Category Archives: Asia

Will China’s Economic Slowdown Derail Reform?

Creative Commons photo courtesy of NicorA year ago, my colleague Nicholas Consonery and I wrote an article for The Fletcher Forum arguing that China’s transition into an era of slower economic growth is a positive sign because it gives Beijing a political window to address more acute structural challenges and vulnerabilities. This past summer, some symptoms of slower growth surfaced, including declining exports, a stock market crash, and a devaluation of the RMB, triggering an exodus among investors and reviving doubts regarding President Xi Jinping’s administration. But this is not unexpected, and we had said that the “government (and economy) will face major bumps along the way.” China’s volatility represents setbacks but not the fundamental derailment of reform, and it remains premature to fear an inevitable “hard landing” for Chinese markets.

For all the hysteria, financial disruptions have not fundamentally damaged China’s real economy. Despite short-term shocks, the A-shares stock market correction has had limited impact on consumption, as most household wealth remains in banks or real estate, and on investment, as corporate financing relies mainly on debt. Furthermore, despite the much-publicized 30 percent crash in June, the Shanghai A-shares index is still up roughly 40 percent over the last year. On the currency side, rates have stabilized and even appreciated after the recent devaluation. The decision to devalue now looks less like a policy blunder and more as an intentional move to boost the RMB’s bid for inclusion in the IMF’s Special Drawing Rights foreign exchange reserves.

Beijing’s experiment to reform capital markets over the past two years has been a push-pull process. On several occasions, regulators rolled back relaxations when markets spun out of control, taking some missteps in the process. When securities on the stock market looked destined to enter freefall, regulators backtracked on ceding control and engaged in an ill-advised intervention, bailing out state-owned enterprises (SOEs) and halting initial public offerings. Recognizing its own mistake, Beijing went on to arrest top individuals who oversaw the rally and then executed the intervention. When investors again panicked after Beijing allowed the RMB to devalue by 3 percent over two days in August, the People’s Bank of China instituted tighter capital controls to stem speculation, cooling down short-term volatility at the cost of backtracking on capital account liberalization. Yet, these setbacks only occurred because China is experimenting with reducing control and opening up its capital markets. These experiments are a positive sign for reform, even if it means greater financial volatility in the future.

This same push-pull process is reflected more broadly in efforts to implement President Xi’s ambitious reform plan to put the economy on a more sustainable path, as outlined in the Chinese Communist Party’s Third Plenum in late 2013. China’s leaders want to liberalize the economy and address the needs of a rising middle class, but must balance those priorities against both political and economic forces resistant to change.

In the political realm, the Communist Party has centralized power to overcome resistance against reform. The Xi administration launched an unprecedented anti-corruption campaign led by Politburo Standing Committee member Wang Qishan, cracking down on toughened sectors such as energy and finance, and setting the stage for reform in those sectors. Also, the Party set up “leading small groups,” running parallel to government ministries but commanded by a core team under Xi or other members of the Politburo Standing Committee. The tightened grasp on power dismayed observers hoping to see more political reform, but has arguably better equipped President Xi to implement his economic reform agenda and pursue economic liberalization.

On dealing with the slowing economy, reform goals have sometimes given way to short-term relief for growth. Under pressure to achieve a GDP growth rate target of around 7 percent this year, already the lowest since 1991, the Ministry of Finance announced in September that it would adopt a “more forceful” fiscal policy to stimulate the economy. The increased spending will not be a repeat of the 4 trillion RMB injection of 2009, but it is nonetheless perverse to Beijing’s aim to expand services and consumption as the main drivers of growth. China has also had to relax its aggressive effort to cap local debt, as slowing growth dwindles local revenues and undermines local governments’ ability to repay. In June, the National Development and Reform Commission allowed local government financing vehicles to refinance their debt, partially rolling back efforts by the Ministry of Finance to restrict backchannel financing and replacing it with provincial bond issuance.

