One World Insight Blog | Douglas "Las" Wengell

“Our Time has Come,” say the Chinese

What makes China so exciting is not so much its epic infrastructure in tangible projects (opposed to financial vaporware), its gigantean size or meteoric rise, but its singular attitude about the future, an attitude quintessentially at the heart of America’s DNA. There’s a confidence and patriotism, a manic energy, a cautious optimism, a sense that, after a “century of humiliation,” as is said here, China’s time has come.

 

Consider that eighty-six percent of the Chinese who believe their country is headed in the right direction, compared with 37 percent of Americans. The majority of the Chinese also believe that it will produce the next Google, while only a third of Americans believe the next big thing will happen on its soil. The reality may be different --  but you can’t deny the loss of American serotonin and testosterone.

 

Such yankee cowboy bravado is at the core of a nation’s vitality and at the heart of America’s economic engine. When anything is possible, the horizon is far and wide, and opportunities great, things happen. It’s intoxicating and self-fulfilling. How many American’s have been inspired by the hope that if you play by the rules and work really hard, anything can happen?

 

Across the political spectrum, Joe and Jane know that rules of the game are stacked against them. The rules have change.

An American Generation Deferred

There was a time, not long ago, when Americans were confident that the next generation would be wealthier, more skilled, better able, prettier, in a better position, happier than the prior one. That’s no longer true by almost every measure. My generation – Gen X – and those after will be the first in American history to witness a declining quality of living as measured by income, wealth and global competitiveness. And this before our engineers-turned-financial wizards single-handedly orchestrated the Great Recession and before Baby Boomers, who road the wing of postwar prosperity, begin their epic retirement, since they can’t afford to.

 

When I look at my life and those aspiring Americans around me – peers, friends, associates, fancy MBAs, interns, fellow travelers – there is a pattern suggesting a new reality. Few have worked at one job longer than a few years. Few have the time or resources to dig into other non-work aspects of their life – family, hobbies, travel. A huge number are freelancers of one sort or another, stitching together full-time work and taking it as it comes. Savings and retirement are worthy – but who can afford it? Legions of educated women have delayed family, whether because of a missing man or out of necessity (and what if things don’t work out?)  Many friends don’t think twice about receiving financial help from their family and more college graduates move home after graduation.

 

The future is too uncertain. It’s a generation deferred.

America: Harder to Climb and Further to Fall

The future is catching up with the present. The American psyche is – or was – obsessed with consumption paid for by debt – in other words, live today at the cost of tomorrow.  It’s a me household and a me budget deficit. Production, savings and innovation are deferred for a nether future. We’ll pay for it after the party. Except what happens then and who takes the hit?

 

With a sordid history emblazed upon the memory of the older Chinese, the nation feels they can only move up. America has already achieved so much. It’s gotten rich and drunk with self-importance. It’s harder to climb and further to fall.

Welcome to the Global Economy Vietnam

Vietnam’s transition to a market-based economy, strong foreign capital investment, and net imports have led to inflation and trade and budget deficits. This in turn is putting pressure on its currency, the Dong. Vietnamese residents have responded by hoarding dollars and gold.

The State Bank of Vietnam has just done what Washington would like to see Beijing do: adjust its currency value, which is pegged to the U.S. dollar. Now, one U.S. dollar will buy me 18,544 dong, compared with 17,941 dong earlier in the week. In other words, exports are cheaper and as a visitor I am richer.

Don’t’ expect this to happen to neighboring China, Thailand or Indonesia. The enjoy strong foreign exchange reserve and trade surpluses. Their currencies are under pressured to rise, not weaken. And Beijing will do what it must to keep its economic engine growing.

India verses China

These two countries account for one-third of humanity. Both of their economies are on fire. Both have a rising middle class. Both are witnessing massive foreign investment, as Western firms look outside of their home countries for profits (something Coke and tobacco companies have been doing for decades.) Millions of Indians and Chinese have been lifted out of poverty.

It’s amazing that a decade ago they were placed in the same sentence. China is racing ahead of India economical and militarily. “China is a brutal place to live if you are on the bottom rung but there is an exit,” said a man in Beijing. Not so in India. India has 10 million manufacturing jobs compared with 150 million in China. India has a sophisticated service sector, but that’s only useful if you are an educated, English speaking, urban Indian. What jobs are there for Indians?

The Chinese government has delivered on basic services and provisions—social mobility, jobs, education and health care. This is what you care about from the bottom rung. India’s chaotic democracy is chaotic and deadlocked, whereas China’s top down, autocracy works at lightning speed, which explains why China’s infrastructure is decades ahead of China and why India is painfully behind in its preparation for the 2010 Asian Games in New Delhi.

Per capita income is double in China, and its life expectancy is lower. Indians are twice as likely to lose a child before the age five. Ninety-three percent literacy in China, compared to sixty percent of Indians who can read (worse for women).

The U.S. is standing behind India and its messy democracy. It hopes it will balance China’s rise.

In the short-term, China is in the lead. Its autocratic system works well at this point in its economic development, when things need to get done. But it faces massive pressure from its people, to keep the machine going, to hold it all together. What if things fall apart, what about China’s long term prospects, can it be both prosperous and free? India’s people may be stifled materially right now, but they are not intellectually sheltered like the Chinese. There is a robust free press in India and deep bridges to the outside world and the support of Washington.  Media after all acts as a watchdog; there are no checks and balances on Beijing. One wrong step and there could be one hundred million peasants on Tiananmen Square.

