Mobilizing Resources, Building Coalitions: Local Power in Indonesia

Mobilizing Resources, Building Coalitions: Local Power in Indonesia, by Ryan Tans
Honolulu: East-West Center, 2012
Policy Studies, No. 64
ISBN: 978-0-86638-220-5
http://www.eastwestcenter.org/publications/mobilizing-resources-building-coalitions-local-power-in-indonesia

What have been the local political consequences of Indonesia's decentralization and electoral reforms? Some recent scholarship has emphasized continuity with Suharto's New Order, arguing that under the new rules, old elites have used money and intimidation to capture elected office. Studies detail the widespread practice of "money politics," in which candidates exchange patronage for support from voters and parties. Yet significant variation characterizes Indonesia's local politics, which suggests the need for an approach that differentiates contrasting power arrangements.

This study of three districts in North Sumatra province compares local politicians according to their institutional resource bases and coalitional strategies. Even if all practice money politics, they form different coalition types that depend on diverse institutions for political resources. The three ideal types of coalitions are political mafias, party machines, and mobilizing coalitions. Political mafias have a resource base limited to local state institutions and businesses; party machines bridge local and supra-local institutions; and mobilizing coalitions incorporate social organizations and groups of voters. Due to contrasting resource bases, the coalitions have different strategic option "menus," and they may experiment with various political tactics.

The framework developed here plausibly applies in other Indonesian districts to the extent that similar resource bases--namely local state institutions, party networks, and strong social and business organizations--are available to elites in other places.

About the Author: Ryan Tans is a doctoral student in political science at Emory University. Previously, he received a Master of Arts in Southeast Asian Studies from the National University of Singapore.

Debate: Progressives & Conservatives on Entitlements

Progressives

Sorry, Erskine, America Rejected Simpson-Bowles. By John Nichols
The Nation, November 29, 2012 - 8:46 AM ET
http://www.thenation.com/blog/171513/sorry-erskine-america-rejected-simpson-bowles

 

Erskine Bowles, who is sort of a Democrat, met Wednesday with House Speaker John Boehner to help Republicans promote proposals to cut entitlements, as part of the “fiscal cliff” negotiations.

This is the right place for Bowles, who has long maintained a mutual-admiration society with House Budget Committee chairman Paul Ryan, R-Wisconsin. The former Clinton White House chief of staff has always been in the corporate conservative camp when it comes to debates about preserving Social Security, Medicare and Medicaid.

It’s good that he and Boehner have found one another. Let the Republicans advocate for the cuts proposed by Bowles and his former Wyoming Senator Alan Simpson, his Republican co-conductor on the train wreck that produced the so-called “Simpson-Bowles” deficit reduction plan.

After all, despite the media hype, Simpson-Bowles has always been a non-starter with the American people.

Last summer, at the Democratic and Republican national conventions, so many nice things were said about the recommendations of the National Commission on Fiscal Responsibility and Reform that had been chaired by former Wyoming Senator Alan Simpson, a Republican, and Bowles that it was hard to understand why they were implemented. Paul Ryan went so far as to condemn President Obama for “doing nothing” to implement the Simpson-Bowles plan—only to have it noted that Ryan rejected the recommendations of the commission.

But, while a lot of politicians in both parties say a lot of nice things about the austerity program proposed by Simpson-Bowles, there is a reason why there was no rush before the election to embrace the blueprint for cutting Social Security, Medicare and Medicaid while imposing substantial new tax burdens on the middle class.

It’s a loser.

Before the November 6 election, Simpson and Bowles went out of their way to highlight the candidacies of politicians who supported their approach—New Hampshire Republican Congressman Charlie Bass, Rhode Island Republican US House candidate Brendan Doherty, Nebraska Democratic US Senate candidate Bob Kerrey. Bipartisan endorsements were made, statements were issued, headlines were grabbed and…

The Simpson-Bowles candidates all lost.

Americans are smart enough to recognize that Simpson-Bowles would stall growth. And they share the entirely rational view of economists like Paul Krugman.

“Simpson-Bowles is terrible,” argues Krugman, a Nobel Prize winner for his economic scholarship. “It mucks around with taxes, but is obsessed with lowering marginal rates despite a complete absence of evidence that this is important. It offers nothing on Medicare that isn’t already in the Affordable Care Act. And it raises the Social Security retirement age because life expectancy has risen—completely ignoring the fact that life expectancy has only gone up for the well-off and well-educated, while stagnating or even declining among the people who need the program most.”

On election night, Peter D. Hart Research Associates surveyed Americans with regard to key proposals from the commission. The reaction was uniformly negative.

By a 73-18 margin, those polled said that protecting Medicare and Social Security from benefit cuts is more important than bringing down the deficit.
By a 62-33 margin, the voters who were surveyed said that making the wealthy start paying their fair share of taxes is more important than reducing tax rates across the board (62 percent to 33 percent).

But that’s just the beginning of an outline of opposition to the Simpson-Bowles approach.

To wit:
* 84 percent of those surveyed oppose reducing Social Security benefits;
* 68 percent oppose raising the Medicare eligibility age;
* 69 percent oppose reductions in Medicaid benefits;
* 64 percent support addressing the deficit by increasing taxes on the rich—with more than half of those surveyed favoring the end of the Bush tax cuts for those making more than $250,000.

Americans want a strong government that responds to human needs:
• 88 percent support allowing Medicare to negotiate with drug companies to lower costs;
• 70 percent favor continuing extended federal unemployment insurance;
• 64 percent support providing federal government funding to local governments;
• 72 percent say that corporations and wealthy individuals have too much influence on the political system.

AFL-CIO president Richard Trumka is right. On November 6, “The American people sent a clear message.”

With their votes, with their responses to exit polls, with every signal they could send, the voters refused to buy the “fix” that Erskine Bowles is selling.

---
Conservatives

The Crisis of American Self-Government. By Sohrab Ahmari
Harvey Mansfield, Harvard's 'pet dissenter,' on the 2012 election, the real cost of entitlements, and why he sees reason for hope.
The Wall Street Journal, November 30, 2012, on page A13
http://online.wsj.com/article/SB10001424127887323751104578149292503121124.html

Cambridge, Mass.

'We have now an American political party and a European one. Not all Americans who vote for the European party want to become Europeans. But it doesn't matter because that's what they're voting for. They're voting for dependency, for lack of ambition, and for insolvency."

