On March 5, Chinese President Xi Jinping spoke to the Shanghai delegates to the National People’s Congress (NPC) session in Beijing. China’s top leaders use these side meetings to convey policy guidance on a range of issues, and Xi used this particular one to offer his perspective on relations with Taiwan. There has been some nervousness in the wake of the January 16 elections, which swept the opposition Democratic Progressive Party (DPP) to power in both the executive and legislative branches. Because the Beijing government has always suspected that the fundamental objective of the DPP is to permanently separate Taiwan from China, observers were waiting expectantly to hear what Xi would have to say about Taiwan.

Well before the March 5 speech, of course, Xi’s subordinates responsible for Taiwan policy had already laid out what Taiwan President-elect Tsai Ing-wen and her party would have to do to prevent cross-Strait relations from deteriorating, and they continued to emphasize those conditions after Xi’s speech. But analysts believed that Xi’s own formulation would be the clearest indicator of Beijing’s policy. He is, after all, China’s paramount leader, and his words carry a far greater weight than those of other Chinese officials.

This is what Xi said to the Shanghai NPC delegation about Taiwan [translation by the author, emphasis added]:

Compatriots on the two sides of the Strait are blood brothers who share a common destiny, and are people for whom blood is thicker than water…Our policy towards Taiwan is correct and consistent, and will not change because of a change in [who heads] the Taiwan authorities. We will insist upon the political foundation of the “1992 consensus,” and continue to advance cross-Strait relations and peaceful development…If the historical fact of the “1992 consensus” is recognized and if its core connotation is acknowledged, then the two sides of the Strait will have a common political basis and positive interaction [virtuous circle] can be preserved. We will steadily push forward cross-Strait dialogue and cooperation in various fields, deepen cross-Strait economic, social, and financial development, and increase the familial attachment and welfare of compatriots [on both sides], close their spiritual gap, and strengthen their recognition that they share a common destiny. We will resolutely contain the separatist path of any form of Taiwan independence, protect state sovereignty and territorial integrity, and absolutely not allow a repetition of the historical tragedy of national separation. This is the common wish and firm intention of all Chinese sons and daughters, and is also our solemn pledge and obligation to history and to the people. The fruits of cross-Strait relations and peaceful development require the common support of compatriots on the two sides; creating a common and happy future requires the common effort of compatriots on the two sides; and realizing the great revival of the Chinese nation requires that compatriots on the two sides join hands to work with one heart.

The italicized sentences are key: They state what the new DPP government should do if it wishes to maintain healthy cross-Strait relations and affirms Beijing’s resolve to oppose any behavior it doesn’t like. Xi didn’t threaten specific actions, but he probably didn’t have to. As always, Beijing reserves the right to decide what DPP attitudes and actions constitute separatism and a quest for Taiwan independence. 

Xi didn’t threaten specific actions, but he probably didn’t have to.

Some background

There are two important points of reference contextualizing this statement from Xi. 

Xi on November 7, 2015. First, there are his reported remarks on the future of cross-Strait relations during his unprecedented meeting with current Taiwan president Ma Ying-jeou in Singapore last November 7. At that time, Xi first appealed to ethnic solidarity and national unity, as he did again on March 5. He asserted that the stakes to end the state of division between Mainland China and Taiwan were very high because it was a critical part of how he views rejuvenating the Chinese nation—a theme he repeated to the Shanghai delegation. 

Xi said Taiwan, under the new government, could either continue to follow the path it has walked for the last seven-plus years under the current Ma Ying-jeou administration (“peaceful development”), or it could take the path of renewed “confrontation,” “separation,” and zero-sum hostility. If Taiwan wished to follow the first path, Xi insisted, its leaders must adhere to the 1992 consensus and oppose “Taiwan independence.” Without this “magic compass that calms the sea,” Xi warned, “the ship of peaceful development will meet with great waves and even suffer total loss.” He was willing to overlook the DPP’s past positions and actions, but only if it identified with “the core connotation of the 1992 consensus” (a reference to the PRC view that the Mainland and Taiwan are both within the territorial scope of China, a view the DPP contests). Xi alluded to the “core connotation” on March 5 but did not re-state its content. Xi then made clear that if “disaster” occurred, it would be the DPP’s fault—it was therefore up to Tsai, he implied, to accommodate to Beijing’s conditions. 

In language and tone, Xi’s Singapore statement was far more strident and alarmist than what he said on March 5. He made that first statement more than two months before the election, when perhaps he thought that tough talk would weaken Tsai’s and the DPP’s appeal to voters. If that was his objective, he failed. The tone of his March 5 remarks was more modulated, but the substance was the same. Beijing would define the crossroads that Taiwan faced, and it was up to Tsai to take the right path—at least what it defined the right path.

Beijing would define the crossroads that Taiwan faced, and it was up to Tsai to take the right path—at least what it defined the right path.

Tsai on January 21, 2016. Second, there is an interview that Tsai gave to Liberty Times (Tzu-yu Shih Pao) on January 21—less than a week after the elections—in which she sought to meet Beijing partway. For the first time, she used the phrase “political foundation” and said it had four elements: 

• “The first is that the SEF-ARATS discussions of 1992 are a historical fact and both sides had a common acknowledgment to set aside differences and seek common ground;” 
• “The second is the Republic of China’s current constitutional order.”
• “The third is the accumulated results of the more than 20 years of cross-strait negotiations, exchanges, and interactions;” and
• “The fourth is Taiwan’s democratic principles and the will of the Taiwanese people to make sure that Taiwan voters understood the limits to his tolerance.”

So, Tsai accepts the 1992 meetings as a historical fact and acknowledges that the two sides did reach an agreement of sorts, but does not accept the 1992 consensus itself as a historical fact. She spoke more about process than content. The Republic of China’s “current constitutional order” is also part of the foundation, which some have read as Tsai’s acceptance that the Mainland and Taiwan are both parts of China’s territory (Beijing’s “core connotation”)—I, however, am not so sure. Tsai did not reject Xi’s requirements out of hand, but she framed them in her own way. 

So are ties growing friendlier?

Was Xi’s tonal moderation on March 5—relative to November 7—an indicator that mutual accommodation was going on? Perhaps. But the fact that the November meeting was ostensibly private while the March speech was public might explain the difference. 

Moreover, the stream of Chinese articles and statements since March 5 that explicitly restate Beijing’s long-standing preconditions are reason to doubt that much accommodation is actually occurring. The three basic scenarios I outlined last December—accommodation, limited Chinese punishment of the Tsai administration, and comprehensive punishment—are still in play, and the key variable remains whether Xi and his subordinates trust Tsai Ing-wen’s basic intentions. That is, will they accept her recent formulations as a good-faith effort to avoid deterioration? The next milestone will be May 20, when Tsai Ing-wen gives her inaugural address and may provide a more detailed formulation of her approach to China.

Chinese President Xi Jinping is paying a US visit to attend the 4th Nuclear Security Summit. A US-based scholar noted that the trip not only shows China’s will to beef up cooperation with the rest of the world, but also signals that China, which has kept a low-profile, is ready to play a bigger role in global governance.

During the two-day summit starting from Thursday, President Xi will also meet with his US counterpart Barack Obama.

Li Cheng, director of the John L. Thornton China Center of the Brookings Institute, said that Xi’s second visit to Washington DC in six months highlights that the two major powers are seeking cooperation rather than confrontation.

The new type of major-power ties between the two nations, with win-win cooperation and mutual respect at its core, advocates collaboration rather than conflict, saidLi, explaining that such a relationship emphasizes a desire for cooperation.

He also pointed out that Xi’s attendance at the summit shows China's willingness to further collaborate with the international community. "His attendance will be greatly welcomed," Li stressed, adding that China now plays a crucial role in climate change, cyber security, nuclear security and global economic governance.

"As a major power, China's voice should be heard, and views should be delivered," said Li. He also noted that the international community will continue to respect China's growing role in international affairs.

Though China has previously maintained a low-profile in global governance, its role has since increased, the scholar commented.

Along with its rising international status, China also shoulders more responsibilities and obligations in narrowing the rich-poor gap, promoting South-South Cooperation and other global affairs, he added.

Li also applauded the momentum of Sino-US ties, saying that the leaders of both nations are making far-sighted choices based on an expandedworld view and their fundamental interests.

Though some disputes emerged, they are far outweighed by bilateral cooperation, he noted, especially praising their collaboration in global issues.

"I believe their worldwide cooperation will generate a spillover effect, so that the two will better understand each other and advance cooperation," said Li. 

This piece originally appeared in People's Daily.

The most noticeable trend under the leadership of Xi Jinping since the 2012 National Congress of the Chinese Communist Party (CCP) has been the continuing consolidation of power. In particular, the military has been a key forum in which Xi has strengthened both his personal power and his new administration’s authority. Xi has adopted several approaches and political tactics to achieve this, including purging the two highest-ranking generals under the previous administration for corruption and other charges; arresting 52 senior military officers on various charges of wrongdoing; reshuffling generals between regions, departments, and services; attempting to systematically reform the PLA’s structure and operations; and, last but not least, rapidly promoting “young guards” (少壮派) in the Chinese military.

