Feb 2, 2010, 5:16 am | by Leo Horn | Posted in Cooperation and coherence, East Asia and Pacific, Global system | Comments Off
In sync with Chinese Vice Premier (and likely PM-in-waiting) Li Keqiang’s address at Davos, an interesting piece appeared today in the Global Times (the international news arm of the Chinese Communist Party’s official People’s Daily, i.e. a mouthpiece), which is revealing about the Chinese leadership’s continued ambivalence towards projecting China as an emerging superpower. Excerpts of the article entitled ‘managing the world’s rising expectations‘ follow:
The world has been expecting more from China, especially since the financial crisis. But between the increasingly high expectations and China’s real capabilities, there is a huge gap, which is evident in the 2010 World Economic Forum that opened Wednesday in Davos, Switzerland.
At the forum attended by about 2,500 leaders from over 90 countries and regions, China is expected by many to purchase Greek bonds, to continue holding US treasury bills, and to lead global recovery while under the onslaught of protectionism.
Even those who are blaming China’s monetary and trade policies for causing tensions in the post-crisis period expect that China should save the world’s economy.
Though such expectations may boost national pride among a section of Chinese, there is a strong case for China to remain clear-headed about the reality it is facing.
On the one hand, it is an emerging economy, with its 8.7 percent GDP growth in 2009 and its soaring middle class population.
On the other hand, it remains a developing nation, with its per capita GDP ranked 106th and over 100 million people below the World Bank indicated poverty line.
The world’s expectations, unless cautiously managed by China, could jeopardize the hard-earned fruits of labor accumulated in the past six decades.
As The Economist once shrewdly observed, “China’s own world view has failed to keep pace with its growing weight. It is a big power with a medium-power mindset and a small-power chip on its shoulder.” The cautious attitude of the leadership reflects concerns that a ‘superpower’ role in international affairs would: (i) make it difficult for China to avoid adopting positions that will add complexity to decision-making and may be at odds with the raw pursuit of national self-interest; (ii) divert its attention and resources away from addressing domestic issues. The more cynical, such as Yan Xuetong, the Director of the Institute for International Studies at the elite Tsinghua University, go as far as to suspect a Western conspiracy to ‘trap’ China and ‘exhaust our limited resources’ by locking it in to onerous international agreements and obligations. Li Keqiang’s address at Davos was in keeping with Deng Xiaoping’s dictum of keeping a low profile in international affairs. It was a reminder that the national interest will remain paramount even as China’s voice and involvement on global affairs rises. Along similar lines, see also the report on China’s participation at Davos in today’s FT: ‘West too busy with its crises to engage east’.
Dec 4, 2009, 3:57 am | by Leo Horn | Posted in Climate and resource scarcity, Economics and development | 5 Comments
Here’s what the world looks like if country sizes were proportional to their emissions (world map scaled to fossil-fuel carbon-dioxide emissions in 2002):
And here’s what the world looks like if countries were sized commensurately with the burden of climate change impacts (world map scaled by the World Health Organization’s regional estimates of per capita mortality from late 20th century climate change):
These maps were drawn from the recently released UN Population Fund (UNFPA) ‘State of World Population 2009′ report, which focuses on the theme of women, population and climate change. While the developed countries have contributed the most to human-induced climate change up to now, people in poor countries—most dramatically in Africa—already are much more likely to die as a result of the climate change that occurred up to 2000.
The picture is significantly more skewed if we were to take account of (i) historical emissions; (ii) the unequal burden of future climate impacts.
Nov 23, 2009, 12:48 am | by Leo Horn | Posted in Climate and resource scarcity, East Asia and Pacific, Economics and development | Comments Off
China won much praise (and prestige) for its prompt and bold response to the unfolding global financial crisis, announcing a fiscal stimulus package worth 14% of its GDP in November 2008, well ahead of other major economies (this compares with a fiscal expansion of 2.5% of GDP for the US, 4% for Japan and Germany, and roughly 2% of GDP for G20 countries as a whole). On the face of it, the Chinese stimulus seems to have paid off: the economy has clearly bottomed out and is once again set on a high growth course. But, as I argue in a forthcoming article in the China Environment Series – versions of which are published on Policy Innovations and Chinadialogue – there are serious concerns about the sustainability (economic and environmental) of the stimulus.
Back in March, I had pointed to early signs that the fiscal stimulus was starting to kick in (see my earlier post here). The latest statistics are encouraging in this regard. Earlier this month, the World Bank upgraded its 2009 growth forecast for China to 8.4% (up from 6.5% at the start of the year). According Yu Bin, a top economist at the State Council’s Development Research Center (an influential government think tank), China’s economy could grow by over 10% in the fourth quarter of 2009, and maintain double-digit growth next year.
But these ‘green shoots’ are anything but green: China may have missed a golden opportunity to use the stimulus as a crucial lever to nudge the economy on to a greener trajectory. The bulk of the stimulus spending has been funneled into energy-intensive sectors and large infrastructure projects, many of which have been on the books for years but slowed or halted by negative environmental assessments that are now being overridden in the interests of salvaging the economy. So far the main beneficiaries of the stimulus seem to have been cement, iron, and steel producers.
More worrying are signs that the government has systematically deprioritised environmental concerns in its no-holds barred approach to rescuing the economy. The rollback of Environmental Impact Assessments—through the establishment of a fast-track system, ironically called the “green passage”—is a surface sign of deeper power shifts within government. Environment vice-minister Pan Yue—once the government’s most outspoken environmental champion—was stripped of his responsibilities as environmental enforcer and has been absent from the political scene since the beginning of the crisis. The new vice-minister in charge of environmental assessments, Zhang Lijun, has announced that most stimulus projects will be eligible for fast-track environmental approvals.
