Nobel Laureates (and other economists) on the Financial Crisis

I'm sure you've heard too much about the financial crisis these days, but here I'm posting some central paragraphs of the most recent publications of economical experts. As experts go, they are as big as you can get. (*author's title hyperlinks to the full original article)

Joseph E. Stiglitz, 2001 Nobel laureate, econ professor at Columbia University:

We could do more with less money. The holes in financial institutions’ balance sheets should be filled in a transparent way. The Scandinavian countries showed the way two decades ago. Warren Buffet showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential.

This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets. Finally, it can be done far more quickly.

At the same time, several steps can be taken to reduce foreclosures. First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit. The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor. Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses. Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs.

By contrast, US Treasury Secretary Henry Paulson’s approach is another example of the kind of shell games that got America into its mess. Investment banks and credit rating agencies believed in financial alchemy – the notion that significant value could be created by slicing and dicing securities. The new view is that real value can be created by un-slicing and un-dicing – pulling these assets out of the financial system and turning them over to the government. But turning them over to the government at market value doesn’t improve banks’ balance sheet; to do that requires overpaying for the assets, a transfer of wealth from ordinary taxpayers to the banks..

In the end, there is a high likelihood that if such a plan is ultimately adopted, American taxpayers will be left on the hook. In environmental economics, there is a basic principle, called “the polluter pays principle.” It is a matter of both equity and efficiency. Wall Street has polluted the economy with toxic mortgages. It should pay for the cleanup.

Download Stiglitz's lecture on Credit Crunch from the James Martin 21st Century School: Here

Gary S. Becker, 1992 Nobel laureate, econ professor at University of Chicago:

I believe it is unwise to give governments equity in private companies, even if the government does not have voting rights in company policies. Many examples in recent history, such as the current Alitalia fiasco, show that political interests outweigh economic ones when governments have some ownership of private companies. This is likely to happen in this bailout if some banks that are helped decide to sharply cut employment in the districts of some congressmen, or to transfer many jobs overseas.

Taxpayers may be stuck with hundreds of billions of dollars of losses from the various government insurance provisions and government purchases of assets. Although the media has made much of this possibility through headlines like "$700 Billion Bailout," such large losses are highly unlikely except in the low probability event that the economy falls into a sustained major depression. Indeed, with efficient auctions, the government may well make money on its actions, just as the Resolution Trust Corporation that took over many savings-and-loan banks during the 1980s crisis did not lose much, if any, money. By buying assets when they are depressed and waiting out the crisis, the government may have a profit on these assets when they are finally sold back to the private sector. Making money does not mean the government involvement is wise, but the likely losses to taxpayers are being greatly exaggerated.

The temporary banning of short sales is an example of a perennial approach to difficulties in financial markets and elsewhere; namely, "shoot the messenger." Short sales did not cause the crisis, but reflect beliefs about how long the slide will continue. Trying to prevent these beliefs from being expressed suppresses useful information, and also creates serious problems for many hedge funds that use short sales to hedge other risks. Their ban can also cause greater panic in other markets.

The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types of stress. In light of such limitations, it is difficult to propose long-term reforms. Still, a few reforms seem reasonably likely to reduce the probability of future financial crises.

- Increase capital requirements. The capital requirements of banks relative to assets should be increased after the crisis is over in order to prevent the highly leveraged ratios of assets to capital in financial institutions during the past several years. Possibly a minimum ratio of capital to assets should be imposed by the Fed on investment banks and money funds. As much as possible, the measure of capital should not be its book value but its market value, such as the market value of publicly traded shares of banks. Book value measures, for example, apparently badly missed the plight of Japanese banks during their decade-long banking crisis of the 1990s.

- Sell Freddie and Fannie. The government should as quickly as possible sell Freddie Mac and Fannie Mae to fully private companies that receive no government insurance or other help. These two giants did not cause the housing mess, but in recent years they surely greatly contributed to it, partly through congressional pressure on them to increase their purchases of subprime loans. They have owned or guaranteed almost half of the $12 trillion in outstanding mortgages while having a small capital base. The housing market already has excessive amounts of government subsidies, such as from the tax exemption of interest on mortgages, and should not have government sponsored enterprises that insure mortgage-backed securities.

- No more bailouts. The "too big to fail" approach to banks and other companies should be abandoned as new long-term financial policies are developed. Such an approach is inconsistent with a free-market economy. It also has caused dubious company bailouts in the past, such as the large government loan years ago to Chrysler, a company that remained weak and should have been allowed to go into bankruptcy. All the American auto companies have asked for and received handouts too since they cannot compete against Japanese, Korean and German car makers, partly because these American companies have been incredibly badly managed. A "too many institutions in trouble to fail principle," as in the present financial crisis, may still be necessary on rare occasions, but failure of badly run large financial and other companies is healthy and indeed necessary for the survival of a robust free-enterprise competitive system.

Edmunds S. Phelps, 2006 Nobel laureate, Director of the Center on Capitalism and Society at Columbia University

House Republicans and some economists object, saying that the government could attain its goal with a bigger or surer profit by selling the banks "default insurance" on their distressed assets: the premiums paid are hoped to far exceed the default costs. To me, government entry into the default insurance business is little different from government purchasing the assets. It is not clear to me that selling default insurance would be more profitable.

House Democrats want a parallel program that would help defaulting mortgage borrowers to avoid foreclosure -- to help them "stay in their homes." Such a step might set an undesirable precedent in economic policy. If, after investing in my vocational training, I cannot make it in the line of work I chose -- not at the real wage that the market has since established, at any rate -- will I be entitled to help from the government to "stay in my work"? Furthermore, many defaulters are housing speculators not families caught up in an adjustable rate mortgage they did not understand. Finally, the overinvestment in houses does not present the systemic risk of economic breakdown that the overextension of credit does.

However, the program to revive the operation of the banks through purchase of the toxic assets faces a sticky wicket. If the government sets the prices too low, the banks will supply little of their assets; they will prefer to hold them to maturity in order to get the price appreciation for themselves. The Treasury will then need to raise the terms. But that may cause the banks to hold off longer, speculating on still better terms ahead.

If, instead, the Treasury sets its prices too high, its funds will go far enough to buy only a portion of the toxic assets offered in response. Thus, it is not certain that such a program would work to clean out the toxic assets at all quickly. Subnormal operation of the banking industry might drag on for a few years.

A program of asset purchases, however needed, is limited in scope. It cannot be counted on to increase the equity capital of the banks -- to shore up their solvency. Underpaying for the toxic assets would actually inflict a further loss of capital. Overpaying the banks for their toxic assets could contribute capital, but that may not be politically feasible or attractive.

So it is clear that the main prong of any "rescue" plan must serve to advance the recapitalization of the banks. Cash transfusions in return for warrants are a good way to do it, as it lets taxpayers share in the upside. The rescue of Chrysler used warrants. This past Monday the FDIC got $12 billion in preferred stock and warrants in the deal that saw Citigroup buy Wachovia. The question is which banks are to be thrown a lifeline, which will have to sink or swim. This one-time dose of corporatism is unpleasant, though the banking industry is to blame for its necessity.

But these steps toward making the system operational again will leave it dysfunctional. We don't want to restore the system as it was. And the risk that the industry would cause another round of wreckage is not the only reason.

What has occurred is not just an old-fashioned banking crisis but also a banking scandal. Most of the big banks were shot through with short-termism, deceptive practices and self-dealing. We must institute basic changes in corporate governance and in management practice to restore responsibility and honesty for the sake of the economy and for the self-respect of the country.

We also need to return investment banking to its roots. There is more to the influence of the financial sector than merely its effects when it goes off the rails. The financial system is not a sort of circulatory system that passively carries fresh saving to the places in the economic body that demand the greatest investing -- as if guided by some "invisible hand." Judgment and vision -- of bankers, fund managers, angel investors and the rest -- matter hugely. So do the distortions, the limits and the license created by the regulatory system and the moral climate. To prosper and advance, the American business sector is going to need a financial system oriented toward business, not "home ownership."

