By Michal Meidan
China's leaders are now finalizing the draft of the twelfth Five-Year Plan, the blueprint that will set the stage for the country's great "rebalancing" act. In the coming five years, the leaders of the Chinese Politburo aim to usher in a shift from the country's current "unbalanced, unstable, uncoordinated, and unsustainable" growth model, toward one that is more socially equitable and environmentally sustainable. The "model workers" of yesterday will be at the forefront of China's consumer revolution, singing a different "revolutionary song", and its corporate behemoths will lead the next industrial revolution.
Terms like Five-Year Plan, model workers, and revolutionary songs still have a whiff of old-style communism about them. In China's case, they suggest a strong leader steering the country to its powerful rise and a political apparatus ready to mobilize the population to execute the plans of the Politburo - the small and mysterious body at the helm of the Communist Party.
In reality, Five-Year Plans are ambitious blueprints that signal a wish list. "Model workers" are a dubious species -- ranging from billionaire CEOs dabbling in philanthropy to migrant workers who stage protests for higher wages. "Revolutionary songs" now sound strikingly like Taiwanese pop and are played on MP3 players. As for the mysterious politburo, forget Mao, Deng, and other ideological revolutionaries. Think MIT or Yale-equivalent engineering graduates. And after 2012, when a new generation of leaders takes the helm, imagine economists, lawyers, journalists, mathematicians, and historians staffing the Party's ranks and you find an intriguing pluralism trapped in a Leninist structure.
How can such a system function? Judging by the past, the leadership can manage by being pragmatic and by building consensus. China's leaders tend to debate, bargain, and reach lowest-common denominator solutions. They co-opt bureaucrats, industry groups, and provincial leaders, while trying to pay heed to an increasingly vocal public opinion, including among workers. They have the fiscal resources and enough political legitimacy to intervene in the market to drive outcomes. Coupled with a fundamental dynamism that comes with unleashing pent-up human and industrial potential, this has so far worked pretty well. China's economy has managed impressive growth. The country's human and geographic landscape has morphed over the course of three decades to create new megacities, industrial giants, and a small class of Chinese consumers. The Communist Party has been good at creating industrial and bureaucratic winners.
But in the coming years, as China's leaders embark on their profoundly ambitious rebalancing act, they will have to transfer wealth from some of these winners to households in order to engineer a structural shift in the economy and to steer growth away from over-reliance on investments and exports toward consumption. Can they create new winners at the expense of the more powerful?
The odds are against them, because in order to take a piece of the pie from the strong, they will have to become a bit more confrontational. With an inherent aversion to confrontation, a more diverse group of leaders at the helm with ties to competing interest groups, and complex domestic and international issues that require coordination, it's hard to see a new leadership tackling vested interests head on.
While this doesn't bode well for an ambitious economic restructuring, it doesn't foretell China's collapse -- or economic stagnation -- either. The incoming leadership will be able to stick to its policy comfort zone and use administrative guidance to engineer some of its rebalancing agenda: spending more on welfare and a social safety net, drawing investments to relatively underdeveloped central and western China, creating greener and more technologically sophisticated industrial giants. At the same time, the new crop of leaders will probably be less averse to letting the market gain (a little) more say in capital and resource allocation, and will be more willing to experiment with tweaks to the system of governance.
As long as diversity within the leadership doesn't create fractures that the Chinese public can see and economic growth remains robust, the Communist Party should be able to maintain the political legitimacy it needs to begin steering the country onto a new growth path.
For bolder reforms, though, China will have to wait for future Five-Year Plans, when its leaders and model workers hum to a different tune.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
FREDERIC J. BROWN/AFP/Getty Images
By Damien Ma and Henry Hoyle
Earlier this week, Xi Jinping was promoted to a senior post on a key Communist party military committee. That's the surest sign yet that Xi (pronounced "she") remains on track to become China's next leader in 2012. But beyond the official biography, just who is this guy?
Xi Jinping is a slightly pudgy 57-year-old man who, in some ways, looks appropriately like a typical roughneck from China's coal country near the Ordos Basin (think West Virginia). But his family is anything but ordinary. He traces his lineage to a revolutionary who fought the Japanese alongside Mao Zedong. In today's China, that generation of old cadres still inspire reverence, rendering them virtually untouchable. In fact, Xi's father, Xi Zhongxun, is considered by some as one of the "eight immortals" in Chinese politics. There's little doubt that the younger Xi's political career benefited tremendously from his family name.
Xi not only boasts a famous father, he is also married (his second) to celebrity singer Peng Liyuan -- a beauty from a bygone Chinese era. Peng is no shrinking violet. She commands positions in the People's Liberation Army and a government advisory body. Her stellar entertainment career earned her a coveted spot to perform for top leaders at the grand celebration of the 60th anniversary of modern China last year. In fact, Peng's career path and independent identity have spurred speculation among many Chinese about the future First Family's marital problems. It's not quite Bill and Hillary or even Nicolas and Carla, but people whisper a lot in China too.
Much about Xi remains under wraps -- everything from his relationship with current president Hu Jintao to his personal political philosophy. It is also unclear how his teenage experiences of manual labor in the Chinese countryside -- his family was purged during the Cultural Revolution -- shaped his views. He certainly emerged intact, with no lingering grudges toward the party. Xi then went on to Tsinghua University, the Yale or MIT of China, depending on whom you ask, and majored in "Marxism and Political Ideology Education," according to his official Chinese biography. His education pedigree seems to fit an emerging pattern in Chinese elite politics today: Beijing University and Tsinghua University have become fertile breeding grounds for future Chinese politicians. In fact, many of the new leaders expected to be promoted in the next round of power handover claim one of those two universities as their alma mater. Like the past five (including Obama) US presidents who have gone to either Harvard or Yale, the Chinese version might be the "Tsinghua Mafia."
Though Xi's familial and university peer networks have certainly given him advantages, Chinese commentary also indicates that he is judged to be competent, albeit instinctively cautious. That trait may explain why he remains less than revealing before he is officially anointed president. Rumors have circulated that Xi turned down the military promotion last year at the fourth plenum in a personal letter to Hu Jintao, arguing that he wasn't ready. Now that he has secured the final base of power, the PLA, Xi may be more willing to speak louder and to show some color.
Damien Ma and Henry Hoyle are analysts in Eurasia Group's Asia practice.
JANERIK HENRIKSSON/AFP/Getty Images
By Nicholas Consonery
We all know that Beijing is dedicated to managing the flow of sensitive information in China. Whole websites are dedicated to discerning the government's propaganda strategies and to uncovering the specific stories that Beijing is trying to control.
But it isn't often that China's own leaders are censored these days--which is exactly what happened to Premier Wen Jiabao last week.
On Oct. 3, Premier Wen granted an extensive interview to CNN's Fareed Zakaria. During the dialogue (well-worth the half-hour), Wen raised eyebrows by arguing that the Chinese people's "wishes for and needs for democracy and freedom are irresistible." Wen promised that, in pursuing these wishes, "I will not fall in spite of a strong wind and harsh rain, and I will not yield till the last day of my life."
Wen's comments were covered widely in the Western press. But in China, such coverage was stifled in the days following his remarks. On Oct. 7, the Wall Street Journal reported that there had been "an official news blackout" of the interview.
Since then, abbreviated versions of it have been popping up in sanctioned Chinese media. The coverage captures the gist of Wen's comments, especially focusing on his four uncontroversial tenets of political reform: "To let everyone lead a happy life with dignity. To let everyone feel safe and secure. To let the society be one with equity and justice. And to let everyone have confidence in the future."
