India vs. China vs. Egypt By THOMAS L. FRIEDMAN

It’s hard to escape a visit to India without someone asking you to compare it to China. This visit was no exception, but I think it’s more revealing to widen the aperture and compare India, China and Egypt. India has a weak central government but a really strong civil society, bubbling with elections and associations at every level. China has a muscular central government but a weak civil society, yet one that is clearly straining to express itself more. Egypt, alas, has a weak government and a very weak civil society, one that was suppressed for 50 years, denied real elections and, therefore, is easy prey to have its revolution diverted by the one group that could organize, the Muslim Brotherhood, in the one free space, the mosque. But there is one thing all three have in common: gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated.

My view: Of these three, the one that will thrive the most in the 21st century will be the one that is most successful at converting its youth bulge into a “demographic dividend” that keeps paying off every decade, as opposed to a “demographic bomb” that keeps going off every decade. That will be the society that provides more of its youth with the education, jobs and voice they seek to realize their full potential.

This race is about “who can enable and inspire more of its youth to help build broad societal prosperity,” argues Dov Seidman, the author of “How” and C.E.O. of LRN, which has an operating center in India. “And that’s all about leaders, parents and teachers creating environments where young people can be on a quest, not just for a job, but for a career — for a better life that doesn’t just surpass but far surpasses their parents.” Countries that fail to do that will have a youth bulge that is not only unemployed, but unemployable, he argued. “They will be disconnected in a connected world, despairing as they watch others build and realize their potential and curiosity.”

If your country has either a strong government or a strong civil society, it has the ability to rise to this challenge. If it has neither, it will have real problems, which is why Egypt is struggling. China leads in providing its youth bulge with education, infrastructure and jobs, but lags in unleashing freedom and curiosity. India is the most intriguing case — if it can get its governance and corruption under control. The quest for upward mobility here, especially among women and girls, is palpable. I took part in the graduation ceremony for The Energy and Resources Institute last week. Of 12 awards for the top students, 11 went to women.

“India today has 560 million young people under the age of 25 and 225 million between the ages of 10 and 19,” explained Shashi Tharoor, India’s minister of state for human resource development. “So for the next 40 years we should have a youthful working-age population” at a time when China and the broad industrialized world is aging. According to Tharoor, the average age in China today is around 38, whereas in India it’s around 28. In 20 years, that gap will be much larger. So this could be a huge demographic dividend — “provided that we can educate our youth — offering vocational training to some and university to others to equip them to take advantage of what the 21st-century global economy offers,” said Tharoor. “If we get it right, India becomes the workhorse of the world. If we get it wrong, there is nothing worse than unemployable, frustrated” youth.

Indeed, some of India’s disaffected youth are turning to Maoism in rural areas. “We have Maoists among our tribal populations, who have not benefited from the opportunities of modern India,” Tharoor said. There have been violent Maoist incidents in 165 of India’s 625 districts in recent years, as Maoists tap into all those left out of the “Indian dream.” So there is now a huge push here to lure poor kids into school. India runs the world’s biggest midday lunch program, serving 250 million free school lunches each day. It’s also doubled its number of Indian Institutes of Technology, from eight to 16, and is planning 14 new universities for innovation and research.

But this will all be for naught without better governance, argues Gurcharan Das, the former C.E.O. of Procter & Gamble India, whose latest book is “India Grows at Night: A Liberal Case for a Strong State.” “The aspirational India has no one to vote for, because no one is talking the language of public goods. Why should it take us 15 years to get justice in the courts or 12 years to build a road? The gap between [youth] aspirations and government performance is huge. My thesis is that India has risen despite the state. It is a story of public failure and private success.”

That is what Das means by India grows at night, when government sleeps. “But India must learn to grow during the day,” he said. “If India fixes its governance before China fixes its politics that is who will win. ... You need a strong state and a strong society, so the society can hold the state accountable. India will only get a strong state when the best of society join the government, and China will only get a strong society when the best Mandarins go into the private sector.”

