How the Disaster May Help Japan's Brand

The March 11 earthquake, tsunami, and resulting nuclear accident have led some to question the health of Japan's "brand." Japanese products, services, and business partnerships in recent years have enjoyed a halo effect emanating from Japan's reputation as a land of safety, efficiency, and trustworthiness. As renowned Japanese columnist Yoichi Funabashi put it this week, "Instead of viewing Japan as a haven of immunity from danger and inconvenience, many around the world now perceive the country as fraught with peril and discomfort." The impact of the recent disasters on Japan's reputation or brand has been one of the focal points of experts who worry that the disaster would damage the prospects of Japan's strategic growth industries such as cuisine, tourism, and services. But this is not the whole story.

Rather it is the perseverance and calm that Japanese society demonstrated during the crisis that remains the enduring image of Japan in the minds of many people. This positive story was featured widely in the U.S. media immediately after the earthquake and remains relevant today. A case in point today is in Vietnam, a country I visited last month to conduct research on attitudes toward Japan and the United States. Every Vietnamese expert I spoke with told me that their impression of Japan had been further enhanced since the March 11 earthquake. In Vietnam, Japan's reputation was already positive in part due to Japan's vital role in Vietnamese economic development, for example as the largest contributor of foreign aid after the World Bank.

But more interestingly, many Vietnamese admired Japanese discipline, order, and perseverance during the recent crisis. Some Vietnamese want their society to resemble that of Japan as a leading Asian Confucian society, described in T.R. Reid's classic book Confucius Lives Next Door.

Vietnam is no outlier on this view. According to a survey conducted May 9-18 by the AIP-Hakuhodo Earthquake Recovery Project on the "Image of Japanese Products Internationally," positive attitudes of those surveyed toward Japan and Japanese products outnumbered negative ones. A total of 2,700 people were surveyed in China, Korea, Thailand, India, Indonesia, Russia, the United Kingdom, the United States, and Brazil. Most people were aware of the earthquake and nuclear accident but wanted to see Japan recover quickly (62.8 percent) and felt sympathy for Japanese people (56.8 percent). As for products, more people responded that their desire to purchase Japanese goods had increased compared with one year ago than those who said it had decreased.

These positive attitudes stand in stark contrast to those in Vietnam toward China. Vietnam's relationship with China reached a "critical mass" in 2008 and has deteriorated since then, reverting to the previous unfriendly relationship that prevailed for the past millennium. Vietnam's brief friendship with China in the 1990s was seen as naive by many of the experts I spoke with. I was in Hanoi during which China's maritime aggression was on display in the South China Sea, when one of its ships cut the underwater cables of a Vietnamese gas survey ship. These episodes have pushed Vietnam closer to the United States and Japan.

China's approach in other areas also has resulted in bringing Vietnam closer to Japan and the United States. Delays in the construction of power plants by Chinese contractors and Vietnam's reliance in its territorially-sensitive northern provinces on China for hydroelectric power have also had this effect. Meanwhile, the appetite for nuclear power and cooperation with Japan in this area remains strong in Vietnam despite the Fukushima crisis. The immediate need in Vietnam is for reliable, affordable electricity, and nuclear power will be a major source in providing that electricity.

Another area is the export of rare earth supplies, which China has restricted, sending prices skyrocketing recently. These strategic metals are used in the production of batteries and high-tech electronics. Demand for rare earths in Japan will increase as its economy recovers in the short-term and as it explores alternatives to nuclear power in the longer-term. China began restricting exports of rare earths to Japan in September 2010 in response to the detainment of a Chinese fishing boat captain by the Japanese coast guard.

Chinese manipulation of the rare earths market again has pushed Japan closer to its neighbors. It has led the Japanese government and companies to promote exploration of rare earths projects in Vietnam and other countries. But one Vietnamese expert told me that he believes that China will begin dumping rare earths on the global market once other countries attain the capacity to produce the metals. This perception that China plays a zero-sum game is common in Southeast Asia and has convinced many that Japan represents a more trustworthy partner that values a positive-sum business ethic.