This crisis should have strengthened the hand of the progressive economic reformers within government. It threw into sharp relief the structural weaknesses and vulnerabilities that they had been cautioning against long before the crisis occurred. The need for a robust counter-cyclical boost to the economy offered the opportunity of marshaling resources on an unprecedented scale toward stimulating new, greener sources of economic dynamism and growth. Spurring green innovation would not only create green-collar jobs but also strengthen competitiveness. The crisis provided an occasion for cash-rich China to purchase state-of-the-art environmental hardware at rock-bottom prices from developed economies in disarray, accelerate industrial upgrading, build technological capabilities, and strengthen its competitive edge.
The evidence, sadly, is that this golden opportunity has been missed.
Sep 9, 2009, 3:39 am | by Leo Horn | Posted in Climate and resource scarcity, Cooperation and coherence, Global system | Comments Off
There have been many blips along the road in the nineteen months since the Bali Roadmap was launched, but with less than a hundred days to go before D-day – and less than 20 negotiating days – the last few weeks have seen a steady crescendo on all sides of the negotiating table. Over the past week alone there have been three significant developments: (i) African countries agreed a common negotiating stand at Copenhagen; (ii) Japan announced its ambitious plan to cut emissions by 25% (from 1990 levels); (iii) the scene was set for a US-China bilateral deal on climate change.
1) Africa emerges as a unified and purposeful participant in the upcoming negotiations
Last week, ten African Heads of State and assorted ministers met in Addis Ababa to agree a common stand for Africa ahead of the Copenhagen conference. This meeting also decided that Africa would be represented by one delegation, to be headed by Prime Minister Meles Zenawi of Ethiopia. I have already delved into the outcomes and significance of this meeting in my previous post.
2) The US and China to sign a bilateral deal on climate change?
A recent visit to Beijing by US Senator Maria Cantwell reportedly set the ground for a wide-ranging bilateral agreement between China and the US on climate change. This deal is to be sealed on the occasion of President Obama’s scheduled trip to China in November, a month ahead of the Copenhagen climate conference. Reuters reports that:
The United States and China are likely to sign a new bilateral agreement to combat climate change during President Barack Obama’s visit to Beijing in November, Washington senator Maria Cantwell said on Friday. Cantwell, who is in Beijing to discuss clean energy and intellectual property issues with Chinese officials, said a deal between the world’s two biggest CO2 polluters would also help build global confidence in the efforts to curb global warming.
This is extremely significant when you consider that the combined emissions of the US and China account for 40% of the global total. Such a deal could send a strong signal and boost confidence ahead of the Copenhagen Climate conference.
3) Japan announces ambitious plans to curb emissions
Japan’s PM-elect, Yukio Hatoyama, reaffirmed his party’s pledge to cut greenhouse gas emissions by a quarter by 2020 from 1990 levels, amidst strong opposition from industry. This is a highly ambitious commitment: it would require Japan – which is already leading the world in terms of its efficiency in energy use – to reduce emissions by a third from current levels in just 11 years. Mr. Taro Aso had previously only committed to reducing emissions by 8% from 1990 levels.
As the world’s second largest economy and fifth largest emitter, Japan’s move would increase pressure on other main players ahead of the upcoming Copenhagen Climate Conference.
Sep 9, 2009, 3:04 am | by Leo Horn | Posted in Africa, Climate and resource scarcity, Economics and development, Global system | 1 Comment
A significant but little reported event occurred last Thursday. The Africa Partnership Forum held a Special Session on Climate Change on 3 September 2009 at the UN Economic Commission for Africa (UNECA) Headquarters in Addis Ababa, Ethiopia. The purpose of the event was to agree a common negotiating platform for Africa focused on Africa’s concerns and expectations in the run up to the Copenhagen Climate Change to be held in December 2009.
The meeting was attended by ten African Heads of State and assorted ministers, regional institutions such as UNECA, the New Economic Partnership for African Development (NEPAD) and the African Union. The Joint Statement is worth reading. It will be transmitted to the UN High Level event on 22 September, the G20 Summit at Pittsburgh and other processes.
This meeting laid out the key elements of Africa’s negotiating positions at Copenhagen. They are as follows:
1) Financing – The basic premise for Africa’s demands at Copenhagen is the recognition that historic responsibility for climate change lies with developed countries, that climate change poses additional costs to development, and therefore that African countries should be compensated and assisted in responding to it.
- An African Union proposal that is taking shape puts the price tag at $67 billion and $200 billion annually in compensation. Note that this is far higher than Sir Nicholas Stern’s estimate of $30 billion per annum that Africa will need to meet the costs of adaptation ($20 billion) and mitigation ($10 billion);
- The AU further specifies that scaled up funds should be new, additional (to ODA), adequate, predictable and sustainable;
- There is a shared concern that Africa has been largely excluded from the existing financial and technology cooperation mechanisms (e.g. the Clean Development Mechanism). The AU argues for a coherent financial architecture for climate change, with equitable governance and simplified access procedures.
2) Adaptation – Africa will be strongly arguing for the need of a legally binding commitment and comprehensive climate change adaptation framework that is regularly monitored and reported to the UNFCCC Secretariat.
3) Mitigation - Africa will push for ambitious and binding greenhouse gas (GHG) emissions reduction targets from developed countries. The targets mentioned so far are: a reduction of 40% by 2020, and 80-95% by 2050 (both from a 1990 baseline). Developing countries should have no binding targets to cut emissions.
4) Technology transfer - African negotiators are calling for a revision of the global Intellectual Property Rights (IPRs) regime, which is seen as a barrier to local development and diffusion of the technologies needed to adapt to and or mitigate the effects of climate change. Developed countries should pay for technology transfers.
