China’s Global Leadership Gap – CNN Commentary

China’s Global Leadership Gap – CNN Commentary

(Also on CNN’s Global Public Square here.)

In a rare and telling diplomatic snub this week China refused to send People’s Bank of China Governor Zhou Xiaochuan to the IMF/World Bank meeting held in Tokyo. The slight, related to the continued stand-off with Japan over a disputed island chain in the East China Sea says more about China’s prospects for greater global leadership than a bilateral territorial disagreement.

For several years running China’s economy has grown along with its ambitions for recognition. Internationalizing the yuan as a reserve currency, more influence over international lending institutions and respect as a leading business and financial center have been chief among them.

The meeting boycott marks the latest in a string of retaliatory acts, including using informal trade measures meant to punish countries acting in ways China dislikes. Imports from the Philippines were suddenly subjected to enhanced inspection and quarantine over a dispute in the South China Sea Rare earth exports critical to Japan’s electronics industry were also suspended in a 2010 island conflict. These steps mark a troubling and regressive tendency in Chinese foreign economic policy.

Since joining the World Trade Organization back in 2001 Beijing has enjoyed many of the benefits of membership while at the same time using protectionist measures to give domestic industries significant advantage. Trade has been used increasingly as a political tool contravening over a decade of engagement to keep these two policy spheres apart.

Refusing to attend the annual international finance meeting will further damage China’s hopes for greater recognition. At a time when the risks of global recession are increasing retrenchment adds doubts about a potential leadership role. While Beijing might think its status as the world’s second largest economy makes it increasingly vital to any discussion, the world continues to turn without it.

Xi Jinping and the rest of China’s new leaders in waiting inherit a country in transition. Rising domestic wage pressure, a slowing economy, and renewed doubts about the security of joint venture intellectual property suggest China’s global economic influence may soon be waning, not continually rising. If slower growth becomes a trend rather than a temporary blip and anti-Japanese business sentiment grows into a broader missive against foreign companies, the lure of China’s growing market would dim significantly.

Embracing the complexities of international discourse rather than shying away from them mark an important maturing stage. Equally important are policies that further opening and reform increasing international participation in China’s domestic economy. This enhances both the perception and reality that China is dedicated to continued global integration. Pulling a no-show at an international gathering in a neighboring country does not.

 

Photo: Tiananmen Square looking north to the Forbidden City. Brian P. Klein.
Slogan by Mao’s portrait reads “May the Communist Party of China Live for Ten Thousand Years” (a former imperial saying re-purposed after the 1949 revolution).

 

The Fundamentalists’ Last Stand

The Fundamentalists’ Last Stand

In Swat, Pakistan three children were attacked including Malala Yousafzai, a 14 year old awarded for promoting girl’s education. She was taken off her school bus by an armed Taliban militant and shot in the head (as of this writing she is reportedly in stable condition.)

After years of acquiescence towards radicalized militant groups, the shooting of a child appears to be finally galvanizing public opinion in Pakistan, a country with a rich history of tolerance.

The BBC’s M Ilyas Khan notes:

“The attempt on Malala Yousafzai’s life has shocked and angered the nation, and reports from parliament suggest a wider anti-Taliban consensus might be in the works – something Pakistan’s fractious politicians have rarely achieved before.”

Richard Leiby reports in The Washington Post:

“The world image of Pakistan is, to put it mildly, not very good,” said Ijaz Khattak, a professor at the University of Peshawar who knows Yousafzai and her father, an educator and peace activist in Swat. “Society is seen as increasingly sympathetic to these terrorists. What this incident can prove to be is a catalyst, because the outrage can turn the tide against the religious fundamentalism.”

Moderate Pakistani Muslims are not alone. The terrorist attack on the U.S. consulate in Benghazi, Libya killed four including  Ambassador Stevens, a highly regarded official active in supporting the new Libyan government. Within days thousands demonstrated in support of secular Libya and against the attackers. In contrast to the riots elsewhere about an amateur video criticizing Islam the crowds of Benghazi descended on militia headquarters driving them out of the area.

