Tuesday, 30 July 2013

Philippines poised to become important new Asian dynamo

Compared to the “Asian Tiger” countries of the 1990’s, the Philippines still has a long developmental route to travel before it too can enter such a guild. For now it will remain a “Tiger Cub”, and it does so during one of the most difficult international economic malaise of the modern age. But the signs are increasingly promising for an extended period of growth.

The Philippines surprisingly experienced greater first quarter growth in 2013 than China and while retaining an enviable budget surplus. Spurred on by a recent bout of encouraging credit rating upgrades - lifting the country to investment grade - the Philippine’s latest development spurt has the potential to continue as long as the healthy trends set in place by President Benigno Aquino persist.

In any growing economy, construction and real estate sectors must be healthy. Both of these industries made important contributions to the growth of the Filipino economy in 2012 as more demand appeared for office space and city dwellings. New buildings are also keeping the real estate price inflation much lower than during the rough pre-2000 period.

Construction is expected to continue in the last three years of Mr Aquino’s presidency as his huge strides in transparency reforms return greater dividends, and his attempts to increase honesty and lower corruption attract more foreign direct investment. Japan, whose growing regional power has received praise from Mr Aquino, is keen to participate in the Philippines’ infrastructure development which is still in desperate need of major upgrade.

On top of this, the Philippines see an impressive amount of remittances flowing into its economy, at the fourth highest rate in the world after India, China, and Mexico. They have performed a key function in the growth of the economy, doubling since 2005 to NZ$26.67 billion in 2012, and boosting the strength of the Filipino currency. Foreign exchange reserves have lifted to over NZ$104.69 billion as a result which is equivalent to 140% of its external debt.

With all this money coming into the country, and remembering the veritable symbol of corruption in the form of ex-President Ferdinand Marcos’ wife Imelda, the government is trying to weed out privilege among Philippine elites. Recently, the country leapt from 129th in corruption to 105th in the latest corruption index, but is still lags 25 points behind China.

Unless fiscal moderation is put into effect, any sudden influx of easy money could threaten the nascent economy. It can encourage overpriced assets and form economic bubbles. When other Asian Tiger economies experienced bursting bubbles in the 1990s, their systems were savaged virtually overnight as capital and foreign investment dried up.

As the Philippines grows in the second decade of the 21st century, this is precisely the time they should closely watch for signs of crony capitalism. Mr Aquino is setting high standards to change the mindsets of his fellow elites.
But changing generations can often be the best panacea for entrenched patterns of thinking, and the Philippines possess swarms of young people. According to the United Nations, the Philippines is one of the youngest countries on earth with a median age of 22. In contrast, both India and Malaysia, also considered “young” countries, boast only a median age of 25.

Rapid growth needs workers and innovation so as the Philippines enter their demographic window around 2015, the prominence of the working population should bring between 7-10% growth per year for approximately a decade. These are typical growth rates experienced in the past by Korea (1985-1995) and Thailand (1995-2005). The Philippines are the last major Asian economy to reach this stage where a very young population begins to deliver a demographic dividend.

A traditional connection with the US should boost this younger generation in ways not felt in other Asian economies. In some interesting data, social networking in the Philippines is reputedly penetrating close to 95% of the population and the country is being called the “world’s text messaging capital”. Filipinos are highly literate in English and also highly computer literate which is already escalating demand for outsourced Western business services, buoyed by a low-cost labour force.

And alongside Mr Aquino’s attempts to curb corruption, he has spent a great deal of time talking to the secessionist groups in the country’s south. In October 2012, after 32 rounds of negotiations, a new agreement between the larger militant groups and Manila recently put an end to the fighting which killed over 120,000 Filipino since the early 1970s.

Muslim rebels in the southern Mindanao region will now have a window of opportunity to form semi-autonomous livelihoods and take advantage of the rich mineral wealth. The Philippines is one of the world’s most resource-rich nations, with an estimated 21.5 billion metric tons of metal deposits and 19.3 billion tons of minerals. 

There is already increased interest in the region as mining companies notice their own window of opportunity with the lull in fighting. However, even though major groups of militants were included in the negotiations, some factions were not. Militant attacks on infrastructure and commercial enterprises could continue in the future from some remaining groups such as Abu Sayyaf.

The Philippines are in an envious position demographically and stand to gain many years of excellent growth. But significant obstacles remain in development, including residue militancy in the south and malignant corruption.

So while an estimated NZ$388 billion in mineral wealth should create thousands of jobs and attract significant foreign investment, fears that President Aquino successor might not continue his high standard wary investors from committing to a jump too soon.

Thursday, 25 July 2013

Japan's elections significant step for stability

Japanese Prime Minister Shinzo Abe's ruling coalition won a majority of seats in the upper house of Japan's parliament this week, giving it control of both chambers for the first time in seven years, according to exit polls.

Abe's Liberal Democratic Party (LDP) and its coalition partner New Komeito won a combined 71 seats, giving them a total of 135 seats in the chamber, more than the 122 needed for a simple majority.

Although the third-lowest voter turnout for a Japanese Upper House election of only 52.61% tempered the LDP win, Mr Abe has clearly attracted favour from many voting Japanese after the country’s economy improved remarkably under his governance. There is little surprise his party eventually took control of Japan’s Parliament.

Now that the LDP control both houses of Parliament, the political gridlock of the past few years could be efficiently overcome. The election results should make it easier for Mr Abe to pass legislation and will be a significant change for Japanese politics, potentially ushering in a new period of political stability. Ideally this will include regional stability, but this aspect is far from certain.

Mr Abe can now work on the third partition of his revitalisation plan, theatrically termed “Abenomics” by observers and analysts. The rest of Mr Abe’s final economic plan involves overhauling outdated sets of laws and regulations as Japan increases competition in labour markets and negotiates entry into foreign trade agreements such as the TPP.

The step is also rumoured to include key tax breaks, new special business zones, and a move to increase female participation in the workplace.

Just as important, the troubled Japanese power sector also needs attention as imports of hydrocarbons have increased the prices of electrical energy dramatically. Liquefied natural gas imports increased by 18% year-on-year in 2011 and 5% in 2012. On top of that, Japan consumed 41% more crude oil in 2012 compared to 2011.