This is a remarkable development. Until just a few years ago, individual countries were passively if at all involved and there was no unified African voice on climate change. The lack of a coordinated stance has placed serious limitations on Africa’s ability to negotiate in the past. As a result, Africa has benefited the least from the current climate regime: only around 2% of all CDM projects are in Africa and most of these are in South Africa.
Much has been made of Africa’s seemingly astronomical compensation demands (which may range from $67bn to $200bn). Incidentally, this is far higher than Sir Nicholas Stern’s estimate of $30 billion per annum that Africa will need to meet the costs of adaptation ($20 billion) and mitigation ($10 billion). However, this is the wrong headline. Zenawi stressed that Africa’s primary objective is not to seek compensation, rather to avoid catastrophic damage in the first place. Therefore Africa will seek a binding commitment to overall emissions reductions consistent with a two degree Celsius increase in global temperatures by the end of the century.
In the words of Prime Minister Zenawi, Africa is determined to participate fully and constructively in the Copenhagen negotiations as ‘responsible actors and negotiators’. This should be seen as a welcome development. Having over 50 countries (i.e. over a quarter of all countries participating) speak with one voice will greatly contribute to making the negotiations more manageable. But Africa’s voice will also add pressure to reach an ambitious and developmentally-oriented deal.
Jun 16, 2009, 4:42 pm | by Leo Horn | Posted in Cooperation and coherence, Global system, Influence and networks | Comments Off
The meeting today of the heads of state of Brazil, Russia, India and China (aka the ‘BRIC’s) in Yekaterinburg represents far more than the triumph of labeling (the term ‘BRIC’ was coined by Goldman Sachs’ Jim O’Neill in 2001. As the FT noted, this is ‘almost certainly the first multilateral nation bloc to be created by an investment bank’s research analysts and their sales team’).
Apart from size and economic potential, these countries have little in common: neither history, culture, politics nor geography serve as unifying factors. The structures of their economies are very different.
What binds this disparate group of countries together is their common desire to shape a new economic order that is less dominated by the US. With the BRICs accounting for 15% of the world economy and 40% of its population and holding 42% of global currency reserves their desire to influence the global economic and financial landscape is justified.
DOLLAR DILEMMAS
Of particular concern to the BRICs is the dominance of the US dollar, which is seen by many in China and Russia as the root cause of global economic imbalances and the current financial turmoil (Zhou Xiaochuan, the governor of the Bank of China made explicit reference to the Triffin Dilemma – i.e. the inherent tension between domestic and global monetary policy that arises from having a national currency serve as a global reserve currency – in his landmark speech on ‘Reforming the International Monetary System’, which Alex has written about here).
Understandably, these countries are increasingly alarmed at the extent to which their own fortunes are tied up with that of the greenback. They are hugely exposed to dollar securities: with combined reserves of US$2.8 trillion they are among the largest holders of Treasuries (China is number one with over US$ 1.5 trillion in its coffers, or 40% of its GDP). A decline in the value of the dollar would result in massive losses for these governments, and in the case of China would undermine social stability. The very loose fiscal and monetary policies being pursued in Washington to prop up the economy are therefore of grave concern. As Steven Mallaby explains:
“a (highly plausible) 30 percent move in the yuan-dollar rate would cost the country around $450 billion — about a tenth of its economy. And, to make the dilemma even more painful, China’s determination to control the appreciation of its currency forces it to buy billions more in dollar assets every month. Like an addict at a slot machine, China is adding to its hopeless bet, ensuring that its eventual losses will be even heavier.”
Or in the words of Michael Hudson:
“US-style free markets hook them (the BRICs) into a system that forces them to accept unlimited dollars. Now they want out.”
The BRICs have already taken steps to wean themselves off their dependence on the US dollar by diversifying their overseas investment portfolios. China for example has concluded currency swap arrangements with six countries worth CNY 650bn ($95bn), which will allow it to trade in its own currency rather than in dollars. Moreover it has invested $40bn in the ASEAN Reserve Fund, announced it will buy up to $50 bn worth of bonds issued by the IMF. Recent data showed that both China and Russia had trimmed their holdings of US government bonds in April.
But they are all too aware that they need to tread carefully, as they cannot afford to undermine confidence in the US dollar. Thus even as the BRIC heads of state meet to plot future alternatives to the dollar, the Russian Finance Minister Alexei Kudrin reassured the international press that the US dollar is in ‘good shape’, and further affirmed that there’s no substitute for the world’s reserve currency.
THE EROSION OF US SOFT POWER
Regardless of whether or not the BRIC grouping endures as a political entity, their meeting today is significant in that it signals a waning of US global authority. To Russia and Brazil in particular the unwillingness of the US to taste its own medicine – viz. socially painful structural adjustments through fiscal austerity and monetary tightening as prescribed by the IMF to other debtor countries in crisis – is a blatant case of double standards (see my related post here). As Michael Hudson writes in his recent article in the FT:
Many foreigners see the US as a lawless nation. How else to characterize a country that holds out a set of laws for others – on war, debt repayment and the treatment of prisoners – but ignores them itself? […] US interest rate and tax reductions in the face of exploding trade and budget deficits are seen as the height of hypocrisy in view of the austerity programmes that the ‘Washington Consensus’ has forced on other countries via the IMF and other vehicles.
The fact that US officials, who had requested attending the BRIC meeting as observers, were denied is noteworthy.
Jun 12, 2009, 6:34 pm | by Leo Horn | Posted in Climate and resource scarcity | Comments Off
At the end of his three day visit to Beijing this week Todd Stern, the US Climate Change Envoy, held a press conference with the Chinese press at which he said that China was doing great and the US didn’t expect China to commit to a cap on its greenhouse gas emissions (unsurprisingly this made the first page of the China Daily, the main English language mouthpiece of the Communist Party).