Few have thought as hard, or as much, about how democracies can preserve individual liberty and national virtue as the eminent political scientist Harvey Mansfield. When it comes to assessing the state of the American experiment in self-government today, his diagnosis is grim, and he has never been one to mince words.

Mr. Mansfield sat for an interview on Thursday at the Harvard Faculty Club. This year marks his 50th as a teacher at the university. It isn't easy being the most visible conservative intellectual at an institution that has drifted ever further to the left for a half-century. "I live in a one-party state and very much more so a one-party university," says the 80-year-old professor with a sigh. "It's disgusting. I get along very well because everybody thinks the fact that I'm here means the things I say about Harvard can't be true. I am a kind of pet—a pet dissenter."

Partly his isolation on campus has to do with the nature of Mr. Mansfield's scholarship. At a time when his colleagues are obsessed with trendy quantitative methods and even trendier "identity studies," Mr. Mansfield holds steadfast to an older tradition that looks to the Western canon as the best guide to human affairs. For him, Greek philosophy and the works of thinkers such as Machiavelli and Tocqueville aren't historical curiosities; Mr. Mansfield sees writers grappling heroically with political and moral problems that are timeless and universally relevant.

"All modern social science deals with perceptions," he says, "but that is a misnomer because it neglects to distinguish between perceptions and misperceptions."

Consider voting. "You can count voters and votes," Mr. Mansfield says. "And political science does that a lot, and that's very useful because votes are in fact countable. One counts for one. But if we get serious about what it means to vote, we immediately go to the notion of an informed voter. And if you get serious about that, you go all the way to voting as a wise choice. That would be a true voter. The others are all lesser voters, or even not voting at all. They're just indicating a belief, or a whim, but not making a wise choice. That's probably because they're not wise."

By that measure, the electorate that granted Barack Obama a second term was unwise—the president achieved "a sneaky victory," Mr. Mansfield says. "The Democrats said nothing about their plans for the future. All they did was attack the other side. Obama's campaign consisted entirely of saying 'I'm on your side' to the American people, to those in the middle. No matter what comes next, this silence about the future is ominous."

At one level Mr. Obama's silence reveals the exhaustion of the progressive agenda, of which his presidency is the spiritual culmination, Mr. Mansfield says. That movement "depends on the idea that things will get better and better and progress will be made in the actualization of equality." It is telling, then, that during the 2012 campaign progressives were "confined to defending what they've already achieved or making small improvements—student loans, free condoms. The Democrats are the party of free condoms. That's typical for them."

But Democrats' refusal to address the future in positive terms, he adds, also reveals the party's intent to create "an entitlement or welfare state that takes issues off the bargaining table and renders them above politics." The end goal, Mr. Mansfield worries, is to sideline the American constitutional tradition in favor of "a practical constitution consisting of progressive measures the left has passed that cannot be revoked. And that is what would be fixed in our political system—not the Constitution."

It is a project begun at the turn of the previous century by "an alliance of experts and victims," Mr. Mansfield says. "Social scientists and political scientists were very much involved in the foundation of the progressive movement. What those experts did was find ways to improve the well-being of the poor, the incompetent, all those who have the right to vote but can't quite govern their own lives. And still to this day we see in the Democratic Party the alliance between Ph.D.s and victims."

The Obama campaign's dissection of the public into subsets of race, sex and class resentments is a case in point. "Victims come in different kinds," says Mr. Mansfield, "so they're treated differently. You push different buttons to get them to react."

The threat to self-government is clear. "The American founders wanted people to live under the Constitution," Mr. Mansfield says. "But the progressives want the Constitution to live under the American people."

Harvey Mansfield Jr. was born in 1932 in New Haven, Conn. His parents were staunch New Dealers, and while an undergraduate at Harvard Mr. Mansfield counted himself a liberal Democrat.

Next came a Fulbright year in London and a two-year stint in the Army. "I was never in combat," he says. "In fact I ended up in France for a year, pulling what in the Army they call 'good duty' at Orléans, which is in easy reach of Paris. So even though I was an enlisted man I lived the life of Riley."

A return to the academy and a Harvard doctorate were perhaps inevitable but Mr. Mansfield also underwent a decisive political transformation. "I broke with the liberals over the communist issue," he says. "My initiating forces were anticommunism and my perception that Democrats were soft on communism, to use a rather unpleasant phrase from the time—unpleasant but true." He also began to question the progressive project at home: "I saw the frailties of big government exposed, one after another. Everything they tried didn't work and in fact made us worse off by making us dependent on an engine that was getting weaker and weaker."

His first teaching post came in 1960 at the University of California, Berkeley. In California, he came to know the German-American philosopher Leo Strauss, who at the time was working at Stanford University. "Strauss was a factor in my becoming conservative," he says. "That was a whole change of outlook rather than a mere question of party allegiance."

Strauss had studied ancient Greek texts, which emphasized among other things that "within democracy there is good and bad, free and slave," and that "democracy can produce a slavish mind and a slavish country." The political task before every generation, Mr. Mansfield understood, is to "defend the good kind of democracy. And to do that you have to be aware of human differences and inequalities, especially intellectual inequalities."

American elites today prefer to dismiss the "unchangeable, undemocratic facts" about human inequality, he says. Progressives go further: "They think that the main use of liberty is to create more equality. They don't see that there is such a thing as too much equality. They don't see limits to democratic equalizing"—how, say, wealth redistribution can not only bankrupt the public fisc but corrupt the national soul.

"Americans take inequality for granted," Mr. Mansfield says. The American people frequently "protect inequalities by voting not to destroy or deprive the rich of their riches. They don't vote for all measures of equalization, for which they get condemned as suffering from false consciousness. But that's true consciousness because the American people want to make democracy work, and so do conservatives. Liberals on the other hand just want to make democracy more democratic."

Equality untempered by liberty invites disaster, he says. "There is a difference between making a form of government more like itself," Mr. Mansfield says, "and making it viable." Pushed to its extremes, democracy can lead to "mass rule by an ignorant, or uncaring, government."

Consider the entitlements crisis. "Entitlements are an attack on the common good," Mr. Mansfield says. "Entitlements say that 'I get mine no matter what the state of the country is when I get it.' So it's like a bond or an annuity. What the entitlement does is give the government version of a private security, which is better because the government provides a better guarantee than a private company can."

