Reform in Burma: Opening for the U.S.

Cebu City, Philippines - In October I wrote about the halting, confusing, but encouraging political reforms in Burma (Myanmar) over the past year. It's been an exciting few weeks since then. At the ASEAN summit in Bali last month, President Obama announced that Secretary of State Clinton would go to Burma-- the first visit of a Secretary of State since John Foster Dulles went to Yangon in 1955. The decision to visit, advertised as a test of Burma's commitment to democratic reform, was understood widely as a small carrot to encourage further progress. Many, however, have criticized the Obama administration for rushing to reward one of the world's most despotic regimes for what have been mostly cosmetic, reversible changes.

The move was made possible largely thanks to the generous political cover of Aung San Suu Kyi, Burma's foremost opposition leader and President Obama's fellow Nobel Peace Prize winner. Ms. Suu Kyi's party, the National League for Democracy, which sat out last year's elections in protest, has decided to contest an upcoming election. Ms. Suu Kyi will herself run in the election, and is all but certain to be filling a seat in parliament. Though she has spent the better part of the past two decades under house arrest and has as good reason as anyone to suspect the motives of President Thein Sein's incipient reforms, Ms. Suu Kyi has been upfront in her readiness to meet the government's reforms in good faith.

Secretary Clinton sat down with Ms. Suu Kyi-- it was their first face-to-face meeting after much previous correspondence-- and met with President Thein Sein, addressing a number of issues that have kept the U.S. and Burma apart. Atop the agenda was Burma's collusion with North Korea on missile and (possibly) nuclear technology. Secretary Clinton also pushed Thein Sein to continue internal reforms by freeing political prisoners and resolving ongoing conflicts with ethnic minority groups.

Coming out of the visit, Secretary Clinton announced that the U.S. would relax some restrictions on economic development aid, allowing the World Bank and International Monetary Fund to work in Burma, and promising $1.2 million in health, education and humanitarian projects to be administered by the United Nations. She and Thein Sein also discussed the possibility of upgrading diplomatic relations and exchanging ambassadors-- a move that Ms. Suu Kyi has also advocated.

In the week since the Secretary's visit, some reciprocal progress has already been made in Burma: Public protest has been legalized, though protesters must register with the government five days in advance, and provide authorities with the substance of their protest. Additionally, the government signed a cease-fire with the Shan State Army, a rebel group in Eastern Burma, and has plans to open two border crossings to Thailand that have both been closed for over a year.

Of course, these are just the first stirrings of change, and it would be unwise to welcome Burma into the brotherhood of democracies just yet. Over 1,600 political prisoners, including many journalists, remain incarcerated, and the government has unresolved conflicts with Karen and Kachin minority groups. Given the way the government brutally suppressed an uprising of monks in 2007, it would be naive to think such violence lies safely in the past.

But President Thein Sein seems earnest in his desire to reform Burma. He has travelled around Southeast Asia more than most of his fellow Generals, and probably has a clear picture of just how far Burma lags behind its neighbors. While it's surely fun to have absolute power, it's probably less fun if you're ruling a poor and backwards country. The opaque government is believed to be sharply divided, with hardliners eager to undermine any attempt at change. Garnering small prizes like a visit from Secretary Clinton is likely to solidify the position of reformers and encourage more genuine progress. U.S. economic sanctions remain in place, as they should, and Burma's small steps toward democratic governance should be met equally with gestures such as those announced last week.

Of course, the U.S. has a strategic reason for promoting a more democratic Burma: seeking another ally to counterbalance growing Chinese power in the region. The major story of President Obama's appearance at the ASEAN Summit was how explicitly he delineated what has long been tacitly understood as the goal of U.S. policy in the region: just as China desires a "string of pearls"-- military bases and diplomatic alliances around the Indian Ocean-- the U.S. seeks strong bilateral relationships with the states surrounding China. In a recent FT op-ed National Security Advisor Tom Donilon made clear the "return" of the U.S. to Asia, forecasting "an intensified American role in this vital region."

At the Summit, President Obama waded into a long-standing dispute over the sea lanes and resources of the South China Sea, heading a group of ASEAN leaders in confronting Premier Wen Jiabao over China's sweeping and aggressive claim to the entire sea. While President Obama didn't take an explicit position in the dispute, Secretary Clinton, in a visit to Manila, recently referred to it as the "West Philippine Sea," which has delighted the media and government here. Premier Wen seemed surprised and somewhat unnerved, and Xinhua, the Chinese state-controlled media has fired back with headlines like "South China Sea matters not a whit to Philippines, U.S."