Many Japan watchers have called the March 11 earthquake a pivot point for Japan's future trajectory. Japan could very well seize this moment to promote innovation, for example in the areas of clean energy and efficiency, and build stronger relationships with its neighbors. But it is a step too far to say that if Japan fails to take advantage of this situation fully, the other path is ruin. It is rather more likely that Japan will face more of the same, with its long-term problems persisting. As one of the most coherent nation-states on Earth, Japan isn't going anywhere. Even if its government fails to come up with a winning strategy, Japan will remain one of the world's most influential economies for years to come.

It is certain, though, that the disaster and the country's response have humanized Japan and shattered stereotypes, making it a country that is more accessible and closer to the rest of the world.


Also published in the Huffington Post.

Photo by Marc Veraart.

Rise of the Rest: Japan and the World

I just got back from giving a talk on a panel titled "The Rise of the Rest IV: Critical Regions in Crisis" at Carnegie Council as part of the rise of the rest series we launched with Nikolas Gvosdev five years ago. The panel included Nikolas Gvosdev, Dov Waxman, David Speedie, and me. It is amazing how relevant this series remains after five years. My remarks were based on a lecture I give at New York University and from a forthcoming book I contributed to on the recent earthquake in Japan.

Here are my remarks from today's talk:

Today, I will touch on some ideas on "the rise of the rest" since our first panel in 2007 at the Nixon Center, then offer my own theory (of convergence), and speak about how it relates to the crisis in Japan.

First, a tour of the horizon on the idea of "the rise of the rest."

The cliche has it that we went from a bipolar world during the Cold War to a unipolar world in the 1990s to a multipolar world today with the rise of the rest. Joseph Nye has added nuance by imagining the world as a three-leveled chess board with the traditional hard-power game on top where U.S. military power still dominates. The second level is the interdependent, complex world of economic globalization, which might be described as multipolar. The third level is the world of transnational issues where no one is in charge, necessitating cooperation between states, companies, organizations, and individuals. The importance of this bottom level has grown with the advance of economic globalization and the information revolution, and it raises the importance of moral power. The power of information in the world of globalization has appeared recently in places like Libya and Egypt as well as in the connectedness the world felt with Japan and the world's response since the recent disasters there.

Kishore Mahbubani and others have expressed dismay in the unfairness of today's international institutions. Although there is a huge shift of power toward Asia, 3 billion Asians do not qualify to run the World Bank or IMF, he noted. This story has certainly come to the fore with the arrest and jailing this week of IMF head Dominique Strauss-Khan.

The original 2007 National Interest article by Barma, Ratner, and Weber pointed to the growing economies of Russia, India, and China as well as the pace in which these so-called non-Western countries were engaging with one another. And the article argued that rather than a simple hub-and-spoke model of international relations, a new choice emerged: countries could route around the United States, as Nick Gvosdev put it. This argument was similar to Parag Khanna's idea that the rise of other states means that relative U.S. influence might decline. This argument also set up the notion that there might be a competing system out there, outside of the U.S.-dominated system.

Harry Harding went on to describe these two systems as two political parties: One was an elitist reform party (which promotes democracy and individual freedom and self-determination, conditional aid, universal norms over sovereignty, skepticism over universal membership organizations, and selective FTAs) and the other was the populist conservative party (which values stability, harmony, and order for domestic systems; strong sovereignty and order internally; cultural diversity over universal norms; looser FTAs, and universal membership organizations). The U.S. wants order internationally while promoting democracy in nations; China opposes hegemony but likes democracy internationally, between nations.

But what about the global public goods such as freedom of movement and safe trading routes? In The Case for Goliath, Michael Mandelbaum demonstrates that the world needs governance and the U.S. is the only country that has been able and willing to assume this role.

For years, U.S. troops have abroad acted as a "public health service" forestalling outbreaks of war and nuclear proliferation, and as a "pest control service" against rogue regimes." Mandelbaum's three famous closing predictions about the world’s attitude toward America’s de facto role as the world’s government: "They will not pay for it; they will continue to criticize it; and they will miss it when it is gone."

Is cooperation and conflict more or less likely? Richard Haass calls the current world one of nonpolarity--power is becoming harder to organize.