Kenneth Rogoff, econ professor at Harvard University, former chief economist at the IMF

Does such nitpicking fail to recognize the urgency of fixing the financial system? Isn’t any plan better than none?

I, for one, am not convinced. Efficient financial systems are supposed to promote growth in the real economy, not impose a huge tax burden. And the US financial sector, in greasing the wheels of the real economy, has been soaking up an astounding 30% of corporate profits and 10% of wages. Thus, unlike in the 1930’s, the US faces a hypertrophied financial system. Isn’t it possible, then, that rather than causing a Great Depression, significant shrinkage of the financial sector, particularly if facilitated by an improved regulatory structure, might actually enhance efficiency and growth?

I am not suggesting that the government should sit on its hands. It needs to provide an expanded form of deposit insurance during this time of turmoil, so that there are no more Northern Rock-style bank runs. That was a big lesson of the 1930’s. The government may also need to consider injecting funds more directly into the mortgage sector while the private sector reconstitutes itself.

Certainly, the government must also find better ways to help homeowners and their lenders work out efficient bankruptcy proceedings. It makes no sense for banks to foreclose on homes when there are workout options whereby people could stay in their homes and banks could recover far more money.

UCLA econo professor Lee Ohanian:

I am particularly concerned about bad policies because significantly higher taxes have been proposed by Barack Obama. His plan would raise the marginal tax rate on the most productive workers more than 10 percentage points -- an increase that would bring us near Western European levels. His plan would also raise capital income taxes, taxing capital gains and dividends at 20%, compared to a 15% rate under Sen. John McCain's plan. A five percentage-point difference might strike you as small, but it is not. I have calculated that a five percentage-point difference in overall capital income taxation over the long haul is equal to a difference in the nation's capital stock of about 18%. This means a 6% difference in GDP and a 6% difference in the average wage rate. This means that real GDP and the average wage would fall, gradually but persistently declining about 6% after 25 years. That's not quite a Great Depression, but a significant step towards one.

What should be done? We should encourage the immigration of prime-age individuals. Beginning in 2007, net immigration fell to half of its level over the previous five years. Increasing immigration would increase the demand for housing and raise home prices. And note that the benefit would be immediate. Home prices -- and the value of subprime obligations -- would rise in anticipation of a higher population base. The U.S. particularly needs highly skilled workers. These workers not only would purchase homes, but would generate higher living standards for all Americans.

Rivalry and Music

Two New York Times articles I enjoyed today.

One is New York and London's rivalry on maintaining/overtaking the title of World's Financial Capital.

And the other, is Times' music critics giving their list of best Bernstein recordings. My own list as follows:

• MAHLER: SYMPHONY NO. 5 Vienna Philharmonic, conducted by Bernstein (Deutsche Grammophon; CD).
• BEETHOVEN: SYMPHONY NO. 3 New York Philharmonic, conducted by Bernstein (Sony Classical; CD).
• BERNSTEIN: SYMPHONY NO. 2; ‘SERENADE’ Lukas Foss, pianist; Isaac Stern, violinist; Symphony of the Air, New York Philharmonic, conducted by Leonard Bernstein (Sony Classical; CD).
• COPLAND: APPALACHIAN SPRING, RODEO, BILLY THE KID, etc New York Philharmonic, conducted by Bernstein (Sony Classical, CD)
  
• MOZART: SYMPHONIES NO 40 & 41 Vienna Philharmonic, conducted by Bernstein (Deutsche Grammophon Masters; CD)

Finance and music are indeed the odd couple. But even if, as the Times article pointed out, London's ascendance in financial sector is threatening New York's egos and bragging rights and more, New York still has a better orchestra=)

A Pantheon of Media Gods

My first reaction was OMG, this is hilarious. But then, this is so true.

The designer, Jessie Rauch, is a student at Rhode Island School of Design, and "A Pantheon of Media Gods" is one of many school projects she worked on. The idea is a simple one:

Media celebrities are transformed into Greek Gods as metaphorical commentary on the power that individual pundits and journalists have in controlling access to information and in the shaping of public opinion.

The only thing is, I didn't see Brian Williams... or Jon Stewart for that matter, since Colbert is here.

Prep for Katie Couric

Do you ever wonder how these big name anchors like Brian Williams and Katie Couric could be so well-informed about everything in the world and always (well, at least most of the time) successfully avoid asking the stupid and obvious questions? The not-so-secret answer is that they've got researchers do the prep work for them.

I was told today that Katie Couric is interviewing the two presumptive presidential nominee John McCain and Barack Obama tomorrow night, and had to do research on Indian issues relating to the US, everything from the economy, to politics, to social, all for one question posing to the candidates. Maybe not even one, just a half a question combined with China, mention the name of the country with 1.13 billion people in the passing, a question like "global warming, gas prices, blah blah blah, China and India is gorging up energy while emitting a bunch of carbon dioxide, what do you plan to do?" Even though I know she may very well ask this kind of stereotypical question, I feel obliged to bring up on the table something the candidates maybe less willing to talk about - the India-US nuclear deal.

Research on India - US Nuclear Pact

Intro & Development of India – US Nuclear Pact:

Washington outlawed nuclear trade with India when Delhi tested a device in 1974, the pact now would lift the ban and supply fuel and reactor technology for civilian programs, even though India has refused to sign the Nuclear Non-Proliferation Treaty.

• June 26, 1946 Pandit Jawaharlal Nehru, soon to become independent India's first Prime Minister, expresses hope that his country will harness nuclear power and develop nuclear weapons

• 18 May, 1974 First Indian nuclear device tested

• July 18, 2005. President Bush and Indian Prime Minister Manmohan Singh made a joint statement regarding civilian nuclear energy cooperation, overturning three decades of US policy (http://www.whitehouse.gov/news/releases/2005/07/20050718-6.html)

• August 2007. India and the United States finalized the terms and a bilateral 123 Agreement concerning peaceful use of nuclear energy was unveiled (http://www.state.gov/r/pa/prs/ps/2007/aug/90050.htm)

• August 2007 Communist allies of Indian Government threaten to withdraw support over the pact, saying that it compromises sovereignty

• October 2007 Snap election averted in India after Government agrees to delay approaching the International Atomic Energy Agency with the accord (necessary step to seal deal)

• Feburary 2008 United States steps up pressure on India to close deal

• July 2008 Coalition talks in India fail. Indian leaders swapping allies to push the deal. The Congress Party is replacing its leftist allies, led by the Communist Party, with a coalition led by the Samajwadi, a North Indian socialist party. The Congress Party’s grip on India is weakening as inflation and fuel prices rise and the economy slows, and securing an ally is crucial to staying in power. Left calls for vote of no confidence. India submits accord to the IAEA

• July 10, 2008 Singh calls for vote of confidence

• July 22, 2008 Indian government survived a parliamentary no-confidence vote with the margin of merely 19 votes.

• August 1, 2008. IAEA Approves Inspections Plan Required for India-U.S. Nuclear Deal

Terms of the deal:

• India agrees to allow inspectors from the International Atomic Energy Association (IAEA), the United Nations' nuclear watchdog group, access to its civilian nuclear program. But India would decide which of its many nuclear facilities to classify as civilian. By March 2006, India promised to place fourteen of its twenty-two power reactors under IAEA safeguards permanently. India also promised that all future civilian thermal and breeder reactors shall be placed under IAEA safeguards permanently. Teresita Schaffer, director of the South Asia program at the Center for Strategic and International Studies, says these will now include domestically built plants, which India has not been willing to safeguard before now. Military facilities—and stockpiles of nuclear fuel that India has produced up to now—will be exempt from inspections or safeguards.

