On a sweltering afternoon in June, the rice fields outside the small town of Omagari in Japan’s northern Akita prefecture are eerily deserted. Only the voice of Kimiko Kyono belting out from the speakers atop her orange Nissan breaks the silence. “Konnichiwa!” she exclaims to the open fields. “This is Kimiko Kyono of the Democratic Party of Japan!” Finally she spots a farmer: “Over there!” A campaign aide drives the car through the field in hot pursuit of the lone voter.

Ms. Kyono, one of the DPJ’s potential candidates in parliamentary elections likely to be called at the beginning of August, has an unenviable task. She is trying to win over risk-averse voters person by person to the opposition party formed in 1998. Yet this youthful looking mother of four is not fazed. “Last time I lost by 30,000 votes,” she says. “This time I hope to win or at least close the gap.”

A confluence of factors means Ms. Kyono might get her wish. While Kazuyasu Kurokawa, the 52-year-old farmer she managed to corner, is noncommittal about his voting plans, others are forthrightly supportive. Teruko Sasaki, 70, is fed up with the status quo. “Things have not gotten better around here,” she says. “I think it is time for a change.”

The incumbent Liberal Democratic Party has been in power for almost six decades, apart from a 10-month period in the early 1990s, and discontent with its performance is at an all-time high. Chronic disillusionment with LDP’s ineptitude and the increasingly severe economic conditions of recent years mean that, even here in the conservative heartland and LDP stronghold, more voters like Ms. Sasaki are contemplating giving the DPJ a shot at ruling the country.

The DPJ under current leader Yukio Hatoyama promises that it would use an election mandate to bring sweeping changes to Japan. The party has devised a set of policies aimed at cushioning citizens from harsh economic realities. Of greater long-term significance, the DPJ has ambitions to overhaul the country’s governing structure, which under the LDP has rested on opaque internal party decision-making processes and underhanded cooperation between the party and the bureaucracy. Instead, the DPJ promises government that is more efficient, transparent and accountable. In short, policy making in Asia’s oldest democracy would finally move out of the proverbial smoke-filled back rooms.

Political transformation is already underway. Japan now has, for the first time in decades, a viable opposition party in the DPJ, which earned the trust of the public when it became the largest party in the upper house in 2007. A strong mandate at the polls could bring an end to the political paralysis that has hampered the revitalization of Japan’s economy and society.

Down and Out

Ms. Kyono’s home prefecture, Akita, is in many ways at the front line of Japan’s decline, a microcosm of many of the problems that bedevil the country. It is an appropriate laboratory for DPJ’s policies related to demographic issues, including the elderly and farmers. Across a host of indicators, the prefecture—together with neighboring Aomori prefecture and the southern island prefecture of Okinawa—finds itself at the bottom of the rankings. Michael Lacktorin, professor of economics at Akita International University, says the No. 1 problem facing the prefecture is demographics. There are around 1.1 million people in Akita, but this is declining by 12,000 people, or around 1%, per year. Half of the decline is from death, half from “social movement” by job seekers.

Japan’s aging society is on full display in Akita. On a recent morning in June, most customers at a large supermarket in Omagari were elderly. In October 2007, 28% of Akita’s population was over the age of 65, close to six percentage points higher than the national average. Average per capita income in the prefecture for fiscal year 2005 was around 2.3 million yen ($24,100), well below the national level of 3 million yen. Agriculture plays an important role in the prefecture’s economy, and here, as in other parts of Japan, farmers are struggling. The percentage of those engaged in full-time farming is dwindling, and more and more rural dwellers are relying on the government sector for employment.

Of course, the latest economic crisis has exacerbated these long-standing social problems. While there are some signs of a recovery, demand for Japanese exports fell sharply in late 2008 and in the first quarter of 2009, causing a sharp economic contraction—gdp fell 3.5% in the fiscal year that ended March 31, a record fall since records began in 1955. The contraction has put pressure on the Japanese workforce, as unemployment rose to 5.2% in May. There are few signs that foreign demand will recover quickly, reinforcing the need for measures to stimulate domestic demand, despite having already budgeted roughly 2% of Japan’s gdp for economic stimulus since autumn 2008. Meanwhile, Japan’s colossal national debt continues to grow and the goal of a balanced budget pushed back due to the Aso government’s antirecession stimulus measures, while social-security spending is soaring as the population ages.

In short, the economic crisis has exposed just how illusory the Koizumi boom years were, based as they were on healthy demand for Japanese goods in the United States and China and on the growing use of temporary and other irregular workers by Japanese businesses. The challenge for Japan’s government remains finding the right balance between public demands for social protection, and the need for structural reform and fiscal restraint. The DPJ believes it can strike that balance.

Exit LDP, Enter DPJ

The litany of problems facing Japan has given the DPJ plenty of fodder for devising policies with a clear appeal to the much suffering Japanese, and even given some of the most diehard supporters of the LDP cause to stop and reconsider. That said, it is hard to differentiate between the LDP and the DPJ on the basis of policies alone, especially since many measures seem to pander to the same constituencies, for example the farmers. Perhaps this should not surprise us— Mr. Hatoyama and former party leader and party founder Ichiro Ozawa are both former LDP members.

Even so, the DPJ has done a better job at shaping its policies into a somewhat coherent “manifesto.” At the party’s modest headquarters in Tokyo’s Nagatacho district, former DPJ policy chief Yukio Edano explained that the most important goal of the party is to expand Japan’s social-safety net, and many of these policies are specifically aimed at alleviating the two main problems facing the rural areas—the aging population and declining agriculture. That includes addressing Japan’s faulty pensions system—antiquated in its management, Byzantine in its organization, and underfunded given growing liabilities—by creating a model based on Sweden’s and supported by the whole of consumption-tax revenue at the current rate of 5%. Mr. Edano says the DPJ also plans to increase spending on health and nursing care. The party plans to introduce an individual household income-support system to make Japanese farmers feel more secure about engaging in agriculture. Another sweetener is the launch of a per capita child allowance of 26,000 yen per child per month.

This is an expensive shopping list, but can be financed partially by the DPJ’s plan to eliminate wasteful government spending, says Mr. Edano. The party has identified savings of around $104 billion that it plans to redirect to other areas, including into the country’s pension system. An increase in consumption tax from the current 5% will happen, but not for “another five or 10 years,” says Mr. Edano.

