apartment blocks stand empty, totems to the debt that looms over China’s financial system”.

Obama nominates Garland

16/03/2016

A piece in the Washington Post notes that today, President Obama has formally nominated Merrick Garland to the Supreme Court to fill the vacancy left by Antonin Scalia.

The report opens “President Obama on Wednesday nominated Merrick Garland to serve on the Supreme Court, setting up a protracted political fight with Republicans who have vowed to block any candidate picked by Obama in his final year in office. Garland, 63, is a longtime Washington lawyer and jurist who is chief judge of the U.S. Court of Appeals for the District of Columbia Circuit. Considered a moderate, Garland is widely respected in the D.C. legal community and was also a finalist for the first two Supreme Court vacancies Obama filled. In announcing his choice in the White House Rose Garden, Obama said he followed “a rigorous and comprehensive process” and that he reached out to members of both parties, legal associations and advocacy groups to gauge opinions from “across the spectrum.” He said Garland “is widely recognized not only as one of America’s sharpest legal minds, but someone who brings to his work a spirit of decency, modesty, integrity, even-handedness and excellence.”

Pointedly the piece notes that “Seven sitting Republican senators voted to confirm Garland in 1997: Dan Coats (Ind.), Thad Cochran (Miss.), Susan Collins (Maine), Orrin Hatch (Utah), James M. Inhofe (Okla.), John McCain (Ariz.), and Pat Roberts (Kan.). GOP lawmakers, though, have said since Scalia’s death that Obama should leave the choice of a new justice to his successor and that they have no intention of holding a hearing or a vote on the president’s pick. Speaking on the Senate floor Tuesday afternoon, Judiciary Committee Chairman Charles E. Grassley (R-Iowa) said “the next Supreme Court justice could dramatically change the direction of the court” and Americans deserved to “weigh in” before that happens”.

By way of context the piece adds “Garland is a Chicago native who graduated from Harvard College and Harvard Law School. After becoming a partner at the law firm Arnold & Porter, he joined the Justice Department, where he handled the drug investigation of then-D.C. Mayor Marion Barry as an assistant U.S. attorney in the District. Ascending the ranks, Garland became principal associate deputy attorney general, where he supervised the massive investigations that led to the prosecutions of the Unabomber and the bombers of the federal building in Oklahoma City. Garland was appointed to the D.C. federal appeals court by President Bill Clinton in April 1997 and confirmed on a 76-to-23 vote. In February 2013, Garland became chief judge of the D.C. federal appeals court”.

The article goes on to mention the comments made by the GOP before this nomination, “A four-page document circulated Tuesday afternoon among a small group of the administration’s allies, with the heading, “Read What Republicans Had to Say About President Obama’s Supreme Court Nominee, Merrick Garland, Before He Was President Obama’s Supreme Court Nominee,” highlighted the support he has enjoyed from lawmakers in the past. “Garland has had a distinguished legal career, and prior to the GOP’s historically unprecedented obstruction, was a favourite of Senate Republicans alongside progressives,” the briefing material says. “When earlier Supreme Court vacancies occurred in the seats now filled by Justices Elena Kagan and Sonia Sotomayor, Utah Sen. Orrin Hatch said he would be ‘very well supported by all sides’ as a SCOTUS nominee.” The document notes that when Obama was filling the first Supreme Court vacancy of his tenure, Hatch was quoted at the time as saying that Garland would be a “consensus nominee” who “would be very well supported by all sides.” The briefing material includes previous descriptions of Garland by leading news organizations as a potential nominee who would attract support of Democrats and Republicans alike”.

Sadly, though not unexpectedly, “Democrats are also preparing to make the Republicans’ opposition to filling the vacancy an issue in the fall election. Speaking in West Palm Beach, Fla., on Tuesday night, Democratic presidential front-runner Hillary Clinton said in her victory speech that one of the reasons the presidential race matters so much is because the Supreme Court appointment has such enormous policy implications. “Together, we have to defend all of our rights — civil rights and voting rights, worker’s rights and women’s rights, LGBT rights and rights for people with disabilities — and that starts by standing with President Obama when he nominates a justice to the Supreme Court,” she said, prompting large cheers from the crowd. While the question of who sits on the nation’s highest court is not traditionally a top-tier election issue, Democrats are hoping to use it as part of a broader narrative about Republican resistance to the president’s policies”.

Worryingly for Republicans the piece adds that “At the moment, more Americans appear to be sympathetic to the White House’s argument. Sixty-three percent of Americans said the Senate should hold hearings on Obama’s nominee to replace Scalia, while 32 percent said it should not hold hearings and leave it to the next president, according to a Washington Post-ABC News poll released last week. Majorities of Democrats and independents supported holding hearings, while Republicans were more evenly split (46-49) and over half of conservative Republicans said hearings should not be held (54 percent)”.

The piece ends “Administration officials are hopeful that the GOP senators who are most vulnerable this November — Sens. Kelly Ayotte (N.H.), Ron Johnson (Wis.), Mark Kirk (Ill.) and Pat Toomey (Penn.) — may lobby their leaders for a vote if they come under fire back home for blocking the nominee. “The success or failure of this will depend on the pressure that can be brought to bear on those senators who Mitch McConnell marched out to the firing line,” said one former senior administration official, who asked for anonymity in order to discuss internal White House deliberations”.

Bernie’s foreign policy, worse than Obama’s

23/02/2016

A piece in Foreign Affairs discusses the foreign policy of Bernie Sanders. His statements on the campaign trail show that this is perhaps the only reason not to support Sanders.

It opens, “Hillary Clinton’s narrow victory over Bernie Sanders in the Iowa caucuses made clear that the race for the Democratic Party nomination is far from over. Even if Sanders fails to secure the nomination, he can claim to have substantively changed the dynamic of the race. On domestic policy, Sanders has pushed Clinton to the left, bringing discussions of economic inequality and financial regulation to the forefront of the campaign. But when it comes to foreign policy, Sanders has been much less influential. Many assume that he just can’t compete on foreign policy with Clinton, who served as secretary of state for four years. In the last two televised debates, Sanders offered glimpses of his views on U.S. engagement with Iran and the need for multilateral coalitions to fight the Islamic State (also known as ISIS), but he has yet to offer a comprehensive foreign policy vision”.

Interestingly the author argues “He would not have to look far for one. Franklin Delano Roosevelt, the inspiration for the “democratic socialism” that underpins Sanders’ domestic policy, can also provide the inspiration for how Sanders might engage in foreign policy. By embracing Roosevelt’s pursuit of great power cooperation within international institutions and international law, Sanders can articulate what the Princeton University professor John Ikenberry has described as a post-hegemonic foreign affairs strategy: the United States would relinquish its dominant role in maintaining a liberal world order and instead share power with rising hegemons in a system that treats all states as equals. Under this framework, the United States would promote multilateral cooperation through international organizations such as the United Nations and by encouraging collective compliance with international law”.

However, problems emerge with this straight away. Firstly, FDR only really dealt with Stalin during the Second World War and after that relations between the two countries froze and remain in stasis during the Cold War. Thus the notion that Sanders could coax Putin into “great power cooperation” would be even more of a naïve failure that the current Obama policy in this regard. Worse, the author mentions that Sanders could take a theme from Ikenberry who lauded the liberal building of the United States after 1945. Yet, in many of Ikenberry’s texts, he assumes that the order will survive after America has in effect retreated from the world. Kagan has rightly warned that this is a dangerous fantasy that should not be countanced. Thus, if the author is correct and these are the themes that interest Sanders then a Sanders foreign policy would be a heightened version of Obama’s, but even more extreme and dangerous. Lastly, this would only propagate the myth of American decline that Obama has both railed against but also done nothing to stop in practical foreign policy terms.

As the writer notes “This approach would build upon U.S. President Barack Obama’s liberal internationalism while rejecting Clinton’s embrace of American exceptionalism, encapsulated in her remark in the first debate: “We’re not Denmark!” Sanders could thus turn Hillary Clinton’s supposed leadership and experience against her and define her as being allied with neoconservative views and out of touch with the Democratic Party’s redefined foreign affairs legacy”.

The article goes on to describe FDR’s foreign policy, “Roosevelt successfully pursued this strategy during World War II. As the historians Frank Costigliola and Alan Henrikson have demonstrated, Roosevelt saw his main diplomatic objective as achieving “Big Three cooperation” among the United Kingdom, the United States, and the Soviet Union. He emphasized the shared interests between the United States and the Soviet Union despite Anglo-American animosity toward Moscow. FDR believed that only cooperation among the great powers could serve as the basis for a new postwar order embodied in the United Nations, international law, and respect for human rights. Sanders has made a similar pitch with his call for a “coalition of wealthy and powerful states” to defeat ISIS, but he could make it more credible by suggesting that Iran would have a role to play in such diplomacy. The Obama administration’s success in negotiating the Iranian nuclear agreement, as well as Tehran’s presence at the Vienna talks on the Syrian civil war, suggest that Iran is willing to cooperate on shared interests in the region. The agreement has also empowered Iranian moderates, such as Iranian President Hassan Rouhani, at the expense of hard-liners bent on regional domination. Given these developments, it is wise for Sanders to open the door to eventual diplomatic normalization with Iran, as he hinted he would in the last debate before the Iowa caucus. The long-term goal should be the development of a great power consensus about the final status of Syria and Iraq”.

The writer goes on to posit that “A Sanders administration could complement its pursuit of great power concert with a renewed commitment to Roosevelt’s postwar vision of international institutions and law. Sanders’ rejection of regime change and the unilateral use of U.S. military force are good first steps in this direction. His next move should be to declare an end to U.S. exemptions from international law by signing and promoting the ratification of the many worldwide treaties and conventions otherwise ignored by Washington, including the Rome Statute, which binds states to the International Criminal Court. The United States should also increase its efforts to reform the UN peacekeeping system to include major U.S. participation in peace operations. These initiatives, combined with support for reforming the voting shares system that governs the World Bank and the International Monetary Fund, would demonstrate a new U.S. commitment to global institutions that limit the power of any one actor and reduce military and economic competition”.

The author adds that “By ending U.S. exemptions to international law, Sanders would reaffirm his commitment to these rights, and especially to protections that make up the core principles of the International Labour Organization (ILO). A Sanders administration could further seek to reform international trade agreements by proposing that all new trade treaties, including the Trans-Pacific Partnership, adopt legally binding ILO Conventions as the basis for labor protections rather than the nonbinding and vague ILO Declaration on Rights at Work”.

However noble these words they are not grounded in any sort of reality. If the United States is to remain the global policemen, which it must, then it must be above these “laws”. This will correctly lead to charges of hypocrisy and double standards but this is the price worth paying for global governance. To sign these treaties would be a dangerous move which could be used by enemies of the United States to further weaken it and strengthen nations like China and Russia who have no intention of abiding by these treaties anyway.

He ends “Sanders’ articulation of a post-hegemonic vision of foreign affairs could form the strongest challenge yet to neoconservatives in both the Democratic and Republican parties. For example, Sanders could contrast his openness toward Iran with Clinton’s persistent hostility and connect her past support for regime change to future attempts at dominance. By strongly embracing international law and human rights, Sanders could initiate a broader challenge to exceptionalist understandings of the United States’ role in the world. Over time, internationalist ideas might become more acceptable, in the same way that “socialist” positions have become increasingly popular today. If Sanders ran on a comprehensive internationalist platform, he could transform the approach to foreign affairs in the United States and eventually make possible congressional ratification of international treaties such as the Convention on the Elimination of All Forms of Discrimination Against Women and the Convention on the Rights of the Child”.

 

“History is not going to look particularly kindly on his tenure”

19/01/2016

A piece discusses the last State of the Union speech given by President Obama, “However hard President Barack Obama tried on Tuesday night to convince the American people that his seven years of wartime leadership have left the country safer and stronger, I’d venture to guess that history is not going to look particularly kindly on his tenure as America’s commander-in-chief. Yes, he ordered the raid that killed Osama bin Laden—a gutsy, important move. There was also the strike in Yemen that took out the radical al Qaeda preacher, Anwar al-Awlaki — a U.S. citizen, no less. Not an easy call by any means, and one that was almost certain to trigger controversy, not least among Obama’s progressive base. You get points for that. More broadly, especially during his first term (when re-election concerns figured prominently, a cynic might add) the president proved relentless in using drones to target jihadist leaders across the Middle East and South Asia. Indeed, when it comes to warfare by remote control, he’s authorized 10 times more strikes than George W. Bush, leaving his predecessor looking positively timid by comparison”.

The writer notes “In Afghanistan, the president announced in 2009 a surge of 30,000 troops — but in the very next sentence told the enemy that he’d withdraw them in 18 months, without reference to the situation on the ground. What successful military leader in the history of the world has ever done that? While Obama has now reversed his politically-driven commitment to remove all U.S. forces before he leaves office, he still plans to draw down to the ridiculously inadequate number of 5,500 troops — despite ample evidence, month after month, that conditions are dangerously deteriorating. The Taliban insurgency threatens more areas of the country than at any time since 2001. New al Qaeda training camps are sprouting uparound the country, including one of the largest ever — repeat, ever — covering 30 square miles, which U.S. forces only belatedly discovered and destroyed in October. What else is out there that we don’t know about? And if all that wasn’t ominous enough, the Islamic State affiliate in Afghanistan is increasingly entrenched and rapidly expanding its capabilities”.

He goes on to argue “Libya was supposed to be the poster child for Obama’s light footprint approach to the smart deployment of American hard power. Uh, right. Deferring to French and British leadership, U.S. air power played a key role in bringing down the Gaddafi regime. Mission accomplished, or so he thought, the president abandoned the playing field as quickly as he could, declaring victory while turning his back on even the pretense of a post-conflict stabilization effort. Chaos ensued. A failed state dominated by marauding jihadists. Four U.S. government employees murdered, including the first ambassador killed in the line of duty since Jimmy Carter’s presidency. And yet again, the icing on the cake, the emergence of an ever-more powerful Islamic State affiliate, controlling territory, attacking vital oil installations, and no doubt planning as we speak to launch terror attacks into Europe — a mere hop, skip, and a jump across the Mediterranean”.

Then the writer gets to Obama’s failed legacy in the Iraq and Syria, “And then we come to Iraq and Syria. Where to begin? Do we have to? The series of sorry, sordid, ideologically-motivated missteps have been endlessly rehashed. Painful. Tragic. Unnecessary. The precipitous withdrawal from Iraq, with Obama’s absurd declaration that “we are ending a war not with a final battle, but with a final march toward home.” Tell it to the troops that had to march right back in 2014 to help prevent Baghdad’s collapse and re-conquer territory previously won with American blood. Then there’s the bizarre, almost surreal retreat from enforcement of the Syria red line. After Obama publicly pledged that Assad’s punishment for gassing his own people would amount to nothing more than “a shot across the bow,” and John Kerry assured the world that any strike would be “unbelievably small,” it didn’t seem like the mangling of American credibility could get any worse. But oh, it did. Paging Vladimir Putin! Then there’s the war against the Islamic State, itself. We will defeat them. No, wait. We will destroy them. But rest assured that we will never put troops on the ground. Ah, yes, the Obama way of war: don’t proceed without first spelling out to the enemy — as well as prospective allies that you hope to enlist in the fight — all the capabilities that you will never bring to bear to achieve victory. Eighteen months later, the war drags on. The enemy metastasizes across multiple countries and continents. A global jihadist insurgency gathers on the horizon. For the first time in four decades, Russian power has returned to the Middle East with a vengeance. Europe strains to the breaking point under the weight of its worst refugee crisis since World War II”.

Correctly he argues that “With the world coming apart at the seams, with U.S. leadership and credibility in a slow death spiral, with adversaries across the threat spectrum increasingly coming to the conclusion that it is open season on Pax Americana, it’s hard to think of a worse time to be hollowing out the instrument of American power that has underwritten global stability and prosperity for 70 years”.

Obama’s correct but endless proclamation of the myth of American decline have done nothing to stop Russian actions, or Saudi fears, or Chinese actions into believing that maybe he protests too much.

The piece ends “Obama has never worn the garb of commander-in-chief comfortably. He’s led a nation at war, often in multiple theaters, for his entire presidency. One of those — the war against the Islamic State — he launched himself. Yet can anyone recall a single speech, even a single memorable line, delivered with the purpose of galvanizing the troops, much less the nation, to sustain the level of sacrifice, commitment, and leadership necessary for victory? That’s no accident. Just think of the catch phrases and concepts that are most associated with Obama’s national security doctrine: Time to focus on nation building at home. Leading from behind. Don’t do stupid shit. Hitting singles and doubles. Ending wars by withdrawing from them. The list goes on. But no assessment of Obama’s performance as commander-in-chief is more damning than the one offered by his own Secretary of Defense, Robert Gates, in his 2014 memoir, Duty. Discussing the president’s leadership of the war in Afghanistan, Gates writes that by early 2010 he had concluded that Obama “doesn’t believe in his own strategy, and doesn’t consider the war to be his. For him, it’s all about getting out.” Despite having just months earlier ordered an additional 30,000 troops into combat, Gates is astonished to find that the president harbored fundamental doubts about his strategy, claiming that Obama was “skeptical if not outright convinced it would fail.” Gates is particularly confounded by what he sees as the President’s lack of passion as a wartime leader who was responsible for maintaining the morale of his troops and their faith in the mission”.

“Circuit breakers have introduced wrenching anxiety”

17/01/2016

A piece in Foreign Policy notes how the Chinese stock market short circuited, “It was an embarrassing about-face for Chinese securities regulators. Just days after introducing “circuit breaker” policies on Jan. 4 — which paused stock markets for 15 minutes on a five percent drop and shut them down for the day on a seven percent drop — Beijing announced Jan. 7 that it would suspend the new rules, effective immediately. The circuit breakers had been intended to stem market panic. But Beijing’s latest move did precisely the reverse; on both Jan. 4 and Jan. 7, stocks experienced a rout, with trading halted on Jan. 7, a Thursday, just 29 minutes after it had begun. Chinese netizens are again calling for the ouster of top securities regulator Xiao Gang, a man they have loved to hate since at least July 2015, and making fun of the circuit breaker policy”.

He adds “How did the policy backfire so badly? Call it human nature. By pausing during a trading rout, the logic goes, circuit breakers enable investors to re-focus on the actual value of what they’re trading, instead of looking over their shoulders at what everyone else is doing. (And any trading algorithms run amok can be corrected before bringing down the whole system.) But something else happened: When the self-interested calculations of reasonable, individual investors clashed with Beijing’s efforts to regulate China’s volatile stock market into submission, the individuals won. And Chinese policymakers, who won a reputation for competence as economic stewards during the nation’s quarter century of torrid growth, suffered yet another black eye”.

Correctly he goes onto mention that “Chinese stocks have sustained massive losses in rent months, particularly over the summer of 2015, before embarking on a mild rally in late 2015. But on Jan. 4, the first on which circuit breakers were introduced — surely in the hopes their mere presence would deter big drops, obviating the need to enact them — stocks plummeted, triggering the dreaded circuit breaker. Markets closed early, and traders went home without knowing just how far stocks would have fallen if given the chance. The next two days were calmer, but the anxiety remained. On top of stock market losses, the value of the renminbi (RMB), China’s currency, had been falling in offshore trading. That development depresses the value of all assets denominated in RMB, and incentivizes people to sell them off before the RMB drops further”.

The scale of what had happened is revealed when he notes that “On the fateful morning of Jan. 7, a randomly selected trader of Chinese stocks could be forgiven for not knowing what stocks were actually worth. Large shareholders in China are banned from selling their positions; circuit breakers mean many stocks have not had a chance to fall so low that they look like a good deal to buyers. The bottom, in other words, was hard to glimpse. As soon as markets opened on, Jan. 7, traders went looking for it. In offshore trading, the RMB had already depreciated around one percent by the time stock markets opened (although authorities later intervened to reverse the drop). Stocks quickly plummeted, and the first switch on the circuit breaker, which requires a 15 minute “cool down” after a five percent loss, was ripe to be triggered. A seven percent drop closing the entire day’s trading could not have felt far off”.

He notes that what happened was that “a surge of people racing for a single, closing exit door. Not everyone was going to get through; not all sellers were going to find buyers. To entice a buyer, a reasonable trader would have priced his or her sell order for a stock even lower than its last trade price. After all, everyone thought they knew the markets would fall further. Some got out in time; some did not. But the psychology behind the mad rush to sell before circuit breakers kicked in explains precisely why they haven’t worked. Chinese securities regulators hoped to stem market panics by limiting losses in any given day, letting cooler heads prevail. Instead, the circuit breakers have introduced wrenching anxiety into Chinese stock markets, compressing the time frame in which traders feel they can cash out, and leaving everyone wondering — still — where the bottom truly lies”.

 

Brazil’s myriad problems

13/01/2016

A report in the Economist discusses the mounting economic problems of Brazil, “THE longest recession in a century; the biggest bribery scandal in history; the most unpopular leader in living memory. These are not the sort of records Brazil was hoping to set in 2016, the year in which Rio de Janeiro hosts South America’s first-ever Olympic games. When the games were awarded to Brazil in 2009 Luiz Inácio Lula da Silva, then president and in his pomp, pointed proudly to the ease with which a booming Brazil had weathered the global financial crisis. Now Lula’s handpicked successor, Dilma Rousseff, who began her second term in January 2015, presides over an unprecedented roster of calamities”.

The author mentions that “By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw growth; GDP per person could be down by a fifth since its peak in 2010, which is not as bad as the situation in Greece, but not far off. Two ratings agencies have demoted Brazilian debt to junk status. Joaquim Levy, who was appointed as finance minister last January with a mandate to cut the deficit, quit in December. Any country where it is hard to tell the difference between the inflation rate—which has edged into double digits—and the president’s approval rating—currently 12%, having dipped into single figures—has serious problems”.

The report adds “Ms Rousseff’s political woes are as crippling as her economic ones. Thirty-two sitting members of Congress, mostly from the coalition led by her left-wing Workers’ Party (PT), are under investigation for accepting billions of dollars in bribes in exchange for padded contracts with the state-controlled oil-and-gas company, Petrobras. On December 15th the police raided several offices of the Party of the Brazilian Democratic Movement (PMDB), a partner in Ms Rousseff’s coalition led by the vice-president, Michel Temer”.

Worryingly for the future stability of the country it mentions “Brazil’s electoral tribunal is investigating whether to annul Ms Rousseff’s re-election in 2014 over dodgy campaign donations. In December members of Congress began debating her impeachment. The proceedings were launched by the speaker of the lower house, Eduardo Cunha (who though part of the PMDB considers himself in opposition) on the grounds that Ms Rousseff tampered with public accounts to hide the true size of the budgetary hole. Some see the impeachment as a way to divert attention from Mr Cunha’s own problems; Brazil’s chief prosecutor wants him stripped of his privileged position so that his role in the Petrobras affair can be investigated more freely. Mr Cunha denies any wrongdoing”.

The piece argues that both external and internal factors have come together, “Now prices of Brazilian commodities such as oil, iron ore and soya have slumped: a Brazilian commodities index compiled by Credit Suisse, a bank, has fallen by 41% since its peak in 2011. The commodities bust has hit economies around the world, but Brazil has fared particularly badly, with its structural weaknesses—poor productivity and unaffordable, misdirected public spending—exacerbating the damage. Regardless of what she may or may not have done with respect to the impeachment charge, Ms Rousseff’s cardinal sin is her failure to have confronted these problems in her previous term, when she had some political room for manoeuvre. Instead, that term was marked by loose fiscal and monetary policies, incessant microeconomic meddling and fickle policymaking that bloated the budget, stoked inflation and sapped confidence. Poor though her record has been, some of these problems have deeper roots in what is in some ways a great achievement: the federal constitution of 1988, which enshrined the transition from military to democratic rule. This 70,000-word doorstop of a document crams in as many social, political and economic rights as its drafters could dream up, some of them highly specific: a 44-hour working week; a retirement age of 65 for men and 60 for women. The “purchasing power” of benefits “shall be preserved”, it proclaims, creating a powerful ratchet on public spending”.

Pointedly it writes “Since the constitution’s enactment, federal outlays have nearly doubled to 18% of GDP; total public spending is over 40%. Some 90% of the federal budget is ring-fenced either by the constitution or by legislation. Constitutionally protected pensions alone now swallow 11.6% of GDP, a higher proportion than in Japan, whose citizens are a great deal older”.

The scale of the problem is seen when the author notes “Analysts at Barclays, a bank, expect debt to reach 93% of GDP by 2019; among big emerging markets only Ukraine and Hungary are more indebted. The figure may still seem on the safe side compared with 197% in Greece or 246% in Japan. But those are rich countries; Brazil is not. As a proportion of its wealth Brazil’s public debt is higher than that of Japan and nearly twice that of Greece. Unable to increase taxes, Ms Rousseff’s government may prefer something even more troubling to investors and consumers alike: inflation. Faced with the inflationary pressure that has come with the devalued real, the Central Bank has held its nerve, increasing its benchmark rate by three percentage points since October 2014 and keeping it at 14.25% since July in the face of the recession. But despite this juicy rate the real continues to depreciate”.

The article calls for harsh cuts, a policy that seems to not have worked, or at least worked at the expense of all other measures, “These efforts are meeting with some success: in December pro-government rallies drew more people than anti-government ones for the first time all year. It looks unlikely that the impeachment will indeed move to the Senate (which would trigger a further six months of turmoil). But this hardly provides a political climate conducive to belt-tightening, let alone to the amendment of the constitution which Mr Barbosa has said is needed to deal with the ratchet effect on benefits. Fiscal adjustment is anathema to the government workers and union members who are Ms Rousseff’s core supporters. Like the country’s economic problems, its political ones, while specific to today’s particular scandals and manoeuvring, can be traced to the transition of the 1980s. History reveals a consistent tendency towards negotiated consensus at Brazil’s political watersheds; it can be seen in the war- and regicide-free independence declared in 1822, the military coup of 1964, which was mild compared with the blood-soaked affairs in Chile and Argentina, and the transition that created the new constitution. One aspect of this often admirable trait is a resistance to purging. The mid-1980s saw a lot of institutions—the federal police, the public prosecutor’s office, the judiciary, assorted regulators—overhauled or created afresh. But many of the old regime kept their jobs in the civil service and elsewhere. The transition was thus bound to be a generational affair”.

It adds “In 2013 the average judge was 45 years old, meaning he entered university in a democratic Brazil. Civil servants are getting younger and better qualified, says Gleisson Rubin, who heads the National School of Public Administration. More than a quarter now boast a postgraduate degree, up from a tenth in 2002. Sérgio Moro, the crusading 43-year-old federal judge who oversees the Petrobras investigations, and Deltan Dallagnol, the case’s 35-year-old lead prosecutor, are the most famous faces of this new generation. Unfortunately, this rejuvenation does not extend to the institution most in need of it: Congress. Its younger faces typically have family ties to the old guard”.

On the scandals at Petrobras the writer notes “One of the causes of the mensalão scandal was corruption that provided Lula’s government with a way to get the votes it needed from the disparate small parties. The petrolão (“big oily”, as the Petrobras affair is widely known) apparently shared a similar aim. Such ruses may have helped PT governments pass some good laws, such as an extension of the successful Bolsa Família (family fund) cash-transfer programme. But the party was not able to do all that it had said it would; potentially helpful reforms in which it was less invested fell by the wayside. Raphael Di Cunto of Pinheiro Neto, a big law firm in São Paulo, points to many antiquated statutes in need of an update, such as the Mussolini-inspired labour code (from 1943) and laws governing foreign investments (1962) and capital markets (1974). A Congress in which dysfunction feeds corruption which feeds further dysfunction is not one likely to take the hard decisions that the economy needs”.

It ends “The strength of Brazil’s institutions suggests something shy of the failed populist experiments of some South American neighbours. And the fact that voters in Argentina and Venezuela rebuffed that populism in the past few months has not escaped the notice of Brazil’s politicians. But every month of dithering and every new petrolão revelation chips away at Brazil’s prospects. The 2010s are already certain to be another lost decade; GDP per person won’t rebound for years to come. It will be a long time before a president can match the pride with which Lula showed off his Olympic trophy. But if Brazil’s politicians get their act together, the 2020s could be cheerier. Alas, if they do not, things will get a great deal worse”.

Losing America’s military edge?

08/08/2015

A report from the Economist argues that the United States may be losing its military edge.

It opens “SINCE the end of the cold war one simple geopolitical rule has endured: do not take on America. The country’s armed forces have been so well resourced and so technologically superior that it would be utterly foolish for any state to mount a direct challenge to the superpower or its allies. This rule still holds—but it is no longer quite as compelling as it once was. Although America still possesses by far the most capable armed forces in the world, the technological advantage that guarantees it can defeat any conceivable adversary is eroding rapidly. “We are entering an era where American dominance on the seas, in the skies, and in space—not to mention cyberspace—can no longer be taken for granted,” admitted Chuck Hagel, the outgoing secretary of defence, last year. He argued that America urgently needed to develop a new generation of military technologies, lest another country come to feel capable of challenging it. His warning was timely”.

The author points out that “The others are certainly growing more assertive. China is increasingly keen to press its territorial claims in the western Pacific. Russia is intent on re-establishing its influence in what it regards as its “near abroad”, as it has shown in Ukraine. Less powerful but more reckless states such as North Korea and Iran might also become more inclined to make mischief if they believe they can inflict so much damage on the American forces that seek to punish them that Washington will think twice about doing so”.

China is certainly assertive but there are doubts as to its long term sustainability, both as an untested military power and a “rising” power. Certainly Russia is causing problems but there are questions as to its long term power. Yet, this does not weaken the authors argument, in the short term there is much wrong with American strategy and if it is to be arrested much needs to be done.

The report adds “The effort that Mr Hagel called for is known as the “third offset strategy”, because it is the third time since the second world war that America has sought technological breakthroughs to offset the advantages of potential foes and reassure its friends. The first such moment occurred in the early 1950s, when the Soviet Union was fielding far larger conventional forces in Europe than America and its allies could hope to repel. The answer was to extend America’s lead in nuclear weapons to counter the Soviet numerical advantage—a strategy known as the “New Look”. A second offset strategy was conceived in the mid-1970s. American military planners, reeling from the psychological defeat of the Vietnam war, recognised that the Soviet Union had managed to build an equally terrifying nuclear arsenal. They had to find another way to restore credible deterrence in Europe. Daringly, America responded by investing in a family of untried technologies aimed at destroying enemy forces well behind the front line. Precision-guided missiles, the networked battlefield, reconnaissance satellites, the Global Positioning System (GPS) and radar-beating “stealth” aircraft were among the fruits of that research”.

Crucially he writes “Bob Work, the deputy secretary of defence charged with overseeing the new offset strategy, says that by the mid-1980s Soviet generals who studied the results of early demonstrations of the operational concept that became known as Air-Land Battle realised what they were up against. “We were an aggressive first mover,” Mr Work says. “We had picked an area that we knew our most likely adversary couldn’t copy.” The impact of this “revolution in military affairs” was hammered home in 1991 during the first Gulf war. Iraqi military bunkers were reduced to rubble and Soviet-style armoured formations became sitting ducks. Watchful Chinese strategists, who were as shocked as their Soviet counterparts had been, were determined to learn from it. The large lead that America enjoyed then has dwindled. Although the Pentagon has greatly refined and improved the technologies that were used in the first Gulf war, these technologies have also proliferated and become far cheaper. Colossal computational power, rapid data processing, sophisticated sensors and bandwidth—some of the components of the second offset—are all now widely available”.

The writer goes on to lambast recent American actions as a “distraction”. This is at best, unkind, the United States needed to, and still does need to fight terrorism to reduce their capabilities to they cannot attack the United States with any significant weapons.

