Monthly Archives: March 2013

In 2005 Robert Zoellick, as US deputy secretary of state, proposed that China might play the role of a “responsible stakeholder” in helping to shape the international agenda. But despite its meteoric rise, most observers now do not see Beijing playing this role. China is often seen as uncooperative on issues ranging from trade and investment flows to intellectual property rights, climate change and the acquisition of natural resources. This has created the impression that Beijing is more inclined to use its clout to advance core interests than strengthen partnerships.

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There has been all sorts of hysteria surrounding Cyprus.

First, it was Cyprus’s potential eurozone exit and the contagion that would cause. Next it was the prospect of a Moscow-led bailout that would transform Cyprus into a Russian beachhead. Then there was talk of revenge, with a former Kremlin adviser, Alexander Nekrassov, warning if there were a large levy on wealthy Russian depositors, “then, of course Moscow will be looking for ways to punish the EU.”

Such a levy has now come to pass. An 11th hour deal spearheaded by Germany has left Russia on the sidelines—and wealthy Russian depositors in Cyprus’s two largest banks holding much of the bag. By not leading the bailout, Russia had a lot to lose: with more foreign direct investment coming into Russia from Cyprus than from any other country, the island is Russia’s most important tax haven. The Cyprus bailout effectively ends Cyprus’s stint as a hub for Russian money—and leaves much of that money frozen via capital controls. There was plenty to gain by stepping in: in return for Russian assistance, Cyprus was offering access to offshore gas deposits or a warm-water port. (Russia’s main point of access to the Mediterranean sea is through ports in Syria — an investment that appears increasingly shaky.)

All of this underscores how unwilling Moscow was to lead. Indeed, Russia will continue to be far less likely to get involved than is widely assumed.

Economics explains some of this reluctance. Moscow is under real pressure, with a budgetary process that is only getting rockier, and rising unemployment. The notion of a Cyprus deal was never going to fly for the Kremlin, as it was largely perceived as throwing good money after bad. Rather, the Russians are — as the Chinese have been doing in Greece — waiting for select assets at a bargain price. It is a “buy low” approach and it is a safe bet that Cypriot assets will become more affordable.

There were also political motives staying Vladimir Putin’s hand. In his State of the Union address in December, Mr Putin emphasised his “deoffshorisation” program, declaring: “The offshore nature of Russia’s economy has become a household term. Experts call this escaping the jurisdiction. We need a comprehensive system of measures for the deoffshorization of our economy.” Against this backdrop, bailing out offshore accounts would have been quite awkward. The wealthy Russians who he would be bailing out are one of his most loyal constituencies: they are thorough Putinists, and the current political landscape offers them no other outlet for their allegiance. When it comes to broader domestic opinion, any other Russians who were actually paying attention to the issue likely approved of Mr Putin’s performance. He was vocal in his protests against any plan that would hit Russian depositors but when the time came, he walked away from the table.

But what about those Cypriot assets? They came with untenable strings attached. The Cypriot gas fields have unproven volumes and carry territorial disputes with Turkey, a headache Mr Putin does not need. A warm-water port in Cyprus could have led to a geopolitical spat with the EU, which he has every reason to avoid.

And it is that desire to avoid a deeper confrontation with the EU that makes any talk of Russian retribution at the EU’s expense highly unlikely. Yes, the relationship will be hurt -the Russian elite blames the EU for procrastinating before addressing the crisis and for shortchanging its interests — but the damage will be contained. As far as we can tell at this stage, the outcome could have been worse for Russia had all Cypriot banks been targeted, rather than just two. Russia’s largest trading partner remains the EU; Moscow is dependent on revenues from gas sales to Europe. The bottom line: Moscow has far more to lose than gain from aggressively reacting to the crisis. Mr Putin seems well aware of this, telling his government to begin talks on restructuring Russia’s €2.5bn loan to Cyprus.