Since the arrival of the military junta in 1962, Burma has acted essentially as a Chinese vassal state, wholly dependent on its neighbor to the north for trade and investment. Among the more substantive changes of the recent months, however, President Thein Sein responded to a popular outcry against the construction of a dam, canceling the Chinese-led project and infuriating Beijing. While Burma and China are sure to remain closely allied, the recent tussle appears to signal Thein Sein's discomfort at depending exclusively on this alliance. The U.S. has exploited this opening to gain some influence with Burma and balance against Chinese regional hegemony.

The events of the past months have been good progress in Burma, but swift regression is possible, and a Burma that recedes to total authoritarianism is a Burma that drops right back into China's pocket. The U.S. is wise to meet their baby steps with baby steps, and continue to encourage reform, sluggish though it will surely be.

Green Jobs and the Chinese Exchange Rate

On the eve of Chinese President Hu's visit today with President Obama, The New York Times ran a revealing story on the decision of America's third largest solar panel manufacturer, Massachusetts-based Evergreen Solar to shutter its US production despite receiving $43 million in aid from Massachusetts.  The company is shifting production to a gleaming new facility in Wuhan province in China largely funded by the Chinese government.  As part of the deal, Evergreen has partnered with a local state-run Chinese authority.  Chalk up another win to China's highly effective business development policy.

Coming on the heels of the decision of venture-backed Solyndra to close one of its two US plants, despite receiving $535 million in stimulus loan guarantees and a publicized visit from President Obama, Evergreen's move showcases the difficulty of manufacturing solar equipment in the US.  At a time when the China price on panels is $1.90/watt and falling, Evergreen's CEO, Michael El-Hillow explains that it cost him $2 to make them in the US.  Until we can change that logic, notwithstanding a modest revival in manufacturing overall, the US is not going to create many clean manufacturing jobs. 

So why is it so difficult to compete in green manufacturing with China which also recently passed the US in the manufacture of wind turbines?  The problem is not low wages as making solar panels and many of the high tech goods China is now beginning to dominate is highly automated. 

As candidly discussed by Evergreen's CEO, the deciding factors for him were cheap financing from the Chinese government together with the low cost of manufacture in China in dollar terms due to the exchange rate.  US solar panel makers have trouble finding money at all to build plants.  When they can find it at all, they must pay double digit rates.  Perversely, in quasi Communist China, capital is cheap and plentiful.  Meanwhile, anything built in China has a cost advantage when prices are transferred into dollars.

It turns out these two things are related.  The persistent trade surpluses that China has run with the US for the last decade have the effect, due to the arithmetic of trade, of flooding the US with Chinese goods but also flooding China with US dollars.  The financial crisis has not changed this dynamic one bit.  China has recycled much of the two trillion in dollars it has taken in from unbalanced trade in to the US economy by storing the money in US government bonds, in effect funding our government deficits.  But the gusher of dollars leaves lots of money left over to fund solar plants and gleaming new infrastructure projects.  Indeed, the surplus explains a good deal of the paradox of how China is able to fund massive new infrastructure projects while the US cannot, though the US is still, for the time being, the richer country. 

Today, President Obama is asking President Hu to open markets, raise the Chinese exchange rate and increase Chinese domestic consumption.  These are all worthwhile objectives, similar to the agenda the US pressed with Japan two decades ago.  In the case of Japan, a slow approach ultimately worked.

However, in the case of China, a slow approach is no longer adequate.  By the time, China accedes to any of these US requests, it may have nipped the next generation of US manufacturing in the bud and totally dominate key future industries. We are not dealing with established industries as we were in the 1990s but with new ones where the US is already behind.  Moreover, in the case of Japan, its currency traded freely and trade issues centered on informal barriers.  In the case of China, the currency peg and trade imbalance are there for all to see.

For the last sixty years, the US led the free trade agenda in the world and prospered thereby.  But it is critical to remember that a key ingredient of free trade is free movement of capital and money.  Unbalanced trade due to exchange rate manipulation is not free trade at all.  Indeed, it can be compared to a hidden tarriff exercised by the country that is preventing its exchange rate from reaching equilibrium levels.  Free trade properly includes not only that in goods, but in capital and currencies as well.  Indeed, exchange rate manipulation, then known as Beggar Thy Neighbor policy, was as detrimental to the world economy in the 1930s as the better known Smoot Hawley tarriff and was one of the reasons for the creation of the Bretton Woods institutions after World War II to prevent disastrous exchange rate competition.