Flowing from this he notes that “China, in particular, has seized the opportunity to catch up. With a defence budget that tends to grow by more than 10% a year, it has invested in an arsenal of precision short- to medium-range ballistic and cruise missiles, submarines equipped with wake-homing torpedoes and long-range anti-ship missiles, electronic warfare, anti-satellite weapons, modern fighter jets, integrated air defences and sophisticated command, control and communications systems. The Chinese call their objective “winning a local war in high-tech conditions”. In effect, China aims to make it too dangerous for American aircraft-carriers to operate within the so-called first island chain (thus pushing them out beyond the combat range of their tactical aircraft) and to threaten American bases in Okinawa and South Korea. American strategists call it “anti-access/area denial”, or A2/AD”.

He writes that the significance of this for American allies is that China could grab islands or resources and the US military will not be able to respond. He notes that this could lead to countries allying with China. While this latter aspect is far fectched due to the history and culture of Asia to say nothing of recent Chinese aggression, the first point is valid. However, it is important to separate the permanent from the temporary. The presidency of Barack Obama will soon end and a different strategy, though not too different, will replace him. It could be hoped that when he leaves office the United States will reengage with Asia as he said he would but has not ease the fears of allies like Japan.

The author adds “Although China is moving exceptionally quickly, Russia too is modernising its forces after more than a decade of neglect. Increasingly, it can deploy similar systems. Iran and North Korea are building A2/AD capabilities too, albeit on a smaller scale than China. Even non-state actors such as Hizbullah in Lebanon and Islamic State in Syria and Iraq are acquiring some of the capabilities that until recently were the preserve of military powers. Hence the need to come up with a third offset strategy. But the economic, political and technical circumstances are very different from the ones that prevailed in the 1950s or the 1970s. America needs to develop new military technologies that will impose large costs on its adversaries, even as budget caps ordered by Congress are squeezing its own defence spending”.

Correctly, he writes that “The programme needs to overcome at least five critical vulnerabilities. The first is that carriers and other surface vessels can now be tracked and hit by missiles at ranges from the enemy’s shore which could prevent the use of their cruise missiles or their tactical aircraft without in-flight refuelling by lumbering tankers that can be picked off by hostile fighters. The second is that defending close-in regional air bases from a surprise attack in the opening stages of a conflict is increasingly hard. Third, aircraft operating at the limits of their combat range would struggle to identify and target mobile missile launchers. Fourth, modern air defences can shoot down non-stealthy aircraft at long distances. Finally, the satellites America requires for surveillance and intelligence are no longer safe from attack. It is an alarming list. Yet America has considerable advantages, argues Robert Martinage of the Centre for Strategic and Budgetary Assessments, an influential Washington think-tank that has consistently drawn attention to the need to counter Chinese A2/AD capabilities. Those advantages include unmanned systems, stealthy aircraft, undersea warfare and the complex systems engineering that is required to make everything work together”.

He goes on to make the point that “Contracts will be awarded this summer for a long-range strike bomber, the first new bomber since the exotic and expensive B-2 began service two decades ago. The B-3, of which about 100 are likely to be ordered, will also have a stealthy, flying-wing design. This time, costs will be kept down by using proven technologies, but with a modular approach to allow for upgrades to be simply plugged in when necessary to counter improving air defences. Targets for the B-3, perhaps supported by unmanned aircraft, will include mobile missile launchers and command bunkers. If surface vessels, particularly aircraft-carriers, are to remain relevant, they will need to be able to defend themselves against sustained attack from precision-guided missiles. The navy’s Aegis anti-ballistic missile-defence system is capable but expensive: each one costs $20m or so. If several of them were fired to destroy an incoming Chinese DF-21D anti-ship ballistic missile, the cost for the defenders might be ten times as much as for the attackers. If carriers are to stay in the game, the navy will have to reverse that ratio. Hopes are being placed in two technologies: electromagnetic rail guns, which fire projectiles using electricity instead of chemical propellants at 4,500mph to the edge of space, and so-called directed-energy weapons, most likely powerful lasers. The rail guns are being developed to counter ballistic missile warheads; the lasers could protect against hypersonic cruise missiles. In trials, shots from the lasers cost only a few cents. The navy has told defence contractors that it wants to have operational rail guns within ten years”.

He goes on to mention “If defence spending remains tight, as seems likely, the money for breakthrough technologies will have to be found from somewhere. That means Congress allowing the Pentagon to make the savings it wants. The most pressing task is to reform military pay and benefits, which are eating up an ever-bigger slice of the defence budget despite falls in the number of Americans in uniform. Closing unwanted bases would also help. So would reforming the way the Pentagon buys things. To get its hands on the technologies it needs, the military establishment and the armed forces themselves may have to take an axe to cherished programmes. One possibility would be to scale back plans to buy nearly 2,500 F-35 fighter jets, which have too short a range for many situations, and use the money to buy unmanned combat aircraft and a bigger fleet of long-range strike bombers. The navy might have to give up on two of its fabulously expensive carrier groups in recognition of their growing vulnerability in favour of investments in submarines, both manned and unmanned. None of this will be easy. The men who command air forces tend to be former fast-jet pilots still in love with their steeds; the sailors who run navies are attached to the muscular power that only big surface ships can display. The army, too, will have to shrink”.

He ends on a pessimistic note “Even if all these obstacles are overcome, it is unlikely that a third offset strategy will secure Western military dominance for as long as the first two did. Technology spreads much more quickly these days, partly thanks to the internet, which the Pentagon helped to create and which now helps rival powers steal America’s military secrets. Technological change of all kinds has become speedier, too, thanks to fierce competition in fashion-conscious consumer markets. The second offset strategy benefited from some unusual circumstances that left America as the world’s unchallenged hyperpower after the end of the cold war. That world has vanished. In the military-technological struggle to come, the contest will be relentless and the victories probably more fleeting. It would help if America’s allies weighed in. They should come up with innovations of their own—or at least invest in the capabilities required to be a useful military partner by adapting to changes in how the Pentagon invests and plans to fight. Few have even begun to think about this. In Britain, for example, politicians and general are arguing about whether defence spending should be allowed to fall below 2% of GDP rather than about how the money should be spent”.

He concludes “Yet if a foe comes to believe it might win what the great strategist Thomas Schelling called “a competition in risk-taking”—an idea that Vladimir Putin, Russia’s president, actively encourages—the rational response to the other side’s technological superiority might be nuclear brinkmanship. As Elbridge Colby of the Centre for a New American Security argues: “The more successful the offset strategy is in extending US conventional advantages, the more attractive US adversaries will find strategies of nuclear escalation.” The enemy always gets a vote”.

 

Chinese market collapse continues

27/07/2015

Shares in mainland China have recorded their biggest one-day fall for more than eight years following a sell-off towards the end of the trading day. The Shanghai Composite closed down 8.5% at 3,725.56 after more weak economic data raised concerns about the health of world’s second largest economy. Profit at China’s industrial firms dropped 0.3% in June from a year ago. That followed data on Friday indicating that factory activity in July saw its worse performance for 15 months”.

The Chinese stock market collapse

09/07/2015

Jeremy Warner writes that China, not Greece is the major financial crisis, “While all Western eyes remain firmly focused on Greece, a potentially much more significant financial crisis is developing on the other side of world. In some quarters, it’s already being called China’s 1929 – the year of the most infamous stock market crash in history and the start of the economic catastrophe of the Great Depression. In any normal summer, a 30pc fall in the Chinese stock market – a loss of value roughly equivalent to the UK’s entire economic output last year – after an ascent which had seen share prices more than double within the space of a year would have been front page news across the globe”.

He goes on to report that “The dramatic series of government interventions to stem the panic – hitherto unsuccessful, it should be added – would similarly have been up there at the top of the news agenda. Yet the pantomime of the Greek debt talks, together with the tragi-comedy of will they, won’t they leave the euro, has relegated the story to little more than a footnote – even though 940 companies, more than a third, have now suspended trading on China’s two main indices. The parallels with 1929 are, on the face of it, uncanny. After more than a decade of frantic growth, extraordinary wealth creation and excess, both economies – America in 1929 and China today – are at roughly similar stages of economic development. Both these booms, moreover, are in part explained by extremely rapid credit growth. Indeed, China’s credit boom dwarfs that of even the “roaring Twenties”. Borrowed money, or margin investing, played a major role in both these outbreaks of speculative excess”.

He makes the important point that “the Chinese stock market bubble is only a one-year wonder, whereas the build-up to the Wall Street Crash of 1929 was more sustained. Even so, the comparison still holds. As noted by JK Galbraith in his classic account, The Great Crash 1929, even as late as 1927 it was possible to argue that American stocks represented fair value. It was only in the final year that the “escape into make-believe” happened in earnest, when the stock market rose by nearly 50pc. This applies to the Shanghai Composite, too. Stripping out the lowly-rated banking sector, valuations for just about everything else have rocketed, making those that ruled on Wall Street in the run-up to October 24, 1929, look relatively modest. Nor do the similarities end there. As in 1920s America, China’s stock market boom has ridden in tandem with an equally speculative real estate bubble”.

Interestingly he notes that “The macro-economic backdrop is also surprisingly similar. Then, as now in China, rural workers had emigrated to the cities in vast numbers in the hope of finding a more prosperous life in fast-growing industrial sectors. In 1920s America, virtually all these sectors – from steel to automobiles and the new technologies of radio and consumer durables – grew like Topsy, inspiring households to invest in them and chase the apparently bountiful profits they were generating. A similar explosion in industrial activity has taken place in China, only more so. China has packed more development into a few short decades than any country in recorded history before, creating a worldwide glut in industrial capacity that even global demand, let alone domestic Chinese demand, is struggling to accommodate”.

He continues noting that “there are many dissimilarities too, not least that China is still essentially a planned and centrally-controlled economy which has so far managed to defy the usual rules of economics. The consensus is that this time will be no different, that even if the stock market does continue to crash, the impact will be no worse than 2007-08, when the Shanghai Composite fell by two-thirds. Yet after a massive fiscal and monetary stimulus, the wider economy barely lost a beat. Have no fear, the Chinese authorities have it all under control. Believe it if you will”.

Crucially he argues that he “can see very little evidence for China’s technocratic elite having things under control. The firebreaks that China put in place over the weekend to mitigate the panic are, in practice, not much different from those applied during the Great Crash of 1929, only this time it’s public rather than private money that promises to quell the fire. They failed spectacularly in 1929. This time around, they’ve thrown the kitchen sink at the problem, but so far it has produced only a mild, and wholly unconvincing, rebound. The fire still smoulders, threatening to break out anew”.

Pointedly he notes “Whether any of this turns into a calamitous economic meltdown obviously depends on the rest of the response. Policymakers have learned a thing or two since 1929; we now know that the real damage in financial crises is done not by the crash itself, but by a collapsing banking sector. Stock markets are only a signal of credit contraction to come. Even so, I doubt China has as much of a handle on its banks, and more particularly its shadow banking sector, as it pretends. One further thought on these parallels. Now that the export-led model of economic of growth seems to have reached its natural end, at least for China, president Xi Jinping pins his hopes on internal consumer demand to drive growth, and he’s vowed to continue with the free-market reforms of predecessors to help achieve this. Unfortunately, it’s proving a difficult transition. Part of the problem with free markets is that by definition they cannot be controlled. Busts are as much part of their DNA as the wealth-enhancing properties of their booms. As China is about to discover, bad downturns come with the territory”.

However, the Economist, ever optimistic, writes that “Lost in all the drama about the stockmarket is that it still plays a surprisingly small role in China. The free-float value of Chinese markets—the amount available for trading—is just about a third of GDP, compared with more than 100% in developed economies. Less than 15% of household financial assets are invested in the stockmarket: which is why soaring shares did little to boost consumption and crashing prices will do little to hurt it. Many stocks were bought on debt, and the unwinding of these loans helps explain why the government has been unable to stop the rout. But this financing is not a systemic risk; it is just about 1.5% of total assets in the banking system. If economic stability is not in peril, why then the panic? The most compelling explanation is politics. The government has staked much credibility and prestige on the stockmarket. When the going was still good, the official press was chock-a-block with articles about how the rally reflected the economic reforms that Xi Jinping, China’s top leader, was set to push. Li Keqiang, the premier, said repeatedly that he wanted equity markets to provide a bigger share of corporate financing—comments, from punters’ perspective, not unlike waving a red cape in front of a bull. The sudden end to the rally is the first major dent in the public standing of the Xi-Li team. The botched attempts to stabilise the market only make them look weaker, giving succour to their critics”.

Of course it is too soon to tell whether it will simply be a “blip” in the economic history of China or the moment when the people realised that the government are not masters of the economy and all their crowing in 2007/8 is now ringing hollow. The political consequences of this realisation are still to be understood.

The dangers of lobbyists

01/07/2015

A piece in the Economist discusses the dangers of lobbying as both bad for business and bad for America.

It opens “IN 1971 Lewis Powell, an American lawyer who would go on to become a Supreme Court judge, wrote a memorandum for the Chamber of Commerce. Business was the victim of a “broadly based and consistently pursued” assault, he argued. There were few elements of American society that had “as little influence in government as the American businessman, the corporation, or even the millions of corporate stockholders.” It was time for companies to change all this—and acquire political power. “Such power must be assiduously cultivated; and that, when necessary, it must be used aggressively and with determination.” Powell has been granted his wish. In 2012 corporate America accounted for more than three-quarters of the $3.3 billion spent on lobbying in Washington, DC. General Electric was the market leader, spending $21.4m, and Google came second, with $18.2m”.

The author goes on to note “And this is just lobbying in the strict sense defined by American law—ie, the work of registered lobbyists, employed to make direct contact with congressmen and officials. Businesses also employ innumerable other people, in areas such as “government relations”, “public affairs” or “corporate communications”, whose job, in plain English, involves lobbying for or against changes in public policy. Then there are the countless business-funded outfits that say they are simply providing information about a particular industry, and the army of friendly, corporate-sponsored academics, who are all indulging in a subtler form of lobbying”.

The article adds that “A big American firm may nowadays have a dozen or more full-time registered lobbyists on Capitol Hill, while also employing the services of a couple of dozen lobbying firms from among the 2,000 or so based around K Street. At a moment’s notice, Gucci-clad glad-handers can flood the halls of Congress, and retired politicians on a retainer can be summoned up to “make a call”. Overworked, underpaid officials find there is always a sympathetic lobbyist on hand to help them draft new regulations”.

The writer mentions that “In a new book, “The Business of America is Lobbying”, Lee Drutman of the New America Foundation, a think-tank, demonstrates that in recent years companies have gone from using lobbying simply to protect themselves from politics (by seeing off such things as tax increases and regulations) to using politics to help them become more profitable. They set the terms of the debate by funding Washington’s innumerable talking-shops; and then work on the politicians and officials to ensure that the legislation locks in their advantage. Mr Drutman’s book complements a 2013 one, “The Fracturing of the American Corporate Elite”, by Mark Mizruchi of the University of Michigan. It argued that whereas companies once lobbied for public goods such as better roads, they are now more inclined to press for company-specific, or at best industry-specific, benefits”.

The piece notes “A classic case of selfish lobbying wrapped in a cloak of selflessness was the Medicare Modernisation Act of 2003. Thanks to the pharmaceutical industry’s lobbyists, this brought new prescription-drug benefits to millions of older Americans, but without any attempt to control costs through means-testing or bulk-buying. John Friedman, an economist at Brown University, estimated that as a result the drugmakers would gain benefits of $242 billion over a ten-year period—a healthy return on the $130m the industry spent on lobbying in the year the law passed”.

The author notes that “There is plenty of other academic evidence to demonstrate that every dollar big business drops into the Washington wishing-well repays handsomely. Mr Drutman’s book notes studies showing, for instance, that the more companies lobby, the lower their effective tax rate; and that firms which lobby are less likely to be detected for fraud than comparable non-lobbying ones”.

Worryingly he makes the valid point that “There is equally abundant evidence that corporate lobbying is bad for society as a whole. The American Jobs Creation Act of 2004, which began as a measure to cut export subsidies, ended up being stuffed with handouts to big business at the behest of lobbyists. This added to the burden on other taxpayers and helped frustrate efforts to simplify America’s Byzantine tax rules. The infestation of lobbyists special-pleading for their clients contributes to Congress’s gridlock, which means that important business like fixing the tax code, and improving America’s infrastructure, does not get done. Ironically, businesses are themselves among the victims when government seizes up. The tax code is so complex that companies and citizens spend 6.1 billion hours and $163 billion preparing their tax returns each year. Bad infrastructure damages the competitiveness of American firms”.

Realistically the piece ends, “Drutman dashes any hopes that the growth of lobbying can be reversed. He notes that it is “sticky”: once companies have made an initial investment in lobbying they almost never give up. They find that the more they do of it, and the better they get at it, the more they get out of it. American companies succeeded in recovering from the slough of the 1970s by overcoming enemies who were outsiders—over-mighty trade unions and anti-business campaigners. Today they have a much trickier problem on their hands: they have to wage war on themselves”.

“Viewing China in darker terms”

18/06/2015

A superb article by Gordon Chang in the National Interest argues that the “Chinese century” is already over, “John Kerry completed a two-day trip to Beijing. The day before, Indian prime minister Narendra Modi wrapped up his three-day visit to Xian, Shanghai, and Beijing. Everyone, it seems, is going to China, implicitly acknowledging that this is indeed its century. In reality, however, the period of Chinese primacy, if it ever existed, is just about over. Neither Modi nor Kerry was in any mood to accommodate Beijing on core issues. We start with Modi. The Indian leader was happy to travel to China to pick up commitments for Chinese investment into his country, and on this score, he appeared successful. On Saturday, he inked twenty-six memos of understanding for business deals valued by his government at $22 billion”.

Chang goes on to note that “Modi, however, was not persuaded to agree to what Beijing wanted. He did not, for instance, endorse Chinese president Xi Jinping’s “One Belt, One Road.” This initiative, considered the centerpiece of Xi’s foreign policy, seeks to create trade routes through Central Asia, the Middle East, Africa, and the Indian Ocean connecting China to Europe. Modi, of course, did not give an inch on China’s expansive claims to India-controlled territory. And in public, he surprised observers by telling the Chinese to be more accommodating. “I stressed the need for China to reconsider its approach on some of the issues that hold us back from realizing full potential of our partnership,” Modi said while in Beijing”.

Chang goes on to write that “Kerry also used strong words, from all accounts. As a State Department official said before the visit, the Secretary of State was traveling to China to “leave his Chinese interlocutors in absolutely no doubt that the United States remains committed to maintain freedom of navigation.” Xinhua, China’s official news agency, put it this way: Kerry was coming to Beijing to “pick a fight.” In fact, Kerry had hoped to find a diplomatic solution, but neither side budged on the South China Sea during the weekend meetings”.

He goes on to write that China claims the entire South China Sea, “Chinese officials maintain America has no legitimate interest there. “The United States is not a party in the South China Sea disputes, which are between China and other claimants and should be handled by those directly involved,” Xinhua stated on Saturday. So China is telling Washington to abandon America’s oldest foreign policy, the defense of freedom of navigation. That is unacceptable for the ultimate guarantor of the global commons. Various sources, starting with the Wall Street Journal, have pointed out that the Pentagon is drawing up plans to send U.S. vessels and aircraft to challenge Beijing’s sovereignty claims that impinge on freedom of navigation; in other words, those claims that purport to turn international sea into Chinese territorial water. At the beginning of this century, Beijing was able to compromise on those claims. Yet, for more than a half decade, it has not signed an agreement to settle a border dispute. And there is little sign of compromise in the near term, as Xi Jinping’s statements make clear. As the Chinese economy continues to erode, the Communist Party is increasingly relying on nationalism to bolster legitimacy, and as it becomes more nationalistic, its ability to work with other nations has markedly declined”.

He ends the article, “Washington once had a policy of moving on whenever there was disagreement with Beijing. The concept was that America could overlook current problems because eventually the Chinese would enmesh themselves into the international system and work as partners for peace. That optimistic view is changing as it is becoming increasingly evident that Chinese officials do not share American goals or the goals of China’s neighbours”.

He concludes, “in New Delhi there seems, over time, to be less optimism as well. Modi’s China trip was not the “complete and utter failure” that some charged—partisan criticisms can be overblown—but not many thought real progress had been made, either. And that is why the Chinese century is coming to a close. Both the world’s most populous democracy and its most powerful one are now viewing China in darker terms—and beginning to act accordingly”.

 

No more easy reforms for China

02/06/2015

An excellent article from Foreign Affairs discusses how China has hit the end of the road of reforms.

It beigns “Since the start of its post-Mao reforms in the late 1970s, the communist regime in China has repeatedly defied predictions of its impending demise. The key to its success lies in what one might call “authoritarian adaptation”—the use of policy reforms to substitute for fundamental institutional change. Under Deng Xiaoping, this meant reforming agriculture and unleashing entrepreneurship. Under Jiang Zemin, it meant officially enshrining a market economy, reforming state-owned enterprises, and joining the World Trade Organization. Under Hu Jintao and Wen Jiabao, it meant reforming social security. Many expect yet another round of sweeping reforms under Xi Jinping—but they may be disappointed”.

The author adds, “The need for further reforms still exists, due to widespread corruption, rising inequality, slowing growth, and environmental problems. But the era of authoritarian adaptation is reaching its end, because there is not much potential for further evolution within China’s current authoritarian framework. A self-strengthening equilibrium of stagnation is being formed, which will be hard to break without some major economic, social, or international shock”.

Crucially he argues that “One reason for the loss of steam is that most easy reforms have already been launched. Revamping agriculture, encouraging entrepreneurship, promoting trade, tweaking social security—all these have created new benefits and beneficiaries while imposing few costs on established interests. What is left are the harder changes, such as removing state monop­olies in critical sectors of the economy, privatising land, giving the National People’s Congress power over fiscal issues, and establishing an independent court system. Moving forward with these could begin to threaten the hold of the Chinese Communist Party on power, something that the regime is unwilling to tolerate”.

Interestingly he goes on to make the point “Another reason for the loss of steam is the formation of an increasingly strong antireform bloc. Few want to reverse the reforms that have already taken place, since these have grown the pie dramatically. But many in the bureaucracy and the elite more generally would be happy with the perpetuation of the status quo, because partial reform is the best friend of crony capitalism”.

The piece goes on to note that “Speech is censored, in the press and on the Internet, to prevent the publication of anything deemed “troublesome.” Actions are watched even more closely. Even seemingly nonpolitical actions can be considered dangerous; in 2014, Xu Zhiyong, a legal activist who had led a campaign for equal educational opportunities for the children of rural migrants, was sentenced to four years in prison for “disturbing public order.” Public gatherings are restricted, and even private gatherings can be problematic. In May 2014, several scholars and lawyers were detained after attending a memorial meeting for the 1989 movement in a private home. Even the signing of petitions can bring retribution”.

He notes that there is effectively no civil society in China, but “even as grievances proliferate, the balance of power between the state and society leans overwhelmingly toward the former. Social movements, like plants, need space in which to grow. And when such space does not exist, both movements and plants wither”.

He goes on to make the point “Lacking support from above or below, reform in China has now stagnated, and may even be moving backward. The current leadership still embraces the rhetoric of reform, and it has indeed launched some reform initiatives. Yet they tend to be, as the Chinese say, “loud thunder, small raindrops.” The most significant is Xi’s anticorruption campaign. Having brought about the downfall of 74 provincial-level officials over the past two-plus years, in addition to hundreds of thousands of lower officials, the campaign is certainly vigorous. In the three decades before Xi took power, only three national officials lost their positions for corruption; in less than three years under Xi, five have already done so. Yet the anticorruption campaign should not really be considered a reform program. Instead of encouraging freer media, more independent courts, and watchdog groups to expose and check corruption, the campaign is driven and controlled from the top and characterised by secrecy, ruthlessness, and political calculation”.

He goes on to write “Small reforms are moving forward in some other areas as well, but none of them is transformational. The 18th Party Congress, held in late 2012, emphasized judiciary reform, but so far, nothing much more than administrative restructuring has happened. A Central Committee edict in late 2014 promised to strengthen “institutions of independent and fair trials and prosecution,” but it set the first principle of legal reform as “asserting the leadership of the Chinese Communist Party.” Party officials frequently nod to the importance of “deliberative democracy,” and early this year, the party released a plan to “strengthen socialist deliberative democracy,” but it is unclear how deliberation can be made meaningful without ways of punishing institutional unresponsiveness”.

He concludes “Underlying the inertia is ideological deadlock. The so-called socialist market economy principle has guided China for over 30 years, allowing for both continuity and reform. It has always contained something of an internal contradiction, because the impersonal legal system required by the market economy could potentially compete with the personalized party leadership as the final arbiter of public affairs, and in recent years, the question has come to the fore with greater urgency: Which is more important, the needs 
of the market economy or those of the Communist Party? In practice, the needs of the party prevail. But the regime has not developed a coherent, contemporary ideological discourse to justify that outcome. Marxism is obviously inadequate. The regime increasingly resorts to Confucianism, with its convenient emphasis on benevolent governance within a hierarchical order. Yet the two coexist uneasily because the party still nominally embraces Marxism-Leninism, whose emphasis on equality goes against Confucianism, which stresses hierarchy”.

 

 

 

 

Where to draw the line with China?

11/05/2015

An interesting piece asks where to stop the line being drawn when balancing against China, “Is it time for the United States to get serious about balancing China? According to Robert Blackwill and Ashley Tellis, the answer is an emphatic yes. In a new Council on Foreign Relations report, they portray China as steadily seeking to increase its national power, reduce the U.S. security role in Asia, and eventually dominate the international system. To deal with this clear challenge to U.S. primacy, they call for “a new grand strategy toward China that centers on balancing the rise of Chinese power rather than continuing to assist its ascendancy.” In their view, success in this endeavour will require the United States to revitalise its economy, build preferential trading arrangements with Asian partners (such as the Trans-Pacific Partnership), deny critical technology to Beijing, and shore up U.S. and allied military capabilities in Asia”.

He adds “They also recommend that Washington strive to manage Sino-American relations through sustained high-level engagement with Beijing, and good things like that. But their overriding goal is to “limit China’s capacity to misuse its growing power.” Needless to say, it is hard for a realist like me to find much fault with these prescriptions (and other prominent realists have been sounding similar warnings for some time now). But recognising the need to balance a rising power just gets us started: The critical question is how one goes about it — and where one draws the line. And though Blackwill and Tellis’s report does offer an imposing array of steps to be taken, it doesn’t answer that crucial question directly”.

The report adds that “In international politics, the capacity to shape existing norms, institutions, and political arrangements — aka the “status quo” — depends primarily on relative power. As the balance of power shifts, rising states invariably try to revise the status quo in ways that benefit their interests. This tendency makes perfect sense. Why would any country want to tolerate arrangements that were not to its advantage? If China’s power continues to grow, therefore, it will inevitably seek further adjustments to the current international order. It would be naive indeed to expect Beijing to passively accept institutional and territorial arrangements created by others and especially those features of the existing order that were put in place while China was weak. It is all well and good to advise China to become a “responsible stakeholder,” as former World Bank President Robert Zoellick once did, but having a bigger stake in the system doesn’t preclude trying to revise certain parts of it as well. Beijing won’t seek to overturn features of the existing order that it likes, of course, only those it regards as inimical to its own security or long-term prosperity”.

He asks the question, “how far should this process of adjustment proceed? Even if we recognize that a rising China will inevitably enjoy greater influence and might even have legitimate reasons to adjust the status quo in some areas (such as voting shares within the International Monetary Fund), that admission hardly implies allowing Beijing to have anything its leaders might want.The crucial question is easy to ask but hard to answer: Where should the United States (and others) draw the line?

Yet this statement seems to assume American decline. The weaknesses of China’s economic system are plain to see and coupled with a host of other flaws mean that it would be wrong to assume China’s inevitable rise.

He adds “What makes this issue especially tricky is the importance of preserving some degree of Sino-American amity. Taken together, China and the United States amount to a third of the world’s economy and about 25 percent of the world’s population. If Washington and Beijing maintain constructive relations over the next several decades, it will be easier to address critical global issues such as climate change, global health, macroeconomic management, and even some tricky regional conflicts”.

He argues that China and America have much that unite them but this narrowly economic argument overlooks the vast differences in culture and values that underpin these two nations.

Pointedly he argues “Compared with the need to maintain global economic growth or prevent irreversible and potentially catastrophic damage to the Earth’s atmosphere, going to the brink over some piles of sand around Mischief Reef doesn’t seem all that significant. It’s a classic use of “salami tactics,” where a revisionist power seeks to alter the status quo through a series of small steps, each of them seemingly innocuous but whose cumulative impact could be enormous”.

He correctly writes “At this point it is useful to remind ourselves (and others) that the United States is not a “pitiful, helpless giant.” China’s economy may overtake America’s in absolute terms in the next few years, but U.S. per capita income is far higher and China still has to devote a greater share of national income to meeting basic needs. America’s military capabilities still dwarf China’s by a considerable margin, and its geopolitical environment is much more favorable. The United States has two friendly countries on its borders (Canada and Mexico), and no powerful enemies or nuclear-armed states nearby. By contrast, China has 14 countries on its borders, four of them with nuclear weapons, and relations with several of these neighboring countries are — to put it mildly — delicate”.

He ends the piece that the question is really where to draw the line, “First, as Blackwell and Tellis note (and as I’ve emphasized in the past), any effort to balance China more energetically will require a lot of buy-in from Asian states that have the most to fear from Chinese dominance. Managing these alliance relations will not be easy, however, for three reasons: 1) some of these states remain wary of each other; 2) none of them will want to disrupt their own economic ties with China; and 3) the distances involved are vast and tend to magnify the usual collective-action problems”.

He ends “though Blackwill and Tellis do not address it, making China the centerpiece of U.S. grand strategy will require Washington to set priorities more carefully than it has in the past two decades and avoid costly quagmires in other places. The era when the United States could dominate most of the world’s regions simultaneously is over; today U.S. leaders have to concentrate more on vital interests and steer clear of quixotic crusades. The neoconservatives’ disastrous Middle East adventures were the greatest gift Beijing could have wished for, and pushing Moscow into Beijing’s arms makes little sense if China is the real long-term peer competitor. Yet the current field of Republican presidential candidates seems to have learned nothing from these past errors and seems all too willing to repeat them. As a respected member of the Republican Party’s vanishing realist wing, Blackwill could do the nation a great service by bringing some much-needed sanity back to the party’s foreign-policy discussions”.

 

“China’s economy is losing altitude fast”

05/05/2015

Patrick Chovanec argues that the Chinese economy is a bubble waiting to burst.

He opens “Of China’s stock market had a mascot, it would be Mad magazine’s Alfred E. Neuman, famous for the line with the goofy grin: “What — me worry?” In mid-April, Beijing announced that China’s official GDP growth sank to 7.0 percent, the lowest since the global financial crisis sideswiped the country’s exports in 2009. A growing number of economists suspect the real rate is actually much lower. But amid a deepening slowdown and rising signs of financial distress — such as the April 20 bond default by one of China’s leading property developers, Kaisa — Chinese share prices have suddenly taken off like a bottle rocket. The Shanghai Composite Index has doubled since July and has risen roughly 22 percent in the past month, to 4,200. Also, Hong Kong’s Hang Seng Index, which had lagged, shot up 16 percent in the past 30 days”.

He adds, “Is it a bubble? You bet. But to understand how this bubble came about and what the ramifications might be, it helps to have a bit of background. In 2007, the Shanghai Composite Index topped 6,000 after tripling in a single year. Even though the Chinese economy was chugging along quite well at the time, many worried that prices had shot up too far, too fast, but reassured themselves that the government would not allow the market to fall. “You don’t understand,” one Chinese CEO confidently explained to me. “This is China. Maybe after the Olympics [in August 2008], but they won’t let it happen before.” Then, in October 2007 — well before the Olympics or the global financial crisis — the bottom fell out. In a sell-off as steep as its rally, like a ballistic missile falling back to Earth, the Shanghai index lost 66 percent of its value, giving back all its gains”.

