China's economic plan

In addition to my previous blog on China-U.S. relations, David Dollar, a World Bank economist specializing in East Asian economics, provides his policy recommendations for the Chinese government during this economic crisis. Below is a round-up of his main points:

In the Asian crisis of 1997-98, China stimulated its economy with a lot of infrastructure projects aimed at bottlenecks in roads, seaports, airports and power. Now, there are no major bottlenecks in those areas, yet some local governments would love new projects, even if they have little future payoff. So, the challenge is keeping the stimulus program focused on legitimate future needs, not white elephants.

Another concern about the stimulus package is that it aims at limiting the damage in the industrial sectors. Of course, the government wants to avoid allowing those sectors to decline too rapidly. But over time one would want relative decline of industry and a shift in the growth model...

...China enters this crisis in excellent fiscal shape; hence it has huge potential to increase transfers through its minimum income support and other safety nets, build up health and education, and follow through on infrastructure projects. Hence, if growth continues to falter, my advice is, “think big” when it comes to government programs and spending this year...

...A second key task for China is to keep open its trade regime and look for opportunities to liberalize further. China’s merchandise trade is quite open compared to other developing countries, and through its World Trade Organization commitments, the country has taken initial steps to open service markets.

Many countries, particularly developing countries that rely on commodity exports to China will be watching and praying that the Chinese plan works.

U.S.-China economic relations

Two giants, one world

The U.S. and China share the world's most important bilateral relationship. This relationship differs both in context and in style from the U.S.-Soviet relationship of the Cold War era. Washington-Moscow relations revolved around ideological competition, hard military confrontation and deep mistrust and hatred; Washington-Beijing relations are characterized by economic interdependency and shared interests in regional and global security issues. Nonetheless, the relationship is complex and is being made more so by the current global economic crisis.

We float together, we drawn together

China and the U.S. are so economical interdependent that any major economic policy shift by either country will surely affect the other. China's massive holdings of U.S. denominated assets are an increasing source of anxiety for both sides today. The Chinese media has accused the U.S. of unleashing a "financial tsunami" and a "financial WMD" on the international economy as a result of incompetent management of its financial sector. Many Americans for their part have long derided what they see as China's unfair manipulation of its currency.

Over two decades of export-led growth have dramatically improved China's economic power. The large foreign reserves that have been accumulated are a source of tremendous national pride and seen as symbolic of China's renaissance on the world stage. Beijing has assertively communicated to the U.S. that it expects its investments to be protected. The Chinese have gone so far as demanding official guarantees from the U.S. to safeguard the value of their US$ 682 billion Treasury bonds holdings.

An unsustainable situation

The reality is that the relationship between China and the U.S. is no longer sustainable for the world economy. The recycling formula whereby China would produce cheap goods for American consumers and channel the majority of its export earnings back into the U.S. economy is indirectly responsible for the abundant and cheap money supply in the U.S. that led to the housing and banking crisis.

It seems that Chinese authorities are well aware that they must put more emphasize on raising domestic demand and move away from their export-heavy strategy. In order to do this, China must strengthen the extent and quality of social service provisions to its citizenry in order to encourage more spending and less saving. China as a whole saves almost 50% of its income, which is previously unheard of during peace time.

Furthermore, China has to gradually raise the income of its people. This will need to be done by investing in more productive capital, investing heavily in education to make its population competitive in today's global economy and gradually allowing its currency to appreciate in order to strengthen the purchasing power of the Renminbi.

This kid is incredible!

Football is a global game but it's rare to see this type of prodigy. This kid is simply unbelievable. He's ONLY 6 YEARS OLD!!!

See it to believe it!

Public Diplomacy is the U.S.'s most powerful tool in its arsenal vis-a-vis the Middle East

The U.S. has lost much influence and reputation in the Middle East today. The military-heavy strategy of the Bush administration in dealing with the broader Middle Eastern region - under the aegis of the U.S. military's Central Command (CentComm) - is increasingly counterproductive for safeguarding long-term U.S. interests.

Many have long ago argued for a shift away from the hammer and closer to dialogue and diplomacy. This essay written in 2003 by Marc Lynch calls for more listening and less dictating to the Arab world. It is also fittingly poignant for the Obama Administration; especially as it begins to get it's feet wet with the region.

