31 July 2013

* 'I am a little worried. Now there is 10-20 per cent chance that we might see 1991 again'

Tue Jul 30 2013

In this Walk the Talk on NDTV 24x7, economist Arvind Panagariya tells The Indian Express Editor-in-Chief Shekhar Gupta why he is "optimistic" about Modi and why this has been "one of the worst eras of performance by an RBI governor"

I am at the campus of the National Council of Applied Economic Research in Delhi. And my guest this week is a brilliant economist who I shall not describe as an establishment economist—although that is a species found widely in institutions in India—and somebody the BJP takes very seriously and I hope it continues to listen to...

Well, the UPA takes me seriously too.

...Arvind Panagariya—Bhagwati professor at Columbia, former chief economist at ADB and writer of many books, including your recent one with Jagdish Bhagwati, India's Tryst with Destiny, and somebody willing to question establishment views even within the intellectual establishment. How tough is that?

If you believe in integrity and if you believe that you should speak your mind, then it is not so tough. And if you are not looking for a job with the government, it is even easier.

With this government? Or maybe that works better with the next one?

Look, if the next government does good things, then I'll be with them, but if they really don't do the right things, they will get my criticism too.

Describe this Indian economic establishment to me.

In our tradition, there isn't enough questioning, particularly when it comes to social programmes run by the government, which has no real capability to deliver. Even then, we don't somehow question. We criticise, we say the government can't do this or that, complain about corruption, but when somebody says this needs to be done, we say the government must do it. There is a disconnect.

So, there is a touching faith in the government.

There is. Look at what happened in Bihar to those 23 children in the mid-day meal (tragedy). It reflects gross incompetence in running those kinds of programmes. Yet, we won't sit back and say that maybe there is an alternative solution that we could work on, with the same objective of doing good to the people at large and reducing poverty.

Do most modern economists know this in India?

Well, I think we are trying to change the narrative as it existed and that was a very important part of the book Jagdish Bhagwati and I wrote. We took various myths—that growth doesn't really matter enough and that redistribution itself can be sufficient—and demolished them one by one with evidence and data.

Would you say that India's intellectual economic establishment is complicit in perpetuating these myths?

It certainly has not played its role and, to a large degree, it has played along. From the beginning, the Left has been pretty strong in India, intellectually. The kind of Right that exists in other parts of the world, like Thatcherite or Reaganite, doesn't even exist in our system. All of us are by that measure left-of-centre. I mean, we all believe in social programmes, in redistribution, nobody says that growth alone will do the trick. This partly comes from this old tradition that the government has to do everything. We built it into our psyche when we started off on this road, first under Jawaharlal Nehru and then in a big way under Mrs Gandhi. By the time Mrs Indira Gandhi became prime minister, we got into tourism, hotels, taxis and all sorts of things.

Indian Army most influential in Asia Pacific region: US General

By PTI | 29 Jul, 2013
Indian Army most influential in Asia Pacific region: US General

WASHINGTON: The Indian Army is by far the most influential in the Asia Pacific region, a top American General today said as he stressed on the importance of building military-to-military relationship between the two countries. 

"As is in many of the Asia-Pacific countries, the Army is the dominant service in those countries. India is a prime example. It is by far the largest service. It is by far the most influential," US Army Chief of Staff General Raymond T Odierno said. 

"It is important for us to build army-to-army relations as we continue to re-balance the Asia- Pacific region," he told a Washington audience. 

Odierno recently returned from a trip to India during which he met his Indian counterpart and held a wide range of discussions with the top Indian military leadership. He also travelled to the Northern Command. 

"The first comments about India, specifically, is, one of things we have to remember is, we have to make sure they maintain their own strategic autonomy. And we do things in line with them to help build capacity, help learn from each other," he said. 

"One thing we realised we have so much in common, the two largest democracies in the world, we are two very professional armies, and there is much we can do to learn from each other," Odierno said in response to a question at the American Enterprise Institute (AEI) -- a Washington-based think tank. 

"We talked a lot about the way ahead in the region, the importance of operations in the region. They took me up to their northern command, which is their most important command, which is responsible for the borders of Pakistan and China," he said. 

"I had the chance to meet with their staff and their commanders, and what really caught me was the fact that, what they have been doing for the past 20 years, is what we have been doing for the past 12, counter-insurgency, protecting their space, there's a lot of lessons learned that they have that we have. And so, there is a lot of knowledge that we can share," the US General said. 

"So I think that will be the basis of the continued relationship, is the sharing of information about what they face on a day-to-day basis up in the Kashmir area, with Pakistan, as well with China, as you just talked about with a minor incursion not too long ago...," he said. 

He added that the two countries have a lot in common, in sharing lessons, in professional development, a lot in developing future leaders, a lot in understanding techniques on what they see will be potentially prominent as they deal with future problems, not only around the world, whether it be there or the Middle East, there's some commonality.

