On the rise

The global economy enjoys a synchronised upswing

The past decade has been marked by a series of false economic dawns. This time really does feel different

ECONOMIC and political cycles have a habit of being out of sync. Just ask George Bush senior, who lost the presidential election in 1992 because voters blamed him for the recent recession. Or Chancellor Gerhard Schröder, booted out by German voters in 2005 after imposing painful reforms, only to see Angela Merkel reap the rewards.

Today, almost ten years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last under way. In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.
But the political mood is sour. A populist rebellion, nurtured by years of sluggish growth, is still spreading. Globalisation is out of favour. An economic nationalist sits in the White House. This week all eyes were on Dutch elections featuring Geert Wilders, a Dutch Islamophobic ideologue, just one of many European malcontents.

This dissonance is dangerous. If populist politicians win credit for a more buoyant economy, their policies will gain credence, with potentially devastating effects. As a long-awaited upswing lifts spirits and spreads confidence, the big question is: what lies behind it?

All together now
The past decade has been marked by false dawns, in which optimism at the start of a year has been undone—whether by the euro crisis, wobbles in emerging markets, the collapse of the oil price or fears of a meltdown in China. America’s economy has kept growing, but always into a headwind. A year ago, the Federal Reserve had expected to raise interest rates four times in 2016. Global frailties put paid to that.

Now things are different. This week the Fed raised rates for the second time in three months—thanks partly to the vigour of the American economy, but also because of growth everywhere else. Fears about Chinese overcapacity, and of a yuan devaluation, have receded. In February factory-gate inflation was close to a nine-year high. In Japan in the fourth quarter capital expenditure grew at its fastest rate in three years. The euro area has been gathering speed since 2015. The European Commission’s economic-sentiment index is at its highest since 2011; euro-zone unemployment is at its lowest since 2009.

The bellwethers of global activity look sprightly, too. In February South Korea, a proxy for world trade, notched up export growth above 20%. Taiwanese manufacturers have posted 12 consecutive months of expansion. Even in places inured to recession the worst is over. The Brazilian economy has been shrinking for eight quarters but, with inflation expectations tamed, interest rates are now falling. Brazil and Russia are likely to add to global GDP this year, not subtract from it. The Institute of International Finance reckons that in January the developing world hit its fastest monthly rate of growth since 2011.
This is not to say the world economy is back to normal. Oil prices fell by 10% in the week to March 15th on renewed fears of oversupply; a sustained fall would hurt the economies of producers more than it would benefit consumers. China’s build-up of debt is of enduring concern. Productivity growth in the rich world remains weak. Outside America, wages are still growing slowly. And in America, surging business confidence has yet to translate into surging investment.

Entrenching the recovery calls for a delicate balancing-act. As inflation expectations rise, central banks will have to weigh the pressure to tighten policy against the risk that, if they go too fast, bond markets and borrowers will suffer. Europe is especially vulnerable, because the European Central Bank is reaching the legal limits of the bond-buying programme it has used to keep money cheap in weak economies.

The biggest risk, though, is the lessons politicians draw. Donald Trump is singing his own praises after good job and confidence numbers. It is true that the stockmarket and business sentiment have been fired up by promises of deregulation and a fiscal boost. But Mr Trump’s claims to have magically jump-started job creation are sheer braggadocio. The American economy has added jobs for 77 months in a row.

No Keynes, no gains
Most important, the upswing has nothing to do with Mr Trump’s “America First” economic nationalism. If anything, the global upswing vindicates the experts that today’s populists often decry. Economists have long argued that recoveries from financial crashes take a long time: research into 100 banking crises by Carmen Reinhart and Kenneth Rogoff of Harvard University suggests that, on average, incomes get back to pre-crisis levels only after eight long years. Most economists also argue that the best way to recover after a debt crisis is to clean up balance-sheets quickly, keep monetary policy loose and apply fiscal stimulus wherever prudently possible.

Today’s recovery validates that prescription. The Fed pinned interest rates to the floor until full employment was in sight. The ECB’s bond-buying programme has kept borrowing costs in crisis-prone countries tolerable, though Europe’s misplaced emphasis on austerity, recently relaxed, made the job harder. In Japan rises in VAT have scuppered previous recoveries; this time the government wisely deferred an increase until at least 2019.

