economics

June 27, 2010

The reality of the ‘China Fantasy’

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Is the “China Fantasy” starting to get deflated by reality? Three years ago, Jim Mann’s provocative book of that title identified the “China Fantasy” as the dogmatic belief of many Western political and commercial elites that China’s economic liberalization and growth would lead inevitably to democracy at home and responsible conduct abroad. The operative word was “inevitably” — the assumption being that China’s remarkable economic success would automatically produce a middle class that demanded greater political rights, and that China’s growing integration with the global economy would produce benign and responsible international behavior. Based on this assumption, the corollary policy prescription for the West was to pursue a policy of engagement and encouragement towards China’s rise.

This paradigm seems to be shifting. I recently participated in a conference in Europe on China, attended by a cross-section of policy, academic, and commercial leaders from Europe, the United States, and China, and came away struck by palpable attitude changes in at least three dimensions. Taken together, these are signposts that the previous conventional wisdom on China is coming under question:

* European attitudes. Many of the Europeans present voiced a pronounced skepticism towards China, both for the Chinese Communist Party’s ongoing refusal to liberalize the political system as well as for what they perceive as China’s irresponsible international posture. Various reasons were suggested for this change in European attitudes from even two years ago, but the most salient one seems to be European ire over China’s obstreperous conduct at last year’s Copenhagen climate change conference. If Europe has a litmus test for international good citizenship, it is climate change. But China’s behavior on that front seems to be prompting increased European frustration with China on other issues as well, including human rights, Iran’s nuclear program, and China’s military build-up.
* Business attitudes. American and European business leaders with extensive China experience also expressed significant disillusionment. As one noted, whereas 5 or 10 years ago the business community was virtually unanimous in its enthusiasm for the China market and in support of closer political ties between China and the West, now the consensus is fractured. Causes for this disenchantment include widespread corruption, intellectual property rights violations, the protectionism of the new “indigenous innovation” policy, and the general restraints on private sector flourishing imposed by China’s state capitalism model. To be sure, many multinational companies remain profitably invested in what is still the world’s largest emerging market, and many more are eager to get in. But Google’s recent exit from China may not be the only one, and some multinationals looking at China are weighing a new set of cost-benefit analyses.
* Chinese attitudes. If assessments in the West are changing, so are elite Chinese attitudes. Most of the Chinese participants were from universities or think-tanks (i.e. not People’s Liberation Army hard-liners), but even they displayed a nationalistic confidence and rather defiant posture towards the West, especially the United States. At its most benign, this is an understandable attitude of a proud rising power. But in too many ways it is not benign, especially considering that the Chinese participants took worrisome stances on issues such as human rights, Taiwan, Tibet, mercantilist nationalism, Iran’s nuclear program, shielding North Korea, and especially the security “threat” purportedly posed by the United States.

The erosion of the “China fantasy” does not mark from a precise date, but a watershed moment ironically may have been the 2008 Beijing Olympics. Anticipated as China’s grand arrival on the global stage, the Olympics were by many measures a major success — and not just for people named “Michael Phelps.” Yet surrounding the Olympics were constant reminders of Beijing’s authoritarianism, whether the petulant rhetorical attacks on Tibet supporters, the draconian efforts at pollution reduction, the omnipresent surveillance, and the tight control on any voices of dissent. Put it this way — as obnoxious are those %&*!@ vuvuzelas at the World Cup, they are also the sound of a free society. You can bet they would have been banned in Beijing.

The end of the “China fantasy” does not necessarily prescribe a wholesale shift in the free world’s posture towards China — just a more realistic one. For the United States, this has several policy implications:

* Remember that “engagement” doesn’t just apply to the government to government relationship with Beijing, but also to the people of China. A forward-looking China policy must include increased support for the seeds of civil society in China — especially young entrepreneurs, religious leaders, human rights activists, students and scholars. Much more than the CCP, they are the best hope for the future of China.
* Keep cultivating our alliance partners in Asia, and also build ties with emerging powers. Nations as diverse as Australia, Japan, Vietnam, Indonesia, South Korea, Singapore, and India have two things in common: they are wary of China’s aspirations to regional hegemony, and they desire closer ties with the United States.
* Strengthen our defense capabilities to deter China’s emergence as a viable peer competitor. The problem with China’s military build-up is not just that it is non-transparent, but that much of it seems designed specifically to counter American force projection and capabilities. For the United States, this means everything from improved cyber-security, command and control system protection, and anti-ship missile defense to, yes, a sufficient F-22 force to preserve air superiority.
* Get our debt under control. Not that the United States needs yet another reason to tackle its mind-blowing $13 trillion debt, but the fact that China owns close to $1 trillion of it is a further concern. The debate will continue over whether this debt financing imbalance actually leaves China or the United States more vulnerable in the aggregate (see this Dan Drezner article for a thoughtful analysis), but at a minimum it is a strategic constraint on the United States.

None of this precludes continued bilateral cooperation with China on important issues, or continued support for sound investment in such a vast market. The “China fantasy” was based more on hope than experience, but the benefit of recent experiences with state capitalism is the chance to replace hope with prudence.

China’s stimulus spending created infrastructure projects that may not be needed

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BEIJING — In late 2008, with the financial crisis rippling through the global economy, China’s leaders embarked on a two-year, $586 billion spending program to try to stave off a recession and keep the Chinese economy growing.

Unlike in the United States — where President Obama’s large stimulus plan became the subject of protracted congressional wrangling and was shaped to include tax cuts and aid to states — Chinese leaders followed a simple mandate: Spend and build.

Forget the tax cuts; in China, it was infrastructure, infrastructure and more infrastructure.

China was already awash in big-ticket construction projects. The stimulus allowed China to speed up some projects, begin digging on others and extend the building boom to less-developed areas in the country’s west and north. The result, 18 months after the stimulus was introduced, is an astonishing frenzy of building — highways, subways, airports, bridges, high-speed rail lines and even new cities constructed, literally, in the middle of nowhere.

China is building tens of thousands of miles of expressways at a pace unseen since the U.S. interstate boom in the 1950s, and it is on track to pass the United States in total highways in the next decade. Among other infrastructure projects — which now amount to 15 percent of China’s gross domestic product — are nearly 100 new airports, some serving isolated cities few outsiders have heard of, and dozens of subways.

“They basically got started about three months earlier than we did, and it was bigger,” said Nicholas R. Lardy, an expert on the Chinese economy with the Peterson Institute for International Economics.

Now a year and a half into the spending spree, and with the stimulus set to end in just six months, many economists and others here are asking pointed questions: Does China really need all this infrastructure? And what’s going to happen when the bills come due?

“In China, we have an old saying: ‘If it’s medicine, it will have some poison inside,’ ” said Guo Tianyong, director of research for the Central University of Finance and Economics. “So the stimulus must have some bad effects.”

“You see little counties building airports — how many people will fly there?” Guo said. “Small cities — why do they need a subway? Maybe there’s no market for all this infrastructure.”
Several economists said it was difficult to determine the worth of all the spending because there is no official, centralized list of projects — making it difficult to untangle whether projects are funded from stimulus loans, from local governments floating bonds or from some combination of the two.

“It’s a black box financed by black laws,” said Xu Xiaonian, an economics professor with the China Europe International Business School. “There’s not enough information to make any sensible judgment.”

But enough is known for economists to point to a crucial difference between the Chinese and American stimulus plans.