Japan closed all but two of its nuclear reactors after the 2011 Fukushima meltdown and the earthquake which devastated parts of the island country.

But already, despite heavy controversy, Japan’s Nuclear Regulation Authority is planning to restart a total of 10 nuclear reactors, however probably not before 2014. In the meantime, billions of dollars are being spent on fossil fuels while a debate over nuclear energy awaits resolution.

With greater legislative powers perhaps the LDP will apply more focus on the rumoured normalisation of Japan’s military in the coming years. This will require looking closely at the prickly issue of revising Article 9, the section of Japan’s constitution forbidding the country from developing and using military power for any purposes other than self-defence.

Symbolism is very important in Japanese culture, and updating the way the country deals with military defence issues would go a long way in proving that Japan is bouncing back from a long hiatus and becoming a great regional power once again.

The ruling LDP understand how important normalisation of Japan’s military will be for the future of the dynamic Asia Pacific environment. Japan’s recent Defence Ministry white paper underlined its military as being the ultimate guarantor of security, a personal view Mr Abe holds closely stemming from a deep nationalistic ideal.

Mr Abe’s views on Japan’s role in the region worry some observers, and his fresh political majority is unlikely to assuage those doubts. He has said in past public debates that Japan’s responsibility in World War II should be left to historians, and that Japan’s “aggression” towards China and Korea is a matter of perspective.

But ultimately, in a region increasingly dominated by a strong Chinese navy, Mr Abe recognises the country’s need for a counterweight military. And Japan’s neighbours, also worried about a rising China are applauding the idea of a stronger Japan. But a big part of Mr Abe’s reasoning to push for military normalisation is a decreasing reliance on US military support and protection.

Normalising Japan’s military is stepping away from US protection. And as the ongoing tensions over US military basing rights on the Japanese islands of Okinawa show, the Japanese are more ready and willing to take responsibility for their security.

The recent Upper House elections in Japan are significant because the LDP’s plans for both the Japanese economy and military can be better streamlined. Japan will still struggle to overcome deep demographic problems and high indebtedness, but a strong coherent government is a positive turn of events from Tokyo’s perspective.

Tuesday, 23 July 2013

China not immune to economic cycles

A few years ago it was China lecturing the United States about structural reforms. Now that Washington has experienced 40 straight months of modest growth the tables have turned. During the first half of 2013, China’s economic slowdown has exposed a Chinese system in desperate need of reform. Hitting the brakes was never a central Politburo plan, but the pace of the global economy has not picked up over the first half of 2013 either and China is moving to implement a Plan B of sorts.

Beijing’s short-term remedies to delay or address key structural problems may not be enough to prevent greater instability. According to the latest figures released from China’s National Bureau of Statistics, the heavily leveraged economy seems to be trending only downwards in direction, and even Beijing expects this trend to continue.

With such a large and complex society which is so reliant on continued growth, the important question is: how much of the present slowdown can Beijing absorb?

China released data recently showing that annual GDP growth slowed to 7.5 percent in the second quarter of 2013. Even though Beijing heartily proclaimed that it officially met its growth target with the latest figures, the data nevertheless confirms the ninth slowdown over the past 10 quarters. This figure - if true, because Beijing is often suspected of fudging the numbers - would be the lowest growth rate for China in 23 years, and analysts suggest the outlook for July to September remains “grim”.

With all the wringing of hands over the latest figures, it pays to keep in perspective the size of the Chinese economy. China still accounts for 13 percent of the world’s global economic activity. And even if the growth figures are closer to 6.7 percent, as suggested by analysts at Seeking Alpha - rather than the official 7.5 percent - these figures would make any European leader smile from ear to ear.

Either way, it is appearing clearer with every passing quarter that China’s growth model of state-led investment with an emphasis on exports is, by Beijing’s own admission, not workable any longer. There are a few reasons for this.

Positive free-trade deals with New Zealand and a close economic relationship with Australia aside, China’s largest trading partners are simply not filing manufacturing orders like they used to, creating an enormous headache for Beijing. Europe is still sorting the details about how it will balance its own chequebooks, while the United States has seen modest growth over the past few years as their economic recovery sputters into life, except in poor Detroit of course.

Because of these changes China will probably never see the same demand for bulk cheap goods return from those regions. Yet to address this imbalance, China is only moving slowly to fill the approaching vacuum.

Two changing highlighted policy steps will be important. Beijing is making agonizing strides to deal with major imbalances in its financial system to move away from an export-oriented economy and towards a structure of greater domestic consumption. Also, developing the Chinese interior to offset the declining pool of cheap labour on the coast – as more working Chinese enter the middle-class – is expected to soak up the rising consumption requirements.

Strengthening domestic consumption is one of Beijing’s alternatives to its failing export model. If more of China’s middle class can spend their money buying goods and services, then it won’t matter very much what happens in Europe or America.

Yet simple government structures which China lacks, such as a robust social welfare system, require people to save a significant percentage of their income to prepare for retirement and health problems later in life. Every yuan saved and not spent on unessential goods slows China’s economy operating under this new model.

On top of this, average consumption has decreased as wealth allocation imbalances have deepened, resulting in a middle-class with drastically shrinking purchasing power as their struggle to find jobs grows more tenuous by the day.

The next three months are likely to see more layoffs as industries struggle to secure credit lines. More bankruptcies as ballooning credit expansion is reined in. Bubbling protests as people discover little alternative to vent their anger and fewer employment opportunities. 

Strategic cash injections from China’s deep pockets will go some way in balancing the Chinese economy – but at the same time will raise jittery international eyebrows - but market expectations are being somewhat tempered as Beijing moves to a more sustainable economic model.

All this movement could lead to a dreaded tumbling effect of financial defaults as Beijing places more restrictions on lending. June’s credit squeeze offered a brief glimpse into what this domino-effect of loan defaults might look like in China. The central bank in China refused to supply promised extra liquidity to the money market in an effort to clamp down on the so-called “shadow banking” economy. As a result, the bond market closed to new issues and a two-week credit crunch created a dangerous default last month.