Extremists in the Middle East have had a litany of excuses for their terrorist ideology. For decades U.S. support of regional dictators including Egypt’s Mubarak and for a time Iraq’s Hussein (when fighting against Iran) gave radical groups easy ideological ammunition. Now that the Arab Spring’s indigenous revolutions toppled these regimes fundamentalists have lost yet another rallying cry.

Malala Yousafzai, who is still struggling for her life in a Pakistani military hospital, may never be able to return to her home because of the continued threat of violence. Taliban militants apparently stated that if Malala lives they will attack again until they kill her.

The day she is free to live anywhere, study anything and say whatever is on her mind without fear marks the day fundamentalists have lost in Pakistan. That day may be coming sooner than some expect.

In the end, only moderate majority populations, galvanized by these acts of terror into a groundswell of popular outrage and action can make these attacks the fundamentalist’s final failed stand.

 

Photos: (Top) Inter Services Public Relations Department. (Bottom) Malala awarded Pakistan’s first Youth Peace Award. Pakistani Press Information Department.

If China Televised a Presidential Debate

If China Televised a Presidential Debate

(Sometime in the future . . .)

Moderator, internationally-renowned artist Ai Weiwei: Thank you all for coming to the National Center for the Performing Arts in downtown Beijing for this first ever, internationally televised CCTV – China Presidential Debate. There will be no opening remarks, only questions submitted by Weibo users whose names will be concealed. Our first question comes from a real estate developer.

What do the candidates believe the role of government should be in the economy?

Candidate on the left podium – The government should have more state control, more direction over the economy and more of a focus on the poor. State-owned enterprises stabilize the country. My opponent believes the free market and western economic ideals should be slavishly followed. I believe China should follow its own development path and bring back the ideals of our founding father.

(We hear mild applause. Several in the audience are holding pictures of Mao and waving small Chinese flags.)

Candidate on the right podium – The government should facilitate greater reform and opening. That is how China will take its rightful place as a global economic and political leader in the 21st century. Private enterprise will drive future growth in leading industries. Government can and must enforce the rule of law to create a positive environment for business to flourish. Corruption must be stamped out. Consumers, not elites should drive growth.

(More applause, a little louder and longer than the first.)

Second question comes from a graduate student at the China Foreign Affairs University.

China was invaded many times in the past. Now we are a strong country. Why shouldn’t we take back what is rightfully ours including Taiwan, the South China Sea and the Diaoyu islands?

Candidate (on the left): China is a strong nation and will defend its national interests wherever they may lie.

Candidate (on the right): China is a strong nation and will defend its national interests wherever they may lie. Let me add that we believe in a peaceful rise.

Okay. Our third and final question, well more of a comment and a question, comes from a factory worker in Guangdong.

My husband and I both work 10-12 hours a day, 7 days a week at a Chinese-owned factory. The owner often doesn’t pay the overtime we are promised, even after we’ve paid the manager to get the extra hours. Many of my co-workers have gotten ill from the chemicals we use to clean computer screens. The company said they would pay for medical costs but the local hospital insist on cash. If we want to see the actual doctor we have to pay more. Even with receipts we never get reimbursed. I went to complain to the union. The union boss told the factory manager and now I’ve lost all of my overtime and have to work the overnight shift.

Since I do not have a residency permit my daughter can’t attend school here. She lives 200 kilometers away with my parents. Local officials took their land. Now they live in a small apartment in a new building many miles away that is already falling apart. The money they received wasn’t enough for the apartment so they had to use up all of their savings. While we earn more than we used to both of our salaries barely pay our parent’s doctor bills (they have no insurance), my daughter’s school fees (even though she goes to a public school) and our company housing and food. I do not feel better off than I did ten years ago. What are you going to do about it?

(Large thunderous applause fills the auditorium.)

The microphones are suddenly cut and the candidates whisked off stage. Ai Weiwei pulls out his own bullhorn just as television screens across the country go black. A few seconds later images of fireworks appear from the 2008 Summer Olympic Games.