This view recalls Parag Khanna's mega-diplomacy in his new book How to Run the World and Ian Bremmer's concept of a g-zero world where there is no "go-to forum."

Harry Harding was more sanguine on this point of cooperation, saying that if the transnational problems of today are so grave, then cooperation will become more likely. Climate change and energy security compel countries to cooperate.

Fareed Zakaria and John Ikenberry seem positive on the American-led system despite shortcomings. Zakaria says we need to integrate the rest, which rose on account of American system.

Similarly, Ikenberry said the United States has set up inclusive institutions that will prolong a Western order. Three aspects of the Western order make it difficult to overthrow:

-Through non-discrimination and an open market, the barriers to economic participation are low and the benefits high, allowing for states to expand their economic and political goals within the order.

-Coalition based leadership allows for shifts in the balance of power between states without affecting the overall order.

-And deeply rooted rules and institutions lay the basis for cooperation.

Moreover, Ikenberry says the security trap that the United States faces--the use of its power creates a backlash--makes institutions more important.

John Mearsheimer, Robert Gilpin, and other realists see times of transition as dangerous because new powers will want to reorganize the rules for their own interests. In Mearscheimer's words, "Given the difficulty of determining how much power is enough for today and tomorrow, great powers recognize that the best way to ensure their security is to achieve hegemony now." Mearscheimer believes trading with China is helping China gain power, which it will use to challenge the U.S.

Finally, some, including George Friedman and Minxin Pei, simply believe China’s power is hyped and focus on the internal problems that "the rest" faces.

Second, my view of convergence in international affairs.

Like the economic theory of factor price equalization, which observes that prices of factors converge as countries trade with one another, I would suggest that as China’s economy becomes richer and its international stake in the global system increases, China's overarching interests will resemble more closely those of the United States and offer less of a “competing model.” That means both more competition--for markets, allies, and resources--but the interaction between China and the U.S. will go both ways.

China's interests and principles in international affairs will change U.S. perceived interests and vice versa, pushing America to keep up in areas in which China excels, such as its advance in Africa and ASEAN, as well as education, innovation, and infrastructure domestically--the key words of President Obama's recent state of union in January 2011. Meanwhile China is racing to challenge American naval power and technology. In the long run, China will be compelled to adopt more freedoms and openness if it wants to continue to advance, I think.

The "West" must keep up with China's tools of statecraft; Japan has been considering launching a sovereign wealth fund and the U.S. has been pushing for more FTAs in Asia. While the U.S. didn't socialize its financial system after the 2008 financial crisis, the importance of regulation and the state was apparent as it is in Japan’s ongoing nuclear crisis today.

It won't be a competition of competing ethics because in a practical sense the right moral principles generally prevail in history, and America's moral principles of universal liberalism have proven right over and over.

Some convergence is being witnessed already. China hand Evan Feigenbaum writes:

"Chinese employment practices [in Africa for example] have produced a backlash in many countries. And that makes me wonder whether Chinese commercial engagement might not produce greater convergence with the US and others in rough, tough investment environments."

But China faces a big dilemma. For China to leap from a manufacturing economy to an innovation economy--which will be necessary for the Chinese Communist Party to generate jobs to stay in power--it will require China to adopt openness and freedoms that threaten its very stability.

Maybe what we will end up seeing is what Henry Kissinger calls a Pacific Community, in which China and the U.S. "co-evolve."

Finally, on this point, where was Japan when we thought it was a threat to the U.S. economy? It had identifiable brands, a strong navy, an unbeatable corporate model, a stellar education system, and a society that prided itself on low crime, high literacy, and social coherence--as, for example, lauded by journalist T.R. Reid. We should put Chinese power in perspective.

Third, what about Japan's recent crisis?

As for Japan after the March 11 earthquake and its relations with the world, we don't know its future but there has been disruption and internationalization stemming from the country's needs since the quake.

Themes showcased during the earthquake and tsunami crisis include: Japan's interdependence with the world, need for leadership, a desire for further transparency in the economy and politics, stoicism and perseverance, and solidarity between the world and Japan.

