Brookings: Topics - China's Economy

Becoming a Techno-Industrial Power: Chinese Science and Technology Policy

Joel R. Campbell — Mon, 29 Apr 2013 09:05:00 -0400

Editor's Note: This paper by Joel R. Campbell, which outlines the history of Chinese science and technology innovation since the founding of the People's Republic, is the April 2013 installment in the Issues in Technology Innovation paper series, which is part of the Center for Technology Innovation in Governance Studies at Brookings.

China’s science and technology policy has developed through four phases since the founding of the People’s Republic in 1949. In the first phase, to 1959, technology supported the creation of heavy industry along Soviet lines, while the second, up through the end of the Cultural Revolution in 1976, saw economic stagnation and ideological domination of technology projects. A third phase, under reforms launched by Deng Xiaoping and carried forward by Jiang Zemin to 2001, stressed building of an independent research base and the gradual shift to market-oriented, product-driven research. Since 2002, Chinese policy has increasingly backed high technology industrialization, along with support for the nascent green technology industry.

Chinese technology policymakers also have promoted an innovation-driven economy. The Ministry of Science and Technology (MOST) is the key policymaking and policy coordination organ, and it funds the five most important technology development projects:

The Key Technologies Research and Development Program, focused on industrial technology
The 863 Program, centered on basic and applied research on marketable technologies
The Torch Program, which supports commercialization of high tech products
The 973 Program, funding multi-disciplinary projects in “cutting edge” technology, and
The Spark Program, promoting development and use of technology in rural areas

Science and industrial parks are key venues for high tech research and development (R&D). Currently, there are fifty-four such parks, mostly located in large cities or provincial capitals. Firms operating in the parks must create or apply technology in high tech fields, devote at least three percent of gross revenues to R&D, and employ at least thirty percent of college degreed workers. The information technology (IT) industry is one of the leading industries in the science parks, and has received special policy recognition since 2000.

The space program has become one of China’s proudest recent accomplishments. Building steadily on its experience with military and civilian missile technology, China has already launched four manned space missions, and has ambitious plans for a space station and unmanned exploration of the Moon, along with possible manned lunar missions. China has also made a major push into green (or “clean”) technology, driven by twin concerns about dependence on foreign oil and serious environmental degradation within China.

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Joel R. Campbell

Image Source: © Jason Lee / Reuters

How the China Development Bank is Rewriting the Rules of Finance: Debt, Oil and Influence

Thu, 18 Apr 2013 14:30:00 -0400

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April 18, 2013
2:30 PM - 4:00 PM EDT

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The China Development Bank may be the most powerful financial institution in the world, argue Beijing-based Bloomberg News reporters Henry Sanderson and Michael Forsythe in their new book, China’s Superbank: Debt, Oil and Influence – How China Development Bank is Rewriting the Rules of Finance (Bloomberg Press, 2013). The China Development Bank has been the enabler of the government's policies both at home and abroad. It invented the system of local finance that helped China weather the global financial crisis and has financed the China-Africa Development Fund, bankrolled the global expansion of Chinese companies and extended tens of billions of dollars in energy-backed loans to borrowers around the globe, including Brazil, Russia and Venezuela.

On April 18, the John L. Thornton China Center at Brookings hosted a discussion on China’s Superbank with Forsythe and Sanderson. Brookings Fellow Erica Downs provided introductory remarks and moderated the discussion.

The Road Ahead for China’s Economy

Tue, 16 Apr 2013 09:00:00 -0400

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April 16, 2013
9:00 AM - 4:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

In recent years, China has increasingly confronted new challenges in economic policy, including rising labor costs, low household consumption, rapid urbanization and inefficient domestic investment. While it is now widely acknowledged in Beijing that major structural adjustments are needed to address these issues, implementing serious reforms pose major challenges for the newly installed leadership.

On April 16, the John L. Thornton China Center at Brookings and China’s Caixin Media Group hosted a conference to examine the daunting challenges confronting China’s new leaders. The morning panels featured a discussion of the financial sector as well as the relationship between the domestic agenda for financial reform and China’s evolving strategy for outbound investment. The afternoon panels took a close look at the political obstacles to implementing major economic reform in areas such as tax policy, the household registration system and land transfers, as well as explore the impact of environmental and natural resource constraints on China’s economic growth.

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20130416_china_economy

Soaring Reserves Put Renminbi Back in the Spotlight

Eswar Prasad and Karim Foda — Mon, 15 Apr 2013 12:26:00 -0400

Editor's Note: The following commentary originally appeared on the Financial Times website, and is based on data by the authors presented in the Financial Times' China Currency Tracker interactive feature.

View the China Currency Tracker at ft.com » (subscription required)

With China’s foreign exchange reserves soaring, the renminbi is back in the spotlight. Rising capital inflows have led to a surge in accumulation of reserves as China’s central bank tries to fend off pressures for the renminbi to appreciate. Further liberalization of capital outflows could help ease the pressure on the currency. Greater exchange rate flexibility remains in China’s interest and would also help pave the way for eventual convertibility of the renminbi.

Last year was a calm one for the renminbi. China’s trade and current account surpluses fell below 3 percent of GDP in 2012, suggesting that the economy was on its way to resolving its protracted external imbalances. Capital inflows eased off and capital outflows rose as the government liberalized controls on outflows. Net accumulation of foreign exchange reserves was just over $130 billion, compared to $330 billion in 2011 and an average of nearly $450 billion per year in the four years preceding that.

Pressures on the renminbi appeared to have become more balanced. In fact, for most of the year, the offshore non-deliverable forwards (NDF) market indicated expectations of mild renminbi depreciation relative to the U.S. dollar.

Pressures on the renminbi appeared to have become more balanced. In fact, for most of the year, the offshore non-deliverable forwards (NDF) market indicated expectations of mild renminbi depreciation relative to the U.S. dollar. In April 2012, the government increased the flexibility of the exchange rate, allowing the renminbi to rise or fall by 1 percent each day relative to the midpoint of the trading range determined by the People’s Bank of China (PBC). Soon after that, the renminbi briefly retreated in value against the dollar before returning to a slow pace of appreciation.

2013 could prove to be a more interesting year on the currency front. Capital inflows into China seem to have picked up due to a mix of pull and push factors. The economy’s short-term growth prospects seem solid, although Chinese equity markets have not performed well. The major advanced economies are likely to maintain protracted low interest rate and easy money policies, pushing capital out to China and other emerging markets.

The economy seems to have settled down to a pace of 7-8 percent GDP growth. Inflation appears under control, leaving room for a strong policy response to counter any slowdown in growth. There are many risks to this relatively benign scenario, including concerns about local government debt, the housing market, and financial system weaknesses.

Still, capital flows to China are likely to increase, particularly since the government has been easing restrictions on inflows. This will maintain appreciation pressures on the currency barring any major global financial turmoil—for instance from a flare-up of the euro zone debt crisis—that could pull capital back from emerging markets to the traditional safe haven currencies.

On a trade-weighted basis, the renminbi’s nominal effective exchange rate relative to its major trading partners has appreciated by 3 percent over the past twelve months. The inflation-adjusted real effective exchange rate has appreciated by 5 percent over this period--although China has maintained moderate inflation, many of its advanced economy trading partners have even lower inflation rates.

With the U.S. bilateral trade deficit with China hitting a new high of $314 billion in 2012 and U.S. job growth still at dismal levels, China’s currency policy could once again become a source of tension between the two countries.

Over the past twelve months (March 2012 to March 2013), the renminbi has appreciated relative to the currencies of virtually all of its major trading partners. In inflation-adjusted terms, the renminbi’s value has risen sharply against the yen--by nearly 18 percent. By this measure, the renminbi has also appreciated by 5.9 percent relative to the euro and 1.5 percent relative to the U.S. dollar. Measured relative to its recent low against the dollar in August 2012, the renminbi is now up by about 3 percent against the dollar.

