What Could China look like in the year 2040? A perspective for the next 30 years

from my book “Australia and the World in 2040“. Complete copies available in February 2018

In the early part of the 21st century, China was the fastest growing economy in the world and overtook the US in GDP terms in 2015. It also had the greatest foreign surplus in the world, and was the largest lender to the US, the biggest foreign debtor nation in the world.

When Xi Jinping came to power in 2011, the per annum growth of China’s economy was beginning to slow from the heady 10-15% rates for most of the 25 years to 2012 to a more modest 6-8%. Although still very high by world standards, slow growth in China meant a lessening of the Communist Party’s legitimacy (at least that was the fear in the minds of its leaders). Much of the high growth in that 25 year period had come from the rapid industrialisation brought about by Deng Zou Ping’s reforms at the 1979 plenum which turned the country into a market economy, at least for manufacturing products.

This resulted in about 400m people migrating from the country sides into cities where they manned the new factories, often in very primitive conditions. It nevertheless saw most of those 400m people go from rural poverty to earning a living wage – an unheard of event anywhere in the world up until that time. By 2010, though, much of China’s advantages in basic manufacturing were eroding with higher wages, higher costs and a higher exchange rate. Many factories were moving to lower cost countries such as Vietnam, the Middle East and Africa.

China now faced new reform challenges, which would see itself move up the “food chain” from low skill manufacturing, to high tech, innovative design and manufacturing. It also needed to rapidly develop its services sector such as education, finance, medical, bio-technology.

They also needed to rapidly reform agriculture where there was no private ownership of land (it was largely controlled by regional party chiefs), so there had been nothing like to development of rural land under private ownership equivalent to what had happened with city dwellings. As a consequence, Chinese agriculture was low tech, low productivity, and the peasants had little incentive to develop their land.

They also singularly lacked what most western countries took for granted, and which China’s rapidly growing and well educated middle class were demanding: rule of law, modern government services such as a social security safety net, modern hospitals, pensions, consumer laws, environmental laws. Most of all though, what Chinese people most wanted was a society free of corruption, especially by part bosses.

At the historic plenum in 2013, Xi Jinping discussed and flagged a number of reforms which in many ways exceeded Deng Zou Ping initiative in the early 1980s. For the first time, the Plenum’s official document committed  for markets to play a “decisive” role in the allocation of resources in the economy. In the coming years this lead to the role of state own enterprises being considerably diminished, with many of them being privatised or closed (if they were too inefficient).

The SOEs, which in 2013 represented over 50% of economic output, were also expected to stand on their own merits in terms of funding, and banks were liberalised and skilled in terms of their commercial lending activities in order for this to be brought about. These reforms resulted in a number of enterprises going to the wall (bankruptcies in SOE’s were allowed for the first time in 2016), but it also resulted in a number of them becoming internationally competitive, and a number of them grew into major global corporations. In 2014, there were 2 Chinese companies in the top 1000 companies (outside the US) by capitalisation. By 2030, there were 55, all growing out of reformed SOEs of 2014, and all public companies floated on the Hong Kong and Shanghai Stock exchanges

To support the 2013 reforms, financial institutions were up-skilled in money market operations as the Party announced that as of the end of 2014 there would be a partial float of the Yuan and a full float by 2016 when it would become the single Chinese currency, both domestic and international, and would be fully convertible. When this came about in January 2016, the currency rose by 25% against the US dollar. Interest rates became market determined by the beginning of 2015, the Chinese Central Bank was made independent of day to day government directive, but was required to work within parameters determined by the government to achieve certain economic outcomes such as exchange rate bands, inflation and unemployment had to be kept within certain bands. Between 2015 and 2020, the government also spent $250m in computerizing their services, particularly to online services, and in boosting the activities and sophistication of the Chinese Bureau of Statistics.

All these changes were primarily designed to make the economy more transparent, less corrupt,  and oriented to moving away from growth coming from investment in export industries to growth coming from productivity improvements and rapidly expanding consumer demand at home. The reforms included:

  1. key economic reforms such as liberalising the setting of interest rates (ie to the market), incentivising innovation, loosening the grip of competition-stifling state-owned enterprises (SOEs) on vital areas of the economy;
  2. allowing private ownership of rural land, and removing the ban on rural residents buying land in cities, which would allow peasants to cash in on the value of the land they work, and thus bring them up to the status of their urban equivalents. It was also hoped that this would unleash a flood of new investment in rural areas, modernising agriculture, and unleashing a further round of rapid growth, It is also seen as a key way to unleash pent up spending from rural areas which would become a major area of growth in consumer spending. This is exactly what happened from about 2018 onwards; and
  3. setting up an independent judiciary at local, regional, and national levels

While at the same time as bringing these economic reforms into being, Xi signalled there would be no political liberalisation following the Plenum in 2013. In fact he considerably strengthened the state security apparatus, doubling its budget between 2013 and 2020. Real political reform would not come until Xi successor came to power in 2023. Over Xi’s time in office, political reforms did take place mostly in the countryside, starting with the election of party officials on local councils. To stand you had to be a member of the communist party, but there were real secret ballot elections as early as 2015 in a number of rural areas. This soon spread to provincial governments by 2020, and the party then formalised its already existing factions of conservative, moderates, modernisers and liberals. If a citizen wanted to vote or stand, you had to be a member of the party. This meant that by the time the President and polit-bureau was elected by all party members in 2028, the party itself had grown from 40m members in 2013 to 750m members. 85% of these members voted in the 2028 elections.

