America's Voluntary Standards System--A "Best Practice" Model for Innovation Policy?

America's Voluntary Standards System--A "Best Practice" Model for Innovation Policy? By Dieter Ernst
East-West Center, Apr 2012
http://www.eastwestcenter.org/publications/americas-voluntary-standards-system-best-practice-model-innovation-policy

For its proponents, America's voluntary standards system is a "best practice" model for innovation policy. Foreign observers however are concerned about possible drawbacks of a standards system that is largely driven by the private sector. There are doubts, especially in Europe and China, whether the American system can balance public and private interests in times of extraordinary national and global challenges to innovation. To assess the merits of these conflicting perceptions, the paper reviews the historical roots of the American voluntary standards system, examines its current defining characteristics, and highlights its strengths and weaknesses. On the positive side, a tradition of decentralized local self-government, has given voice to diverse stakeholders in innovation, avoiding the pitfalls of top-down government-centered standards systems. However, a lack of effective coordination of multiple stakeholder strategies tends to constrain effective and open standardization processes, especially in the management of essential patents and in the timely provision of interoperability standards. To correct these drawbacks of the American standards system, the government has an important role to play as an enabler, coordinator, and, if necessary, an enforcer of the rules of the game in order to prevent abuse of market power by companies with large accumulated patent portfolios. The paper documents the ups and downs of the Federal Government’s role in standardization, and examines current efforts to establish robust public-private standards development partnerships, focusing on the Smart Grid Interoperability project coordinated by the National Institute of Standards and Technology (NIST). In short, countries that seek to improve their standards systems should study the strengths and weaknesses of the American system. However, persistent differences in economic institutions, levels of development and growth models are bound to limit convergence to a US-Style market-led voluntary standards system.

U.S.-China Competition in Asia: Legacies Help America

U.S.-China Competition in Asia: Legacies Help America. BY ROBERT SUTTER
East-West Center
Feb 2012
http://www.eastwestcenter.org/sites/default/files/private/apb147.pdf

As Sino-American competition for influence enters a new stage with the Obama administration’s re-engagement with Asia, each power’s legacies in the region add to economic, military and diplomatic factors determining which power will be more successful in the competition. How the United States and China deal with their respective histories in regional affairs and the role of their non-government relations with the Asia-Pacific represent important legacies that on balance favor the United States.


The Role of History
From the perspective of many regional government officials and observers, the United States and the People’s Republic of China both have historically very mixed records, often resorting to highly disruptive and violent measures to preserve their interests. The record of the United States in the Cold War and later included major wars in Korea and Vietnam and constant military friction along Asia’s rim as it sought to preserve military balance and deter perceived aggression. Many in Asia benefited from America’s resolve and major sacrifices. Most today see the United States as a mature power well aware of the pros and cons of past behavior as it crafts a regional strategy to avoid a potentially dangerous withdrawal and to preserve stability amid U.S. economic and budget constraints.

In contrast, rising China shows little awareness of the implications of its record in the region. Chinese officials and citizens remain deeply influenced by an officially encouraged erroneous claim that China has always been benign and never expansionist. The highly disruptive policies and practices of the People’s Republic of China under the revolutionary leadership of Mao Zedong and the more pragmatic leadership of Deng Xiaoping are not discussed. Well-educated audiences at foreign policy forums at universities and related venues show little awareness of such legacies as consistent Chinese support for the Khmer Rouge as a means to preserve Chinese interests in Southeast Asia.  China’s military invasion of Vietnam and Chinese directed insurgencies against major governments in Southeast Asia, both Western-aligned states and the strictly neutral government of Burma, seem widely unknown.

Chinese officials who should know better also refuse or are unable to deal honestly with the recent past. Speaking last year to a group of Asian Pacific including Vietnamese, American and Chinese officials and scholars deliberating over recent trends in Asia, a Chinese foreign affairs official emphasized in prepared remarks that China “has always been a source of stability in Asia.” After watching the Vietnamese participants squirm in their seats, others raised objections to such gross inaccuracy.

The Chinese lacuna regarding how it has been perceived by its neighbors encumbers China’s efforts to gain influence in the region. China has a lot to live down. Regional governments need steady reassurance that China will not employ its growing power to return to the domineering and disruptive practices that marked forty of the sixty years of the People’s Republic of China. Educated Chinese citizens and at least some responsible officials appear insensitive to this need because of ignorance. They see no requirement to compensate for the past and many criticize Chinese government actions that try to accommodate concerns of regional neighbors. The nationalistic rhetoric coming from China views neighbors as overly sensitive to Chinese assertions and coercive measures on territorial, trade and other issues which revive regional wariness that the antagonistic China of the recent past may be reemerging with greater power in the current period.


Non-government Relations

Like many countries, China’s interaction with its neighbors relies heavily on the Chinese government and other official organizations. Even areas such as trade, investment, media, education and other interchange are heavily influenced by administrative support and guidance. An exception is the large numbers of ethnic Chinese living for generations in neighboring countries, especially in Southeast Asia, which represent a source of non-government influence for China. On balance, the influence of these groups is positive for China, although suspicions about them remain in some countries.

By contrast, for much of its history, the United States exerted influence in Asia and the Pacific much more through business, religious, media, foundations, educational and other interchange than through channels dependent on government leadership and support. Active American non-government interaction with the region continues today, putting the United States in a unique position where the American non-government sector has such a strong and usually positive impact on the influence the United States exerts in the region. Meanwhile, almost 50 years of generally color-blind U.S.  immigration policy since the ending of discriminatory U.S. restrictions on Asian immigration in 1965 has resulted in the influx of millions of Asia-Pacific migrants who call America home and who interact with their countries of origin in ways that under gird and reflect well on the U.S. position in the region. No other country, with the exception of Canada, has such an active and powerfully positive channel of influence in the Asia-Pacific.


Outlook: Advantage U.S.

The primary concerns in the Asia-Pacific with stability and development mean that U.S.-Chinese competition for influence probably will focus more on persuasion than coercion. The strong American foundation of webs of positive non-government regional interchange and the Obama government’s widely welcomed re-engagement with the region contrasts with rising China’s poor awareness of its historical impact on the region and limited non-government connections.

Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances

Macroeconomic and Welfare Costs of U.S. Fiscal Imbalances. By Bertrand Gruss and Jose L. Torres
IMF Working Paper No. 12/38
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25691.0

Summary: In this paper we use a general equilibrium model with heterogeneous agents to assess the macroeconomic and welfare consequences in the United States of alternative fiscal policies over the medium-term. We find that failing to address the fiscal imbalances associated with current federal fiscal policies for a prolonged period would result in a significant crowding-out of private investment and a severe drag on growth. Compared to adopting a reform that gradually reduces federal debt to its pre-crisis level, postponing debt stabilization for two decades would entail a permanent output loss of about 17 percent and a welfare loss of almost 7 percent of lifetime consumption. Moreover, the long-run welfare gains from the adjustment would more than compensate the initial losses associated with the consolidation period.

The authors start the paper this way:

“History makes clear that failure to put our fiscal house in order will erode the vitality of our
economy, reduce the standard of living in the United States, and increase the risk of economic and financial instability.”
Ben S. Bernanke, 2011 Annual Conference of the Committee for a Responsible Federal Budget

Excerpts

Introduction

One of the main legacies of the Great Recession has been the sharp deterioration of public finances in most advanced economies. In the U.S., the federal debt held by the public surged from 36 percent of GDP in 2007 to around 70 percent in 2011. This rise in debt, however impressive, gets dwarfed when compared to the medium-term fiscal imbalances associated with entitlement programs and revenue-constraining measures. For example, the non-partisan Congressional Budget Office (CBO) foresees the debt held by the public to exceed 150 percent of GDP by 2030 (see Figure 1). Similarly, Batini et al. (2011) estimate that closing the federal “fiscal gap” associated with current fiscal policies would require a permanent fiscal adjustment of about 15 percent of GDP.

While the crisis brought the need to address the U.S. medium-term fiscal imbalances to the center of the policy debate, the costs they entail are not necessarily well understood. Most of the long-term fiscal projections regularly produced in the U.S. and used to guide policy discussions are derived from debt accounting exercises. A shortcoming of such approach is that relative prices and economic activity are unaffected by different fiscal policies, and that it cannot be used for welfare analysis. To overcome those limitations and contribute to the debate, in this paper we use a rational expectations general equilibrium framework to assess the medium-term macroeconomic and welfare consequences of alternative fiscal policies in the U.S. We find that failing to address the federal fiscal imbalances for a prolonged period would result in a significant crowding-out of private investment and drag on growth, entailing a permanent output loss of about 17 percent and welfare loss of almost 7 percent of lifetime consumption. Moreover, we find that the long-run welfare gains from stabilizing the federal debt at a low level more than compensate the welfare losses associated with the consolidation period. Our results also suggest that the crowding-out effects of public debt are an order of magnitude bigger than the policy mix effects: Reducing promptly the level of public debt is significantly more important for activity and welfare than differences in the size of government or the design of the tax reform.

The focus of this study is on the costs and benefits of fiscal consolidation for the U.S. over the medium-term to long-term. In this sense, we explicitly leave aside some questions on fiscal consolidation that, while very relevant for the short-run, cannot be appropriately tackled in this framework. One example is assessing the effects of back-loading the pace of consolidation in the near term—while announcing a credible medium-run adjustment—in the current context of growth below potential and nominal interest rates close to zero. A related relevant question is what mix of fiscal instruments in the near term would make fiscal consolidation less costly in such context. While interesting, these questions are beyond the scope of this paper.