Looking more broadly, however, China’s economic transition under President Xi and Premier Li Keqiang has remained largely on course. A landmark reform plan for China’s SOEs, finally passed in September, will bolster private-sector participation and transparency. On factor price reform, the government authorized an electricity sector reform plan in March, while more reforms on the oil and gas sector are expected by the end of this year. Strides have also been made to meet the rising demands of China’s middle class: environment and food and drug safety regulators have all been given more authority, and the government has taken steps to dismantle both the hukou household registration system and the one-child policy. Finally, pessimism over the sluggish 6.9 percent growth rate in the third quarter of this year misses a more important data point: for the first time, services and consumption accounted for more than half of the country’s GDP. Concerns about China’s financial volatility, political centralization, or increased economic stimulus are certainly valid, but to fixate over them is to ignore progress in these significant areas that had long stalled under the Hu-Wen era.

Recent volatility in the financial system is not the beginning of the end for China, but rather the growing pains of a government experimenting with relaxing its tight grip. Despite challenges posed by slower growth, there is little indication that China has abandoned reform, or is on course for a hard landing. As President Xi told the Wall Street Journal in September, his government will have to “crack hard nuts and ford dangerous rapids” on the path to reform. Reforms have not been smooth, and the push and pull in different areas testify to the magnitude of this challenge. But as long as Beijing recognizes that it is in its own best interests to allow the economy to slow down and move toward a more sustainable path, then reform will continue.

America’s Myanmar Mistake

Andrew Mercer

Photo courtesy of Andrew Mercer


If Rwanda was Bill Clinton’s greatest regret and Darfur was George W. Bush’s, Myanmar may well become President Barack Obama’s. U.S. Myanmar policy, occasionally praised as one of Obama and Hillary Clinton’s greatest foreign policy accomplishments, is flavored by willful blindness toward the government’s persecution of Rohingya Muslims.

Myanmar citizens will cast their ballots on November 8th in an election that excludes 800,000 Rohingya voters, dozens of Muslim candidates, and a host of other minorities. Even Nobel Peace Prize-winner Aung San Suu Kyi’s National League for Democracy (NLD) party has refused to run Muslim candidates. After a summer-long media onslaught on the great promise of the country’s “free and fair elections,” the news is catching up: in Myanmar’s elections, people of certain ethnicities and religions are less equal than others.

The election is perhaps least fair for the stateless Rohingya. At the moment, 140,000 of them are wasting away in ghettos and internally displaced persons camps in Rakhine State. They have little hope of returning to their land and businesses, which have been effectively confiscated, and they are at the mercy of the country’s ruthless security forces.

In fact, reports from the Yale Law School’s International Human Rights Clinic, the International State Crime Initiative, and an Al Jazeera investigation have concluded that there is strong legal evidence for classifying persecution against Rohingya as state-sponsored genocide.

Lamentably, this classification may not matter—at least as far as the U.S. government is concerned. Rohingya are already widely considered victims of ethnic cleansing. By 2013, the human rights community had begun hinting at genocide, after leaked draft legislation and regional orders revealed that the Myanmar government and military were actively engaged in restricting the Rohingya’s most basic rights.

However, in Washington, few are willing to use the term “genocide.” They worry that, if they do, they will not be taken seriously, particularly since the U.S.-Myanmar relationship is considered such a success story.

Given the lack of concern the issue is receiving, it is not surprising that the U.S. government has done little to ease the Rohingya’s plight. Tolerance programs at the U.S. Embassy in Yangon, paltry amounts of humanitarian assistance to the Rohingya, and admonishments against religious discrimination are about all the U.S. has offered to the country, which has been rocked by an ethno-religious identity crisis since violence broke out in Rakhine State in mid-2012.

The Obama administration has avoided identifying the crisis as ethnic cleansing and has not acknowledged the government’s active role in perpetuating systematic persecution. The administration often frames the Rohingya situation as a “challenge” that has arisen from “hate speech” caused by the lifting of restrictions on freedom of expression and by the Race and Religion Protection Laws that undercut the government’s “efforts to promote tolerance, diversity, and national unity.”

But the government’s lifting of some restrictions on basic freedoms of speech and expression is hardly the cause of violence, be it “intercommunal” or state sponsored. The Rohingya cleansing is not a natural consequence of a transition to democracy, but a consequence of the government’s discriminatory policies and violence.

