Will China’s economic slowdown affect its reforms?

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The latest macroeconomic data released by China’s National Bureau of Statistics (NBS) on April 18 suggest that China’s economic growth has moderated in the first quarter of 2014.
GDP growth has decelerated from 7.7 percent (year-over-year) in the last quarter of 2013 to 7.4 percent (year-over-year) in the first quarter of 2014.

On a sequential basis, the quarter-on-quarter seasonally adjusted growth slowed from 1.7 percent in Q4 last year to 1.4 percent in Q1 2014.

The deceleration in the first quarter of this year is in line with World Bank expectations (see our latest East Asia Economic Update) (Figure1).

Figure 1: Official growth data on the demand side reflect subdued export growth and a moderation in investment growth. Consumption led growth in the first quarter of 2014, contributing 5.7 percentage points to growth, followed by investment, contributing 3.1 percentage points. Net exports dragged down growth by 1.4 percentage points.

Many economists speculate that the weakening trend in growth may put more pressure on the government to implement more and stronger growth supportive fiscal and monetary policies, following the stimulus measures unveiled recently that include accelerated expenditures on railway construction and social housing, as well as tax breaks for small businesses.

Categories: Asia, Blog




Categories: Asia, Blog

The President’s Trip to Asia: Ukraine and the Global Context

Brookings Institute Blog - Tue, 04/22/2014 - 21:00

As the president prepares for his rescheduled Asia trip on April 23-27, events in Ukraine continue to unfold in a dangerous way. The president’s policy in Ukraine has been met with a concern about what it reveals about U.S. power, perceived U.S. retreat and the fraught question of U.S. leadership. Do Japan and Korea and the other Asian powers view U.S. reactions in Ukraine as signifying a weakening of U.S. commitment to its leadership role? Will the president succeed in implementing his vaunted "pivot to Asia"? How can the U.S. balance the pivot to Asia with ongoing commitments in Europe, to say nothing of the Middle East?

Here are some factors to consider:

Do events in the Ukraine cause Japan and the Republic of Korea to worry about U.S. defense commitments? 

Here’s the difference: Japan and Korea are allies; Ukraine is not. Some critics have contended that the perceived limits of the U.S. response to Russian actions in the Ukraine will leave allies questioning America’s willingness to live up to its commitment. But Ukraine is not an ally; there are limits to the scale and nature of the U.S. commitment there. The U.S. response to challenges in Asia has been more emphatic. When China unilaterally established an Air Defense Identification Zone (ADIZ) in November 2013, covering much of the East China Sea and implicitly threatening Japanese possessions there, the U.S. response was swift and firm: the U.S. secretary of defense made a strong statement clarifying that the Japanese-administered Senkaku Islands (whose status is disputed by China) falls under the U.S. alliance commitment to Japan, and flew two B-52 bombers through the Chinese ADIZ. China did not respond, and the situation did not escalate. One conclusion that can be drawn from the difference between the U.S. response in the East China Sea and in Ukraine: far from undermining the sense of U.S. commitment to its allies, the differences between these episodes should actually reinforce the incentives to strengthen alliances with the United States. In short: it’s good to be an ally.

Can the U.S. still “pivot to Asia”? 

Yes – but the president and his team have to do a better job at communicating what that means. In fairness, when the policy was first announced, no one in the White House used the term “pivot”: the concept was a “rebalance” of the U.S. force structure from its high-level commitments during the wars in Iraq and Afghanistan to a more balanced global presence, including an increase in both the military and diplomatic presence in Asia. Events in Ukraine don’t change or challenge that in fundamental ways. But the phrase ‘pivot’ has drawbacks: we’ve convinced everyone in the Middle East that we’re leaving, no one in Asia that we’re coming and everyone in Europe is confused as to where we’re going. The president should abandon the phrase “pivot” and start talking about a “balanced” foreign policy and a balanced global presence. Meanwhile, the pivot is already starting to happen – through expansion of base facilities, through an expansion of diplomatic presence, with the Marines base in Australia. The president has made it clear to the White House staff that he expects to continue to focus on an increased presence in Asia through to the end of his term. 

Does a focus on Asia mean doing less globally? 

It might. I’ve been a critic of U.S. policy in Syria, but I have to concede that none of our Asian allies wanted to see us get entangled in yet another complex war in the Middle East. Quite a different issue is our security role in the Gulf. All of the Asian powers – Japan, Korea, China, India – rely on the U.S. continuing to play a role in forestalling inter-state war in the Gulf. That’s necessary for the stable flow of oil, and all the Asian powers are dependent on that flow for their economies. None more so than China, whose role in the region is the real issue at the heart of this trip.

Is the trip about trying to contain China? 

American foreign policy commentary tends to fall into binary options: we can submit to China’s inexorable rise, or try to contain it; we have a ‘win-win’ relationship with China, or we’re facing an inevitable conflict – as often happens when one power rises and another falls. All of this is hugely over-simplified. For these reasons:

  • The U.S. is an enduring, not a falling power; 
  • China is a rising power, but faces numerous complications – and most of them are internal. 
  • China and the U.S. are heavily integrated, financially and in trade terms – that limits the incentive for conflict. 
  • China is increasingly dependent on energy imports to keep its economy growing – and it can’t secure those imports without cooperation with the U.S. and the West; that sharply limits China’s options. 
  • China and the U.S. are all-but certain to be competitors; but that’s a long way from Cold warriors. 

So the right policy for the U.S. is neither to blithely accept China’s more aggressive demands, nor to attempt a full-on containment strategy. Rather, U.S. policy has to focus on shaping the environment in which China rises, both in Asia and globally. The TPP trade negotiations are a big part of this, and that will be an essential focus of this trip. And this does link Asia with Ukraine – in both cases, more than U.S. military power is in play (though that is clearly in play too): it’s also America’s market, financial and “coalitional” power that are key to success.

Will all of this satisfy our Asian allies? 

Of course not. If there’s any constant in U.S. alliance management, it’s that allies are never satisfied. But the trip will allow the president to put a focus on continued "rebalancing" activity; to push forward the TPP trade negotiations; and to privately and publicly signal that the U.S. remains committed to its Asian allies. Meanwhile Vice President Biden will travel to Ukraine to keep a U.S. focus on events there.

What can we conclude from all this?

Now and for the foreseeable future, the U.S. will be the most influential global power. But it’s going to be tested by all comers. China has strong, powerful incentives to continue to cooperate with the U.S., but there are incentives for rivalry as well, especially in the East and South China Seas. Russia has fewer incentives for restraint and may pose the sharper challenge in the next few years. The Gulf will continue to matter to America’s global role, and turbulence there will compel American responses. In every region at every turn, the U.S. will be accused of doing too little – and sometimes, like in Syria, that criticism will be right. But the lodestar of U.S. foreign policy must be maintaining its alliances, and broadening its coalitions, to extend its global capacity – what I call U.S. “coalitional power”. Only the U.S. is in a position to play that role.