These bold moves will have profound implications—not only for Xi’s political standing in the lead-up to the next leadership turnover in 2017, but also for the development of civilian-military relations in the country and for the trajectory of China’s military modernization. The third installment in this series focuses on personnel changes that have occurred during the early phase of military reform.

Who are the rising stars in the PLA following the recent reorganization and reshuffling? What are the distinguishing characteristics of the “young guards”? What are possible explanations for and implications of some of the highest-level personnel changes, such as the retirement of the heavyweight military figure General Liu Yuan and the marginalization of Xi’s confidant General Cai Yingting? How does Xi successfully perform the delicate balancing act in personnel appointments by aggressively promoting his own long-time protégés and new loyalists while avoiding making too many enemies?

This is part three of a series that will appear in the upcoming issue of the China Leadership Monitor. Download the article in full below. The first paper in the series can be found here: Promoting "young guards": The recent high turnover in the PLA leadership (Part 1: Purges and reshuffles), and the second paper here: Promoting “young guards”: The recent high turnover in the PLA leadership (Part II: Expansion and escalation).

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• Promoting "Young Guards": The Recent High Turnover in the PLA Leadership (Part III: Personal and Political)

China’s approach to Europe is a contrasting mix of economic opportunism and strategic vision.

A continent gripped by economic weakness and debt is crying out for Chinese investment, and Chinese state enterprises and funds are eagerly participating in the sale of the century, buying up ports, prime real estate and technology firms from Greece to the U.K.

At the same time, Beijing views Europe as the terminus for its massively ambitious “One Belt, One Road” project – a string of ports, logistics hubs and other trading infrastructure stretching all the way from Southeast Asia to the north of England.

Yet a populist backlash against China is building in Europe: recent street demonstrations by European workers over Chinese steel dumping have highlighted the risks of a relationship that increasingly looks troubled.

In their book “China’s Offensive in Europe,” Philippe Le Corre, a visiting fellow at the Brookings Institution, and Alain Sepulchre, a senior adviser with BCG in Hong Kong, analyze China’s rapidly expanding footprint on the continent — and what it means in global terms. They set out some of their thinking in a written Q&A with China Real Time:

You title your book “China’s Offensive in Europe.” This sounds somewhat alarming. Should we be worried?

It may have sounded slightly alarming a few years ago, but China’s economic intentions toward Europe are not just about creating jobs and value: they are about spreading influence on a weakened and somewhat divided continent (the U.K. being perhaps the most obvious example) that is also far away from the U.S., the country seen by China as the ultimate competitor. Europe is part of “the West” where China is willing to leave more than footprints.

Overall, how do you assess the relationship between the EU and China? What are the opportunities and the risks?

On one hand, China has offered to take part in major EU projects such as the European Strategic Investment Fund, launched by the European Commission to relaunch European infrastructure. It will probably become the biggest non-European stakeholder in the ESIF. But on the other hand, there is an attempt by China to divide the EU at various levels. A typical example is the “16+1” group created by China and sixteen Eastern and Central European countries in 2011. Once a year, leaders of these countries meet with Chinese Premier Li Keqiang. Last year in Suzhou, they also met with President Xi Jinjping. Seven countries signed memorandums of understanding with China on “one-belt, one-road.” Three of them hosted Mr. Xi recently, and were offered substantial Chinese investment promises. China has also tried to establish similar platforms with Southern Europe and Nordic countries, so far without success, but there is a risk that a large number of smaller countries (some of them non-EU members, a good example being Serbia which is getting a Chinese-made high-speed railway) will take a separate approach from the rest of Europe when dealing with China. This is not what Europe needs now.

How coordinated is Chinese investment in Europe? Is there a master plan in Beijing?

There is no “master plan” to take over Europe. First, Europe was part of the “China goes out” [investment] policy in the late 1990s. It then started accelerating with opportunities in 2008-2009 during the euro-debt crisis (and thanks to a favorable exchange rate), when China bought eurobonds and started buying into European infrastructure such as Athens’ Piraeus Harbor (which it now controls). Now, Chinese investment is taking a different dimension through the cultivation of individual European countries via the “one belt, one road” initiative as was demonstrated by Mr. Xi’s visits to the Czech Republic in May, and to Poland and Serbia more recently. Although many aspects of OBOR remain unclear, Europe is definitely a final destination for this project.

Would “Brexit” make the U.K. a less attractive destination for Chinese capital?

As a financial center, London would remain attractive to Chinese investors who would still use it as an renminbi trading hub – but they would also use Frankfurt, Paris and Luxembourg, where they have started trading, too. As for the British market, it would be treated as a medium-sized economy with some prospects but a much less important group than the 450-million consumer common market. For all its flaws, the EU is a powerful trade block with clear interlocutors on issues of importance to China, such as the Market Economy Status. Finally, it is not clear if the U.K. would remain a top destination for Chinese investments. Real estate is one thing, but projects such as the “Northern Power House,” a massive development plan in the north of England, have little chance to receive Chinese financial support if the U.K. votes to exit the EU on Thursday.

Chinese companies are on a buying spree in Europe. This is good news for job creation, yet it also creates anxiety, particularly in Germany, about the loss of key technologies. How do you see this playing out?

Overall, the mood within European elites is about welcoming Chinese investments providing they play the European way. So far Chinese investors have been targeting primarily nonsensitive sectors or companies in financial trouble. The case of [German robot maker Kuka being acquired by Chinese home appliance giant Midea] is quite unique as it involves some specific high-tech content in a sector which is of huge potential. The fact that the Chinese acquirer is perceived as low-tech and very aggressive in its domestic and international expansion strengthens the anti-China Inc. feeling.

Is there a danger of a real populist backlash in Europe against perceived unfair Chinese trading practices, including steel dumping?

It is already happening with the recent (nonbinding, but overwhelming) vote on May 12 by the European Parliament against granting market economy status to China by the end of 2016. Members of the European Parliament are directly elected by the European people, and they reflect the continent’s worries over unfair trade practices from China. These are sensitive times in Europe, and China’s message is obviously not popular with European grassroots where people worry about jobs and the future of the continent’s economy.

What is behind the debate on giving China market economy status?

It is a complicated issue for Europeans as the EU itself is based on the rule of law. In this case, the law is the 2001 World Trade Organization agreement that says that China should receive MES by December 2016. Economics and politics are two other factors European leaders cannot avoid: both France and Germany are facing general elections in 2017 and populism is on the rise everywhere. It would be suicidal to grant the status to China now, as almost none of the criteria to be a market economy have been met – except perhaps the upcoming deadline. A compromise will be needed with mitigating measures at the very least, and in the current political context, it will obviously take time.

Europe complains that while its markets are wide open to Chinese investment, China is closing up. German Chancellor Angela Merkel has called for greater reciprocity. How can China be persuaded to level the playing field?

European cumulative overseas direct investment into China is far bigger than what China has been investing so far into Europe. China is still considered an emerging market, typically showing some kind of protectionism. At the same time, China is often not sympathetic to reciprocity be it in politics or business. Two ways could be considered to pressure China. One way – as we have just heard from Chancellor Merkel – is to be offensive by blocking some Chinese investments in deemed sensitive areas (similarly to what is taking place in the US through the CFIUS mechanism) and by finding alternative suitors to firms like Kuka that China wants to acquire. Another way would be to use the pan-European card. In many cases, European businesses and / or political bodies have been battling each other for Chinese investments. This has been going on for years, and it is time for Europeans to partner vis-a-vis China.

On her recent visits to China, Ms. Merkel has spoken out strongly on issues from human rights to the South China Sea. This compares quite markedly with the approach to China adopted by Britain, which tends to avoid sensitive issues. What accounts for Ms. Merkel’s frankness?

There is still a Chinese fascination for Germany’s economic and technological model, which has no equivalent in Europe. Although the German trade surplus with China is shrinking, many German industrial brands are recognized and vastly respected in China (Audi, Siemens, BMW, BASF…). German technology and brands give Germany an incentive. In addition, Ms. Merkel, who has been in power for almost 11 years, is seen by Beijing as Europe’s clear leader. David Cameron is only considered as his country’s prime minister, with little influence on decisions taken within the EU. The fact Ms. Merkel has spoken frankly and repeatedly about sensitive issues has not weakened her – it is the opposite. A good lesson for others, perhaps?

What is the experience so far of European companies bought by Chinese firms?

The experience so far has been a mixed bag. On the workforce front, most companies have been expanding rather than the opposite, but some have been downsizing their labor force at least initially. A typical challenge lies more at the top management / governance level: Chinese owners tend to over-manage or under-manage dispatching too many or too few skilled managers, governing too tightly or too loosely. The right balance has not been found yet. The most ‘non value-added’ factor is probably on the transfer of technology side. In many instances, Chinese investors have not been able to fully leverage the European technology content into their domestic operations. 