China Superpower Conundrum

On one hand, China identifies itself as a poor, emerging nation. This line of thinking implies special assistance. On the other, China wants to be a self-sufficient global citizen and leader.

 

The Chinese have been along on a free ride so far. We have been the bad guy. America does the  heavy lifting in foreign policy and make the tough decisions—and protects shipping lanes.  China keep its currency undervalued and benefits from emerging market status. Eventually China needs to become a responsible, engaged stakeholder in the international system and help solve international problems.

The conundrum is historically China has been an insular nation. “We build walls to keep people out, not invade foreign lands,” was how a businessman put it to me on an overnight train.

 

But the only way China will become a leader is if it takes the lead economically. And that will require innovation. And that require an informed, creative, question-asking citizenry. Qian Xuesen, the man who is credited with developing China’s atomic bomb, nearing death, was reported to have told China’s prime minister that what China most needed was innovation. “We’re not producing any creative people. We are making only technicians.”

 

The government wants advanced education without encouraging people to think.

 

In today’s globalize world, can you become a great power if you don’t allow your people to think? The Party wants to create a modern society. But it doesn’t want to allow too strong a civil society of churches, unions, associations, and other social organization needed to build a modern nation. It does not want citizens using the Internet to access sensitive information, but it needs technology to become the modern country it wants to be. The government needs to promote knowledge in order to compete, but knowledge is dangerous. It needs empowered people in order to become strong, but it can’t let the people be too empowered.

A Vision of One World

Global change will require international cooperation in ways unprecedented. A unilateral model of democracy and capitalism may need to coexist with something else not yet realized.  National self-interest will have to live with collective, global needs. The twentieth century saw the rise of global organizations such as the UN, NATO, WTO – but their power is limited relative to the sovereign state.

The Copenhagen summit was a painful reminder of the daunting challenge of world-wide norms and initiatives. The power of the American president is limited, as is the UN Security Council. Yet the problems facing this One World are global in scope. Someone’s problem is everyone’s problem, as U.S. West coast pollution is traced to Chinese factories. There’s no precedent. It’s a bold new era with far more questions and conundrums than answers and pathways forward.

Interesting times? Most certainly.

One World Global Air Traffic Video

The Iceland volcano halted flights across Europe and the Atlantic, a humble reminder that  our lives are still at the pleasure of nature. Whether it’s people, cargo or digital bits, our planet gets smaller by the day. Check out this stunning video of global air traffic patterns, and note the seemingly lost continent of Africa.

Mandarin becoming the new French and German

A telling sign of American education is the instruction of foreign language. The world is fast becoming global and, while English will continue to be the dominant language into the twenty-first century, the precipitous rise of China has not much impacted pedagogy.   The big three foreign languages – Spanish, German and French – remain the primary options on the curriculum menu – provided they can be offered at all. Mandarin is on offer at a mere 4 percent of future-oriented American schools.

We would be wise to do away with German and French altogether and begin a massive campaign to teach our young Mandarin – giving them and America the advantage it will reap well into the future. Yet it’s the Chinese taking the initiative.

Excerpts from a New York Times piece, January 21, 2010, written by Sam Dillon.

Foreign Languages Fade in Class — Except Chinese

WASHINGTON — Thousands of public schools stopped teaching foreign languages in the last decade, according to a government-financed survey — dismal news for a nation that needs more linguists to conduct its global business and diplomacy.

But another contrary trend has educators and policy makers abuzz: a rush by schools in all parts of America to offer instruction in Chinese.

Some schools are paying for Chinese classes on their own, but hundreds are getting some help. The Chinese government is sending teachers from China to schools all over the world — and paying part of their salaries.

No one keeps an exact count, but rough calculations based on the government’s survey suggest that perhaps 1,600 American public and private schools are teaching Chinese, up from 300 or so a decade ago. And the numbers are growing exponentially.

Among America’s approximately 27,500 middle and high schools offering at least one foreign language, the proportion offering Chinese rose to 4 percent, from 1 percent, from 1997 to 2008.

“It’s really changing the language education landscape of this country,” said Nancy C. Rhodes, a director at the center and co-author of the survey.

“We’ve all been surprised that in such a short time Chinese would grow to surpass A.P. German,” Mr. Packer said.

A decade ago, most of the schools with Chinese programs were on the East and West Coasts. But in recent years, many schools have started Chinese programs in heartland states, including Ohio and Illinois in the Midwest, Texas and Georgia in the South, and Colorado and Utah in the Rocky Mountain West.

America has had the study of a foreign language grow before, only to see the bubble burst. Many schools began teaching Japanese in the 1980s, after Japan emerged as an economic rival. But thousands have dropped the language, the survey found.

Japanese is not the only language that has declined. Thousands of schools that offered French, German or Russian have stopped teaching those languages, too, the survey found.

Experts said several factors were fueling the surge in Chinese. Parents, students and educators recognize China’s emergence as an important country and believe that fluency in its language can open opportunities.

“Chinese is really taking root,” she said. Starting this fall, Jackson High will begin phasing out its German program, she said.

