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+BMW 's and Chinese Justice * * * * * In most places , the name " BMW " implies 
luxury and exclusivity . But in China , the brand has unwittingly found itself 
enmeshed in tales that illustrate the powerlessness of ordinary Chinese against 
the powerful and corrupt . The first scandal occurred last year , after a 
tractor filled with green onions scraped the side of a BMW in Harbin . The 
drivers of both the tractor and the metallic-silver luxury car were 45-year-old 
women , but any similarity between them ended there : the former was a peasant 
, the latter the wife of a wealthy businessman . After a confrontation between 
the two , the wealthy wife drove her BMW into the growing crowd of spectators 
on the roadside , killing the peasant woman and injuring 12 others . The case 
went to the local court , where the judge ruled it an " accidental traffic 
disturbance " and gave the driver a two-year suspended sentence . The judge 's 
ruling spurred rumors that he went easy on her because her hus
 band was related to senior provincial officials . It quickly became a story of 
" rich versus poor , " widely cited as an example of high-level corruption . 
Over the next few months , newspapers and television stations ran with the 
story as it snowballed into a national obsession . Alarmed by the public 
reaction , the Harbin magistrate ordered the case reopened , only to have the 
suspended sentence confirmed when the case was closed this March . The big BMW 
story of late 2003 resurfaced quietly , before being buried again forever . 
That same month , a lottery scandal threw the BMW brand into the limelight once 
again . Lottery officials in Shaanxi province rejected a winning ticket , 
calling it a fake and denying its bearer , a 17-year-old security guard named 
Liu Liang , the grand prize of a $58,000 BMW and 120,000 yuan ( $14,510 ) in 
cash . Liu became so angry about being accused of fraud and denied the car that 
he climbed atop a high advertising billboard and threatened to jump as 
 a show of innocence . But the story did n't end when police officers managed 
to talk him down . News broadcasts covered his continued insistence that he did 
not forge his ticket , along with the lottery center 's claims that their 
rejection of the ticket was legitimate . The police finally stepped in and , 
after a careful investigation , announced that they had found the true criminal 
: Yang Yongming , a private businessman whom the local lottery administration 
had contracted to organize ticket sales . Yang had conspired with the 
government officials directing the lottery , who were arrested for malfeasance 
, to fraudulently obtain the top prizes . In June Liu Liang finally got what he 
deserved - a BMW-325i sedan and a sincere apology from the lottery center . If 
the first scandal was a tragedy , the second was more like a farce . But both 
offer keys to understanding contemporary Chinese psychology . The outcry after 
the first BMW case was not really about the light sentence given t
 o a rich woman , but about the lack of confidence ordinary people have in 
China 's judicial system . In China , power , money , and connections trump the 
law . Even as they are becoming ever more litigious , many Chinese believe that 
they have no hope of securing justice against the powerful . The apathetic 
response of the dead peasant woman 's husband to the $10,000 in compensation he 
received was telling . " I do n't care about the verdict and whether it is 
justice or not , " he said . The most harmful consequence is the public 's loss 
of trust in the system . Social trust is not something you can buy with money . 
If an entire society believes that you cannot depend on legal rights for 
protection - that one must instead rely on a web of relationships with those 
who have power and influence - questions about whether such a society is 
livable or desirable will remain . Similarly , in the second BMW case , people 
did n't blame a corrupt businessman ; they ascribed culpability to the 
 lottery center , a government body . So instead of mistrusting one person , 
they grew suspicious of an institution - even of government itself . When a 
stubborn teenager went up against the mighty lottery authority with its army of 
auditors and inspectors and initial alibis , this individual , not the system , 
was the clear winner of the public 's admiration . Liu Liang may have been just 
a working-class kid , but there was wisdom in his words that there is still a " 
silent majority " who can affect the workings of China 's fragile society . He 
refused to settle privately , because he believed that if he let corrupt 
government officials off the hook , " they 'll keep scamming the public . " 
Thanks to his perseverance and the media 's investigation , the fraud was laid 
bare . Power corrupts everywhere , but individuals in China such as Liu have 
come to form a countervailing force . Even so , such marginal forces do not yet 
constitute a system for redressing grievances . While pop mus
 ic fans in China can listen to whatever they like , including Madonna singing 
" I 'm gonna shake up the system , " ordinary Chinese need courage to speak 
such messages aloud . As one saying goes , " There is not want of conscience in 
Chinese , but there is want of courage . " 
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+France’s Fourth Moment KYIV – Since World War II’s end , France has 
consistently risen to the challenge of restructuring Europe in times of crisis 
. In doing so , France became the catalyst not only for building European unity 
, but also for creating the prosperity that marked Europe’s post-war decades 
– a prosperity now under threat because of the global financial and economic 
crisis . If we are to see a stronger Europe emerge from today’s challenges , 
visionary French leadership is needed again . The first moment when decisive 
French leadership began to unify Europe came when Robert Schuman and Konrad 
Adenauer created the European Coal and Steel Community . By rooting the then 
West Germany in the political , economic , and social fabric of the West , that 
step heralded the start of Germany’s rebirth and economic miracle . The 
second time that France consolidated Europe’s internal architecture came in 
1983 , during the debates over the stationing of American cruise 
 and Pershing missiles in Germany to counter the deployment of SS20 missiles by 
the Soviet Union . France’s resolve to stand with Germany helped prevent 
Germany from drifting into a dangerous neutrality that would have shaken the 
European community to its core . The third moment came after the Berlin Wall 
fell , and it was feared that an enlarged Germany might destabilize Europe . 
After initially trying to delay reunification , France embraced it , in 
exchange for Germany’s reaffirming its commitment to European unity and 
Franco-German leadership of the European community . As a result , Germany 
bound itself to the idea of “ ever closer union ” even more definitively by 
pledging to join the common European currency , the euro . It is now urgent 
that the insights that have animated Franco-German relations be applied to all 
of Central and Eastern Europe . Only by securing the European identity of this 
entire region , and by anchoring the growing Russo-German relationship in a E
 uropean context , can the European Union continue on its path of stability and 
prosperity . Only by reinforcing open trading and financial relations across 
Europe can we hope to subdue today’s crisis . For it is in no European 
country’s interest , or in the interest of the EU as a whole , that Central 
and Eastern Europe feel that they have been cast adrift or that Germany and 
Russia fixate on each other in this time of crisis . As with Germany in the 
1950’s , the nature of Russia’s links with its immediate neighbors is 
turning out to be the defining factor in shaping the country’s international 
image . Many observers regard these relations as a signal not just to the 
region , but to the rest of the world , of the sort of power that Russia wishes 
to be . The issue is partly one of “ internationalism ” itself . In 
contrast to Europe – with its close-knit network of multilateral 
organizations through which states formulate and conduct much of their foreign 
policies – 
 Russia is not accustomed to intensively cooperative international procedures . 
But keeping Russia at arm’s length from Europe has only strengthened the 
sense of isolation that many Russians feel , tempting them to define the 
country’s interests in ways that are irreconcilable with those of Europe . It 
has also heightened Russia’s desire to construct a special , bilateral 
Russo-German relationship heedless of the context of the EU . European history 
during the past 60 years makes clear that the most promising approach to 
meeting the challenge of national reconciliation and stability is not to focus 
on specific contingencies , but to establish procedures that encourage orderly 
change . A singular vision has always animated this process : animosity between 
neighbors must not be allowed to fester , and the rule of law must reign not 
just within countries , but also between them . To believe that such a vision 
can work for Russia , Ukraine , and Europe is not wishful thinking , but
  rests on the successful experience of France and Germany in promoting amity . 
Indeed , the existence or absence of a framework of cooperation often 
determines whether a dispute mutates into a crisis . Such cooperative 
frameworks seek to reconcile national independence with regional 
interdependence , focusing political leaders ’ minds on prosperity for their 
people rather than on gaining unilateral advantages that ultimately impoverish 
and unsettle everyone . The first lesson of European unity is that times of 
crisis must draw the continent closer together , not divide it through 
protectionism , competitive devaluations , and expulsions of immigrants . 