China had always thouight of itself as a great power, it is just that western countries had not allowed it to take what regarded as its rightful place in world affairs. Since 2015, when it became the biggest economy in the world, it began to re-assert itself in the manner of a great power: by 2018, it had 4 million men under arms, 30 nuclear powered submarines and 5 nuclear powered aircraft carriers, and over 5000 supersonic strike fighters which many in the west regard as superior to the US F35 Joint Strike Fighter. It also had a global network of weapon carrying drones controlled out of Hong Kong, and a formidable international spy network.  As a great-power, it had considerable reach, but saw its primacy as being in the AsiaPacific region. The Americans also thought of themselves as an AsiaPacific power, particularly since Barrack Obama refocused them away from Europe and onto Asia in about 2010. Since then, the Pacific became the primary battleground. Interestingly though, it was not the Pacific but the Indian Ocean where tensions initially first came to boiling point between the world’s two superpowers.

Being the largest trading nation in the world, China in 2015 had built its navy into a significant blue water force, although it was still some way behind the US and even India, whose navy was by far its most significant military force. China was determined to make sure all its sea-lanes were kept open, and that trade could flow in and out of China without interference.  In 2015, the most significant of these was not in the Pacific, but in the Indian Ocean. Or, more specifically, the Arabian Sea. This had been for a century or more, one of the busiest sea highways in the world, and was critical for China in particular as the Persian Gulf was its major source of oil and gas. Since the early 1990’s, there has been a great deal of lawlessness around such states as Somalia, Yemen, and the Sudan, in many ways failed states. Somalia also played host to a network of pirates who specialised in boarding western (and sometimes Chinese) freighters, taking their crews and passengers hostage, and then demanding and getting tens of millions of dollars in ransoms.

By 2015, China had just about enough of this. In spite of a large of navies – British, French, German, Italian, American, Australian, Indian, Scandinavian and Japanese – patrolling the Arabian Sea, these hijackings persisted, and were even becoming more daring. China decided to act. First, in the face of mounting international criticism, they sent several divisions of para-troops into Somalia and effectively destroyed the pirate’s operating bases, and killed many of them. Secondly, they put pressure on world banks to freeze their assets. And thirdly, they captured and banished their leader, Jacda Bashire, to the international court in the Hague to be tried (ironic, since they were not a party to the treaty which set the Court up, and did not recognise it as a legitimate legal entity which could preside over its citizens – the same as the US). This effectively ended the pirate operations, at least for some time.

There still remained a core group of criminals who had a organisational structure, and significant wealth through ransoms. On June 5, 2017, one of China’s increasing number of cruise ships was streaming through the South China Sea 2000 kilometres south of Hong Kong and 1000 km east of Vietnam. I was 5.13am. There was an explosion. All 4232 people on board perished, 96% of them being mainland Chinese.

…..to be continued

The Mountain Obama has to climb in his Second Term

With the re-election of Barack Obama for a second term, it is worth reviewing where the US is at as a society and why Obama needs to take some radical surgery to the country’s body politic to make significant progress.

First though, I should say, that if we had to have a global superpower, the US is about as benign as they come. It has been the global policeman for 75 years now, and has presided over a period of unprecedented global growth, prosperity, and largely without war (at least world war). Sadly though I fear this is all about to come to an end. With the rise of China, the US has significant foreign policy and military challenges, which will be difficult to address, especially with the current state of the US economy and what looks like a permanent realignment of relative might of the two super-powers.

Interestingly, there was recently conducted a study by Stanford University about the attitudes of senior American military officers past and present. Surprisingly, for a group you would normally expect to be strongly pro Republican, and pro military spending, nearly eighty percent of them came out strongly for deeply cutting defence expenditures and spending the money on rebuilding America, especially educational institutions, healthcare, infrastructure, and investing in innovation. What drove such a surprising result? Well one thing the US military is, it is not stupid. These officers fully realised, and articulated very forcibly, their long term future depends on a strong economy. Without economic strength, military might disappears viz; the Roman Empire; the British Empire; the Soviet Empire; the Ottoman Empire. These capable individuals realise this very much, and seemingly are willing to articulate the case for change

So far, Obama has been playing a “hands off” approach to foreign policy and when he has intervened to has been remotely i.e. using surrogate armies and/or heavy use of drone aircraft which allows US pilots to fight a war from the safety of their own US located Airbase. With China, both sides have been treaded warily as they size each other up in Asia, and Asia skirmishes have largely been between China and US allies, particularly over the islands in the South China Sea.  There will come a time though when the US will be forced to act in Asia e.g. North Korea, Pakistan, Iran. That will be Obama’s real test.

