Third Quarter Forecast

Stratfor predicts that three major global trends continue to dominate the international system. First, the Greek crisis and attendant economic problems continue to place great stress on European systems, driving the region toward a political and economic redefinition. Second, U.S. operations in Iraq are moving toward a milestone as U.S. combat forces are scheduled to be drawn down by the end of August even as progress is proving elusive in Afghanistan. Third, the Russians, in part using the disarray in Europe and U.S. preoccupation with the Middle East to consolidate its gains in the former Soviet Union, are opening the door to new economic relationships — particularly with the Germans — designed to modernize Russia’s economy.

Certainly the issue that is both most important and new is Europe. For much of the financial crisis, the Europeans held up the continental model as superior to the “Anglo-Saxon” model. Slower growth with stronger social safety nets seemed superior to the more aggressive, less protective, American and British model. The continental Europeans are now facing both cuts in social services and slow growth. More important, this is not equally spread among countries. Southern Europe is in the weakest position and Northern Europe, particularly Germany, is being called on to underwrite the stability of the eurozone. This is causing profound political difficulties in Germany, which, in turn, have prompted Berlin to demand greater controls over the economic policies of its fellow EU countries, via new regulations and supervisory bodies. Germany’s plans are creating a serious rift in Europe that has geopolitical implications. We expect that process to continue during the next quarter. For the time being, European institutions are safe, but it is not clear that the system can withstand any greater shocks.

At the other end of the global spectrum — Middle Eastern military affairs — new international and bilateral sanctions have been imposed on the Iranians to get them to abandon their alleged nuclear weapons program. There are numerous ways for Iran to get around these sanctions, and therefore their effects will be limited. But ultimately the issue on the table is not Iran’s nuclear program, but its conventional power. Without the United States in Iraq, Iran is the dominant military force in the Persian Gulf. The United States is scheduled to withdraw its “combat” forces by August, leaving 50,000 troops behind, including at least six brigade combat teams redubbed “advisory and assistance brigades.” Each reduction of U.S. forces in Iraq increases Iran’s influence on the region. If the nuclear program were abandoned tomorrow, Iran would still be the dominant conventional power native to the region. This means that the United States must stay in Iraq to balance Iran, but the United States must also leave to re-establish a strategic military reserve. With the United States caught in this position, we expect Washington to continue quiet efforts to reach some sort of accommodation with Iran. The issue is, of course, whether Iran has any interest in helping to solve this problem for the United States.

The world continues to resonate from the twin shocks of September 2001 and September 2008: the U.S.-jihadist war and the global financial crisis. It has been processing these events for several years, and it will continue to do so this quarter.

Caught in an ‘Authoritarian Moment’

BEIJING — New York Times writer, Didi Kirsten Tatlow, reports that when Xia Shang, a writer, wanted to commemorate the deaths of 58 people in an apartment building fire in Shanghai last week, he turned to the Internet for help.

Mr. Xia’s offer to buy flowers for the victims, posted on his microblog, was taken up by thousands of netizens. But he quickly found himself at war with the country’s Internet police. First they deleted his post. It was back up hours later, but then seven of them showed up in person at his home and took him away for questioning. Mr. Xia was released after two hours’ interrogation at the police station by “three or four” men he says belonged to the “Internet security police.” The experience left him angry.

“As a tool, microblogs and things will definitely speed up democratization in China,” he said. “But it’s not as free as you might think.”

Mr. Xia’s experience was a striking illustration of how freedom and repression are spreading simultaneously in China, an apparent contradiction that is growing as individual and Internet- and cellphone-based communications challenge authoritarian norms.

On one side are some of China’s 420 million online citizens, pushing the boundaries of free speech, increasingly straying into forbidden territory by organizing online — even on politically sensitive issues, like the fire in Shanghai. Many accuse the city authorities of tolerating lax safety standards and colluding in construction industry corruption, saying such lapses led to the disaster.

On the other side is an ever-growing effort by the authorities to block these challenges. Xiao Qiang, editor in chief of China Digital Times, based in the United States, estimates that “way above 50,000” government employees, uniformed and nonuniformed, monitor the Internet, deleting posts, tracking offenders and crafting new policing technologies. Citizens are also paid to patrol the Internet, and China’s sophisticated “Great Firewall” blocks large amounts of information from entering the country.

The result is a growing push-and-pull that raises the question: How long can it last? And which side will ultimately win?

In a new book, Johan Lagerkvist, a senior research fellow at the Swedish Institute of International Affairs, says the central paradox of China’s Internet is that control and freedom have grown in parallel, since it became commercially available.

Yet, “Parallel growth in control and freedom rarely last long,” says Mr. Lagerkvist in “After the Internet, Before Democracy.” Social contracts crumble under the impact of social change.

In an interview, he wouldn’t predict when change would come.

For now, China is caught in an “authoritarian moment,” he said. But even the growing financial resources of the Party-state will not keep it there indefinitely.