Has Cyprus reignited the regional debt crisis, pushing the eurozone to the brink of collapse and risking a potentially destabilising change in the geopolitical order? Or is the country, with only a million people and accounting for 0.2 per cent of the region’s gross domestic product, a small problem that could be solved within days?

These are the two dominant narratives for Europe’s latest woes. And after being caught by surprise by developments on the ground, analysts and market participants have rushed in the last week to choose among what appears to be two competing interpretations involving opposing predictions.

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Over the past three years the EU has shown a remarkable facility for turning problems into crises and crises into catastrophes. Last summer it seemed that a new leaf had been turned. Mario Draghi, the European Central Bank president, pledged to do “whatever it takes” to stabilise the euro, and the fairly rapid agreement to establish a banking union seemed to be another positive step forward.

But it now seems this dawn was false. The Cyprus crisis has caused the rock to roll back down the hill. Like Sisyphus, the eurozone’s policymakers must now begin pushing it back up.

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Beyond the headline-grabbing combination of a penny off a pint of beer and the partial creation of a British variant of Fannie and Freddie, there is a deeply-disturbing subtext to the fiscal arithmetic in Wednesday’s UK Budget. It reflects an admission from the Office for Budget Responsibility that the underlying growth rate of the UK may be weaker than had been previously assumed.

True, the OBRs central projections contain the usual medium-term optimism, with an ugly duckling 0.6 per cent growth rate in 2013 transformed into a swanlike 2.8 per cent growth rate in 2018. Nevertheless, the OBR admits that “a key risk is that potential output turns out to be lower at the end of the forecast than we currently assume”, a result that might have devastating consequences for the budgetary arithmetic.

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Europe badly needs some good news to reverse the recent negative outlook revisions. Reports over the past few weeks have been rather bearish. The European Commission and lately the European Central Bank have downgraded their growth forecasts for the whole eurozone over the next two years. The Italian election results have made it even harder to govern the country for the coming weeks and months, which is likely to further discourage consumption and investment. The Cyprus bailout plan may lead to renewed contagion in peripheral countries.

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There is a caricature of America’s “pivot” to Asia and it goes something like this: the Middle East and south Asia are the graveyard of US power and prestige and Washington must cut its losses to these ungrateful nations as quickly as possible and turn its full attention to the21st century that is playing out on more peaceful and profitable shores in the Asia-Pacific region. This concept of the pivot is posited not only to be in American interests but is also the supposed preference of most Asian nations.

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The publication last week of the budgets of Republicans in the House of Representatives and Senate Democrats demarcates the political debate in Washington. Though all the press coverage is about the differences between the two proposals, there is also remarkable convergence. Some of that convergence is good news. Other aspects of the convergence threaten the future of the US as a dynamic society.

While short-term debates over macroeconomic strategy are important (how fast to shrink the deficit, for example), America’s economic future will be determined mainly by the longer-term direction of the budget. I will therefore compare the proposals of the two parties in terms of where they would like the US federal government to be in 2023, one decade from now.

On the revenue side, despite all of the apparent differences between the parties, both proposals come down to almost the same share of national income in 2023. The Republicans are at 19.1 per cent of gross domestic product, the Democrats at 19.8 per cent, and the current law at 19.1 per cent. There will be great Sturm und Drang about taxing the rich (Democrats) and lowering tax rates for growth (Republicans) but there is little practical difference in budget terms. Both parties follow the status quo: no big changes in tax collections as a share of GDP relative to the current tax system.

There is similar agreement on overall discretionary spending, the part of the budget other than social transfers and interest. Discretionary spending is being shrunk to historically low levels as a share of national income. Discretionary spending in 2013 (defence plus non-defence) now totals about 7.6 per cent of GDP. In the Republican budget, this total falls to 4.7 per cent of GDP in 2023. In the Democrats’ budget it falls to 4.9 per cent.