It’s P.Q. and C.Q. as Much as I.Q. by Thomas Friedman

President Obama’s first term was absorbed by dealing with the Great Recession. I hope that in his second term he’ll be able to devote more attention to the Great Inflection.

Dealing with the Great Recession was largely about “Yes We Can” — about government, about what we can and must do “together” to shore up the safety nets and institutions that undergird our society and economy. Obama’s Inaugural Address was a full-throated defense of that “public” side of the unique public-private partnership that makes America great. But, if we’re to sustain the kind of public institutions and safety nets that we’re used to, it will require a lot more growth by the private side (not just more taxes), a lot more entrepreneurship, a lot more start-ups and a lot more individual risk-taking — things the president rarely speaks about. And it will all have to happen in the context of the Great Inflection.

What do I mean by the Great Inflection? I mean something very big happened in the last decade. The world went from connected to hyperconnected in a way that is impacting every job, industry and school, but was largely disguised by post-9/11 and the Great Recession. In 2004, I wrote a book, called “The World Is Flat,” about how the world was getting digitally connected so more people could compete, connect and collaborate from anywhere. When I wrote that book, Facebook, Twitter, cloud computing, LinkedIn, 4G wireless, ultra-high-speed bandwidth, big data, Skype, system-on-a-chip (SOC) circuits, iPhones, iPods, iPads and cellphone apps didn’t exist, or were in their infancy.

Today, not only do all these things exist, but, in combination, they’ve taken us from connected to hyperconnected. Now, notes Craig Mundie, one of Microsoft’s top technologists, not just elites, but virtually everyone everywhere has, or will have soon, access to a hand-held computer/cellphone, which can be activated by voice or touch, connected via the cloud to infinite applications and storage, so they can work, invent, entertain, collaborate and learn for less money than ever before. Alas, though, every boss now also has cheaper, easier, faster access to more above-average software, automation, robotics, cheap labor and cheap genius than ever before. That means the old average is over. Everyone who wants a job now must demonstrate how they can add value better than the new alternatives.

When the world gets this hyperconnected, adds Mundie, the speed with which every job and industry changes also goes into hypermode. “In the old days,” he said, “it was assumed that your educational foundation would last your whole lifetime. That is no longer true.” Because of the way every industry — from health care to manufacturing to education — is now being transformed by cheap, fast, connected computing power, the skill required for every decent job is rising as is the necessity of lifelong learning. More and more things you know and tools you use “are being made obsolete faster,” added Mundie. It’s as if every aspect of our lives is now being driven by Moore’s Law. This is exacerbating our unemployment problem.

In their terrific book, “Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy,” Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology note that for the last two centuries it happened that productivity, median income and employment all tracked each other nicely. “So most economists have had this feeling that if you just boost productivity, the pie grows, and, in the long run, everything else takes care of itself,” explained Brynjolfsson in an interview. “But there is no economic law that says technological progress has to benefit everyone. It’s entirely possible for the pie to get bigger and some people to get a smaller slice.” Indeed, when the digital revolution gets so cheap, fast, connected and ubiquitous you see this in three ways, Brynjolfsson added: those with more education start to earn much more than those without it, those with the capital to buy and operate machines earn much more than those who can just offer their labor, and those with superstar skills, who can reach global markets, earn much more than those with just slightly less talent.

Put it all together, he added, and you can understand, why the Great Recession took the biggest bite out of employment but is not the only thing affecting job loss today: why we have record productivity, wealth and innovation, yet median incomes are falling, inequality is rising and high unemployment remains persistent.

How to adapt? It will require more individual initiative. We know that it will be vital to have more of the “right” education than less, that you will need to develop skills that are complementary to technology rather than ones that can be easily replaced by it and that we need everyone to be innovating new products and services to employ the people who are being liberated from routine work by automation and software. The winners won’t just be those with more I.Q. It will also be those with more P.Q. (passion quotient) and C.Q. (curiosity quotient) to leverage all the new digital tools to not just find a job, but to invent one or reinvent one, and to not just learn but to relearn for a lifetime. Government can and must help, but the president needs to explain that this won’t just be an era of “Yes We Can.” It will also be an era of “Yes You Can” and “Yes You Must.”

