Report: NATO members foil Mumbai-style wave of attacks on Europe

From Michael Smith, the gist of the Sky News report:

Intelligence agencies have intercepted a terror plot to launch Mumbai-style attacks on Britain and other European countries, according to Sky News sources.

... militants based in Pakistan were planning simultaneous strikes on London and major cities in France and Germany . . . the plan was in the advanced but not imminent stage and the plotters had been tracked by spy agencies "for some time".

Intelligence sources told Sky the planned attacks would have been similar to the commando-style raids carried out in Mumbai . . . the European plot had been "severely disrupted" following intelligence sharing between Britain, France, Germany and the US.

It is not known whether the attackers are already in Europe.

News of the planned strikes came as the Eiffel Tower in Paris was evacuated because of a bomb scare for the second time in two weeks . . .

When the terror plan came to light, the US military began helping its European allies by trying to kill the leaders behind the plot in Pakistan's Waziristan region.

There have been a record 20 missile attacks using drone aircraft there in the past 30 days.

Why it's important to pay attention:

• It's long been my contention that extremists operating in NW Pakistan, most likely in some collusion with al Qaeda (not a big leap), will keep trying to make some big splashy strike in the West.  Many experts saw the Times Square bombing attempt as a practice run using an expendable. Figuring how hard that is to pull off--in a relative sense, and with AQ and its net falling from our collective memory thanks to the economy, the default alternative for such groups to regrab the headlines is to do something easy and cheap like Mumbai II and to do it in Europe.  So yeah, I find this whole logic believable.

• I think Obama is right when he says, we can absorb another attack without freaking out.  I don't think we would, having gone through Afghanistan and Iraq since and understanding that such unilateralism just leaves us holding the bag.  So the next strikes, I believe, can lead to more interesting and better cooperative opportunities with Russia, China, India, Turkey, et. al, if done well.  Is Obama the guy to do it?  While I don't think Americans would freak, I fear another attack would simply give the man another chance to come off as far-too-Vulcan for the average American voter.  While I think we're still in philosopher-king political mode and will be for a while, I think his off-putting style will mean we'll stop reaching for the smartest-guy-in-the-room option, because that guy should be the brilliant adviser (which Obama lacks because his smartest-guy-in-the-room mindset attracts other big egos and sycophants and apparently not much in between) and not POTUS himself, who should be all about leading and not aspire to such a title.  Therefore, I do not see a rally-round-the-prez dynamic unfolding when it eventually happens.  That bad feeling will simply be piled upon the existing glut of bad feeling about the economy.

• The other side's ability to sked our counter-reactions is a real problem, because, in our habits, we feel the need to "keep all balls in the air," so terror competes with WMD in NorKo and Iran competes with our growing fears of Chinese military build-up competes with global warming competes with . . .. What was nice about the post-9/11 period was the willingness of great powers to clear the decks on most everything else, keeping them in some big-picture perspective mode, and exploiting the common threat opportunity embodied by AQ to contemplate a serious recasting of the great power relationships for the better.  But then Bush-Cheney went wild on the unilateralism/primacy and that moment was largely wasted.  Can it happen the next time a crystalizing attack occurs?  Sadly, I don't see the leadership anywhere in the world to take advantage, so we go on with the current situation, where everybody is juggling balls and no serious progress is being made on anything. Meanwhile, mutual suspicions pile up, and increasingly we've all got enough gripes with every other great power to make cooperation an almost tortured affair. I'm not secretly wishing for something bad to happen; that is a dangerous intellectual route to go for someone who thinks seriously about the future. The point is, I don't have to. Globalization's penetrating speed has not abated one whit with the great recession--anything but. We're only dimly aware of that here in the States because we think that drawing down in Iraq and hoping to do the same in Afghanistan is a big deal for the system, when, in truth, it barely notices it right now and continues down its aggressive integrating path.  In short, we assume it's Old-Core-does-Gap-or-nobody-does-Gap, when in truth, it's New-Core-does-Gap-systematically and compared to that, the West's efforts are marginal and concentrated in bits and pieces.  I'm not looking to go back to the frantic push the US made after 9/11.  I'm looking for a better marrying up of those two efforts, because the mismatches in resources are vast and the big opportunities for new collaborations are slipping away.  AQ or others will accommodate that need whether we want it or not.  That's the dynamic we're in right now with globalization pushing into previously disconnected places with such force that serious blowback will be the norm for the foreseeable future.  Yes, we can dream it'll all come down to some naval battle in the South China Sea, but that's just habit talking.  And that's what I find so sad right now:  that whole "juggling the balls and keeping all of them in the air" mentality of Clinton and Obama is just a placeholder for real leadership, which events will eventually demand.  Why?  Because they will keep trying and eventually they'll get our attention.  As always, what we'll do in that moment will be far more important than the vertical shock laid on us.  Nation-states still run horizontal scenarios to ground, meaning the question of the day is, "When the next vertical shock comes, where will go with it?"

• Then tack on Obama's statement to Woodward that "We need to make clear to people that the cancer is in Pakistan."  I guarantee you, the next scheduled-by-our-enemies response (when the drones aren't enough) will induce a serious calibration effort/opportunity with both China and India.