Contrary to popular perceptions, China's leaders are not outright opposed to political change. Small-scale local elections were initiated in the early 1980s and still happen today, anti-corruption campaigns are unending, and in recent years, party elders have talked publicly and at great length about the importance of intra-party democracy. In other words, more transparent, responsive policymaking and career mobility within the existing Communist party structure are already on the table. In the past year alone, the government has been working to convey a greater responsiveness in handling long-standing grievances like forced housing relocations and is moving toward mandatory public disclosure of the salaries and assets of government officials.
Wen's comments don't look so controversial in this light. So why would the Party's propaganda mechanism instinctively suppress them?
One argument I've heard recently is that Chinese government officials are deft at conveying different messages to domestic and foreign audiences. In other words, maybe Wen was telling us just what we wanted to hear. "If Wen wanted his comments covered," a good friend in the U.S. government argued yesterday, "I think it's safe to say they would have been." This seems plausible. All politicians try to tailor their words to fit their respective audiences. But that does not explain why Wen has already spoken publicly, in China, about continued political reforms several times this year.
Another popular theory is that there is an elite power struggle going on in Beijing, and that Premier Wen is personally working to drive political reform in the face of mighty opposition as he approaches the end of his term in 2012. By this line of thinking, Wen's opponents would have stifled his comments so that the Chinese public wouldn't expect any rapid changes. "Fire's real beauty," as Ray Bradbury wrote in Fahrenheit 451, "is that it destroys responsibility and consequences."
Perhaps. But it seems more plausible that the immediate stifling and subsequent careful management of Wen's comments simply reflect the transitory political environment in China right now. Keep in mind that Beijing is moving toward an unprecedented leadership transition in 2012. Seven of the top nine members of the Chinese Communist Party will be replaced along with hundreds of lower level Party and government officials.
We assume that the top leadership beyond 2012 has been generally agreed on (with some exceptions). But there's no question that most officials have strong incentives to avoid controversy in the lead-up to this transition. Any black mark could undermine their chances to get top spots in the next administration, and any perceived weakness could be exploited by rival factions for their own gain. Meanwhile, it will be getting gradually more difficult for the current leadership to mobilize support as different groups in the Party, government, and military coalesce behind their preferred candidates for the top spots in 2012.
In this tenuous environment, it's no wonder that Beijing's innate response to any talk of difficult political reform is to freeze up. Many in the Chinese government, perhaps including Premier Wen himself, likely do support the idea of political reform in spirit. But many others do not. And the Chinese policy environment does not seem conducive to much compromise between these groups right now. I wouldn't expect much boldness on political reform until we're well past this transitory period.
Nicholas Consonery is a China analyst at Eurasia Group.
By Nicholas Consonery
Last week, in a major policy shift, Chinese officials gave Taiwanese President Ma Ying-jeou and his ruling Kuomintang (KMT) party a big victory by signaling that China will not block Taiwan's trade negotiations with Singapore. In the past, Beijing has used heavy diplomatic pressure to block all but five of the island's potential bilateral trade agreements as part of a long-term campaign to limit Taiwan's global recognition.
What's more, the Ma administration appears convinced that Beijing will allow them to pursue trade agreements with other Southeast Asian governments in the months and years ahead. Malaysia, Thailand and the Philippines are the likeliest partners. Officials in Taipei also announced last week that they're pursuing an investment agreement with Tokyo that they hope will produce a trade agreement down the road. A higher level of economic integration with the broader Asian economy will encourage domestic restructuring in Taiwan and will boost the island's exports -- and therefore its economic strength. And all with Beijing's blessing.
What's going on here?
Most of the press following the recent G-20 summit in Toronto focused on President Obama's inability to persuade Europeans that the global recovery is too fragile for a slowdown in stimulus spending. But the real story was his administration's pledge to move forward on a long-delayed free trade agreement with South Korea.
The Korea-US free trade agreement (KORUS) was completed in 2007, but congressional Democrats, under pressure from labor unions, have refused to vote on ratification. They charge that, among other problems, the deal would allow South Korea to continue blocking entry to American automobiles and beef. Obama said he wants renegotiations to be completed before he visits Seoul for the next G-20 gathering in November and that he intends to submit the deal to Congress for a vote after the mid-term elections. This is Obama's first explicit public commitment to push on a specific trade deal with a clear timeline for passage.
America's 9.5 percent unemployment rate and a very challenging election season might make this a surprising time to try to move forward. But political and security developments in East Asia help explain the timing. China's recent announcement that it will allow some upward movement in the value of its currency has not appeased critics in Congress, and U.S.-China trade frictions will continue. More importantly, the crisis created when North Korea sank a South Korean naval vessel has sharply increased tensions in the region. These developments provide good reason for the United States and South Korea to move closer together. In Toronto, Obama went so far as to describe South Korea as "the lynchpin" of American policy in Asia -- a comment that raised a few eyebrows in Tokyo.
The South Koreans passed this deal long ago and have refused to reopen it to address congressional complaints. But anxiety over what's happening in North Korea will make it easier for South Korean President Lee Myung-bak to argue for compromise and better relations with the United States. The Obama administration assumption is that passage will become easier after the midterms have passed as enough pro-trade Democrats join Republicans to close the deal.
Forward movement on KORUS could add momentum behind other free trade proposals. House Majority Leader Steny Hoyer (D-MD) has argued that trade agreements with Panama and Colombia should move forward at the same time. The move also creates a possible opening for a U.S.-Japan trade agreement framework, something the president will consider more favorably now that new Japanese Prime Minister Naoto Kan is working to improve ties with Washington damaged during the turbulent tenure of Yukio Hatoyama.
The Doha round is going nowhere, but combine the latest moves with a reinvigorated U.S. push for Russia to join the World Trade Organization, and the Obama administration might finally have itself a trade agenda.
SAUL LOEB/AFP/Getty Images
By Nicholas Consonery
On Saturday June 19, Beijing shook Washington and global markets with a landmark announcement that its currency, the renminbi (RMB), would become more flexible. The move caught many by surprise, including yours truly. I thought -- and argued earlier on this blog -- that Beijing's concerns about the fiscal crisis in Europe (which still seems to be getting worse) would likely delay action on the RMB. I was wrong.
At the onset, I'll say that my fundamental understanding of the Chinese government's economic priorities has not changed. Beijing still has tremendous incentive to protect its export-focused industries in the short-term, and the leadership has already made clear that it is very concerned about the potential spillover of a financial or even sovereign debt implosion into the European real economy. This could threaten the strength of Chinese exports to the continent and risk slower growth in China. So even though the RMB has become a bit more flexible, I expect we will only see very slow, crawling-upward appreciation against the dollar this year for these very reasons.
But if Beijing is so concerned about the strength of its exports, why pursue even slow upward movement in the RMB -- which would make Chinese-made goods more expensive? Especially when the currency is already appreciating on a trade-weighted basis; up by 3.37 percent according to the Bank of International Settlements?
The short answer is that Beijing is not impervious to foreign pressure, and became convinced that the potential downside costs of doing nothing outweighed the risks behind a small move.
This leads me to the current discussion over whether Beijing was more motivated by political or economic factors in moving on the currency. I think it's a false paradigm, because both factors were at play, and in China, everything economic is political. To my mind, the decision was economic, but the timing was political.
