Leader: Making 2013 a Pivotal Year of Change: Our Wish List for 2013

In the January 2012 edition of the Sign of the Times, we presented a list of certainties that we believed would continue to hold true in today’s uncertain times. While most of these certainties continue to hold true, this year, we would like to present the top ten triggers for change as wishes that we would like to see come to pass for a peaceful and prosperous 2013. Our wish list is by no means exhaustive or scientific but represents what we see in dialogues and travels as the key risks and opportunities with the potential to have a meaningful impact on 2013 and the years ahead.

1. US Avoids the Fiscal Cliff and Returns to AAA. Given the start-stop nature of the US economy in 2012, clearly one of the most important triggers for global economic recovery is for next year would be for a strong and unequivocal recovery in 2013, triggering an upgrade of US sovereign debt back to AAA status. As a first stop, this will require a bipartisan solution to the so-called Fiscal Cliff (defined as a combination of expiring tax cuts and across-the-board government spending cuts scheduled to become effective at the end of the Dec 31st, 2012) . However, last year’s brinkmanship between Republicans and Democrats on the US debt ceiling does not engender confidence in the parties’ ability to find a mutually acceptable deal, and the Obama Administration has signaled its willingness to go “over the cliff” rather than reach a compromise they do not believe in. A real solution, on the other hand, would be one that resolves rather than merely delays America’s debt and deficit crisis, putting in place concrete and mutually acceptable government spending reduction and targeted revenue increases that restore investors’ confidence in US capital markets. We have highlighted the importance of America’s economy for its continued leadership position in the world in a previous edition of the Sign of the Times.
   The Requirement: Mutual respect which enables an agreement between the Democrats and Republicans. And then the momentum of growth supersedes cuts and taxes to spur the nation on to a sustained and strong recovery.
2. The Euro Crisis Reaches Turning Point. 2013 can well be the year when the Euro Crisis, now going into its fourth year, is resolved. German Chancellor Angela Merkel to date has taken a cautious approach to managing the crisis and also no doubt wary of the reaction of the German electorate. Having just been re-elected as the leader of her party with a 98% majority and clearly leading the opposition in the polls for next year’s federal elections, Chancellor Merkel today has more leverage and room to maneuver than at any time since the start of the crisis. A strong commitment by Germany to the Euro-Zone early in 2013 can restore investor confidence in the region and free up the capital required for an investment led recovery in the failing Euro-states. Although doing so will require Germany to allow higher levels of inflation that previously deemed acceptable, in the long run it will be preferable to another lost year for Europe and another missed opportunity for Germany, which has with hindsight been one of the biggest net beneficiaries of the Euro of course.
   The Requirement: EU leaders, in particular Germany and France, demonstrate what is true to the markets, namely that they have deep pockets and an unshakeable commitment to the survival of the EU.
3. US-China Cross Border Investment Picks Up. Canada’s approval of CNOOC’s US$15bn acquisition of Nexgen, a Canadian oil company, earlier this month demonstrates that Chinese companies have built the skill-sets required to execute large scale cross border investments. With overseas direct investments from China up an estimated 25% in 2012, the next year will likely see growing ambitions to deploy more Chinese capital internationally. The US to date has more or less fiercely resisted foreign direct investment from China on multiple levels, usually citing a variety of security concerns. The reality is of course that multiple sectors are in need of fresh capital. It is also true that the demand for Chinese capital in the US is becoming visible: at a recent ODI investment conference in China, private industry delegates from the US sought to raise over US$1bn for over 90 different investments. The one Chinese entity which has been successful in completing US investments, at least in the financial sector, has been China’s sovereign wealth fund CIC, which acquired 10% stakes in companies like Morgan Stanley and Blackstone. CIC’s hands-off approach of minority investments in selected assets could be the ideal strategy for Chinese capital to make inroads for non-financial sector FDI in the future.
   The Requirement: The US and China agree a list of sectors where both nations are open to investment and to kick-start the process, the US re-emphasises its openness to minority investments from China.
4. China and Japan Diffuse Islands Row. China and Japan’s relationship is both among the most important as well as among the most strained in the Asia-Pacific region. The massive bilateral trade (US$345bn) and Japanese investments (US$6.3bn in 2011) are periodically threatened by very public political spats, most recently this past year involving the sovereignty dispute over the Senkaku/Diaoyu Islands, halfway between Japan and China and claimed as sovereign territory by both. The positions of the two countries appear to be hardening in response to the populist sentiments raised domestically by each government, with a real impact on the economic relations between the two countries: Japanese investment in China contracted by over 30% during the month of October in response to widespread rioting and destruction of Japanese made consumer products in China. With China scaling up its naval capabilities and the Liberal Democratic Party in Japan running for re-election in a platform of national re-armament, 2013 will need to be the year that cooler heads prevail to reach a negotiated settlement. This is only one of many of China’s maritime sovereignty disputes and is closely watched to see if the country can skillfully avoid creating a hostile seaboard along almost the whole of the Asia-Pacific region, potentially undoing the goodwill resulting from 20 years of China’s mostly peaceful rise.