And that's why I pay attention to stories such as this.

WPR's The New Rules: Global Warming Shifts Focus to Friendly North

 

From the Arctic Council's website.

According to virtually all global warming projections, humanity faces significantly more conflict in the decades ahead as we fight over dwindling resources in climate-stressed lands. However, those reports typically overlook one likely outcome that could counterbalance the more negative impacts of global warming -- that of northern territories becoming significantly milder, more accessible, and, most intriguingly, more hospitable to immigration. This is the essential good news to be found in Laurence C. Smith's fascinating new book, "The World in 2050."

Read the entire column at World Politics Review.

Read about the book because of Smith's piece in the WSJ, which I blogged.  Asked Putnam for the book and got it pronto.  Like I hint at in the piece, Smith's survey of futurism was only average and didn't really add anything to the book.  I have no idea why he or his editors felt the need to promise "the world in 2050," because the text simply doesn't deliver. But the book-within-the-book on the "New North" was eye-popping. I would have loved to hear more about that and skip all the surveying.

Israel plays start-up to China's big firm

Tweeted this one earlier this week, but want to post as well.

WSJ technology columnist Peter Stein noting how Israeli private equity firm is specializing in marketing intellectual property from small local high-tech companies to big Chinese manufacturing firms.

You read Baumol et. al's "Good Capitalism, Bad Capitalism," and you come away with the argument that the best mix is to have big go-to-market firms surrounded by a sea of small, innovative high-tech firms that feed the beasts. The authors claimed that America was basically there, in terms of that evolution, having added the high-tech small firms with the IT revolution energizing our innovation base in a number of industries.  Their addition evolved our economy past the big-firm era that marked the post-WWII decades through the difficult 1970s.  The authors also argued that big-firm China was trying to make a similar evolution happen and was succeeding somewhat.

Now with the Great Recession, we get two counter-arguments coming to the fore:  1) globalization is slowly robbing America of its industrial base through off-shoring of manufacturing and losing the proximity between innovation and manufacturing is making us less competitive; and 2) China's increasing reliance on/championing of national flagship companies signals a retreat from further marketization.

My sense is always that linear projections usually fail, so waxing and waning is the norm.  You go too fast down one path, so you pull your foot off the pedal for a period.  I think some American companies in some sectors are recognizing the need to more closely tie innovation with manufacturing.  But in others, like automotive, you don't have a whole lot of choice given the market expansion going on in Asia and Latin America.  

In general, I'm a big believer in IBM CEO Sam Palmisano's notion of a globally-integrated enterprise that sources local, R&Ds local, hires local, manufactures local and sells local--just all over the world.  It's the truly globalized or truly distributed version of the old multinational.  I think companies that do that will fare best over the long haul, understanding that, as countries "rise," they're naturally going to want to carve out space in their expanding domestic market for national flagship companies.  To me, this is China's path right now, along with a firm desire to lock-in access to raw materials around the world through their state-run extractive industries and farm land leasing/purchases.  I think that mindset is a bit 20th century (supply risk oriented versus price risk oriented), but there you have it when a single-party state remains in power.  

Now how China seeks to extend its evolution toward that big firm/small firm mix is to force foreign companies who seek entry into its expanding domestic market to turn over their technologies in joint ventures, something that's naturally going to create a lot of friction.

Less friction filled is what this Israeli private-equity firm is doing. Infinity Group is simply treating China like one giant big firm to which new technologies can be sold, with it playing matchmaker. The process reminds some of when Silicon Valley did the same for Taiwan way back when. Like Taiwan, China wants--nay, NEEDS--to move up the food chain rapidly in order to bring similar development to its better-than-a-half-billion interior rural pool that it has to-date achieved with the urbanized coastal provinces. Then there's China's demographic clock ticking, reflected in the long-term loss of 100m workers by 2050 and the piling up of 400m-plus elders by then.

To me, this is a next, natural phase for globalization, with smart small countries becoming more Israel-like and big, labor-filled developing countries emulating China's strategy, which, quite frankly, isn't unique whatsoever and really is just an updating of what Japan did (the Michael Pettis argument).  If China were to achieve the same per capita GDP growth that Japan did, it could grow rapidly for another quarter century, says Martin Wolf, but . . .

The most interestingly pessimistic view comes from Michael Pettis of Peking University’s Guanghua School of Management. The characteristic of Chinese growth is that it is “unbalanced”, as Mr Wen notes: it is highly dependent on investment as a source of demand and driver of supply (see charts). It is, in a sense, the most “capitalist” economy ever.

Thus, between 1997 and 2009, gross investment rose from 32 per cent to 46 per cent of GDP, while household consumption fell from 45 per cent of GDP to a mere 36 per cent. This must be the lowest share of consumption in any significant economy ever. In a country with hundreds of millions of poor people, it is even shocking. Meanwhile, the rising investment rate has been the main driver of growth. In the early 2000s, “total factor productivity” – increases in output per unit of input – were also important. But the contribution of higher efficiency has been waning.