The tussle over who created the recovery is about more than bragging rights. An endorsement for populist economics would favour insurgent parties in countries like France, where the far-right Marine Le Pen is standing for president. It would also favour the wrong policies. Mr Trump’s proposed tax cuts would pump up the economy that now least needs support—and complicate the Fed’s task. Fortified by misplaced belief in their own world view, the administration’s protectionists might urge Mr Trump to rip up the infrastructure of globalisation (bypassing the World Trade Organisation in pursuing grievances against China, say), risking a trade war. A fiscal splurge at home and a stronger dollar would widen America’s trade deficit, which may strengthen their hand.

Populists deserve no credit for the upsurge. But they could yet snuff it out.

Income Inequality, Robots and a Path to a Fairer Society


Earlier this year, Oxfam reported that the world’s eight richest people control roughly the same amount of wealth as the bottom half of the world’s population. Around the same time, the World Economic Forum identified income inequality as the most challenging problem the world faces today. It is an issue that has been discussed for decades, but in the wake of political upheaval in the U.S. and Europe from voters hurt by globalization, there is more intense interest in creating a less polarized distribution. In this interview, Nobel Laureate Robert Shiller of Yale and Wharton finance professor Jeremy Siegel discuss how the income distribution gap became so wide, and they offer possible solutions. Shiller also notes that one of the big challenges to future income levels may be artificial intelligence and robots, and he suggests some ideas on how to prepare for that eventuality.

An edited transcript of the conversation appears below.

Knowledge@Wharton: The topic of income and wealth inequality has gotten a lot more attention since the Great Recession began in 2008, which was followed by one of the slowest economic recoveries in modern times. The Great Recession just made the statistics about income and wealth inequality even more skewed. The topic then seemed to go mainstream this year when the World Economic Forum at Davos noted that rising income and wealth inequality could be the most significant trend in world economic development over the next 10 years.

Their report had input from 700 experts. So there is more agreement today on the size and importance of this challenge.  

A couple of notes about our guests: In addition to being awarded the Nobel Prize in Economics in 2013, Professor Shiller’s book, Irrational Exuberance, which was a New York Times bestseller, warned about a stock market bubble, which burst shortly after the book was published in 2000. The dot-com boom turned into the dot-bomb bust. And he correctly pointed out that the nation was in a housing bubble a few years later that could lead to a deep recession, shortly before the 2007-2008 financial meltdown.

Professor Siegel also correctly called the top of the tech bubble in 2000, warning about high valuations in the sector. He is the author of the classic Stocks for the Long Run, which argued that stocks have been giving a real return of about 7% for almost two centuries, and thus are a solid investment over the long run. He has been consistently bullish on the equity markets since the time of the 2008 crash, and the Dow has gone from about 6,600 in March of 2009, to above 20,000 today. Professor Siegel also appears regularly on CNBC, CNN, NPR and many other TV and radio shows, to offer his views on the market.

Let’s start the questions. Professor Shiller, do you agree that rising income and wealth disparity is one of the world’s biggest challenges, including, of course, in the United States?

Robert Shiller: I’m worried about the future, that if the trend continues, it could be the biggest problem we’ve faced. … I’m worried that technical progress, robots, will be replacing common labor.

And so is the World Economic Forum. They paid a lot of attention to robotics at the Forum.

When I was there this January, they had some impressive new robots. It’s moving fast. And it’s eliminating jobs. It hasn’t been a real tragedy yet, but it could be in the future.

Knowledge@Wharton: Are you suggesting that the disparities are a problem now, but that the problems may accelerate because of robotics?

Shiller: The problem is that robotics is on the verge, it seems, of replacing many basic functions that labor performs now. There are so many examples. This Christmas, a lot of people got their Google Home, or their Amazon Echo — Alexa. And it’s like there’s another person in your home. If you bought one of these, you can talk to her. You can ask her to put on some music. To control something around the house or to order something.

This is now. The question is, we just don’t know where it’s going. And the worry is that it will eliminate any source of income for some people who can’t do much more with their labor than these things that are being replaced.

Knowledge@Wharton: Professor Siegel, what’s your view? This is a problem that’s been brewing for decades. And now Professor Shiller is suggesting that it’s going to accelerate because of robotics.

Jeremy Siegel: I think we need to separate out several forces. One is the growth of productivity itself overall. And the other is the fact that we’ve had a tremendous falling behind of the lower-income groups relative to the upper-income groups over much more than 20 years — 30 years.