This interview originally appeared in the Wall Street Journal. 

For years China has been known as a destination for foreign direct invest- ment, as multinationals flocked there to build export platforms and take advantage of its fast-growing market. Now, however, it is China’s outbound foreign direct investment (OFDI) that is shaping the world. In the first quarter of 2015, China claimed its largest-ever share of global mergers and acquisitions (M&A), with mainland companies’ takeovers of foreign firms amounting to US$101bn, or 15% of the US$682bn of announced global deals. In three months, China recorded more outbound investment transac- tions than in the whole of 2015, when US$109bn in deals were announced.

These figures probably overstate the true level of capital flows, since some announced deals inevitably fail to reach fruition. But whatever the levels, it is clear that China’s outbound investment is rapidly growing, and that its share of global direct investment flows is among the largest of any country.

The rise in China’s direct investment in Europe is especially striking. According to a recent report by law firm Baker & McKenzie and consultancy Rhodium Group, the total stock of Chinese investment in Europe increased almost ten-fold from US$6bn in 2010 to US$55bn in 2014. In 2015 alone, Chinese OFDI in Europe increased by 44 percent (with deals such as Italian tire manufacturer Pirelli’s US$7.7bn takeover by ChemChina). Total flow of US$23bn exceeded China’s investments in the US, which were US$17bn in the same year. This year could see an even more dramatic jump, if ChemChina’s pro- posed US$46bn takeover of Swiss agro-technology firm Syngenta is approved by regulators.

There are two main reasons why Chinese investors favor Europe over the US. First, the issue of Chinese direct investment is less politicized in Europe. A handful of high-profile Chinese investments in the US have been blocked for political reasons, and the national security review process of the Committee on Foreign Investment in the United States poses an obstacle for some types of acquisitions, especially by Chinese state-owned enterprises (SOEs). Europe lacks a similar review process, and this perhaps explains why SOEs represent nearly 70% of Chinese OFDI in Europe, but less than half in the US. Second, Europe’s ongoing economic and financial difficulties since the global financial crisis of 2008 mean there has been a hunger for Chinese cash to finance infrastructure or bail out debt-ridden firms.The flows are impressive, but it is important to remember that on a stock basis, China’s aggregate investment in Europe is still fairly modest. By the end of 2014, China’s cumulative OFDI represented only 3-4% of all FDI in Europe, and the pool of workers directly affected by Chinese FDI was a mere 2% of the number of Europeans working in American-owned firms in Europe. The rising trend of Chinese investment, however, raises some interesting economic and political questions for European leaders.

Moving up the value chain…

What motives, aside from the sheer availability of cash, are driving this enormous wave of Chinese outward investment? A review of China’s OFDI in Europe over the past decade points to five distinct strategies. Some of these are similar to the strategies seen in earlier waves of cross-border investment by Western, Japanese and South Korean companies; others seem to be more China-specific. They also display widely divergent reliance on political leverage—with SOE investments, unsurprisingly, being the most politically driven.

Authors research

The first strategy is driven by a desire to move from cheap products to more sophisticated ones. An exemplar is Haier, the world’s largest white goods manufacturer. Haier’s development closely tracks that of Japanese and South Korean consumer appliance makers: it first concentrated on making cheap copies of established products, for sale in the Chinese market. It gradually moved up to more sophisticated and innovate products and services and began to export more aggressively.

Haier came to cross-border M&A relatively late, and has used it main- ly to scale up its core “made-in-China” portfolio and accelerate its move up the value chain. Its first acquisitions came in 2012, when it bought a part of Sanyo’s Asian operations and New Zealand’s Fisher & Paykel. After a failed effort to acquire bankrupt European white-goods firm FagorBrandt in 2014, it bought GE’s consumer appliances business for US$5.4bn in January 2016. Political backing for Haier’s overseas expansion has been limited, probably because of the low political importance of the white goods sector.

A second strategy, exemplified by telecoms equipment maker Huawei Technologies, is a straightforward effort to raise margins by diversifying out of the low-margin Chinese market into higher-margin foreign ones. Huawei has derived more than half its sales from abroad for over a decade, and has gradually increased its presence in European markets, in part through loose alliances with major clients such as BT, Orange, Deutsche Telekom, and Telefónica. It has also moved quickly into the device sector. From tablets to smartphones and 3G keys, its products are now spreading across Europe, as are its greenfield investments in European R&D centers. Its efforts to expand through M&A have been hampered by its image as an arm of the Chinese state—although privately owned, it has benefited from huge lines of credit from Chinese policy banks, and has never put to rest rumors of close ties with the People’s Liberation Army.

…and acquiring technology

The third model essentially involves technology acquisition that enables a Chinese firm both to bolster its position at home and create strategic opportunities abroad. Notable examples include personal computer maker Lenovo (which bought IBM’s PC division), carmaker Geely (which acquired Volvo’s passenger-car unit), and more recently ChemChina (with its purchases of Pirelli and Syngenta). The technology-acquisition strategy is much more characteristic of Chinese firms than of Japanese or South Korean companies, which mainly preferred to build up their technological know-how internally, or through licensing arrangements. Even though many of the Chinese acquirers in these deals are private, they are often able to mobilize enormous state support in the form of generous and low-cost financing.

The fourth internationalization model is characteristic of the hospi- tality industry and is one we dub (perhaps controversially) “Orientalist.” Essentially this involves the acquisition of established high-end hotel and leisure brands, with the ultimate aim of reorienting them to cater to a growing Asian—and especially Chinese—clientele. Examples include Shanghai-based Jinjiang International’s recent purchase of the Louvre Hotels group and of 11.7% of Accor’s hotel business. Hong Kong hotel chains Shangri-La, Mandarin and Peninsula have focused their expansion over the past three years in Europe, buying high-end assets in Paris and London. Dalian Wanda, a conglomerate with interests in real estate, retail and cinemas has plans for a series of major mixed-use projects in the UK and France. Like many such projects in China, these are designed to offer a combination of commercial, residential, shopping and recreational facilities. These culturally-oriented acquirers have also benefited from generous financing from China’s state-owned banks.

Heritage Foundation, media reports

The final strategy is a “national champions” model, under which big SOEs use political and financial support from the government to make acquisitions that they hope will vault them into positions of global market leadership. A noteworthy recent example in Europe Dongfeng Motor’s purchase of 14% of PSA, the parent company of Peugeot.

The wave of Chinese investment creates several challenges for European companies and policymakers. For firms, the sudden appearance of hungry and well-financed Chinese acquirers has prompted incumbent multinationals to step up their own M&A efforts, in order to maintain their market dominance. Moves into the European market by China’s leading construction equipment firms, Zoomlion and Sany, most likely prompted the purchase of Finnish crane company Konecranes by its American rival Terex. Similarly, ChemChina’s unexpected bid for Syngenta has caused disquiet among European chemical firms, and probably motivated Bayer’s subsequent bid to take over Monsanto.

In the policy arena, two issues stand out. The narrower one relates to reciprocity: Chinese firms are pretty much free to buy companies in any sector in Europe, without restriction; foreign firms by contrast are barred from investment or majority control in a host of sectors in China, including banking, insurance, telecom, media, logistics, construction, and healthcare. One potential solution is to include reciprocity provisions in the EU-China bilateral investment treaty now under negotiation.

The broader question for Europe is whether some broader geopoliti- cal strategy lies behind China’s outward investment surge, and if so what to do about it. There can be little doubt that in recent years China has increased its political leverage in Europe, and has done so via a “divide and rule” approach of dealing as little as possible with the EU as a whole and as much as possible with individual states. Another tactic has been to create new multilateral forums in configurations favorable to China, the most prominent example being the “16+1,” which consists of 16 central and eastern European nations plus China. Beijing has tried—so far with- out success—to develop similar forums with the Nordic and Southern European countries.

Anxiety along the Belt and Road

A related issue is to what extent Europe should welcome Chinese investment that comes in the form of infrastructure spending. Part of China’s “Belt and Road Initiative” is about increasing connectivity between China and Europe, and this comes with clear financial benefits: China has pledged, for instance, to contribute to the European Commission’s European Strategic Infrastructure Fund; and Chinese-led logistics platforms such as Athens’ Piraeus Port are proliferating. 

But with increased connectivity comes an increased flow of Chinese goods—and especially a flood of low-priced products from China’s excess capacity industries such as steel and building materials. In response to the apparent dumping of Chinese industrial goods in Europe, the European Parliament on May 12 adopted a non-binding but pointed resolution asking the European Commission to reject China’s claim to “market economy status” in the World Trade Organization (WTO). That status—which China says should come to it automatically in December this year under the terms of its 2001 WTO accession—would make it much harder for the EU to impose anti-dumping duties on Chinese imports. The Commission now faces the delicate choice of accepting China’s claim (to the detriment of European producers) or rejecting it (an action that is likely to invite some form of economic retaliation from Beijing). A possible middle way would be to recognize China’s market economy status but to carve out a set of exceptions to protect key European industries. However this dispute plays out, it will simply mark the beginning of a long and complicated relationship between Europe and its fastest-growing investor.