Outsourcing tide is not likely to turn

As western economies trudge towards recovery this year, expectation abounds that economic activity lost to Asia might soon return home too. Such hopes will almost certainly prove shortlived.

President Barack Obama has been the most prominent advocate for a new wave of “insourcing”, using his second inauguration address on Monday to talk up plans that might “bring new jobs and businesses to our shores”.

During his re-election campaign Mr Obama often suggested the US was poised for an industrial and manufacturing renaissance – a theme set to resurface in next month’s State of the Union address. Corporate titans have followed suit, with Jeffrey Immelt, chief executive of outsourcing pioneer General Electric, saying last year that he now viewed outsourcing as an outdated strategy.

Other global companies, including Apple and Lenovo, have since announced plans to bring production facilities home from Asia, while reports last year suggested that GE would also take in house much of the software development it contracts to India.

All of these threads came together most cogently in an essay in last month’s Atlantic, which heralded an “insourcing boom”, highlighting a rejuvenated GE factory in Kentucky churning out water heaters and washing machines once made in China and Mexico.

Enthusiasts for reshoring typically begin their case by noting China’s rising wage costs and declining labour force. Others focus on energy costs, homing in on America’s shale gas boom as a potential source of competitive advantage for its manufacturers.

A third argument is that companies now see outsourced relationships as convoluted and insecure, especially after the type of supply-chain disruption that followed last year’s Japanese tsunami. Insourcing’s more careful advocates point just to the beginnings of a trend away from Asian manufacturing. Even so, most evidence fails to back up even these more modest assertions.

China’s labour costs are rising, but they remain far below those in western economies, with hourly manufacturing pay roughly 25 times lower than in the US, according to the latest figures from the US Bureau of Labor Statistics.

If China becomes too expensive there are plenty of other Asian countries to turn to, not least India, whose huge labour force is cheaper still, and whose government will eventually get its act together to support a viable mass-manufacturing economy.

It is true that some companies that send production overseas later bring it back. But what matters is the flow of activity overall, and here there is little to suggest that the move to Asia has slowed. Quite the opposite, in fact: a study this month from the US Business and Industry Council, a trade body, showed record manufacturing imports into the US in 2011, suggesting more reliance on overseas production, not less.

Sectors in advanced economies that have so far been immune from competition may also become vulnerable, as the capabilities of emerging Asian nations improve. Take garments. Here some western jobs have been relatively protected because they are highly skilled, and because of the need for quick deliveries to domestic consumers. But perhaps not for long.

At the end of last year I visited Sri Lanka, an exporter of everything from underwear to football shirts for retailers such as Zara of Spain and Britain’s Marks and Spencer. Fashion businesses typically operate by shipping basic clothes from the likes of Vietnam and Bangladesh, before completing more complicated tasks – such as packaging, labelling or marketing – in Europe or the US.

Here Sri Lanka sees an opportunity: to establish a garment hub on the corner of the island just off the coast from the world’s busiest east-to-west shipping lane. New manufacturing, warehousing and logistics facilities could in time allow the island to offer capabilities comparable with competitors in the industrialised world.

It is a small example, but a telling one – demonstrating how companies in Asia continue to find ways to insert themselves into supply chains, mostly with the effect of grabbing a greater slice of the global production pie.

It seems like bad news for the west, but it need not be. Leaders such as Mr Obama can concentrate on activities that are not yet outsourceable, support workers to improve their skills, or husband new industries where no other country is yet a threat.

But hoping that production long since sent abroad will be repatriated any time soon? Not likely.