The quantitative framework we use is a dynamic stochastic general equilibrium model with heterogeneous agents, and endogenous occupational choice and labor supply. In the model, ex-ante identical agents face idiosyncratic entrepreneurial ability and labor productivity shocks, and choose their occupation. Agents can become either entrepreneurs and hire other workers, or they can become workers and decide what fraction of their time to work for other entrepreneurs. In order to make a realistic analysis of the policy options, we assume that the government does not have access to lump sum taxation. Instead, the government raises distortionary taxes on labor, consumption, and income, and issues one period non-contingent bonds to finance lump sum transfers to all agents, other noninterest spending, and service its debt. Given that the core issue threatening debt sustainability in the U.S. is the explosive path of spending on entitlement programs, the heterogeneous agents assumption is crucial: Our model allows for a meaningful tradeoff between distortionary taxation and government transfers, as the latter insure households from attaining very low levels of consumption. The complexity this introduces forces us to sacrifice on some dimension: Agents in our model face individual uncertainty but have perfect foresight about future paths of fiscal instruments and prices. Allowing for uncertainty about the timing and composition of the adjustment would be interesting, but would severely increase the computational cost.

We compare model simulations from four alternative fiscal scenarios. The benchmark scenario maintains current fiscal policies for about twenty years. More precisely, in this scenario we feed the model with the spending (noninterest mandatory and discretionary) and revenue projections from CBO’s Alternative Fiscal scenario (CBO 2011)—allowing all other variables to adjust endogenously—until about 2030, when we assume that the government increases all taxes to stabilize the debt at its prevailing level. Three alternative scenarios assume, instead, the immediate adoption of fiscal reform aimed at gradually reducing the federal debt to its pre-crisis level. There are of course many possible parameterizations for such reform reflecting, among other things, different views about the desired size of the public sector and the design of the tax system. We first consider an adjustment scenario assuming the same size of government and tax structure than the benchmark one in order to disentangle the sole effect of delaying fiscal adjustment—and stabilizing the debt ratio at a high level. We then explore the effect of alternative designs for the consolidation plan by considering two alternative adjustment scenarios that incorporate spending and revenue measures proposed by the bipartisan December 2010 Bowles-Simpson Commission.

This paper is related to different strands of the macro literature on fiscal issues. First, it is related to studies using general equilibrium models to analyze the implications of fiscal consolidations. Forni et al. (2010) use perfect-foresight simulations from a two-country dynamic model to compute the macroeconomic consequences of reducing the debt to GDP ratio in Italy. Coenen et al. (2008) analyze the effects of a permanent reduction in public debt in the Euro Area using the ECB NAWM model. Clinton et al. (2010) use the IMF GIMF model to examine the macroeconomic effects of permanently reducing government fiscal deficits in several regions of the world at the same time. Davig et al. (2010) study the effects of uncertainty about when and how policy will adjust to resolve the exponential growth in entitlement spending in the U.S.

The main difference with our paper is that these works rely on representative agent models that cannot adequately capture the redistributive and insurance effects of fiscal policy. As a result, such models have by construction a positive bias towards fiscal reforms that lower transfers, reduce the debt, and eventually lower the distortions by lowering tax rates. Another unappealing feature of the representative agent models for analyzing the merits of a fiscal consolidation is that, in steady state, the equilibrium real interest rate is independent of the debt level, whereas in our model the equilibrium real interest rate is endogenously affected by the level of government debt, which is consistent with the empirical literature.

Second, the paper is related to previous work using general equilibrium models with infinitively lived heterogeneous agents, occupational choice, and borrowing constraints to analyze fiscal reforms, such as Li(2002), Meh (2005) and Kitao (2008). Differently from these papers, that impose a balanced budget every period, we focus on the effects of debt period of time we augment our model to include growth. Moreover and as in Kitao (2008), we explicitly compute the transitional dynamics after the reforms and analyze the welfare costs associated with the transition.  dynamics and fiscal consolidation reforms. Also, since we focus on reforms over an extended period of time we augment our model to include growth. Moreover and as in Kitao (2008), we explicitly compute the transitional dynamics after the reforms and analyze the welfare costs associated with the transition.

Results:The long-run effects


What is the effect of delaying fiscal consolidation on...?

Capital and Labor. The high interest rates in the delay scenario imply that for those entrepreneurs that do not have enough internal funding, the cost of borrowing sufficient capital is too high for them to compensate for their income under the outside option (i.e.  wage income). As a result, the share of entrepreneurs in the delay scenario is roughly one half the share under the passive adjust scenario and the aggregate capital stock is about 17 percent lower. The higher share of workers in the delay scenario implies a higher labor supply. Together with a lower labor demand (due to a lower capital stock), this leads to a real wage that is more than 19 percent lower. Total hours worked are similar in the two steady states as lower individual hours offset the higher share of workers.

Output and Consumption. The crowding-out effect of fiscal policy under the delay scenario leads to large permanent losses in output and consumption. The level of GDP is about 16 percent lower in the delay than in the passive adjust scenario and aggregate consumption is 3.5 percent lower. Moreover and as depicted in Figure 4, the wealth distribution is significantly more concentrated under the delay scenario.

Welfare. The effect of lower aggregate consumption and more concentrated wealth distribution under the delay scenario implies that welfare is significantly lower than in the passive adjust scenario. Using a consumption equivalent welfare metric we find that the average difference in steady state welfare across scenarios would be equivalent to permanently increasing consumption to each agent in the delay scenario economy by 6 percent while leaving their amount of leisure unchanged. We interpret this differential as the permanent welfare gain from stabilizing public debt at its pre-crisis level. A breakup of the welfare comparison of steady states by wealth deciles, shown in Figure 5, suggests that all agents up to the 7th deciles of the wealth distribution would be better off under fiscal consolidation.

What are the effects of alternative fiscal consolidation plans?

Capital and Output. The smaller size of government in the two active adjust scenario relative to the passive one translates into higher capital stocks and higher output, increasing the gap with the delay scenario. Regarding the tax reform, the comparison between the two active adjust scenarios reveals that distributing the higher tax pressure on all taxes, including consumption taxes, lowers distortions and results in a higher capital stock and in a growth friendlier consolidation: The difference in the output level between the delay and active (1) adjust scenario stands at 17.7 percent—while this difference is 17.1 and 15.7 percent for the active (2) adjust and passive adjust scenarios respectively.

Consumption and Welfare. While all adjust scenarios reveal a significant difference in long-run per-capita consumption and welfare with respect to postponing fiscal consolidation, the relative performance among them also favors a smaller size of government and a balanced tax reform. The difference in per-capita consumption with the delay scenario is 3.5, 5.8 and 5.4 percent respectively for the passive, active (1) and active (2) adjustment scenarios. The policy mix under the active (1) adjust scenario also ranks the best in terms of welfare, with the welfare differential with respect to the delay scenario being more than 7 percent of lifetime consumption.

Overall Welfare Cost of Delaying Fiscal Consolidation

In the long-run the average welfare in the adjust scenario is higher than in the delay scenario by 6.7 percent of lifetime consumption. However, along the transition to the new steady state the adjust scenario is characterized by a costly fiscal adjustment that entails a lower path for per capita consumption, so it might not be necessarily true that an adjustment is optimal.

To assess the overall welfare ranking of the alternative fiscal paths, we extend the analysis of section III.A. by computing, for the delay and adjust scenarios, the average expected discounted lifetime utility starting in 2011. We find that even taking into account the costs along the transition, the adjust scenario entails an average welfare gain for the economy. The infinite horizon welfare comparison suggests that consumption under the delay scenario should be raised by 0.8 percent for all agents in the economy in all periods to attain the same average utility than under the adjust scenario (while leaving leisure unchanged). A breakup of this result by wealth deciles (see Figure 9) suggests that, as in the long-run comparison, the wealthiest decile of the population is worse off under the adjust scenario. Differently from the steady state comparison, however, the first four deciles also face welfare losses in the adjust scenario.

A few elements suggest that the average welfare gain reported (0.8 percent in consumptionequivalent terms) can be considered a lower bound. First, the calibrated subjective discount factor from the model used to compute the present value of the utility paths entails a yearly discount rate of about 9.9 percent.20 With such a high discount rate, the long-run benefits from the delay scenario are heavily discounted. Using a discount rate of 3 percent, the one used by CBO for calculating the present value of future streams of revenues and outlays of the government’s trust funds, would imply a consumption-equivalent welfare gain of 5.9 percent (instead of 0.8 percent). Second, the model we are using has infinitely lived agents, so we are not explicitly accounting for the distribution of costs and benefits across generations.

Conclusions

We compare the macroeconomic and welfare effects of failing to address the fiscal imbalances in the U.S. for an extended period with those of reducing federal debt to its precrisis level and find that the stakes are quite high. Our model simulations suggest that the continuous rise in federal debt implied by current policies would have sizeable effects on the economy, even under certainty that the federal debt will be fully repaid. The model predicts that the mounting debt ratio would increase the cost of borrowing and crowd out private capital from productive activities, acting as a significant drag on growth. Compared to stabilizing federal debt at its pre-crisis level, continuation of current policies for two decades would entail a permanent output loss of around 17 percent. The associated drop in per-capita consumption, combined with the worsening of wealth concentration that the model suggests, would cause a large average welfare loss in the long-run, equivalent to about 7 percent of lifetime consumption. Our results also suggest that reducing promptly the level of public debt is significantly more important for activity and welfare than differences in the size of government or the design of the tax reform. Accordingly, even under consensus on the desirability to increase primary spending in the medium-run, it would be preferable to start from a fiscal house in order.

The model adequately captures that the fiscal consolidation needed to reduce federal debt to its pre-crisis level would be very costly. Still, extending the welfare comparison to include also the transition period suggests that a fiscal consolidation would be on average beneficial.  After taking into account the short-term costs, the average welfare gain from fiscal consolidation stands at 0.8 percent of lifetime consumption.