The piece originally appeared in China Economic Quarterly. 

Event Information

On December 1, the Center on the United States and Europe (CUSE) at Brookings hosted a discussion exploring Russian power throughout history and how two of its most pivotal rulers—Josef Stalin and Vladimir Putin—defined Russian leadership and its role in the world in the 20^th and 21^st centuries. The discussion featured remarks by Stephen Kotkin, professor at Princeton University and author of the authoritative new biography, Stalin Volume I: Paradoxes of Power, 1878-1928 (Penguin Press, 2014).

In his book, Kotkin reveals Stalin as a ruler who is both astute and blinkered, diligent and paranoid, cynical and true-believing, charming and vicious. However, Stalin is more than just an eminent biography; it is a book about Russian power in the world as well as Stalin’s power in Russia, recast as the Soviet Union. Ultimately, Stalin offers an analysis of power—where it comes from, how it is utilized or squandered, and what its human consequences are.

Brookings President Strobe Talbott offered introductory remarks and moderated the discussion.  Prior to assuming the leadership of Brookings, Talbott served in the U.S. State Department as ambassador-at-large for the former Soviet Union and then as deputy secretary.

Audio

• Putin and Russian Power in the World: The Stalin Legacy

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20141201_putin_russia_stalin_transcript

The announcement of King Abdullah’s death puts Saudi Arabia in the hands of his designated successor, Prince Salman. Salman has his own health issues and faces an immediate crisis on the kingdom’s southern border in Yemen. Continuity will be Salman’s hallmark, including close ties to Washington.

Now King Salman, born Dec. 31, 1935, who is also defense minister, has been chairing cabinet meetings for several months and handling almost all foreign travel responsibilities for the monarchy since he became the heir in 2012. He has visited China, Japan, India, Pakistan, the Maldives, and France since becoming crown prince after the death of his predecessor, Prince Nayif. He has hosted a series of Saudi allies like Pakistani Prime Minister Nawaz Sharif and Egypt’s president, Abdel Fattah Al-Sisi, who paid their last respects quietly to Abdullah in the last week.

Before becoming crown prince, Salman was governor of Riyadh province for 48 years. When he became governor in 1963, Riyadh had 200,000 inhabitants; today, it has more than seven million. Salman presided over this remarkable transformation with a record for good governance and a lack of corruption. Since most of the royal princes and princesses live in Riyadh, he was also the family sheriff, ensuring any transgressions were dealt with smoothly and quietly with no publicity. He knows where all the bodies are hidden.

Salman also oversaw the collection of private funds to support the Afghan mujahideen in the 1980s, working very closely with the kingdom’s Wahhabi clerical establishment. In the early years of the war, before the U.S. and the kingdom ramped up their secret financial support for the anti-Soviet insurgency, this private Saudi funding was critical to the war effort. At the war’s peak, Salman was providing $25 million a month to the mujahideen. He was also active in raising money for the Bosnian Muslims in the war with Serbia.

Salman’s sons include the first Muslim astronaut, Prince Sultan, and the governor of Medinah, Prince Faysal. Another son, Prince Khaled, is a fighter pilot in the Royal Saudi Air Force and led the first RSAF mission against Islamic State targets in Syria last year. The family controls much of the Saudi media. All will now be up-and-comers.

Salman has his own health issues and has had a stroke. (Persistent rumors of dementia are denied by the palace.) His successor was announced in February 2013 to ensure continuity. Second Deputy Prime Minister Prince Muqrin was born Sept. 15, 1945 and was educated at the Royal Air Force College in England before becoming a pilot in the Royal Saudi Air Force. Later, he was governor of Medinah province and then head of Saudi intelligence. Muqrin is now crown prince.

Abdullah, Salman, and Muqrin are sons of the modern kingdom’s founder, Abdelaziz Ibn Saud, who had 44 recognized sons. The survivors and their heirs constitute the Allegiance Council, which Abdullah created in 2007 to help choose the line of succession. In practice it has only ratified the king’s decisions after the fact.

Muqrin is widely believed to be the last capable son of Ibn Saud. So now that Muqrin has ascended to the crown prince position the kingdom will face the unprecedented challenge of picking a next in line from the grandsons of Ibn Saud. That will raise questions of legitimacy not faced in the last century of Saudi rule.

Abdullah has been the de facto ruler of the kingdom since King Fahd suffered a debilitating stroke in 1995; he became king a decade later when Fahd passed away. A progressive reformer by Saudi standards, Abdullah gave the kingdom 20 years of stability. Salman is likely to provide continuity. The House of Saud values family collegiality and harmony highly. The two previous Saudi kingdoms in the 18th and 19th centuries were wracked by family internal squabbles which their foreign enemies exploited. Eleven of 14 successions were contested and the Saudis ended up in exile in Kuwait until Ibn Saud created the modern kingdom in 1902.

With the Arab world facing its worst crisis in decades, the royals will want to present an image of stability and strength. This is especially true with the collapse of the pro-Saudi government in Yemen, which will be Salman’s first crisis.

The Zaydi Houthi rebels who have all but disposed the pro-American government in Yemen this week have a slogan which reads, “Death to America, death to Israel, curses to the Jews and victory to Islam.” The collapse of President Abd Rabdu Mansour Hadi’s government, which openly supported American drone strikes in Yemen against Al Qaeda in the Arabian Pennisula for the last couple of years, puts a pro-Iranian anti-American Shia militia as the dominant player in a strategically important country. The Bab El Mandab, the straits between Asia and Africa, are one of the choke points of global energy and geopolitics. The leader of the Houthis gave a triumphal speech Tuesday and Iranian diplomats hailed his victory. The Houthis have fought a half-dozen border wars with the Saudis, who spent billions trying to keep them out of power.

The Houthis’ victory also ironically benefits AQAP by polarizing Yemen, the poorest country in the Arab world, between Shia and Sunni with AQAP emerging as the protector of Sunni rights. AQAP is fresh off its attack on Paris and has grown since 2009 into the most dangerous al Qaeda affiliate in the world. It is dedicated to overthrowing the House of Saud. Salman will have his hands full immediately.

This piece was originally published by The Daily Beast. 

In “Designing Pan-Atlantic and International Anti-Crime Cooperation,” a chapter for the new book, Dark Networks in the Atlantic Basin: Emerging Trends and Implications for Human Security (Center for Transatlantic Relations, January 2015), Vanda Felbab-Brown discusses the context and challenges of designing policies to counter organized crime and illicit economies in West Africa. She argues that although large-scale illicit economies and organized crime have received intense attention from governments and international organizations since the end of the Cold War, the strategies designed to combat these developments have been ineffective and, at times, counterproductive. Many populations experiencing inadequate state presence, great poverty, and social and political marginalization are dependent on illicit economies; and policies prioritizing suppression of these economies can, paradoxically, increase the economic and political capital of criminal or militant groups.

The recent drug trade epidemic and the connections between various illicit economies and terrorism have cast a spotlight on West Africa, Felbab-Brown explains. But in analyzing how the drug trade affects West Africa, it is important to note that preexisting institutional and governance deficiencies crucially amplify the destabilizing effects of the drug trade. Neither the  drug trade nor the entrenchment of political corruption and misgovernance in West Africa are new phenomena emerging in the wake of cocaine flows through the region. Rather, political contestation in West Africa has long centered on the capture of rents from legal, semi-illegal, or outright illegal economies such as diamonds, gold, timber, cacao, human trafficking, and illegal fishing, resulting in a pervasive culture of illegality, in which society expects that laws will be broken, enforcement evaded, and that the state will be the source of rents rather than an equitable provider of public goods. A long history of rentier economies, illicit activity, smuggling, endemic corruption, weak institutions, and governance as mafia rule—that provides exceptions from law enforcement to the ruler's clique—has left West Africa with what Felbab-Brown terms the technology of illegality and the state as mafia bazaar.

This context makes West Africa a particularly vexing area for policymakers and international donors who want to combat militancy or organized crime in West Africa. The United States and international community should consider any intervention in the region strategically, calibrating assistance packages to the absorptive capacity of the partner country, focusing on broad state-building, and fostering good governance. The priority of the United States must be to combat the most disruptive and dangerous networks of organized crime and belligerency, recognizing that anti-crime interventions cannot eradicate the majority of organized crime, illicit economies, and drug trafficking in the region. Moreover, efforts by external donors, such as Colombia or Brazil, to transfer policy practices to West African countries need to carefully consider which external lessons and policies are suited for local contexts.

The full book, Dark Networks in the Atlantic Basin: Emerging Trends and Implications for Human Security, is available for purchase from The Brookings Institution Press.

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Updated, 11/14/14 with new content.

