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Recent events in Taiwan, including the Sunflower Movement and the November 29 municipal elections in 2014, indicate changes in Taiwan’s political landscape. Political parties and candidates will have to adjust to changing public opinion and political trends as the January 2016 presidential and legislative elections approach. The two main parties, the Kuomintang (KMT) and the Democratic Progressive Party (DPP), face both opportunities and challenges in disseminating their messages and garnering public support. The strategies that each party develops in order to capture the necessary votes and seats will be critical. 

On April 22, the Center for East Asia Policy Studies at Brookings and Freeman Chair in China Studies at the Center for Strategic and International Studies co-hosted a public forum to identify and analyze the politics behind the 2016 elections in Taiwan. Leading experts from Taiwan and the United States assessed the new forces and phenomena within Taiwan politics; how the election system itself may contribute to election outcomes, especially for the Legislative Yuan; and how the major parties must respond to emerging trends.

 Join the conversation on Twitter at #TaiwanElections

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Dark clouds have gathered over Malaysia as a crisis deepens. Two weeks ago, the country witnessed a massive street protest - dubbed Bersih (lit: “clean”) - organized by a network of civil society groups agitating for electoral reform. This was in fact the fourth iteration of the Bersih protests (Bersih also mobilized in 2007, 2011, and 2012), and managed to draw tens of thousands of participants (the exact number varies depending on who you ask). On this occasion, the protest was a culmination of widespread popular indignation at a scandal involving 1MDB, a government-owned strategic investment firm that accrued losses amounting to approximately USD10 billion over a short period of time, and the controversial "donation" of USD700 million funneled to the ruling party through the personal bank accounts of Prime Minister Najib Tun Razak.

All this is taking place against an inauspicious backdrop of sluggish economic growth, the depreciation of the Malaysian currency, and several exposes on the extravagant lifestyle of Najib’s wife, Rosmah Mansor.

How consequential was Bersih?

When Bersih first mobilized in 2007, it managed to harness a flood of dissatisfaction in opposition to the government of Abdullah Badawi, and contributed to major opposition political gains at the general election of 2008. The second and third protests have also been credited as contributing factors to further opposition inroads at the 2013 polls. Assessments of the latest iteration of Bersih however, have been more equivocal. On the one hand, Bersih 4.0 indicated that the movement can still draw huge crowds and give voice to popular discontent, which continues to grow. On the other hand, analysts have called attention in particular to the comparatively weak turnout of ethnic Malays at Bersih 4.0 compared to the previous protests. This is a crucial consideration that merits elaboration if Bersih is to be assessed as an instrument for change.

Given how Malaysian politics continues to set great store by ethnic identity, the support of the Malay majority demographic is integral for any social and political change to take place. By virtue of affirmative action, ethnic Malays are privileged recipients of scholarships and public sector jobs. Therein lies the problem for any social movement agitating for change. Years of conditioning through policy and propaganda have created a heavy reliance on the state, which in essence means UMNO (United Malays National Organisation), the dominant party in the ruling coalition which Prime Minister Najib helms as party president. While it is difficult to say conclusively that this explains the tepid reaction of ethnic Malays during the Bersih protests, it is not far-fetched to hypothesize that at least a contributing factor was the fear among recipients of scholarships and public sector employees that their benefits might be jeopardized (For example, I know that scholarship holders were sent letters "dissuading" them from participating in "political activities.").

Ultimately though, the most telling feature of the event may not have been the dearth of ethnic Malays but the presence of one particular Malay leader – Mahathir Mohamad, Malaysia’s nonagenarian former prime minister and unlikely Bersih participant.

Hitherto a supporter of Prime Minister Najib, Mahathir has grown increasingly unhappy with the prime minister’s policies. According to Mahathir himself, attempts had been made to share his reservations with Najib in private, but they were rebuffed. Goes by this account, it is not surprising that Najib’s alleged snub prompted private reservations to crescendo into harsh public criticism. By the middle of 2014, Mahathir had assumed the role of Malaysia’s conscience to become one of the loudest critics of Najib. Asked to explain his criticisms, Mahathir reportedly responded: “I have no choice but to withdraw my support. This (referring to the act of privately reaching out to Najib) has not been effective so I have to criticize. Many policies, approaches, and actions taken by the government under Najib have destroyed interracial ties, the economy, and the country’s finances.”[1]

Today, it is Mahathir, Malaysia’s longest serving prime minister who was in office from 1981 to 2003, who is leading the charge to discredit Najib and have him removed from office for malfeasance. What explains Mahathir’s singleness of purpose to have Najib removed from power? Part of the answer may lie in Mahathir’s own record of political quarrels.

What lies beneath Mahathir’s attacks?

Mahathir is no stranger to bitter and bloody personal political battles. His interventions in Malaysian politics throughout his career in office are legion (and many Malaysians might also say, legendary). Longtime Malaysia watchers and critics have assailed Mahathir for his autocratic streak evident, for example, in how he emaciated the judiciary by contriving to have supreme court judges (and on one occasion, the Lord President himself) removed from office, incapacitated the institution of the monarchy by pushing legislation that further curtailed the already-limited powers of the constitutional monarch, and suppressed opposition parties and civil society by using internal security legislation against them.

Mahathir was no less ruthless within UMNO, where he brooked no opposition. The history of political contests in UMNO has his fingerprints all over it. In 1969, it was his provocations as a contumacious backbencher that precipitated the resignation of the respected founding prime minister of Malaysia, Tunku Abdul Rahman. In 1987, Mahathir weathered a challenge to his leadership of UMNO mounted by political rivals (the then deputy prime minister, Musa Hitam, and minister for international trade, Razaleigh Hamzah), turned the tables on them, and had them exiled into political wilderness. In 1998, Mahathir successfully fended off the ambitious Anwar Ibrahim by sacking him, and later having him arrested, charged, and eventually convicted for corruption and sodomy. Even when not directly involved, he was never content to be a bystander, choosing instead to either instigate or leverage power plays. In 1978, he played no small part in nudging Sulaiman Palestin to challenge then incumbent Hussein Onn for party presidency (a move that many Malaysian analysts agree signaled the beginning of the end for Hussein’s political career even though he managed to fend off Sulaiman’s challenge). In 1993, Mahathir did little to prop his then deputy, Ghafar Baba, who was crumbling under the challenge of a charismatic Malay nationalist and rising star by the name of Anwar Ibrahim. It was Mahathir's machinations in 2008 that forced Abdullah Badawi, his handpicked successor no less, to resign a year later.

All said, Mahathir had accomplished the signal feat of being involved in some way or other in almost every political crisis that has beset UMNO since 1969. Several observations can be drawn from this record to explain Mahathir’s present behavior. First, Mahathir has long been possessed of a drive to be at the center of power in UMNO and Malaysian politics. Second, he is also in possession of an acute survival instinct that has enabled the über-politician to see off a string of challengers and ensured his political survival at the helm for 22 years. Finally, one can also plausibly surmise that at the core of his recent interventions is the desire – not unlike others who have held any high office for 22 years - to protect his legacy. Therein lie the rub, for it is not difficult to imagine that Mahathir might have deemed his legacy challenged by Anwar in 1998, ignored by Abdullah Badawi in 2008, and now, disregarded by Najib.

Will Najib survive?

A crucial factor that plays in this unfolding drama between two of Malaysia’s political heaveyweights – and which cannot be over-emphasized – is the fact that power in Malaysia ultimately lies in UMNO itself, sclerotic though the party may have become. It is on this score that Najib remains formidable, even for the likes of Mahathir.

Unlike Anwar, who was only a deputy president when he launched his abortive attempt to challenge Mahathir in 1998 (for which he paid a heavy political and personal price), Najib enjoys the advantage of incumbency. Unlike Abdullah Badawi, who chose to remain quiescent when stridently attacked latterly by Mahathir, Najib has used the powers of incumbency adroitly to head off any potential challenge and tighten his grip on the party. He has done so by out-maneuvering pretenders (he removed his deputy prime minister), sidelining opponents, and co-opting potential dissenters into his Cabinet. These divide-and-rule measures closely approximate what Mahathir himself had used to devastating effect when he was in power. For good measure, Najib has lifted a few additional moves from Mahathir’s own playbook: he has neutralized legal institutions, hunted down whistle blowers, brought security agencies to heel, and shut down newspapers and periodicals that have criticized him. Najib’s consolidation of power has been aided by the fact that there is at present no alternative leader within UMNO around whom a sufficiently extensive patronage network has been created. It bears repeating that the arid reality of Malaysian politics is that power still lies within UMNO, so he who controls the party controls Malaysia. On that score, even if Najib’s credibility is eroding in the eyes of the Malaysian populace, within UMNO his position does not appear to have weakened, nor does he seem to be buckling under pressure.

There are no signs that the enmity between the current and former prime ministers of Malaysia will abate anytime soon. Given the stakes, the depths to which ill-will between both parties now run, and how far the boundaries have already been pushed, the rancor is likely to intensify. Mahathir still commands a following especially online where his studied blog musings on www.chedet.cc, a key vehicle for his unrelenting assaults on Najib’s credibility, remain popular grist for the ever-churning Malaysian rumor mill. In response, Najib has defiantly circled the wagons and tightened his grip on levers of power. While Mahathir is unlikely to relent, the reality is that the avenues available to him to ramp up pressure on Najib are disappearing fast. A recent UMNO Supreme Council meeting that was expected to witness a further culling of Najib’s detractors and Mahathir’s sympathizers turned out to be a non-event and an endorsement of the status quo. In the final analysis then, it is difficult to see Mahathir ultimately prevailing over Najib, let alone bend the sitting prime minister and party president to his will.

This is the first in a series of reports on the demographic and political dynamics under way in 10 “battleground” states, deemed to be crucial in deciding the 2008 election. As part of the Metropolitan Policy Program’s Blueprint for American Prosperity, this series will provide an electoral component to the initiative’s analysis of and prescriptions for bolstering the health and vitality of America’s metropolitan areas, the engines of the U.S economy. This report focuses on Pennsylvania. Among its specific findings are:

• Pennsylvania is becoming a demographic “bridge” between Midwestern states like Ohio and other Northeastern states like New Jersey, as its new growth is tied to urban coastal regions. While often classed as a so-called “Rust Belt” state, its eastern and south central regions are increasingly becoming part of the nation’s Northeast Corridor, with new growth and demographic profiles that warrant attention in upcoming elections.
• Eligible voter populations indicate a state in transition, where minorities, especially Hispanics, and white college graduates are increasingly important, but where white working class voters continue to play a central role. While white working class voters continue to decline as a share of voters and are less likely to work in manufacturing and goods production, they are still a critical segment of voters, including in the fast-growing Harrisburg and Allentown regions where their absolute numbers are actually increasing.
• Recent Democratic victories in Pennsylvania have featured strong support from groups like minorities, single women, and the young but have also benefited from relatively strong support among the white working class, especially among its upwardly mobile segment that has some college education. Compared to 1988, both the latter group and white college graduates have increased their support for Democrats. And both groups have increased their share of voters over the time period.
• Political shifts in Pennsylvania since 1988 have seen the growing eastern part of the state swing toward the Democrats, producing four straight presidential victories for that party. The swing has been sharpest in the Philadelphia suburbs, but has also been strong in the Allentown region and even affected the pro-Republican Harrisburg region. Countering this swing, the declining western part of the state has been moving toward the GOP.
• Key trends and groups to watch in 2008 include the white working class, especially whites with some college, who, unlike the rest of this group, are growing; white college graduates; and Hispanics, who have been driving the growth of the minority vote.