On the economic front, there is progress being made, much of it coming from market forces rather than government policies. The most significant of these is the historic comeback of the US as a global energy power, mostly off the back of technology change which has allowed access to huge oil and gas deposits from shale which previously was not possible. This means the US will be a larger producer of petroleum products than Saudi Arabia by 2020. Coupled with this, there are domestic regulations in the US which says that domestic gas demand has to be satisfied before exports can be made, and given the US’s highly developed domestic pipeline system, this means the whole of the US can be supplied from anywhere in the country. With gas now flooding the domestic market from shale, at 20% of the market price in Asia, this has given a huge boost to energy dependent industries which have all of a sudden become internationally competitive again. The lower US dollar has also helped in this. This has caused an improvement in employment rates, and with it, a pick-up in housing prices. It may be that 2013/14 will see America climb out of its self imposed trough US will become a significant exporter of gas in the next five years, no doubt causing a downward pressure on world prices, and therefore becoming a significant stimulant for the world economy.

This though will do little to solve the serious social inequity in the US which is significantly disenfranchising more than 50% of the population. For instance, less than 50% of the population pay income tax. This is not because they are cheating, it is because 50% of the population represents 3% of the national income and so simply do not earn enough money to pay income tax. This means the country as a whole is wasting large chunks of its manpower and brain power simply through lack of opportunity and a third rate education system. Coupled with health system which costs twice as much per capita than any other major OECD country, but gets fourth rate outcomes, this same 50% are poorly supported from a health perspective and from a social income perspective.

In his first term, Obama made some significant progress on these issues against fierce opposition from the Republican congress, notably in Health care, but the US is still significantly behind other equivalent OECD countries. In my view, nothing exemplifies the parlous state of American politics and economics as much as the US health system. The US currently ranks about 15th in the table of health indicators in the OECD, yet nothing gets the Republican Party so worked up than when “Obama care” comes up. Even with the progress being made, there are still significant parts of the US population without adequate health-cover, and treatment will remain significantly more expensive than in equivalent countries until Obama takes on the doctors, and introduces a national health insurance scheme with all the economies of scale that represents.
One thing we can say though is that one of the most consistent things about America throughout its history is its ability to re-invent itself when all seems lost: slavery; the Civil War; the Great Depression; Pearl Harbour; the Cold War; Russians putting the first man into space; Vietnam. Unfortunately, now almost every statistic, financial and no- financial, shows the US in decline. And its political system is so badly broken, in spite of Barrack Obama’s best efforts. There has seemed simply an inability to do anything about it, particularly leading up to the last Presidential election. One of the outcomes of that election though is the naval-gazing that has caused in the GOP, and the willingness of least some in that party to consider modernising themselves. This has not yet seen any change in their politicians in Congress and compromise from their side still seems out of the question.
Let’s take a look at these key social indicators:

  1. 1.       US Social Indicators are going in the wrong direction.
    The Table below from the OECD shows just how badly the US is doing as a society. Nearly all its social indicators are in the bottom half of the OECD league tables.  What the table below shows is the distribution of social indicators across all OECD countries, and breaks them up into countries in the top two deciles, in the bottom two deciles, and in- between. The measures include:
    a. Household income (PPP)
    b. Ratio of employment to population 15-64
    c. Unemployment rate population 15-64
    d. Reading literacy scales
    e. Poverty rates
    f. Percentage finding it difficult or very difficult to manage on current income
    g. Percentage of average gross wage to meet poverty threshold
    h. Life3 expectancy at birth
    i. Infant mortality rate
    j. Rate of positive experience
    k. Percentage of persons satisfied with water quality
    l. Percentage of people expressing a high level of trust in others
    m. Corruption index
    n. Pro-social behaviour
    o. Voting rates
    p. Tolerance of Diversity

Net Score of top decile minus bottom decile scores by OECD countries

Countries Top Tweo Deciles Bottom Two  Deciles Net Score Net Ranking
Australia 8 0 8 3
Austria 4 0 4 10
Belgium 1 0 1 17
Canada 4 1 3 12
Chile 2 8 -6 27
Czech Republic 2 6 -4 24
Denmark 10 0 10 1
Estonia 0 9 -9 32
Finland 7 0 7 5
France 1 0 1 17
Germany 2 0 2 15
Greece 0 5 -5 25
Hungry 1 9 -8 30
Iceland 9 0 9 2
Ireland 5 1 4 10
Israel 0 9 -9 31
Italy 1 3 -2 21
Japan 5 2 3 12
Korea 2 5 -3 22
Luxenberg 5 2 3 12
Mexico 1 11 -10 33
Netherlands 8 0 8 3
New Zealand 6 0 6 9
Norway 7 0 7 5
Poland 0 7 -7 29
Portugal 0 5 -5 25
Slovak Republic 2 8 -6 27
Slovania 2 1 1 17
Spain 2 2 0 20
Sweden 7 0 7 5
Switzerland 8 1 7 5
Turkey 1 14 -13 34
United Kingdom 3 1 2 15
United States 2 5 -3 22

