China has come out of 2020 more daring

And the prize goes to China

Victor Angelo

 

In the big game of geopolitics, the 2020 world cup must be awarded to China. It has been an exceedingly difficult year for all countries. But here I see that the only one that really comes out stronger, after all the tests, is China. Australia and New Zealand played well, but they are in another league. They do not have by far the political weight of the champion.

The year had started badly, with the city of Wuhan - 11 million inhabitants - at the centre of the concerns. But a strong, extremely nationalistic response and a population shaped by the modern version of ancient Confucianism - those in power command, and the ones who walk the streets of life obey - has turned control of the virus into a political victory for the ruling elite. Above all, for President Xi Jinping.

And the year ended with another goal, scored in the final minutes, with the conclusion of negotiations on investment between China and the European Union. This agreement, important for both sides, had been under discussion for seven years. The drag on this was due to Chinese obstruction, who wanted to have their hands free to invest in Europe while creating obstacles to European ventures in China. Finally, and before Joe Biden took office, Beijing felt it was important to close the pact with the Europeans, thus moving them away from a more combative position that the new American administration might adopt. For the Europeans, the agreement opens the door to investments in finance, health, energy and information technology. If it is respected, it will represent a step forward in rebalancing economic relations between the two sides. The treaty also seeks to defend intellectual property rights and promote certain international labour standards, but without conviction. The Chinese authorities leave no room for manoeuvre in this area, notably in the abolition of forced labour for prisoners or ethnic minorities.

Beyond the economics, our problem with China is above all political. It concerns human rights and democratic values. And there I see no agreement on the horizon, and I guess, not in the distant future. The successes of 2020 and the accentuation of nationalism and Chinese pride, easy to press in the face of confusion in our part of the world, have strengthened the legitimacy and power of Xi Jinping. This legitimacy rests on two main pillars - economic opportunities for most citizens and the maintenance of internal order, including civic discipline. Only this week, when I spoke, as I regularly do, with my correspondents in China, I heard those two dimensions highlighted once more. In response to my references to human rights and democracy, a young Chinese woman reminded me that her generation, even those who have obtained academic degrees abroad and observed how freedoms work in other lands, makes no waves. Young people with higher education prefer to take advantage of the jobs and prosperity that remain immense in a rapidly growing China with a huge internal market. I was told that the number of applications for scholarships in the US and Europe for the next school year has grown considerably. The ambition is to obtain diplomas in prestigious institutions and then return to the market of opportunities that is China. Here, too, the Xi Jinping regime has succeeded in instilling two beliefs. One, that in the long run there will be no future for Chinese graduates who want to settle in the West, because of the growing mistrust that is said to exist there of anyone who might be seen as a surreptitious agent of the Beijing government. Another is that the future belongs to China, which will be the world's largest economy in the coming years, perhaps as early as 2028.

We enter 2021 with a China that feels more powerful and bold, even invincible. But history has long taught us that all giants have feet of clay. Xi Jinping's China, if it does not introduce a certain amount of prudence into its international relations, including moderation in the overmuch New Silk Road and acceptance of fundamental human values, may end up stumbling over its own arrogance and gigantism.  

 

(Automatic translation of the opinion piece I published today in the Diário de Notícias, the old and prestigious Lisbon newspaper)

The ladies are in charge

Harvard professor Carmen Reinhart has just been appointed as the new Chief Economist at the World Bank. The Chief Economist at the IMF, Gita Gopinath, has also come from Harvard University. Both ladies have collaborated with Professor Ken Rogoff, from the same university. They might all think alike which is not the best approach in times of crisis. Diversity and contradictory opinions are much more creative, at a time when we have to imagine a new economic order. But they are all for debt forgiveness when the challenge is too big to be managed, which is not a bad approach. And they have studied financial crashes and deep national crisis extensively.

People say that when two economists discuss there are at least three divergent opinions. In this case, let us see if both ladies can bring fresh ideas to their institutions. The IMF and the WB will be very much in demand in many countries in the post-Covid situation. They must propose an approach that goes beyond austerity and keeps investments flowing across the globe, particularly in the direction of poorer countries.

Europe and China: let's be constructive

The EU and China have their annual summit in Brussels today. The preparatory work has shown that Europe is now prepared to have a firmer position in matters of trade, investment and protection of industrial patents and copyrights. That is the right approach for the economic relations between both sides. Beijing might not like it, but they understand the rationale behind the European position. They fight for their interests, and we should fight for ours. That is the only basis for a sound relationship between two major international players.

When dealing with China, the EU must remain united around the principles of reciprocity, fair competition, and respect for the natural environment.