The renminbi’s modest appreciation relative to the dollar suggests that the exchange rate is still being tightly managed by the PBC through its intervention in foreign exchange markets. Indeed, in the first quarter of 2013, China added $128 billion to its stockpile of reserves, pushing them to a level of $3.44 trillion.

With the U.S. bilateral trade deficit with China hitting a new high of $314 billion in 2012 and U.S. job growth still at dismal levels, China’s currency policy could once again become a source of tension between the two countries. This would not bode well for the bilateral economic relationship and could also raise global trade tensions, particularly as China and other emerging markets continue to feel victimized by aggressive monetary easing in the major advanced economies.

Continued liberalization of capital outflows will help take some of the pressure off from any increase in inflows. Still, there is a strong case for allowing more flexibility in China’s exchange rate. This would have many other domestic benefits as well. As China continues to open up its capital account, greater exchange rate flexibility will be important to make the process smoother and to facilitate the move towards free convertibility of the renminbi. It will also boost monetary and financial sector reforms.

Authors

Eswar Prasad
Karim Foda

Publication: Financial Times

Image Source: © Jason Lee / Reuters

Global Economic Recovery Stuck Below Takeoff Speed

Eswar Prasad and Karim Foda — Sun, 14 Apr 2013 12:17:00 -0400

Editor’s note: This commentary is based on research and analysis from the April 2013 update of Tracking Indexes for the Global Economic Recovery (TIGER) interactive map, which appears on the Financial Times Web site.

The global economic recovery remains stuck below takeoff speed, unable to achieve liftoff and facing the risk of stalling. Half-hearted fiscal austerity measures are proving to be a drag on growth and doing little to rebuild investor and consumer confidence.

Monetary policy continues to shoulder the burden of limiting downside risks and has kept financial markets buoyant even in the face of weak growth prospects.

The Brookings-FT Tiger index shows that growth momentum remains weak in nearly all major advanced and emerging market economies. The best that can be said about the weak pace of economic activity is that it has bottomed out in some key economies. However, prospects of a strong cyclical pickup in growth are likely to be hampered by continued policy uncertainty and concerns about further financial market turbulence, with the simmering euro zone debt crisis once again coming close to boiling over.

The US economy continues to be a relatively bright spot, with economic activity showing modest strength and equity markets booming. Consumer demand continues to prop up the weak recovery, although even that is tenuous as labor market performance remains weak. The Fed’s commitment to maintain easy monetary policy until the unemployment rate falls to 6.5 percent has boosted bond and equity markets. The Fed’s actions have also helped to limit downside risks to growth in the short term but at the cost of creating greater financial system risks. Fiscal policy, both directly and through the uncertainty about its future course, is hampering the recovery.

Growth in the core eurozone economies, including Germany and France, remains weak while the eurozone periphery remains mired in a danger zone.

Growth in the core eurozone economies, including Germany and France, remains weak while the eurozone periphery remains mired in a danger zone. The backstop provided by the ECB’s interventions bought some time for European policymakers, who have been squandering it with political squabbling. There has in fact been some progress on fiscal and structural reforms in countries such as Greece and Spain. However, in general the pace of reforms in the eurozone periphery economies has been far too slow. There are few grounds to anticipate improved growth momentum in these economies, which continue to post shrinking GDP levels. They also have dismal levels of business and consumer confidence, as well as financial systems that are still in distress and unable to provide much credit to finance a recovery. Moreover, recent developments such as the outcome of the Italian elections and the mishandled Cyprus bank rescue plan have raised the risks of an unpleasant end-game to the crisis.

The Bank of Japan’s new leadership has clearly signaled its intention to employ a broad and aggressive set of unconventional monetary policy measures to reverse deflation and support growth. For these measures to gain traction, they need to be supplemented by structural reform measures that are essential to revive the economy’s productivity and competitiveness. Bolstering Japan's productivity and long-term growth prospects requires reforms of the tax system, labor markets, and various aspects of the regulatory regime.

Emerging markets are treading water as their policy space becomes increasingly constrained and they continue to be buffeted by a weak external environment.

Emerging markets are treading water as their policy space becomes increasingly constrained and they continue to be buffeted by a weak external environment.

The outlook for China’s economy is evenly balanced, with some indicators such as industrial production suggesting that growth has stabilized. Inflation appears to have moderated, leaving room for policy stimulus if growth were to slow. The new leadership has hit the ground running in terms of laying out its economic reform agenda and making a series of statements and high-level appointments that bode well for reform prospects. The difficult task of developing specific action plans and implementing them lies ahead. Still, it seems clear that the government is prepared to accept lower growth than in the past decade so long as that growth is more sustainable and increasingly driven by private consumption and productive investment.

In India, the optimism engendered by a wave of modest but important reforms at the end of 2012 has given way to renewed gloom as the February 2013 budget did not sustain the reform momentum. The budget contained some steps to put public finances on a more sustainable path, but even the modest deficit reduction goals may be upended by weak growth. The large current account deficit remains a source of vulnerability and the high level of inflation has constrained monetary policy’s ability to support growth.

Latin American economies have hit a rough patch, with countries like Argentina and Brazil experiencing significant slowdowns. Even Mexico, one of the strongest performers in the region of late, is in danger of losing momentum as export growth has been hit hard by weak external demand.

Politicians around the world continue to avoid tough structural reforms, instead relying on central banks to continue propping up growth. Policy and political uncertainty remain sources of drag that could prevent the world economy from attaining liftoff, raising the risk of a crash.

Authors

Eswar Prasad
Karim Foda

Image Source: © Bobby Yip / Reuters

China’s Global Currency: Lever for Financial Reform

Arthur R. Kroeber — Thu, 11 Apr 2013 12:09:00 -0400

Following the global financial crisis of 2008, China’s authorities took a number of steps to internationalize the use of the Chinese currency, the renminbi. These included the establishment of currency swap lines with foreign central banks, encouragement of Chinese importers and exporters to settle their trade transactions in renminbi, and rapid expansion in the ability of corporations to hold renminbi deposits and issue renminbi bonds in the offshore renminbi market in Hong Kong.

These moves, combined with public statements of concern by Chinese officials about the long-term value of the central bank’s large holdings of US Treasury securities, and the role of the US dollar’s global dominance in contributing to the financial crisis, gave rise to widespread speculation that China hoped to position the renminbi as an alternative to the dollar, initially as a trading currency and eventually as a reserve currency.

This paper contends that, on the contrary, the purposes of the renminbi internationalization program are mainly tied to domestic development objectives, namely the gradual opening of the capital account and liberalization of the domestic financial system. Secondary considerations include reducing costs and exchange-rate risks for Chinese exporters, and facilitating outward direct and portfolio investment flows. The potential for the currency to be used as a vehicle for international finance, or as a reserve asset, is severely constrained by Chinese government’s reluctance to accept the fundamental changes in its economic growth model that such uses would entail, notably the loss of control over domestic capital allocation, the exchange rate, capital flows and its own
borrowing costs.

This paper attempts to understand the renminbi internationalization program by addressing the following issues:

Definition of currency internationalization;
Specific steps taken since 2008 to internationalize the renminbi;
General rationale for renminbi internationalization;
Comparison with prior instances of currency internationalization, notably the US dollar after 1913, the development of the Eurodollar market in the 1960s and 70s; and the deutsche mark and yen in 1970-90;
Understanding the linkage between currency internationalization and domestic financial liberalization;
Prospects for and constraints on the renminbi as an international trading currency and reserve currency.