Now, to some extent, I think there is a relation. But we have to understand that relation. What worries me as the greatest problem — as a long-term factor — is the collapse of productivity that we’ve had across the board since the Great Recession.

Non-farm productivity growth used to be 2.3%. Higher in expansions, somewhat higher when oil prices are going down. We had a big expansion since 2009. We had oil prices going down.

And it’s 0.5%, 0.6%. We’ve never had it so low. And if we just had it normal, we would have wages up by 10% to 12% today, which is significant, compared to what we do see.

Knowledge@Wharton: Is it also true the percentage of benefits from productivity increases that go to labor have diminished quite a bit? And is that a problem?

Siegel: Yes. Well, that’s a problem of, why has it diminished for labor, mostly? I think there are several factors there. And we could certainly go into those with Bob, if you want. But I could start it out, if you’d like.

Knowledge@Wharton: Why don’t you give the headline ones, and then, Professor Shiller, please weigh in.

Siegel: I think some of the lack of a rise in productivity growth and real wages in the working class sector and below has to do with globalization, and the tremendous increase in the supply of labor worldwide that we’ve seen over the last 20 years. I also don’t think our educational system is providing the right sort of training for people coming into the job market in the 21st century. I think our school system is falling down on producing those sorts of workers. There are certainly other factors, and Bob might bring some up, and we might talk further on this.

Shiller: Well, you were asking me what am I most worried about. And so, worries tend to be about the future. I’m actually chiming in with a worry that Norbert Wiener, in his famous book on cybernetics [Cybernetics: or Control and Communication in the Animal and the Machine, first published in 1948], aired in that book. I can’t quote him exactly, but [the idea was] that computers may replace just about anything that ordinary labor can do. And then, what do they do? What jobs are there for them?

Now, he’s been very controversial ever since. And it hasn’t happened yet. Because the people on the bottom half of the population are seeing their income stagnate but not decline over the last 30 years. So it hasn’t happened yet. But you were asking for big problems. You were citing the World Economic Forum, and what people there were citing as a problem, and that’s a future problem that may not even happen. You know, we don’t see the future very clearly.

Jeremy is pointing to some current problems. And the slowdown in productivity growth is a puzzle. And of course, education — yes, I agree. Education could improve the situation currently.

Knowledge@Wharton: So, what would be some policies that might help to alleviate some of this? It sounds like with the robotics issue, it’s difficult to say because we don’t know when it might hit or how big it might hit, or exactly how it will hit. So, that’s definitely a big challenge. But Jeremy, with the items that you cited: Are there some things that we could do, policy-wise, as a nation here or other parts of the world, that would ameliorate a lot of this?

Siegel: Well, first of all, the fact that the labor market — the working man, so to speak, who depends more on his physical labor, less on a skill set so we would call that “unskilled labor” today — I don’t think we made good provisions for these people who really lost during the global expansion.

Now, this is certainly one of Trump’s issues. There were some little plans that were done. But I think we needed to do more because this was a huge social issue. The other thing is, again, preparing people for the right type of jobs. You know, our educational system — we used to be number-one in the United States in the 1960s. Now, on international comparison tests, we’re number 30, 35. We’re in the middle, below some developing countries. This is an embarrassment for our country.

And just in teaching — you look at a program of learning in Germany from 1880, and it’s almost like, you go to mathematics. You go to grammar. You go to these little courses. This is not the right way, I think, that we need to teach our students to get the jobs of the future.

Knowledge@Wharton: So, there are two points there. One is that not enough was done for the people that were left behind. Would you say that policies such as retraining could have helped with that a little bit?

Siegel: Now, that’s a good question. And many of them were resistant. They were older. When you are older, you’re more resistant. There’s always a choice of trying to go on disability or Social Security when you’re not really that disabled. We had a much bigger fraction since 2009 go on disability and Social Security than all our projections were showing. We had a much faster decline in the participation of the labor force than most of our projections were showing.

So, that shocked the system and accelerated what was going on, and pinpointed the problems that we were having.

Knowledge@Wharton: On the education side — it’s easy to say this, but obviously, you have to figure out where funds would come from — but is the implication that we need to invest more, at all levels of education?