We argue that our welfare results can be interpreted as a lower bound. This is because, first, we abstract from default so our simulations ignore the potential effect of higher public debt on the risk premium. However, as the debt crisis in Europe has revealed, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Considering this effect would have magnified the long-run welfare costs of stabilizing the debt ratio at a higher level. Second, the high discount rate we use in the computation of the present value of utility exacerbates the short-term costs. If we recomputed the overall welfare effects in our scenarios using a discount rate of 3 percent, the welfare gain from a consolidation would be 5.9 percent of lifetime utility, instead of 0.8 percent. An argument for considering a lower rate to compute the present value of welfare is that by assuming infinitely lived agents we are not attaching any weight to unborn agents that would be affected by the permanent costs of delaying the resolution of fiscal imbalances and do not enjoy the expansionary effects of the unsustainable policy along the transitional dynamics.

The results in this paper are not exempt from the perils inherent to any model-dependent analysis. In order to address features that we believe are crucial for the issue at hand, we needed to simplify the model on other dimensions. For example, given the current reliance of the U.S. on foreign financing, the closed economy assumption used in this paper may be questionable. However, we believe that it would also be problematic to assume that the world interest rate will remain unaffected if the U.S. continues to considerably increase its financing needs. Moreover and as mentioned before, the model ignores the effect of higher debt on the perceived probability of default, which would likely counteract the effect in our results from failing to incorporate the government’s access to foreign borrowing. The model also abstracts from nominal issues and real and nominal rigidities typically introduced in the new Keynesian models commonly used for policy analysis. However, we believe that while these features are particularly relevant for short-term cyclical considerations, they matter much less for the longer-term issues addressed in this paper.

China's Cyber Thievery Is National Policy—And Must Be Challenged

China's Cyber Thievery Is National Policy—And Must Be Challenged. By MIKE MCCONNELL, MICHAEL CHERTOFF AND WILLIAM LYNN
It is more efficient for the Chinese to steal innovations and intellectual property than to incur the cost and time of creating their own.WSJ, Jan 27, 2012
http://online.wsj.com/article/SB10001424052970203718504577178832338032176.html

Only three months ago, we would have violated U.S. secrecy laws by sharing what we write here—even though, as a former director of national intelligence, secretary of homeland security, and deputy secretary of defense, we have long known it to be true. The Chinese government has a national policy of economic espionage in cyberspace. In fact, the Chinese are the world's most active and persistent practitioners of cyber espionage today.

Evidence of China's economically devastating theft of proprietary technologies and other intellectual property from U.S. companies is growing. Only in October 2011 were details declassified in a report to Congress by the Office of the National Counterintelligence Executive. Each of us has been speaking publicly for years about the ability of cyber terrorists to cripple our critical infrastructure, including financial networks and the power grid. Now this report finally reveals what we couldn't say before: The threat of economic cyber espionage looms even more ominously.

The report is a summation of the catastrophic impact cyber espionage could have on the U.S. economy and global competitiveness over the next decade. Evidence indicates that China intends to help build its economy by intellectual-property theft rather than by innovation and investment in research and development (two strong suits of the U.S. economy). The nature of the Chinese economy offers a powerful motive to do so.

According to 2009 estimates by the United Nations, China has a population of 1.3 billion, with 468 million (about 36% of the population) living on less than $2 a day. While Chinese poverty has declined dramatically in the last 30 years, income inequality has increased, with much greater benefits going to the relatively small portion of educated people in urban areas, where about 25% of the population lives.

The bottom line is this: China has a massive, inexpensive work force ravenous for economic growth. It is much more efficient for the Chinese to steal innovations and intellectual property—the source code of advanced economies—than to incur the cost and time of creating their own. They turn those stolen ideas directly into production, creating products faster and cheaper than the U.S. and others.

Cyberspace is an ideal medium for stealing intellectual capital. Hackers can easily penetrate systems that transfer large amounts of data, while corporations and governments have a very hard time identifying specific perpetrators.

Unfortunately, it is also difficult to estimate the economic cost of these thefts to the U.S. economy. The report to Congress calls the cost "large" and notes that this includes corporate revenues, jobs, innovation and impacts to national security. Although a rigorous assessment has not been done, we think it is safe to say that "large" easily means billions of dollars and millions of jobs.

So how to protect ourselves from this economic threat? First, we must acknowledge its severity and understand that its impacts are more long-term than immediate. And we need to respond with all of the diplomatic, trade, economic and technological tools at our disposal.

The report to Congress notes that the U.S. intelligence community has improved its collaboration to better address cyber espionage in the military and national-security areas. Yet today's legislative framework severely restricts us from fully addressing domestic economic espionage. The intelligence community must gain a stronger role in collecting and analyzing this economic data and making it available to appropriate government and commercial entities.

Congress and the administration must also create the means to actively force more information-sharing. While organizations (both in government and in the private sector) claim to share information, the opposite is usually the case, and this must be actively fixed.

The U.S. also must make broader investments in education to produce many more workers with science, technology, engineering and math skills. Our country reacted to the Soviet Union's 1957 launch of Sputnik with investments in math and science education that launched the age of digital communications. Now is the time for a similar approach to build the skills our nation will need to compete in a global economy vastly different from 50 years ago.

Corporate America must do its part, too. If we are to ever understand the extent of cyber espionage, companies must be more open and aggressive about identifying, acknowledging and reporting incidents of cyber theft. Congress is considering legislation to require this, and the idea deserves support. Companies must also invest more in enhancing their employees' cyber skills; it is shocking how many cyber-security breaches result from simple human error such as coding mistakes or lost discs and laptops.

In this election year, our economy will take center stage, as will China and its role in issues such as monetary policy. If we are to protect ourselves against irreversible long-term damage, the economic issues behind cyber espionage must share some of that spotlight.

Mr. McConnell, a retired Navy vice admiral and former director of the National Security Agency (1992-96) and director of national intelligence (2007-09), is vice chairman of Booz Allen Hamilton. Mr. Chertoff, a former secretary of homeland security (2005-09), is senior counsel at Covington & Burling. Mr. Lynn has served as deputy secretary of defense (2009-11) and undersecretary of defense (1997-2001).

President Obama can't win by running a constructive campaign, and he won't be able to govern if he does win a second term

The Hillary Moment. By Patrick H Caddell & Douglas E Schoen
President Obama can't win by running a constructive campaign, and he won't be able to govern if he does win a second term.
http://online.wsj.com/article/SB10001424052970203611404577041950781477944.html

When Harry Truman and Lyndon Johnson accepted the reality that they could not effectively govern the nation if they sought re-election to the White House, both men took the moral high ground and decided against running for a new term as president. President Obama is facing a similar reality—and he must reach the same conclusion.

He should abandon his candidacy for re-election in favor of a clear alternative, one capable not only of saving the Democratic Party, but more important, of governing effectively and in a way that preserves the most important of the president's accomplishments. He should step aside for the one candidate who would become, by acclamation, the nominee of the Democratic Party: Secretary of State Hillary Clinton.

Never before has there been such an obvious potential successor—one who has been a loyal and effective member of the president's administration, who has the stature to take on the office, and who is the only leader capable of uniting the country around a bipartisan economic and foreign policy.

Certainly, Mr. Obama could still win re-election in 2012. Even with his all-time low job approval ratings (and even worse ratings on handling the economy) the president could eke out a victory in November. But the kind of campaign required for the president's political survival would make it almost impossible for him to govern—not only during the campaign, but throughout a second term.

Put simply, it seems that the White House has concluded that if the president cannot run on his record, he will need to wage the most negative campaign in history to stand any chance. With his job approval ratings below 45% overall and below 40% on the economy, the president cannot affirmatively make the case that voters are better off now than they were four years ago. He—like everyone else—knows that they are worse off.

President Obama is now neck and neck with a generic Republican challenger in the latest Real Clear Politics 2012 General Election Average (43.8%-43.%). Meanwhile, voters disapprove of the president's performance 49%-41% in the most recent Gallup survey, and 63% of voters disapprove of his handling of the economy, according to the most recent CNN/ORC poll.

Consequently, he has to make the case that the Republicans, who have garnered even lower ratings in the polls for their unwillingness to compromise and settle for gridlock, represent a more risky and dangerous choice than the current administration—an argument he's clearly begun to articulate.

One year ago in these pages, we warned that if President Obama continued down his overly partisan road, the nation would be "guaranteed two years of political gridlock at a time when we can ill afford it." The result has been exactly as we predicted: stalemate in Washington, fights over the debt ceiling, an inability to tackle the debt and deficit, and paralysis exacerbating market turmoil and economic decline.

If President Obama were to withdraw, he would put great pressure on the Republicans to come to the table and negotiate—especially if the president singularly focused in the way we have suggested on the economy, job creation, and debt and deficit reduction. By taking himself out of the campaign, he would change the dynamic from who is more to blame—George W. Bush or Barack Obama?—to a more constructive dialogue about our nation's future.

Even though Mrs. Clinton has expressed no interest in running, and we have no information to suggest that she is running any sort of stealth campaign, it is clear that she commands majority support throughout the country. A CNN/ORC poll released in late September had Mrs. Clinton's approval rating at an all-time high of 69%—even better than when she was the nation's first lady. Meanwhile, a Time Magazine poll shows that Mrs. Clinton is favored over former Massachusetts Gov. Mitt Romney by 17 points (55%-38%), and Texas Gov. Rick Perry by 26 points (58%-32%).

But this is about more than electoral politics. Not only is Mrs. Clinton better positioned to win in 2012 than Mr. Obama, but she is better positioned to govern if she does. Given her strong public support, she has the ability to step above partisan politics, reach out to Republicans, change the dialogue, and break the gridlock in Washington.