• India commits to signing an Additional Protocol (PDF)—which allows more intrusive IAEA inspections—or its civilian facilities.

• India agrees to continue its moratorium on nuclear weapons testing.

• India commits to strengthening the security of its nuclear arsenals.

• India works toward negotiating a Fissile Material Cutoff Treaty (FMCT) with the United States banning the production of fissile material for weapons purposes.India agrees to prevent the spread of enrichment and reprocessing technologies to states that don't possess them and to support international nonproliferation efforts.

• U.S. companies will be allowed to build nuclear reactors in India and provide nuclear fuel for its civilian energy program.

What kind of technology would India receive in return?

India would be eligible to buy U.S. dual-use nuclear technology, including materials and equipment that could be used to enrich uranium or reprocess plutonium, potentially creating the material for nuclear bombs. It would also receive imported fuel for its nuclear reactors.

Supporting:

IAEA Director General Mohamed ElBaradei : "This agreement is an important step towards satisfying India´s growing need for energy, including nuclear technology and fuel, as an engine for development. It would also bring India closer as an important partner in the non-proliferation regime," he said. "It would be a milestone, timely for ongoing efforts to consolidate the non-proliferation regime, combat nuclear terrorism and strengthen nuclear safety. The agreement would assure India of reliable access to nuclear technology and nuclear fuel. It would also be a step forward towards universalisation of the international safeguards regime. This agreement would serve the interests of both India and the international community."

• Bring India closer to U.S. - Nuclear partnership

Ashley Tellis of the Carnegie Endowment for International Peace—currently serving as an adviser to the State Department on Indian affairs—says in congressional testimony that the deal recognizes this growing relationship by engaging India, which has proven it is not a nuclear proliferation risk.

Philip D. Zelikow, a former top aide to Secretary of State Condoleezza Rice, said in an interview that the deal posed "the most significant issue of international engagement" in a generation and could one day represent "one of the most consequential things this administration did."

• for India: Energy

India has limited coal and uranium reserves and deepening energy needs. It hopes that by 2050 nuclear power can provide up to 25 percent of its electricity.

• for the nuclear nations: Making Money.

The Washington Post reports: "experts say India plans to sink up to $100 billion into its civilian nuclear industry over the next 20 years. Several nuclear-armed nations, including the United States, France and Russia, are vying for a chunk of that business".

• In terms of International Relations:

1. Encourage India to accept international safeguards on facilities it has not allowed to be inspected before. This is a major step, experts say, because the existing nonproliferation regime has failed either to force India to give up its nuclear weapons or make it accept international inspections and restrictions on its nuclear facilities. "President Bush's bilateral deal correctly recognizes that it is far better for the nonproliferation community if India works with it rather than against it," writes Seema Gahlaut of the University of Georgia's Center for International Trade and Security in a CSIS policy brief. IAEA Director-General Mohammed ElBaradei has strongly endorsed the deal, calling it a pragmatic way to bring India into the nonproliferation community.

2. Recognize India's history of imposing voluntary safeguards on its nuclear program. Proponents of the deal say India has an excellent record of setting credible safeguards on its nuclear program for the last thirty years. After the safeguards on the U.S.-supplied Tarapur nuclear facility expired in 1993, for example, India voluntarily established a new agreement with the IAEA to continue the restrictions.

3. Recognize that India has a good record on proliferation. Although it is not a signatory to the NPT, India has maintained strict controls on its nuclear technology and has not shared it with any other country. Proponents of the deal say this restraint shows that India, unlike its nuclear neighbor Pakistan, is committed to responsible nuclear stewardship and fighting proliferation. In May 2005 India passed a law, the WMD Act, which criminalizes the trade and brokering of sensitive technology.

4. Reward India's decision to adopt similar nuclear export standards as those imposed by the Nuclear Suppliers Group (NSG). India has thus far chosen to abide by the strict export controls on nuclear technology set by the NSG, a group of forty-five nuclear-supplier states that voluntarily coordinates controls of nuclear exports to non-nuclear-weapon states. Experts say if India chose to lift these voluntary restrictions, it could easily sell its technology to far less trustworthy countries around the world. The U.S. deal would reward the Indian government for its voluntary controls and give New Delhi incentive to continue them, against the demands of Indian hardliners who question what India gets out of placing such limits on itself.

Opposing:

• Reversal of half a century of U.S. nonproliferation efforts, undermine attempts to prevent states like Iran and North Korea from acquiring nuclear weapons, and potentially contribute to a nuclear arms race in Asia. “It's an unprecedented deal for India,” says Charles D. Ferguson, science and technology fellow at the Council on Foreign Relations. “If you look at the three countries outside the Nuclear Non-Proliferation Treaty (NPT)—Israel, India, and Pakistan—this stands to be a unique deal.”

• U.S. can’t make money from it. Business Weekly: “The problem is, the Americans may get little from the deal. Instead, Paris-based Areva and two Russian companies are poised to exploit long-standing ties to New Delhi to win the lion's share of the work on the 30 or so reactors the Indians hope to build, at a total cost of some $100 billion. The Russians are already helping to build one reactor, and Areva appears likely to get a contract for another. "Historically, Russia has been a more consistent ally for India, and the French have the advantage of being world leaders in nuclear technology," says Padmanabha Chari of the Institute for Peace & Conflict Studies, a Delhi think tank.”

• Lack sufficient safeguards to prevent New Delhi from continuing to produce nuclear weapons. "We are going to be sending, or allowing others to send, fresh fuel to India—including yellowcake and lightly enriched uraniumt—that will free up Indian domestic sources of fuel to be solely dedicated to making many more bombs than they would otherwise have been able to make," says Henry Sokolski, executive director of the Nonproliferation Policy Education Center, a nonprofit organization dedicated to improving awareness of proliferation issues. **India claimed it was using nuclear technology for civilian purposes right up until its first nuclear weapons test in 1974. A Congressional Research Service report on the agreement states, "There are no measures in this global partnership to restrain India's nuclear weapons program."[http://www.fas.org/sgp/crs/row/RL33016.pdf]

1. The safeguards apply only to facilities and material manufactured by India beginning when the agreement was reached. It doesn't cover the fissile material produced by India over the last several decades of nuclear activity. The CRS report says, "A significant question is how India, in the absence of full-scope safeguards, can provide adequate confidence that U.S. peaceful nuclear technology will not be diverted to nuclear weapons purposes."
2. The deal does not require India to cap or limit its fissile material production. This comes at a time when nearly all the major nuclear powers—including the United States, France, Britain, and Russia—are moving to limit their production.
3. The deal does not require India to restrict the number of nuclear weapons it plans to produce.

• There are far more cost-efficient ways to improve India's energy and technology sectors. These could include making India's existing electricity grid more efficient, restructuring the country's coal industry, and expanding the use of renewable energy sources, Sokolski said in congressional testimony. All these steps would involve much less dangerous transfers of technology that would not be dual-use, and therefore not convertible to nuclear weapons production.

• The agreement was rushed and takes unnecessary risks without adequate preparation or expert review. The agreement "appears to have been formulated without a comprehensive high-level review of its potential impact on nonproliferation, the significant engagement of many of the government's most senior nonproliferation experts, or a clear plan for achieving its implementation," writes William C. Potter, director of the Center for Nonproliferation Studies at the Monterey Institute of International Studies, in Nonproliferation Review. "Indeed, it bears all the signs of a top-down administrative directive specifically designed to circumvent the interagency review process and to minimize input from any remnants of the traditional 'nonproliferation lobby.'"

Who needs to approve the agreement?