That is, until the government goes broke, as has occurred across Europe.

"The Republicans should want to recover the notion of the common good," Mr. Mansfield says. "One way to do that is to show that we can't afford the entitlements as they are—that we've always underestimated the cost. 'Cost' is just an economic word for the common good. And if Republicans can get entitlements to be understood no longer as irrevocable but as open to negotiation and to political dispute and to reform, then I think they can accomplish something."

The welfare state's size isn't what makes it so stifling, Mr. Mansfield says. "What makes government dangerous to the common good is guaranteed entitlements, so that you can never question what expenses have been or will be incurred." Less important at this moment are spending and tax rates. "I don't think you can detect the presence or absence of good government," he says, "simply by looking at the percentage of GDP that government uses up. That's not an irrelevant figure but it's not decisive. The decisive thing is whether it's possible to reform, whether reform is a political possibility."

Then there is the matter of conservative political practice. "Conservatives should be the party of judgment, not just of principles," he says. "Of course there are conservative principles—free markets, family values, a strong national defense—but those principles must be defended with the use of good judgment. Conservatives need to be intelligent, and they shouldn't use their principles as substitutes for intelligence. Principles need to be there so judgment can be distinguished from opportunism. But just because you give ground on principle doesn't mean you're an opportunist."

Nor should flexibility mean abandoning major components of the conservative agenda—including cultural values—in response to a momentary electoral defeat. "Democrats have their cultural argument, which is the attack on the rich and the uncaring," Mr. Mansfield says. "So Republicans need their cultural arguments to oppose the Democrats', to say that goodness or justice in our country is not merely the transfer of resources to the poor and vulnerable. We have to take measures to teach the poor and vulnerable to become a little more independent and to prize independence, and not just live for a government check. That means self-government within each self, and where are you going to get that except with morality, responsibility and religion?"

So is it still possible to pull back from the brink of America's Europeanization? Mr. Mansfield is optimistic. "The material for recovery is there," he says. "Ambition, for one thing. I teach at a university where all the students are ambitious. They all want to do something with their lives." That is in contrast to students he has met in Europe, where "it was depressing to see young people with small ambitions, very cultivated and intelligent people so stunted." He adds with a smile: "Our other main resource is the Constitution."

Mr. Ahmari is an assistant books editor at the Journal.

The Coming World Disorder - The Decline of American Power and the Westphalian World Order

World Order in the Age of Obama. By Charles Hill
November 30, 2012 | 2:30 am
http://www.advancingafreesociety.org/the-caravan/world-order-in-the-age-of-obama

Excerpts:

[...]

What ominous factors caused Kepler to shiver? Disturbances, uphealvals and conflicts. Merchants moaned about untrustworthy bankers. Diplomats strutted even as they wavered. The masses sullenly made deals they needed to survive when the gathering storm broke. Varieties of religious fervor caused many to prepare to be slain rather than submit to rule by others.

The 1648 settlement at Westphalia, though setbacks were many and vicious, enabled procedures fostering what eventually would be called “the international community,” a term that curled many a lip in the midst of twentieth-century world wars. Those wars were attempts to overthrow the established world order. Those wars failed, but in recent decades have become seemingly interminable, and have required the stewards of world order to confront what George Shultz labels “asymmetrical” warfare in which professional standards have been turned into self-imposed liabilities by enemies who reject civilized international conduct.


No international order has proved immortal. Kepler today might note that the world order shaped by the war he predicted, might now fail to survive to celebrate its 375^th anniversary. As President Obama ponders his Second Inaugural Address, what Keplerian factors are now “prepared” for war?
The causes of war as discerned ever since Thucydides’ time are three: wars of ideology, of fear, and of gain.

The ideology of Islamism has been on the rise for generations and now aims to expropriate the Arab Spring. The ambitions of the1979 Iranian Revolution and Sunni fanaticism are transmogrifying into the kind of major religious war that the Treaty of Westphalia sought to forestall.

Thucydides traced the war that ruined ancient Greece to Sparta’s fear that Athens’ growing power was crossing the line where it would be impossible to contain. Israel faces that threat from Iran, as today’s international structures for the maintenance of international security have failed to halt Iran’s drive, propelled by religious ideology, to possess nuclear weapons. Israel, bereft of its traditional sense of American support, is making ready to act against Iran’s menace to its existence. President Obama’s priority must repair relations with Israel by visiting the Jewish state and convincing its leaders that the U.S. understands Israel’s uniquely dangerous position.

And there now grows a deepening appetite for gain. America, perceived as eager to shed the burdens of world order in order to be “fundamentally transformed” through European-style social commitments, talks of engagement even when Iran’s “diplomacy” is a form of protracted warfare. The enemies of world order translate the American election results into the lexicon of abdication, telling themselves that their time has come: there is a world to be gained.

Only America’s return to world leadership can halt this deterioration. “Sequestration” will relegate the U.S. to a second rate power and must be reversed to enable American strength and diplomacy to be employed in tandem. Without this the prediction of a Kepler for today must be grim. As the biographer of Augustus Caesar wrote in the years just before the Second World War, “Once again the crust of civilization has worn thin, and beneath can be heard the muttering of primeval fires. Once again many accepted principles of government have been overthrown, and the world has become a laboratory where immature and feverish minds experiment with unknown forces. Once again problems cannot be comfortably limited, for science has brought the nations into an uneasy bondage to each other.”

In this maelstrom lie opportunities not for idealism but for the cold, austere use of power, soft and hard, in order to, as Augustus was advised, teach the arts of peace to all. The old platforms for the region, including the “peace process,” are gone. New structures must be built and only the US can lead the construction job. Peace is not at hand, but statesmen can see the possibility of laying foundations for a new Middle East in Syria-Lebanon, Egypt-Gaza, Saudi Arabia and the Gulf, and even, should we finally get serious, in Iran.

Charles Hill is the Brady-Johnson Distinguished Fellow in Grand Strategy at Yale University and co chair of the Herb and Jane Dwight Working Group on Islamism and the International Order, Hoover Institution.

These excerpts are from a post that is part of The Caravan, a periodic discussion on the contemporary dilemmas of the Greater Middle East. Other commentary in this symposium on Obama’s Second Term – Middle Eastern Memos is provided by Russell Berman, Itamar Rabinovich, Robert Satloff, Asli Aydintasbas, Habib Malik, Reuel Gerecht, Leon Wieseltier, Tammy Frisby, Abbas Milani, and Fouad Ajami.

