East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Fri, 27 Mar 2015 03:54:49 +0000 en-US hourly 1 China needs to get the integration ball moving http://www.eastasiaforum.org/2015/03/27/china-needs-to-get-the-integration-ball-moving/ http://www.eastasiaforum.org/2015/03/27/china-needs-to-get-the-integration-ball-moving/#comments Thu, 26 Mar 2015 23:00:21 +0000 http://www.eastasiaforum.org/?p=45694 Author: Jan Fidrmuc, Brunel University

Despite China’s history of experimenting with new policies and the economic liberalisation since the late 1980s, China is still only a partially integrated economy. This has caused regional divergence and inequality. Now, as the Chinese economy begins to slow down, prospects of further regional divergence are troubling and have a greater chance of exacerbating political tensions.

Residents visit a street market in Gujiao in northern China's Shanxi province. From coal country to the export-driven manufacturing heartland of China’s southeast, millions of people are enduring wrenching economic change. (Photo: AAP).

During the last six and half decades, Chinese society and its economy have undergone momentous changes. The scale and pace of change were truly unprecedented. One Chinese generation wore Mao suits, rode bicycles and never dreamed of ever travelling abroad (or if so, then only to North Korea or Albania). Their children wear business suits and drive cars. And their grandchildren live in a China whose average income is almost thirty times higher than what it was in 1980.

The process of economic decentralisation first began under Mao Zedong, who actively encouraged regional leaders to compete with each other in output (reported, if not actually produced). Deng Xiaoping’s efforts to reform and liberalise the economy continued this trend. At first, reforms were limited to only a handful of special economic zones such as Shenzhen. But when liberalisation was extended to the rest of the country, its progress was uneven: the coastal provinces charged ahead while the rest of the country followed at a slower pace.

But how did these momentous changes affect economic integration among Chinese provinces?

An instructive manifestation of economic integration is the degree of synchronisation of business cycles among provinces. In a closely integrated economy, most regions experience similar output shocks. As a result, business cycles would move in sync most of the time. That is important, as regions with closely synchronised business cycles would tend to agree on what kind of policy — either contraction or expansion — is required at any point in time. The recent political turmoil in the Eurozone demonstrates what happens when such synchronisation is lacking.

The output shocks can be further decomposed into supply shocks (which affect both output and price level permanently) and demand shocks (which have only a temporary effect on output but a permanent effect on the price level). Over the last 60 years, the correlations of output shocks have changed over time, but the two kinds of shocks have moved in opposite directions. Cross-province correlations between demand shocks suggest provinces have become more integrated over time. But supply shocks suggest provincial economies have been diverging.

Exposure to international trade and foreign investment played crucial roles in driving the growth of the Chinese economy in the past three decades. But the benefits from external economic ties were largely limited to provinces that are engaged in international trade or receive foreign investment. Hence, external engines of growth do not make demand or supply shocks spill over across provinces. Instead, it turns out that inter-provincial trade and factors of production were the main drivers of shock similarity.

China is thus still only a partially integrated economy. As supply shocks have permanent effects on output, their divergence could be a reason to worry. If they continue to diverge, even wider gaps may emerge between China’s regions. The limited role that external economic factors have in spreading shocks across China means that they may be contributing to regional asymmetries. Domestic factors — such as the hukou system of household registration — may have also contributed to supply shocks diverging.

History shows that countries stricken by growing economic disparities can develop important political tensions. For most countries, an overwhelming sense of national identity and high degree of mobility of people can help overcome such tensions. But although 95 per cent of the Chinese population are Han Chinese, they often speak different dialects and have a strong sense of belonging to their region, rather than the nation at large. The restrictions on migration neither foster a notion of national identity nor encourage the effects of shocks to spread across regions.

The Chinese economy is starting to slow down. The well-off southeast Chinese may have been happy to some of their taxes to be used to cross-subsidise the poorer regions in central and western China while their own regions were getting more prosperous over time. But only time will tell whether they feel the same when growth stops.

Jan Fidrmuc is Senior Lecturer at the Department of Economics and Finance, Brunel University, UK.

This is a brief summary of an article published by the author in conjunction with Shuo Huang and Jarko Fidrmuc in the China Economic Review.

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How Lee Kuan Yew shaped Singapore’s identity http://www.eastasiaforum.org/2015/03/26/how-lee-kuan-yew-shaped-singapores-identity/ http://www.eastasiaforum.org/2015/03/26/how-lee-kuan-yew-shaped-singapores-identity/#comments Thu, 26 Mar 2015 11:00:55 +0000 http://www.eastasiaforum.org/?p=45686 Author: Terence Chong, ISEAS

The passing of Lee Kuan Yew, the most important personality in Singapore’s postcolonial history, will have little to no ramifications on the city-state. Lee had gradually receded from national politics over the last decade and had an obsessive focus on leadership transition. Lee, more than anyone else, endeavoured to ensure that his absence would have as little political or economic impact on the country as possible. Singapore continues to hum and buzz with only half-mast flags standing as tangible reminders of his death. For a man who relentlessly subjugated the primacy of the individual to the needs of the community this is perhaps his greatest tribute.

Officers lift the coffin of late Lee Kuan Yew prior to his procession to Parliament House, at Istana Palace, Singapore, 25 March 2015. (Photo: AAP)

Lee’s passing provokes all manner of clichés from ‘the end of an era’ to ‘the death of a titan’. As a founding father, the temptation is to compare him to other national giants like Nelson Mandela or Mahatma Gandhi, but such comparisons would be inaccurate. While they all may have been totemic figures, none of them had as intimate a hand in crafting the life of the citizenry from cradle to grave as Lee.

Lee was not just a galvanising independence figure, breaking through the barriers of colonialism and communism. He also transformed himself from firebrand politician to policy architect when the time called for it. It was this chimera-like ability to exist both as ruthless politician and irresistible intellectual that was the secret to his uniqueness.