Let me explain my thinking:
First, Beijing's move on the RMB might actually have done more to protect Chinese exports than if they had done nothing. In moving on the RMB, Beijing is seeking to avoid foreign policy turmoil that could disrupt its economic goals. In other words, it became clear to Beijing over the past few months that if they did nothing on currency, the Obama administration might not be able to hold back congressional pressure to impose concrete punitive measures against imports from China. Beijing's move on the RMB made it far less likely that these punitive steps are taken, and thus the outlook for China's ability to continue (mostly) unhindered exports to the United States remains strong.
Beijing must have sensed -- more than I gave them credit for -- the growing likelihood of a punitive response from the United States on currency, and they were aware that the more visible and direct the critics in D.C. became, the harder it would become for them to sell a move domestically (which goes back to the point of risking a much more confrontational trade relationship with the United States). So they timed the move to accrue maximum political benefit -- perfectly coordinated to coincide with the G20 summit in Toronto this week. And they gamed us all ahead of time by greatly lowering everyone's expectations -- making even a very small move that much more gratifying. In doing so, they have all but silenced the international criticism and (momentarily?) eroded any broader support for the more punitive moves called for by leading China skeptics in Washington.
But another important point is that I don't believe Beijing would have made any change in their currency policy unless at least some contingent in the bureaucracy was arguing that it was in China's best economic interest to do so. And this is exactly the argument that's been waged within the Chinese bureaucracy for the past six months, where we've observed a consistent back-and-forth between policymakers at the Chinese central bank (PBoC) and the Ministry of Commerce (MOFCOM) on whether and when to proceed with exchange rate reform.
PBoC officials have been arguing consistently that RMB reform must move forward, both because of its immediate function in combating inflation, and because of its longer-term role in promoting the economic restructuring discussed above. But MOFCOM officials have been generally opposed, citing the potential downside risks of appreciation for export-focused industry. At the end of the day, it looks like May's positive economic data -- which showed a nearly 50 percent increase in Chinese exports year-on-year and a slight uptick in consumer price inflation -- convinced the top leadership that the PBoC was right, and that the domestic economy could still benefit from a very gradual appreciation of the currency despite the ongoing fallout in Europe.
The final point is that China's economic priorities are not simply limited to protecting exports. It has been clear, especially for the past year, that Beijing is becoming more serious about taking steps to reduce the economy's reliance on export and investment-intensive growth. The crawling appreciation I'm expecting for this year won't help much in this regard, but in a longer-term sense, Beijing clearly needs a stronger, more flexible currency to accomplish many of its economic goals, from promoting domestic consumer spending to strengthening the ability of Chinese firms to purchase inputs abroad (like natural resources), and fostering the domestic financial industry. The rising generation of Chinese leaders is clearly focused on pursuing these adjustments. In late May, Vice Premier Li Keqiang (who will likely become the next Premier in 2012) promoted this kind of economic restructuring in a consequential speech published in the leading Chinese Communist Party journal Qiushi. In his speech, Li specifically discussed the role that the RMB reform could play in rebalancing the domestic economy. Next time I'll take his words (a bit) more seriously.
Nicholas Consonery is a China analyst at Eurasia Group.
FREDERIC J. BROWN/AFP/Getty Images
in many parts of China have made international headlines in recent weeks by
demanding higher wages -- and getting them. As more of them get what they want,
others will be encouraged to go the same route. Is the world's factory about to
go out of business? Not quite yet, but China's government has a
complicated new management problem.
The surge in worker anger and a wave of wage hikes in companies ranging from
electronics giant Foxconn to fast-food icon Kentucky Fried Chicken have generated talk about the end of cheap labor in China and the birth of an independent labor movement. That's overstated-or at least premature. Higher labor costs are an inevitable result of rising living standards and expectations, a long-term trend that can't be blamed on one Honda plant. An ageing population (in part the result of the one-child policy), the urbanization of huge numbers of workers, as well as Beijing's long-term policy plans to boost the declining share of income in China's GDP had set the stage for a gradual rise in labor costs long before the recent wave of strikes. With wages stagnant for most of the economic crisis, many local governments have introduced minimum wage hikes ranging from 5 percent to 20 percent in recent months. But the trend toward country-wide wage increases will be gradual. For now, there are still enough workers looking for jobs along the coast and in the countryside to keep labor costs manageable for many producers.
The more interesting part of the labor dispute story comes from the changing
nature of China's workforce. The country's economic boom has gradually raised expectations among Chinese workers for a better life. Opportunities to get an education (or provide one for their children), to buy a home, and to afford once unobtainable consumer goods have changed the way that millions of Chinese workers imagine their future. On an unprecedented scale, savvy workers are using the Internet and cell phones to find out what's happening in other factories and towns. They are increasingly aware of their rights and of the existing legislation designed to protect them. They're becoming much more assertive in demanding that their rights be protected.
So far, Beijing has tolerated these worker movements. Premier Wen Jiabao, known to many as "Grandpa Wen," recently spoke in support of the migrant workers who make up the bulk of China's unskilled labor. He insisted that they deserved to be "cared for, protected and respected." As long as labor disputes don't take on an overtly political tone, Beijing will leave it to local governments to deal with them. But one of the Honda strikes came dangerously close to testing the limits when, according to some accounts, workers demanded the right to form independent labor unions.
Here's where things could become more confrontational. China's formal trade union, the All China Federation of Trade Unions (ACFTU), is the only union that the government tolerates. But ACFTU doesn't inspire much confidence in the workers it was created to represent. Its main goal is to unionize most, if not all, of China's foreign-invested firms, and it tends to limit its role to mediating disputes between management and workers. Since its operation are approved by management -- and often staffed with managers -- workers tend to stake their claims independently of it. Some workers are even looking for something a bit more genuinely independent to represent their interests and protect their rights.
How will Beijing respond to these new pressures? First, it will likely keep the pressure on local governments to manage labor problems effectively, whether by brokering concessions, intimidating those who make the most aggressive demands, or both. Second, it could seek to empower ACFTU to play a more assertive role in representing workers interests, a goal that some ACFTU
representatives share. Beijing would rather ensure that its trade union can play its role more effectively than to allow for the creation of labor unions it can't completely control.
For the moment, the world's factory will continue humming along, though with
a few more jolts and bursts. But this is a story worth following as the Chinese leadership adapts to the challenges of navigating an increasingly complex political landscape.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
MIKE CLARKE/AFP/Getty Images
The good news in Europe is that they've finally realized the seriousness
of their fiscal woes. The bad news is that it may be too late. The good news in
the United States is that we have considerably more fiscal rope to hang
ourselves with. The bad news is that we seem intent on not using it. The good
news in Japan... Well, there really hasn't been much good news in Japan lately.
But last week might be a start. The resignation of Prime Minister Yukio Hatoyama and perhaps more importantly, the sidelining of Ichiro Ozawa, secretary-general of the Democratic Party of Japan (DPJ), was widely expected, but not quite so early. Their departure, and the passing of the upper-house election in July, now finally allows the new government to focus on policy rather than politics. It also gives the DPJ a three-year window before another national election will be required.
It will be a long road before Japan gets its act together. But the policymaking process will probably be less self-destructive under new Prime Minister Naoto Kan, benefiting from greater popular support (the DPJ grabbing a sudden 15-point lead over the liberal democratic party following the shakeup), a likely coalition shakeup after the upper-house election that makes new coalition partners better aligned with the DPJ available, and collaboration between the cabinet and the professional bureaucrats (some of the world's most competent and hard-working), who have been essentially left out in the cold for about a year.