When it comes to economic policies, however, details are vague. While there are references to revitalizing small- and medium-sized enterprises through a “SME Charter,” the party falls short on specifics. It, like the LDP, has been unable to outline a plan to fix Japan’s finances and it seems that it doesn’t quite know how to revitalize regional economies such as Akita’s. The DPJ’s manifesto contains a lot of little ideas animated by the vision of a “secure society,” but nothing terribly concrete on how to restore corporate Japan back to its former glory. By appealing to anxiety about the country’s mismanaged pension schemes and inadequate health-care system for the elderly, especially in remote areas, the DPJ is hoping to expand its support base. But it could still botch the campaign. “If a golfer reaches the green, then he should be able to putt his shot,” Mr. Edano says. “But the DPJ is still at the tee and is using a driver. At this stage, even top professionals can hit a shot out of bounds.”

Should the DPJ manage to come to power, it will not be on the strength of its policies alone. The party’s success so far is clearly due to the LDP’s unpopularity. The ruling party has been on the decline ever since it won a historic victory in the 2005 general election. Under the leadership of then-Prime Minister Junichiro Koizumi, the LDP, with the help of Komeito, its coalition partner, secured an unprecedented supermajority in Japan’s House of Representatives on the basis of Mr. Koizumi’s personal popularity and his campaign to privatize Japan Post.

The 2005 election seemed like a turning point for Japanese politics, the apotheosis of Mr. Koizumi’s crusade to destroy the “old” LDP, smash the bureaucracy and institute reforms to liberalize the economy. But within a year Mr. Koizumi was out of office and his successor, Shinzo Abe, was less interested in economic reform than pursuing his dream of making Japan a “normal” country through revision of the Constitution and reform of education curricula—issues that did not resonate with the public.

What followed is all too familiar: the readmission of ousted postal rebels to the LDP, the Abe government’s mishandling of the 2007 pensions crisis followed by the DPJ’s victory in that year’s upper house elections, the substitution of Yasuo Fukuda for Mr. Abe, and then a year later, the substitution of the incumbent Prime Minister Taro Aso for Mr. Fukuda. It has been four years of scandals, of policy decisions avoided, of reforms watered down or scrapped entirely—and of persistently low public approval numbers. Add the failures of the past four years to the LDP’s record over its nearly unbroken run of 55 years in power and it seems reasonable that the upcoming general election will result in a historic defeat for the LDP and the birth of a DPJ-led government.

Of course until the election is held it is possible that the LDP—with a history of pulling out miraculous victories—will survive. A scandal involving former DPJ leader Mr. Ozawa in the spring led to a slight uptick in the Aso government’s approval ratings, but Mr. Ozawa’s resignation halted the DPJ’s decline and has effectively triggered a terminal crisis in the LDP.

As of early July, Mr. Aso continues to face plummeting poll results, open calls for his resignation, and demands that he move up the party leadership election scheduled for September to give the party a chance to choose a new leader in advance of the general election. Meanwhile, Mr. Ozawa is still a driving force in the DPJ. “If the election were held today, we would win,” a party strategist said in an interview with the review in June. The polls, though frequently unreliable, point to DPJ carrying the day. “Barring some cataclysmic event” the DPJ should win a plurality in the coming election, says political analyst Jun Okumura.

Consolidating Power

Getting elected is only the beginning of the party’s challenges. If it is going to deliver on its promises, the DPJ will need to redefine how government works in Japan. If a change of government is to have lasting significance, the DPJ must revolutionize Japanese democracy. If the DPJ merely replicates the LDP’s bad practices, not only will it be ineffective as a ruling party but it will likely deepen the public’s disillusionment with the political system. A DPJ government’s task will be to transform what academic Aurelia George Mulgan has called Japan’s “Un-Westminster” system into a proper Westminster parliamentary democracy, with power concentrated in the cabinet.

LDP rule has long been characterized by a sharp division between cabinet and ruling party, with the LDP’s formal and informal policy-making organs having an established role in the policy-making process that enable LDP politicians outside government to wield a veto over the sitting government’s agenda. At the same time, the bureaucracy has had an outsized role in policy making and as a whole wields political power unmatched among developed democracies. It has been a full-fledged player in a “triangular” struggle for power with the LDP and the cabinet.

The result of this ongoing struggle has been paralysis, particularly after the bursting of the economic “bubble” in the early 1990s, as politicians and bureaucrats struggled to defend their prerogatives and budget shares while various prime ministers attempted to use a newly empowered cabinet office to undermine both LDP and bureaucracy and impose a vision for governing. The Koizumi government was at once a high water mark for this struggle and for the strength of the prime minister and the cabinet in the conflict; the three years since Mr. Koizumi left office have witnessed a steady decline in the ability of the prime minister to corral party members and bureaucrats. Rather than building a Westminster system, Mr. Koizumi strengthened the position of the cabinet within the tripartite governing system without fundamentally transforming the system.

The DPJ seems aware that in order to implement policy it must transform the policy-making process. Naoto Kan, the DPJ’s acting president, visited the United Kingdom in early June to study the relationships between cabinet and ruling party and cabinet and bureaucracy in the British system of government. After meeting with senior Labour and Conservative politicians, Mr. Kan returned to Japan impressed by how Britain has enforced the political neutrality of the bureaucracy, ensuring the supremacy of cabinet over ruling party and civil service. In an article in the July issue of the monthly Chuo Koron, Mr. Kan outlines a model for what the DPJ hopes to achieve in constructing a “parliamentary cabinet system” (in contrast to the LDP’s “bureaucratic cabinet system”).

Describing LDP rule, Mr. Kan argues that the LDP, due to the perpetual gap between cabinet and party, delegated far too much to the bureaucracy, and as a result the government has struggled to resolve the cluster of social and economic problems that have ensnared Japan. According to Mr. Kan, the DPJ will unify ruling party and government to avoid the acrimony that has often characterized the relationship between the LDP and LDP-supported cabinets. To prevent party leaders from being in a position to undermine the government, the DPJ plans to include the party’s secretary-general and policy research council chair in the cabinet, with the former responsible for legislative affairs and the latter assuming the critical post of chief cabinet secretary. The DPJ will prevent backbenchers from sidestepping the cabinet to work with bureaucrats through the ruling party’s policy research council to draft legislation, and will deny the party’s senior leaders outside of government a veto over policy, a right currently possessed by the LDP’s general council, which has the power to decide whether a policy will go to a cabinet vote. Indeed, the DPJ abandoned the model of a general council early in its existence and replaced it with a shadow cabinet.

