The Great Debate UK

from MacroScope:

Is U.S. economic patriotism hurting?

Any Americans believing that their country is being bought up by the Chinese might want to pay heed to a new report from the Vale Columbia Center on Sustainable International Investment. It says that China is a minimal player in terms of foreign direct investment in the United States and that Washington should in fact be doing a lot  more to get it to gear up its buying.

To start with, look at the magic number.  In 2010, the last year for which numbers are available, only 0.25 percent of FDI into the Untied States came from China.  Switzerland, Britain,  Japan, France, Germany, Luxembourg, the Netherlands,  Canada were all far bigger. In the U.S. Department of Commerce's report on the year, China, numbers were so small they were lumped into a category simply called  "others".

This is not enough, the Vale Columbia report says. Given China's burgeoning economic role across the globe, America can benefit from a lot:

First, FDI provides an influx of capital into the struggling economy, increasing employment at no cost to the taxpayer. Second, jobs in foreign affiliates are typically better remunerated than similar jobs in domestically owned companies. Third, keeping the US open to foreign investment demonstrates a global example for international openness. Finally, Chinese money refused by the U.S. could alternatively be directed to competitors or even the U.S.’s enemies.

(On the latter point, its worth reading our global economic correspondent Alan Wheatley's story on China's influence in Europe)

The Vale Columbia report acknowledges that Chinese FDI  is controversial - primarily because a lot of Chinese companies are state-controlled and therefore raise fears that FDI may be more strategic that profit-seeking. There is also the concern about subsidies, piracy and economic espionage.

But the gains from opening the door to Chinese outweigh the risks, the report -- entitled Economic Patriotism: Dealing with Chinese direct investment in the United States -- says, recommending a series of steps such as dumping reciprocity clauses in FDI bilateral dealings.

Céad míle fáilte for the new Chinese leader

China’s vice President could have chosen state banquets in Berlin or Paris for his recent trip to Europe. This wasn’t just any visit – it was the introduction of Xi Jinping, the man tipped to become the next Chinese leader, to the world. But instead of either of those venues he chose to tour Croke Park in Dublin indulging in a spot of Gaelic games on the way. After heading to the US, en route to Turkey, Jinping went to Ireland.

The official Chinese itinerary is extremely telling. Beijing chose one of the smallest nations in the currency bloc for Jinping’s visit and this will be followed with a trip by Irish Taoiseach Enda Kenny to China scheduled for next month.

So why did China choose Ireland? The official line is that Ireland and China have a history of friendship and have built up important business and trade links, especially in agriculture where Ireland exports more than EUR 200 million worth of produce to China each year. However, bi-lateral trade between Ireland and China is tiny compared to that between Germany and Beijing. If you read between the lines then the visit may have a subtle subtext.

Interestingly, Ireland could teach China a thing or two. Its low corporate tax rate and stable political climate has attracted some of the world’s largest corporations, many of whom – including Google and Facebook – now base their European operations out of Dublin. Just this week PayPal announced that it was creating 1,000 jobs and establishing a major presence in Ireland in the coming months.

Not even the banking/sovereign debt crisis back in 2010 stopped these companies coming to Ireland; in fact more businesses have moved their headquarters there in the past two years, helping to make use of the excess office space generated by the collapse of some of Ireland’s banking giants.

While some of the world’s most innovative corporate names have been making Dublin their home, China is still viewed with suspicion by the world’s biggest companies, especially in the tech sector. Google and Facebook have limited operations there and while they may desire to tap into the huge demand potential that China offers they are not willing to risk their businesses to patent piracy etc.

So if China’s new leader wants to improve relations with the world’s largest corporations then Ireland is not a bad place to associate himself, especially in light of the strong relationships Dublin has with global business heads.

from Ian Bremmer:

Fallout is just beginning in North Korea

By Ian Bremmer The opinions expressed are his own.

There are many surprising things about Kim Jong-il’s sudden death, not the least of which is that it took two days for the rest of the world to hear about it. Yet most surprising is the sanguine reaction of the global and especially the Asian markets. On Monday, or actually Sunday as we now know, the world woke up to its first leaderless nuclear power. Coming as close as anyone could to filling his seat was his youngest son, who is in his late twenties. There’s no way these facts were accurately priced into markets that took just a relatively minor dip as a first response. The news from North Korea appears to have been taken far too lightly, and just a few days out, it’s disappearing from the front pages.

While Kim Jong-un’s status as heir apparent seems to tie a nice bow around the situation, let’s get real for a moment. The son of the elder Kim only appeared on the North Korean stage after a stroke necessitated succession planning in Kim Jong-il’s regime in 2008. Consider that founder of the country Kim Il-sung put his son, Kim Jong-il, in front of the citizenry as his heir for more than a decade before his 1994 death. That decade was precious time; time Kim Jong-il spent consolidating power and putting his own people into high government office— and he was over 50 years old when his father passed away. Kim Jong-un has been deprived of that head start; he’s got to rely on whatever ground his dead father managed to clear for him since his 2008 stroke. A couple of years at his father’s side -- and a promotion to four star general -- is scant time for the younger Kim to have developed a real plan for ruling, or real allies in government.