Ironically, this comes just days after the China Daily misquoted Wen Jiabao as saying that China would commit to emissions reduction targets in its 12th Five Year Plan, when in fact what he said was that China would consider introduce emissions intensity targets (see article here).
Readers of the China Daily would thus be forgiven for thinking that China was poised to introduce a carbon emissions reduction target, only to be told by the US that this wasn’t necessary or expected!
Many in the environmental community here (in Beijing) were stunned by Todd Stern’s comments: although there are reasonable grounds for conceding on this particular point, given absolute targets are a negotiation red line for the Chinese (not least because they are unrealistic in the short run), many feel that this upfront concession and the notable softening in tone would likely reduce the US’s leverage in pushing on other points, and preempted any discussion in particular on sectoral targets, something the Chinese would have been open to discussing (incidentally I do not see how Todd Stern’s remarks would preempt a discussion on sectoral caps). Todd Stern’s remarks are all the more surprising when considering his aggressive posturing ahead of the visit. The Times reported that:
America’s leading climate change negotiator will urge China to make a commitment to cutting greenhouse gas emissions during meetings in Beijing this week, as the US seeks to avoid the collapse of the next global warming treaty.
Just a couple of weeks earlier, Pelosi and Kerry were in town trying to persuade the Chinese leadership that any deal that didn’t include a firm commitment to emissions reduction by the Chinese would get torpedoed in Congress. The Chinese can be forgiven for feeling confused!
May 14, 2009, 3:04 pm | by Leo Horn | Posted in Climate and resource scarcity, Conflict and security | Comments Off
Yesterday, May 13th, was a momentous – if little noticed – milestone in 21 century geopolitics: it marked the UN deadline for countries to submit their claims to seabed up to 350 miles from their coasts, in the last major redrawing of the world map that would fix maritime boundaries.
Unsurprisingly – given its vast mineral riches – the Arctic emerged as a major battleground, with competing claims over its seabed being filed with the Commission on the Limits of the Continental Shelf. The stakes are huge: the rapidly receding sea ice cover – 50% of which had disappeared in the two last summers – and technological advances in deep-sea drilling will open up a whole new frontier in oil and gas exploitation.
Russia was first to file with the UN in 2001, and in 2007 it reinforced its claim on a large swathe of Arctic prime property – a chunk of the Arctic shelf the size of Western Europe – with the theatrical planting of a titanium flag on the seabed beneath the North Pole (an area also claimed by Denmark).
In all, 48 countries submitted full claims and dozens more have made preliminary submissions under the deadline. Russia’s submission was contested by Canada, Denmark, Norway and the US (even though the US has not ratified the UN Law of the Sea Treaty, which governs these agreements).
In this connection it is interesting to note the timing of the release of a Kremlin document on Security Policy on the very same day. This document warns of the likelihood of future military conflicts over resources on Russia’s contested borders (including its maritime borders). The document predicts that the struggle over energy resources will dominate international relations, and clearly signals Russia’s readiness to use force to protect its resource claims, even against ‘allies’:
In a competition for resources, problems that involve the use of military force cannot be excluded that would destroy the balance of forces close to the borders of the Russian Federation and her allies [...] the attention of international politics in the long-term perspective will be concentrated on the acquisition of energy resources.
This document signals a continuation of Mr. Putin’s energy grand plan: it was produced by a committee headed by Mr. Putin, and was signed of by Mr. Medvedev himself. An earlier Kremlin document sets a vital national objective to develop Arctic energy reserves by 2020, with plans to establish army bases along the Arctic frontier to ‘guarantee military security in different military-political situations’.
Apr 28, 2009, 5:23 pm | by Leo Horn | Posted in Economics and development, Global system, North America | Comments Off
This is the provocative question that Martin Wolf poses in a recent commentary in the FT, reflecting on an essay by former IMF Chief Economist, Simon Johnson, which compares the crisis in the US to past financial crises in emerging economies.
In ‘The Quiet Coup’ Simon Johnson points to several striking similarities: profligate spending by the elites, massive pile-up of national debt, and elite capture of government demonstrated in the bending of regulatory systems in their favour. Pat Oliphant’s cartoon in yesterday’s International Herald Tribune is a stabbing illustration of this view:
Here is his description of the typical emerging economy financial crisis:
Typically, these countries [seeking IMF assistance] are in a desperate economic situation for one simple reason–the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit–and, most of the time, genteel–oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon–correctly, in most cases–that their political connections will allow them to push onto the government any substantial problems that arise.
Substitute Wall Street for the Russian oligarchy and you get a compelling narrative of the unravelling of the financial crisis in the US.
Johnson points out that between 1973 and 1985 the financial sector never earned more than 16% of domestic corporate profits but by the 2000s this figure reached a staggering 41%. Refreshingly, Simon Johnson doesn’t indulge in the invective ridden mud-slinging between left and right or in the kind of fat-cat bashing that has become a national sport in America. Instead he looks at structural and cultural factors which led to the ascendance of a financial elite so powerful that it came to dictate policy – not directly through corruption or coercion, but indirectly by spreading a belief in the wisdom and foresight of unfettered markets. Particularly interesting is Simon Johnson’s insights in to the way Wall Street culture spread to Capitol Hill – with an effective revolving door operating between the two spheres. This was lent further intellectual legitimacy by a raft of academics personally vested in the promotion of that culture. The assumption took root that whatever was good for Wall Street was good for the American economy, by definition. As Simon Johnson explains:
From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:
• insistence on free movement of capital across borders;
• the repeal of Depression-era regulations separating commercial and investment banking;
• a congressional ban on the regulation of credit-default swaps;
• major increases in the amount of leverage allowed to investment banks;
• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
• an international agreement to allow banks to measure their own riskiness;
• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.