The final terms of the nuclear deal need approval from several sources before they can be implemented. The bodies required to approve the deal include:

• IAEA. check

• India's Parliament. check, after political instability and struggle

• The Nuclear Suppliers Group. ( conference in Vienna on August 21, 2008) The NSG tries to restrict the spread of nuclear technology that could be used in weapons programs through export controls. The United States will try to convince the group to make an exception for India, which may be a difficult case to make when the United States is simultaneously trying to prevent Iran and North Korea from gaining similar access to nuclear fuel and technology.

• Congress. Under the U.S. Atomic Energy Act, which regulates the trade of nuclear material, congressional approval is needed to pass the exemptions to U.S. laws required for the nuclear deal to be implemented. Members of Congress are showing resistance, with some calling for India to commit to strict limits on its nuclear weapons program before the deal goes through. "Congress needs to address the many troubling questions raised by this deal before it considers changing longstanding nonproliferation laws," David Albright, president of the Institute for Science and International Security, said in congressional testimony in October 2005. Problem is, according to Washington Post: There isn't much time; under U.S. law, Congress must be in session continuously for 30 days to consider the deal. Before that clock can start, the 45-nation Nuclear Suppliers Group must give India a green light. While the approval is likely, they won't happen instantaneously. And because of the long August recess, there may not be more than 30 "legislative days" left before Congress adjourns on Sept. 26. The deal raises many legitimate questions. But, on balance, it is in the United States' interest, and Congress should find the time to say yes -- in a lame-duck session after the November election, if necessary.

What effect will the U.S.-India deal have on the NPT?

It could gut the agreement, experts say. Article 1 of the treaty says nations that possess nuclear weapons agree not to help states that do not possess weapons to acquire them. Albright says that without additional measures to ensure a real barrier exists between India's military and civilian nuclear programs, the agreement "could pose serious risks to the security of the United States" by potentially allowing Indian companies to proliferate banned nuclear technology around the world. In addition, it could lead other suppliers—including Russia and China—to bend the international rules so they can sell their own nuclear technology to other countries, some of them hostile to the United States. On the other hand, experts like Gahlaut argue the NPT was already failing in its mission to prevent proliferation. She says many countries—including North Korea, Libya, Iran, and Iraq—have cheated while being signatories of the NPT.

What role does China play in the U.S.-Indian nuclear deal?

It is a motivating factor in the deal, some experts say. China's rise in the region is prompting the United States to seek a strategic relationship with India. "The United States is trying to cement its relationship with the world's largest democracy in order to counterbalance China," Ferguson says. The Bush administration is "hoping that latching onto India as the rising star of Asia could help them handle China," Sokolski says. But other experts say the growing economic relationship between China and India is so critical to New Delhi that its interests in China cannot be threatened or replaced by any agreement with the United States. Indians "have no interest whatsoever in trying to contain China because they believe this could be a self-fulfilling prophesy, and their whole policy is to seek the best possible relationship with China," Robert Blackwill, a former U.S. ambassador to India, said at a Council meeting February 23. Other experts worry U.S. nuclear aid to India could foster a dangerous nuclear rivalry between India and China. Though India has a strong interest in building economic relations with China, New Delhi is still wary of China's military rise in the region.

What effect will the deal have on U.S. and Indian relations with Pakistan?

Pakistan's President Pervez Musharraf, who has suffered fierce criticism at home—and survived two assassination attempts—or his strong alliance with the United States since 9/11, has not received a similar deal on nuclear energy from Washington. Some experts say this apparent U.S. favoritism toward India could increase the nuclear rivalry between the intensely competitive nations, and potentially raise tensions in the already dangerous region. "My impression is that [the Pakistanis] are worried this will feed the Indian nuclear weapons program and therefore weaken deterrence," Blackwill said. Other experts say the two countries, both admittedly now nuclear, could be forced to deal more cautiously with each other. Pakistan is already a proliferation risk: Pakistani nuclear scientist A.Q. Khan's illicit nuclear network, revealed in 2004, shocked the world with its brazen trade of nuclear technology. Some experts worry the U.S.-India deal could prompt Pakistan to go elsewhere for similar terms.

What’s the history of India’s nuclear program?

In the 1950s, the United States helped India develop nuclear energy under the Atoms for Peace program. The United States built a nuclear reactor for India, provided nuclear fuel for a time, and allowed Indian scientists study at U.S. nuclear laboratories. In 1968, India refused to sign the NPT, claiming it was biased. In 1974, India tested its first nuclear bomb, showing it could develop nuclear weapons with technology transferred for peaceful purposes. As a result, the United States isolated India for twenty-five years, refusing nuclear cooperation and trying to convince other countries to do the same. But since 2000, the United States has moved to build a "strategic partnership" with India, increasing cooperation in fields including spaceflight, satellite technology, and missile defense.

One-line Comments on Recent Chinese News

Beijing’s power supply capability increased 124 percent from 2001 (China Daily)

- How much of the power is from coal power stations, may I ask?


(Ironically, ) China on brink of electricity shortfall. (FT)

- You see, that's where totalitarian comes in handy - the whole country for one city.


China seizes 46m illegal publications. (China Daily)

- Illegal publication or illegal censorship? Isn't it just convenient that the rule is so loosely set?


2.9 million RMB to buy a mobile phone number. (cnBeta)

- Is China rich or poor? A developing country or a developed country?


The Ministry of Health commands medical procedures be halted, in order to ensure blood provision for the Olympics. (Jinghua Newspaper, in Chinese)

- I'm sorry, but this sounds like the exact definition of a "bloody Olympics".


（As if that's not enough), China bans sales of about 1000 medicines that contain ingredients of stimulant drugs. And that includes cough syrup. (People.com.cn)

- Don't get sick!

WikipediaWictionaryChambers (UK)Google imagesGoogle defineThe Free DictionaryJoin exampleWordNetGoogleUrban DictionaryAnswers.comrhymezone.comMerriam-Webster

See the Waterfalls Tomorrow

If you want to see the 4 New York City waterfalls designed by Olafur Eliassonwhich, which will start running tomorrow morning, here's a map and some viewing tips from Gothamist. (I personally wouldn't rush to see them though, after all, I haven't even been to the Statue of Liberty, and the only time I went up the Empire State Building was accompany some friends from France. And I believe I'm not alone in this=)

Olafur Eliasson's Waterfalls start flowing tomorrow morning-- perhaps as early as 7am, but sadly, the Circle Line tours of the bay don't start until Friday. So if you want a good view (or a good picture) of these babies, you're going to have to view them from land. No problem: we've marked the best viewing spots for each one on the map above.

1. Governors Island-- this is the toughest one to view without a boat. Best spot is from the piers next to the Maritime Ferry Building at the tip of Manhattan. For a closeup, bring binoculars or a telephoto lens.

2. Brooklyn Piers-- for the angle shown above, you'll need to be on the Manhattan side, on the waterfront by the Helicopter terminal. If you don't mind seeing the back of the falls, you can get a closeup view from the Brooklyn Promenade, or from Empire State Park, north of the Bridge.

4. Pier 35-- this waterfall is best seen from the path right under the FDR that runs alongside the water, or from above, on the Manhattan Bridge Bike Path (north side of the bridge-- be careful of bikers!)

Timing: in the morning, the light will be coming from the East, so you'll get better photographs on the Brooklyn side. In the afternoon or at night, the light will be from the west, and the falls will be lit up with lights, so it's better to shoot from the Manhattan positions.

A block of open space is being developed into a public park for better waterfall project viewing. Pier 1, just south of the Fulton Ferry Landing (map), will be the best spot to see all 4 waterfalls at once.

Everything about Obama's China Adviser - Jeffrey Bader

(some friends on twitter have been talking about Jeff Bader for some days now, and there seem to be little resources about the man most likely to shape the U.S.-China policy in the next eight years, so I decided to do a full research on this guy, and pulled out all materials I can find. Here's all the relevant literature I could find, organized them in 3 parts: 1) Profile, 2) Quotes on the Tibetan Issue, the Olympics, China Trade, and 3) three full-length articles written by the man himself. I have highlighted some important parts in the two relatively long articles for the convenience of your reading.