Second, the DPJ aims to strip the bureaucracy of its budgeting authority. Mieko Nakabayashi, a DPJ candidate from Kanagawa prefecture, says Japan’s current opaque budgeting process is “undemocratic.” “You cannot hide Japan’s budget and economic situation forever,” says Ms. Nakabayashi, who worked for an extended period in the U.S. Senate Budget Committee. “Hiding things from people has reached saturation point.” Here too, the DPJ will not be starting from scratch: A round of administrative reforms early in the decade created the Council for Economic and Fiscal Policy, an advisory council attached to the cabinet that has played an important role in macrobudgeting. But as with many reforms undertaken under LDP rule, the creation of the council was inadequate for shifting responsibility for budgeting from the finance ministry’s budget bureau, and the requesting bureaus in the government’s ministries and agencies, to elected cabinet officials.

In effect, the DPJ aspires to restore the Japanese Constitution, which designates the cabinet as the supreme executive body responsible for administering the law and preparing budgets, and the Diet as the “sole law-making organ.” The goal of these proposals is to create a policy-making process that starts at the top, with the prime minister and the cabinet, and flows down to line bureaucrats. The government, supported by its parliamentary majority, will establish policy-making priorities and compile budgets, the Diet in cooperation with the cabinet will prepare and pass legislation, and the bureaucracy will implement the decisions of its political masters.

Staying in Power

This model is clearly an ideal type: The degree to which a DPJ-led government realizes it will depend on the political abilities of the prime minister and his cabinet ministers. Whether the DPJ’s leaders are sufficiently capable remains to be seen.

One factor working in the party’s favor is that it should have a mandate for political reform. A poll conducted in March by the Yomiuri Shimbun, Japan’s largest daily, found that 74% of respondents did not trust bureaucrats in Tokyo, suggesting that the DPJ will have the public on its side in implementing its plans. At the same time, however, the DPJ must not allow populist, antibureaucrat enthusiasm lead it to promise more reform than it can deliver. Already some of its policies smack of populism. The party’s policies for protecting farmer income, for example, will do nothing to promote competitiveness of the sector against foreign producers.

The DPJ will be operating in an environment shaped by an active news media, a public quick to voice its disapproval, an opposition party that will use every tool at its disposal to stymie the government and a bureaucracy reluctant to surrender its privileges. These obstacles do not mean reform is impossible, but they mean the DPJ must pick its battles carefully, seek allies wherever possible and moderate its rhetoric in order to maximize its freedom of action.

The DPJ may already be backing away from more extreme criticism of the bureaucracy, with Mr. Kan’s acknowledging that there are many talented bureaucrats and that the party recognizes it will need their cooperation if it is to govern effectively. “The DPJ is unlikely to depart from dependence on the bureaucracy,” Takao Toshikawa, editor-in-chief of the biweekly Tokyo Insideline, says, describing the party’s plan to appoint 100 political appointees as “unrealistic.” “The DPJ has no such manpower.” Given these constraints, the DPJ is right to focus on how to concentrate power in the cabinet. Such reforms will require less in the way of legislation and allow more effective use of power by the DPJ’s leaders.

More challenging will be the DPJ’s desire to redistribute power from Tokyo to prefectures and localities. In his article, Mr. Kan lists decentralizing Japan as the complement to consolidating power in the cabinet, but it is unclear what decentralization means to the DPJ and how it will go about achieving it. There is more than an echo of former British Prime Minister Tony Blair’s push for devolution to Scotland and Wales during his first term. Whatever form devolution Japanese-style takes, expect a protracted fight among prefectural and local governments, the ruling and opposition parties in Tokyo, the bureaucracy (which is the target of decentralization), interest groups, and at some level the public at large. In an interview, Aomori governor Shingo Mimura told the review that, in his view, any decentralization of political power must be accompanied with decentralization of budgeting power.

Considering that any sort of radical decentralization can only proceed after the DPJ has effectively concentrated power in the cabinet, stressing decentralization offers more than any government could achieve for the foreseeable future. And given the policy challenges that will face the new government, it is questionable that the first thing that it should do upon realizing administrative centralization is transfer power and money to local governments.

If the DPJ can implement its plans for administrative reform—and it’s a big if—it could succeed in regime change. It will have created a “normal” parliamentary system, having transformed Japanese governance from what political scientist Jun Iio has called the LDP’s “purposeless” government to a government that can set clear policy goals and be judged by its success in achieving those goals. But regime change will have little meaning for the Japanese people until the government uses its new authority to fix economic and social problems. And that will ultimately depend on the ability of the leaders of the DPJ to make hard decisions about how to fix the budget while putting society and economy on sounder footing, decisions that the LDP has been unable to make. If the new government fails to deliver despite administrative reform, it will have no excuses for inaction-and will risk falling from power.

Another element influencing the longevity of a DPJ-led government is the degree of unity the party exhibits. Critics say the party is deeply divided in many policy areas, for example foreign policy, causing some to predict the DPJ eventually will crumble. In its place, a new party that combines elements of DPJ and LDP could form. “In four or five years, you could get a reconstituted one-party system,” says Malcolm Cook, program director for East Asia at the Lowy Institute for International Policy in Sydney. In the meantime, Mr. Cook expects to see even more “political paralysis” in Japan. “It’s not an optimistic view.”

As Japan’s general election approaches, it is increasingly clear that the public is willing to take a chance on the DPJ. Shigeji Sasaki, a 58-year-old hotel worker in Omagari, Akita, says he plans to change his vote to the DPJ from the LDP so that power can be transferred over smoothly “like the American system.” He says he has many demands he would like to see the DPJ government fulfill. “But in general,” he said, “I want a party that can lead Japan.”

The LDP has progressively lost the ability to govern its own members, has made far too little progress addressing public-policy concerns, and has failed to provide even an outline of a policy vision. If the 2009 election is a referendum on LDP rule, the LDP will be toppled. Even if the LDP wins, however, it will still be a monumental election, because an LDP government would be even more ineffective than before the election, as it would likely be deprived of the supermajority in the lower house that is its trump card in battle with the DPJ-controlled upper house. A LDP victory would likely lead to a grand coalition or a political realignment, significant outcomes in their own right.