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The most noticeable trend under the leadership of Xi Jinping since the 2012 National Congress of the Chinese Communist Party (CCP) has been the continuing consolidation of power. In particular, the military has been a key forum in which Xi has strengthened both his personal power and his new administration’s authority. Xi has adopted several approaches and political tactics to achieve this, including purging the two highest-ranking generals under the previous administration for corruption and other charges; arresting 52 senior military officers on various charges of wrongdoing; reshuffling generals between regions, departments, and services; attempting to systematically reform the PLA’s structure and operations; and, last but not least, rapidly promoting “young guards” (少壮派) in the Chinese military.

These bold moves will have profound implications—not only for Xi’s political standing in the lead-up to the next leadership turnover in 2017, but also for the development of civilian-military relations in the country and for the trajectory of China’s military modernization. The third installment in this series focuses on personnel changes that have occurred during the early phase of military reform.

Who are the rising stars in the PLA following the recent reorganization and reshuffling? What are the distinguishing characteristics of the “young guards”? What are possible explanations for and implications of some of the highest-level personnel changes, such as the retirement of the heavyweight military figure General Liu Yuan and the marginalization of Xi’s confidant General Cai Yingting? How does Xi successfully perform the delicate balancing act in personnel appointments by aggressively promoting his own long-time protégés and new loyalists while avoiding making too many enemies?

This is part three of a series that will appear in the upcoming issue of the China Leadership Monitor. Download the article in full below. The first paper in the series can be found here: Promoting "young guards": The recent high turnover in the PLA leadership (Part 1: Purges and reshuffles), and the second paper here: Promoting “young guards”: The recent high turnover in the PLA leadership (Part II: Expansion and escalation).

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The government and opposition in Georgia remain locked in political stalemate. The opposition continues to hold rallies and to call for President Saakashvili to step down, and the opposition and government thus far have found no common basis for moving forward. All this plays out against a backdrop of lingering tensions in relations between Georgia and Russia in the aftermath of the August 2008 conflict.

On June 17, the Center on the United States and Europe (CUSE) at Brookings hosted Irakli Alasania, former Georgian permanent representative to the United Nations and currently the head of the Alliance for Georgia opposition group, for a discussion on the political crisis in Georgia and the prospects for resolution. After a decade of important positions in the Georgian government, Ambassador Alasania resigned from his position at the United Nations in December 2008 and has since been actively involved in the Georgian opposition. Brookings senior fellow Carlos Pascual introduced Ambassador Alasania and moderated the discussion.

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Introduction

Guaranteeing the right to vote and to participate in public and political affairs for all citizens is an important responsibility. Given the precarious position that IDPs can find themselves in and considering the extent to which they may need to rely on national authorities for assistance, IDPs have a legitimate and a heightened interest in influencing the decisions that affect their lives by participating in elections.   

Internally displaced persons often exist on the margins of society and are subject to a number of vulnerabilities because of their displacement. For instance, IDPs face an immediate need for protection and assistance in finding adequate shelter, food, and health care. Over time, they can suffer discrimination in accessing public services and finding employment on account of being an IDP from another region or town. IDPs also face an especially high risk of losing ownership of their housing, property, and land, something which can lead to loss of livelihoods and economic security as well as physical security. Women and children, who often make up the majority of IDP populations, face an acute risk of sexual exploitation and abuse.  

In addition to influencing public policy, elections can also be about reconciliation and addressing divisions and inequities that exist within society. For these reasons and others, IDPs should be afforded an opportunity to fully participate in elections as voters and as candidates.   

As noted in a press release of the Representative of the Secretary General of the United Nations on the Human Rights of Internally Displaced Persons following an official mission to Georgia in December 2005, 

“[IDP] participation in public life, including elections, needs promotion and support. Supporting internally displaced persons in their pursuit of a normal life does not exclude, but actually reinforces, the option of eventual return. … Well integrated people are more likely to be productive and contribute to society, which in turn gives them the strength to return once the time is right."[1]

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The Metropolitan Policy Program at Brookings, hosted The Political Geography of America's Purple States: Five Trends That Will Decide the 2008 Election, a briefing on a new series of reports on the political demography of "purple" states in the 2008 election.

Purple states-or states where the current balance of political forces does not decisively favor one party or the other-will play an undeniably pivotal role in the upcoming election and include: Virginia and Florida in the South; the Intermountain West states of Colorado, New Mexico, Nevada, and Arizona; Michigan, Missouri, and Ohio in the Heartland; and Pennsylvania.

On October 10, 2008 at the National Press Club in Washington DC, authors William Frey and Ruy Teixeira highlighted the political and demographic trends in these 10 battleground states, focusing not only on their role in the 2008 election, but their position as toss-ups in years to come.

The session opened with an overview of the demographic shifts shaping all the contested states studied, and evolved into a detailed presentation of the trends that are testing and reshaping the balance of their voting populations, focusing particularly on five trends that Frey and Teixeira believe will decide the 2008 election. Feedback from James Barnes, political correspondent for the National Journal, helped shape the conversation.

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This is the fourth in a series of reports on the demographic and political dynamics under way in key “battleground” states, deemed to be crucial in deciding the 2008 election. As part of the Metropolitan Policy Program’s Blueprint for American Prosperity, this series will provide an electoral component to the initiative’s analysis of, and prescriptions for, bolstering the health and vitality of America’s metropolitan areas, the engines of the U.S. economy. This report focuses on two major battleground states in the South, Virginia and Florida, which serve as bookends to an emerging New South.

Virginia and Florida have eligible voter populations that are rapidly changing. White working class voters are declining sharply while white college graduates are growing and minorities, especially Hispanics and Asians, are growing even faster. These changes are having their largest effects in these states’ major metropolitan areas, particularly Miami and rapidly-growing Orlando and Tampa in Florida’s I-4 Corridor and the suburbs of Washington, D.C. in Northern Virginia. Other large metro areas in these states are also feeling significant effects from these changes and will contribute to potentially large demographically related political shifts in the next election.

In Virginia, these trends will have their strongest impact in the fast-growing and Democratic-trending Northern Virginia area, where Democrats will seek to increase their modest margin from the 2004 election. The trends could also have big impacts in the Richmond and Virginia Beach metros, where Democrats will need to compress their 2004 deficits. Overall, the GOP will be looking to maintain their very strong support among Virginia’s declining white working class, especially in the conservative South and West region. The Democrats will be reaching out to the growing white college graduate group, critical to their prospects in Northern Virginia and statewide. The Democrats will also be relying on the increasing number of minority voters, who could help them not just in Northern Virginia, but also in the Virginia Beach metro and the Richmond and East region.

In Florida, these trends will have their strongest impacts in the fast-growing I-4 Corridor (36 percent of the statewide vote), which, while Democratic2 trending, is still the key swing region in Florida, and in the Miami metro, largest in the state and home to 27 percent of the vote. The trends could also have big impacts in the South and North, where Democrats will be looking to reduce their 2004 deficits in important metros like Jacksonville (North) and Sarasota and Cape Coral (South). Across the state, the GOP needs to prevent any erosion of support among white working class voters, especially among Democratic-trending whites with some college. They will also seek to hold the line among white college graduates, whose support levels for the GOP are high but declining over time. Finally, the support of the growing Hispanic population is critical to GOP efforts to hold the state, but this group is changing generationally and in terms of mix (more non-Cuban Hispanics), which could open the door to the Democrats.

Both of these states are near the top of the lists of most analysts’ list of battleground states for November 2008. Florida was a very closely contested state in both 2000 and 2004 (especially 2000). But Virginia’s status as a battleground is new to 2008. Yet in both states the contested political terrain reflects the dynamic demographic changes occurring within them. With 27 and 13 electoral votes, respectively, all eyes will be on Florida and Virginia on election night.

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• Maps and Figures, Part One
• Maps and Figures, Part Two

This is the third in a series of reports on the demographic and political dynamics under way in key “battleground” states, deemed to be crucial in deciding the 2008 election. As part of the Metropolitan Policy Program’s Blueprint for American Prosperity, this series will provide an electoral component to the initiative’s analysis of and prescriptions for bolstering the health and vitality of America’s metropolitan areas, the engines of the U.S. economy. This report focuses on three major battleground states in the Midwest—Ohio, Michigan, and Missouri—and finds that:

Ohio, Michigan and Missouri all feature eligible voter populations dominated by white working class voters. However, this profile is changing, albeit more slowly than in faster-growing states like Colorado or Arizona, as the white working class declines and white college graduates and minorities, especially Hispanics, increase. The largest effects are in these states’ major metropolitan areas— Cleveland, Columbus, and Cincinnati in Ohio: Detroit in Michigan; and St. Louis and Kansas City in Missouri— especially in their suburbs.

In Ohio, these trends could have their strongest impact in the fast-growing and Democratic-trending Columbus metro, where Democrats will seek to tip the entire metro in their favor by expanding their margin in Franklin County and reducing their deficit in the suburbs. The trends could also have big impacts in the Cleveland metro (especially its suburbs), in the Cincinnati metro (especially Hamilton County) and in the mediumsized metros of the Northeast (Akron, Canton, and Youngstown). Overall, the GOP will be looking to maintain their support among the declining white working class, especially among whites with some college, who have been trending Democratic. Also critical to their prospects is whether the growing white college-educated group will continue its movement toward the Democrats.

In Michigan, these trends will likely determine whether the fast-growing and populous Detroit suburbs continue shifting toward the Democrats, a development which would tip the Detroit metro (44 percent of the statewide vote) even farther in the direction of the Democrats. The trends will also have a big impact on whether the GOP can continue their hold on the conservative and growing Southwest region of the state that includes the Grand Rapids metro. The GOP will seek to increase its support among white college graduates, who gave the GOP relatively strong support in 2004, but have been trending toward the Democrats long term.

In Missouri, these trends will have their strongest impact on the two big metros of Democratic-trending St. Louis (38 percent of the vote)—especially its suburbs— and GOP-trending Kansas City (20 percent of the statewide vote). The Democrats need a large increase in their margins out of these two metros to have a chance of taking the state, while the GOP simply needs to hold the line. The trends will also have a significant impact on the conservative and growing Southwest region, the bulwark of GOP support in the state, where the Republicans will look to generate even higher support levels. The GOP will try to maintain its support from the strongly pro-GOP white college graduate group, which has been increasing its share of voters as it has trended Republican.

These large, modestly growing states in the heartland of the United States will play a pivotal roll in November’s election. Though experiencing smaller demographic shifts than many other states, they are each changing in ways that underscore the contested status of their combined 48 Electoral College votes in this year’s presidential contest.



Table Of Contents:
Executive Summary » 
Introduction and Data Sources and Definitions » 
Ohio » 
Michigan » 
Missouri » 
Endnotes »

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Last month’s decision by the Palestinian Authority to schedule municipal elections in early October hardly registered in the West Bank and Gaza Strip, much less here in Washington. In light of Hamas’ recent decision to take part in the process, however, those elections have suddenly taken on new meaning. While the election of some 414 village, town, and city councils across the West Bank and Gaza Strip will not change the face of the Palestinian leadership or alter the diplomatic impasse with Israel, local elections have the potential to unlock the current paralysis within Palestinian politics.