Authors Image Source: © Larry Downing / Reuters
Categories: Blog

Good News and Bad in China’s First Quarter Growth Data

Brookings Institute Blog - Tue, 04/22/2014 - 10:09

Global stock markets reacted well to the release last week of China’s first quarter data. GDP growth of 7.4 percent was slightly ahead of consensus forecasts and relieved worries of a hard landing. Many analysts (including me) feel that the composition of growth is more important that the GDP number, and this week the National Bureau of Statistics released the contributions of consumption, investment and net exports to GDP growth (see chart).

View a chart of new data on China's economic growth

At first glance there seems to be pretty robust rebalancing. Consumption contributed 5.7 percentage points to growth, and investment, 3.1 percentage points. The decline in the trade surplus subtracted 1.4 percentage points from growth. Since consumption (household plus government consumption together) and investment are each about one-half of the economy, these numbers mean that real consumption grew at about 11 percent in the first quarter (compared to the year before) while investment grew at about 6 percent. It is definitely good news for rebalancing advocates that consumption has held up very well while investment has slowed but not collapsed. The fear that the crackdown on corruption would hamper consumption appears to be misguided: luxury consumption by corrupt officials is annoying but not big enough for the crackdown to have macroeconomic effects.

The bad news is that we have seen this pattern before. In each year from 2010-2013 the first quarter had very robust growth of consumption. The first quarter is the main holiday period when many big purchases are made. Investment is muted because of weather and holidays. In the years 2010-2013 consumption growth slowed after the first quarter and for the year contributed an average of 4.5 percentage points to growth; while investment accelerated and contributed 4.4 percentage points. Thus, there was almost no shift in the balance between consumption and investment over the period. This continuing high level of investment has led to excess capacity in sectors throughout the economy.

As the year proceeds consumption growth is likely to slow, as in previous years. The contribution of net exports is likely to turn from negative to close to zero as the U.S. and global economies recover. The overall growth rate then will depend on how much investment there is. The pattern of recent years is for the government to stimulate investment to grow robustly and to keep the GDP growth rate around 8 percent. China’s growth will be more sustainable if, alternatively, the government accepted the slowdown of the growth rate towards 7 percent and moved ahead vigorously on the reform agenda that would lead to higher household incomes and consumption and less, but more efficient, investment.

Authors Image Source: © Sheng Li / Reuters
Categories: Blog

Thailand: Road safety will never happen by accident

Photo credit: Dennis Thern

In Thailand, road accidents cause about one death every hour—but for a country of almost 70 million people, how does it fare compared to other countries?

Well, before we get to answering that; the good news for the country is that, according to Thailand Road Safety Observatory, overall road accidents, fatalities and injuries all fell roughly by a third over the past decade. But as for the bad news, the probability of crash victims becoming fatally wounded or permanently disabled is higher than ever.

However, the real bad news—despite the authorities’ efforts to prevent accidents—is that, according to the World Health Organization’s Global Status Report on Road Safety 2013, Thailand continues to have one of the highest rates in road fatalities. In fact, with 38 deaths per 100,000 inhabitants per year, it ranks third in the world, just behind the African countries of Eritrea and Libya, at 48.4 and 40.5 respectively.

Categories: Asia, Blog

Procurement: Delivering Development Outcomes

Brookings Institute Blog - Fri, 04/18/2014 - 12:28

As the debate over reform of World Bank procurement policies progresses, I presented the keynote opening at a World Bank sponsored conference “Procurement: Delivering Development Outcomes” on February 19.  In this presentation, I challenge the procurement community to focus on the real outcomes of the whole procurement process and not just on compliance with the process steps for bid and award.  In addition, I discuss the serious implications of this shift and the need to address the “risk-averse” culture as well as the lack of effective engagement by sectoral technical experts.

Categories: Blog

Tweaking the Financial Stability Oversight Council to Reduce Risks of Another Financial Crisis

Brookings Institute Blog - Thu, 04/17/2014 - 13:00

The Financial Stability Oversight Council (FSOC), created by the Dodd-Frank Act, should be retooled to enhance its ability to maintain financial stability and minimize the risk of another financial crisis, says Donald Kohn, a senior fellow in Economic Studies at the Brookings Institution and its Hutchins Center on Fiscal and Monetary Policy.

“We’ve renovated our regulatory and supervisory structures in charge of making the financial system more resilient,” Mr. Kohn said. “We’ve made progress, but my view is that the job isn’t done yet.” Mr. Kohn is a member of the Bank of England’s Financial Policy Committee and a former vice chairman of the U.S. Federal Reserve Board.

This diagram was originally published in the Bank of England Quarterly Bulletin of 2013 Q3

In remarks delivered at Harvard’s Kennedy School of Government, Mr. Kohn cited several shortcomings of the structure of the 10-member FSOC, currently chaired by the Secretary of the Treasury:

  • It’s composed of several independent regulators, several of which have mandates to focus only on specific institutions or markets, not on the stability of the overall financial system.
  • There are gaps in regulation among FSOC and its member agencies that could interfere with the ability to reduce systemic risk
  • Data is not widely shared among the constituent agencies to the extent that it should be.
  • FSOC is likely to face big obstacles to implementing countercyclical macroprudential policies, that is, policies designed to make credit less plentiful in booms and more plentiful in busts.
  • FSOC has very limited tools [..] and recommendations to other agencies might take considerable time to be implemented.”

Accepting that Congress is highly unlikely to change the current fragmented structure of U.S. financial regulation, Mr. Kohn made six suggestions for changing FSOC:

  • Give each of the agencies with seats on the FSOC a clear objective to maintain financial stability, which would make it harder for an agency to reject or tone down a recommendation that FSOC deemed important to reduce systemic risk.
  • Require FSOC agencies to share data in response to requests from one another.
  • Require FSOC to include in its annual report to Congress an assessment of the regulatory perimeter, i.e. where risks are developed outside the most heavily regulated sectors, and whether laws need to be altered as a result.
  • To give FSOC the independence to act to implement unpopular counter-cyclical policies, give it a new, independent, presidentially appointed, Senate confirmed chair, making the Treasury secretary a member but not the chair of the committee, and give FSOC its own source of funding and staff, perhaps by folding the Treasury’s new Office of Financial Research into the FSOC.
  • Require the FSOC to consider the costs and benefits of its actions and recommendations.
  • Give the more independent FSOC tools it can use more expeditiously to address potential systemic risks, such as giving it more say over triggering countercyclical capital buffers for financial institutions, as outlined in the Basel III international capital accord.

“These changes would require legislation and that’s not going to happen any time soon in our contentious political environment,” he said. “But it can’t hurt to start a conversation that might bear fruit at some future date.”