In this particular case, the policy-driven fiscal measures show that Beijing is willing to tolerate some of the more painful consequences of fixing structural imbalances in the financial system. Yet even with the latest moves, Beijing does not appear entirely ready to implement the necessary raft of reforms. Simply put, Beijing understandably fears a hard landing.

There have been calls to ease the commitment to staunch restructuring, but while this might relieve economic problems temporarily, the inescapable truth remains that China’s growth model needs fixing. Over the vast blue water of the Pacific, Washington is feeling stronger while Beijing has discovered it is not immune to economic cycles.

Thursday, 11 July 2013

A snapshot of Middle East instability

There is talk that Saudi Arabia and Kuwait may have stoked the protests in Egypt over the past weekSome events lend weight to this, but other events point in a different direction.

Kuwait will give Egypt a US$4 billion aid package, including a US$2 billion central bank deposit, a US$1 billion grant, and US$1 billion in oil products, KUNA reported July 11. Saudi Arabia and the United Arab Emirates pledged a combined $8 billion in financial aid July 10. So whatever they’re doing the stability of Egypt is clearly in their interest, and the only way they’ll achieve this is by building up the Egyptian military by supplying them with the cash they need.

The United Arab Emirates will give Egypt US$1 billion and extend a loan for another US$2 billion, Reuters reported July 9. The US$3 billion is expected to be part of a larger financial package. Saudi Arabia is expected to lend US$2 billion to Egypt.  

For the Saudis, the Muslim Brotherhood was an existential threat. Not because they might start an Egyptian attack on the Kingdom, but because the success of the Islamist MB might bolster and encourage similar elements in Saudi Arabia. The House of Saud is very keen to keep their power and the Saudi elements of the MB are already a worry for them. Kuwait is in the same boat really.

It fits the strategic objectives of both Saudi Arabia and Kuwait to be happy at the collapse of the MB government, but whether they were directly involved in the protests I can’t say. Israel and the US also have interests in limiting MB power.

It has also been suggested that the Egyptian unrest is a good chance for Sunni Muslims to roll back the influence of Shiites. But the Shiites aren’t necessarily the problem at the moment. Iran is predominantly Shiite, but they’re seeing their influence weaken across the Middle East. Shiites dominate in Iraq as well, but they’re being beaten back in Syria.

What worries me is the Sunnis and their buddies in al Qaeda. They’re getting a lot of battle experience in Syria right now, and when the surviving fighters return home they could take their ideology with them. And I’m not just talking about Tunisians or Algerians, but Germans and Muslim men from the Balkans. What happens when those competent fighters (not the dumbass “martyrs”) finish their fight in Syria and get sick of their living conditions and government at home?

Middle East-wide civil wars are also unlikely in the near future, for various reasons. Right now is Ramadan, so battle will probably be out of the question for any country other than Syria and Egypt where its already a reality. There are two types of governments in the Middle East at the moment: semi-autonomous/pseudo-democratic and monarchic. The monarchies are surviving all this unrest quite well because they command a lot of legitimacy, but I wonder how long that can last.

Lebanon has the potential for acute instability. Thirty-seven people were injured when a vehicle-borne improvised explosive device detonated in the southern suburbs of Beirut, July 7. Lebanon's The Daily Star reported that one person died in the explosion. The area where the explosion occurred is a Hezbollah stronghold, and Hezbollah have been growing deeply involved in Syria lately.

Hezbollah's Al-Manar television reported the vehicle was in a parking lot near an Islamic centre. Lebanon has been experiencing greater instability and sectarian tensions due to the fighting in Syria and the various Syrian rebels have incentive to conduct attacks in Lebanon against Hezbollah targets to try to draw them away from assisting the al Assad regime.

Oil has risen over US105 a barrel since the Egyptian unrest, but it is unclear whether the two events are entirely linked. I’m of the opinion that oil has found its new floor price of US100 a barrel. It’s just becoming too expensive to produce easy oil now. Deepwater reserves and shale are very expensive to develop and take to market. Apparently they make only US$20 or so on each barrel after production costs, it just isn’t very lucrative anymore. The markets jittered a little over the past because of Egypt, but I think they’ve been ready for unrest in the Suez for a while. And the military secured the canal early in the protests on Thursday last week.

Different rulebooks for US and Chinese spies

Leading international headlines recently are stories of the United States government snooping on internet data. A single man who supplied the world with verifiable documents outlining this spying currently struggles to even find a place to rest his head outside of a Russian airport. The bugbear of American spies is concerning, but the debatably larger threat of Chinese industrial espionage lies just behind newspaper headlines.

The revelations of American digital spying did not uncover anything which wasn’t already fairly well known, or at least suspected. While a case can be made that US intelligence agencies monitoring American internet traffic probably need tighter controls, the crocodile-tears recently emerging from Germany for instance, are laughable.
Barack Obama and Chinese President Xi Jinping at recent summit
- Official White House Photo by Pete Souza

After it was revealed in leaked documents that the United States spies on Berlin and European Union agencies almost as much as it gathers intelligence from China and Iraq, German politician Martin Schulz, President of the EU Parliament, said that if it were true it would be “a huge scandal and a huge burden for relations between the EU and the US”.

But one thing has always been clear: all countries spy on each other. A robust intelligence agency is high on the top-ten list of valuables for any government, despotic or liberal. Sure, some countries are worth paying closer attention to, and a nation’s intelligence agencies will go through natural boom and bust cycles as threats emerge, grow and dissipate. But a responsible government understands there is no such thing as a friendly intelligence service. Everyone has allies, and it pays to know what they are doing because everyone also has secrets.

A few things separate American rules for intelligence gathering from other country’s rules. According to ex-NSA and ex-CIA director Michael Hayden, the Americans are interested in strategic intelligence which will keep their nation safe. Although the leaks about American spying are interesting, their intelligence community places self-imposed limitations on what information it takes and what information it uses. The overarching mind-set is to target conservatively what will maximise efficiency in government planning and maintain American military superiority. Depending on how much one trusts the words of an intelligence chief, self-imposed American limitations are either reality, fiction, or a nasty mix of both.

Nevertheless, this is in contrast to the mind-set and target list of intelligence agencies in China especially. Mr Hayden says when he was director of the NSA in the mid 2000’s he would stand in awe at the depth and breadth of the Chinese cyber-espionage efforts. They vacuumed every secret available, from military and government, to industry and business.