U.S. by the Numbers – Recovery Still a Mixed Bag

U.S. by the Numbers – Recovery Still a Mixed Bag

A torrent of headlines came out today on the latest U.S. jobs numbers. Unemployment fell to 7.8%, below the psychologically important magic number eight. Hitting a four year low this certainly marks a change in the right direction, but we’re still talking baby steps (hand holding a toddler comes to mind.)

To have a substantial impact on the millions still unemployed this really needs to be closer to five or six percent. With only 114,000 jobs created we’re a far cry away from solid recovery. Numbers like 250,000 per month bring back better times from the abyss.

Still, current figures often underestimate the number of new jobs created (note the upward revisions of late) and the situation might be better than reported. We won’t know until after the November presidential election so whatever right direction/wrong direction spin the candidates want to put on these figures now’s their chance. Here’s what it looks like without the spin.

Bureau of Labor Statistics – Non-Farm Payrolls 2002 – 2012).

The gauge for recovery can’t really be measured solely by pre-financial meltdown levels anyway. Many jobs, especially in real estate and construction were unsustainably inflated by easy money sloshing around and unscrupulous mortgage lenders, traders and quantitative charlatans, but that’s another story.

What’s new is the housing slump appears to be in tentative recovery. The National Association of Home Builders/Wells Fargo Housing Market Index has been climbing for several months running now, albeit from a very low base and below even 1990’s levels. There’s ample room for improvement.  Considering the flack the U.S. economy has been hit with since 2008, especially among proponents of the inevitable decline meme (and the dozens of books it spawned) let’s stick with the glass half full version. That same glass used to be cracked, leaking and irreparable.

Other data points show that the economy as a whole can be about as undecided as some American voters with only four weeks to go. The Institute for Supply Manufacturers gauge hit a four month high of 51.5 indicating expansion had returned to the economy.  Alas, the Markit Index of Manufacturers fell slightly to 51.1 (still expanding but at a slower rate), from 51.5 in August.

These pesky social sciences. Conflicting data sometimes relegates the field more to a numbers running racket than say the mechanical precision of physics. Getting billions of electrons marching in single file across a TV screen remains far easier than accurately predicting the hiring and purchasing activity of a few hundred million people.

Since about 70% of the U.S. economy is driven by consumption and the holiday season represents a significant portion of consumer purchases for the year, perhaps better numbers are inventories and retail sales for October and November.

Wherever they end up, we still have a long slog ahead of us until the engines of American prosperity kick into high gear. On the bright side, innovation and ingenuity in the material sciences, biotech, information services and healthcare are expanding at tremendous rates. Once these go mainstream they’ll power an American renaissance sometime down the line. Just don’t ask for a firm date yet.

 

Photo: Depression Era Soup Kitchen, Wikimedia Commons

The Presidential Debate We Needed, but Never Saw

The Presidential Debate We Needed, but Never Saw

One question for the undecided voters of America – are you better off now than you were 90 minutes ago?

Despite a Romney landslide 67% “win” among CNN debate watchers and pundits parsing the candidates words in excruciating detail (worse than the actual number-laded debate itself), undecided voters remained decidedly, undecided.

What voters needed from the debate, a clear idea of the candidates’ plans for American renewal, remained lost in the thicket of questionable facts, long-winded replies, and tired rhetoric.

The debates did little to address the most pressing issues facing the U.S. economy. What can government actually do, in the short-term, to help increase employment, get the deficit under control, and ensure the social safety remains intact.

There was no clear vision for America, no soaring oratory, no sense of mission or purpose. Just two men, talking past each other through volleys of competing accounts of their opponents’ views and saccharine human touch stories. Remember the Denver woman with child in hand whose husband hasn’t had a full-time job in years? Or was it a man in (insert name of swing state here) who lost his insurance coverage and can’t get the operation he needs?

What seemed to get the most rise out of Colorado undecideds were phrases like “stop shipping jobs to China” and discussions on the importance of education. Old wine, new bottles.

How much do the candidates’ facts even matter? Probably not as much as we’d like to believe. Who is going to remember whether the Romney plan (with or without details) will actually add $5 trillion to the deficit. Did green energy companies really receive $80 billion in tax breaks and oil companies only a few billion? How many licks does it take to get to the center of that tootsie pop … no one really cares.

