Category Archives: Politics

China, Economic, Government, Politics

Economic (and political) reforms in China…

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ECONOMIC DATA from China reveals that growth has slowed sharply and that deflation has set in. As China’s economy is being weighed down by both a property slump and weak factory production, many may conclude that the received wisdom over China belongs to the pessimists. Certainly, manufacturing output is at its weakest since the dark days of the global financial crisis. In the first three months of 2015, GDP grew at ‘only’ 7% year-on-year. Growth predictions suggest that this year will probably be China’s weakest in 25 years.

After three soaring decades, fears are rising that China is on the verge of an economic crash. That would be a disaster. China is the world’s second-largest economy and Asia’s pre-eminent rising power. Fortunately, however, the pessimists are missing something from their presumptive models which are not truly reflective of China today. China is not only more economically robust than they allow, it is also putting itself through a quiet (and welcome) financial revolution.

The robustness rests on several pillars. The vast bulk of China’s debts are domestic, and the government still has enough leverage to stop debtors and creditors getting into a panic.

The country has been steadily shifting the balance away from investment and towards consumption, which will help to put the economy on a more stable footing. With a boom in services, China generated over 13m new urban jobs last year, a record that makes slower growth acceptable. Given China’s huge economy, expected growth of 7% this year would boost the global economy by more than 14% (compared to 2007).

But the real reason to doubt the pessimists is China’s reforms. After more than a decade of dithering, the government is acting in three vital areas. First, in finance, it has started to loosen control over interest rates and the flow of capital across China’s borders. The cost of credit has been historically and artificially low, minimising the returns available to savers, as well as succouring inefficient state-owned firms and pushing up investment. Caps on deposit rates are becoming less relevant, thanks now to an explosion of bank-account substitutes that have attracted almost a third of household savings. The governor of China’s central bank, Zhou Xiaochuan, has said there is a ‘high probability’ of full-rate liberalisation by the end of this year.

China is also becoming more tolerant of cross-border cash flows. Slowly but surely, the yuan is becoming more flexible; international conglomerates and multinational firms are able to move revenues abroad far more easily than before. The government’s determined stance to get the IMF to recognise the yuan as a convertible currency before the end of 2015 should pave the way for bolder reforms.

The second area is fiscal. In the early 1990s, reforms gave local government bodies greater responsibility for spending, but few and limited sources of access to revenue. China’s problem of too much investment since then largely stems from those policies. Stuck with a flimsy tax base, cities have relied on sales of land to fund their operations and have engaged in reckless off-balance-sheet borrowing.

The finance ministry insists it has a plan in place to sort out this mess by 2020. Part of those plans include central government transferring funds to the provinces for social priorities, while local government agencies are being promised more in tax revenues. A pilot programme has already been launched in an attempt to clear up local-government debt. This will lay the ground for a municipal-bond market – which, despite the risks, will likely be much better than today’s opaque funding for provinces and cities.

The third area of reform is administrative. At the start of his premiership in 2013, Prime Minister Li Keqiang pledged that he would cut red tape and bureaucracy by making life easier for private companies. Since then, there has been a boom in the registration of private firms: 3.6m were created last year, almost double the number registered in the previous year.

 TWO

IN TIME, the cumulative effects of these reforms will lead to capital being allocated more efficiently. Lenders will price risks more accurately, with the most deserving firms being given funding options and savers earning decent returns. This will have the effect of slowing China’s economy down – how could it not? – but gradually and without breaking the system.

Dangers will remain. Liberalisation breeds instability. When countries ranging from Thailand to South Korea dismantled capital controls in the 1990s, their asset prices and external debts surged, which ultimately led to the then banking crises of south east Asia. China has strong defences but nonetheless its foreign borrowing is rising and its stockmarket is up by three-quarters in just six months.

How politics changes in China is also important. Whilst the economic reforms the country proposes have high-level backing, the anti-corruption campaign of President Xi Jinping means that Chinese officials live in a state of constant fear of state investigators. Many officials dare not engage in local experiments for fear of offending someone powerful.

