China without the hype

COMMENT: "China has been misread by bulls and bears alike," by Michael Pettis, Financial Times, 26 February 2010.

The sensible middle analysis:

That China has structural problems should not have surprised us. No one could have reasonably hoped that the country's institutions would adapt as quickly as its underlying economic and social systems have changed, and institutional mismatches must result in periods of difficult adjustment. This has been true of every rapidly developing economy in history.

Also from history: the serious mismatch created by China's export-driven growth creates the biggest global structural imbalance since Japan did similarly.

Chinese specialists, we are told, have long known of China's massive internal debts, mostly hidden from view. As the world discovers this, it fears a financial collapse.

But Pettis says otherwise:

Will China collapse? No. It may have a painful financial contraction, but this will not necessarily lead to a collapse in growth. Instead it will grind away at its overinvestment and excess capacity, which, with a reversal of the favorable demographics enjoyed since the mid-1970s, will slow growth sharply, but this will coincide with three more favorable circumstances.

They are: 1) continued urbanization; 2) increased education and infrastructure; and 3) the contraction of labor "will force Beijing finally to liberalise the financial system and transfer resources from the inefficient state sector to small and medium enterprises, increasing productivity."

Strikes me as very sensibly analysis. Dramatically slower growth, but still faster growth than mature economies, so its share of global GDP grows.

I especially like the forced liberalization of the financial system. Everything to feed the beast of income growth = stability.

Pettis is a finance prof at Peking U.

Talking is good

POST: India talking to Taliban?, By Alistair Scrutton, Afghan Journal, Mar 30, 2010

I would say this is a good thing.

(Thanks: Our man in Kabul)

Maliki's true colors

ARTICLE: Maliki's forces move against winning Sunni candidates, By Hannah Allam and Mohammed al Dulaimy, McClatchy, March 27, 2010

Maliki showing his authoritarian tendencies.

Not a pretty sight, and more evidence that Iraq's future is perhaps better served by Allawi's surprising victory.

(Via WPR's Media Roundup)

Private security and Somali pirates

ARTICLE: Private guards kill Somali pirate for first time, By KATHARINE HOURELD, The Associated Press, March 24, 2010; 3:25 PM

The inevitable precedent being (re)set:

In the first killing of its kind, private security contractors shot dead a Somali pirate in a clash that left two skiffs riddled with bullet holes, officials said Wednesday.

The killing raises questions over who has jurisdiction over a growing army of armed guards on merchant ships flying flags from many nations.

There's currently no regulation of private security on board ships, no guidelines about who is responsible in case of an attack, and no industrywide standards, said piracy expert Roger Middleton from the British think tank Chatham House.

"There's no guarantee of the quality of individuals you are going to get," said Middleton. "If you're a shipping company, that could be legally concerning. It's also concerning to everyone if you have individuals with guns and not much oversight out on the seas."

Of course there's no firm guarantee on the people you hire, but somebody onboard with a gun beats the skeletal crew being instructed to hand the whole ship over to three guys with machine guns on a skiff.

And so the use of private security guys will only increase with this news.

(Thanks: Robert Frommer)

It's a START

ARTICLE: Russia and U.S. Report Breakthrough on Arms,
By PETER BAKER and ELLEN BARRY, New York Times, March 24, 2010

I don't have any problem with this.

The numbers could be easily slashed by a third, although I don't see much utility in the U.S. going much further, unless it's logically part of phasing out the land-based leg of the triad and concentrating the remainder in air- and sea-assets.

Plus now Obama's got this notch on his belt, so going forward he has the usual presidential bragging rights of "helping rid the world of the scourge . . . " that's merely ended great-power war for almost 65 years now.

China's aid: easy out

OP-ED: The Dark Side of China Aid, By CHRISTOPHER WALKER and SARAH COOK, New York Times, March 24, 2010

Good exploration of how China's aid to developing economies gives them an easy out from demands from international financial institutions for better accounting and more transparency in governance.