Beyond the obvious charisma and oratory skills, he was also a meticulous thinker with an insatiable desire to make things work. From charting the city-state’s foreign policy and economic strategy to determining the type of tree that would provide the best shade from the tropical sun, Lee was close to obsessive over functionality. This obsession is not just found in the efficiency of Singapore’s airports, roads and bureaucracies, but also deeply embedded in the Singaporean psyche.

Lee shaped the Singapore psyche in three different ways.

The first is his cultural invention of the ‘Singaporean’, a manifestation of his vision of society and his social policies. The image of a ‘rugged society’ was used in 1966 to prepare a disparate people for the introduction of compulsory National Service. Singaporeans partook in menial work for the ‘Use Your Hands’ campaign in 1976 when Lee feared that newfound affluence would soften the young.

Lee’s experience with the ‘racial’ riots of the 1960s and Malay nationalists in Malaysia shaped his view that a person’s ‘race’ was a fundamental marker of identity from which there was no escape. Along with English, the notion of the ‘mother-tongue’ was introduced, giving birth to bilingual citizens as determined by the ‘race’ of their parents, thus framing the way many Singaporeans, for better or worse, continue to see each other — as Chinese, Malays, and Indians. It was these notions of ‘racial’ ancestry that Lee returned to when he promoted ‘Confucian ethics’ (and later the ethnically-neutral ‘Shared Values’) in the 1980s, to salvage the citizenry from ‘Westernisation’ and to define an Asian modernity.

The Singapore citizen is thus an unapologetic contradiction of flexibility and rigidity. Singaporeans have been shaped by decades of government campaigns, malleable to official fantasies of the ideal citizen that best catch the global wind. And yet they cling on to certain ‘truths’ such as the sacredness of race and religion, believing them to be taboo subjects that should remain outside the bounds of public discourse.

The second way Lee’s functionalism shaped the Singapore psyche was in his disregard for precedent. Traditional ways of doing things, ideologies or theories were often relegated to the backseat. If there is anything that epitomises this is the invention of NEWater. Singapore’s dependence on Malaysia for water often put it in a vulnerable position in bilateral negotiations. The ability to recycle wastewater by purifying it with dual-membrane and ultraviolet technologies for water self-sufficiency dramatically changed the equation between the two countries..

This disregard also meant that labels like ‘progressive’ and ‘paternalist’ meant little to Lee. On the one hand, Lee was a staunch supporter of the Women’s Charter of September 1961, which resulted in higher legal status for women. But, on the other, in 2011 he openly lamented that women were too educated to care for child-rearing when the country’s total fertility rate nose-dived. The 1984 Graduate Mothers scheme, which encouraged university-educated women to have children, was quickly dismantled when it proved unpopular.

It was certainly not pragmatic for Lee to publicly opine that being gay was a natural orientation, in the face of staunch Protestant and Muslim constituencies, but he did so anyway. His disregard for precedent meant that policy U-turns were not seen as anathema to governance but a sign of nimble assessment of changing realities.

Finally, Lee’s legacy will echo in Singapore’s complex national identity. For Lee national survival was intertwined with economic survival, and the latter was never assured. He believed that the only reason the city-state punched above its weight was because it had retained economic and strategic relevance to the international community. Without this it would sink into obscurity.

The result has been a Singaporean identity characterised by paranoia over external competition and divided between the conflicting voices of the nation-state and the global city. This has heightened Singaporeans’ anxiety over their state’s existence and imbued them with a stark sense of realism. This anxiety and realism has shaped Singaporeans’ identity.

Lee Kuan Yew may be gone, but he will never disappear from Singapore.

Terence Chong is Senior Fellow at the Institute of Southeast Asian Studies, Singapore.

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Time to sow the seeds of land reform in Cambodia http://www.eastasiaforum.org/2015/03/26/time-to-sow-the-seeds-of-land-reform-in-cambodia/ http://www.eastasiaforum.org/2015/03/26/time-to-sow-the-seeds-of-land-reform-in-cambodia/#comments Wed, 25 Mar 2015 23:00:50 +0000 http://www.eastasiaforum.org/?p=45683 Author: Alice Beban France, Cornell University

While the majority of Cambodians live off the land, access is precarious. Recently the Cambodian government has been making some encouraging reforms, but troubling signs remain.

Rapid, unregulated development with unclear property rights has left an estimated 770,000 people affected by land disputes. Smallholder property claims are pitted against companies with Economic Land Concessions (ELCs), long-term leases that allow for the development of land for industrial agricultural purposes. Development programs awarding private communal land titles have so far done little to stem the tide of disputes.

New land disputes continued to erupt in 2014 and there have already been reports of new urban eviction threats in 2015. The central problem is the opacity of the land sector. It is unclear whether or not the recent ELC cancellations are meaningful because there is almost no public data available for state land boundaries, titled areas, or agribusiness investment.

In a pre-election land titling push in 2012–14, thousands of university students were sent around the country to survey and title land to more than 600,000 land owners occupying state land. The government has promised that titling will continue in 2015 under the auspices of the Department of Land Management. In Cambodia’s chaotic post-conflict scramble for resources, land titling has long been held out by the government and donors as key to quelling disputes and spurring investment.

But, a growing number of reports link Cambodia’s land titling campaign with land grabbing and deforestation, particularly in indigenous communities. An alarming number of people whose land was surveyed by the student volunteers are still waiting for their land title. Seventy-four per cent of people whose land was surveyed between 2012–14 are still waiting for at least one title according to an upcoming nationwide report from the NGO forum. People whose land was passed over and left untitled by the student measurement teams are worried.

In the wake of the titling campaign, some people have sold land under pressure from powerful urbanites buying up large swathes of land. These deals fly under the radar of government and CSO monitoring. In Ratanakiri, northeast Cambodia, land sales have continued inside an indigenous community awarded Communal Land Title. The logic of promoting the collateral potential of land title for farm investment is also questionable in a country with high amounts of rural indebtedness and a high-risk banking sector.