Similarly , the euro must not be allowed to become an Iron Curtain that 
consigns non-members to a high-risk zone where investors dare not venture . For 
Ukraine , Europe can help by embracing the free-trade agreement that we are now 
negotiating . Coupled with our successful membership in the World Trade 
Organization , Ukraine would s
 tand to benefit when world and European trade begins to recover . Europe can 
also consider using various stabilization funds to help our economy through the 
crisis that we are all enduring . I do not ask for these things out of a narrow 
concern for my country’s health . Just as the US Federal Reserve has engaged 
in credit and currency swaps with Brazil , Mexico , Singapore , and South Korea 
and other countries to ease their access to the dollars they need , the 
European Central Bank must offer such swap arrangements to Europe’s non-euro 
countries in order for trade and production processes to continue . Yes , these 
are dark times , and all politicians want to protect their voters . But 
Europe’s greatest postwar leaders understood that keeping the wider view of 
Europe in mind is the best way to achieve this goal . As at so many times 
before , now – with all of our economies in peril – is a moment for 
decisive French leadership . 
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+François Hollande’s Wrong Idea of France LONDON – France’s new 
president , François Hollande , has achieved a remarkable series of political 
victories – at home and in Europe – since his election in May . 
Unfortunately , his streak of success will inevitably call forth an economic 
reckoning that will shock France’s apparently unsuspecting citizens and doom 
the French elite’s approach to the “ construction of Europe . ” Since 
winning the presidency , Hollande has won a parliamentary majority and pushed 
Germany toward accepting joint liability for eurozone countries ’ debts . But 
forebodings of crisis have become widespread in French business and economic 
circles . But the real danger – which even Hollande’s sternest critics may 
be underestimating – is not so much his individual policy failings ( serious 
though they may be ) as his approach to the twin challenges posed by France’s 
economic imbalances and the eurozone crisis . On each front separately , he
  might manage to muddle through ; together , they look likely to cement 
France’s loss of competitiveness . Declining competitiveness is best captured 
in a single indicator : unit labor costs , which measure the average cost of 
labor per unit of output . In a monetary union , discrepancies in wage growth 
relative to productivity gains – that is , unit labor costs – will result 
in a chronic accumulation of trade surpluses or deficits . Since the euro’s 
introduction , unit labor costs have risen dramatically faster in France than 
they have in Germany . According to Eurostat data published in April 2011 , the 
hourly labor cost in France was €34.2 , compared to €30.1 in Germany – 
and nearly 20 % higher than the eurozone average of €27.6 . France’s 
current-account deficit has risen to more than 2 % of GDP , even as its 
economic growth has ground to a halt . The high cost of employing workers in 
France is due not so much to wages and benefits as it is to payroll taxes lev
 ied on employers . The entire French political class has long delighted in 
taxing labor to finance the country’s generous welfare provisions , thus 
avoiding excessively high taxation of individuals ’ income and consumption 
– though that is about to come to an end as Hollande intends to slap a 75 % 
tax on incomes above €1 million . This is a version of the fallacy that 
taxing companies ( “ capital ” ) spares ordinary people ( “ workers ” ) 
. Of course , such taxes on firms are always passed on to households – 
usually through straightforward price hikes , and , in France , also through 
unemployment . High tax rates on labor – together with rigid regulation of 
hiring and firing – make employers extremely reluctant to recruit workers . 
As a result , France has had chronic long-term unemployment – forecast to 
reach 10.5 % by 2013 – for many years . Hollande’s predecessor , Nicolas 
Sarkozy , tried to address this problem . He exempted voluntary overtime pay fro
 m employment tax and shifted some of the burden of labor taxation onto 
consumption ( via a hike in VAT ) . But Hollande quickly reversed both of these 
reforms . The repeal of the tax break on overtime reflects another economic 
fallacy to which French Socialist politicians are deeply attached : the “ 
lump of labor ” notion that underlay the most disastrous of their economic 
policies – the 35-hour workweek , introduced in 2000. The idea behind the 
policy is that demand for labor is a constant , and that this fixed number of 
aggregate working hours required by employers to meet final demand can be 
spread more evenly among workers to reduce unemployment . Such measures , 
designed to create jobs by freeing up work hours , are futile at best , and are 
often detrimental . French Socialists should recall their school physics lesson 
about communicating vessels : when a homogeneous liquid is poured into a set of 
connected containers , it settles at the same level in all of them , regard
 less of their shape and volume . Generating more “ liquid ” ( jobs ) 
requires not discouraging the entrepreneurs on whose activities sustainable job 
creation ultimately depends . The effect of fiscal and regulatory pressure on 
employment is to encourage French firms to invest and hire outside France . 
Hollande’s apologists praise his gradualist and consensual approach to 
addressing the economy’s structural distortions . They argue that his 
penchant for setting up consultative commissions is the best way to forge the 
consensus required for structural reform , whereas Sarkozy’s combative style 
was counterproductive . Even banishing skepticism and assuming that Hollande 
could over time persuade his supporters to embrace competitiveness-boosting 
policies , the eurozone crisis is denying France the time that such gradualism 
requires . A simple , effective way to buy time would be to abandon the euro 
and restore competitiveness through a devalued national currency . But this exp
 edient is incompatible with mainstream French politicians ’ devotion to the 
“ European project , ” which amounts to a projection of French soft power ; 
indeed , building Europe lies at the heart of the French establishment’s 
version of what Charles de Gaulle used to call “ a certain idea of France . 
” For mainstream French politicians , renouncing the European project to buy 
the time required to restore competitiveness is as unthinkable as is the 
logical alternative : an all-out push for full European political union . This 
would reestablish monetary sovereignty and create a normal central bank ( like 
the Federal Reserve or the Bank of England ) at the European level . But it 
would also mean abandoning France’s republic in favor of a federal European 
government – anathema to that “ certain idea of France . ” The 
combination of gradualism ( on the most generous interpretation ) in domestic 
economic reform and the paralyzing effect of the eurozone crisis will lead 
 to a massive shock . Remaining in a currency union with the much more 
competitive German economy will require wrenching and rapid reforms , for which 
Hollande’s tepid approach will fail to prepare the complacent French . The 
result will be even more support than was seen in last April’s presidential 
election for extremist political parties that reject both Europe and 
competitive market capitalism . 