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Arthur R. Kroeber

Image Source: © Bobby Yip / Reuters

China’s Increasing Interest in Africa: Benign but Hardly Altruistic

Yun Sun — Fri, 05 Apr 2013 14:42:00 -0400

China’s new leader President Xi Jinping has completed his foreign debut tour as the head of state after visiting Russia and three African countries: Tanzania, South Africa and the Republic of Congo. As the Chinese media hailed his “tremendous victory” and the “successful practice of great power diplomacy with Chinese characteristics”, the issue of China’s role and activities in Africa were once again put under the spotlight. Right before Xi embarked on his trip, Nigerian Central Bank Governor Lamido Sanusi criticized China’s engagement in Africa publicly in the Financial Times. His most quoted charge says “China takes from us primary goods and sells us manufactured ones. This was also the essence of colonialism.”

Sanusi’s comment cast a negative shadow to Xi’s first foreign visit and was met with ferocious rebuttals from an infuriated Beijing. China’s Ministry of Commerce pointed to the western countries’ “exploitation of African resources, trade of African people, occupation of African land and destruction of African culture” as the “essence of colonialism” and argued that it is China, not the West, that has provided support for Africa’s economic and social development. China’s Ministry of Foreign Affairs dispatched the head of its Africa Department, Lu Shaye, to deliver a formal demarche to a Hong Kong media outlet. He defended China’s role in Africa and argued that China has improved Africa’s international status by offering it a powerful alternative market and collaborator, delivering to Africa concrete benefits and treating it as an equal partner. In comparison, he argued, the West only “takes resources from Africa” and treats Africa with a condescending attitude.

The drastically diverging perceptions of China’s role in Africa are an interesting phenomenon. The polarization stems from the focus on different aspects of China’s activities on the continent. For example, dragon-slayers emphasize China’s selfish quest for African natural resources and how it sabotages international efforts to keep unpalatable African regimes in check. On the other hand, panda-huggers applaud China’s contribution to Africa’s economic development through infrastructure projects and revenue creation.

Unfortunately, neither reflects the nuanced, mixed nature of what China means to Africa. China enjoys unique financial and political advantages in promoting Africa’s growth through vast financing with little or no strings attached. However, these short-term benefits should not form a cover-up for the potential long-term negative consequences associated with neglecting issues of governance, fairness and sustainability.

On the positive side, China’s economic engagement in Africa has created significant benefits for African countries. Most importantly, Beijing has considerable capacity and willingness to provide financing to fuel Africa’s growth. During his recent trip, Xi reconfirmed China’s commitment to provide another $20 billion in financing to Africa. China usually attaches a significant amount of such funding to infrastructure projects, which forms the foundation for Africa’s industrialization and economic development. Many of these projects require large investment and long pay-back terms that traditional donors are reluctant to provide.

It is true that China does not emphasize the governance side of the story. This is a reflection of China’s own philosophy on the prioritization between economic development and political progress. Many Chinese officials, analysts and businessmen find the West’s overwhelming emphasis on democracy, governance, transparency in Africa amusing. To the West, they would ask an innocent but critical question: “for people who do not have food on the table, what’s the point of having democracy?” Using its own experience of subjugating political liberalization to the “higher cause” of economic development, China finds its approach to Africa as one that prioritizes the provision of basic elements of development, completely legitimate and fully justified.

In this way, China’s intention in Africa is benign. Beijing has no intention to colonize the continent, dictate the politics or economy of the local countries or deprive them of development opportunities. On the contrary, China truly sees itself as Africa’s “brother” and hopes to help African countries develop through infrastructure projects. Beijing seeks an approach different from that of the West, one that avoids the “meddling” with the internal affairs of African countries through conditional aid. In the last several years, China has contributed significantly to the economic growth of some of Africa’s poorest nations. China wants to see a prosperous Africa, which is beneficial to China’s interests as well.

However, this does not mean China is being altruistic. Helping Africa is important, but China would not do so if it had nothing to gain. Indeed, China emphasizes that any bilateral relationship has to be mutually beneficial. And China’s investment in Africa does pay itself back in multiple ways economically: development and exploitation of Africa’s natural resources, access to local market, employment opportunities for Chinese labors and service contracts for Chinese companies on infrastructure projects that China funds. When Chinese officials emphasize that China also invests substantially in countries that are not rich in natural resources to defuse international criticisms, they often forget to mention that China also has its eyes on other things that these countries can deliver, such as their support of Beijing’s “one China” policy, of China’s agenda at multilateral forums and of China as a “responsible stakeholder”. While there is nothing wrong with not being altruistic in one’s motives, it should be noted that China is not helping Africa in exchange for nothing.

In analyzing the nature of China’s activities in Africa, another important voice to examine is that of Africa itself. Many African countries and officials welcome China’s approach and fiercely defend China internationally. This seems like fairly powerful pushback to western criticisms of China’s role in Africa since African countries should know what they need more than anyone else. Africa’s approval of China poses an intriguing question for those in the West who disapprove of China’s activities in Africa: should the West reexamine its approach to Africa in order to better address what African countries truly need?

Authors

Yun Sun

Image Source: © Siphiwe Sibeko / Reuters

China’s Rise: Assessing Views from East Asia and the United States

Fri, 29 Mar 2013 09:00:00 -0400

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March 29, 2013
9:00 AM - 1:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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The opportunities and challenges presented to East Asia by China’s rapidly increasing international stature, economic influence and military heft have been thrown into sharp relief over the last few years. Escalating tensions over a series of maritime territorial disputes have contrasted with a marked improvement in cross-strait relations and with efforts by China to pursue free trade agreements with ASEAN countries as well as Japan and South Korea. Until recently, however, scholars who follow this issue have not had access to survey data that might allow them to draw more specific conclusions about the attitudes of other East Asians towards the rise of China.

On March 29, the John L. Thornton China Center and Center for Northeast Asian Policy Studies at Brookings, the Program for East Asia Democratic Studies of the Academia Sinica and National Taiwan University, and the Institute of Arts and Humanities of Shanghai Jiaotong University will host a half-day conference to address this question. At the conference, panelists will present data from the Asian Barometer Survey and compare these findings with prevailing survey data in the United States. Leading experts from both sides of the Pacific will weigh the potential implications of these studies for future relations between China and other East Asian countries and for U.S.-China relations.

After each set of presentations, speakers will take audience questions.

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The 2013 People’s Congress: A New Government, A New Direction?

Kenneth G. Lieberthal — Thu, 28 Mar 2013 17:00:00 -0400

In China, where the 12th National People’s Congress officially selected its new leadership, many economic, domestic and foreign policy challenges persist. My colleagues Cheng Li, Jonathan Pollack, Feng Wang, Ran Tao and I discussed China’s most pressing issues and possible outcomes.

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Lifting the Veil: Book Review of China’s Superbank

Erica S. Downs — Wed, 20 Mar 2013 16:27:00 -0400

What do the Three Gorges Dam, local-government investment companies (LICs), the China-Africa Development Fund, Huawei’s transformation into a global player, China’s world-beating solar technology companies, and the issuance of tens of billions of dollars in energy-backed loans all have in common? They were financed by China Development Bank (CDB), one of China’s most powerful institutions and an increasingly important player on the world stage.

Despite CDB’s central role in developing China’s economy and bankrolling the international expansion of Chinese companies, China’s biggest policy lender rarely makes an appearance in most English-language chronicles of the country’s economic rise. All the more reason then to praise a superbly researched new book, written by two Beijing-based reporters for Bloomberg, in which CDB finally makes a star turn. In China’s Superbank: Debt, Oil and Influence—How China Development Bank is Rewriting the Rules of Finance, Henry Sanderson and Michael Forsythe chart CDB’s transformation from an ATM for officials financing pet investment projects into “the world’s most powerful bank.” Lifting the veil on one of global finance’s least understood institutions, the book is essential reading for anyone seeking insight into the workings of Chinese state capitalism.