Siegel: I think we do. And I think we do need to, at all levels, for the bright people and for the people who had fallen behind, and the people who need retraining. And then they have no one but themselves to point to when they drop out, when their good job of 30 years has disappeared.

Knowledge@Wharton: Professor Shiller, your problem [regarding robotics] is a little thornier in the sense that, I think what you’re saying is, we’re not really sure what the outlines of it are.

It looks like it’s heading our way, but we’re not even sure about that, and we’re not sure about what it would look like. So, how do you prepare for that kind of a problem or challenge?

Shiller: Well, yes. What I’ve emphasized here is that we already do have a system in place, somewhat, that helps deal with inequality. It’s our progressive tax system, and our welfare and Medicare, Medicaid, Social Security. So, these are already there. There don’t seem to be plans to make them stronger. And it appears that, historically, countries that face rising inequality do not adjust these in-place systems toward redressing the problem.

So, there’s a recent book by Scheve and Stasavage [Taxing the Rich, a History of Fiscal Fairness in the United States and Europe], who argued through a history of data from many countries, to look at what causes taxes on the high-income people to go up? And what causes redistributions to low-income people to go up? You might think rising inequality does that. But they said that’s not it. The only time our system becomes more progressive is war time. When we’re fighting a war, people become much more concerned about low-income people. And for some years after that there will be a more progressive system.

But it doesn’t respond to inequality. So, I think that one thing I’d like to see is plans made ahead for what we will do if inequality becomes worse, much worse than it is now. And it would be a plan within maybe even the framework of these existing systems, to adjust the way benefits are defined, to adjust the taxes on the wealthy. But it would be a contingency plan made now.

And it has a better chance of happening if it’s done in advance. It becomes much more of an insurance.

You know, you have to insure your house before the house burns down. So, we should set up a system to deal with the possibility of higher inequality in the future now, before it happens.

Nobody is doing this. I’m saying we ought to.

Knowledge@Wharton: Strengthening the social safety net — I think that is what you’re saying.

Would it mean, for example, that if a worker was displaced because of cheaper labor overseas, or displaced by a robot, and was unable to find a job, or unable to find a job anywhere near what they were earning, that there would be some sort of a guaranteed income? Or would they have guaranteed health care they otherwise might not have? What would that look like on the ground?

Shiller: Well, we already have something like that. It goes back to the 1960s, and more notably to the beginning of this century. It’s called trade adjustment assistance, which has been incorporated in a number of bills that have passed Congress and were signed by the president.

So right now, you can apply for trade adjustment assistance, to a state agency in your state.

You have to make a case that your job was taken by a foreigner, [according to] what it says right now.

President Obama, in his State of the Union address in January of 2016, argued that we should expand that into what he called “wage insurance” that protects wage-earners, whether or not they can prove that they lost their job to foreign competition. He didn’t get it. But that would have been a movement. It’s along the lines that I’ve been arguing.

Knowledge@Wharton: Jeremy, you did say that there should have been more done for people who were displaced by some of these global forces, which they had no control over. Do you agree with Professor Shiller’s take on this, about what kinds of policies could help?

Siegel: Well, I’m not as enthusiastic about tax redistribution. I want to create more opportunities. I want to really train people into their jobs. Distribution opportunities could come from so many different directions. And I would prefer that route. Our tax system, of course, is already progressive.

Bob has noted that it’s not all that progressive, when we actually get down to the data about how much income has increased. And that’s probably so.

But there just doesn’t seem to be a good response to handouts. And the rest of those people doing it, or who feel that it’s taken from them and going somewhere else, do not feel ennobled by that form of gift, so to speak. So, I want to concentrate on the training, and on the education, and really rethink: What is an undergraduate education? What kind of skill sets are we giving them? Because we see so many of them having a hard time getting a decent job. And, you know, that should not be [happening] with the unemployment rate at 4.7%.

Knowledge@Wharton: Would this include a measure that would reduce the amount of tuition that colleges charge today, for example?

Siegel: Oh, that’s a big problem. Because I think that was a terrible bill.

Knowledge@Wharton: Which bill, just to be clear?

Siegel: Well, the bills that gave the Pell grants and everything else, that eventually led to “free” outside [private] loans for college education. I think, honestly, everyone seemed to have a win-win.

The colleges, the loan officers. But now, we see a lot of losses. These people are not graduating with the skill set. They’re not getting the jobs to pay off their loans. And the flaws of that are coming home to roost. I’m not an expert on what to do about that situation. But I feel that what has happened was because of a flawed system.

