Daily Archives: October 20, 2011

The humiliating death of Muammer Gaddafi, gunned down and apparently dragged through the streets of his home town Sirte, would seem at first sight to be a final punctuation point in the tumultuous change of power in Libya. Another dictator, like Saddam Hussein before him, found cowering in a bolt hole. Finally, Libyans can breathe easier knowing this monstrous and unpredictable figure is gone from their lives.

But his shadow will only be truly lifted if the new Libyan leadership draws the right lessons, not the wrong ones, from his demise. The right lesson is that it is a cathartic moment that clears the ground for Libyan politics to move forward. The wrong one would be to assume that with the death of Gaddafi all those supporters, whose reasons for so tenaciously defending Sirte are now clearer, will fall in line behind the new government in Tripoli. The first statement from interim prime minister Mahmoud Jibril hit all the right notes on reconciliation. But his words have to compete with the powerful image of Col Gaddafi’s body being dragged through the streets. This is much uglier.

The removal of a leader who capriciously threatened his country and its people as if they were his personal property lifts the fear and loathing that had deep frozen any kind of normal politics in Libya for more than 40 years. This now allows a political space free from the fear of disappearance and life-imprisonment that had been the lot of any dissenter for so long. And, given Col Gaddafi’s lingering hold on the minds of his countrymen, nothing less than his very public end was likely to release them from his last padlock on their freedom.

But if the manner of his going is interpreted by part of the country or the region as a crude revenge – as a summary execution not a combat death, let alone the result of a proper justice process – then it could revive, even in death, Col Gaddafi’s power to divide. Martyrs cast long shadows. Those former leaders cooling their heels in The Hague or elsewhere, such as Charles Taylor of Liberia, assorted former Yugoslavian leaders or Manuel Noriega of Panama, are better managed alive than dead, as court exposure of their misdeeds often aids national healing.

But Libya today is where it is: Col Gaddafi is dead. The good news is politics can move on; the question remains how. The leadership of the National Transitional Council has always stressed its temporary character. Now is the time for an act of magnanimity: now its battlefield success is secure, it should form a government of all Libyans, including clans close to Gaddafi and Berber groups who have felt under-represented. There was a long tail to this conflict after Col Gaddafi’s fall, not only because of a residual emotional loyalty but because of the very real stakes his extended kinsmen had in the old system.

When I last visited Sirte, well before the conflict, it showed Col Gaddafi’s beneficence to relatives as well as his capriciousness as a ruler. He had built out the town, once his home village, with fully-fledged ministries, imagining he could make it his Washington. However he had forgotten to include hotels, so had placed many African foreign ministers he was hosting on an Italian cruise ship he had rented for the occasion, an African Union summit. When it looked as though they would vote against his proposal for a united Africa, he briefly tried to ship them out to sea.

This vindictive anger against opponents was felt more seriously by African leaders, who often found he armed and funded their opponents when they opposed him. So with one or two exceptions, few tears will be shed in Africa’s presidential palaces, even though – like all of us – they will be uneasy at the manner of his going. Like his remaining supporters at home, they will want his death to presage a new chapter of reconciliation and healing rather than revenge and score settling. The Arab world, too, will view the violent end of an authoritarian leader who was widely disliked with relief but also disquiet at the violent precedent for regime change in the region.

For Libya’s western backers, particularly France, the UK and US, this is not therefore a moment for euphoria but for quiet relief, and a public call to Tripoli for restraint and reconciliation.

The writer is chairman for Europe, Middle East and Africa at FTI Consulting, and former UN deputy secretary-general.

Concerns about a hard landing resurfaced earlier this week as China reported a lower-than-expected growth rate in the third quarter.

The fundamentals of the country’s economy, however, remain robust. In spite of the problems surrounding small businesses in the south, industrial growth only moderately eased to 10.5 per cent on an annualised basis, from 10.9 per cent in the second quarter. Consumption growth has remained strong.

The real estate sector is the only domestic sector that has significantly lost steam. Among the 70 cities the National Bureau of Statistics monitors, housing prices did not change in September from August in 29 cities and declined in 17. Thus growth in investment in real estate fell 16.5 per cent annualised, from 22 per cent in August.