The US is pressing the right agenda.  But it must press harder.  A more muscular approach should include not just asking the Chinese to free up their exchange rate but using our leverage as a huge buyer of goods to ensure they do as part of a broader, balanced trade relationship.

Absent a change in the corrosive dynamic of the US China trade imbalance, the US is likely to lose more high tech jobs.  The Chinese people will suffer too as higher standards of living are delayed.  But the entire global economy may suffer as well if we do not avert the instability this corrosive dynamic is engendering.

How to Remain the Number One Economy as China Ascends to Number Two


The news that China’s GDP will surpass Japan’s this year, making China the world’s number two economy, raises important issues for the United States.   There’s no prospect of China taking over our number one slot anytime soon:  Even in our present shape, the American economy will produce at least $14.3 trillion in goods and services this year, compared to China’s $5.3 trillion.  But the Sino-Japanese shakeup in global economic rankings is a sign that we have to raise our game.

The lesson here comes less from China’s ascendance than from Japan’s decline.  Twenty years ago, Japan had racked up 30 years of extraordinarily rapid growth – just as China has today – and scaremongers predicted that Japan would soon overtake us.  Yet, Japan’s good times ended abruptly in 1991, ushering in two decades of economic stagnation.  The origins of Japan’s long downward slide should be all too familiar to Americans, since it began with the sudden collapse of a huge real estate and stock market bubble, which then triggered a banking crisis and deep recession.  

Sweden had a financial meltdown the same year as Japan; yet Sweden put together a new policy consensus around economic liberalization, and the Swedish economy came roaring back within three years.  On the other side of the world, Japan suffered year-after-year of policy mistakes and paralysis by the long-ruling Liberal Democratic Party, and the result was two decades of economic languish.  Moreover, the particulars of Japan’s decline should be an object lesson for our own public officials: Hemmed in by powerful interests and an irresponsible opposition, the LDP couldn’t bring itself to clean up Japanese banks or fix the country’s housing market, much less undertake deeper economic reforms to prepare Japanese businesses and workers for the intense competition of globalization.  So, Japan was left instead with years of financial-sector weakness that limited business investment – sound familiar? – especially for the new enterprises that drive technological innovation and job creation.

As Japan continued to falter economically, the LDP spent trillions of yen on new public projects – and invested almost nothing in reforming their economic policies or upgrading the skills of Japanese workers, especially millions of Japanese women consigned to positions with no future in a modern, idea-based economy.  The result has been the country’s prolonged economic stagnation, and faltering competitiveness even for its global companies.  From 1990 to 2005, for example, Japan’s share of the world market in producing high-tech goods collapsed from 24 percent to less than 15 percent.

The question for the United States is whether our own political system has the capacity to address the challenges here which echo Japan from a generation ago.  We may not face the prospect of a national economic reversal as severe as Japan’s, and our world-class corporations should continue to prosper.  Yet we face serious challenges of our own which, if left unaddressed by Washington, could consign a majority of ordinary Americans to economic stagnation for a long time.

At the top of this catalog of challenges are jobs, because the storied capacity of America’s companies to create new jobs has eroded badly.  In the Bush expansion of 2002-2007, our private sector generated less than half as many net new jobs, relative to growth, as it did in the Clinton expansion of the 1990s, the Reagan expansion of the 1980s, and even the Carter expansion of the mid-to-late-1970s.  The best policy response here is to reduce the cost to businesses of creating those new jobs.  And we know just how to do that – cut the employer’s payroll tax burden for net new hires, and slow future increases in the health care costs which employers have to pay.

The outstanding question is whether Washington can raise its game and enact these kinds of reforms.  Let’s frame the political challenge in the terms that have dogged economic reform in Japan for so long.  Can congressional Republicans accept a tax increase, even one designed to fund a corresponding payroll tax cut?  Optimally, the tax increase could contribute something on its own – for example, a carbon fee that also would help address issues of energy security and climate change.  For the other side of the aisle, can Democrats support a tax cut for business, even if it’s the most effective way to spur job creation?  Similarly, can Republicans swallow hard and support more regulation of our broken health care market, in order to reduce costs for business – and are Democrats prepared to trim federal outlays for powerful health-care interests if doing so will ultimately help create jobs and raise wages? 