Ethno-religious violence has been a favorite direct and indirect tool of the military regime since the 1960s, and the current government remains adept at silencing “hate speech” on topics against its interests. The Myanmar government has led a sustained, targeted campaign against the Rohingya for decades including through the 1974 Emergency Immigration Act, the 1982 Citizenship Law, and particularly horrific episodes of violence since 1978. Given this history, it is utterly impossible—despite the Obama administration’s best efforts—to see the Myanmar government as an agent of tolerance, diversity, or national unity.

Outside of the Obama administration, some politicians have tried to hold the Myanmar government accountable for its abuses. A bipartisan group on Capitol Hill, including Senators Marco Rubio, Bob Menendez, Bob Corker, and Ben Cardin, has realized the culpability of the government, writing a bill to limit full U.S. engagement with a country at war with its minorities. In Myanmar, well-institutionalized violence and discrimination are rooted in a Buddhist-Burman nationalism that continues to rationalize state attacks on minority groups across the country. This is precisely why no number of tepid and toothless admonishments from a half-hearted U.S. will ever end the Rohingya’s torment.

More recently, in October 2015, U.S. Deputy National Security Advisor Ben Rhodes traveled to Myanmar to discuss “U.S. expectations” of the upcoming election. However, those “expectations” remain unclear—and so far they seem to be largely nonexistent. Already, the Myanmar government has disenfranchised the Rohingya, excluded Shan and Kachin townships from elections, blocked overseas advance voters, and refused to allow Aung San Suu Kyi to run for president.

Rather than clarifying that a Muslim-free election won’t be taken seriously by the leader of the free world, the Obama administration has through the International Foundation for Electoral Systems provided funds to Myanmar’s Union Election Commission— which banned Rohingya parliamentarians from running. Some Obama administration officials have even said that the U.S. will view the election as legitimate as long as the Myanmar people do.

That argument is disingenuous at best. It ignores the basic criteria for credible elections and the evidence that many people are already being excluded from voting. Moreover, it discounts the chorus of civil society voices speaking out for plurality and religious tolerance in Myanmar.

There is assuredly an argument to be made that extending an open hand to Myanmar’s leaders without focusing on human rights could be a way to eventually lead the country to act as a responsible state. But minimizing the Rohingya’s plight as a mere human rights issue, rather than taking seriously the likelihood of a state-sponsored genocide, may stop the White House from developing a coherent plan of action. This could give Myanmar time and space to conduct a partial extermination of the Rohingya.

Some hold flickering hope that the NLD’s anti-Muslim stunt was just a political one. They hope that the party will sweep the election and somehow demonstrate the political resiliency and capacity to fight back against the nation’s powerful police and security forces, dogmatic government officials and parliamentarians, and Rakhine extremists for the sake of 800,000 disenfranchised Rohingya the international community has already written off. It may be possible, but without a little moral, principled, and honest support from the U.S., we may soon be talking about Barack Obama’s greatest foreign policy regret.

Global Development in the Age of Automation: Catapult or Detour?

Flickr Image Courtesy of Fiat Chrysler Automobiles

Earlier this fall, renowned physicist Stephen Hawking told readers on Reddit’s Ask Me Anything question series that despite machines having the power to enable humanity to enjoy a life of luxurious leisure, current trends point toward “technology driving ever-increasing inequality.”

Hawking joins a chorus of influential voices from academia and public and private sectors who express cautious optimism about this era of expansive technological change and its impact on quality employment and economic inequality. The growing sophistication and declining costs of technologies such as 3D printing, robotics, and the Internet of Things that define this new age of automation are changing the way goods are produced and delivered and, by extension, transforming labor markets around the world.  Experts point to labor’s declining share of GDP, structural unemployment, and rising economic inequality in many countries as signs that this transformation is underway. Some estimates suggest that more than 47 percent of the U.S. workforce is at high risk of automation.

