On October 1, the Chinese renminbi officially joins becomes the fifth international reserve currency. Until recently, Washington played geopolitics to defer the renminbi’s internationalization. However, what about Wall Street? 

On October 1, the Chinese renminbi officially joins becomes the fifth international reserve currency. Until recently, Washington played geopolitics to defer the renminbi’s internationalization. However, what about Wall Street? 

On October 1, 2016, the Chinese renminbi (RMB) will officially join the International Monetary Fund’s (IMF) international reserve assets; that is, the SDR (Special Drawing Rights) basket. From the perspective of the IMF, this is a ready affirmation of China’s success in opening up its markets. The inclusion of the renminbi into the ranks of the most important international currencies codifies the acceleration of bilateral and multilateral RMB transactions worldwide.

As almost a year has passed since the IMF’s decision, the U.S. has finally, though quietly and belatedly, begun to participate in the RMB internationalization. Nevertheless, as the RMB’s expansion is rapidly accelerating, Wall Street’s moves are still too little too late.

Three waves of capital inflows

After October 1, RMB asset are likely to benefit from three consequent waves of capital inflows. The first wave involved the very inclusion of the RMB among the IMF international reserve assets. That caused a re-weighting of the SDR basket, which is currently valued at $285 billion. Before the RMB inclusion, the basket was dominated by the U.S. dollar (41.9%), followed by the euro (37.4%), UK pound (8.1%) and yen (8.3%). As the RMB was included in the SDR assets, the shares were re-weighted.

Today, the SDR assets remain dominated by the weights of the US dollar (41.7%), the euro (30.9%) and Chinese renminbi (10.9%), followed by the UK pound (8.1%) and Japanese yen (9 percent). The weight of the RMB translates to about $31billion into the RMB assets starting in October, probably gradually over half a decade.

As long as China’s economic growth prevails, even as it decelerates, and financial reforms continue, the RMB inclusion is likely to prompt another wave of capital inflows by central banks, reserve managers and sovereign wealth funds. Today, the allocated part of the global foreign exchange reserves – which the IMF calls the Currency Composition of Official Foreign Exchange Reserves, or COFER – amounts to $7.2 trillion. The US dollar still accounts for nearly two-thirds of the total, against a fifth by the euro, while the pound and the yen are less than 5% each.

Now, assuming that China’s current share of global reserves is about 1 percent, the IMF’s decision could cause a significant capital inflow (5%) – about the weight of the yen or pound – into the RMB assets, which would translate to some $360 billion by 2020. If, on the other hand, the RMB’s COFER share would reflect its SDR weight (10.9%), the inflow of capital could more than double to over $780 billion.

A third capital inflow is likely to ensue as private institutional and individual investors follow in the footprints of the IMF and public investors. If these allocations rise to just 1 percent, they could unleash about $200 billion into the RMB assets by 2020. Again, if these allocations would reflect the renminbi’s SDR weight, capital inflows could double, triple or increase by a magnitude.

Conservative $1 trillion scenarios

In a favorable scenario, the total expected capital inflows to the RMB assets by the IMF, public and private sector investors could soar to an accumulated $600 billion by 2020. That is a conservative scenario. With different assumptions, the real figure could double, triple or far more.

In addition, China’s current share of global reserves may be higher than estimated, as the IMF’s total foreign exchange reserves also include $3.8 trillion worth of unallocated reserves. Furthermore, after half a decade of stagnation in the major advanced economies, all investors are struggling to achieve higher yields and to diversify their assets. Therefore, any major new crisis in the advanced economies could accelerate capital inflows in the RMB assets.

The current RMB/USD exchange rate is 6.67 but expected to soften to about 6.75 by the year-end, which means the renminbi’s continued weakening against the trade-weighted basket in the near-term. Based on current trends, the RMB appreciation will pick pace and is likely to return to 6.40 levels by early 2020s. Nevertheless, the recent renminbi deceleration has been seized as a pretext for caution and complacency in the West, particularly after the volatility of Chinese markets in summer 2015.

Nevertheless, policy stances are no longer identical on both sides of the Atlantic. For years, New York City’s Wall Street and London’s City have competed for the role of the financial capital of the world. Seen purely in terms of size, the New York Stock Exchange has a market capitalization of close to $19 trillion; and NASDAQ $7.5 trillion, whereas that of the London Stock Exchange is over $3.6 trillion. However, historical experience suggests that leadership in international financial services requires that these global financial hubs to remain close to both advanced and emerging markets and the innovation frontier. Yet, unlike London, Wall Street is embracing the renminbi very slowly.

Wall Street hesitation is paced by Washington’s geopolitics. Take, for instance, the case of China-proposed Asian Infrastructure and Investment Bank (AIIB). In spring 2015, many countries in Asia and elsewhere joined the AIIB, while Europeans initially stood aside. What changed the game was the UK’s decision as the first major Western country to participate in the AIIB. It paved the way for the rest of Europe to follow in its footprints.

However, the US has kept its distance.

Washington’s mistake, Wall Street’s loss

Nevertheless, Wall Street cannot afford to fall behind in global financial rivalries. Washington’s geopolitical uni-polarity does not work well in the increasingly multipolar world economy and global markets.

Today, there are more than 20 offshore RMB clearing hubs appointed by the People’s Bank of China (PBOC). Characterized by strong Chinese trading and investment ties, these hubs are strategically located around the world to cover all time zones and major world regions.

Not so long ago, Hong Kong still dominated all renminbi payments internationally. However, things are changing. Last spring, UK became the largest center for the renminbi outside of greater China, according to SWIFT. Hong Kong is still dominant (70%) but in relative decline, followed by the UK (6.5%), and Singapore (4.5%).

The good news in Wall Street is that the US is now the fourth largest RMB center in the world (3.1%). The bad news is that, with its snail pace, it is barely ahead of Taiwan (2.5%) and South Korea (2.1%).

With $2.15 trillion traded daily, London remains the world’s largest single foreign-exchange trading center. The RMB is today the eighth most-traded currency in the city and involved in 1.8 percent of transactions. That amounts to about $39 billion of deals but is way behind $1.9 trillion for the dollar and $837 billion for the euro. However, if the spotlight is shifted on relative growth, which is based on future expectations, rather than absolute volume, which reflects past glory, Chinese renminbi is flying.

What we have seen so far of the international renminbi revolution is just the tip of the iceberg. When Beijing is accelerating its opening-up policies, Washington should not resort to containment policies. American financial intermediaries need the renminbi to achieve adequate yields in the coming decades. Conversely, Chinese financial intermediaries hope to diversify in the advanced markets to optimize diversification.

All integration – including financial integration – is a two-way street.

China’s International Renminbi Is Coming – Is Wall Street Ready? is republished with permission from The Difference Group

The post Are You Ready for Renminbi? appeared first on Economy Watch.

Japan’s monetary gamble and Abenomics are approaching the end of the road. Neither Brussels nor Washington is immune to the adverse consequences of Tokyo’s monetary exhaustion, says Dan Steinbock.

Recently, Japan’s second quarter GDP growth was revised up to 0.7 percent, after four consecutive quarters of stagnation. However, don’t set your hopes too high.

Japan’s monetary gamble and Abenomics are approaching the end of the road. Neither Brussels nor Washington is immune to the adverse consequences of Tokyo’s monetary exhaustion, says Dan Steinbock.

Recently, Japan’s second quarter GDP growth was revised up to 0.7 percent, after four consecutive quarters of stagnation. However, don’t set your hopes too high.

More than three years ago, the conservative caution of the Bank of Japan (BOJ) Governor Masaaki Shirakawa faded into history as his successor Haruhiko Kuroda pledged to do “whatever it takes” to achieve the 2 percent inflation target. Yet, today inflation remains close to zero and Japan’s stock market is down 13 percent.

Irrespective of the outcome of its recent meeting, the BOJ can only postpone the inevitable. Nevertheless, cyclical fluctuations in Japan or elsewhere will in no way mitigate secular challenges.

Failure of monetary gamble

Under Kuroda, the BOJ has boosted quantitative and qualitative easing with negative interest rate policy. Base money and the central bank’s holdings of Japanese government bonds (JGBs) each have swollen to almost ï¿¥400 trillion ($3.9 trillion), which is now 80 percent of the country’s GDP, and they continue to expand at a pace ofï¿¥80 trillion ($780 billion) annually.

What Kuroda is doing would be comparable to Fed chief Janet Yellen boosting base money and the Fed’s treasuries up to $14.9 trillion, while easing at $3 trillion per year, with no specific limit in sight. In Washington, that would mean an economic kamikaze and political suicide. Until recently, Japan was a different story.

Now divisions are spreading in the BOJ. Kuroda’s fractured majority is sticking with the original plan of large-scale JGBS and negative rates to boost growth and inflation. However, some advocate greater flexibility – ï¿¥70 trillion to ï¿¥90 trillion per year – in purchases, hoping that would make a difference. In contrast, skeptics would like to curb the BOJ’s purchases, even at the risk of perceptions of tightening, rising yen and plunging markets.