“We make nothing, we own everything” - The Rise of the Paper Entrepreneur

So said Gordon Gecko 25 years ago. Meanwhile, Geithner and Orszag recently testified to the Senate Appropriations Committee not long ago. There were echoes in the room:

“As great as the economy's immediate challenges are and have been, our country’s economic problems are also deeper and more long-standing.  For nearly a decade, typical American families had seen their incomes stagnate instead of rising steadily as they had for generations.  Much of the economic growth that we had experienced in the past decade was fueled by consumers and the Government running up large debts, aided by a financial system better at making short-term profits than managing long-term risks.  And as a country, we were failing to invest in education, new energy technologies, and basic research and development.”  http://www.ustreas.gov/press/releases/tg589.htm

Indeed, the financial sector that has been very entrepreneurial in the creation, sales and distribution of complex financial instruments in line with thirty years of “Washington Consensus” rhetoric and strong arming at the emerging markets – global monetization and open markets. There have been benefits and wealth creation. But on closer examination one must wonder where innovation ends and greed begins. Just take a look at corporate profits from the finance sector compared to all other parts of the American economy:

Treasure Secretary’s assessment of a “financial system better at making short-term profits than managing long-term risks” is unfortunately not a new insight.  

Every since the titans of Wall Street in the 1980s became rock stars, and the barriers between commercial and investment banking were lifted in the 1990s, and hoards of talented quants headed to banking rather than MIT and science careers, more than any other point in American history, the engine of American innovation has lionized the rise of what Robert Reich aptly calls “paper entrepreneurs,” intangible, financial products and services which are big on gimmicks and light on substance.

The most striking thing about former Labor Secretary Robert Reich’s prescient opinion piece below is that it was written in 1980 – yet its insights are just as relevant today thirty years on.

 

“The paper entrepreneurs are winning out over the product entrepreneurs.

Paper entrepreneurs — trained in law, finance, accountancy — manipulate complex systems of rules and numbers. They innovate by using the systems in novel ways: establishing joint ventures, consortiums, holding companies, mutual funds; finding companies to acquire, “white knights” to be acquired by, commodity futures to invest in, tax shelters to hide in; engaging in proxy fights, tender offers, antitrust suits, stock splits, spin-offs, divestitures; buying and selling notes, bonds, convertible debentures, sinking-fund debentures; obtaining government subsidies, loan guarantees, tax breaks, contracts, licenses, quotas, price supports, bailouts; going private, going public, going bankrupt.

Product entrepreneurs — engineers, inventors, production managers, marketers, owners of small businesses — produce goods and services people want. They innovate by creating better products at less cost.

Our economic system needs both. Paper entrepreneurs ensure that capital is allocated efficiently among product entrepreneurs. But paper entrepreneurs do not directly enlarge the economic pie. They only arrange and divide the slices. They provide nothing of tangible use. For an economy to maintain its health, entrepreneurial rewards should flow primarily to product, not paper.

Yet paper entrepreneurialism is on the rise. It dominates the leadership of our largest corporations. It guides government departments, legislatures, agencies, public utilities. It stimulates platoons of lawyers and financiers.

It preoccupies some of our best minds, attracts some of our most talented graduates, embodies some of our most creative and original thinking, spurs some of our most energetic wheeling and dealing. Paper entrepreneurialism also promises the best financial rewards, the highest social status.

The ratio of paper entrepreneurialism to product entrepreneurialism in our economy — measured by total earnings flowing to each, or by the among of news in business journals and newspapers typically devoted to each — is about 2 to 1.

Why? Our economic system has become so complex and interdependent that capital must be allocated according to symbols of productivity rather than according to productivity itself. These symbolic rules and numbers lend themselves to profitable manipulation far more readily than do the underlying processes of production.

It takes time and effort to improve product quality, exploit manufacturing efficiencies, develop distribution and sales networks. But through strategic use of accounting conventions, tax rules, stock and commodity exchanges, exchange rates, government largesse, and litigation, enormous profits are possible with relatively little effort.

When paper entrepreneurs look for solutions to America’s declining productivity and international competitiveness, they come up with paper remedies to stimulate large-scale capital investment: accelerated depreciation, tax credits, government subsidies, relaxation of antitrust laws. 

Product entrepreneurs focus on techniques for improving output: better quality controls, improved labor-management relations, more effective incentives for managers and employees, more aggressive marketing and sales.

If we are to increase the economic pie, we will need to redress the balance of entrepreneurial effort. Which strategies will stimulate more paper, and which more product?”

The United States Land of Opportunity? Think Again.

A 2010 report from the Organization for Economic Co-Operation and Development finds that social mobility between generations is dramatically lower in the U.S. than in many other developed countries.  The report finds the U.S. below Denmark, Australia, Norway, Finland, Canada, Sweden, Germany and Spain in terms of how freely citizens move up or down the social ladder. Only in Italy and Great Britain is the intensity of the relationship between individual and parental earnings greater.

The credible report is an ugly reality check for a nation that has historically seen itself as uniquely rewarding of talent; as a place free of the sorts of rigid social structures that led so many generations of immigrants to leave Old Europe.

Harvard Professor Elizabeth Warren argues that America’s middle class had been eroding for 30 years even before the massive blows caused by the financial crisis. And with unemployment currently at astronomical levels, if there are no jobs for young people leaving school, the result could be long-term underemployment and, effectively, a lost generation.

According to the report, the main cause of social immobility is educational opportunity. It turns out that America’s public school system, rather than lifting children up, appears to be holding them down.

Another big factor in social mobility is inequality, the report finds. The greater a nation’s inequality, the harder it is for its children to improve their lot. That confirms findings by other researchers. “The way I usually put this is that when the rungs of the ladder are far apart, it becomes more difficult to climb the ladder,” Brookings Institution says. ”Given that we have more inequality in the U.S. right now than at any time since the 1920s, we should be concerned that this may become a vicious cycle. Inequality in one generation may mean less opportunity for the next generation to get ahead and thus still more inequality in the future.”