Profile

from In the Tanks
Gregg Sangillo. National Journal. Washington: Apr 23, 2005. Vol. 37, Iss. 17; pg. 1262, 2 pgs

Jeffrey Bader is taking his 27 years of government experience to the Brookings Institution, where he will direct the think tank's new China Initiative. Though Bader has spent a number of years working on China issues since the 1970s, he was originally focused on a different continent altogether, earning his doctorate in European history from Columbia University. After entering the Foreign Service, Bader was sent to Zaire because he spoke French. When he returned, he landed a staff assistant position to Richard Holbrooke in the East Asia Pacific Bureau at the State Department, where Bader worked on the official normalization of relations with Beijing in 1979. Bader says he got the "China bug," but he was also thinking practically about his career. "Within the State Department at the time, you kind of needed to decide if you wanted to be a big fish in the small pond, or a small fish in the big pond. And I always felt that relations with Europe was a very big pond ... whereas in China, at the time, just a handful of people were involved," Bader says, adding, "It seemed like the issue of the future."

Bader, 59, was a political officer in Beijing in the early 1980s, and later worked at the U.S. Mission to the United Nations. From 1987 to 1990, he was deputy director of the China desk at State, where he was involved in the U.S. response to the crackdown in Tiananmen Square. Bader later served as the China desk director, before becoming deputy assistant secretary of State for East Asian and Pacific affairs. From 1997 to 1999, he was director of Asian affairs at the National Security Council, and then served as ambassador to Namibia. He joined the U.S. Trade Representative's Office during the George W. Bush administration, and led negotiations completing China and Taiwan's accession to the World Trade Organization. He was most recently with Stonebridge International, an international consulting firm run by former National Security Adviser Sandy Berger, which helps a number of corporate clients break into the China market.

Bader believes that the Brookings initiative is well timed, with U.S.-China relations becoming an increasingly hot topic. "I think that there's a longer term debate that's beginning in this country about the relationship with China, because people are now beginning to realize the full ramifications of China's emergence." -Gregg Sangillo


Bader Quotes

On Tibet

1. China analysts say the violence in Tibet demands that the president chart a careful course. ''I think to the extent that he can work the issue privately, it's better, frankly,'' said Jeffrey A. Bader, an Asia specialist who worked at the National Security Council under President Clinton. ''The public statements just make the Chinese dig in their heels all the more, make them more resolute in their repression.''

from Bush Silent, but Others Speak Out on Tibet Crackdown
By SHERYL GAY STOLBERG and SOMINI SENGUPTA; The New York Times March 22, 2008 Section A; Column 0; Foreign Desk; Pg. 3


On Olympics

1. Although China insists politics should play no role in sport, the irony is that hosting the Games is entirely political, says Jeffrey Bader, of Washington's Brookings Institution. Speaking to a panel last year, Bader said "Of course the Chinese are seeking to use the Olympics for their own political ends.

"That's why they want to have the Olympics. They did not decide to host the Olympics because of a newly found love of sports; they did it for political reasons."

Consequently, "it's entirely appropriate for those who want to shine a spotlight on China's shortcomings, to do exactly as China is in seeking to demonstrate their successes."

But Bader, too, says a boycott isn't in the cards. "I don't think there's a mood in any capital to deny athletes participation because of China's conduct," he said by phone. "There may be other means by which groups will express their anger; to express their view that China's behaviour is unacceptable. But I don't think it will be a boycott."

There may be more trouble ahead, he warns. "If what we've seen in the past week is a harbinger of what we're going to see between now and August - there's a greater potential (for things) to get out of hand."

from China's Olympic angst; Murmurs of boycotting opening ceremonies over deadly crackdown in Tibet are rattling Beijing officials
Bill Schiller. Toronto Star. Toronto, Ont.: Mar 22, 2008. pg. AA.1


2. "The Olympics are a major event in the history of the modern Chinese nation," Brookings Institution senior fellow Jeffrey Bader says. "It's a source of tremendous national pride, not just for the leadership but also for pretty much the entire population."

from In Beijing, mum's the word for Olympians; Amid fears of protests, athletes told to watch what they say
by Janice Lloyd; USA TODAY February 21, 2008 NEWS; Pg. 1A


3. Specialists on US-China relations said current frictions should not be exaggerated. "Steven Spielberg is just a private citizen," said Jeffrey Bader, the National Security Council director for Asian affairs at the Clinton White House, and now a senior fellow at the Brookings Institution. "What he said will add to the pressures on China over Darfur, which is no bad thing. But a stampede in that direction? I don't think so."

from Bush rules out an Olympic boycott
Rupert Cornwell. The Independent. London (UK): Feb 15, 2008. pg. 2


On China Trade

1. "If you look at the problems of the last few months, like the product safety issue, the strategic dialogue has served as a mechanism for dealing with them," said Jeffrey Bader, director of the China program at the Brookings Institution. "If the Chinese didn't have confidence in Paulson, we probably would have seen some uglier retaliations."

from China's preference: Chinese goods U.S. and Europe cry foul on trade
Steven R. Weisman. International Herald Tribune. Paris: Nov 16, 2007. pg. 1


2. Speaking in Washington, assistant U.S. trade representative for China Jeffrey Bader said the Bush administration had set up an inter- agency group to monitor China's compliance with its WTO commitments and was prepared to take tough action if the mainland blocked U.S. imports.

from TRADE-CHINA: BEIJING USES GM RULES TO SHIELD FOOD PRODUCERS
Antoaneta Bezlova. Global Information Network. New York: Jan 30, 2002. pg. 1


3. In a reminder of how interconnected the world has become, chief U.S. negotiator Jeffrey Bader devoted much of his speech to reading the long list of countries whose citizens perished in last Tuesday's jetliner attacks on the World Trade Center.

"At a time of the most profound national sorrow, combined with determination and resolve to defeat the deadly menace of terrorism, the United States government will not neglect its other interests," Mr. Bader said. "This week's decision on China's WTO entry demonstrates that."

from WTO approves agreement on China's membership
Clare Nullis. The Globe and Mail. Toronto, Ont.: Sep 18, 2001. pg. B.18


4. "The decision to bring China into the WTO will commit China to adhering to the rules-based global trading system," said Jeffrey Bader, chief U.S. negotiator. "It will open markets and contribute greatly" to encouraging reform in China.

from Pact brings China to door of global trade organization
Naomi Koppel. The Globe and Mail. Toronto, Ont.: Sep 15, 2001. pg. A.18


Full-Length Bader Articles

(though these articles are old, some points are still relevant in thinking about the current or future U.S. - China policy)


Urgent tasks for Bush ahead of the Apec summit
Jeffrey Bader and Matthew Goodman. FT.com. London: Nov 14, 2005. pg. 1

There is more at stake in President George W. Bush's trip to north-east Asia this week than there is in most such excursions. Beyond pressing issues such as North Korea, avian flu, and currency realignment, the critical long-range challenge in the region is ensuring a constructive relationship among China, Japan and the US. When they meet later this week, Mr Bush should press his Japanese and Chinese counterparts to take steps to defuse bilateral tensions and agree to a trilateral dialogue aimed at promoting security and prosperity in Asia.

Relations between Beijing and Tokyo, already strained, have deteriorated sharply over the past year. Sino-Japanese friction is based only in part on differences about the past; at its core, the rivalry is over the future. History has never seen a strong China and a strong Japan at the same time. But this promises to be the case in the 21st century, and both are uneasy about what it portends for their own national destinies.

Simmering resentment in China over the repeated visits by Junichiro Koizumi, the Japanese prime minister, to Tokyo's Yasukuni shrine, where 14 war criminals are buried, erupted in violent demonstrations against Japanese interests in Shanghai last April. Images of the attacks on Japanese television, in turn, fed growing nationalist sentiment in Japan over Beijing's exploitation of history for political gain.