Source: Compilation from OECD Social Indicators in Society at a Glance 2011

There are many highlights in this information, but the most worrying from the US’s perspective is that it comes 22 out of 34, behind such advanced economies as Italy, Spain, Slovenia and equal with Korea. To be fair, it is likely that many of the European countries have gone backwards since the GFC and the Euro crisis(s), but so will have the US. It is likely that countries such as Korea and Israel will have gone ahead of the US since then given neither was greatly affected by either the GFC or the Euro crisis. This probably puts the US about 25th, a disgrace given it is the wealthiest country on earth, and is the most advanced technologically, militarily, and academically.
2. US Obsession with Religion: 
If you look at the measures outlined above, many of the social indicators where the US scores badly is what could broadly be called “social tolerance”. Much of this stems from the blind adherence to religious doctrines for much of the population, and much of its politics. The US is about the only country in advanced economies where it would be impossible for a non-believer to be elected to public office. Over 80% of the population goes to church on Sundays, where in the rest of the anglo world it is less than 10%. Even in the so called Catholic countries of Europe, such as Italy and Ireland, church attendances are less than 20%.
As a direct result of this social intolerance in the US, social measures are well below advanced countries norms. Take teenage pregnancies. With the exception of Russia (practices there are distorted by the championing of abortion as the preferred form of birth control under communism, and these practices continue today), the US has the worst record of teenage pregnancies in the OECD.

 

 

Why? Primarily the opposition of the religious right, and the Catholic Church to both birth control and comprehensive sex education in schools (see table below);
Birth, Abortion and Pregnancy Rates for Developed Countries Ages 15-19 (per 1,000 population)

Countries Births Abortions Pregnancies
Russian Federation 45.6 56.1 101.7
United States 54.4 29.2 83.6
New Zealand 34.0 20.0 54.0
UK 28.4 18.6 47.0
Canada 24.2 21.2 45.4
Australia 19.8 23.8 43.6
Sweden 7.7 17.2 24.9
Denmark 8.3 14.4 22.7
Germany 12.5 3.6 16.1
Netherlands 8.2 4.0 12.2
Italy 6.9 5.1 12.0
Japan 3.9 6.3 10.2

*Note: pregnancies exclude miscarriages; data from mid-1990’s. SOURCE: The Alan Guttmacher Institute report on Teenage Sexuality and Reproductive Behavior in Developed Countries

Related to this, is the increasing trend in the US of children not been vaccinated for preventable diseases, mostly because of opposition from the religious right, who regard it as “ungodly”. The result, eminently preventable diseases such as hooping cough, measles and polio are on the rise there, when even in the developing world, partly as a result of the great work by that great American Bill Gates, and his Gates Foundation, rates are rapidly decreasing. In most of the developed world, these diseases are virtually eliminated by almost universal inoculations of the young.
3. The Paralysis of the American political system.
The US is not a Westminster style parliamentary democracy. Although difficult to believe in the current state of play, the US is not an adversarial system in the sense that Westminster democracies like Australia, the UK and Canada are. The way the US system has worked for 400 years is through compromise and consensus, with much of the power residing with the President. It depends on the legislature reaching compromises in order that the business of government gets done. Now, however, one side, The Republicans, have allowed their party to be high-jacked by extremists (the Tea Partyists), and not very bright ones at that, who regard compromise as a sin (a word used advisedly). Much of their ideology comes from the extreme right parties of Europe (Le Pen in France, the National Front in Britain, the successors to the Nazis in Germany, and One Nation in Australia). These parties generally are made up of disaffected working class voters, often extremely racist, and often under-educated. They carry with them an under-lying hatred of the way things are, and a frustration that they feel they are not getting their “fair share”. Usually, when prosperity continues these people remain in a small minority, but after the economic dislocation in Europe and the US in the last 5 years it has created an environment for extreme views to flourish, in much the same way that the consequences of the Treaty of Versailles and the Great Depression was directly responsible for the rise of Hitler and the Nazis. This time, however, the greatest victim is the US itself, where they have managed to successfully press the self destruct button. This will only be addressed by the moderates in the Republican Party recognising the need to modernise, and being able to convince the social conservatives led by the Tea Party. It is in the early stages of this playing out, but the GOP will rapidly become irrelevant without reform, and will probably lead to the emergence of a new party or permanently entrench the Democrats in the White House.
For the current state of play to continue, the US has almost become ungovernable. No matter how competent the individual is in the White House, and how much his/her heart is in the right place, there seems to be no way by which will emerge a means to bring in the desperately needed reforms which will reverse the poor social outcomes listed above, and restore the United States reputation, previously assumed by the rest of the world, as being the beacon for progressive thinking, social innovation, and sound economic management. The next three years will be critical to this, and Obama will either emerge in his second term as a reformist president in the Roosevelt or Johnston mould, or to be cast out as the biggest lost opportunity in US history.