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+Hollywood’s Favorite Villains Once upon a time , Cold War enemies , white 
supremacists , and evil geniuses reigned supreme as Hollywood’s favorite bad 
guys . No more . Today , it is multinational corporations that are increasingly 
being cast as the über-villains of our globalized world . For all their 
subliminal paid promotions and subtle product placements , corporations are 
getting drubbed in the main story lines of our popular culture . This treatment 
goes far beyond documentaries like Michael Moore’s polemical Fahrenheit 9/11 
or The Corporation , an earnest if somewhat paranoid portrayal of multinational 
companies ’ role in globalization . It extends to mainstream hits like The 
Constant Gardener , in which the idealistic protagonists do battle with a 
malicious global pharmaceutical company that is bent on exploiting Africa’s 
misery to test experimental drugs . To be sure , sociopathic corporations have 
populated books and films for more than a century . But corporate 
 villains , typically multinational companies , have never been so ubiquitous 
as today . Is it unfair ? Most corporations , after all , are merely convenient 
mechanisms for ensuring that scarce global capital is used at maximum 
efficiency , to the benefit of all . Are famously liberal Hollywood film 
directors spending too much time going to anti-globalization rallies ? Perhaps 
. But I would submit that Hollywood’s misgivings , however untutored , 
represent only the tip of a growing iceberg of resentment against the perceived 
injustices of globalization . The simple truth is that corporations represent 
capital , and capital – in the form of factories , equipment , machines , 
money , and even houses – has been the single biggest winner in the modern 
era of globalization . Corporate profits are bursting at the seams of investors 
’ expectations in virtually every corner of the world . Even in moribund 
economies like Germany and Italy , where employment security is vanishing , cor
 porations are swimming in cash . This phenomenon comes as no surprise to 
economists . Add two billion Indian and Chinese workers to the global labor 
force , and the value of other means of production – particularly capital and 
commodities ( for example , gold and oil ) – is bound to go up . And so it 
has , with capitalists everywhere gaining an ever larger share of the economic 
pie . ( In theory , capitalists in labor-abundant China and India could end up 
as losers , but in practice they , too , have benefited thanks to their 
governments ’ success in simultaneously liberalizing and globalizing . ) Many 
policymakers seem to be under the impression that surging profits are a purely 
cyclical phenomenon , as economies continue to grow out from the depths of the 
2001 recession . Wait a bit , they predict , and wages will fully catch up 
later in the cycle . Not likely . Capital’s piece of the pie has been getting 
bigger for more than 20 years , and the trend looks set to continue 
 . Indeed , corporations ’ growing share of income has been a major driver 
behind the long , if uneven , bull market in stocks that began in the early 
1990’s . At the same time , inflation-adjusted wages for rich-country 
unskilled workers have barely budged over the last two decades . Some of these 
trends also have to do with the nature of modern technological change , which 
seems to favor capital and skilled workers disproportionately . But , 
regardless of their cause , rapidly growing inequalities are a powerful force 
for instability everywhere , from wealthy America to rapidly growing China to 
reform-challenged Europe . “ A rising tide lifts all boats , ” 
conservatives like to say . Fine , but what happens to people , like the poor 
of hurricane-struck New Orleans , who don’t own boats ? Growing inequality 
would not be such a problem if governments could simply raise taxes on the rich 
and strengthen subsidies to the poor . Unfortunately , any country that taxes 
capital to
 o aggressively will only succeed in chasing it to regions where the tax burden 
is lighter . In a globalized world , national governments ’ ability to tax 
potentially mobile factors of production is sharply circumscribed . The same 
mechanism that pours profits into the pockets of global corporations also 
prevents governments from claiming a larger share of the spoils . Unfortunately 
, the long-term trend towards ever-lower income shares for unskilled workers is 
likely to continue over the coming decades , as modern technology permeates the 
globe , and as emerging markets like China , India , Brazil , and Eastern 
Europe continue to integrate into global production . This is not to say that 
unskilled workers are actually being made worse off by globalization in 
absolute terms ; the vast majority are actually breaking even or better . But 
unskilled workers ’ incomes are not keeping pace with overall economic growth 
, and the resulting social strains are a ticking bomb . If so , then
  Hollywood’s cartoon-like caricatures of evil multinational corporations may 
some day seize mainstream consciousness , leading to political upheavals that 
shatter today’s social contract . That won’t be good for profits , or for 
the poor . Governments – and corporations – must find better ways to 
provide equal opportunity through improved education , broader financial 
markets , and other channels . Otherwise , globalization’s storyline may not 
proceed according to the script . 
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+Japanese Lessons for China’s Currency SHANGHAI – The question of how much 
China’s currency should appreciate to rebalance its trade has become a global 
hot-button issue . But the answers have been all over the map , with some 
finding that the yuan is not undervalued at all , while others argue that it 
should appreciate against the dollar by more than 30 % . Clearly , there must 
be major differences in the macroeconomic models used to produce such a wide 
range of estimates . But the one thing about which everyone seems to agree is 
the theoretically and empirically unjustified assumption that an equilibrium 
exchange rate actually exists . The theoretical problem is simple : a 
country’s trade balance depends on a lot more than the value of its currency 
in the foreign exchange markets . Interest rates , employment , aggregate 
demand , and technological and institutional innovation all play a role . As 
the economist Joan Robinson pointed out in 1947 , just about any exchange rate
  will be the equilibrium value for some combination of these other variables . 
The equilibrium exchange rate , she famously argued , is a chimera . Not 
surprisingly , the empirical evidence that trade imbalances can be resolved 
through exchange rate changes alone is unconvincing . In the case of China , 
the most useful precedent is probably that of Japan in the period from the end 
of the Bretton Woods fixed exchange-rate regime in August , 1971 , to the 
collapse of its “ bubble economy ” in 1990. During that period , the 
yen’s value more than doubled against the dollar , rising from its original 
fixed rate of 360 to 144 at the end of 1989. Yet , even as Japan’s exports 
became much more expensive in dollar terms and its imports much cheaper in yen 
, its trade surplus rose from $6 billion in 1971 to $80 billion in 1989. For 
two decades , expectations that an appreciating yen would restore external 
balance were repeatedly disappointed . At the time of the December 1971 Smithson
 ian Agreement , 308 yen to the dollar was supposed to do the trick . Fourteen 
years later , during the Plaza Accord negotiations , the Japanese argued for an 
eventual level of 200-210 , while some US Treasury officials thought the final 
target should be as high as 165-170 . At the end of the 1980’s , some 
analysts thought rates as high as 120 might finally produce the long-sought 
equilibrium . Yet , as Japan entered the “ lost decade ” of the 1990’s , 
its exports continued to grow faster than its imports . Japan’s trade surplus 
peaked only in 1994 , at $144 billion , just a few months before the yen’s 
April 1995 all-time high of 79.75 . In retrospect , it is easy to see why none 
of these supposed equilibrium exchange rates delivered external balance . As 
the yen appreciated , Japan responded not by exporting less but by improving 
productivity and quality control through plant and equipment investment and 
innovations in factory management , making possible rapid growth in
  exports of high-value-added products . Exchange-rate equilibrium calculations 
from the 1970’s and 1980’s , which could only have been based on the export 
sector’s contemporary structure , naturally would have little relevance 
subsequently . The same is true of calculations at the beginning of the 
1990’s , which would have forecast Japanese import growth based on 
extrapolations from the high GDP growth rates of the previous 40 years rather 
than on the decade of stagnation that ensued . In China , changes in the export 
sector’s structure similar to those observed in Japan are now taking place . 
These changes are likely to make today’s attempts to find an equilibrium 
yuan-dollar exchange rate seem just as chimerical in hindsight as previous 
calculations of the yen-dollar equilibrium rate . For the 30 years since the 
beginning of China’s economic reforms , Chinese industry has achieved 
impressive efficiency gains by adopting new technologies and realizing 
economies of sca
 le , leading to a huge expansion in locally made products suitable for export 
. While an appreciating currency might eventually drive labor-intensive 
manufacturers out of business , if Japan’s economic history is any guide , 
they are likely to be replaced by producers of things like ships , machine 
tools , semiconductors , and doubtless new products yet to be invented . The 
equilibrium yuan-dollar rate is a chimera not because China’s trade could 
never be balanced , but because the exchange rate alone does not determine 
equilibrium . The structure of the entire economy matters , too . As this is 
constantly evolving in unpredictable ways , there is no reason to expect that 
the assumptions underlying any particular macroeconomic model will ever remain 
valid long enough for its steady-state solution to be achieved in practice . 
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+
+The Cuban Missile Crisis at 50 CAMBRIDGE – This month marks the 50th 
anniversary of the Cuban missile crisis – those 13 days in October 1962 that 
were probably the closest the world has come to a major nuclear war . President 
John F. Kennedy had publicly warned the Soviet Union [ 178]not to introduce 
offensive missiles into Cuba . But Soviet leader Nikita Khrushchev decided to 
cross Kennedy’s red line surreptitiously and confront the Americans with a 
fait accompli . When an American surveillance plane discovered the missiles , 
the crisis erupted . Some of Kennedy’s advisers urged an air strike and 
invasion to destroy the missiles . Kennedy mobilized troops , but also bought 
time by [ 179]announcing a naval blockade of Cuba . The crisis subsided when 
Soviet ships carrying additional missiles turned back , and Khrushchev agreed 
to remove the existing missiles from the island . As then US Secretary of State 
Dean Rusk put it : “ We were eyeball to eyeball , and I think the oth
 er fellow just blinked . ” At first glance , this was a rational and 
predictable outcome . The United States had a 17-to-1 advantage in nuclear 
weaponry . The Soviets were simply outgunned . And yet the US did not 
preemptively attack Soviet missile sites , which were relatively vulnerable , 
because the risk that even one or two of the Soviet missiles would be fired at 
an American city was enough to deter a first strike . In addition , both 
Kennedy and Khrushchev feared that rational strategies and careful calculation 
might spin out of control . Khrushchev offered a vivid metaphor in one of his 
letters to Kennedy : [ 180]“We and you ought not now to pull on the ends of 
the rope in which you have tied the knot of war . ” In 1987 , I was part of a 
group of scholars that met at Harvard University with Kennedy’s surviving 
advisers to study the crisis . Robert McNamara , Kennedy’s secretary of 
defense , said he became more cautious as the crisis unfolded . At the time , 
he thoug
 ht that the probability of nuclear war resulting from the crisis might have 
been one in 50 ( though he rated the risk much higher after he learned in the 
1990’s that the Soviets had already delivered nuclear weapons to Cuba ) . 