Despite the bold talk of the Democrats about the role of activist government in investing in America’s future, there is little substance behind the rhetoric. Their budget cuts non-defence discretionary spending from 3.7 per cent of GDP in 2012 to 2.5 per cent in 2023. And despite the Republicans’ bold talk about standing behind the military, their defence budget falls from 4.1 per cent to 2.5 per cent in 2023.

The larger difference between the two parties lies in the mandatory side of the budget, though even there it is easy to exaggerate the differences. The Republicans want to cut various transfer programmes for the poor, notably the Medicaid health programme; and of course to repeal President Barack Obama’s healthcare act. The Democrats stand behind these social programmes. The difference is 11.9 per cent of GDP in mandatory outlays in 2023 in the Republican budget compared with 14 per cent in the Democratic budget.

The final difference is in the trajectory of debt. The Republicans aim for a balanced budget by 2023, which leads to a sizeable reduction in the debt-to-GDP ratio, from 77 per cent of GDP in 2013 to 55 per cent in 2023. The Democrats instead aim for a budget deficit of 2.2 per cent of GDP in 2023, and a deficit trajectory that stabilises the debt-to-GDP ratio at about 70 per cent. In essence, the Republicans slash healthcare for the poor and reduce the debt-to-GDP ratio as a result, while the Democrats stabilise the ratio to finance these health programmes.

What conclusions can be drawn for these comparisons? First, the histrionics are in large part melodrama. The Republicans and Democrats are broadly on the same course apart from healthcare for the poor. From a global perspective, both parties would be considered on the centre-right of the political spectrum.

Second, the days of the US as the world’s policeman are coming to an end. While America’s military capacity is still far and away the largest in the world, the budget will limit its capacity to undertake adventures such as the wars in Iraq and Afghanistan. It is no coincidence that Mr Obama is shying away from direct engagement in Syria. That is as much fiscal constraint as foreign policy choice.

Third, both parties have accepted the declining role of federal government in domestic economic problem-solving. The Democrats have a list of initiatives in education, infrastructure, clean energy and other areas, but these are very small in macroeconomic terms, more than zero but far too small to make a national impact on America’s large economy. The Democratic budget, for example, calls for a new infrastructure bank capitalised at $10bn, which comes to all of 0.06 per cent of GDP, when the estimated backlog of infrastructure replacement and renovation runs to several trillion dollars.

Each observer will have different attitudes towards the budget convergence. My own are the following. I am glad the two parties are focusing on stabilising, if not reducing, the debt-to-GDP ratio. This is salutary. The differences do count. The Republicans are truly cruel to propose balancing the budget by cutting healthcare for the poor, while the Democrats are shortsighted to plan for sizeable budget deficits rather than consistently higher revenues as share of GDP.

I am absolutely delighted that the military-industrial complex is finally on the chopping block. The recent military adventures have been expensive and destructive tragedies. America can be safe, indeed safer, at much lower levels of military outlays. Yet the cuts in future defence spending are by no means guaranteed. The military lobby is relentless.

I worry deeply about the bipartisan squeeze on public investments in infrastructure, science and technology, education and job skills. Both parties, averse to taxation, have failed to appreciate the scale of public investment needed. The two parties have converged on a massive underinvestment in America’s future.

The writer is the director of The Earth Institute at Columbia University in New York and author of ‘The Price of Civilization’

Europe’s economic situation is viewed with far less concern than was the case six, 12 or 18 months ago. Policy makers in Europe far prefer engaging the US on a possible trade and investment agreement to more discussion on financial stability and growth. However, misplaced confidence can be dangerous if it reduces pressure for necessary policy adjustments.

There is a striking difference between financial crises in memory and financial crises as they actually play out. In memory, they are a concatenation of disasters. But as they play out, the norm is moments of panic separated by lengthy stretches of apparent calm. It was eight months from the South Korean crisis to the Russian default of 1998, six months from Bear Stearns’ demise to Lehman Brothers’ fall, and there were several 30 per cent stock market rallies between 1929 and 1933.