This, Prof Pettis argues, is a “souped-up version” of the Asian development model we saw in Japan and South Korea in earlier decades. The characteristics of this production-oriented approach are:

• transfers from households to manufacturing, via low interest rates on savings
• repressed wages and a depressed exchange rate
• very high investment
• rapid growth of exports; and 
• high external surpluses. 

China is “Japan plus”: its investment rate is higher, trade surpluses larger, rate of consumption lower and exchange rate intervention bigger.

This has been an extraordinarily successful development model, but, notes Prof Pettis, it eventually runs into the constraints of “massive over-investment and misallocated capital”. He continues: “In every case I can think of it has been very difficult to change the growth model because too much of the economy depends on hidden subsidies.” Moreover, China’s scale will shift the price of imports, particularly raw materials, against it, so accelerating the decline in profits.

In China, a rising rate of investment is needed to maintain a given rate of economic growth. At some point, investment will stop rising and growth will slow. China will then face the Japanese challenge: how to sustain demand as the required rate of investment collapses. If, for example, the gross investment needed to sustain a 10 per cent rate of growth is 50 per cent of GDP, then the rate of investment required to sustain 6 per cent growth might be just 30 per cent of GDP. With its massive dependence on investment as a source of demand, any decline in expected growth threatens a huge recession.

One answer would be another government-driven investment surge, however low the returns. The more attractive answer is faster growth of consumption. There is evidence of that during the past two years. But, as Prof Pettis notes, for consumption to grow consistently faster than GDP, household disposable income must also do so. Yet if this is to happen, income must be shifted from the corporate sector. That implies a squeeze on profits, through higher interest rates, higher real wages or a higher exchange rate. But that increases the risk of an investment collapse, with dire consequences for demand. As Prof Pettis argues, in China “growth is high ... because consumption is low”. Rebalancing the economy towards household consumption could undermine the ability to sustain growth itself. If so, China is on an investment treadmill.

Old story:  there ain't no such thing as a free lunch.  How China has grown makes it harder--with each passing year--to get off the investment treadmill. But that investment level, and the requirements of a trade surplus to feed it, creates it own negative feedback look, which China is just beginning to encounter.  Can it run a huge trade imbalance with the developing world like it did with the West, using renminbi this time around?  Pretty tall order considering its resource draw.  Pettis's point isn't that China can't rebalance, just that it won't be a smooth journey.

But I can't help thinking that the work of Infinity Group is a big plus on this score:  helping move China up for the production/labor wage chain by outsourcing the start-up function to a certain extent while it slowly builds that capacity at home.  Naturally, if you're already a big firm and have amassed a lot of IP, you don't want to hand it over to China as price of admission, but if you're a start-up high-tech firm who needs a go-to-market partner, I can see you being indifferent on the nationality, meaning I think we'll see this become a significant trend in the global economy.  Like Baumol et. al's preferred model, I think we'll see something similar in terms of small and large states.  In a globalized world, tech firms in small states have no choice but to go global because the domestic market is so small (why Israel is such a high-tech incubator).  

On that basis, I become even more convinced that the "clash of civilizations" will end up being a big nothing in retrospect, meaning merely a fraidy-cat capture of when globalization starting truly opening up previously-closed civilizations, triggering a totally natural uptick in cultural friction.  But you look at an Israel making this happen with China and you say to yourself, in a clash-of-civilization world, this shouldn't work--yes?  And yet it does, because Israel needs to do this and China needs to do this and that economic logic surmounts all.

Learning from the yen

FT column by Gillian Tett says to read journalist-cum-banker Taggart Murphy's history of the yen to understand the way ahead on the renminbi, also considered to be held to artificially low value by its government.

But what caused the trade imbalance, argues Murphy was: 1) the US Fed deficit structurally built into the body politic by Reagan, and 2) the Japanese "development state" system of national leverage, centralized credit allocation and credit risk socialization (the govs stood behind banks).

That's all ancient history now, and Japan's gov today intervenes to weaken the strong yen.  

Tett says just read the book and swap out Japan for China and it all makes sense all over again.

This has been my argument in the brief for a couple of years now--a grand strategic choice by America that enabled export-driven growth in Asia while allowing us to: 1) be a military superpower and 2) ask for no sacrifice from society because money remained so cheap.

How did Japan escape the grind?  Not well.  (And the same can be said for us today.)  Japan worked to spur domestic demand while keeping exports strong, and that paved the way "for a crazy bubble, followed by a bust, and more currency instability in subsequent years."

Murphy's point:  "Changing the units of account had not the slightest chance of dealing with these fundamentals.  But they made for a more unstable world."

In other words, be careful what you wish for.

This is a consensus argument I find:  it's not the pegging that hurts us but the sterilization of the foreign currency won in the process (i.e., China's continued insistence of controlling its allocation in a macro sense).

What went wrong with Japan is that it outgrew the need for central control of capital allocation via a state-dominated banking system.  It outgrew that system like a child outgrows shoes, says Tett.  But it waited too long to reform the system--the same danger that awaits China, one imagines.

And yet, China claims to be growing up its system as fast as possible.  Tett says the pace remains too slow.

Macro lesson of Murphy's book:  the twin dangers of rapid revaluation and too slow reforms.  In between lies the sweet spot of making capital allocation more marketized and efficient, letting in a reasonable amount of inflation but not too much.

