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The Asian Square Dance – 1st part

Michael Akerib

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Goldman Sachs first coined the expression BRICs – Brazil, Russia, India and China – to identify the economic giants of the future that will reshape the world economic order. While Russia’s economy is linked to the prices of commodities, energy in particular, Brazil has not lived up to expectations. Of the four countries, China and India have shown the most impressive growth in recent years with, respectively, 10% and 8%. Excluding Brazil, the population of the BRIC represents 40% of the world’s inhabitants.

With Asia, reckoned to be today the most dynamic continent, accounting for 65% of the world’s population, and China and India together accounting for 40%, these two countries can potentially alter the fragile equilibrium of the world’s economy. It is forecast that by 2030 the East Asian economies will be the world’s largest economic bloc.

Due to diverging political ideologies and concerns, however, this bloc does not, in fact, exist other than in prose. Even worse, all the countries in the area have made significant investments in military equipment over the recent past thus sharply increasing the risk of conflict particularly as fears grow over China’s intentions.

The US’ dream, during the cold war, of creating an Asian equivalent to NATO was short lived. Today, Asia has five nuclear powers: Pakistan, India, China, North Korea and Russia. On the other hand, the US is constrained by budgetary problems.

Our argument in this series of articles is that the development of Asia, and its impact on the rest of the world, depends to a large extent on the relations between five countries: China, India, Japan, South Korea and the US. Depending on the structure of the type of relations that will develop, and choices made by Russia and the US, for instance on their energy policy, we may see a new world order developing, very different from that of the last four hundred years. Further, if the Chinese economy faces difficulties in the future, the US will be instrumental in determining Asia’s future. Conversely, if the US economy falters, China, if it so wishes, could assume the world’s economic leadership.

Since the end of the Second World War, the US’ role in the area has been a major influencing factor politically, militarily and economically and while it has declined recently, it remains, nevertheless, important. Asia is challenging the EU as the world’s most important trade bloc.

The US imports from Asia for over $2 trillion per year, thus making the US responsible for the creation of hundreds of thousands of jobs. A weakening of the US dollar could significantly diminish the US’ role in the region.

At issue here is what A F K Organski has termed ‘Power transition theory’ – i.e. the change of the guard of the dominant power where the dominant power occupies this position because of its control of resources, be they demographic, economic, geographic, natural or military.

According to the theory, the dominant power, or powers, must ensure the stability of the system failing what the system might be challenged by an emerging hegemon. These situations are conducive to confrontation, very often military.

The emerging hegemon is, no doubt, China, and the events in Eurasia, over the coming quarter century will witness an indirect confrontation between China and the US, a confrontation whose secondary actors are India and Russia.

Is China striving to attain the status of great power and challenge the US, at least regionally, and what role do the other regional powers, as well as Russia and the US play? Or is it just trying to reduce its feeling of being surrounded by enemies?

Asia has become a powerhouse with several countries showing economic strength and appearing to be rivals. A dangerous rivalry inasmuch as five countries in the area have a nuclear arsenal (China, India, North Korea, Pakistan and Russia), with two more (Japan and South Korea) able to produce a nuclear bomb in a relatively short time.

Monetary reserves in Asia are sufficient to allow the area to develop without much further foreign investments. Further, an increase in economic stability is heralded by the recent agreement between several Asian countries – the members of ASEAN, China, Japan and South Korea – to pool their financial resources in case of a speculative attack.

While the major trade partner of most of the countries in the area is Australia, the European Union and the United States, regional trade has increased considerably. Services such as tourism also cater increasingly to Asians.

There remains the question of whether the continent is able to develop its own technological base to compete with Europe and the US. There are diverging points of view on the issue.

The perception by the Asian countries of the effect of China’s domination of the continent evolved into an understanding that they only have two options – siding with China or with Japan and its US ally.

The financial difficulties originating in the US and which have spilled all over the world have affected Asia in its role of major exporter. As a reaction, China, Japan and South Korea are considering the creation of a community modelled on the European Union that would help them expand trade within their area and increase trade with the ASEAN countries, Russia, the Middle East and Europe. They are encouraged in this action as inter-Asian trade has been growing at twice the rate of global trade. Inter-Asian trade is more important as a percentage of total trade than inter-NAFTA trade.