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan

Chinese Strategic Miscalculations in the South China Sea, by Hoang Anh Tuan
Asia Pacific Bulletin, No. 181
Washington, D.C.: East-West Center
September 27, 2012
http://www.eastwestcenter.org/publications/chinese-strategic-miscalculations-in-the-south-china-sea

Hoang Anh Tuan is the Director-General of the Institute for Foreign Policy and Strategic Studies at the Diplomatic Academy of Vietnam.

Excerpts:

Regrettably, China does not yet recognize the extent to which its aggressive course in the South China Sea is damaging its diplomacy with neighboring countries.

China’s current assertiveness in the South China Sea is now slowly but surely eroding its positive image with its ASEAN neighbors as a peacefully rising power. Without exception, countries within Southeast Asia and beyond are very cautious of China’s rise. Even as China’s national economic and global stature increase, its influence, image and “soft power” abroad is declining dramatically.

China now sees “US hands” in both its internal and external affairs. Examples this year of US influence in China’s domestic affairs include Wang Lijun, Chongqing’s former police chief, applying to the US Consulate in Chengdu for political asylum and the blind lawyer, Chen Guangcheng, fleeing to the US Embassy in Beijing. Throughout the region, US allies including Japan, South Korea and the Philippines have all upgraded their already strong military cooperation with the United States. If China continues to ignore the interests or concerns of its neighbors who have a stake in the South China Sea, its aggressiveness is likely to galvanize increased regional cooperation with the United States.

Third, troubles with close neighbors also affect the image and position of China in the world. The most important condition for any country aspiring to ascend to global power status is to maintain good relations with its neighbors. However, if China is unable or unwilling to maintain a cordial relationship with its closest neighbors, how can countries further afield trust and respect this aspiring superpower? As long as China is unable to maintain a significant level of trust and friendship with its neighbors, benevolent global power status for China is likely to remain a pipe dream.

First and foremost, China should take constructive steps to bring about an amicable conclusion to negotiations on the Code of Conduct (COC) in the South China Sea, and implement a face-saving policy renouncing once and for all its U-shaped line. Obviously, this will be a difficult decision for China to take. However, the international dividend and return for China’s peaceful rise would ripple far beyond the neighborhood and confines of the South China Sea.

Russia's Ex-Finance Chief Has Grim Outlook for EU. By Alexander Kolyandr

Russia's Ex-Finance Chief Has Grim Outlook for EU. By ALEXANDER KOLYANDR
The Wall Street Journal, October 23, 2012, on page A11

MOSCOW—Just over a year ago, Alexei Kudrin came out of the Group of 20 meetings in Washington warning that the U.S. and Europe weren't doing enough to head off economic slowdown. Now, no longer in government but still highly respected for his fiscal prudence, the former Russian finance minister doesn't have to mince words. His message is even more dire.

Alexei Kudrin, left, spoke with Russia's Deputy Finance Minister Sergei Storchak during the VTB Capital investment conference in New York, April 2012.

Keeping Greece in the euro zone? "Already impossible," he says in an interview. Spain and Italy next for the exit? "The probability is very high." And creditors beware—Mr. Kudrin sees both Greece and Spain defaulting on their sovereign debt.

"Everything should be done to avoid it, but I don't feel that the process is under control," says the man who shepherded Russia from default to financial stability.

As if that weren't worrisome enough, the 52-year-old who was named finance minister of the year by various publications on four separate occasions during his tenure says he now fears that Europe's economic problems may turn into political ones.

Democracies, he says, don't always survive when their citizens are asked to make the kinds of economic sacrifices that Europe now faces. Already, some analysts are comparing Greece's shocked polity to the Weimar Republic.

Mr. Kudrin is more cautious, but plans to participate next month in a conference at St. Petersburg State University, where he is now a dean, on the question of how economic hardships can lead to political upheavals. The case studies aren't inspiring—from Communist Poland to the Soviet Union to Latin American dictatorships.

Mr. Kudrin thinks that citizens of the Western countries aren't ready to accept the steep drop in living standards they face, but that if governments fail to cut spending they will get even deeper collapses.

"Russia faced that in the 1990s, but due to [Russian President Boris] Yeltsin we've passed it peacefully," he says. "I'm not sure the Western countries would be able to pass through such hardships; it may be very painful."

Mr. Kudrin sees the recent decisions of the European Central Bank as only a temporary relief because its funds aren't limitless. However, he says, the euro would survive dropouts.

Mr. Kudrin expects European economies to contract further in the short term, before growth resumes, and he urges governments to reduce debt in order to be prepared for growth.

His outlook for the U.S. isn't much better. While the looming "fiscal cliff"—tax increases and spending cuts scheduled to take effect Jan. 1—worries analysts and economists, he said the size of the U.S. deficit is the real longer-term risk.

No matter which party wins the White House, the outlook is tough. "Both are in a very difficult position," he says. Even so, the dollar's future is secure, he says.

"Trust in the U.S. dollar is not shaken yet. If the U.S. administration meets the task of the budget consolidation in several years, the dollar will be firm, but even if it weakens, there would be no other currency to replace, given its scale and importance."

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson

Dodd-Frank's 'Orderly Liquidation' Is Out of Order. By Scott Pruitt and Alan Wilson
South Carolina, Oklahoma and Michigan join a federal lawsuit to uphold property rights and checks and balances.The Wall Street Journal, September 25, 2012, 7:14 p.m. ET
http://online.wsj.com/article/SB10000872396390444180004578016953529778498.html?mod=WSJ_Opinion_LEFTTopOpinion

'The tendency of the law must always be to narrow the field of uncertainty." Justice Oliver Wendell Holmes wrote that more than a century ago, but the sentiment runs all the way to our nation's roots. Under our Constitution, the rule of law provides the certainty and transparency necessary to protect individual liberty and support economic growth.

But the 2010 federal financial-reform law known as Dodd-Frank continues to undermine economic growth and the rule of law by injecting immense uncertainty into our economy. As law professor David Skeel demonstrated recently in these pages, the law's Title II gives the Treasury secretary and the Federal Deposit Insurance Corp. unprecedented authority to "liquidate" financial companies. This grants immense power to a handful of unelected federal bureaucrats, empowering them to pick winners and losers among a liquidated company's investors. This arrangement destroys rights long protected by bankruptcy law.