Here’s another challenge we have to meet in order to avoid a version of Japan’s fate: Restore higher levels of domestic savings to support higher levels of both private investment and public investments, especially in education and training, and in 21st century infrastructure including universal broadband and a modern electricity grid.  We know, after two generations of trying, that tax breaks aren’t enough to convince most Americans to save more: Since the 1990s, we’ve provided generous tax breaks in various forms that cover 80 percent of all personal saving, to no avail.  The only certain way to raise national savings, it appears, is to reduce public dissaving by lowering budget deficits.

Facing a slow economy that could go on for a long time, can Republicans accept cuts in defense spending – even with Secretary Robert Gates’ blessing – and measures to expand revenues?  Ronald Reagan, of course, took the same two difficult steps a generation ago; but he was more willing to compromise, it seems, than many of his current-day followers.  Across the aisle, will Democrats vote for measures that expand revenues from those they don’t call “rich,” even gradually, along with initiatives to trim future Medicare and Medicaid costs in part by trimming benefits?  

Stating these challenges so directly exposes the political difficulties.  But we should know by now what can happen eventually when a wealthy country – one like Japan – loses the political will to raise its’ game.  


Nuanced Approach to Chinese Currency Conundrum Bears Fruit

While much of the debate surrounding the Obama administration’s decision to delay a Treasury Department report on China’s currency practices, has defined the decision as a trading China’s help with Iran for benefits to the American economy, the decision is mostly about effectively achieving revaluation of China's currency. The report, which might have (accurately) labeled China a currency manipulator, would have been another bump – this one likely fairly major – in the already strained U.S. – China relationship. Instead, the decision to pursue the currency issue through the G-20 and other diplomatic avenues should be seen not as a concession by the U.S. but rather as the more appropriate, intelligent, and ultimately effective means of pursuing necessary economic adjustment in a changing global economy.

While politically convenient and satisfying on some levels, declaring China a currency manipulator, thereby unleashing a set of political and legal actions, would likely have backfired. The Chinese are clearly unwilling to make policy changes that come as a result of direct, vociferous, public pressure from foreigners, especially the United States, so the report would have set back the effort as opposed to push it forward. Continuing down the path the report would begin by imposing a retaliatory tariff on Chinese imports and risking a trade war would be dangerous, especially as the American and global economies remain vulnerable to additional shocks.

There is already strong domestic debate within Chinese leadership on the issue. It looks like it is only a matter of time until there is some revaluation of the RMB. Indeed, RMB futures responded bullishly to the news, conveying a belief that the administration’s strategy makes it more likely that China will move in the right direction. Secretary Geithner’s visit to China is another sign that the move is paying immediate dividends in the relationship, and recent signs illustrate that it is likely only a matter of time until China makes a policy change.

Because the greatest victims of China’s currency practices are not Americans but instead other emerging economies, the administration’s decision to pursue diplomatic action through the G-20 makes sense. The G-20’s membership incorporates nations far more affected by China’s currency practices than the U.S. In that light, the administration’s decision last year to double-down on the G-20 in lieu of the G-8 seems all the more prescient. 

While China’s currency practices are a convenient scapegoat for fears about a changing global economy, this situation also requires a bit more perspective than some are taking today. While the Chinese currency practices are certainly untenable – both for the US and for China – a revaluation of the RMB is unlikely to have significant, short-term economic impact or alleviate America’s economic woes, and Americans will continue to buy cheap consumer goods from other low cost economies (just other low cost economies, which is why China’s currency policy hurts others more than it hurts the US). It’s also important to note that country by country balance matters far less than our global trade balance. 

Fundamentally, the rise of China and many other emerging economies will ultimately suit America’s values and economic interests, as new markets open, and billions emerge from poverty and enter the global middle class. The transition into this new global economy will be bumpy, but the Obama administration’s response of investing in diplomacy through more representative international institutions conveys an appropriate response to these changes and an understanding the most effective, if not the most emotionally satisfying, stewardship of America’s place in the global economy. 

Japanese Ambassador to Address NDN Tomorrow, 4/7 - Join Us

I am excited to invite you to a special event we are putting on tomorrow, admist the blossoming cherry trees here in the District - a speech by the Japanese Ambassador to the United States reflecting on the 50th Anniversary of our historic security alliance. 

Having recently visited Japan I want to encourage you to attend, watch live on-line, or send on to others you think might be interested.   The winds of political change are blowing strong in Japan.  A relatively new political party, the Democratic Party of Japan, won last year's general election, and unseated the Liberal Democratic Party of Japan, who had been in power for over 50 years.  New leaders and new political ideas are on the table now in Japan, a country who has been the cornerstone of our geopolitical strategy in Asia for decades.