A lot more than land title is needed to provide land security in Cambodia. Titles, community training and stakeholder meetings provide nicely packaged quantitative data for donor agencies but the real outcome measurement remains: are people still losing land?

Some innovative approaches to tackling this question have emerged, including exposing the roles of consumers and investors tied to increased commercial land pressure. The Blood Sugar Campaign, targeting European and US sugar buyers, has encouraged the European Union to launch an investigation. A new report exposes the illegal timber trade satisfying Chinese demand for luxury timber and the International Finance Corporation (IFC, part of the World Bank) is currently investigating a complaint about an IFC funded rubber company filed by sixteen upland communities.

Community activists have become more closely linked nationally and regionally. Donors are realising the need to move beyond brief technical fixes to more long-term support for legal and community empowerment. Discourses linking land rights with food security and the need for dignified farming livelihoods are also growing.

But activism is limited by ongoing intimidation and harassment including the imprisonment of Boeung Kak lake activists for blocking traffic, frequent reports of harassment, attempts to buy off community activists and NGOs, and the recent refusal to extend the visa of a foreign activist. The National Assembly is quietly debating draft media laws that will restrict freedom of speech, agricultural laws that may restrict farmers’ crop choices and includes punishments for those who do not abide by the rules. There is also a controversial NGO Law requiring greater government oversight for NGOs. These regressive legal maneuvers may affect the ability of communities and NGOs to fight for their land.

Cambodia’s experience with the student-led land titling campaign shows that ‘big man rule’ can accomplish a massive amount in a short time. When Hun Sen speaks, people listen. Cambodia’s ruling regime is built on land as a political tool. Land is distributed to elites to bring them into the orbit of the prime minister and facilitate the private accumulation of national resources. Land title is given to poor people as part of pre-election campaigning.

The challenge for the government now is to use this big man power to create long-lasting change rather than short-term political gain. This requires more than gifting land titles or confiscating under-performing or already logged land concessions. Fundamental changes to social policy are needed that see land not as a political tool but as a livelihood.

Alice Beban France is a PhD Candidate with the Department of Development Sociology at Cornell University funded by an award from Fulbright-Hays.  

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How contact and English proficiency can help Japan’s immigration policy http://www.eastasiaforum.org/2015/03/25/how-contact-and-english-proficiency-can-help-japans-immigration-policy/ http://www.eastasiaforum.org/2015/03/25/how-contact-and-english-proficiency-can-help-japans-immigration-policy/#comments Wed, 25 Mar 2015 11:00:18 +0000 http://www.eastasiaforum.org/?p=45678 Authors: David Green and Yoshihiko Kadoya, Nagoya University

With the foreign population in Japan expected to grow in the future, policymakers have an interest in promoting a more positive view of immigration. Current public opinion toward immigration in Japan, like in much of the rest of the world, is generally negative. But recent public opinion data shows that individuals who are more likely to come in contact with foreigners or who self-assess as being of high English speaking proficiency are more supportive of increases in immigration.

This photograph taken on 27 September 2013 shows shoppers walking past displays offering clothing on sale in Tokyo's Harajuku shopping district. (Photo: AAP)

Like many developed countries, Japan faces the demographic shortfalls brought on by an ageing society with a long life expectancy and a low birth rate. Both in and outside of Japan, concerns are rising regarding the solvency of social security systems, inadequate healthcare resources and shrinking workforces. While other western countries have been able to use immigration to help slow population ageing, immigration rates in Japan remain low. Japan’s foreign population stands at 2.1 million people, or 1.6 per cent of the overall population — one of the smallest immigrant concentrations in the developed world. Japan also has one of the world’s fastest ageing societies.

The Japanese government has been quietly opening the door to increased immigration through various initiatives. Japan has been actively recruiting foreign students and trainees from other Asian countries, giving individuals with Japanese heritage residency and permission to work, and offering greater incentives for highly skilled foreign professionals.

As the Abe government is looking to expand Japan’s foreign population, it must consider what influences public opinion towards immigration. According to data from the Japan General Social Survey for 2010 (the most recent one available), most Japanese individuals are against immigration. Around 63 per cent of the population opposes increasing immigration rates. But this statistic belies some diversity within the country.

Traditional migration literature tends to show that education level, household income and employment status positively affect attitudes toward immigration, but no such link exists in Japan. This is likely due to Japan’s low unemployment rate and educated, largely egalitarian populace. The foreign population remains small, so the usual argument for why populations are opposed to immigration — concern over immigrants taking native jobs — appears to hold little merit in Japan. Culture, language and security issues are the more likely to be areas of concern. Older individuals and those with children are less favourable toward immigration.

But the areas with some of the largest foreign populations — including the greater Tokyo area (Kanto) and central Japan (Chubu) — show more positive attitudes.

Individuals whose English conversation levels are self-assessed to be high have some of the most positive outlooks toward immigrants in Japan. English conversation seems to have a strong, and perhaps unexpected, effect on positive attitudes toward immigration. But a high level of English reading proficiency does not seem to have an effect. None of Japan’s top foreign nationalities (Chinese, Korean and Brazilian) are native English speakers, but English conversation ability is still strongly associated with a more positive outlook on immigration.

Why is this? Migration literature often concludes that ‘contact’ with immigrants mitigates anti-immigrant sentiment. In Japan, contact can have a positive effect on public opinion toward immigration; regions with larger foreign populations tend to have more favourable views on immigration. But immigrant numbers remain small in Japan, particularly outside of the urban centres. In lieu of actual contact with foreign residents, some effort toward ‘internationalisation’ — in this case developing English conversation ability — can also have a positive effect. Even minimal contact with a foreign element, such as the superficial contact through developing spoken English skills, may play a role in reducing anti-immigrant sentiment in Japan.