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Lawrence Summers

Is Europe out of the woods? Certainly a number of key credit spreads, particularly in Spain and Italy, have narrowed substantially. But it is far from clear that market conditions have improved. Investors are still limited. Restrictions limit the ability of pessimistic investors to short European debt. Regulations enable local banks to treat government debt as risk-free. This allows them to access funding from the European Central Bank on non-market terms. And there is the suspicion that, in extremis, the central bank would come in strongly and bail out bond holders. Remissions are sometimes followed by cures and sometimes by relapses.

A worrisome indicator in much of Europe is the tendency of stock and bond prices to move together. In healthy countries, when sentiment improves stock prices rise and bond prices fall, as risk premiums decline and interest rates rise. In unhealthy economies, as in much of Europe today, bonds are seen as risk assets, so they move just like stocks in response to changes in sentiment.

Perhaps it should not be surprising that Europe still looks to be in serious trouble. Growth has been dismal, with eurozone gross domestic product still below its 2007 level. Forecasts predict little, if any, growth this year.

For every Ireland, where there is a sense that a corner is being turned, there is a France, where the sustainability of current policy is increasingly questionable.

The controversy surrounding the decision by European authorities to conduct a bail-in that imposes levies on Cypriot bank depositors gives an indication of the degree of fragility in Europe. The idea that converting a small portion of deposits into equity claims in an economy with a population barely over 1m could be a source of systemic risk suggests the current situation rests on a hair trigger.

All of this is compounded by political uncertainty. Italy’s election was inconclusive even by its own standards. Scandals and staggeringly high unemployment are taking their toll in Spain. France is much calmer about its situation than are many outside observers. And Germany’s primary concern is avoiding turmoil before federal elections in September. There is little doubt that, given a choice, all eurozone countries would prefer almost any kind of macroeconomic unorthodoxy to the breakdown of monetary union. But this is insufficient. There is the serious risk that as nations pursue parochial concerns, the political and economic situation will deteriorate to a point that is not remediable.

Structural reform in the most troubled economies is essential, and the work of building a stronger institutional foundation for monetary union must go on. But the key to success will be the recognition that in economic policy – as in life – what is good for one is not good for all.

It is true, as German policy makers constantly point out, that fiscal consolidation and structural reform were key to Germany’s rise from being the “sick man of Europe” to its current position of strength. What they do not recognise is that there cannot be exports without imports. Germany’s export growth and huge trade surplus were enabled by borrowing by the European periphery. If the debtor countries of Europe are to follow Germany’s path without economic implosion there must be a strategy that assures increased external demand for what they produce. This could come from a German economy that was prepared to reduce its formidable trade surplus, from easier monetary policies in Europe that spurred growth and competitiveness, or from increased deployment of central funds such as those of the European Investment Bank.

Invocation of necessity is not a strategy. As any student of Germany’s experience of the 1920s knows, requiring a nation to service large debts by being austere in a context where there is no growth in demand for its exports is far from being a viable strategy.

European policy makers, the International Monetary Fund and external policy makers with a stake in the European outcome need to recognise that the history of financial crises is a history of missed opportunities. New business is always more exciting than unfinished business. And where matters are controversial, forced moves are easier for policy makers than unforced moves because they can be portrayed as moves of necessity rather than choice. So outsiders avoid confrontation and insiders embrace drift. The consequences could be grave.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

Having stressed publicly that Greece was an exception and that no other rescue would impose losses on senior private creditors, European officials embarked this weekend on a controversial path for Cyprus. They did so for understandable reasons, which they will argue are unique. Yet the specifics of the rescue will bring implementation challenges that will undermine its effectiveness and may lead to negative side-effects.

Early Saturday morning, European officials stunned Cypriots by announcing that part of the burden of rescuing the country would be borne by bank depositors. When banks reopen on Tuesday, all account holders will have their savings reduced by 6.75 per cent to 9.9 per cent, depending on the size of their deposits. In exchange, they will receive an out-of-the-money equity claim on banks.