Old story I would add:  centralized and authoritarian works for extensive growth under conditions of scarce capital, as centralized allocation allows the state to direct growth.  But once the economy matures or "complexifies" sufficiently, the system outgrows the crudity of that initial system and needs the wisdom of crowds larger than can be assembled in one room in Beijing.

How the Old Core profits from China's rise: the example of Germany

The basics:

As Americans fret over high unemployment and the prospect of another recession, an economic renaissance is putting Germans back to work and propelling the economy at a pace not seen since the fall of the Berlin Wall.

Ask a German executive why, and you are likely to get the same one-word answer that slips like silk off Gunter Scheipermeier's tongue: "China."

Vilified in the United States as a great sucking sound on the American economy, China is courted here as a revered client. Fast-growing demand from Asia's giant is helping to fuel the strong German recovery, and Germany now stands as proof that a rich nation can profit off China's rise.

China passed the United States last year as the No. 1 overseas market for big-ticket German machinery, with Teutonic titans from Siemens to Volkswagen - which so far this year has sold 1.3 million cars in China, five times as many as it has in the United States - ramping up production and payrolls to fill Chinese orders.

More important, China is driving growth at smaller German manufacturing firms like Scheipermeier's Nobilia that form the true backbone of Europe's largest economy. A family-run company making modular kitchens in a half-mile-long factory, where free-roaming robots work alongside humans on the most advanced assembly line of its kind in the world, Nobilia is treating nouveau riche Chinese like Americans of the 1950s - when nothing said success such as a sparkling, modern kitchen.

At the same time, the company is aiding Germany's domination in the surging Chinese market for imported household goods. Through alliances with other German companies, Nobilia is selling kitchens to the Chinese that fit standard European-size appliances, 24-inch-wide ovens, for example. These kitchens do not accommodate the larger ovens commonly made by U.S. manufacturers and built for American families cooking Thanksgiving turkeys and Sunday rib roasts.

Overdependence on China for exports growth, many here say, could hurt Germany as the economy there eventually cools. And German companies, like their American and Japanese counterparts, are facing increasingly sophisticated piracy threats from a nation where blackmarketeers can copy an entire BMW roadster or Mercedes sedan.

But with showrooms in 17 cities and sales surging 40 percent this year alone, Nobilia now sells more kitchens in China than all but two domestic Chinese manufacturers, with no American challengers in the top 10.

"China is vital to Germany's future," Scheipermeier said. If he has his way, he said, "Chinese duck will be cooked in kitchens more like those designed for German chickens than American turkeys."

A trade competition

One thing is for sure: When it comes to building a healthy trading relationship with China, Germany is cooking America's goose. U.S. exports to the world's second-largest economy surged 25 percent in the second quarter of this year, but German sales to China grew twice as fast. Overall, German exports have jumped 17 percent this year, driven in large part by a 55 percent rise in China of imports. Although the United States still exports more to China in total dollar terms, adjusted for the size of their economies, Germany is now out-exporting the United States to China by a factor of three to one.

How has this been achieved?  A commitment to excellence:

In recent decades, as countries including the United States and Britain put greater emphasis on financial services and property values, the Germans have hyper-focused on the art of manufacturing. Even relatively small German companies have grown into global market leaders for the products Chinese want, from drilling equipment to optical mirrors to prefabricated kitchens. Exports now account for more than one-third of Germany's national output, more than double the rate in the United States, with Germany's $1.2 trillion in annual exports roughly equal to the entire gross national product of India.

Lessons clearly to be learned.

USA-EU differences on role of PRC

FT piece on polling that says Euros take more pessimistic view of China possibly showing global leadership in years ahead than Americans do.  Oddly enough, the Germans were the most pessimistic.  Why odd?  Germany is doing so well economically WRT China.

Polling by German Marshall Fund.

Data says Americans to the tune of 91% predict China will exert strong leadership within next five years.  That may just be our ennui talking.  Only two-thirds of Euros think this.

I think the Euros are being more realistic, as I think China global leadership will be underwhelming for a long time.  Bluster will go up, as will hubris, but serious visionary leadership?  Not China's style nor comfort level--not yet.  In a single-party state, people who go out on ledges get pushed off.

The ability of foreign banks to tap into China's market remains stunted

Gist of WSJ article:  foreign bank profits took sharp fall last year while Chinese banks posted double-digit percentage gains.

The problem:

Foreign banks have long struggled to build a business of any scale, since they are reined in by Chinese regulatory limits on how much local banking operations can lean on foreign parents.

The local logic?  Insulating the economy from foreign financial shocks.  But this means foreign banks can't open much in the way of new branches--thus offering local banks better competition, which presumably would aid the Chinese consumer.

All of this from KPMG report which ferrets this stuff out, because foreign banks do not disclose much about their ops in China, and rarely speak critically of the government.

The Great North as globalization's future economic hot zone

WSJ weekend full-pager by Laurence Smith, prof of geography at UCLA, and it's pulled from an upcoming book, "The World in 2050."  Get used to seeing such analysis: exploring global warming's upside--geographically speaking.