It also may have dispelled some stereotypes.

Stereotypes about Japan have gone through many phases in the American imagination. During World War II, Japan was a foreign enemy and afterward it was the occupied. In the 1950s and 1960s, Japan was seen as a mystical place offering "exotic" traditions such as tea ceremony, karate, geisha, and Zen Buddhism. Whereas in the past to study Japan was something specialized, learning about Japan is now considered part of becoming a globally minded person. In that sense, the recent disaster may have helped extend the trend of Japan becoming a place people relate to.

A new door to the world also has opened for Japan. One potential impact on how Japan views itself in the world may come from the effect of Japan's experience with and participation in Operation Tomodachi, the deployment of 18,000 U.S. personnel who helped with disaster relief and the delivery of emergency supplies.

Other international connections are being made through the introduction of foreign companies helping with the reconstruction and the surge of good will from nonprofits, charities, and foundations helping from abroad and in Japan. In the months following the disasters, many Japanese companies will consider pushing more of their operations abroad--to the United States, China, or Southeast Asia--to hedge against risk, further internationalizing corporate Japan.

On the other side of the coin, interest in Japan has reached new heights with searches for and mentions of Japan on Google and Twitter reaching records since those data have been collected. A Pew poll said during the March 14-18 period, 64% of blog links, 32% of Twitter news links, and the top 20 YouTube videos were about the disasters in Japan.

But these social networks are only a tool or a process. They don't constitute a galvanizing issue to change Japan.

One possible galvanizing issue could be the need for more green technologies and alternative energy in Japan. The nation went through a dramatic shift in energy policy after the oil shocks in the 1970s, and perhaps the nuclear crisis could push the country into another revolutionary shift. At a press conference last week, Prime Minister Naoto Kan said his government will conduct a fundamental review of the nation's basic energy policy.

A second issue that the nuclear crisis has highlighted is the need for transparency broadly speaking. Japanese have looked abroad for foreign sources of information in frustration with their country’s press and the current dissatisfaction in the government's handling of the crisis has a lot to do with a sense that officials, politicians, and companies were holding back information.

Transparency could become a rallying cry that weaves all of the issues in Japan. Whether Japan takes this chance for change is uncertain. But most people agree that this is probably Japan's last chance in our lifetime to shift its course away from comfortable decline.

Photo: Japanese Woman with Mirrors from George Eastman House

James Farrer on China-Japan Tensions

We are pleased to publish this guest post below from James Farrer on the current tensions between China and Japan:

It was a bitter pill for the Democratic Party of Japan (DJP), no matter how they swallowed it. By releasing a Chinese fishing boat captain detained by Japan without a trial, Japanese Prime Minster Kan Naoto was clearly bowing under Chinese pressure. The captain had been arrested by the Japanese coast guard for allegedly ramming his boat into Japanese coast guard vessels while in territorial waters claimed both by China and Japan. The Japanese government appeared to buckle and released the captain to China on Saturday. According to an unnamed official in the prime minister's office quoted in the Asahi Shimbun on Sunday (9/26/2010), "The Chinese could have recalled their ambassador, or cut off diplomatic relations. There was no other possible landing point."

Within Japan this was a shocking turning point in bilateral relations, a sudden strategic victory for a rising China that could lead to many scenarios, including the possibility that China would send fishery administration or even military ships to patrol the waters off the disputed islands and back out of an agreement to jointly develop undersea gas fields in the area. An official in the foreign ministry quoted in Sunday's Asahi, said: "There's no telling how overbearing the Chinese are going to be after this. There’s nothing to be done about it, this will go on for the next twenty years."

The Japanese public seems to have reacted three ways to the release of the captain. One group, the sort who usually read the business-economics newspaper Nikkei Shimbun was undoubtedly relieved to see the government release the captain last Saturday. As Chinese sanctions escalated into the economic sphere, including a stoppage of the export of rare metals to Japan, the worry was that this political spat would seriously effect Japan's increasingly important economic relationship with China. It was this economic group that seemed to be making the decisions in Tokyo last week, hoping that pragmatism and mutual economic interests would prevail. The danger of this view, expressed to me by one Japanese reporter I spoke to, is that in thee economic sphere the Chinese now see Japan as needing China more than China needs Japan, and will continually try to push this advantage on various fronts. Recent strikes against Japanese companies in China are a sign that more economic pressure can be expected.