He goes on to note that “A lot of small-time Chinese savers got burned in that fiery crash. They saw stocks as a risky investment and, for the next six years, kept them at arm’s length. Even when Beijing injected $15 trillion in stimulus lending following the financial crisis, roughly quadrupling the money supply, most of that money avoided the stock market and flowed instead into real estate. While China experienced a massive property boom, the Shanghai index barely treaded water above 2,000″.

Crucially he makes the point that “Bulls argue that China’s stock market is just catching up with the country’s post-stimulus growth spurt. But the timing is ironic because China’s economy is losing altitude fast. The volume of property sales in the first quarter was down 9.2 percent compared with the year before; inventories of unsold properties increased 24 percent. Land sales — a critical factor in financing local-government debt — were down 32.4 percent. The slowdown in China’s construction boom pushed first-quarter steel output down 1.7 percent, year on year, its first decline in 20 years. Chinese exports in March fell 15 percent from a year ago, while industrial profits for the first two months of the year were down 4.2 percent from a year before”.

The piece goes on to mention that “Chinese securities firms have lent an estimated $264 billion to fund stock purchases, about four times as high as when the rally started in July and up 50 percent since January — when regulators announced they would crack down on such lending. The level of margin lending is now about twice as high, relative to market capitalisation, as on the New York Stock Exchange. Many “shadow,” or non-bank, investment vehicles in China that were funding property projects have switched to financing stock speculation. In fact, the downturn in China’s real estate market — and its broader economy — may be helping to fuel China’s stock market rally, as Chinese savers and the Ponzi schemes that cater to them search frantically for returns”.

Interestingly he writes that “Some hypothesise that Beijing has engineered the stampede into stocks as a way for banks and other “too big to fail” entities to paper over big losses from bad lending by issuing inflated shares. If so, it’s a high-risk strategy because any serious drop in those inflated share prices could result in margin loans being called, sending shock waves through China’s financial system. It’s also counterproductive in the long run. China’s strategy to get growth back on track involves shifting from an export- and investment-driven model to an economy that relies more on domestic consumer demand. That means shifting resources from the bloated state sector to the household sector. Conning Chinese households into buying overvalued shares to cover the state sector’s losses does the opposite. Others argue that, by engineering a stock market rally, the Chinese government is attempting to compensate for the negative wealth effect of falling property prices in an effort to prop up consumption. That might make sense, but to succeed, the rally in share prices must be sustainable, not just a short-lived mirage. And the way to do that is by implementing real economic reforms that get growth back on track. There are no short cuts”.

He concludes the piece “All last week, a steady drumbeat of downbeat economic figures from China pushed share prices ever higher, as punters rationalised that Beijing would have to respond by pouring on more stimulus — ignoring Premier Li Keqiang’s repeated statements that more stimulus is not the answer. Whenever Chinese regulators hint at reining in margin lending, however, the market shudders. Many buyers say they don’t believe the rally can last, but plan to ride it out a little longer — and then get out before the crash.  The spectacular rise and fall of China’s stock market in 2007 had little impact on the global economy. Then, as now, the direct exposure of Western banks and investors to China’s share market is limited. But by upping the stakes for the world’s second-largest economy and distracting attention from the urgent task of more meaningful reform, China’s stock market mania risks doing lasting damage”.

A Chinese collapse?

31/03/2015

A collection of academics question when the CCP will collapse. It begins “The endgame of Chinese communist rule has now begun,” influential China scholar David Shambaugh wrote in a March 7 article in the Wall Street Journal. “And it has progressed further than many think.””

The piece opens with Ho-fung Hung an Associate Professor of Sociology, Johns Hopkins University. He argues fairly that “there are serious cracks in the CCP regime, not only because of his arguments and evidence but also because of his deep knowledge about and long-time access to the party’s elite. Whether these cracks will lead to the end of CCP rule, nevertheless, is difficult to predict. The prediction about a CCP endgame this time might end up like the many unrealized predictions before. It may also be like the story of boy crying wolf: The wolf didn’t come the first two times, but it finally came when nobody believed it would come. The bottom line is, the CCP is facing very tough challenges. Whether and how it can weather them is uncertain. Xi is a leader who came to power with very few sources of legitimacy. Mao and Deng were among the founding fathers of the People’s Republic of China. Deng handpicked his successors Jiang Zemin and Hu Jintao — both of whom got the backing of party elders when they came to power. Xi, despite his princeling background, is the first leader chosen out of a delicate compromise among party factions”.

Interestingly he lends credence to “the mysterious Wang Lijun incident occurred, followed by the unusual downfalls of former top leaders Bo Xilai and Zhou Yongkang. What Wang actually told the American diplomats during his sleepover in the U.S. Consulate in Chengdu, and what sensitive information he eventually conveyed to Beijing is still unknown. But the rumour that he revealed a plot by other princelings to get rid of Xi through a coup does not sound too crazy. If this is true, then Xi’s frenetic purge of other factions in his anti-corruption campaign makes sense as a desperate move to whip the disrespectful elite to submission through creating a culture of terror within the Party. Xi’s purges surely make new enemies and make most of the Party elite feel deeply anxious about their fortunes. It won’t be so surprising if some of those anxious elite conspire to depose Xi. Such internal coup against unpopular leaders is not alien to the CCP — it happened with the downfall of the Gang of Four in 1976, and former party chairman Hua Guofeng a few years later”.

He goes on to make the point that “the party’s internal rift is unfolding at the worst possible time, as far as the economy is concerned. Yes, a 7.4 percent annual growth rate is an enviable number to many other emerging economies. But with the soaring indebtedness of the Chinese economy and the ever aggravating unemployment problem, the Chinese economy needs higher-speed growth to stay above water. The debt hangover of the 2008-09 stimulus is worrying. China’s debt to GDP ratio jumped from 147 percent in 2008 to 282 percent now, and is still growing. It is at a dangerously high level compared to other emerging economies. The economic slowdown will lead to profit decline for companies and revenue shortfall for local governments, increasing their difficulty in servicing and repaying debts”.

He admits that the CCP cadres could still prefer to keep Xi over chaos. He ends “we should also ponder another possible scenario: the rise of a hysteric and suffocating dictatorial regime which maintains its draconian control over a society gradually losing its dynamism. Perhaps we can call this hypothetical regime North Korea lite”.

The next writer, Arthur KroeberEditor of the China Economic Quarterly: writes “Neither China nor its Communist Party is cracking up. I have three reasons for this judgment. First, none of the factors Shambaugh cites strongly supports the crackup case. Second, the balance of evidence suggests that Xi’s government is not weak and desperate, but forceful and adaptable. Third, the forces that might push for systemic political change are far weaker than the party. Shambaugh thinks the system is on its last legs because rich people are moving assets abroad, Xi is cracking down on the media and academia, officials look bored in meetings, corruption is rife, and the economy is at an impasse. This is not a persuasive case. True, many rich Chinese are moving money abroad, both to find safe havens and to diversify their portfolios as China’s growth slows. But in aggregate, capital outflows are modest, and plenty of rich Chinese are still investing in their own economy. Following an easing of rules, new private business registrations rose 45 percent in 2014 — scarcely a sign that the entrepreneurial class has given up hope”.

He continues “As for the economy and the reform program, it is first worth pointing out that despite its severe slowdown, China’s economy continues to grow faster than that of any other major country in the world. And claims that the reform program is sputtering simply do not square with the facts. 2014 saw the start of a crucial program to revamp the fiscal system, which led to the start of restructuring local government debt; first steps to liberalize the one-child policy and the hukou, or household registration system (discussed for years but never achieved by previous governments); important changes in energy pricing; and linkage of the Shanghai and Hong Kong stock markets. News reports suggest that we will soon see a program to reorganize big SOEs under Temasek-like holding companies that will focus on improving their flagging financial returns. These are all material achievements and compare favorably to, for instance, the utter failure of Japanese Prime Minister Shinzo Abe to progress on any of the reform agenda he outlined for his country two years ago”.

Crucially, and perhaps correctly he argues “Finally, there is no evidence that the biggest and most important political constituency in China — the rising urban bourgeoisie — has much interest in changing the system. In my conversations with members of this class, I hear many complaints, but more generally a satisfaction with the material progress China has made in the last two decades. Except for a tiny group of brave dissidents, this group in general displays little interest in political reform and none in democracy. One reason may be that they find uninspiring the record of democratic governance in other big Asian countries, such as India. More important is probably the fear that in a representative system, the interests of the urban bourgeoisie (at most 25 percent of the population) would lose out to those of the rural masses”.

Pointedly and worryingly he writes that the whole China collapse syndrome has “a long and futile history. Their persistent failure stems from a basic conceptual fault. Instead of facing the Chinese system on its own terms and understanding why it works — which could create insights into why it might stop working — critics judge the system against what they would like it to be, and find it wanting. This embeds an assumption of fragility that makes every societal problem look like an existential crisis. As a long-term resident of China, I would love the government to become more open, pluralistic and tolerant of creativity. That it refuses to do so is disappointing to me and many others, but offers no grounds for a judgment of its weakness”.

 

The next section, written by Suisheng Zhao of the University of Denver argues, “the CCP regime is in crisis. But it has muddled through one crisis after another, including the catastrophes of the chaotic, decade-long Cultural Revolution and the 1989 Tiananmen crackdown, by tackling its symptoms. It is too difficult to predict the arrival of the cracking up moment now. This current crisis comes after more than three decades of market-oriented economic reform under one-party rule, which has produced a corruptive brand of state capitalism in which power and money ally. The government officials and senior managers in state-owned enterprises (SOEs) have formed strong and exclusive interest groups to pursue economic gains. China ranks among the countries of the highest income inequality in the world at a time when China has dismantled its social welfare state, leaving hundreds of millions of citizens without any or adequate provision of healthcare, unemployment insurance, and a variety of other social services. Meanwhile, China has become one of the world’s most polluted countries. The crisis has worsened as China’s economic growth is slowing”.

He mentions that “President Xi Jinping is likely aware of the danger of possible collapse and has been trying to prevent it from happening. Opposite from the prescription by liberal scholars and Western leaders, Xi has seen that the key to keeping the CCP in power is to further empower the authoritarian state led by the Communist Party, reflecting the long struggle of the Chinese political elites in building and maintaining a powerful state to lead China’s modernisation”.

He continues “The authority crisis called for the creation of an authoritarian state through revolution and nationalism. The Chinese communist revolution was a collective assertion for the new form of authority and a strong state to build a prosperous Chinese nation. The very essence of CCP legitimacy was partly based upon its ability to establish a powerful state as an organizing and mobilizing force to defend the national independence and launch modernization programs. To rectify his predecessors’ overemphasis on the transformation of China through reforms that weakened the state’s authority and the CCP central leadership, Xi has made concentrated efforts to over-empower the authoritarian state. Repeatedly warning against “Westernization,” Xi emphasizes a unified national ideal of the “China Dream” and has allowed the security/propaganda axis to tighten up controls on expression of different political ideologies and opinions”.

He ends “Whether or not empowering the authoritarian state is a long-term solution to the current crisis, it seems to have targeted some of its symptoms and temporarily silenced its liberal critics inside China. As a result, it may help postpone the arrival of a cracking up moment — at least for now”.

 

“A clever scheme that is also doomed”

26/02/2015

An article from the Economist notes that the GOP are playing dangerous with issues that they hold dear, just to score points against President Obama.

It begins “WITH terror threats on every side, how did Republicans—by tradition the party of national security—find themselves pondering a shutdown of the Department of Homeland Security (DHS)? The quick answer involves political calculation, and a desire among conservatives to be seen fighting President Barack Obama over his plans to shield millions of illegal immigrants from deportation with a few strokes of his pen”.

The author goes on to note that “A longer answer involves political weakness. In publicly contemplating a partial government shutdown—the first since the autumn of 2013—Republicans in the House of Representatives are pandering to their party’s angriest grassroots supporters, who have convinced themselves that Mr Obama is not just mistaken in his policies, but is a constitution-trampling tyrant. Calling the president a serial law-breaker helped power Republicans to a thumping win in the mid-term elections last November, handing them control of both chambers of Congress. Since then, Republican leaders have united their fractious party by assailing the constitutionality of Mr Obama’s moves to grant temporary legal papers to more than 4m foreigners living in the country unlawfully, who were either brought to America as children, or who are the parents of citizens or legal residents. The charge has been led by John Boehner, the Speaker of the House—a man who, not so long ago, was derided by hardliners as an establishment squish”.

The writer says that Boehner is using the power of the purse to fight the executive, but the author goes on to mention that “Alas for Mr Boehner, the same Founding Fathers made sure those budget powers are both potent and hard to use. House Republicans have passed a bill that amounts to a precision attack on Mr Obama’s immigration agenda, surgically cutting money for what they call his “executive amnesty” from the funds that flow through the DHS, while ensuring that billions of dollars are available for border guards, immigration agents, counter-terrorism units and other voter-pleasing things. It is a clever scheme that is also doomed”.

Thankfully he reports that “It cannot pass the Senate, where the Republican majority is too slim. The party is even further from the super-majorities needed for Congress to overcome a presidential veto. As a result, Republicans face some ugly choices. They can either let current funding for the whole DHS expire; or, if that does not appeal, they can surrender, or pass a short-term bill to postpone the crisis a while longer”.

The result of all of this bickering is “Ahead of a February 27th deadline to renew DHS spending, Washington folk have turned to a favourite game: guessing who will be blamed if funds dry up. Some House Republicans aim their fire at party colleagues in the Senate, grumbling that they should re-write their chamber’s voting rules in order to ram the House-amended bill past Democrats. Senator Ted Cruz of Texas, a pugnacious right-winger, has an elaborate explanation as to why Democrats will be blamed. If Democrats decline to vote for a spending bill with riders added to destroy Mr Obama’s immigration policies, he says, they will be irresponsibly defunding homeland security in an “extreme” bid to protect the president’s “lawless amnesty”. The DHS stand-off was complicated on February 16th, when a federal district judge in Texas agreed with a complaint filed by 26 states and temporarily blocked the most recent of Mr Obama’s immigration actions, finding that the president had exceeded his powers. The wrangling may yet end up in the Supreme Court”.

In the long term it is the American people and the reputation of America that will suffer, “the shutdown threat raises larger questions about divided government in the Obama era. Mr Boehner and his allies have kept House members content by adopting a staple of Tea Party rhetoric: presenting a policy dispute with Mr Obama as a battle to defend the constitution itself. Once made, that is a hard argument to back away from. If that sort of dogmatism is applied to future budget disputes, gridlock will only worsen. Government shutdowns in modern times have often involved disputes about abortion, welfare and even nuclear-missile funding, with Democrats questioning Ronald Reagan’s strategy for avoiding a third world war. But all sides typically accepted that the constitution obliged them to negotiate and make divided government work. Today, too many Republicans hear the constitution telling them to dig in and seek Mr Obama’s surrender”.

He writer ends the piece “The Founding Fathers did worry about overweening presidents trampling the constitution. They might even have been alarmed at the scope of Mr Obama’s immigration actions. That is why they created independent courts as a check on the executive and—for when that failed—gave Congress powers of impeachment. Today’s Republicans fear even to use the I-word, remembering the backlash that followed the impeachment of President Bill Clinton. As a result, they seem tempted to use their budget powers as a sort of impeachment-lite”.

Of course what the Founding Fathers did not bet on was a group of unhinged Republicans bent of destroying the entire US government to please their own insane “ideology”.

He concludes “More pragmatic Republicans, notably in the Senate, are appalled by renewed talk of shutdowns. A rare House moderate, Charlie Dent of Pennsylvania, says a number of his Republican colleagues “are tired of being driven into a ditch by bad tactics”. He disagrees with Mr Obama’s executive actions on immigration, but says their legality “will be settled in the courts, not in the halls of Congress”. Meanwhile, with Islamic State fanatics on the march, Congress should do its job and fund the DHS. If after that Congress still dislikes Mr Obama’s actions, Mr Dent concludes, it should take up its own immigration legislation. He is right. Alas, many of his colleagues prefer to be seen fighting Mr Obama’s plans, not fixing them”.

McCain blocks Blinken

06/12/2014

Senator John McCain said on Thursday he is blocking President Barack Obama’s nomination of Anthony Blinken as the country’s number two diplomat, citing sharp disagreement with the nominee’s past statements on Iraq. “He’s totally unqualified,” the Republican senator told Reuters, when asked why he was holding up Blinken’s nomination to be deputy Secretary of State. “He’s the guy who said we’re leaving behind the richest, safest Iraq in history. Look it up,” McCain said, referring to Blinken’s reassuring comments two years ago about the decision to withdraw all U.S. troops from Iraq. McCain, a frequent critic of Obama’s foreign policy, has repeatedly voiced strong opposition to the decision to end the campaign in Iraq, where U.S. forces are currently battling the militant fighters of the Islamic State”.

Chinese brain drain

06/12/2014

A piece from the Economist discusses the Chinese brain drain. It begins “Chinese-landscape scrolls and calligraphy adorn the office of Shi Yigong, dean of the School of Life Sciences at Tsinghua University in Beijing. Little about his ornamentation hints at Mr Shi’s 18 years in America, where, like thousands of Chinese students, he decamped for graduate study in the early 1990s. Mr Shi eventually became a professor at Princeton University but he began to feel like a ‘bystander’ as his native country started to prosper. In 2008, at the age of 40, he returned to his homeland. He was one of the most famous Chinese scholars to do so; an emblem for the government’s attempts to match its academic achievements to its economic ones”.

Like most developing countries the article notes that “Sending students abroad has been central to China’s efforts to improve its education since the late 1970s, when it began trying to repair the damage wrought by Mao’s destruction of the country’s academic institutions. More than 3m Chinese have gone overseas to study. Chinese youths make up over a fifth of all international students in higher education in the OECD, a club mostly of rich countries. More than a quarter of them are in America”.

What makes a mockery of Chinese aspirations to lead Asia, if not the world are crushed when the author makes the point that “Every country sends out students. What makes China different is that most of these bright minds have stayed away. Only a third have come back, according to the Ministry of Education; fewer by some counts. A study this year by a scholar at America’s Oak Ridge Institute for Science and Education found that 85% of those who gained their doctorate in America in 2006 were still there in 2011”.

Naturally the CCP have tried their best to counter this though the only means they know how, “To lure experts to Chinese universities, the government has launched a series of schemes since the mid-1990s. These have offered some combination of a one-off bonus of up to 1m yuan ($160,000), promotion, an assured salary and a housing allowance or even a free apartment. Some of the best universities have built homes for academics to rent or buy at a discount. All are promised top-notch facilities. Many campuses, which were once spartan, now have swanky buildings (one of Tsinghua’s is pictured above). The programmes have also targeted non-Chinese. A “foreign expert thousand-talent scheme”, launched in 2011, has enticed around 200 people. Spending on universities has shot up, too: sixfold in 2001-11. The results have been striking. In 2005-2012 published research articles from higher-education institutions rose by 54%; patents granted went up eightfold”.

Yet this does not address the other basic issues, such as lack of academic freedom.

He makes the point that for all of these “perks”, “most universities still have far to go. Only two Chinese institutions number in the top 100 in the Times Higher Education World University Rankings. Shanghai’s Jiao Tong University includes only 32 institutions from mainland China among the world’s 500 best. The government frets about the failure of a Chinese scholar ever to win a Nobel prize in science (although the country has a laureate for literature and an—unwelcome—winner in 2010 of the Nobel peace prize, Liu Xiaobo, an imprisoned dissident). Pulling some star scholars back from abroad will not be enough to turn China into an academic giant. Many of those who return do so on a part-time basis. According to David Zweig of the Hong Kong University of Science and Technology, nearly 75% of Chinese nationals who were lured by a “thousand-talent” programme launched in 2008 did not give up tenure elsewhere”.

Even then those that do “come back” are only in areas like science and technology which are less politically dangerous for the tottering CCP.

The reasons for this brain drain are clear “Research inside China is moulded by the heavy hand of the state. Many grants are allocated by administrators who lack expertise in evaluating proposals, rather than by open, competitive peer review. Staff are not encouraged to be sceptical about existing theories, especially those held by senior staff who control resources, says Mr Cao. The result is management by numbers: academics are rewarded for the quantity of their publications instead of quality. This creates incentives to eschew long-term, open-ended exploration. “Sometimes guanxi [connections] are all you need” to get promotions and grants, says Tsinghua’s Mr Shi, who since returning has recruited Chinese scientists from prestigious universities in America and elsewhere to work in his labs. In science the Communist Party has picked six main spheres of research to fund, including nanotechnology, climate change and stem cells. But letting officials decide on research is a poor recipe for innovation”.

Attempts to change the system have been a total failure, “Until recently universities routinely hired their own students upon graduating. Many staff did not have doctorates, lecturers were given jobs for life with no motivation to excel and all promotion was internal. Ten years ago, when Peking University tried to replace this system with limited employment contracts and open competition for posts, it faced such resistance from its own staff that it had to shelve its plans”.

He does note that this may be changing, “Some universities are changing the way they recruit and hence finding it easier to attract staff from abroad. At Peking University departments now hire and promote using international evaluation-methods. They advertise jobs and academics apply for promotion and are rewarded according to their achievements”.

However, this may be too late for China to be the “world leader” it aspires to be unless the issue of academic freedom is addressed comprehensively.

He ends of a distinct note of caution, “Departments such as Mr Shi’s at Tsinghua have attracted private funding to top up salaries for tenured positions. Assistant professors at some elite institutions are paid as much as $70,000-80,000 a year, up to 80% of which comes from donations. But academic institutions the world over are notoriously slow to reform. China has more than 2,400 universities and research facilities—and so far only a few minds have been changed”.

“China’s leaders still have reason to worry”

02/12/2014

The superb Daniel Altman writes that about the lack of independence of China’s central bank, “the pressure was just too much. The governor of the People’s Bank of China (PBOC), Zhou Xiaochuan, and his colleagues didn’t want to cut interest rates, but the risk that China’s economy might continue to cool was too great for their bosses in Beijing. After holding firm for two years, the PBOC lowered the one-year lending rate by 0.4 percentage points to 5.6 percent and the one-year deposit rate by 0.25 percentage points to 2.75 percent, giving banks more latitude to extend credit. In economic terms, it’s short-run stimulus with a potential long-run cost. But there’s a cost for the PBOC as well. Though the economic situation in China is hardly dire — the economy is still expanding by at least 7 percent annually — things haven’t exactly been going to plan”.

Altman adds later that “With its growth rate at a five-year low in the third quarter, China may miss its economic target for this year. Of course, the calculation of national statistics in China is notoriously opaque, so a missed target might not show up in the official figures. Yet whether it’s on the books or not, China’s leaders still have reason to worry. Slowing growth in China raises the potential for instability and discontent. China’s working-age population of 920 million may already be declining as its population ages, but there are still about 15 million Chinese youths reaching working age every year. Of these, perhaps 7 million will become college graduates, who currently face a job market that doesn’t necessarily value their education and skills”.

Altman makes the point “If China maintains its rapid economic growth while the working-age population declines, then these young people should eventually be able to find some sort of suitable employment. But the economic cycle can cause temporary disruptions in the labour market — the political consequences of which have spooked China’s leaders before. Moreover, an overqualified workforce will not just be restive but will also try to leave. After all, they can’t just vote the bums out. In democracies, governments with lousy economic records are usually replaced. Under China’s system, wholesale change can only come from within the government, and there’s rarely an unscheduled change at the top — especially when a leader has consolidated his power the way Xi Jinping has“.

He adds that the action by the PBOC will only make things worse in the long term, “for the PBOC, cutting rates was equivalent to throwing gasoline on a fire that it was already struggling to control. China’s credit markets are experiencing a ballooning of wasteful and speculative investment. Lower rates may help businesses to borrow and hire, but they’ll add more air to the balloon and make it easier for banks to keep bad loans on their balance sheets as well. Loose credit will also continue to fuel construction, and bringing more supply to the real estate market will only cause falling real estate prices — another headache for Beijing — to fall further. Most likely, this is not what Zhou had in mind. The PBOC had been trying to enforce discipline”.

Thankfully he writes “the politicisation of monetary policy could cost Beijing the realization of one of its dearest ambitions: making the renminbi a global reserve currency. China wants the renminbi to compete with the dollar as a currency for trade, finance, and commodity prices. Needing fewer dollars among its own reserves, China’s economy would be less affected by monetary policy made in Washington”

Altman introduces some nuance “Having an independent central bank isn’t essential — the Bank of England wasn’t independent until 1997, yet the pound was the pre-eminent global reserve currency long before that — but it helps. The reason has to do with time horizons. In democracies, politicians typically have short time horizons; they live and die from one election to the next. As a result, they may want to cut rates and boost the economy before an election, even if it will lead to inflation and a weaker currency in the future”.

He closes the piece “A politicised central bank just causes more hassle, and hassle lead to shifts away from assets denominated in that bank’s currency. So when it comes to having a reserve currency, is the independence of the central bank equally important in China? The first question to ask is how long the time horizons are for China’s leaders. Each one can be expected to serve for 10 years, but his actual time horizon may become much shorter if his regime is under threat. If that happens, then it’s hard to imagine that anything — certainly not any notion of the central bank’s independence — would stop him from trying to defend his mandate and, if necessary, the Communist Party’s control of the government. The PBOC may be independent in good times but not in a crisis, or indeed not even in a slowdown like the one China is undergoing right now. And that’s the same as not being independent at all”. 

He ends “Ironically, that independence may now be in danger in Washington. Among the pet projects of the Republican Party in Congress is a plan to limit the Federal Reserve’s flexibility in conducting monetary policy. Constraining the Fed would eliminate an important advantage of American economic institutions over their Chinese equivalents”.

 

China, looking for friends

02/12/2014

President Xi Jinping said China would forge a new “global network of partnerships”, amid calls for Beijing to develop allies. But analysts said Xi’s comments did not mean a break with the country’s decades-old foreign policy of non-alignment. Addressing the Communist Party’s two-day foreign affairs work conference which ended on Saturday, Xi told party leaders and officials that the government should expand its foreign policy agenda through cooperation and diplomacy. “We should make more friends while abiding by the principle of non-alignment and building a global network of partnership,” Xi said. According to Xinhua, Xi said China should work hard to form a network of mutual benefit through business and technological cooperation. China made non-alignment a core element of its independent foreign policy in the 1980s but there have been growing questions from some quarters in recent years on the wisdom of not having allies, given the country’s growing influence and Washington’s renewed focus on the region”.

Still the indispensable nation

27/11/2014

Micah Zenko argues controversially that America is no longer the indispensable nation.

He beigns “In 1996, political journalist Sidney Blumenthal and foreign policy historian James Chace struggled to come up with a memorable phrase to describe America’s post-Cold War role in the world. ‘Finally, together, we hit on it: ‘indispensable nation.’ Eureka! I passed it on first to Madeleine Albright,’ Blumenthal recalled. In his memoir of the Clinton presidency, The Clinton Wars, Blumenthal elaborated on what the phrase was intended to represent: ‘Only the United States had the power to guarantee global security: without our presence or support, multilateral endeavours would fail.’ Albright, then secretary of state, began using the phrase often, and most prominently in February 1998, while defending the policy of coercive diplomacy against Iraq over its limited cooperation with U.N. weapons inspectors when”,

Zenko goes on to make the point “Over the last six months, the notion of American indispensability has resurfaced in a big way. U.S. President Barack Obama has emphasised this point repeatedly, and most expansively in May while giving a commencement address to West Point cadets: ‘When a typhoon hits the Philippines or schoolgirls are kidnapped in Nigeria or masked men occupy a building in Ukraine, it is America that the world looks to for help. So the United States is and remains the one indispensable nation. That has been true for the century past and it will be true for the century to come.’ Beyond the White House, this assertion has recently been made by Joe Biden, Hillary Clinton, Chris Christie, Jeb Bush, Bobby Jindal, Marco Rubio, and Michelle Bachman. This bipartisan group may not agree on much, but they are all proudly ‘Indispensables.’ Like many foreign policy concepts overwhelmingly endorsed by officials and policymakers, this one has little basis in reality”.

Zenko adds “When Indispensables provide specifics to support their claim, they almost exclusively highlight some use of the U.S. military, whether for humanitarian purposes, coercion, or war fighting. More than any other country, the United States retains a far greater capacity to send troops, disaster response professionals, or bombs virtually anywhere in the world in a short time frame. Today, the U.S. Navy has 102 ships deployed around the world, the Air Force 659 strategic airlifters, 456 air refuelers, and 159 long-range bombers, and the Air Force and Navy combined some 3,407 fighter and attack aircraft. Not to mention the over 300,000 active-duty and reserve Soldiers, Sailors, Airmen, and Marines deployed to warzones or stationed at America’s 576 active military facilities worldwide. These unmatched global military capabilities provide U.S. officials with an unmatched spectrum of policy options. However, these can be used for benign and relatively judicious missions, like responding to typhoons, or for profoundly destabilising and dumb ones, such as invading a distant country to topple its leader with minimal support from other countries and a totally implausible transition strategy”.

Zenko ignores the fact that hard power is often, thought not the only, way to ensure things get done. There have been debates as to whether it has been overused but the basic fact is that many of America’s enemies do not want to change their behaviour and so must be forced to do so.

He goes to argue that those who use the term indispensable “do so in an extremely selective manner. For example, using Obama’s examples, nearly all of the more than 200 Nigerian schoolgirls remain in the clutches of Boko Haram, and clandestine Russian security forces continue to operate with impunity in Ukraine. Abuja and Kiev looked to the United States for help, which it provided to the extent that their governments were willing to accept it. But in both countries the help was insufficient to achieve the intended objectives”.

Yet this just proves how indispensable America really is. If it wanted to it could have spent time and money to ameliorate both of these situations. It chose not to. Zenko seems to be arguing that because it hasn’t chosen to do so America is no longer indispensable, a strange logic.

He expands on this point “Relatedly, Indispensables also omit the vast number of instances where “the world” looks to America for help, and U.S. officials choose to do nothing. Earlier this year, as they have since 2011, mayors in Darfur, South Kordofan’s Nuba Mountains, and Blue Nile, again requested a no-fly-zone to protect civilian populations from the indiscriminate airpower used by the regime in Khartoum. It was denied yet again”.

The fact that the mayors did not go to France or the UK or Germany for requests means that the point is proven. Only America has the power to do want is required and is thus still indispensable. It chose not to use this power for either political or military reasons, because it chose not to use it does not make it any less indispensable.

He quotes an administration official and then asks “why do so few countries with deployable military assets participate in U.S.-led campaigns in a meaningful way? The United States provided the majority of the actual combat forces and airpower in Iraq, Afghanistan, and Libya, and is doing so again in the air campaign to counter the Islamic State (IS). Most countries that could participate have either declined to do so”.

Obviously Zenko has never heard of free riding.

He ends making the fair point “the Indispensables belief that America’s role in the world is “absolutely necessary” in all areas is simply arrogant. It discounts the tremendous and essential contributions from non-U.S. countries, international non-governmental organizations, and civil society. This includes the 128 countries contributing 104,184 troops and police forces currently deployed in support of sixteen U.N. peacekeeping operations worldwide. The United States provides only 113 troops to U.N. peacekeeping operations, but, importantly, foots 27 percent of the bill and provides logistics support”.

 

Shutdown 2015?

21/11/2014

A high-ranking Senate GOP leader on Sunday left the door open to a government shutdown if President Obama moves forward with unilateral action on immigration reform. Asked by “Fox News Sunday” host Chris Wallace if Republicans would “take the bait” and shut down the government, Sen. John Thune (R-S.D.) said “it doesn’t solve the problem, Chris, but look, we’re having those discussions.” Thune noted that House and Senate leaders “are having discussions” on how to react if Obama takes action on the lightning-rod issue as soon as this week. But the Senate Republican Conference chairman charged that Obama would be “choosing friction and partisanship … instead of cooperation (which) would make it difficult” for a GOP-controlled Congress to do immigration reform “or anything” over the next two years  Asked if Obama should wait until after Congress has passed a must-pass government-funding bill when it expires on December 11th, Democratic Senator Sheldon Whitehouse (R.I.) responded that the “timing” could be “negotiable.” Whitehouse blamed the current impasse on immigration reform on Speaker John Boehner (R-Ohio) who refused to consider the Senate-passed measure on comprehensive immigration reform”.

