The New Silk Road

PRESIDENT Xi Jinping of China is hard selling the most ambitious infrastructure project the world would ever see. Named the One Belt and One Road Initiative (OBOR), the project comprises a series of ports, pipelines, power stations, railways and roads to secure and expand China’s trade links to the world, covering at 65 countries. The name conjures romantic imagery of camels carrying silks through the desert, based on the old Silk Road that exported silks to Europe. As populist nationalist movements have gained traction in the West, Jinping has eyed an opportunity to gain influence in the world order by preaching the rewards of revitalising globalisation. OBOR is an opportunity to take advantage of the US’ retreating influence under Donald Trump’s presidency.

Evaluating the benefits of OBOR are incredibly difficult. The world’s second largest project, the Marshall Plan that rebuilt Europe after the Second World War, only had a current-day value of $103bn. Estimated to cost around $1 trillion, OBOR is 10 times the size and encompasses far more countries with far more diversely structured economies than postwar Western Europe. Measures of the financial gain to China, therefore, are unlikely to be accurate, but the chief economic benefits come in the form of greater access to foreign markets. This creates opportunities for export-led growth and greater certainty and security of raw material supplies. Having invested heavily in high-tech industry, OBOR would stand China in good stead to support its manufacturing base.

OBOR also offers a solution to geopolitical issues. The highly contended South China Sea has long been a strategic headache for China: for its ships to reach the rest of the world, they pass by a multitude of countries, including Japan, the Korean peninsula and Vietnam. Were these powers to blockade China’s maritime access to the world, China would be unable to export, the very thing it built its success on as capitalist economy and a huge threat to its continued growth. The Pakistani city of Gwadar offers a solution to this. Pakistan borders south-western China and has access to the Arabian Sea, which provides China with an alternative route out to sea and is why a state-owned Chinese company signed a 40-year lease on a port there.

Infrastructure projects in foreign countries entwines China tighter into the global economy and they become a much larger player in the world. This is especially true now that the US has withdrawn from the Transatlantic Trade Partnership, a trade deal between countries in the Pacific region, and that Donald Trump is somewhat considered a joke in the West. Interdependent blocs of countries are far less prone to conflicts and more open to co-operation, so OBOR stands to hand greater power to the Communist Party for use in future conflicts.

China is using its big state-owned banks to provide financing for other countries, including developing countries with weak credit ratings such as Djibouti. Earlier this year, a railway – built and financed by China, of course – opened between Djibouti and Addis Ababa in Ethiopia. Although Djibouti is enjoying steady economic growth of 6.7%, its government lacks transparency, its debts have hit 60% of GDP, the IMF puts unemployment at 39% and almost 1 in 4 live in extreme poverty. Should the project fail to bolster growth, or adverse economic conditions batter growth, Djibouti will find itself in hot water with the Chinese – little is known about the terms of the loans or how their creditors will use their leverage.

What is clear is that China is taking a gamble. Chinese government debt relative to the size of their economy has risen sharply, rising almost 20 percentage points since the Global Financial Crash. Total debt, including household, government and corporate debt, has risen by 100 percentage points in just as long. If OBOR cannot kickstart slowing growth, then OBOR fuelling a pile-up of debt risks a 2008 US-style financial crash or an extended struggle with deflation and low growth, as happened in Japan. Not only this, but China has a poor track record of cost-effective infrastructure construction. If previous builds, such as a railway in Kenya that was four times more expensive than the international average, then spending will vastly exceed the initial budget. But if the net economic benefits are uncertain – and moreover, the benefits of a better spot in the international pecking order – then why is Xinping pushing OBOR so hard?

One must consider that as well as factors pulling China to OBOR, there are push factors. Growth has slowed in recent years. It is steady, but the people of China have come to expect living standards to always be on the up. Whilst they rapidly become better off, they may tolerate the more unsavoury aspects of being ruled by the Communist Party: a democratic deficit, a poor human rights record. But if life stopped improving, why should they continue to tolerate such governance?

A sufficiently large enough spark could create enough civil discourse for regions of China to break away and declare independence. Tibet is the most likely territory to break, but Xinjiang is strategically the most crucial. It borders eight countries and is China’s land access point to the rest of the continent – without it, China would depend heavily on the South China Sea, which would only lead to greater tensions. Not only could OBOR help postpone a slowdown in growth and buy the Communist Party time to find the next growth cure, but OBOR helps anchor Xinjiang to China, quelling future independence movements.

It soon becomes obvious that OBOR is driven by the state, rather than commerce. The initiative is economically risky and could end in financial meltdown, but if pulled off successfully, it presents an excellent vehicle to heighten China’s standing in the world order. Given previous projects, the initiative is highly likely to go far over budget and it is unclear whether it will see full fruition, especially as it requires so many deals to be struck. Having peddled the dream so openly, the full virtue of soft power will come from completion, but the more individual projects completed, the closer China gets to financial ruin and egg on their proverbial international face. Jinping faces quite the balancing act.