(Via WPR's Media Roundup)

Shrink the Gap with exports

ARTICLE: U.S. Hopes Exports Will Help Open Closed Societies,
By MARK LANDLER, New York Times, March 7, 2010

Very sensible connectivity strategy regarding states whose governments survive by limiting their population's networking with the world:

Seeking to exploit the Internet's potential for prying open closed societies, the Obama administration will permit technology companies to export online services like instant messaging, chat and photo sharing to Iran, Cuba and Sudan, a senior administration official said Sunday.

On Monday, he said, the Treasury Department will issue a general license for the export of free personal Internet services and software geared toward the populations in all three countries, allowing Microsoft, Yahoo and other providers to get around strict export restrictions.

This I like versus the bad ideas on nukes.

Isolating Iran (including their relationship with China)

ARTICLE: Iran's Ace (or Deuce): Its Oil Reserves, By JAD MOUAWAD, New York Times, March 5, 2010

This much is definitely true:

"The Iranians are overconfident in the Chinese reliance on them," said Jon Alterman of the Center for Strategic and International Studies.

The Chinese will not stick their necks out to shelter Iran when push comes to shove. They will just do what is easy enough to thwart Western attempts to ratchet up the pressure while they seek to cover that bet elsewhere to the best of their ability. The Saudis play some role in this, as does emerging Iraq, and the Russians and Kazakhs too, thanks to global warming (the Arctic route) and new pipelines.

But that's why the long slow pressure still makes more sense than some near-term strike. There is no need to force the immediate us-or-them choice on China, which could soon find itself in a domestic financial crisis (the real estate bubble fear).

The logical mix is well known: sanctions targeting the Guard personally, mil aid (especially missile defense) to the region, tough talk that suggests the extension of the nuclear umbrella (Clinton's forte), and the offer still on the table to talk as Iran's isolation slowly deepens.

This is a practiced path.

Leviathan and SysAdmin at NSA

POST: Break Up the NSA!, By Noah Shachtman, Danger Room, March 24, 2010

Same logic behind my Leviathan (destructive) and SysAdmin (restorative) split. Mixing the two is a hard sell in this age of mutually assured dependence.

(Thanks: David Sutton)

Why Israel's current strategy ensures no one wins

POST: By Bernard Avishai, The Middle East Channel, March 8, 2010

A nice piece that imagines a realistic peace for Palestine and Israel from an economic angle.

Core logic:

Can we get real about what "two states" will look like?

Each side will be a culturally distinct city-state, building upwards, integrated with the other in a business ecosystem extending to Jordan, and sharing everything from water to currency, tourists to bandwidth. Over 80 percent of Palestine's trade is with Israel. What won't seem trivial is the capacity of Palestine's economy--currently one-fortieth of Israel's--to create employment. The mean age of Palestinians in the territories is about 19 years old. If we assume normal rates of growth, and the return of only half of the refugees to a Palestinian state, Palestine would soon become an Arabic-speaking metropolis of perhaps 6 million to 7 million people, radiating east from Jerusalem, and facing off against the Hebrew-speaking metropolis, anchored by Tel Aviv. Olive groves, picturesque as they are, will seem beside the point. So will military notions like strategic depth.

The good news is that the Palestinian private sector, though small, is prepared for a take-off. There is a tight-knit, highly competent Palestinian business class already running enterprises from pharmaceuticals to supermarkets, telecommunications to software solutions. Palestine's billion dollar sovereign wealth fund, the PIF, has been investing strategically in construction and wireless telecommunications; it is transparently run by Mohammed Mustafa, a former World Bank official, close to Prime Minister Salaam Fayyad--in effect, the Ramallah bourgeoisie's chairman of the board. The Palestinian stock market lists companies worth only about $2.5 billion, but it has been growing at over 20 percent a year. Palestinian universities graduate 1,200 computer scientists annually.

The Palestinian Authority gets about $2 billion from donor countries a year, a large portion of it wasted on patronage jobs. Part of what has stifled entrepreneurship is old Fatah cadres running monopolies from cement to petroleum. But public sector salaries, along with remittances from family members working abroad, at least wind up in bank deposits. Bank of Palestine CEO Hashim Shawa estimates that about $6 billion in total deposits are available for investment in genuinely competitive ventures. At least twice that amount is in Palestinian-controlled banks in Jordan. Regional investors know Palestinians are relatively well educated and need one of everything.