Bilateral friction also has been fuelled by a dispute over energy rights in the waters between the two countries, by unhappiness over Japan's treatment of history in school textbooks and by Chinese opposition to Japan's bid for a permanent seat on the United Nations Security Council. Less visibly, Beijing and Tokyo wrestle for the microphone whenever broader groupings of regional officials meet, for example in the run-up to next month's east Asian summit in Kuala Lumpur.

Distracted by other foreign policy and domestic concerns, Washington has put too little focus on the strategic challenge posed by Sino-Japanese hostility. Some US officials apparently believe that America might benefit from a certain amount of tension between Japan and China. There are many issues in Asia that demand the president's attention, from halting North Korea's nuclear ambitions to promoting balanced economic policies. Yet the risks to US strategic interests posed by these difficult challenges pale in comparison to the prospect of open Sino-Japanese conflict.

Even festering resentment across the East China Sea, by limiting the scope for co-operation on a range of regional challenges, undermines long-term American goals in Asia. Should regional politics become a zero-sum game in which countries have to choose sides and maintain good relations with one at the expense of the other, the prospects for a prosperous and peaceful Asia are sharply diminished.

There are clear steps that each of the three Pacific powers could take to build a more constructive trilateral relationship. By visiting Yasukuni shrine again on October 17, Mr Koizumi missed a unique opportunity to use his strong mandate from the September elections to perform a "Nixon in China" act by pointedly forgoing the widely expected visit. As long as Japan's war criminals are enshrined there, Mr Koizumi should stay away from Yasukuni. If he will not, he should at least assuage Chinese (and Korean) concerns by clarifying publicly the rationale for the visits, namely honouring Japan's millions of war casualties, while explicitly and forcefully denouncing the war criminals and past Japanese atrocities in China. Tokyo should also begin a long-overdue process of investing in institutions of reconciliation, akin to the broad- ranging cultural, educational and other initiatives vis-a-vis Israel and Poland that Germany undertook after the second world war.

In the light of its rising economic and political influence, Beijing should be in a more confident position to reach out to Japan. China should drop its opposition to Japan's bid for permanent Security Council membership. It should allow, without conditions, the resumption of bilateral visits at the head of state and head of government level.

More fundamentally, as Japan faces up more frankly to its own history in the first half of the 20th century, Beijing should educate its people about Japan's responsible international behaviour in the second half of the century and stop gratuitously stoking popular anger in China against Japan.

For its part, Washington could facilitate Sino-Japanese reconciliation by deepening its co-ordinated engagement with both sides and making clear its support for rapprochement. Robert Zoellick, US deputy secretary of state, has put forward the excellent idea of a trilateral discussion among historians of the three countries, since tendentious interpretations of history seem to be such an emotional flashpoint. Washington should also encourage Tokyo and Beijing to settle their territorial dispute over the median line in the East China Sea, either bilaterally or through arbitration if necessary.

And they should all agree to start a high-level, trilateral strategic dialogue. Japan, China and the US are the three countries whose actions will do most to determine whether the 21st century in east Asia is more peaceful and prosperous than the last. It is time they understood their shared interest and responsibility to ensure that this is so.

Jeffrey Bader is director of the China Initiative at The Brookings Institution. Matthew Goodman is vice-president of Stonebridge International, a strategic consulting firm in Washington, DC.




Oil politics, the Middle East and the Middle Kingdom

JEFFREY BADER and FLYNT LEVERETT. Financial Times. London (UK): Aug 17, 2005. pg. 11


The rapid, almost unfathomable growth in China's energy demand is a key element in Beijing's growing interest in exclusive deals with Middle Eastern energy producers for oil and gas. The recent, ultimately unsuccessful bid by CNOOC to acquire Unocal has reinforced perceptions in Beijing that China cannot rely solely on the global energy market to meet its energy needs because US policy will not allow China reliable access to that market. These developments, if not managed intelligently by Beijing and Washington, have potentially profound implications for critical US interests in the Middle East and US-China relations.

China is already the world's second largest oil consumer, after the US. A net importer since 1993, China now purchases from abroad close to 3m barrels per day. In the last two years, 35 per cent of the increment in the world's consumption of petroleum has been China's. Its automobile population is expected to be the world's second largest market within a decade.

To meet this demand, China has been working to expand ties with Middle Eastern oil-producing states, including Iran and Sudan, which have problematic relations with the US. China is seeking to secure its access to Middle Eastern oil by concluding exclusive supply and equity deals and by expanding its political influence in the region.

Middle Eastern energy producers, meanwhile, are looking to China as an alternative to unchallenged US hegemony in the region. Even the staunchly anti-communist Saudi regime is cultivating China as a consumer of its oil and gas to hedge against further deterioration in US-Saudi relations, and Mahmoud Ahmadinejad, the newly inaugurated Iranian president, has expressed interest in forging strategic partnerships with China and India.

Even before its recent energy focus, China's involvement in the Middle East had been frequently problematic for US interests. Starting in the 1980s, China established its position in the region through arms sales to rogue regimes, including Saddam Hussein's Iraq, and transfers of weapons technology.

In the past, China responded to high-level representations about US security concerns and reined in some of its troublesome activities in the Middle East - for example, terminating its controversial nuclear co-operation with Iran in the 1990s. Now, however, China's escalating energy needs and sense of its own rising economic power may make it harder for Washington to influence Beijing's Middle East policy. Already, China's Middle Eastern push is colliding with US policy goals in the region. Chinese exclusive supply or equity deals could distort energy markets beyond the already considerable natural pressure that Chinese demands are generating. Beijing, for example, is the principal non-African supporter of the Sudanese government, blocking the imposition of international sanctions on a state that has become an important oil supplier to China.

While America's interests in the region diverge in significant ways from China's, it would be a mistake under current conditions to seek to exclude China from the Middle East, or to isolate it more broadly. Middle Eastern energy producers will not follow exhortations from Washington to cut off China. The better policy, with a better chance of success, is to try to work with China to give it a sense of energy security and shared interest in a stable Middle East. This would entail, among other things, assuring China that, short of a conflict that Washington is not seeking, the US will keep sea lanes open to China from the Persian Gulf. This would entail drawing China into discussions with key Middle Eastern countries and other parties about developing effective security arrangements for a region undergoing massive shifts in its internal balance of power.

Such an approach could help persuade China to rely more on international markets and less on exclusive supply deals, and would also increase chances that China would ultimately respect US national security and humanitarian goals in places such as Iran and Sudan. Hu Jintao, China's president, will visit the US next month. It is an opportunity for the Bush administration to lay out a path of co-operation with China on energy and the Middle East. Without such an approach, the clash of interests could be damaging not only to the US and China but could also feed a more general and unwelcome antagonism between the world's only superpower and the world's fastest growing power.

Jeffrey Bader is director of the China Initiative, Flynt Leverett is senior fellow at the Saban Center for Middle East Policy, both at the Brookings Institution



China after Deng Xiaoping: Prospects for continuity or change
(this is basically a general introduction to the China after the 1970s)

Jeffrey A Bader. Asian Affairs, an American Review. Washington: Summer 1997. Vol. 24, Iss. 2; pg. 69, 8 pgs

Even though the focus of this hearing is on analysis, not policy, for those of us involved in making policy it is an especially welcome opportunity. Good analysis does not always lead to good policy, but bad analysis is virtually certain to lead to bad policy. The administration welcomes the opportunity to supplement our own analytical efforts with the views of outside experts. The coming year or two in U.S.-China relations will be filled with important policy decisions. Those decisions will cover fundamental aspects of China's interaction with the United States, in areas including regional security, nonproliferation, military cooperation, peaceful nuclear cooperation, human rights, trade, the environment, law enforcement, and Hong Kong, among other issues in our increasingly multifaceted relationship. They will occur against the backdrop of a series of high-level visits, including state visits by President Clinton and Jiang Zemin. Secretary Madeleine Albright was the first high official of the new administration to visit China and was the first U.S. official to meet with the Chinese leadership after Deng's death.

