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Asia Unbound

CFR experts give their take on the cutting-edge issues emerging in Asia today.

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Can China Change Its Growth Model?

by Evan A. Feigenbaum
The Oriental Pearl Tower is pictured through a glass wall as people walking past and the skyline behind are reflected on the wall in the financial district of Pudong. (Aly Song / Courtesy Reuters) The Oriental Pearl Tower is pictured through a glass wall as people walking past and the skyline behind are reflected on the wall in the financial district of Pudong. (Aly Song / Courtesy Reuters)
How many countries with nearly two decades of double-digit growth under their belt would look in the mirror and say, “Hey, it’s just not working anymore?”

I daresay, not many.

But that is precisely what some Chinese leaders appear to be doing.

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Japan’s Iran Sanctions Dilemma

by Sheila A. Smith
Defense Minister Prince Salman receives a commemorative gift from Japanese Foreign Minister Koichiro Genba following official talks in Riyadh on Sunday. (SPA) Saudi Arabia's defense minister prince Salman bin Abdulaziz receives a commemorative gift from Japanese foreign minister Koichiro Genba following official talks in Riyadh January 8, 2012 (Courtesy SPA).

Cutting off Iranian oil imports has put Tokyo in a difficult position. The United States and its European allies have already agreed to up the ante on sanctions against Iran, but the domestic costs that Japan has to bear in order to cooperate are higher.

Prime Minister Yoshihiko Noda’s government has indicated its desire to cooperate, and last December the Ministry of Foreign Affairs announced new restrictions on the operations of 106 entities as well as one individual with potential links to proliferation-sensitive activities in Iran. But the real effort now is to reduce Japan’s oil imports from Tehran, and to negotiate an exemption from more stringent restrictions on Japanese banks included in the new U.S. sanctions law. Read more »

China’s Game-Changing Water Policies

by Elizabeth C. Economy
A farmer digs a trench to allow water to irrigate his field planted with winter wheat crop near the village of Lidong, located around 217 miles south of Beijing. A farmer digs a trench to allow water to irrigate his field planted with winter wheat crop near the village of Lidong, located around 217 miles south of Beijing. (David Gary / Courtesy of Reuters)

Water is an issue that preoccupies Chinese officials throughout the country, but nowhere perhaps as much as in Beijing. The already water-scarce capital has been suffering a continuous and precipitous decline in water availability over the past decades, as both population size and income levels have grown dramatically. Caixin magazine has a terrific new piece that details not only the current crisis but also the historical challenges Beijing has faced. The piece also explores what the capital should be doing but isn’t. Experts, for example, have been pushing pricing reform, water conservation, and recycling. Some of this is being done, but not enough. Instead, Beijing’s plans center on desalination, exploiting karst resources, and the South-North Water Diversion, each of which, as the article discusses, brings with it additional economic and potentially serious environmental costs. Read more »

ROK Green Growth Quarterly Update: July–September 2011

by Scott A. Snyder
Global Green Growth Institute chairman Han Seung-soo of South Korea delivers a keynote speech during the Global Green Growth Summit 2011 in Seoul June 20, 2011.

Global Green Growth Institute chairman Han Seung-soo of South Korea delivers a keynote speech during the Global Green Growth Summit 2011 in Seoul June 20, 2011 (Courtesy Global Green Growth Institute).

South Korean president Lee Myung-bak has made great strides internationally in propagating an international vision for green growth, especially through the work of the Global Green Growth Institute (GGGI). The Council on Foreign Relations has published a new report on South Korea’s green growth policies by Jill Kosch O’Donnell which describes South Korea’s newly emerging green growth partnerships with Denmark, the UAE, and the World Bank, as well as more mixed progress in implementing green growth strategies domestically. The report can be found here.