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Erica S. Downs

Publication: China Economic Quarterly

Image Source: © Mohamed Nureldin Abdallah / Reuters

Falling Out of Love With China

David Shambaugh — Mon, 18 Mar 2013 00:00:00 -0400

Now that China is becoming a world power, it is beginning to recognize the importance of its global image and the need to enhance its “soft power.” It is tracking public opinion polls worldwide and investing huge amounts into expanding its global cultural footprint, “external propaganda work” and public diplomacy. Unfortunately for China, that’s not enough.

While pockets of positive views regarding China can be found around the world, public opinion surveys from the Pew Research Center’s Global Attitudes Project and the BBC reveal that China’s image ranges between mixed and poor. And the negative view is expanding: for almost a decade, European public opinion toward China has been the most negative in the world, but that is now matched in America and Asia.

Read the full article in The New York Times »

Authors

David Shambaugh

Publication: The New York Times

China’s Carbon Tax Proposal Highlights the Need for a New Track of Climate Talks

Adele Morris, Warwick J. McKibbin and Peter J. Wilcoxen — Fri, 15 Mar 2013 00:00:00 -0400

China’s Ministry of Finance recently announced a carbon tax. Although the statement was vague about the timetable and the tax rate, the mere prospect of China pricing carbon should have prompted swift laudatory international responses, especially by countries that have long hectored China to take stronger action on climate. China’s announcement, and the underwhelming response of the international community, shows that it’s time to start an international conversation about pricing carbon and invite anyone who’s interested aboard. A Carbon Pricing Consultation (CPC) would allow China and other countries that want to price carbon (via a carbon tax, cap-and-trade system or a hybrid approach) to learn more about it, exchange views, find out what other countries are considering, and potentially coordinate their policies.

In a recent paper we proposed a CPC process that would lead to detailed, pragmatic, and ongoing international discussion of the implementation details of domestic carbon pricing approaches, policies that economists widely agree could address the climate problem cost effectively. A domestic carbon price creates broad, efficient incentives to reduce greenhouse gas emissions. Done well, it would gradually shift consumer demand, production methods, new investment, and technology development towards less emissions-intensive goods and services without unduly burdening poor households. Pricing carbon can also raise revenue to fund government programs or cut distortionary taxes. Finally, a carbon price can promote economic growth by replacing less efficient regulatory and spending policies.

Accordingly, we think parties should embrace carbon pricing as a key low-carbon growth strategy and establish a venue to discuss it. Disparate carbon prices across different countries can shift emissions, production, investment, and trade patterns, and mutual understanding of these cross-border effects is of interest to all. Several countries have adopted or are implementing carbon pricing policies, so there is increasing experience to discuss. And the vehement opposition to the EU’s efforts to price carbon in aviation fuels suggests that unilateral approaches to carbon pricing can undermine progress.

This moment to begin a CPC process is opportune. Climate talks in December 2012 in Doha, Qatar, resolved contentious questions about the future of the Kyoto Protocol and finally retired the constraints of the Bali agenda. Now negotiators will turn to developing a new agreement under the United Nations Framework Convention on Climate Change to cover the post-2020 period. At the same time, the Major Economies Forum (MEF) needs a new thrust of engagement, having developed the Clean Energy Ministerial into an enduring venue for technology discussions. A CPC would fit nicely within the MEF, or possibly the G20.

This new line of discussion would address a glaring gap in climate talks to date. Negotiations have tackled emissions targets, temperature targets, technology transfer, financial assistance to poor countries, forest preservation, and many other topics, but not the practical design of cost-effective domestic mitigation policy. Indeed, few countries include their finance and trade ministries in climate talks outside of discussions of finance. This vacuum of economic expertise and leadership leaves parties prone to commitments, such as a two degree maximum global mean temperature increase, that imply implausibly stringent global efforts and fail to identify concrete solutions.

The CPC, unlike existing clean energy and climate consultations, would be led by finance and trade ministries (not the environment and energy ministries). It would focus exclusively on the practical administrative and technical aspects of responsible mitigation policy. One advantage of this pragmatic approach is that parties could sidestep divisive issues such as who bears responsibility for collective mitigation goals, who should compensate whom for what, and whose approach is more ethical. However justifiable, these debates have done little to promote real emissions mitigation.

The CPC would focus on the technical and administrative aspects of the policies, such as options to identify taxable or regulated entities and sources and methods to track revenue, minimize administrative costs, and ensure compliance. Parties could also discuss the role of international offsets and the interplay between carbon pricing and other domestic climate and energy policies. Countries could discuss ways to predict the effects of alternative tax trajectories, and they could discuss how to distribute and manage markets of allowances and tax revenue. Other topics could include the design of border carbon adjustments and other trade-related issues. The CPC could also steer existing resources to assist developing countries in reducing fossil fuel subsidies and pricing carbon.

One impediment to climate policy in the United States is the concern that without meaningful action by developing countries, pricing carbon will harm the US economy with little overall environmental benefit. A move towards transparent price-based policies give all major emitters comfort they are moving forward in concert with others. The first step is to discuss how to do it.

Authors

Publication: East Asia Forum

Image Source: © Darley Shen / Reuters

Examining U.S. Concerns on Trade, Security as China Welcomes New President

Kenneth G. Lieberthal — Thu, 14 Mar 2013 00:00:00 -0400

Editor's note: China officially installed Xi Jinping, already the Communist Party leader, as president for the next 10 years. In an interview with PBS's Judy Woodruff, Kenneth Lieberthal discusses contentious issues of trade, defense, and cybersecurity for China and the U.S. Read an excerpt below.

Judy Woodruff: And let me start with you, Ken Lieberthal. What do we need to know about Xi Jinping? Tell us something about him.

Kenneth Lieberthal: The most important thing we need to know is that he's going to govern China for the next decade.

And the next decade is going to be enormously important for U.S. interests, for China, for Asia and globally. He's worked his way up through every level of the Chinese political system, so he's a very experienced politician and administrator.

He's come in on a program of saying he's going to clean up corruption, he's going to revitalize the Communist Party and keep it in power and use his capabilities to reform the Chinese economic system while maintaining and building military strength.

Authors

Kenneth G. Lieberthal

Publication: PBS Newshour

Image Source: © China Daily China Daily Information Corp - CDIC / Reuters

The Steady Hand of China’s Central Banker

Eswar Prasad — Wed, 13 Mar 2013 09:46:00 -0400

Editor's Note: Fear of inflation and hope for reform in China’s monetary policy are both rising. Lesser men might have balked, but People’s Bank of China governor Zhou Xiaochuan is facing the challenge.

Two months ago, Mr. Zhou was expected to step down after a decade at the helm of China’s central bank, but banking and Communist Party officials have recently indicated that China’s leaders want him to stay on a little longer. During a nationally televised news conference on the sidelines of China’s annual parliamentary meetings on Wednesday, Mr. Zhou refused to say whether he would stay or go.

China Real Time caught up with Eswar Prasad, an expert on China’s economy at Cornell University, and threatened to keep 20% of his bank deposits in low-yielding reserves unless he shared his insights on Mr. Zhou’s record.

Tom Orlik: What was the economy that Zhou Xiaochuan inherited in 2002?

Eswar Prasad: When Governor Zhou became the head of the People’s Bank of China in December 2002, the economy was growing fast and recovering from a brief spell of falling prices. Foreign trade was expanding rapidly and foreign investors were thronging at China’s doorstep. However, some domestic policy tensions were also becoming apparent. The rate of bank credit expansion was already above nominal income growth and surging higher, there were concerns about bad loans in the banking system, and the PBOC was having to intervene heavily in foreign exchange markets to maintain the yuan’s peg to the dollar.