Which brings us to the bad news. Revealingly, Palestinian banks have been unable to lend more than $1.5 billion to credit-worthy business plans. For when you look at all of the things an ordinary businessperson takes for granted--mobility, access to markets, talent, suppliers and financial services--you see the frustrating effects of an occupation designed to advance the settlers, not Palestinian development.

And therein lies the problem: Israel's current strategy amounts to the strangulation of the Palestinian economy--an approach designed to make sure Israel doesn't lose but one that guarantees that nobody truly wins. It is the triumph of zero-sum defense thinking over non-zero-sum security.

(Thanks: Matthew Margulies )

We need both Leviathan and SysAdmin

ARTICLE: Surge Incapacity, BY JAMES TRAUB, Foreign Policy, MARCH 8, 2010

Familiar logic:

If you need to be able to both rapidly deploy and sustain a presence over time, so that public health experts don't go home after three months -- as they do now -- does that require two different forces?

A force or function that represents our immediate response capacity, and one that's designed to stay behind and more continuously administer the system.

Why? Because the former without the latter is an empty threat/promise.

(Thanks: Our man in Kabul)

Strategic Thinking in 10,000 Blog Posts or Less

In the last half-decade, blogs have gone from a quirky personal sideline activity to a mainstream, almost de rigeur professional activity -- following the previous trajectory of Web sites and, before them, e-mail itself. To many, this democratization of the flow of information is a distinct blessing, to others it is the epitome of data deluge. As someone who has now posted blog entries every day for six years and recently passed the 10,000-unit mark (fulfilling Malcolm Gladwell's quota for expert practice), I wanted to take stock of what this has meant to me as a writer and thinker.

Continue reading this week's New Rules column at WPR.

Obama's great outreach looking less flexible by the month

WORLD NEWS: "Nations Spurn Lockstep With U.S.: Leaders From Brasilia to Beijing Sling Timely Arrows at Obama Administration; Americans Deny Opposition Is Growing," by Jay Solomon and Peter Spiegel, Wall Street Journal, 20-21 March 2010.

WORLD NEWS: "Putin Airs Plan to Launch Iran Reactor: Premier's Announcement Deals a Blow to U.S. Efforts to Pressure Tehran, and Draws Quick Rebuke From Visiting Clinton," by Jay Solomon and Richard Boudreaux, Wall Street Journal< 19 March 2010.

WORLD NEWS: "Moscow's 'nuclear doctrine' under fire: Pentagon concern at 'troubling' stance; Fears for new arms control treaty," by Daniel Dombey, Financial Times, 19 March 2010.

OPINION: "Now for the Slaughter," by Peggy Noonan, Wall Street Journal, 20-21 March 2010.

The Obama administration has been singularly disappointing in continuing the Bush team's obsession with nukes (getting equally nowhere with NorKo and Iran), making it far worse with this whole lets-rid-the-world-of-nukes nonsense. This laser-like focus on the prime weapon of the 20th century looks increasingly out of place with the 21st century sensibilities of a lot of risers who are deeply concerned with making energy happen and less interested in having their entire foreign policies tethered to America's particular manias.

Obama's apology tour has mindlessly segued into this grand strategic cul-de-sac, and this vector makes us look increasingly irrelevant as a global leader, so--big surprise!--our leadership is taken less seriously over time.

This is JFK all over again but in a far more beneficent manner: no real brinkmanship to worry over here (Cuba '62), just great powers basically blowing us off. Why? The all-or-nothing demands we make on nukes just strikes them as wacky.

I can't believe this is the best Team Obama can mange. I realize their focus is overwhelmingly domestic, but this is just pathetic--the nuclear tail wagging the grand strategy dog. For all the talent assembled in the administration, one must issue a failing grade to the lot of them, once the apology tour worked its PR magic and it turns out "there isn't any there, there" to the administration's national security agenda: it's just a sad regurgitation of old think.

These guys are looking increasingly "out of time" in a metaphoric sense.

And so the president delays a trip to Asia to work the healthcare process. Not necessarily a bad call, given the current dynamics, and especially since he really doesn't have any important foreign policy message--much less vision--to take to Indonesia and Australia anyway.