Generational change is working against it. Young officials in their 30s and 40s are different from their predecessors. “I can sense a change. They have a more pluralistic outlook,” Mr. Lagerkvist said.

“When they leave their offices, they are more private persons than the older bureaucrats. They have hobbies,” going online to ask questions, like “What do you think of this car?” or about fishing in Tibet.

“Young people want to find out things that people like them in other parts of the world want to find out. And when they are stopped, they will become angry, because they feel their space is being constrained, and they ask, ‘Why?”‘

The growth here in personal freedoms during the last three decades of economic reform has been striking. Entrepreneurs, property owners and consumers are demanding — and getting — rights that were once nonexistent.

Ideas have flooded in, too. From improved mental health care to raising poodles, once-banned ideas and hobbies are now commonplace. The Internet is a major motor in that growth, as people communicate easily across the country and beyond national borders.

Based on past growth, by the end of the year, as many as 460 million Chinese may be online, surfing, blogging, microblogging, social networking and instant messaging, on subjects ranging from dating to democratic reform, forming public opinion groups that the government increasingly needs to take into account.

Five years ago, just 103 million were online, according to the state-backed China Internet Network Information Center. Today, 277 million use mobile phones to access the Internet, a sector growing particularly fast.

Of course, most Chinese aren’t online to express dissent.

“When you go to an Internet cafe, most people are there to play online games,” said Mr. Lagerkvist.

The government is also working to create an online “nationalist information sphere” to counter the growth of individual freedoms, though Mr. Lagerkvist has doubts about its reliability.

Increasingly, people are crossing the line, and the virtual struggle spills over into real life daily, as Mr. Xia’s experience showed.

Mr. Xia posted his offer to buy white or yellow chrysanthemums — traditional mourning flowers in China — about noon on Saturday, the day before the ceremony at the site of the blaze. By 3 in the afternoon, 1,654 people had replied, he said. Then the Internet police stepped in.

“When I checked again at about 4, the post had gone. Taken down. I thought, ‘O.K., so I’ll buy 1,654 flowers.”‘ Later that evening, unexpectedly, the post was back up.

“Maybe someone saw it and said, ‘Hey, that shouldn’t be stopped.’ I don’t know,” he said.

That’s when the police came by. Curiously, said Mr. Xia, they seemed less bothered about the flowers than the fact that he also had posted an item about rumors that a small fire at the building earlier in the day had not been properly put out, leading to the later inferno.

Despite the interference, Mr. Xia continued with his flower campaign. By Sunday morning, the message had been reposted about 8,000 times. He settled on 1,800 flowers — an auspicious number — and posted again, saying these would represent “my 10,000 online friends.” He asked for volunteers to help lay the flowers. “I couldn’t lay 1,800 on my own.”

Hundreds of netizens showed up, said Mr. Xia, and the flowers were all laid that afternoon, contributing to the sea of white and yellow at the street junction where mourners gathered.



China Surges Past India as Top Home of Foreign Students

The number of Chinese students studying in the United States surged 30 percent in the 2009-10 academic year, making China, for the first time, the top country of origin for international students, according to “Open Doors,” the Institute of International Education’s annual report.

The report found that a record high of 690,923 international students came to the United States last year — nearly 128,000 of them, or more than 18 percent, from China. Over all, the number of international students at colleges and universities in the United States increased 3 percent for the 2009-10 academic year.

India, which in recent years had been in the top spot, increased its numbers only slightly, to 104,897 last academic year.

“The number of students from China is booming, because of that booming Chinese economy,” said Peggy Blumenthal, executive vice president of the institute. “But India, which also has a booming economy, is only up 1.6 percent. I think one factor is the great number of Chinese families with disposable income, two working parents and only one child, and a determination to invest their money to make sure that child receives the best education possible.”

David B. Austell, director of the Office for International Students and Scholars at New York University, said the Chinese undergraduates came primarily from the large urban areas on China’s coast. Because they are not eligible for the same financial aid as Americans and usually pay full tuition, he said, their growing presence is an indicator of just how many Chinese families are financially strong.

At the University of Southern California, Tony Tambascia, executive director of the Office of International Services, said the number of Chinese students grew substantially last year, but surpassed the number of Indian students for the first time just this fall.

“We’re getting more Chinese master’s students, and dramatically more freshmen,” he said.

According to the report, which is supported by the State Department, the number of students coming to the United States from Saudi Arabia increased almost 25 percent last year, to 15,810, reflecting the Saudi government’s generous aid for studies abroad.

But not all countries sent more students to the United States last year. The number coming from Japan declined 15 percent, and Mexico, Indonesia and Kenya each sent 7 percent to 9 percent fewer students than in the previous year.

Still, Allan Goodman, president of the institute, said the United States continued to host more international students than any other country. And according to the Commerce Department, such students contribute nearly $20 billion to the economy.

While the majority of Chinese students in the United States are still graduate students, the recent growth has been strongest among undergraduates.