 

Further to the North Korea discussion…..

An interesting additional dimension to my entry earlier in the week on North Korea  appeared in “The Age” this morning (Saturday 9/3/2013) It states:

Missile Shield Spurs China’s Korea Stance

BY JOHN GARNAUT CHINA CORRESPONDENT BEIJING

CHINA’S support for tougher sanctions against North Korea has been prompted in part by concerns of an evolving USanchored missile defence system on its borders, say Chinese and Western analysts. The missile defence systems involve new land and sea-based radar systems, missile interceptors and intelligence sharing between the US and its regional allies aimed at shooting downa North Korean missile during the relatively lowvelocity launch phase. Analysts note that these systems could also be used to shoot down missiles launched from China’s eastern regions.

 Australia is building three air warfare destroyers with Aegis radar and missile control systems that can be potentially integrated into the US system. ‘‘ North Korea’s test of a nuclear warhead and missile may not bring much of a [direct] threat to China,’’ said Cai Jian, a North Korea expert at Shanghai’s Fudan University. ‘‘ But the response from Japan or South Korea, or America’s strategic advances into the region, are more disadvantageous to China. These are the reasons China opposes North Korea’s tests.’’

 The sanctions against last month’s nuclear test by North Korea were jointly drafted by China and the US and endorsed by the UN Security Council on Thursday night. They will make it more difficult for Pyongyang to shift money and technology in aid of its nuclear program.‘‘ These sanctions will bite and bite hard,’’ said Susan Rice, the US ambassador to the UN. The UN resolution follows Pyongyang’s successful ballistic missile test in December, as well as a stream of bellicose invective. Prior to the agreement, Pyongyang threatened to turn South Korea into ‘‘ a sea of flames’’ .

 Responding to the resolution, Kim Jong-un’s regime said on Friday it was nullifying all agreements of non-aggression and denuclearisation with South Korea and was cutting off the North-South hotline. Officials in Seoul said they were on the alert for any possible attack as Pyongyang seeks to vent its anger. ‘ The higher decibel of invective isa bit worrisome,’’ said Bill Richardson, the former governor of New Mexico, who has travelled to North Korea eight times, most recently in January. ‘‘ It’s the highest negative level I’ve ever seen, and it probably means that the hardline elements, particularly the military and not the Foreign Ministry, are in control.’’ On the other hand, Mr Richardson said, ‘‘ China is part of asignificant sanctions effort, and this may cool the North Koreans down, may temper their response.’’

 Several analysts said the effectiveness of the sanctions would depend on China adopting a far greater level of enforcement than it had previously. Regional missile defence systems are evolving in response to North Korea’s weapons program and also to increasing concerns about China’s military intentions. ‘ It allows Japan to say, ‘We’re buildinga missile defence system against North Korea but we can also use it to defend ourselves against China,’’’ said Scott Harold, a security expert with the Rand Corporation in Hong Kong. Dr Harold said the US had been strongly encouraging South Korea and Japan to engage in defence cooperation . ‘‘ Beijing is worried that this is a prelude toa trilateral alliance or a Pacific version of NATO.’’

 Those defence systems may, in turn, prompt China to build more missiles  ‘ The overall direction in which missile defence is going means the US, Japan, probably South Korea and Australia, get used to and work on the basis of integrating their systems ,’’ said Stephan Fruehling, an expert on missile defence systems at the Australian National University’s Strategic and Defence Studies Centre.

 ‘ This has political implications and symbolism, and that is what is causing China grief,’’ he said.

 Sam Roggeveen, editor of the Lowy Institute’s The Interpreter website, said there was a risk of a regional ballistic missile defence race: ‘‘ The easiest way to defeat ballistic missile defences is to overwhelm them with numbers.’’ Chinese analysts say Beijing’s backing of the new round of UN sanctions reflects frustration with North Korea but not a shift in its underlying strategic calculus. ‘‘ People are fed up with North Korea, but I’m not sure this signifies a new age,’’ said Jia Qingguo, professor of international relations at Peking University. ‘ China’s policies are in atransitional period, China is in a transitional period, andI think this period might be quite long.’’

With NEW YORK TIMES

Copyright © 2013 Fairfax Media

In other words, there is nothing like self interest to spur action. It seems China thinks that the possession of ballistic missiles by North Korea is spurring on the western allies in the Pacific: South Korea, Japan, US. Australia, to do something about protecting their population by building additional alliances and technologies which will negate the affects of the North Korean missile capabilities. This in turn would also negate the effectiveness of China own arsenal.

