China’s Economy — still no solid signs of reform

FinalAnswersforRenDa–ChongyangInstitute    This spring, at the request of the Chongyang Institute of Finance at Renmin University, I wrote a few paragraphs on the Chinese economy in advance of the National People’s Congress.    As I head out to Shanghai and Beijing late this month, including an event with the Chongyang Institute, I thought I’d post my answers to their questions.  They were written for a Chinese audience and are a bit repetitive so here’s the summary (slightly updated):

—  China’s leaders have identified the reforms necessary for continued long-term growth:   rebalance to put more money in the hands of consumers and let markets play a greater role.

—  At present, growth of household disposable income is more important than GDP growth; indeed, with growing incomes Chinese families can live better even as the economy slows down.

— China’s decision to use market mechanisms more is also spot on; liberating energies of an educated population, of the new service industries, and of China’s growing army of creators is much more important than protecting existing behemoths and state enterprises.

—  Unfortunately, the numbers don’t show the reform yet.  The GDP continues to growth faster than household disposable income, through the first quarter of this year.   

—  China is borrowing more and investing more but growing less.  That’s not a good sign: there’s more going in, less coming out of the economy.

—  Also not a good sign is that economic stimulus, steel production, and financial markets are being managed by government intervention rather than subjecting them to more market discipline.

So, we watch, wait and anticipate the readjustment of the Chinese economy.    It hasn’t happened yet. The longer it is postponed, the more difficult and bumpy the transition will be.

 

 

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Stop pushing military solutions to a diplomatic problem in Syria

Here They Go Again.  Once again, anonymous Pentagon officials are pressing the President to give them more resources and more authority because only they can solve our problems.   The New York Times headline reads:  “More Is Needed to Beat ISIS, Pentagon Officials Conclude”   It’s a worn Washington gambit.  Anonymous officials say “just give us more resources and we can fix your problem.”   Then the press, Senators and politicians start asking why hasn’t the President delivered.  If he resists, he’s a wimp.  If he goes along, he just digs himself in deeper.     

The anonymous officials are right.  We do need more.   But not more military.   Hitting napalm with a bigger hammer is not going to solve the problem of ISIS.   Our strategy is already 90% military and 10% diplomatic.  Solving the problem requires an effort that is ⅓ military, ⅓ political and ⅓ diplomatic.

In Iraq and Syria, we are witnessing the third Sunni uprising.  The first was the Anbar uprising in 2004-2007 when US occupation and de-baathification threw the Sunnis out of government in a country that was, and remains, more than 40% Sunni.   Only by cooperating with local Sunni tribes were we able to stabilize Fallujah and Ramadi.

Then in 2013-2014 the second Anbar Uprising began when the Malaki government in Baghdad arrested the Sunni finance Minister.  The arrest exploded into demonstrations in Fallujah and clashes between protesters backed by local groups and the Iraqi security forces, which, like the Malaki government, were dominated by Shia. Even the Shia cleric Muqtada al-Sadr sympathized with the protests, seeing the outbreak of an “Iraqi spring.”   By December, Sunni members of parliament were resigning en masse.  Repression and some accommodation with Sunni militias contained the problem, but didn’t solve the underlying question:  what is the place of Sunnis in the governance of Iraq?

Which leads to the new incarnation of Sunni discontent: ISIS.  Local Sunnis displaced by the Iraqi government, ex-Baathists and Saddam’s military leaders plus ever more extreme jihadists combined to join ISIS.  The Baathists are subsumed and integrated into the ISIS command and military structures (See this excellent Reuters piece).   Same mix as the previous uprisings.  Same underlying problem:  no place for the Sunni to govern.   The Kurds have emerged as the most able fighters against ISIS in both Iraq and Syria.  Why?  They were fighting for their own space.   

So, why do we keep trying the solutions that didn’t work in 2003, when US forces fought house-to-house in Fallujah until we had Sunni Allies.  Why do we keep trying the repression by Shia forces that hasn’t worked for the Iraqi government?   Maybe we should stop and think and not just add forces and advisors.  The Pentagon is the place to solve this problem.

