Trump prepares to pass the world leadership baton to China


March 19, 2017

Trump prepares to pass the world leadership baton to China

by Fareed Zakaria

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https://www.washingtonpost.com/opinions/trump-prepares-to-pass-the-world-leadership-baton-to-china/2017/03/16/c64ccee2-0a84-11e7-a15f-a58d4a988474_story.html?utm_term=.d4e26b95c9c6

We do not yet have the official agenda for next month’s meeting in Florida between President Trump and Chinese President Xi Jinping. But after 75 years of U.S. leadership on the world stage, the Mar-a-Lago summit might mark the beginning of a handover of power from the United States to China. Trump has embraced a policy of retreat from the world, opening a space that will be eagerly filled by the Communist Party of China.

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Trump railed against China on the campaign trail, bellowing that it was “raping” the United States. He vowed to label it a currency manipulator on his first day in office. But in his first interaction with Beijing, he caved. Weeks after his election, Trump speculated that he might upgrade relations with Taiwan. In response, Xi froze all contacts between Beijing and Washington on all issues, demanding that Trump reverse himself — which is exactly what happened. (Perhaps just coincidentally, a few weeks later, the Chinese government granted the Trump Organization dozens of trademark rights in China, with a speed and on a scale that surprised many experts.)

The Trump administration’s vision for disengagement from the world is a godsend for China. Look at Trump’s proposed budget, which would cut spending on “soft power” — diplomacy, foreign aid, international organizations — by 28 percent. Beijing, by contrast, has quadrupled the budget of its foreign ministry in the past decade. And that doesn’t include its massive spending on aid and development across Asia and Africa. Just tallying some of Beijing’s key development commitments, George Washington University’s David Shambaugh estimates the total at $1.4 trillion, compared with the Marshall Plan, which in today’s dollars would cost about $100 billion.

China’s growing diplomatic strength matters. An Asian head of government recently told me that at every regional conference, “Washington sends a couple of diplomats, whereas Beijing sends dozens. The Chinese are there at every committee meeting, and you are not.” The result, he said, is that Beijing is increasingly setting the Asian agenda.

The Trump administration wants to skimp on U.S. funding for the United Nations. This is music to Chinese ears. Beijing has been trying to gain influence in the global body for years. It has increased its funding for the U.N. across the board and would likely be delighted to pick up the slack as the United States withdraws. As Foreign Policy magazine’s Colum Lynch observes, China has already become the second-largest funder of U.N. peacekeeping and has more peacekeepers than the other four permanent Security Council members combined. Of course, in return for this, China will gain increased influence, from key appointments to shifts in policy throughout the U.N. system.

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The first major act of the Trump administration was to pull the United States out of the Trans-Pacific Partnership, a treaty that would have opened up long-closed economies such as Japan and Vietnam, but also would have created a bloc that could stand up to China’s increasing domination of trade in Asia. The TPP was, in Singaporean Prime Minister Lee Hsien Loong’s words, “a litmus test” of U.S. credibility in Asia. With Washington’s withdrawal, even staunchly pro-American allies such as Australia are hedging their bets. Australian Prime Minister Malcolm Turnbull has raised the possibility of China joining the TPP, essentially turning a group that was meant to be a deterrent against China into one more arm of Chinese influence.

The United States’ global role has always meant being at the cutting edge in science, education and culture. Here again, Washington is scaling back while Beijing is ramping up. In Trump’s proposed budget, the National Institutes of Health, NASA and the national laboratories face crippling cuts, as do many exchange programs that have brought generations of young leaders to be trained in the United States and exposed to American values. Beijing, meanwhile, has continued to expand “Confucius Institutes” around the world and now offers 20,000 scholarships for foreign students to go to China. Its funding for big science rises every year. The world’s largest telescope is in China, not the United States.

The Trump administration does want a bigger military. But that has never been how China has sought to compete with U.S. power. Chinese leaders have pointed out to me that this was the Soviet strategy during the Cold War, one that failed miserably. The implication was: Let Washington waste resources on the Pentagon, while Beijing would focus on economics, technology and soft power.

