China’s authoritarian turn is a challenge for the world

Beijing’s increasing inflexibility on the global stage risks backfiring

The editorial board

A soldier stands guard after Chinese President Xi Jinping (unseen) inspected troops at the People's Liberation Army (PLA) Hong Kong Garrison as part of events marking the 20th anniversary of the city's handover from British to Chinese rule, in Hong Kong, China June 30, 2017. REUTERS/Damir Sagolj - RC1C33C696D0
A soldier from the Chinese army's Hong Kong garrison in 2017. China's unbending response to the recent protests has only reduced Beijing's popularity © Damir Sagolj/Reuters


There was a time when Beijing knew how to make concessions in its own interest. It made many to the US to gain accession to the World Trade Organization in 2001, enabling economic take-off. In the same decade it showed flexibility towards Hong Kong and Taiwan because, as former premier Zhu Rongji said, concessions to fellow Chinese are concessions to the Chinese nation.

But the art of conceding to reap benefits now seems lost. In its place an unbending, autocratic regime led by Xi Jinping, the strongman leader of the Communist party, has grown up. This authoritarian lurch may suit Beijing at home but it is bedevilling China’s relationship with much of the outside world, not only in Washington but also in European and Asian capitals.

The issue highlights a paradox. The international acceptance towards Beijing that underpinned its rise during the “reform and opening” era that began 40 years ago this month is now in retreat, imperilling the ecosystem that allowed China to prosper.

Hong Kong shows the dynamics of the backlash. Six months of mass protests were inspired in part by opposition to Beijing’s increasingly authoritarian bearing. But the unbending response of the Beijing-backed Hong Kong government has only further reduced its popularity; the pro-Beijing camp suffered an overwhelming defeat in district elections in November.

Similar trends are visible in Taiwan. Not only is President Tsai Ing-wen, whose ruling Democratic Progressive party advocates formal independence from mainland China, the frontrunner for next month’s presidential election. She is also using popular antipathy against Beijing’s heavy-handedness as a key part of her campaign platform.

Ms Tsai points to Hong Kong to try to convince her electorate that “one country, two systems” — the formula under which Hong Kong was allowed to maintain a “high degree of autonomy” after its return to mainland rule in 1997 — would never work for Taiwan. Beijing, however, insists on applying the formula to Taiwan in the event of any future unification.

So much for relations in China’s own backyard. The hardline posture of Mr Xi’s administration is also having a palpable impact on the wider world.

In truth, this year has been an annus horribilis for Chinese soft power; the imprisonment without trial of two Canadians in Beijing, the repression of Uighur minority people in mass incarceration camps, public spats against Arsenal footballer Mesut Özil and basketball’s Houston Rockets manager Daryl Morey, and several other issues have all besmirched China’s image.

It is unclear, however, that Beijing cares greatly about the diplomatic headwinds it has helped to create for itself. Perhaps the concentration of power around Mr Xi is such that nuance is being lost from the Communist party’s internal debates. Or perhaps the US-China trade war and rivalry has created a bunker mentality that does not allow for concessions.

More likely is another interpretation: that this is now the way that China wants to be. A government white paper published in time for national day celebrations in October was crystal clear in its convictions about the superiority of China’s “centralised, unified and firm leadership”.

So proud of this is Beijing that it now wants to export its development model. In one example, officials held a forum in November called “The Significance of China’s Social Governance to the World”, attended by 200 experts from 20 countries. Xinhua, the official news agency, praised the conference as providing “wisdom to a world that is in need of new governance models”.

As Elizabeth Economy noted for the US Council on Foreign Relations this month, China has been training officials from neighbours on how to suppress dissent and attract foreign investment, while accessing and retaining foreign technologies and skills.

If this view persists, it will fall upon the rest of the world to decide to what extent an authoritarian, at times draconian, China can and should be engaged. It will force uncomfortable reviews that seek to balance commercial imperatives against cherished national values such as freedom of speech and human rights.

China should realise that public perceptions can be crucial to future policy in democratic countries. If it persists in trying to get its way through browbeating others, it may end up achieving the very opposite of its aims.

Nowhere and everywhere

Obituary: Qassem Suleimani was assassinated on January 3rd

The mastermind of Iranian expansion, destruction and killing was 62




For a man whose reputation was shadowy and clandestine, Qassem Suleimani sometimes made himself startlingly visible.

He climbed up on the flatbeds of army trucks in Syria, exhorting crowds of weary fighters.

He posed smiling beside rocket-launchers in Iraq, finger on the trigger.

He responded to Donald Trump’s Twitter threats against Iran by calling him a gambler and a bartender, urging him to come on and find out, the hard way, who the real men were in this showdown.