Although Palestinian law calls for local elections to take place every four years, they have only been held twice since the creation of the Palestinian Authority (PA) in 1993, only one of which could be deemed genuinely competitive. The first and only local elections to take place in both the West Bank and Gaza Strip were held in 2004-05, in which Hamas—in its first foray into electoral politics—made major gains. Local elections were again held in 2012, although this time Hamas boycotted the process, preventing the vote from taking place in Gaza and allowing Fatah to declare a sweeping, if somewhat hollow, victory. 

Hamas’ decision to take part in this year’s local elections was therefore something of a surprise. Indeed, Hamas initially expressed dismay at the announcement, accusing the leadership in Ramallah of acting without consulting the other parties. Moreover, should the elections proceed as planned on October 8, they would be the first competitive electoral contest in the occupied territories since Hamas defeated Mahmoud Abbas’s ruling Fatah faction in the 2006 legislative election. Those elections triggered an international boycott of the PA which eventually led to the split between Fatah and Hamas and the current political paralysis.

If nothing else, Hamas’ entry into the elections averts another needless internal crisis in Palestinian politics. A boycott by Hamas would likely have further entrenched the political and geographic division between the Fatah-dominated West Bank and Hamas-ruled Gaza Strip, while dealing yet another blow to the beleaguered National Consensus Government, which despite being accepted by both factions in April 2014 has yet to physically return to Gaza. Movement on the reconciliation track could also help push the long-stalled reconstruction of Gaza, which has yet to recover from the devastating war of 2014.

Hamas has little to lose from participating in an election that is unlikely to significantly alter the political landscape one way or the other...[and Fatah] has little to gain from “winning” another electoral process that is largely uncontested.

What explains Hamas’ apparent change of heart? For one, Hamas may believe it has an advantage over Fatah, which continues to suffer from widespread perceptions of corruption and incompetence—a perception reinforced by the collapse of the peace process as well as the unprecedented unpopularity of President Abbas. Hamas may also view the upcoming vote as a way to gauge its current standing and future prospects in anticipation of long-awaited legislative and presidential elections. Either way, Hamas has little to lose from participating in an election that is unlikely to significantly alter the political landscape one way or the other. 

Hamas’ decision to participate in the elections is welcome news for Palestinian voters eager to see the return of competitive elections and a revival of political life after years of stagnation. It even helps Fatah, which has little to gain from “winning” another electoral process that is largely uncontested. More important, as the party that lost both parliamentary elections and a civil war in 2006-07 and that remains the chief proponent of a failed process, Fatah desperately needs a political victory of some kind as well as a basis on which to stake its claim to legitimacy and continued grip on power.

That said, it is important not to overstate the significance of local elections, which in the end will do nothing to address the deeper problems facing Palestinians in the occupied territories, whether from Israel’s continued occupation and its ever-expanding settlement enterprise or the ongoing political dysfunction within their own ranks. On the other hand, the prospect of the first competitive Palestinian elections in a decade represents a small but significant ripple in the otherwise stagnant waters of Palestinian politics.

Introduction:

Unexpectedly, Italian politics has undergone a significant breakthrough over the last months. New protagonists, new languages, and new projects have markedly enlivened the usually swampy political landscape. In fact, if one adopts concepts and tools that are common to the analysis of political economy in the euro area, one would discover that what happened was far from unexpected. The unprecedented depth of the economic crisis of the last years paved the way to policy responses that were different from those common in the past. How different they should be, is however another question. This analysis shows why change was unavoidable, but some pillars of the “old politics” need to be carefully preserved if the new course is to succeed.

The consequences of the financial crisis on the Italian economy have produced a loss of output of around 9% of Italy's GDP. There had never been a similar loss of income in post-war Italian economy. The protracted recession has caused permanent effects on the output capacity of Italian firms affecting the level of investments that fell by almost 30%. Households have considerably shifted downwards their consumption patterns. This breakthrough in economic behaviors has been mirrored by a sense of deep disappointment among the population vis-à-vis the political class. The dramatic loss of income represented a rupture of the former political-economic model of the Italian economy based on cyclical developments.

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• Political Economy of Letta and Renzi

Saudi deputy crown prince and defense minister Mohammad bin Salman is just wrapping up a heavily hyped visit to Washington, aimed at reinforcing the kingdom’s partnership with the United States. Recent years have frayed what is traditionally the central strategic relationship for Riyadh, principally over the Obama administration’s nuclear diplomacy with Iran.

Since the conclusion of the Iranian nuclear deal last July, the perennial antagonism between Riyadh and Tehran has reached a dangerous pitch, fueling the violence that rages in Syria, Iraq, and Yemen and the undercurrent of instability that saturates the region. And the fallout of their rivalry has left its mark well beyond the boundaries of the Gulf, exacerbating volatile energy markets and, by extension, the global economy. 

Within OPEC, Riyadh and Tehran are eyeing each other warily, and their continuing differences torpedoed a proposed ceiling on oil production at OPEC’s latest meeting. The outcome was not surprising; a similar effort to agree on a production freeze between the group and a handful of non-OPEC producers fizzled in April. In the meantime, any incentives for drastic measures to address soft oil prices have abated as oil prices creep back up to approximately $50 a barrel. 

Iran and Saudi Arabia have plenty of reasons to continue pumping for the foreseeable future. Since the lifting of nuclear-related sanctions in January, Iranian leaders have been determined to make up for lost time and lost revenues, already defying expectations by quickly raising production to levels that hadn’t been reached since November 2011 and aggressively cutting prices in hopes of winning back its pre-sanctions export market. 

The centrality of oil to the legitimacy and autonomy of both regimes means that these plans are little more than publicity stunts.

Meanwhile, Saudi Arabia appears prepared to continue pumping at record-high levels, part of a larger strategy aimed at maintaining market share and driving down non-OPEC production. The two states’ economic incentives are compounded by their fierce geostrategic and sectarian rivalry, which has intensified, as evidenced by the standoff over Iranian participation in the annual pilgrimage to Mecca.

But even as the two states duel over oil production and prices, both Saudi Arabia and Iran are conspicuously planning for a post-oil future. Leaders in both countries have decreed an end to the era of oil dependency, endorsing ambitious blueprints for restructuring their economies that—if implemented—would ultimately transform state, society, and the wider region. The centrality of oil to the legitimacy and autonomy of both regimes means that these plans are little more than publicity stunts. Still, just imagine for a moment what it would mean for Iran, Saudi Arabia, and the Middle East if these grandiose agendas were adopted.

Competing and complementary visions

Tehran’s plan actually dates back more than a decade, with the 2005 release of its “20 Year Perspective” (sometimes called “Vision 2025”). The plan laid out extravagant expectations: rapid growth and job creation, diversification away from oil, a knowledge-based economy. Intervening developments—sanctions that targeted Iran’s oil exports and helped expand non-oil trade—have only bolstered the rhetorical commitment of Iran’s supreme leader, Ayatollah Ali Khamenei, to a “resistance economy” in which oil exports constitute a minor part.

“One of our most serious losses is dependence on oil,” Khamenei bemoaned in a 2014 speech. “I am not saying that oil should not be used. Rather, I am saying that we should reduce our dependence on selling crude oil as much as we can.” 

Not to be outdone, Saudi Deputy Crown Prince Salman announced Saudi “Vision 2030,” to address what he described as “an addiction to oil.” The plan, which has met with equal doses of fanfare and skepticism since its announcement last month, aims to create a “thriving economy” and end Saudi dependence on oil revenues by 2020. Vision 2030 includes provisions to sell off a small stake in the kingdom’s state oil company, Saudi Aramco, and create the world’s largest sovereign wealth fund to manage the country’s income, as well as goals of creating 450,000 new private sector jobs, cutting public sector wages, and tripling the country’s non-oil exports all within the same abbreviated time frame.

Jeopardizing domestic stability

There is one hitch, however: these aspirations, though laudable, are preposterously unmoored from current political and economic exigencies. The institutions of governance and the structure of power in resource-rich states such as Saudi Arabia and Iran are organized around the state’s role as purveyors of vital social and economic goods. Riyadh and Tehran distribute cash handouts, provide jobs in already-bloated state bureaucracies, and levy few taxes. Diversifying away from reliance on oil would essentially require Riyadh and Tehran to radically curtail this distributive role, inviting historic social and political changes that could ultimately compromise regime ideology and weaken state legitimacy. 

[T]hese aspirations, though laudable, are preposterously unmoored from current political and economic exigencies.

In Saudi Arabia, the supply of these benefits is central to the monarchy’s legitimacy. To diversify away from oil, which currently accounts for over 70 percent of government revenues, Riyadh would have to drastically cut spending, far more than it already has. Not only would this further slash subsidies and hike fees, it would also effectively force Saudi workers—two-thirds of whom are employed by the state—to take up private sector jobs, 80 percent of which are currently staffed by expatriates. To accomplish this transition would require fundamental changes to the incentive structure for the Saudi labor force: a much broader willingness to accept low-skill, low-wage jobs, as well as the requisite improvements in education and productivity to support larger numbers of Saudi nationals moving into private sector positions.

For the Saudi economy to be truly competitive, Riyadh would have to initiate dramatic changes to a central component of the Saudi social compact—women’s rights and freedoms. The Vision 2030 document boasts that over 50 percent of Saudi university graduates are women and pledges to “continue to develop their talents, invest in their productive capabilities and enable them to strengthen their future and contribute to the development of our society and economy.” 

But the domestic Saudi labor force is overwhelmingly male, and even the plan’s modest aspirations to raise female participation in the workforce from 22 to 30 percent are likely to run into logistical and social obstacles. Shortly after announcing Vision 2030, Deputy Crown Prince Salman said Saudi Arabia is not yet ready to let women drive. A diversified economy will not emerge in the kind of constricted social environment mandated by the Saudi interpretation of sharia (Islamic law). 

Iran’s Islamic Republic doesn’t have the same degree of gender segregation, but Iran’s official interpretation of Islam has still constrained female participation in the workforce. Iran employs an equally low percentage of women—according to a 2014 U.N. report around 16 percent—and women’s unemployment is more than double that of men (nearly 20 percent).

A Saudi man walks past the logo of Vision 2030 after a news conference in Jeddah, Saudi Arabia June 7, 2016. Photo credit: Reuters/Faisal Al Nasser.

The bigger challenge for Iran will be truly opening up its economy to foreign direct investment. This remains hotly contested among the leadership, even in the aftermath of the nuclear agreement and the lifting of related sanctions. While there is some consensus around the need for foreign capital and technology, hardliners including Khamenei are determined to insulate Iran from any accompanying cultural influence and dependency. As the supreme leader recently inveighed, the global economy is “a plan and system that has been devised mainly by Zionist capitalists and some non-Zionists with the purpose of usurping the economic resources of the whole world...If a country merges its economy with the global economy, this is not a source of pride, rather it is a loss and a defeat!”

This deeply-rooted paranoia has provided a convenient platform for the Islamic Republic to galvanize citizens’ loyalty to the state and hostility to outside interference. And it also inhibits the liberalization that makes foreign investment possible: measures to enhance transparency and security, develop more attractive legal and fiscal frameworks, shrink the role of the state, and undertake an array of other structural reforms. Without these measures, Tehran will struggle to capitalize on its extraordinary reengagement with the world. 