Knowledge@Wharton: Earlier, you had said that we would need to increase investments in education at all levels. Presumably that might mean measures that would not just change the curriculum in colleges, but would also reduce the cost. Is that right?

Siegel: Well, certainly we can reduce the costs — but that we need to change the curriculum to be more practical for most people. There are only a few people that really gain a tremendous amount by [studying a] purely liberal arts, so to speak, curriculum. Especially if they took out a loan to go to college. They want a good job afterwards. And I think we need to form these community training schools, or whatever. That’s what we need to do.

Knowledge@Wharton: Professor Shiller, what would you say are the main constraints or barriers to moving forward with some of the ideas you were talking about just a little while ago?

Shiller: Well, Jeremy hit it on the head. People don’t want handouts. And maybe, yes, when you campaign on taxing the rich, and giving the money to the poor, even the poor — they have self-respect and they don’t vote for that. On the other hand, if it can be framed properly, it represents something that isn’t viewed as a handout. So, one of the examples is education. If we give free education to poor people, that doesn’t sound like a handout, does it? Or to their children?

But it is a redistribution. If somebody is paying for it, it must be paid for by higher-income people. And we have that. And Jeremy’s right, it could be improved.

Siegel: But they’re not getting the jobs. That’s what I’m saying. They’re not getting the jobs that former students and graduates got. The average wage of the graduating students has gone down. And it’s because of the great increase in those students — it’s supply and demand. And I think that’s one of the factors.

Knowledge@Wharton: Do you agree?

Shiller: The problem is that education might not do it. … I’m worried it’s not going to solve this problem. We’re going to have great social unrest, because a lot of people are just not doing well.

Siegel: Well, I think part of what we’ve seen in the Trump election, Brexit, and all that, is an uprising reflecting some of that problem. The question is, is it going to accelerate? I still basically believe that productivity growth is a very good thing. And it does increase the opportunities. But if it’s focused just on a very narrow set, that brings about a problem. People ask me, and you brought up, Bob, robotics, and how fast our workforce will deplete. I like to give the following example. I would like you to comment on it, because I respect your views so much.

Primitive man basically spent all his life hunting for food, and finding minimal shelter for his family, or his companion, and for him to raise a family. That was eight hours a day. Now, with wages in developed countries, that same minimum set, I heard, is 45 minutes to an hour a day.

Now, you’re not going to get foie gras and truffles — but [you will get] a minimum set of nutrition, probably even better, and minimum set of standard living. Which means that we work over seven hours on just our own enjoyment above and beyond that. That’s the history of mankind, over the last thousand years or so. And that’s resulted in about an 85% elimination of what was the standard job. Bob, what do you think?

Shiller: Yes. That is definitely a good thing, no question about it. And it’s worked out fairly well. We have less need for that. And in fact, society has already made adjustments. What I think is really striking is that it’s basically in the last century, that we’ve seen people retiring, and then spending the rest of their life not working.

The median age for retirement within our Social Security system is 62. The life expectancy of people is about 80. So, that’s like 18 years of vacation.

Siegel: Yes. We never had anything approaching that — that’s unprecedented in world history, that’s correct.

Shiller: I think we’ve adjusted to it. We have Social Security. We take care of these people. I mean, they can enjoy good food. It may not be — Social Security is not so generous that you eat foie gras. But you can eat much better than your caveman.

… I think that we’re going to see a lot more leisure in the next century. And maybe we’ll find some meaningful things to do. The problem is, people need a feeling that they contribute. That they’re working. We have to find some way to make sure they’re not starving. They’re not left out. And that they have found something meaningful to do. And I’m hopeful that they will.

Trump’s Imaginary Enemy

Zhang Jun
. China's RMB

SHANGHAI – Last month, China commemorated the 20th anniversary of the death of Deng Xiaoping, the chief architect of the economic reform and opening up that catapulted the country to the top rungs of the global economic ladder. The anniversary comes at a time when economic openness is under threat, as the United States is now being led by a president who believes that the way to “make America great again” is to close it off from the world.
In particular, Donald Trump’s administration is posturing for a stricter approach to China, which he claims has been “raping” the US with its trade policies, including by keeping the renminbi’s value artificially low. Whatever concrete steps Trump takes, it seems clear that US policy will be economically tougher on China in the coming years, potentially even triggering a trade war. But, as a closer look at China’s financial policy stance shows, China is not America’s foe.
Just a few months ago, China was confronted with the urgent challenge of preventing the continued depreciation of the renminbi and cooling down an overheating real-estate market.