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“Paulson’s Principles” for the United States and China

by Evan A. Feigenbaum
U.S. Treasury Secretary Henry Paulson leaves after making closing statements after the 5th U.S.-China Strategic Economic Dialogue in Beijing, December 5, 2008. (Jason Lee/Courtesy Reuters)

U.S. Treasury Secretary Henry Paulson leaves after making closing statements after the 5th U.S.-China Strategic Economic Dialogue in Beijing, December 5, 2008. (Jason Lee/Courtesy Reuters)

With the glaring exception of Japan, Asian economies are recovering earlier and stronger from the crisis than nearly all others. And China has now cemented its place alongside the United States and Europe as a growth engine.

But China faces large—and intensifying—vulnerabilities.

Readers of Asia Unbound will know that I’ve talked here and written here about some of these challenges.

And so I thought I’d flag for interested readers a major speech delivered this morning in Washington by former Treasury Secretary Hank Paulson (full disclosure: my boss).

He has a deep history with the U.S. and Chinese economies—at Goldman Sachs, and then as the Treasury Secretary. As a banker, he worked on historic but thorny issues in China, like privatizations. And at the Treasury, he established the Strategic Economic Dialogue and played a central role in the creation of the Ten Year Energy and Environment Cooperation Framework.

The basic thrust of his speech is twofold:

First, both countries face growing economic challenges and vulnerabilities. And for its part, it is decidedly in the U.S. interest for China to get ahead of these challenges. As Paulson puts it, “China’s success at sustaining growth, fighting inflation, and transitioning from an economic model too dependent on exports and fixed asset investment is closely connected to our own success.”

Second, “the U.S. and China need to take steps—mostly individually, sometimes together—that will have the mutually beneficial effect of supporting and sustaining economic growth.”

That’s a striking formulation because it’s not focused on “cooperation” for its own sake. Rather, as Paulson argues, the U.S. and China “don’t always need to act jointly.” They can take separate and self-interested steps that, in the bargain, put their two economies onto a more complementary footing.

You can read the entire speech here, or watch it delivered here.

But for the central message, here are his five principles—let’s call them, “Paulson’s Principles”—quoted verbatim from the speech:

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Can India and America Up Their Investment Game?

by Evan A. Feigenbaum
Commuters on a suburban train during the morning rush hour in Mumbai.

Commuters on a suburban train during the morning rush hour in Mumbai.Danish Siddiqui/Courtesy Reuters.

My latest column is out in India’s financial daily, the Business Standard. I used this month’s column to talk a bit about structural impediments hindering U.S. investment in India. These challenges will grow if, as many economists suspect, India’s growth continues to slow from its restored post-crisis clip of 8 to 9 percent a year to something more on the order of 7 to 7.5 percent. And in that context, it’s worth noting that Indian stocks have just completed their worst quarter since 2008. And of course food price inflation remains as stubborn as ever.

Here’s my argument, which reflects in part a perspective from my new perch in Chicago rather than Washington, DC:

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My Kind of Town

by Evan A. Feigenbaum

The Chicago skyline in fog caused by extreme cold temperatures of -21 degrees. Courtesy Reuters.

Regular readers of this blog will know that I’ve had a day job at Eurasia Group, a global political risk consulting firm. And they’ll know, too, that I’ve sometimes blogged or talked about the firm’s work, including what my time there has taught me about the relationship between politics and markets in Asia and around the world. For a guy with a background principally in foreign and national security policy, intensive exposure to the markets—and to financial market participants—has been a great experience. But today is my last day at Eurasia Group. I’ll remain an adjunct senior fellow at CFR and will, of course, continue blogging here at Asia Unbound. But I’m taking up a new job as the first executive director of the Paulson Institute, an independent center, located at the University of Chicago, established by former Treasury Secretary and Goldman Sachs CEO Hank Paulson. The institute will promote economic activity and cross-investment, leading to the creation of jobs, as well as encourage progress in environmental protection and the development of alternative sources of clean energy. Its aim is to promote sustainable economic growth and a cleaner environment around the world, focusing initially on concrete actions by businesses and governments in the United States and China—the world’s two largest economies and energy consumers. I’m readying myself for a steady diet of Cubs games, Bears tailgates, and a very cold winter. And I’m looking forward to continued interchange with readers of Asia Unbound.