 

Credit: Featured Image via Reuters

State-sponsored Romance

JAPAN is amidst a testing phase of demographic transition. Not only is it another advanced economy facing an ageing population, but twinned with this is a shrinking population. An ageing population alone brings pains: higher incidence of degenerative disease means more resources must be dedicated to health and social care, presenting opportunity costs. A proportionately diminished working population then face a higher tax burden to fund extra pensions in addition to regular the government provisions.

The problems of a shrinking population are less well known. Lower demand for goods and services means that businesses are less able to exploit economies of scale, making production more costly. Assets become surplus to requirements: for example, unoccupied houses drive down house prices and reduce wealth, whilst operating schools and hospitals with spare capacity is inefficient. The benefits of clustering – the spread of knowledge and competition to innovate – are lost when populations decrease.

In order to boost fertility, the government needs to understand what is suppressing it. Several social and economic factors are at play. Raising a child in modern Japan is expensive and many prospective parents feel strong social pressures to provide a good life for their children – the most significant feature of which is increasingly expensive education. If couples feel pressured to only have children when they can provide sufficient resources, they will choose to postpone and/or have fewer children.

Additionally, women are marrying later. For women, a choice must be made between working and raising children; whilst both are possible, Japanese society does no favours for working mothers. Men and older women hold conservative views of the woman’s role in a child’s upbringing, believing that women should stay at home and focus on the child rather than return to work. Mothers struggle to return to work after children for a range of reasons, most commonly that childcare hours are not a suitable fit for working hours and because men spend considerably less time helping with housework and with the children than in the US, Germany and Sweden. Young women are warming to the idea that there is more to life than motherhood. Given the choice, many are choosing to have a career first, especially if it means they are better able to provide for their child.

Marriage rates are also falling. This isn’t a phenomenon unique to Japan, but unlike other advanced economies, the abandonment of marriage is not being matched by a rise in couples cohabiting. The problem is that young singletons are struggling to meet each other and when this happens, fertility falls. Women are pressured into finding high earning men, but more and more young people are relying on temporary and part-time jobs and the ideal man is becoming unattainable for both sexes: men concentrate on their career whilst women look for better. Romantic expectations need to readjust to the new economic reality. Compensating for less permanent work, young people are working longer hours, but this serves to further isolate singletons.

Whilst some may point to the estimated one million hikikomori that shut themselves in their bedrooms away from their peers or prefer to seek romantic connection in dating games, the vast majority of Japanese men are capable of and desire marriage. The hikikomori are likely a symptom of the frustration felt by many young men struggling to meet expectations that have not changed with the economy.

If these are the root causes of Japan’s demographic transition, what can be done? One common solution to ageing populations is to invite young migrants to live and work. Educated abroad, young workers don’t need schooling and require less healthcare than their elders, so can help reduce the tax burden on the working population. Additionally, if the low birth rate is partly a feature of Japanese culture, greater cultural diversity could raise fertility. However, historically isolationists, the Japanese are averse to immigration despite it being a remedy to their demographic ills.

Instead, the government is opting to stabilise the domestic birth rate using policies such as konkatsu: holding match-making events for young people to meet and socialise, with the intention of finding a partner. The government has created more nursery places, which alleviates the cost of children and can allow mothers to return to work, which may have been holding them back. Trying to reduce working hours to give young people the time to socialise would help them meet each other.

If the government’s policies do not begin reversing the loss of fertility, Japan may well soon be forced to adopt immigration. The most direct solution – influencing societal attitudes on the role of women and the ideal partner – would likely be the most effective and long-termist, however it is a Herculean task for a government alone. Change must come from within society, from the young, but it is unclear whether change is coming rapidly enough to prevent a demographic crisis.

On Britain’s Snap Election: Theresa’s Troubles

TWO months ago, the notion Theresa May could lose her majority was laughable. On Friday morning, 2,227 votes were all that blocked a so-called Progressive Alliance forming with a Labour government at the helm. Despite Labour failing to secure the most seats, Theresa’s most salient achievement was that Jeremy Corbyn emerged perhaps the strongest leader in UK politics, using his momentum to call for her resignation and thus framing her as a failure in the eyes of the country – a 10th of June Survation survey has 49% think she should resign vs only 38% she should not.

There will be more fallout from this election than any for a generation, with severe ramifications and deep rethinking needed for all major players. The mountain supporting May as Conservative Leader is suddenly now thin ice, and whilst Brexit negotiations and the genuine need for a clear, coherent UK negotiating position could keep the wolves at bay, prominent Tories are unlikely to risk further haemorrhaging at the next election. Cough, Boris, cough. The Conservatives find themselves relying on the Democratic Unionist Party (DUP), a socially right-wing Northern Irish party with whom they share few similar stances, to cobble together a coalition. I will focus on the fallout in other blog posts, but for now: what went wrong for the Tories?