President Obama is traveling this week in the Asia-Pacific region. He is attending the APEC Summit in Beijing Monday and Tuesday; the ASEAN Summit and the East Asia Summit in Myanmar Tuesday; and the G-20 Summit in Brisbane Saturday and Sunday. Brookings experts have offered significant commentary on the president's agenda and challenges during this trip:

Richard Bush, director of the Center for East Asia Policy Studies and the Michael H. Armacost Chair, reflects on what Presidents Obama and Xi said about the situation in Hong Kong during their summit.

Charles Freeman, a nonresident senior fellow in the John L. Thornton China Center, reflects on Chinese President Xi's address to business executives during APEC during which Xi discussed the "new normal" of Chinese economic growth and more open visa policies. His remarks, Freeman notes, "sounded a contrasting note to those he made just a month earlier" and "were also out of tune with the well-chronicled anxieties of foreign investors about the souring business environment they face in China."

Neil Ruiz, a senior policy analyst and associate fellow in the Metropolitan Policy Program, says that the new visa rules agreed to by Presidents Obama and Xi "is an important step in building economic bridges between Chinese cities and U.S. metropolitan areas."

Senior Fellow Michael O'Hanlon, the Sydney Stein, Jr. Chair in International Security, focuses on two prospective agreements on military matters, dealing with confidence-building and operational safety issues, reached between the U.S. and China. "The Obama and Xi teams should be proud of a good summit," writes O'Hanlon, "But situating these accords in a broader framework underscores how much work remains to be done."

On the U.S.-China climate agreement to cut greenhouse gas emissions: Brookings Managing Director William Antholis calls it "dramatic" for both diplomatic and domestic political reasons; and Fellow Tim Boersma, acting director of the Energy Security Initiative, says it is "a big deal."

Miriam Sapiro, a visiting fellow and former deputy U.S. trade representative, says that the trip "gives the White House the chance to emphasize foreign and economic policy goals that can be broadly embraced by Democrats and Republicans." Sapiro also commented on the importance of trade policy, including the Trans-Pacific Partnership, in a recent Brookings Cafeteria podcast.

Experts recently joined together in a full-day conference to examine the economic, environmental, political, and security implications of President Obama's trip to China and his interactions with President Xi Jinping. Full audio, video, and a transcript of remarks by former U.S. National Security Advisor Thomas Donilon are available.

Six experts from the John L. Thornton China Center recently offered their views on how President Obama can have a productive visit with President Xi. Their comments covered issues including Hong Kong, trade, and domestic Chinese reforms, among others.

Lynn Kuok, a nonresident fellow with the Center for East Asia Policy Studies, offers her perspectives on Obama's trip to Myanmar. 

In Think Tank 20, experts from Brookings and around the world address interrelated debates about growth, convergence, and income distribution—three elements likely to shape policy debates beyond the G-20 Summit. Use the handy globe interactive to navigate to countries and regions.

Kemal Derviş—vice president and director of Global Economy and Development and the Edward M. Bernstein Scholar—and Peter Drysdale—emeritus professor of economics at Australian National University—are the editors of a new volume on the G-20 summit at five years. They explore questions including, Will these summits add ongoing value to global economic governance, or will they will become purely ceremonial gatherings, which continue to take place because of the inertia in such processes?

The biggest news at the end of the Brisbane G-20 on Sunday will be to confirm for the first time in an official G-20 communique that China will indeed chair the G-20 Summit in 2016. 

Coming on the heals of a momentous week of great power realignments and breakthroughs at the APEC Summit in Beijing and other one-on-one meetings of heads of state, the timing of China’s presidency of the G-20 Summit in 2016 could not be a better follow-up to this week’s accomplishments. It puts China in play as a global leader at a critical moment in geopolitical relations and in terms of several global agendas that will culminate in the next two years. It also provides an unusual opportunity for the U.S. and China to collaborate on a broader set of societal issues affecting everyone everywhere building on their agreements this week.

One of the reasons why the G-20 Summits have yet to realize their full potential is that the leaders-level summits have been captured by the finance ministers’ agendas and discourse. Leaders at G-20 Summits have individually and collectively failed to connect with their publics; ordinary citizens do not see their urgent issues being dealt with. Exchange rates, current account balances, reserve ratios for banks, and the role of the IMF do not resonate with public anxieties over their lives and livelihoods.

Three streams of global issues will culminate in 2015:  the forging of a “post-2015 agenda” on sustainable development with a new set of global goals to succeed the Millennium Development Goals (MDGs); the agreement on  “financing for development” (FFD) arrangements and mechanisms to support the new post-2015 Sustainable Development Goals (SDGs) to be realized in 2030; and the achievement of a United Nations Framework Convention on Climate Change (UNFCCC) by the end of 2015, which looks more promising now than it did a week ago.

What has been learned from previous global goal setting processes is that building on the momentum for the goal-setting process in 2015 and carrying it directly into the mobilization of national political commitment, resources and policies for implementation is vital. China as a member of the G-20 troika in 2015 through 2017 will be in crucial position of bridging the goal-setting and implementation phases of the new SDGs for 2030 to be adopted at the United Nations in September of next year.

China, as one of the five permanent members of the U.N. Security Council, will be in a pivotal position to create complementarities between the G-20 forum for the major economies and the U.N. as a forum for all countries for this critical period of setting the global sustainability agenda for the next fifteen years.  

The post-2015 agenda for social, economic and environmental sustainability is of high interest to the United States, and the new China-U.S. climate change agreement in Beijing this week augurs well for collaboration between the two countries on the broader agenda. White House Chief of Staff John Podesta was on the high-level panel for the post-2015 development agenda last year, which signals high U.S. policy involvement. The Shanghai Institute for International Studies has argued in a recent paper for the U.N. Development Program that “the G-20 and the U.N. could have certain complementary roles. The development issue could become the one linking the major work of both the U.N. and the G-20.”  

The world should welcome the unique role that China can now play in bringing the international community and the global system of international institutions together in charting a common path forward building on the progress made in the various summits this week. 

As much as the nostalgic might hate to admit it, a new year is coming up. And for climate change negotiators, 2015 is a big one: it’s the make-it-or-break it year for a serious, last-ditch effort at an international agreement to slow runaway climate change. 

A new year brings new, hopeful resolutions. Of course, just as ubiquitous are the pesky memories of past resolutions that one never quite accomplished.

Some resolutions fade, understandably. But failure is less forgivable when the repercussions include the increased exploration of fossil fuels at the expense of our warming world. To avoid the most destructive effects of climate change, we must keep two-thirds of existing fossil fuel reserves underground, instead of providing subsidies to dig them up.

One group not living up to its resolution: the G20 members —19 countries and the European Union that make up 85% of global GDP. At the 2009 G20 summit in Pittsburgh, the group agreed to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” At the 2013 summit in St. Petersburg, they reaffirmed this resolution. Yet that same year, these countries funneled $88 billion into exploring new reserves of oil, gas, and coal.

Another resolution abandoned.

This year’s G20 summit will convene in Brisbane, Australia (November 15^th - 16^th) — a perfect opportunity to commiserate about the backsliding on the agreement and to develop a new approach that includes some means of holding each other accountable. So how can the G20 follow through on its laudable and necessary pledge?

1. Get help from the experts.

A new report by the Overseas Development Institute and Oil Change International criticizes the G20 for “marry[ing] bad economics with potentially disastrous consequences for climate change.” It points out that every dollar used to subsidize renewables generates twice as much investment as the dollar that subsidizes fossil fuels.

And the G20 can try harder to heed the doctor’s orders. This report outlines specific recommendations, including revamping tax codes to support low carbon development instead.

2. Set a timeline and stick to it.

National timelines for fossil fuel subsidy phase out would be different depending on the governmental structures and budgeting processes of individual countries. Also, countries can utilize the timeline of the incoming international climate treaty, by including a subsidy phase out as part of a mitigation plan to be measured and reported.

3. It’s easier with friends.

The G20 got it right that no one country should have to go it alone. Now it is time to strengthen its methodology for peer review of inefficient fossil fuel subsidies, and agree upon a transparent and consistent system for tracking and reporting.

That said, it can also be easier to cheat with friends. The new report tracks where investments from G20 state-owned energy companies are directed. As it turns out, G20 countries continue to fund each other’s fossil fuel exploration. Instead of cheating together on their own resolution, G20 members should leverage these relationships to advance investments in clean energy.  

4. Hold each other accountable.

The G20 is not the only group that has committed to phase out fossil fuel subsidies. The issue has received support from advocacy groups, religious leaders, and business constituencies alike. The public will be able to better hold leaders accountable if the G20 declares its commitment and progress loud and proud.

Moreover, G20 members and advocacy organizations can make the facts very clear: fossil fuel subsidies do not support the world’s poor, and the public ends up paying for the externalities they cause in pollution and public health. This accountability to addressing concerns of the people can help the G20 stand up to the fossil fuel industry.

5. If at first you don’t succeed…

True, phasing out fossil fuel subsidies is no piece of cake. There is no G20 standard definition of “inefficient subsidies” or timeline for the phase out. It also hasn’t helped that countries report their own data. They can even opt out of this unenforced commitment altogether. Yet the pledge is there, as is the urgency of the issue. New Year’s resolutions take more than just commitments — they take work. This week’s G20 Leaders Summit is a wonderful place to commit to phasing out fossil fuel subsidies. Again.