That said, don’t expect Kim Jong-un to be deposed. There won’t be a North Korean spring -- for real or for show -- anytime soon. The country is too backward and too brainwashed to mount any sort of populist opposition to the ruling regime, and its people have little if any knowledge of the outside world. Even if Kim Jong-un proves unable to consolidate and retain power, all that would replace him as the head of state is a military junta or strongman; there’s no democracy on the horizon, given the country’s current sorry state of affairs.

The important relationship to watch going forward will be between North Korea and China. Kim will want to impress his people by letting more food into the markets and increasing their terrible standard of living in whatever marginal way he can. He’ll need cash to do so, and will probably call upon China to help. China is North Korea’s last substantial benefactor in the world. In a classic diplomatic sense, because North Korea is America’s enemy and South Korea is America’s friend, China has little choice but to keep propping up the North. If China changes its tack now, it could find North Korea inching towards reunification with the South, putting a firm American ally right on its border. The question is, will China support Kim Jong-un wholeheartedly, or will it too take a step back and see what emerges from the power struggles sure to be playing out behind the scenes at this very moment?

Meanwhile, the U.S. has taken the right approach to this complicated situation: the White House has decided to sit back, watch and wait. It could, and likely already is, offering behind-the-scenes humanitarian relief to the North Korean people. It should continue to offer any such assistance that it thinks will be accepted. The Obama administration should not by any means be applying diplomatic pressure to restart six party talks or anything else of the sort. In essence, the free world should be rooting for Kim Jong-un to stabilize the country so that it can again try to bring North Korea out of the dark ages in an orderly fashion.

from The Great Debate:

Is Burma the next Mexico?

By Federico Varese The opinions expressed are his own.

Hillary Clinton had many "hard issues" to tackle during her recent visit to Myanmar. Yet there was no mention of one of the most, if not the most, difficult issue Burma faces: their lucrative drug trade.

Northern Burma is the home of the “Golden Triangle,” a hub for opium production and the location of hundreds of heroin and amphetamine refineries. So how do political leaders and the international community plan to tackle this problem in the event that Burma truly becomes  a democratic country?

The totalitarian regime which has ruled Burma since 1962 has been, to a point, successful in keeping the production of illicit substances under control. In 1999, Burma's notorious military junta (which is now dissolved) started a ruthless elimination plan of opium in the Golden Triangle (the Shan State, the Wa Region and the Kachin State). The region produced one-third of the world's opium in 1998, but that figure was down to about 5% nine years later. From 2006 to 2007, the army eradicated 8,895 acres of opium fields. A 2007 United Nations Report trumpeted that “a decade-long process of drug control is clearly paying off.”

The actual story is a little more complicated. The regime did manage to reduce opium production, but this policy led to an increase in the production of amphetamines, methamphetamine in particular. The U.N. estimated that at least 700 million tablets were shipped from Burma to Thailand in 2003 alone, which is about 20 tons of methamphetamine, or 7.5% of what is manufactured globally.

Most recently, opium production in Burma is on the rise again, pushed by an ever-increasing demand for heroin in China, as documented by an eye-opening report compiled by the Transnational Institute, an NGO based in Amsterdam.

In order to see these developments for myself, I spent time this past summer in Muse, a town in the northeast section of Myanmar, and Ruili, right across the border in the Chinese province of Yunnan. “What you’ll see in Ruili you won’t be able to observe in any other part of China,” the taxi driver told me, surprised to find a foreigner around these parts. The place is reminiscent of a Mediterranean country, a relaxed atmosphere reigning supreme, where it’s hard to come by taxis and open shops in the mornings.

Imperceptibly, the tide of debate is turning on climate change

By John Prescott, John Gummer and Michael Jay. The opinions expressed are their own.

The forthcoming Durban conference comes at a major crossroads in international relations, with continuing economic malaise in the West being counterpoised with the increasingly rapid shift of power to emerging economies.  Mirroring this structural change is a fundamental shift in the centre of gravity of the global climate change debate that few have yet to recognise.

While the outlook for Durban is highly uncertain, a critical mass of countries are currently advancing landmark domestic climate change legislation at a pace that contrasts sharply with the UN-brokered talks.  This trend, which is being largely driven by emerging economies, is nothing less than game changing.