President Bill Clinton reached a historic agreement with the Republicans in 1997 that led to a balanced budget. Were Mrs. Clinton to become the Democratic nominee, her argument would almost certainly have to be about reconciliation and about an overarching deal to rein in the federal deficit. She will understand implicitly the need to draw up a bipartisan plan with elements similar to her husband's in the mid-to-late '90s—entitlement reform, reform of the Defense Department, reining in spending, all the while working to preserve the country's social safety net.

Having unique experience in government as first lady, senator and now as Secretary of State, Mrs. Clinton is more qualified than any presidential candidate in recent memory, including her husband. Her election would arguably be as historic an event as the election of President Obama in 2008.

By going down the re-election road and into partisan mode, the president has effectively guaranteed that the remainder of his term will be marred by the resentment and division that have eroded our national identity, common purpose, and most of all, our economic strength. If he continues on this course it is certain that the 2012 campaign will exacerbate the divisions in our country and weaken our national identity to such a degree that the scorched-earth campaign that President George W. Bush ran in the 2002 midterms and the 2004 presidential election will pale in comparison.

We write as patriots and Democrats—concerned about the fate of our party and, most of all, our country. We do not write as people who have been in contact with Mrs. Clinton or her political operation. Nor would we expect to be directly involved in any Clinton campaign.

If President Obama is not willing to seize the moral high ground and step aside, then the two Democratic leaders in Congress, Sen. Harry Reid and Rep. Nancy Pelosi, must urge the president not to seek re-election—for the good of the party and most of all for the good of the country. And they must present the only clear alternative—Hillary Clinton.

Mr. Caddell served as a pollster for President Jimmy Carter. Mr. Schoen, who served as a pollster for President Bill Clinton, is author of "Hopelessly Divided: The New Crisis in American Politics and What It Means for 2012 and Beyond," forthcoming from Rowman and Littlefield.

Algeria: structural and other reasons for regime stability

Kal writes:

Richard Phelps argues that Algeria has not seen a popular uprising this year on broad structural lines (‘An Algerian Exception?‘ CMEC Blog): ‘Algerian regime does not have an identifiable leader with whom political power truly lies’.

[...]

And the government has focused its strategy toward them based on this reality and avoided the provocative showings of ‘symbolic’ violence that gave fuel to protest movements in Tunisia and Libya and Syria and Egypt (part of this is owed to the government’s relationships with the private media as well). Official and unofficial media has not covered demonstrations extensively to the extent that protesters in one city would necessarily be aware of those in another. The massive showing of ‘force’ at the February demonstrations — which were quite small, using barely a few thousand people if that — was a show of bodies more than anything else, and while protesters were manhandled and some beaten few or none were shot or killed in the way their counterparts elsewhere in the Arab world were. The government issued reforms, after long deliberations, and statements of intent to reform on a range of issues. It acted quickly to buy off organizers and potential participants or to contain and frustrate them rather than making public ‘examples’ of children or attempting to use overwhelming and direct force. The ‘crackdowns’ on protesters in Algeria this year were in large measure qualitatively different from those elsewhere, as were the demonstrations themselves.

Structurally it is important to understand that Algeria’s politics do operate in a diffuse manner, that power is spread through regional and professional and bureaucratic networks which often compete with one another but are also sometimes dependent on one another. (One might quibble with any comparison of the Algerian presidency to the power of any single office in Lebanon or to even its strongest Lebanese za’im; the perception and reality of the president’s power in Algeria is an interesting thing to follow and to try an gage at any one time but the presidency has frequently overwhelmed the military under Bouteflika.) The business class and the military officers and the technocrats and local notables intersect and it would be difficult to ‘purge’ the government as the Tunisians are now trying to do and it would also be difficult to make removing Bouteflika in a coup appear to Algerians as a symbolic act with and the armed forces a trusted ‘care taker’ of some transition process (let alone a ‘savior’) as the Egyptian Army did with Mubarak, since Algerians are generally more cynical and probably distrust their military and opposition more than their cousins in the rest of the region. It is also important to understand the field in which these various networks and factions (‘clans’) interact, overlap and struggle; it involves a great deal of both external and internal opacity and risk. There are enormous uncertainties involved. Longtime Algeria hand John Entelis wrote in September that change of some kind would wind up taking place in Algeria, if only so that the country’s elite could keep its own interests, and that  ’[w]hether this process develops peacefully or violently is ultimately in the hands of le pouvoir’.


But structural reasons are not the only ones Algeria has not seen an uprising. The Algerian military and political class has dealt with uprisings and transitions before and probably had a better idea of how to deal with such problems technically given its experience in the 1988-1990 period and the youth uprising in 2001 and the tens of thousands of youth riots which have struck the country in the last decade. In other words, it is important to recognize that the Algerian regime — like its counterparts elsewhere — made choices this year.

Read the whole post at http://themoornextdoor.wordpress.com/2011/11/16/exceptions-agency-structure/

The Strategic Implications of Closer Indonesia-China Relations

Growing Convergence, Greater Consequence: The Strategic Implications of Closer Indonesia-China Relations. By Greta Nabbs-Keller. Security Challenges Journal. Volume 7, Number 3 (Spring 2011), pp. 23-42. http://www.securitychallenges.org.au/TOCs/vol7no3.html

Indonesia’s relationship with China has been characterised by a history of enmity, but residual concerns belie increasing economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. This article will argue that the growing convergence of interests between Indonesia and China is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the ASEAN-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with natural ‘antibodies’ against Chinese assertiveness.

Excerpts (edited):

In a 2008 book on the rise of Asia and the transformation of geopolitics, William Overholt, the Director of Rand Corporation’s Centre for Asia Pacific Policy, made the following argument about Indonesia:

A reviving Indonesia, with its vast territory, large population, and determination to lead the region, still zealously guards against any hint of emergent Chinese hegemony. Even more than other countries in the region, Indonesia has powerful antibodies to any hint of strong Chinese assertion.

It was Overholt’s contention that although the US “had lost stature in Southeast Asia … [this] did not presage Chinese dominance”. Overholt is absolutely correct about Indonesia’s wariness of China and indeed relations have been characterised traditionally by high political drama and a history of enmity. But residual Indonesian concerns about China are only part of the story. They belie ever closer economic and foreign policy convergence boosted by the positive effects of democratisation on Indonesia’s perceptions of the Chinese. Relations between East Asia’s two largest states have undergone a remarkable transformation in the period of Indonesia’s democratisation, with significant implications for the broader security and prosperity of the Indo-Pacific region.

The article will argue that the growing convergence of interests between Indonesia and China evident over the last decade is a positive development for Australia. China’s rise has provided the engine of growth for Southeast Asia’s largest economy and has increasingly cemented Indonesia’s importance in the Association of South East Asian Nations (ASEAN)-centred regional order. For Australia, it means a stronger, stable, and more prosperous neighbour next door with Overholt’s natural antibodies against Chinese assertiveness. Although Indonesia’s relationship with China remains characterised by dichotomous elements—friendship versus residual distrust, economic complementarity versus competition—Indonesia has sought to maximise the opportunities inherent in China’s rise, whilst continuing to hedge against the strategic uncertainties posed by China.



Greta Nabbs-Keller is a PhD candidate at Griffith Asia Institute researching the impact of democratisation on Indonesia’s foreign policy. Her broader research interests include Indonesian civil-military relations and Australian regional foreign policy. Before joining Griffith University, Greta worked for the Department of Defence in Canberra and Jakarta.

Under Sec for Internt'l Affairs Lael Brainard Testimony on the U.S.-China Economic Relationship

Under Secretary for International Affairs Dr. Lael Brainard Testimony Before the House Committee on Ways and Means on the U.S.-China Economic Relationship

http://www.treasury.gov/press-center/press-releases/Pages/tg1336.aspx

Oct 25, 2011

Chairman Camp, Ranking Member Levin, distinguished members of the Committee, thank you for the opportunity to testify today on our economic relationship with China.


Challenges and Opportunities
Since the outset, President Obama has placed a high priority on pursuing a more balanced and fair economic relationship with China.  This is central to our goal of doubling exports in five years and supporting several million U.S. jobs.  And, indeed, since 2009, U.S. exports to China have grown by 61 percent, nearly twice as fast as our exports to the rest of the world.  Despite this progress, the playing field is still uneven.  To secure the future for our children, the Administration will continue working hard to get the economic relationship right.

China needs to take action at an accelerated rate, so that the potential of our relationship translates into real near-term benefits for our companies and workers.  China’s leaders understand that China must shift to domestic consumption-led growth, provide a secure environment for the protection and enforcement of intellectual property rights, level the playing field between state-owned and private enterprises—domestic and foreign, and liberalize the exchange rate and financial markets.  China needs to take these actions to sustain its own growth, as well as to address the concerns of its trade partners.  On these issues, we have actively pressed China to accelerate the pace of reform in order to achieve more balanced growth and create fairer competition, and there has been some progress, but there are strong interests within China that favor a go-slow approach.   

In the wake of the financial crisis, with American households saving more and demand weak in Europe and Japan, our exports increasingly will be directed at the fast-growing emerging markets if we are to create the good jobs with good wages that we need to grow our economy.  For the next decade, China is expected to be the biggest source of demand growth in the global economy.  The International Monetary Fund (IMF) forecasts that China’s growth will average 9.4 percent per year over the next five years, and the Organization of Economic Cooperation and Development (OECD) estimates that China’s share of global imports will increase from six percent in 2008, to over nine percent in 2012.  This is a market opportunity that we must seize.

Foreign investment also is playing an increasingly important role in supporting jobs in the United States, and we expect this trend to continue.  In 2009, majority-owned U.S. affiliates of foreign companies were an important contributor to U.S. economic activity, employing approximately five percent of the U.S. private workforce and 17 percent in the U.S. manufacturing sector.  In the decade ahead, China will be a fast-growing source of foreign direct investment among major economies.  Indeed, the stock of Chinese foreign investment in the United States more than doubled last year alone.  Protecting national security is always our first concern, but where Chinese investment does not affect national security, we should welcome it.  To create jobs here at home, it matters whether Chinese investment ultimately ends up in Anhui province, Argentina, or Alabama.