As the Japanese government looks to increase the foreign population, it should consider improving the average English conversation ability as a way of promoting positive perceptions of immigrants.

David Green is an Assistant Professor at the Nagoya University Graduate School of Law.

Yoshihiko Kadoya is a Junior Associate Professor at the Nagoya University Graduate School of Economics.

This article draws from a paper written by the authors in Politics and Policy.

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Using connections brings instant gain but long-term pain for China’s stocks http://www.eastasiaforum.org/2015/03/25/using-connections-brings-instant-gain-but-long-term-pain-for-chinas-stocks/ http://www.eastasiaforum.org/2015/03/25/using-connections-brings-instant-gain-but-long-term-pain-for-chinas-stocks/#comments Tue, 24 Mar 2015 23:00:48 +0000 http://www.eastasiaforum.org/?p=45667 Authors: Li Guoping and Zhou Hong, CUFE

Political connections are invaluable to industries or individual enterprises in China. But while they may bring regulatory benefits to private-owned enterprises during the state-controlled process of going public, they may also lead to China’s stock markets performing poorly.

The Pudong financial district in Shanghai, China. Firms with political connections are more likely to be approved for IPOs by the China Securities Regulatory Commission. (Photo: Joan Campderrós-i-Canas, flickr).

China’s stock markets are fundamentally different from other major stock markets around the world. Ever since they were established in late 1990, the process of going public in China has been tightly controlled by the government. China’s stock markets have also been regulated under a merit-review regime.

In China, the government is an important determining factor for individual firms looking to access stock markets. The China Securities Regulatory Commission (CSRC) is the Chinese counterpart of the US Securities Exchange Commission, but it is fundamentally different. It still has the authority to approve or reject initial public offering (IPO) applications and to determine a wide range of specific issues related to an IPO, such as initial prices and the number of shares to be offered.

Political connections can bring benefits to firms in almost every aspect in the process of going public. Firms with political connections are significantly more likely to be approved for IPOs by the CSRC. They are also significantly more likely to receive preferential treatments from the CSRC. They receive higher IPO prices, higher offering price-to-earnings ratios, and low degrees of IPO under-pricing. Furthermore, firms with political connections are significantly less likely to be selected for pre-IPO onsite auditing by regulatory authorities. Even companies that have gone public or applied for IPOs on the more business-oriented ChiNext (modelled on NASDAQ) have benefited from their political connections.

Unlike political connections, which are ubiquitously important, legal and regulatory requirements for IPO applicants are largely of secondary consideration. Regulatory authorities in China seem to have strongly embraced the stance that effective protection of investors requires good corporate governance. This stance is so emphasised that authorities have written specific requirements on corporate governance into China’s Corporate Law and other regulations. But the repeatedly emphasised importance of corporate governance is more rhetorical than substantive. Research shows that corporate governance has an insignificant impact on a firm’s chance of being approved for IPOs.

The CSRC has been reluctant to switch to disclosure-based regulation. The CSRC has insisted on regulating China’s stock markets using a merit-review model. This is possibly because it provides CSRC officials better opportunities for rent-seeking than disclosure-based regulation. While political connections don’t necessarily mean rent-seeking or corruption, both anecdotal evidence and scholarly studies show that in China they are highly likely to be positively correlated.

It is generally accepted that China’s stock markets have significantly underperformed in the Chinese economy and also in most of the other major stock markets in the world. The poor performance of China’s stock markets has been puzzling the Chinese public, economists and government officials alike. But under China’s state controlled IPO process, politically-connected firms are more likely to falsify financial statements to receive higher IPO prices and higher offering price-to-earnings ratios. By doing so, they mask their poor performance.

Political connections may bring firms and officials innumerable benefits, but they are the prime suspect in the case for inefficiency in China’s stock markets.

Li Guoping and Zhou Hong are researchers in the School of Accountancy at the Central University of Finance and Economics, Beijing.

This article draws on a paper published in the China Economic Review.

 

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Overcoming gender discrimination in India http://www.eastasiaforum.org/2015/03/24/overcoming-gender-discrimination-in-india/ http://www.eastasiaforum.org/2015/03/24/overcoming-gender-discrimination-in-india/#comments Tue, 24 Mar 2015 11:00:34 +0000 http://www.eastasiaforum.org/?p=45663 Author: Rajiv Kumar, Centre for Policy Research, New Delhi

It is a bitter irony that International Women’s Day came right on the heels of the controversy about the government ban on a BBC documentary about the fatal 2012 gang rape of a young Indian woman known by the pseudonym ‘Nirbhaya’. The documentary has, as could be expected, raked up public emotions that feed on self-righteousness, jingoism and middle class pretentions.

The public discussion that followed the government ban unfortunately distracts from the real issue. This was not the only, and will surely not be the last, case of maltreatment of women in India.

Every day there are thousands of Indian girls and women who are kidnapped, tortured and trafficked. Some are victims of honour killings ordered by khaps or fatwas, a punishment dealt on the basis of religious legal judgment. A large number of cases of domestic violence and marital rape routinely go unreported.

Thousands of girls are trafficked across the border from neighbouring Nepal and Bangladesh and forced into prostitution. As a society, Indians choose to not only ignore but also often connive in the perpetration of these crimes.

In any case Indian society does not care to challenge the stereotype of ‘good women’ propagated by both Hindu and Muslim extremists, and fringe groups. Why then the hypocrisy when an ‘outsider’, like the BBC, shines a light on this issue?

In a democracy political leaders are expected to be agents of change and not opportunistic followers of social practices. Leaders like Smriti Irani and Maneka Gandhi, the Minister for Human Resource Development and Minister for Women and Child Development respectively, should take this opportunity to tell the nation what measures are being planned to fight this social evil.