Inequality as national security problem

19/11/2014

David Rothkopf, in an unusual article lessens the risks of ISIS but rightly warns of the dangers of inequality. Taken with the problems in American democracy, if not corrected in the long term, American decline will occur.

He begins “the Islamic State is also an example of a threat that, if not overstated, has been largely misconstrued. It is, after all, only an organization of perhaps 20,000 to 35,000 fighters. It has very limited resources. Its hold on the cities it has claimed is tenuous and to a large degree desperate, depending more on threats than on the active support of the majority of local populations. It is not a major threat to the residents of the United States and certainly not anything like the existential threats Americans faced in the last century. We, however, have applied the transitive property of terrorism to elevate its status: We have come to see the Islamic State as the new al Qaeda, and al Qaeda, despite being a relatively small organization with limited capabilities, had previously been elevated to the role of America’s new Enemy No. 1, occupying a position once held by a real existential threat, the Soviet Union, which had inherited its root-of-all-evil mantle from the Nazis”.

He rightly conceded that ISIS is a threat “Yes, of course, a serious one. But it’s not as much of a threat at least for now to Americans and their way of life as it is to American interests and America’s allies in the Middle East and elsewhere. Were the Islamic State to establish a permanent radical state in the Middle East, that could be destabilizing for years. Further, such a state could serve as a petri dish for global mayhem, a place where the other real risk associated with the group — that of its growing army of foreign fighterscould be cultivated, made more dangerous, and released on different corners of the region or the world”.

He goes on to expand on a section on the future geolpolitical threats, including Pakistan and Russia, climate change, cyber threats but rightly taking an expansive view he argues “those associated with another global economic crunch or the growing risk of cyberconflicts, the consequences of which we barely understand and are ill-prepared to grapple with. In each case, these threats are simmering like that proverbial frog sitting in a pot of increasingly hot water. They may reach a boiling point before we know it and can jump out to save ourselves”.

He adds to an argument that has been noted before but that there are threats in the United States that will undermine the long term power of the country and, if not addressed, will lead to American decline, “They have to do with the fact that despite steady job growth rivaling the gains of the Clinton years, and despite a booming stock market and a rising GDP outstripping those of the world’s other major developed economies, wages are not rising and the quality of the jobs being created is disturbingly low. We are, in fact, seeing America’s first major post-recession recovery that has bypassed its middle class. Ninety percent of the gains have gone to the top 10 percent of the population. Something is broken.Something is badly wrong”.

He goes on to bloster his point “The most grotesque element of this existential threat to the American dream, to America’s sense of itself and to its fundamental social cohesion, is growing inequality. In fact, it is inequality at historic levels. Asreportedin the most recent issue of the Economist, the top one-tenth of 1 percent of America’s population is about to achieve a level of wealth equivalent to that of the bottom 90 percent. That’s just over 300,000 people with holdings equal to that of some 280 million. Those wealthy few will control 22 percent of the wealth. The bottom 90 percent, everybody essentially, will also have 22 percent. This in turn means that the top 10 percent of the U.S. population will control 78 percent of America’s wealth. Almost eight out of every 10 dollars of net worth”.

He strikes a note of balance noting that “This is not a uniquely American problem. The World Economic Forum, having conducted a survey of almost 2,000 global leaders, reports that they view rising inequality as the most threatening trend facing the globe in 2015. In all 44 countries polledby the Pew Research Center, majorities believe that inequality is a major problem in their countries, and in most of those countries (28 of them), they consider it a very big concern. The global numbers are pretty gut-wrenching too: Just 0.7 percent of the population controls 41 percent of the wealth. Roughly 70 percent have just 3 percent of the wealth. But the American case is special no matter how you slice it. It is because, for example, wage disparities between average workers and CEOs are greater in the United States than in any other place in the world — by a lot, more than five times than in the next-worse nation (Venezuela). While U.S. workers, according to a recent articlein the Harvard Business Review that analyzes a new study appearing in Perspectives on Psychological Science, think the difference between average wages and those of the boss should be about seven times, in fact it is 354 times. An analysis by the White House’s Council of Economic Advisers puts the situation in further relief”.

Rothkopf argues that the level of inequality is becoming so bad that it will be a large part of the next presidential election, “Inequality is creeping steadily upward. In fact, the situation has become so bad that the American political party that has in recent years been seen as the champion of Wall Street and fat cats, the Republican Party, scored many of its 2014 election victories by emphasizing the gaps in the flawed economic recovery (which the Republicans, of course, blamed on President Barack Obama.) According to a Slate articleby William Saletan, “Republicans won big in the 2014 elections…. But they didn’t do it by running to the right. They did it, to a surprising extent, by embracing ideas and standards that came from the left…. I’m talking about the core of the liberal agenda: economic equality.” This is a harbinger of things to come”.

Crucially he argues “For candidate Hillary Clinton (who will certainly be the most well-versed and competent of any in the field in terms of national security and foreign-policy issues by virtue of her tenure as secretary of state), there will be a special challenge. She will have to offer an economic approach that is seen as something new, focused more on these issues of inclusion, opportunity- and quality job creation, rather than the message of growth and placating Wall Street that marked her husband’s tenure as president. (Note: I served as a senior economic official in Bill Clinton’s administration.) She will need a new team because those associated with her husband and Obama are too closely associated with Wall Street and bailouts and policies favouring the few, even if that is, to a large degree, an unfair oversimplification. Indeed, her biggest challenge over the next year will be convening a group of new faces with new ideas to tackle this greatest of all threats to the United States”.

He closes “Her competition will likely focus on the same issues — whether that competition consists of centrists like Jeb Bush or relative renegades like Rand Paul. Because at the end of the day, despite the din of media alerts and the flashing lights of government terrorism warnings, the real insecurity that haunts Americans late at night as they contemplate their futures involves not terrorists or rogue nations, but political and financial institutions at home that have been captured by the self-interested few and that are seeking to squeeze the hope out of Americans as no terrorist could do”.

 

Emerging no longer?

15/11/2014

An article in Foreign Policy argues that emerging markets are no longer the honey pots they once were.

It opens, “For most of the first-half of this year, investors in developing economies had a spring in their step. The bond and equity markets in countries known as emerging markets (EMs) enjoyed a surge in inflows because of expectations that the world’s main central banks, including the U.S. Federal Reserve, would maintain their ultra-loose monetary policies. The excess capital floating around had to go somewhere, and the higher-yielding bond markets of Brazil, Indonesia, Mexico, and other EMs still seemed like an attractive place to park their money. And investors had good reason to have faith in these countries. The prospects for meaningful reforms in EMs — in particular public finance and labour market reforms as well political and institutional overhauls to root out corruption and improve governance — looked bright following the overwhelming victory of the business-friendly Narendra Modi in India’s month-long parliamentary election that ended on May 16”.

The writer goes on to make the point that “it seemed like Brazil was about to follow suit. In the closest and most bitterly fought presidential election in recent memory, Dilma Rousseff — the country’s center-left president who is deeply mistrusted by both financial markets and most members of Brazil’s business community because of the interventionist policies that were the hallmark of her four years in power after taking over from her popular predecessor, Luiz Inácio Lula da Silva — won the run-off on Oct. 26 by the skin of her teeth”.

He adds that “The day after the election, the real, Brazil’s currency, slid to a nine-year low against the dollar. Brazilian stocks, which have fallen 11 percent over the past three months because of fears that Rousseff would win, dropped nearly 3 percent. And the impact of Rousseff’s victory is being felt far beyond South America. By winning re-election, she set back the cause of economic reform in EMs around the world. In the space of five months, “Modi mania” has given way to “Rousseff revulsion.” To be sure, sentiment towards EMs was already deteriorating by early September because of renewed fears that the Fed was likely to start hiking interest rates sooner than anticipated”.

This is what often happens when a leader of a large developing country gets elected. The “market” sees things that it wants to see and there is a rush of optimism. The result is that the rationality that it proclaims to have a permanent hold on vanishes and great things are expected when in fact, little is delivered.

The author makes the point that “After falling sharply in the first half of October because of mounting fears about the threat of deflation, particularly in Europe, it has since risen again and now stands at 0.51 percent as investors once again bet that a strengthening U.S. economy will force the Fed to tighten monetary policy in the middle of next year. If market interest rates rise, in particular short-term interest rates, this is a sign that there is a stronger likelihood that official interest rates will soon go up. This means markets are likely to remain volatile in the coming months, with investors forced to pay more attention to countries’ economic fundamentals, such as inflation and balance of payments, which are invariably glossed over during periods of low volatility”.

Crucially he makes the point “For EMs, this is not the best time to be under closer scrutiny. Following Rousseff’s victory, two uncomfortable truths about developing economies have been brought into sharp relief: First, the politics of economic reform matter as much — if not more — as the reforms themselves. Second, the quality and credibility of economic governance matters hugely. Rousseff won Brazil’s election because she was able to portray her two main opponents in the campaign as enemies of the poor who, if elected, would have endangered Bolsa Familia, the popular social welfare scheme set up by Lula da Silva in 2003 which has lifted millions of Brazilians out of poverty. The experience of Enrique Peña Nieto, Mexico’s president since December 2012 and probably the most radical reformer among the leading EMs, is an even more cautionary tale. Despite undertaking a sweeping overhaul of the energy sector, Peña Nieto has managed the politics of economic adjustment badly. Not only did his fiscal policies contribute to the sharp slowdown in Mexico’s economy last year, he is perceived by many Mexicans to be living in an ivory tower, aloof from the drug-related violence and crime ravaging the country. The lesson here is that while Peña Nieto may be a bold economic reformer, Rousseff just got re-elected because she was more attentive to the everyday concerns of ordinary Brazilians”.

He goes on to build his argument noting that “On the policy side, things are even tougher for EM presidents and prime ministers. Brazil is stuck with excessively tight monetary policy — the central bank was forced to hike interest rates on Oct. 29 to a punishingly high 11.25 percent in an attempt to shore up confidence — and a lack of faith in Rousseff’s economic policies. India, on the other hand, has a dream team in place following Modi’s victory in May’s parliamentary election: a central bank led by the highly regarded Raghuram Rajan, whose inflation-fighting credentials have allowed it to reduce interest rates and an inspiring and charismatic prime minister who has already started to liberalize energy prices and appears committed to fiscal and structural reforms”.

He ends the piece “Even in Brazil, there are signs that Rousseff will appoint a more market-friendly finance minister in the coming weeks with a view to placating markets. The Bovespa has already risen 7.5 percent since the election. Investors may be taking the view that Rousseff’s second can’t possibly be any worse than her first. Still, her victory has thrown the challenges of implementing reforms in EMs into sharper relief. It has been a cold shower for those investors who were giddy with excitement after Modi’s victory. The lessons are clear: Investors should lower their expectations — even if business-friendly candidates win elections — and should pay more attention to the politics of economic reform. As Rousseff’s win demonstrated, the fear of change can be as important as the yearning for it”.

Restoring American democracy

07/11/2014

In a superb piece, Christian Caryl writes that American democracy is dimming but offers solutions to fix it.

He opens “The approaching midterm election here in the United States offers fresh occasion for anguish about the fate of American democracy. We have a national vote in this country every two years, and each one offers plenty of opportunities to bemoan the sorry state of the republic. This time it’s the same, only worse. Once again, substantive policy issues are taking a back seat to partisan rancor and vicious negative ads. Once again, record amounts of cash are being spent to promote candidates whose actual ideological differences are often small. Once again, special interest groups are working hard to make sure that their private concerns will shape public policy. And once again, as usually happens in elections where voters don’t have to worry about choosing a president, turnout will end up well below 50 percent. (The figures are even worse — more like 30 percent — for local elections.) All these complaints are familiar enough. Yet there’s something about this particular election cycle that feels even grimmer than usual. President Barack Obama’s approval rating is dismal, but it doesn’t look too bad when compared with the figures for Congress, which are now in the single digits. This has a great deal to do with the deepening paralysis of lawmakers, who increasingly seem more intent on partisan point scoring than on getting things done”.

He goes on to make the important point “What Americans probably don’t realise, though, is that we aren’t the only ones to feel disillusioned. The rest of the world’s countries tend to pay far more attention to us than we do to them, and they’ve noticed what a mess our society is in. I’m not just talking here about the usual agonizing over American “declinism,” the general perception of diminished U.S. influence around the globe. I have a more specific problem in mind: America’s dwindling attractiveness as a model of democracy”.

Indeed Caryl is correct. Across Europe people are disconnected and angry at the unresponsive politicians and bankers who have mired their countries and citizenry in debt that will linger for generations, in the name of saving a “currency” no-one voted for or wanted. At the same time apthy is soaring among established democracies and as has been argued here before the best way to assist in restoring the link between citizens and politicians is compulsory voting. Other measures are needed as well but this measure alone would go a long way in beginning to restore confidence.

Caryl mentions fairly “Larry Diamond, one of America’s leading scholars on global democracy, brought it up in a rousing speech at a recent conference here in Washington. He noted, with admirable frankness, that “we can’t be credible and effective in promoting democracy abroad if we don’t reform and improve its functioning at home.” He used to make this point, he said, as one of his last pieces of advice to Americans who aim to offer assistance to would-be democrats abroad. Now, he said, “it needs to be the first.” He quoted the old Greek proverb: “Physician, heal thyself.” He’s not the only one. Just about everyone you meet in the “democracy bureaucracy” these days says the same”.

He goes on to offer a number of suggestions as to how to begin to fix the problems, “First and foremost, Americans need to stop whining and start reforming. Diamond himself offers a number of good places to start in a chapter of his 2008 book The Spirit of Democracy: The Struggle to Build Free Societies Throughout the World. I don’t have the space to do full justice to his proposals, but suffice it to say that he offers a series of concrete recommendations on everything from tackling the legalised corruption at the heart of our political system to reducing partisan polarisation and enhancing political participation. The answers include full or partial public financing of campaigns, doing away with gerrymandering, and adoption of instant runoff voting, which allows voters to rank candidates by preference rather than forcing them to vote for only one”.

Caryl takes a holistic picture “Democracy will only win out if it delivers better results: good schools, sustainable economic growth, more income equality, and efficient and accessible health care. America’s current record on these fronts is spotty — which is why eyes tend to roll in other countries whenever we start to sing the praises of our system. There’s a big debate about effective governance going on in the world right now (for a good overview, see The Fourth Revolution: The Global Race to Reinvent the State, by John Micklethwait and Adrian Wooldridge). America needs to become a more active participant in that discussion. As Micklethwait and Woodridge note, there are plenty of countries that we, too, can learn from”.

He ends “Yet there’s no question in my mind that people around the world want more democracy. That’s because most people want freedom, political participation, and control over their own lives. But why they should they choose democracy if the way it’s implemented in their own societies results in rampant social injustice, corruption, diminished prosperity, and a decline in personal security? What they want is democracy that works. America used to be the world’s best example of that. Now it’s not. Maybe it’s time for us to clean up our act — and not just for own sake. Bring on those midterms”.

 

“Long pledged to make China’s economy more efficient”

24/10/2014

An article from the Economst argues that China’s weakening prouctivity which cast doubt on China’s long term future.

It opens “THE growth of China’s economy is staggering: it produced $9.5 trillion-worth of goods and services in 2013, nearly three times more than in 2007. But has that growth come simply from deploying more labour and capital? Or did total factor productivity (TFP)—the efficiency with which those two inputs are used—also increase? China’s future growth hinges on the answer. A period of high growth does not necessarily involve a rise in productivity. The more people there are in employment, and the more factories and roads there are for them to use, the bigger an economy will be. But those workers and roads may not be put to good use. As long as the amount by which labour and capital grow outpaces any fall in productivity, GDP will still increase. Growth of this sort, however, can last only so long. Neither labour nor capital are infinite. In the long run, improving the productivity with which they are used is the magic ingredient for any economy, the only path to sustainable growth. Hence the concerns about China. A series of estimates published this year have all suggested that productivity is flagging”.

Importantly the writer mentions “At the pessimistic end of the range is Harry Wu, an economist who has devoted much research to the shortcomings of China’s official economic data. He finds that since 2007 TFP has actually been a drag on the economy, denting growth by about 0.9 percentage points a year. At the more optimistic end, researchers at the World Bank think TFP added nearly three percentage points a year to growth from 2000 to 2010—but even they reckon that is 40% lower than in the 1990s. In between these two estimates are Jianhua Zhang, Chunxia Jiang and Peng Wang, two of whom are with the People’s Bank of China. They conclude that productivity increased just 1.5% a year between 1997 and 2012”.

The point to take out of this is that “As these diverging estimates suggest, overall productivity growth, despite being central to economics, is frustratingly difficult to pin down. It cannot, after all, be seen. When comparing two workers with the same job in the same company, it is easy to determine which one produces more. For economies, such apple-to-apple comparisons are not possible. Instead, economists get at TFP by subtracting the change in capital and labour deployed from the change in overall output. The difference (known as the Solow residual, after Robert Solow, the economist who pioneered this method) reflects the contribution of productivity to growth. In this way, the unseen becomes visible”.

As with much economic theory, masquerading as science, “the process requires several accounting somersaults. Assumptions are needed about, among other things, the size of the capital stock, the rate of capital depreciation and the level of workers’ education. Mr Wu does not trust official GDP figures and so constructs his own. Because his estimate of average annual growth for 2008-12 (6.5%) is dramatically lower than the official figure (9.3%), his calculations yield a negative Solow residual. Productivity, in other words, appears to have gone into reverse”.

Controversially the author notes that “This conclusion looks too gloomy. For one thing, there are problems with Mr Wu’s own numbers. He relies on a selective sampling of official data and applies far-reaching yet apparently arbitrary adjustments to them, assuming, for instance, that reforms in the 1990s added only 1% to services growth. Many other economists see problems with Chinese data—lumpy growth figures are often smoothed, for instance—but not enough to justify such extensive revision, especially during the past decade when there has been a proliferation of data from China’s trading partners that can be used to verify the Chinese numbers”.

While the “gloomy” estimate maybe just that, there is sound advice that argues that it is much better to assume the worst and then build up from that rather than take the best estimate as the baseline figure and go on from that. This should be obvious sense, especially in relation to China.

As has been noted elsewhere, especially in the work of George Magnus, “There is another, more worrying factor behind the deceleration in productivity, however: bad lending and investment decisions. Financial development, handled well, should promote growth by improving the allocation of resources. But the researchers from the central bank find a strongly negative correlation in China between growth in lending and in TFP. That is an indication that state-owned banks, which still dominate China’s financial sector, are not disbursing enough credit to the country’s most deserving companies. And the economy is consuming more and more capital. China’s incremental capital-output ratio (ICOR), a measure of how much investment it takes to achieve each percentage point of growth, rose to 5.4 in 2012 from 3.6 over the preceding two decades, according to the World Bank. Japan, South Korea and Taiwan were far more efficient during their high-growth phases, with ICORs of 2.7-3.2”.

The piece ends “The Chinese government has warned about overcapacity in scores of industries from steel to textiles. Heavy capital spending gins up growth when factories are built, but it also shows up in the data as weak productivity if the factories are only partly used. Nevertheless, it is still alarming. The Communist Party has long pledged to make China’s economy more efficient. The data on TFP show that it is struggling to do that. Accumulating productive capacity is easier than putting it to productive use”.

The dangers of inequality

21/09/2014

An old article from Bloomberg notes the problem of growing income inequality in America and the real dangers this poses to America both to future financial crises and the danger of decline if it is not addressed. It opens, “A widening gap between rich and poor is reshaping the U.S. economy, leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions. Left unchecked, the decades-long trend toward increasing inequality may condemn Wall Street to a generation of unimpressive returns and even shake social stability, economists and financial-industry executives say. “Income inequality in this country is just getting worse and worse and worse,” James Chanos, president and founder of New York-based Kynikos Associates Ltd., told Bloomberg Radio this week. “And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind.” Since 1980, about 5 percent of annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion — about $109 million apiece — beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data”.

He goes on to write “Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant U.S. economy saddled with 9.1 percent unemployment yet boasting record corporate profits. President Barack Obama last month targeted “the wealthiest taxpayers and biggest corporations” for higher taxes, saying they should pay “their fair share.” That drew charges of “class warfare” from House Speaker John Boehner of Ohio”.

The piece goes on to write “Branko Milanovic, a World Bank economist, added in a September article: “Widespread education has become the secret to growth. And broadly accessible education is difficult to achieve unless a society has a relatively even income distribution.” Since 1968, incomes in the U.S. have become steadily less equally distributed, according to the standard statistical measure of inequality known as the Gini coefficient. The U.S. Gini score rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming increasingly unequal”.

Crucially he notes “The typical American household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remained below the level reached in 1997. The widening chasm between haves and have-nots has tangible consequences. Societies with a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S., where the wealthy over time have pulled away from the rest of society, mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, said economist Jonathan Ostry of the IMF. Expansions — or what Ostry and coauthor Andrew Berg label “growth spells” — fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive”.

The article mentions “On the surface, inequality might appear to be a problem of the have-nots. Yet the haves will suffer, too. Barry Ritholtz, CEO of the investment research firm Fusion IQ, says millions of potential investors may conclude, as they did following the Great Depression, that the stock market is a rigged game for insiders. Such seismic shifts in popular sentiment can have lasting effects. The Dow Jones Industrial Average didn’t regain its September 1929 peak of 355.95 until the same month in 1954. “You’re going to lose an entire generation of investors,” says Ritholtz. “And that’s how you end up with a 25-year bear market. That’s the risk if people start to think there is no economic justice.” Rising inequality contributed to the onset of previous financial crises and may already be laying the groundwork for the next one, some economists say. During both the 1920s and the most recent decade, the rich enjoyed large income gains, much of which were made available to the working poor and middle class via credit channels. Politicians encouraged the resort to credit as a way to bridge the gap for those struggling to sustain living standards amid flatlining wage income, according to Rajan’s 2010 book”.

It ends “The government’s response to the financial crisis may also have exacerbated the rich-poor gap by shifting liabilities from private banks to taxpayers. Households and businesses have trimmed their debts since the 2008 peak while government borrowing — to recapitalize the nation’s banks and battle the recession — has exploded. As a result, total domestic nonfinancial sector debt topped $36.5 trillion at mid-year, compared with $32.4 trillion in mid- 2008. And that massive load leaves the economy vulnerable to future shocks. “In the current climate, if nothing is done about income inequality there may be recurring crises,” says Kumhof, adding: “Leverage has not significantly improved. In terms of the danger of another crisis, we’re right back where we started.””

Sources of dysfunction

13/09/2014

Francis Fukuyama writes in Sources of Political Dysfunction in Foreign Affairs that the problems faced by America at this moment in history are a result of how the political institutions were created and have been made worse by worsening polarisation. He argues that the decay is likely to continue and be a real threat to democracy.

He opens “The creation of the U.S. Forest Service at the turn of the twentieth century was the premier example of American state building during the Progressive Era. Prior to the passage of the Pendleton Act in 1883, public offices in the United States had been allocated by political parties on the basis of patronage. The Forest Service, in contrast, was the prototype of a new model of merit-based bureaucracy. It was staffed with university-educated agronomists and foresters chosen on the basis of competence and technical expertise, and its defining struggle was the successful effort by its initial leader, Gifford Pinchot, to secure bureaucratic autonomy and escape routine interference by Congress. At the time, the idea that forestry professionals, rather than politicians, should manage public lands and handle the department’s staffing was revolutionary, but it was vindicated by the service’s impressive performance. Several major academic studies have treated its early decades as a classic case of successful public administration. Today, however, many regard the Forest Service as a highly dysfunctional bureaucracy performing an outmoded mission with the wrong tools. It is still staffed by professional foresters, many highly dedicated to the agency’s mission, but it has lost a great deal of the autonomy it won under Pinchot. It operates under multiple and often contradictory mandates from Congress and the courts and costs taxpayers a substantial amount of money while achieving questionable aims. The service’s internal decision-making system is often gridlocked, and the high degree of staff morale and cohesion that Pinchot worked so hard to foster has been lost. These days, books are written arguing that the Forest Service ought to be abolished altogether. If the Forest Service’s creation exemplified the development of the modern American state, its decline exemplifies that state’s decay”.

He goes on to write “The belief that public administration could be turned into a science now seems naive and misplaced. But back then, even in advanced countries, governments were run largely by political hacks or corrupt municipal bosses, so it was perfectly reasonable to demand that public officials be selected on the basis of education and merit rather than cronyism. The problem with scientific management is that even the most qualified scientists of the day occasionally get things wrong, and sometimes in a big way. And unfortunately, this is what happened to the Forest Service with regard to what ended up becoming one of its crucial missions, the fighting of forest fires”.

He adds “The Forest Service’s performance deteriorated, in short, because it lost the autonomy it had gained under Pinchot. The problem began with the displacement of a single departmental mission by multiple and potentially conflicting ones. In the middle decades of the twentieth century, firefighting began to displace timber exploitation, but then firefighting itself became controversial and was displaced by conservation. None of the old missions was discarded, however, and each attracted outside interest groups that supported different departmental factions: consumers of timber, homeowners, real estate developers, environmentalists, aspiring firefighters, and so forth. Congress, meanwhile, which had been excluded from the micromanagement of land sales under Pinchot, reinserted itself by issuing various legislative mandates, forcing the Forest Service to pursue several different goals, some of them at odds with one another. Thus, the small, cohesive agency created by Pinchot and celebrated by scholars slowly evolved into a large, Balkanized one. It became subject to many of the maladies affecting government agencies more generally: its officials came to be more interested in protecting their budgets and jobs than in the efficient performance of their mission. And they clung to old mandates even when both science and the society around them were changing”.

In general his point about lost autonomy is correct however it is very important that many of these organisations can become a law unto themselves and need guidance and structure. The problem that he identifies is correct in that organisations like the Forest Service need clarity which is not what is given to them either by Congress or the executive branch. Some of the problems are worsened by the supposed need for openness which more often than not is a way for lobbyists like loggers and real estate companies with money to influence things to their advantage.

He goes on to argue that “The story of the U.S. Forest Service is not an isolated case but representative of a broader trend of political decay; public administration specialists have documented a steady deterioration in the overall quality of American government for more than a generation. In many ways, the U.S. bureaucracy has moved away from the Weberian ideal of an energetic and efficient organization staffed by people chosen for their ability and technical knowledge. The system as a whole is less merit-based: rather than coming from top schools, 45 percent of recent new hires to the federal service are veterans, as mandated by Congress. And a number of surveys of the federal work force paint a depressing picture”.

In a section that he calls “Why Institutions Decay” he  notes “In his classic work Political Order in Changing Societies, the political scientist Samuel Huntington used the term ‘political decay’ to explain political instability in many newly independent countries after World War II. Huntington argued that socioeconomic modernization caused problems for traditional political orders, leading to the mobilization of new social groups whose participation could not be accommodated by existing political institutions. Political decay was caused by the inability of institutions to adapt to changing circumstances. Decay was thus in many ways a condition of political development: the old had to break down in order to make way for the new. But the transitions could be extremely chaotic and violent, and there was no guarantee that the old political institutions would continuously and peacefully adapt to new conditions. This model is a good starting point for a broader understanding of political decay more generally. Institutions are ‘stable, valued, recurring patterns of behaviour,’ as Huntington put it, the most important function of which is to facilitate collective action. Without some set of clear and relatively stable rules, human beings would have to renegotiate their interactions at every turn. Such rules are often culturally determined and vary across different societies and eras, but the capacity to create and adhere to them is genetically hard-wired into the human brain. A natural tendency to conformism helps give institutions inertia and is what has allowed human societies to achieve levels of social cooperation unmatched by any other animal species. The very stability of institutions, however, is also the source of political decay. Institutions are created to meet the demands of specific circumstances, but then circumstances change and institutions fail to adapt. One reason is cognitive: people develop mental models of how the world works and tend to stick to them, even in the face of contradictory evidence. Another reason is group interest: institutions create favored classes of insiders who develop a stake in the status quo and resist pressures to reform”.

Interestingly he makes the point “In theory, democracy, and particularly the Madisonian version of democracy that was enshrined in the U.S. Constitution, should mitigate the problem of such insider capture by preventing the emergence of a dominant faction or elite that can use its political power to tyrannize over the country. It does so by spreading power among a series of competing branches of government and allowing for competition among different interests across a large and diverse country. But Madisonian democracy frequently fails to perform as advertised. Elite insiders typically have superior access to power and information, which they use to protect their interests. Ordinary voters will not get angry at a corrupt politician if they don’t know that money is being stolen in the first place”.

He adds that “liberal democracy is almost universally associated with market economies, which tend to produce winners and losers and amplify what James Madison termed the ‘different and unequal faculties of acquiring property.’ This type of economic inequality is not in itself a bad thing, insofar as it stimulates innovation and growth and occurs under conditions of equal access to the economic system. It becomes highly problematic, however, when the economic winners seek to convert their wealth into unequal political influence. They can do so by bribing a legislator or a bureaucrat, that is, on a transactional basis, or, what is more damaging, by changing the institutional rules to favour themselves — for example, by closing off competition in markets they already dominate, tilting the playing field ever more steeply in their favour. Political decay thus occurs when institutions fail to adapt to changing external circumstances, either out of intellectual rigidities or because of the power of incumbent elites to protect their positions and block change. Decay can afflict any type of political system, authoritarian or democratic. And while democratic political systems theoretically have self-correcting mechanisms that allow them to reform, they also open themselves up to decay by legitimating the activities of powerful interest groups that can block needed change”.

This is why the system of political funding in America, in Europe is of such importance. Whoever has funding and access to politicians will inevitably gain. The solution is obvious and has been stated before but the state must control all funding of political parties based on a proportion of how each party does at election time. All other sources of funding such be effectively banned, apart from small donations of 100 or 200 dollars or pounds or euros. The consequences of not doing this has been seen, so what is to be lost in doing it? This will only be done if governments can challenge and unseat vested interests but it is only likely to do this if the problem becomes so bad that there is no other alternative.

He mentions that “Modern liberal democracies have three branches of government — the executive, the judiciary, and the legislature — corresponding to the three basic categories of political institutions: the state, the rule of law, and democracy. The executive is the branch that uses power to enforce rules and carry out policy; the judiciary and the legislature constrain power and direct it to public purposes. In its institutional priorities, the United States, with its long-standing tradition of distrust of government power, has always emphasized the role of the institutions of constraint — the judiciary and the legislature — over the state”.

He notes the “the apparently irreversible increase in the scope of government in the twentieth century has masked a large decay in its quality. This is largely because the United States has returned in certain ways to being a “state of courts and parties,” that is, one in which the courts and the legislature have usurped many of the proper functions of the executive, making the operation of the government as a whole both incoherent and inefficient”.

He turns to the courts and writes that “The primary mover in the Brown case was the National Association for the Advancement of Colored People, a private voluntary association that filed a class-action suit against the Topeka, Kansas, Board of Education on behalf of a small group of parents and their children. The initiative had to come from private groups, of course, because both the state government and the U.S. Congress were blocked by pro-segregation forces. The NAACP continued to press the case on appeal all the way to the Supreme Court, where it was represented by the future Supreme Court justice Thurgood Marshall. What was arguably one of the most important changes in American public policy came about not because Congress as representative of the American people voted for it but because private individuals litigated through the court system to change the rules. Later changes such as the Civil Rights Act and the Voting Rights Act were the result of congressional action, but even in these cases, the enforcement of national law was left up to the initiative of private parties and carried out by courts. There is virtually no other liberal democracy that proceeds in this fashion. All European countries have gone through similar changes in the legal status of racial and ethnic minorities, women, and gays in the second half of the twentieth century. But in France, Germany, and the United Kingdom, the same result was achieved not using the courts but through a national justice ministry acting on behalf of a parliamentary majority. The legislative rule change was driven by public pressure from social groups and the media but was carried out by the government itself and not by private parties acting in conjunction with the justice system”.