The G-20 Summit begins in Brisbane, Australia this Saturday, November 15. Leaders are descending on the city to tackle the biggest economic challenges facing the planet. A major theme of the discussions will likely be convergence—the rapid approach of average incomes in low- and middle-income countries towards those in advanced economies—and its sustainability. In a recent brief in the Brookings Global Think Tank 20 series, I explore this issue in the sub-Saharan African context, examining what has been holding the region back, how Africa might reach the rapid convergence seen by other emerging economies, and if and how convergence might be sustained. For my full brief, see here.

As most know, despite the “growth miracles” happening on the continent, sub-Saharan Africa still has a long way to go. Africa’s economic growth started much later and has gone much slower than the rest of the developing world; thus its per capita income gap against advanced economies still remains quite large. In fact, Africa hasn’t even converged with other emerging economies (see Figure 1). 

In addition to slow growth, Africa faces many, many challenges: Conflict-ridden countries still face a declining income per capita, and inequality is rampant. While Africa’s poverty rate is dropping, its share in global poverty is not: In 1990, 56 percent of Africans lived on under $1.25 a day, meaning that they represented 15 percent of those in poverty worldwide. Over the next 20 years, the region’s poverty rate dropped to 48 percent, but its share of global poverty doubled. At this rate, many predict that by 2030 Africa’s poverty rate will fall to 24 percent, but represent 82 percent of the world’s poor (Chandy et al., 2013). 

Of the utmost importance for convergence, though, is the issue of structural transformation in the region. If sub-Saharan Africa can reduce its reliance on unproductive and volatile sectors, it will build a foundation on which economic growth—and convergence—can be sustained.

Currently, African economies are characterized by a reliance on natural resources, agriculture and a budding services sector. Natural resources are, and will likely continue to be, major drivers of Africa’s economic growth: About 20 African countries derived more than 25 percent of their total merchandise exports in 2000-2011 from them. Unfortunately, this dependence on natural resources comes hand-in-hand with challenges such as financial volatility, rent-seeking behavior, and a loss of competitiveness, among many others—making a turn away from them necessary for long-term, sustainable growth. Similarly, most African economies depend heavily on the low-yield agriculture sector—its least productive sector and with the lowest income and consumption levels.

While labor has been moving out of the agriculture sector, it is moving into the services sector. From 2000-2010, the agriculture labor force share fell by about 10 percent while services grew by 8 percent (McMillan and Harttgen, 2014). While much of the movement into the services industry has been into productive areas such as telecommunications and banking, most service sector jobs in sub-Saharan Africa are informal.  Although informal activities offer earning opportunities to many people, they are often unstable and it is far from clear that they can be an engine of sustainable and inclusive high economic growth. In addition, growth in the services sector overall has historically not shown the economic returns that industry has.

If policymakers can enhance productivity in the services sector, then growth could take off even more rapidly, but until then, the highly productive manufacturing sector will be the key to Africa’s convergence. (For more on this, see the attached PowerPoint presentation.)

The Missing Piece: African Industry

Industrialization in Africa is low: Manufacturing–the driver of growth in Asia—employs less than 8 percent of the workforce and makes up only 10 percent of GDP on the continent (Rodrik, 2014). In comparison to the 8 percent growth in the services sector from 2000-2010, manufacturing saw only 2 percent growth (McMillan and Harttgen, 2014). In addition, the region’s manufacturing sector is dominated mostly by small and informal (and thus less productive) firms. Since the research has shown that industry was key to the explosive and continued growth in Asia and Europe, without concentration on or support of the manufacturing sector, African economies are not likely to replicate those convergence dynamics (Rodrik, 2014). Thus, Africa’s slow pace of industrialization means that, in addition to its late start time and its past sluggish growth, the region has another obstacle towards convergence.

There is hope, however; there are already hints that structural transformation might be happening. The recent rebasing of Nigeria’s economy revealed some important new trends. There, the contribution from oil and gas to GDP fell from 32 to 14 percent, and agriculture from 35 to 22 percent. At the same time, the telecommunication’s contribution sector rose from 0.9 to 9 percent, and manufacturing from 2 to 7 percent.

Achieving a successful economic transformation will help capitalize on improved growth fundamentals and achieve high and sustained per capita growth rates. However, for such a process to yield lasting benefits, it is crucial to better understand the ongoing structural changes taking place in Africa. This is an important task for economists studying Africa and, in addition to achieving a “data revolution,” both meta-analysis and case study methods can be useful complements to the current body of research on the continent.

References

Chandy, Laurence, Natasha Ledlie, and Veronika Penciakova. 2013. “Africa’s Challenge to End Extreme Poverty by 2030: Too Slow or Too Far Behind?” The Brookings Institution, Washington D.C. April 2013, http://www.brookings.edu/blogs/up-front/posts/2013/05/29-africachallenge-end-extreme-poverty-2030-chandy

Rodrik, Dani. 2014. “An African Growth Miracle?” NBER Working Paper No. 20188, June. http://www.nber.org/papers/w20188

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The world’s top economies had much to discuss at the G-20 summit in Brisbane, Australia last month, including reinvigorating global growth, the reduction of trade barriers, financial regulation reforms, and global infrastructure. The G-20 meeting took place at a key time for U.S. international economic policy, as it came on the heels of President Obama’s prior stops at the APEC summit and the ASEAN summit. As the U.S. joins its G-20 colleagues in aiming to boost G-20 GDP by an additional 2 percent by 2018, there remain many questions about how G-20 countries will follow through with the goals set in Brisbane.

On December 3, the Global Economy and Development program and the Economic Studies program at Brookings welcomed U.S. Treasury Undersecretary for International Affairs Nathan Sheets in his first public address since being confirmed in September. Following the recent G-20 meeting, Sheets discussed his perspectives on priorities for international economic policy in the years ahead across key areas including trade, the international financial architecture, and the United States’ evolving economic relationships.

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• U.S. Economic Engagement on the International Stage: A Conversation with U.S. Treasury Undersecretary Nathan Sheets

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Editor’s Note: In the report “Think Tank 20: Growth, Convergence and Income Distribution: The Road from the Brisbane G-20 Summit” experts from Brookings and around the world address interrelated debates about growth, convergence and income distribution, three key elements that are likely to shape policy debates beyond the ninth G-20 summit that was held on November 15-16 in Brisbane, Australia. The content of this blog is based on the chapter on Latin America. Read the full brief on Latin America's growth trends here.

A figure says a thousand words. And, looking at Figure 1, which shows the population-weighted average income per capita in emerging economies relative to the U.S., there could be no doubt in anybody’s mind that since the late 1990s something rather extraordinary happened—a phenomenon with no antecedents in the post-WWII period—that propelled emerging economies into an exponential process of convergence.

Needless to say, this phenomenon had enormous consequences for the welfare of millions of citizens in emerging economies. It lifted more than 500 million people out from poverty and extreme poverty, and gave rise to the so-called emerging middle class that grew at a rate of 150 million per year.

So, it seems that something rather extraordinary happened in emerging economies. Or did it? Let’s look again. When China and India are removed from the emerging markets sample, Figure 1 becomes Figure 2a.

In Figure 2a, one can still discern a period of convergence starting in the late 1990s. But convergence here was not nearly as strong—relative income is still far below its previous heights—and it occurred after a period of divergence that started in the mid-1970s after the first oil shock, in the early 1980s with the debt crisis, and in the late 1980s with post-Berlin Wall meltdown in Eastern European economies.

This pattern is actually characteristic of every emerging region including Latin America (see Figure 2b). Only Asia differs markedly from this pattern—with China and India displaying exponential convergence since the late 1990s, while the rest of emerging Asia experienced a sustained but much slower convergence since the mid-1960s. 

From a Latin American perspective, the relevant question we need to ask is whether the recent bout of convergence that started in 2004 after a quarter of a century of relative income decline is a break with the past or just a short-lived phenomenon?

In order to address this question from a Latin American perspective, we study the arithmetic of convergence (i.e., whether mechanical projections are consistent with the convergence hypothesis) and the economics of convergence (i.e., whether income convergence was associated with a comparable convergence in the drivers of growth).

According to our definition of convergence,[1] since 1950, growth-convergence-development miracles represent a tiny fraction of emerging countries. Only five countries managed to achieve this: Japan, South Korea, Taiwan, Hong Kong and Singapore. In other words, convergence towards income per capita levels of rich countries is an extremely rare event.

But where does Latin America stand? Based on growth projections for the period 2014-2018, not a single Latin American country will converge to two-thirds of U.S. income per capita in two generations. Unfortunately, the arithmetic does not seem to be on the side of the region.

What about the economics? To answer this question, we analyze whether Latin America’s process of income convergence in the last decade was also associated with a similar convergence in the key drivers of growth: trade integration, physical and technological infrastructure, human capital, innovation, and the quality of public services. Figure 3 illustrates the results.