Nonetheless, all three seem to believe that Japan’s fortunes can be reversed by monetary policies alone and that these policies are not part of the problem.

Failure of Abenomics

In December 2013, when the Liberal Democratic Party returned to leadership with Abe as its minister, the LDP campaigned on renewed fiscal stimulus, aggressive monetary easing from the BOJ, structural reforms to boost competitiveness and eventual fiscal consolidation. The devaluation of the yen, critical to Japanese exporters, was the tacit denominator of the proposed changes.

In addition to a huge liquidity risk, Tokyo took another risk in timing, as I argued then. It sought to implement the fiscal stimulus in 2013, while fiscal consolidation would follow. Obviously, unease increased in 2014. As Abe went ahead with the sales tax hike that spring, the recovery was too fragile for consolidation. Instead of strong expansion, Japan slid into recession and began its third lost decade.

Ironically, yen continues to rise, thanks to stagnation in the West and the dated perception that yen remains a safe haven currency.

Last summer, the International Monetary Fund (IMF) finally acknowledged Abenomics is not working. “The targets for growth, inflation, and the primary balance remain out of reach under current policies,” it reported. As Tokyo’s policy authorities recognized the risks, they have delayed the proposed consumption tax hike, adopted new structural reforms and a negative interest policy.

Yet, outlook remains weak with real GDP growth less than 1 percent until early 2020s. Meanwhile, time is running out.

Hitting the ceiling

If the BOJ will continue to purchase JGB debt, it will own almost half of all JGPs outstanding by fall 2017. That would leave another half the JGBs available for the BOJ to buy. Yet, banks need some JGBs for collateral, while insurers must have their long-term JGBs. Therefore, a year ago, even the IMF had to conclude that the BOJ would hit its JGB purchase ceiling “sometime in 2017 or 2018.”

Now there is the additional challenge of the flat yield curve. After the BOJ’s negative rates in January, the JGB curve has flattened drastically. Coupled with low rates, persistently flatter yield curves are likely to weaken financial intermediation and penalize banks, insurers and pension funds, reducing their risk-taking.

Worse, Kuroda’s monetary gamble does not only involve bond markets, but equities as well. Under its stimulus plan, the BOJ buys 3 trillion yen ($29 billion) of exchange-traded funds (ETF) annually. In spring, these purchases made it a top-10 holder in about 90 percent of all Japanese stocks, according to Bloomberg data. In late July, the BOJ doubled its ETF buys to 6 trillion yen ($59 billion) per year. It could become the No 1 shareholder in some 40 Nikkei 225 companies by early 2018.

In the next few years, the BOJ could not only own most of the Japanese bond market, but virtually most Japanese stocks; even as Japan’s gross debt will exceed 250 percent of its GDP. It is a disastrous path.

The selloff twist

Usually, political opposition can undermine failed economic policies. Yet, Japan’s main opposition Democratic Party has been struggling since it lost to Abe in 2012. In turn, Emperor Akihito has even sought to abdicate the throne in his lifetime to prevent Abe from reviving the pre-war Imperial Japan.

If countervailing forces linger in domestic economy and politics, even internationally, market volatility is a different story.

Since the summer, Japan has been suffering from a bond tantrum as its sovereign debt has had its worst rout in a decade. Some expect the BOJ next to pursue a reverse “Operation Twist.” It could sell long-end bonds, while buying the short-end to make the easing more sustainable over time. However, as trillions in long-dated JGBs continue to carry negative yields, an abrupt withdrawal from the long-end could roil the market.

Japan remains the world’s third-largest economy and the second-largest debt market. Moreover, correlations among major markets have increased significantly since 2008. A perceived policy reversal could unleash a dramatic selloff in JGBs, while global fixed-income markets would not remain immune.

If that selloff will not ensue in the fall or 2017-18, it will only grow into a more devastating market tsunami over time.

Japan’s Impending Monetary Exhaustion is republished with permission from The Difference Group

The post Is Japan at the End of the Monetary Rope? appeared first on Economy Watch.

Today, advanced economies blame China for steel overcapacity. In reality, four decades ago Washington and Brussels opted for bad policies, which China seeks to transcend. 

In the G20 summit in Hangzhou, some world leaders had harsh words for China’s steel overcapacity. Before the summit, President Barack Obama was urged by US lawmakers, unions and trade associations to blame China’s trade practices for US mill closures and unemployment and to stress the need for “aggressive enforcement of US trade remedy laws.”

Today, advanced economies blame China for steel overcapacity. In reality, four decades ago Washington and Brussels opted for bad policies, which China seeks to transcend. 

In the G20 summit in Hangzhou, some world leaders had harsh words for China’s steel overcapacity. Before the summit, President Barack Obama was urged by US lawmakers, unions and trade associations to blame China’s trade practices for US mill closures and unemployment and to stress the need for “aggressive enforcement of US trade remedy laws.”

In Brussels, European Commission president Jean-Claude Juncker seconded US concerns. In Canada, steelworkers and producers pressed Prime Minister Justin Trudeau to push China for the same reasons. In Japan, Prime Minister Abe called for structural reforms to address China’s steel overcapacity.

Yet, as history shows, the first major steel crisis occurred already in the 1970s, starting in the US and Europe.

The postwar steel crisis

Since the postwar era, crude steel production has grown in three quite distinct phases. In the postwar era – often called the “golden era” of the advanced economies – global steel production grew an impressive 5 percent annually. It was driven by Europe’s reconstruction and industrialization, and catch-up growth by Japan and the Soviet Union.

As this growth period ended with two energy crises, a period of stagnation ensued and global steel demand barely ticked 1.1 percent annually. In the US, the challenges of the Rustbelt led to labor turmoil, offshoring and the Reagan era. In the UK, similar turmoil paved way to the Thatcher years.

Some steel growth prevailed but mainly in the smaller Asian tiger economies of Korea and Taiwan, which could not drive the global economy amid the collapse of the Soviet Union and the asset crisis in Japan in the 1990s.

A third period ensued between 2000 and 2015 when China’s entry into the World Trade Organization initiated a period of massive expansion in steel production and demand fueling annual output growth by 13 percent.

While China’s industrialization and urbanization is likely to continue another 10-15 years, the most intensive period of expansion is behind. As a result, the steel sector is facing overcapacity and stagnation for 5 to 15 years.

Policy responses in the US and Europe

Are Washington and Brussels now urging Beijing to resolve overcapacity by deploying the kind of policies they used in the first postwar steel crisis? No. After the mid-70s, the open trading regime took a step back as aggressive trade practices arose in the US and Europe. The two adopted fairly similar external policy measures but different domestic measures.

In the US, policymakers avoided direct intervention in the domestic market and allowed domestic firms to suffer large losses, which resulted in huge plant closures. That translated to substantial reductions of least efficient integrated producers and the rise of more efficient players, including mini-mills. In contrast, Brussels administered a de facto domestic cartel.

Economically, the European capacity reductions proved less effective than those in the US, whereas socially Brussels was able to smooth the process of transformation, but mainly in the short-term.

As Washington and Brussels sought to protect their markets through non-tariff barriers, they opted for protectionist external policies, which imposed substantial costs on economies and consumers.

Chinese objectives

In the coal and steel sectors, Chinese government hopes to allocate $15.4 billion in the next two years to help up to 3 million laid-off workers find new jobs, particularly in the service sector.

However, unlike US and Europe in the 1970s, Chinese policymakers today are eager to sustain globalization and to intensify world trade and investment, as evidenced by the Hangzhou-hosted G20 Summit, the One Belt One Road initiative as well as the creation of the Asian Infrastructure Investment Bank and the BRICS New Development Bank.

In the coming years, Beijing is committed to resolving the overcapacity burden but not at the cost of Chinese living standards or those in other emerging economies. Instead, the objective is to sustain China’s economic rise, while supporting the industrialization of other major emerging economies. And that is very much in the interest of Washington, Brussels and Tokyo as well.

Overcoming the Second Steel Crisis is republished with permission from The Difference Group

The post Is the Latest Steel Crisis China’s Doing? appeared first on Economy Watch.

In Hangzhou, China began the push for G20 to overcome protectionism and fuel global growth prospects. That is vital to reverse stagnation in advanced economies and slowdown in emerging nations.

On September 4-5, the leaders of the G20 economies met in Hangzhou. The summit had great symbolic importance that was easily understood in emerging economies but largely ignored in advanced economies.

In Hangzhou, China began the push for G20 to overcome protectionism and fuel global growth prospects. That is vital to reverse stagnation in advanced economies and slowdown in emerging nations.

On September 4-5, the leaders of the G20 economies met in Hangzhou. The summit had great symbolic importance that was easily understood in emerging economies but largely ignored in advanced economies.

Although economic gravity has been in emerging Asia for decades and the emerging world has fueled global growth prospects for nearly a decade, this was the first time that the G20 truly met in the territory of the future.