THE PRESIDENT AT HOME- Tradition and change at Rashtrapati Bhavan

Diplomacy: K.P. Nayar

My favourite Rashtrapati Bhavan story is about a visiting head of state who stayed there, successfully escaped its confines and restrictions, which inevitably come from being a state guest, and was then unsuccessfully shamed by his hosts for having attempted a shocking escapade. This head of state, a hero of his country’s independence movement and a close friend of Jawaharlal Nehru, also had a reputation as an irrepressible womanizer. True to that reputation, on the second night of his stay at Rashtrapati Bhavan, this state guest persuaded his ambassador to smuggle him out in his diplomatic car after his hosts had retired for the night and take him to a woman on G.B. Road, the only red light area of Delhi in those years. An alert member of the guest’s local security detail noticed the visiting president’s departure and within minutes an emergency meeting was called by his higher-ups who were concerned about the guest’s safety.

After all, the visitor was a global pioneer against anti-imperialism, and decolonization was still a dream for many countries. Moreover, only months earlier, there had been an assassination attempt, which the leader narrowly survived, one of many before and after, plotted by his enemies at home and abroad. Human intelligence at the disposal of the government had no difficulty tracing a diplomatic car parked on G.B. Road, although the ambassador had the discretion not to fly his national flag with his president travelling in the vehicle.

A dynamic, young Indian Police Service officer who was in charge of guest’s security decided that when the ambassador’s car returned to Rashtrapati Bhavan with the visiting president, the lights would go up along the vehicle’s route keeping pace with its advance until the guest alighted in the presidential porch. Moreover, the entire route along Rashtrapati Bhavan would be lined by policemen who would salute the guest at regular intervals like a guard of honour.

The IPS officer, who told me the story also confessed defeat. The state visitor was unfazed and the attempt to shame him was like water off a duck’s back. Many decades later, when I narrated this episode at a party in Moscow, a Russian friend confessed to a similar defeat. The same president, whose identity diplomats of my generation would have no difficulty guessing, was a guest at the Kremlin and the Soviets saw to it that he smuggled a woman into his suite.

The female, a willing Russian spy, and her lover were secretly photographed and the pictures were then shown to the visitor who was acting difficult with the Soviet leadership since he was a nationalist to the core and unwilling to be a satellite in the manner of East Europeans. As in New Delhi, this state guest disarmed his hosts in Moscow when he asked for more of those compromising photos insisting that his stock would go up among friends back home if he flaunted them.

The capable state

Gulzar Natarajan : Wed Jul 31 2013

No magic pill solution or quick fix can make up for basic administrative deficiencies

In a review of Jean Drèze and Amartya Sen's latest book in the Financial Times (July 12, 2013), historian Ramachandra Guha questions whether the Indian state is "up to the job of doing more to tackle poverty". Mainstream debates about the persistence of poverty and pervasive failures in public service delivery in India tend to overdraw on the state's innate ability to deal with this.

Take the recurring instances of midday meal poisoning, the latest being the tragedy in Bihar's Saran district. If the headmaster follows the minimum protocols for management of the kitchen and school inspectors do basic supervision, and all these processes are embedded in an institutionalised system of accountability, such incidents could easily be averted. In its absence, even a mundane task like running a school kitchen, when done in scale, seems fraught with complications.

"State capability" can be broadly defined as the ability of a government bureaucracy to get things done. It is a measure of the state's institutional capacity and organisational capital to effectively implement its programmes and deliver basic public services to its citizens.

An inadequacy in state capability invariably manifests itself as implementation deficits. In its absence, process innovations and technologies can get you only so far in managing large groups of stakeholders in complex and dynamic environments. They can help a good system become great, but are less likely to be effective in getting a system trapped in a bad equilibrium to shift to a better one.

The standard response to governance failures is to address them through one of four approaches. The commonest refrain, especially among the urban middle class, predominantly employed in the formal private sector, is an increased role for the private sector. This feeling is at least partially fuelled by the representativeness bias arising from contrasting high-profile examples of "successful" private businesses with pervasive government failures and the internalisation of their own workplace norms. And it is reinforced by opinion makers and the mainstream media.

The other common response is to embrace participatory governance, which promotes the empowerment of communities through decentralised decision-making. Women's self-help groups and microloans are the commonest examples of this approach. It is argued that such "bottom-up" strategies alone can ensure accountability and transparency, critical to the achievement of sustainable and inclusive development.

Another strategy places faith in innovative approaches to address governance failures. Accordingly, conditional cash transfers, unlocking the energy of social enterprises, establishment of a strong anti-corruption ombudsman, extensive use of the latest in information technology, process re-engineering within public systems, applying insights from behavioural psychology and so on are paths to improving governance and eliminating poverty.

Finally, influential academics believe that programme design and evaluation, using rigorous field experiments, can be an antidote to governance failures. Accordingly, they advocate an evidence-based, incentive compatible design of policies and their evaluation.

I believe that all the aforementioned approaches take a partial view of the complex development process. Provision of basic public goods, an effective welfare state, delivery of statutory services and the protection of basic civil and property rights are the responsibilities of governments everywhere, and will continue to be so. The private sector can, at best, be a marginal contributor to alleviating failures in these. The limitation of the community development driven approach, as Harvard professor Lant Pritchett provocatively argues, is that it is "all bottoms and no ups" — more effective as a social empowerment than an economic growth strategy.

Pataliputra Lost

Jul 31, 2013

The shocking terrorist attack at Bodh Gaya and the midday meal tragedy show that the icon of inclusive development has transformed from a sushasak to a kushasak

During the late Mughal era Bihar was part of Bengal suba and remained so for most of British rule. As an appendage of Bengal for a couple of centuries, Bihar remained a backward region. It was only in 1911 that it became a separate province.