Elected officials have a false sense of security that because we are the sole superpower that we must be number one in everything. The facts suggest otherwise. The U.S. is below average in public finance, education results, healthcare outcomes, the status of infrastructure, investments in basic research, to name a few. We need to stop looking in the rear view mirror, make tough choices and invest in our future.

The Emergence of the “Beijing Consensus”

From the formation of the United States, Americans have always been paranoid about falling behind. The rise of Japan in the 1980s was the last example. Now it’s China.

As recently as 2008, when China was still an emerging economy eager to put its best foot forward for Western consumers, it lifted censorship, at least temporarily, on several Web sites before the Beijing Olympics. At the same time, it responded to pleas from U.S. and European politicians to cooperate on several other fronts. When China was seeking to join the World Trade Organization a decade ago, it accepted compromises to U.S. and European demands. With China’s rising clout, the West has less leverage over Beijing. At climate talks in Copenhagen, however, China blocked a comprehensive deal and refused to go beyond its earlier promises. Western diplomats complain about the way Beijing is dragging its feet on sanctions on Iran’s nuclear program and is propping up unsavory regimes across the world in its hunt for the natural resources to power its growth.

These days, China is no longer emerging. It has emerged — sooner and more assertively than had been expected before the wrenching global financial crisis, which badly damaged all the established industrial powers, from the United States to Europe and Japan. Its currency, the renminbi, is frozen at an undervalued level, and Internet controls are stricter than ever — even as Google threatens to leave.

The severe recession has fast-forwarded history, catapulting an unprepared world into a period of uneasy cohabitation between the United States, the No. 1 economy, and its likely successor.

“China is the West’s greatest hope and greatest fear.”  “No one was quite ready for how fast China has emerged.” “Everyone is trying to understand what sort of China they will be dealing with.” Politicians, pundits and academics.

For the first time, economists are pointing to Chinese spending — not the U.S. consumer — as the key to a global recovery. China’s GDP could overtake that of the United States within a decade; a PriceWaterhouseCoopers report predicts by 2020; and Goldman Sachs predicts by 2027; others are speculating about when the renminbi might begin to challenge the dollar as the world’s reserve currency.

Meanwhile, as developing countries look for a recipe for faster growth and greater stability than that offered by the now-tattered “Washington Consensus” of open markets, floating currencies and free elections, there is talk about a “Beijing Consensus.”

When the United States was snapping at the heels of the British empire, the global ruler of the early 20th century, the situation caused plenty of heat, even though both countries spoke the same language, shared similar values and were liberal democracies. China, in contrast, is a Confucian- Communist-capitalist hybrid under the umbrella of a one-party state that has so far resisted giving greater political freedom to a growing middle class.

What is the Beijing consensus? Some see it as a form of economic management with greater government involvement that is on the rise across the world. Others interpret it to mean more strictly controlled capital markets, which have made a re-appearance even in previously open countries like Brazil. Policy makers in Malaysia and Dubai focus on replicating China’s special economic zones, which afford generous terms to foreign investors in manageable geographic areas. Some suggest that China’s lack of democracy is an advantage in making unpopular but necessary changes. “It is more challenging for democratic systems because ever day they come under public pressure and every short period they have to go back to the polls,” said Victor Chu, chairman of First Eastern Investment Group in Hong Kong, the largest direct investment firm in China. “China is lucky to have the ability to make long-term strategic decisions and then execute them clinically.”

Some say Chinese officials are using their country’s $2.4 trillion in foreign currency reserves as a bargaining chip, knowing that any hint of reducing those reserves would rattle currency markets. “As China is emerging on the global stage with unprecedented power and influence, it is not proving to be the global partner the United States and E.U. seek,” said Professor David Shambaugh of George Washington.

The world will be asking more and more of China. So far, it appears to be getting less and less in return.

Market Access to China Treacherous - Multinationals Including

McDonald’s plans to double its presence in the world’s fastest-developing economy over the next few years. For those who know how ubiquitous it already is, it’s a huge increase. McDonald’s has about 1,100 outlets and it opened its first outlet in Shenzhen in only 1990. It expects informal eating out to grow by 10% a year, because of China’s growing middle class. China accounts for about 23% of McDonald’s revenue from the Asia-Pacific, Middle East and Africa regions. More uncoupling of American multinations and the S&P 500 from America, or any nation.

Starbucks recently announced similar plans. Same for Boeing, Intel, GM and the list goes on. If you want to know where the action will be in the coming years, multinationals are not counting on the West.  

China is the biggest recipient of foreign direct investment in the world: 450 of the Fortune 500 companies have a business presences there, and many of those reeling at home are doing brisk business in China. G.M. is hurting everywhere but for China.

Despite WTO agreements, Beijing is not making it easy for the largest, most powerful Western corporations, no less medium-sized American firms or non-Chinese entrepreneurs, citing national security concerns, which it defines broadly. “As a socialist country, China must put its own interests first when opening up and keep a firm hold on the right to lead core industries,” said a minister. Beijing is instating a formal review process, similar to the Committee on Foreign Investment in the United States. But a similar panel in China would be part of a government that has much greater direct influence on businesses than in the US.