Depressingly he writes “The explosion of opportunities for litigation gave access, and therefore power, to many formerly excluded groups, beginning with African Americans. For this reason, litigation and the right to sue have been jealously guarded by many on the progressive left. But it also entailed large costs in terms of the quality of public policy. Kagan illustrates this with the case of the dredging of Oakland Harbor, in California. During the 1970s, the Port of Oakland initiated plans to dredge the harbor in anticipation of the new, larger classes of container ships that were then coming into service. The plan, however, had to be approved by a host of federal agencies, including the Army Corps of Engineers, the Fish and Wildlife Service, the National Marine Fisheries Service, and the Environmental Protection Agency, as well as their counterparts in the state of California. A succession of alternative plans for disposing of toxic materials dredged from the harbor were challenged in the courts, and each successive plan entailed prolonged delays and higher costs. The reaction of the Environmental Protection Agency to these lawsuits was to retreat into a defensive crouch and not take action. The final plan to proceed with the dredging was not forthcoming until 1994, at an ultimate cost that was many times the original estimates. A comparable expansion of the Port of Rotterdam, in the Netherlands, was accomplished in a fraction of the time. Examples such as this can be found across the entire range of activities undertaken by the U.S. government. Many of the travails of the Forest Service can be attributed to the ways in which its judgments could be second-guessed through the court system. This effectively brought to a halt all logging on lands it and the Bureau of Land Management operated in the Pacific Northwest during the early 1990s, as a result of threats to the spotted owl, which was protected under the Endangered Species Act”.

He argues that “A decentralised, legalistic approach to administration dovetails with the other notable feature of the U.S. political system: its openness to the influence of interest groups. Such groups can get their way by suing the government directly. But they have another, even more powerful channel, one that controls significantly more resources: Congress”.

He goes on to elaborate,”With the exception of some ambassadorships and top posts in government departments, U.S. political parties are no longer in the business of distributing government offices to loyal political supporters. But the trading of political influence for money has come in through the backdoor, in a form that is perfectly legal and much harder to eradicate. Criminalized bribery is narrowly defined in U.S. law as a transaction in which a politician and a private party explicitly agree on a specific quid pro quo. What is not covered by the law is what biologists call reciprocal altruism, or what an anthropologist might label a gift exchange. In a relationship of reciprocal altruism, one person confers a benefit on another with no explicit expectation that it will buy a return favour. Indeed, if one gives someone a gift and then immediately demands a gift in return, the recipient is likely to feel offended and refuse what is offered. In a gift exchange, the receiver incurs not a legal obligation to provide some specific good or service but rather a moral obligation to return the favor in some way later on. It is this sort of transaction that the U.S. lobbying industry is built around”.

He makes the point that “The explosion of interest groups and lobbying in Washington has been astonishing, with the number of firms with registered lobbyists rising from 175 in 1971 to roughly 2,500 a decade later, and then to 13,700 lobbyists spending about $3.5 billion by 2009. Some scholars have argued that all this money and activity has not resulted in measurable changes in policy along the lines desired by the lobbyists, implausible as this may seem. But oftentimes, the impact of interest groups and lobbyists is not to stimulate new policies but to make existing legislation much worse than it would otherwise be. The legislative process in the United States has always been much more fragmented than in countries with parliamentary systems and disciplined parties. The welter of congressional committees with overlapping jurisdictions often leads to multiple and conflicting mandates for action. This decentralized legislative process produces incoherent laws and virtually invites involvement by interest groups, which, if not powerful enough to shape overall legislation, can at least protect their specific interests. For example, the health-care bill pushed by the Obama administration in 2010 turned into something of a monstrosity during the legislative process as a result of all the concessions and side payments that had to be made to interest groups ranging from doctors to insurance companies to the pharmaceutical industry. In other cases, the impact of interest groups was to block legislation harmful to their interests. The simplest and most effective response to the 2008 financial crisis and the hugely unpopular taxpayer bailouts of large banks would have been a law that put a hard cap on the size of financial institutions or a law that dramatically raised capital requirements, which would have had much the same effect. If a cap on size existed, banks taking foolish risks could go bankrupt without triggering a systemic crisis and a government bailout. Like the Depression-era Glass-Steagall Act, such a law could have been written on a couple of sheets of paper. But this possibility was not seriously considered during the congressional deliberations on financial regulation”.

An example of this he argues is the “Dodd-Frank Wall Street Reform and Consumer Protection Act, which, while better than no regulation at all, extended to hundreds of pages of legislation and mandated reams of further detailed rules that will impose huge costs on banks and consumers down the road. Rather than simply capping bank size, it created the Financial Stability Oversight Council, which was assigned the enormous task of assessing and managing institutions posing systemic risks”.

Under the heading, What Madison Got Wrong he writes “The economist Mancur Olson made one of the most famous arguments about the malign effects of interest-group politics on economic growth and, ultimately, democracy in his 1982 book The Rise and Decline of Nations. Looking particularly at the long-term economic decline of the United Kingdom throughout the twentieth century, he argued that in times of peace and stability, democracies tended to accumulate ever-increasing numbers of interest groups. Instead of pursuing wealth-creating economic activities, these groups used the political system to extract benefits or rents for themselves. These rents were collectively unproductive and costly to the public as a whole. But the general public had a collective-action problem and could not organize as effectively as, for example, the banking industry or corn producers to protect their interests. The result was the steady diversion of energy to rent-seeking activities over time, a process that could be halted only by a large shock such as a war or a revolution. This highly negative narrative about interest groups stands in sharp contrast to a much more positive one about the benefits of civil society, or voluntary associations, to the health of democracy. Tocqueville noted in Democracy in America that Americans had a strong propensity to organize private associations, which he argued were schools for democracy because they taught private individuals the skills of coming together for public purposes”.

He elobrates “Madison himself had a relatively benign view of interest groups. Even if one did not approve of the ends that a particular group was seeking, he argued, the diversity of groups over a large country would be sufficient to prevent domination by any one of them. As the political scientist Theodore Lowi has noted, “pluralist” political theory in the mid-twentieth century concurred with Madison: the cacophony of interest groups would collectively interact to produce a public interest, just as competition in a free market would provide public benefit through individuals’ following their narrow self-interests”.

He goes on later in the article to note, “Democracies must balance the need to allow full opportunities for political participation for all, on the one hand, and the need to get things done, on the other. Ideally, democratic decisions would be taken by consensus, with every member of the community consenting. This is what typically happens in families, and how band- and tribal-level societies often make decisions. The efficiency of consensual decision-making, however, deteriorates rapidly as groups become larger and more diverse, and so for most groups, decisions are made not by consensus but with the consent of some subset of the population. The smaller the percentage of the group necessary to take a decision, the more easily and efficiently it can be made, but at the expense of long-run buy-in. Even systems of majority rule deviate from an ideal democratic procedure, since they can disenfranchise nearly half the population. Indeed, under a plurality, or “first past the post,” electoral system, decisions can be taken for the whole community by a minority of voters. Systems such as these are adopted not on the basis of any deep principle of justice but rather as an expedient that allows decisions of some sort to be made. Democracies also create various other mechanisms, such as cloture rules (enabling the cutting off of debate), rules restricting the ability of legislators to offer amendments, and so-called reversionary rules, which allow for action in the event that a legislature can’t come to agreement”.

He makes the point that “the so-called Westminster system, which evolved in England in the years following the Glorious Revolution of 1688, is one of the most decisive in the democratic world because, in its pure form, it has very few veto points. British citizens have one large, formal check on government, their ability to periodically elect Parliament. (The tradition of free media in the United Kingdom is another important informal check.) In all other respects, however, the system concentrates, rather than diffuses, power. The pure Westminster system has only a single, all-powerful legislative chamber — no separate presidency, no powerful upper house, no written constitution and therefore no judicial review, and no federalism or constitutionally mandated devolution of powers to localities. It has a plurality voting system that, along with strong party discipline, tends to produce a two-party system and strong parliamentary majorities. The British equivalent of the cloture rule requires only a simple majority of the members of Parliament to be present to call the question; American-style filibustering is not allowed. The parliamentary majority chooses a government with strong executive powers, and when it makes a legislative decision, it generally cannot be stymied by courts, states, municipalities, or other bodies. This is why the British system is often described as a “democratic dictatorship.” For all its concentrated powers, the Westminster system nonetheless remains fundamentally democratic, because if voters don’t like the government it produces, they can vote it out of office. In fact, with a vote of no confidence, they can do so immediately, without waiting for the end of a presidential term. This means that governments are more sensitive to perceptions of their general performance than to the needs of particular interest groups or lobbies”.

He goes on to contrast the budget process in the UK “The Westminster system produces stronger governments than those in the United States, as can be seen by comparing their budget processes. In the United Kingdom, national budgets are drawn up by professional civil servants acting under instructions from the cabinet and the prime minister. The budget is then presented by the chancellor of the exchequer to the House of Commons, which votes to approve it in a single up-or-down vote, usually within a week or two” with that in the US which can and does take months, “The budget works its way through a complex set of committees over a period of months, and what finally emerges for ratification by the two houses of Congress is the product of innumerable deals struck with individual members to secure their support — since with no party discipline, the congressional leadership cannot compel members to support its preferences. The openness and never-ending character of the U.S. budget process gives lobbyists and interest groups multiple points at which to exercise influence. In most European parliamentary systems, it would make no sense for an interest group to lobby an individual member of parliament, since the rules of party discipline would give that legislator little or no influence over the party leadership’s position. In the United States, by contrast, an influential committee chairmanship confers enormous powers to modify legislation and therefore becomes the target of enormous lobbying activity”.

He adds later that “In full perspective, therefore, the U.S. political system presents a complex picture in which checks and balances excessively constrain decision-making on the part of majorities, but in which there are also many instances of potentially dangerous delegations of authority to poorly accountable institutions. One major problem is that these delegations are seldom made cleanly. Congress frequently fails in its duty to provide clear legislative guidance on how a particular agency is to perform its task, leaving it up to the agency itself to write its own mandate. In doing so, Congress hopes that if things don’t work out, the courts will step in to correct the abuses. Excessive delegation and vetocracy thus become intertwined. In a parliamentary system, the majority party or coalition controls the government directly; members of parliament become ministers who have the authority to change the rules of the bureaucracies they control. Parliamentary systems can be blocked if parties are excessively fragmented and coalitions unstable, as has been the case frequently in Italy. But once a parliamentary majority has been established, there is a relatively straight-forward delegation of authority to an executive agency”.

He writes that the “obvious solution to a legislature’s inability to act is to transfer more authority to the separately elected executive. Latin American countries with presidential systems have been notorious for gridlock and ineffective legislatures and have often cut through the maze by granting presidents emergency powers — which, in turn, has often led to other kinds of abuses. Under conditions of divided government, when the party controlling one or both houses of Congress is different from the one controlling the presidency, strengthening the executive at the expense of Congress becomes a matter of partisan politics. Delegating more authority to President Barack Obama is the last thing that House Republicans want to do today”.

Thankfully he realises that “In many respects, the American system of checks and balances compares unfavorably with parliamentary systems when it comes to the ability to balance the need for strong state action with law and accountability. Parliamentary systems tend not to judicialize administration to nearly the same extent; they have proliferated government agencies less, they write more coherent legislation, and they are less subject to interest-group influence. Germany, the Netherlands, and the Scandinavian countries, in particular, have been able to sustain higher levels of trust in government, which makes public administration less adversarial, more consensual, and better able to adapt to changing conditions of globalization”.

He concludes “The U.S. political system has decayed over time because its traditional system of checks and balances has deepened and become increasingly rigid. In an environment of sharp political polarization, this decentralized system is less and less able to represent majority interests and gives excessive representation to the views of interest groups and activist organizations that collectively do not add up to a sovereign American people. This is not the first time that the U.S. political system has been polarized and indecisive. In the middle decades of the nineteenth century, it could not make up its mind about the extension of slavery to the territories, and in the later decades of the century, it couldn’t decide if the country was a fundamentally agrarian society or an industrial one. The Madisonian system of checks and balances and the clientelistic, party-driven political system that emerged in the nineteenth century were adequate for governing an isolated, largely agrarian country. They could not, however, resolve the acute political crisis produced by the question of the extension of slavery, nor deal with a continental-scale economy increasingly knit together by new transportation and communications technologies”.

He ends, “Two obstacles stand in the way of reversing the trend toward decay. The first is a matter of politics. Many political actors in the United States recognize that the system isn’t working well but nonetheless have strong interests in keeping things as they are. Neither political party has an incentive to cut itself off from access to interest-group money, and the interest groups don’t want a system in which money won’t buy influence. As happened in the 1880s, a reform coalition has to emerge that unites groups without a stake in the current system. But achieving collective action among such out-groups is very difficult; they need leadership and a clear agenda, neither of which is currently present. The second problem is a matter of ideas. The traditional American solution to perceived governmental dysfunction has been to try to expand democratic participation and transparency. This happened at a national level in the 1970s, for example, as reformers pushed for more open primaries, greater citizen access to the courts, and round-the-clock media coverage of Congress, even as states such as California expanded their use of ballot initiatives to get around unresponsive government. But as the political scientist Bruce Cain has pointed out, most citizens have neither the time, nor the background, nor the inclination to grapple with complex public policy issues; expanding participation has simply paved the way for well-organized groups of activists to gain more power. The obvious solution to this problem would be to roll back some of the would-be democratizing reforms, but no one dares suggest that what the country needs is a bit less participation and transparency. The depressing bottom line is that given how self-reinforcing the country’s political malaise is, and how unlikely the prospects for constructive incremental reform are, the decay of American politics will probably continue until some external shock comes along to catalyze a true reform coalition and galvanize it into action”.

China’s health problems

07/09/2014

China’s rapid development has created a “time bomb” of health problems arising from choking smog, reckless driving, widespread smoking, growing obesity and ignorance about mental illness, a new report warns. The Lancet medical journal has devoted an entire issue to China’s looming public health crisis, warning its leaders must learn from the mistakes of the West or face enormous health problems that could be largely prevented. Roughly 800,000 Chinese die each year from injuries, with road accidents currently the leading cause of death for people under the age of 45 after an explosion in the number of cars on the roads. Writing in the Lancet, Professor Jeffrey P Koplan of Emory University in Atlanta, together with Huang Cheng of George Washington University and Professor Yu Hai of the Zhejiang School of Medicine, said China must do more to address reckless and drunk driving. They also point out 173 million Chinese suffer from mental illness but only “a small proportion of them have sought professional help”. Air pollution caused 1.2 million premature deaths in 2010, they noted, and soil and water pollution are also rife. In June 2013, Xinhua, the official Chinese news agency, said six Chinese invididuals are diagnosed with cancer every minute, with around two million deaths each year. By 2020, the Chinese government forecasts four million new cancer cases annually”.

 

An end to paralysis?

05/09/2014

Yet more appointments for the administration are being held up. As usual everyone suffers.

Writing late last year, for the Brookings Institution it was noted that “Over one thousand presidential appointments are subject to time-consuming Senate confirmation. That system currently allows Senators to place anonymous “holds” and filibuster votes on nominees — making it increasingly difficult for the executive branch to function”.

The article notes that “after years of inaction, the Senate is now considering reforms to streamline the process: adopting new rules to limit anonymous holds and agreeing to pass legislation to reduce the number of appointments requiring confirmation”.

The scholars note simple refoms that can be quickly implemented that can make a big difference such as “These would include creating a “surge capacity” before the beginning of a new president’s term involving a temporary increase in the number of FBI agents, Senate staffers and others involved in vetting so as to avoid backlogs, an expansion of the White House personnel operation to create a permanent staff of professionals, and a tiered-system of background checks, with the most stringent reserved only for top-level positions.”

The second category they note are structural reforms that will take time and energy to implement, if they are so desired, such as “a reduction in the number of positions requiring Senate confirmation, streamlining the forms nominees need to fill out during the confirmation process, and a sharp curtailing of the use of ‘holds’ by individual senators”. Or more radically ideas such as “mandatory discharge procedures, providing that if a committee does not act within 30 or 45 days of receiving a nominee with a full package of required information, that nomination would become eligible for consideration by the full Senate. Bolder still would be what some have called “confirmation by rule,” nominees below a certain threshold of rank or significance would be deemed confirmed by default if the Senate did not act within a specific period”.

The Democracy in America blog notes that “Barney Frank had an op-ed in the Washington Post arguing that the refusal of Senate Republicans to confirm any Obama administration nominee to the Consumer Financial Protection Bureau unless the president adopts their pro-Wall Street stances on financial reform creates a constitutional crisis”.

The results of this are clear when it notes that “a Senate minority refuses to approve any nominee, regardless of qualifications, until its policy preferences are enacted, it effectively means that the minority can dictate policy to the majority, forcing the government to undo legislation it has passed”.

The article concludes noting that Republicans are far more capable of blocking nominees than Democrats due to their world outlook. Checks and balances have had their day, it is time they were whittled down to a set of core principles and not an overriding unquestioned idea.

Either way, it is doubtful that any but the most minor of the reforms suggested above will be implemented. Leaving little hope for the only true, long lasting solution.

What China wants

26/08/2014

A long essay in the Economist discusses what China wants. It opens “Matthew Boulton, James Watt’s partner in the development of the steam engine and one of the 18th century’s greatest industrialists, was in no doubt about the importance of Britain’s first embassy to the court of the Chinese emperor. ‘I conceive’, he wrote to James Cobb, secretary of the East India Company, ‘the present occasion to be the most favourable that ever occurred for the introduction of our manufactures into the most extensive market in the world.’ In light of this great opportunity, he argued, George Macartney’s 1793 mission to Beijing should take a ‘very extensive selection of specimens of all the articles we make both for ornament and use.’ By displaying such a selection to the emperor, court and people, Macartney’s embassy would learn what the Chinese wanted. Boulton’s Birmingham factories, along with those of his friends in other industries, would then set about producing those desiderata in unheard-of bulk, to everybody’s benefit. That is not how things turned out. The emperor accepted Macartney’s gifts, and quite liked some of them—a model of the Royal Sovereign, a first-rate man o’ war, seemed particularly to catch his fancy—but understood the whole transaction as one of tribute, not trade. The court saw a visit from the representatives of King George as something similar in kind to the opportunities the emperor’s Ministry of Rituals provided for envoys from Korea and Vietnam to express their respect and devotion to the Ruler of All Under Heaven. (Dealings with the less sophisticated foreigners from inner Asia were the responsibility of the Office of Barbarian Affairs.) ‘We have never valued ingenious articles, nor do we have the slightest need of your country’s manufactures’ The emperor was thus having none of Macartney’s scandalous suggestion that the Son of Heaven and King George should be perceived as equals. He professed himself happy that Britain’s tribute, though admittedly commonplace, should have come from supplicants so far away. But he did not see it as the beginning of a new trading relationship”.

The writer goes on to mention “In retrospect, a more active interest in extramural matters might have been advisable. China was unaware that an economic, technological and cultural revolution was taking place in Europe and being felt throughout the rest of the world. The subsequent rise of colonialist capitalism would prove the greatest challenge it would ever face. The Chinese empire Macartney visited had been (a few periods of collapse and invasion notwithstanding) the planet’s most populous political entity and richest economy for most of two millennia. In the following two centuries all of that would be reversed. China would be semi-colonised, humiliated, pauperised and torn by civil war and revolution”.

He goes onto write “Now, though, the country has become what Macartney was looking for: a relatively open market that very much wants to trade. To appropriate Boulton, the past two decades have seen the most favourable conditions that have ever occurred for the introduction of China’s manufactures into the most extensive markets in the world. That has brought China remarkable prosperity. In terms of purchasing power it is poised to retake its place as the biggest economy in the world. Still home to hundreds of millions mired in poverty, it is also a 21st-century nation of Norman Foster airports and shining solar farms. It has rolled a rover across the face of the moon, and it hopes to send people to follow it. And now it is a nation that wants some things very much. In general, it knows what these things are. At home its people want continued growth, its leaders the stability that growth can buy. On the international stage people and Communist Party want a new deference and the influence that befits their nation’s stature. Thus China wants the current dispensation to stay the same—it wants the conditions that have helped it grow to endure—but at the same time it wants it turned into something else”.

While this is broadly true it is also something of a misnomer. China is not as open and free as the writer seems to think. The evidence is that China has not obeyed vast swathes of the WTO regulations. Not only that but the Chinese government still holds huge sections of the Chinese economy which allow the highest officials to become vastly wealthy. The problem with this is course is twofold, firstly these companies cannot compete globally and secondly, they cannot be reformed as it would make hundreds of thousands redundant which would gravely threaten the power of the CCP and the stability of the regime itself.

Worryingly he goes on to write that “The post-perestroika collapse of the Soviet Union taught China’s leaders not just the dangers of political reform but also a profound distrust of America: would it undermine them next? Xi Jinping, the president, has since been spooked by the chaos unleashed in the Arab spring. It seems he wants to try to cleanse the party from within so it can continue to rule while refusing any notions of political plurality or an independent judiciary. That consolidation is influencing China’s foreign policy. China is building airstrips on disputed islands in the South China Sea, moving oil rigs into disputed waters and redefining its airspace without any clear programme for turning such assertion into the acknowledged status it sees as its due. This troubles its neighbours, and it troubles America. Put together China’s desire to re-establish itself (without being fully clear about what that might entail) and America’s determination not to let that desire disrupt its interests and those of its allies (without being clear about how to respond) and you have the sort of ill-defined rivalry that can be very dangerous indeed”.

This has been commented on with many hoping that China will have greater dilaouge with the United States and the rest of Asia but as has been noted before, this is optimistic based on past performance.

He importantly writes that “The structural reasons for China’s subsequent decline and the empire’s demise have been much discussed. Some point to what Mark Elvin, a historian, calls ‘the high-level equilibrium trap’; the country ran well enough, with cheap labour and efficient administration, that supply and demand could be easily matched in a way that left no incentive to invest in technological improvement. Others note that Europe benefited from competition and trade between states, which drove its capacity for weaponry and its appetites for new markets. As Kenneth Pomeranz, an American historian, has argued, access to cheap commodities from the Americas was a factor in driving industrialisation in Britain and Europe that China did not enjoy. So was the good luck of having coal deposits close to Europe’s centres of industry; China’s coal and its factories were separated by thousands of kilometres, a problem that remains trying today. For some or all of these reasons, and probably others too, China did not industrialise in the way that the West did. Europe had learned of gunpowder from China in the Middle Ages, but by the 19th century Europeans were far better at using it to get their way”.

Crucially he argues “Much of what has taken place since—republican revolution in 1911, the rise and victory of Maoism in 1949 and now ‘socialism with Chinese characteristics’—has been a reaction to the loss of wealth, power and status, and a desire to regain the respect China’s leaders and people feel to be their country’s due. The reformers and revolutionaries of the late 19th century came to believe that traditional Chinese culture was part of the problem. In an attempt not to be carved up by the colonial powers, they began to ditch much of China’s cultural heritage; to save themselves as a nation, many believed they had to destroy themselves as a culture. In 1905 the Confucian examination system that had been the focus of governmental training for two millennia was abandoned. The last emperor and the entire imperial system were overthrown in 1911. With no modern institutions to support it, the new republic soon collapsed into chaos. After Mao reunited China in 1949, the Communists stepped up the assault on Chinese culture yet further. China’s institutions, and the mindsets they created and embodied, were replaced wholesale by ideas from elsewhere. This was the equivalent of Europeans throwing out any vestiges of Roman law, Greek philosophy or Christian belief. Under Mao, Confucius became the enemy. And yet the sense of China as a great civilisation persisted, and persists to this day—leaving the country with a deep identity crisis that it is still struggling to resolve”.

He argues that “China is not bent on global domination. It has little interest in polities beyond Asia, except in as much as they provide it with raw material and markets. Talk of China’s ‘neo-colonialism’ in Africa, for instance, is much exaggerated. The country’s stock of direct investment there still lags far behind Britain’s and France’s and amounts to only a third of America’s. Though China’s influence is undoubtedly growing, its engagement is not imperial but transactional, says Deborah Brautigam, of Johns Hopkins University. When a Japanese company bought the Rockefeller Centre in the 1980s, ‘Americans thought they were buying all of Manhattan,’ says Ms Brautigam. ‘The same is true of China in Africa. It’s all about perception.’ In a forthcoming book, she investigates 20 media reports of land acquisitions by Chinese firms in Africa, claimed to total 5.5m hectares. She found the real figure to be just 63,400 hectares. Chinese foremen have abused African workers, Chinese companies have run illegal mines and annoyingly undercut local traders with cheap Chinese goods. But these are the problems of bad business, not of grand strategy”.

The author should know however that the two are closely interlinked and it would be naive to think that China’s plans for Africa will remain static but will in all probability grow significanctly as time goes on.

He does make the point that “China is ‘neither a missionary culture nor a values superpower,’ says Kerry Brown of the University of Sydney. ‘It is not trying to make other people into China.’ The rhetoric of American foreign policy—and frequently its content, too—is shaped by claims to be the champion of democracy and liberty. The Communist Party is less committed to universal values. Alliances often grow out of shared values; if you don’t have them, friends are harder to find. Awe can be a respectable alternative to friendship, and China has begun to awe the world—but also to worry it”.

Yet with Chinese belief in American “decline” rife they could and indeed are acting out at least regionally in ways that are unsettleing and should be stopped. China may not be a missionary power but it is only interested in itself, as every state is, but it will go to extreme lengths and upset the trend for greater democracy and and greater free trade both of which China is either against or has lukewarm support for.

Interestingly he does note “there is a tension in Chinese foreign policy. The country wants to have as little involvement abroad as it can get away with, except for engagements that enhance its image as a great power. It will act abroad when its own interests are at stake, but not for the greater or general good. Its navy has started to take part in anti-piracy operations off the Horn of Africa and in UN peacekeeping in Africa. In 2011 it sent a ship to co-ordinate the evacuation of 36,000 Chinese workers from Libya. More such actions may follow as its companies get more deeply involved in the world, but only if they are seen as either low-cost or absolutely necessary. Acute awareness of its domestic weaknesses acts as a restraint, as does the damage China sees done by the militarisation of America’s foreign policy in recent years. In a wide range of fields, what China is against is a lot clearer than what it is for. It vetoed the interventions Western powers sought in Syria and Darfur and has taken no position on the Russian annexation of Crimea (despite having a dim view of any sort of centrifugalism at home). At the 2009 climate summit in Copenhagen China made sure no deal emerged that would even suggest it might have to slow its industrial growth. There and elsewhere it showed itself ready to block but not ready to build. As a former senior official in the Bush administration says of Chinese engagement at the G20, ‘They love to show up, but we’re still waiting for their first idea.’ The former official argues that the world needs more Chinese engagement and initiative, not less. Chinese leaders dislike the existing system of alliances, he says, but offer no alternative system of collective security”.

He adds “A lack of engagement is not unusual in a rising power. It took a world war to draw America irrevocably onto the world stage. And the absence of an articulated agenda does not stop China wanting more standing. Despite being one of the five permanent members of the UN Security Council—a position it achieved as one of the victorious powers in the second world war—it is frustrated by what it sees as its lack of influence in international organisations and is leading the other large developing nations in pushing for a better deal”.

He adds later “China’s armed forces are, if not technologically first-rate, certainly large and impressive, not least because they include a nuclear-missile force. But some of Mr Yang’s small countries have a big friend. With troops and bases in Japan and South Korea, America has been the dominant power of the western Pacific for 70 years. Its regional presence has not declined much since it won the cold war a quarter of a century ago. On a trip to Asia in 2011 Barack Obama announced a “pivot” of his country’s policy away from the Middle East and towards Asia. China’s leaders are convinced that America is determined to prevent their country from increasing its strategic and military influence in Asia—that it is trying to contain China as it once sought to contain and eventually crush the Soviet Union. The irony is that China is the only country that really believes the pivot is happening. South-East Asian nations express a fair amount of scepticism at the idea that America’s attention has been newly fixed on their region, and his opponents in America claim Mr Obama has done far too little to follow through on what he said in 2011. That said, the recent Shangri-La Dialogue did nothing to dispel China’s fears. Japan’s prime minister, Shinzo Abe, offered to assist China’s neighbours with military hardware, and has been pushing, within the constraints of Japan’s pacifist post-war constitution, for a more robust defence policy in the region”.

He goes on to mention When Mr Xi said, at his 2013 California summit with Mr Obama, that ‘the vast Pacific has enough space for two large countries like the United States and China,’ it was an expression not so much of the possibility of peaceful coexistence that must surely come from being separated by 10,000km of water, as of the idea that the western Pacific was a legitimate Chinese sphere of influence. And if Mr Xi’s words, repeated to America’s secretary of state, John Kerry, in Beijing in July, seemed to imply a symmetry between the countries, China knows that, in fact, it enjoys various asymmetric advantages. For one, it is a unitary actor. It can drive wedges between America and its allies in the region. Hugh White, an Australian academic, argued in a recent article that, by threatening other Asian countries with force, ‘China confronts America with the choice between deserting its friends and fighting China.’ China’s armed forces are much less proficient than America’s. But China enjoys the advantage of playing at home. America can dominate these seas only through naval and air operations. If Chinese anti-ship missiles present a serious threat to such operations they can greatly reduce America’s ability to project power, without putting China to the expense of developing a navy of its own remotely so capable”.

Worryingly he makes the point “China also thinks there is an asymmetry of will. It sees a war-weary America as unlikely to spend blood and treasure defending uninhabited rocks of no direct strategic importance. America may speak loudly, but its big stick will remain unwielded. China’s people, on the other hand, their views shaped not just by propaganda but also by a nationalism that needs scant encouragement, look on the projection of power in the China seas very favourably. And its military-industrial complex yearns to be paid to build bigger, better sticks of its own. Even if party leaders wanted to succeed in their stated desire for a peaceful rise and to remain within international law, the way they have shaped the spirit of their country would not necessarily let them”.

He ends “China is no longer the “crazy, first-rate man o’ war” described by Macartney in 1793. In spite of its many problems, it is a sleeker, more modern ship. Over 200 years, through much pain and suffering, it has transformed the very core of its identity, changing itself from an inward- and backward-looking power to an outward- and forward-looking one. Since 1978, it has shown both flexibility and unwielding resolve in its continued pursuit of wealth and power. Now those goals are within reach and China stands on the verge of greatness. The next few decades may prove to be the most difficult of all”.

The power of deterrence

29/07/2014

Jennifer Lind writes in Foreign Affairs about the the pivot and what should be left to the Chinese, “The United States’ promises to protect its allies in East Asia underwrite the region’s security. Yet whispers about the credibility of those promises are growing louder. China, meanwhile, continues to assert its claims to disputed islands in the East China and South China Seas through so-called salami tactics: making one provocative move after another, as if taking a salami slice by slice. Each provocation slightly enhances China’s position but is too small to merit a forceful response. Many commentators argue that the United States must enhance deterrence by making clearer and stronger commitments to its allies. But the United States will not solve its problems in East Asia by declaring itself in lockstep with its allies. For guidance, U.S. policymakers should instead look to a previous case that the United States managed successfully: West Berlin during the Cold War. In that case, a major power — the Soviet Union — was also pushing, pressuring, and trying to divide the United States from its allies. Washington solved the problem by standing firm in the face of both sides. The Kennedy administration clarified the vital interests that it would fight to protect, while explaining to its West German ally that the United States would not fight to achieve every German goal in the standoff”.