The risks and opportunities of this era of technological change are important to consider from the viewpoint of low-skilled workers and vulnerable groups, particularly in developing and emerging economies. These groups make up a large portion of the workforce in global manufacturing and agriculture value chains – areas that are increasingly at risk of being replaced by machines. They also stand to gain the most from harnessing technology as a driver of economic opportunities and improved well-being.

Development Catapult

Labor-intensive manufacturing has been an important engine of economic growth for many economies, such as Bangladesh, where the garment industry is the largest employer in the country. More than 3.5 million people work in the industry, 90 percent of them women. The industry helped reduce the poverty rate in the country from 56 percent in 1992 to less than 32 percent two decades later.

Technology has played an important role in the growth of these industries and economies. This era of technological progress could serve as a catapult for many developing countries, helping them leapfrog low-skilled manufacturing to create high value industries that meet the demands of an increasingly digitized and knowledge-based economy. This development catapult will create jobs as well: according to one study, over 1 million robot-driven jobs could be created by 2016. Research also shows that the Internet creates 2.6 jobs for every job lost to increased technological efficiency.

Technology can also unlock new economic opportunities by making the means of production accessible to more people, enabling new business models like the sharing economy. For example, online work has enabled women in remote areas in India to earn cash while caring for children and elderly family members. Facilities such as “makerspaces” and tech incubators provide access to new technologies, which can bring more people into the economy through self-employment and entrepreneurship.

Moreover, jobs in the technology industry may offer higher salaries. As part of its Digital Jobs in Africa initiative, the Rockefeller Foundation found that in countries such as Zambia and Ghana, jobs in the ICT sector provide higher than average wages and are less volatile than much of the informal work available to most youth.

Development Detour

If automation leads to a shift away from labor-intensive manufacturing, what will this mean for millions of entry-level job applicants? Could this actually be a development detour for many countries?  The number of jobs expected to be created in this age of automation pales in comparison to jobs created through labor-intensive manufacturing. In 2009, 99 million people were employed in the manufacturing industry in China. Foxconn, the Taiwanese contract manufacturing company and supplier to Apple and other consumer electronics companies, will use robots and machines to complete 70 percent of its assembly line work. Although automation may be an opportunity for China to maintain some of its manufacturing competitiveness in the face of rising wages and competition from other countries, it is not unreasonable to anticipate that China and many other manufacturing centers around the world could see significant job elimination with automation.

Many low-skilled workers are likely to face barriers in accessing these opportunities. These jobs will likely require more complex skill sets, making it difficult for lower-skilled, less-educated workers to capture the opportunities created by automation. Instead of hiring line workers, more advanced factories are hiring industrial engineers. This is particularly concerning for women who, in many countries, face significant gaps in education and skills needed for many jobs created through automation.

Technology is also likely to affect the quality of jobs and protection of worker rights. Automation could make certain positions more attractive if machines fill the more physically grueling, unsafe, and lower paying jobs. Wages could rise dramatically if the benefits of higher productivity are returned to workers but it may be harder for human capital to compete with cost-effective machines, prompting downward pressure on wages. Furthermore, more “on-demand employment” or contractor work that is generated by technological advances can be unreliable and offer limited benefits and weak protection under traditional employment law.

The age of automation is no longer science fiction that only Hawking and futurists can envision. This future has arrived, and just as it could serve as a catapult for global development, it could easily lead to a detour with roadblocks and challenges along the way. The answers are not easy. Investments in education and skills are a natural starting point, but this can’t be left to policymakers alone. The private sector is an essential partner in designing and applying automation in a way that respects worker rights, creates opportunities for more people, and drives inclusive economic growth.

This article draws on findings from research the author conducted while working at Business for Social Responsibility (BSR), a non-profit business network. For more information about this research please see the BSR issue brief.


Can Digital Privacy Be Protected By Borders?


In the United States, if the FBI thinks you committed a crime, it can go to a judge for a warrant and search your house. But if your house happens to be in Ireland, would a U.S. warrant give the Feds permission to search your property? Of course not.

But what about digital property? Does the FBI have the authority to access someone’s data, even if it is stored outside of the U.S.?