In order to derive a better balance of benefits from trade and investment opportunities with China, we need to see progress on three key challenges.  First, in many sectors in which the United States is competitive globally, China must address a range of discriminatory policies, including those that favor domestic state-owned enterprises through barriers to foreign goods, services, and investment, as well as the provision of subsidies and preferential access to raw materials, land, credit, and government procurement.  Second, rampant theft of intellectual property in China lowers the return to investments in research and development and innovation that represent a fundamental source of our country’s national competitive edge.  Third, China must shift to a pattern of growth that can be sustained, drawing on home-grown demand rather than excessive dependence on exports.  This requires that China bring its exchange rate into alignment with market fundamentals.


China’s Reforms
China’s current headline growth rate may look enviable right now, but China will face daunting challenges in coming years.  We have a tremendous stake in ensuring that China deals with those challenges in a way that fundamentally reorients its growth pattern through greater balance and fairer competition.

China has had remarkable success in lifting hundreds of millions of its citizens out of poverty.  But it has come at some cost, including large-scale environmental degradation and an economy that spends much more on investment than goods and services for its people.  Chinese leaders understand that, with per capita income of around one-tenth of that of the United States in 2011,[1] and per capita household spending less than one-twentieth of that in the United States, the way China grew in the last two decades will not get them to the next stage of development.  Instead, China will face what economists call the “middle income trap.”

China’s excessive dependence on growth driven by exports to advanced economies and investment will need to change.  During the 2008-2009 global crisis, China was able to sustain growth through a massive credit-fueled investment boom.  This will leave a financial hangover for years.  China risks repeating the experience of other fast growing Asian economies that experienced sharp falls in growth soon after their investment-to-gross domestic product (GDP) ratios peaked.  With investment reaching an all-time high of almost 48 percent of GDP, however, China’s peak is higher than other Asian economies.

China already is seeing rapidly slowing labor force growth, and the number of workers in China soon will be on the decline.  While China maintains many advantages, a study by KPMG concluded that rising labor costs in China are shifting a rising market share of light manufactured goods to other producers in Asia.[2]  A recent study by the Boston Consulting Group similarly concluded that China’s cost advantage is rapidly eroding.[3]

In the face of overinvestment and rising wages, China will need to move up the value chain.  But China’s weak protection and enforcement of intellectual property rights threaten to retard the development of Chinese innovation and Chinese brands.

And the adjustment process – whether to greater consumption-led growth, higher value services, or innovation-intensive activities – is hampered by China’s continued excessive reliance on administrative controls, such as credit quotas to maintain price stability and intervention to temper exchange rate adjustment, that are subject to political determinations and thus leave policy making behind the curve.  These controls are reflected in a financial system that fails to offer Chinese households financial assets that keeps up with inflation, let alone economic growth, and starves China’s most innovative firms and sectors of capital, despite massive domestic savings, while also depriving foreign competitors of the opportunity to offer a full range of products and services.  Relying more on market-based prices, such as exchange and interest rates that facilitate adjustment to changing conditions, would make China’s growth more resilient, and avoid an excessive build-up of foreign exchange reserves. 

For sustained growth, China wants greater access to U.S. technologies and high-tech dual use exports, to make progress on bilateral investment, and wants their exports to be accorded the same terms of access as exports from other market economies.  We are willing to make progress on these issues, but our ability to move will depend in part on how much progress we see from China on issues that are important to us.


U.S. Engagement and Enforcement
We have worked tirelessly across the Administration to pursue a tight set of priorities with China – using the Strategic and Economic Dialogue (S&ED), as well as the Joint Commission on Commerce and Trade (JCCT).  And since many other countries share our concerns, we also pursue these issues through multilateral channels, such as the G-20, the IMF, and the World Trade Organization (WTO), which are critical complements to our bilateral engagement.  To advance our goals, whether it is faster appreciation of the exchange rate or reduced barriers to U.S. exports, we need to work smartly with our partners around the world and with China.  And when engagement proves insufficient, this Administration will continue to be more aggressive than any of its predecessors in using all appropriate tools to address the particular problem, such as going after China’s unfair trade practices by taking China to the WTO and vigorously applying U.S. trade remedy laws.

While we face substantial challenges, and our job is far from finished, we have made important progress towards leveling the playing field and making the bilateral relationship more beneficial for American companies and workers.  China’s trade surplus has declined from 7.7 percent of GDP in 2008, to 3.9 percent in 2010, and has declined further in the first half of this year compared to the same period last year, though an important part of the decline was due to slower growth in China’s export markets.  In both its latest Five-Year Plan and the recent S&ED, China committed to targets to promote consumption-led growth, including raising household incomes, increasing minimum wages, and increasing services relative to GDP.

On the exchange rate, since China resumed exchange rate adjustment in June 2010, the renminbi has appreciated about seven percent against the U.S. dollar and about ten percent taking into account China’s higher rate of inflation relative to inflation in the United States.  China’s currency has appreciated nearly forty percent against the dollar over the past five years in real terms.  But the continued rapid pace of foreign reserve accumulation and the ongoing decline in the share of Chinese consumption in GDP indicate that the real exchange rate of the renminbi remains misaligned despite recent movement, and a faster pace of appreciation is needed. 

Renminbi appreciation on its own will not erase our trade deficit.  But allowing the exchange rate to adjust fully to reflect market forces is the most powerful near-term tool available to the Chinese government to achieve two of its top economic goals:  combating inflation and shifting the composition of demand towards domestic consumption.  By contrast, persistent misalignment holds back the rebalancing in demand needed to sustain the global recovery both in China and the world, and gives rise to substantial international concerns and ultimately to trade frictions.  Further, emerging markets that compete with China resist appreciation of their own currencies to maintain their competitiveness vis-à-vis China. 

At the G-20 earlier this month, surplus emerging markets such as China committed to accelerate the rebalancing of demand towards domestic consumption, and to move toward more market-determined exchange rates through greater exchange rate flexibility.

We also are making progress on our bilateral trade and investment priorities, in close collaboration with the Office of the U.S. Trade Representative and the Department of Commerce.  At the most recent S&ED, after commitments made during the January state visit of President Hu and the prior December JCCT, China pledged to rescind all of its government procurement indigenous innovation catalogues, including by provincial and municipal governments.  So far, the Central government has repealed four key measures that underpinned the indigenous innovation product accreditation system, and a number of local governments have taken positive steps.  China also pledged to increase inspections of government computers to ensure that agencies use legitimate software, and to improve its high-level government coordination and leadership mechanisms to enhance long-term protection and enforcement of intellectual property rights.  And last year, China met its S&ED pledge to raise the threshold for central government review of foreign investments from $100 to $300 million, leaving more foreign investment approvals to the mayors and governors who better understand the benefits of foreign direct investment.

Reforming and opening up China’s financial sector also remains a key priority.  This not only would provide Chinese households with savings and insurance products to meet their financial goals without having to save so much of their income, but also would level the playing field with China’s state-owned enterprises for access to credit.  We will continue pushing hard to address market access barriers in China’s financial sector, and we are seeing modest signs of progress.  China now allows foreign banks to underwrite corporate bonds and is creating more opportunities for our financial services firms to manage investments in China as well as manage Chinese investments abroad.  At the most recent S&ED, China committed to allow foreign firms to sell mutual funds, provide custody services, and sell mandatory auto liability insurance.

In short, while we will stand up to unfair and discriminatory practices and demand change, we will continue to engage with and encourage China as it pursues its reforms.  And to meet this generational challenge, we must continue to work to strengthen the multilateral system that governs trade and finance, and not turn away from it.  I believe this is the best way to promote American interests.

Thank you.


References
[1] September 2011 IMF World Economic Outlook Database, using market exchange rates.

[2] KPMG International, Product Sourcing in Asia Pacific 2011, pp. 7-9.

[3] Boston Consulting Group, Made in America, Again, August 2011, p. 5.

Chellaney: Hydro-control turning China into dreaded hydra?

THE WATER HEGEMON

Hydro-control turning China into dreaded hydra? By Brahma Chellaney
Bangkok Post, Oct 18, 2011 at 12:00 AM
With Beijing controlling the sources of Asia's most important rivers, water has increasingly become a new political divide in China's relations with neighbours like India, Russia, Kazakhstan, Nepal and the Mekong River countries.

http://www.bangkokpost.com/opinion/opinion/261849/hydro-control-turning-china-into-dreaded-hydra

International discussion about China's rise has focused on its increasing trade muscle, growing maritime ambitions, and expanding capacity to project military power. One critical issue, however, usually escapes attention: China's rise as a hydro-hegemon with no modern historical parallel.

The Mekong River, whose water level last March dropped to only 33 centimetres, the lowest in 50 years. People living downriver in Thailand, Laos and Cambodia attributed the fall in water level to newly constructed dams in China.

No other country has ever managed to assume such unchallenged riparian pre-eminence on a continent by controlling the headwaters of multiple international rivers and manipulating their cross-border flows. China, the world's biggest dam builder _ with slightly more than half of the approximately 50,000 large dams on the planet _ is rapidly accumulating leverage against its neighbours by undertaking massive hydro-engineering projects on transnational rivers.

Asia's water map fundamentally changed after the 1949 Communist victory in China. Most of Asia's important international rivers originate in territories that were forcibly annexed to the People's Republic of China. The Tibetan Plateau, for example, is the world's largest freshwater repository and the source of Asia's greatest rivers, including those that are the lifeblood for mainland China and South and Southeast Asia. Other such Chinese territories contain the headwaters of rivers like the Irtysh, Illy and Amur, which flow to Russia and Central Asia.