A lot of good, fertile land sitting with technologically advanced and relatively wealthy populations will come into play, along with a lot of transportation connectivity made possible or kicked into year-old exploitation.  

This article focuses on the Arctic (above the Circle), and flips Jared Diamond on his head, asking not what makes civilizations perish but what allows them to grow?   His answer:  

First and foremost will be economic incentive, followed by willing settlers, stable rule of law, viable trading partners, friendly neighbors and beneficial climate change.

Point being, you toss in the beneficial climate change and the northern states have all the mixings.

Now, the guy does rightfully call out Russia an an outlier, but my expectation is, Russia will see this as a godsend and fall into the misguided notion of having to dominate to flourish because its geography and experience base will put it in good stead.

Right now the Arctic is a welfare state of sorts: deeply subsidized economic activity that centers on extractive industries (the Core's version of the Gap sans the violence).

Will these wastelands get settled?  Did the barren desert of America's southwest?

The close:

I imagine the high Arctic, in particular, will be rather like Nevada--a landscape nearly empty but with fast-growing towns. Its prime socioeconomic role in the 21st century will not be homestead haven but economic engine, shoveling gas, oil, minerals and fish into the gaping global maw.

Sidenote:  here's another slew of countries China will need to be friends with due to its extreme resource dependencies.

Just thank God we bought Alaska while we could.

While not exactly on topic WRT this piece, it raises the question of whether or not buyers of certain ag commodities could exploit global warming to shift production from current locations to better ones--as in, safer, more stable, easier to control, etc.

Kims back in the driver's seat

NYT John Pomfret reporting that America and its allies in Asia are working to reopen talks with North Korea, afraid that the ongoing succession process could send the whole relationship down the path to war.

Score one for the Kims and so much for Team Obama's "strategic patience" (tough talk and shows of force and letting the Kims stew in their own paranoid juices).  I had thought the White House had settled on a solid path of not caving in, but Obama seems to have chickened out rather quickly:

Anxiety is rising on both sides of the Pacific that tightened sanctions and joint military exercises - what U.S. officials have called "strategic patience" - could, if continued indefinitely, embolden hard-line factions in the North to strike out against South Korea or to redouble efforts to proliferate weapons of mass destruction.

Ooh!  So NorKo sinks a South Korean military ship and we better back off, lest they strike out against South Korea!  Gotta love that logic.

So we basically say to Kim the Younger:  do as Daddy has done and you will be both respected and rewarded.

Spineless.

Our breakthrough demand?  NorKo doesn't have to admit it sunk the ship, just express condolences for the loss of life.

The US State Department sources describe a three-legged stool of sanctions, mil exercises and talking with NorKo.  If we only do the first two, we risk war!

And so the same old, same old is pursued with the usual vigor.  Non-change I can believe in.   Because the last thing we want to risk is a conflict that consumes this war criminal regime.  Kim's strategy of achieving firm deterrence against the US has been a complete success, telling similar regimes around the world to get themselves a nuke for similar, air-tight protection from US pressure.

Does China rebalance the world economy in its search for resources?

FT full-pager analysis definitely worth a read.

It explores the notion that China's reach for raw materials around the planet is creating such a self-sustaining bond between Asia and Latin America/Africa as to constitute a real rebalancing in the works--truly post-American consumer, so to speak.

China's outbound FDI was about $5B in 2003.  By 2013 it could be $100B, with two-thirds staying in Asia (a pattern found among all Asia states), one-sixth going to LATAM and presumable most of the rest going to Africa.  On this basis, China comes out of nowhere to become Brazil's biggest trade partner and--next year--its biggest foreign investor (filling up all those CHINAMAX mega ships with iron ore and what not).

Meanwhile, with China experimenting through Hong Kong with letting foreign companies hold and thus settle their business with China in yuan, Beijing is described--accurately I think--as rerunning the same strategy they pursued with the US over the previous three decades:  recycling the trade surplus back into the partner's financial nets so as to stimulate further demand of Chinese exports.  In effect, that means China will run up trade surpluses with a lot of poor countries just like it did with rich America.  We'll see how that works in terms of triggering a political backlash.  My guess is that it won't run three decades before China feels the friction.

And yet, is this not what we asked for?

Well, not exactly.  What we really wanted was for Asia's stubborn trade surplus with America (ably consolidated by China over the past two decades) to shift over into something far more even. This isn't happening, in large part because China seeks to have its cake (surplus with America) and eat it too (replicate it across the Gap).

The one good thing:  by slowly increasing the circulation of the yuan, Beijing progressively loses control of its exchange and interest rates, meaning it becomes harder to "cheat" through monetary means.

WPR's The New Rules: China Still Needs U.S. in Global Security Role

 

When Europe ran the world, trade followed the flag, meaning that globalization in its initial expression -- otherwise known as colonialism -- grew out of the barrel of a gun, to paraphrase Mao Zedong. On this subject, Franklin Roosevelt and Vladimir Lenin agreed, even if that conclusion led them to embrace diametrically opposed strategies: FDR's realization that "the colonial system means war" drove him to erect an international liberal trade order following World War II that doomed the vast colonial systems of his closest European allies. Roosevelt's success not only enabled America to contain and ultimately defeat the soul-crushing Soviet alternative, it laid the initial groundwork for today's American-style "open door" globalization, itself a nod to cousin Theodore. In the end, that "traitor to his class," as Roosevelt was often labeled, should rightfully be acknowledged as the single-most successful anti-imperialist revolutionary leader of the 20th century.