Authors Image Source: © Keith Bedford / Reuters
Categories: Blog

Reassurance at the Heart of the Obama-Abe Summit

Brookings Institute Blog - Wed, 04/16/2014 - 15:06

Why reassurance is needed

The upcoming summit meeting between President Obama and Prime Minister Abe offers a good opportunity to inject a healthy dose of reassurance to allay two fundamental concerns that worry not only the United States and Japan but also many other countries in the region: 1) the ability of the United States to successfully execute its policy of rebalancing towards Asia, and 2) Japan’s ability to stay the course on a pragmatic foreign policy that avoids forays into historical revisionism and attaches the utmost priority to the task of economic revitalization through ambitious structural reforms. These are no small feats and there are limits to what a leaders’ summit can achieve, but the best way to get there is through actual deliverables.

The economic agenda—in particular the bilateral market access talks in the Trans-Pacific Partnership (TPP)—is the obvious candidate for both governments to aim for for a significant breakthrough.  An agreement in principle in the trade negotiations would boost confidence in the American commitment to remain a Pacific power and the Japanese resolve to tackle the sources of its economic stagnation and remain an influential actor in international affairs. There are of course other areas of promising bilateral cooperation, such as the drafting of new guidelines for defense cooperation, but these will not be ready by the time of the leaders’ meeting.

Trade, therefore, looms large in the success of the Obama-Abe summit. The key here is that the TPP agenda opens a new chapter in U.S.-Japan relations—not only because of the unprecedented ambition in the economic sphere (across the board tariff reductions, tackling of non-tariff barriers, and drafting new rules of trade and investment for the Asia-Pacific), but also because the outcome of the TPP talks has emerged as a focal point in solving the foreign policy credibility problems that both countries face. Trade can no longer be considered “low politics” when it figures so prominently in the final outcome of a bilateral summit meeting with important ramifications for core priorities in each country’s foreign policy: the American rebalance and Japan’s economic rebirth. This coming Obama-Abe meeting is a fresh and eloquent reminder of the growing importance of geo-economics in world affairs.

Trade as the politics of credibility

The Trans-Pacific Partnership is an integral pillar of the rebalance because it offers a richer strategy of U.S. engagement with the region, one that captures the deep and multi-dimensional ties in U.S.-Asia relations. The TPP guarantees that the American rebalance will not be perceived as a narrowly defined shift in military strategy. But more importantly, it is the TPP leg of the rebalance that can accomplish the most important task of all: to reassure Asian nations that the United States is not interested in fueling a Cold War in Asia by isolating its most important security competitor in the region. At the core of the American TPP policy lies an inducement—not containment—strategy towards China. The bet is that China, working of its own volition and setting its own pace, will find the TPP a useful lever to accomplish the set of ambitious economic reforms that it admits are essential to re-launch its development model. 

Critics of the rebalance toward Asia point to the lack of military resources (both because of the need to address pressing crises in other regions of the world and because of the budgetary cuts imposed through the sequester) and the weakening effect of polarized domestic politics (for example, the government shutdown that prevented President Obama from attending the APEC summit last October) as indicators of the rhetorical nature of the rebalance.  They even question American resolve to enforce its own red lines in Syria or prevent further Russian encroachments in Ukraine.  Hence, at this critical juncture the U.S. government can ill afford to let the TPP talks stall.  Securing a market access deal with Japan and passing trade promotion authority will be two essential tasks in rescuing the Asian rebalance.

Prime Minister Abe received high marks at home and abroad when he emphasized economic revitalization as the central priority of his administration and hinted at a pragmatic approach to foreign policy. However, his visit to the controversial Yasukuni Shrine last December and hints about possibly revising the Kono statement (which offered remorse for the plight of comfort women) caused concern for alliance managers on both sides of the Pacific. More recent statements from the Abe administration that the war apologies will stay in place are certainly a positive development, although the task of historical reconciliation is still a long way off. However, the Abe government should also redouble efforts in displaying its resolve to tackle the politically painful structural reforms that will determine the ultimate success of the economic revitalization strategy—popularly known as Abenomics. For “Japan to be back” success in the economic front is the first priority. But when Japan doggedly plays defense in agricultural liberalization, it undermines confidence in its ability to carry out bold reforms.

In order to grasp the importance of the TPP in the bilateral and regional agenda, we must also avoid overselling it. The TPP will do nothing to boost the credibility of America’s military deterrence in the region, will not help in healing the wounds of history, and will not be the main driver in many of the structural reforms that Japan needs to implement (for instance, in the labor market and health care). But it is certainly true that the TPP is an integral component of the American policy of rebalancing towards Asia, and Japan’s ability to exert international leadership by arresting the narrative of economic decline. A bilateral understanding on tariff liberalization would be a significant deliverable for this summit meeting and would also help reenergize the broader TPP talks. American and Japanese trade negotiators have engaged in marathon negotiations, but we are running out of time. The market access talks are important in their own right, but they hold a larger meaning in reassuring us that the United States will remain a fully engaged Pacific power and that Japan will leave economic stagnation behind.

Authors Image Source: © Yves Herman / Reuters
Categories: Blog

Latin America and the Changing Macroeconomic Landscape

Brookings Institute Blog - Wed, 04/16/2014 - 10:29

While the likelihood of major threats—such as the breakup of the eurozone—have been greatly reduced, Latin America  stills faces tough challenges on the road ahead, including the tightening global financial conditions as Fed tapering proceeds, a potential  slowdown of the Chinese economy, and the need to raise productivity and the mediocre growth potential in the region.  I sat down to discuss some of the most pressing issues facing the region today.

Ernesto discusses the potential impact of both a steep and a gradual rise in U.S. interest rates on Latin America:

Ernesto explains why a financial crisis in Latin America is unlikely:

Ernesto explains how Mexico and Central America will experience the potential slowdown of the Chinese economy differently than South America:

Ernesto argues that improving the quality of education is key to raising the productivity and growth prospects of Latin America:

Categories: Blog

The Future of the State Revisited: Reforming Public Expenditure

IMF blog - Wed, 04/16/2014 - 07:46

By: Sanjeev Gupta and Martine Guerguil

(Version in FrançaisРусский中文, and 日本語)

The global financial crisis brought to the fore the question of sustainability of public finances. But it merely exacerbated a situation that was bound to attract attention sooner or later—governments all over the world have been spending more and more in recent decades. Here at the IMF, we’ve been looking into the factors behind this increase in public spending, particularly social spending, and our latest Fiscal Monitor report discusses some of the options for spending reform.

Explaining the Growth of Government 

How much governments spend mainly reflects a country’s individual preferences about the desired size of the government and services it delivers. Yet, over a number of years now, government spending as a share of overall economic output has been on a clear upward trend. Some of this may be due to fundamental economic factors (Chart 1).


Chart 1.  Upward Trends in General Government Spending (percent of GDP)

The nineteenth-century German economist Adolf Wagner theorized that the demand for public goods and services increases as countries become richer (“Wagner’s Law”). William Baumol provided another explanation, namely that the cost of public provision of goods and services tends to increase faster than productivity; his example was orchestra musicians, whose salaries rise even if they arguably don’t play much better than decades earlier (“Baumol’s cost disease”). Our own analysis reported in the Fiscal Monitorprovides evidence supporting both hypotheses.