When I was a student in Patna in the 1930s and early 1940s, Biharis constituted a minority among the intelligentsia. It was Bengalis who dominated — as professors, school teachers, government officers, lawyers, doctors and even clerks.

The situation was different in Uttar Pradesh. Inheritor of the cultural heritage of the Lucknow nawabs and pure Urdu, it had an air of superiority. I once represented Patna University at an All-India Inter-University Debate in Allahabad in 1941. When my turn came to speak, I was hooted and called a “Bihari buddhu” (fool). I promptly replied, “Bihari Buddha, not Bihari buddhu”. Perhaps that’s what got me the prize!

For centuries — under the Mauryas, and later the Guptas — Bihar led the country in every sphere of human endeavour. The whole of India for the first time became one political entity. Bihar was the centre of culture, knowledge and civilisation and impacted all Asia.

During the medieval period, Sher Shah Suri from Bihar was a pioneer of secularism and good governance in the country. Mughal Emperor Akbar followed in his footsteps. Later, Veer Kuer Singh was the most successful military leader of the 1857 war and was the only one to repeatedly defeat British troops in battle. Bihar provided the platform for the Mahatma to launch the Freedom Movement.

Jayaprakash Narayan, also from Bihar, was the hero of the 1942 Quit India Movement and, in 1977, the saviour of Indian democracy. Dr Rajendra Prasad was the most loyal follower of the Mahatma, who held him in high regard for his legal acumen. He became the first President of India and had an unmatched 11 years in office. In 1956, the US expert Appleby, invited by Nehru, reported that Bihar was the best administered state. It was an irony that feudal Bihar remained backward.

From the mid-60s, Bihar started rapidly going down the slippery slope of rampant corruption and rank casteism. It reached its nadir under Lalu Prasad Yadav. Bihar became a basket case. This dismal situation started improving when Nitish Kumar took over as chief minister.

The growth rate of Gujarat and Bihar are often compared. Bihar started from a lower level and Gujarat from a higher base. Like Narendra Modi, Nitish Kumar was viewed as a possible Prime Minister. Nitish Kumar persistently denied he had any such ambition but his actions spoke differently. He was happy to be in the National Democratic Alliance and enjoyed the fruits of office as Cabinet minister in the Union government while his colleagues in the coalition, Ram Vilas Paswan and Omar Abdullah, resigned in the wake of the 2002 Gujarat riots.

As his reputation as an efficient chief minister grew, he started trying to overtake Mr Modi and played the “secular” card. Posters showing him holding hands with Mr Modi, displayed by his alliance partner, the BJP, during an all-India meet of BJP leaders in Patna irked him so much that he called off the dinner he was to host for them.

He managed to get a Pakistani parliamentary delegation to visit Bihar and give him a certificate of good governance. Despite 26/11, he chose to go on a goodwill visit to Pakistan.

His intentions were obvious. He started talking of Bihari pride like Mr Modi boasted of Gujarati pride. He demanded “backward state” status for Bihar and offered political support to the Congress or any party that obliged. This meant that Bihar was up for grabs to the highest bidder! This was hardly in keeping with Bihari pride.

Why Muslims should confront the IM

Ashish Khetan

The Indian Mujahideen are for real, and investigators have more evidence about them than they would have us believe

There is an overwhelming body of evidence available with Indian investigative agencies to show that between 2003 and 2008, a group of Muslim extremists who called themselves Indian Mujahideen (IM) went about bombing temples, trains and marketplaces, even as the police across India kept implicating dozens of innocent Muslims in these incidents.

Thirteen Muslim youth, mostly from the Students Islamic Movement of India (SIMI), were falsely implicated in the 2006 Mumbai train blasts. About half-a-dozen SIMI activists were implicated in the Jaipur blasts of 2008. More than a dozen were framed in a series of blasts that rocked cities and towns in Uttar Pradesh (U.P.) between 2005 and 2008. The material evidence available with investigative agencies now, to which I have access, indicates that all these blasts were carried out by the IM. But instead of accepting the mistakes made in the past and seeking out the real culprits, they have brushed this new evidence under the carpet and kept persisting with cases they know are bogus.

Much to answer

IM suspects arrested post-September 2008 were booked only in those cases that were still not “solved,” such as the 2008 Delhi and Ahmedabad blasts and 2007 ‘Gokul Chat’ Blast in Hyderabad. The evidence of their involvement in old bomb blasts was never brought to the notice of any court. Why? Doing so would have meant, one, that different State agencies between 2003 and 2008 were framing innocent Muslims while the IM was busy bombing one city after another. Two, it would have meant taking action against officers who made wrong arrests and thus virtually gave the IM a free reign to unleash mayhem. Three, correcting their errors would entail releasing innocent Muslims languishing in jails from Mumbai to U.P. to Rajasthan to Delhi. That would have opened a Pandora’s box. So-called secular governments from Maharashtra to U.P. would have had a lot to answer to the Muslim community, besides the people in general.

Neither our agencies nor our politicians have had the courage or will to make amends. By mixing fact with fiction, the Indian state has created a situation where we do not know who is guilty and who is innocent. It has created a situation where for some, the Sadhvi Pragyas and Assemanands are innocent while for others, the Atif Ameens and Chhota Sajids are innocent. It has created a situation where the real accused would never have to answer for killing dozens of innocent civilians. On the other hand, those who are completely innocent may be sent to the gallows.