N. Korea lifts restrictions on private markets as last resort in food crisis

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Washington Post Foreign Service
Friday, June 18, 2010; 4:27 PM

SEOUL — Bowing to reality, the North Korean government has lifted all restrictions on private markets — a last-resort option for a leadership desperate to prevent its people from starving.
In recent weeks, according to North Korea observers and defector groups with sources in the country, Kim Jong Il’s government admitted its inability to solve the current food shortage and encouraged its people to rely on private markets for the purchase of goods. Though the policy reversal will not alter daily patterns — North Koreans have depended on such markets for more than 15 years — the latest order from Pyongyang abandons a key pillar of a central, planned economy.

With November’s currency revaluation, Kim wiped out his citizens’ personal savings and struck a blow against the private food distribution system sustaining his country. The latest policy switch, though, stands as an acknowledgment that the currency move was a failure and that only capitalist-style trading can prevent widespread famine.

“The North Korean government has tried all possible ways [for a planned economy] and failed, and it now has to resort to the last option,” said Koh Yu-hwan, professor of North Korean studies at Dongguk University in Seoul. “There’s been lots of back and forth in what the government has been willing to tolerate, and I cannot rule out the possibility of them trying to bring back restrictions on the markets. But it is hard for the government to reverse it now.”

Because North Korea operates in secrecy and isolation, outside observers rely on informants and accounts from defectors. In this case, experts agree that the food shortage is dire. Several analysts who monitor and travel to North Korea said that in recent weeks, Pyongyang has abandoned almost all its rules about who can spend money and when. That would seem to indicate that Kim — who once equated free-market trading with “egotism” and a collapse of social order — now wants to rehabilitate the markets damaged in November.
As of May 26, the government no longer forces markets to close at 6 or 7 p.m., has dropped the rule restricting customers to women older than 40 and has lifted a ban on certain goods being sold. An official in the city of Pyungsung informed the Good Friends humanitarian group that the living standard had “drastically decreased since the currency exchange, and the government cannot provide distribution so they have to bring the market back up.”

The Good Friends newsletter quoted the official as saying: “There are increasing deaths from starvation so opening [the] market is a reasonable resolution. Death due to starvation has gone out of control.”

In the mid-1990s, amid a total collapse of the central planned economy, somewhere between 3 and 5 percent of the population — perhaps 1 million people — died of starvation. Meanwhile, North Koreans increasingly turned to small markets for trading and buying supplies.

In part because of that, the hermit nation now maintains a stronger line of defense against starvation — one that did not exist during the famine.

Compared with the peak of the food crisis, in the mid and late ’90s, “the actual amount of food — less is available now,” said Kim Heung-gwang, a North Korean defector and president of a group called North Korea Intellectuals Solidarity. “But back then, the food circulation industry wasn’t as built up. Even though the absolute amount of food is less now than it was 15 years ago, I think the starvation problem will be less significant.”

In 1994, Kim said, people “didn’t know how to survive because they were looking for rations.”

North Korea analysts say that the Nov. 30, 2009, currency reform caused nearly as much trauma as the famine 15 years earlier. The government turned 100 won into 1, and North Koreans responded with minor protests.

In recent months, North Korea’s chronic food problems have probably worsened. When South Korea’s government concluded in late May that the North was responsible for sinking one of the South’s warships, killing 46 people, international outrage caused food aid to slow. The South announced that it would cut all trade with its neighbor, though the North has denied any responsibility. China remains North Korea’s primary benefactor, but little is known about how much food China supplies. According to analysts, Pyongyang’s latest reaction could suggest it is struggling to secure the necessary aid from China.

Staff writer Blaine Harden and special correspondent Yoonjung Seo contributed to this report.

Vietnam assembly derails high-speed rail link By Matt Steinglass in Hanoi

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Published: June 21 2010 22:54 | Last updated: June 21 2010 22:54

Vietnam’s usually docile national assembly has mounted a rare display of independence by voting down a controversial $56bn high-speed rail project linking the capital, Hanoi, with Ho Chi Minh City in the country’s south.

Nguyen Sinh Hung, the deputy prime minister, and Ho Nghia Dung, the transportation minister, had staked their prestige on the project, which was scheduled for completion with Japanese aid by 2035

The plan was derailed when only 209 of the 493 deputies voted for the project in a ballot that required majority support. Vietnamese law mandates that all projects with budgets of more than $1.9bn (€1.5bn, £1.3bn) get assembly approval.

Nguyen Minh Thuyet, one of the deputies most critical of the project, said the vote was a watershed for the legislature. “It shows the assembly has become more and more independent, and more serious in its work.”

But analysts cautioned that the rejection was not necessarily a sign of a permanent strengthening of democratic governance or separation of powers in the Communist party-ruled country.

“Certain ministers will lose prestige, but not the government,” said Nguyen Tran Bat, chairman of the Investconsult Group in Hanoi. “Ministers will need to prepare projects more carefully before submitting them to the assembly.”

Opponents were critical of the project’s potential to raise the national debt, as well as the sketchy projections for usage. The proposed 1,600km trajectory was also much longer than the 800km limit at which transit analysts say high-speed rail was competitive with air travel.

In the months leading up to the rejection, Japanese officials recommended launching the rail line with shorter links.

The World Bank and Asian Development Bank had also been reluctant to fund the project.

Le Dang Doanh, a senior government economist who opposed the rail link, said the project had not been cancelled and could be re-submitted to the assembly at a later date.

The assembly is due to meet again this year. The trains were to have been built by one of two Japanese consortiums, either Sumitomo Corp and Mitsubishi Heavy Industries, or Itochu Corp and Kawasaki Heavy Industries.

Mr Thuyet said the rejection would have the most serious consequences for Mr Dung, the transportation minister. After the plan’s failure on Saturday, Mr Dung was criticised for saying he was “not sad” to see it voted down.

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China’s bear hug has benefits for wary Taiwan By David Pilling

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Published: June 24 2010 00:10 | Last updated: June 24 2010 00:10

Along with their electricity bill from the state-owned power company, Taiwanese residents recently received a pamphlet extolling the virtues of a trade agreement with mainland China. The Economic Co-operation Framework Agreement, or Ecfa, as it is known in the elegant phraseology of trade negotiators, is the centrepiece of the Taiwanese government’s drive to repair relations with Beijing. If things go to plan, an agreement could be inked by the end of the month.

Ma Ying-jeou was elected president in May 2008 with a mandate to mend fences with Beijing. In truth, there was not really much of a fence left. His predecessor, Chen Shui-bian, had infuriated Beijing by pursuing what it regarded as a “splittest” agenda. Mr Chen, the first non-Kuomintang leader of Taiwan in 50 years, had sought to enact a new constitution that would strengthen the island’s independence. He had “Taiwan” – rather than the Republic of China – embossed in passports and pursued a United Nations seat for an island that Beijing still regards as a breakaway province.

Mr Chen’s presidency ended in ignominy. He is currently serving a 20-year sentence for corruption. Mr Ma, the beneficiary of that fall from grace, has moved swiftly to unpick his predecessor’s separatist handiwork. Taiwan has cooled the independence rhetoric and established direct flights and shipping routes across the 110-mile-wide Taiwan Strait. The island’s 23m people – 4 per cent of whom live and work on the mainland – can now fly direct to 23 Chinese cities. Shanghai is an hour and 20 minutes away instead of the day-long slog, via Hong Kong, that it used to be.

The kiss-and-make-up atmosphere was symbolised by China’s delivery, six months into Mr Ma’s premiership, of two giant pandas to Taiwan. Their names, Tuan Tuan and Yuan Yuan, cunningly combine to spell the word “reunion”, angering an opposition already complaining that the black-and-white ambassadors did not come accompanied by the requisite export papers. (Beijing naturally regarded their transfer as a purely domestic affair.)