While Saudi Arabia has maintained a more consistent and mutually beneficial pattern of foreign investment, its leadership too will have to revamp its approach if it is to broaden its economic base. For Riyadh, the challenge is less one of attracting foreign capital than of developing a sustainable influx of technology and expertise to develop sectors other than energy. The kingdom will also have to overcome serious regulatory hurdles and a proclivity for mammoth (and often white elephant) projects.

Compromising regional clout

Riyadh and Tehran will need to balance their economic aspirations and their approach to the region, too. Historically, their role in global energy markets has largely shielded both states from the fallout of regional instability. The world’s need for reliable oil at reasonable prices has inculcated the commitment of outside powers to secure transportation of resources and considerable autonomy for Riyadh and Tehran from the implications of their own policies. 

As a result, Saudi Arabia and Iran can fund nefarious activity across the region, violate the civil and human rights of their citizens and other residents, and carry out belligerent foreign policies without severe repercussions for their oil revenues. Only in the past five years has Tehran seen the limits of the world’s reluctance to jeopardize its investment with a major oil exporter; and the recent reversal of the U.N. condemnation regarding the Saudi-led coalition in Yemen demonstrates that Riyadh remains insulated.

Saudi Arabia and Iran can fund nefarious activity across the region, violate the civil and human rights of their citizens and other residents, and carry out belligerent foreign policies without severe repercussions for their oil revenues.

Regional developments make the prospect of economic diversification even less likely, as sensitivity to such developments will only increase if either country successfully develops its non-oil sectors. At the same time, regional stability is a basic prerequisite for economic diversification. Robust growth and good governance throughout the Middle East would provide the optimal context for the economic transformation of Iran and Saudi Arabia, since the marketplace for their non-oil exports is concentrated in the immediate neighborhood. But such transformation would require both countries to put economic priorities that serve their general populations above the ideological and religious agendas—supported by oil rents—that propel their regional and international influence and that provide a large portion of their autonomy in foreign policymaking. 

Technocrats in both countries understand this intuitively. At a 2015 conference on Iran’s economy, President Hassan Rouhani wondered “How long can the economy pay subsidies to politics?” He added that the country’s economy “pays subsidies both to foreign policy and domestic policy. Let us try the other way round for a decade and pay subsidies from the domestic and foreign policy to the economy to see [what] the lives and incomes of people and the employment of the youth will be like.” The problem, of course, is political will: neither country is prepared to elevate the interests of its people over the demands of ideology.

Imagining an unlikely future

Can either Iran or Saudi Arabia really kick the oil habit? It seems exceptionally unlikely. Even as Khamenei extols the need for inward-focused development, Tehran is racing to expand crude output level to four million barrels per day by March 2017. 

Oil enabled the creation of the modern Middle Eastern state and fueled the rise of both countries to regional predominance. Oil is a vector for their regional rivalry, and it provides prestige and funds to be used in other arenas of competition. A genuine diversification of the two largest economies in the Middle East and North Africa would jeopardize their revenue streams and domestic legitimacy, as well as their efforts to assert their primacy across the Islamic world.

[N]either country is prepared to elevate the interests of its people over the demands of ideology.

“All success stories start with a vision,” Deputy Crown Prince Salman is quoted as saying on the Vision 2030 website. But vision is insufficient to bridge the gap between aspiration and reality; a serious agenda to implement either the Saudi or the Iranian vision would require painful compromises to regime ideology and a fundamental overhaul of the institutions and the structure of power in both countries. 

Imagine, though, for a moment, that these far-fetched ambitions were quite serious, and that both the Saudi and Iranian leadership were determined to do what was necessary to truly wean their economies off oil dependence. Consider what it might mean for the region if these grandiose ambitions were not simply the illusions of overpriced consultants and embattled technocrats—if a leadership emerged in one or both of the Middle East’s most powerful actors prepared to invest political capital in a genuine transformation of priorities and policies. What might be possible if Tehran and Riyadh sought to compete for economic opportunities instead of fueling violence and sectarianism around the region? If instead of a vicious sectarian and geopolitical rivalry, these two old adversaries engaged in a race to the top?

What will it take to move these visions from wishful thinking to reality? More than rhetoric, to be sure. But even the articulation of improbable objectives will have its impact. As documented in a recent book, Iran’s post-revolutionary experience demonstrates that the regime’s reliance on promises of economic gains has generated public expectations for effective and accountable governance. Now Iranians and Saudis have been told by their leaders—who happen to be officially infallible—that the time has come to transcend oil. What might happen if they believe it?

Partisan gridlock and political extremism threaten to tear down the pillars of public policy and render the U.S. government utterly dysfunctional, argues Senior Fellow Thomas Mann, co-author with Norman Ornstein—resident scholar at the American Enterprise Institute—of It’s Even Worse Than It Looks (Basic Books, 2012). He argues that a flood of super-PAC money, negative ads and cowed mainstream news media are contributing to the problem.

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• Mann: Blame for Gridlock Is Squarely on Republican Party

Executive Summary

Large-scale antipoverty programs have achieved significant and positive results in many developing countries around the world in the past decade. This paper explores the challenges of “scaling up” small-scale antipoverty programs—taken here to mean the processes by which successful efforts to raise the incomes of the poorest citizens in developing counties are expanded in coverage over time and across geography. In particular, I advocate supplementing approaches that highlight resource and program constraints with an expanded focus on the political dynamics involved in expanding pro-poor policies. Thus, greater emphasis should be placed on understanding the political factors that limit the expansion and survivability of antipoverty programs. A broader view along these lines highlights the bargaining strength of beneficiaries, the need to secure public support, the potential for political misuse of antipoverty programs, and how institutional fragilities affect their sustainability. Antipoverty programs can be effectively scaled up if attention is paid to addressing these political and institutional challenges. An agenda for future research is also identified.

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Last month’s decision by the Palestinian Authority to schedule municipal elections in early October hardly registered in the West Bank and Gaza Strip, much less here in Washington. In light of Hamas’ recent decision to take part in the process, however, those elections have suddenly taken on new meaning. While the election of some 414 village, town, and city councils across the West Bank and Gaza Strip will not change the face of the Palestinian leadership or alter the diplomatic impasse with Israel, local elections have the potential to unlock the current paralysis within Palestinian politics.

Although Palestinian law calls for local elections to take place every four years, they have only been held twice since the creation of the Palestinian Authority (PA) in 1993, only one of which could be deemed genuinely competitive. The first and only local elections to take place in both the West Bank and Gaza Strip were held in 2004-05, in which Hamas—in its first foray into electoral politics—made major gains. Local elections were again held in 2012, although this time Hamas boycotted the process, preventing the vote from taking place in Gaza and allowing Fatah to declare a sweeping, if somewhat hollow, victory. 

Hamas’ decision to take part in this year’s local elections was therefore something of a surprise. Indeed, Hamas initially expressed dismay at the announcement, accusing the leadership in Ramallah of acting without consulting the other parties. Moreover, should the elections proceed as planned on October 8, they would be the first competitive electoral contest in the occupied territories since Hamas defeated Mahmoud Abbas’s ruling Fatah faction in the 2006 legislative election. Those elections triggered an international boycott of the PA which eventually led to the split between Fatah and Hamas and the current political paralysis.

If nothing else, Hamas’ entry into the elections averts another needless internal crisis in Palestinian politics. A boycott by Hamas would likely have further entrenched the political and geographic division between the Fatah-dominated West Bank and Hamas-ruled Gaza Strip, while dealing yet another blow to the beleaguered National Consensus Government, which despite being accepted by both factions in April 2014 has yet to physically return to Gaza. Movement on the reconciliation track could also help push the long-stalled reconstruction of Gaza, which has yet to recover from the devastating war of 2014.

Hamas has little to lose from participating in an election that is unlikely to significantly alter the political landscape one way or the other...[and Fatah] has little to gain from “winning” another electoral process that is largely uncontested.

What explains Hamas’ apparent change of heart? For one, Hamas may believe it has an advantage over Fatah, which continues to suffer from widespread perceptions of corruption and incompetence—a perception reinforced by the collapse of the peace process as well as the unprecedented unpopularity of President Abbas. Hamas may also view the upcoming vote as a way to gauge its current standing and future prospects in anticipation of long-awaited legislative and presidential elections. Either way, Hamas has little to lose from participating in an election that is unlikely to significantly alter the political landscape one way or the other. 

Hamas’ decision to participate in the elections is welcome news for Palestinian voters eager to see the return of competitive elections and a revival of political life after years of stagnation. It even helps Fatah, which has little to gain from “winning” another electoral process that is largely uncontested. More important, as the party that lost both parliamentary elections and a civil war in 2006-07 and that remains the chief proponent of a failed process, Fatah desperately needs a political victory of some kind as well as a basis on which to stake its claim to legitimacy and continued grip on power.

That said, it is important not to overstate the significance of local elections, which in the end will do nothing to address the deeper problems facing Palestinians in the occupied territories, whether from Israel’s continued occupation and its ever-expanding settlement enterprise or the ongoing political dysfunction within their own ranks. On the other hand, the prospect of the first competitive Palestinian elections in a decade represents a small but significant ripple in the otherwise stagnant waters of Palestinian politics.

2015 is a pivotal year. Three major workstreams among all the world’s nations are going forward this year under the auspices of the United Nations to develop goals, financing, and frameworks for the “post-2015 sustainable development agenda.” First, after two years of wide-ranging consultation, the U.N. General Assembly in New York in September will endorse a new set of global goals for 2030 to follow on from the Millennium Development Goals (MDGs) that culminate this year. Second, to support this effort, a financing for development (FFD) conference took place in July in Addis Ababa, Ethiopia, to identify innovative ways of mobilizing private and public resources for the massive investments necessary to achieve the new goals. And third, in Paris in December the final negotiating session will complete work on a global climate change framework. 

These three landmark summits will, with luck, provide the broad strategic vision, the specific goals, and the financing modalities for addressing the full range of systemic threats. Most of all, these three summit meetings will mobilize the relevant stakeholders and actors crucial for implementing the post-2015 agenda—governments, international organizations, business, finance, civil society, and parliaments—into a concerted effort to achieve transformational outcomes. Achieving systemic sustainability is a comprehensive, inclusive effort requiring all actors and all countries to be engaged.

These three processes represent a potential historic turning point from “business-as-usual” practices and trends and to making the systemic transformations that are required to avoid transgressing planetary boundaries and critical tipping points. Missing from the global discourse so far is a realistic assessment of the political decisions and institutional innovations that would be required to implement the post-2015 sustainable development agenda (P2015).

For 2015, it is necessary is to make sure that by the end of year the three workstreams have been welded together as a singular vision for global systemic transformation involving all countries, all domestic actors, and all international institutions. The worst outcome would be that the new Sustainable Development Goals (SDGs) for 2030 are seen as simply an extension of the 2015 MDGs—as only development goals exclusively involving developing countries. This outcome would abort the broader purposes of the P2015 agenda to achieve systemic sustainability and to involve all nations and reduce it to a development agenda for the developing world that by itself would be insufficient to make the transformations required.

Systemic risks of financial instability, insufficient job-creating economic growth, increasing inequality, inadequate access to education, health, water and sanitation, and electricity, “breaking points” in planetary limits, and the stubborn prevalence of poverty along with widespread loss of confidence of people in leaders and institutions now require urgent attention and together signal the need for systemic transformation.