The timing of the hearing also is significant in that we recently marked the twenty-fifth anniversary of the Shanghai Communique, a cornerstone in U.S.-China relations, issued at the conclusion of former president Nixon's historic trip to China and his meeting with Mao Zedong and Zhou Enlai. Deng Xiaoping did not live to see the twenty-fifth anniversary, but he did more than any other Chinese leader to foster closer ties with the United States.

I will discuss Deng's legacy and the prospects for continuity or change in four areas: economic reform, political reform, China's place in the world, and U.S.-China relations. The last fifty years of Chinese politics have been filled with dramatic and often unpredicted events, which have occurred roughly once or twice a decade: the catastrophe of the Great Leap Forward and the accompanying famine that killed millions in the 1950s, the Cultural Revolution that purged the top leadership and traumatized a nation in the 1960s and early 1970s, the demise of Mao Zedong and his left-wing followers and the rise of market-oriented reform under Deng Xiaoping in the 1970s, and the mass demonstrations of 1986 and 1989 leading to the Tiananmen tragedy. I should note here that as paramount leader in 1989, Deng bore the responsibility, which he readily acknowledged afterward, for ending the Tiananmen demonstrations by force-a decision that left deep scars in Chinese society. That history is a cautionary warning against "straight-line" predictions in a society as dynamic and complex as China's.

The transition to the next generation of leadership-to Deng's successor-has been under way for several years. Deng left public office in 1989, when he resigned the chairmanship of the Communist Party's Central Military Commission, and he was incapacitated and inactive during the last years of his life. He promoted Jiang Zemin as the "core" of the next leadership generation. Jiang, who holds two critical Party positions (general secretary and Central Military Commission chairman) as well as the presidency, has grown in stature as the "first among equals." Deng's long survival also allowed Jiang to consolidate and strengthen his position. In public statements by the Party on the occasion of Deng's passing, Jiang's position as the "core" of the leadership was once again underscored. The other key figures in China's leadership are the members of the seven-man Politburo Standing Committee, notably Premier Li Peng, National People's Congress chairman Qiao Shi, economic czar and Vice Premier Zhu Rongji, and the top figures in the PLA [People's Liberation Army], represented on the Politburo Standing Committee by General Liu Huaqing.

As I noted, Deng did not play an active role in the leadership after his health began to deteriorate in 1993. The leadership team I just enumerated-in place essentially since 1989-has thus had several years to operate without Deng's direct guidance. Deng's longevity probably served to mute leadership differences and enforce cautious, consensus-oriented policies. That said, who China's "paramount leader" is may be less important now than it has been in the past. China has begun to diminish, if not yet thoroughly dismantle, the "rule of man" system and is gradually replacing it with a rule of law and institution-building that hold the promise of making future policy swings less violent than those of the 1949-1992 period. We will be watching with great interest the progress of this development.

Economic Reform

Deng Xiaoping was eulogized by his successors as the "chief architect" of China's reform program and its opening to the outside world. His commitment to economic reform led him, throughout the 1980s, to open China to foreign investment and business to acquire the resources, technology, and expertise necessary to carry out his plans for modernizing the country. He instigated highly successful economic reforms in agriculture, dismantling the commune system in favor of household contracts and private farming. He then moved to restructure the urban economy, introducing market incentives in industry, reforming price and wage systems, and granting public and private enterprises more autonomy.

His reforms were controversial and were opposed by orthodox Party officials, who feared they would reduce the Party's control over the economy and expose China to foreign influences. Deng's last response to that opposition was to make a much-publicized trip to south China in January 1992, during which he renewed his emphasis on economic reform, enunciated a new slogan-"market economy with socialist characteristics"-and urged that the pace of economic reform be accelerated. Those remarks gave a powerful boost to reform-minded leaders and set China more firmly on the reform course. His famous expression of a pragmatic approach to economic growth-"It doesn't matter if the cat is black or white, as long as it catches mice"-first uttered in the 1960s, continues to describe a policy that downplays ideology and relies increasingly on letting the economy respond to market forces rather than government dictates.

China's current leaders, in place since the early 1990s, have continued these policies. They remain committed to reform; indeed they recognize that reform is necessary for long-term growth and prosperity. Like Deng, they have learned that a command economy is inefficient and unresponsive and that an inward-looking China, cut off from the outside world, cannot progress.

And the progress China has achieved has been extraordinary. China's GDP rose 11.7 percent annually in real terms from 1991 to 1995. Its foreign exchange reserves top $100 billion, second only to Japan's. Eight in ten urban households have acquired a color television. An urban middle class is emerging, and a population along China's eastern coast of 250 to 350 million people live a lifestyle comparable to that of an advanced developing country.

But Deng also left behind a legacy of unsolved economic problems, and partial reform has brought new ones. His successors will have to grapple with the drain on the country's resources and the government's revenues caused by massive, inefficient, state-owned enterprises. That state-owned sector and the trade regime that protects them are obstacles to China's full realization of its economic potential and its accession to the World Trade Organization. There is a vast disparity between the remarkable expansion of the coastal area and the relatively slow growth of the internal provinces. China's population is 1.2 billion and growing, and the economy must create more than ten million new jobs per year. Eighty to 100 million people have migrated to Chinese cities and towns in search of work or higher incomes. Far-reaching reforms in the financial and communications sectors and massive expenditures on essential infrastructure projects must be undertaken if China is to continue its economic success. With its high growth rate, China is stretching the capacity of existing resources and energy. By 1993, China had become a net oil importer for the first time since the 1960s. By the year 2005, China could be importing 40 percent of its oil.

Implementing the necessary reforms will mean breaking the "iron rice bowl" of security to which urban Chinese workers and managers have been accustomed, a weaning process sure to cause even more discomfort, distress, and disruptions. Hence, although the overall direction of China's economic future remains clearly set, debate will continue over the pace and sequence of reforms, and over the distribution among competing groups of the benefits and proceeds of economic development. Some of the reforms to come are likely to be even more difficult than those already implemented.

Political Reform

Deng broke with tradition, imperial and communist, and relaxed the political grip of the central state apparatus. He decentralized economic decision making, empowering regional government to set their own targets and pace. He reorganized the Communist Party, the PLA, and the central government bureaucracies, ending the period of "mass struggle," class warfare, and "proletarian revolution," and adding an emphasis on professionalism and training. The legal and bureaucratic reforms he began continue to be implemented by his successors, who are beginning to institutionalize the rule of law; lay the foundation for more stable, rational, and transparent decision making; and make the judicial system more fair and predictable.

But Deng's refusal to recognize that an open political system is a necessary complement to, and component of, a strong, prosperous economy continues to haunt his successors. They, too, have yet to recognize that a modern society calls for broader participation in decisions about who governs China and how it is governed, greater respect for political rights, and separation of party and government. There was a brief period of experimentation in the late 1980s, but since June of 1989, maintaining stability by silencing public dissent and opposition before they can threaten the dominance of the Communist Party has been a central preoccupation of the leadership.

Despite government repression of political dissent, personal freedom for ordinary Chinese has burgeoned, with new opportunities that include freedom of movement; greater choice in employment, housing, education, and consumption; and expanded access to information with the creation of thousands of new media outlets. Quasi-independent organizations and the indirect influence of public opinion on politics have continued to grow. Village elections have given millions of Chinese the opportunity to exercise choice in determining who their local leaders will be.