This would be no easy feat, not least because the authorities’ efforts to stem the renminbi’s decline were rapidly shrinking China’s foreign-exchange reserves.
The situation was so grim that some international investors and economists suggested that the government would have to give up on managing housing prices and focus, instead, on propping up the exchange rate, as Japan, Russia, and South Asian economies had done. China, they argued, could not allow its hard-earned foreign-exchange reserves to slip away.
But, after partly decoupling the renminbi from the dollar in August 2015, the People’s Bank of China (PBOC) tried hard not to intervene to boost the renminbi’s value. As China’s economic growth continued to decline and America’s continued to recover, the renminbi’s exchange rate continued to fall.
Some observers might have wondered whether the PBOC purposely allowed the depreciation to boost China’s trade competitiveness in advance of a potential victory by Trump in the US election – a result that many assumed would weaken the US dollar. Perhaps it did. But it did not actively devalue the renminbi.
When Trump’s election as US president defied expectations and made the already-strong dollar rise further, depreciation pressure on the renminbi intensified. By the end of last year, the renminbi had depreciated by around 15% against the dollar from the summer of 2015, and rapidly rising expectations of further depreciation were driving more investors to take their capital out of China.
The PBOC had to take stronger action to contain the renminbi’s decline. To stabilize exchange-rate expectations, it imposed tighter restrictions on short-term capital outflows. At the same time, it took its previous efforts to decouple the renminbi from the dollar – a shift from a fixed median-price system to a market-based exchange-rate package – a step further, adding 11 currencies to the renminbi’s reference currency basket. With that, China’s exchange-rate storm subsided, and a two-way fluctuation range for the renminbi-dollar exchange rate was established, an important step toward a market-based exchange rate regime.
The PBOC took these steps before Trump’s January inauguration. Given Trump’s accusations of currency manipulation by China, that was good timing, regardless of the fact that the PBOC’s intervention was aimed at strengthening, not weakening, the renminbi. Enduring restrictions on short-term capital outflows, however, could still become a target, though such criticism, too, would be unwarranted.
China’s regulation of cross-border capital flows has long been a contentious subject. A few years ago, most economists recommended that China liberalize the capital account, thereby eliminating a key institutional barrier to the establishment of Shanghai as an international financial center and of the renminbi as an international reserve currency.
But, according to respected economists like Justin Yifu Lin and Yu Yongding, the full liberalization of China’s capital account would be highly risky for China. They also point out that there is little evidence backing claims that free cross-border capital flows are necessary for continued economic development.
As recent experience shows, China’s use of adjustable quotas for qualified foreign and domestic institutional investors to manage short-term cross-border capital flows remains a valuable tactic for protecting its exchange rate and foreign-exchange reserves. As a country with considerable savings and an underdeveloped financial market, China knows that it must be careful.
To be sure, when China’s economic situation has called for it, the authorities have taken steps to reduce restrictions on capital flows. Some 20 years ago, China began to allow – even encourage – current-account liberalization, in order to attract inflows of foreign direct investment into its manufacturing sector and boost exports and economic growth. But it was not until 2008 that Chinese policymakers – seeking to offset the upward pressure that high capital inflows were placing on the renminbi – allowed local enterprises to invest abroad. And even then, such investments could be made only in specific circumstances.
Similarly, in 2013, China established a pilot free-trade zone in Shanghai, to explore approaches to facilitating short-term capital flows and to quiet demands for financial liberalization from the US and the International Monetary Fund. But, in order to mitigate possible financial risks, China continued to develop its regulatory framework for capital-account convertibility.
China also initiated in 2013 its “one belt, one road” initiative, a massive undertaking that will establish the physical and institutional structure for closer trade and investment relations with countries in the Asia-Pacific region and beyond, thereby accelerating the internationalization of the renminbi. At that time, overseas investments and acquisitions by Chinese enterprises were being strongly encouraged, in order to provide an outlet – something like the US Marshall Plan for the reconstruction of post-war Europe – for the excess capital and production capacity that had emerged following the 2008 global financial crisis.
Deng used to tell Chinese officials that, when faced with new challenges, one should “stay calm, hold one’s ground, and respond.” So far, that is what China has done, pursuing cautious financial liberalization according to its own needs and logic. Whatever Trump says, that does not make China an enemy of America.