His Instagram account showed him ordering a missile strike against the White House with the slogan, in English: “We will crush the USA under our feet.”

He had earned his shadow reputation in other ways.

His habit of glancing downward, carefully, his eyes slightly hooded under thick brows, which could set his interlocutors trembling.

His wish to sit alone at meetings, his silences in conversations, and his simple words, as if he was ordinary.

That befitted him as a peasant’s son from the mountains near Afghanistan, whose most vivid childhood memory was straining his puny body on a building site to earn enough money to clear his father’s debts.

And it befitted him, too, as the head after 1998 of the Quds Force, the elite arm of the Islamic Revolutionary Guard Corps, where he masterminded Iran’s ever-widening circle of influence, destruction and killing.

To him the job was still soldiering. That was his calling, even if he did most of it in black shirt and jacket from his desk.

His eight-year service in the Iran-Iraq war, the Sacred Defence, in which he was wounded and near-choked by chemical weapons, did more than battle-harden him.

It taught him to slide between local militias, crossing borders, making alliances, that proved invaluable later.

It taught him that neighbouring countries had to be controlled to keep Iran strong.

Most of all he learned that the trenches and attrition of the Sacred Defence, the million deaths, were not a good way to wage war. He would deal out death by other means.

That weapon was his Quds Force: up to 20,000 men whose first purpose was to protect Iran’s Islamic revolution of 1979, and whose second was to reclaim Quds, Jerusalem.

His passion for the revolution, which he had raced to serve in his 20s, grew into a determination to forge an Axis of Resistance—a Shia Crescent, as its detractors called it—against dominant Sunni powers, from the Mediterranean to the Arabian Sea.

His men could be sent out to fight or to train fighters, to spy, to bribe, to negotiate contracts and to sow terror, all over the region and beyond. Thus, covertly, he could present the enemies all around with “many Irans”.

He could slip in himself, unseen, whenever needed. In Syria, where he was tilting the civil war in Bashar al-Assad’s favour, he worked out of an unremarkable building in Damascus. In Iraq, where he ensured that pro-Iran Shia loyalists filled the rickety governments, he might suddenly appear in a minister’s office, negotiate the use of airspace for weapons flights, kiss the minister’s forehead, and disappear.

After visits in 2006 to Lebanon, where he directed and properly weaponised Hizbullah’s campaign of roadside bombs and targeted murders, he exulted to the Americans that he had been “busy in Beirut”. He was nowhere and everywhere, smoothly declaring his innocence of killings, committing—like any good spymaster—absolutely nothing to paper.

The Quds Force, besides, was only part of his network. Most of it was composed of militant allies and proxies, Shia militias recruited the world over whose ties to Iran were sometimes obvious, as with Hizbullah, but could often be denied. Such militias were quick to set up, quick to train, if the men were motivated enough.

He had done it himself, joining up for the Sacred Defence as commander of a unit he had put together from his local gym in Kerman. Far better to work with such a citizen unit, he thought, than with a useless regular army, such as Syria’s.

Even where the Shia militias were multiple and unruly, as in Iraq, they gave him the flexibility and the manpower to strew along the roads enough sophisticated explosive devices, made in Iran, to kill hundreds of Americans.

He could be flexible himself, if it suited his ends. He happily worked with Hamas, though it was Sunni, to target Israel. After 9/11 he even offered the Americans intelligence on the Taliban. He felt pleased to co-operate, though that evaporated in a minute when George W. Bush declared Iran to be part of the “Axis of Evil”.

During the war against Islamic State in Syria and Iraq, his forces worked in concert with American bombing raids. As long as the enemy were useful to him, he suspended his wish to drive them out.

His critics in Tehran—for he had many, not least in the rival ministry of intelligence—claimed that his ruthless methods did not always serve Iran well. They also thought his reverent closeness to Ayatollah Ali Khamenei, easing the supreme leader’s relations with the army, was a bid for presidential power.

No, he insisted. He was just a soldier. The most beautiful place he knew was the battlefield, and martyrdom the highest calling.

He would sometimes take veterans’ groups out to places, such as the Faw Peninsula, where he had been part of a desperate fight with no ground gained. But many who fought there had found paradise.

He would read their names and weep that he was not among them. He would embrace their children, just to smell martyrdom on them.

So when he made himself blatantly visible—strolling in Baghdad without bodyguards, visiting battlefields without a flak jacket—it was not out of character.

He could thus draw the bullet, or the drone, that might kill him.

No true victory without that.