The long-term importance of the 2009 general election will be whether a DPJ victory marks the beginning of a new parliamentary democracy in Japan and whether DPJ politicians such as Ms. Kyono and Ms. Nakabayashi—if elected—can build a new system of power that lays the foundations for future prosperity.

This article is the cover story of the REVIEW’s upcoming July/August issue.

Tobias Harris is a doctoral candidate in political science at the Massachusetts Institute of Technology. He is the author of Observing Japan (www.observingjapan.com), a blog on Japanese politics. Colum Murphy is deputy editor of the REVIEW.

1. Japan: Political leadership needed for better democracy
2. The DPJ will bring the ships home — and open Japan’s economy to the US?
3. Decapitating the bureaucracy in Japan

Ross Garnaut has a fondness for saying that we have a chance (just a chance) of pulling together and surviving climate change. That chance is still alive after the release of a collaborative report by the Pew Center and the Asia Society, entitled ‘Common Challenge, Collaborative Response: A Roadmap for US-China Cooperation on Energy and Climate Change’.

Until now, there has been scant common ground between the two largest producers of greenhouse gases (GHGs), the largest developed country and the largest developing country.

The contributors list to the report reads as a who’s who of serious thinkers about climate change from the US and China, including many people who hold high level official positions and are closely involved in their countries’ respective official Climate Change negotiating teams.

Secretary Clinton all but endorsed the report last week by making a major address on Climate Change at the Asia Society [transcript and video] in which she advocated for some of the high level proposals and announced that US Special Envoy for Climate Change, Tod Stern would accompany her on her first international trip, including to China.

The report proclaimed that, without the US and China, ‘it will not be possible to find a meaningful remedy’ to the climate change problem. That these two countries ‘must be partners in any effort to avert catastrophic climate change and usher in a new and prosperous low-carbon global economy’.

This represents important progress from both sides.

Further common ground was found on the principle of ‘common but differentiated responsibilities’. Already a key principle of the UN Framework Convention on Climate Change (UNFCCC) ‘common but differentiated responsibilities’ is the starting point for China’s National Climate Change Program. The Roadmap acknowledges that the US is ‘the world’s largest economy and largest historic greenhouse gas emitter’. This idea is embedded throughout the document, which even provides historical data:

the United States is by far the largest contributor to the greenhouse gases now burdening the atmosphere, responsible for 29 per cent of energy-related CO2 emissions since 1850. China accounts for only about eight percent of these historic emissions. But as its economy has boomed, its emissions have soared, and it recently surpassed the United States as the world’s largest annual emitter.

For top level US and Chinese Climate Change brass to accept these words leaves the door open for agreement in Copenhagen.

The Roadmap acknowledges key differences between the US and China in ‘their stages of development, economic structures, political systems, resource endowments, emission drivers, and opportunities for emission reduction’. China’s population is more than four times the size of the United States’ and its per capita emissions are 78 per cent lower (although China’s per capita emissions are growing at a rate four to six times as fast as those of the United States). Despite China’s rapid economic ascendancy, it remains a developing country (albeit a strong, emerging economy), with a per capita income 30 per cent lower than the world average, and an enormous rural population living on far less.

The Roadmap also acknowledges that while some of China’s GHG intensive products are exported, the vast majority are consumed domestically.

This language could be a foundation upon which an official agreement might be predicated. It fuses the language of both sides into a sensible whole from which progress can be made.

The objective of the report is clear: to direct senior leaders in the US and China to develop a sustained, focused partnership aimed at dealing with the most urgent important aspects of climate change.

However, for all the diplomatic progress that the Roadmap represents, it neglects the central aspect of any long term solution to climate change: global atmospheric GHG concentration targets, and the national emission trajectories required to achieve those targets.

Much of the report focuses on areas of priority for collaboration, ordered according to two measures: those that

1. have the greatest potential for reducing emissions and strengthening energy security;
2. would benefit most from direct collaboration.

These criteria lead to the nomination of five priority areas for high return government investments:

1. deploying low emissions coal technologies,
2. improving energy efficiency and conservation,
3. developing an advanced electric grid,
4. promoting renewable energy, and
5. quantifying emissions and financing low-carbon technologies.

The roadmap argues that ‘the United States and China should not await new domestic legislation or multilateral agreements before launching stronger collaborative efforts’. But preventing catastrophic climate change means stabilizing the global concentration of GHGs in the atmosphere. Achieving that requires at least two points of agreement among the 15 (at minimum) major GHG emitting countries:

1. What global atmospheric concentration of GHGs is acceptable?
2. What will be each country’s fair GHG emissions trajectory to reach that target?

The US-China Roadmap is a welcome and authoritative development. There needs to be much more intensive work at international consensus-building if there is any likelihood of achieving Garnaut’s slim chance. And Australia needs to be playing an active role in that, including with China.

The full report can be found here [.pdf].

1. Climate change and game theory
2. Bush wrong on India and China and climate change
3. Can China rescue the world climate change negotiations?

There has been much talk over the last few days suggesting that the US must adopt a modest foreign policy, that Obama will have to do less before he can do more, and that American power is in relative decline and lacks what it will take to re-shape the world.

But President Obama shows no lack of ambition in foreign affairs.

In his Inaugural Address, Obama outlined his intention to revitalize US power.

‘We understand that greatness is never given. It must be earned’ he said.

The rhetoric alone goes a substantial way to restoring America’s international reach.

‘To all the other peoples and governments who are watching today, know that America is a friend of each nation, and every man, woman and child who seeks a future of peace and dignity. And we are ready to lead once more’.
Obama’s first day saw the move for closure of Guantanamo Bay, the suspension of military commissions, the ban on torture, and the action of ‘severely restricting his own power and the power of former Presidents to withhold documents on the basis of secrecy”.

This is not just an American agenda. It restores America’s role on the international stage, and reaffirms a commitment to the rule of law and to global human rights. In doing so, it enhances America’s stature and America’s influence throughout the world.

Obama went on:

‘Our power alone cannot protect us, nor does it entitle us to do as we please. Instead… our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.’

He assembled his Joint Chiefs of Staff and Military Commanders and charged them with a new mission: to end an unjust war and to focus on a just war.