The US should fear the creation of a trading block including China, Japan and South Korea as it would represent 43% of US’ foreign trade and holdings of over one trillion dollars in US Treasury paper.

 

Common problems
The countries in the area, with the notable exception of Russia, share two major problems: access to raw materials in general, and energy in particular, and an economy essentially geared to exports, and thus very dependent on the purchasing power of EU and US consumers. This last aspect is changing rapidly though with domestic markets starting to take shape and offering local producers a partial insulation from the American-led boom and bust cycles.

It is generally felt in the US that China has not been doing enough to stimulate internal demand – the number of consumers is no bigger than Italy while the population is 20 times that of the European country – and that the situation has been worsened by the decision of the Chinese government to peg the Yuan to the US dollar, thus effectively undertaking a devaluation.

Should China’s export drive remain as a major contributor the country’s economy, the accumulation of reserves by 2020 will be bigger than that of Germany, Japan and the Middle East countries put together. America’s response could be to return to a more isolationist policy by slapping import duties on Chinese products or getting China to open its doors to greater exports of US products.

Both China and India have to contend with an extremely large population. In fact, they are the only two countries with a population of over 1 billion persons. Economic development has brought, to both countries, an uneven distribution of wealth to the extent that social disruptions can be feared in the future.

China has become the world’s second largest oil consumer and it is likely that it will surpass the US to lead the world in energy use. Imports which represent 50% of consumption are likely to rise to reach 80% in another 10 – 15 years particularly considering the oil intensity of economic growth is particularly high, as in most developing countries. Thus, for each 1% growth in GDP, the country needs 1.2% additional oil.

In fact, China is the world’s fast-growing energy user, Russia is the most inefficient user of energy and he US is the country with the largest carbon footprint.

China is also the world’s largest consumer of several raw materials.
The country’s search for natural resources has been done in a predatory way, and there is fear that, backed by its staggering reserves, it could encourage suppliers to increase prices at levels beyond those acceptable to a large number of other users.

India’s energy requirements are expected to grow by 30% in the next 3 to 5 years and its imported crude oil dependency is expected to reach 95% by 2025.

India depends for 50% of its energy needs on coal and increasing its use would create major environmental problems.

Its gas suppliers are considered to be relatively unreliable and include Bangladesh, Iran, Myanmar and Turkmenistan.

This situation has encouraged India to pursue the road to nuclear power.
Such growth in raw material requirements is not sustainable and is strategically dangerous.

Both China and India have very large armies (in fact the largest in the world) and nuclear weapons.

Japan is also a major energy importer, relying entirely on imports for oil. Japan has an important stockpile of energy products, and it has encouraged other Asian countries, including China, to jointly plan the stocks and their administration.

Indeed, Asia’s energy needs are expected to double in the coming 20 years. In spite of this, OPEC countries do not seem to be prepared to invest in increasing production, in large part because of the massive funds required. They have been estimated by McKinsey to be of the order of $ 45 billion a year over the next three decades.

The countries in the area perceive themselves as rivals in securing energy sources and China, particularly, has shown an eagerness to develop partnerships, whether through limited investments, or through political support, in the United Nations, of countries like Iran.

Hydrocarbon reserves in the China Sea are claimed by several countries, and are a growing point of contention. Neighboring countries are fearful of China’s rising military power and have led them to develop closer relations with the US.

In an effort to temper their competition, India and China have made some joint bids to buy and share oil fields.

Japan too is dependent on energy imports and has recently been unlucky with their supply sources. Thus, they have had to curtail their investments in Iran, Kuwait, Russia and Saudi Arabia.

To counterbalance these losses, Japan has offered Saudi Arabia the possibility of building oil-storage facilities in Okinawa, provided Japan can have access to them in case of emergency.

A closer rapprochement between the two countries depends, however, on the US’ willingness for this to take place as the Saudi monarchy depends on the US military shield against the rising threat of Iran and of the djihadists, and there is no way Japan can replace the US in that role. This, in spite of the fact that Asia is today, by far, the largest buyer of both Saudi and more generally, Middle Eastern oil – up to 60% and 70% of their exports, respectively.