The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.
Although I believe he rather underplays the significance of housing policies in setting the stage for the mortgage crisis, Simon Johnson makes a very valid and important point about the need to apply some anti-trust medecine (surgery?) to the financial sector. His answer to the current mess is very much in sticking with America’s trust-busting instincts: break up the financial oligarchy:
Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. [...] Ideally, big banks should be sold in medium-sized pieces, divided regionally or by type of business. [...] this may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole.
This is exactly the kind of medicine that was prescribed to – or rather forced upon – emerging economies by the IMF with the US’s full backing. Paraphrasing Joseph Schumpeter, Johnson comments that ‘everyone has elites; the important thing is to change them from time to time.’ Not surprisingly, he is pessimistic about the US’s economic prospects.
Mar 18, 2009, 4:36 pm | by Leo Horn | Posted in East Asia and Pacific, Economics and development, Global system | 1 Comment
The latest World Bank quarterly update on China’s economy made headlines today, as it revised downward by one full percentage point (to 6.5%) its estimated economic growth rate for China in 2009. This downward adjustment in China’s estimated GDP growth has prompted much concerned commentary, which is understandable given how entwined China’s and the world’s economic prospects have become. I’ll briefly consider here the significance of 6.5%, and the prospects, risks and trade-offs that are wrapped up within that figure.
China would of course still be performing remarkably well in relative terms, with the new projected growth rate hovering at around 8 percentage points above the projected industrialized world average for 2009. The World Bank quarterly update reassures us that “China’s fundamentals are strong”: though dampened, economic prospects remain strong, given that: (i) the financial system has remained largely insulated from the effects of global financial turmoil, and; (ii) vestiges of central planning and a very strong fiscal position mean the government has an unparalleled ability to marshal resources to stimulate growth in the short term.
The numbers are encouraging in this regard. The government moved fast announcing a RMB 4 trillion (GBP 400 billion) fiscal stimulus package last November. In the first two months of 2009 urban fixed investment – which is the most important driver for economic growth in China accounting for 42% of GDP – surged to RMB 1 trillion (GBP 100 billion), a 26.1% increase from a year earlier. China’s industrial production grew 11% in February (on a year earlier), and new bank landing in February was four times the same month last year (at RMB 1.07 trillion). These are clear signs that the fiscal stimulus is kicking in, and in a big way.
Yet several commentators are forecasting doom on the basis that 6.5% is dangerously short of the 8% target growth rate, which is widely taken to be the minimum rate of growth needed to prevent spiraling unemployment and ensuing social unrest. Quite apart from a lack of evidence of such a social threshold at 8%, such dire outcomes are not inevitable. The silver lining in the current economic cloud is that China faces an unprecedented opportunity in this crisis to rebalance its economy, and by extension contribute to the rebalancing of the world economy. To make 6.5% socially sustainable the Chinese government will have to steer its economy away from the capital-intensive, export-led growth path of the past few years, towards labour-intensive growth powered by domestic demand.
Instead however, the government response seems to be reinforcing the structural imbalances that are at the source of China’s economic vulnerabilities – and to a certain extent of global economic imbalances – today.
The fiscal stimulus and financial easing measures are sizeable and speedily administered, but far too much of the money is pouring in to sectors already plagued by overcapacity. Around half of the stimulus package will be spent on infrastructure investment, compared to just 1% on social spending and 9% on the environment. This kind of short term boost is unlikely to do much to increase consumer spending in the medium term. A similar story can be told of the massive injections of credit. As Michael Pettis explains in a recent article in appearing in Newsweek: “because of the structure of the Chinese financial system, all this new lending is channeled into the manufacturing and infrastructure sectors”.
In normal times China’s huge overcapacity – domestic production outstrips consumption by about 10% of GDP – is simply exported to the world. It is worrying therefore that even as industrial production and bank lending soared, external trade slumped: exports tumbled 25.7% in February (from a year earlier), and imports fell 24.1%. With slumping global demand, where will all this excess capacity go?
The World Bank update rightly recommends that:
Looking ahead, less focus on targeting short term GDP growth would allow for more emphasis on the rebalancing and reform agenda [...] There are useful synergies between China’s short and medium term policy objectives. The subdued prospects for the global economy - and thus for exports – increase the importance of boosting domestic demand and domestic consumption, which is also key for rebalancing.
Dec 12, 2008, 11:41 am | by Leo Horn | Posted in East Asia and Pacific, Economics and development | 3 Comments
This is a response to some thoughtful reactions to my earlier post on democracy in Thailand, and to arguments made in last week’s Economist about the situation there.
My arguments are no vindication of the PAD, whose reckless actions I find condemnable and ultimately counter-productive and whose proposals (including the 70% vote) are misguided. My intention was to provide some background on the current political situation, background that I found lacking in my main news sources. And to challenge the simplistic notion that what we are seeing is a rejection of democracy by rich urban elites who feel threatened by a democratic government that cares for and represents the poor. There are many valid reasons why ordinary citizens from all walks of life united against an elected government: their primary motive was not to defeat democracy, rather to fight its abuses.
The portrayal of the current political crisis as a battle of rich urban elites versus a majority of poor rural folk united behind the popular Mr. Thaksin is inaccurate and unhelpful. Poor farmers in the north like Mr. Thaksin. Poor city-folk in Bangkok don’t. Poor Muslims in the south hate him. While Mr. Thaksin’s party gained the most seats in parliament, more people voted against him than voted for him. He doesn’t have the kind of broad-based popular mandate that many commentators credit him with.