Nevertheless, international media, which remains headquartered in rich economies, focused on the sensational, whether it was a misreported snub of President Obama, speculative rumors about diplomatic jostling, inflated hopes associated with bilateral meetings, or British Prime Minister Theresa May’s red suit.

In reality, the G20 summit was set to achieve two main objectives.

Overcoming protectionism in the short-term

The G20 final communiqué focused on struggle against tax evasion; accelerated efforts to push international trade and investment; fiscal stimulus and innovation to boost economic growth; and strengthening support for refugees. Indeed, Hangzhou sought to reverse was the eclipse of global economic integration.

In the past half-decade, advanced economies have sustained a semblance of stability, by relying on historically ultra-low interest rates and massive injections of quantitative easing. The QE measures exceed $12 trillion, $10 trillion in negative-yielding global bonds, and there have been 660 interest rate cuts since the collapse of Lehman Brothers in 2008.

Yet, global prospects remain dim, advanced economies are amid secular stagnation and emerging economies are coping with slowdown. Global economic integration – as measured by world trade, investment and migration – has been paralyzed.

World export volumes are not just growing more slowly, but falling; not least because of trade restrictions imposed by certain G20 economies in key product categories. Meanwhile, global foreign direct investment (FDI) remains well behind the global crisis levels of 2008. Finally, global migration continues to linger.

“We aim to revive growth engines of international trade and investment,” President Xi Jinping said in a closing statement. “We will support multilateral trade mechanisms and oppose protectionism to reverse declines in global trade.”

During the summit, leaders from the world economies agreed to oppose protectionism. In the coming months, they will have to walk the talk.

Pushing emerging growth in the medium-term

A day before the summit, President Obama and President Xi announced the ratification of the Paris Agreement of the 2015 UN Climate Change Conference. Since the US and China represent 20 percent and 18 percent respectively of global carbon dioxide emissions, the two can push efforts against global warming in both advanced and emerging economies.

Initially, global climate change initially evolved in advanced economies, which industrialized in the 19^th and early 20^th century. Today, it is hurting disproportionately emerging and developing economies, which are still amid industrialization.

Ironically, while the G20 accounts for two thirds of the world population, 85 percent of global GDP and 80 percent of international trade, it, too, has served mainly the interests of advanced economies. The G7 nations comprise less than a tenth of the world’s total population, but they continue to account for almost half of the world economy.

As the G20 host, China has set a different tone, starting in May, when Foreign Minister Wang Yi said that Beijing intends to cooperate with other G20 countries to deliver ten outcomes. In particular, China’s goal is to “initiate cooperation to support industrialization of Africa and least developed countries (LDCs).”

Given its rising economic and political position in the world economy, China is seen as a more credible “broker” to leverage power between advanced, emerging and developing countries, including the least developed countries.

Starting in Hangzhou, for the first time, emerging and developing economies may have a bigger voice in the global economy. It is a very, very belated start of a long effort to transform global governance.

G20: Overcoming Protectionism, Emerging Growth is republished with permission from The Difference Group

The post Emerging Economies Belated G20 Voice appeared first on Economy Watch.

As China assumes G20 leadership, the prospect of global “protectionism” is on the rise and the stakes could not be higher for cooperation and major structural reforms. Without continued investment and trade, secular stagnation in advanced economies and growth deceleration in emerging economies will continue to broaden.

As China assumes G20 leadership, the prospect of global “protectionism” is on the rise and the stakes could not be higher for cooperation and major structural reforms. Without continued investment and trade, secular stagnation in advanced economies and growth deceleration in emerging economies will continue to broaden.

Since 1980, global economic integration accelerated dramatically until the onset of the financial crisis in the fall of 2008. After years of secular stagnation in major advanced economies and deceleration of growth in large emerging economies, modest signs of recovery have prompted international observers’ hope for the revival of globalization.

In the absence of broad policy acceleration following the G20 Summit in Hangzhou, China, such hopes may amount to hollow pipe dreams.

Massive monetary stimulus, but no pickup in trade and investment

At the peak of globalization, Baltic Dry Index (BDI) was often used as a broad barometer of international commodity trade and as a leading indicator since it seemed to reflect future economic growth. The index soared to a record high in May 2008 reaching 11,793 points. However, as the financial crisis spread in the advanced West, international trade collapsed in the emerging East. Barely half a year later, the BDI had plunged by 94 percent, to 663 points, lowest since 1986.

As China and other large emerging economies chose to support the ailing advanced economies through the G20 cooperation, major economies in North America and Europe pledged accelerated reforms in global governance, while launching massive fiscal stimulus and monetary easing. These factors caused the BDI to rise to 4,661 in 2009. However, as promises of reforms were ignored and stimulus policies expired, the BDI bottomed out at 1043 in early 2011, coinciding with the European sovereign debt crisis.

In the past half decade, advanced economies have sustained a semblance of stability, but only by relying on historically ultra-low interest rates and massive injections of quantitative easing; today QE measures exceed $12 trillion, some $10 trillion in negative-yielding global bonds, and there have been 660 interest rate cuts since the collapse of Lehman Brothers in 2008. Intriguingly, these huge shifts are not reflected by the BDI, which has continued to stagnate. It reached a historical low of 290 last February oscillating in upper-600 point range today – amid the global crisis levels.

Optimists argue that the index reflects poorly on globalization because it is a better indicator of international commodity trade than global economic integration. Yet, the indicators of global investment and trade herald even gloomier prospects.

Eclipse of globalization

Starting around 1870, capital and trade flows rapidly became substantial, driven by falling transport costs. However, this first wave of globalization was reversed by a retreat into nationalism and protectionism between 1914 and 1945.

After World War II, trade barriers came down, and transport costs continued to fall, thanks to the U.S.-led Bretton Woods system. As foreign direct investment (FDI) and international trade returned to the pre-1914 levels, globalization was fueled by the “three glorious decades” of economic miracles in Western Europe followed by the rise of Japan. However, this second wave of globalization mostly benefited the advanced economies. It was their “golden era.”

After 1980, many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign capital. This era of globalization peaked between China’s membership in the World Trade Organization (WTO) in 2001 and the onset of the global recession in 2008. It lent credibility to the idea that large emerging economies had become a central force in the global economy, even before the global crisis. Therefore, when the advanced West, led by the U.S., was swept by the Great Recession, large emerging economies (proxied by China) fueled the global economy, which was thus spared from a global depression.

As the G20 cooperation dimmed, so did global growth prospects, too. Before the global crisis, world investment soared to almost $2 trillion. Despite new demographics, growth and productivity, global FDI flows rose to $1.7 trillion in 2015; the highest level since the global crisis, yet well behind the record high a decade ago. That could undermine the investment needs and future of the Sustainable Development Goals and the ambitious Paris Agreement on climate change.

Unfortunately, the state of world trade is even worse. As the 18^th report of the Global Trade Alert showed last year, world export volumes are not growing more slowly, but falling. Manufacturing prices were down almost 10 percent, whereas world export prices remained some 20 percent lower than their 2011 highs – not least because of trade restrictions imposed by certain G20 economies in key product categories.

At the same time, the third leg of globalization, global migration, is plunging in developed regions, while stagnating in developing regions. Even worse, the 21^st century has started with the greatest global forced displacement since the postwar era, with more than 65 million people displaced from their homes by conflict and persecution in 2015, according to the UN Refugee Agency.

In the past, world investment, trade and migration habitually picked up as recessions ended. Today, there will be no return to “business as usual.” As a result, the stakes could not be higher for G20 cooperation today. Global economic integration is at crossroads.

China and G20’s historical moment

The good news is that, between 2008 and 2013, as economic momentum shifted from the transatlantic axis to Asia, it led emerging Asia to add more to the global economy than the entirety of Germany. Indeed, Asia may have produced nearly another Germany in the past three years, despite China’s growth deceleration.

Following the global crisis in 2009-10, half of global GDP growth could be attributed to China, although its GDP was less than 10 percent of the world total. A huge $590 billion stimulus plan supported Chinese growth when the world economy needed it the most. However, as that stimulus helped to keep many advanced, emerging and developing economies afloat, it cost China a massive debt burden that will take years to unwind.

Today, China accounts for 25 percent of world GDP growth, which is closer to its share in the world economy. Undoubtedly, China will do its share for global growth prospects, as evidenced by the massive One Belt One Road (OBOR) initiative, which has potential to accelerate industrialization in multiple world regions, and the China-sponsored BRICS New Development Bank and the Asian Infrastructure Investment Bank, which seek to complement – not substitute – multilateral organizations, which are dominated by major advanced economies.

However, amid its rebalancing and deleveraging, China cannot do more. It is now the turn of the major advanced economies and other large emerging economies to execute their structural reforms. That’s what their economies need to alleviate secular stagnation and deceleration, while supporting aging populations. That’s also what G20 needs to restore acceptable levels of global economic integration.

In early July, G20 ministers reached a deal to cut global trade costs, reaffirmed commitment to reduce trade protectionism and set up a new global investment policy. Thanks to a series of deals in Shanghai, the prospects of ‘de-globalization’ remain pressing but are no longer inevitable.