Trump’s new national security adviser, H.R. McMaster, once remarked that trying to fight the United States symmetrically — tank for tank — was “stupid.” The smart strategy would be an asymmetrical one. The Chinese seem to understand this.

Playing Malaysia’s Number Game


March 13, 2017

Manjit Bhatia’s article’s article is on my blog.

https://dinmerican.wordpress.com/2017/03/08/najibs-criminal-state-of-mind/

Image result for Najib Razak and the Malaysian economyThe Malaysian Treasury is all but full

What follows is my friend Nurhisham Hussein’s response.

My own reaction is that I do not trust Malaysian government statistics since they are subject to manipulation by politicians in power. I do respect Nurhisham’s views and commend him for attempting to defend  “economic data from Malaysia”.

The sad truth is that there is so much fake news from Najib Razak and his cohorts in recent years that I have difficulty in knowing what is fact and what is fiction. It is something I experienced in attempting to figure out Donald Trump. But when it comes to Malaysia it is pretty straight forward since in the Malaysian context, fiction is fact.

By the way, what China has to do with the issues raised in Manjit’s article. This statement which I quote from Nurhisham’s article –“One of the key tests to determine whether economic data is falsified is internal consistency and statistical irregularity. China, for example, fails on both counts”–is irrelevant.

Allow me to quote a comment from Greg Balkin who regards Nurhisham’s article as: “A very strong rebuttal to Manjit Bhatia’s shoddy arguments.

Unlike MB who simply fights against the wind and even with his own shadow, at least Nurhisham Hussein provided actual facts and statistics for readers to contemplate on and question if necessary.

As a long-time Southeast Asia watcher, I have been very concerned about Malaysia which is increasingly beset with contradictory developments. Economically, it continues to grow faster than some neighbouring countries such as Thailand and Cambodia (That is bull Greg, check your facts on Cambodia from the Asian Development Bank before making your comment. In its most recent assessment,the Bank described Cambodia as an emerging tiger economy), yet it is mired in a series of financial scandals over the past three years, not to mention the worrying political scene.

The problem is many Malaysians have lost faith in the Najib Administration to the extent that any article that chastises Putrajaya is welcome even if it is not backed up with facts and statistics. One can read many of them on Malaysiakini or Free Malaysia Today. But it does not help Malaysians to develop a more critical mind when it comes to holding the powers-that-be to account.

This explains why many opposition leaders, blinded by popular support and swayed by populist sentiment, simply make one unsubstantiated allegation after another, only to find their position untenable and forced to retract thereafter.

No worries, for they have the people behind them whose negative perceptions of the government are already cast in stone and it matters not if these allegations hold water. If this vicious circle persists, I would not surprise to see Malaysia vote out UMNO and replace it with another set of arrogant politicians armed with half-baked policies to administer the country.

But it is a politician’s job to make sensational yet unsubstantiated claims, and an economist’s one to right them. Precisely why MB’s latest article is not only a huge letdown, but one that is unbecoming of his credentials, if any.”

Let me present an alternative reaction to Nurhisham’s article. It is from someone who calls himself Bumiputera Graduate as follows:

“I am unsure if Nurhisham is trying to shore up confidence in the Malaysian economy or defend the credibility of social and economic data produced in Malaysia.

I think Nurhisham is an expert at  the sleight of hand.  He has shifted the focus in the article from the main points that Manjit is making to those where Manjit is inaccurate.

Among the inaccuracies Nurhisham pointed out is that Malaysia does publish its labour force participation numbers, and that its budget deficit is going down. But Nurhisham doesn’t deny that perceived inflation figures are higher than reported figures; he only says it’s also the case with the US, which is not an answer at all.

He doesn’t touch on Manjit’s point on Bank Negara Malaysia manipulating the currency. Is Manjit right? Or is he wrong? Nurhisham says that his friends and associates at IMF and the World Bank have full confidence in Malaysia’s statistics.

Who knows if Manjit’s friends at the Fund and the Bank don’t have any confidence in Malaysia’s statistics. Hardly an argument worth a pinch of salt coming from the general manager, economics and capital markets of a government agency – the Employers Provident Fund – whose investment decisions are themselves questionable.

Again, when there are conservative estimates of 2 million undocumented migrant workers, with what confidence will you say that the minimum wage is implemented?