Reliance on Russia for energy is therefore extremely important. While a pipeline is being built from Siberia to the Pacific that could partly alleviate these escalating needs, a number of other pipeline projects have been proposed. All these projects require large investments ($ 1-2 million per kilometer of pipeline or around $ 12 billion for the pipeline that will link Russia and China), long delays in building and face substantial political and ecological problems. Further, the gas transmission systems in China and Japan are under-developed and therefore not suitable for the transport of large quantities of imported gas.

Russian industry has access to gas supplies at prices substantially below those practised on world markets and has therefore become a voracious user. The Russian government will be increasing prices for domestic consumption, including for private heating, and / or turning to alternative energy sources such as coal, hydro-electric or nuclear power.

Other possibilities have also been considered, but they all depend on Russia’s cooperation.

Thus, for instance, integrating the energy grids of Russia with those of China, Japan and the two Koreas has been proposed to enable the exchange of seasonal surplus.

This entails not only Russia’s cooperation, but also North Korea’s. It also requires large investments, although possibly not of the scale of building a pipeline network.

Another common point between the China, India, Japan and South Korea is that they constitute, jointly, the world’s largest weapons market and their suppliers are the European Union, Russia and the United States.

China and Japan also share the will to stop North Korea’s nuclear program.

The two countries are also large emitters of greenhouse gases.

Both China and Russia fear, perhaps rightly so, that the US is conducting an encirclement strategy due to their military presence in Central Asia as well as, in Japan, South Korea and Taiwan as far as China is concerned, and Russia is concerned with a possible NATO expansion in Europe.

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Guiding a new generation of learners on inclusive green economy

MD Staff

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As population numbers continue to grow and material resource use rises to unprecedented levels, the limits of today’s dominant model of economic growth have become increasingly apparent: extraction of material resources, including biomass, fossil fuels and non-metallic minerals has tripled since 1970, reaching an approximate 90 billion tonnes in 2019. A comprehensive overview of alternative economic models that center around environmental sustainability – published by UN Environment, the Zayed International Foundation for the Environment and Tongji University – hopes to help guide efforts to move to inclusive, green economies.

The official launch today of The Inclusive Green Economy: Policies and Practice marks the successful completion of a long-standing collaborative project.

Nineteen million premature deaths are estimated to occur each year due to environmental and infrastructure-related risks and natural-resource use. Resource extraction has also been identified as the leading cause of global biodiversity loss. This has led to an increasing number of countries to rethink their economic development model.

“Since Rio+20, an increasing number of countries are embarking on pathways towards inclusive green economies. I hope this book will help guide these efforts globally”,  Dr. Mohamad Ahmed Bin Fahad, Chairman of the Zayed International Foundation for the Environment highlighted in his welcome address at the launch.

An inclusive green economy is defined by UN Environment as one that is low-carbon, efficient and clean in production, but also inclusive, based on sharing, circularity, collaboration, solidarity, resilience, opportunity and interdependence. The handbook aims to offer a comprehensive framework for analysing inclusive green economy issues, such as investing in natural capital and clean technologies, as well as policies to enable investments. 

“With this collection – based on a wide range of thinking on the transition to an inclusive green economy – we hope to provide a useful resource for students and other stakeholders” Fulai Sheng, co-editor of the publication, emphasised.

 “This new textbook makes an important contribution to our understanding of how poverty, inclusiveness and employment issues must be fully taken into account to ensure a fair and just transition to a green economy”, Steven Stone, Chief of UN Environment’s Resources and Markets Branch, said.

Commending UN Environment and its partners on their efforts, the Executive Director of the UN Institute for Training and Research (UNITAR), Nikhil Seth, further observed that “publications like the one launched today will be instrumental in transmitting novel ideas and concepts that can inspire leaders of tomorrow”.

Dr. Meshgan Al Awar, Secretary General of the Zayed Foundation and Co-Author of the textbook, summarized the implication and significance of this initiative by noting, “The Inclusive Green Economy textbook provides an inspiring framework for nations, organizations and individuals to follow and simulate as they endeavor in this direction”.