In the last six months alone, as a forthcoming study, by Global Legislators Organisation (GLOBE) and the Grantham Institute at the London School of Economics, documents:

•    China is developing comprehensive climate change legislation and has included carbon targets in its latest Five Year Plan. •    South Africa’s government has released its climate change white paper, including a raft of measures such as renewable energy targets and a carbon tax. •    In Mexico, all political parties in parliament recently agreed to come together to back a comprehensive climate change law. •    South Korea is in the process of passing legislation for an emissions trading scheme which would be binding by 2015 and covers those facilities producing more than 25,000 tonnes of CO2 per year. •    The Australian government’s carbon tax bill will become law in 2012. •    Germany has outlined a radical new energy plan in response to the Fukushima disaster, including a massive increase in renewable energy investment.

Adoption of such landmark initiatives is — with a few notable exceptions (Australia being prominent) — largely bipartisan.  One key reason for this encouraging move towards bipartisanship is that many legislators increasingly recognise the positive co-benefits of climate change legislation which range from energy efficiency and increased energy security to the reduction of air pollution.

This, in turn, symbolises a crucial shift which is a key part of the wider change.  Previously, the political debate on climate change has been largely framed around the narrative of sharing a global burden — with governments, naturally, trying to minimise their share.

from Africa News blog:

Was South Africa right to deny Dalai Lama a visa?

By Isaac Esipisu

Given that China is South Africa’s biggest trading partner and given the close relationship between Beijing and the ruling African National Congress, it didn’t come as a huge surprise that South Africa was in no hurry to issue a visa to the Dalai Lama.

Tibet’s spiritual leader will end up missing the 80th birthday party of Archbishop Desmond Tutu, a fellow Nobel peace prize winner. He said his application for a visa had not come through on time despite having been made to Pretoria several weeks earlier. (Although South Africa’s government said a visa hadn’t actually been denied, the Dalai Lama’s office said it appeared to find the prospect inconvenient). Desmond Tutu said the government’s action was a national disgrace and warned the President and ruling party that one day he will start praying for the defeat of the ANC government.

It’s the second time the Dalai Lama has been unable to honour an invitation to South Africa by Tutu after failing to make it to a meeting in 2010.

South Africa will certainly win more plaudits in Beijing, which last week agreed to $2.5 billion in investment projects with during a visit by South African Deputy President Kgalema Motlanthe.

But pro-Tibet activists say South Africa is undermining its credentials as a country of freedom and democracy, established after the end of white minority rule a generation ago.

Ten years on – is it the end of the 9/11 moment?

-Sir Robert Fry is chairman of McKinney Rogers. His career in the British military includes being director of operations in the Ministry of Defence, advising then prime minister Tony Blair on the military strategic direction of the UK’s response to the September 11 attacks. The opinions expressed are his own.-

In his recent book “On China”, Henry Kissinger rather immodestly, but entirely knowingly, echoes the title of Clausewitz’s seminal work, “On War”. If you’re Henry Kissinger, you can do that. If you’re Henry Kissinger you can also offer a view of unrivalled authority on the politico/strategic landscape of the modern era, which is why his suggestion that China in the 21st Century might reprise the role of Germany in the 20th demands some attention. After the pre-occupation with terrorism of the last 10 years, this sounds rather different. Political ends may be timeless, but the means to prosecute them are rapidly changing, and currency, water, cyber and nuclear instruments may be the weapons of the post 9/11 era.

Chinese maritime capability now includes a missile inventory with the capacity to deny sea control in the Asian littoral to U.S. carrier groups, but why would China pick a conventional fight when its ownership of U.S. foreign debt offers profound strategic leverage without a shot ever being fired?

Timothy Geithner, speaking after the fall of Lehman Brothers, first raised the spectre of currency wars with charges that China was manipulating the yuan in a form of exchange rate mercantilism. But this is a complex and ambiguous area and Sino/American relations are underwritten by what looks like a re-run of the Cold War concept of mutually assured destruction, with the greenback playing the role of nuclear weapons: any large scale dumping of Chinese dollar holdings would not only torpedo its role as a reserve currency, but also devalue remaining Chinese reserves, leaving both nations in a mutually dependent financial embrace.

A more immediate cause of conflict is the voracious appetite of emerging economies for resources; above all, water. The Nile Basin, the swathe of the Middle East fed by the Tigress and Euphrates and, perhaps most important of all, the Tibetan headwaters of the North Indian river systems all provide potential flashpoints for inter-state confrontation, with the last of these coinciding with a Sino/Indian territorial dispute – water will be a weapon in its own right; it is also likely to be the recurring pretext for the use of others.