In contrast to relative income, during the last decade, LAC-7 [2] countries failed to converge towards advanced country levels in every growth driver. The overall index of growth drivers—the simple average of the five sub-indexes—remained unchanged in the last decade relative to the equivalent index for advanced economies. By and large, the latter holds true for every LAC-7 country with exceptions like Colombia (the only country that improved in every single growth driver in the last decade) and Chile (the country in the region where the levels of growth drivers are closer to those of advanced economies). 

Latin America had a decade of uninterrupted high growth rates—with the sole exception of 2009 in the aftermath of the Lehman crisis—that put an end to a quarter of a century of relative decline in income per capita levels vis-à-vis advanced economies. However, high growth and income convergence were largely the result of an unusually favorable external environment, rather than the result of convergence to advanced-country levels in the key drivers of growth. Fundamentally, the last was a decade of “development-less growth” in Latin America.

With the extremely favorable external conditions already behind us, the region is expected to grow at mediocre rates of around 2 percent in per capita terms for the foreseeable future. With this level of growth, the dream of convergence and development is unlikely to be realized any time soon.

To avoid such a fate the region must make a renewed effort of economic transformation. Although the challenges ahead appear to be huge, there is plenty of room for optimism. First, Latin America has built a sound platform to launch a process of development. Democracy has by-and-large consolidated across the region, and an entire generation has now grown up to see an election as the only legitimate way to select national leaders. Moreover, it is for the most part a relatively stable region with no armed conflicts and few insurgency movements threatening the authority of the state. Second, a sizeable group of major countries in Latin America have a long track record of sound macroeconomic performance by now. Third, the region could be just steps away from major economic integration. Most Latin American countries in the Pacific Coast have bilateral free trade agreements with their North American neighbors (11 countries with the U.S. and seven countries with Canada). Were these countries to harmonize current bilateral trade agreements among themselves—in the way Pacific Alliance members have been doing—a huge economic space would be born: a Trans-American Partnership that would comprise 620 million consumers, and have a combined GDP of more than $22 trillion (larger than the EU’s, and more than double that of China). Were such a partnership on the Pacific side of the Americas to gain traction, it could eventually be extended to Atlantic partners, in particular Brazil and other Mercosur countries.

In the last quarter of a century democracy, sound macroeconomic management and an outward-looking development strategy made substantial strides in the region. If these conquests are consolidated and the same kind of progress is achieved in key development drivers in the next 25 years, many countries in the region could be on the road to convergence.

[1] We define convergence as a process whereby a country’s income per capita starts at or below one-third of U.S. income per capita at any point in time since 1950, and rises to or above two-thirds of U.S. income per capita.

[2] LAC-7 is the simple average of Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela, which account for 93 percent of Latin America’s GDP.

2015 is a pivotal year for global development; this fall is a pivotal moment. Meetings this fall will determine the global vision for sustainable development for 2030.

Three papers being released today—“Action implications focusing now on implementation of the post-2015 agenda,” “Systemic sustainability as the strategic imperative for the post-2015 agenda,” and “Political decisions and institutional innovations required for systemic transformations envisioned in the post-2015 sustainable development agenda”—set out some foundational ideas and specific proposals for political decisions and institutional innovations, which focus now on the implementation of the new global vision for 2030. This blog summarizes the key points in the three papers listed below.

Fundamentals for guiding actions, reforms and decisions

1) Managing systemic risks needs to be the foundational idea for implementing the post-2015 agenda.

The key political idea latent but not yet fully visible in the post-2015 agenda is that it is not a developing country poverty agenda for global development in the traditional North-South axis but a universal agenda based on the perception of urgent challenges that constitute systemic threats.

The term “sustainable development” by itself as the headline for the P-2015 agenda creates the danger of inheriting terminology from the past to guide the future.

2) Goal-setting and implementation must be effectively linked.

The international community learned from the previous two sets of goal-setting experiences that linking implementation to goal-setting is critical to goal achievement.  G-20 leader engagement in the post-2015 agenda and linking the success of the G-20 presidencies of Turkey (2015), China (2016), and Germany (2017) would provide global leadership for continuity of global awareness and commitment.

3) Focus on the Sustainable Development Goals must be clear.

Criticism of the 17 Sustainable Development Goals (SDGs) as being too defuse and too detailed is ill-founded and reveals a lack of political imagination. It is a simple task to group the 17 goals into a few clusters that clearly communicate their focus on poverty, access, sustainability, partnership, growth, and institutions and their linkages to the social, economic, and environmental systemic threats that are the real and present dangers.

The Bretton Woods era is over. It was over before China initiated the creation of the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB). Never has it been clearer than now that maintaining a single global system of international institutions is essential for geopolitical reasons. For the implementation of the post-2015 agenda, all the major international institutions need to commit to them.

In a joint paper with Zhang Haibing from the Shanghai Institutes of International Studies (SIIS), we make five specific governance proposals for decision-makers: 

The implementation of the post-2015 agenda requires that nations internalize the SDGs by debating, adapting and adopting them in terms of their own domestic cultural, institutional, and political circumstances. It will be important for the U.N. declarations in September to urge all countries to undertake domestic decision-making processes toward this end.

2) Presidential coordination committees should be established.

To adequately address systemic risks and to implement the P-2015 agenda requires comprehensive, integrated, cross-sectoral, whole-of-government approaches.  South Korea’s experience with presidential committees composed of ministers with diverse portfolios, private sector and civil society leaders provides an example of how governments could break the “silos” and meet the holistic nature of systemic threats.

3) There needs to be a single global system of international institutions.

China’s Premier Li Keqiang stated at the World Economic Forum in early 2015 that “the world order established after World War II must be maintained, not overturned.” Together with a speech Li gave at the OECD on July 1st after signing an expanded work program agreement with the OECD and becoming a member of the OECD Development Center, clearly signals of China’s intention to cooperate within the current institutional system. The West needs to reciprocate with clear signals of respect for the increasing roles and influence of China and other emerging market economies in global affairs.

4) We must move toward a single global monitoring system for development targets.

The monitoring and evaluation system that accompanies the post-2015 SDGs will be crucial to guiding the implementation of them. The U.N., the OECD, the World Bank, and the IMF have all participated in joint data gathering efforts under the International Development Goals  (IDGs) in the 1990s and the Millennium Development Goals (MDGs) in the 2000s. Each of these institutions has a crucial role to play now, but they need to be brought together under one umbrella to orchestrate their contributions to a comprehensive global data system.

By engaging in the post-2015 agenda, the G-20 leaders’ summits would be strengthened by involving G-20 leaders in the people-centered post-2015 agenda. Systemically important countries would be seen as leading on systemically important issues. The G-20 finance ministers can play an appropriate role by serving as the coordinating mechanism for the global system of international institutions for the post-2015 agenda. A G-20 Global Sustainable Development Council, composed of the heads of the presidential committees for sustainable development from G20 countries, could become an effective focal point for assessing systemic sustainability.

These governance innovations could re-energize the G-20 and provide the international community with the leadership, the coordination, and the monitoring capabilities that it needs to implement the post-2015 agenda.

The tragic and deadly attacks in Paris, the day before leaders were set to arrive in Antalya, Turkey, for the G-20 summit, underlined the divisions that Syria, its fleeing population, and the terrorists of ISIS have created, as fear and short-term political calculations seem to shove aside policies aimed at sustainable solutions to the unprecedented refugee challenge.

It had started on a more hopeful note. Turkey, which chairs the G-20 this year, had placed the refugee issue on the agenda, hoping for a substantive global dialogue while looking for broad-based solutions to the crisis in Syria and the terrorism challenge. No doubt the 2 million refugees in Turkey played a big role, as President Erdogan and other officials tried to rally support for this unusual situation in a variety of G-20 and other venues.

Turkey was supported by another full member of the G-20, the EU, the only non-nation state member of the group, which shrugged off its complacency when hundreds of thousands turned up on its shores in 2015. European Council President Donald Tusk and Jean-Claude Juncker, European Commission president, echoed the Turkish President in calling for a global response: “Meeting in Turkey in the midst of a refugee crisis in Syria and elsewhere, the G-20 must rise to the challenge and lead a coordinated and innovative response… recognizing its global nature and economic consequences and promote greater international solidarity in protecting refugees.”

The G-20 is an imposing group, consisting of the world’s 20 largest economies, accounting for 85 percent of its GDP, 76 percent of its trade, and two-thirds of its population. Established in 1999 and growing in reach since the 2008 financial crisis, it should be a body that carries weight beyond the economic, with effective mechanisms to have impact on the global agenda. Yet, while Syria and the refugee crisis was the first time the G-20 stepped outside its usual narrower economic mandate, the agenda was quickly overtaken.     