Now, Mr Ma, who was born in Hong Kong of mainland parents, wants to go one step further by concluding a trade agreement. The not-unreasonable rationale is that Taiwan’s political status is making it increasingly isolated. It has been excluded from a web of free trade agreements that have shot, Spiderman-like, across Asia. Its growth slowed to a lacklustre average of 4 per cent during the eight years of Mr Chen’s presidency. Mr Ma says Taiwan’s isolation is damaging its attractiveness as a destination for foreign investment.

The danger of being left out in the cold was illustrated with the January enactment of the China-Asean free trade agreement. This gives the 10 countries of the Association of South East Asian Nations preferential access to China’s vast market, potentially deepening Taiwan’s disadvantage. Mr Ma says a deal with China will even things out by reducing tariffs on Taiwanese exports to the mainland and clear the path for agreements with other Asian nations too scared to offer bilateral deals to Taipei.

The opposition senses a trap. It says Beijing wants to draw Taiwan into its economic embrace until reunification becomes a fait accompli. Frank Hsieh, who lost to Mr Ma in the 2008 presidential election, says mainland companies have started to infiltrate Taiwanese media, spreading the pro-Beijing gospel. He concedes that lower tariffs might help some big businesses in industries such as petrochemicals and textiles, but says smaller ones will suffer from a flood of cheap Chinese imports. Taiwan, he says, already sends 41 per cent of its exports to China. It needs to diversify, not deepen its dependence.

Morris Chang, considered the father of Taiwan’s world-class semiconductor industry, supports the deal, though he says it won’t affect his own business. “The general direction we should take is to be more open to China and vice versa,” he says. Mr Ma is not a “babe in the woods” who will negotiate away Taiwan’s economic wellbeing or de facto independence for a quick deal.

Even Jimmy Lai, a staunchly anti-Beijing entrepreneur and media impresario, supports the agreement, saying Taiwan can benefit from China’s dynamism without compromising its freedoms. “China wants to integrate the economies slowly, slowly and eventually overwhelm it. But this is a dream devoid of reality,” he says. “People won’t give up democracy just because Beijing has given them some goodies.” Mr Lai, who moved to Taiwan from Hong Kong because he found its democracy and civil liberties “irresistible”, says that by drawing closer to China economically, culturally and socially – but not politically – Taiwan will get a new burst of vitality.

It may seem odd to be considering any kind of agreement with a country that has 1,300 missiles pointing at your tiny, isolated island. But Mr Ma is betting that China will never use them. Both sides are waiting. Beijing hopes the Taiwanese will eventually see the light and come home to a strong and vibrant China. Taiwan hopes that China will grow rich and more democratic, by which time reunification might not be such a pressing issue. If that is right, Taiwan could yet turn out to be an international flashpoint that, mercifully, will never flash.

Vietnamese fishermen in Gulf fight to not get lost in translation

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New Orleans, Louisiana (CNN) — The lengthy documents they initially were asked to sign used language even a native English speaker would struggle to understand.

The Vietnamese interpreters BP first brought in for safety and cleanup training stirred painful memories and suspicions because they spoke to the elders with a North Vietnamese dialect and used what some described as “Communist terminology.”

The closings of fishing areas have been announced on radio stations these fishermen don’t follow, so some have piloted their boats where they shouldn’t, which means tickets from the Coast Guard keep coming.

For the Vietnamese-Americans living in the Gulf Coast region, the oil disaster is especially complicated. It’s made murky by language barriers, cultural misunderstandings and a history of challenges that have shaped them for more than half a century.

Their ties to seafood run deep and wide. A third of all fishermen in the Gulf are Vietnamese, making them arguably the most affected minority out there. More than 24,000 people of Vietnamese origin live in Louisiana, according to the last completed census. About 6,000 live within a two-mile radius in the neighborhood of New Orleans East — distinguishing it, the area’s priest says, as the greatest concentration of Vietnamese people outside of Vietnam.

In the rectory of Mary Queen of Vietnam Church, the Rev. Vien Nguyen sits in front of an altar to his ancestors and his Catholic faith. Religious texts in English and his native tongue fill the high shelves around him, as do books bearing titles like “Freshwater Crayfish Aquaculture,” “The Evolution of Cajun & Creole Cuisine” and Franz Kafka’s “The Trial.”

Here, he introduces some of the Kafkaesque oil-disaster trials facing his own people.

He talks about their distrust of lawyers — “sharks,” he calls them — who’ve come in from out of state, circling them with promises and confusing papers. He mentions the mental health concerns — depression, lack of sleep, tensions in homes — that need to be addressed, a task made difficult by an absence of Vietnamese-speaking therapists in a community that still stigmatizes admissions of emotional trouble. He worries about the lack of job training and opportunities for a people who’ve worked in an industry that may suffer for God knows how long.

“These are proud, active people who contribute to their own livelihood, and now they have to be in lines,” asking for handouts, he says. “It is a devastating blow.”

About 80 percent of Vietnamese-Americans in the Gulf region are connected to the seafood industry through jobs that include fishing, shucking oysters, packing shrimp, and running stores and restaurants, the priest and others say.

The work they do is something many brought with them from fishing villages in their native land, a place most of them fled as “boat people” after the 1975 fall of Saigon and the end of the Vietnam War. That departure was for many the second time they’d become refugees. They’d already uprooted themselves and started over with nothing in 1954, when their country divided into North and South and they, as the Catholic minority living in Vietnam, ran from the Communist rule that took over the North.

The former Archbishop Philip Hannan of the Archdiocese of New Orleans reached out to them in refugee camps in America, inviting them to call his home theirs. So they came here in the ’70s and ’80s with the help of Catholic Charities and, over the next 30 years, reinvented their lives once more — in a climate reminiscent of the country they’d left behind.

They worked hard in a familiar industry that didn’t require them to master English, often leaving their children to be cared for by older siblings and relatives so they could put in long days. They created a self-reliant community where their own local businesses thrived. They planted acres of vegetable gardens along levees, incorporating the agricultural roots of their ancestors.

Today, people wearing the traditional conical straw hats stoop in their cultivated yards or walk along streets with names like Saigon Drive. A trailer, lined with coolers of freshly caught shrimp for sale at hiked-up prices, is parked in front of a strip mall that includes Tram Anh Video, Kim Tram Jewelry and Tien Pharmacy.

Hurricane Katrina five years ago marked the third time they lost everything and had to start over. But it was also the storm that gave them a voice.

The documentary “A Village Called Versailles” — a reference to the public housing project where they first settled — debuted on PBS last month. It chronicles how the Vietnamese-Americans living in New Orleans East galvanized after Katrina, making theirs among the first neighborhoods to rebuild.
Nguyen: What’s in a name?

Forty percent of Vietnamese people share the surname Nguyen.

Dynasty names, dating back to the 13th century, influenced the surnames people had, explained Mariam Lam, an associate professor of comparative literature and Vietnamese at the University of California, Riverside.

In some cases, names were changed by force. Other times, people changed their surnames for fear of retribution. And in other instances, names were taken, or bestowed upon people, as an honor.

Vietnam’s last dynasty, the Nguyen Dynasty, came into power in 1802. Descendants of previous lords changed their surnames, while others fled to China, Lam said.

The Nguyen Dynasty, which lasted until 1945, awarded many with the surname during its rule, and criminals, Lam said, changed their names to avoid prosecution.

“As with all other common surnames,” Lam added, “most people having this surname are not necessarily related.”

RELATED TOPICS

* Gulf Coast Oil Spill
* Vietnam
* Joseph Cao
* Hurricane Katrina

Grass-roots organizers established agencies to fight for assistance and empower people, including one for youth called the Vietnamese American Young Leaders Association of New Orleans (VAYLA-NO). The church, which began holding Mass just six weeks after the floodwaters destroyed what they’d created, became a staging ground for construction help and community meals. Health clinics sprouted up, as did a new charter school. And collectively, they protested a planned 90-foot-high landfill of hurricane debris on their neighborhood’s edge, shutting down a move by the city government that they’d never confronted en masse before.