The labour market, going by his 3.6% indicator, may be at full employment, but he’s sweeping away the big problem of graduate unemployment (predominantly a Malay problem), the huge migrant labour problem, and the low productivity.

But if Manjit does a bit more of research and does a full article on the Malaysian economy, he may come up with a longer menu of issues that plague the economy than Nurhisham will be able to defend.

Manjit Bhatia, the byline says, is with a risk analysis company. If people like Manjit have views like this, that says a lot for the confidence that foreign analysts have in the Malaysian economy.

I think Nurhisham fails miserably in trying to shore up optimism in the economy, if that was his intention, even as he defends the credibility of data coming from Malaysia. With rebuttals such as his, what little confidence the public has, will further slide down.”

I leave you, my blog readers, to decide between the two views (Greg Balkin and Bumiputera Graduate). As far as I am concerned, and if I have surplus cash to invest, I will stay out the Malaysian stock exchange, the bond market and the Malaysian ringgit for a while, since I have no confidence in the Najib Administration’s management of the Malaysian economy. –Din Merican

 Playing Malaysia’s number game

by Nurhisham Hussein

The article further states that there is no data for the job participation rate in Malaysia. This is rather unconventional classification, as everyone else uses the term labour force participation rate (LFPR) instead. In any case, the article is completely mistaken. The LFPR for Malaysia has been available at monthly frequencies since 2009, quarterly since 1998, and annual frequencies going back to 1982. The annual numbers are further broken down by age, gender, education, and ethnic background. The data shows, far from a decline in labour market conditions, a steeply rising LFPR from 62.6 per cent in 2009, to a near record high of 67.6 per cent in 2016 (with a long term average of 65 per cent). It should also be noted that Malaysia’s long term average unemployment rate is just under 4 per cent. At the current rate of 3.6 per cent, the labour market would still be considered to be at full employment.

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Between Idris Jala and Najib Razak–A Deformed Malaysia

The article goes on to say that Malaysia’s minimum wage is scarcely enforced. On the contrary, data from the EPF, to which all salaried workers are required to contribute, show a massive shift in Malaysia’s salary distribution when the minimum wage was introduced in 2013. Fully 10 per cent of the workforce shifted from below the minimum wage to above it, and the wage effect was evident across the entire bottom half of the distribution.

Fourth, the article claims that, “In Kuala Lumpur alone, credible estimates put inflation at least twice the ‘official’ number”, and “inflation hits close to double-digits, in real terms, according to some investment banks’ research.” The second statement is nonsensical – there is no such thing as inflation in “real” terms, because in economics real prices of goods refer to inflation-adjusted prices. But the larger point – that inflation is perceived to be higher than official statistics – is actually well known. Well known because the same discrepancy has been documented nearly everywhere.

A recent Federal Reserve research note explicitly addressing this issue, found that US citizens perceptions of inflation were consistently twice as high as the official statistics. Why that is so is an interesting question in itself and would take far too long to explore, but the larger point is that differences between perception and official statistics cannot be taken as prima facie evidence that those statistics are false. There is plenty of evidence that the opposite is true, for example via MIT’s Billion Prices Project, that it is perceptions that are mistaken and not the statistics. Furthermore, research into the methodology and mechanics of constructing consumer price indices conclude that if anything, the CPI tends to overstate inflation, not understate it.

Fifth, the article claims Malaysia’s fiscal deficit and national debt are “ballooning”. In fact, the deficit has been halved since 2009, to just 3.1 per cent for 2016, while the debt to GDP ratio has been kept under the 55 per cent limit the government imposed on itself. Manufacturing, far from being routed, has continued to thrive, with sales breaching an all time high of ringgit 60 billion a month over the past few months. Moreover, Malaysia has been one of the very few countries in the region to record positive trade growth over the past two years.

In the Age of Trump, democratic institutions are under attack everywhere. Trust in public institutions has declined, not just in Malaysia, but globally. Globalisation itself is in retreat, and schisms and conflicts that we thought were gone, have arisen anew. Be that as it may, undermining confidence in public institutions without substantive evidence reinforces these troubling trends, and works against the very foundations of a democratic society. Without them, the very thing that Manjit Bhatia appears to be arguing for, becomes further from reality.