As a result, several significant structural changes in institution arrangements and governance are needed as prerequisites for systemic transformation. These entail (i) political decisions by country leaders and parliaments to ensure societal engagement, (ii) institutional innovations in national government processes to coordinate implementation, (iii) strengthening the existing global system of international institutions to include all actors, (iv) the creation of an international monitoring mechanism to oversee systemic sustainability trajectories, and (v) realize the benefits that would accrue to the entire P2015 agenda by the engagement of the systemically important countries through fuller utilization of  G20 leaders summits and finance ministers meetings as enhanced global steering mechanisms toward sustainable development.   Each of these changes builds on and depends on each other.

I. Each nation makes a domestic commitment to a new trajectory toward 2030

For global goal-setting to be implemented, it is essential that each nation go beyond a formal agreement at the international level to then embark on a national process of deliberation, debate, and decision-making that adapts the global goals to the domestic institutional and cultural context and commits the nation to them as a long-term trajectory around which to organize its own systemic transformation efforts. Such a process would be an explicitly political process involving national leaders, parliaments or rule-making bodies, societal leaders, business executives, and experts to increase public awareness and to guide the public conversation toward an intrinsically national decision which prioritizes the global goals in ways which fit domestic concerns and circumstances. This political process would avoid the “one-size-fits-all” approach and internalize and legitimate each national sustainability trajectory.

So far, despite widespread consultation on the SDGs, very little attention has been focused on the follow-up to a formal international agreement on them at the U.N. General Assembly in September 2015. The first step in implementation of the SDGs and the P2015 agenda more broadly is to generate a national commitment to them through a process in which relevant domestic actors modify, adapt, and adopt a national trajectory the embodies the hopes, concerns and priorities of the people of each country. Without this step, it is unlikely that national systemic sustainability trajectories will diverge significantly enough from business-as-usual trends to make a difference. More attention needs to now be given to this crucial first step.  And explicit mention of the need for it should appear in the UNGA decisions in New York in September.

II. A national government institutional innovation for systemic transformation

The key feature of systemic risks is that each risk generates spillover effects that go beyond the confines of the risk itself into other domains. This means that to manage any systemic risk requires broad, inter-disciplinary, multi-sectoral approaches. Most governments have ministries or departments that manage specific sectoral programs in agriculture, industry, energy, health, education, environment, and the like when most challenges now are inter-sectoral and hence inter-ministerial. Furthermore, spillover linkages create opportunities in which integrated approaches to problems can capture intrinsic synergies that generate higher-yield outcomes if sectoral strategies are simultaneous and coordinated.

The consequence of spillovers and synergies for national governments is that “whole-of-government” coordinating committees are a necessary institutional innovation to manage effective strategies for systemic transformation. South Korea has used inter-ministerial cabinet level committees that include private business and financial executives as a means of addressing significant interconnected issues or problems requiring multi-sectoral approaches. The Korea Presidential Committee on Green Growth, which contained more than 20 ministers and agency heads with at least as many private sector leaders, proved to be an extremely effective means of implementing South Korea’s commitment to green growth.

III.  A single global system of international institutions

The need for a single mechanism for coordinating the global system of international institutions to implement the P2015 agenda of systemic transformation is clear. However, there are a number of other larger reasons why the forging of such a mechanism is crucial now.

The Brettons Woods era is over. It was over even before the initiative by China to establish the Asia Infrastructure Investment Bank (AIIB) in Beijing and the New Development Bank (NDB) in Shanghai. It was over because of the proliferation in recent years of private and official agencies and actors in development cooperation and because of the massive growth in capital flows that not only dwarf official development assistance (concessional foreign aid) but also IMF resources in the global financial system. New donors are not just governments but charities, foundations, NGOs, celebrities, and wealthy individuals. New private sources of financing have mushroomed with new forms of sourcing and new technologies. The dominance of the IMF and the World Bank has declined because of these massive changes in the context.

The emergence of China and other emerging market economies requires acknowledgement as a fact of life, not as a marginal change. China in particular deserves to be received into the world community as a constructive participant and have its institutions be part of the global system of international institutions, not apart from it. Indeed, China’s Premier, Li Keqiang, stated at the World Economic Forum in early 2015 that “the world order established after World War II must be maintained, not overturned.”

The economic, social and environmental imperatives of this moment are that the world’s people and the P2015 agenda require that all international institutions of consequence be part of a single coordinated effort over the next 15 years to implement the post-2015 agenda for sustainable development. The geopolitical imperatives of this moment also require that China and China’s new institutions be thoroughly involved as full participants and leaders in the post-2015 era. If nothing else, the scale of global investment and effort to build and rebuild infrastructure requires it.

It is also the case that the post-2015 era will require major replenishments in the World Bank and existing regional development banks, and significantly stronger coordination among them to address global infrastructure investment needs in which the AIIB and the NDB must now be fully involved. The American public and the U.S. Congress need to fully grasp the crucial importance for the United States, of the IMF quota increase and governance reform.  These have been agreed to by most governments but their implementation is stalled in the U.S. Congress. To preserve the IMF’s role in the global financial system and the role of the U.S. in the international community, the IMF quota increase and IMF governance reform must be passed and put into practice. Congressional action becomes all the more necessary as the effort is made to reshape the global system of international institutions to accommodate new powers and new institutions within a single system rather than stumble into a fragmented, fractured, and fractious global order where differences prevail over common interests.

The IMF cannot carry out its significant responsibility for global financial stability without more resources. Other countries cannot add to IMF resources proportionately without U.S. participation in the IMF quota increase.   Without the US contribution, IMF members will have to fund the IMF outside the regular IMF quota system, which means de-facto going around the United States and reducing dramatically the influence of the U.S. in the leadership of the IMF. This is a self-inflicted wound on the U.S., which will damage U.S. credibility, weaken the IMF, and increase the risk of global financial instability. By blocking the IMF governance reforms in the IMF agreed to by the G-20 in 2010, the U.S. is single-handedly blocking the implementation of the enlargement of voting shares commensurate with increased emerging market economic weights.  This failure to act is now widely acknowledged by American thought leaders to be encouraging divergence rather than convergence in the global system of institutions, damaging U.S. interests.

IV. Toward a single monitoring mechanism for the global system of international institutions

The P2015 agenda requires a big push toward institutionalizing a single mechanism for the coordination of the global system of international institutions.  The international coordination arrangement today, is the Global Partnership for Effective Development Cooperation created at the Busan High-Level Forum on Aid Effectiveness in 2011.  This arrangement, which recognizes the increasingly complex context and the heightened tensions between emerging donor countries and traditional western donors, created a loose network of country platforms, regional arrangements, building blocks and forums to pluralize the architecture to reflect the increasingly complex set of agents and actors. This was an artfully arranged compromise, responding to the contemporary force field four years ago.

Now is a different moment. The issues facing the world are both systemic and urgent; they are not confined to the development of developing countries, and still less to foreign aid. Geopolitical tensions are, if anything, higher now than then.  But they also create greater incentives to find areas of cooperation and consensus among major powers who have fundamentally different perspectives on other issues. Maximizing the sweet spots where agreement and common interest can prevail is now of geopolitical importance.  Gaining agreement on institutional innovations to guide the global system of international institutions in the P2015 era would be vital for effective outcomes but also importantly ease geopolitical tensions.

Measurement matters; monitoring and evaluation is a strategic necessity to implementing any agenda, and still more so, an agenda for systemic transformation.  As a result, the monitoring and evaluation system that accompanies the P2015 SDGs will be crucial to guiding the implementation of them.  The UN, the OECD, the World Bank, and the IMF all have participated in joint data gathering efforts under the IDGs  in the 1990s and the MDGs in the 2000s.   Each of these institutions has a crucial role to play, but they need to be brought together now under one umbrella to orchestrate their contributions to a comprehensive global data system and to help the G20 finance ministers coordinate their functional programs.   

The OECD has established a strong reputation in recent years for standard setting in a variety of dimensions of the global agenda.  Given the strong role of the OECD in relation to the G20 and its broad outreach to “Key Partners” among the emerging market economies, the OECD could be expected to take a strong role in global benchmarking and monitoring and evaluation of the P2015 Agenda.  The accession of China to the OECD Development Centre, which now has over fifty member countries, and the presence and public speech of Chinese Premier Li Keqiang at the OECD on July 1^st, bolsters the outreach of the OECD and its global profile.

But national reporting is the centerpiece and the critical dimension of monitoring and evaluation.  To guide the national reporting systems and evaluate their results, a  new institutional arrangement is needed that is based on national leaders with responsibility for implementation of the sustainable development agendas from each country and is undertaken within the parameters of the global SDGs and the P2015 benchmarks.

V.   Strengthening global governance and G20 roles

G-20 leaders could make a significant contribution to providing the impetus toward advancing systemic sustainability by creating a G-20 Global Sustainable Development Council charged with pulling together the national statistical indicators and implementing benchmarks on the SDGs in G-20 countries.  The G-20 Global Sustainable Development Council (G-20 GSDC) would consist of the heads of the presidential committees on sustainable development charged with coordinating P2015 implementation in G-20 countries.  Representing systemically important countries, they would also be charged with assessing the degree to which national policies and domestic efforts by G20 countries generate positive or negative spillover effects for the rest of the world.  This G-20 GSDC would also contribute to the setting of standards for the global monitoring effort, orchestrated perhaps by the OECD, drawing on national data bases from all countries using the capacities of the international institutions to generate understanding of global progress toward systemic sustainability. 

The UN is not in a position to coordinate the global system of international institutions in their functional roles in global sustainable development efforts.  The G-20 itself could take steps through the meetings of G-20 Finance Ministers to guide the global system of international institutions in the implementation phase of the P2015 agenda to begin in 2016. The G-20 already has a track record in coordinating international institutions in the response to the global financial crisis in 2008 and its aftermath. The G-20 created the Financial Stability Board (FSB), enlarged the resources for the IMF, agreed to reform the IMF’s governance structure, orchestrated relations between the IMF and the FSB, brought the OECD into the mainstream of G-20 responsibilities and has bridged relations with the United Nations by bringing in finance ministers to the financing for development conference in Addis under Turkey’s G-20 leadership. 

There is a clear need to coordinate the financing efforts of the IMF, with the World Bank and the other regional multilateral development banks (RMDBs), with the AIIB and the BRICS NDB, and with other public and private sector funding sources, and to assess the global institutional effort as whole in relation to the P2015 SDG trajectories.  The G-20 Finance Ministers grouping would seem to be uniquely positioned to be an effective and credible means of coordinating these otherwise disparate institutional efforts.  The ECOSOC Development Cooperation Forum and the Busuan Global Partnership provide open inclusive space for knowledge sharing and consultation but need to be supplemented by smaller bodies capable of making decisions and providing strategic direction.

Following the agreements reached in the three U.N. workstreams for 2015, the China G-20 could urge the creation of a formal institutionalized global monitoring and coordinating mechanism at the China G-20 Summit in September 2016. By having the G-20 create a G-20 Global Sustainable Development Council (G-20 GSDC), it could build on the national commitments to SDG trajectories to be made next year by U.N. members countries and on the newly formed national coordinating committees established by governments to implement the P2015 Agenda, giving the G-20 GSDC functional effectiveness, clout and credibility.   Whereas there is a clear need to compensate for the sized-biased representation of the G20 with still more intensive G-20 outreach and inclusion, including perhaps eventually considering shifting to a constituency based membership, for now the need in this pivotal year is to use the momentum to make political decisions and institutional innovations which will crystallize the P2015 strategic vision toward systemic sustainability into mechanisms and means of implementation.