The fact checking cycle will run for the next few days and when the October truths come out they’ll be forgotten by November 6th. One zinger worth holding onto — Romney loves Big Bird, but won’t use taxpayer money to fund PBS.

Moving on to the next debate a youthful Paul Ryan faces off against the seasoned and outspoken Vice President Biden. In this match-up will an elder statesman school his less experienced upstart or does a Gen X politician goad the VP into saying something outlandish and damaging to the Obama campaign? It’s reality television on sedatives.

For the most expensive election in U.S. history one would have expected a better show. Maybe in the third and last debate the gloves will finally come off and we’ll get to see a real battle of ideas that make a difference.

Asia by the Numbers

Asia by the Numbers

(UPDATE 10/8/12: Both the World Bank and Asian Development Bank have lowered 2012 growth forecasts for China and Asia.)

Remember those halcyon days of unending Asia growth and the re-birth of a Silk Road century? Cherish the memories.

Nothing but negative news keeps flowing out of regional giants these days. Expert debates rage on about China’s hard vs soft landing while recent data just keep disappointing. HSBC China Manufacturing Purchasing Manager’s Index wallowed below the critical 50 threshold again. Political intrigue aside, China’s next generation of leaders are facing significant economic headwinds and challenges unknown to their predecessors.

From the September 29th HSBC Purchasing Manager’s IndexTM:

 

“Data in September signalled a stronger decline in Chinese manufacturing output, as the volume of new orders fell for the eleventh consecutive month. New export orders declined at the sharpest rate in 42 months amid reports of weak international demand…”

 

 

Historical numbers show a long decline since late 2010 (and a wild ride starting with the 2008 U.S.-led financial crisis).

Japan’s Tankan business sentiment survey showed more general weakness (negative views of business for the past 12 months and worsening in the last quarter). Unsurprising considering the weak overseas demand, yen troubles making exports more expensive and now troubles with China over the East China Sea. ANA airlines reported 40,000 cancelled flight reservations for September through November sparked by dueling territorial claims and violence on the mainland targeting Japanese factories, stores and restaurants.

Add to that Australia’s struggles with shrinking exports and a surprise Reserve Bank of Australia rate cut to 3.25% (Philippine’s central bank has cut rates as well), Vietnam’s slowdown, and rising South Korean consumer debt.

With the U.S. caught in a “slow-growth” trap of its own making and greater Europe still flirting with renewed recession, trade is now a back seat driver for most of Asia. The slowdown in China is especially concerning for southeast Asia’s and Australia’s resource-intensive exports since China became their main market over the past several years.

Prospects aren’t all negative of course, though finding bright spots in an increasingly overcast night’s sky is tough. Indonesia keeps generating solid six plus percent growth. High investment and sustained consumer demand (accounting for over 32.9% of GDP last quarter ending in June) are driving economic expansion.

Jakarta has so far managed to avoid the massive over-building in China which will drag down the middle kingdom for some time to come. The infrastructure needs throughout the island nation of over 200 million people, if well managed, might provide sustained growth for a while.

Prognosis: Substantial western growth isn’t coming back anytime soon. For Asia to prosper domestic demand (read: consumers) has to expand and that means further market liberalization and access to capital that has often been denied, mainly for political reasons.

The China model of controlled growth and U.S.-style unchecked market excess both have their discontents, but policies favoring middle class growth and expansion remain key. Balance will be the buzzword going into 2013.

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Iran’s Economy at the Edge

Iran’s Economy at the Edge

(UPDATE: 10/3/12 – BBC reporting protests in Tehran.)

Months of tightening U.S. sanctions appear to be taking their toll on Iran’s economy. The rial plunged against the dollar (losing 25% in street value in the past week and down some 80% since 2011). Imports, paid for in dollars, have become increasingly expensive. Inflation approached 24% in August alone. Oil exports, a major revenue earner for the regime have plummeted as well. Shrinking dollar reserves make financing whatever remaining trade even more difficult.