Nurhisham Hussein is General Manager, Economics and Capital Markets at Employees Provident Fund, Malaysia.

The Intellectual Journal of Trumpism Is Born


March 11, 2017

The Intellectual Journal of Trumpism Is Born

by Jonah Goldberg
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Can a new magazine launched to defend Trump take ideas seriously? Our former colleague Eliana Johnson has a short profile of the guy launching American Affairs, the forthcoming intellectual journal of Trumpism, rising Phoenix-like from the ashes of the Journal of American Greatness.

A 30-year-old conservative wunderkind is out to intellectualize Trumpism, the amorphous ideology that lifted its namesake to the presidency in November. Until recently, the idea itself was an oxymoron, since Trumpism has consisted in large part of the President-elect’s ruthless evisceration of the country’s intellectual elite. But next month, Julius Krein, a 2008 Harvard graduate who has spent most of his admittedly short career in finance, is launching a journal of public policy and political philosophy with an eye toward laying the intellectual foundation for the Trump movement. If his nerdy swagger is any indication, he has big ambitions: He noted wryly that he is — “coincidentally” — the same age that William F. Buckley Jr. was six decades ago when he founded National Review, the magazine that became the flagship of the conservative movement. No offense to Krein, but he should keep the comparisons to Bill Buckley to a minimum. No one wins from such comparisons (except Buckley), and raising expectations you can’t meet strikes me as a bad idea. But other than that, I’m glad someone is doing this.

The conservative movement needs more idea-development, not less. I agree with Yuval Levin, who tells Johnson, “Not nearly enough of that is happening around the changes we’ve seen in this election.” Also, a thing like “Trumpism” deserves an intellectual effort to define it in non-pejorative terms. That said, I’m skeptical of some of Krein’s larger ambitions. Johnson reports that American Affairs will “launch in both a print and digital version, and a substantial portion of the funding will come from Krein himself. He said donors to traditional conservative institutions have been ’surprisingly’ receptive to his pitch, though he declined to name the additional contributors.” How receptive could the donors be if the editor is largely self-funding?

But that’s nitpicking. Krein also said, “We hope not only to encourage a rethinking of the theoretical foundations of ‘conservatism’ but also to promote a broader realignment of American politics.” That’s a pretty tall order for a hedge-fund guy in his spare time. It’s even harder when Donald Trump is your lodestar. I’m quoted in the piece: “It will take a good deal of time for even Trump’s most gifted apologists to craft an intellectually or ideologically coherent theme or narrative to his program,” said Jonah Goldberg, a senior editor of National Review.

“Trump boasts that he wants to be unpredictable and insists that he will make all decisions on a case-by-case basis. That’s a hard approach for an intellectual journal to defend in every particular.” My point there is you beat ideas with ideas. You can challenge the “theoretical foundations of ‘conservatism’” (perhaps starting with an explanation for why you put it in scare quotes) or you can defend a theoretical program. Unless you’re just going to defend Pragmatism and/or the instinctual, infallible, wisdom of Donald Trump in all cases, you’ll either need your own theory of the case or you’ll need to allow for writers willing to criticize Trump outright.

There’s nothing wrong with that, except American Affairs is being launched to defend Trump and Trumpism. If Krein isn’t willing to tolerate serious criticism of Trump in furtherance of Trumpism, then he should skip the journal and go work directly for Sean Spicer. If he does allow criticism, (a) good for him and (b) he should be prepared for his pro-Trump journal to be denounced by Trump himself. While I am perfectly comfortable saying that Krein is no William F. Buckley — because no one is — I would note that great magazines and journals are often born out of such chaos and internal contradictions.

Irving Kristol and Daniel Bell founded The Public Interest (which was more of an inspiration for neoconservatives than was The National Interest, contrary to what Eliana wrote). But they had some pretty profound disagreements, causing Bell to walk away early on. Irving Kristol solved these, and similar, problems by making the PI a magazine for writers, not editors.