For that reason and others, the attorneys general of South Carolina, Oklahoma and Michigan last week joined a federal lawsuit challenging Dodd-Frank's unconstitutional "orderly liquidation" provisions. Dodd-Frank's elimination of investors' rights directly harms our states because state pension funds are partly invested in financial companies. We must raise these constitutional objections now because once a company is liquidated, it will be too late.

Title II eliminates all meaningful judicial review and due process. Once the Treasury secretary orders the liquidation of a financial company, the company has only 24 hours to convince a federal court to overturn that order. Unless the court somehow manages to decide the entire case in the company's favor before the clock expires, the government wins by default and can begin to liquidate the company even as appeals are pending. Dodd-Frank further limits the authority of the courts by prohibiting them from reviewing whether the Treasury secretary's decision was constitutional, or whether the liquidation is actually necessary to protect financial stability.

The Treasury secretary's largely unaccountable decisions in these cases will put investments at risk, and creditors won't know until it is too late. Dodd-Frank prohibits the company from disclosing the liquidation threat before the district court decides the case. Once the liquidation goes forward, the creditors' only recourse will be to plead their case before the FDIC, with minimal judicial review—meaning that creditors' recoveries are "likely to be close to zero," as bankruptcy scholars Douglas Baird and Edward Morrison have put it.

Even more disturbing is the possibility that a company might agree to be "liquidated" and rebuilt under a new banner—like "New Chrysler" replacing "Old Chrysler"—leaving its creditors no right to block the reorganization. Instead, creditors not favored by federal bureaucrats will have little choice but to accept the deal offered to them by the government in a black-box process.

When the federal government replaced "Old Chrysler" with "New Chrysler" in 2009, it told one set of Chrysler's creditors (Indiana's state pension funds) to swallow $6 million in losses. Indiana attempted to defend its employees' pensions in court, but the government shuttered "Old Chrysler" before the Supreme Court could hear Indiana State Police Pension Trust v. Chrysler. Our states face the same threat because they have invested in the debt of financial companies that can be liquidated under Dodd-Frank.

We have taken an oath to uphold the rule of law and defend the Constitution. We are determined to uphold that oath, including defending the Constitution against the overarching power of the federal government.

Our lawsuit attempts to defend the very heart of our Constitution's structure: By committing such broad power to federal bureaucrats and nullifying critical checks and balances, Dodd-Frank's "orderly liquidation" authority violates the Constitution's separation of powers, the Fifth Amendment's guarantee of due process, and the guarantee of "uniform" bankruptcy laws.

The president and Congress can easily repair these constitutional violations by amending Dodd-Frank, restoring the rights long protected by federal bankruptcy law and reaffirming the Constitution's checks and balances. Until then, we will vigorously defend the rule of law through this litigation. The hard-earned pension contributions and tax payments of our citizens deserve nothing less.

Mr. Pruitt is attorney general of Oklahoma. Mr. Wilson is attorney general of South Carolina.

The South China Sea's Gathering Storm. By James Webb, US Senator

The South China Sea's Gathering Storm. By James Webb
The Wall Street Journal, August 19, 2012, page A11
http://online.wsj.com/article/SB10000872396390444184704577587483914661256.html

Since World War II, despite the costly flare-ups in Korea and Vietnam, the United States has proved to be the essential guarantor of stability in the Asian-Pacific region, even as the power cycle shifted from Japan to the Soviet Union and most recently to China. The benefits of our involvement are one of the great success stories of American and Asian history, providing the so-called second tier countries in the region the opportunity to grow economically and to mature politically.

As the region has grown more prosperous, the sovereignty issues have become more fierce. Over the past two years Japan and China have openly clashed in the Senkaku Islands, east of Taiwan and west of Okinawa, whose administration is internationally recognized to be under Japanese control. Russia and South Korea have reasserted sovereignty claims against Japan in northern waters. China and Vietnam both claim sovereignty over the Paracel Islands. China, Vietnam, the Philippines, Brunei and Malaysia all claim sovereignty over the Spratly Islands, the site of continuing confrontations between China and the Philippines.

Such disputes involve not only historical pride but also such vital matters as commercial transit, fishing rights, and potentially lucrative mineral leases in the seas that surround the thousands of miles of archipelagos. Nowhere is this growing tension clearer than in the increasingly hostile disputes in the South China Sea.

On June 21, China's State Council approved the establishment of a new national prefecture which it named Sansha, with its headquarters on Woody Island in the Paracel Islands. Called Yongxing by the Chinese, Woody Island has no indigenous population and no natural water supply, but it does sport a military-capable runway, a post office, a bank, a grocery store and a hospital.

The Paracels are more than 200 miles southeast of Hainan, mainland China's southernmost territory, and due east of Vietnam's central coast. Vietnam adamantly claims sovereignty over the island group, the site of a battle in 1974 when China attacked the Paracels in order to oust soldiers of the former South Vietnamese regime.

The potential conflicts stemming from the creation of this new Chinese prefecture extend well beyond the Paracels. Over the last six weeks the Chinese have further proclaimed that the jurisdiction of Sansha includes not just the Paracel Islands but virtually the entire South China Sea, connecting a series of Chinese territorial claims under one administrative rubric. According to China's official news agency Xinhua, the new prefecture "administers over 200 islets" and "2 million square kilometers of water." To buttress this annexation, 45 legislators have been appointed to govern the roughly 1,000 people on these islands, along with a 15-member Standing Committee, plus a mayor and a vice mayor.

These political acts have been matched by military and economic expansion. On July 22, China's Central Military Commission announced that it would deploy a garrison of soldiers to guard the islands in the area. On July 31, it announced a new policy of "regular combat-readiness patrols" in the South China Sea. And China has now begun offering oil exploration rights in locations recognized by the international community as within Vietnam's exclusive economic zone.

For all practical purposes China has unilaterally decided to annex an area that extends eastward from the East Asian mainland as far as the Philippines, and nearly as far south as the Strait of Malacca. China's new "prefecture" is nearly twice as large as the combined land masses of Vietnam, South Korea, Japan and the Philippines. Its "legislators" will directly report to the central government.