China may class all of this gathered data as ‘strategic’, because what helps the Chinese economy today will certainly help it tomorrow. Foreign industry and trade secrets are constantly being stolen by suspected Chinese cyber-spies.United States President Barack Obama even made a special point to China’s President Xi Jinping at a summit last month. Unfortunately for American and international business the meeting failed to generate any public statement on progress.

During the dust storm surrounding American spying - and the resultant gnashing of teeth by many people - the United States Department of Justice filed charges late June against China’s largest wind-turbine manufacturer, Sinovel Wind Group, accusing the company of stealing trade secrets from its former software supplier, American Superconductor Corporation (AMSC).

The Chinese company used stolen code in its wind turbines which it then sold back to the United States and installed only kilometres from the AMSC headquarters, among other locations. If China cooperates on the charges, two Chinese citizens could face up to 35 years in prison, as would an AMSC employee. However, China is unlikely to cooperate on the espionage charges, and is instead investigating a potential case of financial fraud at Sinovel.

Sinovel has denied the claims and filed countersuits against AMSC for breach of contract. But even the Chinese company is struggling as it competes in a constricting global market. According to company reports, Sinovel lost 58 percent of revenue in the last year while admitting that it over-reported its revenue in 2011 by 929 million yuan (NZ$192 million).

AMSC also lost 93 percent of it share value after Sinovel suddenly broke its contract in 2011 and cancelled product imports. The American company is reportedly seeking US$1.2 billion in damages from Sinovel alongside the current espionage charges. According to AMSC president Daniel McGahn, the very fact Sinovel felt comfortable stealing and then proceeding to sell back the knock-off goods to America “shows not only a blatant disrespect for intellectual property but a disregard for international trade law”. This is an important point.

These charges show a clear tolerance level has been reached by American companies tired of dealing with constant intellectual property theft from suspected Chinese cyber-spies. US Attorney General John Vaundreuil called the case a “well-planned attack on an American business by international defendants – nothing short of attempted corporate homicide.”

China wishes to enter into the Trans Pacific Partnership (TPP) and engage on a fair economic playing field with some of the largest Pacific nations. However, given the United States' involvement in the TPP - and that a critical topic for the Americans is intellectual property rights - China’s potential inclusion into the TPP will require deep reforms to how it deals with industrial espionage.

While it is understandable that American companies are pushing back on Chinese espionage efforts after highly damaging recent events. It also implies that the attraction and benefits of the Chinese market has been too strong in the past for many of those businesses to tackle trade secret theft. As American companies and government begin to fight back, it could offer another piece in the puzzle pointing towards slower Chinese growth and a greater (and safer) emerging South Asian market which is attracting more US business.

The way in which the Beijing handles the Sinovel case could impact how the United States negotiates future deals with incoming Chinese companies. If the threat of Chinese espionage cannot be mitigated, bilateral relations between the two countries could suffer as a result. The United States would feel the pain, but ultimately Washington has more options than Beijing in where it does its business.

As more cases like the Sinovel charges are unveiled in the future they will prove the rule that everyone spies on each other. However, there are different rulebooks for espionage depending on who is doing the spying. In the present cases, the United States will continue to strengthen its own domestic spying capabilities to limit further foreign industrial espionage efforts. While Chinese companies are likely to continue to steal intellectual property rights unless the Chinese government can fortify legislation and prosecute offenders.

Wednesday, 10 July 2013

The internal paradox of a strong India

The geographic enormity of India and the intricate spectrum of people and culture on the subcontinent make for a complex but burgeoning dynamism. It is a country of First World endeavours, spending billions of dollars putting men into space, with Third World constraints ranging from electricity blackouts to militant attacks and in 2010 around 840 million people living on less than US$2 per day.

When adjusted for purchasing power parity, India has grown in stature to rival the mighty Japanese economy. And even though China seems to attract the bulk of the international media’s attention in this new “Asian Century”, India’s population is projected to lurch past China’s in less than 20 years. That number seems to be important for India, as both it and China have tripled their share of the global economy in the past 20 years as well.  

As India grows, it plays with greater tenacity on the world stage. India is building a world-class navy and participating in various aid projects. Long a recipient of donor funds, India is now an important provider of development assistance, following and significant heartening trend in Asia.

In 1990 more than half the population of Asia lived in extreme poverty. By 2015 that proportion will be down to 10 percent. While many Indians still live in terrible conditions, they are not only living in a region excitedly preparing to deal with 60 percent of the world’s growth by 2015, they are emerging as game-changing donors throughout the region.

It is true there are few accurate measures of aid-like flow from these countries; China is quite likely a larger aid supplier than Australia. While Indian assistance quadrupled over the past decade sitting at a healthy NZ$1.6 billion a year in grants and loans.

This all bodes well for India as it matures into a strong country with profound cultural paradoxes. However, the prospects for India as a rising East Asian power depend on how the country addresses its domestic obstacles and relations with neighbouring countries.

At first glance, those obstacles seem impenetrable or at least extremely difficult: a government admittedly ambivalent about pervasive corruption and stifled by bureaucracy, slipping fiscal and trade deficits despite over 20 regional trade agreements, high inflation, and a weakening investment environment.

A record low of 5 percent GDP growth registered in the fiscal year of 2012-13, which closed March 31 - down from 6.2 percent in the year previously – worries international and domestic observers that a real change in momentum might not be possible in the next fiscal year. Neither the slowing export growth figures nor the slowdown in fixed investment growth from 4.5 percent to 3.4 percent year-over-year help the situation either.

Adding to the worries, the Reserve Bank of India (RBI) has cut its interest rates by 75 basis points since early January in an attempt to encourage growth, but it has not yet had the desired effect. There could be room for more changes, but the RBI has already warned it could have exhausted their current range of options saying there was little space for more monetary easing.

Food prices and manufactured products grew slowly and inflation slipped to below 5 percent in May 2013, its lowest rate in three years and nowhere near the average rate of 8.8 percent over the past three years. However, while an early monsoon season has been particularly deadly this year, it should boost farm production and is expected to help drop food prices and ease inflation later in the year.