So where is this combination of economic dynamism, greater social mobility, expanding options in daily life, and continuing political repression likely to lead China's political system? The collapse of the Soviet Union does not provide a useful model for understanding China's future. Although they had in common leadership by an authoritarian single party that was intolerant of public dissent and determined to monopolize power, the differences between the two are more striking. The USSR was an internal empire of numerous nationalities that nearly outnumbered the dominant Russians, clinging to an external empire through emphasis on a heavy industrial/military sector, an unwelcome alliance structure, and military occupation. Its economy was a shambles, offering consumers little. The USSR was closed to foreign investment and different forms of property ownership and resisted interaction with the West. China has had none of these characteristics for the last two decades.

Nonetheless, Chinese and foreign observers alike understand that China's vast social and economic problems and its rigid political structure present real risks of social disruption and disorder. Disillusionment with the political system has led to popular cynicism. Crime and corruption are on the rise. Ethnic tensions have surfaced in Tibet, and recently in Xinjiang, in the form of riots and a number of terrorist bombings.

Political opening is unwelcome not only because it threatens the dominant position of the leadership but because, for those who lived through the chaos between 1910 and 1950, or the mass movements of the 1950s, 1960s, and 1970s-most especially the Cultural Revolution-it raises the specter of instability or renewed chaos. We should not dismiss this as frivolous or mere pretext. That said, political reform will be necessary if China is to sustain its modernization program, and indeed, in the long term, it is inevitable. At some point, perhaps after this year's Fifteenth Party Congress, China's leaders will have to move beyond the negative conclusions they drew from Tiananmen and their reliance on repression to maintain stability. That is unlikely to mean significant movement toward Western-style democracy in the short term, but it could mean a resumption of the gradual liberalizing trends of the 1980s, perhaps buttressed ideologically by invocation of a so-called Chinese path to development.

China's Place in the World

Deng's decision to move China out of its isolation changed not only the manner in which it conducted its relations with other countries but also its vision of its role and place in the world. In pursuit of China's reunification, Deng devised the principle of "one China, two systems" for Hong Kong's reversion to Chinese sovereignty, a framework which the PRC has also proposed for Taiwan. Deng pushed China to join major international organizations and subscribe to multilateral treaties, moderated or ended its disputes with other nations, and halted its support for Communist insurgencies elsewhere. His decision to promote better relations with China's neighbors and major economic powers was rooted in his drive to ensure a peaceful international environment that would permit China to concentrate on its domestic economic and social modernization. His decision to send thousands of Chinese students to America has been a significant factor in expanding China's international outlook, as well as China's scientific knowledge. Deng also knew that opening the PRC to the outside world was the only way to acquire the resources, technology, and expertise necessary to modernize his country.

China's foreign policy since the late 1970s has been a function of this domestic priority. Under its current leadership, China has continued to reduce tensions with its neighbors, agreeing on drawdowns in troop deployment along borders and other confidence-building measures with Russia and its central Asian neighbors. China has adopted a less-confrontational and even conciliatory stand in resolving its territorial disputes with India and Japan. Its relations in the South China Sea area, however, although peaceful, are uneasy.

China today is also driven by a desire to be treated as a major power commensurate with its growing economic and military clout. Yet in many ways China remains a reluctant participant in the international system, unwilling or slow to accept the responsibilities that go with being a regional or global power. Steeped in a political environment of isolation and distrust of the outside world, China's current leaders are only slowly recognizing that China has an interest in conforming to international standards. If China wants to influence international norms, it must participate actively and responsibly in their formulation-and in their observance.

As China develops its interactions with its East Asian and Pacific neighbors, much attention will be focused on the People's Liberation Army. Modernization of the military ranked fourth among the "Four Modernizations" that Deng announced in 1978. The PLA chafed under a tight budget and has looked to extrabudgetary activities to supplement on-line funding. Since 1989 the PLA has benefited from more generous funding, but when adjusted for inflation, the actual increase has been unimpressive. Last year's nominal increase was 12.7 percent6 percent after inflation-with much of it devoted to a salary increase. Estimates of actual defense expenditures vary widely, but a credible figure is about 3 percent of GNP or, in absolute terms, less than Japan's. China's recent acquisitions of new weapons systems have relied increasingly on Russia, the source of SU-27 fighter aircraft, Kilo-class submarines, SA-IO surface-to-air missiles, Sovremenny-class destroyers, and heavy transport aircraft.

The relaxation of tensions with Russia having progressed impressively, PLA planning seems more oriented toward other potential areas of conflict off its eastern coast, as its aggressive exercises in the Taiwan Strait last year demonstrated. We do not see signs that the PLA is assuming or demanding the driving role in defining board strategic policy objectives, or that it seeks to reverse China's essentially conservative approach to its relations with its neighbors. A U.S. policy that stresses and balances forward deployment, mutual transparency, regional cooperation, maintenance of our alliances, and development of bilateral military ties helps ensure that there is clarity and predictability in China's defense policy and provides our best response to the PLA's evolution.

U.S.-China Relations

Let me turn last to our bilateral relationship with China. Deng played the central role in normalizing our bilateral relations in 1979 and in moving those relations toward cooperation. He was committed to a positive relationship with the United States as a necessary condition for China's modernization. Although Deng was not uncritical of the United States, at difficult junctures in the relationship he worked to prevent damage, often against advocates of a rigid approach.

China's current leadership appears to want to continue to develop a productive and cooperative relationship with the United States. President Jiang Zemin and Premier Li Peng went out of their way to emphasize to Secretary Albright their commitment to continuity and stability in the relationship. China's leaders want and need access to U.S. markets, technology, and know-how. They have somewhat mixed feelings about our military presence in the Asia-Pacific region but understand that it is a stabilizing influence that allows them to devote their attention and resources to domestic problems. Chinese students by the tens of thousands come to the United States for advanced study and training. Cultural, educational, and professional exchanges have brought Chinese from all walks of life to the United States, and the majority of them carry back a positive message not only of America's good will but of how much China has to learn from the United States. Surveys in China continue to indicate that the United States is the most admired country but also that, after Japan, the United States is the most frequently criticized. The surveys also indicate that many Chinese disagree with U.S. policies toward China.

Chinese are troubled by the threats that modernization and "Westernization" pose to their political system and traditional values. China's leaders and elite are uncertain of the U.S. government's attitude and intentions toward an emergent China. They are critical of discrete U.S. policies: imposition of sanctions for nonproliferation or human rights abuses, support for democracy in Hong Kong and cultural preservation and human rights in Tibet, arms sales to Taiwan, support for the rights of dissidents, reaffirmation of the U.S.-Japan alliance, and congressional opposition to most-favored-nation trade status and to holding the year 2000 Olympics in Beijing. They see such policies as part of a carefully coordinated policy designed to weaken, if not dismember, China and to prevent it from taking its rightful place of global and regional leadership. Confronted with the worldwide collapse of communism and the thorough discrediting of Marxist ideology and economics at home, China's leaders are turning to nationalism to rally their country and legitimate their hold on power. Rising nationalist sentiment is not purely, or even predominately, the product of leadership manipulation, however. It reflects the pride of the Chinese people in the accomplishments of the last two decades, after a century and a half of humiliation and thirty years of Maoist turmoil and totalitarianism. It also reflects the defensiveness of a society undergoing rapid change inspired by outside forces whose intentions are not always perceived as benign.

Implications for U.S. Policy

What the developments I have been describing mean for U.S. policy will be the subject of continuing discussions in the administration, in the Congress, in the media, and in the public. The current administration's approach, like that of the previous five, is one of "comprehensive engagement," which means seeking areas of cooperation and dealing directly and frankly with areas of difference. It is premised on the assumption that there is no natural or inevitable hostility between the United States and China. Working together, we can advance key global and regional security and commercial interests. Over time, our interaction will continue to help transform China in the liberalizing direction that has generally prevailed over the last two decades. China's history has shown us that we should be prepared for surprises. Deng's passing, however, has not altered the validity of these premises.