   The Requirement: A cooling off of tensions and a tacit agreement to ignore the issue and resume full relations is probably the most we can expect.
5. Syrian Civil War Ends as China Joins International Community. The ongoing conflict between the Syrian government and its people is among the most deadly conflicts raging in the world today, and the Syrian government’s conduct has caused it to lose legitimacy in the eyes of both the Western and a significant portion of the Arab world. However, coordinated action at the supra-national level has been hindered by multiple vetoes by China and Russia of UN Security Council resolutions condemning Syria’s government. China’s increasingly isolated position in this regard is not only the result of its economic links with Syria but of its cultural understanding of legitimate sovereignty. The Mandate of Heaven, or T’ien Ming, is an ancient Chinese political concept used to assert or deny the legitimacy of the ruling dynasty. When an Emperor ruled justly, fairly and wisely, it was said that the Mandate of Heaven was with him and bestowed legitimacy on his rule. Misrule, on the other hand, precipitated the loss of the Mandate and the overthrow of the dynasty. This process however has been understood as an internal one and has no precedent abroad. Despite this fact 62% of the Chinese population is in favour of China supporting the UN in protect human rights through intervention. China continues to take a hands-off approach to foreign interventions, driven party by the lingering trauma of the 19th century, where the Western world infringed on China’s sovereignty with a series of unequal treaties, and driven party by the fear of establishing a precedent that may allow future international intervention in China’s own affairs. With the Syrian government increasingly isolated, China’s voice may well tip the scales to sufficient international pressure to end to the civil war. The Syrian conflict is the perfect stage for President Xi to show the world where China stands on an issue that has the vast majority of the world united.
   The Requirement: China’s leaders reconcile their understanding of sovereignty with their belief that government mandates are only valid if leaders respect the people.
6. Iran Nuclear Crisis Resolved: China has the opportunity to play a critically important role from a geopolitical perspective in the resolution of the Iranian Nuclear Crisis. Iran’s ongoing quest to acquire armed nuclear capabilities and US-Israeli anxiety reached new heights in 2013, with tightening US-led sanctions and Israel increasingly threatening a pre-emptive military strike in the face of Iran’s continued uranium enrichment. In this case the UN Security Council has penalized Iran with sanctions and countries like Russia have worked with the US and France to draft proposals that would allow for the creation of a peaceful Iranian nuclear program. China continues to maintain strong economic and commercial links with Iran while adhering to the UN sanctions. China today imports 10% of its oil from Iran (which represent 20% of Iran’s total oil exports) and this is strategically important to both nations. Further, China has been instrumental in building the Iranian nuclear program in the first place, and today still has nuclear technicians and advisors on the ground there, despite opposing Iran’s developing nuclear weapons. As long as China continues to separate its business dealings and oil trade from what it calls “diplomatic questions ” it will continue to act as a safety valve for the pressures exerted by international sanctions on Iran (and others). China in this case not only has the leverage required to push through a multi-party deal to potentially end the Iranian Nuclear Crisis but also has the opportunity to position itself as one of the prime beneficiaries of such a deal given its strong trade and investment links. The risk for China is that it becomes complicit in Iran’s weapons programme and in its aims. Be careful what you wish for. America needs to decide whether it wants such a precedent of course since it represents what will be the first in a series of political victories for China.
   The Requirement: China seizes the opportunity to position itself as both an advisor to Iran and a technical aide to international inspectors and thereby press for peace.
7. India-China Partnership Continued Growth: On the 50th anniversary of the Sino-Indian War, India and China jointly declared 2012 to be the year of India-China friendship and cooperation. China has also declared that the India-China relationship is “the most significant bilateral relationship of the 21st Century” and bilateral trade looks to be on track to reach the stated target of US$100bn by 2015. We continue to believe in the potential power of the India-China relationship and the potential for both countries to profit from the relationship, whether through industrial, energy or technology partnerships (We outlined our thinking on the India-China Partnership in the March 2012 Edition of the Sign of the Times) . Unlocking the value of the commercial relationship however requires both countries to not escalate to any security associated priority level the border disputes in Kashmir and along India’s northeastern border and it also requires China’s strong ties with Pakistan to not cause security issues for India. Talks on resolving the border disputes have effectively stalled, and China continues to build out infrastructure in the disputed region of Kashmir it controls, which together with the deepwater port it is building for Pakistan in Gwader, stand to provide it with an overland outlet to the Indian Ocean. China’s decision earlier this year to include a map in its new passports encompassing many of the disputed territories in Asia as Chinese territories prompted a strong reaction from many including the Indian government.
   The Requirement: China and India continue to accelerate their mutual dependency, including growing their cross-border finance and trade links, while de-escalating and de-prioritising their disputes.