Last year, there were 39,921 Chinese undergraduates studying in the United States, a 50 percent increase from the previous year, and more than four times as many as five years earlier.

The Indian experience has been quite different; that country sent 15,192 undergraduates last year, fewer than five years earlier. And the number of Indians coming to the United States for graduate study dropped by almost 4 percent last year

“The educational-advising people say that the job market is so hot in places like Mumbai and Bangalore that students thinking about grad school decide it’s not worth it,” Ms. Blumenthal said, “since they can just go out and get a good engineering job.”

As in past years, the report found that California, with 94,279 international students, hosts far more students from abroad than any other state. The University of Southern California is the institution with the most international students, 7,987 last year.

The report also tracks Americans studying abroad, although those numbers come from a year earlier. In the 2008-9 academic year, 260,327 American students studied abroad, down slightly from 262,416 the previous year.

While Britain, Italy, Spain and France remain the leading destinations, the study found, all four hosted fewer students, with the declines ranging from 2.5 percent to 10.8 percent.

But nontraditional destinations outside Europe gained popularity. Chile, Peru and South Korea all had increases of more than 26 percent, and China, Australia, Costa Rica, Japan, Argentina, South Africa, Ecuador, Brazil and New Zealand all hosted more American students than in the previous year.

A version of this article, authored by TAMAR LEWIN, appeared in print on November 15, 2010, on page A14 of the New York edition.

Recipe Found for Cross-Cultural Love

While our blog articles are usually “hard core” and business driven, we came across this interview by Mami Maruko of The Japan Times that we thought might catch your fancy as an interest piece. The Japanese culture and the Italian one have very significant differences and each has its individual prejudices that sometimes prevent them from blending as families. In the cae of Cristiana Pozzi and Akiko Kobayashi, it appears to be a match made in heaven:

Staff writer, Cristiano Pozzi, 37, born and raised in the Lake Como area in northern Italy, and Akiko Kobayashi, 36, from Tokyo, first met in 2003. Cristiano, a chef at an Italian restaurant, and Akiko, owner of a nail salon in Akasaka, were introduced to each other in Tokyo by a mutual Italian friend. They dated for a year, but Cristiano went back to taly after his contract with the restaurant expired. His promise that he would soon return to Tokyo did not materialize and Akiko thought that their relationship had ended. But two years later, Cristiano finally came back to Tokyo and found a job at another Italian restaurant. The couple got married in 2008, and their son, Oscar Aguri, was born the following year. The family now lives in Setagaya Ward, Tokyo.


What was the proposal like?

Akiko: He failed to propose to me the first time round. He told me later that he had prepared an engagement ring, and intended to propose to me aboard the plane to Italy, but we both slept right through the flight! He lost the timing and ended up proposing to me a month later. One evening in our bedroom, we were commenting on how beautiful the stars were and he asked me: “Don’t you feel something strange under your pillow?” I looked under the pillow, and the engagement ring was there.

Cristiano: Then, I said to her, “Will you marry me?”


How did your parents react to the marriage?

Cristiano: My mom was surprised (his father died when he was 20).

Akiko: When we went to our parents to get approval for the marriage, Cristiano came wearing a suit with a cake in his hand, and he even prepared an interpreter for the day!

Cristiano said to my dad, “You only have Akiko, so I decided to stay in Japan.”

Now my dad says how lucky he is to have Cristiano as a son-in-law. My parents love Cristiano, because he’s so gentle and does many, many things for the family.


What kind of wedding did you have?

Akiko: We had a wedding first in Japan at the Conrad Tokyo in Minato Ward, Tokyo, and later at Cristiano’s hometown in Italy. Most of the guests were Cristiano’s family and friends, but my parents, two of my friends, and four of my father’s friends attended the wedding, too.

Cristiano: I was surprised at the difference in the price of the two weddings. Japanese weddings are way too expensive!


What do you like about each other?

Akiko: Cristiano is so gentle and never talks ill of others. Also, when I’m in a bad mood, he is not affected by it. Even when he gets cross, he keeps the anger to himself, and leaves the room silently.

Cristiano: Akiko is “ii kanji” (cool), and is such a good organizer.


What language do you speak to each other?

Cristiano: Usually, we speak in Japanese.

Akiko: We use English only when we fight. I want to learn to speak more Italian, though, as I can only say very simple things like “hello” in Italian.


What language do you speak to your son?

Cristiano: I speak to him 100 percent in Italian.

Akiko: I use 100 percent Japanese.


What kind of conditions did you have in getting married?

Cristiano: I asked Akiko to agree on a double-income lifestyle throughout our marriage.

Akiko: Cristiano promised me that he will live in Japan after getting married.


What was the most memorable event in your marriage?

Akiko: The birth of Aguri. He was born by Caesarean section two months early at 1.5 kg due to the separation of my placenta. When this happens, the mother and child are at risk due to hemorrhage, sometimes even resulting in death. Often, the baby is left with some kind of disability.