A few years later, in 2008, they’d help elect the nation’s first Vietnamese-American congressman, Louisiana Republican Anh “Joseph” Cao.

The next challenge: oil

Over a bowl of homemade pho, a Vietnamese beef noodle soup, Tuan Nguyen provides a glimpse into how the community is mobilizing to face its newest challenge.

He’s the 30-year-old deputy director of the Mary Queen of Vietnam Community Development Corporation (MQVN CDC), established after Katrina, and serves on the rapid response team created by Cao after the oil disaster. Along with others on the team, he’s been crisscrossing the region, meeting with fishermen and others — not just Vietnamese — to assess their needs, gather testimonies, answer questions and advocate on their behalf.

They’ve succeeded in gaining the ear of a BP official, Larry Thomas, who among other things has approved the hiring of qualified and trained bilingual interpreters.

“We had never been exposed to the Vietnamese community,” says Thomas, the BP manager of government and public affairs for the lower 48 states and the Gulf of Mexico. “Clearly, it’s a tight-knit community, and it’s been a steep learning curve for us. The interaction has been great.”

Even with all he knows about navigating the system and securing whatever assistance is available, whether that’s food stamps or BP claim dollars, Nguyen can’t persuade some of his own relatives to get the help they so desperately need.

“One of my wife’s uncles is a very proud man. He’s a deckhand. I told him to come in and talk about services,” Nguyen says. “He said, ‘I can’t stand in line. What if someone sees me?’ ”

While his wife’s uncle won’t accept assistance, others in the state have driven hours to get simple answers to questions from agencies like the MQVN CDC. The hope, Nguyen and others say, is that grass-roots organizations will sprout up elsewhere to help meet the growing and often different community needs.

One such organization has already been formed in Biloxi, Mississippi, an area that is home to about 5,000 Vietnamese-Americans. The Mississippi Coalition of Vietnamese American Fisherfolk and Families, led by volunteers, is hoping to step in where the New Orleans organizations logistically can’t.

Celina Tran, 36, is working full-time — on top of her real estate broker job — to help wherever she can. She’s accompanying people to the BP claims office. She’s meeting with fisherfolk to discuss their concerns and recognizes with frustration how unqualified she is to talk to them about fights in their marriages. She’s sending testimonials to the state judiciary, in an attempt to force Mississippi to expand assistance opportunities.

And all the while, she’s worrying about what the future holds. She sees families falling behind on mortgages — for their homes and their boats. At about $1 million a pop, many of the big Biloxi vessels require payments of $10,000 to $15,000 a month. The up to $5,000 a month that BP is paying out to captains and boat owners is of little comfort to them, especially when there are home mortgages, too, college tuition payments and more.

“They’ve been doing this for 45 years, 50 years of their life. They’ve relied on each other,” Tran says. “If this drags out, it will only get worse.”

Nearly 180 miles away, back over the Louisiana state line, Ngoc Nguyen is racing around with her clipboard. She and her husband own St. Vincent Seafood in Leeville, a small fishing community. It’s a business they took over from her father-in-law, who’s standing around the dock in his “Luck of the Irish” T-shirt.

The shrimp being unloaded off their boat amounts to a third of what they usually bring in, says Nguyen, 27. It was out for two months, but given water closures imposed because of the oil disaster, access to shrimp was limited.

“There’s nothing else we can do,” she says, refusing to ponder what the family’s alternative would be if life doesn’t get back to normal, and soon. “We’ve never invested in anything else. It’s all seafood.”

But Rep. Cao holds out hope that the Vietnamese community in the Gulf will pull through — because it always has.

“We are resilient people. We are survivors,” he says. “It’s an obstacle in life, and we will overcome it. And we will emerge stronger.”

Economic Policy Through the Lens of History Roger E. A. Farmer

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“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
John Maynard Keynes

Ideas are powerful. They dictate the way we behave. When ideas are acted upon by powerful people they affect all of our lives.

In 2008 the world experienced a financial crisis. In the space of a month, the stock market lost 40% of its value and the world entered the worst recession since the 1930s. The U.S. unemployment rate went from 4.5% to 10%. Between September 2008 and September 2009 the economy lost half a million jobs a month.

Following the 2008 crisis, there was a fierce debate in the press between classical economists like Eugene Fama of the University of Chicago and Robert Barro of Harvard, and Keynesian economists like Paul Krugman of Princeton University and Brad Delong of the University of California at Berkeley. Classical and Keynesian ideas have been actively debated by economists for seventy years. When one side or the other gains more credibility, the effect on all of our lives is substantial.

Policy makers are guided by economic theories. In the 1990s and early 2000s classical economists argued that markets should be given free rein. Their ideas led to deregulation of the financial markets in the late 1990s and the repeal of legislation that had been put in place during the Great Depression. Classical ideas ascended for thirty years, beginning in the 1970s and ending with the onset of the financial crisis in 2008.

In response to the 2008 crisis, the pendulum of economic ideas has swung back towards regulation. Policy makers in the Obama administration are influenced by the ideas of the English economist, John Maynard Keynes. Keynes argued that free markets need to be controlled and that government should be held responsible for ensuring that everyone who wants a job has one.

Why is there such disagreement amongst economists, politicians, and journalists about economics? Who are the classical and Keynesian economists and what did they say? Most importantly, how has economic history influenced the development of classical and Keynesian ideas?

Classical and Keynesian Economics

The economic history of the past hundred years can be divided into three periods, each guided by one of two different economic theories: classical and Keynesian economics.

Before 1930, classical economics was dominant. In the period from 1946 to 1976 classical ideas were replaced by a new theory, Keynesian economics. From 1976 through to 2008 classical economics once more gained the upper hand.

The swing from classical to Keynesian economics (1946 to 1976) and back again to classical ideas (1976 to 2008) was driven by historical events. The rise of capitalist free-market economies in the mid-eighteenth century led to dramatically improved living standards and Scottish economist Adam Smith developed classical economics to explain their remarkable success.

During the Great Depression of the 1930s capitalism failed in a spectacular way as the unemployment rate in the U.S. climbed to 24%. This failure of free markets to deliver prosperity led to a rejection of classical economic theory and the development of an alternative set of ideas to explain what had gone wrong: Keynesian economics.

From the end of WWII through the mid 1970s, most economists were Keynesians. But during the 1970s, Keynesian economics itself came under attack when it failed to explain how high inflation and unemployment could coincide as they did at the end of that decade. Economists retreated to classical ideas which they reformulated using mathematics. By that time, the Great Depression had been forgotten and faith in free markets was once again the dominant view.

All that changed in 2008 when a financial crisis of epic proportions reminded us that market economies could sometimes go spectacularly wrong. The 2008 recession caused economic theorists once again to rethink their positions. Now, we are likely to enter a new era that draws on ideas from both schools of thought.

The Birth of Classical Economics

Capitalism began in sixteenth century Europe. It was made possible by a new legal institution, the joint stock company that allowed many people to pool their resources in large-scale ventures while limiting their liability if the venture failed. The first joint stock company in England was the Muscovy Company, created by royal charter in 1555, although it wasn’t until the eighteenth century that capitalism really began to flourish.

Capitalism was accompanied by the rise of political and economic liberalism. Political liberalism is the idea that every adult human being has the right to express his or her opinions freely. Economic liberalism is the idea that the free exchange of goods in markets makes everybody better off.

By the American Revolution in 1776, liberal ideas were in the ascendancy. Political liberalism gave birth to democracy, fostered by the then radical notion that rulers govern with the consent of the people. Economic liberalism led to our modern system of production whereby individuals are free to buy and sell goods in markets in pursuit of profit.