The argument Lind makes sounds too good to be true. Reappraise what US interests are and leave the rest to the Chinese. One of the most obvious dangers is in the analogy with the USSR and China and the Cold War. America and the USSR balanced each other out and created broad stability, if America were to do what Lind suggests it would be read in China as America believing its own “decline” and even worse would then feed into China’s obviously mistaken belief that it is “rising“.

She goes on to write, “In the coming years, territorial disputes between China and its neighbours will create tension, crisis, and possible conflict in East Asia. In the South China Sea, Beijing asserts sovereignty over an area (enclosed by the so-called nine-dashed line) in which six nearby countries — Brunei, Malaysia, Philippines, Taiwan, and Vietnam — maintain competing territorial claims of their own. In the East China Sea, China has claimed sovereignty over the Japan-controlled Senkaku Islands (which the Chinese call the Diaoyu Islands). It will prove difficult to settle these disputes through negotiations; the countries involved have issued a bewildering tangle of competing legal and historical claims, and the contested islets have become a rallying cry for nationalist politicians. Moreover, many of the territories in question come with rich fishing grounds and are thought to lie near substantial oil and natural gas deposits. These disputes have intensified in recent years”.

Her prediction of increased tension in Asia has already come true, almost entirely due to Chinese aggression which is producing predictable results.  Some states have taken a more legal approach but will ultimately have to strengthen its defences.

Lind returns to the Cold War anology, “it’s the Americans who fear entanglement, in an unwanted and potentially devastating war with China. Given this profound change, it is unsurprising that U.S. allies question Washington’s commitment to their security. In March, for example, the Japanese newspaper Asahi Shimbun discussed how increasing tensions over the Senkaku/Diaoyu were leading many Japanese observers to cite “the unreliability of Japan’s main ally.” Responding to such doubts, Washington has reiterated its commitment to Japan’s security in broad terms. U.S. President Barack Obama and other U.S. officials have announced that although Washington does not take a position on the sovereignty of the Senkaku/Diaoyu Islands, its security guarantee for Japan would apply to attacks against the islands because they are “administered by Japan.” In the South China Sea, Washington has similarly declared its neutrality on territorial claims, but it has not stated that the United States would support the Philippines militarily in the event of conflict. This approach only invites more challenges. Simply declaring that the United States will defend areas administered by Japan does not address the core strategic problem that Washington and Tokyo face — China can still use salami tactics to harass and provoke. In Washington, such acts will simply be seen as annoyances; but in Tokyo, they will be perceived as infringements on Japanese sovereignty, and will continue to raise doubts among Japanese that the Americans may not protect them. As a result, the alliance will weaken”.

The liklihood of a Sino-US war are slim. Even if the two countries do go to war, which despite what the theory says, is not likely America will have little to fear and perhaps even much to gain. China’s military is weak, disorganised, corrupt and there is no certainty that it could beat Japan, let alone America in a war. As to her claim that America is an unrealiable ally firstly it should be said that Japan has no where else to go, but more importantly America is treaty bound to defend Japan should it come under an attack.

Lind goes on to argue that “In East Asia today, the challenge for Washington is to distinguish vital U.S. interests from the rubber stamps — and to convey those distinctions to U.S. allies and partners. Here’s one way that might be done. In the East China Sea, the United States has committed itself to defending the territory that Japan administers, including the Senkaku/Diaoyu Islands. Chinese provocations — such as flying aircraft over the islands or sending ships through disputed waters — are annoyances. They do not seize for Beijing the finite benefits of ownership. But if China were to build civilian or military structures on those islands, encamp troops or establish settlements, or extract finite resources from the islands, Beijing would be taking assets that Japan believes it owns. If China were to build a pier on one of the Senkaku/Diaoyu Islands, for instance, the United States should help Japan disassemble it — just as they would if China built a pier on Okinawa”.

She writes “The situation is different in the South China Sea, as Washington has not promised to defend the Philippines’ territorial claims there. Whether the U.S.-Philippine alliance is sufficiently important to justify a U.S. guarantee for Manila’s claims remains an open question. But one can still distinguish symbolic issues from important American interests when it comes to Philippine claims in the South China Sea. When Beijing harasses Philippine ships, it’s regrettable. But when China seeks to reap the benefits of ownership — by establishing settlements and extracting resources, for example — it crosses a meaningful threshold. The key insight here is not what constitutes core interests versus rubber stamps — but simply that Washington must distinguish between them. Today, it has become commonplace for pundits to argue that everything matters, everything is interconnected, and slippery slopes abound.”

What she fails to understand however is the importance of deterrence. Secondly she again uses the Cold War analogy incorrectly. The world of the Cold War is long gone and thus it has little relevance to modern thinking in a world dominated by the United States.

She ends “The brilliance of the Kennedy administration’s approach to Berlin was that it simultaneously neutralized Soviet salami tactics and strengthened the U.S. alliance with West Germany. Honest talk between the United States and its partners in East Asia could similarly strengthen their relationships — while thwarting China’s efforts to divide them”.

No insurmountable challenges

19/07/2014

In an excellent article former National Security Adivser, Tom Donilon writes that America is not in decline.

Donilon writes “For all our optimism, Americans have always worried about our place in the world. It’s in our DNA, and it helps drive our renewal. To borrow from the great political scientist Samuel Huntington, “[T]he United States is unlikely to decline so long as its public is periodically convinced that it is about to decline. The declinists play an indispensable role in preventing what they are predicting.” When Kissinger wrote the above words in 1961, he did have some valid concerns. At the time, the U.S. economy was struggling to grow its way out of a recession. The Soviet Union had launched the world’s first artificial satellite, known as Sputnik, into orbit. The nation went into a panic, thinking we had fallen behind in technological innovation and would soon be outspent and outmatched by Moscow. And yet the decade and a half that was the subject of Kissinger’s fears — the period from the end of World War II until John F. Kennedy’s administration — is now seen by most historians as an era of unparalleled American economic growth and power. The decade that followed was even more prosperous, ending with the United States, not the Soviet Union, making the first lunar landing. And a mere 30 years after Kissinger wrote those words, the Soviet Union had ceased to exist entirely”.

He does correctly say that “We need to be humble about our ability to predict the future with certainty, but the evidence is that there has long been a tendency to underestimate America’s staying power. Today, the declinists are back, arguing that China will soon overtake us and that our gridlocked politics, long-term deficits, and decaying infrastructure will prevent us from playing the same global role that we have since World War II. We must take these concerns seriously and not assume that America will retain its primacy simply because declinists in the past have turned out to be wrong. Leadership is not something the United States has by happenstance — it is something we have had to earn over and over again”.

Donilon goes on to discuss five core strengths of America, the first being as he terms it “economic resiliency”, “The 2008 financial crisis tested our resilience and dealt a real blow to our international prestige and authority. Long-term challenges remain. But the fact is that no country comes close to matching our fundamental economic strength. The U.S. economy is built on a sound structural foundation, combining an entrepreneurial orientation, deep and efficient capital markets, highly experienced managers, and strong technological leadership. By every measure, the United States has the largest national economy in the world today, generating nearly $17 trillion in GDP. Our economy is nearly double the size of the second-largest, China’s. Our stock market capitalization is five times bigger than China’s. We lead the world in attracting foreign direct investment and are also the world’s largest single investing economy. An economy’s most important asset, however, is not its sheer size. China’s enormous population base will put it on a path to become the largest economy in the world at some point in the future. But history shows that size alone has not been the most important factor in determining the most powerful nation. At the peak of Britain’s global power, it was China that had the world’s largest economy, even though the country was then a middling power”

Donilon argues correctly that “A far better measure of an economy’s health is its quality and sustainability. We have the wealthiest large economy in the world, as well as one of the most diversified and technologically advanced. China has a very large economy, but it’s still a poor country. According to the World Bank, U.S. GDP per capita is $53,143; China’s is $6,807. That provides an important perspective. And when we look to our prospects for the future, it’s clear that the United States is well poised to maintain our leading position. Think about three aspects of our economy: innovation, energy, and higher education. First, the United States has an innovation edge over the rest of the world. Apple, Google, Facebook, Twitter — all are synonymous with American economic vitality today, but only one of these companies existed 15 years ago. The eight largest technology companies in the world by market capitalization are based in the United States. And when it comes to the next frontiers in extraordinary breakout technology, like 3-D manufacturing, artificial intelligence, nanotechnology, cloud computing, robotics, big data, and advanced material science, American entrepreneurs and companies are leading the way. The United States also leads the world in research and development, with a projected $465 billion in spending this year — that’s over 30 percent of all global R&D”.

He goes on to discuss the much mentioned resource boom, “For most of the past 40 years, the United States thought of itself as a nation dependent on oil and energy-related events beyond our shores. Now, as U.S. innovation and technology allow us to tap unconventional resources, nearly every prediction about our energy future has been turned on its head. Today, the United States is the No. 1 producer of natural gas in the world, and the price of natural gas here is a fraction of what it is elsewhere. The International Energy Agency projects that the United States will be the world’s largest producer of oil by the end of the decade. Unconventional energy will propel our economy and support American jobs — nearly 900,000 by next year will come just from shale gas”.

He makes the excllent point, via the Sage of Omaha, “Warren Buffett summed it up nicely in his latest letter to his shareholders: ‘I have always considered a ‘bet’ on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead.'”

The second point is the military strength of America, “And by historical measures, the current U.S. defense burden is not excessive as a share of GDP. As we wind down the war in Afghanistan, our military now stands on a more sustainable footing, without the kind of overstretch that some have worried about. We also possess a network of formal alliances with over 50 nations — the largest in history. Centered on our treaty alliances in Asia and Europe, this network has been built for over half a century on a bipartisan basis. No other country can look to anything like it. These enduring partnerships are a unique American strength, and we continue to deepen them across the globe today”.

He then correctly notes the lucky position of America geographically. He goes on to write about the power of American demography as opposed to that of China’s, “We are likewise blessed to have a bright demographic future. Our workforce is relatively young and still growing. Between now and 2050, the U.S. population is expected to grow by nearly 100 million people, expanding our workforce by 40 percent. Contrast that with the populations of other developed nations in Western Europe, Japan, and South Korea, which are aging and shrinking. By 2050, the median age in China will be nearly 50; in the United States it will be 40. A big part of the reason our demographic profile looks better than the rest of the world’s is that we are a nation of immigrants. Immigrants are both younger than the population at large and participate in the workforce in larger numbers than those born in the United States”.

As others have written, he correctly notes that there are problems however, “For all the tangible and intangible virtues of American primacy, we must also be clear-eyed about the liabilities side of our strategic balance sheet. Here are five big concerns.  Getting control of the U.S. long-term budget deficit is critical. America’s fiscal position risks undermining its overall economic foundation. Despite the general impression to the contrary, the fact is that in the last several years our deficit has dropped precipitously — in fact, faster than in any period since the demobilization after World War II. But in just two years, deficits will begin rising again, driven mainly by mandatory entitlement spending. As a result, we will have less flexibility to make useful investments in the future of our country, from science and technology to the national defence. In taking on our deficits, economic growth should continue to be our priority in both the short term and the long term. Former Treasury Secretary Larry Summers has estimated that an increase of just one-fifth of 1 percent in annual economic growth would address the projected long-term budget gap. Second, our infrastructure is falling into disrepair. Just five years ago, the World Economic Forum ranked our infrastructure ninth best in the world — today it’s 19th, and U.S. public construction spending as a percentage of GDP has plummeted to its lowest point in 20 years. Our overburdened roads and bridges create a situation that is environmentally, politically, and economically unsustainable”.

Donilon rightly points out the problems in the American education system, “Similarly, we need a wake-up call when it comes to primary and secondary education. Our universities are the best in the world, but we rank 14th on Pearson’s well-regarded education index for grade school. This is simply unacceptable. If we are going to prepare Americans for the jobs of the future and restore middle-class security, we have to out-educate the world. That starts with a strong school system that stretches from pre-K through college. Overcoming these liabilities will take time and difficult choices. But here’s the key point: None of these challenges is insurmountable”.

He ends with the anecdote, “I was recently reminded of a conversation I had with Henry Kissinger during my time in the White House. I asked him what he made of all this renewed talk of American decline. And I’ll never forget his reply. He said “Well, Tom, would you rather be national security advisor for any other country?” The answer was self-evident — of course not”.

43 nominees waiting

17/07/2014

Next month, President Obama will host African leaders at what the White House describes as “the largest single engagement by any U.S. president with Africa.” But for the State Department, engaging those leaders has been more difficult. The Senate has yet to act on the nominations of 13 ambassadors to African countries, and two of the nominations have languished for over a year. With no ambassadors in place, the diplomats left in charge of embassies often have trouble meeting with the host country’s leadership, according to current and former State Department officials. “They are not getting in on a regular basis to see heads of state,” said Linda Thomas-Greenfield, the assistant secretary for African affairs. But the problem is not just in Africa. In all, 43 nominees to be ambassador are awaiting action by the Senate. “That means,” Secretary of State John Kerry said in a statement last week, “we’re going without our strongest voice on the ground every day in more than 25 percent of the world.” The difficulty for Mr. Kerry and the Obama administration has its roots in the rule changes Senate Democrats pushed through last year in response to Republican filibusters over many of the administration’s nominees. As a result of those rule changes, it is harder for the minority party to block a nomination through the threat of a filibuster, but the cooperation needed to rapidly confirm several nominees at once is much harder to come by. As payback for the rule changes, Senate Republicans are typically refusing to provide the unanimous consent required to proceed with quick confirmation votes”.

Problems and opportunities for America

13/07/2014

Elbridge  Colby writes in an extremely balanced article that America is not in decline but faces serious problems, many of which can be fixed.

He opens, “Many analysts have attributed Americans’ current anxiety to the aftershock of waging two long wars in Iraq and Afghanistan. But the polls actually reflect something deeper and more potent — a legitimate, increasingly tactile uncertainty in the minds of the American people created by changes in the world and in America’s competitive position, which they feel far more immediately than do the participants in Washington policy debates. Average Americans do not experience the world through the lens of great-power rivalry or U.S. leadership abroad, but rather through that of an increasingly competitive globalized labor market, stagnating income growth among the middle class, and deep and unresolved worries about their children’s future. A recent CNN poll, for instance, found that Americans think by a 2-to-1 margin that their children’s lives will be worse than their own. They are questioning the promise of growth and expanding opportunity — the very substance of the American dream”.

He writes “Many foreign-policy experts seem to believe that retaining American primacy is largely a matter of will — of how America chooses to exert its power abroad. Even President Obama, more often accused of being a prophet of decline than a booster of America’s future, recently assertedthat the United States “has rarely been stronger relative to the rest of the world.” The question, he continued, is “not whether America will lead, but how we will lead.” But will is unavailing without strength. If the United States wants the international system to continue to reflect its interests and values — a system, for example, in which the global commons are protected, trade is broad-based and extensive, and armed conflicts among great nations are curtailed — it needs to sustain not just resolve, but relative power. That, in turn, will require acknowledging the uncomfortable truth that global power and wealth are shifting at an unprecedented pace, with profound implications. Moreover, many of the challenges America faces are exacerbated by vulnerabilities that are largely self-created, chief among them fiscal policy. Much more quickly and comprehensively than is understood, those vulnerabilities are reducing America’s freedom of action and its ability to influence others”.

He makes the point that American economic decline is a fact, “For the first time in 200 years, most growth is occurring in the developing world,and the speed with which that shift — a function of globalization — has occurred is hard to fathom. Whereas in 1990 just 14 percent of cross-border flows of goods, services, and finances originated in emerging economies, today nearly 40 percent do. As recently as 2000, the GDP of China was one-tenth that of the United States; just 14 years later, the two economies are equal (at least in terms of purchasing power parity). This shift reorders what was, in some sense, a historical anomaly: the transatlantic dominance of the past 150 years. As illustrated by the map below, it wasn’t until the Industrial Revolution took hold in the 19th century that the world’s “economic center of gravity” decisively moved toward Europe and the United States, which have since been the primary engines of growth. Today, however, the economic center of gravity is headed back toward Asia, and it is doing so with unique historical speed”.

This has been the subject of some contention, with peope like Dr Robert Kagan arguing that America’s share of global GDP has remained roughly the same. Colby notes “This trend will persist even though emerging economies are hitting roadblocks to growth, such as pervasive corruption in India and demographic challenges and serious distortions in the banking system in China. For instance, according to the asset-management firm BlackRock and the Organization for Economic Cooperation and Development (OECD), consumption in emerging markets has already eclipsed that in the United States, and spending by the middle classes in Asia-Pacific nations is on track to exceed middle-class spending in North America by a factor of nearly six by 2030″.

He rightly warns that the US economy is becoming “less competitive. The McKinsey Global Institute, for instance, has measured the relative attractiveness of the United States across a range of metrics, such as national spending on research and development and foreign direct investment as a percentage of GDP. It found that U.S. business attractiveness relative to that of competitors fell across 14 of 20 key metrics from 2000 to 2010 — and improved in none. And according to the Harvard Business Review, U.S. exports’ global market share dropped across the board from 1999 to 2009 and suffered particularly sharp falls in cutting-edge fields such as aerospace. This shift in economic growth toward the developing world is going to have strategic consequences. Military power ultimately derives from wealth. It is often noted that the United States spends more on defense than thenext 10 countries combined. But growth in military spending correlates with GDP growth, so as other economies grow, those countries will likely spend more on defense, reducing the relative military power of the United States. Already, trends in global defense spending show a rapid and marked shift from the United States and its allies toward emerging economies, especially China. In 2011, the United States and its partners accounted for approximately 80 percent of the military spending by the 15 countries with the largest defense budgets. But, according to a McKinsey study, that share could fall significantly over the next eight years — perhaps to as low as 55 percent”.

He makes the valid point “The United States is worsening this problem by refusing to confront its federal debt and deficits. Unsustainable fiscal policy will limit U.S. competitiveness and freedom of action in the world with a severity and alacrity not remotely appreciated in today’s U.S. foreign-policy debates. The total federal debt currently held by the public, which includes foreign creditors, is approximately $13 trillion. That is almost three-quarters of U.S. GDP, the highest it has ever been except for a brief period during and after World War II. Moreover, the drivers of the debt are entitlement programs that will impose enormous costs indefinitely. Today, well over 60 percent of federal revenue is consumed by spending on Social Security, the major health-care programs (including Medicare, Medicaid, and subsidies under the Affordable Care Act), and interest payments on the federal debt. By 2043, spending on entitlements and net interest payments will consume all federal revenue, according to the Congressional Budget Office. Every dollar the U.S. government spends on anything else — defense, intelligence, foreign affairs, the federal justice system, infrastructure, science and technology, education, the space program — will be borrowed. And by that time, the total federal debt held by the public will far exceed U.S. GDP”.

Colby adds sensibly, “Because America’s fiscal policy affects everything else and because the current trajectory is unsustainable, entitlement reform is inevitable. The only question is when it will begin. A number of the fixes that could have the most significant impact are straightforward and could be phased in over time with minimal disruption. For example, increasing the retirement age — which could be done over a decade or longer — would substantially improve America’s fiscal condition. Investing effectively in infrastructure — long a U.S. comparative advantage, now increasingly a relative weakness — would boost productivity and growth over the long term. So would reforming corporate tax laws to encourage companies to bring profits home. (The current system creates perverse incentives for companies to maximize tax advantages by keeping profits out of the United States.) The nation can also focus on enhancing productivity in parts of its economy that would benefit greatly from even modest improvements. As writer Reihan Salam and others have shown, sectors such as health care and education — which together comprise a quarter of the country’s economy — are inefficient compared with other OECD nations. Government services are laggard. Introducing best business practices and up-to-date information technology to those areas would not only improve Americans’ lives, but would also tap underexploited sources of national wealth”.

He goes on to make the point that “The key to preventinng relative decline and perhaps sparking a renaissance in American power — lies not simply in remedying problems with fiscal responsibility, economic productivity, and military spending, but in leveraging the country’s comparative advantages, which are significant. The United States has an open political system that, historically, has proved able to self-correct and adapt. It has a culture that favors economic growth, accepts and integrates people from all over the world, and enables mobility, creativity, and personal renewal and reinvention. As a result, the nation remains an abiding destination for foreign investment — a reliable source of growth and safety in uncertain economic and geopolitical times. In particular, America’s energy boom and its ability to attract talent from around the world could yield an outsized return on investment. In 2013, while the United States enjoyed a surge of over a million barrels per day in its liquid-fuels supply — including crude oil and biofuels — supply from OPEC countries dropped sharply. The United States is on its way to being a net exporter of energy”.

Optomistically he writes “In 2013, the United States overtook Russia as the world’s leading producer of oil and gas. Within two years it is likely to surpass Saudi Arabia as the world’s largest crude oil producer. U.S. imports of oil and gas have fallen steeply in the last five years, reducing the trade deficit. The United States will soon be a net exporter of energy. The economic boost from the so-called “North American energy revolution” has already been profound. Natural gas prices in the United States have plummeted, both in absolute terms and relative to other markets around the world.   Consequently, the United States is now uniquely advantaged in industries, such as petrochemical production, that require massive amounts of energy. Billions of dollars of investment capital have flowed into the United States, thereby helping to revitalize the manufacturing sector. Energy analyst Daniel Yergin has linked the creation of 2 million jobs to the development of shale energy, and other reports suggest that the renewal of the energy industry (and associated manufacturing and support services) is pumping hundreds of billions of additional dollars into the U.S. economy every year”.

Colby goes on to mention the power of human capital in America and the problems it faces, “the productivity, innovation, and entrepreneurship of its workers. The United States remains an attractive destination for smart, skilled, and creative individuals, even as the global competition for such workers intensifies. In 2010, for instance, Gallup reported that over 165 million of the approximately 700 million adults worldwide looking to emigrate would like to move to the United States, well ahead of second-place Canada. The United States did particularly well among younger respondents. According to a 2010 study, about 24 percent of the world’s adults hoping to emigrate listed the United States as their ideal destination — more than three times the number wanting to head to second-place Canada. U.S. advantages in the global ‘war for talent’ include the perception of meritocracy and mobility in the American system, exceptional centers of economic activity in places like New York and Silicon Valley, and the allure of American higher education. Shanghai Jiao Tong University’s influential annual review of the world’s top universities, for instance, lists 17 American universities among its top 20. Major U.S. universities also havemuch larger endowments than potential rivals abroad, helping them lure the best and the brightest, which in turn enables them to serve as incubators for innovation”.

He makes the valid point that America’s own policies are making this problem worse, “Preserving the U.S. edge in human capital is essential. But the United States is not exploiting this advantage as much as it should. Its current approach to H-1B visas, for instance, is overly restrictive and ultimately harmful. The United States regularly educates and trains hyperskilled Ph.D. students in the sciences, for example, and then makes it difficult for them to stay in the country. America should welcome and try to keep skilled and talented workers and entrepreneurs. The payoffs are clear: Every H-1B visa granted for an employee to join a high-tech company adds another five jobs to the economy. Other countries, such as Canada and Australia, already understand this dynamic. They are attracting talent through incentives and criteria, such as educational attainment and work history, that suggest great economic potential. The United States ought to learn from their example. More broadly, improving America’s world-class universities and research centers is essential to building and attracting the world’s best talent and to fostering the innovation that will fuel economic growth in the 21st century”.

He ends on a sober but realistic note, “PERHAPS THE SINGLE MOST IMPORTANT THING AMERICANS CAN DO, however, is to be honest with themselves about the challenges the country faces and the seriousness with which it needs to treat them. America needs to talk less about its exceptionalism and focus more on demonstrating it. If America chooses the path of economic adaptation, reform, and restored productivity — that is, if it resolves to make tough choices — it will be able to remain prosperous and strong and therefore retain extraordinary influence over its future and in the world. If it does not, it will see the domestic sources of its power erode far more quickly and with far more damaging consequences than is currently appreciated. Within the United States, there is an ongoing debate about the appropriate uses of American power abroad. But whatever one’s views on how U.S. power should be used, there is little reason to support its erosion. If one favors extensive American engagement, a resilient America will be better able to lead and intervene effectively. If one favors retrenchment and restraint, a more powerful America will be better insulated from outside threats. If one favors measured engagement, strength provides options and the firmest basis for sustained success. And, irrespective of foreign policy, an economically dynamic, growing America will benefit all its citizens, particularly the generations to come”.

Otto von Bismarck is often quoted as having said that God takes special care of drunks, children, and the United States of America. But as another saying goes, God takes care of those who take care of themselves. Although the former may still be true, the latter certainly is.

While believing that America is doomed to decline is a fallacy, refusing to confront the problems that imperil its economic vitality would be no less a failing. American strength and freedom of action are not rights to be inherited but outcomes to be earned. Preserving U.S. influence abroad requires that Americans focus on renewing the sources of their nation’s power and mitigating its weaknesses. It is time to play the long game.

The danger of normality

11/07/2014

There has been much comment on the recent foreign speeches of President Obama. Recently however, Robert Kagan has argued that America still owes the world much in stark contrast to Obama’s quasi-withdrawal from foreign policy.

Kagan opens, “Almost 70 years ago, a new world order was born from the rubble of World War II, built by and around the power of the United States. Today that world order shows signs of cracking, and perhaps even collapsing. The Russia-Ukraine and Syria crises, and the world’s tepid response, the general upheaval in the greater Middle East and North Africa, the growing nationalist and great-power tensions in East Asia, the worldwide advance of autocracy and retreat of democracytaken individually, these problems are neither unprecedented nor unmanageable. But collectively they are a sign that something is changing, and perhaps more quickly than we may imagine. They may signal a transition into a different world order or into a world disorder of a kind not seen since the 1930s. If a breakdown in the world order that America made is occurring, it is not because America’s power is decliningAmerica’s wealth, power, and potential influence remain adequate to meet the present challenges. It is not because the world has become more complex and intractablethe world has always been complex and intractable. And it is not simply war-weariness. Strangely enough, it is an intellectual problem, a question of identity and purpose”.

He goes on to write, “Many Americans and their political leaders in both parties, including President Obama, have either forgotten or rejected the assumptions that undergirded American foreign policy for the past seven decades. In particular, American foreign policy may be moving away from the sense of global responsibility that equated American interests with the interests of many others around the world and back toward the defense of narrower, more parochial national interests. This is sometimes called ‘isolationism,’ but that is not the right word. It may be more correctly described as a search for normalcy. At the core of American unease is a desire to shed the unusual burdens of responsibility that previous generations of Americans took on in World War II and throughout the cold war and to return to being a more normal kind of nation, more attuned to its own needs and less to those of the wider world. If this is indeed what a majority of Americans seek today, then the current period of retrenchment will not be a temporary pause before an inevitable return to global activism. It will mark a new phase in the evolution of America’s foreign policy. And because America’s role in shaping the world order has been so unusually powerful and pervasive, it will also begin a new phase in the international system, one that promises not to be marginally different but radically different from what we have known these past 70 years. Unless Americans can be led back to an understanding of their enlightened self-interest, to see again how their fate is entangled with that of the world, then the prospects for a peaceful twenty-first century in which Americans and American principles can thrive will be bleak”.

Kagan goes on to write “For Americans, the choice was never been between isolationism and internationalism. With their acquisitive drive for wealth and happiness, their love of commerce, their economic and (in earlier times) territorial expansiveness, and their universalistic ideology, they never had it in them to wall themselves off from the rest of the world. Tokugawa Japan and Ming China were isolationist. Americans have always been more like republican Rome or ancient Athens, a people and a nation on the move. When, roughly 70 years ago, American foreign policy underwent a revolutionary transformation, it was not a transformation from isolationism to internationalism. What Americans had rejected before World War II was a steady global involvement, with commitments to other nations and responsibilities for the general well-being of the world. That was what the so-called ‘internationalists’ of the time wanted for the United States. Theodore Roosevelt, John Hay, Henry Cabot Lodge, Elihu Root, Henry Stimson, Woodrow Wilson, and many others believed that Americans ought to take on a much bigger role in world affairs, as befitted their growing power. The United States had become ‘more and more the balance of power of the whole globe,’ Roosevelt observed, and it ought to behave accordingly. And indeed, following the Spanish-American War and for the first two decades of the twentieth century, the United States did pursue a wider and deeper global involvement than it had ever done before, culminating in the dispatch of two million troops to France. When World War I ended, Wilson, like Roosevelt before him, ambitiously set out to make the United States a central player in world affairs. Beseeched by all the European powers after the warfor American financing aid to steady their economies and for American security guarantees against each otherWilson wanted the United States to commit itself to an enduring global role”.

He goes on to make the valid point that “Americans rejected this role. Disillusioned by the compromises and imperfections of the Versailles Treaty, mourning the loss of more than 100,000 dead soldiers, skeptical about American participation in the league, and spurred on by Republicans eager to defeat Wilson and recapture the White House, a majority of Americans came to oppose not only the league but also the internationalists’ broad vision of America’s global role. This was no absentminded lapse back into nonexistent isolationist traditions. It was a deliberate decision to turn away from the increasingly active global involvement of the previous two decades, to adopt a foreign policy of far greater restraint, and above all to avoid future military interventions beyond the Western Hemisphere. Wilson’s Republican successors promised, and the American public welcomed, what Warren Harding called a ‘return to normalcy.’ Normalcy in the 1920s did not mean isolation. Americans continued to trade, to invest, and to travel overseas; their navy was equaled in size only by Britain’s, and had fleets in the Atlantic and the Pacific; and their diplomats pursued treaties to control the arms race and to ‘outlaw’ war. Normalcy simply meant defining America’s national interests the way most other nations defined theirs. It meant defending the homeland, avoiding overseas commitments, preserving the country’s independence and freedom of action, and creating prosperity at home. The problems of Europe and Asia were not America’s problems, and they could be solved, or not solved, without American help. This applied to global economic issues as well. Harding wanted to ‘prosper America first,’ and he did. The 1920s were boom years for the American economy, while Europe’s postwar economies stagnated. To the vast majority of Americans, normalcy seemed a reasonable response to the world of the 1920s, after the enormous exertions of the Wilson years. There were no obvious threats on the horizon. Postwar Weimar Germany was a faltering republic more likely to collapse than to take another stab at continental dominance. Bolshevik Russia was wracked by civil war and economic crisis. Japan, though growing in power and ambition, was a fragile democracy with a seat on the League of Nations permanent council. To most Americans in the 1920s, the greatest risk to America came not from foreign powers but from those misguided “internationalists” and the greedy bankers and war profiteers who would involve the nation in foreign conflicts that were none of America’s business”.

Kagan writes that “normalcy” remained the norm for two decades even has the power of the Royal Navy was collapsing, the Spanish Civil War was being fought and Nazi Germany  began to become threatening. He argues that “They were not ignorant of what was going on. Even back then information traveled widely and rapidly, and the newspapers and newsreels were filled with stories about each unfolding crisis. Reports of Mussolini’s dive-bombers dropping their ordnance on spear-carrying Ethiopians; Germany’s aerial bombing of the civilian population of Guernica; Japan’s rampage of rape, pillage, and murder in Nankingthey were horrific and regrettable. But they were not reasons for the United States to get involved. On the contrary, they were reasons for not getting involved”.

Kagan continues, “it was not clear that the United States had vital interests anywhere outside the Western Hemisphere. Even after the German invasion of Poland in 1939, and the outbreak of a general European war that followed, respected American strategic thinkers, priding themselves on ‘realistic thinking,’ the ‘banishment of altruism and sentiment’ from their analysis, and ‘single-minded attention to the national interests,’ advised that, with two oceans and a strong navy standing between America and every great power in the world, the United States was invulnerable.A Japanese attack on, say, Hawaii, they ruled out as literally impossible. Republican Senator Robert A. Taft felt confident in saying that no power ‘would be stupid enough’ to attack the United States ‘from across thousands of miles of ocean.’ Nor would the United States suffer appreciably if Nazi Germany did manage to conquer all of Europe, including Great Britain, which by 1940 the realists regarded as a foregone conclusion. Taft saw no reason why the United States could not trade and conduct normal diplomacy with a Europe dominated by Nazi Germany just as it had with Great Britain and France”.