The slowdown of the property sector is a result of the government’s efforts to control prices. Inflated prices not only prevent ordinary people from owning a home, but also discourage investment in the productive sectors, engendering China’s future growth. The stabilisation of property prices should therefore be a welcome sign.

The real cloud hanging over China now is the slowdown of exports. The sector grew only 17.1 per cent annualised in September, considerably lower than the 22.7 per cent rate in the first three quarters combined. Growth in imports also fell back, but at a slower pace than export. Hence, the slowdown in the third quarter was entirely caused by the drop of net export.

The prospects for exports are not optimistic for the current quarter and beyond. News from the upcoming Canton Fair, the most important trade fair in China, suggests that the volume of overseas orders will probably be flat on last year.

While the current mood of the market is that a hard landing is a distant possibility, this optimism could well be proved wrong if Europe sinks further or the situation in the US worsen. Problems in these economies are clearly weighing on the Chinese economy.

But this is not the first time that China is feeling the pain of external shocks. The situation today resembles what happened in the mid-1990s. The inflation rate reached 24 per cent in 1994, prompting the government to launch a serious austerity programme to curb domestic expansion. It could have been a soft landing if the Asian financial crisis had not happened. But it did, and it took a serious toll on China with several painful years of deflation.

Despite all the years spent calling for structural adjustments, the Chinese economy still relies heavily on the export sector to generate growth. The slowdown in global demand should be a loud wake-up call for China to take real action to rebalance its economic structure. The robust growth of the domestic sectors amid the global weaknesses is an encouraging sign that healthy growth can be maintained by the country’s economy.

The writer is director at China Center for Economic Research at Peking University

Response by Kerry Brown

China’s economic model is still a work in progress

Nine per cent growth, in the current circumstances, is pretty astounding. Especially in view of the overall target under the current five-year plan that’s aiming for a more modest seven per cent growth over the period to 2015.

The days of double digit increases were always going to come to an end – it is remarkable they continued as long as they did. For housing, the government’s measures look like they will work – restricting properties people can own, trying to cool the market down, and avoiding what one speculator called “the mother of all asset bubbles”.

For exports, again, the surprise is that there are no surprises. Where exactly, in the current straightened circumstances in the European Union and the US, are Chinese going to send their goods? Recent reports suggest that some manufacturers are even shifting production back to developed markets because it is becoming cheaper. Government subsidies over factors of production such as electricity, water, land are coming to an end in China – as are cheap labour costs.

The period in which China weans itself off the need to have export-led growth has begun – and surely that, at least, will cool some of the political heat about China’s booming deficits in the EU and US in particular.

Is there real evidence yet that China’s sleeping domestic consumer market is about to stir awake? That has been the big hope since 2008. But those middle class purchasers of Chinese and imported goods remain as illusive as ever. Yao Yang is right – for the export market to diminish, locals need to step in and fill the gap. But so far, there is little sign that this is happening.

Chinese remain as worried as ever about healthcare costs, education costs, and paying their mortgages. The ambition to create a strong enough social welfare system to give some certainty to people in these areas is still just that – an ambition. China’s pension problems, while so far concealed, are more frightening than those the west confronts – which is really saying something.

The current trade data are fascinating because they represent a work in progress – the gigantic shift towards a more mature economic model, and greater balance. But on this latest set of data, for the long term, the new leadership coming in late next year really have their work cut out. They have to implement the major realignments that are necessary for China to take its economic development to what it itself states is the next stage – middle income level status by 2020.

The writer is head of the Asia programme at Chatham House, leading the Europe China Research and Advice Network. The views here are the author’s own and do not reflect those of the EU.

That China’s third quarter growth rate of 9.1 per cent, just marginally below forecasts, would spark a sell-off in the markets says a lot about the gloomy state of the global economy. Analysts have not yet decided whether a rate below expectations is good or bad, given the concerns about inflation.