Another segment of the public, who are more likely to read the relatively liberal Asahi Shimbun, was relieved, but also dismayed. This more internationally-minded group, including many Democratic Party supporters, had hoped for the past few years that Japan and China were actually improving their relations. Now the DPJ's China policy seems to be in tatters. Talk of an "East Asian Community" and a "mutual strategic relationship" seems naive in this tense atmosphere, to say nothing of the rhetoric of "fraternal love" of the previous Prime Minister Hatoyama Yukio. Now, there is a depressing sense that no relief from Chinese pressure is forthcoming. The Chinese government is now demanding an apology and recompense for the trouble caused in the case of the hapless fisherman. This may be perceived in Japan as a signal that the Chinese government has no interest, or perhaps no incentive, in improving relations with Japan. Most troubling of all to the Japanese internationalists, the recent actions against Japan included halting exchanges between school children, and canceling tours to Japan, acts that inflame tensions between the citizens of the two countries at the societal not simply the political level. Many Japanese China-watchers are convinced that twenty years of anti-Japanese education in China (especially under the leadership of Jiang Zemin) have produced an atmosphere in China in which anti-Japanese rhetoric is all-purpose political medicine that the Chinese government can apply to any problem, domestic or foreign. If this is the case, there will be little chance for true detente.

In general the leftist and liberal segments of the Japanese public are worried that China has reacted only tepidly to the efforts of the DPJ to improve relations between the two countries. One of the most baffling acts involved the Chinese navy conducting exercises near Okinawa at about the time Japan was debating the agreement to shift U.S. forces within Okinawa. The Chinese naval exercises seemed timed perfectly to embarrass both the peacenik and pro-China wings of the DPJ, which subsequently beat a retreat to the relative security of the US alliance. The U.S. bases in Okinawa will stay put, and it seems likely that the hawks within the DPJ (a party which includes an extremely broad spectrum of politicians from socialists to rightists) will have a greater say in foreign policy.

Only one group seems genuinely energized by these events. This is the small but loud, and perhaps growing, right wing in Japan. Right wingers in Japan, like the so-called angry youth in China, thrive on Sino-Japanese tensions of any kind. Much of their online rhetoric is racist and dehumanizing, and aimed at stirring up anti-foreigner tensions within Japanese society as well as in Japan's relations with China and Korea. The more rational right wing sees this as a chance to bash the government of Kan, who will likely pay a heavy price for kowtowing to Beijing. The conservative Sankei Shimbun even went after the Asahi Shimbun for not towing a strict enough line on Japanese sovereignty claims for the disputed islands. The mainstream conservative Yomiuri criticized the weakness of the prime minister’s actions as not standing up for Japan’s territorial integrity.

Read in the Western press these events may seem inconsequential. Westerners forget that China and Japan have one of the largest bilateral trade relationships in the world, and profound mutual interests at the societal and political levels. Living as I do between Tokyo and Shanghai, as so many thousands of people do these days (Japanese, Chinese and others), we can only hope that both governments find a way of managing the seemingly irresolvable territorial dispute, and perhaps even return to the policies of engagement that began between the previous Prime Minister Hatoyama Yukio and Chinese Premier Wen Jiabao.

James Farrer is Director, Institute of Comparative Culture, Sophia University, Tokyo, Japan. Photo from huneycuttaddison.

Cyber Nationalists or Critical Netizens?

Yifan Xu reports for Policy Innovations on a survey of Chinese Internet users.

Is the Internet spreading and intensifying nationalism among the Chinese public? A nationwide opinion survey conducted in 2008 by the Research Center of Contemporary China sheds some light on the issue. Respondents were asked to indicate their level of agreement with nationalistic statements such as "the world would be a better place if people from other countries were more like the Chinese," and nationalist policies such as "China should limit the import of foreign products in order to protect its national economy."