India's Mountain Strike Farce

New Delhi's China policy illustrates how meekness attracts bullying.
By BRAHMA CHELLANEY

Indian Prime Minister Manmohan Singh's government has announced the formation of a "mountain strike corps" to defend India's Himalayan border with China. With its 50,000 troops and action-movie name, the new outfit might seem like the muscular response New Delhi needs to counter this summer's spate of Chinese border incursions. But the announcement represents another example of Indian strategic timidity in the face of Chinese aggression.

The Chinese army's Himalayan campaign is a stealthier counterpart to Beijing's naval aggression in the South and East China seas. Beijing is pursuing a strategy of "salami slicing"—a steady progression of small actions, none of which serves as a casus belli by itself, that over time leads to a strategic transformation in China's favor.

Nuclear-armed India, despite its size and capability, has been paralyzed in responding to this strategy. Time and again Mr. Singh's beleaguered government has chosen concession over confrontation, as if India's only options are appeasement or all-out war.

This weakness was on full display in April and May when the Chinese army seized land inside India's Ladakh region. China withdrew its encamped troops only after three weeks of negotiation ended in virtual Indian capitulation. In exchange for China's withdrawal from territory it had no right to occupy, India demolished a line of defensive fortifications in Ladakh's Chumar area and ended forward patrols in the area. It also agreed to consider a Chinese-drafted "Border Defense Cooperation Agreement."

That agreement would replace more equitable 1993, 1996 and 2005 border accords with one that ratifies China's preferred approach to territorial disputes: What is ours is ours and what is yours is negotiable.

European Pressphoto Agency

The Indo-Tibetan Border Police in training.

Encouraged by this bloodless victory, China has since upped the ante. Its military provocations include multiple raids and other forays across the Himalayan frontier, the world's longest disputed border. On June 17, a People's Liberation Army platoon raided Chumar, smashing up Indian surveillance and other equipment and taking away security cameras.

India’s First Ballistic Missile Sub to Begin Sea Trials

By Zachary KeckJuly 30, 2013

India’s first indigenously-built, nuclear-powered ballistic missile submarine, INS Arihant, is set to begin sea trials shortly India’s The Tribune reported on Sunday, citing unnamed Indian officials.

“The nuclear reactor that will power the submarine can be formally declared ‘critical’ anytime now, while the nuclear-tipped missiles to be launched from underwater are in place,” an unnamed source was quoted as saying.

The sea trials are set to begin in mid-August with the wait being attributed to the rough waters caused by India’s yearly monsoon, which begins to weaken in mid-August according to the source. Once it sets sail the submarine will undergo extensive testing underwater including test launching submarine-launched ballistic missiles.

Once the INS Arihant is ready to conduct deterrent patrols, perhaps as early as the end of this year, India will have at least a nascent nuclear triad—the ability to launch nuclear weapons by land, air or sea.

India is only the sixth country to acquire a sea-based nuclear leg, with the others being the U.S., the UK, France, Russia and China, albeit—as noted last week—Beijing’s ballistic missile submarines are not believed to have conducted deterrent patrols.

India’s quest to build a nuclear-powered ballistic missile submarine (SSBN, in U.S. Navy parlance), reportedly began in 1970 under Prime Minister Indira Gandhi. Code-named the Advanced Technology Vehicle (ATV) program, its existence was kept under wraps for more than three decades ago before the former chairman of India's Atomic Energy Commission, PK Iyengar, revealed it at a public forum back in 2007.

“Indian scientists and technologists are capable of making light water reactors and we are already constructing an LWR at Kalpakkam in south India for the submarine,” Iyengar was quoted by The Guardian at the time as saying.

Russia is thought to have helped design the vessel, although India claims it built the LWR entirely by itself.

The INS Arihant (slayer of enemies) was first launched in 2009 without any corresponding submarine-launched ballistic missiles or the LWR. The vessel weighs 6,000 tons, has a length of 367 feet (110 meters) and reportedly travels at twenty four knots underwater. According to the Tribune, it cost Rs 15,000 crore (appx. US$2.5 billion) to build.

It is powered by an 80-mw pressurized water reactor that uses uranium as fuel and light water as a coolant and moderator. This will allow it to operate quietly and stay submerged for about 2 months at a time.

The SSBN can reportedly carry up to 12 K-15 Sagarika submarine-launched ballistic missiles (SLBMs), that have a range of around 700 km, or 4 K-4 SLBMs, which have a range of 3,500 km and are comparable in many ways to India’s Agni-III land-based missile. The K-4 Missiles are still under development, however. It is also believed to be developing a K-5 SLBM with a range of nearly 1,864 mi.

In 2008, Rear Admiral (retired) Raja Menon was quoted by India Today as saying, “One submarine carries at least 12 [K-15] missiles with Multiple Independently Targetable Reentry Vehicles, which could mean as many as 96 warheads.”

India first announced that it had tested a K-15 SLBM from a submerged pontoon at a depth of 50 meters in January of this year (see video below). At the time it said that it had secretly conducted over a dozen earlier tests of the K-15, and that the development phase was now complete.