Cristiano: I panicked and didn’t know what to do when I heard about the state that my wife and son was in. I could speak and understand only little Japanese back then, so I called many people up including my father-in-law and friends, and asked them to come to the hospital to explain to me what was going on.

Akiko: Luckily, Aguri and I both survived. Aguri was kept in a neonatal intensive care unit for two months, but after coming out of hospital, miraculously, he has grown steadily.


What is your dream for the future?

Akiko: I want to go and live in Australia with Cristiano after we retire (she used to live in Australia). I also want Aguri to study at an Italian university, as he is half-Italian.

Cristiano: I want to buy a motorcycle. I have one in Italy, but I want to sell it, and get a nice one in Tokyo.


The Failure of German Multiculturalism

Stratfor reports that German Chancellor Angela Merkel declared at an Oct. 16 meeting of young members of her party, the Christian Democratic Union, that multiculturalism, or Multikulti, as the Germans put it, “has failed totally.” Horst Seehofer, minister-president of Bavaria and the chairman of a sister party to the Christian Democrats, said at the same meeting that the two parties were “committed to a dominant German culture and opposed to a multicultural one.” Merkel also said that the flood of immigrants is holding back the German economy, although Germany does need more highly trained specialists, as opposed to the laborers who have sought economic advantages in Germany.

The statements were striking in their bluntness and their willingness to speak of a dominant German culture, a concept that for obvious reasons Germans have been sensitive about asserting since World War II. Stratfor feels that the statement should be taken with utmost seriousness and considered for its social and geopolitical implications. It should also be considered in the broader context of Europe’s response to immigration, not to Germany’s response alone.


The Origins of the German Immigration Question

Let’s begin with the origins of the problem. Post-World War II Germany faced a severe labor shortage for two reasons: a labor pool depleted by the devastating war — and by Soviet prisoner-of-war camps — and the economic miracle that began on the back of revived industry in the 1950s. Initially, Germany was able to compensate by admitting ethnic Germans fleeing Central Europe and Communist East Germany. But the influx only helped assuage the population loss from World War II. Germany needed more labor to feed its burgeoning export-based industry, and in particular more unskilled laborers for manufacturing, construction and other industries.

To resolve the continuing labor shortage, Germany turned to a series of successive labor recruitment deals, first with Italy (1955). After labor from Italy dried up due to Italy’s own burgeoning economy, Germany turned to Spain (1960), Greece (1960), Turkey (1961) and then Yugoslavia (1968). Labor recruitment led to a massive influx of “Gastarbeiter,” German for “guest workers,” into German society. The Germans did not see this as something that would change German society: They regarded the migrants as temporary labor, not as immigrants in any sense. As the term implied, the workers were guests and would return to their countries of origin when they were no longer needed (many Spaniards, Italians and Portuguese did just this). This did not particularly trouble the Germans, who were primarily interested in labor.

The Germans simply didn’t expect this to be a long-term issue. They did not consider how to assimilate these migrants, a topic that rarely came up in policy discussions. Meanwhile, the presence of migrant labor allowed millions of Germans to move it from unskilled labor to white-collar jobs during the 1960s.

An economic slowdown in 1966 and full-on recession following the oil shock of 1973 changed labor conditions in Germany. Germany no longer needed a steady stream of unskilled labor and actually found itself facing mounting unemployment among migrants already in country, leading to the “Anwerbestopp,” German for “labor recruitment stop,” in 1973.

Nonetheless, the halt in migration did not resolve the fact that guest workers already were in Germany in great numbers, migrants who now wanted to bring in family members. The 1970s saw most migration switch to “family reunions” and, when the German government moved to close that loophole, asylum. As the Italians, Spanish and Portuguese returned home to tend to their countries’ own successive economic miracles, Muslim Turks became the overwhelming majority of migrants in Germany — particularly as asylum seekers flocked into Germany, most of whom were not fleeing any real government retribution. It did not help that Germany had particularly open asylum laws in large part due to guilt over the Holocaust, a loophole Turkish migrants exploited en masse following the 1980 coup d’etat in Turkey.

As the migrants transformed from a temporary exigency to a multigenerational community, the Germans had to confront the problem. At base, they did not want the migrants to become part of Germany. But if they were to remain in the country, Berlin wanted to make sure the migrants became loyal to Germany. The onus on assimilating migrants into the larger society increased as Muslim discontent rocked Europe in the 1980s. The solution Germans finally agreed upon in the mid-to-late 1980s was multiculturalism, a liberal and humane concept that offered migrants a grand bargain: Retain your culture but pledge loyalty to the state.

In this concept, Turkish immigrants, for example, would not be expected to assimilate into German culture. Rather, they would retain their own culture, including language and religion, and that culture would coexist with German culture. Thus, there would be a large number of foreigners, many of whom could not speak German and by definition did not share German and European values.