New Delhi has already spotted the slowdown and revealed plans last year to help boost the Indian economy by offering foreign investment the chance to be involved in its retail, broadcasting, aviation, and power sectors. Yet the expected obstacles of government bureaucracy and delays in key reforms to simplify investment in India has changed the mood of business from “unduly optimistic” in 2007 to “unduly pessimistic today”, according to Prime Minister Manmohan Singh.

All this aside, India is still a critical addition to the Asian Century, at least in the sense that investors are always waiting to take advantage of new, positive changes in the economic system. Geography explains some of the reasons why India has struggled to build political structures and organise resource development in the past. India is very hot and lacks the temperate zones which benefit the European landmass and the Chinese mainland. And positively, it is India’s position in the Indian Ocean that sets it apart and plugs it into the world.

The Indian Ocean is the world’s energy superhighway taking oil and gas from the rich Middle East to the growing middle class in the tropical lands of East and South Asia. As Robert Kaplan points out, India fuses the Greater Middle East with the geopolitics of East Asia “creating an increasingly unified and organic geography of conflict and competition across the navigable southern rim of Eurasia.”

It is important to ask the question now about where India will fit into Asia because in a very clear sense what the world expects from India might just be over and above India’s own expectations of itself. The country is geographically both blessed and constrained, with great potential to develop so long as deep structural problems can be addressed.

If these fiscal obstacles cannot be overcome - and their social inequality balanced - Indian failure to develop could have far-reaching consequences. A gulf still remains separating India’s potential and its achievements making it that much tougher to catch up to the rest of a quickly growing Asia.

Unrest in northwestern China questions ethnic policy

In China’s Xinjiang Uighur Autonomous Region, differing cultural values between Uighurs and Han Chinese highlight the need for Beijing to review its ethnic policy. Recently erupting violence at the end of June, killing 35 people, underlines the country’s struggle with its ethnically diverse border regions and also exposes the skewed living standards between Chinese living near the coast and those deeper in the mainland.

Chinese security forces demonstrate stop protests
in Urumqi, China's farwest Xinjiang region - Picture: AFP
Beijing is looking at new pragmatic approach for their border regions. An historic heavy-handed control has already singed relationships with ethnic minorities and a softer way of dealing with the inland people could be in development.

Xinjiang is located far inland near the Central Asian borderlands. The majority-Muslim northwestern region dealt with the recent riots just four days before the fourth anniversary of the 2009 clashes which killed almost 200 people. Several clashes around police stations over the past few weeks have heightened security measures.

It is unclear which ethnic minority the attackers represented, but state media have hinted at a possible connection with the Uighur exiles operating outside of China that Beijing calls “terrorists”. Those exiles are angry at a perceived cultural dilution as Beijing implements a massive migration of ethnic Han into the region. Fighting between the two groups is increasing and exacerbated by the region’s vast energy reserves.

Beijing is under pressure from the violence to find a way to reconcile its ethnic policy with its long-term goal of developing the mainland into a wealthy and modern society. China has struggled with Tibet in much the same way as Xinjiang due largely to the enormous distances separating the advanced coast from its disperse and ethnically divided interior which feels increasingly subjugated by China.

Much of the legitimacy of the Communist Party in the eyes of the Han Chinese population comes from an expectation of continued stability and territorial integrity. Unrest in Xinjiang has been quelled with a heavy security hand in the past along with a policy of encouraging the movement of Han Chinese to marginalise the Uighur influences and integrate minorities into mainstream Chinese society.

While this sounds good on the face, the policy pivots on whether the minorities actually want to be associated with Han lifestyle. The fact that riots are occurring more often since 2008 as Uighurs push back against Beijing’s social engineering will bother Chinese officials trained in the ideology of sinic cultural superiority. Clearly the cultural traditions of the ethnic minorities are still closely respected, and adoption of what is essentially a foreign culture is unattractive for many of them.

Calling Beijing’s ethnic policy in the mainland a total failure at this point might be premature. But building a “harmonious society” was always going be a difficult task for central planners. Forcing two or more starkly different ethnic groups together under an artificial edifice is clearly not working but there are some signs that Beijing is considering more conciliatory policies in its border regions.

Ethnic unrest in China is not homogenous and differs from one restive region to another. Taken together however, the clashes and public disobedience suggest China will continue to struggle with the complicated nature of stabilising the country. China can not very well adopt a Soviet strategy of forcibly removing whole populations. Instead Beijing will continue diluting the populations and tighten security while adopting a softer approach to grievances.

Saturday, 6 July 2013

Egypt’s present struggle in context

Mass demonstrations of supporters of ousted Egyptian President Mohammed Morsi occurred in several Egyptian cities on July 5, AFP reported. Thousands rallied in the northern cities of Alexandria, Beherira and Minya following Friday afternoon prayers. Meanwhile, in Cairo, thousands marched in Giza, Abbasiya and Heliopolis. Thousands more continued a sit-in in the Cairo district of Nasr City. Eventually, the Muslim Brotherhood will try to revive itself by re-assimilating into Egypt's political institutions, though it is in no hurry to attempt to reclaim the presidency.

To understand Egypt’s trouble, it pays to frame the protests and recent ouster in the background of the past few years. Essentially, the Egyptian military has been in control of Egypt since 1952 and even today has not lost any of that power. During the unrest in 2011, at the beginning of the period known as the Arab Spring, Egyptians removed the military’s civilian partner - the head of state Hosni Mubarak - and began the process of what has become a wildly gyrating political rollercoaster.

The Egyptian military, it was explained on this site at the time, used demonstrations in Cairo as a smokescreen to force Mr Mubarak from his position after the aging leader’s plans for his son to replace him displeased the generals. Mr Mubarak’s son was unconnected to the military and the threat of reforms on the armed forces was believed to be high. In response, the military stoked social tensions which were already bubbling to the surface in Egypt and encouraged local television media and international media to display large protests calling for Mr Mubarak’s removal.
The military retained control of much of the judicial system and rotated the faces in high positions with more of their own officers. But the military’s civilian partner, in the form of Hosni Mubarak and his National Democratic Party, suddenly fell away causing a major dilemma for the military. A military council known as the Supreme Council for the Armed Forces (SCAF) was appointed as an interim government in Egypt after the pressure on Mr Mubarak became too great. This was further exacerbated with a multi-party era when elections were promised for the demonstrators. These were held close to a year ago in 2012, and the demonstrations cooled down significantly.  