With 2 percent inflation target, Japan signals new strategy to boost economy

SEOUL — Japan’s central bank on Tuesday doubled its inflation target to 2 percent, a main pillar in the country’s aggressive new strategy to break away from a two-decade economic stagnation.

The Bank of Japan’s new commitment, coupled with the government’s splurge of spending on public works projects, represents a controversial rethink about the way developed countries should repair their crisis-battered economies.

Under Prime Minister Shinzo Abe, elected last month, Japan has turned away from the well-worn practices followed by economies under duress — conventions that call for austerity and debt reduction. Japan, instead, is trying to spend its way out of a recession rather than cutting back.

Exclusive: Bank of Japan may ease again, double price target as government keeps up heat

(Reuters) - The Bank of Japan will consider easing monetary policy again this month and also perhaps doubling its inflation target to 2 percent, sources said, as the economy's weakness threatens to delay its escape from two decades of deflation.

Any easing will likely take the form of another increase in the BOJ's 101 trillion yen ($1.2 trillion) asset buying and lending program, mostly for purchases of government bonds and treasury discount bills, sources familiar with its thinking said.

Under intense pressure from new Prime Minister Shinzo Abe, the BOJ will likely adopt a 2 percent inflation target at its January 21-22 rate review, double its current goal, and issue a statement with the government pledging to pursue bold monetary easing steps, the sources said.

By accompanying the new target with more stimulus, the BOJ hopes to show its determination to get the country out of deflation and fend off more radical demands from politicians, such as a revision to the BOJ Law guaranteeing its independence in guiding monetary policy.

"The trend for prices is weak and that's a concern. The outlook for overseas economies is also highly uncertain," said one of the sources who spoke on condition of anonymity due to the sensitivity of the matter.

Markets have not been expecting the BOJ to follow up December's stimulus so quickly, and instead had been speculating on what new policy steps it might take. The 2 percent inflation target has been largely priced in after the BOJ pledged last month to review its current price goal.

After the December easing, Governor Masaaki Shirakawa stressed how much money the BOJ was already pumping into the economy via asset purchases, which was seen as a sign of his reluctance to boost stimulus further.

If the BOJ does ease in January, it would be the first time it has expanded stimulus at successive meetings since 2003, when it was battling a banking crisis amid a five-year experiment with quantitative easing that lasted until 2006.

However, an increase in asset purchases would still disappoint those investors expecting the BOJ to try bolder action in response to Abe's calls for radical steps.

Some BOJ board members have floated other options, such as committing to buy assets open-endedly or cutting the 0.1 percent interest the BOJ pays on excess reserves that financial institutions park with the central bank.

But those ideas have not made much headway and may be put on hold until the conservative Shirakawa's term ends in April. A lack of new steps could disappoint markets and trigger a rebound in the yen, analysts say.

Abe on Wednesday revived a top government panel with legal authority to map out economic policy guidelines, and invited the BOJ chief to attend it regularly, providing more opportunity to put pressure on the central bank.

"It is important that the government and the BOJ have common goals and that both parties work to achieve these goals," said Economics Minister Akira Amari after a meeting of the Council on Fiscal and Economic Policy.

Shirakawa, who was also at the meeting, said fiscal discipline was important to avoid worries that the central bank is bankrolling government spending, a sign of the delicate balance Abe's cabinet must strike when it urges the BOJ ease further by buying more debt.

NO CONSENSUS YET

Central bankers are divided over the necessity for further action. Some officials feel the bank has offered enough stimulus for now, having set a 1 percent inflation target last February and eased policy via an increase in asset purchases five times in 2012.

But a growing number of pessimists fret over persistent price declines and risks for the export-reliant economy, such as the continued slowdown in global growth and slumping sales to China following last year's territorial dispute.

"I think the BOJ will ease policy this month. Sustainable economic growth with price stability is already part of the BOJ's mandate," said Atsushi Mizuno, a former central bank board member who is now vice chairman at Credit Suisse.

"If the BOJ thinks the economy is weakening or straying from the recovery path, then they should ease," he told Reuters in an interview on Wednesday.