While respecting diversity, the policy seemed to amount to buying migrant loyalty. The deeper explanation was that the Germans did not want, and did not know how, to assimilate culturally, linguistically, religiously and morally diverse people. Multiculturalism did not so much represent respect for diversity as much as a way to escape the question of what it meant to be German and what pathways foreigners would follow to become Germans.


Two Notions of Nation

This goes back to the European notion of the nation, which is substantially different from the American notion. For most of its history, the United States thought of itself as a nation of immigrants, but with a core culture that immigrants would have to accept in a well-known multicultural process. Anyone could become an American, so long as they accepted the language and dominant culture of the nation. This left a lot of room for uniqueness, but some values had to be shared. Citizenship became a legal concept. It required a process, an oath and shared values. Nationality could be acquired; it had a price.

To be French, Polish or Greek meant not only that you learned their respective language or adopted their values — it meant that you were French, Polish or Greek because your parents were, as were their parents. It meant a shared history of suffering and triumph. One couldn’t acquire that.

For the Europeans, multiculturalism was not the liberal and humane respect for other cultures that it pretended to be. It was a way to deal with the reality that a large pool of migrants had been invited as workers into the country. The offer of multiculturalism was a grand bargain meant to lock in migrant loyalty in exchange for allowing them to keep their culture — and to protect European culture from foreign influences by sequestering the immigrants. The Germans tried to have their workers and a German identity simultaneously. It didn’t work.

Multiculturalism resulted in the permanent alienation of the immigrants. Having been told to keep their own identity, they did not have a shared interest in the fate of Germany. They identified with the country they came from much more than with Germany. Turkey was home. Germany was a convenience. It followed that their primary loyalty was to their home and not to Germany. The idea that a commitment to one’s homeland culture was compatible with a political loyalty to the nation one lived in was simplistic. Things don’t work that way. As a result, Germany did not simply have an alien mass in its midst: Given the state of affairs between the Islamic world and the West, at least some Muslim immigrants were engaged in potential terrorism.

Multiculturalism is profoundly divisive, particularly in countries that define the nation in European terms, e.g., through nationality. What is fascinating is that the German chancellor has chosen to become the most aggressive major European leader to speak out against multiculturalism. Her reasons, political and social, are obvious. But it must also be remembered that this is Germany, which previously addressed the problem of the German nation via the Holocaust. In the 65 years since the end of World War II, the Germans have been extraordinarily careful to avoid discussions of this issue, and German leaders have not wanted to say things such as being committed to a dominant German culture. We therefore need to look at the failure of multiculturalism in Germany in another sense, namely, with regard to what is happening in Germany.

Simply put, Germany is returning to history. It has spent the past 65 years desperately trying not to confront the question of national identity, the rights of minorities in Germany and the exercise of German self-interest. The Germans have embedded themselves in multinational groupings like the European Union and NATO to try to avoid a discussion of a simple and profound concept: nationalism. Given what they did last time the matter came up, they are to be congratulated for their exercise of decent silence. But that silence is now over.


The Re-emergence of German Nation Awareness

Two things have forced the re-emergence of German national awareness. The first, of course, is the immediate issue — a large and indigestible mass of Turkish and other Muslim workers. The second is the state of the multinational organizations to which Germany tried to confine itself. NATO, a military alliance consisting mainly of countries lacking militaries worth noting, is moribund. The second is the state of the European Union. After the Greek and related economic crises, the certainties about a united Europe have frayed. Germany now sees itself as shaping EU institutions so as not to be forced into being the European Union’s ultimate financial guarantor. And this compels Germany to think about Germany beyond its relations with Europe.

It is impossible for Germany to reconsider its position on multiculturalism without, at the same time, validating the principle of the German nation. Once the principle of the nation exists, so does the idea of a national interest. Once the national interest exists, Germany exists in the context of the European Union only as what Goethe termed an “elective affinity.” What was a certainty amid the Cold War now becomes an option. And if Europe becomes an option for Germany, then not only has Germany re-entered history, but given that Germany is the leading European power, the history of Europe begins anew again.

This isn’t to say that Germany must follow any particular foreign policy given its new official view on multiculturalism; it can choose many paths. But an attack on multiculturalism is simultaneously an affirmation of German national identity. You can’t have the first without the second. And once that happens, many things become possible.

Consider that Merkel made clear that Germany needed 400,000 trained specialists. Consider also that Germany badly needs workers of all sorts who are not Muslims living in Germany, particularly in view of Germany’s demographic problems. If Germany can’t import workers for social reasons, it can export factories, call centers, medical analysis and IT support desks. Not far to the east is Russia, which has a demographic crisis of its own but nonetheless has spare labor capacity due to its reliance on purely extractive natural resources for its economy. Germany already depends on Russian energy. If it comes to rely on Russian workers, and in turn Russia comes to rely on German investment, then the map of Europe could be redrawn once again and European history restarted at an even greater pace.