Meanwhile, China’s new Nasdaq-style ChiNext board, which aims to boost start-ups and small and medium-sized companies, is a huge step forward for the formation of its capital markets.If you want in, you must play by Beijing’s rules. Except for maybe Google, most are willing to comply despite domestic repression. Don’t expect Walmart to let on to its American customers.  

 

Quadrennial Defense Review: U.S. Defense Challenges

The Quadrennial Defense Review was recently released to Congress, and it details the challenges America faces in the twenty-first “One World” century. Among them: asymmetrical warfare with non-state actors using non-conventional, disruptive, radioactive, bioactive, improvised weapons; “cyber” warfare; nuclear non-state actors; climate change and wars fought over natural resources.

 Hear a fascinating World Affairs lecture by Kathleen Hicks, Deputy Under Secretary of Defense for Strategy, Plans & Forces, about its highlights:

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Watch live streaming video from worldaffairs2010 at livestream.com

Labor Shortage in Vietnam and China - Who will make Western stuff?

Those folks in Vietnam and China who make our stuff – they are demanding more pay, a sign of rising prosperity and a global manufacturing food chain in the works. According to Vietnam’s Department of Labor, joblessness remains high but business still cannot attract enough workers. It recommended salary increases and “better welfare mechanisms,” a code for phrase for job benefits taken for granted in the West. Workers are realizing that they are better off going it alone, selling on the street, whatever, than being an underpaid nothing on an assembly line.

The same is true for China, but with much higher stakes. In Guangzhou, just a year after laying off millions of factory workers, unskilled factory workers in China’s industrial heartland are being offered signing bonuses. Factory wages have risen as much as 20 percent. Some manufacturers, already weeks behind schedule because they can’t find enough workers, are closing down production lines and considering raising prices. Along with an appreciating Yuan (inevitable but for when), such increases will drive up the prices American consumers pay for all sorts of Chinese-made goods, which is just about everything you’ll find in Walmart.

But rising wages could lead to greater inflation in China. In the past, inflation has sown social unrest as the cost of living becomes more expensive. This makes Beijing nervous. The Obama administration has been pushing China to let the renminbi rise against the dollar, which would erode some of China’s advantage in exporting. (Rising wages in China have the same effect — plus they give Chinese families more spending power to grow internally and buy more American made goods.) It’s a complicated dance. Bubbles and asymmetries aside, economics ultimately settles on equilibriums. Labor shortages and its affect on wages is just another illustration.

The immediate cause of the shortage is that millions of migrant workers who traveled home are not returning to the east coast. Government projects like rail and highway construction have absorbed millions of workers, particularly after Beijing allocated nearly $600 billion to economic stimulus spending in 2009 and 2010. Consumer spending is also rising; auto sales more than doubled last month from a year before, and this has created jobs in retailing, restaurants, hotels and other inland businesses.

Temp agencies in Guangzhou have raised their rate for factory workers in early 2010 to US$1.17 an hour, from 95 cents an hour, just to put things in perspective. (The rate was 80 cents an hour two years ago, before the global crisis depressed wages.). But many factories already pay above minimum wage. They are wary because it is not certain they can pass the increased costs on to cash-strapped importers in the United States and Europe.

Two powerful trends are also working to reduce the supply of young labor headed to the “Walmart factories”. For one, the central government has rapidly expanded postsecondary education. (Universities enrolled 6.4 million new students in 2009, compared to 5.7 million in 2007 and just 2.2 million in 2000.) At the same time, China’s birth rate has been sliding steadily ever since the introduction of the “one child” policy in 1977. Personnel managers are even abandoning the unwritten tradition of not hiring those over 35 — imagine that policy in the West! – despite concerns about whether they can keep up with the grueling rapid pace of assembly line work.

China is rising on the economic ladder, and this is a good thing, provided the planet can take the hit of more humans becoming conspicuous consumers. Maybe one day China will outsource to Africa.

But some things don’t change. Quoted in a Chinese paper said one young man: “I expect my wages to rise a lot now. For sure, I want to buy a car. Car first, then maybe marriage later.”

The War over Fresh Water

The natural world knows no boundaries. Twenty-first century wars will be fought over natural resources. One example I encountered was the Mekong River, flowing through Laos, Thailand, Cambodia and Vietnam – and how China’s dams upstream are having an adverse effect to everyone else. Another example is the feud over water between India and Pakistan (who have gone to war three times since 1947), which threatens to derail peace between historically distrustful neighbors.

The two countries have harmoniously shared the waters of the Indus River for decades. But now, the Pakistanis complain that India, like China, is hogging water upstream, which is hurting Pakistani farmers downstream. The latest dispute revolves around India’s plans to build a huge hydroelectric power project on the Kishenganga River, a tributary of the Indus. Islamist groups in Pakistan are watching. “If our government doesn’t act to resolve this issue then the people will take it in to their own hands. If water doesn’t flow in to these rivers, then blood will.” What more can one say?

It’s likely to get worse before it gets better, which could just as well be a refrain for so much of our shrinking world. Pakistan’s water availability has fallen 70 percent since the 1950s. The disputed dam is in Indian-occupied Kashmire, so the issue is not just environmental its political and ideological. Capture Kashmir back, and retake our water. We may be human. We may live on the same planet. But ethnic divisions are ancient, and they may be the root of our undoing.