So while it is time to celebrate our historic and successful Alliance with the world's 2nd largest economy, it is may also be time to renew, update and modernize our approach to a nation who like the United States is working to update its traditional approaches to the fast-changing world of the 21st century. 

So, please join us tomorrow at noon at NDN in DC or on the site live for what will be an interesting and important dialogue with an accomplished and thoughtful diplomat, Ichiro Fujisaki, the Ambassador of Japan to the United States of America.

Chinese Currency and Trade Issues Remain Central

The New York Times this morning covers China’s suppression of the renminbi to encourage exports and active use of the World Trade Organization’s rules to prevent protectionism by its trading partners. 

To maximize its advantage, Beijing is exploiting a fundamental difference between two major international bodies: the World Trade Organization, which wields strict, enforceable penalties for countries that impede trade, and the International Monetary Fund, which acts as a kind of watchdog for global economic policy but has no power over countries like China that do not borrow money from it.

China had a $198 billion trade surplus with the rest of the world last year, with its exports to the United States outpacing imports by more than four to one. Despite that, in the last 12 months, Beijing has filed more cases with the W.T.O.’s powerful trade tribunals in Geneva than any other country complaining about another’s trade practices.

In addition, Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions.

China buys dollars and other foreign currencies — worth several hundred billion dollars a year — by selling more of its own currency, which then depresses its value. That intervention helped Chinese exports to surge 46 percent in February compared with a year earlier.

Paul Krugman, in his column today, calls on the Treasury Department to declare China a currency manipulator, I, like Krugman, believe that the common conception of China’s "ownership" of the U.S. is a bit backwards. (Think: When you owe the bank $1 million, the bank owns you, but when you owe the bank $100 billion, you own the bank.) Having said that, Krugman’s solution – "playing policy hardball" by imposing a 25 percent surcharge on imports – seems to approach dangerous levels of protectionism while the global economy remains unstable and could turn out to be ineffective, backfire, or start a trade war. 

Fundamentally, there seems to be a question of domestic Chinese politics at hand – the global economy would be helped by China floating the renminbi sooner rather than later, but that action cannot appear to come as a result of foreign, especially American, pressure. There is, of course, another calculation in play – China’s currency policies hurt America less than they hurt others, namely developing nations. Since public American pressure on this issue is likely to backfire and other countries should care about this a lot, we are left with the less-exciting (and less fun for economic pundits) avenue of behind-the-scenes diplomacy and multilateral action.

Two other stories worth following on global and domestic finance:

China's Censorship and Information Freedom

The Chinese government has taken some umbrage at Secretary Clinton's speech on internet freedom last week. The Secretary, to be sure, called China out for censoring the internet, but she couched that criticism in pretty cozy language:

The internet has already been a source of tremendous progress in China, and it is fabulous. There are so many people in China now online. But countries that restrict free access to information or violate the basic rights of internet users risk walling themselves off from the progress of the next century. Now, the United States and China have different views on this issue, and we intend to address those differences candidly and consistently in the context of our positive, cooperative, and comprehensive relationship.

Ma Zhaoxu, a spokesman for the Chinese foreign ministry, was less friendly in his response:

The US attacks China's internet policy, indicating that China has been restricting internet freedom. We resolutely oppose such remarks and practices that contravene facts and undermine China-US relations.

China's internet is open. China is a country with the most vibrant internet development. By the end of last year, China had 384 million internet users, 3.68 million websites and 180 million blogs. China's Constitution guarantees people's freedom of speech. It is China's consistent policy to promote the development of internet. China has its own national conditions and cultural traditions. It supervises internet according to law, which is in parallel with the international paractice...

We urge the US to respect facts and stop attacking China under the excuse of the so-called freedom of internet.

Once we're past the PRC's spurious claims about how free their internet is, we can see this in the context of a much bigger picture. Much like our ongoing spats over Tibet, Taiwan and human rights, the Chinese see internet policy as a purely domestic matter, and take criticism of their policy as an affront to their sovereignty. Given our persistent failure to affect China's behavior on any other sovereignty issues, we're likely to continue receving nothing but hostility when we bring up internet freedom.

But China's trucluence shouldn't be taken as a reason to shut up about internet freedom and censorship. As the Secretary made clear in her speech, freedom of information is at the heart of both our economic prosperity and our national security. Deeper than that, freedom of information is-- in itself-- a core value of American society.

The progress of freedom around the world has been swamped because developing countries see China as a living example that economic success can be achieved without relaxing the grip of authoritarian rule. For the first time in decades, perhaps centuries, freedom is in retreat around the world. Now more than ever, America must stand as a beacon of liberalism and an exemplar of the power of openness.