The results show that Chinese netizens with higher education and income levels are less likely to be nationalistic and are less supportive of protectionist policies. In particular, for the statement "the world would be a better place if people from other countries were more like the Chinese," using the Internet decreases the probability of agreement by 10.7 percent; expressing oneself online reduces the probability of agreement by 10.3 percent; and using government websites reduces the probability of agreement by 17.6 percent.

This suggests that the old cyber-libertarian dream of the Internet serving as a catalyst for political reform may still have some elements of truth. At least the Chinese Communist Party must think so, given its extensive censorship of the Internet.

When Google withdrew its business from China in early 2010, Chinese netizens made a few sarcastic comments comparing the CCP's Internet censorship with the "closing door" policy of the Qing Dynasty—just like the Qing governors struggled to maintain the great Chinese Empire, the CCP is trying to create a "great Chinese Intranet." The CCP's logic is simple: the Internet makes possible negative information and news about the Party, which was previously unavailable from the traditional mass media.

In recent years, Chinese political dissidents have been actively using the Internet to reach out to ordinary people as well as foreign populations. For instance, while human rights activist Hu Jia was under house arrest, he remained active via emails and blogs, and posted a series of video diaries on YouTube. The Internet is in fact thick with opinions from nationalists and anti-nationalists alike.

The most interesting survey finding is that people who have used the Internet to access a government website—to get information, make a comment, or lodge a complaint—are even less likely to be nationalistic. This could be a spillover effect from dissatisfaction with the government.

The August 2010 Zhouqu landslide provides an interesting contrast. Generally speaking, disastrous events cause a nationalistic surge. In the 2008 survey, following the Wenchuan earthquake, respondents were more likely to agree with nationalistic statement. Yet the Zhouqu landslide has led to wide criticism of the government online. Netizens accused the government of working harder to promote a positive image of itself than to mount an effective rescue effort.

As New York Times columnist Nicholas D. Kristof observed in 2002, nationalism in China is a double-edged sword: "it has potential not just for conferring legitimacy on the government but also for taking it away." Armed with personal computers, critical netizens are able to quickly spread anti-nationalist discourse and protests in a decentralized fashion. Should that happen in China, the cyber-libertarian dream may materialize.

[PHOTO CREDIT: March oh! (CC).]

The End of the Free Market or The End of State Capitalism?

Ian Bremmer will be on The Daily Show with Jon Stewart tomorrow. Below is my review of his new book:

Political risk guru Ian Bremmer examines the growing momentum of "state capitalism" in his new book The End of the Free Market: Who Wins the War between States and Corporations? Bremmer argues that state capitalism differs from free-market capitalism in that politics rather than profit is the main driver of decision-making. For this reason, it threatens to curtail free markets and the global economy. It is the latest chapter in the "rise of the rest," or the expansion of non-Western states in the international system.

Capitalism takes many forms but all of them can be distinguished by their "use of wealth to create more wealth, a broad enough definition to capture both free-market and state capitalism," Bremmer notes. In the free-market form of capitalism, the job of the state is to "enable" wealth generation by enforcing contracts and limiting the influence of moral bads such as greed—the latter can lead to market failures, which have occurred periodically since the Dutch tulip craze of 1637. Free-market governments attempt to ensure that the economic game is played fairly.

In contrast to free-market capitalism, the economy in state-capitalist regimes is dominated by the state agenda. "Forced to choose between the protection of the rights of the individual, economic productivity, and the principle of consumer choice, on the one hand, and the achievement of political goals, on the other, state capitalists will choose the latter every time," Bremmer explains. Continuing the sports game analogy, state capitalists control the referees as well as the main players.

Bremmer admits that state capitalism isn't new. He traces the first reference to an 1896 speech by Wilhelm Liebknecht, a founder of the Social Democratic Party of Germany. But due to recent questions regarding the merits of free markets after the 2008–2009 financial crisis, the need for job growth and economic stability in less-than-democratic regimes, and the growth of the economies and influence of state-capitalist countries, this form of capitalism is catching on worldwide.