At National Review we had an even more stormy beginning, with libertarians, Machiavellians, Ultramontane Catholics, Straussian philosophers, social conservatives of every flavor, and a wide variety of ex-Communists squabbling and debating everything under the sun. The creative tension was invaluable in forming the foundation of modern conservatism. Bill Buckley made it work through sheer force of personality. We didn’t have a fan in the Oval Office until Ronald Reagan. Great magazines and journals are often born out of chaos and internal contradictions.

The New Republic (now a pale shadow of its former self) was always at its best when it was at war with itself. I grew up on it in the 1980s, when many of the editors hated one another’s guts and fought over Reagan, the Contras, etc. The magazine’s early years were even more chaotic. The New Republic was founded, according to Walter Lippmann (a one-time New Republic staffer as well as an aide to Woodrow Wilson), “to explore and develop and apply the ideas which had been advertised by Theodore Roosevelt when he was the leader of the Progressive party.”

Pretty much TR was to The New Republic as Trump is to American Affairs. But when Wilson was elected, and started leading us to war, The New Republic was all over the map because of disagreements among the editors. Eventually, their old ideological hero Teddy Roosevelt charged into the offices of The New Republic like a Bull Moose to chew them out for their disloyalty. Realizing he couldn’t set them straight, TR shouted that the magazine was “a negligible sheet, run by two anemic Gentiles and two uncircumcised Jews.” If Trump tweets something like that at Krein & Co., he’ll know he’s on his way to “greatness.”

— Jonah Goldberg is a senior editor of National Review.

NY TIMES BOOK REVIEW: Click Image

 

Economists in Denial


February 27, 2017

Economists in Denial

By Lord Skidelsky*

https://www.project-syndicate.org/columnist/robert-skidelsky

*Robert (Lord) Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

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View from above of the Bank of England. The central bank of the UK manages the sterling currency and regulates financial transactions. Banker to Central Banks.

Early last month, Andy Haldane, Chief Economist at the Bank of England, blamed “irrational behavior” for the failure of the BoE’s recent forecasting models. The failure to spot this irrationality had led policymakers to forecast that the British economy would slow in the wake of last June’s Brexit referendum. Instead, British consumers have been on a heedless spending spree since the vote to leave the European Union; and, no less illogically, construction, manufacturing, and services have recovered.

Haldane offers no explanation for this burst of irrational behavior. Nor can he: to him, irrationality simply means behavior that is inconsistent with the forecasts derived from the BoE’s model.

It’s not just Haldane or the BoE. What mainstream economists mean by rational behavior is not what you or I mean. In ordinary language, rational behavior is that which is reasonable under the circumstances. But in the rarefied world of neoclassical forecasting models, it means that people, equipped with detailed knowledge of themselves, their surroundings, and the future they face, act optimally to achieve their goals. That is, to act rationally is to act in a manner consistent with economists’ models of rational behavior. Faced with contrary behavior, the economist reacts like the tailor who blames the customer for not fitting their newly tailored suit.

Yet the curious fact is that forecasts based on wildly unrealistic premises and assumptions may be perfectly serviceable in many situations. The reason is that most people are creatures of habit. Because their preferences and circumstances don’t in fact shift from day to day, and because they do try to get the best bargain when they shop around, their behavior will exhibit a high degree of regularity. This makes it predictable. You don’t need much economics to know that if the price of your preferred brand of toothpaste goes up, you are more likely to switch to a cheaper brand.

Central banks’ forecasting models essentially use the same logic. For example, the BoE (correctly) predicted a fall in the sterling exchange rate following the Brexit vote. This would cause prices to rise – and therefore consumer spending to slow. Haldane still believes this will happen; the BoE’s mistake was more a matter of “timing” than of logic.

This is equivalent to saying that the Brexit vote changed nothing fundamental. People would go on behaving exactly as the model assumed, only with a different set of prices. But any prediction based on recurring patterns of behavior will fail when something genuinely new happens.

Non-routine change causes behavior to become non-routine. But non-routine does not mean irrational. It means, in economics-speak, that the parameters have shifted. The assurance that tomorrow will be much like today has vanished. Our models of quantifiable risk fail when faced with radical uncertainty.