In his maiden Independence Day speech, Prime Minister Narendra Modi took the lead by calling upon mothers to educate their sons not to abuse women. But Modi’s call has been in vain. Led by bureaucrats, and seemingly immune to the gravity of pervasive social malpractices, political leaders chose to rave and rant in reaction to this abuse but then revert to business as usual.

Rather than leaving the job of tackling violence against women and children to civil society organisations, which politicians will subsequently perceive as agent provocateurs, it is time political leaders followed Mahatma Gandhi’s example of leading movements against social ills.

There is a huge reform agenda to be taken up if India is serious about exorcising its society of abuse against women and children. The first necessary steps are legal provisions against amniocentesis (a procedure used to determine the sex of a foetus), child marriage and dowry that violate the rights of girls. These legal provisions must be supported by social mobilisation, a massive education effort and well-advertised deterrents.

The legislative approach has proven to be grossly inadequate, even when confronting social evils like untouchability. Yet the political class carries on with its current approach, rather than using its convening powers to change society’s underlying value systems.

The government must now take a radically different approach to ensure women’s social status, safety and security — which should be their birthright. It should begin by allocating sufficient resources and strictly enforcing an outcome-based performance and accountability mechanism for ministries that receive these allocations.

A country that can send a space vehicle to Mars can surely tackle these social evils. Tackling gender-based discrimination could be a priority assignment for the government’s policy think-tank NITI Aayog. It could also test its effectiveness in bringing on board various stakeholders, like state governments and civil society organisations, in ridding India of a national stigma.

The agenda for rooting out unacceptable attitudes and violence against women — as reflected in the rapists’ statements in the banned BBC documentary — must also include police and judiciary reforms. Crimes against women do not happen without the active connivance, or abject disregard of basic norms, by the police and judiciary. Unless both the judiciary and the police are reformed, and the rampant corruption that permits the trafficking of women across India’s national borders and from villages to cities is stopped, countless Nirbhayas will continue to be kidnapped, tortured, raped and killed.

Police and judicial reforms are perhaps even more important than economic reforms if India is to lay claim to being a civilised society.

In India divinity is worshipped as Shakti, a female form. She has innumerable avatars and names. Indians recite the Devi Kavach to protect ourselves. We celebrate Durga, Kali, Lakshmi and Saraswati Pujas around the country. We worship Fatima and Mary. India’s saints have penned beautiful poetry like the Saundarya Lahri in praise of the Devi. And yet we do not have the social and political will to root out crimes against women!

It is time we did.

Rajiv Kumar is an economist and senior fellow, Centre for Policy Research, Delhi.

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Competition the true marker of Xi Jinping’s economic reforms http://www.eastasiaforum.org/2015/03/24/competition-the-true-marker-of-xi-jinpings-economic-reforms/ http://www.eastasiaforum.org/2015/03/24/competition-the-true-marker-of-xi-jinpings-economic-reforms/#comments Mon, 23 Mar 2015 23:00:15 +0000 http://www.eastasiaforum.org/?p=45653 Author: James Laurenceson, UTS

The usual assessment of Xi Jinping’s performance as China’s leader goes like this: since taking the reins at the end of 2012 he’s over-delivered on anticorruption and underwhelmed on economic reform.

The headlines out of China suggest there’s no denying the scale and robustness of activity on the anticorruption front. First there were the high-profile political slayings of ‘tigers’ such as Bo Xilai and Zhou Yongkang. At the same time, more than 200,000 ‘flies’, or lower level government officials, were swatted. Corrupt officials hiding overseas were then targeted in operation ‘Fox Hunt’. Next, President Xi moved on to tackling graft in state-owned enterprises. Now he’s taking on the military.

 

Putting a finger on Xi’s economic reform achievements has been harder. What disappoints many China-watchers (particularly those overseas) is that there haven’t been any big announcements on privatising state-owned enterprises (SOEs) and state-owned banks (SOBs). But China’s economic reform program hasn’t underwhelmed. Rather, it’s continuing to follow its own, highly successful, course.

Here’s another way of looking at it.

Xi’s anti-corruption drive shouldn’t be interpreted as just a political power play. There’s been a lot written about how the clampdown is hindering short-term economic growth: sales of luxury brands have slumped and restaurants and entertainment venues have lost their best customers. Government officials are reluctant to issue required approvals for fear they will be accused of extending favours. But, according to the World Economic Forum, corruption is still the second most problematic factor for doing business in China today. If China can weed out corruption, the economy will thrive in the long term.

Some commentators are also getting it wrong by confusing privatisation with economic reform. Economic reform is about raising productivity. The leap in living standards in China is proof that productivity has gone through the roof.

One of the great lessons to come out of China over the past three and a half decades is that privatisation isn’t crucial for boosting productivity — competition is. In 2014, eminent China-economy scholar Nicholas Lardy said that private firms now account for more than two thirds of output, up from nothing in 1978. In manufacturing, their share is four fifths. And in 2012, the World Bank reported that measures of monopoly power across China’s economy are low and declining. In fact, they are lower than in the US.

Even in a limited number of ‘pillar industries’ — where SOEs continue to dominate — the reformers in China’s government have gotten creative. In aviation and telecommunications, incumbents have been broken up and corporatised. Now, there is fierce competition between SOEs.

But what about in finance, that most stubborn of sectors?

In 2014, lending by the big SOBs increased by RMB4.4 trillion (US$705 billion). But total aggregate financing — the broadest measure of credit in the economy compiled by the central bank — swelled by RMB15.4 trillion (US$2.5 trillion). In other words, even those behemoth SOBs have become minority players.

That serves to make an important point. The critics are right that the SOBs are still there. But they’re wrong that they are a serious drain on productivity. SOBs now face more competition than ever before and simply don’t control the share of resources that they used too.

In early 2015, e-commerce giants Alibaba and Tencent launched themselves headfirst into becoming serious financial sector players. A Chinese banking regulator pilot program to establish privately-owned banks made this possible. The government’s support was on show when Premier Li himself launched Tencent’s new creation. He declared that part of its job was to ‘…[force] traditional financial institutions to accelerate reforms’.