Douglas Dillon , Kennedy’s treasury secretary , said he thought that the risk 
of nuclear war had been about zero . He did not see how the situation could 
possibly have escalated to nuclear war , and thus had been willing to push the 
Soviets harder and to take more risks than McNamara was . General Maxwell 
Taylor , the chairman of the Joint Chiefs of Staff , also believed that the 
risk of nuclear war was low , and he complained that the US let the Soviet 
Union off too easily . He felt that the Americans should have removed the 
Castro regime . But the risks of losing control of the situation weighed 
heavily on Kennedy , too , which is why he took a more prudent position than 
some of his advisers would have liked . The moral of the story is that a little 
nuc
 lear deterrence goes a long way . Nonetheless , there are still ambiguities 
about the missile crisis that make it difficult to attribute the outcome 
entirely to the nuclear component . The public consensus was that the US won . 
But how much the US won , and why it won , is hard to determine . There are at 
least two possible explanations of the outcome , in addition to Soviet 
acquiescence to America’s superior nuclear firepower . One focuses on the 
importance of the two superpowers ’ relative stakes in the crisis : the US 
not only had a greater stake in neighboring Cuba than the Soviets did , but 
could also bring conventional forces to bear . The naval blockade and the 
possibility of a US invasion strengthened the credibility of American 
deterrence , placing the psychological burden on the Soviets . The other 
explanation questions the very premise that the Cuban missile crisis was an 
outright US victory . The Americans had three options : a “ shoot-out ” ( 
bomb the missile si
 tes ) ; a “ squeeze out ” ( blockade Cuba to convince the Soviets to 
withdraw the missiles ) ; and a “ buyout ” ( give the Soviets something 
they want ) . For a long time , the participants said little about the buyout 
aspects of the solution . But subsequent evidence suggests that a quiet US 
promise to remove its obsolete missiles from Turkey and Italy was probably more 
important than was thought at the time ( the US also gave a public assurance 
that it would not invade Cuba ) . We can conclude that nuclear deterrence 
mattered in the crisis , and that the nuclear dimension certainly figured in 
Kennedy’s thinking . But it was not the ratio of nuclear weapons that 
mattered so much as the fear that even a few nuclear weapons would wreak 
intolerable devastation . How real were these risks ? On October 27 , 1962 , 
just after Soviet forces in Cuba shot down a US surveillance plane ( killing 
the pilot ) , a similar plane taking routine air samples near Alaska 
inadvertently viola
 ted Soviet air space in Siberia . Fortunately , it was not shot down . But , 
even more serious , unbeknownst to the Americans , Soviet forces in Cuba had 
been instructed to repel a US invasion , and had been authorized to use their 
tactical nuclear weapons to do so . It is hard to imagine that such a nuclear 
attack would have remained merely tactical . Kenneth Waltz , an American 
scholar , recently published an article entitled [ 181]“Why Iran Should Get 
the Bomb . ” In a rational , predictable world , such an outcome might 
produce stability . In the real world , the Cuban missile crisis suggests that 
it might not . As McNamara put it , “ We lucked out . ” 
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+Merkel in China NEW DELHI – German Chancellor Angela Merkel’s second visit 
to China in a year comes against the backdrop of dire forecasts of a difficult 
September for the eurozone . Mindful of such concerns and persistent pessimism 
in global financial markets , Merkel is now taking bold political initiatives 
at home and overseas . Indeed , her China trip should be seen as an effort to 
assert leadership across the eurozone . At home , Merkel recently sent out a 
clear message to her critics that Germany must pay a price for eurozone 
leadership . She cautioned her colleagues against loose talk about a “ Grexit 
” – Greece’s exit from the eurozone – and assured visiting Greek Prime 
Minister Antonis Samaras that Germany remained committed to his country’s 
membership of the eurozone . While it required courage to take such a tough 
stance , doing so helped to bolster her position at home and throughout the 
eurozone . There is now no doubt that Merkel is willing to commit Ge
 rmany to the cause of preserving both the European Union and the eurozone , 
and that she will work to achieve that goal . If she succeeds , she will emerge 
as the first great European leader of the twenty-first century . This stance 
suggests that Merkel appreciates the essence of the argument that François 
Heisbourg , the chairman of the council of the International Institute for 
Strategic Studies ( IISS ) , advanced in a [ 179]recent essay : a federal 
arrangement does not fall apart because of problems at the periphery but 
because of “ failure at the heart of the system . ” Merkel has come to 
terms with Germany’s position – and that it must act to preserve the unity 
of the whole . The eurozone ( and probably the EU ) cannot be saved in Greece 
or Finland if it cannot be saved in Germany . Committing Germany to that 
objective is precisely what Merkel has defined as her political goal for the 
rest of her term in office . Within hours of declaring her leadership at home , 
Merk
 el announced her visit to Beijing . The timing was highly significant : Merkel 
goes to China , the emerging global power , after declaring her own commitment 
to strengthening the eurozone , if not the EU as a whole , as a credible pole 
of an emerging multipolar world . In recognition of Germany’s growing 
significance , Chinese Prime Minister Wen Jiabao welcomed a delegation of 
German business leaders to Beijing this May with the words : “ Stronger 
Chinese-German cooperation is good for the two countries , good for China-EU 
relations , and good for world prosperity and stability . The strategic 
dimension of Chinese-German relations , therefore , can only be strengthened , 
not weakened . ” There are several dimensions to the bilateral relationship . 
Germany needs both China’s markets and the funds that its government can 
deploy to purchase German and European bonds . It also has more than 7,500 
enterprises operating in China , with gross investment totaling $18.5 billion . 
Mor
 eover , Germany has sold $15 billion worth of technology to China , and 
bilateral trade hit a high of $169 billion in 2011 , accounting for 30 % of 
total China-EU trade . The two countries have set a bilateral trade target of 
$280 billion for 2015. Trade , however , is not the only immediate concern . 
Far more important , especially for Germany , is to get China to invest in and 
hold its bonds . In mid-August , at the First IISS Oberoi Lecture in Mumbai , 
Klaus Regling , the CEO of the European Financial Stability Facility , 
underscored the importance of Chinese demand for EFSF bonds and China’s role 
in stabilizing the eurozone . Regling also revealed that there is now increased 
and frequent coordination between monetary authorities in the United States , 
Germany , and China , drawing attention to the fact that the “ old Triad ” 
of the dollar , euro , and yen may now have been replaced by a “ new Triad 
” of the dollar , euro , and Chinese renminbi . While Regling spoke of 
 an emerging “ multipolar monetary system , ” his remarks clearly indicated 
the functioning of a “ tripolar ” system . Lying at two ends of that 
monetary triangle , the eurozone and China have acquired a geopolitical stake 
in helping each other . [ 180]Hans Kundnani and Jonas Parello-Plesner of the 
European Council on Foreign Relations view the China-Germany relationship as 
one that will shape the overall China-EU relationship . Like many strategic 
analysts , they worry whether Germany , in pursuit of purely short-term 
economic interests , might forsake long-term strategic interests and concerns 
about human rights , environmental problems , press freedoms , and other 
political and geopolitical issues . It is significant , therefore , that German 
political parties have emphasized the need for Merkel to raise such matters in 
her talks with Chinese leaders . However , Merkel’s focus may well remain on 
trade , investment , and currency flows . After all , unless she can turn ar
 ound the eurozone , her rising profile at home and in Europe could easily 
wither . What this means is that to secure German leadership of Europe , and 
her own leadership of Germany , Merkel has to “ walk on two legs , ” so to 
speak . She needs to balance both geo-economic and geopolitical factors – 
both interests and values – in advancing Germany’s relations with China . 