Karakoram Highway: China’s Treacherous Pakistan Corridor

July 30, 2013
By Adam Hodge

China’s use of Pakistan’s Gwadar port depends on the rugged, unreliable Karakorum Highway.

When a Chinese company took control of Pakistan’s deep-sea Gwadar Port in February, much of the commentary focused on whether or not it heralded a Chinese military vanguard in the region. Though conventional wisdom seemed to be that a militarized Gwadar Port was a fretful prospect, for the moment, Gwadar is just an economic beachhead on China’s “march west”.

But while the port is militarily undeveloped, it is also lacking as a base for trade. As The Diplomat’s James R. Holmes has pointed out, though the port occupies a prime position at the mouth of the Strait of Hormuz, it harbors other serious geographic disadvantages. Most notably, the neighboring province of Baluchistan is home to an entrenched insurgency and frothing sectarianism, and makes for a perilous place to lay a trade route.

But China has bigger problems in wanting to use Gwadar port as an economic base, problems that ironically lie more than 2,000 kilometers away, high in the cloud-tipped Karakoram mountain range in northern Pakistan. The success of Gwadar as a Chinese trading post hinges on the political and geological stability of the 1,300-kilometer Karakoram Highway (KKH), China’s only overland link to Pakistan. Without the KKH, which cuts an impressive path through rugged, high-altitude terrain, there is no land route to Gwadar. Without a reliable land route to the port, Gwadar’s value decreases dramatically; and the KKH is anything but reliable.

Beijing knows this. On July 5, Chinese Premier Li Keqiang and newly re-elected Pakistani Prime Minister Nawaz Sharif signed eight memoranda of understanding agreements with an eye toward accelerating economic integration between the countries. Among these was a pact to develop an “economic corridor” from Kashgar, in northwestern China, to Gwadar. It included the establishment of a joint committee to oversee the upgrade and realignment of the KKH, which is desperately in need of improvement

The KKH was a largely Pakistani endeavor throughout its initial phases in the 1950s and 1960s. In the mid-1970s, however, the Chinese marshaled 10,000 road builders into Pakistan – almost one for every Pakistani worker at the time – to complete the highway. Beijing did so because it hoped to sweeten the relationship between the two countries and augment trade, goals the project has more or less accomplished. The highway has remained sealed in some sections, unsealed in others, with Pakistani and Chinese workers improving the most hazardous bits in piecemeal fashion over the years.

*** The PC16: Identifying China's Successors

Tuesday, July 30, 2013

Stratfor

By George Friedman

Editor's Note: For more information on purchasing the full PC16 report, which assesses each member of the grouping, and for details on custom briefings and analysis for your organization, please click here.

China has become a metaphor. It represents a certain phase of economic development, which is driven by low wages, foreign appetite for investment and a chaotic and disorderly development, magnificent in scale but deeply flawed in many ways. Its magnificence spawned the flaws, and the flaws helped create the magnificence.

The arcs along which nations rise and fall vary in length and slope. China's has been long, as far as these things go, lasting for more than 30 years. The country will continue to exist and perhaps prosper, but this era of Chinese development -- pyramiding on low wages to conquer global markets -- is ending simply because there are now other nations with even lower wages and other advantages. China will have to behave differently from the way it does now, and thus other countries are poised to take its place.

Reshaping International Order

Since the Industrial Revolution, there have always been countries where comparative advantage in international trade has been rooted in low wages and a large work force. If these countries can capitalize on their advantages, they can transform themselves dramatically. These transformations, in turn, reorganize global power structures. Karl Kautsky, a German socialist in the early 1900s, wrote: "Half a century ago, Germany was a miserable, insignificant country, if her strength is compared with that of the Britain of that time; Japan compared with Russia in the same way. Is it conceivable that in 10 or 20 years' time the relative strength will have remained unchanged?" Lenin also saw these changes, viewing them as both progressive and eventually revolutionary. When Kautsky and Lenin described the world, they did so to change it. But the world proved difficult to change. (It is ironic that two of the four BRIC countries had been or still are Communist countries.)

When it is not in the throes of war, trade reshapes the international order. After World War II, Germany and Japan climbed out of their wreckage by using their skilled, low-wage labor to not only rebuild their economy but to become great exporting powers. When I was a child in the 1950s, "Made in Japan" meant cheap, shoddy goods. By 1990, Japan had reached a point where its economic power did not rest on entry-level goods powered by low wages but by advanced technology. It had to move away from high growth to a different set of behaviors. China, like Japan before it, is confronted by a similar transition.

The process is fraught with challenges. At the beginning of the process, what these countries have to sell to their customers is their relative poverty. Their poverty allows them to sell labor cheaply. If the process works and the workers are disciplined, investment pours in to take advantage of the opportunities. Like the investors, local entrepreneurs prosper, but they do so at the expense of the workers, whose lives are hard and brutal.

It's not just their work; it's their way of life. As workers move to factories, the social fabric is torn apart. But that rending of life opens the door for a mobile workforce able to take advantage of new opportunities. Traditional life disappears; in its place stand the efficiencies of capitalism. Yet still the workers come, knowing that as bad as their lot is, it is better than it once was. American immigration was built on this knowledge. The workers bought their willingness to work for long hours and low wages. They knew that life was hard but better than it had been at home, and they harbored hopes for their children and with some luck, for themselves.