By moving forward on these recommendations, the G-20 Leaders Summits would be strengthened by involving G-20 leaders in the people-centered P2015 Agenda, going beyond finance to issues closer to peoples’ homes and hearts. Systemically important countries would be seen as leading on systemically important issues.  The G-20 Finance Ministers would be seen as playing an appropriate role by serving as the mobilizing and coordinating mechanism for the global system of international institutions for the P2015 Agenda.  And the G-20 GSDC would become the effective focal point for assessing systemic sustainability not only within G20 countries but also in terms of their positive and negative spillover effects on systemic sustainability paths of other countries, contributing to standard setting and benchmarking for global monitoring and evaluation.    These global governance innovations could re-energize the G20 and provide the international community with the leadership, the coordination and the monitoring capabilities that it needs to implement the P2015 Agenda. 

As the MDGs culminate this year, as the three U.N. workstreams on SDGs, FFD, and UNFCC are completed, the world needs to think ahead to the implementation phase of the P2015 sustainable development agenda. Given the scale and scope of the P2015 agenda, these five governance innovations need to be focused on now so they can be put in place in 2016.

These will ensure (i) that national political commitments and engagement by all countries are made by designing, adopting, and implementing their own sustainable development trajectories and action plans; (ii) that national presidential committees are established, composed of key ministers and private sector leaders to coordinate each country’s comprehensive integrated sustainability strategy; (iii) that all governments and international institutions are accepted by and participate in a single global system of international institutions;   (iv) that a G-20 monitoring mechanism be created by the China G-20 in September 2016 that is comprised of the super-minister officials heading the national presidential coordinating committees implementing the P2015 agenda domestically in G-20 countries, as a first step;  and (v) that the G-20 Summit leaders in Antalya in November 2015 and in China in September 2016 make clear their own commitment to the P2015 agenda and their responsibility for its adaption, adoption and implementation internally in their countries but also for assessing G-20 spillover impacts on the rest of the world, as well as for deploying their G-20 finance ministers to mobilize and coordinate the global system of international institutions toward achieving the P2015 agenda.

Without these five structural changes, it will be more likely that most countries and actors will follow current trends rather than ratchet up to the transformational trajectories necessary to achieve systemic sustainability nationally and globally by 2030.

Ye Yu, Xue Lei and Zha Xiaogag, “The Role of Developing Countries in Global Economic Governance---With a Special Analysis on China’s Role”, UNDP, Second High-level Policy Forum on Global Governance: Scoping Papers, (Beijing: UNDP, October 2014).

Zhang Haibing, “A Critique of the G-20’s Role in UN’s post-2015 Development Agenda”, in Catrina Schlager and Chen Dongxiao (eds), China and the G-20: The Interplay between an Emerging Power and an Emerging Institution, (Shanghai: Shanghai Institutes for International Studies [SIIS] and the Friedrich Ebert Stiftung [FES], 2015) 290-208.

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Colin I. Bradford, “Global Economic Governance and the Role International Institutions”, UNDP, Second High-level Policy Forum on Global Governance: Scoping Papers, (Beijing: UNDP, October 2014).

Colin I. Bradford, “Action implications of focusing now on implementation of the   post-2015 agenda.”, (Washington: The Brookings Institution, Global Economy and Development paper, September 2015).

Colin I. Bradford, “Systemic Sustainability as the Strategic Imperative for the Future”, (Washington: The Bookings Institution, Global Economy and Development paper; September 2015). 

Wonhyuk Lim and Richard Carey, “Connecting Up Platforms and Processes for Global Development to 2015 and Beyond:  What can the G-20 do to improve coordination and deliver development impact?”, (Paris: OECD  Paper, February 2013).

Xiaoyun Li and Richard Carey, “The BRICS and the International Development System: Challenge and Convergence”, (Sussex: Institute for Development Studies, Evidence Report No. 58, March 2014).

Xu Jiajun and Richard Carey, “China’s Development Finance: Ambition, Impact and Transparency,” (Sussex :  Institute for Development Studies, IDS Policy Brief, 2015).

Soogil Young, “Domestic Actions for Implementing Integrated Comprehensive Strategies:  Lessons from Korea’s Experience with Its Green Growth Strategy”, Washington: Paper for the Brookings conference on “Governance Innovations to Implement the Post-2015 Agenda for Sustainable Development”, March 30, 2015).

The Chinese currency, or renminbi (RMB), has been a contentious issue for the past several years. Most recently, members of Congress have suggested tying China currency legislation to the upcoming votes on the free trade agreements with South Korea, Colombia and Panama. While not going that far, the Senate Majority Leader, Harry Reid, and Senator Charles Schumer have promised a vote on the issue some time this year.

The root of the conflict for the United States—and other countries—is complaints that China keeps the value of the RMB artificially low, boosting its exports and trade surplus at the expense of trading partners. Recent government data show that the bilateral trade deficit between the U.S. and China grew nearly 12 percent in the first half of 2011—fueling efforts to boost job creation domestically by authorizing import tariffs and other restrictions on countries that manipulate their currencies.

Although the U.S. Treasury has repeatedly stopped short of labeling China a “currency manipulator” in its twice-yearly reports to Congress, it has consistently pressured China to allow the RMB to appreciate at a faster pace, and to let the currency fluctuate more freely in line with market forces. The International Monetary Fund (IMF), the World Bank and many economists have also argued for faster appreciation and a more flexible exchange rate policy as part of a broader program of “rebalancing” the Chinese economy away from its traditional reliance on exports and investment, and towards a more consumer-driven growth model. Partly in response to these pressures, but more because of domestic considerations, China has allowed the RMB to rise by about 25 percent against the U.S. dollar since mid-2005. Yet the pace of appreciation remains agonizingly slow for the United States and other countries in Europe and Latin America whose manufacturing sectors face increasing competition from low-priced Chinese goods.

The international conversation over the RMB remains perennially vexed because China and its trade partners have fundamentally divergent ideas on the function of exchange rates. The United States and other major developed economies, as well as the IMF, view an exchange rate simply as a price. Consistent intervention by China to keep its exchange rate substantially below the level the market would set is, in this view, a distortion that prevents international markets from functioning as well as they could. This price distortion also affects China’s own economy, by encouraging large-scale investment in export manufacturing, and discouraging investment in the domestic consumer market. Thus it is in the interest both of China itself and the international economy as a whole for China to allow its exchange rate to rise more rapidly.

Chinese officials take a very different view. They see the exchange rate—and prices and market mechanisms in general—as tools in a broader development strategy. The goal of this development strategy is not to create a market economy, but to make China a rich and powerful modern country. Market mechanisms are simply means, not ends in themselves. Chinese leaders observe that all countries that have raised themselves from poverty to wealth in the industrial era, without exception, have done so through export-led growth. Thus they manage the exchange rate to broadly favor exports, just as they manage other markets and prices in the domestic economy to meet development objectives such as the creation of basic industries and infrastructure. These policies do not differ materially from those pursued by Japan, South Korea and Taiwan since World War II, or by Britain, the United States and Germany in the 19th century. Since the Chinese leaders perceive that an export-led strategy is the only proven route to rich-country status, they view with profound suspicion arguments that rapid currency appreciation and markedly slower export growth are “in China’s interest.” And because China—unlike Japan in the 1970s and 1980s—is an independent geopolitical power, it is fully able to resist international pressure to change its exchange-rate policy.

A second issue raised by China’s currency and trade policies is the persistent trade surplus since 2004 which has contributed about three-quarters of the nearly US$3 trillion increase in China’s foreign exchange reserves over the past eight years. Close to two-thirds of these reserves are invested in U.S. treasury debt. Some fear that China has become the United States’ banker, and could cause a collapse in the U.S. dollar and the U.S. economy by dumping its dollar holdings. Others suggest that China’s recent moves to increase the international use of the RMB through an offshore market in Hong Kong signal China’s intent to build up the RMB as an international reserve currency to rival or eventually supplant the dollar. All of these concerns are based on serious misunderstandings of both international financial markets and China’s domestic political economy. China is not in any practical sense “America’s banker;” it is more a depositor than a lender, and its economic leverage over the United States is very modest.

And while China’s leading position in global trade makes it quite sensible to increase the use of the RMB for invoicing and settling trade, it is a huge leap from making the RMB more internationally traded to making it an attractive reserve currency. China does not now meet the basic conditions required for the issuer of a major reserve currency, and may never meet them. Most importantly, the RMB is unlikely to become more than a second-tier reserve currency so long as Chinese leaders cling to their deep reluctance to allow foreigners a significant role in China’s domestic financial markets.

China’s Currency Policies

China’s exchange-rate policy must be understood within the context of two political-economic factors: first, China’s overall development strategy which aims to build up the nation’s economic and political power with market mechanisms being tools to that end rather than ends in themselves; and second, China’s geopolitical position.

The Chinese development strategy, which emerged gradually after Deng Xiaoping began the process of “reform and opening” in 1978, is based on a careful study of how other industrial nations got rich—and in particular, the catch-up growth strategies of its east Asian neighbors Japan, South Korea and Taiwan after World War II. A key lesson of that study is that every rich nation, in the early stages of its development, used export-friendly policies to promote domestic industry and to accelerate technology acquisition. In earlier eras, when the use of the gold standard made it impossible to maintain permanently undervalued exchange rates, countries used administrative coercion and high tariffs to achieve the same effect of favoring domestic manufacturers over foreign ones. Britain’s policies of using colonies as captive markets for its manufactured exports, and prohibiting the colonies from exporting manufactures back to Britain, were important components of that nation’s rise as the world’s leading industrial power in the late 18th and 19th centuries. Resentment of those policies was one cause of the American Revolution; once independent, the United States spurred its economic development through the “American system,” which featured high tariff walls (often 40 percent or more) through the 19th and into the early 20th century. Germany used similar protective policies to foster its industries in the late 19th century. Countries did not become advocates for free trade until their firms were secure in global technological leadership and the need for protection waned for Britain, this occurred in the mid-19th century; for the United States, the mid-20th.

After World War II, undervalued exchange rates became an important tool of export promotion, partly because new global trading rules under the General Agreement on Tariffs and Trade (GATT, which morphed into the World Trade Organization in 1995) made it more difficult to maintain extremely high levels of tariff protection. The testimony of post-war economic history is quite clear. Countries that maintained undervalued exchange rates and pursued export markets enjoyed sustained high-speed economic growth and became rich. These countries include Germany, Japan, South Korea and Taiwan. Countries that used other mechanisms to block imports and encouraged their industrial firms to cater exclusively to domestic demand—so-called “import substitution industrialization,” or ISI, which usually involved an overvalued exchange rate—in some cases grew quite rapidly for 10 years or more. But this growth could not be sustained because the ISI strategy includes no mechanism for keeping pace with advances in global technology. Most ISI countries, including much of Latin America and the whole of the Communist bloc, experienced severe financial crisis and fell into long periods of stagnation.