This makes China the source of cross-border water flows to the largest number of countries in the world. Yet China rejects the very notion of water sharing or institutionalised cooperation with downriver countries. Whereas riparian neighbours in Southeast and South Asia are bound by water pacts that they have negotiated between themselves, China does not have a single water treaty with any co-riparian country. Indeed, having its cake and eating it, China is a dialogue partner but not a member of the Mekong River Commission, underscoring its intent not to abide by the Mekong basin community's rules or take on any legal obligations.

Worse, while promoting multilateralism on the world stage, China has given the cold shoulder to multilateral cooperation among river-basin states. The lower-Mekong countries, for example, view China's strategy as an attempt to "divide and conquer". Although China publicly favours bilateral initiatives over multilateral institutions in addressing water issues, it has not shown any real enthusiasm for meaningful bilateral action. As a result, water has increasingly become a new political divide in the country's relations with neighbours like India, Russia, Kazakhstan, and Nepal.

China deflects attention from its refusal to share water, or to enter into institutionalised cooperation to manage common rivers sustainably, by flaunting the accords that it has signed on sharing flow statistics with riparian neighbours. These are not agreements to cooperate on shared resources, but rather commercial accords to sell hydrological data that other upstream countries provide free to downriver states.

In fact, by shifting its frenzied dam building from internal rivers to international rivers, China is now locked in water disputes with almost all co-riparian states. Those disputes are bound to worsen, given China's new focus on erecting mega-dams, best symbolised by its latest addition on the Mekong _ the 4,200-megawatt Xiaowan Dam, which dwarfs Paris's Eiffel Tower in height _ and a 38,000-megawatt dam planned on the Brahmaputra at Metog, close to the disputed border with India. The Metog Dam will be twice as large as the 18,300-megawatt Three Gorges Dam, currently the world's largest, construction of which uprooted at least 1.7 million Chinese.

In addition, China has identified another mega-dam site on the Brahmaputra at Daduqia, which, like Metog, is to harness the force of a nearly 3,000-metre drop in the river's height as it takes a sharp southerly turn from the Himalayan range into India, forming the world's longest and steepest canyon. The Brahmaputra Canyon _ twice as deep as the Grand Canyon in the United States _ holds Asia's greatest untapped water reserves.

The countries likely to bear the brunt of such massive diversion of waters are those located farthest downstream on rivers like the Brahmaputra and Mekong _ Bangladesh, whose very future is threatened by climate and environmental change, and Vietnam, a rice bowl of Asia. China's water appropriations from the Illy River threaten to turn Kazakhstan's Lake Balkhash into another Aral Sea, which has shrunk to less than half its original size.

In addition, China has planned the "Great Western Route", the proposed third leg of the Great South-North Water Diversion Project _ the most ambitious inter-river and inter-basin transfer programme ever conceived _ whose first two legs, involving internal rivers in China's ethnic Han heartland, are scheduled to be completed within three years.

The Great Western Route, centred on the Tibetan Plateau, is designed to divert waters, including from international rivers, to the Yellow River, the main river of water-stressed northern China, which also originates in Tibet.

With its industry now dominating the global hydropower-equipment market, China has also emerged as the largest dam builder overseas. From Pakistani-held Kashmir to Burma's troubled Kachin and Shan states, China has widened its dam building to disputed or insurgency-torn areas, despite local backlashes.

For example, units of the People's Liberation Army are engaged in dam and other strategic projects in the restive, Shia-majority region of Gilgit-Baltistan in Pakistan-held Kashmir. And China's dam building inside Burma to generate power for export to Chinese provinces has contributed to renewed bloody fighting recently, ending a 17-year ceasefire between the Kachin Independence Army and the Burmese government.

As with its territorial and maritime disputes with India, Vietnam, Japan and others, China is seeking to disrupt the status quo on international river flows. Persuading it to halt further unilateral appropriation of shared waters has thus become pivotal to Asian peace and stability. Otherwise, China is likely to emerge as the master of Asia's water taps, thereby acquiring tremendous leverage over its neighbours' behaviour.

Brahma Chellaney is Professor of Strategic Studies at the Centre for Policy Research and the author of "Water: Asia's New Battleground." Project Syndicate, 2011.

The future of politics will be decided in Asia, and the US will be right at the center of the action

America's Pacific Century. By Secretary of State Hillary R. Clinton
November Issue of Foreign Policy Magazine
http://www.state.gov/secretary/rm/2011/10/175216.htm 
The future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the center of the action.

October 11, 2011

As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point. Over the last 10 years, we have allocated immense resources to those two theaters. In the next 10 years, we need to be smart and systematic about where we invest time and energy, so that we put ourselves in the best position to sustain our leadership, secure our interests, and advance our values. One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment -- diplomatic, economic, strategic, and otherwise -- in the Asia-Pacific region.

The Asia-Pacific has become a key driver of global politics. Stretching from the Indian subcontinent to the western shores of the Americas, the region spans two oceans -- the Pacific and the Indian -- that are increasingly linked by shipping and strategy. It boasts almost half the world's population. It includes many of the key engines of the global economy, as well as the largest emitters of greenhouse gases. It is home to several of our key allies and important emerging powers like China, India, and Indonesia.

At a time when the region is building a more mature security and economic architecture to promote stability and prosperity, U.S. commitment there is essential. It will help build that architecture and pay dividends for continued American leadership well into this century, just as our post-World War II commitment to building a comprehensive and lasting transatlantic network of institutions and relationships has paid off many times over -- and continues to do so. The time has come for the United States to make similar investments as a Pacific power, a strategic course set by President Barack Obama from the outset of his administration and one that is already yielding benefits.

With Iraq and Afghanistan still in transition and serious economic challenges in our own country, there are those on the American political scene who are calling for us not to reposition, but to come home. They seek a downsizing of our foreign engagement in favor of our pressing domestic priorities. These impulses are understandable, but they are misguided. Those who say that we can no longer afford to engage with the world have it exactly backward -- we cannot afford not to. From opening new markets for American businesses to curbing nuclear proliferation to keeping the sea lanes free for commerce and navigation, our work abroad holds the key to our prosperity and security at home. For more than six decades, the United States has resisted the gravitational pull of these "come home" debates and the implicit zero-sum logic of these arguments. We must do so again.

Beyond our borders, people are also wondering about America's intentions -- our willingness to remain engaged and to lead. In Asia, they ask whether we are really there to stay, whether we are likely to be distracted again by events elsewhere, whether we can make -- and keep -- credible economic and strategic commitments, and whether we can back those commitments with action. The answer is: We can, and we will.

Harnessing Asia's growth and dynamism is central to American economic and strategic interests and a key priority for President Obama. Open markets in Asia provide the United States with unprecedented opportunities for investment, trade, and access to cutting-edge technology. Our economic recovery at home will depend on exports and the ability of American firms to tap into the vast and growing consumer base of Asia. Strategically, maintaining peace and security across the Asia-Pacific is increasingly crucial to global progress, whether through defending freedom of navigation in the South China Sea, countering the proliferation efforts of North Korea, or ensuring transparency in the military activities of the region's key players.

Just as Asia is critical to America's future, an engaged America is vital to Asia's future. The region is eager for our leadership and our business -- perhaps more so than at any time in modern history. We are the only power with a network of strong alliances in the region, no territorial ambitions, and a long record of providing for the common good. Along with our allies, we have underwritten regional security for decades -- patrolling Asia's sea lanes and preserving stability -- and that in turn has helped create the conditions for growth. We have helped integrate billions of people across the region into the global economy by spurring economic productivity, social empowerment, and greater people-to-people links. We are a major trade and investment partner, a source of innovation that benefits workers and businesses on both sides of the Pacific, a host to 350,000 Asian students every year, a champion of open markets, and an advocate for universal human rights.

President Obama has led a multifaceted and persistent effort to embrace fully our irreplaceable role in the Pacific, spanning the entire U.S. government. It has often been a quiet effort. A lot of our work has not been on the front pages, both because of its nature -- long-term investment is less exciting than immediate crises -- and because of competing headlines in other parts of the world.

As secretary of state, I broke with tradition and embarked on my first official overseas trip to Asia. In my seven trips since, I have had the privilege to see firsthand the rapid transformations taking place in the region, underscoring how much the future of the United States is intimately intertwined with the future of the Asia-Pacific. A strategic turn to the region fits logically into our overall global effort to secure and sustain America's global leadership. The success of this turn requires maintaining and advancing a bipartisan consensus on the importance of the Asia-Pacific to our national interests; we seek to build upon a strong tradition of engagement by presidents and secretaries of state of both parties across many decades. It also requires smart execution of a coherent regional strategy that accounts for the global implications of our choices.

WHAT DOES THAT regional strategy look like? For starters, it calls for a sustained commitment to what I have called "forward-deployed" diplomacy. That means continuing to dispatch the full range of our diplomatic assets -- including our highest-ranking officials, our development experts, our interagency teams, and our permanent assets -- to every country and corner of the Asia-Pacific region. Our strategy will have to keep accounting for and adapting to the rapid and dramatic shifts playing out across Asia. With this in mind, our work will proceed along six key lines of action: strengthening bilateral security alliances; deepening our working relationships with emerging powers, including with China; engaging with regional multilateral institutions; expanding trade and investment; forging a broad-based military presence; and advancing democracy and human rights.

By virtue of our unique geography, the United States is both an Atlantic and a Pacific power. We are proud of our European partnerships and all that they deliver. Our challenge now is to build a web of partnerships and institutions across the Pacific that is as durable and as consistent with American interests and values as the web we have built across the Atlantic. That is the touchstone of our efforts in all these areas.

Our treaty alliances with Japan, South Korea, Australia, the Philippines, and Thailand are the fulcrum for our strategic turn to the Asia-Pacific. They have underwritten regional peace and security for more than half a century, shaping the environment for the region's remarkable economic ascent. They leverage our regional presence and enhance our regional leadership at a time of evolving security challenges.