UN Environment

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Retirees worldwide will outlive their savings by a decade – and women will fare worse

MD Staff

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Retirees in six major economies can expect to outlive their savings by years. Women should prepare to bear the brunt of such shortfalls, going without retirement savings for at least two years longer than their male counterparts.

As government and employer-sponsored retirement plans are under strain globally, individuals have found themselves to be increasingly responsible for their retirement savings. Despite this, savings have not accelerated fast enough to make up for the deterioration of traditional retirement plans, suggests a new report by the World Economic Forum, Investing In (and for) Our Future.

In six economies analysed, most male retirees can expect to live past their savings by nearly a decade. Women can expect to go even longer without their savings, as they will likely live more than 10 years without retirement savings to rely on due to their longer average lifespans.

These shortfalls can vary greatly by country and gender; men in the United States are expected to outlive their savings by about eight years while women in Japan will live nearly 20 years past their savings account. Despite these vast differences, the average retiree in Australia, Canada, Japan, the Netherlands, the United Kingdom, or the US will not be able to last through retirement on savings alone.

Image: Investing in (and for) our Future, World Economic Forum

These shortfalls must be addressed, by both individuals and policy-makers, to ensure that seniors can enjoy life throughout their non-working years.

Governments must act to create retirement landscapes that prevent savings shortfalls. Currently, retirement policies in many countries, including India and China, can often hinder optimal retirement savings and investments.

Though governments should act, they would be wise to avoid implementing one-size-fits-all retirement policies as individual retirement needs can vary greatly from person to person. Instead, governments should change, or even roll back, their regulations to allow individuals to make investments that will increase their long-term returns.

A new report from the World Economic Forum identifies two key investment changes governments should allow so individuals can most effectively address their savings gaps. Both identified actions aim to optimize investment so retirement savers can achieve higher yields from their savings.

1. Consider risk from the perspective of someone saving for retirement

“The real risk people need to manage when investing in their future is the risk of outliving their retirement savings,” said Han Yik, Head of the Institutional Investors Industry, World Economic Forum. “As people are living longer, they must ensure they have enough retirement funds to last them through their longer lives. This requires investing with a long-term mindset earlier in life to increase total savings later on.”

Many people are far too risk-averse in their retirement investing. While consistent saving is important to build retirement money, being mindful of long-term returns on retirement portfolios is crucial to ensuring that an individual doesn’t outlive their savings. Many young to middle-age savers should change their risk outlook, understanding that outliving their savings is a far greater risk to them than short-term investment risk.

2. Diversify the investment of saving accounts, by geography and asset type

While focusing on long-term returns is often beneficial for retirement savers, diversification can preserve those returns by mitigating overall investment risk.

Currently, most retirement investment vehicles are largely based on traditional equity and fixed-income investments that have the advantages of being easy to value as well as having high liquidity. However, given the long-term nature of retirement savings, that liquidity comes at a cost. Although they require adequate understanding and sound financial advice, investment in alternative assets, particularly illiquid assets, can bring strong diversification benefits to a retirement investment portfolio.

In this area, again, policy-makers must ensure their retirement policies do not hamper the ability of individuals to make the best long-term choices for their portfolios. In most countries, default retirement options focus on liquidity and the ability to perform daily valuations at the expense of long-term growth. Governments should consider changing or even rolling back these regulations to allow retirement savers to invest in the assets best suited to their individual retirement goals.

In addition, many retirement portfolios also tend to have a heavy domestic focus. Diversifying the geography of investments in portfolios can reduce risk to home country economic events. By expanding the locations of their investments, retirement savers, particularly savers from smaller economies, can protect themselves from market or economic slumps in an individual economy while still maximizing their returns.

Decumulation, or spending in retirement, is another key area of well-being after the working years yet there is far less research dedicated to it.

For instance, today’s retirement spending projections are based on the rule that retirees will withdraw 4% of their portfolio each year they are retired. However, the World Economic Forum and Mercer suggest that this estimate does not match how retirees spend in the real world, with much higher spending in early retirement years and less as retirees age. This spending volatility highlights the need for new retirement solutions that both allow for flexible spending while also ensuring savings that last through retirement.