This constitutes a notable expansion in the EU’s application of PSI (private sector involvement).

In addition to committing €10bn of bilateral and multilateral assistance to support a new austerity package, officials went beyond the Greek precedent of restructuring government bonds (and in isolated cases wiping out junior and subordinated bank bond holders) and extended burden-sharing further.

I can think of at least four reasons that led influential European countries to impose on Cyprus what they previously deemed as improbable if not unthinkable.

The scale of the problem and its concentration in the banking system: Like Ireland a few years ago, Cyprus has been brought to its knees by irresponsible banking. In entrusting funds to Cypriot institutions, depositors (and especially foreign depositors) inadvertently funded the over-extension of the banking system, both domestically and abroad. Now they are being forced to contribute to the bail out.

Lax banking regulation: At a time of renewed emphasis on sound banking worldwide, officials have questioned publicly whether Cypriot banks have intermediate funds with dubious origins. By killing once and for all the notion that Cyprus is a safe and lax offshore haven, the levy serves to limit such intermediation in future.

The alternatives seemed worse: As explained in a frank statement by the Cypriot government, the country had run out of easy options. Impossibly tough choices had to be made among local constituents, including pensioners, wage earners, companies and, of course, depositors.

Countering moral hazard: European hardliners have been increasingly worried about the complacency that has spread in struggling countries following the dramatic involvement of a “whatever it takes” European Central Bank. This weekend’s decision serves as a wakeup call to other struggling European economies, which wrongly believe that the solution to their problems has been outsourced to the ECB.

These are all valid reasons. As such, I am puzzled less by the decision to extend PSI to depositors and more by how it has been done. Specifically:

By choosing to include all deposits and not just the large ones, thus penalizing all segments of the population, officials opted for a highly regressive approach that also undermines the traditional construct of deposit insurance schemes around the world.

By limiting the levy on large accounts to just 9.9 per cent, officials will raise insufficient funds for Cyprus while encouraging remaining deposits to flee the country, thus increasing the likelihood of a second PSI down the road.

If this is correct, the specifics of this weekend’s agreement risk becoming part of the problem rather than a solution for Cyprus.

In Cyprus, they would fuel a private liquidity implosion and more acute credit rationing. They would also risk triggering a disruptive political backlash and social unrest.

In Europe, they could well undermine the recent tranquil behavior of depositors and creditors in other vulnerable European economies – in particular Greece, Italy, Portugal and Spain. Despite assurances from European officials that Cyprus is “exceptional” and the measures are “unique,” this weekend’s actions have increased the risk premium. They will also add to the disillusionment of an increasing of Europeans with the traditional political order and parties.

More generally, the actions will test the faith that global investors place in central banks’ ability to offset political surprises and, thus, enable and protect an endogenous process of economic and financial healing. Since this comes at a time when many risk markets’ assets appear technically over-bought, they could also prompt pullbacks in asset prices.

European officials were right to look for a bold approach for Cyprus. But in compromising excessively on critical design elements, they risk ending up in the disruptive muddled middle: not going far enough to solve the country’s problems, and not being sufficiently careful in containing potential negative externalities.

Few would have predicted the Vatican would beat the International Monetary Fund in electing a non-European as its leader. The considerations that reportedly led to the selection of Argentina’s Jorge Mario Bergoglio – now known as Pope Francis – will resonate well with those who feel the IMF has been increasingly short-sighted in holding on to an outdated nationality-based approach for selecting its managing director.

The ascendancy of Pope Francis is widely seen as an explicit recognition that Europe no longer dominates the Catholic church, and as consistent with a shift in dynamism and numbers in favour of the developing world. It is also an attempt to bring the perspective of a relative outsider to a church whose insularity is believed by many to have undermined its credibility. Finally, it is expected to facilitate renewal at a time when many are looking for inspiration and enlightenment.