China’s Voracious Appetite for Natural Resources at Odds with West

America views Southwest Asia as a security threat. China sees it as an opportunity.  While America is stuck in an Afghanistan quagmire, China is cutting deals with Afghans to aid its economy. In this case, for copper. China’s $3.4 billion bid is the largest foreign investment in Afghanistan and, to be fair, the largest anyone would offer. But that’s hardly the whole story.

You might be surprised to learn that after the blood and treasure America has spent on Iraq, China is investing more in extracting Iraqi oil than American companies. It has reached long term agreements with US-nemesis Iran to buy natural gas. It is the dominant investor in Pakistan, where a Chinese-built port in Gwadar, on the Gulf of Oman, is expected to carry Middle Eastern oil and gas over the western Himalayas into China. And China is cutting deals with despots in Sudan.

In effect, American troops and tax dollars have helped make Afghanistan safe for Chinese investment. (Of course, had an American firm won the bid, the world would have accused war cynical war critics that we waged war to seize the country’s fast mineral assets.)

China views its splurges as national security: to control long-term access to natural resources to keep its industrial empire going and keep its people looking forward.

If China wants to be a global player, it will need to bare responsibility by supporting global stability, not riding on the heels of America’s largess.

The U.S. Debtor Nation

Within a mere twelve years, the largest line item in the United States federal budget will be interest payments. This is politically untenable. Divisions aside, it’s a reality that must be addressed.

 

A nation’s finances are similar to a household. It has assets and debt and must make investments to maintain its property. As a nation, our “home” is aging. We are not making the needed investments in fixing the roof and upgrading the plumbing.

 

There’s no shortage of formidable graphs illustrating unsustainable trends. This one is of household debt as a percentage of GDP.

Arriving back in the United States

Arriving back in the United States from Tokyo in March, I knew there would be some shock and adjustment ahead of me. Some say returning home is the hardest part. There is some truth to that.

Within the first few hours, after landing at SFO, I hopped onto an aging rail car with stained carpets and dirtied windows known as the Bay Area Rapid Transit system. Once the envy of the country, new and modern, compared to Singapore and Hong Kong and elsewhere, it felt outdated and stuffy. I thought of Thomas Friedman’s pithy summary that we have become “The United States of Deferred Maintenance,” whilst China is becoming “The People’s Republic of Deferred Gratification”. It saves, invests and builds; we spend, borrow and patch.

 Just visit LAX or JFK – cramped, dark, like an aging world fair local – and compare it to a modern Asian international airport. It was once the envy of the world; now it’s trying to hide its age with cosmetic fixes. In some ways, LAX is representative of America: living off prior investments and success, drawing down principle, and too short-sited or conceited to make investments in its future.

 When the train passed through Oakland, I paid witness to a racial incident between an African American young woman and a spiffy business man. Slurs were wielded. Many in the train car walked to another. The tension was palpable. Nearly eight months traveling in Asia, the only time I felt this kind of tension was in Lhasa, Tibet, among the locals and the Han Chinese. Racism exists everywhere, of course; what struck me was how palpable it was back in the States, despite all the political correctness, and here I was in the “progressive” region of Northern California.

 The first few times in the American supermarket was disconcerting. It is a super in every way. Rows upon rows of cereals (all with essentially the same ingredients, corn and corn sugar), frozen foods, potato chips and snack foods.  Not just one variety but tens of them, fully stocked, the store gigantic and, not unusual, mostly empty. You just don’t see this in Asia. What struck out was the consumption, the choices, the inefficiencies, the saturation of all things material.

 

Other impressions over the last few weeks: How expensive it is to live and eat in America; the diversity of our democracy; the isolated dens of individualism; the conspicuous wealth along side poverty; the comfort obliviousness living inside a superpower nation; the superficial television news and lack of global curiosity; the rise of  aggressive, hostile, reality denial politics who want to “take back” America, its racial undertones unmistakable.

 But then there are the upsides. The diversity, the open mindedness, the anything-is-possible ethos, the lack of government involvement; the freedom to live dreams independent of tradition and expectation; the world class research centers like Berkeley and Stanford; the judicial order and material wealth; the availability of most anything; the capitalist model, with its variety of goods at competitive prices.

 One World. Despite all our faults, America is a benchmark, Washington still the epicenter of global leadership. The fear of losing our greatness is, it turns out, as American as apple pie, a paranoid anxiety that goes back to our 1776 independence.

The Fragile Stability of SE Asia

A longstanding political crisis that has divided Thais into bitterly opposed camps became a national embarrassment and, with the deaths of protesters, tragedy . It’s also a testimony to the fragility of Southeast Asia, when you consider that socially stable, democratic, relatively prosperous Thailand is the kind of vacation destination deemed safe by the Secretary of State, and popular among Westerners. Of course, that’s not true at the moment.

The immediate crisis had been escalating since mid-March, when tens of thousands of members of the increasingly heterogeneous “United Front of Democracy against Dictatorship” began their takeover of the streets of Bangkok. The activists from all over Thailand carried their tents, sleeping-mats and food supplies into the area around the high-rent shopping-district of the Rajprasong intersection, which is Bangkok ground zero. The red-shirts' political representatives held intermittent talks with the government of Thailand's prime minister Abhisit Vejjajiva; but these broke down in the first days of April, and the protestors then vowed to stay in place until the parliament was dissolved and new elections announced. And they have.

The crackdown was launched three days after Abhisit declared a state of emergency, which provided the government with broad powers of arrest, censorship, and suspension of civil liberties. Among the first measures taken was the blocking or closure of independent media, including thirty-six websites; the popular bilingual news-site Prachatai was one of those affected. So much for democracy.