“With populations around the world living longer than ever before, we need far more creative decumulation solutions for longevity protection” says Rich Nuzum, President, Wealth at Mercer. “There are some alternative solutions emerging such as pooled annuity funds, but older individuals are going to need a more diverse range of financial tools to help protect against longevity risk.”

Some countries, such as the UK and the Netherlands, have begun to recognize the importance of robust policies for the decumulation period and are even considering rolling back regulations for retirement savings. However, there is much more to be done in this area to ensure that seniors can thrive during their period of enjoying the funds they have worked so hard to save over their working years.

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Sustainable development: Within reach in Iran and Asia and the Pacific

Armida Salsiah Alisjahbana

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Climate change is increasing the intensity and frequency of natural disasters in Asia and the Pacific. The tragic loss of life and the destruction wrought by recent flooding in the Islamic Republic of Iran is a reminder of the threat to lives, livelihoods and societies posed by extreme weather events. A reminder that only an integrated response to economic, social and environmental challenges can pave the way to sustainable development.

The floods which swept across the Islamic Republic of Iran in spring this year were devastating. They affected 10 million people and 500,000 people were displaced of which half were children. Hospitals and schools were destroyed, denying 100,000 children and education and thousands access to basic health care. Large sections of the country’s road network were affected, which will weigh on the economy, but also impact on many families’ daily lives. Damages have been estimated at $4.7 billion, a third of which concern the agricultural sector, critical to many livelihoods.

Yet as tragic and costly as the recent floods have been, they are also part of a wider phenomenon: the increasing risk of natural disasters outpacing resilience in the Islamic Republic of Iran and in Asia and the Pacific. Sand and dust storms, drought, desertification and wind erosion are all expected to rise in South-West Asia by 2030. Intensified by climate change, these disasters are becoming increasingly frequent. They hit the poor and vulnerable hardest, particularly in informal settlements. Some of Iran’s least developed provinces have suffered the most, with successive sand and dust storms destroying crops and infrastructure, and undermining people’s health, study and work.

These challenges exemplify why economic, social and environmental considerations must be considered together, if we are to effectively mitigate the consequences of natural disasters and achieve sustainable development. Evidence from across the globe tells us ignoring the social impact of economic growth can place a huge strain on societies, and at its worst lead to instability and conflict. Ignoring the environmental cost of economic growth in many parts of our region has led to climate change and an increased risk of natural hazards, which entrench poverty and perpetuate inequality. Nowhere is an integrated, multilateral response needed more than in Asia and the Pacific, the most disaster-prone region in the world.

With this in mind, the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) has worked with the Islamic Republic of Iran to establish the Asian and the Pacific Centre for the Development of Disaster Information Management (APDIM) in Tehran. It will deliver targeted capacity development for disaster information management and knowledge sharing. A regional cooperation mechanism for combatting the sand and dust storms has already been adopted. This will work to reduce the causes of risk of multiple hazards, develop a sand and dust storms alert system and tap regional partnership networks to enhance technical support where it is most needed.

My ambition is for APDIM to fit into a broader regional development and cooperation effort. One to reduce the inequality and environmental degradation which have accompanied recent exponential economic growth in our region. Our analysis shows the investment needed to achieve sustainable development in Asia and the Pacific is within reach. Developing countries’ investment needs stand at an additional $1.5 trillion per year, or five percent of their combined GDP. In the Islamic Republic of Iran, we estimate investments needed to climate-proof basic infrastructure are equivalent to roughly 1 per cent of Iran’s GDP in 2018. Further investment would be required in education and people centered approaches to build resilient communities and economy.

Sustainable development which balances economic growth with the need for social inclusion and environmental protection is essential to ensure a prosperous Iran today and a clean, compassionate and safe future for our children. Investing in people, as well as investing in skies, land and water can ensure that future. The Islamic Republic Iran has the means and the will. Yet persistence will be required to achieve this ambition, and the United Nations family stands ready to assist in any way it can in the months and years ahead.

UNESCAP

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