The Conservatives called the election and ran on the premise of ‘strong and stable leadership’, a phrase I wish to purge from memory, and strengthening the UK’s negotiating hand (oops). Aside from their pro-Brexit position, little else stood out as positively unique to this Conservative manifesto. The usual promises of reduced net immigration, a relatively unsubstantial increase in the NHS budget (£8bn vs Labour’s £32bn), meeting defence spending commitments and cherishing Trident, and slashing corporation tax to attract and retain big business were all thrown in.

However, their notorious attempt at policy innovation, branded the ‘Dementia Tax’ whereby the elderly would pay for social care using the value of their home, provoked heavy backlash and a series of U-turns. Whilst this was a genuine attempt to tackle the growing burden of an ageing population on social care, the reform was ill thought-out and poked holes in the strong and stable guise. Labour, having promised extra funding for social care, seized the opportunity to smear them as weak and wobbly. Further adding to the anger was the revelation that Nick Timothy, one of the recently resigned duo of May’s closest advisors, added the policy to the manifesto only the night before it was released, without Cabinet ministers’ approval. Were the Tories’ strength not Brexit, backed overwhelmingly by the over 65s, this policy could have hurt their support among a core voter base.

It’s clear now that two key factors in the failure of the Tories’ gambit was that they called the election on the thinly-veiled ambition of sweeping away a seemingly weak opposition in order to push through their negotiation aims – a hard Brexit.

Glaringly obvious in the neon illumination of hindsight, arrogance has been hailed another detrimental feature of the campaign. Calling the election on the presumption that May would receive their votes then refusing to debate the other leaders and engage with citizens – as is a staple component of the democratic process – can and should be labelled nothing but disdain for voters. Such alienation could only have played well for Corbyn, who has long sought for a “new, gentler kind of politics” to bring onboard previously disillusioned voter segments.

Midway through the campaign, journalists reported instances where the crowds of ‘ordinary voters’ Theresa faced as she toured the country were Conservative party activists, or where activists had held the microphone for reporters with the purpose of preventing them from asking unscripted questions. This played out well for Corbyn, who appeared comfortable and enthusiastic with the general public, most visably relaxed during the live audience interviews rounding off the campaign. As Corbyn grew into the campaign, May appeared scared to face the public for fear of losing her lead.

As found by FiveThirtyEight, a polling aggregator, the ‘Shy Tory’ effect is not on average present when the Tories already lead the polls. There is however, a kickback against the ‘conventional wisdom’, suggesting the public don’t like being told how they’re going to vote. Calling the election based on this conventional wisdom with this effect present, it seems, was not a good idea. The clarity of this is perhaps the biggest pain in her post-election headache as Corbyn piles on the pressure and surpasses her in the polls. Another surprise to the polls is the Green Party’s kamikaze: in efforts to prevent a Conservative victory, their candidates stood down in 38 seats as not to split the progressive vote, helping Labour and the Lib Dems to take nine seats from the Conservatives.

By making the campaign about Brexit, voters were also given the opportunity to air their discontent with the government’s negotiating aims and methods. Whilst many Remain voters have come to terms with Britain leaving the EU, as hinted by the demise of the Lib Dems and their anti-Brexit campaign, Mrs May opting for the sharpest possible exit from the EU with prominent members of her party having a history of antagonising the ‘Brussels Bureaucrats’, namely Foreign Secretary Boris Johnson, a divisive figure since the Referendum, and Michael Howard, appearing to threaten war with Spain over Gibraltar. Meanwhile, having accepted the referendum result, Corbyn’s seemingly vague soft Brexit stance with a non-confrontational tone has created an additional arena for a protest vote. The hard stance did help pick up UKIP voters, but cost them a 2% on average in Remain voting areas. Comparatively, Labour picked up 12% in Remain areas.

Interlinked with Remain voters is the youth vote. Young voters, aged 20-24 voted 62% Labour vs 22% Conservative. A prominent explanation for this is that Labour ‘bribed’ the young with the last minute policy of cancelling university tuition fees for students. Of course, which current or prospective student would not opt to do away with £27,000 debt plus interest repayments for the standard three year course? Not to mention that older generations could get by without university education with degrees now becoming increasingly in demand. But it is overly simplistic to suggest tuition fees are the only policy that appealed to the young. Seniors have long benefitted from real rises in house prices, whilst the young have found it increasingly harder to acquire footing on the property ladder. The Labour pledge to build one million new homes not only seeks to subdue a housing crisis, it constitutes a wider economic programme of investment in public services, national infrastructure and skills. In the eyes of the young, the Conservative campaign centred on Brexit did not match up to Labour’s investment for the future.

Ironically, shining a spotlight on the widely perceived weak leader in Mr Corbyn finally gave him the opportunity to show off his strength as a leader: campaigning. As he relaxed and seemed to enjoy himself, May’s campaigning inadequacies – avoiding the common citizen’s scrutiny and parroting catchphrases – handed him rapid gains from a rock bottom starting point. A large manifesto reversal haunted the middle of her campaign and unpopularity with the younger population contributed to her opposition’s unexpected boost.