Following the G20 Summit in Hangzhou, what is needed is a multi-front attack on the global slump in investment and trade. Otherwise, the global forced displacement will get a lot worse, which would undermine the remaining global growth prospects and foster destabilization around the world.

Led by China, G20 Must Reverse the Eclipse of Globalization is republished with permission from The Difference Group

The post Can China Mitigate Rising Global Protectionism? appeared first on Economy Watch.

As China assumes leadership in the grouping, Beijing a wants greater role for Africa and the developing world in the G20.

When China’s Foreign Minister Wang Yi spoke in the Hangzhou Summit in May, he made it clear that Beijing intends to cooperate with other G20 countries to deliver ten outcomes. One of these focuses on Africa.

As China assumes leadership in the grouping, Beijing a wants greater role for Africa and the developing world in the G20.

When China’s Foreign Minister Wang Yi spoke in the Hangzhou Summit in May, he made it clear that Beijing intends to cooperate with other G20 countries to deliver ten outcomes. One of these focuses on Africa.

As the G20 host, China’s goal is to “initiate cooperation to support industrialization of Africa and least developed countries (LDCs).” Wang added, “This year, China will encourage G20 members to help Africa and LDCs speed up industrialization, reduce poverty and pursue sustainable development by means of capacity building, investment increase and infrastructure improvement.”

After seven decades of promises by major advanced economies, it is hardly a surprise if Africans feel somewhat wary about such pledges. However, this time may prove different.

Africa’s role in the G20

Currently, South Africa is the only G20 member from Africa. However, China wants Africa to have a greater role in the grouping and to institutionalize that role. At the Forum for China-Africa (forac) meeting in South Africa last year, President Xi pledged $60 billion toward Africa’s development agenda. To walk the talk, Chinese hosts have invited to Hangzhou more African countries. With Beijing’s support, Africa can also become a permanent subject of the G20 meetings.

Until recently, the international multilateral organizations, including the International Monetary Fund (IMF), World Trade Organization (WTO) and World Bank, have been essentially inter-governmental organizations in which advanced economies dominate financing, vote, leaders and effective policies.

Yet, a truly new, more multipolar world order has begun to emerge in the past few years, not least because the initiative of the G20, China and other large emerging economies. One of the first signs was the creation of the BRICS New Development Bank (NDB), which was followed by the institution of the Asian Infrastructure Investment Bank (AIIB). In October, the Chinese renminbi (RMB) will join the IMF’s international reserve currencies, thus paving way for Indian rupee in the future.

None of these changes came about automatically, or through advanced economies’ initiatives, or without significant behind-the-façade friction. The same goes for African industrialization, which is the explicit goal of Africa’s Agenda 2063 for all the 54 economies in the continent. That requires the core economies to push for greater regional and intra-regional cooperation. It won’t be easy. Then again, China, too, had to overcome its warlords, imperial disintegration, a century of colonial humiliation, and a bitter civil war – before even the start of industrialization.

Moreover, Chinese economy has not expanded, thanks to advice from international multilateral organizations. Actually, what Beijing has done – from Deng Xiaoping to Xi Jinping – has often violated Western doctrines.

Overcoming development bias

A decade ago, I met a senior World Bank official in Washington, D.C. Among other things, we exchanged views about advanced technology and industrialization in emerging and developing economies. In Asia, I noted, the diffusion of new technologies has resulted in more diversified industrial structures, thanks to foreign multinationals and local labor forces.

I argued that, in the future, we might see some parallels in several African economies. However, the official was skeptical.

“I agree with your view on technology diffusion in Asia,” he said, “but I doubt it’s possible in Africa.” Why? I asked. “Africa does not manufacture. African economies consume, but don’t produce.”

“If you had visited Shenzhen in the late 1970s, it was a poor fishing village of 20,000 people where most were poor and lived on a subsistence economy,” I said. “If you visit the city today, it is a megacity of millions, a thriving ICT centre and its living standards are some of the highest in China. What seems impossible today may be trivial tomorrow.”

African industrialization, with Chinese characteristics

There is no reason why some urban centers in Africa could not evolve from assembly centers to manufacturing giants. Moreover, foreign direct investment (FDI) has played a critical role in China’s rapid economic development. To China, it has meant technology and know-how; to foreign multinationals, participation in China’s growth and benefits from the mainland’s industrialization and urbanization. There is no reason why FDI could not play a similar role in Africa in the future.

The most critical need in Africa is the acceleration of industrialization vis-à-vis elevated infrastructure investment, higher agricultural productivity, faster urbanization and an enduring focus on upgrading productivity, competitiveness and human capital. Chinese lessons stress the initial role of assembly factories to support self-sufficiency in manufacturing, creating jobs, expanding the economy and boosting positive externalities. In some cases, Chinese investments in Ethiopia, Congo, Cote D’Ivoire, Mozambique and Tanzania may be illustrative.

Moreover, such objectives contribute to the diversification of the industrial structure. Many African nations still rely excessively on resource exports and remain exposed to international commodity cycles. As the recent plunge of energy prices demonstrates, this can drastically penalize economies in which most budget revenues stem from oil and gas, as evidenced by Nigeria and Angola.

Industrialization does not only support economic objectives, such as self-sufficiency and resource independence, it can boost non-economic goals – from security to human capital – but not without peace and stability and a relentless struggle against corruption.

Greater Role to Africa and Developing World in the China-Led G20 is republished with permission from The Difference Group

The post Can Africa Benefit from a Greater G20 Role? appeared first on Economy Watch.

More than seven decades after 1945, international multilateral organizations continue to represent the victors of World War II, not the economic powerhouses of the 21^st century. However, change is in the air.

More than seven decades after 1945, international multilateral organizations continue to represent the victors of World War II, not the economic powerhouses of the 21^st century. However, change is in the air.

The G20 is the premier forum for global economic governance. It accounts for two thirds of the world population, 85% of global GDP and 80% of international trade. As a result, it offers a comprehensive indicator for the health of the global economy. Nevertheless, in the past G20, like many other comparable groupings, has operated mainly under the interests of major advanced economies.

As the world will turn its eyes toward the G20 in Hangzhou, China will set a different tone. It is one that the developing world has despaired for since the postwar era, one that does not seek to threaten the existing multilateral organizations, but to complement them.

Cautious optimism

There is reason for cautious optimism.  While G20 heads of government, or heads of state, have periodically met since the fall of 2008, this is the first time that the G20 Summit will be hosted by the largest emerging economy in the world; one in which living standards on average remain far behind those in advanced economies.

The role of the living standards matters. People who are subject to similar life conditions tend to share similar needs, interests and goals, across national boundaries. Until recently, they have lacked a representative voice in most international multilateral organizations, including the International Monetary Fund (IMF), World Trade Organization (WTO) and World Bank. In the latter, advanced economies dominate financing, voting quota, leaders and thus effective policies.

Despite the sincere idealism of many in their work force, these organizations have not been truly international, but driven by the interests of, by and for major advanced economies.

Yet, a new, more multipolar world order has begun to emerge in the past few years, not least because the initiatives of China and other large emerging economies. One of the first signs was the creation of the BRICS New Development Bank (NDB), which was followed by the institution of the Asian Infrastructure Investment Bank (AIIB). In October, the Chinese renminbi (RMB) will join the IMF’s international currency reserves, perhaps paving way for Indian rupee sometime in the future.

The lesson to be learned, however, is that none of these critical initiatives came about automatically, or through advanced economies’ initiatives, or without significant behind-the-faced friction.

In effect, G20 is a case in point.

Struggle for representative global governance

In his May speech in Hangzhou, Foreign Minister Wang Yi noted that the G20 is different from previous cooperation mechanisms. “Here, developed countries and developing countries sit at the same table as equal partners, and discuss and decide on international economic matters on an equal footing,” he said. “This reflects a major change in the world economic pattern and represents historical progress in keeping with the trend of our times.”

International media, I am afraid, did not entirely catch the subtext of Wang’s comment. What he did not say – after all, he is a diplomat – is that even G20 cooperation began only at the moment when advanced economies had exhausted all other alternatives.

That moment occurred in fall 2008, when for a few weeks the G7 economies – the US, Canada, four major European economies and Japan – were facing a specter of global depression that could prove far worse than the Great Depression in the 1930s. In this sense, global cooperation did not begin in the previous decade when there were many opportunities to do so. Nor did it begin after the Cold War when military budgets were slashed and the so-called peace premium was within the reach of major advanced economies.

In effect, even though the “emerging states” have been in the effective policy agenda of the advanced economies since the 1950s, reforms in global political governance have not.

G20 as G7 creation

Even the establishment of G20 was not the result of truly global multilateral consensus. It superseded the old G33 and was formally established by the G7 finance ministers in Berlin in 1999, mainly at the initiative of then-German finance minister Hans Eichel.