8. India Recovers. Emboldened by its recent victory in a contentious parliamentary vote on the proposal to allow foreign investment in the retail sector, the ruling coalition government led by the Congress Party is now poised to use its political capital to launch additional reforms proposals to encourage foreign investment in other critical sectors like insurance and banking, and to drive forward the implementation of long-pending reforms such as the new goods and services tax. A slew of additional political victories on important structural reforms in 2013 could help India break the vicious circle of spiraling fortunes and revive investor confidence at home and abroad. This would help stabilize the currency from the lows it suffered through 2012, ease up the pressure from the ratings agencies, and create a market environment where the government can proceed with its privatization programme to help contain the fiscal deficit. More importantly, it would provide a clear signal to Indian entrepreneurs and international investors that the country is again “open for business” and help accelerate economic growth from c.5.0-5.5% in the 2012 to a 7-8% growth rate by the end of 2013 setting the scene for a full recovery (We have laid out multiple future growth scenarios for the Indian economy in the November edition of the Sign of the Times ). The near-term growth revival would in turn help India achieve its longer-term strategic challenges such as creating employment on a massive scale, building infrastructure and reforming governance. We continue to believe that for an Indian government to really deliver on India’s potential a more radical agenda needs to be pursued. (See our previous policy work “Indian Wide Open”, February 2012).
   The Requirement: A relentless programme of reform that shows the government as a party of bold ideas and actions.
9. Japan Returns to Growth and Bold Innovation: While 2012 looks like it has been a lost year for India, much of the past twenty years by some measures have been lost for Japan, which has spent the better part of the past two decades plagued by low growth and deflation. This year’s nuclear disaster in Fukushima in some ways illustrates many of the factors that have contributed to Japan’s relative decline. Japan’s boom was driven by leadership in applied technological innovation across multiple sectors and a strong outward focus on trade and to a lesser degree investment. The Fukushima disaster, the government analysis of the role of TEPCO’s management, the board scandal at Olympus and the loss of leadership in consumer technology to Apple among many events have highlighted a corporate culture that looks too closed and inward looking, focused on protecting its position rather than on exploiting its clearly huge advantage in innovation, disciplined execution and a nation not maximizing the value of its massive savings and pensions reserves to create new markets. Having slipped back into recession just before the next election, a sustainable return to growth will require Japan to have the confidence to take what is already in the R&D lab and ready it for international launch at global scale.
   The Requirement: The return of an institution such as the fabled Ministry of International Trade and Industry (MITI), driving and coordinating, technological breakthroughs in medicine, energy and material sciences that translate into new products and global scaled new markets for Japan’s corporations in the years to come.
10. Egypt Provides Arab Blueprint for Democracy with Islam. In 2011, Egypt’s revolution was seen as a major force in the Arab Spring which saw regime changes in four countries and civil uprising or major protests in eight others. Following this landmark success, 2012 has presented a more mixed picture: on the one hand the country solidified the regime change with the peaceful election of President Mohamed Morsi in June and on the other hand the path to drafting a new constitution has been problematic since President Morsi declared widespread powers for himself. Today, Tahrir Square is again the site of concerted protests against the government. A successful resolution of the current crisis can provide an opportunity for Egypt to demonstrate to others in the region and the world that Islam, democracy and fundamental rights can sit well together. The Muslim Brotherhood and other religious conservative parties have won a clear majority in Egypt’s parliamentary elections, evidence that the Egyptian electorate is not necessarily against a broader role for Islamic groups in the country’s political process. As the subsequent events have shown, what they are not looking for is for these groups to assume the rights that they have successfully removed from the previous dictators. While President Morsi’s unilateral declaration of presidential power has strengthened his hand against the fiercely secular military and Mubarak-era judiciary, it has also alienated the people and the political opposition which together form the most important partners for democracy.
    The Requirement: The president and the parliamentary majority effectively realign themselves with the opposition, demonstrating to Egypt’s people and the world that democracy, fundamental rights and Islam can go hand-in-hand peacefully.

In Conclusion

Should all of the events on the wish list come to pass, 2013 will be a great year building peace, prosperity and freedom across the world. While the achievement of all of the goals and targets laid out above would represent nothing less than an astounding success for the world, we recognise the challenges associated with each one as well as the role of unforeseen event risk, which can derail even the best laid plans. Therefore, the most likely realistic upside scenario is probably one that sees meaningful progress towards the goal rather than their full achievement. We will continue to track and explore more deeply the issues laid out above in the coming year as well as focus on some of the longer term structural economic, political and social issues facing India, China and the world. Season’s greetings!

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