Peter Beinart took a slightly different view, the day after the Inaugural Address:

‘If he’s very lucky and very good, Obama may be able to get US foreign policy out of the red by late in his first term. … If he has the chance, my guess is he’ll revive a vision that has intrigued progressive Presidents since Wilson: collective security, the idea that ultimately America’s security and prosperity are bound up with the security and prosperity of people across the globe.’

Beinart has an incorrect view on how one builds “foreign policy capital”. Foreign policy solvency depends on reclaiming the world’s respect.

The Obama administration has gone some way towards reviving the vision of collective security.

‘Guided by those principles once more … we can meet those new threats that demand even greater effort, even greater cooperation and understanding between nations’ he said.

‘To the Muslim world, we seek a new way forward, based on mutual interest and mutual respect’. He stood behind these words this week by appearing on Al Arabiya News Channel, where he declared: “the bottom line in all these talks and all these conversations [about Israel and Palestine] is, is a child in the Palestinian Territories going to be better off? Do they have a future for themselves? And is the child in Israel going to feel confident about his or her safety and security?” As Ezra Klein opines, “Al-Qaeda is not feeling the hope and change”.

None of this speaks of American decline. This is not an America that others do not look to.

The corrosion of American power has more than anything been a consequence of America’s failure to live up to the idea of America. The positive reaction that Obama’s Inauguration received all around the world decisively reserves that tide.

China’s state media, CCTV, which cut short his words, felt the impact of America’s new power:

‘To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history, but that we will extend a hand if you are willing to unclench your fist’.

While the US economy may be now larger than that of other countries by a smaller multiple, and that may limit America’s material reach, America’s power to shape and influence world affairs rests more surely on its ideals of liberty, of hope and virtue.

That is the base from which Obama is remarkably and surely reclaiming America’s role in world affairs.

‘To those nations, like ours that enjoy relative plenty, we say we can no longer afford indifference… For the world has changed, and we must change with it’. And so we must.

1. Torture and American leadership
2. The WTO and American economic diplomacy under Obama
3. President Obama, the TPP and U.S. leadership in Asia

There seems to be considerable confusion about Garnaut’s recommendation as to what targets for emissions reduction the Australian government should set.

Garnaut is very particular in the way he articulates his recommendations. The media and public commentary has not been so particular.

There are two sets of targets: primary and secondary. The primary target is the global concentration of GHGs in the atmosphere. This target must (by its nature) be a global target agreed to by at least all of the major GHG emitting countries. The secondary target relates to emsissions reductions. The emission reduction target is a national action target. Each country would have their own emission reduction target. Meeting the global atmospheric GHG concentration target would require all countries to meet their respective emission reduction target.

1. Primary target: global atmospheric GHG concentration target (ZZZ ppm by 2050)
2. Secondary target: GHG emission reduction target (ZZ% reduction of Australia’s annual emissions from 2000 levels by 2020 and ZZ% by 2050)

The secondary target is conditional on the primary target.

If the primary target is strong, the secondary target must be strong also. If the primary (global) target is weak, a strong secondary (Australian) target would have scant benefit and significant cost to us.

Announcing before hand, that Australia will set a strong secondary target CONDITIONAL UPON global agreement on a strong primary target makes reaching a strong primary target more likely. Other countries know we will not free ride on their efforts.

Similarly, announcing ahead of time that we are prepared to set a moderate secondary target CONDITIONAL UPON global agreement on a moderate primary target (assuming a stronger target is politically impossible), makes moderate success more likely. It also makes a strong primary target more likely since other countries also know we will not let them free ride on our efforts.

This is why Garnaut says:

The Australian government should, at an early date, say that Australia was prepared to play its full proportionate part in a global agreement that adds up to a 450 ppm outcome.

If such an agreement is not possible internationally (and what is more likely to be possible internationally is a 550 ppm outcome) then we would be prepared to play our full proportionate part in a global mitigation effort that delivers a 550 ppm outcome.

Garnaut concludes that if the world agreed on an atmospheric GHG concentration target of 450 ppm by 2050, our fair role in achieving that target would be to reduce our annual emissions by 25% from their 2000 levels by 2020 and 90% from the 2000 level by 2050.

If the agreed upon primary target was 550 ppm by 2050, our full proportionate part in achieving that goal would be to reduce our emissions by 10% from 2000 levels by 2020 and by 80% from 2000 levels by 2050.

For reference, the relevant chapters of Garnaut’s report are:

7.     Australia’s emissions in a global context
8.     Assessing the international response
9.     Towards global agreement
10.   Deepening global collaboration
11.   Costing climate change and its avoidance
12.   Targets and trajectories

For a 680 page document, the Garnaut Review is remarkably easy to read. Anyone who feels obliged to comment on climate related issues should read it first.

1. China’s carbon emission reduction targets: trancending business as usual
2. Garnaut’s targets and the simple arithmetic
3. Carbon emission targets and investment in clean technologies

The US-China relationship is among the most important bilateral relationships in the world. Yet during the American Presidential election, China appeared something of a no-go zone.

In the US there are broadly two camps on China: those who would seek to contain, and those who seek to engage.

President-elect Obama is lauded for his instincts towards international engagement, cooperation, listening respectfully to others, and pragmatism. These are instincts that will serve him well dealing with China. But his comments on trade during his campaign for the Presidency, his penchant for blaming US manufacturing job losses on China and his promise to establish an ‘enforcement office’ at USTR to pressure China to revalue the RMB, point in a different direction and herald a trickier time for Sino-American relations.

Real Clear Politics has described considerable concern in Asia that the protectionist side of Obama will dominate his dealings with Asia, and notably China. Is the concern in Asia justified?

Perhaps not when you compare Obama with President Bush, when newly elected.

Current Secretary of the Treasury, Hank Paulson, claims that President Bush chose the path of engagement. This is far from true. It is true that US engagement with China, economically and strategically, has grown enormously under the Bush Administration. But a review of media reports from 2000-2001 show that, in fact, at the outset Bush rather chose to antagonize, not to engage, China.

Here’s a reminder of how the US-China relationship looked at the time:

As a candidate, Bush was criticized for being “stuck in a cold war time warp” and relying on “isolationist, right-wing advisers for guidance” (30/4/2000). He talked strongly of defending Taiwan militarily, and selling arms to Taiwan (a long term policy, but not one traditionally trumpeted loudly). His enthusiasm for the misguided Theatre Missile Defense (TMD) plan was perceived in Beijing as a policy of containment. Bush abandoned the Clinton era rhetoric describing China as a ‘strategic partner’, in favor of the more antagonizing ‘strategic competitor’.