The BoE conceded that Brexit would create a period of uncertainty, which would be bad for business. But the new situation created by Brexit was actually very different from what policymakers, their ears attuned almost entirely to the City of London, expected. Instead of feeling worse off (as “rationally” they should), most “Leave” voters believe they will be better off.

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Justified or not, the important fact about such sentiment is that it exists. In 1940, immediately after the fall of France to the Germans, the economist John Maynard Keynes wrote to a correspondent: “Speaking for myself I now feel completely confident for the first time that we will win the war.” Likewise, many Brits are now more confident about the future.

This, then, is the problem – which Haldane glimpsed but could not admit – with the BoE’s forecasting models. The important things affecting economies take place outside the self-contained limits of economic models. That is why macroeconomic forecasts end up on the rocks when the sea is not completely flat.

The challenge is to develop macroeconomic models that can work in stormy conditions: models that incorporate radical uncertainty and therefore a high degree of unpredictability in human behavior.

Keynes’s economics was about the logic of choice under uncertainty. He wanted to extend the idea of economic rationality to include behavior in the face of radical uncertainty, when we face not just unknowns, but unknowable unknowns. This of course has much severer implications for policy than a world in which we can reasonably expect the future to be much like the past.

There have been a few scattered attempts to meet the challenge. In their 2011 book Beyond Mechanical Markets, the economists Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire argued powerfully that economists’ models should try to “incorporate psychological factors without presuming that market participants behave irrationally.” Proposing an alternative approach to economic modeling that they call “imperfect knowledge economics,” they urge their colleagues to refrain from offering “sharp predictions” and argue that policymakers should rely on “guidance ranges,” based on historical benchmarks, to counter “excessive” swings in asset prices.

The Russian mathematician Vladimir Masch has produced an ingenious scheme of “Risk-Constrained Optimization,” which makes explicit allowance for the existence of a “zone of uncertainty.” Economics should offer “very approximate guesstimates,” requiring “only modest amounts of modeling and computational effort.”

But such efforts to incorporate radical uncertainty into economic models, valiant though they are, suffer from the impossible dream of taming ambiguity with math and (in Masch’s case) with computer science. Haldane, too, seems to put his faith in larger data sets.

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A Towering Figure in Economics–Lord Keynes

Keynes, for his part, didn’t think this way at all. He wanted an economics that would give full scope for judgment, enriched not only by mathematics and statistics, but also by ethics, philosophy, politics, and history – subjects dropped from contemporary economists’ training, leaving a mathematical and computational skeleton. To offer meaningful descriptions of the world, economists, he often said, must be well educated.

 

Sri Lanka and China’s Indian Ocean Strategy


February 22, 2017

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Number 372 | February 21, 2017

ANALYSIS

Sri Lanka Suffers from China’s Indian Ocean Strategy

By Shiyana Gunasekara

Amidst local protests against the Chinese presence in the southern Sri Lankan town of Hambantota, Beijing insists that the town’s port project has been discussed in the “spirit of equality and mutual benefit, and follows market rules.” China’s activity in the Indian Ocean – particularly in Sri Lanka, which is a focal point in China’s One Belt One Road (OBOR) plan – appears to be predatory lending under the guise of economic development.

India needs to recalibrate its strategy towards the other South Asian countries for its own security, if not regional stability; however, Delhi has yet to offer a comparable alternative to doing business with China. Instead, India has taken its asymmetric power in the region and the de facto allegiances of its much smaller neighbors for granted.  With China’s recent track record of placing military vessels in traditionally commercial docks, India must take its role as the South Asian hegemon seriously.

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80% share of  Sri Lanka’s Hambantota Port goes to China

In October 2016, Sri Lanka’s Prime Minister Ranil Wickremesinghe announced that the China Merchants Holdings (International) Company Ltd. would hold an 80% share of the Hambantota Port in exchange for over USD $1 billion in the country’s debt.  This should be of particular concern to India, since China has used the Colombo South Container Terminal, owned by the same Chinese firm, to dock submarines, as opposed to the Sri Lanka Port Authority’s mooring designated for military vessels.  Previously, Colombo intended to hide visits of two other Chinese naval vessels from the media. With the majority of the Hambantota Port sold to China’s semi-private sector, India should be prepared for another visit by the People’s Liberation Army (PLA) Navy – perhaps for a much longer period of time.