First and foremost, we need to get the right players together.  The negotiations in Vienna and now Geneva are finally bringing together the right outsiders.  It’ll take all the neighbors, including Iran and Saudi Arabia, and all the major powers, including Russia, the US and Europe, to set out an agreement.  Yes, Assad will have to stay for some time, perhaps until a UN-supervised election can be organized in a highly-decentralized Syria. The Russians will have to keep their base in Tartus.  The Iranians will have to maintain a support base for Hizbollah in Lebanon.  Israel will need to keep a buffer in the Golan heights and influence in the Druze community of Syria.  The Saudis will support the Sunni, but let them support a Sunni homeland not a Sunni uprising.  

Much will stay the same.  This is not the chance to transform the region into democracies and to push the Russians back into the Black Sea.  But it is a chance to set forth a new governing model that gets us beyond the delusions of harmony created 100 years ago with the Sykes-Picot agreement and the mandates given to France and Britain, and beyond the simplistic ideas of the Bush administration that everyone would live happily together in Iraqi democracy.  It hasn’t worked in Iraq.  It hasn’t worked in Libya.  So don’t expect it to work in Syria.

Second, we need to provide a path to Sunni governance and autonomy, so that Sunnis, like the Kurds, have an autonomous future in Iraq and in Syria.  Sunnis need something to fight for.   We need to get as many Sunni groups as possible to the table in Geneva, especially local Sunni leaders in areas not occupied by ISIS.  Our only hope is to break up the toxic mix of tribes, generals and fanatics.  It won’t be easy but the conditions and goals of Sunni autonomy need to be clearly stated, and may begin with local self-governance in areas that are opened through military pressure on ISIS.  

Third, we need to continue steady military pressure on ISIS with bombs and advisors.  But, adding more explosives to the cauldron will only intensify the fighting and Sunni resentment.  We won’t solve this rebellion by adding more US forces to help Shia kill Sunnis and put their land under control of Shia-dominated governments in Iraq and Syria.   Sorting out the diplomacy and opening up prospects for Sunni self-governance just might work.

 

Diplomacy on the Rocks: Disputes and Solutions over Rocky Outcroppings from the South China Sea to the Arctic

We (Brown Junior Sophie Purdom and I) organized a great workshop last Friday in Providence.  We had a wonderful cast of participants and the variety of experts gave us insights that we might have otherwise missed.

The incredible speakers ranged from Law of the Sea Experts (U of Maine Law School’s Charles Norchi), to Naval War College academics (James Kraska, Walter Berbrick) and scholars from Brown’s Environmental Institute (Caroline Karp, Siri Veland and Ewige Cavan).   The Coast Guard Academy (Becca Pincus) contributed more ideas on the Arctic, and we enjoyed the presence of the Thai Navy (Kovit Talasophon), the Korean Coast Guard (Sukkyoon Kim) and, last but not least, diplomats like Ambassador Chas Freeman and Icelandic DCM Erlingur Erlingsson.

All were accomplished in their fields and lively presenters; together, they created a dialogue that looked at these issues from all angles, legally, environmentally and practically.    The icing on the cake, or at least the rainbow of sprinkles, were Brown student presentations on specific issues, and one big idea:  An Arctic Peace Park!   The whole proceedings are at this link.Wrap up

Summary:    Disputes over rocks grow from law of the sea claims (but remember islands have fresh water, rocks do not; islands convey economic zones, rocks do not) and spin dreams of hydrocarbons and fish or just of power and control.   These disputes are unlikely to find solutions in legal arguments, including the Philippines case against China at the tribunal over the south China sea, but the problems can be managed. We all have an interest in seeing them resolved, or at least shelved continentally, because we all need environmental standards and navigation regulations to apply, especially in sensitive areas like the Arctic.   The Arctic council does a very good job of expanding standards and promoting cooperation, but we shouldn’t expect it to tackle sovereignty and other claims.    In the South China sea, just about all the features that can be occupied have been occupied, so it’s time to accept that the “Go” board is full and see what we can do about settling things in place.   In the end, we need the political will to manage the resources and opportunities jointly and move away from sterile disputes about who owns what.

Santa Clara Law

Just catching up before I post some latest thoughts.   I participated in a symposium at Santa Clara Law School in February.   It was an lively (really!) and interesting (yes!) discussion of developments in international law and standards for corporate compliance.   I gave a keynote with my big theory of the world:

Value Chains –>  Exploding Middle Class –> Demands for fairness and impartial services –> Revolts when they don’t get it (Arab Spring, Occupy, Tea Party, Indian demonstrators) –> Companies need to keep clean –> Governments had better deliver good governance and efficient services or risk global instability.