The elections eventually conducted were relatively free and fair, and the long-existing but marginalised Muslim Brotherhood (MB) successfully fielded Mr Morsi as a candidate and took power. The MB are the most coherent and long-lasting political force in Egypt aside from the military. However, the new democratic system was not a full package of power despite what many observers in the international community first thought. The actual control Mr Morsi had over Egyptian politics and the judicial structure was extremely constrained by what the military wanted. The generals in the SCAF held on to the true reins of power and a de facto balance was agreed upon with the Muslim Brotherhood.

This balance did not include the power for Mr Morsi and his Muslim Brotherhood to create and enforce structural changes to the Egyptian political system. Mr Morsi’s government has since struggled to bring real momentum to getting Egypt’s economy back on track and attract historical support from the United States and the International Monetary Fund for the fiscal aid it desperately needs. A mix of increasingly unpopular Islamist policies and a political deadlock between the SCAF and MB has drastically spiralled Egyptian standards of living even lower. The demonstrations over the first week of July are a result of Egypt’s internal political struggle and seemingly impenetrable obstacles in balancing the military’s control with popularly-supported democratic revolution.

Ultimately, the situation in Egypt has not changed very much since even before the ouster of Hosni Mubarak in 2011. The military regime controlled Egypt before the first protests and still holds onto power today. At the beginning of the Arab Spring in Egypt, the demonstrations were directed against the generals in power with the express purpose to usher in a more popularly-controlled government. Many of the interviewed protestors during the initial demonstrations to remove Mr Mubarak spoke English, because these people could be understood easily by those viewing the reports in Western countries. Their narrative seemed to suggest a liberal, Western-style, secular democracy was preferred. However, the deeper consciousness of Egypt awoke during the elections when an Islamist government was voted in instead. In hindsight, the thought that a secular democracy could suddenly spring in a country with a long history of authoritarian rule was clearly fanciful.

In the recent demonstrations, there seems to be a lot of popular support for the removal of Mr Morsi. Much of the blame for the past year’s economic and social ills has been deftly lumped on Mr Morsi’s government by the SCAF. Because of the narrative the military created during Mr Mubarak’s ouster, they are widely believed in Egypt not to be responsible for the daily problems in Egypt. The military thought it could use the MB as a replacement for their lost civilian partner in Mr Mubarak. Instead the MB used its time in office to consolidate power for the group at the expense of domestic issues and against the direction of the SCAF.
The pressure on Egypt’s economy appears to have become too great and the military are revisiting their political strategy. Which is all a nice way of saying: they conducted a coup. But since the military never really rescinded power, this is not a classic coup at all, but rather a rebalancing at the expense of democratic ideals.

Whether the Muslim Brotherhood can be kept out of Egyptian politics is an open question, considering it still attracts significant support from Egyptian masses and especially the Islamist groups. Many people are not supportive of the military as they see it as an atavistic framework from the unpopular Hosni Mubarak days.

Just as it always has, the military ruled from behind the scenes while the brunt of the responsibility appears to rest on the Muslim Brotherhood. This week, in an extremely ironic turn, the same middle-class, educated, English-speaking group of protestors are calling for the military to intervene as their saviour against the elected government which they fought to create a year ago. The military have played their puppet game so well that the Egyptians are actually calling on them for help.

Instead of supporting Mr Morsi’s government, the generals have acquiesced and an interim government is now in place while many of the previously ruling Muslim Brotherhood members are in military custody. Their intervention is not a typical coup in the sense that direct military control is not being enforced, but the actions of the SCAF leave very little behind in the way of democratic processes for Egypt. During the ouster of Mr Morsi, the military also nullified the controversial Egyptian constitution and will probably create a replacement political structure with key differences from the original make-up of the SCAF to govern Egypt in the short term. But it can be assured that the generals will not give up power.

At the moment, the military are without a civilian partner and the longer this situation festers, the more the Egyptian populace will become frustrated with the military and begin to blame it for their ingoing social issues. This is the political frontlines which the generals wish to avoid exposure to. What the military hope for is that the Muslim Brotherhood has learned their lesson and will begin to listen to SCAF direction once more. However, the MB is by far the largest political group in Egypt and it is highly likely they will enter government again if elections are conducted.

Those who voted for the MB in the last elections are still in support of the group today. These supporters brought the MB to power last year because they were the only ones with a coherent core with very little political factionalism. But the protests in Cairo and elsewhere were different this time around because the liberal, secular factions have presented a united front and could be working towards their own political group. This group is loosely united under the June 30 movement associated with the Tamarod political faction and could offer the first real alternative to the Muslim Brotherhood for civilian rule. 

The Muslim Brotherhood and the control of Egypt's military

Egyptian troops clashed with supporters of ousted Egyptian President Mohammed Morsi in the Sinai city of El Arish, Suez, and Ismailia on July 5, witnesses and security sources said. Protesters reportedly tried to enter government buildings in all three towns. Some threw rocks, security sources said, and troops responded by shooting in the air and firing teargas into the crowds. 

Earlier this week on July 3, Egyptian military chief Gen. Abdel Fattah al-Sisi announced that the country's president, Mohammed Morsi, had been removed from office in the wake of popular unrest. The ousting of Mr Morsi was completed after he refused to step down and issued defiant calls against the military regime. The ruling Muslim Brotherhood was not involved in the military’s decision to intervene in Egyptian politics, and it is presently unknown whether democratic elections will be restarted.

Gen. Abdel Fattah al-Sisi announces the
removal on Egyptian President
Mohammed Morsi on state television
At many times during these demonstrations, violence has occurred leaving dozens of people dead throughout Egypt and the Sinai Peninsula. The Muslim Brotherhood can be expected to continue to engage in protests that, coupled with a security crackdown on the group, might result in violence as pro-Morsi demonstrators clash with opposition groups and military forces clash with both. The military’s recent decision to intervene reveals the truly desperate political and economic morass in Egypt, and the inability of Mr Morsi to rule.