Alibaba and Tencent are also going into the credit rating business. Again, that’s happened because the central bank opened up the credit reporting market to private firms. Premier Li’s work report earlier this month to the National People’s Congress didn’t mention privatisation at all. But it was full of references to relaxing market access for private participants.

That’s China’s economic reform agenda in a nutshell.

If you’re looking for SOEs and SOBs to be privatised in 2015, you’ll be disappointed. Better to put that to one side and look instead at China’s progress with competition and productivity.

James Laurenceson is Deputy Director of the Australia–China Relations Institute, University of Technology, Sydney.

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The mixed blessing of Asia’s growing middle class http://www.eastasiaforum.org/2015/03/23/the-mixed-blessing-of-asias-growing-middle-class/ http://www.eastasiaforum.org/2015/03/23/the-mixed-blessing-of-asias-growing-middle-class/#comments Mon, 23 Mar 2015 11:00:29 +0000 http://www.eastasiaforum.org/?p=45649 Author: Adrian C. Hayes, ANU

Everybody seems excited about the rise of a new, global middle class — especially in Asia. A report from Deutsche Bank states that ‘the burgeoning of Asia’s middle class makes it an important consumer market, an engine of economic growth in the region, and an important global political force’. The McKinsey Global Institute is even more emphatic: ‘We are quite simply witnessing the biggest economic transformation the world has ever seen as the populations of cities in emerging markets expand and enjoy rising incomes — producing a game-changing new wave of consumers with considerable spending power’.

But who are these people that are about to change the world? Are they really so deserving of our attention, and if so, why? What exactly is at stake in their rise?

For some development specialists, a defining characteristic of the growing middle class is that it represents people who are no longer poor. But there are different calculations and opinions on how the middle-class should be defined. For example, Martin Ravallion of the World Bank defines the global middle class as individuals earning between US$2–13 a day at 2005 purchasing power parity (PPP). In this definition, a person is part of the middle class of the developing world ‘if that person is not poor by developing country standards, though still poor by developed country standards’.

On the other hand, the Asian Development Bank (ADB) defines the middle class in terms of per capita consumption of between US$2–20 per day (at 2005 PPP). Different calculations of poverty have led some economists to argue that it makes more sense to define the new middle class in terms of their consumption rather than their simply being non-poor.

Using Ravallion’s definition, it was estimated that in the developing world approximately one person in three was in the middle class in 1990. In 2005 it was one in two. This means an extra 1.2 billion people joined the middle class in 15 years, with China accounting for about 632 million (52 per cent) and India 117 million (9.6 per cent). Careful analysis showed this was not the result of a simple horizontal shift in income distribution (whereby all incomes rise by a similar proportion), but rather of greater poverty reduction at the lower extremes and a ‘bunching up’ of people living just above the poverty line, so that in 2005 one person in six in the developing world was living on between US$2–3 a day.

Trends in the population dynamics of Asia’s middle class are complex and highly dependent on the shape of overall income distribution (which itself is changing), but the overall pattern is clear: the middle class in Asia’s emerging economies is growing faster than the population as a whole, and its aggregate income is growing faster still.

As the middle class grows in size and affluence it can become a force of its own for further economic growth. The middle class, when compared with powerful elites on the one hand or the poor on the other, includes population segments most committed to values aligned with sustained economic growth: they embrace competition and openness to the world; they admire innovation and entrepreneurship; they value education and personal development; and they have an insatiable demand for products and services to suit their needs for security, comfort and convenience. The enormous diversity of occupation and lifestyle in the middle class can also be seen as a valuable asset.

But things can go wrong too.

Thomas Piketty and others have shown that too much inequality is bad for growth, and even worse for general psychological wellbeing. In the case of Brazil the rising middle class was not strong enough to transform what the Massachusetts Institute of Technology’s Danon Acemoglu calls the ‘extractive institutions’ strengthening the rule of the elite. The emergence of a rising middle class does not mean that future middle-class growth is guaranteed if the institutions supporting open competition and innovation are not in place.

With the right political support Asia’s growing middle class can be an engine of economic growth regionally and globally, but its spending power also presents a challenge for achieving sustainable development. In the absence of transformational change to reduce externalities, more consumption means more demand on natural resources and more pollution.

No one denies Asian populations the right to develop, but national leaders and policymakers everywhere have a responsibility to initiate mechanisms to decouple economic growth and environmental degradation.

Middle class people support reducing pollution in their own local environments where they can see and enjoy the benefits, but finding the will to support regional or global action — as is needed to mitigate climate change — is more difficult. This will be easier if middle class growth is inclusive and some of the new wealth is used to eradicate poverty, support public goods and protect the environment. The model of development we see in many Asian cities — where the middle class retreats into its own world of gated communities, private schools and private hospitals — is not ideal.

The rise of Asia’s middle class may be part of the most momentous economic transformation in recent history, but national leaders need to make sure the right institutional structures are in place if this transformation is to produce long-term benefits for all.

A lot is at stake. A growing middle class can mean more people lifted out of poverty and leading comfortable and productive lives. But it can also mean more social inequality, more pollution, more congestion, and more loss of natural capital and public goods. History shows that while the middle classes can to a large extent make their own destinies, political leadership is vital if their rise is to contribute to broad-based national prosperity.

Adrian C. Hayes is an Adjunct Associate Professor at the Australian Demographic and Social Research Institute at the Australian National University.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

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Banking on America’s Asian choices http://www.eastasiaforum.org/2015/03/23/banking-on-americas-asian-choices/ http://www.eastasiaforum.org/2015/03/23/banking-on-americas-asian-choices/#comments Mon, 23 Mar 2015 01:00:12 +0000 http://www.eastasiaforum.org/?p=45643 Author: Peter Drysdale, East Asia Forum

The US–China relationship is undoubtedly the single most important bilateral relationship in the world today. More hinges on the successful management of that relationship, not only for Asian but also for global peace and prosperity, than on any other single relationship in the world.