These findings imply that, in the absence of mitigating measures, pressure on governments to spend will continue, though possibly at a slower pace as income and productivity growth level off.  In fact, our estimates suggest that, in the absence of reforms, government spending in emerging market economies could increase by between 3 and 6 percentage points of GDP through 2050.

And upward pressure on public spending is likely to come from at least two other sources:  population aging, which will increase the cost of providing health care and pensions; and the normalization of monetary policy, which will increase debt payments when interest rates eventually start to rise.

Options for spending reform

The main task for governments is to ensure their finances remain sustainable now and into the future while still fostering growth and equity, and somehow do this in the face of the pressures to increase spending. To square that circle, governments will need to strike a delicate balance between tax policy and spending reform.

In advanced economies, where consolidation needs are largest and room to raise additional revenue through taxes is limited, spending cuts may be necessary as part of a wider reform strategy. In many emerging market and low-income economies, on the other hand, large shares of the population lack access to a full range of public services such as education and health care. In their case, there is scope to expand the provision of public goods and services by raising taxes. But some reprioritizing of expenditure is also likely to be needed.

Country circumstances and preferences clearly matter and the devil—as always—is in the details, but some common elements emerge from the experience that countries have had with expenditure reform:

  • Countries should avoid across-the-board spending cuts . Although they may be expedient, such cuts are neither efficient nor welfare-enhancing, and have deleterious effects on the economy’s long-term ability to grow.
  • Restoring sustainability will require containing social spending and the public wage bill, which together make up the bulk of government spending. Reining in the growth of social spending requires tackling public pensions and welfare benefits. In the case of pension reform, gradually raising the retirement age, while protecting the vulnerable and expanding access when needed, seems to be the most attractive option. In both advanced and developing countries, improving the targeting of welfare benefits can generate fiscal savings without compromising equity. Reducing the wage bill in a durable way would require replacing the wage and hiring freezes implemented in several countries since 2009 with deeper structural measures.
  • Governments can achieve cost-savings by improving efficiency. The scope for efficiency gains appears to be large in the provision of education and health care and in public investment—the latter is particularly relevant for low-income countries.
  • The trend decline in public capital stocks in advanced and emerging market economies will need to be gradually arrested. Slowing this decline (Chart 2) will require more productive public investment or increased private sector participation.
  • Supportive fiscal institutions can boost the effectiveness of expenditure reforms.  Empirical evidence suggests that effective decentralization frameworks and expenditure rules, for example, can help promote spending control.
  • Last but not least, expenditure reforms are more likely to be successful and long-lasting if supported by wide political consensus. A broad communications strategy is especially important as political uncertainty and social pressures can easily derail reforms.

Chart 2. Downward Trends in Government Capital Stock

Categories: Blog

UPDATE: Cuba's Emerging Entrepreneurs One Year Later

Brookings Institute Blog - Mon, 04/14/2014 - 21:00

In Raul Castro’s Cuba, many small and medium-sized private businesses are yielding good returns to their investors. As the author discovered during his recent return to the island, successful entrepreneurs are reinvesting profits into their expanding enterprises – pointing to the emergence of a new group of on-island capitalists capable of generating some badly needed capital accumulation for the Cuban economy.

My 2013 Brookings monograph, Soft Landing in Cuba? Emerging Entrepreneurs and Middle Classes, included case studies of some of Cuba’s new private firms. During my return visit this spring, I located as many of these firms as I could to check on their progress, one year on. Here’s what I found.

In the delightful provincial city of Cienfuegos, the leading paladares (private restaurants often in family homes) I re-visited reported having had an excellent year. After pointing out the upgrades in her Restaurante Las Mamparas, Maylin Hernandez proudly walked me up the main boulevard to her sparkling new cafeteria, The Big Bang (see photo below). While Las Mamparas, with its higher prices and international fare, caters mainly to tourists, the second investment targets a Cuban market with lighter food and soft drinks. Opening early, the Big Bang hopes to persuade Cubans to accompany their morning coffees with a heartier breakfast, U.S.-style.

Maylin in Big Bang holding Soft Landing / Richard Feinberg, Brookings Institution

Across the boulevard, Dona Nora (featured on the cover of Soft Landing) had also benefited from some décor upgrades. Evidently, cash flow had been so good that the owners were off on a lengthy European vacation. Meanwhile the paladar Tranvía had moved to a more central location offering a stunning rooftop view of the city and an open-air BBQ grilling Cuban-style meats. 

In Havana, many new paladares had opened their doors in recent months, generating a more heated competitive culinary environment. Searching for new profit centers, investors have turned to serving up late-night entertainment at bars and dance clubs, catering both to foreigners and to middle-class Cubans with disposable income. Investors in one successful venture, Sangri-La, have already launched a second night club, “Up-and-Down,” with VIP lounges requiring a $20 consumption minimum per person, a hefty sum by Cuban standards.

In its assessment of private bed and breakfasts, Soft Landing described a composite case of such establishments. Over the past year, Havana and other major cities have seen more of the official “for rent” symbols over the doors of homes and apartments, such that some owners report vacancies and downward pressures on prices. Nevertheless, since the returns remain high – just one night’s rent can equal an entire month of salary for a state employee – many Cubans continue to upgrade their homes, banking on the arrival of more tourists. In fact, international tourism has been on the upswing in recent months; eventually, it is assumed, U.S. sanctions will be further eased and American tourists will arrive in such big waves that the large hotels will not be able to accommodate them. The spillover could fill the B&Bs. 

In the retail space, I returned to Piscolabis, a shop specializing in Cuban-designed artisan crafts, strategically located in the Old Havana district. Although the owners reported that profits had somewhat lagged expectations, evidence of expansion was everywhere: I could see a second floor addition being prepared, and a new sidewalk café – a profit center – had opened. The number of employees had grown smartly in percentage terms, from three to five. 

In the construction sector, builder Jesus maintains his brisk business in Havana, primarily remodeling private homes. Soft Landing had also drawn attention to the emergence of construction cooperatives, often created by worker brigades exiting state construction companies. These new non-state entities – where wages can be many times those paid by state builders – had become so attractive to workers that the larger state construction companies are suffering a shortage of skilled labor, raising questions about the nation’s capacity to implement large projects. A major foreign hotel chain warned the author: Cuba’s ability to respond to a sudden major influx of tourists could be endangered by a labor shortage impeding the rapid construction of major new hotels. Perhaps for this reason, the newly approved foreign investment law allows for workers to be imported, where necessary to overcome construction bottlenecks.

Other businesses featured in Soft Landing are also prospering, including Nostalgic Cars, with its fleet of gleaming 1950s model Chevrolets; and dance instructor Lidusoy, who is capitalizing on her years of performing with the iconic Hotel Nacional’s Parisien Cabaret, now offering private salsa lessons to foreigners.

But one featured business was notably absent: the Prometheus 3-D movie theater had shuttered, when the government suddenly outlawed all such establishments in late 2013. 

Similarly, the government ruled that private clothing retailers could no longer sell imported apparel, probably to protect domestic producers and the large state distributors. Consequently, many private clothing boutiques were forced to close their doors (see photo below). 