The essence of these arguments is similar to those made to encourage the IMF to move decisively from its nationality-based approach – which has ensured only Europeans have led it since its creation in 1944 – to one that is genuinely open, transparent and merit-based.

Europe no longer dominates the global economy. If anything, it has become the biggest source of systemic risk in recent years. Meanwhile, developing countries have significantly outperformed, both economically and financially, with some gaining systemic influence greater than that of several European economies.

The continent is seen by many as having co-opted the IMF to support an insufficiently objective approach to solving Europe’s own problems. Moreover, the fund has appeared shy in conveying important lessons learnt in previous developing economy debt crises. Indeed, officials from Africa, Asia and Latin America complain about its outmoded adherence to a one-way flow of best practices.

In the past, western governments showed little restraint in using the IMF as a vehicle for giving advice to (and imposing conditionality on) emerging economies. But now they themselves face persistent problems, the IMF appears hesitant to engage the whole membership in formulating advice, let alone to act as a conduit for suggestions from developing to advanced countries.

Then there is the relative void at the centre of the global system. After the high reached in April 2009 at the London meeting of the Group of 20 leading economies, global policy co-ordination has diminished to a worrying degree – especially when judged against the complexity and fluidity of today’s global economy.

All this has served to undermine the credibility and effectiveness of the IMF – at a time when the interlinked nature of the world’s economies is substantial. Just witness the currency tensions associated with the widening pursuit of unconventional monetary policies.

The IMF should not wait for the end of the tenure of Christine Lagarde, its managing director, to reform the selection process comprehensively. Indeed, as illustrated in the two previous occasions when governments had to scramble to choose a new managing director after incumbents resigned, a proper revamp cannot be undertaken in the midst of intense political posturing and electioneering.

Using the Vatican’s achievement as a catalyst, Ms Lagarde should calmly start the process now, especially as she is not even midway through the first of her potential multiple terms. Already, she has shown her willingness to do the right thing even when this risked upsetting western officials (warning about the fragility of European banks, for example, and telling US Congress that its dysfunctional behaviour was threatening the global economy).

With the help of outside experts, she could spearhead a lasting revamp that decisively places merit above nationality. This would also allow for changes to rules that preclude highly qualified candidates from making it to the final rounds (such as the arbitrary age limit that in 2011 derailed the Israeli central bank governor Stanley Fischer, a respected monetary official who has excelled at both the national and multilateral levels).

Even better, such changes would come at a time when political squabbles in America’s Congress risk derailing implementation of the marginal adjustment to the IMF’s voting and representation agreed in 2010.

We should not underestimate the role such a move could play in enhancing the integrity and effectiveness of the IMF.

The writer is the chief executive and co-chief investment officer of Pimco


This session of National People’s Congress will be more memorable for the fact that it marks the transition to the next generation of senior Chinese leaders than for any pronouncements. Premier Wen Jiabao will pass his mantle to Li Keqiang at a time when stalling growth, widening wealth disparities, pervasive corruption and mounting social unrest mean people are anxious for change.

Whereas Mr Wen took a populist approach on taking office a decade ago, emphasising the needs of the rural economy, Mr Li will embrace an ambitious urbanisation programme as the solution for China’s many ills. For the premier-designate, this is more than just a growth driver – it is the key to addressing many of the country’s challenges, from inequality and environmental degradation to exploitative land grabs by local officials.

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David Cameron and the UK’s Office for Budget Responsibility may have their differences of opinion on the negative impact of fiscal austerity but at least they appear to see eye-to-eye on the effects of monetary policy. Since the Conservative-Liberal Democrat coalition came into office in May 2010, the OBR has persistently projected a return to decent economic growth thanks to the supposed benefits of monetary stimulus, a view shared by the Bank of England and, indeed, by the government’s political strategists. Austerity might be painful but, with thanks to monetary stimulus, the sunny uplands were supposed to be within reach long before 2015, the year in which the coalition reaches its sell-by date.