In 1776, the Scottish philosopher Adam Smith penned An Inquiry into the Nature and Causes of the Wealth of Nations and the science of economics was born. Smith wrote:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Or as Gordon Gekko, the fictional character in Oliver Stone’s 1987 movie Wall Street put it; “Greed is good.” What is the evidence for this remarkable claim?

Capitalism and Growth

Before the advent of capitalism, there was very little improvement in living standards. The lifestyle of the average person in Roman times, two thousand years ago, was not very different from that of a peasant in fifteenth-century England1. Although the rulers of Rome lived in relative luxury, as did the kings of England, even the poorest person in an advanced society today enjoys many luxuries that would have been inconceivable to Julius Caesar or Henry VIII.

Since the inception of capitalism in sixteenth-century Europe, income per person has grown at a bit less than 2% per year, and as a consequence, the standard of living of the average person has doubled every thirty-five years2. The power of compound growth is staggering. By fostering this growth, capitalism has been responsible for pulling more human beings on this planet out of misery than any other known form of social organization.

Yet capitalism is not a monolithic concept. Free exchange cannot happen without a legal system that clearly defines how contracts will be enforced. Ever since the inception of capitalism, a fierce debate has raged between those who favor more or less regulation of free markets.

On the one hand, classical economists believe that more often than not, unregulated markets work well. On the other, Keynesian economists believe that it is the responsibility of the government to intervene in markets to make sure all are employed.

Capitalism and Crises

Although capitalism delivers growth, it does not deliver steady growth. Sometimes growth sputters, and when it does, many people lose their jobs at the same time. When growth falls temporarily, we say that the economy is in recession. There have been ten recessions since World War II and most of them have been relatively mild. But sometimes recessions can be very deep. When this happens, many people begin to question the ability of capitalism to deliver prosperity.

Capitalism developed in a symbiotic relationship with democratic political institutions. When a crisis occurs, democracies evolve new institutions to help combat the crisis. A good example of this is the development of central banks like the Bank of England in the United Kingdom or the Federal Reserve System in the United States. Central banks were created to cope with a series of financial panics, very similar to the current crisis, that occurred during the nineteenth century. In the United States, deep recessions were accompanied by bank failures in 1819, 1837, 1857, 1873, and 1893.

As we saw in 2008, when a nation’s financial system fails, it pulls the whole economy down. To help prevent the disastrous effects of financial crises, the English economist Walter Bagehot (pronounced “Ba-jet”) wrote a book in 1873 called Lombard Street in which he outlined the principles of effective central banking. Bagehot was an early editor of the Economist and the son-in-law of its founder, James Wilson. Lombard Street was London’s financial center and the nineteenth century equivalent of Wall Street today. Partly as a result of his seminal ideas, the Federal Reserve System, America’s central bank, was created in 1913.

The Great Depression

The 1920s was a period of remarkable prosperity in the U.S., much like the 1990s and early 2000s. President Calvin Coolidge fiercely defended free markets. During his presidency, from 1923 to 1929, the stock market climbed to remarkable heights and free market ideas were on the rise.

All of this suddenly came to an end when the stock market fell by 24% in two days in October 1929. By 1933, the market had lost 84% of its value. Shortly after the stock market crash, unemployment began to climb. By 1933, 24% of the labor force was without a job. The immense human misery of this period gave rise to a deep distrust of capitalism. As the American author John Steinbeck put it in his novel The Grapes of Wrath,

Men who have created new fruits in the world cannot create a system whereby their fruits may be eaten. And the failure hangs over the State like a great sorrow . . . . and in the eyes of the people there is the failure; and in the eyes of the hungry there is a growing wrath. In the souls of the people the grapes of wrath are filling and growing heavy, growing heavy for the vintage.

In response to this failure of the free market, the English economist John Maynard Keynes wrote an important and influential book, The General Theory of Employment Interest and Money, published in 1936. This book changed the world. Before The General Theory, the idea that the government has a responsibility to provide jobs was almost unheard of. After the publication of The General Theory, it became widespread. In 1946, Congress passed the Employment Act, which gave government a new responsibility, the maintenance of full employment.

Two Visions of the World

Capitalist economies have been subject to repeated cycles of prosperity and depression ever since the seventeenth century. Classical economists developed theories of why these cycles occur. In 1928, the English economist Arthur Pigou wrote an important book on the topic called Industrial Fluctuations.

Pigou listed at least six different causes of business cycles: industrial disputes, agricultural shocks caused by bad weather, monetary disturbances, changes in tastes, invention of new technologies, and shocks to consumer and business confidence. The Norwegian economist Ragnar Frisch provided a physical model that further captures this classical vision, likening the economy to a rocking horse that is constantly hit by a child with a club. Blows from the club represent economic shocks. An airline pilots’ strike, an oil spill in the Gulf of Mexico, or the invention of the computer are significant blows. If the rocking horse were no longer hit with these blows it would quickly come to rest. Similarly, if the economy were no longer hit with shocks, the free market would quickly restore full employment.

As a direct result of his real life experience of the Depression, Keynes disagreed with the classical vision. Instead, he introduced what I consider to be his two most important new ideas. First, he argued that the labor market does not work well and that without a little help from government, very high unemployment can persist forever. Second, he argued that the rate of unemployment is determined by the beliefs of participants in the financial markets; he said that the beliefs of traders on Wall Street were governed by “animal spirits.” In a famous passage in The General Theory, Keynes compared investors in the stock market to judges of a beauty contest who, instead of judging the beauty of the contestants, are trying to guess how beautiful the other judges think the contestants are.

Keynes’ theory linked the stock market with the labor market. In his view, the loss of confidence by investors caused the Great Depression. When businessmen and women lost confidence in the economy they stopped buying new machines and factories. The firms that produced factories and machines laid off workers. When workers lost their jobs they stopped spending and that reduction in purchasing power caused more layoffs in other industries.

Keynes’ vision of the economy was very different from Frisch’s characterization of classical economics as a rocking horse. In my book How the Economy Works, I develop a different metaphor to describe Keynes’ vision3. The economy is like a sailboat on the ocean with a broken rudder. Gusts of wind represent economic shocks. If the winds die down, a sailboat can become becalmed on the ocean. In the same way, if the economy was no longer blown by economic winds, the free market could leave it with unemployment of 5%, 10%, or 20%.

Stagflation and Other Terms Defined

From 1946 until the mid 1970s, the rise of Keynesian ideas directly influenced economic policy. The size of government increased from 10% of the economy in 1929 to 20% in 1945. Since government spending is more stable than private spending, this helped dampen business cycles which were four times less volatile after WWII than before. By reducing the volatility of business cycles, government intervention in the economy prevented large increases in unemployment during recessions. The use of government spending and taxes to stabilize the business cycle is called fiscal policy.

After WWII, central banks throughout the world began to intervene actively to combat recessions. In every one of the ten post-war recessions, the Federal Reserve lowered the interest rate at the beginning of each recession to help stimulate private demand. The use of interest rate changes to control recessions is called monetary policy.

Fiscal and monetary policy worked well to keep unemployment low from 1946 through 1976. But at the same time, there was a steady increase in inflation. By 1975 it had reached 11% per year while the unemployment rate was at 8%, a very high number by post-war standards.

Inflation is a steady increase in the average price of goods. It was not a problem during the Great Depression and instead, contemporary economists were concerned about deflation, a situation of falling prices. Between 1929 and 1933 prices and wages fell by 25%. Keynes thought that inflation would only occur if the economy were operating at full employment. He built this idea into the new theory he wrote about in his 1936 book.