Boutique with “cerrado” sign / Richard Feinberg, Brookings Institution

Another worrisome signal: the government’s new foreign investment law permits foreigners to partner with officially-sanctioned cooperatives, but notably not with privately-owned firms. In Cuba’s rapidly evolving business climate, this could change, but in the meantime the official regulations discriminate against the emerging private sector.

Overall, despite some government backsliding, and signs of a tightening macroeconomic outlook, the business climate appears somewhat improved over the last year. Many businesses are quickly recouping their initial capital outlays, are reinvesting in business upgrades, and are searching for new investment opportunities. Emerging from within Cuban socialism, this dynamic private sector could become a major pillar of future growth – if the authorities permit it to do so.

Authors Image Source: © Enrique de la Osa / Reuters
Categories: Blog

Socrates & the Pope: Overheard at the IMF’s Spring Meetings

IMF blog - Mon, 04/14/2014 - 13:41

By IMFdirect editors

Socrates’ famous method to develop his students’ intellect was to question them relentlessly in an unending search for contradictions and the truth—or at the very least, a great quote.

The method was alive and well among the moderators, panelists and audiences of the IMF’s Spring Meetings seminars that took place alongside official discussions, where boosting high-quality growth, with a focus on the medium term, was at the top of the agenda.  Our editors fanned out and found a couple of big themes kept coming up.  Here are some of the highlights.

Monetary policy 

Lots of people are talking about what happens when the flood of easy money into emerging markets thanks to low interest rates in advanced economies like the United States slows even more than it has in the past year.

At a seminar on fiscal policy the discussion focused on the challenges facing policymakers as central banks slowly exit from unconventional monetary policy and interest rates begin rising.

A live poll of the audience found 63 percent said the global economy remains weak and unconventional monetary policies should remain in place.

“One of the big risks is that we withdraw our accommodative policies prematurely,” said Charles Evans President, Federal Reserve Bank of Chicago. Evans also stressed that inflation around the world is low.

“I think that’s a sign of weakness, and I think that’s a sign of risk,” he said.

In a full day discussion of what monetary policy ‘s new normal might look like, Axel Weber, Chairman of Zurich-based UBS, said the global economy is returning to normal, and higher returns in more advanced economy markets always leads to a reversal of capital flows, which means volatility for emerging markets.

“So get used to the new normal,” said Weber.

Emerging economies  

What emerging markets are thinking and doing about this was another hot topic.

The U.S Federal Reserve should consider the impact on other countries of its plan to gradually taper its policy of quantitative easing, said the head of the Reserve Bank of India, Raghuram Rajan during a day long series of panel discussions on emerging markets.

“Sensitivity to conditions in emerging markets while exiting would be useful,” said Rajan, who added that “what the Fed does now affects what the emerging markets do going forward.”

Others thought emerging markets should equip their economies with the right tools to deal with the impact of Fed tapering, which includes deeper local financial markets that can offer more products, services and liquidity.

“There is no substitute for good, sound policies,” said Rodrigo Vergara from the Central Bank of Chile. “We have sound fiscal policy.   You might want to try to start a pension fund, but if you don’t have sound fiscal policy it won’t work.  We have deep markets, and deep institutions.”

In another live poll during a panel discussion, 56 percent of the audience said domestic factors are key to growth in emerging market economies.

Liaquat Ahamed, Pulitzer Prize-winning author of The Lords of Finance said the U.S. Federal Reserve does have a key role to play in resolving a liquidity crisis, as it did following the Lehman Brothers collapse in 2008.

“But that is different from saying the Fed should conduct its day-to-day monetary policy with a view to avoiding spillovers,” Ahamed noted.

In the monetary policy seminar, Adair Turner, former chair of the U.K.’s Financial Services Authority, said that emerging markets and other countries should use macroprudential policy to guard against the impact of capital flows.

“You can’t ask advanced economies central banks to put on a global hat,” he said.

The audience from a seminar on emerging markets earlier in the week begged to disagree. In another live poll, 70 percent said the U.S. should take into account the impact of its policies on other countries.

U.S. central bank policy is not the main worry of all emerging market economies.

“The main risk for Chile isn’t taper, it’s China,” said Vergara.  “China is Chile’s main trading partner and main consumer of their commodities.  When you see that credit has gone from 120 % to 180 % you think about a financial crisis.

If you’re looking for more to worry about in the global economy, you should take Gillian Tett’s advice.  The Financial Times columnist gave kudos to the recent Global Financial Stability Report chapter on emerging economies.

“It’s jam packed with fantastic statistics and graphs, and scary ones too,” said Tett.

 Growth & more

In a conversation with PBS anchor Charlie Rose, IMF head Christine Lagarde talked about the global outlook and how policymakers’ concerns are now shifting from crisis recovery to creating durable and sustainable growth. To get there, countries need, among other things, key structural reforms in labor markets, infrastructure and other areas.

There were also seminars on Africa, the Middle East, and IMF’s turning 70 this year that you can watch online.


Rising income inequality is now acknowledged as a critical economic, social and economic issue for everyone.  Christine Lagarde is talking about it, the IMF’s chief economist Olivier Blanchard is talking about it, and the IMF has new research on redistributive policies to curb inequality and the potential trade-off between redistribution and growth.

Speaking on why inequality should be at the top of policymakers’ agendas, Winnie Byanyima, head of Oxfam International, said that “inequality is morally wrong…it is a real threat to democracy.”

“A consensus has emerged. The IMF says more equality brings more growth. The World Bank says the same. Obama says he cares about inequality. Even God is on our side. Look at what the Pope said.”

The question is, what are we going to do about it?

Contributors: Gita Bhatt, Maureen Burke, Jacqueline Deslauriers, Glenn Gottselig, Lika Gueye, Hyun-Sung Kang


Categories: Blog





Categories: Asia, Blog

From farm to chopsticks: Improving food safety in China

A challenge for Chinese businesses is to re-capture the vast domestic market owing to the recent food scares that have seriously undermined the domestic brands.

After several high-profile food safety incidents, according to one recent survey, around 64% of Chinese consider food safety as the number one priority that affects their daily lives and requires immediate action by the government.

The Chinese government is taking these concerns very seriously and has launched important reforms in its system of food control. It promulgated a new Food Safety Law in 2009, and created a new food safety authority in 2013 to deal with these issues. These reforms are now rolling out to provincial and local levels. These reforms will eventually affect more than one million state officials, restructure more than a dozen government ministries, and revise more than 5,000 regulations. The reforms will result in a complete overhaul of the food control system and introduction of new global best practice policies for food safety.