The U.S. can better put to use its massive technological and information superiority via public and official diplomacy, track-two diplomatic initiatives and most importantly, simply listening more and talking less.

The years of the Bush and Cheney Administration dictating about democracy, freedom, good and evil have cleary not produce the intented results. Could it be that it's because Mr. Bush and Cheney forgot the simple yet time-tested adage that "we have two ears and one mouth, which means we should listen twice as much as we talk"?

Dubai: Is the Miracle Over?

Dubai has marketed itself as the investor's future dream economy. The city-state built itself on the back of oil revenue but in recent years it has banked on a mass economic diversification campaign to maintain the economic growth long after the oil runs out.

However, hard economic times are quickly eroding the reputation it has worked so hard to build and putting in peril its future plans to establish itself as the hub of Middle Eastern finance, tourism and knowledge industries. As a sign of the worsening economic outlook, the Dubai government has canceled 86% more residence visas in January 2009 than a year earlier. The government has hinted that it may go into the red for the first time ever in this year's budget spending.

Although Dubai does not possess the vast energy resources of Abu Dhabi or Qatar, it did benefit significantly from the high oil prices of the past few years, reaching $150 dollars a barrel at their peak. Large swaths of the windfall from oil revenues was invested overseas through its Sovereign Wealth Fund. Private investment was also pouring into the country at head-spinning speed, especially in the construction and infrastructure industries. Real estate and massive development projects attracted cheap foreign labour from South Asia, and developers saw the opportunity for a quick buck.

However, the real estate bubble is quickly unraveling. Developers have seen their cashflows dry up. Their two primary sources of financing, banks and pre-payments for yet to be completed projects, have both dried up. Clients are not buying and banks have stopped lending. The government has lost billions of its investments due to the American financial collapse.

Of course this was all predictable. As Dubai decided to connect itself to the global economic switchboard by wholeheartedly adopting liberal economic policies it has benefited immensely in terms of growth and wealth development. This cannot be denied. However, I have always had my doubts about Dubai's shake-and-bake economy. Let's remember that the city-state has dwindling natural resources, a small population and little substantial industrial capacity.

I am closely watching the government's reaction to the economic woes. It has important alternative energy plans and has put all its eggs in one basket in trying to develop into a modern 21st century knowledge economy. This of course is the plan, whether it will be possible is an entirely different story.

Don't get reactionary, get nostalgic!

I love this quote in Thomas Friedman's Op-Ed:

"Dear America, please remember how you got to be the wealthiest country in history. It wasn't through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: Build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat."

Obama between protectionism and world trade

Obama is in the unenviable position of trying to tame two wild horses with regards to his economic policies. One one hand, he had campaigned on the direct promise to create millions of new jobs for Americans. On the other, he understands the need to steer away from the path of short-sided protectionism that led to the beggar-thy-neighbour policies of the Great Depression era. The former aims to placate angry Americans loosing their jobs; the latter anxious foreign governments waiting to see whether the U.S. would block their exporters from a peace of the 800 billion pie.

The task seems much harder said than done. To ensure that the fiscal stimulus will have the desired effect of job creation, the congressional bill includes the controversial 'Buy American' clause, allowing only U.S. steel, iron and manufactured goods to be used in any government funded projects included in the stimulus package.

This has enraged the Europeans who have threatened retaliatory measures. U.S. exporters like Caterpillar and General Electric, who were looking to tap into the billions of construction projects planned by European governments, are concerned at the prospects of loosing business abroad as a result of foreign backlash against 'Buy American'.

Obama and his economic policy team certainly have a difficult circle to square. Let's see where this tug-of-war between protectionist impulses and neoliberal economics leads us.

A shameful act that happens all too often

The kidnapping of John Solecki, an official of the United Nations High Commission for Refugees (UNHCR) in Pakistan is a reprehensible act. The killing of his driver even more so.

I have first hand knowledge of the good-natured work of the UNHCR from my days in the Ministry of Citizenship and Immigration Canada working on refugee issues. UNHCR was always a first-class partner and their mandate was strictly based on safeguarding the sanctity, security and future of the world's most vulnerable people, the refugees.

It is inexcusable for groups not to distinguish between enemies and those who have apolitical and humanitarian goals in a war zone. Sadly, the targetting of non-combattants seems to reoccur in virtually every major flashpoint region over and over again.