American reaction has been muted. The State Department waited until Aug. 3 before expressing official concern over China's "upgrading of its administrative level . . . and establishment of a new military garrison" in the disputed areas. The statement was carefully couched within the context of long-standing policies calling for the resolution of sovereignty issues in accordance with international law and without the use of military force.

Even so, the Chinese government responded angrily, warning that State Department officials had "confounded right and wrong, and sent a seriously wrong message." The People's Daily, a quasi-official publication, accused the U.S. of "fanning the flames and provoking division, deliberately creating antagonism with China." Its overseas edition said it was time for the U.S. to "shut up."

In truth, American vacillations have for years emboldened China. U.S. policy with respect to sovereignty issues in Asian-Pacific waters has been that we take no sides, that such matters must be settled peacefully among the parties involved. Smaller, weaker countries have repeatedly called for greater international involvement.

China, meanwhile, has insisted that all such issues be resolved bilaterally, which means either never or only under its own terms. Due to China's growing power in the region, by taking no position Washington has by default become an enabler of China's ever more aggressive acts.

The U.S., China and all of East Asia have now reached an unavoidable moment of truth. Sovereignty disputes in which parties seek peaceful resolution are one thing; flagrant, belligerent acts are quite another. How this challenge is addressed will have implications not only for the South China Sea, but also for the stability of East Asia and for the future of U.S.-China relations.

History teaches us that when unilateral acts of aggression go unanswered, the bad news never gets better with age. Nowhere is this cycle more apparent than in the alternating power shifts in East Asia. As historian Barbara Tuchman noted in her biography of U.S. Army Gen. Joseph Stillwell, it was China's plea for U.S. and League of Nations support that went unanswered following Japan's 1931 invasion of Manchuria, a neglect that "brewed the acid of appeasement that . . . opened the decade of descent to war" in Asia and beyond.

While America's attention is distracted by the presidential campaign, all of East Asia is watching what the U.S. will do about Chinese actions in the South China Sea. They know a test when they see one. They are waiting to see whether America will live up to its uncomfortable but necessary role as the true guarantor of stability in East Asia, or whether the region will again be dominated by belligerence and intimidation.

The Chinese of 1931 understood this threat and lived through the consequences of an international community's failure to address it. The question is whether the China of 2012 truly wishes to resolve issues through acceptable international standards, and whether the America of 2012 has the will and the capacity to insist that this approach is the only path toward stability.

Mr. Webb, a Democrat, is a U.S. senator from Virginia.

From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions

From Bail-out to Bail-in: Mandatory Debt Restructuring of Systemic Financial Institutions. By Zhou, Jian-Ping; Rutledge, Virginia; Bossu, Wouter; Dobler, Marc; Jassaud, Nadege; Moore, Michael
IMF Staff Discussion Notes No. 12/03
April 24, 2012            
ISBN/ISSN: 978-1-61635-392-6 / 2221-030X
Stock No: SDNETEA2012003
http://www.imf.org/external/pubs/cat/longres.aspx?sk=25858.0

Excerpts

Executive Summary

Large-scale government support of the financial institutions deemed too big or too important to fail during the recent crisis has been costly and has potentially increased moral hazard. To protect taxpayers from exposure to bank losses and to reduce the risks posed by too-big-tofail (TBTF), various reform initiatives have been undertaken at both national and international levels, including expanding resolution powers and tools.

One example is bail-in, which is a statutory power of a resolution authority (as opposed to contractual arrangements, such as contingent capital requirements) to restructure the liabilities of a distressed financial institution by writing down its unsecured debt and/or converting it to equity. The statutory bail-in power is intended to achieve a prompt recapitalization and restructuring of the distressed institution. This paper studies its effectiveness in restoring the viability of distressed institutions, discusses potential risks when a bail-in power is activated, and proposes design features to mitigate these risks. The main conclusions are:

1. As a going-concern form of resolution, bail-in could mitigate the systemic risks associated with disorderly liquidations, reduce deleveraging pressures, and preserve asset values that might otherwise be lost in a liquidation. With a credible threat of stock elimination or dilution by debt conversion and assumption of management by resolution authorities, financial institutions may be incentivized to raise capital or restructure debt voluntarily before the triggering of the bail-in power.

2. However, if the use of a bail-in power is perceived by the market as a sign of the concerned institution’s insolvency, it could trigger a run by short-term creditors and aggravate the institution’s liquidity problem. Ideally, therefore, bail-in should be activated when a capital infusion is expected to restore a distressed financial institution to viability, with official liquidity support as a backstop until the bank is stabilized.

3. Bail-in is not a panacea and should be considered as one element of a comprehensive solution to the TBTF problem. It should supplement, not replace, other resolution tools that would allow for an orderly closure of a failed institution.

4. Most importantly, the bail-in framework needs to be carefully designed to ensure its effective implementation.

• The triggers for bail-in power should be consistent with those used for other resolution tools. They should be set at the point when a firm would have breached the regulatory minima but before it became balance-sheet insolvent. To make bail-in a transparent tool, its scope should be limited to (i) elimination of existing equity shares as a precondition for a bail-in; and (ii) conversion and haircut to subordinated and unsecured senior debt.  Debt restructuring under a bail-in should take into account the order of priorities applicable in a liquidation.
• A clear and coherent legal framework for bail-in is essential. The legal framework needs to be designed to establish an appropriate balance between the rights of private stakeholders and the public policy interest in preserving financial stability. Debt restructuring ideally would not be subject to creditor consent, but a “no creditor worse off” test may be introduced to safeguard creditors’ and shareholders’ interests. The framework also needs to provide mechanisms for addressing issues associated with the bail-in of debt issued by an entity of a larger banking group and with the cross-border operations of that entity or banking group.
• The contribution of new capital will come from debt conversion and/or an issuance of new equity, with an elimination or significant dilution of the pre-bail in shareholders.  Bail-in will need to be accompanied by mechanisms to ensure the suitability of new shareholders. Some measures (e.g., a floor price for debt/equity conversion) might be necessary to reduce the risk of a “death spiral” in share prices.
• It may be necessary to impose minimum requirements on banks for issuing unsecured debt or to set limits on the encumbrance of assets (which have been introduced by many advanced countries). This would help reassure the market that a bail-in would be sufficient to recapitalize the distressed institution, thus forestalling potential runs by short-term creditors and avert a downward share price spiral. The framework should also include measures to mitigate contagion risks to other systemic financial institutions, for example, by limiting their cross-holding of unsecured senior debt.