Categories: Asia, Blog

A Welcome Boost to the US Development Agenda: Recommendations of the Global Development Council

Brookings Institute Blog - Mon, 04/14/2014 - 12:28

Today the Global Development Council presented a first set of practical and valuable recommendations to the president and the public. I can already hear the yawns, and the queries asking for a reminder as to what is this council, which was first proposed as an independent advisory council on development three-and-a-half years ago in the president’s Policy Directive on Development and whose initial members were appointed 16 months ago. But this brief report is worth reading and discussing. It recommends four areas in which the development agenda can move ahead in the next few years. The recommendations are built on administration initiatives and do much to both integrate some of these initiatives and move them a further step along. The report is not comprehensive and does not touch on many elements of development, but does focus attention on four actionable recommendations that can advance the U.S. contribution to development.

The first recommendation is to Harness the Private Sector through modernizing the tools the U.S. government utilizes for development finance. The report endorses the concept of a “one-stop” U.S. Development Finance Bank and separately endorses specific improvements in the authorities and resources of USAID, OPIC, and the international financial institutions. It recommends pragmatic steps that in the last several years have picked up support from diverse sources, including the policy community, business groups and political leaders.

Coming from the policy community, the most far reaching of the council’s recommendations is the formation of a Development Finance Bank, first proposed by Ben Leo and Todd Moss at the Center for Global Development. Recommendations targeted to enhance the capabilities of specific U.S. development finance mechanisms have been advanced by scholars at the Center for American Progress, Council on Foreign Relations, Center for Strategic and International Studies, and the Brookings Institution. From the business community, in addition to the traditional business lobby organizations, a new business coalition, American Leadership in Global Development, has recently been formed to advocate strengthening U.S. development finance tools. And there is burgeoning interest in Congress as well, such as a multi-year authorization of OPIC that is included in HR 2548, the Electrify Africa bill, introduced by Representatives Ed Royce and Eliot Engel and now with 95 House cosponsors.

The most important step the members of the council could take to advance this agenda is to commit to the president, jointly and individually, to see these recommendations through the legislative process, and to offer to serve as the facilitator among the executive branch, business, civil society, and Congress—to work on a bipartisan basis to advance this national interest.

A second set of recommendations joins Innovation, Transparency, and Evidenced-Based Policy. It is particularly encouraging to see the spotlight put on transparency and the U.S. commitment to the International Assistance Transparency Initiative (IATI). Data transparency is an essential tool of accountability, informed evidence-based policy and innovation. The Millennium Challenge Corporation (MCC) has been a positive experiment in the value of bringing transparency to government and a demonstration of how transparency can help an agency stay true to its mission by helping to fend off political and bureaucratic diversions.

The strong U.S. commitment to be fully compliant with IATI by the end of 2015—having all U.S. assistance data posted and of good quality and detail—is commendable but has run into unfortunate delays. Both the Assistance Dashboard and U.S. postings of data to IATI have been inadequate in scope and nature of the data and have yet to reach a level where the data is very useful, especially to developing-country users. There has been recent indications of a renewed commitment to making the data comprehensive and sufficiently detailed so as to be useful, so hopefully the Global Development Council turning the public spotlight on IATI, and indirectly the Foreign Assistance Dashboard, will bring the political leadership, urgency, and resources needed to empower the agency staff responsible for bringing data transparency into fruition.

The council’s report appropriately calls on USAID’s new Global Development Lab to be bolder, more ambitious and tolerate risk.  In addition, the council should call on the Lab to embrace transparency as an operational methodology. The Lab gathers into one unit at USAID disparate efforts to bring science and technology and innovation into development, and is intended to integrate and build synergies between the programs. Bringing transparency to the operations of the Lab can further help promote innovation as expanding the knowledge of the activities and programs of the Lab can spark new thinking and experimentation elsewhere that can feed into the Lab.

The transparency agenda also needs to be expanded to government budget and policymaking, as transparency can lead to a better informed public, better informed policies and reduced corruption and favoritism.

There would appear to be conflict between “innovation” and “evidence-based policy.” The first requires risk taking, the second operating from the known and proven. This tension can exist within any single project, but the fact is that in development we are always balancing multiple objectives. Some activities, where there is a history of experience and success, can operate from known certainties and evidence; others that delve into lesser known solutions must tolerate more risk. But even in the latter, rigorous monitoring and evaluation is essential in order to learn and adjust according to the evidence.   

The third recommendation is focused on Climate-Smart Food Security.  The Global Development Council has very adroitly identified a concrete way to act on the charge of the UN High-Level Panel on the Post-2015 Development Agenda to integrate the sustainability and development agendas into a common strategy. The council’s report makes the connection very simply and clearly, noting that it is the “world’s poorest, particularly women (who will) suffer disproportionately from climate change” and that we must feed “an ever-growing global population without…accelerating climate change and environmental degradation.” The recommendation calls for integrating the Obama administration’s Climate Action Plan and Feed the Future programs and for the U.S. to launch a global initiative to reclaim the 600 million acres of degraded agricultural lands.

The fourth recommendation is for the president in the next 18 months to hold a Conference on Global Development. The purpose is to better educate the American people about the role and successes of development. My first reaction was, “not another conference, it will be a one-time flash that the American people never know about.”

But my second thought was, “Wow, if this could be bottom-up, maybe it could make a difference.”  Eighteen months might be just enough time to orchestrate a real grass-roots effort, the results of which could then be disseminated through the networks that were used to feed into the conference. 

This would not require the creation of any new organization or networks; they already exist. The U.S. Global Leadership Coalition brings together leading citizens at the state-level to discuss U.S. global engagement and smart power; the World Affairs Council and Organization of International Visitors have affiliates across the country in large and medium-sized cities; Rotary International and other service clubs are in all towns and cities and have various international connections and programs; and student forums populate university and college campuses. The list goes on. With the draw of reaching the ear of the president and influencing the national dialogue, the networks could be mobilized to feed a discussion across the country that would help bring the reality and success and needs of development to the American people and particularly to community leaders and activists. This endeavor could help identify the elements of a bipartisan consensus on the role of development for U.S. national interests. It would be important not to let this dialogue die after the conference but to transmit the results back through the networks to sustain longer-term attention. A model that council member Alan Patricof referenced during the public discussion today is the 1995 White House Conference on Small Business.

The council’s report appropriately recognizes and encourages the U.S. administration’s role in the development of the post-2015 agenda. I would add that the recommended conference on development, and the process suggested here to feed into and out of that conference, could be an important means of engaging the American people on that agenda both during its formulation and afterwards.

It is important to note that there are several imperatives integrated throughout the recommendations. One is the empowerment of women. This is a moral and a practical imperative, as eliminating extreme poverty and advancing sustainable development will not be achieved if half of the world’s population is left on the sidelines; the evidence is overwhelming that investing in women brings substantial economic and social returns. A second is the critical role of transparency and accountability. The third is consistency with the direction of the post-2015 development agenda, of which the council’s report reflects a careful reading.

The report importantly concludes by repeating the critical importance of transparency and accountability, calling on Congress and the Obama administration to work together, and restating the goal of inclusive and sustainable development.

Yes, we have waited a little too long for these recommendations, but let’s recognize their value and work alongside the Global Development Council to see their implementation. The focused and practical recommendations demonstrate the value of bringing knowledgeable and diverse voices to U.S. development policy. The public session today, held before presenting the recommendations to President Obama, was an open and informative exchange and sets a good example for transparency and public dialogue in the work of the council.