Tom Orlik: What did that mean for China’s monetary policy?

Eswar Prasad: China’s monetary policy was constrained by the need to keep the yuan’s value constant relative to the dollar. The trade surplus and capital inflows were putting pressure on the yuan to appreciate, which could have hurt China’s export competitiveness. The PBOC had started intervening aggressively in foreign exchange markets to offset these appreciation pressures by buying up dollars and other hard currencies. Low interest rates in many advanced economies were preventing the PBOC from raising domestic interest rates as that would draw in even more capital inflows. This also meant that interest rates could not be used to guide banks to tighten or loosen credit conditions; instead, the PBOC had to resort to quantity targets and other means that hampered banking reforms.

Tom Orlik: Mr. Zhou faced challenges with inflation in 2004, 2008 and 2011 – how did he deal with them?

Eswar Prasad: In each of these episodes, Mr. Zhou recognized that the expansion of bank credit needed to be controlled and took measures to limit this expansion. Unable to raise interest rates to the level that would be compatible with domestic price stability, he had to resort to measures such as quantity restrictions (setting ceilings for each bank’s credit expansion) and higher reserve requirements on banks.

Tom Orlik: In 2005, Mr. Zhou broke the yuan’s peg to the dollar – why was that?

Eswar Prasad: By 2005, the pressures on monetary policy were ratcheting up. Inflation had begun to come under control after the spike in 2004 but it was clear that the exchange rate regime had become a millstone around the neck of monetary policy. China’s interest rates could not deviate too much from U.S. interest rates, which were much lower than the rates that the PBOC would have preferred domestically. There were also increasing pressures on the yuan to appreciate, with the PBOC accumulating over $200 billion in foreign exchange reserves each year through its exchange market interventions. To start on the road to monetary independence, Mr. Zhou convinced China’s leaders that it was time to depeg the yuan from the dollar and allow it to appreciate. While there was considerable pressure from the U.S. and other advanced economies for this to happen, Mr. Zhou made the strong argument that such a move would be in China’s own interest and that the rate of appreciation could be managed in a manner that would give Chinese exporters time to adjust.

Tom Orlik: What’s the relation between China’s exchange rate regime and the U.S. financial crisis?

Eswar Prasad: China’s tightly managed exchange rate regime is one side of global current account imbalances. China’s purchases of U.S. Treasuries as part of its exchange market intervention helped keep interest rates lower for longer in the U.S., giving financial institutions cheap money with which they eventually wreaked havoc. While these imbalances were not at the root of the crisis, they played a role in perpetuating financial market excesses in the U.S. that eventually resulted in the global financial crisis. The case that some U.S. policymakers have made that these imbalances were the proximate cause of the crisis is, however, not tenable.

Read the full interview at the Wall Street Journal »

Authors

Eswar Prasad

Publication: The Wall Street Journal's China Real Time Report

Environmental Outlook: Air Pollution In China

Kenneth G. Lieberthal — Tue, 05 Mar 2013 00:00:00 -0500

Editor's note: In an interview with NPR's Diane Rehm, Kenneth Lieberthal to talk about the catastrophic air pollution crisis in China. Read an excerpt below.

Diane Rehm: Ken Lieberthal, to what extent are Chinese leaders, number one, taking this into account, number two, acknowledging it publicly and number three trying to do something about it?

Kenneth Lieberthal: Public acknowledgement has increased a lot just over the past year. Interestingly, that was largely forced by the U.S. Embassy's measuring air pollution at the embassy compound in Beijing and putting out a Twitter feed live all the time that tells you what that rating is.

And what it turned out was that the official statistics put out by the Chinese Ministry of Environmental Protection were systematically, dramatically lower than those of the embassy so that caused an uproar. The Chinese then improved their game.

They began measuring those very dangerous pollution, the small particulate pollution and they began giving more accurate figures with more measurement. That is now a Cause célèbre in China.

In terms of what they're doing about it, though, frankly it is fundamentally a combination of their approach to economic development, which is to drive GDP growth every day all the time. With most of that GDP growth being in manufacturing and in construction and with officials everywhere benefiting the most when they can build big projects and drive GDP growth by big capital, intensive projects, those tend to be the most polluting things out there.

And they're supported by things like cement and aluminum and so forth, all of which are highly polluting. So at the end of the day, this is a model of development just built into the genetic code of the current political system. And they need to change that model of development dramatically as part of the solution to this catastrophic air pollution. So this is not going to happen quickly or easily.

Authors

Kenneth G. Lieberthal

Publication: NPR's The Diane Rehm Show

Review of "The Political Economy of the Chinese Coal Industry: Black Gold and Blood-Stained Coal"

Erica S. Downs — Thu, 21 Feb 2013 00:00:00 -0500

Tim Wright examines China’s coal industry to shed some light on broader issues in China’s political economy during the transition from socialism to capitalism. The big questions this volume touches on include: to what extent do different levels of government undermine the capacity of the central government to achieve its objectives? Is the state predatory or developmental? Is the state advancing at the expense of the private sector? Have workers been winners or losers in the reform era?

Although some readers may question the extent to which the experiences of one industry can generalized to the Chinese political economy as a whole, the coal industry is an excellent choice for a single case study for several reasons. First, coal powers China’s economy, accounting for about 70 per cent of China’s energy mix. Second, the coal industry is an important source of employment, providing jobs for millions of people. Third, China’s heavy coal use is a major source of widespread environmental degradation in China, which threatens to undermine the achievement of the country’s longer-term economic goals, and China’s carbon dioxide emissions, which are the largest in the world. Fourth, coal is a source of conflict between the central and local governments, the state and the private sector and different industries.

Wright’s analysis of issues ranging from rent seeking to mine safety paint a detailed picture of how China’s political economy operates. For example, chapter five illustrates the limits of state capacity by chronicling the difficulties the central government faced in its efforts to close township and village mines (TVMs) in a bid to reduce the social and environmental costs of rural mining. The central government’s objective of reducing the role of TVMs in the coal sector encountered widespread opposition from mine owners bent on maintaining their property rights, workers determined to hold onto their jobs, and local officials intent on maintaining the government revenue and opportunities for personal enrichment provided by the TVMs. Consequently, neither the first nor second rounds of mine closures (in 1999–2001 and after 2005) were entirely successful, although Wright argues that the central government’s achievements were greater the second time around.

The breadth of the material covered in this volume make it a one-stop shop for readers interested in learning more about the issues discussed in media stories about China’s coal industry. Case on point: the brownouts suffered by 17 provinces in January 2008. Chinese officials were quick to offer up the weather as a scapegoat, arguing that a blizzard prevented rail deliveries of coal to power plants. However, the widespread power outages had their roots in the struggle between coal producers and power plants over the price of coal used in electricity generation, discussed by Wright in chapter two. Unable to pass the full cost of coal onto their customers, many power stations maintained dangerously low coal stocks, which they depleted before the arrival of the snow-delayed replenishments. Similarly, while China is often viewed as the poster child for mining disasters, with Chinese fatalities making headlines around the world, Wright explains how and why China’s coal safety record has dramatically improved over the past decade in chapters seven and eight.

