The Year of the Horse

Why China's radical economic reforms in 2014 could bring new prosperity to hundreds of millions -- if Xi Jinping can ride out the bumps ahead.

After three decades of dramatic expansion and increasing imbalances, Beijing in 2014 will begin radically transforming its economy, with the goal of achieving sustainable long-term growth. Documents released after the Third Plenum, an important Communist Party meeting held in November, explained -- albeit vaguely -- the reforms that President Xi Jinping and Premier Li Keqiang proposed for China. These include liberalizing the currency and interest rate regimes, changing the allocation of credit in the financial system, spurring innovation, reforming land ownership and residency requirements, imposing a stronger rule of law, and perhaps even partially distributing state assets to households.

Whether or not the reforms succeed, analysts who predict that China is about to embark on a decade of 7 percent growth or more will almost certainly be proven wrong. Broadly speaking, either Beijing will successfully implement the reforms over the next two to three years, or political opposition will prevent it from doing so. If Beijing does not succeed, and if China's growth relies on the same mechanisms that have driven it over the past few years, China's economy will continue to grow at roughly 7-8 percent annually for perhaps two or three more years. During this time, however, debt levels will surge, and the risk of a financial crisis will ultimately cause growth rates to collapse. If China does not control its surge in debt, in other words, it will probably face either a financial crisis or a decade of economic stagnation well before 2020.

If Xi successfully executes the reforms -- and the steps he has taken to consolidate power will weaken political opposition, making this outcome increasingly likely -- the very nature of the reforms will cause growth rates to slow sharply, ultimately to below 3-4 percent. To believe, as many economists do, that successfully implementing reforms guarantees growth of 7 percent or more for the rest of this decade probably represents the greatest piece of confusion about China's adjustment. As the reforms are implemented, growth rates must drop sharply. In fact one can almost argue that the rate at which growth slows will give a fairly accurate indication of the pace of reform: the faster China slows, the better off it will be over the medium and long term.

Two important mitigating factors will limit the adverse social and economic impacts of the slowdown in growth from the roughly 10 percent boom of recent decades. Over the last 10 years, nearly 50 percent of the world's credit and money growth has occurred in China (indicating just how addicted Chinese growth is to debt.) If Xi can successfully implement reforms that increase the efficiency of investment and strengthen the services sector, lower growth will occur without the need for surging credit. This will result in a more rapid increase in Chinese wealth than occurred during the past decade, when investment in projects whose real economic value to China was less than the cost of the investment overstated real growth.

More importantly -- and contrary to those who believe slower growth will lead to social instability -- the reforms will change the way the benefits of growth are distributed. If successful, a disproportionate share of the benefits will be retained not by the state and the wealthy, as occurred over the past three decades, but by ordinary Chinese households. A drop in GDP growth, in other words, will not translate into an equivalent drop in the growth rate of median household income. Instead, if the reforms are successful, the income of ordinary Chinese should grow at roughly 2-3 percentage points faster than GDP. For the state sector and for the wealthiest segment of China's economic elite, however, slower GDP growth will result in much slower income growth, and perhaps even a contraction.

Why does successful reform necessitate a sharp drop in growth? There are at least two reasons. The first has to do with debt. One of the key drivers of reform is the need to contain the explosion in credit that has driven Chinese demand over the past few years. Instead of allowing debt to grow two to three times as fast as GDP, as it has over the past few years, Beijing must take steps to stabilize or even reduce this growth in debt. As China deleverages, fewer factories and bridges will be built, and fewer workers will be employed -- causing economic growth to immediately drop.

Yes, the reforms could increase the efficiency of investment. Instead of borrowing to invest in unnecessary infrastructure or manufacturing capacity, Chinese investors could begin to invest more in very productive areas like small and medium enterprises, or in the service industry. If the reforms are successful, the quality of Chinese investment will rise and the amount of productivity generated by each additional unit of debt will be higher. But to counteract the consequence of much slower credit growth, the reforms will have to immediately unleash truly extraordinary and historically unprecedented increases in productivity. This is within the realm of possibility, of course, but hardly plausible: It is difficult to find any case in history in which such a sharp slowdown in credit growth did not result in much slower economic growth.

Second, China's astonishing growth during the past three decades is the result of a system in which hidden transfers from the household sector subsidized growth. These transfers -- which include land and energy subsidies, nearly unlimited access to credit for state-owned enterprises, a relaxed attitude to environmental degradation, downward wage pressure, monopoly pricing power, an undervalued currency, and most importantly, artificially low interest rates -- are also at the root of the current imbalances. Once China rebalances its economy toward healthier and more sustainable sources of demand, the very processes that turbocharged growth will no longer do so.