The membership of the G20 was decided by Eichel’s Deputy Caio Koch-Weser and then-US treasury Secretary Larry Summers’ Deputy Timothy Geithner (Wall Street banker who later served as president of New York Fed and treasury secretary under President Obama).  Koch-Wieser and Geithner simply went down the list of potential countries, saying, Canada in, Spain out, South Africa in, Nigeria and Egypt out, and so on. As a result, most G20 member states just happen to belong to the transatlantic axis, NATO or its allies, and US free trade agreements.

Initially, then, G7 created G20 in its own image. Consequently, some large economies, such as Spain, Netherlands and Switzerland, were not included because the stated goal was global representativeness. Other motivations may have been geopolitical, which is why Iran was not included.

The only reason why the 2008 abyss was avoided was cooperation between the leading advanced economies and large emerging nations, which recognized their inter-dependency and need for collaboration. In return for cooperation, the major advanced economies pledged they would speed up structural reforms in global governance to make the key organizations more representative of the world they claim to represent.

Nevertheless, as the reforms did not follow (and some were intensely opposed behind the public façade), China and other large emerging economies, particularly Brazil, India, Russia and South Africa began to promote complementary – not substitutionary – inter-governmental multilateral organizations.

Being on the right side of history

In the past two decades, we have witnessed a massive transfer of relative economic power from advanced economies to emerging nations. Yet, economic power is only remotely associated with the size of the population.

Today, the list of the world’s 20 most populous nations includes only three advanced economies; that is, the US, Japan, and Germany. Conversely, several large nations have no voice in the current G20, representing South Asia (Pakistan, Bangladesh), Sub-Saharan Africa (Nigeria, Ethiopia, Democratic Republic of Congo), Southeast Asia (Philippines, Vietnam, Thailand), and the Middle East (Egypt, Iran).

In brief, the G7 economies comprise less than 9 percent of the world’s total population but continue to account for more than 47 percent of the world economy. Despite all the rhetoric of development in advanced economies and international multilateral organizations since 1945, barely one tenth of humanity dominates almost half of the world economy.  

It is thus hardly surprising that, in many low- and middle-income nations, development practitioners see China, given its rising economic and political position in the world economy, as a more credible “broker” to leverage power between advanced, emerging and developing countries, including the least developed countries.

It is time for emerging economies and international multilateral organizations that truly represent their interests to complement the incumbent ones. Why shouldn’t these organizations look like the people they should represent?

That’s why I believe this time is different with G20. Starting in Hangzhou, for the first time, emerging and developing economies may have a bigger voice in the global economy. It is a symbolic start of a long, complex and belated effort to shift global governance to better represent the world itself.

A New Beginning for the G20 is republished with permission from The Difference Group

The post How will the G20 Work in a Multi-polar World? appeared first on Economy Watch.

The new Philippine president is waging a tough drug war, pushing economic growth domestically and greater pragmatism in foreign policy that could contribute to Southeast Asia’s future.

The new Philippine president is waging a tough drug war, pushing economic growth domestically and greater pragmatism in foreign policy that could contribute to Southeast Asia’s future.

 Internationally, Rodrigo Duterte, the new president of the Philippines, has been portrayed as a “dangerous populist”. That’s a gross caricature. In the elections, he leaned on the nationalistic, social-democratic PDP-Laban (lit. Philippine Democratic Party-People’s Power). He is a tough pragmatic realist who focuses on actions and results, not talks and formalities.

After two decades as Mayor of Davao, the country’s second-largest city, Duterte won the elections with a tough stand on crime. He has a track record. When he took over in Davao in the 80s, it was regarded as a dangerous economic backwater. Today, the city is booming and crime is down. Now he would like to “Davao” the nation.

True, Duterte’s macho rhetoric tends to blur the substance of his actions. Sheer authority earns his respect. Allegedly molested by a priest as a boy, he has been vocal for the rights of women, and ethnic minorities, including Muslims. He wants to unleash inclusive growth in the Philippines. He supports the US-Philippine alliance, but would lean more toward China and does not believe Washington would honor its defense obligations.

With a pace of a whirlwind, Duterte seeks to transform the Philippines for the better – or perish in the process of doing so.

Liberalizing the economy

As international media has focused on the Philippine drug war, it has ignored the dramatic rejuvenation of the archipelago nation’s economy that Duterte would like to serve more ordinary Filipinos. After election, Davao businessman Carlos G. Dominguez, Duterte’s finance secretary and childhood friend disclosed the new administration’s 10-point economic agenda. The basic idea is to maintain current macroeconomic policies, while instituting progressive tax reform.

Unlike his predecessor, President Benigno Aquino II, Duterte wants to accelerate annual infrastructure spending to account for 7% of GDP, mainly with public-private partnerships. Budget deficit is likely to increase and he has suggested raising the ceiling to 3 percent of GDP. Unlike stagnating advanced economies, the Philippine economy can manage deficits with future growth. To attract foreign investment, Duterte also hopes to relax the economic provisions of the constitution to adjust the foreign ownership cap of local companies to 70%, a task in which the previous Aquino administration failed.

In the past half a decade, manufacturing has accounted for more than half of FDI applications, which is vital to absorb labor growth as rural workers leave for cities, and to diversify economy away from low-skill services.

These policies have potential to accelerate modernization. Unlike his predecessor, Duterte will promote increasing agricultural productivity and rural tourism. Industrialization has still a long way to go as less than 20% of the population is employed by industry. The urbanization rate is only 50% and behind Indonesia. Internationally, the growth potential of the economy has been assessed at around 6.5% per annum, the bulk of which comes from services, construction, and manufacturing sectors. The future of IT business services is bright.

Recently, research firm Nielsen found Philippine consumer confidence to be at an all-time high, buoyed by the promise of future reforms. In the second quarter, GDP growth soared on the back of election-year spending to 7.0%, the fastest in Asia. Indeed, structural growth potential of the economy could be closer to 8 percent, if growth would be more inclusive.

Like Brazil a decade ago, Duterte wants growth to improve social protection programs, including the government’s conditional cash transfer program. He is a secular no-nonsense politician dedicated to strengthening the reproductive health law. In a Catholic country, where divorce can be as tricky as in the Vatican, such goals are controversial but hold a great potential for living standards.

Unlike his predecessors, Duterte supports greater decentralization and autonomy for the south. To him, federalism is the antidote to bureaucratic centralism, a legacy of colonial powers and ruling political dynasties that cultivate corruption and patronage. Moreover, federalism is vital to defuse a long-lasting communist insurgency and Muslim separatism in the south – and the spread of Jihadism in the future.

The starting point is favorable. The Philippine economy has a strong balance sheet and is well positioned to cope with global shocks. An economy of 100 million people is characterized by solid domestic demand, youthful demographics, but low exposure to global trade. Comprising one of the world’s largest Diasporas, 12 million Filipinos live abroad, while their remittances bring in vital foreign exchange.

Like other promising emerging economies, the Philippines has its downside risks. Thanks to its geographical location, large-scale natural disasters can cause major property loss, population displacement and disrupted food supply in storm-prone nation of 7,000 islands. Internationally, an earlier than anticipated Fed rate hike could hurt the Philippine peso. In turn, weaker-than-expected growth in China could harm exports and erode the current account balance.

War against drugs and crime

Since the election, the drug war has claimed more than 1,800 lives. The bloody bodies of alleged dealers and users have been left on sidewalks with cardboard placards suggesting involvement in the drug trade. Rights groups opposed Duterte backing death squads when he was still mayor of Davao and Time nicknamed him “The Punisher” Today, Human Rights Watch calls the situation “extremely alarming”.

Drastic times call for drastic measures, argue the proponents of the administration. By early August, Duterte had linked more than 150 judges, mayors, lawmakers, police and military personnel to illegal drugs ordering them to surrender: “I’m giving you 24 hours to report to your mother unit or I will whack you,” he said at a military camp. Reportedly, nearly 600,000 people have surrendered to authorities, trying to avoid getting killed. Prisons have turned into overcrowded, sardine-pack nightmares.

As far as critics are concerned, Duterte is undermining human rights, despite his statements against extrajudicial killings. This argument has been directed against Duterte by the UN, the United States and the Philippine rights organizations. Yet, he considers the critics naïve. Let’s illustrate the point: One of his most vocal critics has been Senator Leila de Lima; a former human rights commissioner, who had a stint as Aquino’s Justice Secretary and whose statements have often been taken at face value by well-meaning observers.

As de Lima accused Duterte for human rights violations, he dropped a bombshell alleging that de Lima was linked to the illegal drugs trade inside the New Bilibid Prison (which is under the DOJ); that she had bought a mansion to her driver who is also her lover; and that the driver collected drug funds for her during her senate campaign. Duterte struck a nerve. Last March, Discovery Channel’s Lou Ferrente, a former Gambino mobster, took a closer look at the world’s largest prison, which held 20,000 inmates and was run by drug lords who lived like royalties and seemed to have a close relationship with de Lima. While de Lima blames Duterte for character assassination, she is now under investigation for alleged links to illegal drug syndicates. According to the new DOJ, the investigation covers the top to the bottom ranks of the previous DOJ that de Lima headed.