Better Allawi than Maliki

ARTICLE: Iraq's Allawi says open to all in coalition talks, By Rania El Gamal and Muhanad Mohammed, Reuters, Mar 27, 2010

I must admit that I am happy to see Allawi, for all his faults, squeak by with a numerical win over Maliki, because it means the Sunnis are engaged and that the two broad secularized coalitions took most of the vote, signaling Iraq remains no easy pushover for Iran.

The bargaining here should be fascinating to watch.

Is something happening between the Koreas and can we use it?

ARTICLE: South Korean navy ship sinks; North link played down, By Cho Mee-young, Reuters, March 26, 2010

Clearly, the full story awaits, but something obviously made the hole. The mine explanation, for now, sounds the least escalatory (the SK ship, allegedly firing on birds, accidentally wanders into a mine), but we must remember that NorKo has a history of picking fights when things are bad at home and it's frustrated with SouKo and the U.S., so if the North was more directly involved, this would fit the usual pattern.

Combined with recent analysis that public dissatisfaction with the regime is getting more open, this would be a great sign in the sense that we could use Pyongyang feeling anxious enough--and stupid enough--to trigger the inevitable denouement.

That would be a sweet gift to Obama, if it could be arranged.

(Thanks: Michael Smith)

Leviathan and SysAdmin at work in Somalia (only one officially)

ARTICLE: U.S. Aiding Somalia in Its Plan to Retake Its Capital,
By JEFFREY GETTLEMAN, New York Times, March 5, 2010

Hinting that U.S. military help to the Somali would-be/sort-of-central government would shift into more direct mode, under the right conditions. Per the recent comment from AFRICOM's public affairs guy, the official word is that we only train the UN peacekeepers that are involved.

This article suggests that some direct training has been going on for a while, albeit quietly:

The Somali government is preparing a major offensive to take back this capital block by crumbling block, and it takes just a listen to the low growl of a small surveillance plane circling in the night sky overhead to know who is surreptitiously backing that effort.
"It's the Americans," said Gen. Mohamed Gelle Kahiye, the new chief of Somalia's military, who said he recently shared plans about coming military operations with American advisers. "They're helping us."

More still:

Over the past several months, American advisers have helped supervise the training of the Somali forces to be deployed in the offensive, though American officials said that this was part of a continuing program to "build the capacity" of the Somali military, and that there has been no increase in military aid for the coming operations.

The Americans have provided covert training to Somali intelligence officers, logistical support to the peacekeepers, fuel for the maneuvers, surveillance information about insurgent positions and money for bullets and guns.
Washington is also using its heft as the biggest supplier of humanitarian aid to Somalia to encourage private aid agencies to move quickly into "newly liberated areas" and deliver services like food and medicine to the beleaguered Somali people in an effort to make the government more popular.

So the usual sort of SysAdmin support to capacity build, with the Leviathan (in the form of Special Ops troops) in the wings, ready to take advantage of what may ensue:

Most of the American military assistance to the Somali government has been focused on training, or has been channeled through African Union peacekeepers. But that could change. An American official in Washington, who said he was not authorized to speak publicly, predicted that American covert forces would get involved if the offensive, which could begin in a few weeks, dislodged Qaeda terrorists.
"What you're likely to see is airstrikes and Special Ops moving in, hitting and getting out," the official said.

So pretty much the model I laid out in "The Americans Have Landed" piece a few years back for Esquire: quiet SysAdmin, with occasional but very short bloody thrusts from the Leviathan.

China can't keep growing its military at the recent rate

ARTICLE: China Says It Is Slowing Down Military Spending,
By MICHAEL WINES and JONATHAN ANSFIELD, New York Times, March 4, 2010

Basics: China announces its next defense budget will rise only 7-8%, which is about half the recent annual rises and the first time it's dipped below 10% in a long time.

Good quote and sensible analysis from David Shambaugh at end:

"Given other demands on state expenditures from various sectors -- the stimulus, unemployment, insurance -- to continue giving the military 15 percent increases year on year does cause some Chinese to raise questions," Mr. Shambaugh said in a telephone interview. "There have been complaints from some other sectors that it has been distorting expenditures. Maybe some of those arguments have come home to roost."