By slowing credit growth and eliminating the hidden transfers that subsidized rapid growth, the reforms proposed during the Third Plenum will rebalance China's economy, eliminate its dangerous addiction to debt, improve the quality of growth, and strengthen the relative position of ordinary Chinese households within the economy -- but they cannot do so without substantially reducing China's economic growth rate in the near term. In fact, we will be able to judge the success with which Beijing implements reforms by measuring their impact on GDP growth. If China is able to impose an orderly adjustment quickly, growth rates will slow substantially for several years. GDP growth rates of 7 percent or higher, on the other hand, would suggest that credit is still rising too quickly and China has otherwise been unable to implement the reforms, in which case China is likely to reach debt capacity constraints more quickly.

The next few years are crucial for China -- and will require far more from Xi and Li than the past 20 years required from their predecessors. The reforms proposed after the Third Plenum are promising, but they will likely face substantial political opposition. Their implementation will upset the economic elite, who benefitted disproportionately from Chinese growth of the last three decades and who must consequently bear a larger share of the cost of adjustment. If these reforms are successfully executed, Xi will be hailed as the most important Chinese leader since Deng Xiaoping -- but however successfully Beijing executes the reforms, another decade of growth in the 7-percent range is almost impossible.


Democracy Lab

Silver Lining: The Year 2013 in Human Rights

For human rights advocates, 2013 brought many grim setbacks. Yet there were still some important signs of progress.

With the slaughter of civilians in Syria still horribly unrestrained, it is easy to be discouraged about human rights. There is, of course, every reason for outrage about Syria, and about the international community's narrow focus on peace talks, unlikely as they are to succeed anytime soon, without any comparable effort to stop the killing of civilians while the fighting continues. But there has been human rights progress in many areas in 2013. That is of obvious importance for the immediate beneficiaries, but it also should encourage efforts for progress on persistent abuses elsewhere. Here are a few of the human rights milestones of the past year:

Abusive Rwandan-backed rebel group in Congo crumbles. The eastern part of the Democratic Republic of Congo has probably had more conflict-related deaths than anywhere else since World War II. A plethora of armed groups have killed and raped civilians with impunity. Among them is a succession of rebel groups sponsored by Rwanda, both to protect it from any resurgence of the forces that committed the 1994 genocide and to exploit the region's vast mineral resources. The latest rebel incarnation, which emerged in May 2012, was the M23, led by, among others, Bosco Ntaganda, who was wanted by the International Criminal Court for war crimes and crimes against humanity.

Rwanda got away with instigating these atrocities due in part to the lingering guilt among the international community for failing to stop the genocide. The killing in 1994 was halted only by an invasion of the Rwandan Patriotic Front, led by Paul Kagame, today Rwanda's president. Another factor has been the international admiration for Rwanda's impressive economic advances in the post-genocide period, albeit under the leadership of an autocratic government that brooks no dissent.

Things began to change in June 2012, when Human Rights Watch and a group of United Nations experts uncovered compelling evidence that Rwanda was providing military support to the M23. For the first time, powerful Western governments -- including Rwanda's most important backers, the United States and Britain -- began to criticize Rwanda and even to suspend assistance. Rwanda simply denied supporting the M23, undermining the government's credibility and reconfirming the importance of pressuring it to stop.

At first the pressure succeeded in forcing the M23 to pull back from Goma, the area's largest city, and it later contributed to Ntaganda's surrender to the ICC. Still, for over a year, it was not enough to stop the M23 from preying on the people of the region. When the M23 opened an offensive in October 2013, however, Rwanda's role was all too clear. This time, United States Secretary of State John Kerry and British Foreign Secretary William Hague telephoned Kagame and told him to stop. He did. Deprived of the military support it needed to survive, and facing intensified pressure from a reinforced UN peacekeeping force (see photo above), the M23 crumbled within days. For the first time in years, eastern Congo is apparently free of the predations of a Rwandan-backed armed group.

China abolishes "re-education through labor." Many falsely assume that China is immune to pressure on human rights. In reality, that is more a convenient excuse for governments seeking China's commercial favor than a realistic assessment. China's judicial system is notoriously compromised, formally under the direction of the Communist Party, but at least it offers the pretense of a trial before a court. However, China has also long maintained a parallel system of administrative detention in which the police, without any judicial intervention, can sentence people to up to four years of forced labor, often under harsh conditions. The most active part of this system was known as "re-education through labor." Those caught up in it ranged from minor criminal offenders to dissidents, religious minorities, Falun Gong practitioners, and petitioners seeking redress. As recently as January, 160,000 people were serving sentences under re-education through labor.