Yet the coincidence of inflation and unemployment does occur. We call this stagflation. Because stagflation cannot occur in Keynesian theory, academic economists gave up on Keynes and the pendulum of ideas swung back to classical thought from 1979 to 2009. A new of wave of classical economists refined Pigou’s ideas by developing a mathematical theory that made them more precise.

Economic Science and the 2008 Crisis

Economics is a science, but it is not an experimental science. We cannot disrupt the lives of millions of people to find out if one policy works better than another. Instead, we must wait for time to experiment for us. The Great Depression and the occurrence of stagflation were two experiments that helped economists refine their ideas. The 2008 financial crisis is a third.

The 2008 crisis has been disruptive to economic theory because it has reminded us that free markets can fail in a spectacular way. Once again, policy makers are looking to Keynesian remedies. But the ideas of Keynes’ General Theory are not enough to help us now because his ideas do not explain the stagflation we experienced in the 1970s. Instead, economists are developing new ideas that put together Keynesian and classical ideas.

In the past, we developed institutions to help markets function smoothly. The Federal Reserve System was created to deal with nineteenth century financial crises. The use of active fiscal and monetary policy evolved from our experiences in the Great Depression. Stagflation in the 1970s also led to change as central bankers created a new policy, called inflation targeting, to help deal with inflation.

In each of the previous episodes of change, academic economists developed new theories to explain the failure of the old. Our democratic system has created new institutions and policies to implement the recommendations that have come from new theories. The 2008 crisis, like its predecessors, is likely to lead not just to the birth of new ideas, but also to new policies to guide our economy into the next century.

1Angus Maddison, The World Economy, 1—2001 AD, from Historical Statistics, http://www.ggdc.net/maddison/
2Angus Maddison, op. cit.
3Roger E. A. Farmer, How the Economy Works: Confidence Crashes and Self-Fulfilling Prophecies, Oxford University Press, New York, 2010.

Roger E. A. Farmer is Distinguished Professor of Economics and Chair of the Department of Economics at the University of California Los Angeles. He is the author of two new books on the current global economic crisis. How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies, is written for the general reader and specialist alike, and Expectations, Employment and Prices is written for academics and practicing economists. Both books are published with Oxford University Press.

Beijing’s Coalition of the Willing For the West, failed states are a problem. For China, they’re an opportunity

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You’ve probably heard by now that China, in its bid to lock in access to energy and mineral riches in far-flung corners of the world, is causing heartburn for the legions of do-gooders working to turn the world’s most fragile countries into stable, prosperous states. Everyone from the president of the World Bank to Bono has blamed Chinese companies and government officials for threatening the hard-won progress the West has made in the global south, while warning of dire consequences for countries on the receiving end of Chinese largesse.

Commentators such as Zambian economist Bob Sichinga have even accused Beijing of “raping” Africa in its bid for natural resources. I call it the China effect — the disturbing notion that Western-led development efforts could come to naught, cast aside by the allure of fast money and rapid economic progress. And it’s easy to see the appeal: While U.S. and European gurus are busy lecturing Third World autocrats about good governance and transparency, Chinese engineers are building highways to the dictators’ weekend homes.
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What’s less well known is the key role such states as Brazil, Kazakhstan, Nigeria, South Africa, and Venezuela are playing in China’s international diplomatic game. Over the past decade and a half, while few in the West were paying attention, Beijing has built a coalition of countries — a great many of them in Africa — that can be trusted to vote China’s way in an increasingly clogged alphabet soup of international fora. It’s a bloc reminiscent of the one the Soviet Union assembled during the Cold War, though focused on economic and trade advantages, not security issues.

So far, China’s strategy is working, and nowhere more so than with Beijing’s campaign to delegitimize Taiwan as an independent state. In 2008, for instance, Malawi announced it had cut diplomatic relations with the island would-be nation; Taipei couldn’t match China’s offer of $6 billion in aid. Senegal broke relations in 2005, signing an agreement that reportedly included an initial $600 million in financial assistance from China. Chad followed suit after a series of secret meetings with Chinese officials and an undisclosed amount of aid. Today, just four African countries still recognize Taiwan as the one true China: Burkina Faso, Gambia, São Tomé and Príncipe, and Swaziland, down from 13 in 1994; the global number has declined from 68 states in 1971 to 23 currently. Even Panama and Nicaragua, two of the few Latin American states that still officially recognize Taiwan, abstained from a vote on its 2007 bid to join the World Health Organization. Taipei’s list of friends is headed rapidly toward zero.
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Not only is Beijing building a string of alliances across the globe with countries overlooked and sometimes shunned by the United States, but it also aims to alter, or at least complicate, the loyalties of those still in the Western camp. To U.S. officials, most of Beijing’s new allies are decidedly third tier, mere afterthoughts in the West Wing and on the State Department’s seventh floor (at least until a crisis breaks out). But to China, they are becoming an increasingly potent diplomatic weapon.

At the United Nations, support for Chinese positions on human rights jumped from 50 percent in 2000 to 74 percent in 2008, according to the European Council on Foreign Relations. The council also found that 41 countries that were Western-voting allies on human rights issues in the U.N. 10 years ago now support China and Russia. From Africa to Asia to Latin America, these include a notable list of Chinese commercial partners, some of the most undistinguished performers on the Failed States Index. Many of these same countries have joined to vigorously defend traditional sovereignty — a notion deeply important to Beijing because it fears and resents Western meddling in its internal affairs. Support for China and Russia on this issue has exceeded 80 percent in recent years.

China has also deployed this winning formula at the World Trade Organization (WTO). Within the WTO, Beijing has already put together an African coalition large enough to torpedo specific rules it opposes. But the strategic prize China is seeking in Geneva is official status as a market economy — a valuable legal and trade designation that prevents other countries from launching anti-dumping cases. Chinese companies stand to gain billions if Beijing’s diplomats can outmaneuver the United States and the European Union, which accuse China of unfair competitive practices and inadequate bankruptcy and intellectual-property laws. Egypt, Russia, South Africa, Venezuela, and dozens of other countries have proved happy to extend this designation to Beijing on bilateral terms in return for Chinese engagement. Now, China’s goal is to cobble together enough WTO votes from African and Latin American countries to see this protection expanded globally — while teaming up with India to sink the Doha round of trade talks, which threatens to swamp Chinese farmers with a flood of cheap imports.

China is also making great strides within a host of smaller multilateral organizations that don’t invite the United States and the European Union to join — obscure bodies like the East Asia Summit, the Forum on China-Africa Cooperation, and the Shanghai Cooperation Organization. In these venues, Chinese officials have not hesitated to combine soft power with a bit of muscle. African and Asian ambassadors have made off-the-record statements suggesting that China uses its aid and trade as leverage to make them tilt away from U.S. initiatives. If countries do not toe Beijing’s line or don’t abstain when asked, their economic projects could be put at risk.

China’s goal is not to challenge the West militarily or even economically just now. The United States and Europe are, after all, the lifeblood of China’s export economy. But we shouldn’t dismiss China’s efforts as merely a sophisticated reprise of the Soviet Union’s failed bid for the loyalties of the global south. China is a capitalist dynamo, not a creaking autarky, and its market-authoritarian example is fast winning adherents around the world — while marginalizing the values that have informed Western progress for 300 years.

China’s Export Economy Begins Turning Inward

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BEIJING — For years, Chinese leaders looked to the millions of poor workers from the country’s interior as the engine of a roaring export economy. They would move to coastal provinces, toil in factories and churn out the world’s household goods.
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A potential customer looked over a Lexus in January at an automobile showroom in Beijing. A tag indicated the monthly payments.
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Workers were on strike earlier this month at the Honda Lock factory in Zhongshan, China.