Political reforms matter, too, because there is a pressing need to end the dire system of hukou, or household registration, which relegates some 300m people who have migrated to cities from the countryside to second-class status and hinders their ability to become empowered consumers. Similarly, farmers and ex-farmers need the right to sell their houses and land, or they will not be able to share in China’s transformation.

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Britain, Europe, Foreign Affairs, Government, NATO, Politics, Society, United States

Britain’s shrinking influence on the global stage…

BRITISH FOREIGN POLICY

SOME two decades ago the British foreign secretary, Douglas Herd, decreed that Britain should aim to ‘punch above its weight in the world’. Today the country seems hesitant, reluctant even, to enter the ring. Some, such as a recently retired British NATO chief, have even complained that the prime minister, David Cameron, has become a ‘foreign-policy irrelevance’. America continues to despair of Britain’s shrinking armed forces and has openly criticised Britain’s ‘constant accommodation’ of China. Allies are worried, and so they should be given world events as they are. For example, consider Britain’s non-adoptive approach over events between Russia and Ukraine.

Yet, despite the world’s tensions, the country’s politicians, who are fighting to win a general election on May 7th, appear unbothered by those expressing concern. That is a mistake. Britain’s diminishing global clout and influence has become a big problem, both for the country and the world.

A powerful force in relative decline, Britain’s propensity is to veer between hubristic intervention abroad and anxious introspection at home. Following Tony Blair’s expeditionary misadventures in Iraq and Afghanistan, conflicts which cost us heavily, Britain’s coalition government was always going to shun grand schemes. Now, it would seem, is that our ruling politicians are not so much cautious, but apathetic, ineffective and fickle.

The prime minister did make a brave and passionate case for armed intervention and assistance in toppling the Libyan regime of Muammar Qaddafi. But like so many other examples concerning foreign intervention he did not reckon for the day after and Libya is now in a state of internecine civil war. He led America to believe that Britain would support it in bombing raids over Syria, only to find that his parliamentary vote was bungled by strong political opposition. Britain may have been one of the moving forces behind the workings of the 1994 Budapest memorandum, which ostensibly guaranteed Ukraine’s security when it gave up its Soviet-era nuclear weapons, but the prime minister has been almost absent in dealing with Russian revanchist aggression against it. Last year, too, as host of a NATO summit in Wales, David Cameron urged the alliance’s members to pledge at least 2% of their GDP to defence. Just months later, a fiscally straightened Britain intent on deficit reduction at all costs looks poised even to break its own rule.

David Cameron’s pledge of an in-out referendum on Europe if he wins the election has given the impression of Britain being semi-detached. Rather than counteracting that position through vigorous diplomacy, the prime minister has reinforced it. In European Union summits, for instance, he has often been underprepared and zealously overambitious. His rather humiliating and embarrassing attempt to block Jean-Claude Juncker from becoming EU president of the Commission left him with only Hungary for company as a dissenting voice. Mr Cameron’s insistence of pulling the Conservatives out of the EU’s main centre-right political group has had the unintended effect of cutting Britain out of vital discussions with other centre-right leaders, such as Angela Merkel of Germany.

And what of Labour? Ed Miliband, the party’s leader, may well be pro-European, but he has no more connection of American foreign policy than Mr Cameron does. He apologises for Labour’s interventionist history so strenuously and unreservedly that he leaves little or no room for liberal intervention. And, of course, differing arguments abound from all political parties over the submarine-based nuclear-missile system that is seen by the Conservative Party as a pillar of Britain’s relations with America and NATO – an argument that swings to total rejection when it comes to the Scottish Nationalist Party, a position which rankles right-wing politicians as the SNP could end up propping-up a potential Labour minority government through confidence and supply motions.

Those who defend the prime minister say that Britons are war weary and impoverished. What do they say, then, of Mrs Merkel and François Hollande, the French president, who have shown that you can have an active foreign policy while dealing with an economic crisis?