Human rights activists and Chinese lawyers have long campaigned against this huge loophole to any promise of a fair criminal-justice system. For many years, China had been making noises about "reforming" the system. Critics expressed skepticism, fearing that this would involve only cosmetic changes, such as adding a judge to the police panel that makes detention decisions. But in new President Xi Jinping's first reform move, the government announced that it was abolishing re-education through labor (along with a slight loosening of the one-child policy). There are still other ways the police can detain people without trial -- drug users and sex workers will likely be the principal victims -- but this most common method now seems to be on the way out.

The "Responsibility to Protect" is still vibrant. In 2005, the world's governments made an historic pledge that they would step in if a national government failed to stop mass atrocities. The R2P doctrine, as it is known, has since been invoked successfully, most notably in Kenya and the Côte d'Ivoire. Some, however, have begun to argue that R2P is unraveling. They cite its controversial use in Libya (as NATO moved from protecting civilians to regime change), as well as the world's failure to stop the slaughter of civilians in Syria.

But in 2013, the doctrine showed a renewed vitality. When mass slaughter on sectarian grounds broke out in the Central African Republic, France and the African Union (AU) sent troops to reinforce overwhelmed AU peacekeepers, the United States contributed more than $100 million, and, as the year drew to an end, the United Nations was preparing for its own peacekeeping mission. Much more remains to be done to pull the country back from the brink, but the international community's responsibility to act is well understood.

In late December, political conflict and ethnic slaughter also threatened neighboring South Sudan, which broke away from Sudan and emerged as an independent nation only two years ago. Within days, the UN Security Council approved an additional 5,500 peacekeepers for South Sudan, a swift response suggesting that, at least in the right circumstances, the R2P doctrine is still a force to be reckoned with.

The UN Human Rights Council begins to live up to its promise. The council was established in 2006 to replace the UN Human Rights Commission, which had lost credibility as repressive governments flocked to it in an effort to use their votes to avoid censure. The council had tighter membership standards, but for its first few years was little better than its predecessor. In recent years, however, the council has come into its own. A key factor has been the Obama administration's decision to join it after the Bush administration shunned it. Other governments have also played an important role, including Mexico, Switzerland, Chile, Botswana, Brazil, Argentina, Mauritius, Benin, Maldives, Costa Rica, and a number of European Union states. Together they made a successful effort to bridge the political divides and overcome the apathy that often stood in the way of effective action. Even traditionally more reluctant countries, such as Nigeria and Thailand, were persuaded to play productive roles.

The positive results are most visible in the case of Sri Lanka. In 2009, when some 40,000 civilians were killed in the waning months of the conflict with the Tamil Tigers, the council's initial reaction was to congratulate the government on its victory. But for the past two years, the council has pressured Sri Lanka to honor its pledge to investigate war crimes by both sides and bring those responsible to account. Similarly, in March 2013, among other useful steps, the council established a commission of inquiry to collect evidence of North Korea's crimes against humanity -- the first step toward possible prosecution.

Two former African leaders face prosecution. During his reign as president of Chad from 1982 to 1990, Hissène Habré is alleged to have committed systematic torture and thousands of political executions. Deposed, he fled to Senegal, where he lived in comfortable exile as the country's former president, Abdoulaye Wade, obstructed repeated efforts to prosecute him -- in Senegal, in Belgium, and via mandate of the African Union.

Yet Habré's victims, and activists working with them, persevered. Their fortunes began to change when Macky Sall assumed Senegal's presidency in 2012 and the International Court of Justice ordered Senegal to prosecute Habré "without further delay." In June 2013, Senegal arrested Habré, and he remains in custody for a trial anticipated in late 2014 or early 2015. Habre's trial would mark the first time in modern history that the courts of one country tried the leader of another for alleged grave crimes under international law.

Similarly, an internationally established tribunal in September 2013 affirmed the conviction of Charles Taylor, the former president of Liberia, for planning and aiding and abetting atrocities by rebels in neighboring Sierra Leone, including by trading his arms for their diamonds. This sets a precedent that may come to haunt other leaders who assist atrocities in other countries by providing military support to abusive forces.

Exposing the National Security Agency's mass surveillance to public scrutiny. President Barack Obama is still trying to prosecute Edward Snowden, but he deserves a hero's welcome from everyone else for the tremendous service he did by exposing the NSA's massive surveillance ofelectronic communications and activities. If not for Snowden, we wouldn't know the extraordinary breadth of the NSA's data collection practices -- such as the fact that the agency collects metadata about potentially all phone calls in the United States because, under woefully outdated rules, none of us has any legitimate expectation of privacy about this information on the grounds that we shared it with the phone company.