Merkel’s statement is therefore of enormous importance on two levels. First, she has said aloud what many leaders already know, which is that multiculturalism can become a national catastrophe. Second, in stating this, she sets in motion other processes that could have a profound impact on not only Germany and Europe but also the global balance of power. It is not clear at this time what her intention is, which may well be to boost her center-right coalition government’s abysmal popularity. But the process that has begun is neither easily contained nor neatly managed. All of Europe, indeed, much of the world, is coping with the struggle between cultures within their borders. But the Germans are different, historically and geographically. When they begin thinking these thoughts, the stakes go up. [Source: George Friedman of Stratfor]

China Demographics Dictate India as Global Manufacturing Hub

China’s rapidly aging population is set to dramatically shrink its workforce and effectively pass the baton to India as the world’s manufacturing hub, according to analysis from Morgan Stanley and the Global Times. China’s one child policy, which has seen it manage its population over the past three decades, is now finally kicking into the work pool and reducing the number of Chinese workers.

The Global Times says, “2015 will mark the beginning of the end of China’s demographic dividend.” The World Bank also echoes those sentiments, predicting that China’s GDP growth will fall to 7.7 percent in 2015 and to 6.7 percent by 2020. Morgan Stanley expects India’s growth to head in the opposite direction and to surpass China’s growth two years from now. Personally, I suspect that when speculation and manipulation is stripped out of China’s current GDP growth rates, India’s economy is already growing at a faster pace than China’s.

China’s aging workforce is already having an impact on the nature of conducting business in the country. It was in recognition of this that China strengthened its labor laws two years ago, making it more difficult for employers to lay off aging staff without having to pay significant compensation, based on years of service, for loss of employment. That move effectively made employers financially responsible for at least part of the nation’s pension requirements. China will possess 200 million people above 60 years in 2015, and workers coming to retirement age are expected to add an unprecedented 10 million retirees per annum to that figure. That loss of workforce is already starting to make China more expensive, and this trend will continue. India, however, is poised to provide the vast bulk of the global labor pool. By 2020, the average Indian will be 29, while the average Chinese will be 37.

The data has interesting repercussions.

China is becoming a consumer market to sell to rather than a global manufacturing hub
This is often quoted as the dynamic that will maintain China as a major destination for foreign direct investment. While this is true, the nature of selling to China is still wrapped in many problems, especially for overseas investors. The China market is prone to protectionist measures, and with the Chinese government itself still a major shareholder in many Chinese state-owned enterprises, foreign investors will have an increasingly tough time competing with them. Additionally, selling to China requires a profound knowledge of Chinese culture and tastes. Then there’s the stranglehold that China has on much of its domestic logistics industry. Selling to China is fine, but it is a path fraught with difficulties. The successful foreign investor will have deep pockets and a sound Chinese joint venture partner to help them. The domestic expertise and finesse to assist sales of products to the Chinese consumer will invariably require Chinese local expertise. Brands well-known globally will have to adapt marketing, positioning and even recipes to fit the Chinese model. As I pointed out two months ago, white goods need to become red. [Source: Op-Ed Commentary for China-Briefing: Chris Devonshire-Ellis

Balancing Wealth and the Public Good: An Interview with the COO of Abu Dhabi’s Development Company

As noted by McKinsey Quarterly, Mubadala Development Company is a study in contrasts. An investment company with assets of $24 billion, its businesses deliver both strong commercial and social returns—reflecting the government of Abu Dhabi’s policy agenda. Its subsidiaries span multiple industries, including aerospace, energy, health care, hospitality, infrastructure, real estate, and technology—and while its sole shareholder is the government of Abu Dhabi, it has announced plans to take several of its local subsidiaries public in the next decade. This makes it a virtual incubator of companies that the government expects to play a critical part in the economy that Abu Dhabi is building.

Among the most distinctive contrasts at Mubadala is its charter’s mandate that it should not only be profitable but also lay the foundations for a diversified economy in the Emirate. Its mission is closely aligned with Abu Dhabi Economic Vision 2030, an official document mapping out the Emirate’s primary development areas from a government perspective. In an era when companies around the world seek to integrate social values and the public interest into their business models, Mubadala stands as a vivid example. Its mission and structure are built around what it calls a “double bottom line”: pursuing opportunities that could deliver both strong social returns and commercial profit. In a July 2010 interview, Mubadala’s chief operating officer, Waleed Al Mokarrab Al Muhairi, spoke with McKinsey’s Zafer Achi about Mubadala’s role in Abu Dhabi’s economic development and the trade-offs the company makes to fulfill seemingly competing mandates.

Here is an interview conducted by McKinsey Quarterly:

The Quarterly: How do Mubadala and Abu Dhabi’s development fit together?