As far as Duterte is concerned, he feels he is not moving fast enough. The Mexican drug cartel Sinaloa, the largest source of illegal drugs to the US, is already using the Philippines as an intermediate destination. Due to challenges in directly reaching America, the cartel is operating in the Philippines via transshipment. These activities were discovered around 2013 when a Mexican operation worth almost $100 million was confiscated. Duterte’s concern is that Manila has only a few years to curb illegal drugs and to avoid the fate of Mexico’s border regions.

These dramatic exchanges and tough measures have unleashed much debate in the Philippines. What actually happened in era of President Aquino? Despite substantial funds and the presidential crime commission, why so little was done to fight the drug lords and the cartel.

Despite rights organizations’ criticism, Duterte has the support of most Filipinos. In July, his trust rating soared to 91%. After two long decades of Marcos and after another two decades of anti-Marcos politics, reforms have not been accompanied by inclusive economic growth. Today, ordinary Filipinos are tired of waiting.

Duterte would like to “destroy the oligarchs that are embedded in government”. He describes them as “guys who just sit in their airplanes or their mansions. Their money adds up like the fare adding up in a taxi’s meter.” In early August, he singled out Filipino tycoon Roberto Ongpin, one of the 50 richest Filipinos in 2015 with a net worth of $900 million, according to Forbes. Duterte described him as a businessman close to people in power and implied he used political influence to foster his businesses. The oligarch ties go way back. Ongpin started his career as the trade secretary of Ferdinand Marcos.

The fall from grace

After the relinquishment of US sovereignty over the Philippines in July 1946, the Philippines was one of the most promising economies in Asia. In 1950, its living standards were still twice as high as in Taiwan or South Korea. However, as industrialization took off in Japan and spread to tiger economies in East and Southeast Asia, the Philippines fell behind. Today the Philippine living standards are about 15% relative to Taiwan and 20% in comparison to South Korea.

In the postwar era, the US retained military bases in the Philippines, as well as commercial privileges regarding Philippine imports and natural resources. As economic growth and development began to intensify in the mid-1960s, Ferdinand Marcos won the election. During his first term, industrialization increased, infrastructure was created and schools were launched. Meanwhile, Marcos steered increasing funding to the military, while sending more than 10,000 Filipino soldiers to Vietnam to support the US.

In his second term, Marcos began to create a personality cult, amid increasing economic and political turmoil. When he declared Martial Law in 1972, Washington looked the other way. Thanks to heavy borrowing, the economy grew. However, by the 1980s, foreign debt servicing and mismanagement of key industries caused a major downturn and the Philippines became known as the “sick man of Asia”.

The 2010 election win of President Aquino was buttressed by the legacy of his father, an opposition leader assassinated by Marcos, and his mother, the first post-Marcos president. During his rule, Aquino began his struggle against corruption and good governance, but growth did not filter down. Every third or fourth Filipino continues to live below the poverty rate, while drugs and crime thrive in slums.

While Aquino failed to achieve inclusive growth, he did get US forces back to the Philippines.

The role of Washington: security assurances

Since the postwar era, Manila has been Washington’s major non-NATO ally in the region. The American-Filipino relationship rests on the 1951 Mutual Defense Treaty (MDT), the 1999 Visiting Forces Agreement (VFA), and the 2014 Enhanced Defense Cooperation Agreement (EDCA), which has allowed the US Navy to return to Subic Bay. Leftist parties consider the return of US troops a violation of Philippine sovereignty, while pro-US Filipinos hope to join the US-led Trans-Pacific Partnership (TPP) in the next round of expansion.

The new alliance with Washington was designed by President Aquino and his foreign minister Albert del Rosario. In Washington’s view, it complemented US’s pivot to Asia, including the plan to move the majority of US warships to Asia Pacific by 2020. However, as Rosario resigned for health reasons in the spring and Aquino is no longer in office, Chinese-Philippines rapprochement has begun, which has not escaped unnoticed in Washington.

In the past few months, there have been several diplomatic rows between Duterte and US ambassador Philip Goldberg. A recent one followed a meeting between State Secretary John Kerry and Duterte who said, “I’m fighting with [Kerry’s] ambassador. His gay ambassador, the S.O.B. He pissed me off.” In the US media, the debate focused on the homophobic slur; it should also have been focused on efforts to influence the election. Before the vote, the US Navy sent its third warship in less than seven months into the waters of the disputed South China Sea. Meanwhile, Ambassador Goldberg made it clear that Duterte was not Washington’s choice and supported Aquino’s favorites. “[Goldberg] meddled during the elections,” says Duterte. “He was not supposed to do that.”

Historically, the distrust between Duterte and Washington goes back to the Meiring case, which US mainstream media has portrayed as a psychological melodrama that “fuels Rodrigo Duterte’s ‘hatred’ of the US”, as the New York Times put it amid the Philippine elections. However, the case may have more to do with US covert operations in Southeast Asia. The story goes back to Davao in May 2002 when a metal box exploded in the hotel room of Michael Terrence Meiring and mangled his legs.

The police found in the room powerful high-tech explosives and “highly-confidential” documents. Meiring had spent millions of dollars and had close ties with well-placed government authorities in Southern Mindanao, as well as Muslim separatists, Communist insurgents and jihadists, such as Abu Sayyaf; the feared terrorist organization, which Senate President Aquilino Pimentel Jr. once described as a “CIA monster” because the agency helped to train the group.

After Meiring was taken to the hospital, he vanished as men representing the FBI took him in the dark of night and flew him out of the country, with facilitation by the US Embassy. Subsequently, Duterte blocked US requests to base drones or spy planes at Davao’s old airport.

In Washington, the Meiring case is discounted as conspiracy speculation. Yet, since the Bush era, Washington’s neoconservatives have promoted the use of “regional states in developing a hedge against the possible emergence of an overly aggressive China”. To Duterte, the Meiring debacle was an infuriating violation of Philippine sovereignty.

The role of Beijing: economic cooperation

On July 12, the Hague international court ruled in the dispute between China and the Philippines over the South China Sea. Internationally, the ruling of the Permanent Court of Arbitration (PCA) has been characterized as a sweeping rebuke of Chinese claims in the South China Sea. However, in international relations, the impact is more ambiguous, which means greater uncertainty and possible volatility in the region.

China refused to participate in the arbitration because in Beijing’s view the tribunal had no jurisdiction over the case. Despite the focus of the UN Convention on the Law of the Sea (UNCLOS), the PCA is not a UN agency. Nor is its ruling enforceable. The US has strongly supported international arbitration and the rule of law. Yet, US record on international law is highly mixed; it has often acted unilaterally against international law, including through regime change, invasions and coups d’etat. Washington still has not ratified the UNCLOS, which in Beijing creates an impression that US wants China to abide by rules it rejects. Historically no permanent member of the UN Security Council has complied with a ruling by the PCA on an issue involving the Law of the Sea.

Currently, China and the Philippines have opted for a cooperative stance, which is predicated on Sino-Philippine dialogue that could reduce the weight of geopolitical issues, while supporting mutual gains in economic development. In the long-term, this is the most preferable trajectory to Manila, Beijing, Washington and ASEAN.

Despite significant pressures, Duterte is hedging his bets between US security assurances and Chinese economic cooperation, as evidenced by former President Fidel Ramos’s informal talks recently in China, which may result in a formal dialogue. Intensified bilateral cooperation could increase China’s participation in infrastructure investment and Chinese multinationals in economic zones; financing possibilities vis-à-vis the Asian Infrastructure Investment Bank; agreeing on “joint development areas” in South China Sea; possibly even joint potential in anti-corruption and anti-drug activities.

The great awakening

In the past few weeks, international media has “rediscovered” the Philippines, mainly thanks to the drug war, which ensures dramatic footage and great headlines, and are sometimes politically convenient. However, the structural trends of the beautiful island nation – rapid growth and great economic potential, a huge infrastructure push and rising foreign investment, the quest for law and order, and the effort to finally end futile friction with insurgents and to focus on economic development – continue to be largely ignored.

Opposition critics argue that Duterte’s rule could deteriorate into autocratic mismanagement that will penalize the gains of the Aquino years. Still others understand the need for tough policies, but remain concerned about unintended rights violations and collateral human damage.

In contrast, Duterte’s supporters ask why the war against drugs and for law and order did not start six years ago in the Aquino era when it would still have been easier while others wonder why corruption was permitted, despite multiple high-profile cases that have been recently disclosed in the public and private sector. To them, the Duterte era is a great reawakening – a second People’s Power Movement, if you will.

Duterte hesitated for months before he began to compete for the presidency, and for a reason. He is taking huge personal and security risks to achieve his objectives. Like Lee Kuan Yew once in Singapore, he is determined to clean the government, the bureaucracy and the private sector, while defusing external conflicts.

In emerging Asia, prosperity can only be built on peace and stability.