While it might not appear to be, the Egyptian military have grudgingly acted against their interests to remove the democratically-elected leader of Egypt. Mr Morsi was only in power as the head of the Muslim Brotherhood political party for a year. His tenure was plagued with obstacles, both social and fiscal, and as he could not enact policies to assuage Egypt’s dire existential problems, the Egyptian people have clearly decided Mr Morsi is unfit to govern Egypt. What Egyptians plan to replace him with, if they can at all, is far less certain.

Unfortunately for the political Islamist movements across the Middle East, the overthrow of the failed Muslim Brotherhood experiment undermines the international efforts to bring such groups into the political mainstream. Many of the policies which led to demonstrations in Cairo were highly unpopular and reflected conservative religious ideals. The situation was made worse by the MB’s heavy-handed efforts to ride over minority parties and also in their failure to protect minority groups such as the Egyptian Coptic Christians from increasingly violent attacks over the past year.

This is not the desired result the military - which is still in control of Egypt – wanted in the slightest. Egypt’s generals preferred for Mr Morsi to remain in power to absorb more of the public’s ire, as he was the face of a democratically-elected regime, while the military retained control of Egypt’s economic and political structure and continued to try to restart its struggling economy.

But this was not to be. The military now face a situation in which they are both in control and own full responsibility for Egypt’s future. They will be looking to return to the background shadows as soon as they can build an alternative for Mr Morsi which will have the military’s interests as top priority.

Worryingly, what the Egyptian military have done by removing Mr Morsi is both lend legitimacy to violent demonstrations as a process of enacting political change and destroyed the burgeoning democratic system. Neither of these precedents will be healthy for Egypt in the long run. As any elections are conducted in the future, the factions will be even more polarised than before. And if an unsatisfactory result occurs for any of the involved parties, they have essentially been told that demonstrations will resolve those issues. Mob violence is never a wise thing to succumb to, but the lesson is clear for protesting Egyptians: the more violent and destructive they become, the more chance they have of victory.

Egypt needs a coalition government which takes into consideration the Islamist ideals, the growing desire for secular principles, and one which keeps the military leaders satisfied. On paper, this is simple. In reality the disparate groups of Egyptian politics will continue to make this all but impossible. While the military are finding it increasingly difficult to maintain the status quo of holding power and using their time-tested strategy of a civilian government partner, their positions throughout the judicial spectrum will ensure they remain in control for the foreseeable future.

The Muslim Brotherhood (MB) will now have to regroup and consider a response to their forcible removal. The group has existed for decades and will be used to being side-lined so they should remain mostly cohered. The MB also preserves much of their support from the lower-income and religiously motivated Egyptian populace which put them in power in 2012. However, as new political movements form in Egypt, most notably as part of the Tamarod movement, the MB will find greater obstacles in the future. Leaders of the MB have refused to suggest violence as a response to the military’s actions, but splinter groups can be expected to leverage the frustrations of many Egyptians and some violence could occur nevertheless.

The past week brings into focus that nothing has changed in Egypt. It may be useful to paint the military’s actions in the framework of a coup, but the reality is that the generals were never out of power in the first place. Mr Morsi, as was Hosni Mubarak before him, was simply the military’s crucially important civilian partner.

Protests and counter-protests are likely to continue over the next few days as the reaction to the military’s actions settle in. The Muslim Brotherhood will contest the decision to remove them from power while the opposition political parties will support the move. However, since the Islamists still have strong majority support in the country, in all likelihood a new Islamist president would be elected in new elections and probably would continue to carry out the policies of Morsi and the Muslim Brotherhood while the military hold the strings once again.

In other words, little is likely to change for a struggling Egypt. 

Thursday, 4 July 2013

China struggles with a boom and bust cycle

Large Chinese goods producers slowed to multi-month lows as global demand weakened at the end of the second quarter of 2013. Coupled with this, the latest figures from Beijing saw China’s GDP grow by only 7.7 percent in the first quarter of 2013, down from an already subpar 7.9 percent in the fourth quarter of 2012.

A significant slowdown in China would be more catastrophic for Beijing than it might be for other governments. But while the signs for a slowdown are growing, a meltdown is still unlikely.

Last week, the interbank lending rate in China spooked global financial markets as it jumped sharply.

The debt lent to state owned enterprises and for infrastructure ventures, accumulated by Chinese banks for years, might now be bubbling over into a credit crunch. Chinese money markets also screeched to a near halt worrying people with access to China’s markets, which is almost everybody.

The central bank is trying to shift China’s financial structure from a debt-driven economy to a profit-driven economy. The skyrocketing lending rate has since dropped from its recent high in mid June, but it is still higher than Beijing’s ideal.

All countries go through natural boom and bust cycles. Companies go out of business and credit dries up while social anxiety mounts as unemployment rises.

Often the downturn is short as uncompetitive companies drop out of the market and larger corporations soak up a greater share of consumers. But sometimes the cycle can be protracted and usher deep structural and sometimes even political changes. It is not yet clear which breed of cycle China is facing.

Slower growth will pose an existential problem for the Chinese Communist Party. Their legitimacy and social contract with the Chinese populace rests on nearly full employment.

Many times in China’s deep past a lack of prosperity compelled the inner agricultural regions to force governmental change. Dynasties have fallen more often at the hands, shovels, and pickaxes of China’s own people than from the weapons of outside forces.

Ever since the end of the Maoist era in 1978, economic development has been priority number one for the party. To address the present downturn, the Chinese government is already extending liquidity as much as possible to cushion the impact of mounting financial challenges.

Beijing stands to retain widespread employment for the population, but at the same time they risk absorbing bad loans from poorly performing corporations and small businesses. Such loans have the potential to force more financial problems in the future, but Beijing really has little choice.

Borrowing money is expensive and can’t continue for long stretches without undermining the very reason it was employed in the first place. And growth in the past several years has been increasingly driven by the financial sector rather than the real sector of trade in goods and services.

But it is easy to predict collapse, and in some circles collapse in China is unabashedly desired.
At this point, the Chinese economy is far from out of the woods and their growth target appears to be under threat. Yet while a slowdown to less than 8 or 10 percent growth year-on-year will be a significant headache for Beijing, a true collapse to 2 or 3 percent growth is highly unlikely.