Does it make me positive on the yen? I wouldn't go that far. For putting the budget back on a sustainable path? It's a step in the right direction. But with DPJ leadership change improving the likelihood of coherence in Japanese policymaking, I'm less overtly negative. And for Japan right now, that's saying something.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
YOSHIKAZU TSUNO/AFP/Getty Images
By Nicholas Consonery
Over the weekend, while in Busan, Korea, U.S. Treasury Secretary Tim Geithner said Beijing should resume "reform of their exchange rate mechanism." This brief comment was just a hint at the deluge of pressure China will face from the U.S. over currency policy in coming months unless the Chinese leadership allows the RMB to start appreciating against the dollar. But these days, Beijing looks less and less willing to alter course.
The RMB has been fixed against the dollar since the beginning of the financial crisis in July 2008. A month ago, Beijing looked like it was on the cusp of revaluing the RMB and allowing more upward momentum against the dollar -- mostly to assuage tension over currency policy with the United States.
But the debt crisis in Europe is weakening support in the Chinese government for changes in currency policy because the value of the RMB has been anything but stagnant against the euro in recent weeks. As concerns about European fiscal solvency have stewed in the markets, the dollar has appreciated significantly against the euro and other major currencies - and dragged the RMB along with it. Since January of this year, the RMB has actually appreciated by 20 percent against the euro-upward momentum that has accelerated significantly since May when concerns about solvency in Greece and Portugal wreaked havoc on markets. On Friday, June 4, the RMB appreciated by 1.58 percent against the euro in just that one trading day.
This rapid upward movement in the RMB against the euro presents a major concern for the Chinese economy. Why? Because the euro zone is China's single biggest export market, accounting for 19.7 percent of Chinese exports in 2009. In recent weeks, top officials at China's commerce ministry have publicly called for continued support for export-focused industries (which would include the currency peg) as the crisis in Europe plays out. Believers in this argument are now pointing to May's decline in China's purchasing manufacturer's index, which measures industrial activity, as early proof that Europe's troubles are already bleeding over into Chinese growth. Meanwhile, Chinese exporters and the local governments that support them report weaker confidence in the prospects for euro value and for the broader European economy.
But other policymakers in Beijing seem more optimistic. Among those is Zhou Xiaochuan, the central bank governor, who argued alongside Secretary Geithner that the euro crisis' impact on the Chinese economy "should not be very great." This may be wishful thinking, predicated on the belief that European officials can use enough fiscal alchemy to convince forex traders that the euro isn't on a set course to parity with the dollar this year. At the same time, Zhou might be trying to signal his continued support for pressing forward with reform to the RMB exchange rate mechanism now, despite Europe's woes.
It will fall to the top leadership in the Chinese Communist Party structure -- probably President Hu and Premier Wen themselves -- to settle this debate and make the final decision about what to do with the RMB. But if history is any guide, Beijing is steadfastly opposed to any kind of "shock therapy" for the Chinese economy. And a 20 percent appreciation of the RMB against the euro in just five months seems shocking enough to delay any more upward movement in the value of the Chinese currency for now.
By Abraham Kim
How do you respond when your enemy sinks one of your ships and drowns dozens of your sailors? If you believe your better-armed enemy wants a fight, can you afford to do nothing? In a democracy? In an election year? As voters mourn the dead and look to you for leadership?
On 27 March, an explosion sank the South Korean naval ship Cheonan, killing 46 sailors. Preliminary reports from an international team of investigators led by South Korea suggest a possible torpedo attack, but the evidence is still inconclusive. Publicly, North Korea is denying any responsibility, but privately, Pyongyang could be sending a signal to South Korea and its allies that it is losing patience with the lack of humanitarian and energy assistance coming from the international community. Also, North Korea could be trying to stir up another crisis to help consolidate domestic support behind the regime as economic troubles worsen. Aiming to comfort a mourning population, the South Korean leadership has vowed that the government's response will be "strong and resolute" once the cause is identified and those responsible are found -- a veiled threat against Pyongyang. Despite the tough rhetoric, punitive action will ultimately be muted once Pyongyang is implicated. South Korea and the international community have very little leverage over North Korea, especially without Beijing's cooperation. At the same time, South Korean President Lee Myung-bak must stabilize the situation before events begin to disrupt the economy and other national affairs.
South Korea and the international community have few palatable options. A military response from South Korea could set off a tit-for-tat exchange with a nuclear-armed North Korean military that would have its long-range guns and missiles locked on Seoul. Closing the Kaesong special economic zone -- the only North-South Korea joint venture currently in operation -- wouldn't impose much additional hardship on Kim Jong-Il's regime. The likeliest option, an appeal to the U.N. Security Council for punitive action, might not amount to much, since China and Russia would probably block any bid to impose additional sanctions on an already isolated Pyongyang. In Shanghai last week, Lee failed to win a commitment from Chinese President Hu Jintao to support a joint international response if North Korea was found responsible for the Cheonan incident. With Kim Jong-Il currently in Beijing to seek more aid, it's unlikely that China will join in punishing the regime. In the end, the international community's response will probably amount to empty public condemnation with a few toothless sanctions.
This isn't all bad for South Korea, because the Lee administration has a clear interest in keeping a lid on further turmoil on the Korean peninsula. The government fears that new tension could take the steam from South Korea's struggle to recover from the global financial crisis and unnerve foreign investors that recently have taken greater interest in the market. Last month, Moody's upgraded South Korea's credit rating from A2 to A1, highlighting the growing momentum that the government wants to maintain. In addition, Seoul will host the G20 summit in November, and the Lee government wants to avoid any trouble that would make heads of state and business leaders think twice about attending. The president sees the summit as a tremendous opportunity for South Korea to demonstrate that it's the newest developed country on the global scene and an economic leader during a time of considerable economic anxiety.
That said, Lee's government will have to say something more substantive about the Cheonan sinking to avoid the appearance of shrugging off what amounts to a North Korean act of war. This is not to signal that authorities are ready to take any substantive punitive action, but more to manage domestic politics. Lee has learned the hard way during his two years in power that the government sometimes has to allow for the expression of public outrage before a page can safely be turned. Otherwise, as in the 2008 anti-U.S. beef protest and the aftermath of former president Roh Moo-hyun's suicide, shifting winds can direct public fury toward the government itself.
The political stakes are particularly high in light of upcoming local elections, widely considered a referendum on Lee's presidency. Political observers suggest that a poor showing for Lee's Grand National Party on June 2 could leave President Lee a lame duck president for the next two and a half years. So far, Lee has managed the crisis with political sensitivity and dexterity. He may even benefit from rising anger at North Korea if outrage over the Cheonan incident rallies voters to Lee and his party.
If South Korea retaliates against North Korea, Lee will have done Kim Jong-Il a favor. If Seoul swallows hard and moves on, it may be Kim who has done Lee a favor.
Abraham Kim is an Asia analyst at Eurasia Group.
KIM JAE-MYEONG/AFP/Getty Images
By Damien Ma
Amid growing fears that China is now shunning foreign investment, Beijing unveiled a new foreign direct investment (FDI) blueprint in mid-April aimed at calming jitters. The policy was short on details but long on message: China has not spurned FDI, but wants to steer it toward the relatively underdeveloped interior of the country to narrow the growing wealth gap between the urban powerhouses along the coast and the western frontier.