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+Ms. Europe or Frau Germania ? BERLIN – Just what is the matter with Angela 
Merkel ? Only a short while ago , she was celebrated as “ Ms. Europe ” ; 
now , she increasingly gives the impression of being Frau Germania . Instead of 
providing resolute leadership in the global financial and economic crisis , the 
European Union’s largest economy is withdrawing into its shell . Germany has 
always been the motor of European integration , in accordance with its 
political and economic interests . Every post-World War II government has 
always been willing to harness Germany’s financial strength to further that 
aim , i. e. , to foot the bill for Europe . The motto was simple : Germany 
gives and profits in turn . Should Germany spurn the first part of this formula 
, the European project would suffer serious damage – and so will German 
national interests . Yet this is the direction in which Chancellor Merkel seems 
to be heading . Indeed , in the wake of the Greek crisis , Merkel spoke 
 publicly of the need to be able to exclude eurozone members that do not play 
by the rules . Does she seriously believe that the euro and the EU would 
survive such punitive action ? Instead of ideas for strengthening the 
solidarity and stability of the eurozone , absurd proposals are floated in 
Berlin . The idea that Germany would show financial solidarity with weakened 
eurozone members only if they accept draconian stabilization measures is 
similarly unrealistic . Such measures would only exacerbate deflation in these 
countries , which are the most important markets for German exports . What is 
essential is the right combination of stability and financial aid , even if the 
latter is unpopular with the German public . To be sure , eurozone member 
states also needed the courage to respond to the crisis of confidence 
confronting the common currency with concerted action for tighter control of 
national budgets and improved cooperation . As a first step , however , Greece 
must be given h
 elp , through the financial solidarity of EU governments . On the other hand , 
foreign criticism of Germany for running a current-account surplus similar to 
China’s is unfounded . Such criticism disregards two important differences : 
first , unlike China , Germany , as a member of the eurozone , cannot 
undervalue its currency . Second , German “ exports ” go mainly to the EU . 
To demand that Germany should stop increasing its competitiveness , or even 
reduce it , is simply bizarre . From 1990 to 2005 , Germany struggled with high 
unemployment , slow growth , and low competitiveness , and Europe’s economy 
suffered as a result . Recovery was difficult to achieve , but the Common 
Market has profited from Germany’s renewed competitiveness . The crucial 
point is not the German economy’s renewed strength , but whether Germany will 
use this strength in Europe’s interest or its own . Unfortunately , Merkel 
seems to have decided on the second option , because it entails fewer d
 omestic political risks . The responsibility for the current conflict within 
the EU rests with eurozone governments , but primarily with Germany and France 
, the zone’s two strongest economies . Rather than lead , the Franco-German 
couple is constantly , and publicly , at each other’s throats . While 
today’s quarrel is about who should pay for restructuring Greece , the real 
issue is the latent distrust between the two partners , which carries the 
danger of a permanent estrangement . From the German point of view , France 
only wants to solve its national budget and debt problems at Germany’s 
expense , simultaneously weakening Germany’s competitiveness . The French 
government , on the other hand , fears that the Germans ’ commitment to 
eurozone stability is a ploy aimed at pushing France into a corner and leaving 
it behind economically . Since the global crisis erupted in the fall of 2008 , 
both Merkel and French President Nicolas Sarkozy have been faced with threats 
that
  their political majorities might disappear if they put aside their national 
interests in favor of a European compromise . France has no chance of meeting 
Germany’s stabilization objectives unless Sarkozy wants to forget about 
re-election . Merkel would cause outrage among her conservative voters ( as 
well as court defeat at the German Constitutional Court in Karlsruhe ) should 
she agree to a more free-spending policy , including any direct financial 
assistance for Greece . Soon , Helmut Kohl , Europe’s Honorary Citizen and 
Germany’s Chancellor of Reunification , will be celebrating his 80th birthday 
. As is usual on such occasions , there will be a lot of lofty speeches about 
Europe . But , in view of the current situation , we can safely ignore these . 
What Europe needs in this serious crisis are statesmen and women of Kohl’s 
caliber , not domestic politicians ! As the big economic and political winner 
of the eurozone , Germany , in particular , cannot let a serious crisis
  of confidence threaten the European project , because nearly two-thirds of 
its exports go to the EU . Ever since the collapse of Lehman Brothers in 
September 2008 , it has been clear that the global crisis would challenge the 
EU and the euro , because Europe lacks a common government and fiscal policy . 
Coordination within the eurozone – above all between its most important 
economies , France and Germany – is therefore all the more important . It is 
in Berlin and Paris , first and foremost , that the crisis-management strategy 
for the eurozone must be decided . 
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+Reshaping China’s Government-Services Supply Chain HONG KONG – A supply 
chain links producers and consumers through a complex web of outsourcing 
contracts , with market leaders in any product category orchestrating 
activities to produce components profitably along its entire length . For 
example , an iPad is designed in California – with chips from Japan and parts 
from South Korea , Taiwan , and elsewhere – and finally assembled in China 
for global distribution . But the ecology of supply chains is not as 
straightforward as this depiction suggests . Most studies of supply chains 
examine their operations , but take for granted governments ’ critical 
enabling role . Because the non-delivery of government services would inhibit 
the proper functioning of business supply chains , understanding how the 
government-services supply chain works is vital . For example , the Chinese 
economy’s transformation was enabled by the synchronized delivery of 
government services to support t
 he logistics , finance , and manufacturing supply chains . This was a complex 
task that involved different levels of the Chinese government and many state 
agencies and ministries . A supply chain is not only a network for production , 
but also a live feedback mechanism , continually adjusting itself to ensure 
that production is coordinated and aligned efficiently to meet changes in 
global consumers ’ demand , tastes , and preferences . Technology has enabled 
faster , more efficient “ just-in-time ” delivery , taking full advantage 
of specialization and knowledge-sharing on a global scale . As Apple has 
discovered , the winner in orchestrating a supply chain emerges with the lowest 
global costs and the largest market share . The iPad could not be produced at 
such high speed and low cost without the “ made-in-the-world ” supply chain 
based in China . In addition to the macro and micro aspects of economics , 
understanding supply chains in private and public goods and services
  in China requires [ 178]mezo ( institutional ) and meta ( system-wide ) 
analysis . When China initiated its economic reforms in 1979 , it inherited a 
centrally planned economy that lacked the institutional infrastructure for 
markets . Recognizing the need for systemic change , China allowed local 
governments in special economic zones and cities to experiment with modern 
legal , administrative , and logistical practices for export industries , 
including investments in utilities and transport . Intense competition among 
local governments for foreign investment led to dramatic improvements in the 
business environment , featuring economic incentives in areas like land , labor 
, and taxation , as well as speedy issuance of permits and approvals . City 
leaders were given responsibility for mobilizing local resources to generate 
GDP and employment , and they were ( and continue to be ) rewarded with 
promotion for good performance . The result was considerable innovation and 
institutionali
 zation of local government services to support market activities , including 
outsourcing of expertise in infrastructure project design , administration , 
and operations to private and foreign consulting and design companies . To 
support China’s participation in global manufacturing supply chains , many 
local governments sold and dismantled their state-owned enterprises ( SOEs ) , 
enabling many new private firms to provide the services needed for an 
export-oriented , market-based economy . At the national level , the 
consolidation of SOEs and banks , and the modernization of their corporate 
governance via public listing on stock exchanges , enabled improved efficiency 
in regulated utilities , hard infrastructure , and resource sectors , 
complementing liberalization and market growth . The Chinese 
government-services supply chain also benefited substantially from a 
meritocratic human-resources tradition . Officials with substantial and 
successful experience in local governments , mi
 nistries , or SOEs were deliberately promoted and cross-posted to 
less-developed regions to spread know-how , technology , and best practices and 
processes . Indeed , China’s economic success reflects the depth of 
administrative and market experience embedded in the Chinese bureaucracy . 