Three weeks before Bush took office, he was described as ‘on a collision course with China’ (04/1/2001), Yan Xuetong, at that time executive director of the Institute of International Studies at CASS (China’s premier government think tank) said, ‘in the next four years, I would not rule out a possible military confrontation’ (04/1/2001). The whole of the Asia Pacific was frightened about a nuclear arms race between the US and China (25/1/2001).

Bush escalated the issue of arms to Taiwan by hinting that Taiwan would be included in the anti-missile defense umbrella (06/3/2001).

Then, on 1 April 2001 was the “spy plane incident”**. The Chinese detained the US crew on Hainan Island for 12 days. As soon as the US personnel were back in Hawaii, Bush began blaming the crisis entirely on China, dropping the diplomatic rhetoric he grudgingly adopted under duress during the stand-off (13/4/2001).

Following the spy plane incident, Bush stepped up encirclement rhetoric. On 25 April Bush said ‘he would do ‘whatever it takes’ to defend Taiwan from any China attacks’ (26/4/2001). Shortly after, he ratcheted up the rhetoric, engaging Russia on TMD plans (01/5/2001). China promptly responded that such actions ‘could lead to a possible arms race’ (02/5/2001). To celebrate the Bush administration’s first 100 days, the People’s Daily described Bush as ‘arrogant’, ‘emotional”, ‘egotistic’ and ‘capricious’ and recommended Bush ‘learn from his predecessor, Bill Clinton’ (03/5/2001).

Instead, with the approach of his first meeting with President Jiang Zemin (the APEC leaders summit was held in Shanghai in October 2001; an unavoidable encounter), Bush began to preach religious tolerance to China (04/5/2001). In a move deliberately calculated to antagonize China, he met with the Dalai Lama in Washington (just 5 months before the scheduled meeting with Jiang) (23/5/2001).

On June 2, John Lewis wrote in the New York Times, ‘partly as an unintended consequence, but mostly by design, the administration’s actions have appeared to cast Beijing as America’s enemy. The expanded arms sales to Taiwan, rhetoric that enlarges the commitment to defend the island, the thinly disguised decision to make Chinese missiles a target of revised missile defense plans, the proposed shift in defense strategy from Europe to the Pacific and the call for new long-range weapons to counter China’s military power have come in stunning procession.’ (02/6/2001)

Colin Powell’s visit to Beijing late July offered a moment to breathe in Bush’s rush towards hostility (29/7/2001) but the game-changer, of course, was the terrible events of September 11. President Jiang immediately condemned the attacks and offered to share intelligence with the US and help combat terrorism (26/9/2001).

The attacks gave Bush an enemy far more proximate than China. The open-ended War on Terror had been launched and China was transformed from putative enemy into active ally. Containment and strategic competition were transformed into active engagement on this and a range of other fronts: a strategy that has been remarkably successful over the last 7 years.

It will be important for Obama to avoid the early mistakes of Bush in handling of the US-China relationship. There is no guarantee that such circumstances as eventually constrained the Bush Administration’s inclination towards hostility with China will similarly constrain the undercurrent of economic hostility in America that an Obama administration must manage in dealings with China. The risks are especially high in a time of global economic crisis.

China has already expressed hope ‘that the policy of free trade will continue to be adhered to’, and has defended its exchange rate policy, but the hostility generated by President Bush is notably absent. Xinhua’s account of the conversation between Obama and President Hu on Saturday is encouraging:

Obama said that settlement of the global financial crisis requires close cooperation by governments of all countries, expressing the hope that the United States and China will strengthen cooperation at the world economic summit planned for November 15 in Washington.

More than most things in foreign policy, Obama needs a China Policy before he takes office: one that emphasises the centrality of Sino-American cooperation on responding to climate change and coping with the financial crisis, as well as commitment to an open economy. Early signs point to Obama bearing the mantle of responsibility well. If that continues, we can expect to see more of the pragmatic, tough but fair Obama.

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Update: Thomas Barnett offers a different spin on Bush’s legacy of engagement with China (ht: The Interpreter).

In the grand sweep of history, this is arguably George W. Bush’s greatest legacy: the encouragement of China to become a legitimate stakeholder in global security.

This sort of effort at grooming a great power for a greater role in international affairs is a careful balancing act, and the Bush team sounded most of the right notes, from reassuring nervous allies in Asia, to avoiding the temptation of trade retaliation while simultaneously pressuring Beijing for more economic liberalization, to drawing China into the dynamics of great power negotiation over compelling regional issues like the nuclear programs in both North Korea and Iran.

Clearly I think this gives more credit than credit due.

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** CORRECTION:

It was earlier stated in this post that “on 1 April 2001 a US spy plane crashed in Chinese waters.” This is not true. A loyal reader provides a correction:

A U.S. Navy EP-3, flying in international airspace, was clipped by a Chinese fighter jet.  The damaged U.S. plane flew to the island of Hainan, where it landed at a military airfield.  As per regulations, the crew methodically destroyed the equipment on the inside of the aircraft, then exited.

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See also:
Obama and Asia
What Obama means for Asia
Keeping up with Asia
Japan assesses the next US presidency

1. Obama goes to China
2. Bush, the G20 and China
3. United States and China: Will positive relations endure?

In May we wrote about China running out of coal and repeated the economic truism that there’s no such thing as a shortage; only a price that needs to go up.

Yesterday, China’s grid price for electricity went up for the second time in two months (except in Tibet) [NDRC].

Source: Rosen and Houser (2007) China Energy: A guide for the perplexed

There have been months of negotiations and lobbying between China’s energy producing firms (especially the five firms which dominate the market**), the two state-owned grid companies, the National Development and Reform Commission (NDRC), provincial officials and probably the SERC and SAAC as well. [See Rosen and Houser's eminently readable, China Energy: A Guide for the Perplexed (p24-25) for details]

During those negotiations, the Chinese people have had to put up with frequent electricity shortages. This circumstance is reminiscent of 2002-2003, when small cities routinely went without electricity for entire weekends. The NDRC has come up with a band-aid solution (see over the fold), but unless China embarks on a more comprehensive reform of its electricity market, 3-4 years from now China will be experiencing wide spread and frequent power shortages again.