As it tried to accelerate growth by moving from a planned to a more market-driven economy in the 1980s, China gradually depreciated the RMB by a cumulative 80 percent, from 1.8 to the dollar in 1978 to 8.7 in 1995. Since then, however, the RMB has only appreciated against the dollar, moving up to a rate of 8.3 by 1997, and holding steady at that rate until mid-2005 after which gradual appreciation resumed. Since 2006 the RMB has appreciated at an average annual rate of about 5 percent against the dollar, to its current rate of about 6.4, and it is likely that this average rate of appreciation will be sustained for the next several years. This history demonstrates that supporting export growth, while important, is not the sole determinant of China’s exchange-rate policy. During the Asian financial crisis of 1997-1998, the consensus of most economists held that the RMB was overvalued; despite this, Beijing kept the value of the RMB steady, on the grounds that devaluation would further destabilize the battered Asian regional economy. As a consequence, China endured a few years of relatively anemic growth in exports and GDP, and persistent deflation. The leadership decided that this was a price worth paying for regional economic stability.

Conversely, the appreciation since 2005 reflects Beijing’s understanding that clinging to a seriously undervalued exchange rate for too long risks sparking inflation. This occurred in many oil-rich Persian Gulf countries in 2005-2007, which held fast to unrealistically low pegged exchange rates and suffered annual inflation rates of 20 percent to 40 percent. For Chinese leaders, an inflation rate above 5 percent is considered dangerously high, and the most rapid currency appreciation in the last few years has occurred when inflationary pressure was relatively strong. A second reason for switching to a policy of gradual appreciation was the view that an ultra-cheap exchange rate disproportionately benefited manufacturers of ultra-cheap goods, whose technology content and profit margins were low. While these industries provided employment for millions, they did not contribute much to the nation’s technological upgrading. A gradual currency appreciation, economic policymakers believed, would eventually force Chinese manufacturers to move up the value chain and start producing more sophisticated and profitable goods. This strategy appears to be bearing fruit: China is rapidly gaining global market share in more advanced goods such as power generation equipment and telecoms network switches. Meanwhile, it has begun to lose market share in low-end goods like clothing and toys, to countries like Vietnam, Cambodia, Indonesia and Bangladesh.

In short, China’s exchange-rate policy is mainly driven by the aim of enhancing the nation’s export competitiveness. But other factors play a role, namely a desire to maintain domestic and regional macro-economic stability, keep inflationary pressures at bay, and force a gradual upgrading of the industrial structure. From the point of view of Chinese policy makers, all of these objectives suggest that the exchange rate should be carefully managed, rather than left to unpredictable market forces. While economists may argue that long-run economic stability is better served by a more flexible exchange rate, Chinese officials can point to the excellent track record their policies have produced: consistent GDP growth of around 10 percent a year since the late 1990s, inflation consistently at or below 5 percent, export growth of more than 20 percent a year, and a steady increase in the sophistication of Chinese exports. Until some kind of crisis convinces them that their economic policies require major adjustment, China’s economic planners are likely to stick with their current formula.

International pressure to accelerate the pace of RMB appreciation is unlikely to have much impact. The basic reason is that other countries have very little leverage that they can bring to bear. In the 1970s, the United States was able to pressure Germany and Japan to appreciate their currencies because those countries were militarily dependent on America. (Moreover, the United States was able unilaterally to engineer a devaluation of the dollar by going off the gold standard in 1971.) Japan’s position of dependency forced it to accede to the Plaza Accord of 1985, which resulted in a doubling of the value of the yen over the next two years. China, being, geopolitically independent, has no incentive to bow to pressure on the exchange rate from the United States, let alone Europe or other nations such as Brazil. The only plausible threat is that failure to appreciate the RMB could lead to a protectionist backlash that would shut the world’s doors to Chinese exports. Yet this threat has so far proved empty: even after three years of the worst global recession since the Great Depression, trade protectionism has failed to emerge in the United States or Europe.

Other considerations further strengthen the Chinese determination not to give in to foreign pressure on the exchange rate. One is the Japanese experience after the Plaza Accord. The generally accepted view in China is that the dramatic appreciation of the yen in the late 1980s was a crucial contributor to Japan’s dramatic asset-price bubble whose collapse after 1990 set the former world-beating economy on a two-decade course of economic stagnation. Chinese officials are adamant that they will not repeat the Japanese mistake. This resolve was strengthened by the global financial crisis of 2008, which in China thoroughly discredited the idea—already held in deep suspicion by Chinese leaders—that lightly regulated financial markets and free movements of capital and exchange rates are the best way to run a modern economy. China’s rapid recovery and strong growth after the crisis are deemed to vindicate the nation’s strategy of a managing the exchange rate, controlling capital flows, and keeping market forces on a tight leash.

The Internationalization of the RMB

Despite this generally self-confident view of the merit of its exchange-rate and other economic policies, Chinese leaders are troubled by one headache caused by the export-led growth strategy: the accumulation of a vast stockpile of foreign exchange reserves, most of which are parked in very low-yielding dollar assets, principally U.S. treasury bonds and bills. For a while, the accumulation of foreign reserves was viewed as a good thing. But after the 2008 financial crisis, the perils of holding enormous amounts of dollars became evident: a serious deterioration of the US economy leading to a sharp decline in the value of the dollar could severely reduce the worth of those holdings. Moreover, the pervasive use of the dollar to finance global trade proved to have hidden risks: when United States credit markets seized up in late 2008, trade finance evaporated and exporting nations such as China were particularly hard hit. The view that excessive reliance on the dollar posed economic risks led Chinese policy makers to undertake big efforts to internationalize the RMB, beginning in 2009, through the creation of an offshore RMB market in Hong Kong.

Before considering the significance of RMB internationalization, it is worth addressing some misconceptions about China’s large-scale reserve holdings and investments in U.S. treasury bonds. Because China’s central bank is the biggest single foreign holder of U.S. government debt, it is often said that China is “America’s banker,” and that, if it wanted to, it could undermine the U.S. economy by selling all of its dollar holdings, thereby causing a collapse of the U.S. dollar and perhaps the U.S. economy. These fears are misguided. First of all, it is by no means in China’s interest to cause chaos in the global economy by prompting a run on the dollar. As a major exporting nation, China would be among the biggest victims of such chaos. Second, if China sells U.S. treasury bonds, it must find some other safe foreign asset to buy, to replace the dollar assets it is selling. The reality is that no other such assets exist on the scale necessary for China to engineer a significant shift out of the dollar. China accumulates foreign reserves at an annual rate of about US$400 billion a year; there is simply no combination of markets in the world capable of absorbing such large amounts as the U.S. treasury market. It is true that China is trying to diversify its reserve holdings into other currencies, but at the end of 2010 it still held 65 percent of its reserves in dollars, well above the average for other countries (60 percent). From 2008 to 2010, when newspapers were filled with stories about China “dumping dollars,” China actually doubled its holdings of U.S. Treasury securities, to US$1.3 trillion.

The other crucial point is that China is not in any meaningful sense “America’s banker,” and its economic leverage is modest. China owns just 8% of the total outstanding stock of US Treasury debt; 69% of Treasury debt is owned by American individuals and institutions. Measured by Treasury debt holdings, America is America’s banker—not China. And China’s holdings of all US financial assets – equities, federal, municipal and corporate debt, and so on – is a trivial 1%. Chinese commercial banks lend almost nothing to American firms or consumers. The gross financing of American companies and consumers comes principally from U.S. banks, and secondarily from European ones. It is more apt to think of China as a depositor at the “Bank of the United States”: its treasury bond holdings are super-safe, liquid holdings that can be easily redeemed at short notice, just like bank deposits. Far from holding the United States hostage, China is a hostage of the United States, since it has little ability to move those deposits elsewhere -- no other bank in the world is big enough.

It is precisely this dependency that has prompted Beijing to start promoting the RMB as an international currency. By getting more companies to invoice and settle their imports and exports in RMB, China can gradually reduce its need to put its export earnings on deposit at the “Bank of the United States.” But again, headlines suggesting that internationalization of the RMB heralds the imminent demise of the current dollar-based international monetary system are premature.

The simplest reason is that the RMB’s starting point is so low that many years will be required before it becomes one of the world’s major traded currencies. In 2010, according to the Bank for International Settlements, the RMB figured in under 1 percent of the world’s foreign exchange transactions, less than the Polish zloty; the dollar figured in 85 percent and the euro in 40 percent. There is no question that use of the RMB will increase rapidly. Since Beijing started promoting the use of RMB in trade settlement (via Hong Kong) in 2009, RMB-denominated trade transactions have soared: around 10 percent of China’s imports are now invoiced in RMB. The figure for exports is lower, which makes sense. Outside China, people sending imports to China are happy to be paid in RMB, since they can reasonably expect that the currency will increase in value over time. But Chinese exporters wanting to get paid in RMB will have a difficult time finding buyers with enough RMB to pay for their shipments. Over time, however, foreign companies buying and selling goods from China will become increasingly accustomed to both receiving and making payments in RMB – just as they grew accustomed to receiving and making payments in Japanese yen in the 1970s and 1980s.

Since China is already the world’s leading exporter, and is likely to surpass the United States as the world’s leading importer within three or four years, it is quite natural that the RMB should become a significant currency for settling trade transactions. Yet the leap from that role to a major reserve currency is a very large one, and the prospect of the RMB becoming a reserve currency on the order of the euro—let alone replacing the dollar as the world’s dominant reserve currency—is remote. The reason for this is simple: to be a reserve currency, you need to have safe, liquid, low-risk assets for foreign investors to buy; these assets must trade on markets that are transparent, open to foreign investors and free from manipulation. Central banks holding dollars and euros can easily buy lots of U.S. treasury securities and euro-denominated sovereign bonds; foreign investors holding RMB basically have no choice but to put their cash into bank deposits. The domestic Chinese bond market is off-limits to foreigners, and the newly-created RMB bond market in Hong Kong (the so-called “Dim Sum” bond market) is tiny and consists mainly of junk-bond issuances by mainland property developers.

Again, we can reasonably expect rapid growth in the Hong Kong RMB bond market. But the growth of that market, and granting foreigners access to the domestic Chinese government bond market, remain severely constrained by political considerations. Just as Chinese officials do not trust markets to set the exchange rate for their currency, they do not trust markets to set the interest rate at which the government can borrow. Over the last decade Beijing has retired virtually all of its foreign borrowing; more than 95 percent of Chinese government debt is issued on the domestic market, where the principal buyers are state-owned banks that are essentially forced to accept whatever interest rate the government dictates. There is absolutely no reason to believe that the Chinese government will at any point in the near future surrender the privilege of setting the interest rate on its own borrowings to foreign bond traders over whom it has no control. As a result, it is likely to be many years before there is a large enough pool of internationally-available safe RMB assets to make the RMB a substantial international reserve currency.

In this connection the example of Japan provides an instructive example. In the 1970s and 1980s Japan occupied a position in the global economy similar to China’s today: it had surpassed Germany to become the world’s second biggest economy, and it was accumulating trade surpluses and foreign-exchange reserves at a dizzying rate. It seemed a foregone conclusion that Japan would become a central global financial power, and the yen a dominant currency. Yet this never occurred. The yen internationalized – nearly half of Japanese exports were denominated in yen, Japanese firms began to issue yen-denominated “Samurai bonds” on international markets, and the yen became an actively traded currency. Yet at its peak the yen never accounted for more than 9 percent of global reserve currency holdings, and the figure today is around 3 percent. The reason is that the Japanese government was never willing to allow foreigners meaningful access to Japanese financial markets, and in particular the Japanese government bond market. Even today, about 95 percent of Japanese government bonds are held by domestic investors, compared to 69 percent percent for US Treasury securities. China is not Japan, of course, and its trajectory could well be different. But the bias against allowing foreigners meaningful participation in domestic financial markets is at least as strong in China as in Japan, and so long as this remains the case it is unlikely that the RMB will become anything more than a regional reserve currency.