This is the last thing China wants. Up until now there has been a willingness on both sides – particularly the US and China  to try and work through their differences in order to come to a peaceful accomodation in the Pacific. The growth of a new military  alliance, facilitated by North Korean intransigence, just might make the Chinese come to the same accord I described in my article earlier in the week i.e. a historical agreement to dismantle the North Korean regime in return for with drawal of US troops from South Korea, declare the Korean peninsula politically neutral enforced by UN troops (not including the US), and hold free and fair elections.

The alternative to this will not only be the development of a military alliance of democracies in the Asia Pacific, but the other action mooted in my earlier articel i.e. the withdrawal of the nuclear guarantee to Japan and South Korea meaning they will acquire nuclear weapons aimed straight at China.

These moves might be just what the new Chinese Premier will need to build a case with the PLA, and the remaining hardliners in his cabinet, to move on North Korea.

It would be both historical and highly statesman-like, and may be the dawn of a new Chinese democracy and peace in what is now becoming an unstable part of the world.

It also happens to be the world engine room for growth in the forseeable future. The stakes are high to get it right…

The New Korea?

There have recently appeared two interesting, but very different takes on the behavior of the bizarre North Koreans

A view on the geo-political implications of North Korean behavior http://www.cato.org/publications/commentary/time-us-disengage-north-korea-crisis?utm_source=Cato+Institute+Emails&utm_campaign=7a8995a9f8-Cato_Today&utm_medium=email&mc_cid=7a8995a9f8&mc_eid=271f8f78af

and a view on China’s motives:  http://www.businessinsider.com/why-china-supports-north-korea-2013-2

My view is I think it is time the world community came to an historic agreement and closed down this rogue state before they blow us all up. Isn’t it time that China and the US came to a statesman-like agreement about those crazies. Surely they could do a deal whereby in return for US troops withdrawing from the Korean peninsula and being replaced by UN force including Chinese, they could hold fee elections and unite the peninsula. China doesn’t want a nuclear Nth Korea any more than the US does.

In many ways, the first article by Doug Bandow is sort of agreeing with this view, although he took it further by suggesting the US abandons the nuclear guarantees with Japan and South Korea, which may force China in to coming to a wider settlement including a militarily neutral united Korea. It is an interesting thought. It might also bring Russia into play and force it to play a more constructive role than it has hitherto, both in Asia and the Middle East. A US withdrawal from Korea and the removal of the guarantee certainly is high stakes, but may ironically be less risky than the current stale-mate, where the North Koreans seem to think they can thumb their noses at the great powers with impunity. This is a very serious and dangerous position for both great powers to take. Any little tin pot regime who acquires nuclear weapons in the future will think they suddenly will have equal status, and who knows what might happen. It also gives every tinpot dictator every reason to go after the nuclear option because they then will be propped up (unintentionally) by the great powers.

I think in terms of geo-politics the Korean situation is a bigger issue for both great powers than a middle east settlement but there appears to be zero momentum for it.  Withdrawal of the nuclear guarantee may be seen as the ultimate in “real politic” but if it ultimately brings to a head the issues that are bubbling along now and leads to a settlement, it could be Obama’s and the new Chinese regime’s greatest foreign policy achievement. It certainly should be worth considering, and undoubtedly ups the stakes considerably.

Not sure about the view on China’s intentions. I hear what he says about mineral rare earth, but the benefits sort of pale into insignificance when compared to the risk of regional wars with the withdrawal of the US. Personally, I would have thought a democratic, neutral, economically progressive united Korea would be far more beneficial to China than an unstable nuclear armed failed state.

The other point I’d make, is that any unification should be thought about in the light of the German experience. They would be crazy to converge onto a common currency as Germany did to its great cost. Better to have a federation with two currencies, and watch south Korean, Japanese, US and Chinese investment money pour into the North until in 50 years time when the north and south economies are similarly prosperous then they could unite the currencies.

The North is brilliantly positioned to become the new north Asian economic super tiger.Now that would really be to China’s advantage.

The Real Tony Abbott…

For all those who are interested in interesting debate, good governance, and for Australia to continue as a tolerant, inclusive, civilised society, I highly recommend you read this article…

http://m.theage.com.au/opinion/politics/a-thirst-for-power-lies-at-the-heart-of-abbotts-agenda-20121022-2818x.html

Written by ex diplomat, senior public servant, and political insider Bruce Haigh, it gives an insiders view of Abbott dating back to his undergraduate days right through to his present persona. It explains more clearly than I have seen elsewhere why Abbott behaves as he does, and why he is incapable of modifying his current self destructive ways.

It also spells out very specifically why we must all work (on both sides of politics) to ensure Abbott never becomes Prime Minister.