Conclusions

Bail-in power needs to be considered as an additional and complementary tool for the resolution of SIFIs. Bail-in is a statutory power of a resolution authority, as opposed to contractual arrangements, such as contingent capital requirements. It involves recapitalization through relatively straightforward mandatory debt restructuring and could therefore avoid some of the operational and legal complexities that arise when using other tools (such as P&A transactions), which require transferring assets and liabilities between different legal entities and across borders. By restoring the viability of a distressed SIFI, the pressure on the institution to post more collateral, for example against their repo contracts, could be significantly reduced, thereby minimizing liquidity risks and preventing runs by short-term creditors.

The design and implementation of a bail-in power, however, need to take into careful consideration its potential market impact and its implications for financial stability. It is especially important that the triggering of a bail-in power is not perceived by the market as a sign of the concerned institution’s non-viability, a perception that could trigger a run by short-term creditors and aggravate the institution’s liquidity problem. An effective bail-in framework generally includes the following key design elements:

• The scope of the statutory power should be limited to (i) eliminating or diluting existing shareholders; and (ii) writing down or converting, in the following order, any contractual contingent capital instruments, subordinated debt, and unsecured senior debt, accompanied by the power of the resolution authority to change bank management.
• The triggers for bail-in power should be consistent with those used for other resolution tools and set at the point when an insititution would have breached the regulatory minima but before it became balance-sheet insolvent, to allow for a prompt response to an SIFI’s financial distress. The intervention criteria (a combination of quantitative and qualitative assessments) need to be as transparent and predictable as possible to avoid market uncertainty.
• It may be necessary to require banks or bank holding companies to maintain a minimum amount of unsecured liabilities (as a percentage of total liabilities) beforehand, which could be subject to bail-in afterwards. This would help reassure the market that bail-in is sufficient to recapitalize the distressed institution and restore its viability, thus reduce the risk of runs by short-term creditors.
• To fund potential liquidity outflows, and given the probable temporary loss of market access, bail-in may need to be coupled with adequate official liquidity assistance.
• Bail-in needs to be considered as one element of a comprehensive framework that includes effective supervision to reduce the likelihood of bank failures and an effective overall resolution framework that allows for an orderly resolution of a failed SIFI, facilitated by up-to-date recovery and resolution plans. In general, statutory bail-in should be used in instances where a capital infusion is likely to restore a distressed financial institution to viability, possibly because, other than a lack of capital, the institution is viable and has a decent business model and good riskmanagement systems. Otherwise, bail-in capital could simply delay the inevitable failure.

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/

Some Root Causes of the Arab Revolution: Rising Literacy and a Shrinking Birth Rate (due to the first)

A Look at the Root Causes of the Arab Revolution. Spiegel interview with Emannuel Todd
http://www.spiegel.de/international/world/0,1518,763537,00.html
May 20, 2011

Rising Literacy and a Shrinking Birth Rate

Excerpts:

SPIEGEL: Aren't poverty or affluence also crucial? Tunisia, Syria, Egypt and Yemen don't have bubbling oil revenues.

Todd: Of course, one can placate the people with bread and money, but only for a while. Revolutions usually erupt during phases of cultural growth and economic downturn. For me, as a demographer, the key variable is not the per capita gross domestic product but the literacy rate. The British historian Lawrence Stone pointed out this relationship in his study of the English revolution in the 16th and 17th centuries. He saw the critical threshold at 40 to 60 percent.

SPIEGEL: Well, most young Arabs can now read and write, but how is the birth rate actually developing? The population in Arab countries is extremely young, with half of its citizens younger than 25.

Todd: Yes, but that's because the previous generation had so many children. In the meantime, however, the birth rate is falling dramatically in some cases. It has fallen by half in the Arab world in just one generation, from 7.5 children per woman in 1975 to 3.5 in 2005. The birth rate among female university graduates is just below 2.1, the level needed to maintain a population. Tunisia now has a birth rate similar to that of France. In Morocco, Algeria, Libya and Egypt, it has dropped below the magic threshold of three children per woman. This means that young adults constitute the majority of the population and, unlike their fathers and mothers, they can read and write, and they also practice contraception. But they suffer from unemployment and social frustration. It isn't surprising that unrest was inevitable in this part of world.

[...]

SPIEGEL: Why has it taken so long for the values of the modern age to reach the Islamic world? After all, the golden age of Arab civilization ended in the 13th century.

Todd: There is a simple explanation, which has the benefit of also being applicable to northern India and China, that is, to three completely differently religious communities: Islam, Hinduism and Confucianism. It has to do with the structure of the traditional family in these regions, with its debasement and with the disenfranchisement of women. And in Mesopotamia, for example, it extends well into the pre-Islamic world. Mohammed, the founder of Islam, granted women far more rights than they have had in most Arab societies to this day.

SPIEGEL: Does that mean that the Arabs conformed to older local circumstances and spread them across the entire Middle East?

Todd: Yes. The patrilinear, patrilocal system, in which only male succession is considered valid and newlyweds, preferably cousins in the ideal Arab marriage, live under the roof and authority of the father, inhibits all social progress. The disenfranchisement of women deprives them of the ability to raise their children in a progressive, dynamic fashion. Society calcifies and, in a sense, falls asleep. The powers of the individual cannot develop. The bourgeois achievement of marriage for love, and the free choice of one's partner, replaced the hierarchies of honor in Europe in the 19th century and reinforced the desire for freedom.

SPIEGEL: Is female emancipation the prerequisite for modernization in the Arab world?

Todd: It's in full swing. The headscarf debate is missing the point. The number of marriages between cousins is dropping just as spectacularly as the birth rate, thereby blasting away a barrier. The free individual or active citizen can enter the public arena. When more than 90 percent of young people can read and write and have a modicum of education, no traditional authoritarian regime will last for long. Have you noticed how many women are marching along in the protests? Even in Yemen, the most backward country in the Arab world, thousands of women were among the protesters.

SPIEGEL: The family is the private sphere par excellence. Why do changes in its structure necessarily spread to the political sphere?