Coastal mega-metropolises have served as both emblems of China's three-decade surge and as magnets for foreign investors. But over the last decade, Beijing has blazed new trails that link Shanghai with the desert entrepot of Xinjiang. This project is already producing a formidable harvest as new cities spring up along the way. When Americans first pushed beyond the Mississippi in large numbers, they created places like Chicago, the city of big shoulders. In China, there will be many more million-plus cities, and foreign investors can now cast their attention from the coast to the rest of China.
Case in point is Chongqing, the "Chicago of China," a municipality in south/central China of more than 30 million people that hugs the Yangtze River. Like Shanghai, it carries the administrative clout of an entire province. Like Chicago, Chongqing has become the country's crossroads. The city's GDP climbed to around $70 billion in 2008, and has already attracted some 4,500 foreign-invested enterprises, including a Hewlett Packard commitment to build a manufacturing facility by 2010.
And like Chicago, Chongqing is a place of high political intrigue. The city's current Party Secretary Bo Xilai, whose charismatic persona is unusual for the typical stolid Chinese politician, has a good shot of returning to Beijing as one of the most powerful players in the Politburo during the party's 2012 political transition. Bo's potential ascendance in Chinese politics should bode well for the future development of Chongqing, which will likely continue to draw Beijing's attention and resources.
Chongqing won't challenge Shanghai's No. 1 status anytime soon. (Chicago is still known as "Second City"). Yet it's already home to China's biggest motorcycle maker, a major Chinese automaker, ChangAn (joint venture with Ford), and a handful of well-known Chinese appliance companies. The municipality could also become a key logistics artery, as the local government has ambitious plans to expand ports, high-speed rail, and highways. In 2009, Beijing issued a national logistics plan aimed precisely at fortifying the network of linkages between the coast and more remote areas. Chongqing will profit from that, as well.
But new large-scale opportunities for foreign investors in China's interior are hardly limited to Chongqing. Urban centers -- from Wuhan and Zhengzhou to Hefei and Changsha -- are driving the growth of "central China." Plans to develop high-speed rail projects, already well underway, will drastically shorten the commute to and from the coast. Wuhan, a "smaller" Chinese city with a population the size of New York City's, has become a major rail hub from which passengers transfer for west- and south-bound routes. The eventual plan is to connect Shanghai to Chongqing with high-speed rail, routed through Wuhan, which would take just 10 hours.
Like New York's urban jungle, which captured the futuristic wonders and unique dynamism of America, Shanghai has evolved from symbol of China's once-mystical Shangri-la to modern monument to the country's rise. But there's a lot of country left to develop, and the urbanization trend isn't going away. China hopes to lift its urbanization rate from below 50 percent today -- well below the U.S. level of 82 percent -- to about 70 percent by 2040. (To put this in context, China expects to add the equivalent of an entire United States into its cities over the next generation.) These new nodes of growth are trying to prove they can help shape China's development future. Beijing is fully on board -- and wants investors to know it's time for them to climb on board, as well.
Damien Ma is a China analyst at Eurasia Group.
By Nicholas Consonery
Stinging criticism by People's Bank of China vice governor Zhu Min over the Greek debt crisis rattled markets on Friday, leading the Wall Street Journal to conclude that signs of a new world order were emerging, a "testament to how much the world has changed since the global financial crisis."
But Zhu Min's comments actually reflect how much the pre-financial crisis economic thinking simply persists. To the extent that China acts on this thinking, it will threaten continued weakness in the global economy and make the need for the world's major economies to rebalance ever more urgent. As a new economic order emerges, the fear is that China transitions from a source of dynamism, to a source of risk.
In this regard, Zhu Min's criticisms were emblematic of a long-running pushback from Beijing against western governments (especially the U.S.) who have in recent months harangued Chinese policy makers to implement a more serious strategy to bolster China's domestic consumer economy and diminish its export of subsidized goods to global markets. The concern is that the historically strong consumer markets in the U.S. and Western Europe have been weakened significantly, meaning there might not be a buyer-of-last-resort for many Chinese-made goods.
This is a theme that was most elegantly highlighted by Martin Wolf in the Financial Times last week, when he bemoaned the dedication of the world's largest exporters (he called them "Chermany") to maintaining their export-focused orientation, while criticizing consumer nations for persistent fiscal deficits. Should Zhu Min's advice be followed, the result, argued Mr. Wolf, would be an "altogether negative role in the search for a way out from the global slump in aggregate demand."
But things look different from the Chinese perspective. Beijing refuses to accept any responsibility for the massively unbalanced global economy, preferring to apportion the blame on profligate Western economies that spent their way into oblivion. And though the Chinese leadership certainly wants their economy to be much more reliant on sustainable domestic demand, they believe these changes must occur over a decade or more.
So, even though the market impact of Zhu's comments reflects growing influence by China, they also suggest a preference by Beijing to return to the status-quo -- ante the financial crisis. My concern is that the Chinese government intends to perpetuate a swath of preferences for its export-focused industries, anxiously awaiting the day when the global economy rebounds and Beijing can again rely on the export sector to rectify its seemingly unsolvable dilemma in drawing down production overcapacities in strategic, heavy industries (like steel).
The consequences of the Greek debt crisis for the value of the euro are another difficulty for China; one that the PBoC has been particularly attuned to because of the significant upward pressure on the values of the dollar and the yuan. On the surface, the PBoC is struggling to tame the inflows of speculative foreign money and the resulting rise in asset prices within China. But at the same time, a falling euro might allow China's major export competitors, especially Germany, to make up some of the export market share that was lost during the financial crisis. The result would be a marginal weakening of China's export sector, which will amplify top-level concerns in China about small and medium-sized producers and their vital role in driving employment.
Nicholas Consonery is a China analyst at Eurasia Group.
A few years ago, Vietnam looked set to lead the pack among "frontier markets," the next wave of emerging players to offer cutting-edge growth and investment opportunities. Banks were setting up Vietnam funds. Unfortunately, the country's sometimes profoundly inadequate civil service, its amateurish management of economic risk, and the continuing power of more advanced emerging markets to dominate investor interest combined with the global slowdown to hit the country harder than some of its neighbors. The highest inflation rate in the region in 2008 threatened the political survival of reformist Prime Minister Nguyen Tan Dung. For all these reasons, Vietnam's sunrise dropped back below the horizon.
Day may finally be about to break. Vietnam remained politically stable through the tough times, and, despite pressure from conservatives, the bureaucracy has largely remained committed to reform. The new buzzword is stability, not growth at all costs, but investors are again buzzing about opportunities in Vietnam's major cities and its provinces with export zones, and we're seeing a spike in interest (particularly from Japan, South Korea and the multilateral institutions) in Vietnam's export infrastructure. The government is now both willing and able to spend more on power generation, roads and rail. There's good reason to believe these investments will soon bear fruit.
Outsiders are impressed. Eager to showcase one of their few genuine successes,
the World Bank and Asian Development Bank have ample incentive to double down
on Vietnam's growth. The prime minister has kept their confidence by pressing
ahead with market-oriented reforms despite the spike in inflation in 2008 and
the economic turbulence of recent months. A few concessions to
conservatives -- meant to bolster social stability with targeted social spending
projects -- will probably see him through to a second term in 2011.