Categories: Blog


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Categories: Asia, Blog

Bold Steps for China’s Cities

Also available in: العربية  Español


In 2030, more than 300 million Chinese are expected to have moved into cities. By then, 70 percent will live in urban settings. Given China’s size, it will mean that one in six urban dwellers worldwide will be Chinese. The challenges coming with that demographic shift are already visible and well known, in China and beyond.

Urbanization is a global trend. So when we think about new approaches to urbanization here in China, we believe that they are of value for other countries facing similar issues. In other words, China’s success in urbanization could pave the way for global rethinking on how cities can be built to be healthy, efficient, and successful.

Categories: Asia, Blog

Europe’s Economic Outlook

IMF blog - Fri, 04/11/2014 - 11:30

By Reza Moghadam

Economic growth across Europe is slowly picking up, which is good news. But the recovery is still modest and measures to boost economic growth and create jobs are important.

Western Europe: picking up the pace

The recovery projected last October for the euro area has solidified. This is reflected in our revised forecasts—e.g., the 2014 forecast for the euro area is up from 1 percent last October to 1.2 percent now, with important upgrades in countries like Spain. These revisions reflect the stronger data flow on the back of past policy actions, the revival of investor confidence, and the waning drag from fiscal consolidation. The positive impact on program countries is palpable—improving economies, lower spreads, and evidence of market access. We’ve also seen a welcome pick-up in growth in the UK (almost 3 percent is expected for 2014).

While stronger growth prospects and market sentiment are welcome, there is still much to do to solidify and pick up the pace of the recovery, not least because unemployment remains unacceptably high in too many places. Unfortunately, the headwinds in the euro area are many. We have previously emphasized the role of debt overhangs in firms and households, of fragmented financial markets, and of policy uncertainty. Action is being taken in all these areas, both at the country level and pan-European level, with steps to Banking Union—the single supervisor, the asset quality review and stress tests—especially important to ensuring the adequacy of bank capital and market confidence.

More recently, we have emphasized the role of “lowflation”, i.e., of a large and persistent undershoot relative to the ECB’s medium-term inflation target of 2 percent. Persistently low inflation puts pressure on debtors, real lending rates, relative price adjustment and jobs. We welcome the attention the ECB is paying to this risk, and its recent statement stresses that it is considering further action, including unconventional policies within its mandate.

I would also emphasize the role of structural reforms in reviving longer-term growth, which has taken a hit from several years of under-investment and unemployment. This is the subject of our book, just published on Jobs and Growth: Supporting the European Recovery. Beyond the near term challenges for macroeconomic policy support and deeper integration in Europe, the book focuses on three medium-term priorities: reducing high levels of public and private debt; implementing product and labor market reforms; and taking advantage of new growth opportunities through innovation and further integration into global supply chains.

Emerging Europe: strengthening policies

Growth in most of Central, Eastern and Southeastern Europe is recovering in the wake of euro area recovery, but growth in the region as a whole will be held back—we have marked it down since last October—by the expected contraction in Ukraine and slowdowns in Russia and Turkey. External funding conditions have also become more challenging. Even before tensions in Ukraine flared, we saw that capital flows into the region had started to reverse, with portfolio flows turning negative in late 2013 (this development comes on top of the on-going bank deleveraging the region has faced). In the near-term, these forces will offset—perhaps even more than offset—the tailwind from Euro Area recovery.

Although the reversal in capital flows has hurt most emerging markets, the hit to those with stronger policy frameworks and fundamentals has been less. This underlines the need to strengthen policies. Those with exchange rate and monetary policy flexibility should continue to use it as the first line of defense against volatility. All countries, especially those with weaker fundamentals, need to address legacy issues and problems exposed by the crisis: structural weaknesses that hold back growth and keep unemployment high; non-performing loans that hamstring credit; and exhausted fiscal buffers.


Finally, a word on Ukraine, where we face the very difficult confluence of a geo-political crisis and an economic one. The authorities are showing a remarkable capacity to rise to the occasion, with unprecedented action to tackle not only immediate problems but also chronic ones. This includes action to:

  •  ensure exchange rate flexibility and competitiveness;
  •  stabilize the financial system and confidence in banks;
  •  gradually reduce the fiscal deficit;
  •  adjust energy prices from far-below-world levels (with safeguards for the poor); and
  • implement wider reforms to tackle corruption, governance and the business climate.

There is still work to do to finalize some actions and ensure that the program is financed. If all goes well, we expect our Board will consider the program in late April/early May.

See webcast of the Europe press conference.

Categories: Blog

Arab Economic Transformation Amid Political Transitions

IMF blog - Fri, 04/11/2014 - 07:37

By Masood Ahmed

(version in عربي)

The International Monetary Fund released today a new paper entitled “Toward New Horizons—Arab Economic Transformation amid Political Transitions.”

The paper makes the case for the urgency of launching economic policy reforms, beyond short-term macroeconomic management, to support economic stability and stronger, job-creating economic growth in the Arab Countries in Transition—Egypt, Jordan, Libya, Morocco, Tunisia, and Yemen.

These countries face the risk of stagnation if reforms are delayed further.Economic conditions have deteriorated from transition-related disruptions, regional conflict, an unclear political outlook, eroding competitiveness, and a challenging external economic environment.

As economic realities fall behind peoples’ expectations, there is a risk of increased discontent. This could further complicate the political transitions, impairing governments’ mandates and planning horizons and, consequently, their ability to implement the policies necessary to catalyze the much-needed economic improvements.

How can these countries create jobs, lift growth, and foster fairness? Here are seven lessons from the report:

1)     There’s a need for a medium-term vision to set policies for the economic future. Countries need prudent economic management, paired with bold reforms to create an enabling environment for private sector–led growth, to safeguard the promise of the Arab transitions for better living conditions and job creation on a meaningful scale. Better economic conditions can then help reduce discontent and thereby smooth the political transitions.

2)     One size does not fit all. Individual countries should design specific reform programs based on their starting positions and reform goals. A number of reform areas, however, will be common for them, including deeper trade integration, a focus on business regulation and governance, labor market and education reform, improved access to finance, and better social safety nets. 

3)     Near-term policies need to focus on quickly creating jobs. Delays in the revival of private investment, in the context of impaired economic confidence, indicate a need for governments to shore up economic activity in the near term. Experience from other countries suggests that well designed infrastructure projects can create jobs and lay a better foundation for private sector activity.

4)     Fiscal reforms should aim to foster fairness. Expenditure-side reforms should include redirecting social protection from expensive and inefficient generalized subsidies to transfers that better target the poor and vulnerable. Some countries also have room for raising income tax progressivity and increasing excise and property tax rates, and the closing of tax exemptions and loopholes. Together, these policies would enhance equity while freeing scarce resources for priority expenditure in infrastructure investment, health, and education.