This volume, which draws on Wright’s long experience as a chronicler of China’s coal industry, should be of value to readers interested not only in the evolution of China’s coal industry but also the development of the Chinese political economy. The Political Economy of the Chinese Coal Industry is exhaustively researched and extensively utilizes the English- and Chinese-language literatures on coal in China. Indeed, it is Chinese language materials that are the source of many of the short anecdotes that add texture to Wright’s writing. He introduces us to 40 bachelors in a village in Hebei Province who were too poor to get married until the establishment of a coal mine provided them with jobs (p. 106). Similarly, Wright tells us about a mine owner in Shanxi Province who tried to conceal the deaths of 36 workers by transporting their corpses to Inner Mongolia (p. 162). Wright also does his readers a service by discussing China’s coal industry not only in a Chinese historical context but also in an international context, with the United Kingdom often serving as the point of comparison. For example, in his discussion of the negative impact of coal mining and coal use on China’s environment, he cites research by Thomas Rawski that “although Chinese levels of air pollution are higher than those in developed countries today, they are far from exceptional when compared with the same countries during early industrialization” (p. 40). In sum, Wright’s study should be a “go to” book for readers interested in a nuanced analysis of the evolution of China’s coal industry and the insights it provides into China’s political economy.

Authors

Erica S. Downs

Publication: The China Quarterly

Beijing's Steady Progress Toward Rebalancing

Eswar Prasad — Tue, 19 Feb 2013 00:00:00 -0500

While the world's attention has been focused on the political and economic dramas in Europe, Japan and the U.S., one country has been quietly chipping away at some of its own economic problems. Recent data suggest a gradual but remarkable transformation in China's growth model. It is far too early to declare victory, however, and the new leadership has its work cut out for itself.

New data suggest that it is time to revise the view that China's growth is driven largely by exports and investment. Private and government consumption together accounted for more than half of China's output growth in 2011-12, signaling a big shift in the composition of domestic demand. Physical capital investment, the main driver of growth over the previous decade, is no longer the dominant contributor to growth. As for exports, a shrinking trade balance has in fact dragged down growth these past two years.

China has made substantial progress in reducing its external imbalances. Its trade and current account surpluses have shrunk steadily and markedly relative to their peaks in 2007, when they hit 7.6% and 10.1% of gross domestic product, respectively. In 2012, both of these surpluses were below 3% of GDP.

One reason for this shift is that China's strong growth, combined with economic weaknesses in its key export markets, has brought down the trade deficit. Another is that the government has eased restrictions on capital inflows and outflows, allowing Chinese investors and corporations to look to foreign investments for diversification purposes.

Capital outflows exceeded inflows in 2012, something not seen for over a decade. This has raised concerns about capital flight. But the reversal might simply reflect a maturing, richer economy with more open financial markets that allow investors to take advantage of diversification opportunities.

There are other signs of progress on domestic rebalancing as well. The decline in the share of private consumption in GDP has been halted. The share even went up slightly in the last two years, although it still remains well below that of every other major economy, advanced or emerging. Consistent with the government's objective of promoting the services sector, employment in this sector grew faster in 2012 than in the industrial sector. The shares of these two sectors in GDP are now equal.

This is not to say that all is well with the Chinese economy. There are problems lurking on the books of the big state-owned banks which have continued lending mainly to state enterprises. The shift away from state-owned to private enterprises has ground to a halt. Provincial governments have large levels of debt. Overall employment growth remains meager, and the environmental consequences of the growth model are painfully obvious. For all of these and other problems, however, the fact that the government has been able to gently steer the large and fast-moving economic ship in the right direction is a notable achievement.

Growth is the magic tonic that has helped China cope with the myriad of economic problems it faces. A declining labor force and limits to investment growth suggest that China will have to rely on faster productivity growth to keep up its GDP growth.

The big challenge now is to speed up reforms needed to improve the quality and efficiency of growth, continue the shift away from capital-intensive production, generate more employment and allow more of the benefits of growth to filter down to the average household. This will require more disciplined banks, broader financial markets, a stronger social safety net and other reforms that were clearly laid out in China's 12th five-year plan two years ago.

Earlier this month the government announced a plan to reduce inequality that incorporates some of these reforms. Trying to reduce inequality through government intervention is usually not a good idea, as it puts the focus on redistributive policies rather than ones that promote growth.

But this plan seems to use the goal of reducing inequality more as a framework for a broad set of reforms that will secure growth and improve income distribution. The proposed reforms include liberalization of interest rates to boost competition in the banking system, removal of restrictions on labor mobility to promote urbanization, and increased spending on social programs to reduce household savings and raise private consumption. Beijing has hit upon a clever strategy, as it will be a lot harder for vested interests to block reforms that are sold as being for the benefit of the masses.

China has a golden opportunity—with growth recovering and inflation low—to look beyond short-term demand management and focus instead on improving the balance, quality and sustainability of growth. While its new leaders have sung the appropriate paeans to reforms, now is the time to pick up the playbook from two years ago and act on it.

Authors

Eswar Prasad

Publication: Wall Street Journal

Rebalancing and Reforms in China

Eswar Prasad — Thu, 07 Feb 2013 15:29:00 -0500

Editor's Note: In testimony to the U.S.-China Economic and Security Review Commission, Eswar Prasad discusses China's continued progress on reducing its external imbalances, the main policy reforms that are needed, and the implications for the United States.

Since the financial crisis, China has made substantial progress on reducing its external imbalances, with the surpluses on both the current account and the trade balance falling sharply from their peaks in 2007. China has also made some progress on domestic rebalancing. Recent data suggest that it is time for a revision of the view that the country’s growth is driven largely by exports and investment. Private and government consumption together accounted for more than half of China’s output growth in 2011-12, signaling a significant change in the composition of domestic demand. Physical capital investment, the main driver of growth over the previous decade, is no longer the dominant contributor to growth while a shrinking trade balance in fact made a negative contribution to growth in these two years.

Despite all of this progress, there remain major challenges to putting in place the reforms needed to improve the quality and efficiency of growth, continue the shift away from capital-intensive production, generate more employment, and allow more of the benefits of growth to filter down to the average household.

The twelfth five-year plan that was approved by the National People’s Congress in March 2011 appeared to herald a turning point in China's economic development. It represented, at least in rhetoric, a marked shift in emphasis from high growth to the quality, balance and sustainability of that growth. The longer-term objective of the plan was to reorient growth to make it more balanced and sustainable from different perspectives--economic, social and environmental.

While steady growth and low inflation have eased immediate policy concerns, China still faces a number of challenges related to the longer-term structural transformation of the economy.

There were promising signs of a push for reforms in the first half of 2012, as a number of modest but significant actions signaled continued progress towards economic reforms. This reform momentum stalled in the latter half of the year, however, partly due to some unexpected political turmoil in the lead-up to the political transition that got underway last fall. Nevertheless, the economy has continued to turn in a good performance despite a weak external environment. While steady growth and low inflation have eased immediate policy concerns, China still faces a number of challenges related to the longer-term structural transformation of the economy. The new leadership has indicated a desire to push forward with reforms, but there have been few indications of specific measures under consideration.

In this testimony, I will review progress on different aspects of China’s rebalancing, discuss the main policy reforms that are needed, and summarize the implications for the United States.

Read the full testimony » (PDF)

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Authors

Eswar Prasad

Publication: U.S.-China Economic and Security Review Commission

China's Marathon is India's Triathlon

Tanvi Madan — Mon, 04 Feb 2013 11:00:00 -0500

Steve Rattner’s observation in The New York Times a couple of weeks ago that India had lost the race to China came on the heels of a year or more of global hand-wringing about India and its prospects. That had followed a few years of internal and external observers feting India as the next big thing. It brought to mind Heidi Klum’s weekly quip on Project Runway, “in fashion, one day you’re in, the next day you’re out.” If one wants to keep track of whether India is in or out, up or down, losing or winning “the race,” one only has to take a look at the latest Economist cover story or survey report headline on India. In 2004, “India’s Shining Hopes” were dazzling the world. A year later, India had been elevated to China levels with the newspaper declaring “The Tiger in Front.” By 2006, the newspaper was asking “Can India Fly?” with the answer a couple of years later being that unfortunately India was still “An Elephant, Not a Tiger.” Just a year later, however, there was “Good News from India” and a year after that the newspaper was laying out “How India’s Growth Will Outpace China’s.” Alas, by 2012, the newspaper, disappointed by developments in India, wistfully proclaimed that India needed to be “In Search of a Dream.”