The tragedy in Paris highlighted deep divisions over the refugees. Poland’s new government was the first to announce that it would stop participating in the EU resettlement plan whereby it would have accepted 5,000 refugees. Politicians from Hungary, the Czech Republic, Slovakia as well as those with a nativist message from the Nordic countries, France, Germany, and others saw an opening for tighter border controls and a much less welcoming approach to the more than 800,000 refugees that have already made their way into Europe, not to mention the many more on the way. Such views linking refugees to terrorism are not restricted to Europe but can be seen on the other side of the Atlantic, as U.S. presidential candidates and some 27 State Governors declared that Syrian refugees were not welcome.

At this early date, except for a single Syria passport “holder”—a document easily acquired these days, and found near one of the suicide bombing sites in Paris—all those who died or are being sought as suspects are citizens of either France or Belgium. Clearly, there could be some who get into Europe by using the refugees as a cover but with literally thousands of Europeans fighting in Syria, the real threat emanates from the small number of home-grown extremists in Europe who have easy access to the West and a cultural and linguistic familiarity that will elude newcomers for years. This was the same scenario one saw in the Madrid, London, Copenhagen, and the Charlie Hebdo attacks in Paris earlier this year. 

Fear is winning out over policy

The EU also appears in disarray on aiding the 4 million refugees in Jordan, Lebanon, and Turkey. This is significant since it is reduced funding and aid that is leading to the worsening of conditions in Jordan, Lebanon, and Syria, and driving many to Europe. Turkey too is reaching its limits and may potentially face a million or more new refugees if Aleppo falls. Yet funds pledged to these countries remain largely unfulfilled—of the 2.3 billion euros pledged by EU governments, only 486 million are firm government offers. The discussions between the EU and Turkey for additional aid to refugees of 3 billion euros also remain less-than-certain since such aid requires that EU countries agree to receiving and distributing asylum-seekers from Turkey. It also underlines the lack of funding for Jordan and Lebanon.    

In the end, the G-20 yielded little by way of concrete actions on refugees, though additional border controls, enhanced airport security, and intelligence sharing were promised. There was a call for broader burden sharing and greater funding of humanitarian efforts, as well as a search for political solutions. The G-20 also added little to the broad outlines of a potential settlement on Syria discussed in Vienna, Austria, on November 14, 2015, a day before the start of the G-20 summit.

Unfortunately, these are the very things that separate G-20 members among and within themselves. The growing danger is that fear and political opportunism rather than well-thought-out polices will guide the global response to the greatest human displacement tragedy since World War II. It is precisely this fearful and exclusive reaction that ISIS seeks. Indeed, that legacy may live long after ISIS is gone.                           

Event Information

As China presides over the G-20 for the first time, the country has the significant opportunity to impact a system of global governance under increasing stress. At the same time, while enduring the costs and realizing the benefits of its leadership role, China can address critical issues including innovation, global security, infrastructure development, and climate change. Even as China recently has made its own forays into regional institution-building with the launch of the Asia Infrastructure Investment Bank and the “One Belt, One Road” initiative, its G-20 presidency presents a new platform from which the country can advance its own agenda as part of a broader global agenda. As the first and second largest economies in the world, the United States and China can benefit enormously by understanding each other’s perspective.

Think tanks like the Brookings-Tsinghua Center have been playing an important role in this bilateral and multilateral exchange of views. On March 22, in celebration of the 10th anniversaries of the Brookings-Tsinghua Center and the John L. Thornton China Center at Brookings, Tsinghua University hosted a conference to examine how China can realize the 2016 G-20 theme of “an innovative, invigorated, interconnected, and inclusive world economy.” The event began with introductory keynote remarks on the substantive advancements China and the United States have made in think tank development and people-to-people diplomacy, followed by an additional set of keynote remarks and panel discussions presenting Chinese and American perspectives on the G-20 agenda and the state of global governance.

Event Materials

• Chinas G20 Presidency Transcript

For the past several years, international affairs have been analyzed through two lenses. One lens has focused on geopolitics: in particular, the question of how great power relations are evolving at a time of redistribution in the world’s economic and now also political power. The second lens considers the framework of global governance, especially the question of whether or not the existing formal and informal institutions have the tools and the ability to manage complex global challenges.

China's presidency of the G-20 bridges the issues of global governance and great power relations. At a basic level, the G-20 will set a tone for how major powers attempt to tackle the challenges that confront us all.

China’s assumption of the G-20 chairmanship in 2016 marks an important symbolic threshold. It is the first time a major non-Western power will chair the world’s premier body for international economic cooperation—not to mention one of the world’s most important geopolitical bodies, as well. China’s presidency comes at an important time in the substance of the G-20’s agenda, too, as a slowing Chinese economy is integral to the dynamics of an overall slowing global economy. As such, this event offers an opportunity to reflect on geopolitics and global governance—and the way forward. In short, what is the state of international order? 

Heading down a bumpy road?

There is little doubt that we are at an important inflection point in international order. For the past 25 years, the international system—with its win-win economic structures—has been relatively stable. But this order is under challenge and threat, and it is eroding. We risk the rise of a lose-lose international system, encompassing a deterioration of the security relations between great powers, and a breakdown of the basic structures of international cooperation. 

That may be the worst-case scenario, but it is a plausible one. Countries must be vigilant about preventing this outcome. Even though the established powers and the so-called emerging powers (clearly China is an emerged power) may not hold the same views about the content of international order, all sides have a stake in pursuing intense negotiations and engaging in debate and dialogue. It is imperative that parties find a middle ground that preserves key elements of the existing order while introducing some degree of adaptation, such that this order does not collapse.

For the past 25 years, the international system—with its win-win economic structures—has been relatively stable. But this order is under challenge and threat, and it is eroding.

A version of this kind of negotiation may occur later this year. Japan’s presidency of the G-7 will begin just ahead of China's presidency of the G-20, putting important issues into sharp relief. As the older, Western-oriented tool for managing global issues, the G-7 still focuses on global economics but increasingly tackles cross-cutting and security issues. The G-20 is the newer, multipolar tool through which both emerged and emerging powers collaborate—but, so far, members have limited their deliberations to economic issues. The two processes together will reveal the tensions and opportunities for improvement in great power relations and in geopolitics. 

Of particular note is where political and security issues fall on the dockets of these two bodies. Although the G-20 did tackle the Syria crisis at its St. Petersburg meeting in 2013, political and security issues have otherwise not been part of the group’s agenda. But these topics form an important part of the landscape of great power politics and global governance, and they are issues for which we find ourselves in very difficult waters. Tensions between the West—particularly Europe—and Russia are running high, just as disputes are mounting in Northeast Asia. The question of America’s naval role in the Western Pacific and China’s claims of a nine-dash line are serious flash points in the U.S.-China relationship, and we should not pretend that they are not increasingly difficult to manage, because they clearly are.

I believe it is shortsighted for the G-20 not to take up some of these tense security issues.

These are not part of the formal agenda of the G-20, but they should be. Although many economists may disagree with me, I believe it is shortsighted for the G-20 not to take up some of these tense security issues. The group’s argument has been to focus on economic issues, for which there are shared interests and progress can be made, which is a fair point. But history tells us that having difficult, tense issues involving a number of stakeholders leads to one of two scenarios: either these issues are managed in a credible forum, or tensions escalate and grow into conflict. There is no third option. Moreover, these are not issues that can be resolved bilaterally. They have to be settled in a multilateral forum.

In 2016, Japan will take up the issue of the South China Sea in the G-7—a scenario that is far from ideal, since key stakeholders will not be present. Even so, the G-20 refuses to take up security issues, leaving countries without an inclusive forum to deal with these tense security concerns. Of course, they could be raised in the U.N. Security Council, but that is a crisis management tool. We should be building political relations and involving leaders in preventing great power conflict, all of which, by and large, does not happen at the U.N. But it could happen at the G-20. 

With great power comes great responsibility

A better dynamic is at work with respect to the issues of climate change and global energy policy. The Paris climate accords are counted as a major breakthrough in global governance. To understand how the outcome in Paris was achieved, we have to look again at great power relations. What really broke the logjam of stale and unproductive negotiations was the agreement struck between President Xi and President Obama. Their compact on short-lived climate pollutants transformed the global diplomacy around climate change, yielding the broader agreement in Paris.

[G]reat power status primarily entails a responsibility to act first in resolving tough global challenges and absorbing costs.

Why did the U.S.-China agreement on climate change facilitate the Paris climate accords? The United States and China did not impose a framework, nor did they insist on a particular process or stipulate a set of rules. What they did was lead. They acted first and they absorbed costs. This is the essence of the relationship between great power politics and global governance.

Great power status confers a certain set of privileges, not least of which is a certain degree of autonomy. To that end, the United States has avoided multilateral rules more than other countries, and other countries may aspire to that status. But the larger point is that great power status primarily entails a responsibility to act first in resolving tough global challenges and absorbing costs. That is how great powers lead through a framework of global governance. In today’s world, where global governance will necessarily be more multipolar than in the past, we have to find new approaches to sharing the burdens of moving first and absorbing costs. That is, far and away, the most likely way to maintain a relatively stable but continuously adapting international order—one that is empowered to tackle global challenges and soothe geopolitical tensions.