Chinese mayors are CEOs of their local economy , responsible not only for 
market development , but also for social stability . The critical mechanism for 
orchestrating and implementing the complex web of contracts embodied in 
China’s government-services supply chain is the Five-Year Plan , which 
foresees vertical and horizontal integration of almost all Party and 
administrative agencies . The FYP uses broad objectives and targets for social 
and economic development , formed after extensive internal and public 
consultations . These mandates are translated by sub-national officials into 
projects and work plans , such as targets for reducing energy use per unit of 
GDP in order to address resource c
 onstraints and concern about climate change . China’s success in developing 
from scratch a modern government-services delivery system explains why many 
foreign investors find it much easier to deal with Chinese governments than 
those in other developing countries . The 12th FYP aims to shift China from an 
export-driven growth model toward a balanced economy that relies on domestic 
demand , while simultaneously addressing industrial transformation , social 
inequities , and environmental degradation . This implies more complex 
contracts that go beyond promoting markets , GDP growth , and employment to 
ensure inclusive , equitable , and high-quality government-services delivery . 
Implementation of these evolving social goals through local government agencies 
by specific officials is a daunting task that requires profound changes in 
roles and performance metrics . No one doubts that Chinese local governments 
play a much more active and intrusive role than their counterparts in the Wes
 t , which implies an additional complicating factor . Local governments now 
face not only growing demands from the emerging middle class for greater 
transparency , competition , fairness , and access to opportunities , but also 
deepening conflicts between local interests and global rules . Orchestrating a 
complex government-services supply chain in a substantially open continental 
economy with 1.3 billion people and five levels of government is difficult 
enough using a simple GDP growth objective . Adapting the governance metric in 
a country of China’s size to an economy that is green , inclusive , and 
equitable presents a novel challenge in human history . The only precedent for 
such an achievement is China itself . 
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+Russia’s Ukrainian Path to the Future MOSCOW – Russia and the West are 
losing each other yet again . The magnetic attraction and repulsion between the 
two has been going on for centuries . Indeed , historians have counted as many 
as 25 such cycles since the reign of Tsar Ivan III . In the past , however , 
Russia’s sharp anti-Western turns were reversed – usually out of simple 
necessity – after relations reached rock bottom . Not this time . On the 
contrary , the deterioration of the relationship nowadays has developed a 
momentum of its own . There are four reasons for this . First , the “ loss 
” of the Cold War , and with it imperial and superpower status , has created 
a deep and so far unresolved crisis in the collective mentality of Russia’s 
political class . Russian leaders continue to perceive the West as a phantom 
enemy in opposition to which all the traditional mythologies of Russian foreign 
policy are being resurrected . Second , by the end of Vladimir Putinâ€
 ™s second presidential term , Russia’s modernizing dreams had been shattered 
. Modernization , indeed , simply turned out to be yet another redistribution 
of property to those on top , particularly those who came out of the St. 
Petersburg mayoral office and the Federal Security Bureau ( FSB ) . The image 
of the West as an enemy has become the only ideological excuse for Putin’s 
model of the corporate state . Third , the soaring price of oil has made the 
Kremlin’s inhabitants believe that they are all-powerful . Today’s Russia , 
which thinks of itself as a “ great energy state , ” laughs at its previous 
meager desire to catch up with little Portugal in terms of living standards . 
Finally , a series of Western mistakes and misfortunes , a crisis in 
transatlantic relations , lack of leadership , and the growing threat of 
Islamic fundamentalism ( in both the Middle East and Europe ) have led Russian 
leaders to believe that the West is a sinking ship , to be abandoned as soon
  as possible . While this belief unfortunately does have some validity , it 
requires one very important caveat : Russia is part of that ship . Russia can 
make advances to Hamas , Hezbollah , and Iran , and it can remind the Arab 
world that the Soviet Union helped it develop and offered it protection in the 
United Nations Security Council . But in the eyes of Islamic extremists , 
Russia is part of the “ Satanic ” West – indeed , its most vulnerable 
part . Thus , it is Russia , with a soaring birth rate among its Muslim 
citizens that is the most attractive for expansion and take-over . But 
Russia’s self-destructive confrontation with the West can be halted , and its 
centuries-old debate between Westernizers and the Slavophiles put to rest once 
and for all . This , however , will depend on Ukraine’s success on the path 
of European development it chose in the Orange Revolution of 2004-2005 . 
Ukraine does , indeed , present a threat , but not to Russia’s security , as 
Kremlin
  propagandists claim . The real threat is to the Putin model of a corporate , 
authoritarian state , unfriendly to the West . For the Kremlin’s occupants , 
it is a matter of life and death that countries that were once part of the 
Soviet Union but chose a different model of development – Ukraine being the 
chief example – should never become attractive to ordinary Russians . The 
example posed by the Baltic nations does not threaten the Kremlin much , 
because they are perceived as foreign to the Russian psyche . Indeed , in 
Soviet films , Baltic actors were usually cast in the roles of Nazi generals 
and American spies . Ukrainians , on the other hand , are close to us in their 
culture and mentality . If they made a different choice , why can’t we do the 
same ? Ukraine’s success will mark the political death of Putinism , that 
squalid philosophy of “ KGB Capitalists . ” If Ukraine succeeds in its 
European choice , if it is able to make it work , it can settle the question 
 that has bedeviled Russian culture for centuries – Russia or the West ? So 
the best way to help Russia today is to support Ukraine’s claim that it 
belongs to Europe and its institutions . This will influence Russia 's 
political mentality more than anything else . For if Russia’s anti-Western 
paranoia continues and the Kremlin’s Eurasian fantasy of allying with China 
lasts another 10-15 years , Russia will end up seeing China swallowing its Far 
East and Siberia . Indeed , the weakened Russia that will be Putin’s legacy 
will then also lose the Northern Caucasus and the Volga region to their growing 
Muslim populations . The remaining Russian lands would then have no other 
choice but to attach themselves to Ukraine , which should by then have become a 
successful member of the European Union . After 1,000 years , Russia will have 
come full circle , returning to Kievan Rus after wandering on the roads of the 
Mongol hordes , empire , communism , and farcical Putinism . So Russia 
 now has a choice : Ukrainian plan A or Ukrainian plan B. 
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+Should Europe Regulate Sovereign Wealth Funds ? WIESBADEN – State-controlled 
investments from overseas – so-called sovereign wealth funds ( SWFs ) – are 
now the subject of intense debate . The United States and France have made 
their fears known . In Germany , too , the debate centers on SWFs ’ political 
and economic significance for the country’s future . The problem has been 
exacerbated by the growing wealth of a number of countries , some of them 
formerly run by socialist or communist regimes . China , Russia , India , and 
the Gulf States have integrated their wealth into the global economy , to the 
immense benefit of world trade . The openness of Germany’s markets makes them 
especially attractive to global trade . This openness will not change , yet 
there are some who now call for new safety fences – in other words , for 
protection . For example , Russian investors are interested in taking a massive 
share in the German-French aerospace company EADS , which is alrea
 dy 5%-owned by a Russian bank . For many , this proposal has underscored a 
change in investors ’ behavior . But what , exactly , has changed ? SWFs have 
been around for years . Among the first countries to invest their considerable 
state-owned funds were Kuwait , the United Arab Emirates , Norway , and 
Singapore . They invested , and still invest , their budgetary surpluses 
worldwide in government bonds and state-owned enterprises . Industrialized 
countries like the US and Japan also have so-called “ reserve funds . ” 
Some of these funds are huge . In the UAE , the Abu Dhabi Investment Authority 
has estimated capital assets of $875 billion , making it probably the world’s 
largest state-owned investment company . In July 2007 , another rich UAE fund , 
Dubai International Capital , bought 3 % of EADS , after taking a stake of 
almost 2 % in the automotive manufacturer Daimler in January 2006. The Kuwait 
Investment Authority , also a state-owned fund , holds 7 % of Daimler . Sin
 gapore possesses two SWFs – Temasek-Holdings , with capital assets of 
roughly $100 billion , and the Government of Singapore Investment Corporation , 
with approximately $330 billion . Both funds are invested worldwide , including 
with the port operator PSA . Some funds are subject to considerable 
restrictions . Japan limits its state investments overseas to bonds , mostly 
those issued by the US . Until recently , China , which holds foreign currency 
reserves of more than $1.2 trillion ( the world’s largest ) , followed this 
policy , too . But a $3 billion investment by the Chinese SWF in the US 
investment firm Blackstone suggests a more worryingly strategic investment 
policy , one that appears aimed at advancing its own industrial interests in 
certain markets . Russia , where the line between state-controlled and 
privately controlled companies is often blurry , has demonstrated this strategy 
in Europe . Indeed , Russian investments in aerospace , telecommunications , 
and , most 
 of all , in the energy sector , are the main source of concern for Germany . 