Whether it's true right now or not, you just know Shambaugh will eventually be right.

China: I used to rule the world

ARTICLE: Market Defies Fear of Real Estate Bubble in China, By DAVID BARBOZA, New York Times, March 4, 2010

The gist:

Everyone agrees China is in the middle of a spectacular real estate boom. The question is whether it is in the middle of a rapidly growing real estate bubble.

When other recent booms collapsed -- in the United States, for instance -- they depressed entire economies. In China's case, a bursting bubble could affect much of the world. China is the fastest-growing large economy and, so far, a main engine pulling the world out of recession.

Beijing is clearly concerned.

As seems usual in history, once everyone declares you "king of the world," disaster soon threatens.

The optimistic view? So much of China's wealth is hidden that we can't see how and why this boom is more reasonable that it looks from the outside.

Then again, that just another opaqueness situation, which hardly comforts--yes?

Examples of globalization's advance in India and Saudi Arabia

ARTICLE: Abuse Case Rouses India's Middle Class,
By LYDIA POLGREEN, New York Times, March 2, 2010

OP-ED: Loosey Goosey Saudi, By MAUREEN DOWD, New York Times, March 2, 2010

Interesting pair of articles that suggest globalization is most definitely on the march: When you hear about middle-class "rage" in India versus the usual impoverished version, that's a historic change; and when the Saudis take to bragging that they're moving in the correct reformist/secular direction and that Israel's headed the wrong way, that's the House of Saud bowing to some inevitability as a survival tactic, the big thing being the royal family feels the need to tell the larger world that it is slowly syncing its internal rule sets to something more recognizable to the global community.

Mallaby on Chinese currency problem

OP-ED: Currency spat reveals a nervous Chinese autocracy, By Sebastian Mallaby, Washington Post, March 19, 2010

Cool piece from the almost always great Mallaby.

Obama's recent push on the currency valuation question triggers the nasty Wen response. Many see pushback and confidence, but Mallaby spots more fear than fearlessness:

What to make of this outburst? It is not right on the merits. If any country is responsible for protectionism and for politicizing the exchange rate, it is China: Beijing's leaders have made a political decision to peg their currency at an artificially low level, handing their exporters a competitive advantage. Yet China's outburst reflects the insecurity behind its confident facade. It serves as a reminder of how autocratic political systems suffer from the lobbies and gridlock that bedevil democracies.

The reminder is timely because China's financial comeback has made autocracy look good lately.

More details and the usual "freeing" argument that, as I have noted in a recent post on a WSJ editorial, doesn't exactly explain the whole convertibility-versus-floating distinction well:

So while China's leaders frequently sound smug, they are nervous. In the news conference at which he chastised Obama, China's premier also referred menacingly to "the unsteady, uncoordinated and unstable development of the Chinese economy." Amid all the uncertainty about how to let the air out of an asset bubble and bring runaway bank lending under control, the last thing Chinese leaders seem to want is to abandon the yuan's peg to the dollar, which they regard as a source of stability.

Again, though, this view is wrong on the merits. Chinese growth is unstable partly because of the yuan-dollar peg, which obliges the government to set interest rates with an eye toward the exchange rate rather than using them to manage the cost of capital. But the technocratic arguments are trumped by political pressures. Exporters lobby the government not to let the yuan rise, and the lobbying is effective. Nationalists reflexively oppose policies that Washington demands; no Chinese official wants to look soft on foreign policy. In conversations in Beijing this week, several Chinese analysts suggested that Google's protests against Chinese hacking were a deliberate provocation orchestrated by the Obama administration. Such is the climate of suspicion toward Washington.

Sooner rather than later, China needs to free its exchange rate and switch from rationing capital to pricing it.

But that last bit is a nice way of saying it: the switch from rationing capital to effectively pricing it. The WSJ says convertibility alone will do that, without needing to let the yuan necessarily float in a truly free fashion, which may be more of a danger than aid for the global economy.

(Via WPR's Media Roundup)