Full length version:   SpeechforSantaClaraLawCenter

Cyber analogies vs cyber realities

Encrypt Thyself — Attacks and Consequences

From Slashdot:     new NSA Director Mike Rogers emphasized a need to establish behavioral norms for cyber war. “We’re still trying to work our way through distinguishing the difference between criminal hacking and an act of war,

He’s right.  Too many of the articles I read about cybersecurity throw everything together: defacing web sites, spam, phishing, as well as potentially disabling attacks on infrastructure are all seen as “cyberconflict” or “cyberattack”.  The language then leads to comparisons to war, Pearl Harbor, the Battle of Britain or nuclear deterrence.   So, below,  I’ve tried to categorize various kinds of intrusions in various sectors.  To me, this is the first step towards defining a better strategy which, like the Seattle Seahawks in last year’s Superbowl, relies on defense more than offense.

Normal Civilian Users Companies  Finance Civil Infrastructure .mil & .gov And the Antidote please:
Spying Unnoticed, could lead to other systems Loss of intellectual property Potential  information leading to crime Identify vulnerabilities for  future use Identify vulnerabilities to gain an advantage End-to-end encryption
Vandalism & defacing Inconvenient Inconvenient, temporary loss of business Temporary disruption, possible criminal profit. Relatively inconsequential Locked down code
Alter data Few consequences Potential business problems until rectified Criminal  advantage Potential  future failures Could mislead adversary Intrusion detection & BACKUPS
Install Sleeper Probes (Logic bombs) Unnoticed No particular use, unless blackmail. Future use could  disrupt or provide criminal advantage — Blackmail? Available in case of war Fifth column Tracking changes
Physical destruction by cyber intrusion Minor losses Limited loss of business Widespread loss of business Potential act of war Potential act of war All of the above — plus physical security

My Bloomberg Piece on Modi and the US visitors

http://www.bloombergview.com/articles/2014-07-30/how-modi-can-boost-india-u-s-ties

How Modi Can Boost India-U.S. Ties
JUL 30, 2014 4:35 PM EDT
By Richard A. Boucher
Narendra Modi is two months into his tenure as prime minister of India. This week, U.S. Secretary of State John Kerry and Secretary of Commerce Penny Pritzker will travel to India for the U.S.-India Strategic Dialogue — a trip that coincides with the deadline for approving the World Trade Organization’s Trade Facilitation Agreement, a measure strongly supported by the U.S. that India is now threatening to derail. Just what does the future hold for U.S.-India relations under Modi?

Modi’s priorities are growth and governance: improving government efficiency, speeding up government approvals and keeping corruption down. For that, India feels a well-deserved bump of investor interest, foreign and domestic. If he has a strategic outlook, it is to pick up manufacturing jobs as China grows more expensive.

So what’s he doing to get there?

On foreign policy, Modi’s first priorities are regional: He invited leaders from all his neighbors, including Pakistan, to his inauguration. China is very much on his mind. He traveled there with business delegations several times as chief minister of Gujarat state. As prime minister, his first visit was to Bhutan, which showed neighborliness but also put China on notice not to push on the Himalayas. His administration has already had talks with Chinese leaders, and he met President Xi Jinping at the BRICS summit in Brazil. However, the accounts of these meetings all show cooperation with a note of discord — over borders or Indian oil companies in the South China Sea, for example. Modi wants to convey the idea of a strong and confident India in the region and with China.

What about the U.S.? Well, to begin with, the visa question — the U.S. pulled his visa after the 2002 anti-Muslim riots in Gujarat — is moot. He can and will travel to the U.S. anytime on a diplomatic visa. Similarly, the flare-up over the Indian diplomat in New York, Devyani Khobragade, has died down. President Barack Obama has invited Modi for a state visit after United Nations meetings in September. So, it’s all on the up-and-up, right?

More or less. Frankly, Modi doesn’t appear to have any vision for the relationship; two years from the end of his term, Obama doesn’t appear to have one, either. However, there is much both nations can do to lay a strategic foundation for future cooperation.