Kagan notes that holders of these views were labled as isolationists but Kagan writes that Morgenthau has argued that they come from the Hamiltonian school of American realism

Dr Kagan goes on to note “The events of 1941 forced a fundamental reassessment not only of America’s global strategy but also of how to define America’s interests. Even as they waged the struggle against Germany and Japan, Roosevelt and his advisers during the war began thinking of how the postwar world ought to be shaped, and they took as their guide what they considered the lessons of the previous two decades. The first had to do with security. The Japanese attack had proved that vast oceans and even a strong navy no longer provided adequate defense against attack. More broadly, there was the realizationor rather the rediscoveryof an old understanding: that the rise of a hostile hegemonic power on the Eurasian landmass could eventually threaten America’s core security interests as well as its economic well-being. As a corollary, there was the ‘lesson of Munich’: would-be aggressors in Eurasia had to be deterred before they became too strong to be stopped short of all-out war. Another lesson was that the United States had an interest in political developments in Eurasia. Walter Lippmann argued that, for Americans to enjoy both ‘physical security’ and the preservation of their ‘free way of life,’ they had to ensure that ‘the other shore of the Atlantic’ remained always in the hands of ‘friendly,’ ‘trustworthy’ democracies”.
Kagan adds later that “Roosevelt supported the United Nations but was not a great believer in collective security. American power, he believed, would be the key. He saw the United Nations much as Wilson had seen the League of Nations, as a vehicle for U.S. global involvement. Indeed, as the historian Robert Dallek has noted, for Roosevelt the United Nations was partly meant to “obscure” the central role American power was to play in the new world order obscure it, that is, from Americans”.

Kagan goes on to make the point “This new American grand strategy for the postwar world could not have been a more radical departure from “normalcy.” Its goals were not simply defense of the territory, prosperity, and sovereign independence of the American people, but also the promotion of a liberal world order that would defend not only America’s interests but those of many other nations as well. The rise of a Eurasian hegemon would threaten other nations long before it would threaten the United States, for instance, yet Americans now accepted primary responsibility for preventing it. The new strategy was not selfless or altruistic. American officials believed that it was in the best interest of the United States. But neither did it fit the normal definition of the “national interest.” As Dean Acheson explained, Americans had to learn to “operate in a pattern of responsibility which is greater than our own interests.” This was the real revolution in American foreign policy. The new strategy was not directed at any particular nation or any specific threatat least not at first. The Soviet Union had not yet emerged as the next great challenge to the new global order. During World War II, Roosevelt and most other top officials expected mutual cooperation with the Soviets after the war, and even as late as 1945, Acheson still believed in the possibility of partnership with Moscow”.

Kagan goes on to mention “The new forward-leaning posture became especially pronounced as the postwar era transitioned into the cold war. The Marshall Plan aimed to shore up Western European economies and democracies before they collapsed and succumbed to communism. The Truman Doctrine aimed to bolster Greece and Turkey before they fell to communist subversion. When the communist revolution triumphed in China in 1949, American critics blamed the Truman administration for not doing enough to prevent ita charge, fair or not, that no one would have thought to make before World War II. The unanticipated North Korean invasion of the South produced panic in Washington and, in the minds of Truman and his advisers, powerfully reinforced the ‘lesson of Munich.’ Henceforth the United States would have to be vigilant and ready to act, with force, anywhere in the world. All of this was precisely what the anti-interventionist critics had warned about in the 1930s. Taft, a thoughtful and intelligent man, had indeed predicted that, once sent off to the war, American forces would never come home again. Victory would prove as much a curse as a blessing”.

Kagan writes that FDR was afraid that the American people would not accept this expanded global role and that in his last State of the Union, Kagan writes, FDR exhorts them to have courage and “fulfill our responsibilities”.

Kagan writes that the consequences of this expansive engagment was “In the half-century following World War II, the United States successfully established, protected, and advanced a liberal world order, carving out a vast ‘free world’ within which an unprecedented era of peace and prosperity could flower in Western Europe, East Asia, and the Western Hemisphere. Although tensions between the United States and the Soviet Union sometimes rose to dangerous levels, the period was characterized above all by peace among the great powers. The United States and the Soviet Union did not come to blows, and just as importantly, the American presence in Europe and East Asia put an end to the cycles of war that had torn both regions since the late nineteenth century. The number of democracies in the world grew dramatically. The international trading system expanded and deepened. Most of the world enjoyed an unprecedented prosperity. There was no shortage of disasters and near-disasters, as well as the two costly wars in Asiabut the strategy was largely successful, so much so that the Soviet empire finally collapsed or voluntarily withdrew, peacefully, under the pressure of the West’s economic and political success, and the liberal order then expanded to include the rest of Europe and most of Asia. All of this was the result of many forcesthe political and economic integration of Europe, the success of Japan and Germany, and the rise of other successful Asian economiesbut none of it would have been possible without a United States willing and able to play the abnormal and unusual role of preserver and defender of a liberal world order”.

He goes on to argue persusaively that “Just as remarkable was the degree to which the rest of the nations in the liberal world generally accepted and even welcomed America’s overwhelming power. Again, the reason had as much to do with power and geography as with ideological affinity. It was true that for most nations in the world the United States appeared to be a relatively benign hegemon. But the core geopolitical reality was that other nations faced greater and more immediate threats from their neighbors than from the distant Americans. When those neighbors grew menacing, they looked to the United States as a natural partnercomforting for its ability to project power and defend them but comforting also for its distance. The United States thus violated some of the cardinal rules of international relations. For decades, realists had believed that the only peaceful and stable world order was one based on a multipolar balance of power, a “concert” of nations poised in rough equilibrium in a system that all the players regarded as necessary and legitimatelike Europe in the years following the Congress of Vienna. This was the world with which Henry Kissinger felt comfortable and which he constantly predicted, even in the 1960s, was just right around the corner. Unipolarity was supposed to be inherently unstable and short-lived, because other great powers would always band together to balance against a power grown too strongas had happened in Europe in response to the rise of France and Germany in the nineteenth and twentieth centuries”.

Kagan then argues that when the Cold War was over after the collapse of the Soviet Union people began to think that America could return itself to being a normal country again, looking after its interests and not getting so involved in the affairs of other nations.

Kagan mentions “In September 1990, in an article titled ‘A Normal Country in a Normal Time,’ Jeane Kirkpatrick argued precisely that. With the Soviet Union collapsing, there was no longer a ‘pressing need for heroism and sacrifice.’ The cold war had given foreign policy ‘an unnatural importance’ in American life. The ‘foreign policy elite’ had grown accustomed to thinking of the United States as having ‘expansive, expensive, global purposes’ that ‘transcended … apparent American interests.’ It was time for the United States ‘to focus again on its own national interests,’ by which she meant national interests as ‘conventionally conceived’—’to protect its territory, wealth, and access to necessary goods; to defend its nationals.’ This was the ‘normal condition for nations.’ Kirkpatrick expressed what many felt after the fall of the Berlin Wall in 1989, and not just the followers of Patrick Buchanan, who found much to praise in her essay. Francis Fukuyama also argued that with communism vanquished and democracy triumphant, there were no other great geopolitical or ideological challenges on the horizon”.

He mentions the 1991 Iraq war and notes that it was Saudi Arabia was the chief concern of the Bush administration, “Powell argued, ‘but Saudi Arabia is different.’ Dick Cheney worried that driving Saddam out of Kuwait was going to cost ‘one hell of a lot of money,’ that Americans had a ‘short tolerance for war,’ and that, after all, ‘the oil goes mostly to Japan.’ James Baker took a similar view, as did a majority of Democrats in Congress, as did a majority of Americans. A poll taken in November 1990 showed that 51 percent of Americans were opposed to trying to drive the Iraqis out of Kuwait by force and that only 37 percent were in favor of it. Most favored economic sanctions to punish Saddam. Other Bush advisers, however, led by Brent Scowcroft, saw things differently. Saddam’s invasion, they believed, was ‘the first test of the postwar system.’ For half a century the United States had taken the lead role in deterring and punishing would-be aggressors. Although driving Iraqi forces out of Kuwait would be ‘costly and risky,’ Scowcroft feared that failure to do so would set ‘a terrible precedentone that would only accelerate violent centrifugal tendenciesin this emerging ‘post-Cold War’ era.’ Appeasement of aggression in one region would breed aggression elsewhere. To President Bush, it was all reminiscent of the 1930s. Thus did Roosevelt’s original grand strategythe defense of a liberal world order against collapse, responding not to any single, specific threat but to whatever political, economic, or strategic challenges might ariseseem to reemerge after the long cold war”.

Kagan writes that “In the decade following the fall of the Berlin Wall, moreover, the United States also conducted a number of sizeable military operationsseven to be precise, roughly one every 17 months: in Panama (1989), Iraq (1991), Somalia (1992), Haiti (1994), Bosnia (1995), Iraq again (1998), and Kosovo (1999). None were a response to perceived threats to vital national interests. All aimed at defending and extending the liberal world orderby toppling dictators, reversing coups, and attempting to restore democracies in Panama and Haiti; preventing mass killing or starvation in Somalia, Bosnia, and Kosovo; deterring or reversing aggression in the Persian Gulf in 1991; and attempting to prevent the proliferation of nuclear or other weapons of mass destruction in Iraq in 1998. When Bush sent 30,000 troops to remove the corrupt dictator Manuel Noriega, it was not, as George Will wrote approvingly at the time, in order to pursue national interests ‘narrowly construed,’ but to fulfill ‘the rights and responsibilities that come with the possession of great power.’ When Bush then carried out in Somalia what was arguably the most purely humanitarian, and therefore most purely selfless, intervention in American history, he told the public, ‘I understand that the United States alone cannot right the world’s wrongs.’ But the ‘people of Somalia need … our help’ and ‘some crises in the world cannot be resolved without American involvement.’ The United States, in short, was the ‘indispensable nation,’ as Bill Clinton would proclaimindispensable, that is, to the preservation of a liberal world order. Such was the thinking behind most of Clinton’s foreign policy initiatives: the enlargement of NATO, which included the extension of unprecedented military guarantees to such nations as Poland, the Czech Republic, and the Baltic states; the billions sent to try to save Boris Yeltsin’s faltering democratic experiment in Russia; and the intense focus on containing North Korea, Iraq, and Iran”.

Interestingly Kagan makes the point that “Even the American confrontation with Iraq, beginning in the late 1990s and culminating in the U.S. invasion in 2003, had begun as a world order issue, before it became subsumed by George W. Bush’s ‘War on Terror.’ When President Clinton ordered four days of bombing and missile attacks against suspected Iraqi weapons production facilities at the end of 1998, he warned that, if Saddam were not stopped, ‘The community of nations may see more and more of the very kind of threat Iraq poses now: a rogue state with weapons of mass destruction, ready to use them or provide them to terrorists. … If we fail to respond today, Saddam and all those who would follow in his footsteps will be emboldened tomorrow.’ In the twentieth century, Americans had ‘often made the difference between chaos and community, fear and hope. Now, in the new century, we’ll have a remarkable opportunity to shape a future more peaceful than the past.’ At the end of the day, George W. Bush’s decision to remove Saddam Hussein, whether that decision was wise or foolish, was driven more by concerns for world order than by narrow self-interest. Of all the American interventions of the post-cold-war era, only the invasion of Afghanistan could be understood as directly related to America’s own national security. The long interventions in Iraq and Afghanistan certainly played a part in undermining American support, not just for wars but for the grand strategy that led to those wars. However, that support had been shaky from the beginning. Polls throughout the 1990s showed Americans wary of overseas interventions, even though the public generally supported their presidents when they used force. Opposition parties generally opposed the interventions undertaken by both Democratic and Republican presidents. Democrats voted against George H. W. Bush’s Persian Gulf war; Republicans opposed the Clinton administration’s interventions in Haiti and the Balkans as superfluous”.

He admits the temptation to, like Atlas, give up holding the world aloft but writes “Can’t U.S. allies carry more of the burden? The question has been asked since the dawn of the cold war, but the answer has always been: probably not. The same factors that have made the United States uniquely capable of supporting a world ordergreat wealth and power and the relative security afforded by geographyhelp explain why American allies have always been less capable and less willing. They have lacked the power and the security to see and act beyond their narrow interests. So where they failed before they will fail again. Even twenty-first-century Europeans, for all the wonders of their union, seem incapable of uniting against a predator in their midst, and are willing, as in the past, to have the weak devoured if necessary to save their own (financial) skins. There are moral costs, too. Like most people, Americans generally like to believe that they are behaving justly in the world, that they are on the side of the right. If possible, they like to have legal or institutional sanctions for their action, or at least the general approval of like-minded nations. On the two occasions in the past 100 years when the United States contemplated taking on a central role in global affairs, in 1918 and 1945, American leaders insisted on simultaneously creating world organizations that could, at least in theory, provide this legitimacy for American actions. The problem is, the world lacks any genuine overarching legal or institutional authority, much less a democratic authority, to which all nations subordinate themselves. Questions of right and wrong are settled not according to impartial justice but usually according to the distribution of power in the system. Americans have usually had to use their power to enforce their idea of justice without any assurance beyond their own faith that they are right. This is a heavy moral burden for a democratic people to bear. In their domestic lives, Americans are accustomed to having that burden spread evenly across society”.

He continues making the excellent point “Today more than 50 percent of Americans believe the United States plays “a less important and powerful role as a world leader than it did a decade ago.” One senses that, for many Americans, this decline is not a reason for panic but comes as something of a relief. Less power means fewer responsibilities. A sense of futility, today as much as in the 1920s and 1930s, is both an invitation and a justification for a return to normalcy. The sense of futility has affected policymakers, too. Senior White House officials, especially the younger ones, look at problems like the struggle in Syria and believe that there is little if anything the United States can do. This is the lesson of their generation, the lesson of Iraq and Afghanistan: that America has neither the power nor the understanding nor the skill to fix problems in the world. This is also escapism, however, for there is a myth embedded in this plea of futility. It is that wielding power effectively was ever any easier than it is today. With rose-colored glasses we look back at the cold war and imagine that the United States used to get others to do what it wanted, used to know what it was doing, and used to wield such overwhelming power that the world simply bent to its will or succumbed to its charms. But American policy during the cold war, despite its ultimate success, was filled with errors, folly, many near-disasters, and some disasters”.

He goes on to argue that “Periods of peace and prosperity can make people forget what the world “as it is” really looks like, and to conclude that the human race has simply ascended to some higher plateau of being. This was the common view in Europe in the first decade of the twentieth century. At a time when there had not been a war between great powers in 40 years, or a major Europe-wide war in a century, the air was filled with talk of a new millennium in which wars among civilized nations had become impossible. Three-quarters of a century and two world wars and a cold war later, millennial thoughts return. Studies cited by Fareed Zakaria purport to show that some “transformation of international relations” has occurred. “Changes of borders by force” have dropped dramatically “since 1946.” The nations of Western Europe, having been responsible for two new wars a year for 600 years, had not even started one “since 1945.” Steven Pinker observes that the number of deaths from war, ethnic conflict, and military coups has declinedsince 1945and concludes that the human race has become “socialized” to prefer peace and nonviolence. The dates when these changes supposedly began ought to be a tip-off. Is it a coincidence that these happy trends began when the American world order was established after World War II, or that they accelerated in the last two decades of the twentieth century, when America’s only serious competitor collapsed? Imagine strolling through Central Park and, after noting how much safer it had become, deciding that humanity must simply have become less violentwithout thinking that perhaps the New York Police Department had something to do with it”.

He goes on, “Nor do they realize, perhaps, how quickly it can all unravel. The international system is an elaborate web of power relationships, in which every nation, from the biggest to the smallest, is constantly feeling for shifts or disturbances. Since 1945, and especially since 1989, the web has been geared to respond primarily to the United States. Allies observe American behavior and calculate America’s reliability. Nations hemmed in or threatened by American power watch for signs of growing or diminishing power and will. When the United States appears to retrench, allies necessarily become anxious, while others look for opportunities. In recent years, the world has picked up unmistakable signals that Americans may no longer want to carry the burden of global responsibility. Others read the polls, read the president’s speeches calling for “nation-building at home,” see the declining defense budgets and defense capabilities, and note the extreme reticence, on the part of both American political parties, about using force. The world judges that, were it not for American war-weariness, the United States probably would by now have used force in Syriajust as it did in Kosovo, in Bosnia, and in Panama. President Obama himself recently acknowledged as much when he said, “It’s not that it’s not worth it. It’s that after a decade of war, you know, the United States has limits.” Such statements set the web vibrating. In East Asia, nations living in close proximity to an increasingly powerful China want to know whether Americans will make a similar kind of calculation when it comes to defending them; in the Middle East, nations worried about Iran wonder if they will be left to confront it alone; in Eastern Europe and the Baltic states, American security guarantees are meaningless unless Americans are able and willing to meet them”.

He concludes, “Looking back on the period before World War II, Robert Osgood, the most thoughtful of realist thinkers of the past century, discerned a critical element missing from the strategic analyses of the day. Mere rational calculations of the ‘national interest,’ he argued, proved inadequate. Paradoxically, it was the ‘idealists,’ those who were ‘most sensitive to the Fascist menace to Western culture and civilization,’ who were ‘among the first to understand the necessity of undertaking revolutionary measures to sustain America’s first line of defense in Europe.’ Idealism, he concluded, was ‘an indispensable spur to reason in leading men to perceive and act upon the real imperatives of power politics.’ This was Roosevelt’s message, too, when he asked Americans to defend ‘not their homes alone, but the tenets of faith and humanity on which their churches, their governments, and their very civilization are founded.’ Perhaps Americans can be inspired in this way again, without the threat of a Hitler or an attack on their homeland. But this time they will not have 20 years to decide. The world will change much more quickly than they imagine. And there is no democratic superpower waiting in the wings to save the world if this democratic superpower falters”.

Ikenberry’s misplaced optimism

08/06/2014

John Ikenberry, writing in Foreign Affairs, argues that geopolitics is just an illusion. The problem is that Ikenberry’s argument is based more on optimism than any real basis

He opens “Walter Russell Mead paints a disturbing portrait of the United States’ geopolitical predicament. As he sees it, an increasingly formidable coalition of illiberal powers — China, Iran, and Russia — is determined to undo the post–Cold War settlement and the U.S.-led global order that stands behind it. Across Eurasia, he argues, these aggrieved states are bent on building spheres of influence to threaten the foundations of U.S. leadership and the global order. So the United States must rethink its optimism, including its post–Cold War belief that rising non-Western states can be persuaded to join the West and play by its rules. For Mead, the time has come to confront the threats from these increasingly dangerous geopolitical foes”.

Ikenberry, goes on to describe Mead’s argument as alarmist, “Mead’s alarmism is based on a colossal misreading of modern power realities. It is a misreading of the logic and character of the existing world order, which is more stable and expansive than Mead depicts, leading him to overestimate the ability of the ‘axis of weevils’ to undermine it. And it is a misreading of China and Russia, which are not full-scale revisionist powers but part-time spoilers at best, as suspicious of each other as they are of the outside world. True, they look for opportunities to resist the United States’ global leadership, and recently, as in the past, they have pushed back against it, particularly when confronted in their own neighbourhoods. But even these conflicts are fueled more by weakness — their leaders’ and regimes’ — than by strength. They have no appealing brand. And when it comes to their overriding interests, Russia and, especially, China are deeply integrated into the world economy and its governing institutions. Mead also mischaracterises the thrust of U.S. foreign policy. Since the end of the Cold War, he argues, the United States has ignored geopolitical issues involving territory and spheres of influence and instead adopted a Pollyannaish emphasis on building the global order. But this is a false dichotomy. The United States does not focus on issues of global order, such as arms control and trade, because it assumes that geopolitical conflict is gone forever; it undertakes such efforts precisely because it wants to manage great-power competition. Order building is not premised on the end of geopolitics; it is about how to answer the big questions of geopolitics”.

Ikenberry is certainly correct to say that China and Russia are merely “part-time spoilers” but the danger is that Ikenberry assumes that they can be full integreted into the current international order as they are. Indeed, given the chance both Russia and China will attempt to undermine and replace the US led order with something more suited to their own interests. His assertion that the US “assumes that geopolitical conflict is gone forever” is doubtful. It may be more correct to say that it is a result of the worldview of the current administration, for example, its refusal to deal with the crimes in Syria and its constant refrain of international law and “mediation”. Needless to say the assumption of the end of geopolitics is a core tenet of the EU which has been proven wrong on so many occasions.

Ikenberry writes that the building of the global order “has helped draw countries into the United States’ orbit. It has helped strengthen global norms and rules that undercut the legitimacy of nineteenth-century-style spheres of influence, bids for regional domination, and territorial grabs. And it has given the United States the capacities, partnerships, and principles to confront today’s great-power spoilers and revisionists, such as they are”.

Yet Ikenberry seems to want it both ways. He wants to claim that the world is governed by America thus ending great power conflict. At the same time the spoilers of Russia and China are obviously not going away. International order is still here but at the same time it could, under no circumstances said to be complete.

He adds “In matters of geopolitics (not to mention demographics, politics, and ideas), the United States has a decisive advantage over China, Iran, and Russia. Although the United States will no doubt come down from the peak of hegemony that it occupied during the unipolar era, its power is still unrivaled. Its wealth and technological advantages remain far out of the reach of China and Russia, to say nothing of Iran. Its recovering economy, now bolstered by massive new natural gas resources, allows it to maintain a global military presence and credible security commitments. Indeed, Washington enjoys a unique ability to win friends and influence states. According to a study led by the political scientist Brett Ashley Leeds, the United States boasts military partnerships with more than 60 countries, whereas Russia counts eight formal allies and China has just one (North Korea)”.

Ikenberry continues, “Geography reinforces the United States’ other advantages. As the only great power not surrounded by other great powers, the country has appeared less threatening to other states and was able to rise dramatically over the course of the last century without triggering a war. After the Cold War, when the United States was the world’s sole superpower, other global powers, oceans away, did not even attempt to balance against it. In fact, the United States’ geographic position has led other countries to worry more about abandonment than domination. Allies in Europe, Asia, and the Middle East have sought to draw the United States into playing a greater role in their regions”.

However, while all this is obviosly true, Ikenberry is incorrect to say that geopolitics is finished, or in his term, is an illusion. Russia, China and Iran may be mere spoilers but they can do much damage to their neighbourhoods. This should puncture the notion that geopolitics has ended, a mistake the EU continues to make.

He concedes that “Mead does not argue that China, Iran, or Russia offers the world a new model of modernity. If these illiberal powers really do threaten Washington and the rest of the liberal capitalist world, then they will need to find and ride the next great wave of modernization. They are unlikely to do that”.

Again Ikenberry conflates the two concepts. His either/or defination of geopolitics leaves little room for the nuances of the world. The illiberal states do not threaten America but at the same time they can, and have made the world harder for America and its allies to advance their goals and values. These states will, in all probabilty, remain stuck where they are, cursing the American order and at the same time doing everything they can to frustrate it.

Ikenberry does make the valid point that “Mead’s vision of a contest over Eurasia between the United States and China, Iran, and Russia misses the more profound power transition under way: the increasing ascendancy of liberal capitalist democracy. To be sure, many liberal democracies are struggling at the moment with slow economic growth, social inequality, and political instability. But the spread of liberal democracy throughout the world, beginning in the late 1970s and accelerating after the Cold War, has dramatically strengthened the United States’ position and tightened the geopolitical circle around China and Russia. It’s easy to forget how rare liberal democracy once was. Until the twentieth century, it was confined to the West and parts of Latin America. After World War II, however, it began to reach beyond those realms, as newly independent states established self-rule. During the 1950s, 1960s, and early 1970s, military coups and new dictators put the brakes on democratic transitions. But in the late 1970s, what the political scientist Samuel Huntington termed “the third wave” of democratization washed over southern Europe, Latin America, and East Asia. Then the Cold War ended, and a cohort of former communist states in eastern Europe were brought into the democratic fold. By the late 1990s, 60 percent of all countries had become democracies. Although some backsliding has occurred, the more significant trend has been the emergence of a group of democratic middle powers, including Australia, Brazil, India, Indonesia, Mexico, South Korea, and Turkey. These rising democracies are acting as stakeholders in the international system: pushing for multilateral cooperation, seeking greater rights and responsibilities, and exercising influence through peaceful means”.

He notes the increased democarcies in Asia, citing Indonesia, Mongolia, the Philippines, South Korea, Taiwan, and Thailand Indonesia, Mongolia, the Philippines, South Korea, Taiwan, Thailand and Burma. Although the last two could not be said to be true democracies.

He writes optomistically, “These political transformations have put China and Russia on the defensive. Consider the recent developments in Ukraine. The economic and political currents in most of the country are inexorably flowing westward, a trend that terrifies Putin. His only recourse has been to strong-arm Ukraine into resisting the EU and remaining in Russia’s orbit. Although he may be able to keep Crimea under Russian control, his grip on the rest of the country is slipping. As the EU diplomat Robert Cooper has noted, Putin can try to delay the moment when Ukraine “affiliates with the EU, but he can’t stop it.” Indeed, Putin might not even be able to accomplish that, since his provocative moves may serve only to speed Ukraine’s move toward Europe”.

This thread of optimism again surfaces when he implies China will become democratic just as the rest of Asia has done. Firstly, Asian democracy is not as secure as European democracy and at the same time China may well not become a democracy but the CCP will be replaced by a military dictatorship, which is a far more likely outcome.

He goes on to argue “While the rise of democratic states makes life more difficult for China and Russia, it makes the world safer for the United States. Those two powers may count as U.S. rivals, but the rivalry takes place on a very uneven playing field: the United States has the most friends, and the most capable ones, too. Washington and its allies account for 75 percent of global military spending. Democratization has put China and Russia in a geopolitical box”.

This overlooks the idea that America still thinks geopolitically. Much of what he says is correct, but Washington still plays Chile off Peru and Botswana off Kenya. Geopolitical thinking still exists in the halls of American power, despite his earnest desire for its demise.

Ikenberry continues, “Not only does Mead underestimate the strength of the United States and the order it built; he also overstates the degree to which China and Russia are seeking to resist both. (Apart from its nuclear ambitions, Iran looks like a state engaged more in futile protest than actual resistance, so it shouldn’t be considered anything close to a revisionist power.) Without a doubt, China and Russia desire greater regional influence. China has made aggressive claims over maritime rights and nearby contested islands, and it has embarked on an arms buildup. Putin has visions of reclaiming Russia’s dominance in its “near abroad.” Both great powers bristle at U.S. leadership and resist it when they can. But China and Russia are not true revisionists. As former Israeli Foreign Minister Shlomo Ben-Ami has said, Putin’s foreign policy is “more a reflection of his resentment of Russia’s geopolitical marginalization than a battle cry from a rising empire.” China, of course, is an actual rising power, and this does invite dangerous competition with U.S. allies in Asia. But China is not currently trying to break those alliances or overthrow the wider system of regional security governance embodied in the Association of Southeast Asian Nations and the East Asia Summit. And even if China harbours ambitions of eventually doing so, U.S. security partnerships in the region are, if anything, getting stronger, not weaker. At most, China and Russia are spoilers. They do not have the interests — let alone the ideas, capacities, or allies — to lead them to upend existing global rules and institutions”.

He again argues that “that China and Russia have become deeply integrated into the existing international order. They are both permanent members of the UN Security Council, with veto rights, and they both participate actively in the World Trade Organization, the International Monetary Fund, the World Bank, and the G-20. They are geopolitical insiders, sitting at all the high tables of global governance”.

Yet despite repeated attempts by the IMF and World Bank to ask China to let its current float against the dollar they have refused. China knows to do so would mean Chinese goods would soar in price which would destroy whatever is left of their cheap manufacturing base on which the power of the CCP largely rests. China and Russia may well be on the UNSC but they have continually obstructed calls for the extension of the US led order. They do nothing on Syria, provoke tension and conflict in Ukraine and in the seas surroundig them, and have given shelter to thugs like the president of Sudan over Darfur. There are dozens of other examples where they could not be said to be well integrated into the liberal US led order. The obvios conclusion is that they wish to overturn it and are unable to, or do not wish to overturn it but still think geopolitically.

He ends the piece wanting it both ways again, “Ultimately, even if China and Russia do attempt to contest the basic terms of the current global order, the adventure will be daunting and self-defeating. These powers aren’t just up against the United States; they would also have to contend with the most globally organised and deeply entrenched order the world has ever seen, one that is dominated by states that are liberal, capitalist, and democratic. This order is backed by a U.S.-led network of alliances, institutions, geopolitical bargains, client states, and democratic partnerships”.

He concludes, “In the age of liberal order, revisionist struggles are a fool’s errand. Indeed, China and Russia know this. They do not have grand visions of an alternative order. For them, international relations are mainly about the search for commerce and resources, the protection of their sovereignty, and, where possible, regional domination. They have shown no interest in building their own orders or even taking full responsibility for the current one and have offered no alternative visions of global economic or political progress. That’s a critical shortcoming, since international orders rise and fall not simply with the power of the leading state; their success also hinges on whether they are seen as legitimate and whether their actual operation solves problems that both weak and powerful states care about. In the struggle for world order, China and Russia (and certainly Iran) are simply not in the game. Under these circumstances, the United States should not give up its efforts to strengthen the liberal order. The world that Washington inhabits today is one it should welcome. And the grand strategy it should pursue is the one it has followed for decades: deep global engagement”.

 

“Starting to look very like Japan”

27/05/2014

An article in the Telegraph seems to confirm what has long been suspected, the Chinese economy is preparing to burst.  It begins “China’s authorities are becoming increasingly nervous as the country’s property market flirts with full-blown bust, threatening to set off a sharp economic slowdown and a worrying erosion of tax revenues. New housing starts fell by 15pc in April from a year earlier, with effects rippling through the steel and cement industries. The growth of industrial production slipped yet again to 8.7pc and has been almost flat in recent months”.

The piece adds “Land sales fell by 20pc, eating into government income. The Chinese state depends on land sales and property taxes to fund 39pc of total revenues. ‘We really think this year is a tipping point for the industry,’ Wang Yan, from Hong Kong brokers CLSA, told Caixin magazine. ‘From 2013 to 2020, we expect the sales volume of the country’s property market to shrink by 36pc. They can keep on building but no one will buy.’ The Chinese central bank has ordered 15 commercial banks to boost loans to first-time buyers and ‘expedite the approval and disbursement of mortgage loans’, the latest sign that it is backing away from monetary tightening. The authorities are now in an analogous position to Western central banks following years of stimulus: reliant on an asset boom to keep growth going. Each attempt to rein in China’s $25 trillion credit bubble seems to trigger wider tremors, and soon has to be reversed”.

He goes on to mention “Wei Yao, from Société Générale, said the property sector makes up 20pc of China’s economy directly, but the broader nexus is much larger. Financial links includes $2.5 trillion of bank mortgages and direct lending to developers; a further $1 trillion of shadow bank credit to builders; $2.3 trillion of corporate and local government borrowing ‘collateralised’ on real estate or revenues from land use”.

He continues adding that China’s financial system is exposed to the property market by perhaps as much as 80% of GDP, “the risk is that several cities will face a controlled crash along the lines of Wenzhou, where prices have been falling non-stop for two years and have dropped 20pc. President Xi Jinping has made a strategic decision to pop the bubble before it spins further out of control, allowing bond defaults to instil market discipline. But the Communist party is in delicate position and may already be trapped”.