These kind of report cards, rankings and ratings of India generate much interest, especially when the country’s progress is juxtaposed against that of China. Thus, predictably, Rattner’s piece laying out his view of the result of the economic race between China and India received some attention. Most of the responses tended to focus on whether or not India was losing or had lost the economic race. A different question, however, needs to be asked: Is that the only race India is in and the only race that those cheering for India want that country to win? Because it’s not that India doesn’t have the same “eye on the prize” as China does, as Rattner argues; it’s that the prize is different. Indeed, the race is different.

A few years ago, Indians and Indiawallahs might have “taken offense” – what Manu Joseph has called “India’s favorite spectator sport” – to a greater extent to Rattner’s declaration. Slowing economic growth and governance challenges, however, have reinforced the realization that victory parades are premature and the nation-building project that started six and a half decades ago continues. Many agree that India is indeed losing the race at the moment, at least the one that Rattner writes about: the economic one and, more narrowly, the infrastructure one. Some have even argued that he is late to this discovery and India lost the economic race a while back. Others have pointed out that the race isn’t over yet or that India started from behind and will catch up. Some have criticized Rattner for emphasizing growth at the expense of democracy. Yet others have responded with “what race?” either asserting that China and India haven’t been in the same league for the last three decades, or that comparisons should not be made because it’s like comparing apples and oranges.

It is perhaps futile to demand that people cease and desist from comparing the two Asian giants. Some have tried. Indian Finance Minister P. Chidambaram recently dismissed comparisons between the Chinese and Indian economic situations as irrelevant, saying that the countries faced different problems. Yet, his own prime minister has compared India’s banking system (favorably) and its scientific research achievements (unfavorably) with those of China. On the other side of the aisle, Gujarat Chief Minister Narendra Modi has compared his state’s progress with that of China, as have Indian corporate leaders. At the recently concluded Jaipur Literary Festival, a panel (“The Elephant Paradigm, the Dragon Paradox.”) was devoted to comparing the two, with panelist Gurcharan Das saying that India was a soup and China a salad, and Nandan Nilekani noting that a good diet required both.

Neither the idea of a “race” between China and India is new nor is the hope on the part of many in the West that India win that race. It is a concept and comparison that predates Rattner, Francis Fukuyama, Niall Ferguson, Pankaj Mishra, Raghav Bahl and Tarun Khanna and Yasheng Huang. 60 years before Rattner’s piece, in The New York Times Magazine, Barbara Ward, then of The Economist, laid out “The Fateful Race between China and India,” pitting an authoritarian and a democratic country against each other in a development race that the whole world was watching. American policymakers interested in aiding India used the idea to lobby for assistance arguing, as historian Nick Cullather noted, that while there was an arms race and space race, the development race was the third and “deciding heat in a Cold War triple crown” and the U.S. needed to help India win. The idea did not get mainstream support till the second half of the 1950s. As Washington watched the battle unfold beyond Europe for hearts, minds and stomachs, the idea stuck that if Soviet-backed China succeeded while democratic India failed economically, it would be a victory for communism. If, on the other hand, the U.S. could help India win the development race versus China, it could demonstrate to the “uncommitted” world that democracy and development could co-exist and thrive.

By 1957, the “competition between Communist China and India” was enshrined in official U.S. documents and linked to American national security. NSC 5701 explicitly stated that it was in the U.S. national interest to strengthen India because, “A strong India would be a successful example of an alternative to Communism in an Asian context and would permit the gradual development of the means to enforce its external security interests against Communist Chinese expansion into South and Southeast Asia.” This argument laid the basis for years and billions of dollars of aid to India over the next few administrations. It enjoyed bipartisan support, with then Senator John F. Kennedy and Vice President Richard Nixon both advocating for aid for India on these grounds. The latter, emphasizing the significance of the competition, even asserted, “what happens in India…could be as important or could be even more important in the long run, than what happens in the negotiations with regard to Berlin.” Initially, this aid was designed to help India win the race; over time, as Indian performance lagged, it was designed not just to prevent India from losing the race, but from falling off the racetrack. Eventually, frustration about this performance led to "India fatigue" and the cheerleading squad – and, with it, aid – dwindled.

The race was not just a Western concept. In 1951, it was the editor of a leading Indian newspaper who laid out in Life magazine the idea that China and India were “two testing grounds” and that the results had Cold War implications. Over the next decade and a half, Indian government officials, private sector leaders and public intellectuals used this idea of a China-India competition to attract aid. They also worried about the implications of the race at home. While Indian policymakers often denied there was a race underway, Prime Minister Jawaharlal Nehru accepted that comparisons between India and China were inevitable. In the 1950s, he acknowledged the “great test:” if his government did not “deliver the goods…democracy will then be in peril…Then people may think of totalitarian methods…” He wasn’t the only one making the comparison to the country next door, with many in India complaining about its progress lagging behind that of China. Nehru’s responses would be familiar today: he highlighted the progress that India was making, noted that democracy made development more difficult, emphasized China’s problems, noting that its statistics were exaggerated, and asserted that China’s failures were not as evident because of the lack of openness, but that “the lid” would come off and “terrible criticism” would emerge later. Overall, he stated that development might take longer, but it would be more sustainable in a democracy, which was “the sounder way of doing things.”

More recently, Indian leaders have cited the hare-tortoise or the sprint-marathon analogies to argue that it’s only a question of time or distance, but India will eventually win. But the issue that Nehru brought up decades ago and Bihar Chief Minister Nitish Kumar has brought up more recently – democracy – leads to the question of whether China and India are in the same race at all. If one must put it in sporting terms, the question is whether China is running a marathon while India is participating in a triathlon—one where it is not running, swimming and riding sequentially, but simultaneously, competing in an economic development race, a democratic one, as well as a social one.

India’s progress should be assessed on each of those fronts, even though final results might take a while to come in. Perhaps it is harder to track democratic and social progress. Perhaps statistics are easier to pick and choose from and quote than “the rhythm and sensibility” of countries are to measure. Perhaps the fact that there is nothing monochromatic about India makes it frustrating to assess. And perhaps developments in India lend themselves to different interpretations. Rattner’s piece makes this evident. For example, you can see the government’s response to the protests after a horrific gang-rape as a sign of concern or you can see peoples’ response as one of hope. You can see Mukesh Ambani’s billion-dollar home as a symbol of wealth disparity and limited economic mobility or, as Dhruva Jaishankar of the German Marshall Fund noted, given Ambani’s father’s modest beginnings, you can see it as a sign of the economic mobility that is possible. Or you can see both. Regardless of the difficulty of tracking the triathlon, it is important to look at more than just the economic race India is running. Investors looking for short-term returns might be focused on just that race, but neither Indians nor those who want it to really win should. After all, those who want India to win – and, as Rattner notes, there are many in the West who “fervently” hope that it does – are rooting for that country because it is a multi-ethnic and multi-religious democracy and not despite it. Democracy should not be used as excuse for not developing. But development without democracy is not a prize India should want to win.

Authors

Tanvi Madan

Bringing Beijing Back In

Kenneth G. Lieberthal — Thu, 17 Jan 2013 00:00:00 -0500

The U.S. rebalancing strategy (pivot) toward Asia has produced desirable results, but the current strategy could increase security conflicts with China. Kenneth Lieberthal drafted this memorandum to President Obama as part of Big Bets and Black Swans: A Presidential Briefing Book.