Jobs and Inflation: The Great Trade-Off, Demystified

The relationship between inflation and unemployment is real, but far from simple

By Justin Lahart


The Phillips curve hasn’t been behaving like economists expected since the early 2000s. Photo: Kena Betancur/Getty Images 



When unemployment goes down, inflation picks up, and when unemployment goes up, inflation cools down. That has been a central tenet of economics for the past 60 years, guiding Federal Reserve policy makers and private forecasters.

But the trade-off between unemployment and inflation, described by economist George Akerlof in his 2001 Nobel Prize Lecture as “probably the single most important macroeconomic relationship,” hasn’t been behaving the way it is supposed to lately.

In 1958 Alban William Housego Phillips, a New Zealand economist whose résumé included stints hunting crocodiles in Australia and operating a secret radio in a Japanese prisoner-of-war camp, published the paper that would make him famous. In it, he showed that in the years spanning 1861 to 1957 the unemployment rate and wage inflation in the U.K. were negatively correlated—meaning that when one went up, the other one tended to go down, and vice versa.

That makes sense: When unemployment is low, workers can bargain for bigger wage increases than they can when unemployment is high.



American economists Paul Samuelson andRobert Solowseized on Mr. Phillips’s work, showing in a 1960 paper that it applied to the U.S. as well. They dubbed the downward-sloping line that can be drawn in a chart where the unemployment rate and wage inflation are plotted against each other the “Phillips curve.” (Since wages and prices tend to move together, the Phillips curve holds for price inflation as well.)

But the Phillips curve isn’t a static relationship over the long haul, with any given unemployment rate leading to a predetermined level of inflation. People’s inflation expectations matter, as economists Milton Friedman and Edmund Phelps pointed out in the late 1960s and America painfully learned in the 1970s.

The basic insight is that inflation expectations play a role in bargaining over wages. If the unemployment rate is 5% and workers think that prices will rise by 10% annually, they will demand bigger wage increases than they would if they think inflation will be 2%.



Those inflation expectations, meanwhile, are shaped by people’s past inflation experiences. So when inflation started shifting higher in the late 1960s, driven in part by government spending programs that drove the unemployment rate down, inflation expectations eventually shifted higher as well.

The Phillips curve shifted higher as a result, so that any given level of unemployment was associated with much higher inflation than it had been in the past. The Great Inflation had arrived.

It didn’t break until the early 1980s when the Fed, under Chairman Paul Volcker, slammed the brakes on the economy, driving inflation down and resetting inflation expectations lower. Over the next two decades, the central bank, guided by a Phillips-curve framework, kept a tight lid on inflation.


Alban William Housego Phillips. Photo: Alamy


But since the early 2000s, and especially since the financial crisis, the Phillips curve hasn’t been behaving like economists thought it would. When the unemployment rate shot higher following the financial crisis, inflation fell less than Phillips curve models predicted.

And when the unemployment rate fell to 3.5% in late 2019, inflation was remarkably muted. An alternative Phillips curve, based on the pace of gross domestic product rather than the unemployment rate, has run into the same problems.

Some people have suggested that, as a result of forces such as globalization and the reduced bargaining power of workers, the Phillips curve relation is broken.

That probably isn’t true. An economy where wages and inflation don’t have something to do with the supply of labor would be a strange one. Indeed, research conducted economists Peter Hooper, Frederic Mishkin and Amir Sufishows that at the local level in the U.S., the Phillips curve is working quite well, with changes in metropolitan area unemployment negatively correlated with changes in the rate of inflation.

 

One possibility for why, on a national basis, the Phillips curve has gotten out of kilter may be a downward shift in how low the unemployment rate can go without inflation accelerating. Technology may have made it easier for employers to find employees, for example. And an increased willingness to hire and promote women and minorities may have led businesses to take on workers who in the past were underutilized.

Another possibility is that after years of persistently low inflation, inflation expectations have become so set that changes in the unemployment rate affect inflation less than in the past. That would explain the “flattening” in the Phillips curve many economists believe has occurred, with changes in the unemployment rate associated with smaller changes in the inflation rate than before.

Finally, it could be that after years of inflation coming in below the Fed’s 2% target, inflation expectations have slipped. If that is right, then it could take an even lower unemployment rate than economists think to push inflation meaningfully higher again.


Does Inattention Explain Today’s Low Inflation?

In the 1980s and 1990s, people were acutely aware of inflationary risks, whereas economic actors today may be setting their expectations based on a different set of considerations. Given the powerful role of expectations in determining economic outcomes, this could be enough to alter the functioning of the business cycle.

Koichi Hamada

hamada38_KAZUHIRO NOGIAFP via Getty Images_japanstockspeoplewalking


TOKYO – The world has lost a great warrior for price stability. Paul Volcker led a determined campaign to restrain double-digit inflation as the US Federal Reserve’s chair in the 1980s, and exerted a powerful influence over US economic policy for decades to follow.