The complete details of Chinese loans and other financial assistance have not been disclosed to the public, notably including details of the loan interest rates. China leads the country’s foreign inflows, with 98% of Chinese assistance to Sri Lanka being loans and only two percent as grants. China’s Export-Import Bank accounts for 77% of these loans, with 14% coming from the China Development Bank, and five percent from interest-free loans. China’s Export-Import Bank has notoriously given loans to countries on its OBOR initiative with strict self-serving procurement and contracting regulations: Chinese companies must be awarded the contract, both for the project itself and for procurement, and at least 50% of project procurement must be services, equipment, technology and materials from China.

Foreign direct investment and other forms of financial engagement from a G2 country to an emerging economy should be focused on market-friendly approaches to supporting economic development in the latter. Chinese investment in Sri Lanka, and other countries along China’s visionary trail would be a true boost to the local economy if the loan money were staying in the country through greater local employment and project procurement. Instead, Sri Lanka borrows money from China, which China requires to be used to contract largely state-owned Chinese companies. These companies provide salaries to Chinese employees who come to Sri Lanka to build infrastructure projects using mostly Chinese materials and technology.

The Mattala Airport and the Hambantota Port are prime examples of large-scale infrastructure projects financed by China that did not promote local economic development.These projects were purely gambles by the former Sri Lankan government, for which there was no guaranteed return on investment – a risky move for an economy coming out of an expensive three-decade war.

Sri Lanka, undergoing vast economic reforms outlined by the International Monetary Fund (IMF), might not be the only South Asian state that will have to be bailed out due to crushing Chinese-owned debt.  An IMF report on the Chinese-Pakistan Economic Corridor (CPEC), noted that import requirements of the project “will likely offset a significant share of inflows, such that the current account deficit would widen.” While the IMF acknowledges that the long run benefits may help mitigate said costs, such success is not guaranteed, as seen in Sri Lanka.  Hence Pakistan too should take into serious consideration the equity-for-debt swap that Sri Lanka was forced into due to the island nation’s ill-advised decisions and China’s over-eagerness to offer self-serving loans.

India is the largest power in South Asia in essentially every measure, and should continue to initiate deeper maritime collaborations with its neighbors for its own interests as well as for the benefit of the region. India can accomplish this goal by providing fiscal alternatives for its smaller neighbors to develop their infrastructures and human capital that are more favorable than Chinese-financed loans with unclear intentions.

China is a pragmatic power, and most likely foresaw Sri Lanka’s economic decline that resulted in Chinese ownership of the Hambantota port. China’s actions of fostering questionable loan conditions and blurring the line between commercial and military objectives do not correspond to its purported aim of establishing a positive public image. Ultimately, if China commits to increased transparency, its ambition to become a re-emerging global power will be better received.

About the Author

Shiyana Gunasekara is a masters candidate at Johns Hopkins School of Advanced International Studies focusing on international economics and Asian affairs, and was a Fulbright Scholar to Sri Lanka in 2014-2015. She can be contacted at Shiyana.Gunasekara@jhu.edu

The East-West Center promotes better relations and understanding among the people and nations of the United States, Asia, and the Pacific through cooperative study, research, and dialogue.

Established by the US Congress in 1960, the Center serves as a resource for information and analysis on critical issues of common concern, bringing people together to exchange views, build expertise, and develop policy options.

The Asia Pacific Bulletin (APB) series is produced by the East-West Center in Washington.

APB Series Editor: Dr. Satu Limaye, Director, East-West Center in Washington
APB Series Coordinator: Peter Valente, Project Assistant, East-West Center in Washington

The views expressed in this publication are those of the authors and do not necessarily reflect the policy or position of the East-West Center or any organization with which the author is affiliated.

Donald Trump–The Reluctant Multilateralist (?)


February 21, 2017

Donald Trump–The Reluctant Multilateralist (?)

by Barry Eichengreen

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Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors:The Great Depression, the Great Recession, and the Uses – and Misuses – of History.–www.project-syndicate.org

FLORENCE – Donald Trump did not assume the US presidency as a committed multilateralist. On that, partisans of all political persuasions can agree. Among his most controversial campaign statements were some suggesting that NATO was obsolete, a position that bodes ill for his attitude to other multilateral organizations and alliances.

