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What US fiscal woes teach China

By  Yukon Huang , The Diplomat <

As the largest foreign buyer of US government securities, China can only  fret  as the value of its holdings is held hostage to a fractured political process in Washington. But while the longer-term implications of these developments are likely to hurt the United States’ democracy and human rights agenda as far as China is concerned, ironically, they will help its international financial situation.

On the political front, China’s leadership will quietly welcome comparisons with the relative ease with which its system is able to move on collective action within a tightly-controlled political process. This will reinforce self-serving messages as the Communist Party celebrates its 90

And, while China struggles to achieve a ‘soft landing’ from its economic stimulus programme, the fiscal problems in the United States will be used as a reminder to its restless constituents that democracy doesn’t guarantee that the right compromises will evolve to support the common good. Nor will the problems in Europe in forging a collective sharing of looming default burdens, or the continued decline of the Japanese economy, strengthen the case for liberalizing China’s political system. Indeed, all this will make it even harder to bridge the cultural divide that separates China from the West over the way they view global issues.

Read: China's $2 trillion hole.

But on the economic front, recent developments are likely to push China’s leadership to move more aggressively to reshape the policies relating to the country’s exchange rate and trade regime that have exacerbated tensions with the United States over the past decade. The United States’ fiscal woes will reinforce the view that it makes little sense for China to continue generating trade surpluses that must then be used to buy US securities, which may only diminish in value over time. Any lingering notion that mercantilist tendencies still drive Chinese policymakers should now be discarded.

Some estimates suggest that with unchanged external policies, China’s foreign exchange holdings could increase from the current $3.2 trillion to $5 trillion by 2015. But with the prospects of all three major reserve currencies under a cloud, parking such amounts in foreign securities is unappealing, making it unlikely that these levels will materialize.

China’s overseas direct investments—which amounted to less than $5 billion seven to eight years ago, but now run around $60 billion annually—are another option for channelling these surpluses. But sensitivities among OECD countries make it unlikely that China can find enough attractive opportunities in the resource- and technology-based industries to make this a serious alternative. While growth in overseas investments will be brisk in the coming years, this won’t satisfy China’s desire to diversify its holdings, and returns would still be vulnerable to exchange rate fluctuations.

Civil Society: To What Purpose? - Blogs - World Bank Group

I'd mentioned in a previous post that I had a few more thoughts on this report on citizen engagement from the Development Research Centre on Citizenship, Participation and Accountability (Citizenship DRC) at the UK's Institute of Development Studies (IDS). In light of recent conversations at the Bank regarding civil society, I've been thinking about the significance of framing civil society in instrumental terms (i.e., as a means toward an end in achieving sectoral reforms) vs. framing it as a fundamental institution of good governance. The report notes outright that associations can be schools of democracy, contributing to political participation and citizen influence over public policy. In fragile states, it says, associations can strengthen the culture of citizenship and help build responsive states. Based on my own admittedly subjective experience with these issues, this appears to be true; those who have actively participated in some form of associational life tend to be better equipped to participate in the formal give and take of democratic governance. And yet it seems as though much of the mainstream development world still views civil society mainly as a tool through which sectoral reforms can be achieved. Civil society has a vital role to play in advancing and consolidating sectoral reforms, of course. But viewing civil society mainly as a means through which sectoral objectives can be achieved - in areas such as health care, housing, education, the environment - minimizes the significance of civil society as institution necessary for good governance. If development institutions view their engagement with civil society merely as instrumental to other goals, they will miss a host of opportunities to strengthen an important keystone of state-society relations. To be sure, the report notes that some governance-oriented civil society organizations (CSO) have focused too heavily on the theory of citizen participation without offering actual avenues for action. In contrast, many sectoral or other issue-based grassroots community activists have taught themselves how to achieve real policy change, without outside technical support. It's hard to argue against real-world experience.

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