As the process matures, low wages rise -- producing simple products for the world market is not as profitable as producing more sophisticated products -- and the rate of growth slows down in favor of more predictable profits from more complex goods and services. All nations undergo this process, and China is no exception. This is always a dangerous time for a country. Japan handled it well. China has more complex challenges.

The 16 Countries That Will Replace China ***

July 30, 2013

China has become a metaphor. It represents a certain phase of economic development, which is driven by low wages, foreign appetite for investment and a chaotic and disorderly development, magnificent in scale but deeply flawed in many ways. Its magnificence spawned the flaws, and the flaws helped create the magnificence.

The arcs along which nations rise and fall vary in length and slope. China's has been long, as far as these things go, lasting for more than 30 years. The country will continue to exist and perhaps prosper, but this era of Chinese development -- pyramiding on low wages to conquer global markets -- is ending simply because there are now other nations with even lower wages and other advantages. China will have to behave differently from the way it does now, and thus other countries are poised to take its place.

Reshaping International Order

Since the Industrial Revolution, there have always been countries where comparative advantage in international trade has been rooted in low wages and a large work force. If these countries can capitalize on their advantages, they can transform themselves dramatically. These transformations, in turn, reorganize global power structures. Karl Kautsky, a German socialist in the early 1900s, wrote: "Half a century ago, Germany was a miserable, insignificant country, if her strength is compared with that of the Britain of that time; Japan compared with Russia in the same way. Is it conceivable that in 10 or 20 years' time the relative strength will have remained unchanged?" Lenin also saw these changes, viewing them as both progressive and eventually revolutionary. When Kautsky and Lenin described the world, they did so to change it. But the world proved difficult to change. (It is ironic that two of the four BRIC countries had been or still are Communist countries.)

When it is not in the throes of war, trade reshapes the international order. After World War II, Germany and Japan climbed out of their wreckage by using their skilled, low-wage labor to not only rebuild their economy but to become great exporting powers. When I was a child in the 1950s, "Made in Japan" meant cheap, shoddy goods. By 1990, Japan had reached a point where its economic power did not rest on entry-level goods powered by low wages but by advanced technology. It had to move away from high growth to a different set of behaviors. China, like Japan before it, is confronted by a similar transition.

The process is fraught with challenges. At the beginning of the process, what these countries have to sell to their customers is their relative poverty. Their poverty allows them to sell labor cheaply. If the process works and the workers are disciplined, investment pours in to take advantage of the opportunities. Like the investors, local entrepreneurs prosper, but they do so at the expense of the workers, whose lives are hard and brutal.

It's not just their work; it's their way of life. As workers move to factories, the social fabric is torn apart. But that rending of life opens the door for a mobile workforce able to take advantage of new opportunities. Traditional life disappears; in its place stand the efficiencies of capitalism. Yet still the workers come, knowing that as bad as their lot is, it is better than it once was. American immigration was built on this knowledge. The workers bought their willingness to work for long hours and low wages. They knew that life was hard but better than it had been at home, and they harbored hopes for their children and with some luck, for themselves.

Will China’s Economy Crash?

Op-Ed July 29, 2013

Summary 

Experts are sounding warning signals about China’s slowing growth, but if China recalibrates its economy in the right way, everyone will benefit. 

After many years of euphoria over China's rapid growth and the country's apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it. 

China's economic model has relied heavily on investment and debt. It shouldn't be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.

During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use. 

A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening. 

To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth. 

But this cannot happen except at lower growth rates. 

So what happens next -- will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run. 

What is far more likely is that in the coming years, China's gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption. 

Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well. 

Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis. 

Beijing has huge challenges ahead. China's growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend. 

This will not be easy to pull off, but there are positive signs. Xi's government seems determined to make the necessary changes, even at the expense of much slower growth. 

Even if GDP growth declines but average Chinese household income grows at 5% to 6% a year, it would put China in the right direction. 

As for the rest of the world, there's no reason to panic over China's economic slowdown. Contrary to popular beliefs, China is not the global engine of growth; it is merely the largest arithmetic component of global growth. What drives global growth is demand. China, with a large trade surplus, is not a net provider of demand to the world. 

What matters to the world, in other words, is not how fast China grows but rather, how its trade with foreign partners evolves. If China rebalances in an orderly way, its imports of manufactured goods and services should rise faster than its exports. This will be good for the world. 

What's more, manufacturing industries around the world that lost out to China in the export business will benefit. When wages rise for Chinese workers -- so that they have more money to buy goods and services at home -- it means other developing countries will have a chance to compete for exports if they offer lower labor wages. 

There is no doubt that Beijing has a long road ahead in terms of managing a huge economy, but as of now there should be nothing surprising or unexpected about the slowing growth of China. It will probably benefit the Chinese people and the global economy. 

Will China's economy crash?



By Michael Pettis, Special to CNN
July 29, 2013 


Should we be concerned about China?

STORY HIGHLIGHTS

Michael Pettis: Some experts think that China's economy is in big trouble

Pettis: Most likely, China's growth rate will decline in the coming years

He says the country needs to shift from investment to consumption model

Pettis: If China recalibrates its economy in the right way, everyone will benefit

Editor's note: Michael Pettis is a professor of finance at Peking University, a senior associate at the Carnegie Endowment for International Peace and author of "The Great Rebalancing" (Princeton University Press).