Liberal values and promoting international co-operation require defending, especially so just now. New emerging powers, particularly China, want a far bigger say in how the world works. By seizing Crimea at will, and invading Ukraine, Vladimir Putin’s Russia has challenged norms of behaviour that were established after the Versailles Treaty and Second World War. If Britain now refuses to stand up for its values, it will inherit and become part of a world that will be less to its liking.

Britain is still well placed to make a difference. With a great diplomatic tradition, a permanent seat on the UN Security Council and reasonably strong ties to Europe and America, Britain ought to be pushing hard to extend open trade, human rights and international law as well as providing impetus towards new agendas against crime, terrorism and climate change.

If Britain is to make its voice heard, it needs to bulk up its diplomacy and armed forces. Pledging to spend 2% of GDP on defence may seem arbitrary but it is a crucial sign to America and other countries that Britain is prepared to pull its weight in exchange for NATO’s guarantee of joint security. This should make more sense than the obscure commitment to spend a lavish amount of 0.7% of GDP on foreign aid.

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Government, Iran, Politics, Society, United Nations, United States

Iran and nuclear talks…

IRAN

Intro: Yet whatever comes of these negotiations will make it unlikely they will be seen as historic. If a comprehensive agreement is signed by the end of June it will be regarded as an important milestone passed on the way

The lengthy and protracted talks in Lausanne between Iran and six world powers in forging a deal to constrain its nuclear programme ran straight through the March 31st deadline. The cause of the overrun (and hence the need for more haggling) has been due to the tension between the fuzzy declaration of principles that the Iranians would prefer and the detailed framework agreement that the United States would need to persuade a sceptical Congress to postpone a vote on new sanctions on April 14th.

For Iran, any deal would require the staged lifting of sanctions. The Americans want precise numbers on how many uranium enrichment centrifuges Iran can activate, the exact quantities of uranium held and how much plutonium can be discharged at the reactor at Arak. At this stage, though, the Iranians want to avoid the specifics on its nuclear limits, while eager to secure firm commitments on the lifting of sanctions – particularly those imposed by the United Nations. For its part, the West wants automatic ‘snap-back’ on sanctions if any serious violation by Iran is detected, but Iran has rejected this demand.

Yet whatever comes of these negotiations will make it unlikely they will be seen as historic. If a comprehensive agreement is signed by the end of June it will be regarded as an important milestone passed on the way. But if the process collapses, the accord would amount to no more than a brave effort that met with failure.

The broad aim in Lausanne is to leave Iran free from most of the sanctions and far enough from acquiring a nuclear weapon. But the apparent inability to nail down critical details and the number of issues that remain unresolved means that the next phase of talks are likely to be even tougher. For America and its allies, forestalling Iran on the building of a nuclear weapon is first and foremost, as this would reduce the incentives for other regional powers, such as Saudi Arabia and Egypt, to move towards the nuclear threshold themselves.

The yardstick is Iran’s ‘breakout capability’. This is the time it would take to produce enough weapons-grade uranium for one device. Extending it from a couple of months, the situation today, to at least a year is a sensible and quantifiable goal. Iran had previously indicated it would cut its number of operating centrifuges to about 6,500. Not yet agreed is the amount of low-enriched uranium Iran will be allowed to stockpile – a variable which directly links to the number of centrifuges it can keep.

Iran requires low-enriched uranium for its medical and other civilian projects, but such stockpiles can easily be enriched to weapons grade material. However, the biggest problems which still need to be tackled lie elsewhere. There remains ambiguity about what rights the Iranians will have to continue nuclear research and development. Iran is working on centrifuges up to 20 times faster than today’s which they want to start deploying when the agreement’s first ten years are up. Better centrifuges would reduce the size of the covert enrichment facilities that Iran would need to build a weapon if it were so intent on escaping the agreement’s scriptures. That’s a real concern, as detection by the West would be far more difficult.