This prepared the ground for the more stringent actions on Bangkok's bloody Saturday night: the use of water-cannons, tear-gas, and live ammunition to force the red-shirts off the streets. Twenty-one people are reported to have been killed and over 800 injured. The government will do anything to avoid that from happening again.

Thailand now peers into the abyss. Thailand's crisis traces its deeper roots to the mid-2000s with the rise, fall and subsequent exile of Thaksin Shinawatra, the populist leader elected in 2001 and ousted in a military coup in 2006. The confrontation between red-shirted pro-Thaksin republicans with a political base in the rural poor versus yellow-shirted royalist conservatives backed by the urban middle and upper-classes - fails to convey the political heterogeneity that has been emerging under misleadingly unified banners. But there are other dynamics at play: the cross-class, cross-space, and formation of the red-shirted alliance in the streets of Bangkok, as well as those writing, posting, and otherwise supporting them elsewhere in Thailand and abroad.

The Thai word phrai has become an ubiquitous reference-point by red-shirt members of the UDD. Phrai can be rendered in English as “commoner”: it is a direct reference to the feudal era, which officially ended in 1932 with the transformation of Thailand from an absolute to constitutional monarchy. Thomas Fuller, the New York Times's Bangkok correspondent, criticized a popular red-shirt bumper-sticker which reads: “The blood of the phrai is worth nothing”. This may be “overblown rhetoric”, says Fuller. “There are many stories of upward mobility in Thailand and, despite the presence of tens of thousands of protesters, the anger has not translated into personal attacks on the wealthy. The main target of the protesters' ire seems to be the system: the perception that bureaucrats and the military serve the elite at the expense of the poor.”

 

It is class war, a byproduct of rapid development and unequal economic implications, exactly the situation Beijing fears. “The battle is between the army that supports the establishment, government and Bangkok's urban elite against the people from the provinces … It is a class war,” said a prominent University president.

The state’s use of violence to repress the red shirts has not succeeded; they remain in key locations throughout Bangkok, defying Abhisit Vejjajiva's demand that they evacuate the city's streets. The red shirts continue to call for the immediate resignation of the prime minister, the dissolution of parliament, and plans for new elections.

 

Thailand's crisis continues as the American State Department looks on with concern. If US-ally Thailand can’t be put in the “stable” category, who can?

Memories of aTibetan Plateau

The recent earthquake in the Western region of China, Qinghai Province, between Xining and Lhasa, in the Tibetan Plateau, is heart breaking. At least 1,700, mostly poor and rural Tibetan’s are dead.

 

One of my most memorable experiences was taking the train from Beijing to Lhasa. The final part of the journey passed through the barren landscape of the Plateau, between Golmud and Lhasa, not far from the quake epicenter. As I have noted, it’s a deprived region economically, made of more Tibetans than Han Chinese. Beijing has responded with more immediacy than the devastating 2008 Sichuan quake – but the CCP is still not going to let the Dali Llama visit.

The Rise of the Rest

America has always assumed that the world would come to our banks, speak our language and list on our stock exchanges. Our threshold for understanding other cultures is low. We’re too often convinced we are “number one” George W. Bush’s conceit was its poster child, and cost us more in “brand equity” than we care to admit.

 

The old world was capital and labor. Today’s competitive advantage – and our biggest strength –  is realizing new ideas.  One economist is calling the twenty-first century the third industrial revolution. The first was the shift of labor from farms to factories; the second was the transition from manufacturing to services; the next is the emergence of a flat world, where national boundaries fall, brands go global and workers compete irrespective of geography.

 

We can no longer coast on the vapors of post-war 1950s hegemony. While we were partying, or trying to get rich the easy way, the world changed. Globalization is here.

Singapore – New Biotechnology Player

Singapore is always reinventing itself. As a nation, it lives the motto, “only the paranoid survive.”  The electronics industry leads Singapore's manufacturing sector, accounting for nearly 50 percent of its output, but the government also is heavily promoting development of the chemicals and biotechnology sectors, which now account for 16 percent of manufacturing. Hundred of millions of dollars are being invested in infrastructure, fund research and development, and recruiting top international scientists.

Leading drug makers such a Merck, Pfizer and GlaxoSmithKline have set up plants here.

In Contrast…A Once Humming American City

The news and television and books and interviews coalescence before my wonder-struck eyes – everything and everyone are related, borders nothing more than lines on a map.

Having just visited the Urban Planning Museum, I stumble upon this. Guess the city? Incubator of middle class prosperity, manufacturing power house, a technology and innovation leader, a net exporter, a source of national pride and jobs for hard working citizens. Today Berlin after the war. Read Bob Herbert timely piece on the loss of America’s quintessential middle-class symbol, Detroit, Michigan, U.S.A.

 

http://www.nytimes.com/2009/11/21/opinion/21herbert.html

Cambodia, Don't Forget Us

From Vietnam, I travel along the Mekong Delta and enter into Cambodia. After a night in the capital of Phnom Penh, I head to Siem Reap, the launching pad to Angkor Wat.

 

Cambodia is woefully poor. Per capita income $651. Its sordid history – The Killing Fields, Pol Pot (aka Khmer Rouge), famine, etc. – is still apparent in lost limbs. Siem Repa and Phnom Penh are pleasant enough (and what most visitors like me see) but nothing like the hot rural plains. The bus stops along the way gave me some idea. Despite this, except for street food, it’s more expensive than you’d think. Even at one large supermarket, I quickly realized that most everything in this country is imported. Outside of the basics, there is no manufacturing.