Just a couple of years ago, when he was nearly 90, he grilled me on the inflationary potential of Abenomics, Japanese Prime Minister Shinzo Abe’s economic-reform strategy (I was an adviser on formulating the strategy). But despite Volcker’s praiseworthy achievements, it is worth considering the relevance of his approach in today’s low-inflation environment.

In 1936, when John Maynard Keynes published The General Theory of Employment, Interest, and Money, global price movements were sluggish. Assuming that below-zero inflation would remain relatively rigid, and basing inflation expectations on past outcomes, Keynes prescribed large-scale fiscal expenditure.

This helped countries to escape from the deflation of the Great Depression. But after World War II erupted in 1939, inflation surged in many countries, including Greece, Hungary, and the Philippines. In the United States, inflation reached double-digit rates in 1942 and 1947.

When Volcker became Fed chair in August 1979, US inflation was again at double-digit levels – 11.35% – and rising. To rein it in, and stabilize the wider global economy, the Fed hiked interest rates, despite the backlash from some US industries. When he left his post in 1987, the inflation rate was below 4% (its peak since then is 5.4%, in 1990).

During the same period, Robert Lucas – who went on to win the economics Nobel in 1995 – managed to convince a large share of academic economists that they had been formulating expectations wrong: according to his “rational expectations model,” an economic agent’s predictions about the future, not knowledge of history, makes all the difference.

According to this approach, monetary policy – especially predictable monetary policy – has little power to change capacity utilization or resource allocation.

With that, the counter-Keynesian macroeconomic revolution appeared to have succeeded.

During the Great Moderation, which began in the mid-1980s, business-cycle fluctuations in developed countries became significantly less volatile, and resource allocation was guided by the price mechanism.

But the Great Moderation ended abruptly in 2008, when the subprime mortgage crisis in the US quickly fueled a global financial and economic crisis, which in turn triggered a severe eurozone debt crisis. A Keynesianism resurgence soon followed, with many of the world’s most influential economies embracing stimulus measures, whether fiscal (as in China) or, more commonly, monetary (as in Europe, Japan, the United Kingdom, and the US).

While all of the world’s major advanced-economy central banks rapidly expanded their balance sheets, Japan initially lagged behind the others. After all, its mortgage market was not under the same kind of stress as those in the US and the eurozone.

But this imbalance put local industry at a competitive disadvantage, as the yen appreciated against other major currencies. Abenomics, launched in 2013, helped to correct this imbalance, with the Bank of Japan’s accelerating balance-sheet expansion weakening the exchange rate and easing the pressure on Japanese industry.

Since 2008, global inflation and expectations for future prices have broken with the pattern established in the early 1980s. While central banks have continued to pursue 2% inflation, the eurozone and Japan, in particular, have struggled to reach that target. (The US has managed to eke annual inflation of just over 2% since 2017.)

Unlike during Volcker’s era, prices compounded the inflationary inertia, as price formation became a strategic decision amid excess demand. As the CEO of a Japanese-owned international fast-food chain recently told me, he decided not to raise prices after a 2% consumption-tax hike came into effect last October, because he assumed that his competitors would do the same.

Why the mechanism of business cycles has changed so profoundly, or whether it is merely our interpretation of events that has changed, are difficult questions. But there is a concept that can help us answer them: the theory of rational or behavioral inattention.

As the Nobel laureate economist Christopher A. Sims observed in 2003, in the past, it was assumed that economic agents are not only rational, but also computationally unconstrained.

But the truth is that people have limited information-processing capacity, so, as the German phenomenologist Edmund Husserl noted, our brains select information to set aside unprocessed. Our behavior – rational or not – is shaped not by all available information, but only by the information to which we pay attention.

During Volcker’s Fed tenure, people were acutely aware of the costs of double-digit inflation, so they would notice and respond – even overreact – to any development that seemed remotely likely to spur inflation.

As today’s economic actors set their expectations, they may well be paying attention to very different kinds of developments. Given the powerful role of expectations in determining economic outcomes, this could be enough to alter the functioning of the business cycle.

Economists such as Paul Krugman and Kiminori Matsuyama argue that there are two types of macroeconomic equilibria: one where information is anchored to history, and another where it is anchored to rational expectations about the future.

Understanding how economic actors determine which information to process or neglect could go a long way toward revealing the relative importance of history and expectations in determining equilibria, thereby helping policymakers to avoid costly imbalances. Volcker would surely approve of that.


Koichi Hamada is Professor Emeritus at Yale University and a special adviser to Japanese Prime Minister Shinzo Abe.