This leads to the issue on which everything else will eventually hinge. Iran has a long history of deception about its nuclear programme. For instance, it only declared its two enrichment facilities at Natanz and Fordow following exposure by U.S. intelligence. A highly intrusive inspection and verification regime is thus essential, and would have to continue long after other elements of an agreement expire. Compliance would mean inspectors from the IAEA being able to inspect any facility, declared or otherwise, civil or military, on demand.

IAEA powers are far more sweeping than those which exist under the safeguard agreements that are part of the Nuclear Non-Proliferation Treaty (NPT). Under the ‘additional protocol’ granted to the IAEA, inspectors are allowed not only to verify that declared nuclear material is not being squirrelled away for military use but also to check for undeclared nuclear material and activities. In Iran’s case, such powers for the IAEA are seen as essential.

For a deal to be concluded in June, Tehran will have to consent to such a rigorous inspection regime. It will also have to address a string of questions posed by the IAEA over the ‘possible military dimensions’ of its nuclear programme. On March 23rd IAEA’s director, Yukiya Amano, said that Iran had only replied to one of those questions. Parchin, a military base which the IAEA believes may have been used for testing the high-explosive fuses that are needed to implode, and thus set off, the uranium or plutonium at the core of a bomb, remains strictly out of bounds. Nor has the agency been given access to some of Iran’s leading scientists such as Mohsen Fakhrizadeh, the physicist and Revolutionary Guard officer who is alleged to be at the heart of the research on weapons development.

The IAEA’s report on Iran in February stated that it ‘remains concerned about the possible existence – of undisclosed nuclear-related activities – including activities related to the development of a nuclear payload for a missile.’ Iran insists it will only sign up to strict new inspections when all the main elements of the deal are in place.

II

IT WOULD APPEAR that the talks in Lausanne concerning Iran’s nuclear ambitions are nearing a deal. But there will be questions as to whether the agreement is a good one, or whether indeed it allows Iran to keep a stockpile of centrifuges that can then be used to produce weapons grade enriched uranium. Analysts will be scrutinising the deal for signs of how this agreement will help move towards global security.

Iran continues to insist that it wants the nuclear technology for power plants and peaceful purposes only. It would be fair to say that there is a degree of scepticism around that as, Israel, for instance, remains very concerned and has threatened to attack Iran if it feels that is the only way to protect itself from nuclear attack. Israel’s rhetoric should not just be taken as soundbites. Israel has carried out a number of airstrikes in protection of its sovereignty over the years as far back as 1981. Then it carried out the world’s first airstrike against a nuclear plant when its jets bombed a French-built site in Iraq. Perhaps under US pressure Prime Minister Binyamin Netanyahu has not played up past threats to attack Iran.

Whilst the Israelis are not party to the talks that is not to say they are in favour of how the talks are going. The deal being proposed in Switzerland now has taken some 18-months to arrive at. Mr Netanyahu has reiterated his opposition to the draft, saying it ‘bears out all of our fears, and even more than that’. Others, like the British, insist that any deal must put the bomb beyond the reach of Iran. But the problem here is that Israel does not believe that the restrictions being imposed would do that if Iran chose to suddenly abandon the agreement and gear up its nuclear programme through clandestine means.

There are only eight countries that have successfully detonated nuclear weapons – the United States, Russia, Britain, France, China, India, Pakistan and North Korea. It is widely believed that Israel also has nuclear weapons, a point the country is deliberately vague about.

The sceptics will always say that any deal will simply legitimise parts of the process and therefore make it easier for Iran to build a nuclear weapon should it choose to do so. There will also be long-term doubts about keeping all the necessary equipment and expertise for bomb-making out of Iran. How can we ever be sure the sanctions being applied are effective and fully-working for which they were intended?

In a passive sense, and in the long-term, it is surely better to have negotiations that keep Iran talking to the international community, as isolation would probably work against long-term peace and security.

Putting the bomb beyond reach is imperative. And the processes involved to make sure that does indeed happen must be verifiable, with confidence and accountability in that verification process.

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