Waleed Ahmed Al Mokarrab Al Muhairi: The Abu Dhabi Economic Vision 2030 is a directional blueprint that maps out the primary areas of development for the Emirate. Its purpose is to enable the Emirate to, among other things, shift the balance of its economy from one primarily reliant on hydrocarbons as a source of GDP to one in which nonhydrocarbon industries will play a much larger role. If you look at the different priority areas where Mubadala deploys its capital, you’ll see that there’s a very good fit between what’s articulated in the 2030 vision and what we do. We invest in highly innovative industries that play to Abu Dhabi’s strengths and competitive advantages, such as those that are capital intensive or rely on world-class logistics. Such industries help meet our aspiration to increase innovation and the role of intellectual property in the Abu Dhabi economy.

The Quarterly: How do you meld the pursuit of economic wealth and of strategic social goals in the public interest?

Al Muhairi: We look at a number of filters as we debate the Abu Dhabi Economic Vision 2030 and figure out what makes sense for Mubadala. Those filters range from goodness of fit—meaning playing to our strengths—to things like how significant a sector could be over time and the types of jobs an investment might create. We take a very deliberate approach to picking sectors, picking clusters, and understanding what’s needed to get from a large investment to a thriving, productive contributor to and, ultimately, driver of the GDP and the economy.

Take our investment in Emirates Aluminum. This joint venture between Mubadala and Dubai Aluminum is constructing the largest single free-standing smelter in the world. Phase one is already operational, and we think we’ll be able to reach 1.5 million tons per annum over the next few years, with an aspiration to be a top-three or -four producer worldwide. This investment was a good fit: aluminum is an energy-intensive business and relies on a multifaceted transport infrastructure, both of which we have. It also creates the type of employment we think will be quite beneficial for Abu Dhabi. So in many ways, it meets our priorities. Now, there are many opportunities for deals we might make to support Emirates Aluminum once Mubadala has firmly established itself in that space. For example, we want to diversify and secure our upstream supplies. We don’t necessarily have a target in mind, but we will look for potential transactions.

The Quarterly: Does any part of Mubadala invest for purely financial returns—without a strategic objective?

Al Muhairi: Yes, although all our deployments of capital, even from a financial perspective, have had a strategic twist. For example, our investment in General Electric has certainly turned into not only one of our largest, and most important, deployments of capital on the financial-investing side but also into a very strong and very strategic relationship—as a result of the framework agreement that we’ve put in place. So what started out as, “Hey, we think it would be a great idea for you to invest in GE,” ended up with the creation of a significant joint venture, Mubadala GE Capital, along the lines of a GE Capital, here in Abu Dhabi.

We have many examples of investments that start out as financial investments but take on a strategic angle. But nothing prevents us from looking at pure financial plays—and we will do so increasingly over time.

The Quarterly: How do you trade off financial returns against strategic contributions to society?

Al Muhairi: We tend not to compromise on this. Part of the thinking is that if you start making those trade-offs, you’ll end up on a slippery slope that can take you places you wouldn’t ideally want to be. So we always use financial returns as the first filter when making an investment. If it passes the financial test, we look at the strategic metrics and see if, together, the financial and strategic metrics create a cluster or businesses that make sense from an Abu Dhabi perspective.

If our shareholder asks us to do something that makes sense only from a social perspective, we’ll try to turn it around and engineer it in a manner that respects the mandate of Mubadala to produce economic returns. If that doesn’t work, we’ll go back to our shareholder and say, “We don’t believe this is the right project from Mubadala’s perspective.” And the government of Abu Dhabi and our board of directors are quite adamant about staying true to both sides of our mandate.

The Quarterly: What about the trade-offs between the responsibility to produce annual returns and long-term goals that are 20 years out?

Al Muhairi: Because of our bondholders, we are committed to being very transparent about our financials, which we release twice a year. We have our pro forma midyears and then we have final statements we release at the end of every year. We’re committed to doing that and think that’s done wonders, from a transparency perspective, for Mubadala. But we are an investment vehicle that is quite mid- to long-term focused. Our board has given us very, very clear guidance: “The shareholder wants you to think seriously about developing these clusters. We know you can’t do that on a six-monthly timetable.” So it’s important to keep yourself honest. It’s important to be transparent, hence the six-monthly reporting. But don’t lose track of your vision.

We’ve taken that advice to heart, and that’s really the way we manage as an organization. Not having the intense quarter-on-quarter expectations takes away some of the pressure but none of the discipline.

The Quarterly: Mubadala has a renewable-energy initiative, Masdar. How does that fit into your mission?

Al Muhairi: Masdar signals a commitment from both the leadership of Abu Dhabi and Mubadala to deploy significant amounts of capital into an area we think will have superior financial returns—and which we’ve also identified as a target area for innovation and growth from an economic-diversification and -development perspective. In many ways, Masdar is similar to our health care initiatives, our aerospace initiatives, our technology initiatives. You can think of it as our renewable-energy initiative. Now, it tends to be a little bit more encompassing than some of the others, in the sense that it has embedded educational partnerships, including venture labs and accelerators. So it’s a very holistic view of how we want to approach what we hope will be an important sector in Abu Dhabi’s economic future.

The Quarterly: How do you deal with the limited availability of talent and labor in Abu Dhabi?