As successful as these alliances have been, we can't afford simply to sustain them -- we need to update them for a changing world. In this effort, the Obama administration is guided by three core principles. First, we have to maintain political consensus on the core objectives of our alliances. Second, we have to ensure that our alliances are nimble and adaptive so that they can successfully address new challenges and seize new opportunities. Third, we have to guarantee that the defense capabilities and communications infrastructure of our alliances are operationally and materially capable of deterring provocation from the full spectrum of state and nonstate actors.

The alliance with Japan, the cornerstone of peace and stability in the region, demonstrates how the Obama administration is giving these principles life. We share a common vision of a stable regional order with clear rules of the road -- from freedom of navigation to open markets and fair competition. We have agreed to a new arrangement, including a contribution from the Japanese government of more than $5 billion, to ensure the continued enduring presence of American forces in Japan, while expanding joint intelligence, surveillance, and reconnaissance activities to deter and react quickly to regional security challenges, as well as information sharing to address cyberthreats. We have concluded an Open Skies agreement that will enhance access for businesses and people-to-people ties, launched a strategic dialogue on the Asia-Pacific, and been working hand in hand as the two largest donor countries in Afghanistan.

Similarly, our alliance with South Korea has become stronger and more operationally integrated, and we continue to develop our combined capabilities to deter and respond to North Korean provocations. We have agreed on a plan to ensure successful transition of operational control during wartime and anticipate successful passage of the Korea-U.S. Free Trade Agreement. And our alliance has gone global, through our work together in the G-20 and the Nuclear Security Summit and through our common efforts in Haiti and Afghanistan.

We are also expanding our alliance with Australia from a Pacific partnership to an Indo-Pacific one, and indeed a global partnership. From cybersecurity to Afghanistan to the Arab Awakening to strengthening regional architecture in the Asia-Pacific, Australia's counsel and commitment have been indispensable. And in Southeast Asia, we are renewing and strengthening our alliances with the Philippines and Thailand, increasing, for example, the number of ship visits to the Philippines and working to ensure the successful training of Filipino counterterrorism forces through our Joint Special Operations Task Force in Mindanao. In Thailand -- our oldest treaty partner in Asia -- we are working to establish a hub of regional humanitarian and disaster relief efforts in the region.

AS WE UPDATE our alliances for new demands, we are also building new partnerships to help solve shared problems. Our outreach to China, India, Indonesia, Singapore, New Zealand, Malaysia, Mongolia, Vietnam, Brunei, and the Pacific Island countries is all part of a broader effort to ensure a more comprehensive approach to American strategy and engagement in the region. We are asking these emerging partners to join us in shaping and participating in a rules-based regional and global order.

One of the most prominent of these emerging partners is, of course, China. Like so many other countries before it, China has prospered as part of the open and rules-based system that the United States helped to build and works to sustain. And today, China represents one of the most challenging and consequential bilateral relationships the United States has ever had to manage. This calls for careful, steady, dynamic stewardship, an approach to China on our part that is grounded in reality, focused on results, and true to our principles and interests.

We all know that fears and misperceptions linger on both sides of the Pacific. Some in our country see China's progress as a threat to the United States; some in China worry that America seeks to constrain China's growth. We reject both those views. The fact is that a thriving America is good for China and a thriving China is good for America. We both have much more to gain from cooperation than from conflict. But you cannot build a relationship on aspirations alone. It is up to both of us to more consistently translate positive words into effective cooperation -- and, crucially, to meet our respective global responsibilities and obligations. These are the things that will determine whether our relationship delivers on its potential in the years to come. We also have to be honest about our differences. We will address them firmly and decisively as we pursue the urgent work we have to do together. And we have to avoid unrealistic expectations.

Over the last two-and-a-half years, one of my top priorities has been to identify and expand areas of common interest, to work with China to build mutual trust, and to encourage China's active efforts in global problem-solving. This is why Treasury Secretary Timothy Geithner and I launched the Strategic and Economic Dialogue, the most intensive and expansive talks ever between our governments, bringing together dozens of agencies from both sides to discuss our most pressing bilateral issues, from security to energy to human rights.

We are also working to increase transparency and reduce the risk of miscalculation or miscues between our militaries. The United States and the international community have watched China's efforts to modernize and expand its military, and we have sought clarity as to its intentions. Both sides would benefit from sustained and substantive military-to-military engagement that increases transparency. So we look to Beijing to overcome its reluctance at times and join us in forging a durable military-to-military dialogue. And we need to work together to strengthen the Strategic Security Dialogue, which brings together military and civilian leaders to discuss sensitive issues like maritime security and cybersecurity.

As we build trust together, we are committed to working with China to address critical regional and global security issues. This is why I have met so frequently -- often in informal settings -- with my Chinese counterparts, State Councilor Dai Bingguo and Foreign Minister Yang Jiechi, for candid discussions about important challenges like North Korea, Afghanistan, Pakistan, Iran, and developments in the South China Sea.

On the economic front, the United States and China need to work together to ensure strong, sustained, and balanced future global growth. In the aftermath of the global financial crisis, the United States and China worked effectively through the G-20 to help pull the global economy back from the brink. We have to build on that cooperation. U.S. firms want fair opportunities to export to China's growing markets, which can be important sources of jobs here in the United States, as well as assurances that the $50 billion of American capital invested in China will create a strong foundation for new market and investment opportunities that will support global competitiveness. At the same time, Chinese firms want to be able to buy more high-tech products from the United States, make more investments here, and be accorded the same terms of access that market economies enjoy. We can work together on these objectives, but China still needs to take important steps toward reform. In particular, we are working with China to end unfair discrimination against U.S. and other foreign companies or against their innovative technologies, remove preferences for domestic firms, and end measures that disadvantage or appropriate foreign intellectual property. And we look to China to take steps to allow its currency to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners. Such reforms, we believe, would not only benefit both our countries (indeed, they would support the goals of China's own five-year plan, which calls for more domestic-led growth), but also contribute to global economic balance, predictability, and broader prosperity.

Of course, we have made very clear, publicly and privately, our serious concerns about human rights. And when we see reports of public-interest lawyers, writers, artists, and others who are detained or disappeared, the United States speaks up, both publicly and privately, with our concerns about human rights. We make the case to our Chinese colleagues that a deep respect for international law and a more open political system would provide China with a foundation for far greater stability and growth -- and increase the confidence of China's partners. Without them, China is placing unnecessary limitations on its own development.

At the end of the day, there is no handbook for the evolving U.S.-China relationship. But the stakes are much too high for us to fail. As we proceed, we will continue to embed our relationship with China in a broader regional framework of security alliances, economic networks, and social connections.

Among key emerging powers with which we will work closely are India and Indonesia, two of the most dynamic and significant democratic powers of Asia, and both countries with which the Obama administration has pursued broader, deeper, and more purposeful relationships. The stretch of sea from the Indian Ocean through the Strait of Malacca to the Pacific contains the world's most vibrant trade and energy routes. Together, India and Indonesia already account for almost a quarter of the world's population. They are key drivers of the global economy, important partners for the United States, and increasingly central contributors to peace and security in the region. And their importance is likely to grow in the years ahead.

President Obama told the Indian parliament last year that the relationship between India and America will be one of the defining partnerships of the 21st century, rooted in common values and interests. There are still obstacles to overcome and questions to answer on both sides, but the United States is making a strategic bet on India's future -- that India's greater role on the world stage will enhance peace and security, that opening India's markets to the world will pave the way to greater regional and global prosperity, that Indian advances in science and technology will improve lives and advance human knowledge everywhere, and that India's vibrant, pluralistic democracy will produce measurable results and improvements for its citizens and inspire others to follow a similar path of openness and tolerance. So the Obama administration has expanded our bilateral partnership; actively supported India's Look East efforts, including through a new trilateral dialogue with India and Japan; and outlined a new vision for a more economically integrated and politically stable South and Central Asia, with India as a linchpin.

We are also forging a new partnership with Indonesia, the world's third-largest democracy, the world's most populous Muslim nation, and a member of the G-20. We have resumed joint training of Indonesian special forces units and signed a number of agreements on health, educational exchanges, science and technology, and defense. And this year, at the invitation of the Indonesian government, President Obama will inaugurate American participation in the East Asia Summit. But there is still some distance to travel -- we have to work together to overcome bureaucratic impediments, lingering historical suspicions, and some gaps in understanding each other's perspectives and interests.

EVEN AS WE strengthen these bilateral relationships, we have emphasized the importance of multilateral cooperation, for we believe that addressing complex transnational challenges of the sort now faced by Asia requires a set of institutions capable of mustering collective action. And a more robust and coherent regional architecture in Asia would reinforce the system of rules and responsibilities, from protecting intellectual property to ensuring freedom of navigation, that form the basis of an effective international order. In multilateral settings, responsible behavior is rewarded with legitimacy and respect, and we can work together to hold accountable those who undermine peace, stability, and prosperity.

So the United States has moved to fully engage the region's multilateral institutions, such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC) forum, mindful that our work with regional institutions supplements and does not supplant our bilateral ties. There is a demand from the region that America play an active role in the agenda-setting of these institutions -- and it is in our interests as well that they be effective and responsive.

That is why President Obama will participate in the East Asia Summit for the first time in November. To pave the way, the United States has opened a new U.S. Mission to ASEAN in Jakarta and signed the Treaty of Amity and Cooperation with ASEAN. Our focus on developing a more results-oriented agenda has been instrumental in efforts to address disputes in the South China Sea. In 2010, at the ASEAN Regional Forum in Hanoi, the United States helped shape a regionwide effort to protect unfettered access to and passage through the South China Sea, and to uphold the key international rules for defining territorial claims in the South China Sea's waters. Given that half the world's merchant tonnage flows through this body of water, this was a consequential undertaking. And over the past year, we have made strides in protecting our vital interests in stability and freedom of navigation and have paved the way for sustained multilateral diplomacy among the many parties with claims in the South China Sea, seeking to ensure disputes are settled peacefully and in accordance with established principles of international law.