Implications for U.S. Policy

The above analysis suggests two broad conclusions of relevance to United States policymakers. First, China’s exchange-rate policy is deeply linked to long-term development goals and there is very little that the United States, or any other outside actor, can do to influence this policy. Second, the same suspicion of market forces that leads Beijing to pursue an export-led growth policy that generates large foreign reserve holdings also means that Beijing is unlikely to be willing to permit the financial market opening required to make the RMB a serious rival to the dollar as an international reserve currency. A related observation is that an average annual appreciation of the RMB against the dollar of about 5 percent now seems to be firmly embedded in Chinese policy. An appreciation of this magnitude enables China to maintain export competitiveness while achieving two other objectives: keeping domestic consumer-price inflation under control, and gradually forcing an upgrade of China’s industrial structure.

Generally speaking, these trends are quite benign from a U.S. perspective. In substantive terms, there is little to be gained from high-profile pressure on China to accelerate the pace of RMB appreciation, since the United States possesses no leverage that can be plausibly brought to bear. While the persistent undervaluation of the RMB will present increasing difficulties for American manufacturers of high-end equipment, as Chinese manufacturers gradually become more competitive in these sectors, the steady appreciation of the currency will increase the purchasing power of the average Chinese consumer and the total size of the Chinese consumer market. United States policy should therefore de-emphasize the exchange rate, where the potential for success is limited, and instead focus on keeping the pressure on China to maintain and expand market access for American firms in the domestic Chinese market, which in principle is provided for under the terms of China’s accession to the World Trade Organization.

This paper is part of a series of in-depth policy papers, Shaping the Emerging Global Order, in collaboration with ForeignPolicy.com. Visit ForeignPolicy.com's Deep Dive section for discussion on this paper.

I this week had the pleasure of doing a podcast debate with my Brookings colleague Jonathan Rauch on the question of whether we need stronger machines and weaker transparency in American government, or the opposite. Guess which side I took! This has been a long-running water cooler and cafeteria discussion between Jon and myself since I arrived at Brookings almost a year ago. While we find some areas of agreement in the podcast (more than you might think),I remain unconvinced by the so-called “political realist” school that Jonathan is a leader of. As I have previously written and blogged (here, here and here), I think the realists are fantasists, disconnected from the actual reality of politics, including its risks. We need more transparency, not less to deal with, for example, things like corruption risk, particularly in the post-Citizens United era. Indeed, that decision itself embraces the value of a vigorous transparency regime when other safeguards are relaxed. My belief is that Washington works both more efficiently and more ethically under the scrutinizing gaze of the American media, ngo's and public. As former White House ethics czar, I often facilitated administration openness efforts, including as a means of accountability, for example helping put the White House visitor logs online.

Jon and my lively debate covers not only issues of transparency itself but also applies them to other current topics—the Affordable Care Act, Trade Promotion Authority, and much more. The debate was silently moderated by our colleague Ben Wittes as part of his “Chess Clock Debates” series. With only ten minutes on the chess clock each to make our points, it was a concise discussion that hit the fundamentals briskly. Thanks to Ben for inviting us and giving us a public forum to discuss this critical policy issue.

The 2016 Brown Center Report (BCR), which was published last week, presented a study of Common Core State Standards (CCSS).   In this post, I’d like to elaborate on a topic touched upon but deserving further attention: what to expect in Common Core’s immediate political future. I discuss four key challenges that CCSS will face between now and the end of the year.

Let’s set the stage for the discussion.  The BCR study produced two major findings.  First, several changes that CCSS promotes in curriculum and instruction appear to be taking place at the school level.  Second, states that adopted CCSS and have been implementing the standards have registered about the same gains and losses on NAEP as states that either adopted and rescinded CCSS or never adopted CCSS in the first place.  These are merely associations and cannot be interpreted as saying anything about CCSS’s causal impact.  Politically, that doesn’t really matter. The big story is that NAEP scores have been flat for six years, an unprecedented stagnation in national achievement that states have experienced regardless of their stance on CCSS.  Yes, it’s unfair, but CCSS is paying a political price for those disappointing NAEP scores.  No clear NAEP differences have emerged between CCSS adopters and non-adopters to reverse that political dynamic.

"Yes, it’s unfair, but CCSS is paying a political price for those disappointing NAEP scores. No clear NAEP differences have emerged between CCSS adopters and non-adopters to reverse that political dynamic."

TIMSS and PISA scores in November-December

NAEP has two separate test programs.  The scores released in 2015 were for the main NAEP, which began in 1990.  The long term trend (LTT) NAEP, a different test that was first given in 1969, has not been administered since 2012.  It was scheduled to be given in 2016, but was cancelled due to budgetary constraints.  It was next scheduled for 2020, but last fall officials cancelled that round of testing as well, meaning that the LTT NAEP won’t be given again until 2024.  

With the LTT NAEP on hold, only two international assessments will soon offer estimates of U.S. achievement that, like the two NAEP tests, are based on scientific sampling:  PISA and TIMSS.  Both tests were administered in 2015, and the new scores will be released around the Thanksgiving-Christmas period of 2016.  If PISA and TIMSS confirm the stagnant trend in U.S. achievement, expect CCSS to take another political hit.  America’s performance on international tests engenders a lot of hand wringing anyway, so the reaction to disappointing PISA or TIMSS scores may be even more pronounced than what the disappointing NAEP scores generated.

Is teacher support still declining?

Watch Education Next’s survey on Common Core (usually released in August/September) and pay close attention to teacher support for CCSS.  The trend line has been heading steadily south. In 2013, 76 percent of teachers said they supported CCSS and only 12 percent were opposed.  In 2014, teacher support fell to 43 percent and opposition grew to 37 percent.  In 2015, opponents outnumbered supporters for the first time, 50 percent to 37 percent.  Further erosion of teacher support will indicate that Common Core’s implementation is in trouble at the ground level.  Don’t forget: teachers are the final implementers of standards.

An effort by Common Core supporters to change NAEP

The 2015 NAEP math scores were disappointing.  Watch for an attempt by Common Core supporters to change the NAEP math tests. Michael Cohen, President of Achieve, a prominent pro-CCSS organization, released a statement about the 2015 NAEP scores that included the following: "The National Assessment Governing Board, which oversees NAEP, should carefully review its frameworks and assessments in order to ensure that NAEP is in step with the leadership of the states. It appears that there is a mismatch between NAEP and all states' math standards, no matter if they are common standards or not.” 

Reviewing and potentially revising the NAEP math framework is long overdue.  The last adoption was in 2004.  The argument for changing NAEP to place greater emphasis on number and operations, revisions that would bring NAEP into closer alignment with Common Core, also has merit.  I have a longstanding position on the NAEP math framework. In 2001, I urged the National Assessment Governing Board (NAGB) to reject the draft 2004 framework because it was weak on numbers and operations—and especially weak on assessing student proficiency with whole numbers, fractions, decimals, and percentages.  

Common Core’s math standards are right in line with my 2001 complaint.  Despite my sympathy for Common Core advocates’ position, a change in NAEP should not be made because of Common Core.  In that 2001 testimony, I urged NAGB to end the marriage of NAEP with the 1989 standards of the National Council of Teachers of Mathematics, the math reform document that had guided the main NAEP since its inception.  Reform movements come and go, I argued.  NAGB’s job is to keep NAEP rigorously neutral.  The assessment’s integrity depends upon it.  NAEP was originally intended to function as a measuring stick, not as a PR device for one reform or another.  If NAEP is changed it must be done very carefully and should be rooted in the mathematics children must learn.  The political consequences of it appearing that powerful groups in Washington, DC are changing “The Nation’s Report Card” in order for Common Core to look better will hurt both Common Core and NAEP.

Will Opt Out grow?

Watch the Opt Out movement.  In 2015, several organized groups of parents refused to allow their children to take Common Core tests.  In New York state alone, about 60,000 opted out in 2014, skyrocketing to 200,000 in 2015.  Common Core testing for 2016 begins now and goes through May.  It will be important to see whether Opt Out can expand to other states, grow in numbers, and branch out beyond middle- and upper-income neighborhoods.

Conclusion

Common Core is now several years into implementation.  Supporters have had a difficult time persuading skeptics that any positive results have occurred. The best evidence has been mixed on that question.  CCSS advocates say it is too early to tell, and we’ll just have to wait to see the benefits.  That defense won’t work much longer.  Time is running out.  The political challenges that Common Core faces the remainder of this year may determine whether it survives.

Turkish Foreign Minister Mevlut Cavusolu’s decision earlier this month to decline to participate in the Munich Security Conference due to Israeli ministerial participation marks a new low in the troubled Turkish-Israeli relationship.

And yet, the latest statistics released this week by the Israeli government document an overall volume of $5.44 billion dollars in Turkish-Israeli trade during 2014. This marks an all-time high point in Turkish-Israeli economic relations, up 11.5 percent from 2013, including $2.75 billion in Israeli exports to Turkey (a 10 percent year-to-year increase) and $2.68 billion in Turkish imports to Israel (13 percent higher than 2013).

This pattern of an almost non-existent political dialogue at the senior levels accompanied by robust bilateral trade has characterized the Turkish-Israeli relationship since 2011. Short of unexpected dramatic changes, the relations between the two former allies will likely continue in this pattern for the foreseeable future. 

Almost two years after Israel’s official apology to Turkey over the Mavi Marmara incident (which I wrote about in depth here), the two countries continue to move in different directions, despite sharing similar strategic concerns on a range of regional issues – the civil war in Syria, instability in Iraq and Iran’s nuclear program.

The main bone of contention between the AKP-led Turkish government and the Likud-led government in Israel remains the Palestinian issue. Turkey continues to speak out against Israeli occupation and settlement activity in the West Bank, as well as on Israeli human rights violations towards the Palestinian population. In addition, Turkey remains one of the main (very few) patrons of Hamas, providing the group with political and economic support and allowing the organization to maintain representation in Istanbul. Israel viewed with disdain Turkish attempts, together with Qatar, to facilitate a ceasefire with Hamas during the summer 2014 war. Anti-Turkish sentiments in Israeli public opinion skyrocketed in response to President Erdogan’s allegations that Israeli policies on Gaza are genocidal. 

Amidst rising tensions in the relationship, President Erdogan publicly vowed after his August 2014 election that as long as he’s in power, Turkey’s approach to Israel will not change. As a result, there are no serious expectations that any senior-level political dialogue will resume, and mutual representation is likely to remain at a junior diplomatic level (after ambassadors were withdrawn from Tel Aviv and Ankara in 2011).

The interesting aspect of the relationship continues to be the booming trade between the two countries, which despite political tensions continues to grow at a rapid pace. Clearly there is an interest on both sides to insulate the economic sphere from the political sphere. Robust trade serves both countries’ economic interests and during a very unstable period keeps the relationship afloat. Nevertheless, an Israeli – Turkish natural gas deal which was considered in the past as a likely scenario and possibly a regional and bilateral “game changer” seems at present to be “off the table.” Potential energy cooperation between Turkey and Israel around the Eastern Mediterranean natural gas discoveries may be possible only in the context of political rapprochement.