First, India needs to push through its half-finished reforms and earn a reputation as a country that can get things done, as well as spur investment, not through some protracted negotiation of a complicated agreement, but through reforms that make a difference for U.S. and other investors. Ultimately, raising India’s position on the World Bank’s Doing Business index, where India now stands at No. 134, between Yemen and Ecuador, would make India more important to U.S. firms and raise its standing in the modern world of value chains, open markets and cross-border investment.

Modi began by changing hiring and firing policies, but more reforms could bring more jobs and job market flexibility. The last government pushed through a law for foreign universities to set up in India — and U.S. schools are more than eager to do so — but didn’t finish the job with regulations. The substitution of a goods and services tax (like a value-added tax) for a myriad of corporate levies has been promised. Modi’s government announced that foreigners could invest up to 49 percent in defense firms, enough to get some joint participation but not the majority share that would make India a hub for defense manufacturing. Completing these reforms would boost business investment and fix India on the growth map again, as would not doing dumb things like getting crosswise with the global effort to open up trade and investment through the Trade Facilitation Agreement.

Second, some new reforms are needed. The great leap forward to nuclear cooperation and a cleaner energy future for India fell flat because of India’s nuclear liability law. The foreign community has united to make it clear that amendments are needed. Japan will press during Modi’s visit to Japan in August, so watch for announcements. In addition, will Modi truly reform state enterprises (public-sector undertakings, in Indian parlance)? Will he finally open up retail and finance to foreign investment? What about e-commerce? More reform means more business, more prosperity and more respect for India in the U.S. and elsewhere.

Of course, the U.S. can take some meaningful steps without a grand vision. As it withdraws from Afghanistan, the U.S. can recommit to honest counterterrorism cooperation, building on the dialogue the countries have had since the Mumbai attacks. With China on both countries’ minds, we can expand naval cooperation to protect sea lanes from the Persian Gulf to the Strait of Malacca. At Beijing’s Asia-Pacific Economic Cooperation summit in November, the U.S. can push for India to join. (Was India part of the Asia pivot, or does the U.S. have a myopic view of what constitutes Asia?)

Other U.S. reforms, of immigration law and in particular an expansion of H-1B visas, would benefit innovation in both countries.

So there is an agenda for U.S.-India relations, but it is centered on reforms and investment with a strategic underpinning. Grand announcements with no follow-through won’t help either side. In this regard, Pritzker’s presence this week is more important than Kerry’s. If Obama wants to make a difference, he could follow up during Modi’s September visit by introducing him to U.S. business leaders who want to invest and strengthen the foundation for the nations’ relations in the years to come.

To contact the author of this article: Richard Boucher at amb.richard.boucher@gmail.com.

To contact the editor responsible for this article: James Gibney at jgibney5@bloomberg.net.

Five Tectonic Shifts

Amidst all the turmoil of daily events –Ukraine, Gaza, Iraq, Syria, Congo– five tectonic shifts are reshaping the new world. While they don’t always dominate the turmoil, in the long run they change the way we need to look at the world.   Billions of people in emerging market countries and the developed world will be more affected by these shifts than by the twists and turns in the daily news.  For our part, we need to offer less intervention and better governance to these billions.

First, value chains.  In Trenton New Jersey there’s bridge with a big sign that says “Trenton Makes, the World Takes.”  Our idea of trade –and our trade policy– is based on this idea that “I make something and sell it to you, you make something and sell it to me.”   It’s not like that anymore; we make things together with a group of our friends.  Manufacturing, since Henry Ford at least, has always been a serial process.  As firms have understood how to break production down more efficiently and move each step to where it could be done at least cost, everything becomes the product of many sources.  Nutella is made from a dozen inputs.   Sixty percent of China’s exports are based on imports.  An iPhone comes from China, but its parts come from Japan, Korea, the US, Southeast Asia and dozens of other places.  If we start measuring trade in value-added terms, the balances look different –US deficit with China is really a third less– and the flows become more obvious.   Check out the WTO/OECD work.

For countries, this means that policies to benefit from value chains are the path to development:  open investment rules, frictionless borders, educated workers, modern infrastructure, advanced logistics.   By investing in these tools, Costa Rica, for example, has secured its position.  China as well, but China occupies a position at the low value end of value scale. They make about $10 bucks off an iPhone.  The real money comes from research and development, design and marketing. That’s how Apple makes the big profits.  But, we’d better watch out:  computerized manufacturing, 3D printing and other technologies are taking the manufacturing jobs out of the production chain. The design and marketing will remain.  Instead yearning for bygone days of manufacturing jobs, we’d better enhance our role at the high end:  with better technological infrastructure, real investment in education and smoother regulatory systems.