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According to polls, the race to the White House is over. Clinton has won; Trump has lost. If that proves the case, US economic erosion will slow but imperial foreign policy may escalate, which has critical repercussions in Asia.

The polls reflect the new status quo. Despite her high unfavorability ratings, Clinton now has the support of every second registered voter, whereas Trump, with his high unfavorability ratings, can rely only on every third. As a result, Clinton’s likely voters nationwide amount to 45-50 percent, as against Trump’s 35-40 percent.

According to polls, the race to the White House is over. Clinton has won; Trump has lost. If that proves the case, US economic erosion will slow but imperial foreign policy may escalate, which has critical repercussions in Asia.

The polls reflect the new status quo. Despite her high unfavorability ratings, Clinton now has the support of every second registered voter, whereas Trump, with his high unfavorability ratings, can rely only on every third. As a result, Clinton’s likely voters nationwide amount to 45-50 percent, as against Trump’s 35-40 percent.

Campaign financing tells the same story. By early August, Clinton had raised $365 million in big money financing, almost a third of it outside money. In contrast, Trump had barely $100 million, only a tenth of it outside money. Four of every five dollars in the Clinton campaign has come from large corporations and Wall Street, big lobbyists and big unions, not ordinary Americans.

How did we get here?

Questionable choices

By suppressing the dissent of Bernie Sanders’s center-left opposition in the Democratic convention, Hillary Clinton consolidated leadership, while attracting some dissatisfied Republicans and Reagan Democrats who favor hawkish foreign policy but progressive social policy.

Afterwards, Clinton faced huge political headwinds as FBI Director James Comey testified that she had shown “reckless” disregard with highly-classified emails, while multiple FBI investigations (which the Obama administration sought to deter) are underway into the Clinton Foundation.

The rising public storm paved way to a triumphant Republican convention in which Trump could have sustained a semblance of unity. Instead, he stumbled on his mouth by quarreling about a US Muslim soldier killed in action and with the Speaker of the House Paul Ryan, lost voters in several swing states and polarized division among Republicans.

The pessimist take is that the Trump campaign is amid a meltdown, while Trump seeks to save his face and might withdraw. In turn, Republican leaders such as Mitch McConnell are considering a replacement. According to party rules, it would be a logistical nightmare, but technically possible.

In that case, Trump would have to remove himself; or the GOP would have to remove Trump. That would pave the way for Trump’s Vice President Mike Pence, or Paul Ryan. While conservative Ted Cruz might try, he would not get majority support. There would also be many dark horses.

Of course, die-hards cannot believe that Trump could be fired. Besides, Trump shows no signs of resignation. Consequently, they expect Trump to stage a “fantastic” comeback.

Intriguingly, the shifts in the polls do not reflect voters´ perceptions about America’s direction and priorities. Most Americans believe that the top priority in the 2016 election is economy, while two thirds believe that America is heading in the wrong direction.

Here is the contradiction in a nutshell: In November, most Americans will knowingly vote for a president they do not particularly like, don’t really trust and whom they believe will continue to take America in the wrong direction.

If this scenario will materialize, what kind of economic and foreign policies will the Clinton administration opt for?

More economic erosion

Clinton has promised to create 10 million new jobs in America in the next four years. In reality, that does not require miracles. Thanks to demographics and output potential, US economy should create some 200,000-250,000 new jobs on a monthly basis, which means 2.4-3 million annually; that is, 9.6-12 million new jobs in four years. Ironically, it could be undermined by the kind of assertive foreign policy that Clinton supports.

Clinton has promised to expand programs for poor Americans and to increase contributions from the prosperous. Her discretionary spending relies on $1.1 trillion for infrastructure, universal pre-school and tuition assistance, paid family leave and so on. To alleviate America’s income polarization, she advocates 4% surtax on incomes above $5 million, raising rates on medium-term capital gains and estate tax rate to 45%.

According to consensus estimates, Clinton plan could generate $1.1 trillion in the next decade. However, it is a centrist plan that will not overcome US inequity. Drastic times call for greater ambition.

Today, US economy faces a massive sovereign debt burden, which amounts to $19.4 trillion (105% of the GDP). Nevertheless, Washington still lacks a credible, bipartisan, medium-term debt plan. Clinton believes that rising debt is a national security risk and her economic program would reduce it in relative terms by 2026.

Like Sanders, she would probably reduce the deficit through tax increases, with limited cuts to discretionary spending; unlike Sanders, she would not challenge the Wall Street’s financial aristocracy or reduce military spending.

In view of consensus projections, by 2026 US debt will soar by half to $29.3 trillion (106% of GDP), assuming fairly ambitious real GDP growth rate of 1.7% next decade. However, it does not include downside risks, such as monetary exhaustion, immigration decline, recession, or geopolitical crises.

Instead, a less ambitious growth rate of 1.2% would cause the debt-to-GDP ratio climb to 115-120%. In relative terms, this is comparable to the Greek burden at the eve of its sovereign crisis in 2009. The tiny Greek crisis shook Europe; the huge US debt crisis would rock the world.

Toward military friction

After his Nobel Peace Prize in 2009, President Obama was widely expected to scale back America’s commitments overseas, particularly George W. Bush’s long wars in Afghanistan and Iraq, and shift responsibilities to allies. Instead, the Obama White House has authorized deployments in Syria, is rethinking troop drawdown in Afghanistan, considering sending more troops to Iraq and Syria, expanding the fight with ISIS to North, West and East Africa (e.g., Nigeria, Libya, Somalia), and spending more for sending heavy weaponry to Eastern and Central Europe to counter Russia. The US military is now actively engaged in more countries than when Obama took office.

In the Clinton era, US military policy would be more costly, assertive, and global. She is unlikely to cut military spending even though the US already spends $600 billion on defense – more than the next seven countries combined, according to SIPRI.

While the US pivot to Asia began in Obama’s first term, it was first framed by Clinton, as foreign secretary. In that role, she promoted the Trans-Pacific Partnership (TPP); but to beat Sanders, she turned against it. As president, she might flip-flop again and support it.

She also supported the shift of 60 percent of US military ships to Asia Pacific, a decision that has toughened attitudes in China and contributed to increasing rearmament and conflict escalation in the region.

That is why neoconservative leaders, led by Robert Kagan, have rushed behind Clinton´s campaign. That is also why 50 former GOP national security leaders recently slammed Trump who would like to renegotiate US pacts with its allies.  They wanted to ensure the continuity of US “military-industrial complex” and the expansive foreign policy – but Clinton will reap the political benefits.

Even after the global crisis and China’s growth deceleration, Asia may have generated wealth amounting to twice the size of Germany into the world economic map. In the 21^st century, the world’s economic future relies on peace in the region.

If the massive US military transfer is really meant for stabilization, it would contribute to peace. If not, it will split the region, slow China’s rise and the catch-up of emerging Asia. That, in turn, could undermine the promise of the Asian Century.

What if Clinton Wins – US Presidential Election 2016 is republished with permission from The Difference Group

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In the aftermath of the Brexit tensions, Italy is defying Brussels to bail out troubled banks and preparing for constitutional referendum in October. If Prime Minister Matteo Renzi fails to achieve adequate support, economic destabilization will shift from the UK to Italy – which could pave way to the rise of anti-establishment left or right.

In the aftermath of the Brexit tensions, Italy is defying Brussels to bail out troubled banks and preparing for constitutional referendum in October. If Prime Minister Matteo Renzi fails to achieve adequate support, economic destabilization will shift from the UK to Italy – which could pave way to the rise of anti-establishment left or right.

 “Thank you Great Britain, next it is our turn,” tweeted Matteo Salvini, the leader of the right-wing Northern League (NL), a major Italian center-right opposition party. Meanwhile, ex-Prime Minister Silvio Berlusconi has anointed Stefano Parisi, a former Internet executive and government economic advisor, as his political heir, giving him a mandate to reconsolidate Italy’s fragmented center-right, starting with Berlusconi’s own Forza Italy (Go Italy!) party.

Along with radical right, Euroskepticism has been on the rise in Italy as elsewhere in Europe. Until recently, Italy saw itself as part of an integrated Europe, but that was before the immigration crisis and continued economic stagnation – both of which are attributed to Prime Minister Renzi by Italy’s radical right and left.

“Whether you like it or not, the British people have chosen,” said Alessandro Di Battista, after the UK’s Brexit referendum. He is one of the leaders of opposition center-left 5-Star Movement (M5S), Italy’s second-most popular party. The Brexit will have a direct impact on more than 300,000 Italians who are official residents in the UK, and another 300,000 or more who work illegally in underpaid jobs. Any Brexit effect will also have repercussions on the Italian business, economy and markets, especially as the Milan bourse has become part of the London Stock Exchange.

The indirect impact of the Brexit will be broader. As far as major opposition leaders, such as Salvini and Di Battista, are concerned, the Brexit vote will pave way to Italy’s own referendum and – as they hope – Renzi’s defeat in October. In that case, Italian business lobby Confindustria has predicted “political chaos” in the euro core economy of 60 million people. In contrast, the M5S remains committed to EU but not to Renzi.