Read the entire column at World Politics Review.

I just participated--this morning--in my first virtual meeting of the Geopolitical Risk Global Agenda Council of the World Economic Forum as led by Eurasia Group CEO Ian Bremmer.  I wrote this piece in anticipation of that, in effect offering my definition of the biggest geopolitical risk I could imagine: "declining" or "retreating" America + rising-but-pol-mil-weak China = a system whose revealed risk could suddenly spike.  How so? Some scenario comes along that confirms US impotence or unwillingness to step into any new breaches, while likewise confirming the "paper tiger" nature of the PLA (shiny weapons + no experience makes Wang a tentative soldier).  Then the question is, what or who steps into this breach?  Rising secondary powers? Underpowered and/or atrophied international organizations? Or, most likely, is that breach simply left wide open, revealing the true macro geopol risk in the system--namely, that we stand astride a transition from an overburdened and overleveraged superpower to an inexperienced and lacking-in-will-and-political resilience newcomer?  And what is the possibility of alliance between the two at this time?  Poor indeed. You pile that geopol "revealed risk" on top of a fragile global recovery, and that's a dangerous mix.

How inscrutable China pre-empts possibility of "resource wars"

Guardian piece via WPR's Media Roundup.

Top of the story:

Blades slicing through the morning heat, the helicopter rose from the tarmac and swept into a cobalt sky, high above Rio's Guanabara Bay.

It powered north-east over deserted beaches, dense Atlantic rainforest and fishing boats that bobbed lazily in the ocean below. Then finally, 80 minutes on, the destination came into view: a gigantic concrete pier that juts nearly two miles out into the South Atlantic and boasts an unusual nickname: the Highway to China.

Dotted with orange-clad construction workers and propped up by dozens of 38-tonne pillars, this vast concrete structure is part of the Superporto do Acu, a £1.6bn port and industrial complex that is being erected on the Rio coastline, on an area equivalent to 12,000 football pitches.

Reputedly the largest industrial port complex of its type in the world, Açu is also one of the most visible symbols of China's rapidly accelerating drive into Brazil and South America as it looks to guarantee access to much-needed natural resources and bolster its support base in the developing world.

When Acu opens for business in 2012, its 10-berth pier will play host to a globetrotting armada of cargo ships, among them the 380-metre long Chinamax – the largest vessel of its type, capable of ferrying 400,000 tonnes of cargo.

Millions of tonnes of iron ore, grain, soy and millions of barrels of oil are expected to pass along the "Highway" each year on their way east, where they will alleviate China's seemingly unquenchable thirst for natural resources.

"This project marks a new phase in relations between Brazil and China," Rio's economic development secretary, Julio Bueno, said during the recent visit of about 100 Chinese businessmen to the port complex, which is being built by the Brazilian logistics company LLX and should receive billions of dollars of Chinese investment.

This new phase of engagement with Brazil and South America, is part of China's "going out strategy" – an economic and, some say, diplomatic push for Chinese companies, many of them state-run, to invest abroad, snapping up access to minerals, energy and food by pouring the country's colossal foreign reserves into overseas companies and projects.

Ah, I thought we were going to fight the Chinese for access to all these resources, when it turns out China can just buy them and Brazil is more than happy to sell them in bulk on long-term contracts.

Where do they come up with these devious tricks?

"What, no f--king assassin's mace?"  A.J. whines to Carm and Tony.  Disgusted, he surfs off the History Channel over to MTV.

And an entire continent falls to the Chinese, because, as everyone in America knows, if you're the biggest buyer of South American commodities, everybody down there obeys your every wish and command!

What does mass blogging in China tell us?

image here

Thomas Friedman column on blogging in China becoming the true voice of the people at 70 million strong.

Positive or negative trend?  Because you're talking relatively successful people in a fast rising country, the overall voice is going to be one of nationalistic pride--even hubris, leading Friedman to hypothesize that aggressive bloggers are already becoming yet another source of populism that Beijing is both scared and mindful of in its decision-making.

Already, notes Freidman, the US ambassador is hosting big-time bloggers in an effort to get out America's message to the people with less official filtering.

Key point and a cool bit from Friedman:

“China for the first time has a public sphere to discuss everything affecting Chinese citizens,” explained Hu Yong, a blogosphere expert at Peking University. “Under traditional media, only elite people had a voice, but the Internet changed that.” He added, “We now have a transnational media. It is the whole society talking, so people from various regions of China can discuss now when something happens in a remote village — and the news spreads everywhere.” But this Internet world “is more populist and nationalistic,” he continued. “Many years of education that our enemies are trying to keep us down has produced a whole generation of young people whose thinking is like this, and they now have a whole Internet to express it.”

Watch this space. The days when Nixon and Mao could manage this relationship in secret are long gone. There are a lot of unstable chemicals at work out here today, and so many more players with the power to inflame or calm U.S.-China relations. Or to paraphrase Princess Diana, there are three of us in this marriage.