This is because many of the businesses receiving financial aid are still productive on relative terms and contributing to the economy.

Many other economies around the world are doing far worse than China, and even with its drop in growth so far this year, some independent forecasting boards suggest the country can still expect to grow around 7.5 percent in 2013. Compared to India and Brazil, both expected to grow by less than 5 percent this year, this is still quite a high growth expectation for China.

Also, as Joshua Kurlantzick says at Bloomberg Businessweek, China’s currency is still relatively controlled and its stock markets are not that large. Dire economic news might not encourage “the kind of runs on the Chinese yuan and Chinese exchanges that damaged such countries as Thailand in the Asian financial crisis”.

But the fluctuating lending rates seen recently are the result of a profound weakness in China’s financial sector. Without the cheap lending rates which Chinese businesses have become used to, bankruptcies could further destabilise already jittery markets and may cause cascading chain reactions throughout China’s banking system.

As credit becomes more expensive, companies will find it more difficult to stay afloat and its employees could find themselves without jobs. Beijing needs desperately to avoid the kind of social dangers associated with unemployment.

There remains a potential for China to tumble on the bumpy road ahead. However, if China’s central banking system can continue to resist the temptation to feed more cash into the economy to control lending rates, China might be able to weather the approaching boom and bust storm.

For many reasons, Chinese policy is cyclical and major companies will not be allowed to fail as long as Beijing clings to even a fraction of central control. The question is: can China’s ruling party survive the present unfolding boom and bust cycle?

Tuesday, 2 July 2013

In the South Pacific, Chinese economic development continues

There is a paradigm shift happening in the Asia Pacific that is energising the region in a slow but clear way. For the foreseeable future at least, many of the Pacific’s smaller states are set to continue their trend of relying on larger power patrons for funding while developing stronger ties with each other, creating something of a Pacific network.

This is in parallel to the overarching narrative of the Asia Pacific’s other 21st Century competition power dynamics between the United States and China. Both giant powers wish to leverage more influence over the various small countries in the region. But as the South Pacific develops economically there is a desire to diversify options for investment and trade. And as the interconnection intensifies, it is presenting a whole new security dynamic and offering all new opportunities in the same basket.

The bottom line reason is that neither China nor America views the South Pacific as highly important strategically for their interests. There are bigger fish to fry in Asia. The scattered Pacific islands represent a huge geographical area with only limited strategic value, and so far offer little in the way of attractive natural resources. East and South Asia are gaining much more of Washington and Beijing’s attention in the Asia Pacific, and for good reason.

The South Pacific is a different beast to the rest of Asia, and the American’s promise to “rebalance” towards the Asia Pacific has unfortunately tended to emphasise ‘Asia’ at the expense of the ‘Pacific’ in that sentence. Few doubt that qeopolitical competition between the US and China will increase significantly in the coming decades. There is also little doubt that countries all throughout the Asia Pacific will find themselves in difficult positions about how to align and when.

Remember that by 2025, the section of Asia predicted to account for around half the world’s economic output will not be the smaller nations in the South Pacific. It will be Vietnam, Japan, the Philippines, Indonesia, and South Korea.

They are all growing rapidly and some will be among the world’s top performing economies for in future years. But the South Pacific, despite a large influx of loans from China, and from traditional partners such as Australia and New Zealand, still lags behind in development and economic heft.

A niggling worry for South Pacific states is those loans and aid structures set up by China and other larger powers. Speaking at the Otago University Foreign Policy School this week, University of Hawaii’s Professor Terence Wesley-Smith makes the point that China’s rise in the Oceania will be for the long haul. But their interaction with the Pacific region appears to be more commercial rather than strategic. Any talk of a Chinese conspiracy to build military bases smuggled in by aid projects is “crazy stuff”.

According to Mr Wesley Smith, Beijing’s foreign policy objectives are very pragmatic and not threatening. State-owned enterprises operating throughout the Pacific, as well as an estimated 3000 private Chinese companies both small and large, do not reflect a creeping Chinese expansionism and in reality probably have very little oversight from Beijing and even less state coordination. Simply put, there is no ‘China Inc’ approach in the South Pacific.

But it is a harsh truth that capitalist expansion and liberal capitalism especially, leads to military acquisitions or at least preferable relationships. The more developed an economy, the more dynamic and adventurous it becomes. Trade is increased with the outside world, and these new interests need protection. What China is attempting in the Pacific may not appear to be overtly strategic but there is a classic balance-of-power situation developing in which China’s trading partners in the South Pacific may need to reconsider their national security.

The challenge is not necessarily for Pacific nations, but rather the traditional networks such as Australia and New Zealand. China is working with South Pacific countries directly to deliver aid, investment, and trade. Although China is looking to connect with traditional diplomatic and economic partners, their loans and aid to South Pacific nations largely sidestep those partners.

Pacific islands like dealing with China, and Beijing has deep pockets. There are many benefits to a close relationship with Beijing and it is important for those nations to receive the funding China offers. However, China still does not yet consider the South Pacific a top priority. Only 4 percent of Chinese investment goes to Oceania, whereas China spends 45.7 percent on its many African interests.

From the perspective of the countries in the South Pacific, China’s presence represents options and opportunities. Just like any developing nation, island countries in the Pacific prefer to receive aid and investment without preconditions for political or societal changes. Chinese soft loans have come largely without strings attached and Beijing has fostered close partnerships with pariah regimes such as Fiji after all their traditional partners walked away. China does not appear to encourage Fiji or other South Pacific countries to “do things the Chinese way”.

But what the Pacific island countries are finding is that the old way of using China for their economic prosperity and the US for national security might not be meeting the modern demands of a region becoming more interconnected.

China is both a stakeholder and challenger in the region. They are acting like a regional power, but are eschewing power in favour of a hands-off trade agenda. More Chinese citizens are spreading away from the Chinese mainland, headed for the sunny shores of the South Pacific – around 80,000 Chinese civilians live in the region as well as an estimated 30,000 illegal immigrants.

All of this is part of Beijing’s more assertive foreign policy stance. China is looking to move forward from Deng Xiaoping’s strategy of laying low in the world. While the South Pacific might not be high on Beijing’s priority list, interacting with the island nations is another opportunity for China to show that it is an important global actor.