These extensive sanctions include all imports, exports and financial transactions with U.S. entities. With Europe’s participation Iran can now barely function in the international banking system.

The main goal, however remain stopping Iran’s nuclear enrichment activities, not destroying the livelihoods of the general population.

Here’s the gambit: Ratchet up non-lethal economic force on Iran while avoiding a military conflict (including keeping Israeli jets on the ground and averting a regional war). This in turn should cause a political crisis that either forces Ahmadinejad to capitulate or a new leader to replace him ready to negotiate. Regime change a la an “Iranian Autumn” of popular discontent might follow, but seems unlikely at the moment and has not been a core objective. Then again stranger things have happened in the Middle East since 2011.

Iran’s nominally “elected” ruler, Ahmadinejad would carry the full blame of his country’s increasing isolation, not the behind-the-scenes clerics who really run the country. His decidedly more sedate tone in a recent UN speech (no tirades against the U.S. and calls for the end of Israel) suggest his popularity has taken a hit. With barely nine months left in his final term of office he might be more ready to negotiate. The deal on the table before this latest round of provocation still gave Iran access to nuclear material for fuel and medical-grade uses.

Unintended consequences in international affairs are a constant risk. Influencing extremely complicated systems, including tens of millions of people reacting to sudden economic hardship and political machinations of theocratic leaders chief among them.

The flip-side of this strategy could include a backlash against the West for causing economic harm, a more radicalized government, and nuclear enrichment accelerating as a result. No one said this was going to be easy. Still since Iran’s economy already faces home-grown problems from years of serious mismanagement current troubles probably won’t radicalize secular Iranians while hard-liners gain one more reason to run riot.

Either way results should be in soon. Israeli Prime Minister Netanyahu, complete with an almost comical bomb illustration during his UN speech, continued to warn of a point of no return and Israel’s readiness to strike. The U.S. meanwhile re-affirmed its commitment to never allow Iran to possess a nuclear bomb, which could take less than a year once a decision to pursue weaponizing had been made. Iran’s economy gets closer to breaking point by the day and sanctions won’t be lifted without a deal while its nuclear race continues. The specter of destruction (economic, political or military) is coming to head in the not-so-distant future. Let’s hope the sanctions gambit pays off.

 

Photo: Wikimedia Commons

 

 

 

 

 

 

 

Foxconn Riots and the Limits of China’s Middle Class

Foxconn Riots and the Limits of China’s Middle Class

Several thousand rioting workers in Foxconn’s Taiyuan factory this week highlighted the inherent limits on China’s emerging middle class. Questions about the causes of the violence continue to circulate, either a dispute sparked by a security guard beating a worker or a fight in one of the privately contracted dormitories that went awry. (Jennifer Preston of the New York Times’ “The Lede” summarizes the blogosphere’s accounts versus official government pronouncements here.) In either case the life of your average manufacturing worker revolves around 10-12 hour days, sleeping in dormitories and eating in massive cafeterias. Room and board are deducted from their pay, when they’re paid on time and accurately.

With some 79,000 workers at this particular plant Foxconn runs the equivalent of a small-sized U.S. town. Workers often self-segregate based on their hometowns or provinces giving rise to rivalries and sometimes conflict. But why hasn’t the sheer size of this workforce spawned a private housing boom, new neighborhoods, and the freedom to congregate and eat where one pleases?

Back in the 1950’s and ’60’s U.S. factory workers fueled a booming middle class. Many were young (in their 20‘s). After several years they got married, bought homes, cars and appliances. Restaurants, hair salons, bowling alleys and movie theaters sprang up nearby. For most of Asia, including Japan, Taiwan, and South Korea which used to assemble similar goods, the story was much the same. Workers salaries rose to the point were they could afford mortgages and banks were eager to lend to workers with stable incomes. Public infrastructure connected new communities to the factory gates. Their children spurred a rise in school construction. Personal and corporate income taxes fueled public infrastructure projects.