Are state-controlled investors now aiming primarily for strategic rather than 
purely financial returns ? Because SWFs ’ resources are so substantial , it 
is advisable to take precautions to avoid becoming a target of politically 
motivated market manipulation , or becoming economically and psychologically 
dependent on foreign governments ’ decisions . Most Western countries already 
have instruments to deter foreigners from making unwanted investments , not 
only in defense industries , but also in other sectors . But , while 
Germany’s Foreign Trade and Payments Act protects against takeovers in the 
defense industry ( though the law needs strengthening ) elsewhere Germany has 
no system for examining investments by SWFs that may be strategically motivated 
. The International Monetary Fund now encourages more transparency by foreign 
investors , and has plans for a code of conduct . The EU Commission also f
 avors voluntary agreements aimed at strengthening transparency . Some SWFs now 
seem willing to engage in constructive dialogue . But assessing potential 
threats is not easy . Most investments are seen to benefit a country’s 
economy , if not its security . We in Germany need to distinguish one from the 
other . Bills have been drafted that amount to amendments to the Foreign Trade 
and Payments Act and related regulations . While strengthening the act , they 
seek to avoid affecting the openness of the German economy . Under proposed new 
legislation , if a foreign investment in a German company amounts to more than 
25 % , an assessment can be made of whether public order or safety might be 
threatened . In my view , this would address the concerns about SWFs , while 
not generally impeding investment because it would apply only in a very few 
cases . Germany has also drawn up a plan to protect its industries that is 
modeled on US regulation . Since 1988 , the US president can prohibit fo
 reign direct investment if it is seen as a threat to national security . An 
additional control was introduced last year , so now all direct investments in 
which a foreign government is involved are scrutinized by the Committee on 
Foreign Direct Investment . The principle of reciprocity should clearly apply 
to transnational investments . Germany is open to foreign investors , but in 
return we Germans demand the same market access abroad . Much remains to be 
done in this area even in Europe , as Germany’s own experiences with France 
and Spain demonstrate . In China and almost all Middle Eastern countries , 
foreigners are restricted to minority shareholdings and must contend with high 
import duties and numerous non-tariff barriers . Protective measures must 
remain the exception rather than the rule . We Europeans must accept the 
challenges of global competition , and transnational investments are the basis 
of thriving economic development at home and abroad . Nevertheless , we must n
 ot allow ourselves to become the passive economic playthings of other nations 
, or of big state-owned enterprises . We must play an active part in shaping 
globalization , and that means crafting appropriate rules . 
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+China and a New Balance of Power SHANGHAI – The last rival superpower to the 
United States , the Soviet Union , collapsed in 1991. But , apart from its 
military strength , the USSR was never really powerful enough to counterbalance 
US influence . In the late 1980’s , Japan seemed capable of challenging 
America’s industrial leadership , but by the 1990’s it lost its competitive 
edge . China might itself wish to be a major force in a multi-polar world , but 
has been plagued by its lack of overall strength . Given these realities , 
China sees the expanding European Union as a likely counterweight to unchecked 
US power . In terms of economic output , today’s EU is on par with the US . 
But it has yet to build a strong defense system that can respond effectively 
either to regional contingencies or to global needs . What would be the 
strength of such a system if and when it is developed , and how will it compare 
with that of the US ? In assessing America’s strength , China foll
 ows US debates on the merits of a uni-polar or a multi-polar world with keen 
interest . Some Americans favor a uni-polar system in which the US dominates . 
Such a Pax Americana would cost the country less to sustain , but the world 
would worry if America adopts a wrong policy , as has been the case in Iraq . 
The US certainly has a right to curb terrorists like those who staged the 
attack on September 11 , 2001. But the “ war on terror ” did not warrant 
the decision to attack a sovereign state and topple its government on the 
flawed presumption that it housed weapons of mass destruction and was linked to 
the 2001 attacks . The US went to war despite strong opposition from France , 
Germany , Russia , China , and other United Nations Security Council members . 
France and Germany have since sought to restore good relations with the US , 
but continue to disapprove of the war . The Middle East , always a region of 
concern for Europe , has become even less stable as a result of the war
  . American leadership has been one of the war’s casualties . In China , the 
concept of an independent European defense – embodied in the European 
Security and Defense Policy ( ESDP ) , as well as the EU’s Rapid Reaction 
Force ( RRF ) and various police missions – is thus generally seen as 
necessary and effective in a multi-polar world system . China observes that on 
most security matters , the ESDP will ( for now ) mimic American security 
interests , because the EU and US share fundamental values of human rights and 
democracy . Moreover , many EU members have simultaneously pledged their 
defense capabilities to NATO , which has been led by the US since its creation 
. But the ESDP , once fully developed , will not necessarily follow America’s 
lead unconditionally , especially if American policy continues to deviate from 
the norm of international law , as in Iraq . As a result of acquiring a 
pan-European defense capacity , the Europeans are likely to play a more 
independent
  role than at present in managing intra-European security relations and 
carrying out global missions . China welcomes this expanded security role for 
the EU . Although it remains wary of international intervention by the EU , the 
substance and pattern of ESDP operations are likely to win China’s respect 
for several reasons . First , China’s leaders note that the ESDP gives 
priority to the legitimacy of its missions . So far , all ESDP missions have 
respected international law and governmental arrangements among disputing 
parties . Most of its military or police missions have been based on UN 
Security Council resolutions , and ESDP missions outside Europe have been at 
the invitation of local authorities . Of course , ESDP security missions , even 
those in accordance with Security Council resolutions , may not operate within 
the UN system – the EU prefers its own independent leadership . The ESDP does 
not necessarily require Security Council authorization as a condition for its 
 missions , and it retains an independent role in executing them . However , 
when compared with the US , the ESDP ( in Chinese eyes ) cares far more about 
international legitimacy , backed by the authority of the UN . Second , the 
ESDP is concerned with good governance and institution building . The EU is 
keen to restore or establish human rights , stability , and prosperity . 
Outside Europe , the ESDP acts to enhance governance rather than promote regime 
change , and the EU has often assisted governments ’ efforts to improve 
security conditions . Third , the ESDP is open to international cooperation . 
The EU works with either non-EU states , such as NATO members like Canada , 
Norway , and Turkey , or applicants for EU membership . The ESDP cooperates 
with the UN and other regional organizations , such as the African Union and 
ASEAN . When the EU reaches out , it tends to play a leading role in these 
collaborations . There are good reasons to expect that China will continue to 
acce
 pt an independent European security mechanism . There is little concern , if 
any , about the ESDP intervening in internal Chinese affairs , such as Taiwan . 
Indeed , China wants a strong and independent Europe , and from that vantage 
point it is not too early for China to envisage a truly multi-polar global 
system . 
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+The “ Browning ” of African Technology Forget MIT . Hello , Tsing Hua 
University . For Clothilde Tingiri , a hot young programmer at Rwanda’s top 
software company , dreams of Beijing , not Cambridge , animate her ambitions . 