We may not get the needle to move on censorship in China, but we must be vocal in support of information freedom-- an unambiguous good-- and in our criticism of those who stifle liberty anywhere on the globe.

Crafting An American Response to the Rise of the Rest

Salon Magazine asked me and a few others to offer their thoughts on the first year of the Obama Presidency.  My short essay is below.  A version of the essay can be found on the Salon site here. 

Crafting an American Response to the Rise of the Rest

The first year of the Obama Administration was largely reactive to an agenda left by the previous Administration.   The new President and his team have spent their time cleaning up the extraordinary messes left for them – financial crisis, the Great Recession, Guantanamo, exploding deficits, Iraq, deteriorating Afghanistan and Pakistan – and attempting to tackle problems left unaddressed for far too long – climate change and energy policy, health care reform and immigration reform.  

In that regard the agenda of President Obama’s first year was determined to a great degree by the Bush Administration’s strategic reaction to a global political and economic environment which no longer exists.  While President Obama cannot escape the governing inheritance left to him, he can do more to discard the outdated vision and rhetorical framework which came along with it, and begin to offer a much more compelling, modern and Obama-driven take on the challenges ahead and how we must meet them. 

At the core of this 2nd generation Obama narrative must be a strategic response to the most significant transformation taking place in the world today, what Fareed Zakaria has called the “rise of the rest.”  The twenty years of American-led economic liberalization and globalization which followed the collapse of communism has brought – with extraordinary rapidity - dozens of countries and billions of people into the modern economy.  Their growing geopolitical and economic might is creating a radically different global environment than America faced in the 20th century, and arguably even 5-10 years ago when the Bush Administration made the strategic choices Obama is wrestling with today.  

The true scope of this transformation is only really becoming apparent now, and it leaves our new President with the historic opportunity, and tremendous responsibility, to craft a comprehensive strategic response to this global “new politics” of the 21st century.  It will also allow him to extricate himself from the anachronistic rhetorical framework suited for another day and another President. 

This new strategy might have three main elements:

Challenge America To Raise Its Game
– The global economy of the 21st century will be much more competitive for our companies, workers and capital than the century just past.  In the decade since China entered the WTO, for example, median income in the US has actually declined, an unprecedented event we believe is directly tied to more virulent global competition characteristic of this new age.  If America is to have rising standard of livings in the face of what will be extraordinary competition coming from China, India, Brazil, Mexico and many other countries, we will have to raise our game, try harder, invest smarter, accelerate innovation, lessen our exposure to foreign energy sources, over time bring our government's spending and income more in line, modernize our health care system, continuously upgrade our skills and radically improve our public schools.   This agenda is not about enabling the “recovery" of an economic age which will never return, but about building a 21st century American economy and workforce that can successfully compete in a much more competitive world.   

Reimagine the Architecture of Global Governance – The rising powers and their people will want – and deserve – a seat at the global rulemaking table.   We’ve seen the early stages of this new era with the recent discussions about updating the IMF, the swapping of the G20 for the G8 and the assertiveness of India, China and other nations at the recent Copenhagen conference.   The day in which the “Western powers” can call the global shots has come to an end, new arrangements will have to made, and a new and different role for America will have to be crafted.   Existing foreign commitments in Afghanistan and Iraq, and our global counter-terrorism efforts, will need to be explained in this new geopolitical context. 

But at the same time America will have to become a much more spirited advocate for ensuring that this new global political table is one where the traditional American formula of free markets, political liberty, democracy and the rule of law is not watered down or worse replaced by a much less liberal global formula.  At this time when so many people across the world are working to improve their own societies is the most important time for America to recommit itself to the values which have done so much to improve the human condition in recent decades. 

Modernize Government So It Can Do More With Less
– With a huge percentage of the federal workforce hitting retirement age soon, it is an opportune time to start thinking creatively about we can reinvent America’s government for the digital age.  Can we replace large bureaucracies with more entrepreneurial, problem-solving oriented, leaner work forces using the extraordinarily powerful set of new digital tools available to them to deliver better outcomes for less money?  Getting more for less will not only help deal with the growing federal debt, but also help free money up to make the investments needed for America to build a 21st century economy. 

By reorienting his government around meeting the challenge of the rise of the rest and a much more competitive age, President Obama can extricate himself from a faded strategic orientation of a bygone era; give the nation a powerful national mission to rally around in the years ahead; and help ensure continued American prosperity and pre-eminence in a vastly changed world outside our shores.