In a quarterly review of its long-term forecasts, also scheduled at this month's meeting, the BOJ is likely to cut its forecast for economic growth in the fiscal year ending in March from a 1.5 percent expansion projected in October, the sources said.

While it may slightly revise up its forecast for the next year, the feeble growth projections suggest Japan's exit from deflation remains some way off, which could help the central bank justify loosening policy again.

Government officials are also turning up the heat, demanding further stimulus as well as a higher inflation target.

Core consumer prices, Japan's key gauge of inflation, were down 0.1 percent in November from a year earlier.

Pressure on the BOJ intensified after Abe's Liberal Democratic Party (LDP) won December's lower house election by a landslide, calling on the central bank to set a 2 percent inflation target and ease policy "unlimitedly" to achieve it.

While the central bank is likely to meet Abe's calls for a 2 percent inflation target and issue a joint statement with the government, sources said it will not set a deadline for achieving the target, stressing that 2 percent inflation is a long-term goal that won't be achieved unless its easing is accompanied by government efforts to revive growth, such as deregulation.

Though the statement will not be legally binding, it will put the BOJ's target in the public spotlight and give the government a reason to demand further easing if the goal is not met.

($1 = 87.1300 Japanese yen)

How China Gets Its Way

The New York Review of Books

How China Gets Its Way
January 10, 2013
Jonathan Mirsky

China’s Search for Security
by Andrew J. Nathan and Andrew Scobell
Columbia University Press, 406 pp., $32.95

In 1955, when I began my graduate studies of China and its language, one of my fellow students at Columbia asked our professor, Nathaniel Pfeffer, whether the United States would ever recognize Beijing instead of Taipei as the capital of China. Pfeffer memorably replied that it would take a vehement anti-Communist, because only such a person could escape being called a Communist. He then caused hilarity in the class by suggesting that then Vice President Nixon could be such a man. In October 1967, five years before his presidential trip to China, remembered for his observation that the Great Wall certainly was great, Nixon wrote:

We simply cannot afford to leave China forever outside the family of nations, there to nurture its fantasies, cherish its hates and threaten its neighbors. There is no place on this small planet for a billion of its potentially most able people to live in angry isolation.

In their exceptionally interesting, articulate, and sometimes surprising study of the aims and conduct of China’s foreign affairs, Columbia’s Andrew Nathan and Rand’s Andrew Scobell write, “Every American president since then [1972] has stated that the prosperity and stability of China are in the interest of the United States.” Recalling Nixon’s remarks in 1967, they note that wishes can lead to something unintended. Once Beijing joined with other nations to deal with international issues, it regarded the United States as its most dangerous threat. The authors suggest—but only in passing—that a Sino-American war is possible, and emphasize that while Beijing often behaves in ways acceptable to other countries,

the world as seen from Beijing is a terrain of hazards, stretching from the streets outside the policymaker’s window to land borders and sea lanes thousands of miles to the north, east, south, and west and beyond to the mines and oilfields of distant continents.

A terrain, in short, often under the control of other powers to which Beijing is determined not to kowtow.

It is hardly surprising, therefore, that the authors highlight Chinese nationalism, which is based largely on never-to-be-forgotten humiliations at the hands of imperialists, and a determination never to be a victim again. Nathan and Scobell rightly insist that “nationalism remains the party’s most reliable claim to the people’s loyalty…. Nationalism unites all Chinese of all walks of life no matter how uninterested they are in other aspects of politics.” Indeed. Some time ago at Oxford I saw several hundred of China’s elite students picketing the visiting Dalai Lama as a “criminal.”

The authors note that dissenters rarely venture into foreign policy. But—and this is one of their surprising insights—they see Chinese nationalism as built on contradictions: “If the nation’s problems are perceived as …

Shinzo Abe Elected Japan's New Prime Minister (VIDEO)

TOKYO — Shinzo Abe took office as Japan's seventh prime minister in six years Wednesday and vowed to overcome the deep-rooted economic and diplomatic crises facing his country.