We have also worked to strengthen APEC as a serious leaders-level institution focused on advancing economic integration and trade linkages across the Pacific. After last year's bold call by the group for a free trade area of the Asia-Pacific, President Obama will host the 2011 APEC Leaders' Meeting in Hawaii this November. We are committed to cementing APEC as the Asia-Pacific's premier regional economic institution, setting the economic agenda in a way that brings together advanced and emerging economies to promote open trade and investment, as well as to build capacity and enhance regulatory regimes. APEC and its work help expand U.S. exports and create and support high-quality jobs in the United States, while fostering growth throughout the region. APEC also provides a key vehicle to drive a broad agenda to unlock the economic growth potential that women represent. In this regard, the United States is committed to working with our partners on ambitious steps to accelerate the arrival of the Participation Age, where every individual, regardless of gender or other characteristics, is a contributing and valued member of the global marketplace.

In addition to our commitment to these broader multilateral institutions, we have worked hard to create and launch a number of "minilateral" meetings, small groupings of interested states to tackle specific challenges, such as the Lower Mekong Initiative we launched to support education, health, and environmental programs in Cambodia, Laos, Thailand, and Vietnam, and the Pacific Islands Forum, where we are working to support its members as they confront challenges from climate change to overfishing to freedom of navigation. We are also starting to pursue new trilateral opportunities with countries as diverse as Mongolia, Indonesia, Japan, Kazakhstan, and South Korea. And we are setting our sights as well on enhancing coordination and engagement among the three giants of the Asia-Pacific: China, India, and the United States.

In all these different ways, we are seeking to shape and participate in a responsive, flexible, and effective regional architecture -- and ensure it connects to a broader global architecture that not only protects international stability and commerce but also advances our values.

OUR EMPHASIS ON the economic work of APEC is in keeping with our broader commitment to elevate economic statecraft as a pillar of American foreign policy. Increasingly, economic progress depends on strong diplomatic ties, and diplomatic progress depends on strong economic ties. And naturally, a focus on promoting American prosperity means a greater focus on trade and economic openness in the Asia-Pacific. The region already generates more than half of global output and nearly half of global trade. As we strive to meet President Obama's goal of doubling exports by 2015, we are looking for opportunities to do even more business in Asia. Last year, American exports to the Pacific Rim totaled $320 billion, supporting 850,000 American jobs. So there is much that favors us as we think through this repositioning.

When I talk to my Asian counterparts, one theme consistently stands out: They still want America to be an engaged and creative partner in the region's flourishing trade and financial interactions. And as I talk with business leaders across our own nation, I hear how important it is for the United States to expand our exports and our investment opportunities in Asia's dynamic markets.

Last March in APEC meetings in Washington, and again in Hong Kong in July, I laid out four attributes that I believe characterize healthy economic competition: open, free, transparent, and fair. Through our engagement in the Asia-Pacific, we are helping to give shape to these principles and showing the world their value.

We are pursuing new cutting-edge trade deals that raise the standards for fair competition even as they open new markets. For instance, the Korea-U.S. Free Trade Agreement will eliminate tariffs on 95 percent of U.S. consumer and industrial exports within five years and support an estimated 70,000 American jobs. Its tariff reductions alone could increase exports of American goods by more than $10 billion and help South Korea's economy grow by 6 percent. It will level the playing field for U.S. auto companies and workers. So, whether you are an American manufacturer of machinery or a South Korean chemicals exporter, this deal lowers the barriers that keep you from reaching new customers.

We are also making progress on the Trans-Pacific Partnership (TPP), which will bring together economies from across the Pacific -- developed and developing alike -- into a single trading community. Our goal is to create not just more growth, but better growth. We believe trade agreements need to include strong protections for workers, the environment, intellectual property, and innovation. They should also promote the free flow of information technology and the spread of green technology, as well as the coherence of our regulatory system and the efficiency of supply chains. Ultimately, our progress will be measured by the quality of people's lives -- whether men and women can work in dignity, earn a decent wage, raise healthy families, educate their children, and take hold of the opportunities to improve their own and the next generation's fortunes. Our hope is that a TPP agreement with high standards can serve as a benchmark for future agreements -- and grow to serve as a platform for broader regional interaction and eventually a free trade area of the Asia-Pacific.

Achieving balance in our trade relationships requires a two-way commitment. That's the nature of balance -- it can't be unilaterally imposed. So we are working through APEC, the G-20, and our bilateral relationships to advocate for more open markets, fewer restrictions on exports, more transparency, and an overall commitment to fairness. American businesses and workers need to have confidence that they are operating on a level playing field, with predictable rules on everything from intellectual property to indigenous innovation.

ASIA'S REMARKABLE ECONOMIC growth over the past decade and its potential for continued growth in the future depend on the security and stability that has long been guaranteed by the U.S. military, including more than 50,000 American servicemen and servicewomen serving in Japan and South Korea. The challenges of today's rapidly changing region -- from territorial and maritime disputes to new threats to freedom of navigation to the heightened impact of natural disasters -- require that the United States pursue a more geographically distributed, operationally resilient, and politically sustainable force posture.

We are modernizing our basing arrangements with traditional allies in Northeast Asia -- and our commitment on this is rock solid -- while enhancing our presence in Southeast Asia and into the Indian Ocean. For example, the United States will be deploying littoral combat ships to Singapore, and we are examining other ways to increase opportunities for our two militaries to train and operate together. And the United States and Australia agreed this year to explore a greater American military presence in Australia to enhance opportunities for more joint training and exercises. We are also looking at how we can increase our operational access in Southeast Asia and the Indian Ocean region and deepen our contacts with allies and partners.

How we translate the growing connection between the Indian and Pacific oceans into an operational concept is a question that we need to answer if we are to adapt to new challenges in the region. Against this backdrop, a more broadly distributed military presence across the region will provide vital advantages. The United States will be better positioned to support humanitarian missions; equally important, working with more allies and partners will provide a more robust bulwark against threats or efforts to undermine regional peace and stability.

But even more than our military might or the size of our economy, our most potent asset as a nation is the power of our values -- in particular, our steadfast support for democracy and human rights. This speaks to our deepest national character and is at the heart of our foreign policy, including our strategic turn to the Asia-Pacific region.

As we deepen our engagement with partners with whom we disagree on these issues, we will continue to urge them to embrace reforms that would improve governance, protect human rights, and advance political freedoms. We have made it clear, for example, to Vietnam that our ambition to develop a strategic partnership requires that it take steps to further protect human rights and advance political freedoms. Or consider Burma, where we are determined to seek accountability for human rights violations. We are closely following developments in Nay Pyi Taw and the increasing interactions between Aung San Suu Kyi and the government leadership. We have underscored to the government that it must release political prisoners, advance political freedoms and human rights, and break from the policies of the past. As for North Korea, the regime in Pyongyang has shown persistent disregard for the rights of its people, and we continue to speak out forcefully against the threats it poses to the region and beyond.

We cannot and do not aspire to impose our system on other countries, but we do believe that certain values are universal -- that people in every nation in the world, including in Asia, cherish them -- and that they are intrinsic to stable, peaceful, and prosperous countries. Ultimately, it is up to the people of Asia to pursue their own rights and aspirations, just as we have seen people do all over the world.

IN THE LAST decade, our foreign policy has transitioned from dealing with the post-Cold War peace dividend to demanding commitments in Iraq and Afghanistan. As those wars wind down, we will need to accelerate efforts to pivot to new global realities.

We know that these new realities require us to innovate, to compete, and to lead in new ways. Rather than pull back from the world, we need to press forward and renew our leadership. In a time of scarce resources, there's no question that we need to invest them wisely where they will yield the biggest returns, which is why the Asia-Pacific represents such a real 21st-century opportunity for us.

Other regions remain vitally important, of course. Europe, home to most of our traditional allies, is still a partner of first resort, working alongside the United States on nearly every urgent global challenge, and we are investing in updating the structures of our alliance. The people of the Middle East and North Africa are charting a new path that is already having profound global consequences, and the United States is committed to active and sustained partnerships as the region transforms. Africa holds enormous untapped potential for economic and political development in the years ahead. And our neighbors in the Western Hemisphere are not just our biggest export partners; they are also playing a growing role in global political and economic affairs. Each of these regions demands American engagement and leadership.

And we are prepared to lead. Now, I'm well aware that there are those who question our staying power around the world. We've heard this talk before. At the end of the Vietnam War, there was a thriving industry of global commentators promoting the idea that America was in retreat, and it is a theme that repeats itself every few decades. But whenever the United States has experienced setbacks, we've overcome them through reinvention and innovation. Our capacity to come back stronger is unmatched in modern history. It flows from our model of free democracy and free enterprise, a model that remains the most powerful source of prosperity and progress known to humankind. I hear everywhere I go that the world still looks to the United States for leadership. Our military is by far the strongest, and our economy is by far the largest in the world. Our workers are the most productive. Our universities are renowned the world over. So there should be no doubt that America has the capacity to secure and sustain our global leadership in this century as we did in the last.

As we move forward to set the stage for engagement in the Asia-Pacific over the next 60 years, we are mindful of the bipartisan legacy that has shaped our engagement for the past 60. And we are focused on the steps we have to take at home -- increasing our savings, reforming our financial systems, relying less on borrowing, overcoming partisan division -- to secure and sustain our leadership abroad.

This kind of pivot is not easy, but we have paved the way for it over the past two-and-a-half years, and we are committed to seeing it through as among the most important diplomatic efforts of our time.