Desperate for more education , this fall she plans to attend graduate school 
for computer science – in China , not America . The Chinese are no strangers 
to Rwanda . Near Tingiri’s office , Rwanda’s largest telecom company , 
Rwandatel , is installing new wireless telephony equipment made by Huawei of 
Shenzen . Africa boasts the world’s fastest-growing market for wireless 
telephony , and Huawei – with offices in 14 African countries – is running 
away with the business , sending scores of engineers into the bush to bring a 
new generation of low-cost technology to some of the planet’s poorest people 
. Motivated by profit and market share rather than philanthropy , Huawei is 
outpacing American and European rivals through lower prices , faster act
 ion , and a greater willingness to work in difficult environments . According 
to Chris Lundh , the American chief of Rwandatel , “ That’s the way things 
work in Africa now . The Chinese do it all . ” Well , not quite . Across 
sub-Saharan Africa , engineers from India – armed with appropriate 
technologies honed in their home market – are also making their mark . India 
supplies Africa with computer-education courses , the most reliable water pumps 
, low-cost rice-milling equipment , and dozens of other technologies . The 
sudden influx of Chinese and Indian technologies represents the “ browning 
” of African technology , which has long been the domain of “ white ” 
Americans and Europeans who want to apply their saving hand to African problems 
. “ It is a tectonic shift to the East with shattering implications , ” 
says Calestous Juma , a Kenyan professor at Harvard University who advises the 
African Union on technology policy . One big change is in education . Ther
 e are roughly 2,000 African students in China , most of whom are pursuing 
engineering and science courses . According to Juma , that number is expected 
to double over the next two years , making China “ Africa’s leading 
destination for science and engineering education . ” The “ browning ” of 
technology in Africa is only in its infancy , but the shift is likely to 
accelerate . Chinese and Indian engineers hail from places that have much more 
in common with nitty-gritty Africa than comfortable Silicon Valley or Cambridge 
. Africa also offers a testing ground for Asian-designed technologies that are 
not yet ready for US or European markets . A good example is a solar-powered 
cooking stove from India , which has experimented with such stoves for decades 
. Wood-burning stoves are responsible for much of Africa’s deforestation , 
and , in many African cities , where wood accounts for the majority of cooking 
fuel , its price is soaring . The Indian stove is clearly a work-in-pr
 ogress ; it is too bulky and not durable enough to survive the rigors of an 
African village . But with India’s vast internal market , many designers have 
an incentive to improve it . How many designers in America or Europe can say 
the same ? Of course , technology transfer from China and India could be a mere 
smokescreen for a new “ brown imperialism ” aimed at exploiting African oil 
, food , and minerals . In recent years , China’s government alone has 
invested billions of dollars in African infrastructure and resource extraction 
, raising suspicions that a new scramble for Africa is underway . But Africans 
genuinely need foreign technology , and the Chinese , in particular , are 
pushing hard – even flamboyantly – to fill the gap . This year , 
Nigeria’s government bought a Chinese-made satellite , and even paid the 
Chinese to launch it into space in May . China was so eager to provide space 
technology to Africa’s most populous country that it beat out 21 other bidde
 rs for a contract worth $300 million . China’s technology inroads are 
usually less dramatic , but no less telling . In African medicine , Chinese 
herbs and pharmaceuticals are quietly gaining share . For example , the 
Chinese-made anti-malarial drug artesunate has become part of the standard 
treatment within just a few years . Likewise , Chinese mastery over ultra-small 
, cheap “ micro-hydro ” dams , which can generate tiny amounts of 
electricity from mere trickles of water , appeals to power-short , river-rich 
Africans . Tens of thousands of micro-hydro systems operate in China , and 
nearly none in Africa . Americans do-gooders like Nicholas Negroponte , with 
his $100 laptop , have identified the right problem : Africa is way behind 
technologically and rapid leap-frogging is possible . But Chinese and Indian 
scientists argue that Africa can benefit from a changing of the technological 
guard . They may be right . 
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+The China Question President Bush’s recent visit to Asia made little news 
– by design . But that’s because Bush didn’t begin to address the issue 
that is looming ever larger in the region : the changing face of security in 
Asia in view of China’s growing economic and military might . This summer , 
for example , China and Russia conducted their first-ever grand-scale joint 
military exercise . This was followed by Russian news reports that China , 
Russia , and India would conduct trilateral military exercises , named “ 
Indira 2005 , ” on the same scale before the end of this year . In the past , 
such a combination of countries was almost unthinkable , and these exercises 
cannot be explained away as simple “ one-off ” affairs with little 
resonance . Instead , they reflect China’s long-term strategic goal of 
establishing hegemony across Asia . One tool of this ambition is the Shanghai 
Cooperation Organization ( SCO ) , under which the Sino-Russian exercises took 
plac
 e . Established in June 2001 , the SCO includes China , Russia , Kazakhstan , 
Kyrgyzstan , Tajikistan , and Uzbekistan . The SCO’s original purpose was to 
mitigate tensions on the borders of China and the Central Asian countries after 
the collapse of the Soviet Union and the arrival of the United States military 
with the war in Afghanistan . China regards the SCO as a stage for broadening 
its influence over a vast region , ranging from the Asia-Pacific to Southwest 
Asia , the Middle East , East Africa , and the Indian Ocean . Indeed , its 
members include about 45 % of the world’s population , and 28 % of the 
landmass ranging across the Eurasian continent . China’s active leadership of 
the SCO has resulted in policies that it favors . Gradually , the SCO shifted 
its focus to fighting Islamic radicals . Nowadays , however , the SCO is often 
used as a forum to campaign against supposed American unilateralism and to 
provide a united front – especially between China and Russia â€
 “ against the US with respect to security and arms-reduction issues in the 
region . This includes joint anti-terror training and demands to reduce US 
forces in the region , particularly from Uzbekistan and Kyrgyzstan . The SCO 
provides China not only with a platform to confront the existing US-led 
alliance in the Asia-Pacific region , but is increasingly being used to prevent 
the formation of a US-led network to restrain China’s advance . Ultimately , 
it is feared that the SCO could develop into a military alliance similar to the 
Warsaw Pact of the Cold War era , with an embryonic “ Great China Union ” 
at its core . But China’s regional diplomacy goes far beyond the SCO . It 
seizes every opportunity that comes its way , including the Six Party Talks on 
North Korea’s nuclear ambitions , to emphasize its centrality to the 
settlement of any and all Asian issues . Moreover , it continues to build its 
“ string of pearls ” of military bases at every key point on maritime tra
 nsportation routes along the “ arc of instability ” from the Middle East 
to China’s coast . No one seems to know how to respond to China’s 
diplomatic and military muscle flexing in Asia , for the extent of China’s 
ambitions remains utterly unclear . But , while everyone else ponders China’s 
motives , its government is acting . Indeed , the UK’s premier security think 
tank , the Institute for International Strategic Studies , recently warned that 
, while the world focuses on the fight against international terrorism and the 
unfolding events in the Middle East , China is rapidly expanding its influence 
from Asia to Africa . The “ pearls ” in Africa include Sudan , Angola , 
Algeria , Gabon , Namibia , Zambia , Tanzania , Zimbabwe , Uganda , Djibouti , 
Mali , Central Africa , Liberia , Ethiopia , Mozambique , Sierra Leone , and 
the Democratic Republic of Congo . In each country , China is nurturing special 
military and commercial relations intended to promote loyalty t
 o Chinese interests . As in Asia , there is a pattern at work : growing 
Chinese influence begets increased support for Chinese policies . Of course , 
it’s a two-way street . Whenever complaints come up in the United Nations ’ 
Human Rights Committee , China can count on the support of many African 
countries that have their own human rights problems . Even the selection of 
Beijing as the site of the 2008 Olympics benefited from “ African votes . ” 
And China has publicly stated that it will back African nations in potential 
disputes at the World Trade Organization ( WTO ) and other international 
organizations . Similarly , many African states now seem to be leaning heavily 
toward China in its dispute with Taiwan . When Japan’s government tried to 
become a permanent member of the UN Security Council , few African countries 
backed its bid , despite receiving economic aid for decades . China likes to 
boast of its “ peaceful rise . ” But the rise of Bismarck’s Germany at th
 e end of the nineteenth century was also peaceful – for a while . The 
question is not whether China rises to great-power status peacefully , but 
whether it intends to remain peaceful when it gets there . Just as the world 
confronted the “ German Question ” 125 years ago , it is now confronting 
the “ China Question . ” We need a better answer this time . 
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