Last week, however, Trump stepped back, reassuring an audience at US Central Command in Tampa, Florida (the headquarters for US forces that operate in the Middle East). “We strongly support NATO,” he declared, explaining that his “issue” with the Alliance was one of full and proper financial contributions from all members, not fundamental security arrangements.

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This more nuanced view presumably reflects a new appreciation, whether born of security briefings or the sobering fact of actually occupying the Oval Office, that the world is a dangerous place. Even a president committed to putting “America first” now seems to recognize that a framework through which countries can pursue shared goals is not a bad thing.

The question now is whether what is true for NATO is also true for the International Monetary Fund, the World Bank, the World Trade Organization, and the Basel Committee on Banking Supervision. Trump’s record on the campaign trail and Twitter is not heartening. Back in 2012, he tweeted criticism of the World Bank for “tying poverty to ‘climate change’” (his quotation marks). “And we wonder why international organizations are ineffective,” he complained.

Likewise, last July, he mooted the possibility that the United States might withdraw from the WTO if it constrained his ability to impose tariffs. And he vowed repeatedly during the presidential campaign to withdraw from the Paris climate agreement. But the evolution of Trump’s position on NATO suggests that he may yet see merit to working through these organizations as he comes to recognize that the world economy, too, is a dangerous place.

Following the election, Trump acknowledged having an open mind on the Paris climate agreement. His position seemed less to deny the existence of global warming than to insist that policies mitigating climate change not impose an unreasonable burden on American companies.

The way to limit the competitive burden on US producers is, of course, by ensuring that other countries also require their companies to take steps to mitigate climate change, thereby keeping the playing field level. And this is precisely what the Paris agreement is about.

The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.–Barry Eichengreen

The same can be said of the Basel Committee’s standards for capital adequacy. Holding more capital is not costless for US banks, as advisers like Gary Cohn, formerly of Goldman Sachs and now the head of Trump’s National Economic Council, presumably tell the president morning, noon, and night. Leveling the playing field in this area means requiring foreign banks also to hold more capital, which is precisely the point of the Basel process.

Trump may similarly come to appreciate the advantages of working through the IMF when a crisis erupts in Venezuela, or in Mexico as a result of his own policies. In 1995, the US Treasury extended financial assistance to Mexico through the Exchange Stabilization Fund. In 2008, the Federal Reserve provided Brazil with a $30 billion swap line to help it navigate the global financial crisis. But imagine the outrage with which Trump’s supporters would greet a “taxpayer bailout” of a foreign country or Mexican officials’ anger over having to secure assistance from the same Trump administration responsible for their country’s ills. Both sides would surely prefer working through the IMF.

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Jim Yong Kim–From Brown University to The World Bank

Trump can’t be pleased that the Obama administration rushed to push through the reappointment of its chosen World Bank president, Jim Yong Kim. But he clearly recognizes the benefits of development aid. While he has said that the US should “stop sending foreign aid to countries that hate us,” he has also observed that failure to help poor countries can foment instability.

This would appear to be an area where Trump will favor bilateral action, which would enable him to assuage his conservative critics by insisting that no US funds go toward family planning, while taking credit for any and all assistance. At the same time, minimizing the role of the US in the World Bank would create a vacuum to be filled by China, Trump’s bête noire, both in that institution and through the activities of the Chinese-led Asian Infrastructure Investment Bank.

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The real test of Trump’s stance on multilateralism will be how he approaches the WTO. Persuading the US Congress to agree on corporate and personal income-tax reform, a $1 trillion infrastructure initiative, and a replacement for Obama’s signature health-care reform won’t be easy, to say the least. Doing so will require patience, which is not Trump’s strong suit. This suggests that he will feel pressured to do what he can unilaterally.

One thing he can do unilaterally is slap duties on imports, potentially in violation of WTO rules. We’ll soon find out whether those rules will deter him.

https://www.project-syndicate.org/commentary/trump-nato-reluctant-mulitlateralist-by-barry-eichengreen-2017-02