The factory model in China, however remains largely stuck in an almost feudalistic past where the company provides, or more accurately controls, what workers can and can’t do, even in their off time. The hukou or residency permit system restricts workers from buying apartments near where they work unless they are already a resident (most are not). Their children can’t attend local schools so many must be left behind in villages with grandparents (see Alexandra Harney’s “The China Price” for the affects of low cost manufacturing on workers.) The state-controlled union can operate, but it mostly supports the interests of the government rather than the workers they’re meant to represent.

The basis for this manufacturing system isn’t strictly a socialist ethos or “manufacturing with Chinese characteristics”. Early industrial U.S. company towns often ran the local store (charging ridiculously high prices) and provided housing (at a cost). When workers tried to organize they brought in local thugs or police to impose force. Those days are long gone primarily because workers could and did organize for better pay, regular hours, and safety. Present day working life in China remains more a matter of control than culture. While the Foxconn riots weren’t directed at management worker’s inability to organize can lead to explosions of pent up anger elsewhere.

Labor advocating for its interests and securing freedom of choice in where to live, eat, and enjoy their spare time forms one of the most basic tenants of middle class growth.  Reasonable hours and significantly higher overtime pay increases personal income and domestic consumption. Company co-sponsored health insurance plans lowers the need to pile away current savings for future medical needs. Rising wages for middle class workers increases social stability. While incomes have been going up some 10% for Chinese workers the income gap is widening and basic healthcare and housing remain out of reach for many.)

Without structural changes China’s economic transition from state and investment-led growth to consumer-driven demand will remain stunted. When tens of thousands of employees stuffed into cramped dormitories and shuffled like cattle through stadium-sized cafeterias finally gain more economic freedom, China’s middle class will flourish. Until then pent up frustrations that erupted in the Foxconn riots suggest more turbulent times ahead.

 

Photo: Youtube video.

Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Occupy East China Sea – China, Japan Face Off Over Disputed Islands

Chinese fishing fleets continue pressing their claims to the resources of a disputed island chain in the East China Sea while Japan considers what it can do with a Coast Guard fleet to protect their administrative control. The Senkaku/Diaoyu or Diaoyu/Senkaku island debate rages on with an occupy movement in full swing.

With the Japanese government’s decision to buy the islands from its private owner, rather than let right–leaning Tokyo governor Ishihara do the same (and escalate tensions further), a wave of anti-Japan protest spread in China. In addition to the anticipated demonstrations against Embassies and consulates, large crowds looted, set fires and attacked civilians (Japanese and Chinese, some in Japanese made cars).

The question over sovereignty of the islands has revolved around two main arguments from China –  historical precedent and geographical rights. Neither holds much sway in the international community of today rather than say several hundred years ago when imperial dynasties ruled.

For the history defense, China claims the islands were never Japanese territory and show up on several ancient maps of the region. History converges around 1895 after the Sino-Japanese war when the Japanese government began to control the islands. Han Yi-Shaw, guest writing in Nicholas Kristof’s New York Times opinion blog dives deep into the historical record and concludes:

“Collectively, these official documents leave no doubt that the Meiji government did not base its occupation of the islands following “on-site surveys time and again,” but instead annexed them as booty of war. This is the inconvenient truth that the Japanese government has conveniently evaded.”

Whatever the reasons espoused by Japan’s rulers at the time, war was (and in some places continues to be) the main arbiter of establishing control over physical territory. If history was the gauge to judge international decisions over territorial disputes Mongolia could claim rights over China, India and vast swathes of the Middle East and Europe. Iran would have overlapping claims from their Persian empire. Mexico re-gains the American Southwest, but perhaps Spain, France and Britain would like to carve out the rest of the U.S.

Historical precedent also shows Japan did administer them, unchallenged, then lost them in World War II to the U.S., and then re-gained them afterwards. If China doesn’t recognize the end of war agreements (to some of which they were not a signatory) then far more lies in question than just a few islands.

Geography also plays a weak role. China is looking to the UN Convention on the Law of the Sea (UNCLOS) to arbitrate a claim that the islands belong to their continental shelf. Since they lie outside of the standard 200 nautical mile limit the government is setting in motion a review to extend the range of the shelf.

While this is certainly better than waging war to win back the islands based on an over one hundred year old conflict UNCLOS doesn’t settle national sovereignty issues, it attempts to resolve conflict over exclusive economic zones.