The Europeans have also to consider that we are dealing with State capitalism at its strongest form. Behind each big corporation, there is the Communist leadership of China and their concern with their own survival as a regime. For that, they need to expand the Chinese economic interests abroad, control new sources of wealth in foreign lands, and bring back prosperity to the people of China. Europe is a special land of business opportunities, an attractive economic space for big investments. That’s fine, if the basic international rules are respected and the link between each side is open to accept traffic on both directions.

Above all, the Europeans must keep in mind issues of national security. As far as we are concerned, China is a partner with greater potential for business but is also a first-grade geostrategic player. We must be able to keep our strategic sectors under our own control. That will contribute in no small manner to balance the geopolitical power of our Chinese neighbours. The world needs our contribution to the balance. Europe’s big challenge, in this area, is to remain a strong pillar of international wisdom.

The EC, Ireland and Apple: time to be reasonable

The European Commission´s decision regarding Apple is the new subject in the priority list of EU concerns. Two days ago, after a two-year probe, Brussels announced that the tax favours Ireland had offered Apple during many years had been judged illegal. It ordered the US multinational to pay tax arrears – just €13 billion plus interest, which adds another €1.4 billion to the bill.

Now, the government of Ireland says they do not approve of the EC ruling. They don’t want the money and consequently they have decided to seize the European Court of Justice for it to annul the decision taken by Brussels.

This matter raises a number of issues.

On the political front, there are several: it complicates the economic and trade relations with the US, taking into account that the US Administration itself has in the recent past imposed very heavy fines on EU companies; it questions the role of the EC on matters of national taxes, particularly when the country in question is at the periphery of the European economic space, has very limited resources and needs to attract investment to generate jobs; and there is the impact of all this on public opinion, at a time when the European citizens are drowning in deep tax waters, being taxed beyond the reasonable and seeing, at the same time, that the big corporations can do smart tax planning and pay amounts as low as 0,005% on gains, as Apple did in Ireland in 2014.

On the legal front, we can expect a long process. It will be a field day for lawyers and lovers intricate disputes.  It will particularly be interesting to study the arguments of each side. There will a new doctrine on multinationals, on national taxes, on investment advantages and benefits. It will be fascinating, if one is patient enough to follow the matter.

However, the best solution would be an arbitration. That´s what we have to recommend. There is a case, no doubt, but there is also an excellent opportunity to be realistic and even-handed.

Sierra Leone has a great potential

This afternoon I was in touch with a Sierra Leonean friend who lives in Freetown. He is a very enterprising young man. Thus, I asked him about the economic prospects. A got a disappointed fellow on the other side of the line. Basically, his point was that the politics are fine, there is peace but there is very little outside investment. West Africa remains a forgotten land, even after several years of political stability. And now, with the news about Ebola, the epidemic that is killing people in the neighbouring Guinea, the will to go and look for investment opportunities in the region is even lower. It´s a pity. These are potentially very rich countries. But they need capital and know how to move up.  

Portugal´s financial image has improved

Portugal´s international financial image got a boost today. The government managed to sell 5-year sovereign debt paper for a total amount of 3,5 billion euros at a very favourable rate: 4,657%.

The point is now to be able to attract the foreign investors’ interest to put money into the real economy. The Portuguese entrepreneurs have been doing well and exports have increased during 2013. But that´s is not enough. The country needs major injections of capital into the productive sectors. And that can only happen if the govern manages to capitalise on the image of the country and show Portugal as a safe investment destination. 

Portugal on the street

Large crowds marched today in the key cities and towns of Portugal against the austerity measures the government is implementing. The key feature of these manifestations was their peaceful nature. People have shown, once more, that they can be on the streets and behave responsibly.

Many of the protesters could be defined as middle class families that are going through a process of impoverishment. For many of them and for many years their living standards were based on a fiction: that the country could afford a level of public expenditures that was well beyond the means of the economy. With the international financial crisis this fiction could no longer be sustained. The state could no longer borrow in the international markets at low rates of interest. To be able to finance the public sector and adjust spending to the real possibilities of the economy over a short period of time, the state had to look for funds coming from the IMF, the ECB and the European Commission. These monies came with strings attached, as expected. And that hurts. It hurts even further because the government has realised – but cannot explain it properly and clearly, for reasons that are beyond my understanding – that the long term sustainability of public expenditures calls for further cuts, particularly if one takes into account the fragility of the economy and the very low rate of productive investment that has been recorded so far.

In a country where the state was the true engine of the economy – unfortunately the private sector had not been able during the last two decades to take off and expand; it remained too dependent of state projects and orders and largely linked to political patronage – if public expenditure goes significantly down most of the economy tends to collapse.

The point is to get as many investments from outside as possible. My hope is that today’s popular civism be perceived by those potentially interested in investing in Portugal as an encouragement to do so.