These days, the workers are crucial for China’s economy in another way: They must start buying the very products they manufacture, spending their paychecks on lipstick and lingerie, plastic lawn chairs and plasma television sets. Officials see them as the linchpin of China’s move away from a lopsided economic model that relies too heavily on foreign consumption.

Some of China’s top leaders, including Prime Minister Wen Jiabao, have emphasized the need for that restructuring for years, especially since the global financial crisis pummeled the export industry. But China’s move this week to make its currency, the renminbi, more flexible and the authorities’ apparent tolerance of recent factory strikes that have led to significant wage increases both signal that Chinese leaders could be serious about re-engineering the nation’s economic model.

The currency shift brings immediate political benefits, since China will now presumably come under less pressure at the Group of 20 summit meeting this weekend. But there are important domestic considerations as well. The breaking of the renminbi’s de facto peg to the dollar means the currency is likely to appreciate in value, making Chinese exports somewhat less competitive in the global marketplace but strengthening the purchasing power of Chinese consumers. Likewise, government policies to encourage wage increases for poor laborers — there are an estimated 150 million migrant workers in cities — could also spur consumption, if the pay increases outpace inflation.

“The central government attitude toward raising wages is undoubtedly positive because it’s directly tied to boosting domestic consumption and restructuring the economy,” said Liu Cheng, a scholar of labor law at Shanghai Normal University. “For a long time, wage growth has lagged behind economic growth, and that has forced China to continue to depend on exports.”

Chinese leaders have little choice but to overhaul the model. For one thing, the pool of cheap labor is drying up. China’s population of 15- to 24-year-olds has already peaked and will continue to shrink over the next decade, even if China were to change its one-child policy, according to projections by the United Nations. Just as important, young workers these days are no longer willing to toil under the same conditions tolerated by laborers a decade ago.

Some Chinese leaders have been vocal in recent months about the need to raise household consumption. Li Keqiang, the vice prime minister who is viewed as a likely successor to Mr. Wen, stressed that as a priority in public addresses this year. On June 1, Seeking Truth, an official journal of the Communist Party, published an article by Mr. Li in which he wrote that “increasing citizens’ consumption is the key to expanding domestic demand.”

Raising wages is only one of several actions the government must take if it wants to stimulate household consumption. The savings rate in China is much higher than that in Western nations, at least partly because people rely on savings to finance much of their education and health care needs. In January 2009, China announced that it intended to spend $123 billion by 2011 to set up universal health care for its 1.3 billion people, but that plan is vastly underfinanced, scholars say.

Keeping a lid on inflation is also crucial. Low wages have helped hold down the inflation rate despite years of extraordinary double-digit growth and huge government investments in projects. But in May, the consumer price index edged up to 3.1 percent from the previous May; the government wants the average in all of 2010 to be no higher than 3 percent. That was most likely one factor that pushed the People’s Bank of China to announce last Saturday that the renminbi would become more flexible.

Analysts say that a currency revaluation by itself will not necessarily make China’s exports significantly less competitive or rein in China’s dependence on its export industry. From mid-2005 to mid-2008, the renminbi appreciated 21 percent against the United States dollar, but China’s trade surplus with the United States continued to grow by an average of 21 percent during that period. In recent months, China’s exports have shown a strong recovery, with nearly 50 percent growth year-on-year in May. Chinese officials obviously felt confident enough in the recovery to go forward with the currency shift.

Besides exports, China’s economic growth has depended on state-led investment, especially infrastructure building, and that too leads to big risks, some analysts say. Stimulus spending and a surge in lending by state banks during the economic crisis helped China power through the slump. But the lending spree has contributed to inflationary pressures and a soaring property market that the central government is trying to cool down.

Victor Shih, an associate professor at Northwestern University who studies the political economy of China, said a significant portion of $1.6 trillion that has been lent to companies run by local governments is likely to pile up as bad loans, posing a risk to state banks, and thus the entire economy. “There will be a big cost,” he said. “China is trying to recapitalize its banks before a lot of these bad loans show up on the balance sheets.”

As with export dependence, some Chinese leaders are starting to see the danger and have moved to slow bank lending.

But effective infrastructure projects are literally the road to more widespread wage increases across China, and thus greater domestic consumption. An explosion of highways and rail lines in the central interior provinces means companies are now operating more factories in those areas, where costs are lower. Some workers in the interior are seeing wages increase at the same rates as those on the coast, or at even higher rates.

Anne Stevenson-Yang, head of the Beijing office of Wedge MKI, an equity analysis firm, said her research into at least 15 companies across China showed that some in the interior had raises of up to 30 percent this year, a higher rate than those on the coasts. But absolute wages are still lower in the interior, so more and more low-margin manufacturing companies are setting up shop there, especially as provincial governments on the coast slowly push out some assembly-line factories in favor of higher-end businesses.

In theory, many laborers will no longer have to flock to the coast, and consumption in the interior will rise, leading to more uniform economic growth across China.

“Probably the factory cities and dormitories of the ’80s will disappear,” Ms. Stevenson-Yang said, “and one day people will think, ‘Wow, what was that all about?’ ”

Jonathan Ansfield contributed reporting, and Helen Gao contributed research.

Shangri-La Dialogue Highlights Tensions in Sino-U.S. Relations Publication: China Brief Volume: 10 Issue: 13 June 24, 2010 06:48 PM Age: 3 days Category: China Brief, Home Page, Military/Security, Foreign Policy, China and the Asia-Pacific By: Ian Storey

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Lieutenant General Ma Xiaotian

Strained relations between the United States and China took center stage during the June 4-6 Shangri-La Dialogue (SLD) in Singapore, the annual meeting of Asia Pacific defense ministers, military officers, diplomats and academics organized by the London-based International Institute for Strategic Studies (IISS) and attended by this author. The main points of contention that emerged between the two sides were how the international community should deal with North Korea in the aftermath of the Cheonan incident, and U.S. arms sales to Taiwan. The SLD also shone a spotlight on growing U.S. wariness at Chinese policy toward the contested Spratly Islands, and revealed how the South China Sea disputes have become a sticking point in Sino-U.S. relations.

On North Korea, U.S. Defense Secretary Robert Gates was uncompromising. Describing the sinking of the South Korean warship Cheonan on March 26 with the loss of 46 lives as “part of a larger pattern of provocative and reckless behavior,” Gates asserted that the incident required a tough regional response, as “inaction would amount to an abdication of our collective responsibility to protect the peace and reinforce stability in Asia [1].” His comment was seen as a swipe at the PRC, which has refused to assign blame to its North Korean ally for the attack. Indeed, in the question and answer session that followed Gates’ speech, Major General Zhu Chenghu, director-general of the National Defense University in Beijing, appeared to cast doubt on the conclusions of the international team that investigated the sinking that the North Korean military was responsible for torpedoing the vessel by describing “controversial views” over who carried out the attack. Zhu went on to imply that America’s stance over the Cheonan was hypocritical given its failure to condemn the Israeli commando raid on a flotilla of ships carrying supplies to Gaza on May 31, which resulted in the death of nine activists. Clearly surprised by Zhu’s comment, Gates flatly rejected the comparison, describing the Cheonan incident as a surprise attack while Israel had issued the Turkish ship with warnings. The intemperate exchange set the tone for the rest of the day’s proceedings between the Chinese and Americans.

More controversial was Gates’ defense of U.S. arms sales to Taiwan. In January, the Obama administration approved a $6.4 billion arms package to the island, which includes surface-to-air Patriot missiles, medium-lift Blackhawk helicopters and anti-ship Harpoon missiles. In keeping with past practice, Beijing condemned the decision and suspended military-to-military ties with the United States. This included rejecting a request from Gates prior to his trip to Singapore to visit Beijing after the SLD because the timing was “inconvenient.”