The predictability his government provides will only brighten the country's investment outlook, particularly with so much uncertainty in the neighborhood. Japanese and Korean investors, in particular, are looking toward Vietnam to hedge their bets on China. Given the uncertainty surrounding Thailand's industrial policy (exemplified most dramatically by the ongoing controversy over work at Map Ta Phut, the country's most important petrochemical hub), and the political volatility that's likely to follow the death of Thailand's king, Vietnam has never looked sunnier.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
Aude GENET/AFP/Getty Images
By Ian Bremmer
President Obama embarks today on a tour of East Asia, a region central to U.S. geopolitical interests and its economic recovery. The primary goal is "strategic reassurance," a term Deputy Secretary of State Jim Steinberg has used to describe U.S. relations with China.
On Friday, he'll reassure Japan's brand new Prime Minister Yukio Hatoyama that, despite well-publicized recent frictions in U.S.-Japanese relations and a broader U.S. engagement with China, his administration considers ties with Japan a cornerstone of U.S. foreign policy. And he'll seek some reassurance that the new DPJ government isn't about to revisit key assumptions in the relationship. Hatoyama will likely take the opportunity to "clarify" his view on the importance of the security partnership. Throw in a highly publicized Obama speech on Saturday, and we can expect an easing of suspicion and a lot of warm smiles, especially since the two sides now appear to have a deal on a joint-commission to resolve the Okinawa troops and base relocation issues.
On Sunday, Obama will be in Singapore, where he'll reassure Prime Minister Lee Hsien Loong that the US isn't planning on reducing its Asian presence anytime soon. He'll then join the festivities at the Asia-Pacific Economic Cooperation summit. During the meetings, there will be early discussion of an "Asian Economic Community" and rumors that Obama is involved in discussion with ASEAN leaders on a U.S.-ASEAN free trade agreement -- though he'll more likely simply be offering reassurance that his government hasn't set its trade agenda on indefinite hold. The meeting will end with public pledges from all sides to reject protectionism, the sort of empty reassurances we've seen in recent months at G20 meetings in Washington and London. Much of the media focus will be on the silk shirts and blouses inspired by Singapore's Peranakan culture that the leaders will be wearing.
More interesting are the side meetings that we'll hear much less about. Obama is scheduled to sit down with Myanmar's prime minister to reassure him that the United States is willing to engage the country's military junta if there's any prospect that engagement might yield results. Back home, Obama will reassure critics in Washington that he won't move to lift sanctions until Myanmar's generals offer something of substance. He's also scheduled to meet with Indonesian President Yudhoyono to assure him that the U.S. views the emerging regional player as a valuable local partner, and with Russia's President Medvedev to assure him that his administration is serious about improving strained relations with Moscow.
On Monday, Obama
heads for Shanghai and Beijing for a three-day visit that includes some
sightseeing and a Q&A with Chinese students around meetings with President
Hu Jintao and Premier Wen Jiabao. The talking points for these sessions are
nearly as ambitious as what you'd expect from one of those G20 meetings. There
will be discussion of the recently contentious U.S.-Chinese trade relationship,
energy, human rights, stability in Pakistan and Afghanistan, and the nuclear
programs in North Korea and Iran. Obama can reassure China's leaders that he
seeks mutually profitable engagement with the one subject he's NOT likely to
bring up: The value of China's currency. The Chinese wouldn't welcome the
discussion, and Obama has no interest in inviting the Chinese to comment on the
state of the U.S. economy and Washington's role in it.
If there's any tangible progress from Obama's time in China, it will be on climate change/green energy issues. There may well be an agreement to expand joint development and investment in renewable energy technology. It won't be a true "breakthrough," but given the low likelihood that anything especially important comes out of climate change meetings in Copenhagen next month, the Obama team will use any sign of modest progress to reassure skeptics of his commitment on the issue and to tout the trip as a success.
On the way home, Obama will stop off in Seoul to tell South Korean President Lee Myung-bak that KORUS, the U.S.-South Korean free trade agreement, isn't dead. He'll also reassure Lee that, though the US won't reduce troop levels on the peninsula, Washington can help make their stay a little easier for South Korea's government to manage.
Ian Bremmer is president of Eurasia Group.
JACQUES WITT/AFP/Getty Images
By Ian Bremmer
The international conflict over North Korea's nuclear program has been locked in stalemate for years. The United States and Japan fear that Pyongyang will sell nuclear weapons and material to rogue regimes and/or terrorist groups or stumble its way into a shooting war. China and South Korea worry that North Korea will collapse, flooding Chinese border regions with sick and starving refugees and leaving South Korea with a reunification project that will cost a fortune and last a generation. This problem has allowed Kim Jong Il to periodically saber-rattle his way into fresh supplies of cash, food, and fuel. It's all been entirely predictable.
But the Dear Leader's illness has changed the game. His government has been unusually belligerent lately, even by North Korean standards. Following the latest missile tests, they haven't made new demands for talks or aid and insist they will not return to six-party talks until others at the table accept North Korea as a nuclear state. Its government has since sentenced two US journalists to 12 years of hard labor for "hostilities against the Korean nation and illegal entry." Especially provocative have been a series of cyber-attacks on US and South Korean government websites, which officials in both countries believe originated from North Korea. This more reckless North Korean behavior suggests that senior civilian and military officials, increasingly unsure how the coming power transition will go, are trying to secure some extra room for maneuver.
For the moment, North Korean actions are aimed at an internal, not an international, audience. That makes their actions less predictable -- and increases the risk of accidental confrontation.
The Obama administration, aware that bad things happen when all sides are in escalation mode at the same time, has stepped back from the tougher rhetoric of weeks past. There's been little mention of sanctions. For the imprisoned journalists, Secretary of State Clinton is now asking for mercy rather than demanding justice.
But if North Korea really is moving into political succession mode as Kim Jong Il's health heads downhill, those who will be left behind are making a much-faster-than-planned move to shore up support for his recently designated successor, third son Kim Jong Un. It will be easier for them to maintain national unity at a time when the country stands on the brink of war.
Until the North Korean leadership feels confident enough to return to the established patterns of negotiation and extortion, its actions will remain much more difficult to predict. That problem, in turns, elevates the risk of miscalculation -- and a confrontation that no one wants.
AUM JUNG-SEOK/AFP/Getty Images
By Ian Bremmer
Some want to see the US and China form a comprehensive political and economic partnership, an alliance of pragmatism that provides workable solutions to key international problems: the global economic slowdown, climate change, collective security, and other issues. Those who make this argument ignore the reality that China remains a developing country with serious internal challenges ahead. This will sharply limit the Chinese leadership's eagerness for taking on new international burdens, however triumphalist their rhetoric becomes.
More to the point, U.S. and Chinese advantages are not as complementary as some think. An America that is gradually losing much of its economic advantage over fast-emerging states will continue to take on much of the geopolitical heavy lifting --on nonproliferation, on the Middle East peace process, on the challenge of quelling militancy in Afghanistan and Pakistan, on Iraqi stability, on risks that Iran will destabilize the region, on piracy, and plenty of other issues. The U.S. military and U.S. taxpayer will begin to feel even more over-extended, and the electorate will challenge U.S. policymakers to justify America's global security presence.
Beijing may soon announce that China is building its first aircraft carrier. That will set off alarm bells in the American media, but it's really much ado about not much. China's navy is focused on protecting Asian shipping lanes. Building one carrier isn't the same as assembling a complete carrier battle group. The United States has 11 such groups. In other words, for all the talk about China's future blue water navy, Beijing will not be able to project a global naval presence for decades to come.
Yet, though the United States will maintain its military dominance for the foreseeable future, China will feel that it's doing more than its share in the provision of public goods on the geo-economic side. In particular, the Chinese will be expected to buy U.S. Treasuries as Americans inflate away the value of those assets. That's why high-level Chinese officials have been talking up the idea of a new reserve currency.