Snowden also helped to highlight the NSA policy that foreigners outside the United States don't even have a recognized right to the privacy of the contents of their communications. He revealed that the NSA doesn't believe it affects our privacy when it collects our communications, only when it examines them. That amounts to saying it would be okay for the government to collect a video stream from your bedroom and store it on a government computer so long as it wasn't watched until the government came up with some reason to do so.

And without Snowden we wouldn't realize how weak the Foreign Intelligence Surveillance Court has been in reviewing all of these transgressions -- though we shouldn't have been surprised given that its judges, all hand-picked by the conservative Chief Justice John Roberts, hear only from the government and lack technical expertise. None of this has been fixed, although recommendations from a reform panel that Obama established address some of the issues. But after Snowden's disclosures, it is hard to imagine the world simply moving on as if nothing has happened.

A treaty to protect domestic workers takes effect. The world's most vulnerable workers are probably the millions who labor in people's homes, most of them women and girls. Working in isolation, often far from their own countries, they are ripe for economic exploitation, physical and sexual abuse, and trafficking. Yet they historically have been excluded from the rights afforded most other workers under national labor laws, due to a reluctance to legislate working conditions in the home, often coupled with the myth that these workers are treated like members of the family.

That should begin to change with the new Domestic Workers Convention, which took effect in September. It entitles domestic workers to most of the same rights that laborers outside the home have long enjoyed, including such basics as a weekly day off, limits on hours of work, and a minimum wage. In the two years since the convention was adopted, dozens of countries have strengthened labor-rights protection for domestic workers including comprehensive reforms in the Philippines and Argentina and new protections in Brazil's constitution. There is still a long way to go, but increasingly domestic workers' second-tier status under national labor laws is coming to an end.

Burma releases most of its political prisoners. The reformist government of Burma's President Thein Sein is at best a work in progress. The military still dominates the government and shows no willingness to change the constitution to, for example, permit Aung San Suu Kyi to run for president. War crimes committed in the ethnic conflicts in Burma's border regions remain unprosecuted. New violence has erupted against Muslims, particularly the Rohingya minority, led by Buddhist extremists and often tolerated by the security forces, with muted criticism from key national figures such as Aung San Suu Kyi.

But there is important good news. Independent organizations, while still subject to constraints, are flourishing more than at any time in the past 25 years. The media, while still embattled, are more outspoken. And hundreds of political prisoners -- the vast majority -- have been released. Some new people have been charged on political grounds -- a trend that needs to be stopped -- but there is no question that political detention has decreased dramatically in the last year.

Marriage equality is on a roll. It has been legalized in not only 18 U.S. states (and the District of Columbia), which the U.S. government must now recognize, but also in 16 countries, plus parts of Mexico. Governments joining the trend in 2013 were Brazil, France, Uruguay, New Zealand, and Britain (though it has yet to take effect in the latter).

A step forward for the right to health. Because of the narrow focus of the U.S. Constitution, most Americans do not realize that international human rights law includes not only civil and political rights but also economic, social, and cultural rights. An example is the right to the highest attainable standard of health. Obamacare might have been much less controversial if more Americans treated access to medical care as a basic human right. But one area where progress was made globally on the right to health involved the danger of mercury poisoning. Much of the world's artisanal gold mining uses mercury to separate gold from ore. Mercury is toxic, and particularly harmful to children. Exposure can cause life-long physical and mental disability. A treaty adopted in October requires governments to eliminate the most dangerous uses of mercury in mining and promote alternative forms of gold processing that do not require mercury.

An official assessment of Bush's torture policies seems nearer. On his second day in office, Obama pledged to end the Bush administration's "enhanced interrogation techniques" -- the U.S. government's preferred euphemism for torture. But shamefully, Obama has refused to prosecute those who planned and ordered the torture, encouraging future presidents to treat it as a policy option rather than the crime that it is. What's more, Obama has even fought efforts to investigate the torture, and cited the need to preserve state secrets to block victims' civil lawsuits.

That has not stopped the Senate Intelligence Committee from conducting an extensive investigation and producing a 6,000-page report. While still classified, it reportedly rejects the CIA's claim that the "enhanced interrogation techniques" yielded key information for the capture of Osama bin Laden or any other information of value, and finds that the CIA lied to Congress, the White House, and the Justice Department about the effectiveness of the program. The CIA (meaning the Obama administration) has been fighting tooth and nail to block publication, even as its own unpublished internal report is said to have reached similar conclusions. But as the year came to a close, this obstructionism seems increasingly to be failing. Senator Dianne Feinstein, the chair of the committee, has said she intends to seek declassification of a 300-page executive summary -- the only accounting for Bush-era torture that we're likely to see anytime soon.