US President Barack Obama boards Air Force One after a trip to Asia in late 2014. (Photo: AAP).

For all the anxieties about whether it will inevitably turn to dust, the objective judgment would have to be that, on balance, Sino–US relations have been managed remarkably well. The profound difficulties that are part and parcel of a relationship between the world’s pre-eminent economy and democracy and the world’s largest emerging single-party state have been handled deftly. Be it the response to the Bo Xilai affair or the Chen Guangcheng defection, sure-footedness distinguishes the outcomes, if not perhaps the nail-biting drama of getting things sorted behind the scenes. Seizing the strategic opportunity — on climate change, in managing the balance between America’s complex Asian alliances and China’s core security interests in Asia — has dominated the management style. That’s the score so far.

The Xi–Li leadership took a big step in elevating the relationship with Washington to a new level of strategic importance with the Obama–Xi meeting in California in June 2013, taking the intimacy of the relationship to a new height. These may be only the first steps towards thickening the processes of engagement but they signal intent and facilitate getting things right and getting things done.

There is a huge amount at stake, both economically and strategically, in their bilateral relationship for both the United States and China. For both countries, it is the most important of their bilateral relationships. And while it is certainly premature to frame the emergence of a more and more tightly-structured and managed bilateral relationship between the two countries as an alliance relationship (particularly absent close military ties, as is still the case), it is not in any way fanciful to see the relationship already developing many of the key characteristics of an alliance partnership. Certainly the current Chinese leadership is still telling itself that the relationship with the United States is its top priority and that to make it so has been its most important external achievement thus far.

How, then, should we interpret the clumsy US response to China’s Asian Infrastructure Investment Bank (AIIB) initiative, with its under-the-table arm-twisting of allies not to participate? Is it just a hapless and exceptional set of accidents or is it a harbinger of how things will be done down the track in US management of China relations?

Promoting infrastructure investment is seen as a particular priority in Asia and the Pacific. Meeting the US$8 trillion deficit that the Asian Development Bank (ADB) estimates in regional infrastructure demand is critical to the continuing growth and development of regional economies through deeper integration and connectivity and the role of these economies as the major engine of global growth for years to come.

As is widely recognised, finance is not the only constraint. But the scale of funding through the multilateral development banks such as the World Bank and the ADB, small relative to the size of demand, has shrunk in recent years, and there is clear scope for intermediating Asian savings to cope with the huge shortfall in infrastructure investment. In effect, to this point China has been locked out of increasing the capitalisation of existing global financial institutions to help fill the gap.

In this context, the AIIB — which was mooted around the APEC Summit in Indonesia in 2013 and formally launched by China around the APEC Summit in China last year — is an entirely welcome initiative. The existing multilateral development banks were created to reduce the transaction costs of assessing development projects, as well as to reduce the risks of these investments. At present, they are not making a significant contribution to the commercial financing of investment to upgrade or extend essential economic infrastructure, partly due to their limited financial capacity.

China already has large bilateral development financing programs. It can carry on with these, as other countries do, at will. The Chinese can do whatever infrastructure financing they wish unilaterally, but they have chosen to offer multilateral partnership in this initiative. The AIIB proposal is totally different from bilateral development funding: it is open to shareholding by any government and by private investors; participants will shape its governance and operations; it is designed to narrow gaps in the region’s economic infrastructure; and it represents a timely contribution to the provision of this class of international public goods. The idea that China’s global partners should stand back from participating in this process makes no sense: the Europeans have signed on; Australia should announce that it has imminently; and there is every reason why Japan and the United States should do the same.

In our lead essay this week, Evan Feigenbaum suggests that while the rise of new regional institutions and agreements in Asia will pose a growing and competitive challenge to US leadership in the Pacific, opposing all of them because of their origins is pointless and counterproductive. ‘For one, India and China are unwilling to live in perpetuity without changes to the Western-built architecture that prevailed a decade ago,’ he explains. ‘Nor is China the only driver of the new pan-Asianism. In the 1990s, it was Japanese bureaucrats who pushed for an Asian Monetary Union. And today, New Delhi’s involvement with the Beijing-backed Asian Infrastructure Investment Bank (AIIB) and BRICS institutions has taken place despite growing Indian ambivalence about China and even as India’s pursues enhanced quotas and shares in the Bretton Woods institutions’.

Feigenbaum proposes three tests that need to be applied in consideration of American national interests when determining how the US should respond to Asian initiatives. Which pan-Asian groups or pacts can Washington live with and which will undermine vital US interests? Which pan-Asian ideas supplement US-preferred approaches and which aim to supplant them? Can Washington propose an alternative that will better serve whatever purpose the initiative is meant to serve?

On all three tests, Feigenbaum finds no good cause for the US’s ham-fisted attempt to derail the AIIB.

So why has US-China (and US alliance) diplomacy gone so wrong over this issue?

For one thing, as the New York Times points out: ‘In significant ways, this is a problem of America’s own making. The United States has urged China to exercise more leadership, but the top posts at the International Monetary Fund, the World Bank and the Asian Development Bank have been restricted to Europeans, Americans and the Japanese. Congress bears considerable blame for refusing to pass legislation to shift voting power more fairly among IMF member states, including China. China’s move to create the new development bank is part of the price being paid for that obstruction’.

For another, there appears to have been dysfunctional and incomplete consideration of all the issues involved, with those without an expert background making and determining the play at an early stage — not only in the US but also slavishly and even more haplessly in Australia. This was too important an issue to be determined by security functionaries, outside its full strategic context, and far too important an issue to dissemble about along the way.

Hopefully this episode will not disturb good management of the US–China relationship in the long term and the United States will swing its weight in the right direction behind China’s effort to contribute through the AIIB to establishing an international public good, as it did in an earlier time when Japan moved to set up the Asian Development Bank.