Todd: The relationship between those at the top and those at the bottom is changing. When the authority of fathers begins to falter, political power generally collapses, as well. This is because the system of the patrilinear, endogamous extended family has been reproduced within the leadership of nations. The family patriarch as head of state places his sons and other male relatives in positions of power. Political dynasties develop, as in the case of the senior and junior Assad in Syria. Corruption flourishes because the clan runs things for its own benefit. The state is of course privatized as a family business. The power of obedience is based on a combination of loyalty, repression and political economics.

h/t ‘A Convergence of Civilizations’, http://themoornextdoor.wordpress.com/2011/11/02/a-convergence-of-civilizations

Francis Fukuyama said very much this same thing in 1999, The Great Disruption. I don't know if he did it independently.

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.

Global Poverty Estimates: A Sensitivity Analysis

Global Poverty Estimates: A Sensitivity Analysis. By Shatakshee Dhongde & Camelia Minoiu
IMF Working Paper
Oct 13, 2011

Summary: Current estimates of global poverty vary substantially across studies. In this paper we undertake a novel sensitivity analysis to highlight the importance of methodological choices in estimating global poverty. We measure global poverty using different data sources, parametric and nonparametric estimation methods, and multiple poverty lines. Our results indicate that estimates of global poverty vary significantly when they are based alternately on data from household surveys versus national accounts but are relatively consistent across different estimation methods. The decline in poverty over the past decade is found to be robust across methodological choices.

Introduction
Global poverty monitoring has been brought to the forefront of the international policy arena with the adoption of the Millennium Development Goals (MDG) by the United Nations. The first MDG proposes reducing global poverty by the year 2015 and is stated as “halving the proportion of people with an income level below $1/day between 1990 and 2015” (United Nations, 2000). Progress towards attaining this MDG is monitored using global poverty estimates published by the World Bank and a number of independent scholars. The process is not only expensive (Moss, 2010) but also mired with conceptual, methodological, and datarelated problems (Klasen, 2009).

Current estimates of global poverty proposed in the literature differ in magnitude as well as in the rate of change in poverty. Consider, for instance, Chen and Ravallion (2010) and Pinkovskiy and Sala-i-Martin (2009)—two studies that estimate global poverty using the international poverty line of $1/day (see Figure 1). Chen and Ravallion (2010) estimate that in 2005 nearly 26 percent of the population in the developing countries was poor, and the global poverty count fell by 520 million individuals since 1981. By contrast, Pinkovskiy and Sala-i-Martin (2009) estimate poverty to have been ten times lower in 2005, which implies a reduction of almost 350 million individuals since 1981. Although there is general agreement that global poverty has declined over the years, the estimated level of poverty and rate of poverty decline vary substantially across studies.




This paper aims to contribute to the debate on global poverty not by providing a new set of estimates, but by addressing two important questions. First, we ask why estimates from different studies differ so much. As we unravel the various assumptions made by researchers, we show that global poverty estimates are simply not comparable across studies. For instance, they differ in terms of underlying data sources, number of countries included, welfare metric, adjustments to mean incomes, and statistical methods employed to estimate the income distribution. Given this variety of methodological choices, we arrive at our second question: Can we assess the impact of different approaches on the resulting poverty estimates? Since global poverty estimation requires making multiple assumptions simultaneously, we aim to isolate and assess separately the relative importance of each such assumption by undertaking a novel sensitivity analysis.

An important hurdle in estimating long-term trends in global poverty is the lack of high-quality, consistent survey data. The poor are those individuals whose income is less than or equal to some threshold set by the poverty line. If countries had complete information on every individual’s income then with an agreed-upon global poverty line, identifying the poor would be a straightforward exercise. However, there are severe data limitations.

Data on income is typically collected through household surveys (HS) of nationally representative samples. However, survey data are often available for periods far apart and suffer from a number of inconsistencies (regarding sampling and interviewing techniques, definitions of variables, and coverage) that render them incomparable across countries. Nonetheless, they are the sole source of information on the relative distribution of incomes in a country—that is, the shares of national income possessed by different population groups (quintiles, deciles). HS also provide estimates of mean income/consumption which are used to scale the income shares to obtain mean incomes by population group. A more readilyaccessible and consistently-recorded source of information are national account statistics (NAS) which also provide aggregate income or consumption estimates and are available for most countries on a yearly basis.

A key methodological choice in estimating global poverty is whether to use data on mean income/consumption from HS or NAS or whether to combine data from the two sources. Some studies in the literature analyzed the sources of discrepancies between the levels and growth rates of income/consumption data from HS and NAS (Ravallion, 2003; Deaton, 2005). However these studies did not measure the precise effect of using HS and NAS data on global poverty levels and trends. In order to determine how sensitive global poverty estimates are to alternate data sources, we estimate global poverty by anchoring relative distributions alternately to HS and NAS estimates of mean income and consumption. This is our first sensitivity exercise.

The second sensitivity exercise concerns the choice of statistical method used to estimate income distributions from grouped data, that is, data on mean income or consumption for population groups (quintiles, deciles). We estimate global poverty by estimating each country’s distribution using different methods. These include the General Quadratic (GQ) and the Beta Lorenz curve, and the lognormal and Singh-Maddala functional forms for the income density function.2 In addition to these parametric specifications, we also consider the nonparametric kernel density method whose performance we assess in conjunction with four different bandwidths—a parameter that controls the smoothness of the income distribution.

As a benchmark, we follow the World Bank methodology to the extent possible and estimate global poverty in 1995 and 2005—the latest year for which data is available for many countries. Data on the relative distribution of income across population deciles is collected for 65 countries from the World Bank’s poverty monitoring website PovcalNet. Our sample covers more than 70 percent of the total world population and includes all countries for which both HS and NAS data are available in both years. Global poverty is estimated using international poverty lines ranging from $1/day to $2.5/day to provide further insight into how methodological choices impact poverty rates at different income cutoffs.

Our results are twofold. First, a large share of the variation in estimated poverty levels and trends can be attributed to the choice between HS and NAS as the source of data. Global poverty estimates vary not only in terms of the proportion of the poor, and correspondingly the number of poor, but also in terms of the rates of decline in poverty. Poverty estimates based on HS and NAS do not tend to converge in higher income countries. Second, the choice of statistical method used to estimate the income distribution affects poverty levels to a lesser extent. A comparison of poverty estimates across parametric and nonparametric techniques reveals that the commonly used lognormal specification consistently underestimates poverty levels. While there is little doubt that the proportion of poor declined between 1995 and 2005, our results underscore the fact that global poverty counts are highly sensitive to methodological approach.

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