Some have focused on the minor changes in sector growth patterns; evidence that China is finally rebalancing, with consumption rising relatively faster than output; and signs that fixed investment is becoming more judicious, with a slowdown in property development. While the general sense is that macroeconomic policies do not need major adjustments, globalists tend to worry more about whether China will continue to be a strong source of demand given the weakness of the US and eurozone economies.

Ostensibly, Beijing’s goal is to manage a “soft landing”. But even at home, many have not fully accepted the premise of the current five-year plan that slower, but higher quality growth, averaging seven per cent, is better. Skeptics believe that this target is no more credible than the 7.5 per cent target (compared with the actual 11 per cent achieved) in the just-completed plan.

Many recognise that slower growth would be more environmentally sustainable. Yet some vested interests still feel that these are issues for richer, more developed countries.

Thus making a credible case that seven per cent growth is better than ten means challenging the traditional objectives that have preoccupied China’s leaders during the post-Mao reform era. Two targets have been sacrosanct – price stability and employment generation – with the understanding that rapid economic growth makes them more achievable.

But times have changed. Keeping prices stable was much simpler when the main concern was providing access to a range of basic consumer goods at affordable prices. Having become the world’s assembly plant for such items has solved that problem. Instead, the current bout of inflation stem from the demand of a rising middle class for a varied diet of modern goods and services that are more costly to provide. Part of this is driven by the search for housing in cities where real estate prices have surged with urbanisation and speculative pressures. Pushing the economy to grow too fast will make it only harder to maintain price stability in the future.

However, employment generation made considerable sense when the stock of surplus labour in the countryside and in bloated state enterprises had to be absorbed by a small, but expanding, private industrial sector. China had to grow out of its past distortions and inefficiencies. But its employment needs today are quite different from those a generation ago. Faced with a declining labor force due to a rapidly aging population, creating copious, but relatively low-skilled, jobs is no longer the priority. The focus now is on fewer, but higher value-added, positions.

On both scores, Beijing and the rest of the world need to be more relaxed about China’s declining growth rates, provided that the process is managed well – which, of course, is a big if.

The writer is a senior associate at the Carnegie Endowment and a former country director for the World Bank in China

Response by Jonathan Fenby

Cast your mind back a couple of years. The world’s second biggest economy was growing at an unsustainable rate. Exports, the pundits and the markets agreed, had recovered too well from the late 2008 downturn. Property and infrastructure spending under the stimulus package launched in response to the dip was too high and badly allocated. The accompanying credit boom was producing excess liquidity and a plethora of impending bad loans. Then inflation more than doubled from the two to three per cent China had enjoyed for much of the first decade of this century.

Now consider what we have today. Growth is slowing. The property market has cooled. The authorities have put the brake on credit growth. Though inflation is still 6.1 per cent and will remain a structural problem until Beijing reforms agriculture, consumer prices seem to have peaked.

That might appear to be a success story. But, as Yukon Huang writes, times have changed. Markets and the media prefer the bad news story, so that a 9.1 per cent growth rate is cause for concern. The expanding trade surplus in the second and third quarters is ignored, while the fall in export growth is highlighted.

On top of this, China, as the nation which has benefited so much from globalisation, cannot avoid being caught up in the deep uncertainties about the eurozone and the US – and fears about the effect on the People’s Republic despite efforts to diversify its export markets.

A recession in the developed would, of course, be a major blow. But a sense of proportion is needed. The current account’s share of gross domestic output has fallen from 20 per cent in the middle of this decade to ten per cent in 2007, and to five per cent last year. Yes, small private sector companies face a potentially crushing combination of rising wages, credit curbs and late payment by western buyers as highlighted in a stream of reports from the manufacturing hub of Wenzhou. Two dozen firms are reported having gone bust. No doubt the true figure is much higher compounded by the contagion effect of lending between individuals and firms in the shadow banking sector, but there are anywhere from 250,000 to 400,000 enterprises in the city.

If China faces a serious downturn, its leadership will take remedial action as it did in late 2008, probably by selective stimulus measures. That may introduce distortions and create a fresh set of problems. But it is the way the last major Communist-ruled state on earth operates.

The writer is China director at Trusted Sources

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