While water wars are in prospect, cyber wars are a reality. With the capacity to bring down critical national systems, cyber weapons succeed nuclear weapons in their capacity for mass effect; but unlike nuclear weapons, which have been used only twice in human history, cyber weapons are used on a daily basis, targeting everything from private bank accounts to national infrastructure. It is this very ubiquity that makes it difficult to distinguish between a criminal act and enemy action, and if the crooks, geeks and cyber terrorists are to be isolated a formal and declaratory deterrent framework may be necessary to distinguish the enthusiastic amateur from the determined state actor.

from Reuters Investigates:

Intrigue in China’s U.S. Treasury buying

A Reuters exclusive today describes a method China used recently to hide some of its U.S. Treasury purchases - "US caught China buying more Treasuries than disclosed."

Treasury officials said they were simply modernizing outdated procedures two years ago when they revamped the rules for participating in government bond auctions.

The real reason for the change, a Reuters investigation has found, was more serious: The Treasury concluded that China was buying much more in U.S. debt than was being disclosed, potentially in violation of auction rules, and it wanted to bring those purchases into the open - all without ruffling feathers in Beijing.

Stephen Culp, Reuters graphics editor, came up with a handy visual explanation for the practice that allowed China to mask billions of dollars worth of U.S. debt purchases at auctions. China placed its bids informally through primary dealers, who then placed their bids at Treasury auctions without naming China as a customer. The Treasury outlawed the practice in June, 2009, but kept the reason for the rule-change under wraps.

Read the story in PDF format here.

from MacroScope:

Give me liberty and give me cash!

Come back Mr Fukuyama, all is forgiven.

In his 1992 book "The End of History and the Last Man", American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually 'immortal' in countries with a GDP per capita above $10,000.

" Only five democracies above the $6,000 income level have died. Even democracies above the $6,000 level have a 99 percent chance of sustaining their political system each year. The only exceptions were the military coups in Greece in 1967 ($9,800), Argentina in 1976 ($8,180) and Thailand in 2006 ($7,440), and the events in Venezuela in 2009 ($9,115), as well as Iran in 2004 ($8,475)," RenCap global chief economist Charles Robertson writes.

The $6,000 per capita GDP seems to be a crucial level, marking the point where a country is likely to shift to democracy. Tunisia, which early this year triggered the wave of uprisings against autocracy across the Arab world, recently crossed that threshold.

Conversely, democracy is most fragile at the lowest income levels and when incomes are shrinking. The world's populous democracy, India, is a notable exception as its per capita income was under $800 from 1950-1967, and only exceeded $2,000 in 2003.

Nuclear plants aren’t the only meltdown worry in Germany

Having just got back from a couple of days in Hannover, I couldn’t help but be struck by the dominance of the local news agenda by two topics – and the almost complete absence of a third. Taking the British media at face value, I might have expected a city in near-panic, with people nervously scanning menus for safe dishes to order and maybe antiseptic handwashing facilities being hurriedly installed in public places. In fact, the town looked exactly as I remembered it from my last visit a few years ago, with E.coli rarely mentioned either in conversation or on the 24-hour TV news channels.

In fact, apart from endless replays of the goals from Tuesday night’s football (Germany versus Azerbaijan, a real clash of the Titans that must have been!), the news was all about the remote risk of a meltdown in the country’s nuclear power plants, and the anything-but-remote risk of meltdown in what is left of the Greek economy.

As far as the first is concerned, it seems that the sight of one of the reactors at Fukushima succumbing to a tsunami generated by the second biggest earthquake ever recorded has convinced Germans that they are better off counting on their neighbours in France and Czechoslovakia for their nuclear power than on generating their own. As the Americans say: go figure.

If there were ever any doubt, Frau Merkel has made it clear that, after all the tough talk, Germany is going to cough up for Greece. The arguments are simply about how to package the donation so as to make it look as penny-pinching as possible, and accompanied by the maximum pain that can be inflicted on the recipients – after all, the Bundeskanzlerin is elected by Germans, not Greeks. But there are clearly limits to how much austerity can be imposed on a country where standards of governance have been sliding for 2,500 years, and when Greece’s debts are finally restructured/reprofiled/rolled over or whatever euphemism for default is finally chosen, German voters are bound to overestimate the cost to themselves and underestimate the pain for the Greeks.

(Question: why don’t they offer a cash prize for the best euphemism for default? What about Negative Asset Investment Value Elimination?)

How will it all play out? I have no idea, but so far I see no reason to change the forecast I made back in 1998, when this ship of fools was launched amid so much fanfare on an ocean of Euro-rhetoric. I thought then that the most likely outcome was that the “savers” – the Germans, Dutch and Austrians (I wasn’t aware then of the Finns) – would get tired of being taken for mugs and, realising their prudence was ultimately futile, would loosen their belts and join the party. After all, in the euro zone, they can’t beat ‘em, so they may as well join ‘em.

Although this still seems to me the most likely outcome, it is probably some way off yet, though I would not be surprised if this or the next German Government lost enthusiasm for its current campaign to rein in its relatively modest overspending.