 

The second big shift grows from worldwide manufacturing:  multiple engines of growth. If we make things together, we pull each other along or pull each other down.   The US economy used to be the “engine of the free world.”    It’s not just us any more. There are 17 economies that produce more than $1,000,000,000 of output per year — yes, seventeen trillion dollar economies now.   And, by 2025 there will be thirty trillion-dollar markets.   More big markets means more consumers to pull the world’s economy.  We saw this during the US-European crash; China kept  Brazil, Australia and Southeast Asia afloat.   Essentially, this is a good thing for everyone, even we must struggle to keep our place at the top.

 

Third, these engines obtain their power from a growing middle-class.   You can measure the middle-class in various ways.  My favorite is Uri Dadush’s method:  how many people can buy a car?    He estimated 573 million potential car-buyers in developing countries already in 2010 –55% more than other methods.   And, the middle class are not just buying cars.   They’re revolting.   We see it all over the world, even in the U.S.    Occupy Wall St and the Tea Party both reflect middle-class revolts.   The anti-corruption wave in India and Prime Minister Modi’s ascendant electorate channel middle-class revolts.  China’s new middle class and peasant aspirants demonstrate against privilege.  The Arab Spring was a middle class revolt, run on cell-phones and the internet, and in the subsequent counter-revolution, entrenched interests, military and cronies are trying to protect their power and other contenders, like the Islamists, try to prevent a middle-class society.  The middle class is now coming to Africa; eight of the top twenty countries in economic growth last year were African.  Around the world, middle-class revolt isn’t always pretty, but I think the middle class in the end is unstoppable.

 

Fourth, these contenders for emerging power inside countries lead us to more wars fought internally, often with external intervention, than the classic struggle between nations for domination and territory.  Think Iraq, Afghanistan, Syria, eastern Ukraine, Libya, and Congo  more often than Crimea and the South China Sea.   We need to think twice before we intervene in these messes, but we also have to rethink how we fight wars when we do get involved.  Our biggest failures have been failures to understand the internal sources of conflict in Vietnam, Iraq and Afghanistan.   Jumping willy nilly into piranha pools doesn’t make a good foreign policy.  We need a better way to help resolve internal conflicts.

 

Fifth, governance matters.  Most of these struggles start with a failure of governance: people revolt against regimes that don’t deliver to the growing aspirations of a middle class or a would-be middle class.  The Tunisian fruit seller whose suicide started the Arab spring wanted less bureaucratic interference and corruption in his business.   The solutions, like the causes, also involve better governance.  Several recent books argue that governance is the critical factor for development and for growth that spreads its benefits fairly.  Quality governance produces quality growth.

In Afghanistan, Central America, Haiti, and Iraq, we’ve done a lousy job of helping people govern:  we either substituted ourselves and our system or held elections and walked away.  Our own paralysis of governance at home does not offer a good example to others.    The European Union has done better in spreading good governance across its continent, albeit to a hungry group of Eastern European countries willing to do whatever it takes to make it in the modern world.  More will come.  We’d better be ready to help with a kit of real tools:   e-government, open regulatory systems, better healthcare systems, education that works, timely justice, and governance systems that work in developing countries.

How do we play our leading role in this world?   First, we need to clean up our own act. An economy is like a boat:  every few years we need to pull it out of the water and scrape off the barnacles of the tax code, of inefficient regulation, of overlapping programs, of subsidies for friends of legislators.   We’re still the main organizers of value chains, the biggest engine of growth, the (somewhat tarnished) model of the middle-class society, the destination for education and example for those trying to deliver better governance.  We need to work harder, though:  work harder at opening up channels for investment and trade, at delivering quality governance, at replacing conflict with new opportunities, even as we cope with the messes that these tectonic shifts produce as they grind forward.


Bottom line:   as these underlying forces change our world, maybe we need to be less of Mr. Fixit and more of Mr. Clean.

Mrfixit-newspaperadvert-1918                                                                M.Propre