On Tuesday, the NDRC announced (Chinese only) that the price at which coal based electricity generators can sell electricity to the grid networks would rise by between 10-25 RMB per MWh, effective Wednesday.

For context, see this statement released by Huaneng Power International, detailing their on-grid tariffs both before and after the price adjustment. Huaneng now charges just under 250 RMB/MWh in Gansu Province (their lowest rate) and just over 520 RMB/MWh in Guangdong (their highest rate, excluding their Combined-cycle plant in Shanghai, which is a bit of an outlier at 604 RMB/MWh). The rise represents around 4-5% of current prices. Last month’s price rise was around the same magnitude [Wall Street Journal].

In mid-June the NDRC raised the price of oil in China by 18% (see my post: Understanding China’s oil prices). It remains to be seen how long yesterday’s 4-5% price hike will mollify China’s big 5 electricity generators. It is unlikely to be long, and once they decide they need to raise their prices again, they’ll resort to cutting supply (deliberate electricity shortages) to pressure the government into agreeing.

The problem here is not that prices are too low; its that they don’t adjust quickly enough. This problem is inherent in a system where government sets prices. Flexible prices allow markets to clear (supply to match demand). If the price is fixed in a changing market, supply will not match demand. The result is either surplus or shortage. In this case, wide spread shortages of electricity.

As long as power generators face market prices for their inputs and central-government-mandated prices for their outputs, this is a history that will be repeated in China again and again.

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** From Zhao Yong, in Drysdale, Jiang and Meagher (eds) (2007): Five firms manage and operate 36 per cent of China’s electricity generating assets: 1) China Huaneng Group, 2) China Datang Group, 3) China Guodian Group, 4) China Huadian Group, 5) China Power Investment Group. Much of the rest is operated by relatively small firms.
China’s 7 regional grids are managed by the State Power Grid Company and the Southern China Grid Company (both state owned).
NDRC = National Development and Reform Commission
SERC = State Electricity Regulatory Commission
SAAC = State-owned Assets Administration Commission

1. China running out of coal?
2. Understanding China’s oil prices
3. Throwing light on Indonesia’s electricity crisis

A significant fall in China’s trade surplus couldn’t have come at a better time: just months before the US Presidential election.

The figures were announced (Chinese only) by China’s General Administration of Customs on Monday.

Change in China trade statistics: 2007-2008

(The People’s Daily is reporting a fall of 9.6% in China’s trade surplus, although it isn’t clear how they arrived at that number since their source is the above table)

China’s lower trade surplus is mirrored by a lower trade deficit in the US: while exports to the US rose by 8.9%, Chinese imports from the US rose by 24.5%, leaving China’s trade surplus with the US to fall by 15.6% compared with the first half of 2007.

There are various reasons for the US$13 billion drop in China’s trade surplus.

The Chinese authorities are keen to point to official policies aimed at reducing the surplus, but the US driven global economic slowdown probably had more impact. The slowdown has reduced the buying power of the majority of countries that import from China in significant measure; it has also caused the value of the US$ to fall against most major currencies, including the RMB. Another major factor was the rising price of energy resources, with the higher prices of imports of energy reducing the dollar value of the trade surplus.

Why is this good news in relation to the US election?

During Ohio’s Democratic Party primary election Obama sounded awfully protectionist, and China was the implicit if not explicit target. The reality is that good trade policy makes bad politics, and good politics make bad trade policies. Though it might have nothing to do with trade policy, falling Chinese trade surpluses (and falling US deficits) will take some of the pressure of US trade politics.

If trade policy can be kept out of the politics of the US elections, so much the better.

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Update: The Democratic Party has just announced its Party Platform (pdf) – instant evidence of the conclusion above: trade needs to keep a low profile in this election.

1. China’s current account surplus and inflation
2. Fixing China’s current account surplus
3. China’s exchange rate policy, its current account surplus, and the global imbalances

Author: Dominic Meagher

Paul Dibb, writing for The Australian, claims “Garnaut’s 500-page report seems to be based on an acceptance of the more calamitous end of the spectrum”. However if anything, Garnaut is optimistic.

Since (at least) early 2007 Garnaut has been writing and talking about a global “Platinum Age” of economic growth, named in relation to the “Golden Age” coined by renowned economic historian Angus Maddison. Maddison identified the period from 1950-73 as a “Golden Age” of global economic growth (growth averaged 4.9% during the 23 year period, the most rapid sustained global growth in the history of humanity). Garnaut has been pointing out that growth in 2007 exceeded 5% for the fourth successive year (more rapid than the Golden Age – a Platinum Age).

One of the most basic relationships in environmental economics describes the extent of human induced environmental degradation as a function of population, economic activity, and an environmental impact coefficient (the Holdren-Ehrlich Identity). The environmental impact coefficient is the degradation we cause per person per dollar.This identity makes it clear that if the economy grows rapidly and population remains the same, the only way to avoid increasing environmental degradation is to decrease the environmental impact coefficient: do things more cleanly. So far so good…

Economists have, for a long time, assumed that China would not continue growing as quickly as it has. This idea seems to be based on the notion that such rapid progress simply can’t be sustainable. The International Energy Outlook 2005 (pdf) projected China’s growth from 2002 – 2015 at 6.4% (see Table 2). Half way to 2015 China is still growing at almost double that rate.

Garnaut understood the significance of China’s economic growth for the world’s economy earlier than most people. Australian’s will remember hearing a lot about the resources boom during the 2007 election; this allowed Rudd to dissolve Howard’s central claim to legitimacy – after all, with China’s demand for resources, anyone could have delivered 11 years of consistent economic growth. 2006/2007 was when most people began to become aware of China’s global economic significance.

Garnaut is largely to thank for Australia’s awareness of the importance of the Chinese led resources boom to Australia’s economy. [see here (pdf)]

Garnaut has an unique ability to grasp the key features of the global economy. He understands China’s economy in particular. He understands that India will likely follow suit. And he understands that the (largely coal based) structure of these two economies mean that as we rapidly increase our economic activity (and our population), we will be increasing, not decreasing our environmental impact per dollar per person.

It is Garnaut’s understanding of the key drivers of the global economy – not the US financial system, but China and India’s industrialisation – that define his perspective. The world economy will grow. Quickly. And increasingly dirtily.