Al-Qaida-Islamic State Competition in Syria

By Kamran Bokhari

Al-Qaida is poised to take advantage of a weakened Islamic State.

There is a growing expectation these days that the caliphal regime of the Islamic State will collapse. The disproportionate focus on this desired outcome obscures the fact that even when this happens the specter of jihadism will continue in Syria in the form of many other groups. Key among them is al-Qaida, which has quietly been working to take advantage of the mainstream rebels’ weakening at the hands of Syrian President Bashar al-Assad’s regime and the international efforts to neutralize IS.

While sharing the same goal and (more or less) the same ideology, al-Qaida and IS are bitter competitors for the leadership of the global jihadist movement whose rivalry will shape the future course of transnational jihadism.

Two suicide bombers detonated bombs in Damascus on March 15, targeting a main judicial building and a restaurant, killing dozens and injuring nearly 150 people. On March 12, another suicide bombing at a Shiite shrine in the Syrian capital claimed 80 lives. In recent years, IS has carried out such attacks. However, both these attacks have been claimed by Hayat Tahrir al-Sham (Committee for the Liberation of the Levant), the third and most-recent incarnation of the group formerly known as Jabhat al-Nusra, the Syrian branch of al-Qaida.

Portraits of Syrian President Bashar al-Assad (R) and his late father former president Hafez al-Assad are seen inside the old palace of justice building in Damascus following a reported suicide bombing on March 15, 2017. Two suicide bombings hit Damascus including the attack at the central courthouse that left at least 32 dead, as Syria's war entered its seventh year with the regime now claiming the upper hand. / AFP PHOTO / Louai Beshara (Photo credit should read LOUAI BESHARA/AFP/Getty Images)
Portraits of Syrian President Bashar al-Assad, right, and his late father and former President Hafez al-Assad are seen inside the old Palace of Justice building in Damascus, following a reported suicide bombing on March 15, 2017. Two suicide bombings hit Damascus including the attack at the central courthouse that left at least 32 dead, as Syria’s war entered its seventh year with the regime now claiming the upper hand. LOUAI BESHARA/AFP/Getty Images

Bombings in Damascus are rare, and in the last three days two major attacks have occurred. This means that al-Qaida’s Syrian ally has developed the capability to penetrate the Syrian regime’s best possible security arrangements to strike in the capital. This may sound surprising but only to those who have not been paying attention to al-Qaida’s moves in the country. While the world’s attention is focused on IS, especially as it loses its largest urban center in Mosul and expects an assault on its capital Raqqa, al-Qaida has been quietly preparing to assume a lead role in the evolving Syrian battlespace, particularly IS’ downfall.

Not too long ago, both groups were part of al-Qaida’s global jihadist network. In 2012, IS – then called the Islamic State of Iraq – was on a path toward resurgence in Iraq in the aftermath of the departure of U.S. troops in December 2011 amid renewed Shiite-Sunni polarization. That same year, al-Qaida, taking advantage of the Syrian civil war, was able to establish a branch called Jabhat al-Nusra in the Levantine country. From al-Qaida’s point of view, these were two separate branches that reported back to the global leadership based in northwestern Pakistan.

By then, the apex al-Qaida leadership had been sufficiently weakened, especially with the May 2011 killing of its founder, Osama bin Laden, at the hands of U.S. Navy SEALs. Since 2003, al-Qaida had been on a steady decline, and its leadership had traded operational control of the international jihadist movement for personal security of its top leadership. This led to the effective operational independence of the various geographic nodes of al-Qaida. The most significant was the Iraqi node, which emerged as the most powerful al-Qaida branch given the anarchy that prevailed in Iraq in the eight years after the U.S. attempt to effect regime change, which unleashed the torrent of the Shiite-Sunni conflict.

By the time the Arab Spring uprising turned bloody in Syria, the Iraqi branch of al-Qaida had not just been revived but was also in a position to expand into Syria. Given that it had nearly a decade of military and governance experience, it was able to seize control of the largest swath of territory in eastern Syria. By 2013, it announced a merger with its then Syrian counterpart, Jabhat al-Nusra, and renamed itself the Islamic State of Iraq and Syria (ISIS). The central leadership of al-Qaida rejected the merger, but it was not in a position to reverse ground realities. ISIS leader Abu Bakr al-Baghdadi publicly chastised al-Qaida leader Ayman al-Zawahiri and declared ISIS independent from al-Qaida.