The author goes on to discuss “Reliance on ‘fair weather’ land revenues to fund the budget is like the pattern in Ireland before its housing bubble burst. The IMF says China is running a fiscal deficit of 10pc of GDP once the land sales and taxes are stripped out. Zhiwei Zhang, from Nomura, said the latest loosening measures are not enough to stop the property slide, predicting two cuts in the reserve requirement ratio (RRR) for banks over the next two quarters. He warned that any such move will merely store up further problems. Nomura said the inventory of unsold properties in the smaller third and fourth tier cities – which make up 67pc of residential construction – has reached 27 months’ supply. The bank warned in a recent report that the property slump could lead to a ‘systemic crisis’. The Chinese state controls the banking system and has $3.9 trillion of foreign reserves that can be deployed in a crisis. The RRR is extremely high at 20pc and can be slashed if necessary. A cut to 6pc, the level in 1998, would inject $2 trillion in liquidity”.

He ends “What is certain is that China’s demographic profile is already changing the economic calculus. The workforce contracted by 3.45m in 2012 and another 2.27m in 2013. For better or worse, China is already starting to look very like Japan”.

America, stuck in 1991?

11/05/2014

A piece in Foreign Policy argues that far from Russia being “in the wrong” it is the West and especially America that is wrong. The piece argues that the EU has, or an least had, an excuse for thinking it lives in a Kantian paradise of endless peace but America, he argues, perhaps unfairly, lives in this Kantian world also.

He opens, “Russia is  dragging the world back into the 19th century, at least according to Barack Obama’s administration. ‘You just don’t in the 21st century behave in 19th-century fashion by invading another country on completely trumped-up pretext,’ said Secretary of State John Kerry, following Moscow’s annexation of Crimea. ‘What we see here are distinctly 19th- and 20th-century decisions made by President [Vladimir] Putin to address problems,’ added another senior administration official. ‘Sending in troops and, because you’re bigger and stronger, taking a piece of the country — that is not how international law and international norms are observed in the 21st century,’ President Obama declared a few weeks later. As Moscow continues to threaten a broader invasion — most recently demanding that Kiev withdraw its troops from eastern Ukraine — America’s indignant response reveals a great deal about how its leaders think about international norms”.

This is certainly a valid argument for US response when it comes to Ukraine, however, bear in mind President Obama’s masterful speech to the Nobel Committee on war and the neccessity for war. So to say that because of Ukraine, America lives in a Kantian world is unfair and simplistic.

He writes, “Unfortunately, it is the Americans, not the Russians, who are trapped in a time warp. They believe that the legal norms promoted by the United States during its brief period of global hegemony — which started in 1991 and has eroded over the last decade — are still in force”.

He goes on to mention “It was not a coincidence that this order emerged after the Soviet Union collapsed, leaving the United States the sole superpower — and American politicians, commentators, and intellectuals supremely enthusiastic about it. Today, this order is breaking down, the result of the decline of U.S. power and hence America’s ability to enforce its values and interests abroad. While many American intellectuals believed that the order reflected the consent of foreign elites to a self-evidently superior system of international organisation, it in fact represented their acquiescence in the face of superior power. Now that this superior power is gone, so are the norms that it promoted”.

It was not just Americans who were “supremely enthusiastic” about this New World Order. Europeans were delighted as they slashed defence budgets across the continent, seeing no threats and no need to maintain armies and spending at Cold War levels. Indeed it was Europeans who were most enthusiastic and had most to gain, at least in the short term, with the new peace. American military spending declined, but only modestly.

He argues that this order is breaking but it was never really set in stone in the first place. It was always based on regions and even then with significant exceptions. The 1995 bombing by US forces in Serbia because the EU were unable to meet the challenge is just one example. Another is the 2011 war in Libya in which France and the UK were the only real European countries who did any fighting. The notion of US decline has been categorically rebuffed before. He is correct to write that the powers joined this new peaceful order becuse of US power but this power is not gone. The norms are not either on or off but supported by American power in the right set of circumstances when a host of factors exist. This is witnessed by the ongoing spat between China and the rest of Asia with some taking China to court using international law. American cannot force China to abide by these rules, short of going to war to correct its outreagous behaviour, and to not understand this explains the flaw in this article.

He adds that “The first pillar of the post-Cold War liberal order was the international court. The idea that countries should use international tribunals rather than war to settle their disputes actually dates back to the 19th century, when the United States and Britain successfully used arbitration to resolve their differences. But after World War I, and then again after World War II, the victors established permanent international courts with jurisdiction over all disputes that could arise under international law. The most prominent such court has been the International Court of Justice (ICJ), a U.N. organ established in 1945. In the 1990s, more than 100 countries established a World Trade Organization (WTO) dispute settlement mechanism aimed at resolving disagreements over trade barriers. The International Tribunal for the Law of the Sea, which was given jurisdiction over maritime disputes, began operations in the same decade. But though such forums have helped resolve trade disputes, it is clear now that the broader ambition of international tribunals — to provide a peaceful avenue for resolving quarrels that might otherwise lead to war — has failed. The ICJ has successfully handled some minor border disputes, but when the interests of powerful countries are at stake, it has been evaded at every turn. When the court ruled against the United States in a dispute with Nicaragua in 1986, for example, the United States simply disregarded the judgment and withdrew from the ICJ’s jurisdiction”.

He goes on to argue “The second pillar of the post-Cold War order was recognition of human rights. Under international human rights law, all governments must respect the rights of their citizens. While the number, nature, and scope of those rights are contested — and while many countries that signed onto human rights treaties argued that rights must be interpreted in light of their own religious, traditional, or practical commitments — the new liberal order envisioned a world that abided by the basic terms of liberal democracy”.

Of course there have been exceptions to these rules given America’s size and power but the alternative as the author would have it is to have no international law and do away with all of these institutions altogether. It is better to have a flawed system then no system at all.

He does make the valid point “The failure of the human rights regime has put the West in a difficult position. When violations become too obvious to ignore — as was the case in the Balkans and Rwanda in the 1990s and in Iraq, Libya, Sudan, and Syria in the 2000s — the West faces a choice between ignoring them and thus violating its commitment to human rights, and launching a military intervention that violates its commitment to peaceful resolution of disputes. The only escape from this dilemma is the U.N. Security Council, which alone possesses the legal authority to launch wars against countries that do not comply with their human rights obligations. But the United Nations functioned effectively only during the early 1990s, when other members of the Security Council feared U.S. might. It was in 1991 that the Security Council authorised a military intervention in Iraq, following Saddam Hussein’s invasion of Kuwait. But today the Security Council is as frozen as it was during the Cold War, and declining U.S. power has made it difficult for the West to defy Russia, China, and world opinion as NATO did in 1999, when it intervened in Kosovo, and as the United States and its allies did in 2003 by invading Iraq”.

Again his argument is short sighted. He seeks to compare the 1991 invasion of Iraq to the 2003. These were totally different and had different rationales and contexts. He says the UNSC is “the only escape” but this is only true in a legal sense. This view pays little attention to the lack of legitimacy the UNSC has as it backs away from a host of decisions that would affect Chinese and Russian national interests. He also overstates the effectiveness of the UNSC during its so called golden years between the end of the Cold War and the current period when it is supposedly frozen.

He adds that another pillar was “free trade and investment. After World War II, Western countries entered a legal regime, then known as the General Agreement on Tariffs and Trade, that required them to gradually lower tariffs. This regime was strengthened in the 1990s, when the WTO was established. Efforts were also made to bring international investment under legal control — encouraging rich countries to invest in poor countries by preventing poor countries from expropriating those investments. In recent decades, hundreds of bilateral investment treaties have been signed, both protecting investments and providing for arbitration in case of dispute. Trade is the one bright spot in the current international environment. No one is reverting to protectionism, as countries did prior to World War II. The WTO dispute settlement mechanism continues to function. But efforts to improve on past successes have nonetheless foundered. Investment law has also faced problems, as countries have begun to disregard adverse judgments from arbitration panels”.

He adds that “So what would compel these countries to obey international law?  An enormous number of theories were produced, with their accompanying buzzwords: Countries complied with international law because their leaders had internalized the law. Or because they were bound by cooperative networks of judges and bureaucrats from different countries. Or because domestic and international NGOs put pressure on violators. Or because countries had become interdependent. Or simply because it was fair. At the heart of all these theories was the assumption that all countries complied with international law more or less equally. The most obvious explanation for legal compliance was all but ignored. Countries obeyed international law in the post-Cold War period because the United States and, to a lesser extent, Europe forced them to do so”.

He goes on to argue rightly “If this explanation wasn’t clear in the 1990s, it is clear now. As the United States loses power, it has become obvious that no one else will guarantee the peaceful settlement of disputes, enforce human rights, or ensure that international criminals are tried and convicted. Indeed, the one exception among the collapsing pillars of the liberal order — international trade — proves the rule. The United States, Europe, Japan, and China are the four great trading blocs, and they cooperate with each other because they know that if anyone reverts to protectionism, others will retaliate. The system functions because it never depended solely on enforcement by the United States. The United States is just one of several countries that enforce the rules through the threat of mutual retaliation. Put another way, the liberal order that was born with the Soviet Union’s collapse rested on a fiction: that all nations were equal and submitted to the same rules because they reflected universal human values. In reality, of course, the rules were Western rules, and they were enforced largely by the United States, which was no one’s equal”.

He ends the piece “the fiction has been exposed, and the world order looks increasingly like the one that reigned during the 19th century. In this order, a small group of “great powers” sets the rules for their relations with each other and interacts under conditions of rough equality. Smaller countries survive by establishing client relationships with the great powers. The great powers compete with each other over these client relationships, but otherwise try to maintain conditions of stability that allow for trade and other forms of cooperation. The major challenge for the great powers is to ensure that competition for clients does not erupt into full-scale war. In the late 19th century, the great powers were Russia, Britain, France, Italy, Japan, and the United States. Today, they are the United States, China, Russia, and Europe”.

The world is still as violent as it was, which the exception of Europe, but at the same time his view of a crumbling international order and rules is exxegerated and is too binary to make any sense in the real world.

Demanding pensions

05/05/2014

Following on from a piece in the Economist about civil society in China, another article notes that migrant workers are beginning to demand better wages and conditions.

It begins, “THE Pearl river delta in the southern province of Guangdong is no stranger to strikes, most of them small and quickly resolved. But a walk-out by workers at factories owned by a Taiwanese company, Yue Yuen, the world’s largest maker of branded sports shoes, including big names such as Nike and Reebok, has been remarkable for its scale and duration. It began on April 5th and has grown to involve tens of thousands of employees. On a sprawling industrial estate, angry workers watched by riot police rage about an issue few cared much about until recently: their pensions. For bosses and officials, this is a worrying sign of change”.

Naturally enough the report notes the response of the Chinese government, “The government has imposed a virtual news blackout on the unrest in the city of Dongguan, a place synonymous with the delta’s manufacturing heft (nearly 80% of its 8.3m people have moved there from other parts of China over the past three decades, or are the children of such migrants). Foreign journalists have been allowed onto Yue Yuen’s main estate in Gaobu township, a Dongguan suburb, but strikers complain that Chinese media are kept away. This contrasts with a relatively free rein given to Chinese reporters in 2010 to report on a large strike over pay by workers at a factory owned by Honda in Foshan, another delta city. That incident involved putting pressure on a Japanese company, an uncontroversial target for most Chinese. This latest, bigger strike (one of the largest in years involving a non-state enterprise in China) has touched a more sensitive government nerve”.

End of the CCP

24/04/2014

An excellent article by Issac Stone Fish predicts the end of the Chinese Communist Party.

It opens, “Nothing lasts forever, not even the Chinese Communist Party. Whether it will perishin a few years, or last for decades to come, there are a series of worrying indicators. Beijing has been slow to implementreforms that will orient the economy on a sustainable path. President Xi Jinping is knee-deep in an anti-corruption campaign against senior Chinese Communist Party (CCP) members unprecedented in its reach and scope in modern China, raising concerns about the party’s ability to police itself. Meanwhile, outside the corridors of power, China’s increasingly sophisticated populace is concerned with pollution, freedom of speech, and the country’s relationship with its neighbours, especially Japan. It’s impossible to predict the future, of course, and the CCP overcame greater challenges following Mao’s death in 1976 and after the Tiananmen Square protests in 1989. But six months shy of the Communist Party’s 65th anniversary, it’s worth emphasising that the party and China are not the same thing — China predates the party, and will outlast it”.

Fish posits two possible senario’s, “Russia’s Communist Party, which molded the Soviet Union into its own image and dominated it from the union’s 1922 formation to its 1991 dissolution, offers the best cautionary tale for the party. But in looking for ways to forestall the inevitable, the party may want to also study the experience of a government further afield: that of the Institutional Revolutionary Party, commonly known by its Spanish initials as PRI, which ruled Mexico from 1929 to 2000. Mexico under the PRI was not only the longest running one-party state of the 20th century, the PRI also fared well after losing power. Today, the Russian Communist Party is in shambles; its saints and leaders — Lenin, Stalin, Brezhnev– have been disgraced. The PRI elite, on the other hand, faced relatively little backlash after they lost power in 2000. And in a relativelyfree and far election, Mexicans voted the PRI back into power in 2012 — an ideal consolation prize for a party that formerly monopolized power. While the CCP and PRI structurally and ideologically are very different, the experiences they fostered, and the situations they find themselves in, have some striking similarities. The USSR on the eve of its collapse was an empire, overextended from an arms race with the United States and reeling from a 10-year quagmire in Afghanistan. Poverty was rampant, international travel was restricted, and Moscow’s autarkic economy meant domestic products were shoddy and foreign goods were scarce. By contrast, Mexico and China were (and are) healthily integrated into global markets”.

He mentions that “the CCP continues to fixate on comparisons with the shambolic USSR. A six-part party-madedocumentary about the Soviet Union’s collapse, based on a 2012 book, has recently been shown at dozens of political meetings.The movie begins with a narrator warning, ‘On the eve of the 20th anniversary of the death of the Soviet Union and its party, we are walking on the same ground.’ And in a December 2012 speech, Xireportedly told party insiders. ‘Why did the Soviet Union disintegrate? Why did the Soviet Communist Party collapse? An important reason was that their ideals and convictions wavered.’ But by obsessing over the USSR, ‘I think they’re looking at the wrong example,’ says Jorge Guajardo, who served as Mexico’s ambassador to China from 2007 to 2013. In hindsight, he told Foreign Policy, ‘living in China on a daily basis felt like living in Mexico under the PRI.’ Guajardo remembers watching the celebrations for the 60th anniversary of the Chinese Communist Party on Oct. 1, 2009, held on the Avenue of Eternal Peace in central Beijing”.

Fish goes on to note “The similarities between the widely held assumption that China is the party and the party is China reminded him of a time, in the not-too-distant past, when there was no daylight between the PRI and Mexico. Guajardo, who’s now a senior director at McLarty Associates, a Washington, D.C.-based consultancy, started noticing other comparisons. The dissatisfaction with the government’s handling of a massive earthquake in Sichuan in 2008 helped spur the growth of civil society, which reminded him of the 1985 Mexico City earthquake, ‘which laid bare the PRI’s corruption, lack of transparency, and inefficiency,’ he saidin a January 2014 speech. And just as the PRI fought corruption by going after the ‘big fish,’ Xi has vowedto go after ‘tigers and flies’ — both high-ranking and low-ranking corrupt officials”.

He adds that “‘On economic, political, and social dimensions — in some ways they’re very similar,’ says Li He, a professor at Merrimack College in Massachusetts and authorof the book From Revolution to Reform: A Comparative Study of China and Mexico. Both countries, Li said, faced wrenching peasant revolutions before a strong, single party unified the country. Both adapted liberal economic reforms both domestically and internationally — Mexico joinedNAFTA in 1994, China entered the WTO in 2001, nearly 25 years after it began its comprehensive Reform and Opening policy”.

He ends noting that “An article about China’s current anti-corruption campaign published on the website of CCP journal Seeking Truth in January summed upthe lessons to be learned from the Soviet Union: ‘If corruption cannot be effectively controlled, the people will eventually no longer recognize [the validity] of the ruling party.’ The conviction learned from the failure of the Soviet Union seems to be that rooting out corruption will ensure the people remain faithful to the CCP. But what lessons can be learned from Mexico? ‘I would tell Xi to stop the anti-corruption campaign,’ says Guajardo. ‘The system is built on corruption. Get used to it, own up to it.’ Perhaps the best lesson is that all political parties lose power eventually”.

 

Impossible to govern?

16/04/2014

David Lampton in a piece for Foreign Affairs asks if China is becoming harder and harder to govern. He begins, “China had three revolutions in the twentieth century. The first was the 1911 collapse of the Qing dynasty, and with it, the country’s traditional system of governance. After a protracted period of strife came the second revolution, in 1949, when Mao Zedong and his Communist Party won the Chinese Civil War and inaugurated the People’s Republic of China; Mao’s violent and erratic exercise of power ended only with his death, in 1976. The third revolution is ongoing, and so far, its results have been much more positive. It began in mid-1977 with the ascension of Deng Xiaoping, who kicked off a decades-long era of unprecedented reform that transformed China’s hived-off economy into a global pacesetter, lifting hundreds of millions of Chinese out of poverty and unleashing a massive migration to cities. This revolution has continued through the tenures of Deng’s successors, Jiang Zemin, Hu Jintao, and Xi Jinping. Of course, the revolution that began with Deng has not been revolutionary in one important sense: the Chinese Communist Party (CCP) has maintained its monopoly on political power”.

He argues that political reform has taken place in China but quietly, “The fact is that China’s central government operates today in an environment fundamentally different, in three key ways, from the one that existed at the beginning of Deng’s tenure. First, individual Chinese leaders have become progressively weaker in relation to both one another and the rest of society. Second, Chinese society, as well as the economy and the bureaucracy, has fractured, multiplying the number of constituencies China’s leaders must respond to, or at least manage. Third, China’s leadership must now confront a population with more resources, in terms of money, talent, and information, than ever before”.

These are the key three reasons that has made running China a far more difficult proposition than it was even twenty years ago. He argues that “Beijing has reacted to these shifts by incorporating public opinion into its policymaking, while still keeping the basic political structures in place. Chinese leaders are mistaken, however, if they think that they can maintain political and social stability indefinitely without dramatically reforming the country’s system of governance. A China characterized by a weaker state and a stronger civil society requires a considerably different political structure. It demands a far stronger commitment to the rule of law, with more reliable mechanisms — such as courts and legislatures — for resolving conflicts, accommodating various interests, and distributing resources. It also needs better government regulation, transparency, and accountability. Absent such developments, China will be in for more political turmoil in the future than it has experienced in the last four-plus decades”.

As has been mentioned here before this danger has been present in CHina for decades, even hundreds of years, but there is less and less room for the leadership of the CCP to demand what it wants. If it there is one thing that China’s leaders fear more than anything else it is domestic instability leading to revolution or collapse of the regime.

He makes the valid point that “Reform is like riding a bicycle: either you keep moving forward or you fall off”. He goes on in the piece to note that “According to the German sociologist Max Weber, governments can derive their authority from three sources: tradition, the qualities and charisma of an individual leader, and constitutional and legal norms. China, over the reform period, has shifted away from the first two types of legitimacy and toward something like the third. Like Mao, Deng enjoyed a mix of traditional and charismatic authority. But the leaders who followed him earned their legitimacy in different ways. Jiang (who ruled from 1989 to 2002) and Hu (ruling from 2002 to 2012) to various extents were both designated as leaders by Deng himself, and Xi’s elevation to the top position, in 2012, was the product of a collective political process within the CCP”.

He notes “China, in other words, has gone from being ruled by strongmen with personal credibility to leaders who are constrained by collective decision-making, term limits and other norms, public opinion, and their own technocratic characters.”

Interestingly he make the valid argument that “China’s rulers have strayed from Mao and Deng in another important respect: they have come to see their purpose less as generating enormous change and more as maintaining the system and enhancing its performance. Deng’s goals were transformational. Deng sought to move China up the economic ladder and the global power hierarchy, and he did. He opened China up to foreign knowledge, encouraged China’s young people to go abroad (an attitude influenced by his own formative years in France and the Soviet Union), and let comparative advantage, trade, and education work their magic”.

Lampton writes that “Hu enacted virtually no political or economic reforms; his most notable achievement was enhancing relations with Taiwan. The charitable interpretation of Hu’s years in office is that he digested the sweeping changes Deng and Jiang had initiated. Following his promotion to top party leader in November 2012, Xi impressively consolidated his authority in 2013, allowing a vigorous debate on reform to emerge, even as he has tightened restrictions on freedom of expression. The core of the debate concerns how to reinvigorate economic growth and the degree to which political change is a precondition for further economic progress. After the Central Committee meeting of November 2013 (the Third Plenum), the Xi administration stated its intention to “comprehensively deepen reform” and has created a group to do so. The need for such a body signals that many policy disputes remain and that the central government intends to stay focused on change until at least 2020”.

He goes on to discuss the divisons in Chinese society, “These changes in individual leadership style have coincided with another tectonic shift: the pluralisation of China’s society, economy, and bureaucracy. During the Mao era, leaders asserted that they served only one interest — that of the Chinese masses. The job of the government was to repress recalcitrant forces and educate the people about their true interests. Governance was not about reconciling differences. It was about eliminating them. Since Mao, however, China’s society and bureaucracy have fragmented, making it harder for Beijing to make decisions and implement policies. To deal with the challenge, the Chinese government, particularly since Deng, has developed an authoritarian yet responsive system that explicitly balances major geographic, functional, factional, and policy interests through representation at the highest levels of the CCP. Although the pathways for political self-expression remain limited, and elite decision-making opaque, China’s rulers now try to resolve, rather than crush, conflicts among competing interests, suppressing such conflicts only when they perceive them to be especially big threats. They have attempted to co-opt the rank and file of various constituencies while cracking down on the ringleaders of antigovernment movements”.

He mentions that “the state-owned sector, the China National Offshore Oil Corporation, or CNOOC, is supporting policies that favor more assertiveness in the South China Sea, where significant hydrocarbon deposits are thought to lie, and it has found common ground with the Chinese navy, which wants a bigger budget and a modernized fleet. On issues both foreign and domestic, interest groups have become increasingly vocal participants in the policy process. China’s bureaucracy has adapted to the proliferation of interests by becoming more pluralised itself”.

Not suprisingly Lampto notes “Mao almost never allowed public opinion to restrain his policies; the popular will was something he himself defined. Deng, in turn, did adopt reforms, because he feared that the CCP was close to losing its legitimacy, yet he only followed public opinion when it comported with his own analysis. Today, in contrast, almost all Chinese leaders openly speak about the importance of public opinion, with the goal being to preempt problems. In August 2013, for instance, the state-run newspaper China Daily reminded readers that the National Development and Reform Commission had issued regulations requiring local officials to conduct risk assessments to determine the likelihood of popular disturbances in reaction to major construction projects and stated that such undertakings should be shut down temporarily if they generated “medium-level” opposition among citizens. China has built a large apparatus aimed at measuring people’s views — in 2008, the most recent year for which data are available, some 51,000 firms, many with government contracts, conducted polling — and Beijing has even begun using survey data to help assess whether CCP officials deserve promotion”.

He adds later that “Public opinion may even lie behind the uptick in Beijing’s regional assertiveness in 2009 and 2010. Niu Xinchun, a Chinese scholar, has argued that Beijing adopted a tougher posture in maritime disputes and other foreign issues during this period as a direct response to public anger over Western criticism of China’s human rights record, especially in the run-up to the 2008 Olympic Games, when some Western leaders suggested that they might not attend”. However the fallacy with this for the CCP is that as soon as they start citing opinion polls and popular support for policies people should question why their leaders are not accountable electorally, to say nothing of the possibility of referenda.

He writes “Beijing’s greater responsiveness stems in large part from its recognition that as local governments, nonstate organizations, and individuals all grow more powerful, the central government is progressively losing its monopoly on money, human talent, and information. Take the question of capital. Ever since the Deng era, more and more of it has accumulated in coffers outside the central government. From 1980 to 2010, the portion of total state revenues spent at the local level rose from 46 percent to 82 percent. Meanwhile, the share of total industrial output produced by the state-owned sector dropped from 78 percent in 1978 to 11 percent in 2009. Of course, the state still holds firm control over strategic sectors such as those relating to defense, energy, finance, and large-scale public infrastructure, and ordinary Chinese still do not enjoy anything close to unlimited economic freedom. The change has also benefited corrupt local officials, military leaders, crime syndicates, and rogue entrepreneurs, all of whom can work against citizens’ interests”.

He re-inforces his point noting, “The combination of more densely packed urban populations, rapidly rising aspirations, the spread of knowledge, and the greater ease of coordinating social action means that China’s leaders will find it progressively more challenging to govern. They already are. In December 2011, for example, The Guardian reported that Zheng Yanxiong, a local party secretary in Guangdong Province who had been confronted by peasants angry about the seizure of their land, said in exasperation”.

He ends the piece “China’s reformist revolution has reached a point that Deng and his compatriots could never have anticipated. China’s top leaders are struggling to govern collectively, let alone manage an increasingly complex bureaucracy and diffuse society. Their job is made all the more difficult by the lack of institutions that would articulate various interests, impartially adjudicate conflicts among them, and ensure the responsible and just implementation of policy. In other words, although China may possess a vigorous economy and a powerful military, its system of governance has turned brittle. These pressures could lead China down one of several possible paths. One option is that China’s leaders will try to reestablish a more centralised and authoritarian system, but that would ultimately fail to meet the needs of the country’s rapidly transforming society. A second possibility is that in the face of disorder and decay, a charismatic, more transformational leader will come to the fore and establish a new order — perhaps more democratic but just as likely more authoritarian. A third scenario is much more dangerous: China continues to pluralize but fails to build the institutions and norms required for responsible and just governance at home and constructive behavior abroad. That path could lead to chaos”.

He concludes positing a “fourth scenario, in which China’s leaders propel the country forward, establishing the rule of law and regulatory structures that better reflect the country’s diverse interests. Beijing would also have to expand its sources of legitimacy beyond growth, materialism, and global status, by building institutions anchored in genuine popular support. This would not necessarily mean transitioning to a full democracy, but it would mean adopting its features: local political participation, official transparency, more independent judicial and anticorruption bodies, an engaged civil society, institutional checks on executive power, and legislative and civil institutions to channel the country’s diverse interests. Only after all these steps have been taken might the Chinese government begin to experiment with giving the people a say in selecting its top leaders”.

He ends, “Preliminary indications suggest that proponents of economic reform have gained strength under his rule, and the important policies adopted by the Third Plenum will intensify the pressure for political reform. But Xi’s era has only just begun, and it is still too early to say whether his time in the military and experience serving in China’s most modernized, cosmopolitan, and globally interdependent areas — Fujian, Zhejiang, and Shanghai — have endowed the leader with the necessary authority and vision to push the country in the direction of history”.

He finishes, “The dangers of standing still outweigh those of forging ahead, and China can only hope that its leaders recognize this truth and push forward, even without knowing where exactly they are headed. Should Xi and his cohort fail to do so, the consequences will be severe: the government will have forgone economic growth, squandered human potential, and perhaps even undermined social stability. If, however, China’s new leaders manage to chart a path to a more humane, participatory, and rules-based system of governance — while maintaining vigorous economic growth and stability — then they will have revitalized the nation, the goal of patriots and reformers for over a century and a half”.

 

Least productive Congress ever

14/04/2014

At the moment, according to the Federal Register, there have only been 23 public laws enacted in the second session of the 113th Congress — a number that virtually ensures that this Congress will pass the fewest number of laws of any in history. (It’s hard to imagine that, in an election year, Congress is going to go on a law-passing spree.) Don’t like laws passed as a measure of productivity? How about bills passed — although this stat can be slightly misleading since not all bills are created equal with some mattering far more than others. Still, the story remains the same — as told by this chart from Rachel Maddow’s blog“.

Still a long way to go

01/03/2014

In education and health care the BRICS have a long way to go.

Holding up DoD

28/02/2014

Sen. John McCain has placed a hold on two of President Obama’s nominees for  top Pentagon jobs, after he said they gave unsatisfactory answers during their  confirmation hearings Tuesday. McCain placed a hold on Bob Work, Obama’s nominee for deputy defense  secretary, after he said the littoral combat ship program he had overseen while  serving as under secretary of the Navy “is on solid ground and is meeting its  cost targets.” The 2015 defense  budget request proposes cutting the purchase of 52 littoral combat ships to only  32 ships, and calls for future alternatives to the ship. “I think this is very normal with Navy ship building,” Work said, adding that  a modified littoral combat ship model could be one of the  alternatives. “You think it’s normal?” McCain asked. “The cost overruns associated with  this ship, the fact that we don’t even know what the mission is…this whole  idea of moving different modules off and on. You disagree with the Government  Accountability Office (GAO) statement at the cost overruns? This is  normal?” Work said cost overruns for the ship program occurred before he served as  undersecretary from May 2009 through March 2013, and that he had not read the  2013 GAO report.  McCain said he was “stunned” that Work hadn’t read the report”.

No free thinkers allowed

26/02/2014

An article from the Economist recently notes that in China free thought is not allowed. Where this leaves those who assume China will overtake America technologically with greater innovation is unclear.

It begins noting the motto of Peking University, “one of China’s leading academic institutions, is ‘freedom of thought and an all-embracing attitude’. But in recent months it was not all-embracing enough to allow Xia Yeliang, an outspoken economics professor, to keep his job. Economics was not the subject on which Mr Xia was most forthright. He was a signatory of Charter 08, a petition drawn up in 2008 that called for sweeping political change, and he was known for his liberal political views. (Another signatory of the charter was Liu Xiaobo, who won the Nobel peace prize in 2010 and is now serving an 11-year jail term for subversion.) Mr Xia was dismissed in October, accused of being a poor teacher. Unable to find another post in China, this month he took up a position as a visiting fellow at the Cato Institute, a think-tank in Washington, DC. Mr Xia’s case is part of a wider clampdown on free-thinking intellectuals. In December Zhang Xuezhong, a legal scholar, was dismissed from East China University of Political Science and Law in Shanghai after he published a series of articles defending the provisions of China’s constitution. State media called such views a Western plot to overthrow the party. Also in December, Chen Hongguo, an academic at the Northwest University of Politics and Law in Xi’an, resigned. The university had objected, among other things, to his holding salons that discussed texts by Western philosophers such as John Stuart Mill”.

The Communist Party, concerned that it is losing control, has issued a number of political directives banning liberal topics in the classroom. “Since Xi Jinping came into power [as party chief] he has tried to control everything, learning the means from Mao Zedong,” said Mr Xia. “It is a great regression.” The crackdown has also been aimed at activists among ethnic minorities. Ilham Tohti, an economist at the Central University for Nationalities in Beijing, was detained on January 15th. Mr Tohti is a member of the ethnic Uighur minority, a Muslim group in China’s north-west, many of whom believe their land has been occupied by the Chinese. He is accused of spreading separatist thought and inciting ethnic hatred. On February 7th Radio Free Asia, a radio network sponsored by the American government, released an interview with Mr Tohti from before he was detained. In it he denied any association with a terrorist group and spoke of his fears, asking for the interview to be released if he were detained: “The number of police officers around me has gradually increased,” he said. “I am almost confident that the Chinese government is trying to get rid of me this time.” He said he had only ever advocated human and legal rights and equality for Uighurs”.

The piece ends, “Mr Zhang, the legal scholar, sees his own dismissal as a scare tactic that will fail in the long term as the dissonance grows between politics and everyday life. “When there are many people who are…waiting to stand up, crackdown measures will only make people angry,” he says. That may be so, but for now, on the surface at least, the party appears to be in control”.

This is yet more evidence that China will not be the hub of innovation and free thought that many claim or hope, it will be. Instead, like Russia, China will stagnate and whatever gains it has made will be worthless. Of course, the alternative is to open the society up to free thought, expression and belief. That would mean ending the monopoly of CCP power which, for all the talk of reform, is not going to happen. The CCP is fearful of being stuck in the middle income trap. If this does happen it will be the fault of the CCP.