Peter Drysdale is Editor of the East Asia Forum.

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The US must adapt to Asia’s new order http://www.eastasiaforum.org/2015/03/22/the-us-must-adapt-to-asias-new-order/ http://www.eastasiaforum.org/2015/03/22/the-us-must-adapt-to-asias-new-order/#comments Sun, 22 Mar 2015 11:00:03 +0000 http://www.eastasiaforum.org/?p=45636 Author: Evan A. Feigenbaum, Paulson Institute

The United States has dominated global economics and finance in the post-war era. But the rise of new regional institutions and agreements in Asia will pose a growing and lasting competitive challenge to US leadership in the Pacific.

Chinese President Xi Jinping and US President Barack Obama in 2014. (Photo: AAP).

To adapt and compete, American strategy must reflect a clear understanding of the depths and origins of change in Asia. The US cannot compete in either geopolitics or business unless it understands the sources of its competition in the first place.

The US still looms very large in the global economy, but in relative terms it is smaller than in 2008, much less 1998. Those two dates are important because the second of these financial crises bookended a tumultuous decade, further fuelling debates in Asia about overreliance on Western economies and the utility of an intraregional hedge against future volatility. After 2008, many Asian countries have emphasised domestic, intraregional, and emerging market demand.

But it was the crisis of 1997–98 that left a particularly searing legacy on many Asian countries. The US was perceived to be disconnected and aloof. Washington refused to bail out Thailand in 1997, just three years after bailing out Mexico. Many in Asia began looking to intraregional solutions. Asia-only currency swaps, Asia-only trade and investment pacts, regional bond funds, and other ideas emerged and evolved during this period. Many of these excluded the US.

Today, elements of that impulse can be seen in the Regional Comprehensive Economic Partnership (RCEP), the principal competitor to Washington’s Trans-Pacific Partnership (TPP), which includes the members of ASEAN and six regional powers but not the US.

Still, today’s pan-Asianism poses a tougher challenge than its 1990s variant, in part because the context has changed.

For one, India and China are unwilling to live in perpetuity without changes to the Western-built architecture that prevailed a decade ago.

Nor is China the only driver of the new pan-Asianism. In the 1990s, it was Japanese bureaucrats who pushed for an Asian Monetary Union. And today, New Delhi’s involvement with the Beijing-backed Asian Infrastructure Investment Bank (AIIB) and BRICS institutions has taken place despite growing Indian ambivalence about China and even as India’s pursues enhanced quotas and shares in the Bretton Woods institutions.

China seeks to leverage this new pan-Asianism as its foreign and economic policies converge in unprecedented ways. Beijing has pledged and spent staggering sums of money, leveraging state-backed financial vehicles for diplomatic and economic ends. But Beijing has more going for it than just its capital. Surrounded by rivals, China is said to be a ‘victim’ of its strategic geography, yet it also benefits from very favourable economic geography.

For these reasons, some pan-Asian formations are inevitable. They will progress regardless of Washington’s views and preferences, thus the US should approach some of what is happening — pan-Asian dialogue mechanisms, for example — much as it supports European institutions.

Ultimately, American policymakers must answer three questions.

First, which pan-Asian groups or pacts can Washington live with and which will undermine vital US interests? Those that merit vigilance will pursue functional agendas detrimental to US security, prosperity, market opportunities, or values.

Bloc-like trade agreements or non-tariff barriers meet this concern. But a pan-Asian infrastructure bank that finances bridges, roads, and rail links is not inherently exclusionary since US firms also benefit from better infrastructure and Washington does not itself offer large-scale project finance. The price of opposing non-vital threats may well exceed the cost of living or working with them.

Meanwhile, Washington needs strategic and tactical coherence. Currently it has neither: the Obama administration first argued that exclusion from Asian institutions inherently threatened US interests. With the East Asia Summit, mostly a talk shop, it encouraged allies to join and ultimately did so itself. But now, with the AIIB — a vehicle that will finance billions in infrastructure — Washington has discouraged its allies and held itself aloof.

Second, which pan-Asian ideas merely supplement US-preferred approaches and which aim to supplant them? An Asian contingency reserve fund and the AIIB will most likely supplement existing structures.

Third, Washington cannot beat something with nothing and simply has to up its own game. The TPP is perhaps the most glaring example. If an RCEP-like arrangement threatens US interests, then why hasn’t the US government put its full weight behind the TPP? The administration needs to work with Congress on the Trade Promotion Authority and ultimately bring the deal home.

Instead of outright opposition, Washington should at least be seeking an observer arrangement in the AIIB. If the lack of anticorruption and environmental standards is of concern, then it makes more sense to try to shape the new organisation’s standards than to remain aloof.

Above all, Washington needs to intensify its own economic diplomacy in Asia. This means encouraging a liberal, open, market-based economic order in the region. To this end, the TPP is necessary but insufficient. A broadened agenda would include bilateral investment treaties with China and India, creative public-private partnerships to inject the US into infrastructure developments in Southeast Asia, and sectoral agreements. Congress also needs to put more weight behind reforms of international financial institutions.

The US will remain a Pacific power and is an essential strategic balancer. With China unsettling its neighbours, America’s security-related role has been reinforced in recent years.

But as Asians increasingly rely on one another for economic public goods, Washington risks ceding leadership and missing opportunities by tilting at ideas whose trajectory it cannot easily halt and whose historical and ideological roots run deep.

The US has never feared competition, but — to defend their interests — Americans must adapt to the contours of a changing Asia.

Evan A. Feigenbaum is Vice Chairman of the Paulson Institute at the University of Chicago.

A longer version of this article was originally published here. Reprinted and adapted by permission of Foreign Affairs, (2 February 2015). Copyright (2015) by the Council on Foreign Relations, Inc.

 

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