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Revelations last month of epidemic levels of Chinese military attacks into internet-based systems and networks have only confirmed long-held suspicions. Indeed, it appears that no country, company or citizen is safe from unwanted intrusions by shadowy China-based organisations with spy-novel worthy identifiers such as People’s Liberation Army unit 61398. In the wake of these public assertions, there has been much hand-wringing about how the US and other affected nations must “hit back” against suspected online snooping and unauthorised high-technology assaults.

But just how to do that? Despite the fact that these attacks emanate from purportedly military facilities, their remedy does not lie in applying traditional military responses such as retaliation and deterrence.

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The next few monthly jobs reports, including this Friday’s, will be watched especially closely to assess the balance in a rather unusual tug of war that has developed in Washington: between a dysfunctional Congress set on creating headwinds to a slowly-recovering US economy, and a central bank willing to roll out one untested measures after the other in its attempt to steer the economy towards higher growth and more robust job creation.

The “sequestration” is, of course, the latest example of America’s self-made obstacles. This set of blunt budgetary cuts, which automatically went into effect this week due to Congressional inaction, will add another fiscal drag of 0.5 percentage points off gross domestic product in 2013. Coming on top of January’s tax increases and recovering (but still-weak) endogenous growth drivers, this will serve to again limit the annual growth rate of the economy to 2 per cent or less – and do so without involving a rational and durable reform to America’s medium-term fiscal dynamics.

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[Hugo] Chávez was an outstanding leader of Venezuela, and a good friend of the Chinese people,” noted China’s foreign ministry on Wednesday. Whatever personal sorrow might be felt in Beijing this week, China’s regret at the strongman’s passing is founded largely on worries over the future of economic relations with his government.

Those relations have grown considerably in recent years. According to Matt Ferchen, a scholar at the Carnegie-Tsinghua Center for Global Policy, the China Development Bank has cut loans-for-oil deals in Venezuela over the past five years that account for some 60 per cent of all China’s exposure in Latin America. In 2012, Venezuela made payments on the $42bn loan by sending China an average of about 300,000 barrels of crude oil a day.

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Given the political and ideological polarisation between Barack Obama and congressional Republicans, there are few potential areas for action on US legislation both sides can agree to. One area where both sides believe they have something to gain is on reforming American immigration laws.

The economic argument for allowing more immigration is strong. Manufacturers and high-technology businesses have long complained about the paucity of visas for highly skilled foreigners. An October 2012 study by the Kauffman Foundation found that a quarter of engineering and technology companies founded between 2006 and 2012 had at least one key founder who was foreign-born.

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An apparently obvious conclusion from last month’s Italian elections is that citizens – ie, voters – don’t like austerity programmes. The question that voters, especially in Italy, may not yet have reflected upon is what is the alternative in order to reduce the excessive burden of the debt, public or private, which has been accumulated over the past. There are at least three choices.

The first is to inflate away the debt, through the central bank buying large amounts of risky assets, thus socialising the losses, and keeping interest rates low, so as to reduce the real value of the debt. Some central banks around the world are indeed trying to pursue such an avenue, but the success is yet to be proven. In Europe this solution is prevented by the agreement that the member states reached at the launch of the euro that the European Central Bank should be independent and conduct monetary policy with the primary objective of pursuing price stability.

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John Kerry’s maiden voyage as US secretary of state includes four stops in the Middle East: Egypt, Saudi Arabia, the United Arab Emirates and Qatar. As the saying goes, he has only one chance to make a first impression – and what is said and not said on this visit will have repercussions for years to come.

Stopping first in Egypt made sense given its centrality to the Arab world and its continuing turbulence. It is impossible to know with certainty the message Mr Kerry conveyed in private to his hosts. But one hopes he introduced a sense of strict conditionality into US policy. The aim should not be that President Mohamed Morsi and his government succeed no matter what. Rather, US policy should be that Washington is prepared to work with and on behalf of Mr Morsi and a Muslim Brotherhood-led government only so long as they demonstrate a sustained commitment to pluralism at home – and to acting as a reliable partner abroad, be it with regard to Israel, Iran or Hamas.