The Second Circuit Court of Appeals is trying to answer that second question. Microsoft and the U.S. Department of Justice are waiting for the decision that will determine whether or not law enforcement officials can access emails stored outside of U.S. borders. No matter which side wins, the ruling will affect discussions about national sovereignty and how it relates to the Internet for years to come.

The case began when a judge issued a warrant requiring Microsoft to turn over emails of a suspected drug trafficker that were stored on an Irish server. A lower court upheld the warrant’s validity when the company protested. Microsoft fought back, arguing that such a demand was an extraterritorial warrant and that investigators needed to get an Irish warrant to access the emails. The U.S. government countered that because Microsoft is based in Redmond, Washington, all of its data is subject to U.S. warrants.

Behind the dispute is the practical matter that it takes an average of 10 months to process a U.S. warrant request under a mutual legal assistance agreement. Pulling data from the Irish server remotely would take minutes.

Microsoft—and most other technology companies—provides its services in the cloud, storing data on remote servers to provide quick, multi-device access to consumers. However, the term “cloud” itself is a misnomer. It evokes the idea of data floating about, placeless. But this notion of the cloud is an illusion: data in the cloud is stored on physical servers that are situated squarely on sovereign territory, and the companies that manage the data are subject to the laws of that country.

If Microsoft wins its appeal, the U.S. government would be compelled to go through established mutual legal assistance processes to get its hands on data stored on servers outside of U.S borders. Judging from Ireland’s support of Microsoft’s position, other states favor this outcome and would quickly embrace an affirmation of their data sovereignty. Some countries, such as Russia and Australia, already require data about their citizens to be stored locally, in order to keep it beyond the reach of the United States. At least 20 more countries have considered similar laws.

If Microsoft wins its lawsuit, such “data localization” regulations could become the norm. But if that happens, technology companies would face a compliance nightmare. They would have to build expensive data storage facilities abroad, fork over hefty fines, or give up on major markets. Startups with fewer resources would find it exceedingly difficult to expand abroad, stifling the spread of innovation.

It’s not just a business problem, either. Many warn that if the court rules in Microsoft’s favor it could pave the way for a “Balkanization” of the Internet that would fracture the global network.

On the other hand, if the Department of Justice wins, the outcome may not look all that different. Microsoft insists that extending the reach of search warrants to data stored abroad will start a “global free-for-all” in which “any country with jurisdiction over a provider can reach into any other country” and plunder its emails. Suddenly, foreign companies offering localized data solutions would find their services in high demand with neither the companies nor their data subject to U.S. law. The resulting patchwork of local solutions sounds remarkably similar to the “Balkanization” situation the experts warn of.

At the moment, those warnings sound particularly prescient. Last week, the European Union’s Advocate General invalidated the existing Safe Harbor agreement that has governed data transfer from E.U. to U.S. servers due to concerns about privacy and government surveillance. Microsoft immediately filed a notice with the court, pointing out that the opinion “could subject U.S. companies to charges of violating European law any time they transfer personal data to the U.S., especially when U.S. law-enforcement agencies instigate the transfer.”

Concepts of national sovereignty on the Internet are getting hazier by the day. Last month, France’s data regulator ruled that the European Union’s “right to be forgotten” directive extends beyond and other European search products to all search results, worldwide, for French citizens. Google responded: “As a matter of principle we respectfully disagree with the idea that one national data protection authority can assert global authority to control the content that people can access around the world.”

Simultaneously, China is reportedly pressuring U.S. tech companies to sign a pledge to turn over user data and source code in exchange for access to the massive Chinese market. Language in the document suggests the government wants a back door into encrypted communications, which could violate the privacy of foreigners communicating with Chinese citizens. Like France, China seems to prefer extraterritorial application of its domestic Internet policy—and if companies want access to the Chinese market, there may not be much they can do about it.

What the U.S. court really faces in the Microsoft case is an existential decision about the sovereignty of nations in the age of a global Internet. No matter which way the court rules, the case is indicative of problems we will continue to face as technology, built not to adhere to any international political order but to facilitate broad information-sharing and communication, clashes with an entrenched system of physical borders and interlocking jurisdictions that simply cannot contain the flow of data.