Gates’ speech at the SLD reflected U.S. disappointment and frustration with China’s decision to freeze military relations. The defense secretary accused the Chinese of reneging on a pledge made by Presidents Barack Obama and Hu Jintao in late 2009 to advance “sustained and reliable” military-to-military relations at all levels so as to develop bilateral ties and reduce “miscommunication, misunderstanding, and miscalculation,” exemplified by the March 2009 Impeccable incident off Hainan Island. Gates said China’s decision “makes little sense” because the United States has been providing weapons systems to Taiwan for decades, Washington does not support independence for Taiwan, and that arms sales help maintain the balance of power across the Taiwan Strait in the face of “China’s accelerating military buildup [which is] largely focused on Taiwan.” The suspension of military ties by China would not, moreover, change U.S. policy toward Taiwan. In short, Gates’ message to the Chinese on U.S. arms sales was blunt: Get over it.

The Chinese delegates bristled at Gates’ speech, and responded by pointing the finger of blame squarely at Washington for the suspension of military ties. Major-General Zhu described the arms package as having caused damage to China’s “core interests” and that while the Chinese treat the United States as a partner and friend, “Americans take the Chinese as the enemy.” In a robust presentation to the SLD delegates later that morning, General Ma Xiaotian, the PLA’s Deputy Chief of Staff, rejected all of Gates’ assertions. According to Ma, it was America and not China that had erected obstacles in the way of military cooperation, namely the provision of weapons to Taiwan, U.S. military surveillance activities in China’s declared 200 nautical miles Excusive Economic Zone, and US domestic legislation which curbed cooperation with the PLA. Ma went on to label US arms sales to the island as “not normal” and a gross interference in China’s internal affairs. General Ma also rejected Gates’ contention that China’s military build-up was directed at Taiwan (Xinhua News Agency, June 6).

Although Ma and Gates finally shook hands on the second day of the SLD― having failed to do so at the opening dinner the night before― in a departure from previous practice, no bilateral meetings took place on the sidelines of the conference.

The testy exchanges between Gates and the Chinese generals in Singapore came hard on the heels of another frosty meeting between the two sides at the Strategic and Economic Dialogue (S&ED) in late May in Beijing. According to one report, at that meeting the PLA’s Rear Admiral Guen Youfei had launched a scathing attack on the United States, accusing it of being a hegemonic power bent on encircling China (Washington Post, June 8). The report suggested that Guan had not gone out on a limb, and that his comments reflected mainstream thinking in the Chinese government. A delegate at the SLD familiar with the meeting confirmed to the author that the atmospherics at the Beijing meeting had been very poor [2].

Of direct relevance to the security of Southeast Asia were Gates’ remarks concerning the changing strategic context of the South China Sea dispute. As noted by contributors to the Jamestown Foundation, tensions in the South China Sea have been on the upswing since 2007 due to a combination of rising nationalism, increasing friction over access to energy and fishery resources, attempts by the various disputants to bolster their jurisdictional claims, and the rapid modernization of the PLA Navy which is shifting the military balance of power in China’s favor [3].

At SLD, Gates highlighted the territorial dispute as an “area of growing concern for the United States.” He reiterated long-standing U.S. policy― that America has a vital interest in the maintenance of stability and freedom of navigation in the sea, does not take sides on competing sovereignty claims, and opposes the use of force to resolve the problem. Yet he added that the United States objected “to any effort to intimidate U.S. corporations or those of any other nation engaged in legitimate economic activity,” a clear reference to attempts by the PRC to pressure foreign energy corporations― including U.S. giant ExxonMobil—into suspending oil and gas projects in disputed waters off the Vietnamese coast.

Gates went on to underscore the importance of the 2002 ASEAN-China Declaration on the Conduct of Parties in the South China Sea (DoC) as a mechanism to mitigate rising tensions. Conceived by ASEAN as a way of promoting dialogue and cooperative confidence building measures among the claimant countries, talks between the organization and China on formulating guidelines to implement the DoC stalled in 2009 over Beijing’s insistence that discussions could only proceed on a bilateral basis rather than with the ten member grouping as a whole, an approach rejected by ASEAN. According to Gates, the United States supports the “concrete implementation” of the agreement, a remark that can only be seen as Washington’s stamp of approval for Vietnam’s efforts as ASEAN Chair to break the diplomatic impasse and coax Beijing into putting the agreement into practice (See “China’s ‘Charm Offensive” Loses Momentum in Southeast Asia Part I,” China Brief, April 29, 2010.

The message could not have been lost on the Chinese delegation that on the first day of the Dialogue Gates had met with his Vietnamese counterpart, and that after the conclusion of the conference Admiral Robert Willard, Commander U.S. Pacific Command, and Andrew Shapiro, Assistant Secretary of State for Political-Military Affairs, discussed the territorial dispute in Hanoi at annual bilateral security talks (VietNamNetBridge, June 8).

Gates’ comments on the South China Sea should be considered in conjunction with recent statements made by senior U.S. military officers regarding the impact of China’s military modernization on the dispute. In Congressional testimony in January, Admiral Willard suggested that China’s “aggressive program of military modernization” appeared designed to “challenge U.S. freedom of action in the region and, if necessary, enforce China’s influence over its neighbors — including our regional allies and partners” [4]. In a speech to the Asia Society in Washington D.C. on June 9, Admiral Mike Mullins, Chairman of the Joint Chiefs of Staff, expressed “genuine concern” at China’s military build up which, he argued, seems “oddly out of step with their stated goal of territorial defense” [5]. A week later, Admiral Patrick Walsh, Commander of the U.S. Pacific Fleet, told a Japanese newspaper that the United States was concerned that Chinese assertiveness in the South China Sea risked endangering freedom of navigation and the flow of maritime trade (Asahi Shimbun [Japan], June 15).

From the perspective of governments in Southeast Asia, the current tribulations in Sino-U.S. relations are seen as boding ill for regional stability. Accordingly, Southeast Asians at the SLD highlighted the positive role ASEAN could play in promoting dialogue and trust among the major powers in the Asia Pacific region. It was in this context that Singapore Deputy Prime Minister and Defense Minister Teo Chee Hean commented that the inaugural ASEAN Defense Ministers Meeting Plus (ADMM Plus)—which will bring together the 10 ASEAN defense ministers and their counterparts from the eight Dialogue Partners, including China and the United States in October—would help ensure that “mistrust or disagreements do not lead to tensions, and tensions do not spiral into confrontation and conflict.” Yet SLD delegates pondered how effective the ADMM Plus could be at easing Sino-U.S. tensions if, as presently envisaged, it will only meet once every 2-3 years.

Notes

1. Dr. Robert M. Gates, Secretary of Defense, United States, speech delivered at 9th IISS Asia Security Summit, Singapore, June 5, 2010 http://www.iiss.org/conferences/the-shangri-la-dialogue/shangri-la-dialogue-2010/plenary-session-speeches/first-plenary-session/robert-gates/.
2. Interview with SLD delegate, June 5, 2010.
3. Clive Schofield and Ian Storey, The South China Sea Dispute: Increasing Stakes and Rising Tensions, Jamestown Foundation Occasional Paper, November 2009.
4. Statement of Admiral Robert F. Willard, United States Navy, Commander, United States Pacific Command, Before the House Armed Services Committee on Recent Security Developments Involving China, January 13, 2010.
5. Admiral Mullen’s Speech at the 2010 Asia Society Washington’s Annual Dinner http://www.asiasociety.org/policy-politics/international-relations/us-asia/adm-mullens-speech-2010-asia-society-washingtons-ann.

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