 

In Phnom Penh, at the waterfront, near the King’s Palace, are a row of international flags of nations that have supported Cambodia in its rebuilding. A Western infrastructure is in place. Most striking is that ATMs dispense American dollars (as late as 1980, Cambodia had no monetary system). Only change below one dollar is given in Cambodia Riel.

Parting Thoughts on Vietnam

This picture is a good symbol of modern Vietnam, a tangled and tenuous patchwork of law and order. Having spoken to a bunch of folks during my time in Vietnam, North and South, what I have heard is not unlike the opportunities and risks facing any other developing nation. Now that it’s opened itself up to the global economy, it’s biggest risks appear not embracing a bold future and instituting reforms unfavorable to Hanoi.

 

As an investor, Vietnam appears risky. Its market reforms have a long way to go. For those with business interests in Vietnam, it’s a grown floor opportunity but more risky than India and China.

 

Challenges

Poor infrastructure

Lack of capital to make the kind of investments you see in China

Quality of public education

Inflation and instability of Dong currency.

Corruption and one party system

Lack of judicial process, advanced legal system, rigorous enforcement

Greater Transparency for Laws, Regulations, and Administrative Procedures.

Import tariffs remain high

Intellectual property law

 

Opportunities

Young, hard working, future-oriented, commerce-driven citizens

Competitive advantage: cheap cost of labor and business orientation

Inexpensive labor (per capita income is only $2,900)

 

Future

Investments in education

Road networks being built

Subway lines for Hanoi and Saigon planned but will take a decade to complete

The Vietnam Success Story – So Far…

Vietnam is moving parallel to China. Vietnam game up communist economics in 1986, with a policy called doe moi, “economic renovation,” and it has been liberalizing its economy since then, joining the World Trade Organization in 2007.

 

Vietnam’s growth rate has been among the highest in the world in recent years, expanding annually at by about 7 percent annually. Since then, trade is booming, increasing from $1.2 billion in 2000 to $12.5 billion. Business opportunities: services and products for a burgeoning urban middle class, with incomes four to five times the national average and over half its 85 million population under 30.

 

Vietnam became a member of the WTO only in 2007. By then, U.S. exports to Vietnam grew by 70+ percent to reach $1.9 billion, while Vietnam’s exports to the United States, the country’s largest export market, were up by 24 percent, reaching $10.6 billion. Vietnam has attracted $83.1 billion in foreign investment commitments since the country was opened to foreign investment in 1988.

 

Foreign direct investment in hotels and resorts, office buildings, information technology, steel and petrochemicals has surged from US$10.2 billion in 2006 upward to US$58 billion in 2008. Multi- US$ billion FDI projects in have been approved,

 

Yet inflation threatens to send many back to the rice fields. Due to huge current accounts, insecurity around its pegged currency, the Dong, and tight controls by Hanoi.

 

Its public debt is 52 percent of GDP!

Doing Business in Vietnam more Difficult than China

Except for large multinational brands, outside of outsourcing, doing business in Vietnam appears to me too costly and risky. Vietnam has all the characteristics of an emerging Asian nation, with the same economic opportunities and challenges. Unlike China, however, its fledging market and legal reforms have a way to go. Foreign firms face daunting obstacles and, unlike China and India, the market is small, with a population under 85 million (but half are under the age of 30). 

 

For starters, obtaining a business license can cost anywhere from US$25,000 to $250,000. Since the Vietnamese legal system is in its infancy, there is as yet no commercial code, no body of law and judicial precedents familiar to Western investors, and the few Vietnamese who may be involved in the implementation of the legal system do not have what we would regard as the proper background and training to decide commercial disputes.

 

Here’s some entertaining do’s and dont’s picked up by the American Chamber of Commerce:

 

Do not assume that either the laws or regulations presently in effect in Vietnam will not be changed to your detriment before and/or after a project is started or completed.

Do not assume that even seemingly inconsequential failure(s) to comply with the laws and/or regulations of Vietnam will not cause you to face a possible loss or forfeiture of your investment in a project.

Do not assume that all Vietnamese you deal with will have the same concept of fairness and fair dealing that you might or would expect to find in other foreign countries.

Be prepared for laws and regulations that are incomplete, ambiguous and subject to different conflicting interpretations by different government agencies.

Vietnam’s Nouveau Riche

You can’t miss it in the big city centers of Hanoi and Saigon.  Like in India, like in China, not only is the middle class growing, but so are huge fortunes being made by Vietnamese entrepreneurs As in China, the big money is in real estate and land development. What was most striking was how opulent is some of this wealth, along side peasants on motorbikes or run-down shacks only miles away from million dollar housing developments.

 

A Vietnamese business man I befriended drove me around some high class suburbs outside of Hanoi, where American style McMansions go for a million dollars.

Asian Smoke Stacks

Tobacco companies make a, well, killing in Asia, where smoking is ubiquitous by men. All the efforts to regulate smoking in the West have done little to dampen these firms profits, who have been exploiting the Asian market for at least the last twenty years.

Cigarettes are cheap, too. Other than gruesome pictures of tarred lungs on the package, and a local language warning, there is no incentive to quiet.

Women for the most part don’t smoke, and certainly not in public. Young European women, seduced perhaps by feeling immortality, is another story.