Conversely the PAD are not a homogenous group. As last week’s Economist put it: “the PAD is a motley bunch, united only in its fanatical hatred of Mr. Thaksin”. It is Mr. Thaksin’s abuses of power that they are outraged about, not his policies to help the poor. People did not take to the streets in protest when Mr. Thaksin first announced and implemented his “populist” policies. Neither were there street protests when his crack-down on drugs led to extrajudicial killings of hundreds (thousands?) of supposed drug traffickers many in dubious circumstances. Neither did they take to the streets when he botched up the relative peace in the south. Thais have a high tolerance for politicians’ professional shortcomings.
But what many Thais could not stomach was Mr. Thaksin’s reckless bending of the system to suit his own personal needs. The straw that broke the camel’s back was when Thaksin used some cunning structures to avoid paying tax on the sale of Shin Corp to Temasek. He also had changed a law to aid in this sale. That was what brought people into the streets in protest, and led to the formation of the PAD.
The PAD is a political movement with a focused agenda – i.e. to stop Mr. Thaksin’s continued meddling in the nation’s politics. As a movement it has changed a lot over the past two years: alarmingly, its tactics and rhetoric signal a growing disillusionment with democracy. Their proposal of a 70% appointed legislative body – which would clearly constitute a dilution of democracy – is particularly ill-considered.
The Economist points to the Monarchy’s meddling in Thai politics as a cause for the current mess. Well, if that is objectionable, why is Thaksin’s meddling any better? The PAD denounces precisely that. And even if I disagree with them on many ideas and tactics, I agree with them on this issue. While the Crown’s interventions are postulated by political commentators deciphering hearsay, hints, and signals, there is ample and strong evidence of Thaksin’s meddling in the public domain. Frankly, would Mr. Somchai Wongsawat have been given the premiership had he not been a trusted ally (brother-in-law) of Thaksin? Mr. Somchai himself said upon being forced out that he was relieved as, in his words: “I was not working for myself” (quoted in the IHT, December 5th, 2008). By his own admission, Thaksin has vowed to stay in politics, despite being barred from political participation for another four years by the country’s highest court. And he is not shy about meddling. The phone-in appearances at mass rallies in Bangkok and the bribing of deserting MPs (at the tune of THB 55 million per head) to join his new party are some examples of his brazenness. The PAD rightly points out that Mr. Thaksin’s continuous meddling in politics and state affairs is unlawful and unconstitutional.
The PAD’s blockading of the airport was wrong, and pointless. The government didn’t capitulate: in the end it was a court decision that ousted the PM and his government. That siege has tainted Thailand’s image, further weakened its already fragile economy at peak tourist season, and set back its dreams of becoming a hub in ASEAN. The country will take years to recover from the hole it has dug itself into, and I hope those responsible will be brought to justice.
But while I blame the PAD for taking the airports for ransom, I find it harder to blame the police or the army for not moving in and removing the protesters by force. The Economist points to the reluctance of the army and police to intervene as evidence of Royal backing for the protestors. But is it really a bad thing that the armed forces were determined not to use violence to disperse crowds – both yellows (PAD) and reds (pro-Thaksin) alike? Many of those occupying the Government House and two airports were women and youngsters, and an intervention will have been very bloody.
Perhaps I over-egged the pudding somewhat in commenting that we are witnessing the teething pains of a maturing democracy. These are testing times for democracy in Thailand. But the real threat to democracy is not in the obdurate challenges to an elected government (which is merely a tyrant’s façade). Mr. T more than anyone else is to blame for the current sorry state of democracy in Thailand.
Dec 2, 2008, 4:04 pm | by Leo Horn | Posted in Conflict and security, East Asia and Pacific, Economics and development | 3 Comments
With my wedding in Bangkok fast approaching, I have been watching the events unfolding there closely and with trepidation. I am dismayed at the blinkered and naïve reporting and commentary in the mainstream Western press about the situation in Thailand (I refer in particular to The FT, The Economist, The Washington Post etc). The political impasse is described in clichés, as a battle of virtuous rural masses versus power-possessive urban elites, of progressives and democrats versus royalists, militarists and other hideous elements of the ‘ancien regime’. I’ve no doubt that the current events signify a failure of democracy in Thailand. It is indeed that very failure that the protesters are decrying, with resort to ever more desperate tactics.
A recent blog by the FT’s Gideon Rachman – whose pieces I frequently enjoy reading – typifies the mainstream view, which is shallow and simplistic both in its account of the situation and in its interpretation of democracy (see article here). According to Mr. Rachman (who by the way likes clichés):
“The urban middle-classes are rising up and demanding that democracy be rescinded.
Do not be fooled by the fact that the group occupying the airport call themselves the “People’s Alliance for Democracy“. Their intent is clearly anti-democratic. They have just brought down an elected government.”
In this vein, the anti-government movement (known as the People’s Alliance for Democracy, or PAD) has been widely condemned on the basis that it unlawfully rejects a government that was voted in through the ballot and thus has prima facie democratic legitimacy. It seems to be a straightforward case of foul play on the part of the urban elites, who directly challenge the people’s choice. Or is it?
The premise that elections in themselves constitute democracy is deeply flawed for a start. Many countries have the vote, yet not many are truly democratic. And ballots have on occasion delivered despots. A narrow procedural interpretation of democracy misses out on what the real substance of democracy is. The essence of democracy resides in the institutions that uphold and protect human rights and the principles of freedom, fairness and order. As my brother Joe puts it, voting makes you only 20% democratic, the other four prerequisites for democracy being: a credible opposition; checks and balances; a free press; and the rule of law free from intimidation. When democracy is abused, it is often these four aspects that are attacked, not the people’s right to vote (see his article ‘What Democracy is Not’).