I see an advantage for us in all of these developments: our system is much more comfortable processing such popular pressures than China's is--and a lot more experienced to boot.

A lot of strategists on our side salivate at the notion that China will be forced into military confrontations with the West by all this rising nationalistic spirit, but the truth is just the opposite: fear of enraging the population by accepting any form of defeat keeps the Chinese leadership very keen to avoid any scuffle with the U.S. that it cannot control.

You there! Innovate! Now!

Moscow Times op-ed by a biz strategist consultant (via WPR's Media Roundup).

Great rundown here that encapsulates a lot of Russian history:

Eminent Western speakers put forward seemingly logical ideas on modernization and what Russia needs to do to modernize at the Global Policy Forum, which was held in Yaroslavl on Thursday and Friday. But most of them were not Russia experts as such and were thus naively overoptimistic on the country’s willingness and ability to implement change.

Applying Western logic to Russia is a risky business since things here are often the opposite of how things happen in the West. Will this modernization effort be any different from numerous others in Russia’s history?

The problem has always been implementation. Russia has been modernizing on and off since Peter the Great founded St. Petersburg in 1703. Periodically aware of the huge developmental gap with the West, it has never caught up.

As Russian history has shown, Western-style reforms invariably get blown off course by exogenous or endogenous shocks that necessitate short-term crisis management. After that, a conservative reaction sets in because of the fear of losing power after reform attempts fail and are discredited by the people.

Most Russian reform efforts are reactive and short-term, rather than proactive and structural. The result is a country that for centuries has been scraping along the bottom and failing to fulfill its colossal potential.

The government’s strong modernization campaign is concentrating on high technology, and yet it has not even plucked the low-

hanging fruit that would do so much to improve the country’s low productivity, such as radically cutting the number of bureaucrats and amount of red tape.

The Kremlin also has a poor understanding of science, technology and innovation, hence its piecemeal policies on modernization. “Innovation by decree” is one of the least effective models for modernization.

Now try remembering that when it comes to China's much vaunted state capitalism.  The author ends the piece by noting that China's authoritarianism is much more flexible, but the point remains the same: you cannot innovate by decree and if you let real innovation happen, you cannot control it by decree either--and still reap its economic rewards.

A Chinese naval build-up that deeply impresses me

NYT story on Chinese making substantial if beginning effort on deep-sea exploration--naturally for mineral resources.

Seabed control!

It'll be interesting to see how hard the Chinese go after this in coming years.  I would expect a pretty strong push given the volume requirements.

As for military conflicts stemming from this?  Let's just say disrupting seabed control is probably a lot easier and cheaper than you think, so let's remember which economy in this equation is becoming the most resource-dependent on the planet.

Because it ain't America.

A general on this would seem to be:  the deeper you go, the more you rely on a peaceful international security environment.

China confronts the green-eyed monster abroad

I've been preaching this one directly to the Chinese on trips going back to 2004: as you become the face of globalization, you will run into all the same hatreds that America has long endured--and then you'll want a different military than the one you've been wasting your money on.

From a WAPO piece earlier this month via reader David Emery:

In a spasm of violence this spring, an angry mob toppled the Kyrgyzstan president, torched his office and ransacked other buildings associated with his hated authoritarian regime. The crowd then turned on a less obvious target: a popular Chinese-owned shopping mall stuffed with cheap clothes and electronics from China.

An easy dynamic to spot, and even easier for me to have predicted years ago:

As China pushes beyond its borders in search of markets, jobs and a bigger voice in world affairs, a nation that once boasted of "having friends everywhere" increasingly confronts a problem long faced by the United States: Its wealth and clout might inspire awe and wary respect, but they also generate envy and, at times, violent hostility.

The "ugly Chinese" will compete, side by side, with the "China model"--bet on it.

Yes, no question that Central Asia's future is a whole lot more Chinese than Russian.  Just don't expect it to be a cake walk for anybody.

With great power comes great responsibility--and great envy.

Why China will continue to disappoint as a "near-peer" rival

NYT's Keith Bradsher in early Sept regarding a visit by Larry Summers in Beijing:

Top Chinese officials are calling for quiet discussions instead of open friction with the United States, after a summer marked by bilateral disagreements over the value of China’s currency, American military exercises off the Korean Peninsula and American efforts to resolve territorial disputes in the South China Sea.

State media showed China’s president, Hu Jintao, meeting Wednesday with Lawrence H. Summers, the director of the National Economic Council, and Thomas E. Donilon, the deputy national security adviser. American and Chinese officials have been trying to lay the groundwork for a state visit to the United States this winter by the Chinese president.

Wednesday’s meeting with Mr. Hu followed earlier talks this week in Beijing by the two American officials that were aimed not at fashioning new pacts, but at maintaining a dialogue that had been strained at times in recent months.

“Strategic trust is the basis of China-U.S. cooperation,” said Dai Bingguo, a Chinese state councilor who met with them, the official Xinhua news agency reported.

Prime Minister Wen Jiabao told the two Americans that China and the United States should not view themselves as rivals, according to the Chinese state news media.