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A prosecution at the International Criminal Court in the Hague of Kenyan political leaders allegedly responsible for the election violence that cost more than 1,000 lives and left 700,000 people displaced in the last presidential election was intended to stop it happening again. Instead it has become the flashpoint that may set off new violence after Monday’s elections.

Two of the leaders indicted by the ICC Chief Prosecutor, Uhuru Kenyatta and William Ruto, led rival Kikuyu and Kalenjin ethnic groups whose followers’ subsequent clashes caused most of the deaths in 2007 and 2008. Initially as a defensive tactic, these political rivals combined. Now their alliance is snapping at the heels of long-time front runner Raila Odinga, the outgoing prime minister widely thought to have been cheated of the presidency last time round. A campaign based on a powerful emotional appeal by Mr Kenyatta and Mr Ruto against western interference and the much pilloried Dutch-based court has turned an election that should have been about the extraordinary economic and social challenges Kenya faces into a referendum on the west and its purported preferred candidate, Mr Odinga, for pursuing justice against these two relaunched home town heroes.

The outcome remains in doubt and is likely to go to a second round, not least because those long excluded by Kikuyu-led governments are not swayed by this message. But what this reframing of the election has already done is reinforced tribal voting blocs that an increasingly urbanised and middle class Kenya might have been expected to be leaving behind, and put huge strain on a revamped justice and electoral system. Kenya’s chief justice has publicly complained of threats against himself and colleagues by Kikuyu-linked groups. So confidence is shrinking in the ability of the authorities to either count the vote honestly or keep the peace.

Resisting a return to violence and electoral manipulation is a surging Kenyan civil society that is employing mobile phone apps (Kenya is the pioneer of mobile banking) and 30,000 poll-watchers to monitor the results. Indeed the emergence of a strong national human rights movement is one of the happier consequences of the last election. A further reason for some optimism is that the two of the alleged principal culprits of the violence last time are partners in this election. This will hopefully mean violence will not flare up between their followers.

Whether or not Kenya struggles through Monday and a likely second round in April, real damage has been done to the ICC and its mission of securing accountability for mass crimes against humanity. The court was intended to end the impunity that has allowed so much bad government in so many places over the centuries. Thirty-three African states are among the 121 countries that created the court. At the time it was an acknowledgement that not all African states will at all times have robust and independent enough courts to hold former leaders to account. So when domestic justice failed, the default to an international court of last resort would be, it was argued, an important deterrent to those who might think they could still get away with crimes against their citizens.

Now the ICC finds itself pitted against much of Africa’s political leadership. If the two Kenyan indictees are elected, there is no appetite on the continent for boycotting them or handing them over. Instead a perceived sense of double standards has developed with a belief that the ICC only goes after Africans and has become a tool of western policy. Although unfair, it has not been helped by clumsy ICC action in cases such as Libya.

The ICC now has an African chief prosecutor and the quality of indictments appears to be stronger. The accused Kenyans have so far co-operated but have made clear that if the case is not dismissed they want it repatriated to a more amenable Kenyan court. And in the meantime there are allegations of concerted efforts to intimidate and bribe witnesses.

A further casualty may be Kenya’s relations with the west. Business as well as diplomatic relations will suffer if an ICC indictee is running the country. Both the US and the UK have made that clear. But western energy companies fear they may lose contracts to Asia if a new government feels victimised. Inevitably, it will throw a wider shadow over investment confidence at just the time when the region has been enjoying historically high growth rates. Yet Kenyans understandably don’t like to hear this and diplomats only whisper it because it does smack of interference.

In the meantime, in a season of consequential elections around the world, one of the most significant for its implications at home and abroad has until now been one of the least noticed. Let’s hope Monday’s voting does not change that.

Mark Malloch-Brown was UK Minister for Africa at the time of the last Kenyan elections.

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