Thailand’s educated middle classes have good reason to protest. The problem with the current government is that it remains firmly in the grip of the brazenly corrupt and patently undemocratic – indeed tyrannical – Mr. Thaksin. Mr. Thaksin’s net worth tripled during his years in office. He used his fortune – which was ill-gotten from the outset – to concentrate political power in his hands until he became a distorting, destructive force unto Thailand’s democracy. Even from exile he continues to hold the strings, directing money to allies and supporters in Thailand, and putting in place proxy Prime Ministers. Earlier in the year, when the army, and later the police, refused to act on his orders to disperse the PAD rallies, he allegedly brought in paid thugs by the lorry-load to do the ugly work instead.
Democracy calls for checks and balances to hold power to account, and these are needed most where power is most concentrated. Yet Mr. Thaksin nakedly abused his tremendous power by annihilating all checks and balances. Journalists who dared criticise Mr. Thaksin were persecuted. By withdrawing advertising money – which he controlled – or threatening lawsuits, newspapers were effectively coerced into taking approved editorial lines. And when the law inconvenienced him, he simply changed it (doing so was easy as parliament was filled with his cronies and sold-out MPs). He supported a law that protected his monopoly in the telecoms sector by baring foreign ownership, but when a good time came to sell, he changed the law to enable the deal. He further tinkered with the law to avoid paying taxes on the $1.9 bn he made from the sale of his telecoms empire to Singapore’s Temasek. This was the final straw, in the eyes of PAD.
Democracies are not perfect political systems, as Churchill once famously observed. Civil disobedience has often been a progressive force for democratic evolution. It paved the way for Indian independence and democracy, and brought the European empires to their knees. Even in the most mature of democracies it has played a role. It forced through the Civil Rights Bill in America and set in motion political changes that opened the way for America’s election of its first black president. As displeasing and alarming as the PAD protests are, they are holding power to account.
To his credit, Mr. Thaksin does deserve some praise for creating a political platform for the poor farmers of Thailand’s populous North-Eastern Provinces, something his predecessors had failed to do. But most of his rural policies (e.g. cash handouts, easy credit, debt relief) were populist, short-sighted and unsustainable. In a relatively poor and young democracy as Thailand, vote-buying is often par-for-the-course. But where there used to be a near competitive market for votes, Mr. Thaksin created a monopoly with his vastly superior spending power. However, it is in the market for ideas that the PAD should do more to compete with Mr. Thaksin for the ‘hearts and minds’ of these hitherto voiceless farmers, by proposing policies that convincingly address their needs and concerns.
While disapproving of the PAD’s tactics (not least because of the disruption to my wedding!) I can nevertheless understand their impatience. When the highest courts found Mr. Thaksin guilty on corruption charges on the basis of strong evidence, he fled, but he didn’t give up. The proxy government led by his brother-in-law Prime Minister Somchai Wongsawat has been attempting to amend the constitution to protect Mr. Thaksin from facing charges. The PAD’s request to whoever next gets appointed as caretaker PM is simple and clear: ‘drop Mr. Thaksin’s self-serving constitutional amendments, or else face us in the streets again’.
In and out of office, Mr. Thaksin has systematically emasculated the foundations of democracy in Thailand, by compromising all its key institutions – the press, the courts, parliament, law enforcement etc. Against this background the rebellion of the educated Thai middle classes may be seen as a stand for democracy: rather than a backsliding on the democratic scales, I’d like to surmise that perhaps we are witnessing the teething pains of a slowly maturing democracy?
Oct 16, 2008, 5:26 pm | by Leo Horn | Posted in Climate and resource scarcity, Global system | Comments Off
With a global recession looming, international efforts to curb greenhouse gas emissions may be in jeopardy, as concerns are voiced in the US, Canada and Europe about the wisdom of adopting measures that would impose an additional cost burden on already fragile economies. Such thinking is misguided, and it is dangerous. A recession may in fact ease the introduction of carbon emissions trading schemes.
At the recent EU summit in Brussels there was widespread reluctance to meet pledges all EU governments made last year to cut CO2 emissions by 20% by 2020. Eight Eastern European countries – including Poland, Hungary, Romania, Bulgaria, Slovakia, Latvia, Lithuania and Estonia — released a joint statement urging the EU to balance the wish for cleaner air against “the need for sustainable economic growth” at a time of “serious economic and financial uncertainties.” Italy threw its weight behind these countries, threatening to veto the proposed EU plans.
Likewise in the US, top power industry executives seized the opportunity to lobby for delaying carbon emissions legislation, at the recent New York Utility Conference. More dramatically in Canada, the Liberals were dealt an electoral defeat on Wednesday largely on the basis of their strong advocacy in favour of a carbon tax (see story here).
All this backtracking is akin to forfeiting the forest for the tree. Financial crises are short-term phenomena, global warming on the other hand is with us for the long haul, and the window of opportunity for addressing it is fast narrowing. The prospect of economic recession does not in any way reduce the magnitude or the urgency of the climate problem, nor does it provide any compelling reason for delaying action. Or as EU President Barroso put it:
“Saving the planet is not an after-dinner drink, a digestif that you take or leave. Climate change does not disappear because of the financial crisis.
Moreover, as David Wheeler of the Center for Global Development argues, smart carbon regulation will be easiest, not hardest, to introduce during a recession, since a slowing economy emits less, and smart cap-and-trade regulation can “lock in” this head start on emissions reduction at almost no cost during the recession. His proposal for the US is to:
• Immediately pass a cap-and-trade bill that sets the initial total limit at the pre-recession emissions level, and schedule a progressive decline in the overall limit that will achieve the needed long-run goal.
• Establish an annual auction for 100% of the emissions permits.
• Set aside a healthy share of the auction proceeds to provide a compensating rebate for every American
In this way the consumer is shielded from cost increases, and the power provider incentivised to develop less carbon-intensive energy options for the future.