Part of the dynamic we witness in elite US circles right now is an attempt to redirect our fears away from non-state actors and back toward the rising "near-peer"--an old Pentagon code phrase for China.  It is seen as part and parcel of admitting our need to get our own economic house in order, pull back from "empire" and keep our powder dry for the real threat down the road.

For many, this is a highly tempting path.

But the problem with it is, the Chinese will continue to disappoint.  They simply will not maintain sufficient counter-party status to sustain a truly hardened competition.  There will never be an opportunity for a true American shove because the Chinese will always be careful enough to avoid the push necessary to trigger that. They simply have too many stakes in the fire to ever fully give themselves--and their future--over to America and its tendency to go overboard in "crusades." Yes, we can chase them around that block for quite some time, but it will not give us the economy nor the military power we need for the future; it will just give us familiar detours from the changes we ultimately must make.

Meanwhile, vast collective problems will remain poorly addressed, because so long as Sino-American strategic partnership remains stunted, a critical mass of great-power cooperation will remain out of reach.  And no, I'm not being unrealistic about what that partnership may entail.  China and the US have vastly different economic needs:  China has no choice but to shrink the Gap economically while the US has little choice but to continue working the Gap militarily.  There is vast strategic overlap there that provides both sides missing assets, so long as both sides can become far more realistic about what cooperation would entail and yield.

Both sides currently lack the leadership to make this happen, I fear, especially in combination with even more unrealistic and uninformed domestic constituencies standing behind them.  But the efforts to foster such links will and must continue, even if we're collectively just killing time.

There is no faster nor surer path for America and China to become second-tier powers than for rivalry to fester into conflict. That's the real lesson to take from Britain and German in the first half of the 20th century.

Our present success in fostering an American-style globalization vastly outpaces Britain's success in establishing its colonial-style globalization of the late 19th and early 20th centuries, so the strategic risks we face is sharing power are completely different, no matter how slowly China has evolved toward something more pluralistic in terms of their politics.  We have won all the major battles worth winning in getting China's buy-in on markets and globalization, securing a fifth-generation-warfare victory that--yes--may still take a good two decades to unfold.  

The greatest danger we face today is our own desire to self-sabotage that delayed win, primarily because we are led by too many people lacking the strategic imagination to see it in the distance.

But fear not, our numbers are growing--and not just in business circles.

Explaining China's growing reliance on national flagship companies

NYT story by Michael Wines notes World Bank data saying the China's state sector, after years of declining share of the national economy, is starting to edge back up:

During its decades of rapid growth, China thrived by allowing once-suppressed private entrepreneurs to prosper, often at the expense of the old, inefficient state sector of the economy.

Now, whether in the coal-rich regions of Shanxi Province, the steel mills of the northern industrial heartland, or the airlines flying overhead, it is often China’s state-run companies that are on the march.

As the Chinese government has grown richer — and more worried about sustaining its high-octane growth — it has pumped public money into companies that it expects to upgrade the industrial base and employ more people. The beneficiaries are state-owned interests that many analysts had assumed would gradually wither away in the face of private-sector competition.

New data from the World Bank show that the proportion of industrial production by companies controlled by the Chinese state edged up last year, checking a slow but seemingly inevitable eclipse. Moreover, investment by state-controlled companies skyrocketed, driven by hundreds of billions of dollars of government spending and state bank lending to combat the global financial crisis.

Besides the obvious explanation of the huge stimulus package, I would cite three other key trends:

1) the push to jump-start industrial development of the second-tier cities;

2) Beijing's fears about access to raw materials means it's pushing national companies to lock-in a lot of assets while it has the bank account to do so; and 

3) the shift to trying to rely more on domestic demand has incentivized Beijing to champion national flagship companies (however "red" their affiliation) at home so as to be able to dominate expanding market spaces.

These are all great temptations and normal strategies for this point in China's developmental trajectory.  Will they overcome the general trend toward more reliance on markets?  Perhaps for a while but then these strategies will contribute to an overall stagnation of growth simply because they favor the inefficient over the more efficient.

But here the thing to remember:  most development paths consist of two steps forward and one step back. Linear projections are always wrong.

Iran's oil exports not choked, but redirected eastward

Our sanctions are described as "choking" Iran's exports.  But what I see is an export level dropping in concert with production, where the sanctions may be having significant impact, but probably not as much as claimed. 

Clearly, what the sanctions etc. has done is redirect Iranian oil exports from Europe & Japan to "rising" Asia. Eventually, the investment profile will change to reflect that, meaning the energy investments Iran attracts will likewise be shifted from West to East.  It just takes longer.  

Naturally, the Obama administration wants to shut down that possibility as well, but I suspect it'll be far less successful simply because rising Asia needs oil and gas from EVERYBODY, and can't afford our WMD qualms.

And frankly, why should they when we shield our best-boy in the region on the same subject?

Scary, I know, but eventually Iran's nukes gets Israel the strategic security it needs.  Frightening journey, yes, but I've yet to see an alternative pathway of any serious plausibility.

Chart of the Day: Year(s) of the (energy) pig

Pretty easy to hit high growth numbers if you're tossing everything into the boiler.  This is extensive growth defined:  anything that burns is considered fuel.