(CNN) -- After many years of euphoria over China's rapid growth and the country's apparently inevitable rise to global economic dominance, the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.

Fortunately, the new story may be as muddled as the old one.

China's economic model has relied heavily on investment and debt. It shouldn't be a surprise that after many years of tremendous growth driven at first by badly needed investments, Chinese spending on infrastructure and manufacturing capacity is slowing down.

During the same period, debt levels surged as borrowed money poured into more highways, airports, steel mills, shipyards, high-speed railways, and apartment and office buildings than the country could productively use.
Michael Pettis

A few economists predicted as far back as 2006 that China would face a serious debt problem. By 2010, it became obvious even to the most excited of China bulls that this was indeed happening.

To protect itself from the risk of a debt crisis, China must bring spending to a halt. Beijing now wants to rebalance the economy away from its excessive reliance on investment and debt, and to increase the role of consumption as a driver of growth.

So what happens next -- will China collapse? Probably not. A financial collapse is effectively a kind of bank run, and as long as government credibility remains high, banks are guaranteed and capital controls are maintained, it is unlikely that China will experience anything like a bank run.

What is far more likely is that in the coming years, China's gross domestic product growth rate will continue to decline as the country focuses on stimulating consumption.

Growth rates during the administration of President Xi Jinping are unlikely to exceed 3% to 4% on average if the economic rebalancing is managed well.

Will the slower growth rate be a disaster for China? Certainly, it would be huge departure from the growth rate of roughly 10% a year for nearly three decades. Would much lower growth rates create high unemployment and huge dislocations for the economy? Some are worried about such scenarios. But the Chinese economy has so far shown a lot of resilience despite passing storms such as the global financial crisis.

Beijing has huge challenges ahead. China's growth has been a boon to large businesses, the state, the powerful and the wealthy elite. What the Chinese government needs to do is recalibrate growth so that average household incomes can rise and consumers have more money to spend.

This will not be easy to pull off, but there are positive signs. Xi's government seems determined to make the necessary changes, even at the expense of much slower growth.

China’s Solar Industry Wins Reprieve

By James Parker
July 30, 2013

China’s embattled solar industry received a semi-reprieve last week when the EU-China solar trade spat reached a partial settlement. Whilst the deal agreed will provide some relief for China’s photo-voltaic (PV) cell makers, there is still room for European competitors to challenge the ruling, and it must be approved by the EU Commission later this week. What’s more, the EU is also considering separate duties on Chinese solar panels to counter alleged subsidies received by Chinese producers.

The preliminary and threatened follow-up action by EU Trade Commissioner De Gucht had posed a serious threat to China’s PV cell manufacturers, particularly given the unrelated and deeper problems facing the industry. The potential catastrophe facing China’s solar industry should the EU have continued with the full range of potential action was highlighted by the strength of the Chinese response: Beijing launched what were widely deemed to be retaliatory actions against not only the solar-related product of polysilicon, but also against imports of European wine, with a possible case against luxury cars also being mentioned.

After the watered-down action was announced by Brussels on Saturday, it took only a day for the Chinese side to announce a reciprocal freeze of these investigations into wine and polysilicon. The Chinese side indeed has much reason to be pleased, as the deal’s minimum price clause (56 cents per watt) is much lower than the level requested by the EU complainants (80 cents per watt or more). On the other hand, there is also a volume limit intended to “carve-out” a segment of the European solar market for non-Chinese manufacturers.

As it is, there is still much bitterness in the air. As the EU Commission faced a rare lack of support from EU member states, accusations about the reliability of investigative methods have been made, and Milan Mitzschke, president of EU ProSun – the body representing European solar manufacturers – has described the announced agreement as “…not a solution but a capitulation”. EU ProSun also already suggested that they will mount a legal challenge to the settlement.

On top of these doubts, there is still a further EU trade case targeting alleged subsidies received by Chinese solar manufacturers that has yet to be resolved. This fact probably explains why the Chinese investigations into wine and polysilicon have been “frozen” rather than removed entirely.

Even with the soft settlement in the EU anti-dumping case, China’s solar manufacturers still face a host of difficulties. Their debt problems and solvency predicaments continue, overcapacity still haunts the sector, and consolidation remains likely in the future. These firms must now find new markets – be they in the non-EU abroad or, if the Chinese government decides to help, back home. There is still plenty of drama to come. 

Peace Dividend

BY DANIEL ALTMAN | JULY 29, 2013

Why China stands to gain the most from the Middle East talks.

Remember when the Israeli-Palestinian conflict made front pages every day and the United States fought wars to secure oil and gas in the Middle East? Back then, the region's political problems were of primary economic importance to Americans. But now, as the prospect of energy independence dawns, to whom does the Middle East really matter?

On the surface, it sure seems like American interests are at stake. Thirteen years almost to the day after the Camp David summit failed, negotiations have started anew in Washington. A lot has changed since 2000, however.

Monthly imports of crude oil and other petroleum products from the Persian Gulf peaked at 96.7 million barrels in April 2001. This year, they've been hovering around 50 million to 60 million barrels. Natural gas imports from the Middle East are also much smaller today than they were in 2000, but they've always been dwarfed by pipeline imports from Canada. Even American imports of liquefied natural gas -- a major export for Qatar and Yemen -- come primarily from Trinidad and Tobago. And overall, imports of natural gas have been falling since 2007.