A year later, ISIS seized Mosul, announced the re-establishment of the caliphate and declared itself “the” Islamic State. Clearly, IS emerged as the most powerful jihadist force in the Levantine-Mesopotamian landmass. However, that did not mean al-Qaida had been delivered a knockout punch. While it no longer had a presence in Iraq, it did have Jabhat al-Nusra to rely on after the group’s core was able to re-emerge following the falling apart of the 2013 merger.

Since then al-Qaida has been working to distinguish itself from IS.

It is important to note that, fundamentally, al-Qaida and IS are very similar. They have sprung forth from the same basic Salafi-jihadist ideology, and they both seek to establish a caliphate. Ironically, al-Qaida has denounced IS as extremist and sees IS as a renegade movement that has hijacked the global jihadist movement. Al-Qaida believes that the ground realities needed for a sustainable caliphate will take decades to materialize.

IS, on the other hand, believes that al-Qaida has deviated from the cause because of an overcautious approach. IS also sees itself as having done the heavy lifting for the jihadist cause, which it feels led to the establishment of the caliphate. Put differently, IS feels it has succeeded in operationalizing what al-Qaida has largely theorized about. Unique geopolitical circumstances in the form of the collapse of the Saddam Hussein regime and the Arab Spring provided IS with the opportunity to establish its regime.

IS is also heavily sectarian in outlook. Its anti-Shiite stance is not so much purely ideological as it is geopolitical, given that it was founded in Iraq amid the disenfranchisement of the Sunnis.

On the other hand, al-Qaida, which also despises the Shiites, does not see the Sunni-Shiite struggle as central to its goal. Furthermore, most of the noted ideologues of the jihadist world support al-Qaida and deem IS a rogue entity whose efforts to fast-track the caliphate are doomed to failure.

Thus, al-Qaida in Syria has been moving under the assumption that IS will crumble in the face of the onslaught from the U.S.-led international forces. In fact, it would not be an exaggeration to say that it is actually hoping for it. That said, it is well aware that this will not happen soon.

But that doesn’t matter for al-Qaida, given that it is on a much longer road to the caliphate.

Since its 2013 disassociation from then-ISIS, al-Qaida in Syria has been focused on trying to gain the leadership of the Syrian rebel landscape, which has been dominated by Salafi-jihadist entities of different stripes. For several years, it pursued this course as Jabhat al-Nusra, fighting alongside rebel groups in different parts of the country. Since IS had appropriated the transnational caliphate brand, Jabhat al-Nusra tried to assume the leadership of the Syrian nationalist camp. At the same time, however, it maintained its al-Qaida affiliation, which increasingly became a liability – preventing it from achieving its goal of becoming a leader of the rebels.

Finally, last summer it rebranded itself as Jabhat Fatah al-Sham and formally disassociated itself from al-Qaida. Since al-Qaida leader al-Zawahiri blessed the move, it is clear that the separation was not a genuine one. Six months later, the recapture of Aleppo by the regime proved to be another major opening for the group. The loss of Aleppo symbolized the massive collapse of the major rebel groups such as Ahrar al-Sham and many others.

The disarray in the rebel landscape created an opportunity for Jabhat Fatah al-Sham to join forces with a few smaller like-minded rebel groups to form Hayat Tahrir al-Sham two months ago. This latest al-Qaida incarnation in Syria also controls Idlib – the one province (situated between Latakia and Aleppo) that the regime has not regained control over in western Syria.

From here, it is now preparing to fill the vacuum that will gradually emerge as IS weakens. The twin bombings are part of this effort and a way to show the rebels that despite the loss of Aleppo it has the wherewithal to take the fight to the regime’s doorstep.

This will obviously force the regime to respond and prioritize al-Qaida over IS. However, the regime’s forces are spread thin on multiple fronts. Meanwhile, IS is the priority of the U.S.-led international coalition. Al-Qaida’s strategy is to be ready to assume the jihadist leadership when the IS regime crumbles. This is one key potential way in which jihadism will persist long after IS has been degraded.