With this obvious mutual dependence, can't Washington and Beijing form a mutually profitable partnership? The United States makes the world safe for Chinese commerce while, in the interest of global economic stability, China continues to subsidize U.S. spending?
Don't bet on it. Here's why:
The economic downturn will move domestic constituencies in both countries to complain about their share of burdens and dismiss much of the value provided by the other side. Populist-minded U.S. political officials will get in front of this public anger to avoid being swallowed up by it. Not so long ago, the Chinese leadership could simply have shrugged off this problem on their side. But an increasingly active Chinese blogosphere and a more assertive local press can, without directly challenging the Party's right to rule, help drive public demand for action that the government can't afford to ignore.
But here's the bigger problem: Those on the U.S. side providing the geopolitical leadership (mainly in the Pentagon) and those on the Chinese side managing foreign economic policy don't speak the same institutional language. Their values, their worldviews, and their vocabularies are entirely different. There is not enough common ground on which these two institutions can forge a partnership.
That's why the U.S. and Chinese governments are likely to find themselves increasingly at odds over the next several years --and why hopes for a G2 solution to a wide range of transnational problems are likely to be dashed.
Jed Jacobsohn/Getty Images
By Ian Bremmer
North Korea could become Obama's first true foreign-policy crisis. The country's second nuclear test has drawn international condemnation --including some unusually tough language from China -- and we'll surely see a UN Security Council resolution expressing more of the same. But there's just not much policy flexibility here, and therefore not many ways of cooling things off.
The six party talks were already broken down, and the North Koreans had been steadily upping the ante over the past two months -- with increasingly belligerent rhetoric, the arrest of two American journalists, and new satellite and missile test launches. None of these actions has brought the North Koreans much satisfaction, and they've contributed to a harder-line Obama administration response than was otherwise likely -- including the push through of yet another UN Security Council resolution and the establishment of preconditions for new talks.
It's hard to know how much of North Korea's aggressiveness flows from economic necessity and how much suggests a shift toward a more overtly hostile policy. But it's perfectly clear that Pyongyang is responding to a geopolitical squeeze that it has found increasingly uncomfortable.
This is not simply "belligerent business as usual," and the second nuclear test is a big deal for the North Koreans. First, they know they're crossing a "red line" for their friends in Beijing. (Apparently, North Korea took the unusual step of giving the United States a one-hour heads-up before the test, while saying nothing to Beijing.) Second, they only have enough nuclear fuel for a very small arsenal (perhaps 6-8 devices in total). In other words, they knew in advance they better make this test count.
Tensions will likely subside for a few weeks. The Obama administration has responded with the diplomatic equivalent of outrage but will ultimately need to back off preconditions and recognize the need to return to the bargaining table -- particularly since this will be the price for China to continue to focus its frustration on Pyongyang. The next question will be at what point the United States and China turn the economic aid back on. There's no hard-line domestic faction pushing the Obama administration for tougher sanctions (as there is on Iran). But the Japanese government will look extremely unfavorably on rewarding North Korean provocations, and the White House will weigh that reality with care.
If officials in the U.S. and North Korean governments decide to push the current conflict further, we'll see an active restart of the nuclear program and provocative border incidents -- disruption of neighboring shipping and potentially a limited incursion into the demilitarized zone (DMZ). We could even begin to see some market impact in South Korea.
For now, North Korea appears determined to push the envelope. The United States can't give Pyongyang what it wants. All that's left is for the two sides to negotiate their way back to the negotiating table. That may take time, and the problem is growing that, in the interim, neither side has total control of where the conflict might go next.
By Ian Bremmer
This week's headlines have painted a dire picture of the state of Japan's economy. GDP contracted by 4 percent over the first three months of 2009, the worst quarterly performance on record. Year on year, Japan's economy shrunk by more than 15 percent, the steepest such decline in more than half a century. But my latest visit to the country has convinced me that there's already light at the end of Japan's dark economic tunnel. Instead, it's the political situation we ought to be worrying about.
Despite the alarming headlines, I was pleasantly surprised to see the beginnings of a turnaround in economic sentiment. The prevailing gloom I felt in talks with Japanese business leaders earlier in the year has given way to cautious optimism that a recovery in China is about to lift the rest of Asia out of its malaise. Executives had lots of questions for me on threats to stability in Pakistan (mostly because President Asif Ali Zardari visited Tokyo last month asking for money), on Venezuela (because Japan has signed a deal with Hugo Chavez to build an energy partnership), and even a surprising curiosity about opportunities in Iraq. In other words, Japanese investors have resumed their shopping.
Japan's political situation, on the other hand, has only gotten murkier. Prime Minister Taro Aso and the ruling Liberal Democratic Party (LDP) have managed to climb their way out of single-digit approval ratings, but numbers in the low 30s still leave the party facing likely defeat in an election that must be called by early September. And the LDP's recent recovery took place at a time when the unpopular, scandal-ridden, and ailing Ichiro Ozawa still ran the opposition Democratic Party of Japan (DPJ). Now that he's announced his resignation, public focus will return to the country's dire economic performance -- and the LDP's inability to turn it around. Recovery is coming, but not fast enough to bail out the ruling party, and Aso has neither the track record nor the temperament to reverse his fortunes as the far more talented Junichiro Koizumi managed to do four years ago.
So what will the next Japanese government look like? When my turn arrived to ask questions of knowledgeable friends in political and business circles, I got some very interesting answers. More than one well-informed source warned me that Japan is about to have a centrist third party, one comprised of disgruntled factions from within the LDP and DPJ. How successful the new party will be is open to question, but the plans are well underway -- one of the LDP's leading politicians and a younger DPJ maverick (referred to as a "rising star" by one official) have been busy raising cash for the new party (to be announced right after elections) from senior Japanese executives.
The risk is of political paralysis. In other words, it's starting to look like Japanese politicians will be fully occupied with sorting out their new alliances and rivalries over the next couple of years just as China resumes its rise, the Obama administration works to build ties with Japan on new ground, and gradual economic recovery offers opportunities for much-needed structural economic reforms. That's bad news -- for Japan and for its friends in Washington.
By Ian Bremmer
The first five "fat tails" are detailed in the entry below. Here are the second five. Again, each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state's real economy has dramatically increased the likelihood of a fat tail occurring -- from 2 percent or 3 percent six months ago to 10 percent to 20 percent over the next several months, a serious enough concern to warrant focused attention.
6. Turkey's secularists lash out
Reinvigorated by their solid performance in recent local elections and still seething over last year's failed bid to close the ruling justice and development party (AKP), Turkey's opposition secularists in the military, media, and business elite are emboldened to try again, launching a public campaign to build opposition to the ruling party across the country. A sharper-than-expected economic contraction provides them with a new political opportunity to take on the AKP in the courts.
Weakened by the AKP's own poor election showing, Prime Minister Recep Tayyip Erdogan struggles to manage the nationalist and radical Islamist elements within his party. Convinced that his political survival depends more on party unity than on building consensus across the political class, Erdogan overplays his hand by trying once again to amend the constitution. The high court orders closure of the AKP and bans Erdogan from office. Turkey then finds itself in an institutional crisis that brings policymaking -- and the country's bid to join the European Union -- to a grinding halt in the middle of a recession. Foreign investors abandon ship, moving capital into less risky markets.