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China’s Great Rebalancing Act

by Evan A. Feigenbaum

A resident cycles past the Wumen Gate of the Forbidden City in Beijing. Reuters/Jason Lee.

As Vice President Biden meets with Xi Jinping and other Chinese leaders this week, his number one economic talking point is almost certain to be about “rebalancing.”  Nearly all of Washington’s principal economic concerns, from currency valuation to Chinese industrial policy, touch this central issue.  But, quite frankly, rebalancing is not just an American goal.  It is, too, a Chinese objective because Beijing’s existing growth model—predicated on the two pillars of exports and capital-intensive investment—is delivering diminishing returns, and China’s savvy leaders know it.

A major new report from Eurasia Group, China Great Rebalancing Act, explains why.

First, a little truth in advertising:  I’m the head of the Asia practice group at Eurasia Group, so I helped write the report.  But our team’s report is well worth reading because it provides a very comprehensive overview of the forces and dynamics shaping the future of China’s political economy.

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Japan’s Nuclear Quandary (continued)

by Sheila A. Smith
Protesters take part in an anti-nuclear rally in Tokyo March 27, 2011. The sign on the left reads, "Change energy policy". The sign on the right reads, "Do not sprinkle radioactive material".

Protesters take part in an anti-nuclear rally in Tokyo March 27, 2011. The sign on the left reads, "Change energy policy". The sign on the right reads, "Do not sprinkle radioactive material". (Courtesy Reuters/Toru Hanai)

Partisan politics aside, public confidence in industry and government has plummeted. Credibility of data marshaled to date in support of the conclusion that Japan’s reactors are safe has been undermined, and media polls reveal a steady drop in public support for Japan’s existing nuclear energy policy.  

A broader debate in Japan is unfolding, and the temptation is to draw the battle lines so that industry and government are on one side and Japan’s citizens are on the other. But this would be a flawed—and from a policy perspective, deeply damaging—premise. Read more »

Japan’s Nuclear Quandary

by Sheila A. Smith
An aerial view shows Kyushu Electric Power's Genkai nuclear power plant, in Genkai town, Saga Prefecture, in this picture taken by Kyodo on June 9, 2011. The Japanese government moved closer on Wednesday to securing approval from local authorities to restart the first of 35 nuclear reactors shut for regular maintenance or kept idle since the March earthquake and tsunami. Japan's trade and energy minister, undeterred by several dozen anti-nuclear protesters urging him to go home, tried to persuade local governments in the southern Saga prefecture that it was safe to restart nuclear reactors shut since a deadly natural disaster struck the country's northeast on March 11.

An aerial view shows Kyushu Electric Power's Genkai nuclear power plant, in Genkai town, Saga Prefecture, in this picture taken by Kyodo on June 9, 2011. The Japanese government moved closer on Wednesday to securing approval from local authorities to restart the first of 35 nuclear reactors shut for regular maintenance or kept idle since the March earthquake and tsunami. (Courtesy Reuters/Kyodo)

The Kan cabinet is facing a defining moment in Japan’s postwar nuclear debate. With the bulk of nuclear reactors now offline, the country is holding its breath over how the prime minister will proceed. Difficulties continue at Fukushima Daiichi. Dangerous levels of radiation have been reported in the No. 1 and No. 2 reactors, and new sources of food—this time beef—have been taken off the market by the Japanese government with dire consequences for the livestock producers in the stricken regions.   

The short-term prognosis for Japan’s electricity supply is uncertain, yet it is the longer term effort to reform Japan’s energy policy that is the key to resolving the current impasse. Public confidence in Japan’s nuclear industry was shattered by the disaster at Fukushima Daiichi, and until the reactors are fully cooled, it is unlikely that the full impact of this disaster will be appreciated. In the meantime, decisions need to be made, and Japan’s energy supply needs to be assured.  Read more »