Al Muhairi: It’s one of the things that we’ve had to tackle quite quickly. Everything we do, in health care, aerospace, semiconductors, even Masdar—all that revolves around how we find solutions for human-capital issues. It’s something I spend a lot of time thinking about.

As a result, we’ve worked quite closely on curriculum issues with the Abu Dhabi Educational Council, for everything from primary schools to tertiary education. And we’ve tried to find models that work for the different types of positions we need to fill in different industries. For example, in the semiconductor industry we need people with a polytechnic type of background, all the way to PhDs who can help us on manufacturing and process design. So we work with the authorities to create the linkages between industry and academia, and as a third and important pillar we’re thinking about how we can use R&D to help bridge that talent gap as well.

The Quarterly: This is certainly important for the economic diversification of the Emirate, but doesn’t it add to the portfolio companies’ cost of doing business?

Al Muhairi: I wonder if that’s true. The way we think about it is educating our own people and getting them in productive industries. Any way you look at this, it’s positive for the economy and therefore has benefits, whether through social dialogue or the impact educated parents will have on educating children.

Source: McKinsey Quarterly

Survey: The Business Climate in the Greater Tumen Region

The Greater Tumen Initiative is the regional UNDP body responsible for business to government and government to government activities in China, Russia, Mongolia & Korea. It provides a unique multilateral forum for the member countries to identify and implement regional initiatives that encourage economic growth, encourage multinational investment and infrastructure, and promote business and trade throughout the North-East Asia region. The Business Advisory Council of the GTI is a platform for the permanent dialogue between government and private sector, established with support of the United Nations Office for Partnership.

In association with their Business Advisory Council, the Greater Tumen Initiative (GTI) is conducting a survey to assess the business climate in the Greater Tumen Region. The questionnaire is aimed at collecting data from companies that currently engage in business activities in the Greater Tumen Region (GTR). The survey serves to evaluate GTR’s investment climate from regional and foreign companies’ perspectives and is designed to assess systematically the barriers companies face while conducting business in the GTR. It also aims at providing the GTI member governments (China, Republic of Korea, Mongolia and the Russian Federation) with important feedback from the business community.

We appreciate your time and effort in supposrting the GTI initiative!

The survey can be accessed at the below website*:

*If clicking on the above link does not automatically redirect you to the Survey, please copy and paste the URL into your web browser.

Belgium Inks Deal to Help High-Speed Rail in Golden State

SACRAMENTO – Steve Hymon reported today that the California High-Speed Rail Authority signed a memorandum of understanding (MOU) today with the country of Belgium to continue sharing high-speed rail planning and development information. The agreement, with Belgium’s Federal Public Service Foreign Affairs, Foreign Trade and Development Cooperation, was approved by the Authority Board at its May 2010 meeting.

“This is another example of the international recognition and support of California’s high-speed rail system,” said Curt Pringle, Chairman of the California High-Speed Rail Authority. “We’re pleased that this partnership with Belgium will enhance our planning as this project moves forward.”

Belgium has been operating high-speed rail since 1997, with routes connecting Belgium to France, Germany, the Netherlands and the United Kingdom. The agreement includes the exchange of information on technical standards, purchasing and building methods, engineering know-how, funding options as well as operations and maintenance data.

“Belgium has extensive experience and expertise in providing high-speed rail technology, with neutrality and objectivity towards technical references, standards and manufacturers. The Belgian railways have been instrumental in making European high-speed rail a success, through international technical integration. We’re happy to share this experience with the California HSRA”, said Geert Criel, Consul-General of Belgium.

The signing of the agreement was followed by a presentation by Universal Consensus Global Alliance Member, Joseph M. Borremans, Senior International Project Manager and Representative for North-America of TUC-RAIL (Belgian Railways group). TUC RAIL extended and modernized one of the world’s busiest railway networks situated at the heart of Europe and has been involved in many international projects, acquiring valuable experience as a leader in high-speed rail technology.

This demonstrated interest in California’s project is the latest to accompany similar agreements between the California High-Speed Rail Authority and seven other countries operating high-speed rail.

The California High-Speed Rail Authority is the state entity responsible for planning, constructing and operating an 800-mile-long high-speed train system serving California’s major metropolitan areas.

China’s state capitalism and multinationals: An interview with the president of Eurasia Group

Ian Bremmer discusses the changing rules of competition in China, where the state is the principal actor and arbiter in the economy.

As China gains dominance on the world stage, more and more multinational corporations will need to rethink their assumptions about competing under its state-capitalism model—one in which the government is the principle economic driver. So says Ian Bremmer, president of the political-risk consulting firm Eurasia Group and author of the upcoming book The End of the Free Market: Who Wins the War Between States and Corporations? In this video interview, Bremmer discusses the fundamental distinctions between state capitalism and free-market economies, as well as the strategic implications this has for Western companies and governments alike. McKinsey Publishing’s Rik Kirkland conducted the interview in New York.