Petroleum imports from the Middle East aren't as important as they used to be for the European Union, either. In 2001, about 25 percent of the EU's imports came from the Middle East. Last year, the share was just 15 percent; Russia and the rest of the former Soviet Union supply far more of Europe's oil.

So where is all the Middle East's oil going? Countries in East Asia depend on it. China, for example, got about half its crude from the Middle East in 2011. But that figure paled next to that of Japan, which imports 87 percent of its oil from the Middle East.

Of course, oil and gas aren't the only economic reasons to worry about the Middle East. Egypt's Suez Canal is still a critical passageway for commerce, and its throughput more than doubled between 2001 and 2012. Not much of that traffic was traveling to or from the United States, though. The biggest users were shippers in Southeast Asia, the Red Sea region, and Northern Europe.

As a whole, the European Union received about 4.4 percent of its merchandise imports from Gulf countries in 2012. Adding Egypt, Israel, Jordan, Lebanon, Syria, and Turkey brought the total to 8.3 percent. Both of these shares have been increasing in recent years. Meanwhile, China's total trade with the Middle East has been growing steadily, too; imports from the region tripled between 2007 and 2011.

Trade between the United States and the Middle East is much smaller, though it has increased since the collapse at Camp David. Thanks in part to new trade agreements, the share of American imports of goods and services coming from the region has risen by about two-thirds, from 3 percent in 2000 to 4.9 percent in 2012. The twist is that the new trade agreements -- and trade with the Middle East in general -- have often been pursued for political reasons.

Bahrain, Jordan, and Oman were never going to be the most crucial trading partners for the United States. Nor are they necessarily the most economically efficient sources of imports; other countries might have offered Americans lower-priced goods under the same favorable trading rules. But strengthening economic ties in the Middle East has long been seen as a useful underpinning for strategic goals: protecting Israel, isolating Iran, and maintaining a local military presence. As a result, the importance of the American economic relationship with the Middle East has been artificially maintained.

China Is Set to Suffer the Skyscraper Curse

Jul 30, 2013 2 

Auditors seeking to head off a Chinese crash are rushing to scrutinize the debt-swollen books of the country’s local governments. Economists are poring over statistics, bond spreads, electricity gauges and stock valuations. They might all have more luck if they got their noses out of the books and looked up.

On July 20, the Broad Group broke ground on Sky City on the outskirts of the south-central city of Changsha. The skyscraper will rise 838 meters (2,749 feet) into the heavens to become the world’s tallest building. If that weren’t feat enough, the project aims to wrap up construction in 90 days and at almost half the cost of Dubai’s Burj Khalifa, which it would top.


William Pesek is based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region. 

Broad Chairman Zhang Yue is building not just a piece of history but also an almost-perfect metaphor for all that’s wrong with China’s economy. If his vanity project were the only indicator available to economists, they would have to conclude that a crisis was nigh.

Of course, no one knows if China is cascading into a crisis -- not even Premier Li Keqiang, who is charged with reining in overcapacity, runaway investment (much of it financed by local governments) and an addiction to exports. This triumvirate once propelled China’s 10-percent-plus growth; now they’re huge anchors dragging the economy down.

Yet the experiences of Japan, Malaysia, the United Arab Emirates and the U.S. show an uncanny correlation between architectural one-upmanship and economic doom. In the 1920s, for example, New York’s Chrysler and Empire State buildings opened amid the Great Depression. Later, New York’s World Trade Center and Chicago’s Sears Tower presaged fiscal crises and the breakdown of the Bretton Woods system.
Asian Crisis

In the late 1990s, Kuala Lumpur’s Petronas Towers opened at the height of the Asian crisis. A decade later, Dubai’s economy hit a wall right on cue as the 828-meter Burj Khalifa was getting its Guinness World Records mention.

Skyscrapers are akin to giant punctuation marks made of steel, glass and concrete, screaming, “Check us out!” More than technological progress, they usually reflect hubris. Exaggerated pride and easy credit -- terrible bedfellows in the best of times -- fuel irrational growth and valuations; they drive developing nations toward overreach. This is precisely where China finds itself in 2013 as the economy’s excesses spark fears about financial turmoil, debt defaults and social instability. China will have to be very lucky to avoid the skyscraper curse.

The Changsha project is a particularly interesting metaphor for China’s economy. The blistering pace at which the building will go up -- more than two stories a day -- raises serious concerns. Broad Group’s claim to fame is prefabricated steel and concrete modules that supposedly make construction cheaper and more ecologically friendly. Last year, it put up a 30-story hotel in just 15 days. Yet how well can a 202-story building that is essentially a giant Lego set withstand earthquakes, extreme wind or fire?

China, too, has grown with seemingly impossible rapidity. But fast and cheap growth doesn’t mean China has created a stable, efficient or diverse economy. That has become especially apparent since 2008, when Beijing nimbly steered around the global crisis. It only did so by doubling down on credit excesses that it’s now having trouble controlling -- including asset bubbles and the surge in local-government debt.

China’s impatience in building its economy, for example, has left little time for developing indigenous corporate brands. Instead, the state is more interested in buying established overseas businesses and demanding technology transfers as the price of access to the Chinese market. The trouble with skipping some of the development steps is that occasionally one trips.