Update: See this related essay about the role of the ever tougher struggle of every day people in recent American elections, The Great Volatility in the American Electorate Today.

Are Free and Open Societies in Retreat?

The Economist has a thought-provoking article in this week's edition which discusses the findings of a new Freedom House report, "Freedom in the World 2010: A Global Erosion of Freedom."

The article has this compelling passage:

For freedom-watchers in the West, the worrying thing is that the cause of liberal democracy is not merely suffering political reverses, it is also in intellectual retreat. Semi-free countries, uncertain which direction to take, seem less convinced that the liberal path is the way of the future. And in the West, opinion-makers are quicker to acknowledge democracy’s drawbacks—and the apparent fact that contested elections do more harm than good when other preconditions for a well-functioning system are absent. It is a sign of the times that a British reporter, Humphrey Hawksley, has written a book with the title: “Democracy Kills: What’s So Good About the Vote?”.

A more nuanced argument, against the promotion of electoral democracy at the expense of other goals, has been made by other observers. Paul Collier, an Oxford professor, has asserted that democracy in the absence of other desirables, like the rule of law, can hobble a country’s progress. Mark Malloch-Brown, a former head of the UN Development Programme, is still a believer in democracy as a driver of economic advancement, but he thinks that in countries like Afghanistan, the West has focused too much on procedures—like multi-party elections—and is not open enough to the idea that other kinds of consensus might exist. At the University of California, Randall Peerenboom defends the “East Asian model”, according to which economic development naturally precedes democracy.

Whatever the eggheads may be saying, there are some obvious reasons why Western governments’ zeal to promote democracy, and the willingness of other countries to listen, have ebbed. In many quarters (including Western ones), the assault on Saddam Hussein’s Iraq, and its bloody aftermath, seemed to confirm people’s suspicion that promoting democracy as an American foreign-policy aim was ill-conceived or plain cynical.

In Afghanistan, the other country where an American-led coalition has been waging war in democracy’s name, the corruption and deviousness of the local political elite, and the flaws of last year’s election, have been an embarrassment. In the Middle East, America’s enthusiasm for promoting democracy took a dip after the Palestinian elections of 2006, which brought Hamas to office. The European Union’s “soft power” on its eastern rim has waned as enlargement fatigue has grown.

But perhaps the biggest reason why democracy’s magnetic power has waned is the rise of China—and the belief of its would-be imitators that they too can create a dynamic economy without easing their grip on political power. In the political rhetoric of many authoritarian governments, fascination with copying China’s trick can clearly be discerned.

I have believed for some time now that the way the world was developing would inevitably force President Obama and his Administration to become much more spirited global advocates of political freedom and liberty than was their initial instinct. Why?

For the great political dynamic of the early 21st century is what Fareed Zakaria has called "the rise of the rest" - or the increasingly rapid rise in power and socio-economic status twenty years of globalization has brought to many developing nations.  In these nations there are billions of similarly "rising" people, individuals and families who though this process of modernization have seen a dramatic rise in their affluence, education levels and access to information.  It seems inexorable that these rising citizens, tied to the world through the rapid beat of global technology, media and commerce, will increasingly demand greater openness, transparency, accountability and democratic institutions from their leaders.  They will want more than affluence and stability - they will want the political self-determinination and freedom they see in other nations.

As I have written before, I think the emerging ideological struggle in the world today is more open society versus closed, than it is a replay of the 20th century construct of left and right.  As this Freedom House report reminds us, it is at this moment in history, when so many nations and peoples are rising and reinventing old and less modern societies, when America and its ideological allies must make their case for their vision of how humanity will best prosper together in a very different century ahead.  We really don't know how the 21st century will turn out.  But with the world being so young now, and with so many nations going through profound transformation, we have to see this struggle to ensure successful transitions of these rising nations to modern, democratic, and free countries as the next stage of the great battle we waged to defeat totalitarianism, communism and fascism in the 20th century.  Our work, my friends, is not yet done.

In that regard I think it is critical, essential, required that this President and this Administration make it crystal clear to the people in these rising nations that America stands with them and their aspirations; that we want to work side by side with them in forging better nations with greater opportunities and freedom; that we will be patient but resolute in our commitment; for at no moment can an authoritarian government which denies basic freedoms to their people ever be considered better or even an acceptable alternative to well constructed democratic societies which offer liberty, democracy itself, free markets and the rule of law.