Abe was elected as Japan's leader hours earlier Wednesday, bringing back to power the conservative, pro-business Liberal Democratic Party that governed for most of the post-World War II era. It replaces the liberal-leaning government of the Democratic Party of Japan that lasted three years.

"A strong economy is the source of energy for Japan. Without regaining a strong economy, there is no future for Japan," Abe told his first news conference after becoming prime minister for the second time.

Calling his administration a "crisis breakthrough Cabinet," Abe promised to launch bold economic measures to pull Japan out of deflation. He also vowed to step up an alliance with the United States to stabilize Japan's diplomacy shaken by increasing territorial threats from its neighbors.

Abe, whose nationalist positions have in the past angered Japan's neighbors, was also prime minister in 2006-2007 before resigning for health reasons that he says are no longer an issue.

The outspoken and often hawkish leader has promised to restore growth to an economy that has been struggling for 20 years. His administration also faces souring relations with China and a complex debate over whether resource-poor Japan should wean itself off nuclear energy after last year's earthquake and tsunami caused a meltdown at an atomic power plant.

On top of that, he will have to win over a public that gave his party a lukewarm mandate in elections on Dec. 16, along with keeping at bay a still-powerful opposition in parliament. Though his party and its Buddhist-backed coalition partner is the biggest bloc in the more influential lower house, Abe actually came up short in the first round of voting in the upper house, then won in a runoff.

Capitalizing on voter discontent with the Democratic Party of Japan, Abe has vowed to shore up the economy, deal with a swelling national debt and come up with a fresh recovery plan following last year's tsunami disaster, which set off the worst nuclear crisis since Chernobyl.

Abe promised to launch bold economic measures, and mobile financial steps and strategies to encourage investment.

"We must recover a Japan where hardworking people can feel that there is a better tomorrow," he said.

Abe is expected to push for a 2 percent inflation target designed to fight deflation. Continually dropping prices deaden economic activity, a situation the Japanese economy has been stuck in for two decades.

Finance Minister Taro Aso, another former prime minister who is one of Aso's most-trusted senior lawmaker, said fighting deflation would be a challenge: "We've never dealt with deflation since the end of the war. In fact, nobody in the world has."

Besides generous promises to boost public works spending – by as much as 10 trillion yen ($119 billion), according to party officials – Abe is pressuring the central bank to work more closely with the government to reach the inflation target.

In foreign policy, Abe has stressed his desire to make Japan a bigger player on the world stage, a stance that has resonated with many voters who are concerned that their nation is taking a back seat economically and diplomatically to China.

He has said he will support a reinterpretation of Japan's pacifist postwar constitution to loosen the reins on the military, stand up to Beijing over an ongoing territorial dispute and strengthen Tokyo's security alliance with Washington. Beijing has already warned him to tread carefully, and will be watching closely to see if he tones down his positions now that he is in office.

"Japan's national security faces a clear and present danger," Abe said, referring to intensifying territorial disputes around the Japanese seas, and renewed his campaign promise to protect the safety of the people of Japan and its territory.

"Japan must strengthen the Japan-U.S. alliance, the cornerstone of Japan's diplomacy," Abe said. That will be key to re-stabilizing Japan's regional diplomatic relations, he added.

Abe has picked the U.S. as the first destination of his official overseas trip, expressing hopes to hold talks with President Barack Obama as early as January.

The new foreign minister is Fumio Kishida, an expert on the southern island of Okinawa, where many residents upset over crime and overcrowding want a big reduction in the number of U.S. troops they host – now at about 20,000. The new defense minister is Itsunori Onodera, who was in Abe's previous administration.

The LDP governed Japan for decades after it was founded in 1955. Before it was ousted in 2009, the LDP was hobbled by scandals and problems getting key legislation through a divided parliament.

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AP writer Mari Yamaguchi contributed to this report.