5)     Budgets need to be anchored in strong medium-term policy frameworks. In some cases, there may be room to scale up deficits in the near term, when adequate financing is available, but all countries will need to consolidate their budgets in the medium term to buttress economic stability. The slower the pace of adjustment, the larger the financing needs will be, underscoring the need to anchor policies in medium-term consolidation plans that will help secure the continued willingness of creditors to provide the necessary financing.

6)     Effective communications need to be front and center. Communications are critical as governments transform their economies. Governments must be able to explain persuasively the reasoning behind difficult decisions if people are to support them.

7)     The international community needs to step up support. Even as countries need to stay in the driver’s seat and plan their policy programs through wide national consultation, there is a need for the international community to support policy efforts. Such international support can be in the form of finance, technical assistance, or access to trade.

Building the future

This report will serve as an important input to the upcoming regional conference organized by the IMF, in collaboration with the Jordanian government and the Arab Fund for Economic and Social Development, in Amman, Jordan titled “Building the Future: Jobs, Growth, and Fairness in the Arab World,” during May 11-12.

The conference, which will be attended by Ministers and Governors from the region, as well as the IMF Managing Director Christine Lagarde, will provide an opportunity for high-level policymakers, leading private and public sector executives, development partners, civil society representatives, and academics, to enrich the dialogue on the main elements of an economic vision for the 6  Arab Countries in Transition including by drawing on regional expertise and vision, and on lessons from similar episodes of fundamental economic transformation in other parts of the world.

Categories: Blog

The Vienna Document, the Open Skies Treaty and the Ukraine Crisis

Brookings Institute Blog - Thu, 04/10/2014 - 08:59

As the Ukraine crisis has developed and fears of a broader Russian military intervention have grown, the Organization for Security and Cooperation in Europe’s (OSCE) Vienna Document on confidence- and security-building measures and the Open Skies Treaty have been used to provide some transparency regarding Russian military activities. In a recent interview, Russian Deputy Defense Minister Antonov disputed that Russia had deployed thousands of troops near the Ukrainian-Russian border. Antonov remarked that there are agreements on conventional arms control and that “these instruments can permit everybody to verify, to know about undeclared military activities…”

As the potential for conflict between Ukraine and Russia looms, participants in conventional arms control agreements, including the Vienna Document and Open Skies Treaty, are seeking to clarify the specifics of the Russian military build-up on the Ukrainian border. Deemed relics of the Cold War by many, the utility of these agreements has been underscored by the Ukraine crisis. These agreements will not be a panacea to resolve the crisis, and Russia has been uncooperative in fully adhering to their requirements, but their ability to increase transparency has nevertheless yielded some valuable benefits.

First, the Vienna Document has provided useful indicators about the Russian military build-up near Ukraine. The document was originally created in 1990 but has periodically been revised, most recently in 2011. The document is an agreement between 57 states, all party to OSCE. The documents consists of a set of confidence- and security-building measures to enhance transparency, including an annual exchange of military information, on-site inspections and notifications of certain types of military activities.

Beginning in early March, the OSCE convened an observation team of 56 unarmed military and civilian personnel from 30 party states to assist in monitoring military developments in Ukraine following Russia’s occupation of Crimea. The observation team was assembled under Chapter III of the Vienna Document, which “allows for voluntary hosting of visits to dispel concerns about unusual military activities.” Through the Vienna Document, the OSCE observation team has conducted inspections along the Ukrainian border. However, the observation was refused access into Crimea to observe military activities there.

Under different provisions within the document, OSCE members are allowed to carry out three inspections and two evaluation visits in Russia per calendar year. Earlier this year, Russia conducted large military activities in northwestern Russia, distinct from the military exercises on the Ukrainian border. Latvia and Switzerland each conducted one inspection in that time frame, leaving only one inspection available for the more recent military build-up on the Ukrainian border. For the last inspection, Ukraine assembled a team to monitor developments in the Belgorod and Kursk regions of Russia near the Ukrainian border. Additionally, both evaluation visits, intended to gather specific information about military units in garrison, were used on the Russian military exercise earlier in the year.

Because of the exhausted quotas, the Vienna Document has been limited in its ability to garner information on the ongoing military build-up on the Ukrainian border. While Russia could voluntarily allow for additional inspections or evaluations, there are currently no indications that Russia is interested in doing so.

Aside from on-site inspections, the Vienna Document requires states to notify other parties to the treaty of certain military activities. In one stipulation, the document requires 42 days prior notification of certain military activities, specifically those exceeding 9,000 troops, 250 tanks, 500 armored combat vehicles or 250 pieces of artillery. A second provision calls for the OSCE to monitor all military activities exceeding 13,000 troops, 300 tanks, 500 armored combat vehicles and 250 pieces of artillery. Finally, parties to the document will carry out no more than one military activity every three years involving more than 40,000 troops, or 900  tanks, or 2,000 armored combat vehicles or 900 pieces of artillery.

It is estimated that Russia currently has 40,000 troops deployed near Ukraine’s eastern border. Russia has not provided advance notification to OSCE members of the military buildup, despite being well over the numerical requirements under the Vienna Document.

In addition to the Vienna Document, the Open Skies Treaty has provided information about Russia’s military build-up on the Ukrainian border. Signed in 1992, the treaty allows its 34 members to conduct a predetermined number of flights to collect imagery of territory of other members of the treaty. All aircraft must be equipped with specific sensors to ensure that the data collected is not excessively detailed. For example, camera resolution is limited. While some states party to the treaty maintain their own National Technical Means (e.g., imagery satellites) that provide more accurate imagery intelligence, an important goal of the treaty is to enhance confidence amongst parties to the treaty by granting all the opportunity to collect imagery.

Two different sets of observational over flights have been conducted in response to the Ukraine crisis. The first set was permitted under Annex L of the Open Skies Treaty, which allows states on a bilateral and voluntary basis to conduct observational flights. On March 13, Sweden conducted an observational flight over Ukraine, followed by a March 14 observational flight over Ukraine conducted by the United States. On March 20, Ukraine carried out an observational flight over Russia under Annex L of the treaty. In addition to the observational flights permitted under Annex L, regular quota flights have been used to monitor the situation in Ukraine. On March 19, Romania flew over Ukraine and on March 20, the U.S. and Germany jointly conducted an observational flight over Russia. Currently, Open Skies states are continuing to conduct over flights to monitor developments in the region.

Developed during the last years of the Cold War as mechanisms to increase transparency between the NATO and the Warsaw Pact, the Vienna Document and Open Skies Treaty are finding newfound relevance during the current Ukraine crisis. While the full benefits of the agreements have not been realized, given lack of access to the Crimean peninsula and Russia’s failure to provide advanced notification of military activities, the agreements have still provided useful information. Russia has fulfilled its obligations with regard to over flights under Open Skies and has hosted the requisite number of Vienna Document events, allowing for some enhanced transparency. These agreements provide important means to gain greater understanding about military activities and could play a role in helping to de-escalate the crisis.

  • Ariana Rowberry
Image Source: © Reuters Photographer / Reuter
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