What steps can President Obama take to solidify and strengthen America's bilateral relationship with China?
What should the U.S. expect from Xi Jinping as a leader?
How could Xi react to U.S. efforts to engage and cooperate? What policy positions should President Obama make explicit to Xi?

Download Memorandum (pdf) | Download the Presidential Briefing Book (pdf)

TO: President Obama

FROM: Kenneth G. Lieberthal

Your rebalancing strategy toward Asia has produced desirable results, including convincing China that the United States is serious, capable and determined to be a leader in the region for the long term. But this strategy is also generating dynamics that increasingly threaten to undermine its primary goals. It is therefore time to rebalance judiciously the rebalancing strategy, and China’s leadership change provides you with an opportunity to do so.

Your objective should remain an Asia that, five-to-10 years from now, will contribute substantially to global and U.S. economic growth and will mitigate security dilemmas that drain American treasure and reduce the region’s economic dynamism.

Unfortunately, at this point your current strategy is in danger of actually enhancing rather than reducing bad security outcomes. Most notably, territorial disputes have become sharper, and Beijing is largely operating under the false assumption that the flare-up of these disputes reflects an underlying U.S. strategy to encourage Japan, Vietnam, and the Philippines to push the envelope in the hope that Chinese responses will lead those countries — and ASEAN — to become more united and dependent on the United States.

Welcome mats for our increased security engagement are now being laid out around the region. This is satisfying in the short term but carries longerterm risks. U.S. friends and allies are encouraging the United States to enhance its security commitments, but they are also tying their economic futures to China’s growth. The United States is thus in danger of having Asia become an ever greater profit center for China (via economic and trade ties) and a major cost center for the United States (via security commitments), especially if the Trans-Pacific Partnership (TPP) does not develop as hoped.

Recommendation:

To shift this trajectory, you should take the initiative this spring to solidify and strengthen the core bilateral relationship with China while continuing to provide reassurances to allies and partners of U.S. staying power in the region. Nobody in Asia wants to have to take sides between the United States and China, and none any longer fear a G-2. All seek “wise management” of U.S.-China relations. An initiative that improves U.S.-China relations and contributes to regional stability can, therefore, potentially enhance U.S. position throughout Asia.

Background:

China’s leadership change presents an opportunity. Xi Jinping fears serious challenges to the Chinese system if he cannot improve relations with a population that has become increasingly vocal, critical and nationalistic. Xi knows he must significantly alter a development model that is exacerbating social and political tensions, even as the rate of growth slows.

Early indications are that Xi is more open and politically agile than was Hu Jintao, but his specific priorities and capacity to effect change are not yet known. He may take a strong stance on regional issues to signal China’s determination or he may welcome a chance to tamp down international tensions to focus more on domestic transformation. You should give him a clear option to pursue the latter approach.

Specifically, you should offer Xi a game-changing opportunity to put U.S.- China relations on a more predictable long-term footing that protects critical Chinese equities but also requires that China engage more positively on key bilateral, regional and global issues. Any U.S. policy that moves the needle on China’s behavior will be welcome throughout Asia.

Beijing is bureaucratically incapable of taking the initiative to suggest the ideas recommended below. Xi will want the United States to put cards on the table to which he can then respond — and then the real negotiation will begin. That lets you shape the opening agenda.

The strategy is to offer Xi full good-faith efforts to deal with key irritants, provided China works with your administration on the areas of major U.S. concern indicated below. You can do important things to change Beijing’s calculus of American intentions while also advancing specific U.S. interests.

I recommend that you engage with Xi Jinping early on in order to establish a strong personal relationship with him. Use this to propose working out a four-year framework for U.S.-China relations that establishes a solid foundation of trust for the next one-to-two decades and provides substance to China’s mantra of “a new type of major power relationship.” Suggest that at least four times per year you and he hold half-day summits – not onehour bilaterals — on the margins of multilateral events. Substantively, you might raise the following for consideration:

• The current Strategic & Economic Dialog (S&ED) is structurally very awkward for China and has never produced a sustained dialogue across the economic and foreign policy spheres. Propose that it be repackaged into a political and military (pol/mil) dialogue that is sustained (rather than a brief annual meeting) and a separate economic dialogue that closely parallels the Strategic Economic Dialogue that former Treasury Secretary Paulson led.

• For the pol/mil dialogue, suggest an enhanced Strategic Security Dialogue (SSD) that convenes four day-long meetings a year, with each side establishing a working group for ongoing liaison. The Strategic Security Dialogue, which met briefly twice under the S&ED, is the only formal U.S.-China dialogue that brings together military and foreign policy leaders in the same room. At least two of the enhanced SSD meetings should exclusively address overall U.S. and Chinese security postures in Asia a decade hence – basic thinking, pertinent doctrine, core concerns/interests, and areas where mutual restraint may benefit both sides. The United States has never held such discussions with China, and they may be critical for building strategic trust.

U.S.-China military-to-military (mil-mil) relations lag far behind those of their civilian counterparts. Suggest several initiatives to relieve some of the strain in that sphere. The PLA sees restrictions on inviting them to military exercises as indicative of hostile U.S. expectations of the relationship. You can indicate the possibility you will use your waiver authority to permit PLA participation in various future U.S.- organized military exercises (Defense Secretary Panetta has already done this for RIMPAC 2014). You might also offer serious discussions on military cooperation to assure better the ongoing flow of reasonably-priced oil from the Persian Gulf.

Relatedly, maritime territorial disputes are feeding China’s wariness about U.S. strategy in the region. You can offer to clarify authoritatively our principles to reduce Chinese suspicions. Such clarification would make clear that: The United States will take no position on sovereignty in territorial disputes to which it is not a party; the United States supports an ASEAN collective negotiation with China on a Code of Conduct in order to reduce the potential for territorial disputes to escalate, but does not seek Chinese negotiation with all of ASEAN on resolving territorial disputes; and the United States will adhere to its core principles of peaceful management of disputes, freedom of navigation (including in Exclusive Economic Zones), and normal commercial access for American and other firms to maritime resources.

You can suggest various initiatives to enhance economic cooperation. These might include, for example, intensifying negotiations for a U.S.- China Bilateral Investment Treaty; inviting China to engage on the TPP when Beijing feels it is able to do so; completing the years-long technology export policy review, which can help U.S. business while also removing serious irritants in U.S.-China economic relations; directing the Department of Commerce and the U.S. Trade Representative to establish a consultative arm to help Chinese firms understand the pertinent U.S. investment laws and regulations; and indicating U.S. interest in working with China at the Clean Energy Ministerial to develop cooperative ways for major emitters to improve their capacity to deal with climate change.

The above highlights the scope and some of the content of what you might indicate to Xi that you are prepared to move forward on as a package, if Xi will put together a comparable level of efforts on the following issues:

• Mitigation of tensions over maritime territorial disputes
• More extensive U.S.-China mil-mil engagement and discussion of longterm strategic postures in Asia
• North Korea’s nuclear and missile programs
• Opening additional areas of the Chinese economy (especially in the service sector) to American investment
• Strengthening enforcement of intellectual property protections and engaging on cyber-security threats
• Joint initiatives on climate change

Conclusion:

Xi may be unable or unwilling to respond significantly to your offer. But taking this wide-ranging initiative early on costs little or nothing, since you would be seeking to begin a reciprocal negotiation, not to commit the United States to unilateral actions. The payoff is potentially very large in reshaping Chinese and American behavior in ways that will make our overall rebalancing strategy a long-term region-wide success.

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Authors

Kenneth G. Lieberthal