7. Argentina opens up
Fat tails can offer opportunities as well as risks. That's the case in Argentina. There the global recession could unravel the country's economy. The government's inability to manage the fallout would push its poll numbers sharply lower, persuading advisors to President Cristina Fernandez de Kirchner to advance the date of legislative elections from October to June to allow her allies a chance to face voters before the opposition gets organized and the economy deteriorates further. The president's husband, former president Néstor Kirchner, would head the government's legislative list.
Against the backdrop of spiraling social discontent, President Kirchner's Peronist party loses its lower house majority, and Néstor Kirchner would finish behind dissident members of his own party in Buenos Aires. The president resigns, and Vice President Julio Cobos becomes president. Kirchner's departure opens new policy possibilities. The Cobos government reduces state interference in domestic markets, removes restrictions on the farming sector, and improves the transparency (and therefore the credibility) of the national statistics institute. He signs an agreement with the IMF and promises to resolve the country's outstanding debt problems, quelling fears of default. This leads to a serious improvement in market sentiment.
8. The emirates disintegrate
The weakness of existing federal institutions has pulled back the curtain on a serious problem -- Emirati leaders haven't been able to respond in a coordinated way to the financial crisis. Abu Dhabi has jumped in to recapitalize the other emirates, but its strong moves to extend political control could push angry royals in Dubai, Ras al Khaymah and Sharjah, to look for future opportunities to reassert their independence.
Under this scenario, once the financial crisis passes, the smaller emirates try to kickstart their economic programs, provoking a federal veto. Sheikh Mohammed bin Rashid al Maktoum of Dubai tries to reestablish his economic autonomy by launching new infrastructure projects without the approval of Abu Dhabi's al Nahayan family. Abu Dhabi then blocks Dubai's negotiations with international partners, damaging Dubai's credibility and humiliating its royal family. Sharjah tries to restart talks on gas imports from Iran and Ras al Khaymah considers the same option. The Abu Dhabi-dominated federal government opposes the process. The smaller states then create a new federation or simply become independent states, and the UAE federation ceases to exist. The weak institutionalization of federalism and the UAE's increasingly personalized politics make this scenario not quite as unlikely as it seems.
9. Japan's policy paralysis
Japan's Liberal Democratic Party (LDP) will likely lose control of the lower house of parliament, the chamber which selects the prime minister, in an election that must be called by September 10. The opposition Democratic Party of Japan (DPJ) will likely win a majority of seats outright and form a new cabinet or a large plurality and forge a coalition with independents and LDP defectors.
But the more worrisome scenario involves the DPJ failing to win a majority of lower house seats, creating a chain reaction of party schisms that paralyze the coalition building process. The LDP loss aggravates already bitter internal rivalries, splintering the party that has ruled Japan almost continuously for more than 50 years. Internal battles over policy also plague the DPJ. If more conservative DPJ members form alliances with former LDP members, the DPJ could fall apart as well, further complicating the coalition-building process at a moment of economic uncertainty.
Japan is then ruled (as it was during the mid 1990s) by a fragile and fractious multiparty coalition that can't advance reforms needed for response to the economic crisis, deregulation, and foreign-policy priorities like reinvigorated relations with Washington, undermining Japan's value as an economic and security partner. This scenario provokes anxiety over the future strength of the Japanese economy and its security alliance with the United States. It then takes several years for the country's leading political parties to redevelop along ideologically coherent lines.
10. Poland runs off the rails
In Poland, the Civic Platform (PO)-led ruling coalition has successfully promoted a moderate, pro-market, pro-western agenda and has become one of Eastern Europe's most stable and capable governments. But under this fat tail scenario, the global economic outlook pushes Poland into a severe recession. Following an anti-market, anti-foreigner, and thinly veiled anti-banking/anti-Semitic electoral campaign, the populist/nationalist Law and Justice party (PIS) takes power in 2011, and the country turns inward. The new government blames capitalism (as well as the west in general and PO in particular) for all of Poland's ills. Its policy agenda is economically statist and culturally intolerant and nationalist.
The PIS-led government asserts control over a broad range of state and quasi-state companies in sectors like energy, mining, and banking/insurance. Officials appoint boards of directors for these companies based less on competence than on political loyalty. Poland withdraws its commitment to join the eurozone. The government scores domestic political points via attacks on both the EU and Russia -- with negative strategic and economic consequences. PIS launches corruption "witch hunts" against former communists, PO party loyalists, and foreigners, destabilizing Poland's economy and generating capital flight.
Click Here for The 10 crises you aren't expecting but should be (Part 1)
By Ian Bremmer
Some readers will be surprised to see that Eurasia Group's list of top risks for 2009 (reprinted below) doesn't include China. Doesn't that country face a serious threat of destabilizing social unrest? It's clear that the global economic downturn has had an impact; thousands of manufacturers have shut down in the past few months as demand for China's exports falls in the United States and across Europe. That puts large numbers of unhappy people on the streets. And this is a country that already faces tens of thousands of protests each year over a broad range of public grievances.
So why didn't China make the cut? Because nationalism and pride in the very visible achievements of the Chinese system are now conspicuously more intense than at any time since I started traveling to China. I experienced this phenomenon again and again before, during, and after the Beijing Olympics last August. For millions of Chinese, those Games were their Games, their opportunity to command the spotlight on the international stage. The Communist Party delivered on promises of a great show.
It's not just the success of the Olympics, of course. It's decades of heady economic growth that continues to create opportunities for ever-larger numbers of people. There's no evidence at this point that a significant number of Chinese citizens hold their government responsible for the developing slowdown in the Chinese economy. In fact, there's an often expressed feeling in the country that American misdeeds and the western free-market system are to blame. If anything, many Chinese probably believe that it's China's over-reliance on the West that needs to change.
It's true that demonstrations have erupted across the country over the past year, reflecting deep public anger over a startling diversity of heart-wrenching issues -- from infants dying from poisoned milk to schoolchildren crushed to death inside shoddily constructed schools during the Sichuan earthquake to disputes over property rights to all kinds of other local economic problems. But the overwhelming majority of these demonstrations are targeted not at the Communist Party leadership in Beijing but at local officials, bureaucrats, and business interests.
Still, when it comes to social stability, the Chinese government takes nothing for granted. The leadership has spent considerable time and resources on efforts to stimulate growth and to create new jobs. That will help keep displaced workers off the streets. For those who do protest, the party elite has again demonstrated a determination to quell social dissent by any means necessary. Both commitments will probably help limit the turmoil produced by any large-scale and coordinated public protest in 2009.
Longer term, the risk of social instability is obvious. The party leadership is well aware that the country's vast range of environmental problems and their impact on the lives of ordinary Chinese create enormous potential for trouble. Nor is it at all clear that China can continue to generate the 10 to 12 million jobs needed to sustain longer-term economic growth-particularly jobs that require highly-skilled labor. That will prove a growing problem as tens of millions more people in search of opportunity emigrate from the countryside into China's fast-expanding cities.
The party's ability to maintain its monopoly hold on political power depends on its ability to continue to generate prosperity. But it has earned enough political capital over the years that the authoritarian system is unlikely to face regime-threatening protests at the first sign of a slowdown-even a serious one. China is an enormous, dynamic economy with more systemic flexibility than many people realize, and it's likely to emerge from the global financial crisis in better shape than most of the world's other emerging markets.
That should be enough to keep the most dangerous risks at bay...at least for 2009.
Photo: MIKE CLARKE/AFP/Getty Images
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.