Europe – what a mess

In retrospect, it was a big mistake to think that the Euro could work across diverse economies, without fiscal and monetary union. But that in itself was impossible because of the very diverse ideas in Europe about economic responsible economic management and fiscal discipline. Indeed, the formation of the Eurozone encouraged all the member economies that they could have German style living standards, but without the disciplined, focussed and skilled German workforce and economy, and without the economic management which has charactarized the German government, at least for the last 10 years.

Many countries, led by the French, have believed they could run economies with very generous social benefits without the hard economic management and decision making which so charactarizes successful economies. For instance, when the last president of France hesitatingly tried to instigate mild economic reforms such as raising the retirement age from 60 to 62 there were howls of protest which forced him to back down. This does not even go near economic distorting policies like the Common Agriculture Policy (CAP), exorbitant pension and social welfare provisions, industry subsidies, and unaffordable internal and external deficits. In spite of the fact that the IMF, ECB, World Bank, and Germany have been handing out enormous bail outs to many broke countries in southern Europe, nearly all of them have been unable to fully implement them because their electorates will simply not wear them.

The only way is for the market to force it on them ie leaving the euro zone and issue their sovereign currencies. How might this work? Take Greece. Greece in the current circumstances will never pay back its debts. It will be saddled with such stringent provisions that it could remain in recession for 20 years. Time for a change in direction.

If Greece, without warning, announced that henceforth the Greek currency would be in drachma, and all international debts would be written off,  then there would be short term pain, but eventually the market would kick in (probably 18 months to 2 years), and the Greek economy would begin to recover. There would undoubtedly be a 50% plus devaluation against the euro, which would make Greek exports cheaper, and imports more expensive. It would also allow the Greek central bank to recapitalise the Greek Banks by printing more Drachmas. This, though, would all end in disaster if it were not accompanied by drastic economic reforms to the social welfare system, collection of taxes and other charges, removal of distorting government subsidies of various kinds, reform of the legal system and a crackdown on the corruption which so distorts the efficient running of the Greek state.

Within five years, the Greek economy will recover, the debts will be written off, and the competitive advantages of Greece will start to kick in in a much more  growth friendly environment than before. The low growth, deficit cutting and low investment environment which ios the consequences of the European bailouts, will be delivered via a market mechanisms and will not therefore be the subject of the political vastitudes currently underway in Greece.

No-one though sees this as pain free. It is not. It will be very painful indeed, but in the medium term it will be less so than 20 years of recession, and it will give hope to a population sadly lacking in it, especially the young. It is somethingthe population and government can galvanise around, and on which it could build a prosperous future.

It is also something the other southern European governments such as Spain, Italy and Portugal would also likely copy once the benefits become apparent. The French, well they will remain French, and keep their heads buried in the sand, even though the economy distorting welfare state, government subsidies, the CAP, and unreformed labour, capital and distribution markets are worse than almost anywhere in the EU, and France’s economic performance reflects that. They should also take the economic medicine, and return to the Franc. But they won’t of course!

The devilish dilemma which is the Euro zone.

It seems to be going from bad to worse in Europe, not necessarily in the economic conditions, but with the political impasse which is accompanying them. The EU basically has two options as a way out of this self imposed mess: the breaking up of the Eurozone and a return to individual currencies, or further and complete economic and political union.

The first is really not an option at all. Just to give you one example of what this would cause. In Greece, as a microcosm of the breakup, individuals and firms are taking their money out of banks and either putting then abroad, or literally hiding their euro notes under their beds. They would be doing this for rational economic reasons. If Greece left the Euro zone, the country would convert back to the drachma , with an almost certain immediate devaluation of at least 50%.  For those who had left their wealth in euros this means a doubling of their wealth in equivalence in drachmas.  But what about those who cannot do that: those on social security, those who own property in Greece, those who own businesses. They will all suffer a substantial, perhaps fatal, loss when compared to the rest of the world. Let alone the rash of writs which undoubtably will occur as people and firms seek to cover their losses in the courts.

These effects would be multiplied 100 times if the break up occurs all over Europe, leading to a worldwide depression even worse than that in the 1930s.

The second alternative is futher economic and political union. The problem with this is that voters are simply not buying it. In all democratic tests of this throughout the euro zone over the last two years, the voters in all countries are living in denial. The economic and political medicine they need to take for their survival simply is unacceptable.

God help us all if there does not emerge a sense of reality very soon, because everyone will be affected, even in prosperous, “bullet-proof “Australia.

Why the changes we are seeing in the world order no flash in the pan…..

The changes in the world order we have seen in the last 5 to 10 years are not only extremely profound, they are also permanent, however much that is possible. The power of the world is rapidly shifting eastwards, returning it to where it was before and during the middle ages and before the industrial revolution. The power the European states, and after that, the Americas,  acquired on the back of rapid industrialisation , was in many ways a historical accident.