Of course we cannot be foolish in how we advocate for this traditional American creed in the new world of the 21st century, but nor can we ignore it.  Too many people across the world are waiting to hear from us.  And I dismiss the idea that this discussion is about "human rights," or "universal rights," as if these things are somehow secondary to the important things great powers discuss when they meet.  The firm and resolute advocacy of open and free societies has to be the very cornerstone of America's foreign policy at this critical - and exciting - juncture in human history.  It is not something left to the coffee after the diplomatic main course.   There has been no moment in our history in fact when so many people and so many nations have had the chance to rise to the level of freedom and self-determination the 21st century offers; which is why the effort to help them achieve it should be seen as the great geopolitical opportunity for America of this new era, one which must be enthusiastically seized.

We will get a sense of the state of the Administration's thinking on all this Thursday, when the very able Secretary of State will deliver an important speech on internet freedom.  My hope is that she goes big, is bold, and makes clear what is at stake, and helps us all understand the historic opportunity in front of us today.

China's Currency Conundrum Continues

Martin Wolf in the FT sums up nicely the big problem with China’s currency practices:

At the conclusion of a European Union-China summit in Nanjing last week, Wen Jiabao, the Chinese premier, complained about demands for Beijing to allow its currency to appreciate. He protested that “some countries on the one hand want the renminbi to appreciate, but on the other hand engage in brazen trade protectionism against China. This is unfair. Their measures are a restriction on China’s development.” The premier also repeated the traditional mantra: “We will maintain the stability of the renminbi at a reasonable and balanced level.”

We can make four obvious replies to Mr Wen. First, whatever the Chinese may feel, the degree of protectionism directed at their exports has been astonishingly small, given the depth of the recession. Second, the policy of keeping the exchange rate down is equivalent to an export subsidy and tariff, at a uniform rate – in other words, to protectionism. Third, having accumulated $2,273bn in foreign currency reserves by September, China has kept its exchange rate down, to a degree unmatched in world economic history. Finally, China has, as a result, distorted its own economy and that of the rest of the world. Its real exchange rate is, for example, no higher than in early 1998 and has depreciated by 12 per cent over the past seven months, even though China has the world’s fastest-growing economy and largest current account surplus.

Do these policies matter for China and the world? Yes, is the answer. Mark Carney, governor of the Bank of Canada, notes in a recent speech, that “large and unsustainable current account imbalances across major economic areas were integral to the build-up of vulnerabilities in many asset markets. In recent years, the international monetary system failed to promote timely and orderly economic adjustments.”* He is right.

What we are seeing, as Mr Carney points out, is a failure of adjustment to changes in global competitiveness that has unhappy precedents, notably during the 1920s and 1930s, with the rise of the US, and, again, during the 1960s and 1970s, with the rise of Europe and Japan. As he also notes, “China’s integration into the world economy alone represents a much bigger shock to the system than the emergence of the US at the turn of the last century. China’s share of global gross domestic product has increased faster and its economy is much more open.”

Moreover, today, China’s managed exchange rate regime is quite different from those of other big economies, which was not true of the US when it rose to prominence. Thus, China’s managed exchange rate is shifting adjustment pressure on to other countries. This was disruptive before the crisis, but is now worse than that in this post-crisis period: some advanced countries, notably Canada, Japan, and the eurozone, have already seen big appreciations of their currencies. They are not alone.

China’s currency practices are hurting the United States far less than developing nations and the eurozone, amongst others, and the US government knows it. Two things are mind-boggling to me: why other countries don’t stand up to the Chinese more (I’m glad many have avoided the all-too-easy protectionist route, because that could be a disaster, but am not sure the current dialog on rebalancing is going to move the ball enough), but, more importantly, how the Chinese could possibly think that currency manipulation is a good long term strategy. Sure, it helps exports, and the CCCP has basically made a massive political bet on dramatic GDP growth based on exports, but it doesn’t have to be this way. 

For a so-called socialist country, China is barely one at all. The domestic social safety is virtually non-existent, and as badly as the U.S. needs to expand healthcare coverage, China needs to much more. A social safety net would lessen the incredibly high savings rates that Chinese operate with (because they have no choice), in turn giving China’s people a greater ability to consume, a positive outcome for both the Chinese economy and the rest of the world.

In America these days, it’s popular to agonize over the amount of money we owe China. But China is saving because it has to, not because it wants to. As the saying goes, when you owe the bank $100,000, the bank owns you, but when you owe the bank $1.6 trillion, you own the bank. (For more on this, read Christopher Hayes’ recent article in The Nation.)

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