This assumption underpins his thinking when he writes in Chapter 4 (paraphrased):

The high-end scenarios (projecting carbon emissions growth at 2.5% to 2030) have often been dismissed as extreme or unrealistic. However the Platinum Age projections assume emissions growth at 3.1% to 2030.

(See Figure 4.8 – click to enlarge)

So Paul Dibb is correct in one sense: Garnaut’s projections are at the more calamitous end of the spectrum of projections. However since most projections fail to appreciate the importance of China and India, we should consider Garnaut’s projections at the more realistic end. The others are wildly naive in their optimism.

1. Australia drags, China leads on global action to reduce emissions
2. Garnaut on understanding the Great Crash of 2008
3. Managing China’s per capita carbon emissions

Philippa Dee and Christopher Findlay have correctly identified the issues facing the WTO in dealing with ‘behind-the-border’ barriers, the major impediments to trade in services. Their approach recognizes that reform of these barriers requires a domestic transparency process operating in (and by) individual WTO countries.

The approach they advocate is of major importance in enhancing the domestic benefits for countries participating in multilateral trade negotiations, and for the future of the WTO system. ‘Behind-the-border’ barriers often apply at a regional or provincial level, and are therefore quite unlikely to reach the negotiating table unless the national ‘offers’ governments take to negotiations in Geneva are consciously structured to include these non-transparent barriers to trade.

The WTO has no authority to deal with these barriers. Its charter recognises that the sovereignty of individual member countries is absolute and inviolate. Given the limitations to the authority of the WTO, a major challenge for participating countries is to find a way to include ‘behind-the-borders’ barriers in the market opening offers they take to the negotiation table. If multilateral trade negotiations continue to reduce protection without bringing these into account, there will be little scope for the WTO to open world markets for services.

Any response to the problem facing the WTO in dealing with services must therefore satisfy two conditions:
• it must encourage and enable individual governments participating in multilateral trade negotiations to identify, and bring to the negotiating table, their own ‘behind-the-border’ barriers to trade; and
• it must leave them in full control of domestic policy.

An initiative that meets these conditions has been proposed by Australia and New Zealand business and industry organizations – The Tasman Transparency Group (TTG). The relevance of the TTG initiative, however, is not limited to tackling ‘behind-the-border’ barriers. It recognises that all the national gains available from liberalising in a multilateral context depend on what each country takes to the negotiating table, not what they hope to take away from it.
The domestic transparency initiative they propose is on TTG’s website: http://www.tasmantransparencygroup.com

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Related post:

Services negotiations in the WTO are stuck: What is the circuit breaker?

1. Services negotiations in the WTO are stuck: What is the circuit breaker?
2. Interest groups and the WTO
3. Rudd must act on trade reform

Author: Dominic Meagher

China’s energy markets can most accurately be described as operating under the principles of managed market-based economy. Gasoline prices have been heavily controlled and the prices for key energy resources such as coal are not exactly set by the market.

But nor is the government any longer able to completely control energy prices as it once did.

Last week China’s NDRC lifted the prices of gasoline, diesel oil, aviation kerosene and electricity (Xinhua). At 18 per cent, the price rise was the largest ever one day price rise for gasoline in China, and the first price rise since November (CNBC).

So what’s behind this sudden energy price adjustment?

The two key objectives of energy price control are price stability and clearing the market (supply matching demand). But covering energy shortfalls when there is rapidly rising demand at home and abroad is inconsistent with maintaining price stability. This is fundamentally why the NDRC cannot hold prices stable permanently: and energy shortages have become a larger problem than price rises. But what explains the timing and size of the price adjustment now.

To be sure, there is no simple answer.

Under a price regime like the one that controls China’s energy markets, the policy authorities have to balance several competing voices as they try to achieve two conflicting objectives in a rising market. They would be keenly aware of pressures in the global market and the global wave of protests over rising fuel costs in response. But they also have to deal with active lobbying from domestic oil refineries whose profits are squeezed when the cost of their inputs rises but the price of their product is fixed. Getting this right is a balancing act where no one is left happy.

Yet the interests of the Chinese oil refineries is not so straightforward as it seems. China’s largest fuel companies not only operate the vast majority of China’s refineries, they also produce much of China’s oil and dominate the retail distribution of gasoline. And they are responsible for importing most of the oil not produced domestically.

When Sinopec (0386.HK: Quote, Profile) and PetroChina (601857.SS: Quote, Profile) lobby the NDRC to raise gasoline prices, they focus on the profits and viability of their refining arm, which PetroChina’s 2007 Annual Report described as incurring heaving losses leading to the cessation of production in certain areas.

However Sinopec not only imports oil from other suppliers but also has foreign oil assets of its own. It is a significant player in the international and Chinese oil business dealing in international prices, as well as a supplier to its domestic refineries into controlled markets. From Sinopec’s 2007 Annual Report (pdf), Sinopec’s before tax profit last year was almost RMB83 billion (about AU$13-14 billion). PetroChina has a larger proportion than Sinopec of its business in oil production rather than refining. PetroChina reported in its 2007 Annual Report before tax profits of just over RMB200 billion (around AU$33-34 billion).

So when oil companies complain that prices are too low, consumers in China, like consumers everywhere, point to the Chinese oil companies’ massive profits.

China’s oil prices remain much lower than international market prices. The result of this price spread is higher demand for oil in China (and higher demand for complementary goods such as cars) but less incentive for Chinese refineries to increase production. Sinopec and other large retailers such as PetroChina have been restricting petrol sales for months, sometimes restricting sales to only selling enough for 45km of driving. There’s no profit at this end of the Chinese market for Chinese oil companies. Long queues of trucks waiting for petrol have become common sights in many parts of China. Independent retailers are forced to raise their prices to remain in business, but they only sell to loyal customers for fear of being reported for price gouging (Reuters).

Last week’s price rise will have some impact on the pace of growth in demand. The large refiners will likely allow petrol to flow again, calculating that another price rise is not on the immediate horizon. It may also reduce some of the diplomatic pressure from other oil importing countries on China. And it is another sign that as China becomes more and more enmeshed in the international market, the pressure for market reform at home becomes irresistible. So China will have to deal with the larger problem with its energy markets eventually.

But when and how? That is a problem left for another day, the political economy of which will be at least as complicated as that which saw the lift in Chinese gas prices last week.

1. Indian food stocks, prices and the exchange rate
2. Are higher food prices here to stay?
3. China’s grid price for electricity goes up (band-aid solution)