Interesting academic research recently undertaken in the US looked at historical patterns of economic measures: trade flows, per capita income, population levels, capital flows, government expenditures, GDP per head – everything basically which makes the world economy function. And what were their conclusions? In 1970, the centre of the world economy was in the mid Atlantic; in year 2000, the centre had shifted to Israel; by 2020, it will shift to Tibet – the inevitable force eastwards.

The shift of power to Asia, and more particularly to India and China, returns the world to the natural order of things, driven inextricably by large populations, strong cultures, and strong commitment to education and development. Industrialization is being pushed along by a final realisation that this can only occur under free markets and open trade, and once started, and once the benefits are felt by the populations, the electorates will not allow a return to the “bad old days”.

In this, it is interesting to observe the handover of power currently underway in China. Early indications are that the progressive faction of the communist party lead by Wen Jiabao has won the ideological battle between the old ultra conservative Mao sympathisers, lead by the charismatic but ideological Bo Xilai, and those who want to uphold the rule of law and move gradually to some level of democratization.  A similar struggle is currently being played out in India, although possibly with a different outcome. The pace of reform there has slowed over the past three or four years, and there is not a clear indication of the political outcome. However, India being a democracy, a slow down in economic growth and development will inevitably cause an electoral backlash, which will eventually lead to further reforms. It is just in India everything seems to take so much longer.

Where does this leave Australia? As the only advanced Western economy (including NZ of course) at the centre of the world action. Even our current set of mediocre politicians couldn’t stuff that up. Could they?????

Why the EU doesn’t work, and other Federations do

Amongst all the angst about the so called EU melt-down, it is worth considering why the federation of Euro Countries is in such trouble and other federations (eg Canada, Australia, the US) generally are not.

The problem with the Europe project is that it is “half pregnant” ie there is a common currency, but not common fiscal and monetary policies. This means all member states accept the market price for the European currency, but they can basically do as they like with the other leavers  of economic management. This means that Greece can pay its population way above what the country can afford, and far more than most countries in the EU, and the others cannot do anything about it. Economic imbalances are inevitable in these circumstances.

Before the Euro, when each country had their own currencies, countries would be judged by the international market, and their currencies would be adjusted by that market based on their economic health. In the current circumstances, some economists are estimating the a free floating Drachma would be less than half its equivalent in Euros. This means amongst other things that Greek exports (eg tourism, shipping, olive oil) would be 50% cheaper to the rest of the world and imports would be twice es expensive, thus the Greek economy would be relatively more competitive. In the absence of this adjustment mechanism, internal adjustments have to be made: cutting pension levels, reducing real wages across the boards, recapitalising Greek Banks, substantially reducing government expenditures at all levels, in order to make Greek goods more competitive with the rest of the world. It is a hard, possibly impossible process. In fact, in my view, a Greek exit from the euro zone is even now inevitable, and they will be better off for it. If you want proof, just look what Iceland has done in the last 18 months. It is now almost back to health.

Contrast with other federations. In Australia for instance, the federal government has taxing powers and distributes monies to the states based on certain criteria. The objective of this is to even out the different growth rates in each state. At the moment, in the middle of mineral boom, the mineral states of Western Australia and Queensland are growing at over 6% per annum. The rest of the country is below 1%. The distributions of money are therefore adjusted down for those two states and increased for the others. This has the affect of smoothing out the imbalances across the country.. In this way government expenditures across Australia are controlled in the interests of responsible economic management. By the way, this is the opposite of what has happened for the first hundred years of Federation – the outlying states consistently were subsidized by Sydney and Melbourne taxpayers. Interest rates are also set by the Central bank, as are inflation and money supply targets, both of which are administered by the independent Reserve Bank of Australia.

The EU euro zone has two choices: full economic union, or break up the currency union. Until a decision is made on this, I’m afraid the euro zone will be condemned to year on year recession (like Japan has been since the mid 1990’s)

No Going Back

Comment on Economist article (19 May, 2010) “No Going Back” 

I just hope this is not an exercise in throwing good money after bad. European Governments, and by extension the EU, have an appalling record in unravelling profligacy in their economic structures: the common agricultural policy; pension allowances way above the rest of the western world; ridiculous early retirement allowances; running up sovereign debt.

This has come to a head with the backlash in Germany when the German populace realised their government was about to prop up a state which allowed, no encouraged, its citizenry to retire at an age well before they themselves were allowed. This is just the tip of the iceberg in terms of profligate spending by western European governments, including Germany.

The reforms recently announced for Greece, and the additional monies, will go to waste unless all Western European Governments seriously tackle their fiscal deficits, as well as doing something about the fundamental structures of their economies.

The waste of the past is catching up to Western Europe, and unless these spending binges are seriously reined in (including the CAP), recovery will not only be a long way off, but will probably mean a permanent recession in Western Europe for the next ten years. If you don’t believe me, examine Japan in the 1990’s. The circumstances in Europe are almost identical.

I seriously doubt the political will is there, either at the national level (including UK), or at the European Union level.