It is amply clear that big emitting developing countries such as China and India will not make significant commitments to curb their greenhouse gas emissions unless the US and EU lead by example. With only about a year to go before the new global deal to replace the Kyoto Protocol is due to be reached in Copenhagen conference, the US and EU have no room to falter. More than ever, political courage and leadership is needed to ensure global efforts to address climate change are not jeopardized.
Oct 12, 2008, 5:02 pm | by Leo Horn | Posted in Africa, Conflict and security, Economics and development, Global system | Comments Off
So far, many observers and experts point out, developing countries seem to be holding out quite well amidst the global financial turmoil. In reality the current global financial crisis poses multiple and profound risks to development, which I will briefly outline.
Finance ministers from 24 developing countries (the Group of 24, or ‘G-24’) meeting last Friday at the IMF, noted that:
“many emerging markets and developing economies are not immune to the spillovers of the ongoing global financial crisis”
and that:
“preventing macroeconomic volatility from financial spillovers and sustaining continuous growth were key priorities for developing countries”
See the G-24 public communiqué here.
There are several ways in which the global financial crisis can impact on development. Impacts will be highly country-specific. Key factors include:
- Cuts in international development aid – Jakaya Kikwete, President of Tanzania and Chairman of the African Union, expressed his ‘deep concern’ about the financial crisis dampening rich countries’ commitment to development aid (see news report here). And for good reason: development aid tends to be strongly pro-cyclical, in other words a nation’s generosity to other nations tends to be proportional to its own good fortunes.
- Reduced access to international financial capital markets – The impact will likely be bigger for middle-income countries and some emerging markets (excluding China, given it is a super high saver). Much of sub-Saharan Africa had limited access to international private capital to start with, and will therefore not be strongly affected by this.
- Possible reversals in capital inflows to developing countries – due to the global credit crunch and as investors’ appetite for risk abates.
- The spread of stock market turbulence to emerging markets – in one day last week, markets in Brazil, Mexico, South Africa and Turkey plunged 10%.
- Downturn in global demand for developing country exports.
- Postponement of large investment projects. There is emerging evidence that large investment plans (e.g. in India’s power sector) are being delayed or cancelled as turbulence in capital markets undermine prospects for raising funds.
- Remittances will be impacted by the economic downturn, as well as inflation and a weak dollar. See a recent news report on how remittances to the Caribbean are being hit.
It is of course unrealistic to expect that developing countries can be wholly insulated from the global financial crisis. However, the one very powerful instrument that rich countries do have at their disposal to help keep development on track is aid. A cutback in aid at this point can have severe impacts, as high food and oil prices justify increases in aid. Aid will be needed for countries with reduced sources of revenue and finance, as social expenditures are typically the first to get cut when fiscal resources tighten. Emergency support should be targeted to countries that are fiscally highly vulnerable (the IMF has identified 22 such countries).
Sep 30, 2008, 7:36 am | by Leo Horn | Posted in East Asia and Pacific, Economics and development | Comments Off
As a long-time resident of Beijing, concern about food and product-safety is almost a chronic neurosis. Over the past year alone, health scares have ranged from carcinogenic textiles and toothpastes, to the sale of rancid pork from dug up pig carcasses, to hormone and pesticide-laden fruits and veggies and most recently, melamine-laced milk.
This latest episode of the tainted milk has caused particular outrage because of the life-threatening impact on a large number of toddlers (53,000 affected on the latest count). What appeared at first to be a company-specific incident quickly spread to engulf the entire industry, implicating an ever wider web of co-conspirators including the very people whose job it was to police the corporate malefactors.
The story that is unfolding tells of unbridled greed, political wrangling and high-level cover-up. It has thrown up searching questions about China’s own brand of über-capitalism, characterised by weak regulatory oversight, compromised public institutions and entrenched collusion between businesses, the media and government officials in the brazen pursuit of profit.
The extent and sophistication of media involvement in high-profile campaigns of criminal misinformation to protect and promote tainted brands is now coming to light. David Bandurski, of the China Media Project, has covered this story in detail. Even as questions were beginning to surface about the safety of milk powder from Sanlu Dairy, the company’s supposed contributions to the lives of ordinary Chinese were being trumpeted loudly across the media:
“In early August, as the stage was set for the Beijing Olympic Games and news about poisonous milk powder was being suppressed by corporations and officials, scores of print media and major Web portals across China ran a story about how the dairy brand Sanlu, now at the center of the dairy industry scandal, had been honored in an award campaign called “30 Years: Brands that Have Changed the Lives of Chinese.””
It later emerged that the these stories, ostensibly written by staff reporters in the leading Chinese newspapers, were in fact penned and planted by the head of the PR department of Sanlu Dairy.
It is typically at the local level that collusion between the media and government is at its worst. As Will Moss, a Beijing-based public relations expert explains, local governments have been keen to safeguard this cosy relationship with the local media:
“In recent years, Chinese journalists have reported a number of tactics used by provincial and local officials to curb cross-regional reporting, including you-scratch-my-back-I-scratch-yours pacts in which local party leaders agree to discourage investigative reporting by media under their immediate control.”
The complicity of food quality watchdogs is also apparent. A glimpse at the website of the China Food Quality News is revealing about how profit-oriented this government-designated food quality mouthpiece has become: the homepage is studded with corporate logos, including of several ‘tainted’ brands such as Sanlu and Yili. Thus the very institutions that are meant to quality-control the dairy companies are being brought out by them, and used instead as instruments of corporate branding.
Will Moss eloquently sums up the challenge facing China in the wake of this scandal (see: Sanlu melamine milk powder crisis becomes a national issue):
“the larger challenge for China is not just to prove that it can clean up the dairy industry, but to prove that its commercial environment can evolve into something other than a cozy swamp where insiders get rich and outsiders get kidney stones.”
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