Neither historical precedent nor length of continental shelf is going to ultimately win favor with the international community or gain the credibility China wants for its claims over these islands. Maintaining the status quo by both sides has been the accepted norm. Increased interest in potential natural resources, rising nationalism on both sides, and China’s rapid military expansion threaten that tentative peace. Japan’s purchase from a private citizen may appear to upend the status quo, but not necessarily. It largely prevented more hawkish factions from attempting to fire up nationalistic sentiments.

For now both sides will need to look strong domestically without crossing a red line into open conflict. As long as neither country builds on the island, begins drilling operations at sea or aggressively restricts access to fishing grounds, a tentative calm can be maintained. The only peaceful way to resolve the dispute is for both sides to negotiate directly. Otherwise we’re back to the days of might makes right in Asia, and that didn’t go well at all.

Photo: Wikimedia Commons

Asia Slowdown Hits Vietnam

Asia Slowdown Hits Vietnam

You can’t argue with growth, until it slows, and slower it goes in parts of emerging Asia. Countries like Vietnam, long believed immune to the troubles of industrialized nations are now in the throes of their own domestic economic downturn. The culprit turns out not to be currency speculators or international financial institutions demanding draconian austerity measures, but greed, pure and simple.

The symbols of fast money were evident everywhere. Bicycles and mopeds that clogged roadways only few years ago now compete with cars. Malls sprang up in the capital city of Hanoi transforming the skyline from Stalinist heavy-slab concrete to glimmering glass. Residential and commercial real estate projects rose like plumes of mushrooms after a soaking rain.

All of this new wealth creation relied on easy money. An investment-led boom that rivaled the ages since Thailand and Malaysia took off over a decade ago now appears to be losing steam, and fast. Government officials have lowered 2012 GDP growth expectations by almost a full percentage to 5.2%. Back in 2010 growth had pushed 7%.

Many of those glimmering construction projects are left unfinished, construction companies are going broke and banks are left holding the bag. Foreign investment is dropping as well and the Ho Chih Minh stock index, has fallen nearly 25% since the beginning of 2010. The NYT’s Thomas Fuller highlighted the real costs of a slowdown:

“[Y]oung people are finding it harder to find jobs; nearly 20 per cent of small and medium-size companies have gone out of business during the past year; and municipal infrastructure projects are being delayed or cancelled.”

As with any simmering financial crisis on the verge of boiling over, warning signs were evident for years. Back in 2008 the main concern was a wave of foreign investment overflowing Vietnam’s fragile financial system, inflation and hot money running out of the country wreaking havoc with the currency. The inability of the country’s leadership to manage that situation pointed to problems at the top. The lack of monetary policy control has only grown worse over time. A lending frenzy to try and keep the good times rolling has now given way to talk of bail-outs.

In a 2008 Time magazine article Martha Ann Overland wrote:

“To tackle inflation, the government knows it needs to raise interest rates and rein in spending, particularly by state-owned enterprises that have used state financial institutions as their own piggy banks. But any sudden moves can also threaten to strangle businesses and scare away new investors, which Vietnam must avoid if it is to meet its revised 7% growth rate.” However, “Vietnam’s long-term economic outlook is good, says Tom Nguyen, head of global markets at Deutsche Bank in Ho Chi Minh City.”

That perpetual optimism may be in shorter supply these days.

Beyond Vietnam’s recent stumble the larger issue of whether the China model, long considered a rival to western free market ideals, is on the ropes as well. Top-down state-directed growth, primarily through state-owned companies or those closely associated with single party states, appear increasingly vulnerable not only to international financial crisis, but to their own lack of reform.

Of course greed and speculation was a hallmark of the global financial crisis as well. Raging free markets unhinged from regulations gave rise to the worst U.S. economic recession since the Great Depression.

At its root these problems, for both developed and developing economies, center on a misguided race to riches. All growth is not created equal. Policies need to focus first and foremost on building and sustaining a middle class which in turn drives balanced growth and stability for all.

Photo: Wikimedia Commons