In the short-term, however, challenges will focus on Italian banks.

Fragile banks, credit rating on review

In Italy, unease is increasing as Renzi is now willing to defy the EU and pump billions of euros into its troubled banking system. As the result of Italy’s three-year recession and a decade of stagnation, bad loans restrict the bank’s ability to lend, which, weakens government’s efforts at rejuvenation. To recapitalize Italy’s banks, Rome needs a waiver from European commission state-aid rules.

While German Chancellor Angela Merkel has rebuffed Renzi’s request, Berlin supports Rome’s efforts to clean up the banking system. Merkel knows only too well that if Brussels will penalize Italian banks, Rome might reject Renzi and she would have to rely on anti-system M5Sor radical right’s leaders in Italy.

Nonetheless, Italy’s banking threat has alarmed Europe’s regulators. Not so long ago, Brussels signed off some $170 billion worth of precautionary measures, which will help Italian banks with short-term liquidity challenges. However, it is the pressure on capital that’s the greater concern, as evidenced by new stress tests at the end of July. These concerns were particularly associated with Italy’s third-largest bank, Banca Monte dei Paschi di Siena (BMPS), which has close ties with Renzi’s center-left Democratic Party (PD). While BMPS announced it had secured underwriters to back a turnaround, the stress tests found the bank to have the greatest challenge out of 51 of Europe’s top banks to cover its toxic loans in adverse economic conditions.

Recently, the rating agency DBRS placed Italy’s last “A” credit rating on review citing uncertainty over the October referendum. Understandably, the DBRS decision has irked both Renzi and the Economy Minister Pier Carlo Padoan. Currently, DBRS is only one of the four major agencies whose rating the European Central Bank (EBS) can still use to keep Italy in the top band for collateral requirements for its lending to banks.

A downgrade would bring Italy’s sovereign rating to BBB, which would raise the cost for Italian banks of using government bonds as collateral for ECB loans.

Renzi’s rise and fall – or rise?

Renzi needs wins. In local elections last June, the M5S and center-right parties, including the NL, beat the PD in key municipalities. In Rome, M5S’s lawyer Virginia Raggi who ran on an anti-establishment platform, pledging to fight corruption defeated Renzi’s candidate for mayor.

The message reverberated in Italy’s capital where Gianni Alemanno, mayor until 2013, remains on trial for corruption and the Mafia Capitale scandal confirmed organized crime’s foothold in municipal services. While Renzi acknowledged PD’s defeat, he refused to resign leadership in the party and has staked his political future on the constitutional referendum in October.

Italians are sympathetic to the idea of streamlining politics in the Eurozone’s third-largest economy in which a gridlocked legislature and unstable governments sustain a seemingly endless ping-pond between the two chambers of parliament. If Renzi loses his referendum, he will resign from the role of the prime minister and the PD’s leadership. That, in turn, would end the post-Berlusconi period of relative stability in Italy, while paving way to ‘Italexit’ – an Italian referendum on the EU.

Only a few years ago Renzi took power in Rome with promises of ambitious reforms and real recovery. What went wrong?

Nicknamed il Rottamatore (the scrapper), the 41-year-old Renzi, former mayor of Florence, became the youngest person in history to be Italy’s Prime Minister in February 2014; younger than Mussolini. The good news was that, by the end of 2013, the longest recession in Italy’s postwar history had ended. The bad news was that the Italian economy was a tenth smaller than before the crisis, and unemployment rate had doubled to over 12 percent since 2007.

Yet, Renzi’s political starting-point was favorable. The PD had its strongest constituencies in Northern-Central Italy and the big cities, as the Communists did in the past. Internationally, it was regarded as social-democratic, progressive by outlook and reformist by inclination. Renzi himself was seen as a liberal modernizer with a penchant to tweet his ideas and latest achievements.

Representing much-needed generational change in the aging Italy, he hoped to reverse the country’s decline by launching huge projects, starting with a new electoral law to consolidate political decision-making, reforms in the public administration, and the tax system.

However, in December 2014, the ratings firm Standards & Poor’s lowered Italy’s long- and short-term sovereign credit ratings to ‘BBB-/A-3.’ Nevertheless, S&P expected Italy’s government to implement reforms, and the ECB’s monetary policy to support a normalization of inflation.

In reality, Renzi’s political capital could collapse in October, which would effectively nullify his reform program. In turn, the eclipse of Renzi’s reforms could herald Italy’s next sovereign downgrade, which could foster a perception about the ECB’s quantitative exhaustion.

‘Bribesville’and CIA paved way for Berlusconi – and Renzi

Following the end of the Cold War, Italy’s ruling class disintegrated after a nationwide judicial investigation into political corruption in the early 1990s. The Mani Pulite (‘clean hands’) investigation resulted in the demise of the First Republic and the dissolution of many political parties, even suicides of high-profile politicians and industrialists. At one point, every second member of the Italian Parliament was under indictment.

Known as Tangentopoli (“Bribesville”), the corrupt system amounted to an estimated $4 billion, mainly from bribes for large government contracts. In national politics, one result was the fragmentation of major center-left parties. Like in Brazil today, allegations also emerged about a ‘soft coup’ orchestrated by Italian judicial investigators and the CIA. US Ambassador Reginald Bartholomew said that, behind the operation, the CIA helped Italian prosecutors to accuse politicians.

The destabilization resulted in the center-right, pro-US Silvio Berlusconi’s four governments between the mid-1990s and 2013, until he was convicted of tax-fraud. These two decades also led multiple left-wing and center-left politicians consolidate their combined forces into the Democratic Party (PD).

However, times are changing. As Renzi has only a quarter of a year left to reverse Italy’s economic and political headwinds, odds are against the PD’s reforms. Despite half a decade of promises of deleveraging, Italy’s general government debt is still at 133 percent of the GDP, higher than at the onset of the European debt crisis.

Even as Italy is amid a cyclical rebound, its real GDP growth will remain barely 1 percent in 2016-17. Thanks to aging, slowing productivity and de-industrialization, growth will decelerate to 0.6-0.8 percent by the early 2020s. In brief, as challenges will increase, economic muscle will shrink.

Today, Renzi is being surrounded by political enemies on the right and the left, and within the PD. As his power base is softening, the PD could fragment. Despite his electoral win in 2013, he controls only two-thirds of the party, which represents the liberal, Third Way-oriented modernizing bloc. Other factions include Christian leftists, social democrats, leftist democrats, and the reformist left that now opposes Renzi’s policies.

If Renzi falls, PD will pay the bill and could be followed by radical right and anti-establishment left. That would also result in foreign policy shifts. Recently, Defense Minister Roberta Pinotti said Italy would probably agree if the US asked to use its airspace or airbases to launch attacks on the Islamic State in Libya. In contrast, the anti-system left and right have their own views about Italy’s role in the US war against terror.

A post-Renzi Italy

The 5-Star Movement, the Northern League, and the center-right opposition party Forza Italia strongly oppose the October referendum, which they call undemocratic and favorable to the incumbent PD.

The NL is reorganizing its ranks to become a national party, with a Euro-skeptic platform. The party’s rising star Matteo Salvini sees himself as Marine Le Pen with Italian characteristics. Salvini has a very critical view of the EU and he sees the euro as a “crime against mankind.” He is opposed to illegal immigration. On economic issues, he supports flat tax, fiscal federalism and protectionism. In demonstrations, he dons a Mussolini-style black shirt to court Italy’s extreme right group Casa Pound.

In foreign policy, Salvini emulates Le Pen’s ideas, opposes the international embargo against Russia and supports Italy’s broader economic opening to Eastern Europe and Asia. In the US, he has endorsed Donald Trump whom he met in Philadelphia last April. Nevertheless, his ratings have eroded in summer.

Currently, the Eurosceptic M5S enjoys 30.6% support in polls, as against the ruling PD’s 29.8%, whereas the support of the far-right NL has declined to less than 13%. The M5S can no longer be ignored as anti-establishment voice founded by comedian Beppe Grillo. Almost every third Italian is behind it. Concurrently, Luigi Di Maio, the deputy speaker of the parliament, has become the most likely figure to lead the party at the next general election. While he remains critical of Brussels, he believes that the EU is now used as a scapegoat for the weaknesses of Italy’s domestic politics.

Renzi wants structural reforms, EU integration and US cooperation. Despite its Euroscepticism, the M5S supports EU membership, but also national referendum on the euro. Salvini wants political power, exit from the euro and Euro-skeptic cooperation with Russia. Whatever the outcome of the October referendum, it will be preceded by the Italian banking debacle.

In turn, both Brussels and Berlin know very well that if they support Renzi too much, they risk losing the support of EU integrationists. However, if they don’t support Renzi enough, they risk losing Italy.

After the Brexit threat, Brussels cannot afford Italexit.

Italy at the Brink: From Renzi’s Referendum to Italexit? is republished with permission from The Difference Group

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