While there is "no single model of state capitalism," its leading practitioners, China and Russia, "share a well-developed sense of risk aversion," having recently abandoned communism as their guiding philosophies. Other notable users of this model include energy-rich states, such as Angola, Iran, Kuwait, Malaysia, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. Another cluster of countries in this group, some of which have benefited from rising commodity prices, include emerging markets that have only tentatively committed to free-market principles, such as Brazil, Egypt, India, Indonesia, Mexico, South Africa, and Turkey.

Another way to identify a state-capitalist country is by looking at the use of four specific policy tools. One policy tool favored by state capitalists is the national oil (and gas) corporation (NOC), such as Gazprom of Russia, China National Petroleum Corporation, and the National Iranian Oil Company. NOCs like these own 75 percent of the world's crude-oil reserves. A second tool is the state-owned enterprise, such as China's First Automobile Works.

A third tool is privately-owned companies—so-called national champions—that are supported by the state to develop a "commanding position" in an economy. The Brazilian mining concern Vale, according to Bremmer, is a prominent example of a company that was coerced by its government to advance the state objective of stimulating the economy.

A final tool is the sovereign wealth fund (SWF), the largest of which includes the UAE's Abu Dhabi Investment Authority valued at $300–650 billion and Saudi Arabia's Monetary Agency valued at $430–500 billion. Many types of governments have SWFs but they "tend to be as transparent—or as secretive—as their governments," Bremmer writes, noting that Norway's Government Pension Fund is exceedingly open and accountable. Norway is an example of a country that has some state-capitalist trappings but is not in the state-capitalist camp. Similarly, the U.S. bailout of financial institutions was designed to "save the free market, not bury it," Bremmer notes. "It's not the tools that count; it's how they're used. But countries that have all four of these institutions tend to be state capitalist," he writes.

How do these tools threaten the free market? While Bremmer is careful not to predict a new Cold War, he does worry about fissures in the international system and state-capitalist support for undemocratic regimes such as Guinea. As the head of Eurasia Group, a political risk company, it is Bremmer's job to ask what if. He poses at least ten hypothetical scenarios in the book, including given the mutually assured economic destruction (or interdependence) between the United States and China, what happens if China closes the door?

While the phrase "The End of the Free Market" may capture public anxiety in America today, Bremmer should have called his book "The End of State Capitalism"—he bets that free markets will win the "war" with statists. First, state capitalism just doesn't have the same appeal as an ideology that communism had, it is "more a set of governing principles than a coherent political ideology." Second, state capitalism is actually a sign of domestic political vulnerability. It is a response to the risks countries face as they open up, which Bremmer detailed in his earlier book The J Curve. Meanwhile, free markets hold several advantages over their statist cousins: Most importantly, these systems better facilitate innovation and long-term growth.

Bremmer lays out several recommendations to ensure that free markets do indeed prevail. Most of these recommendations are just good common sense for America: keep markets open, invest in hard power, pick the right fights, and welcome world-class foreign workers. Bremmer is saying subtly that for America to continue to lead it should be strong, smart, and principled. In other words, it should stay true to its values.

Slowing Japan's Galapagos Syndrome

Enjoy, a play by Japanese playwright Toshiki Okada, opens with two characters working at a comic book cafe in present-day Tokyo who spend nearly the first act solely ruminating about the etiquette of public toilets. The brilliant drama reveals the world of a Japanese generation of self-centered but lovable slackers who are accused by their peers of "destroying the future of Japan." While watching this play in Manhattan this month, it occurred to me that like these characters, who were lost in the minutiae of their own lives, Japan too has turned inward.

It's true that shyness is so common in Japan that it almost considered a virtue. Where else would one find DVDs for sale to practice "just looking" at people or "Miterudake," as the product is called? But given its cultural proclivity for and historical experience with isolation (during its policy of sakoku), the last thing Japan needs is a reason to curl up inside its shell. An isolated Japan would be especially unfortunate as it would further erode the country's relevance in international politics as well as its economic competitiveness and prosperity.

Amid economic doldrums and deflationary mentality, a declining population and growing anxiety about Japan's place in the world, and an enormous letdown after high hopes in the governing Democratic Party of Japan (DPJ), there is a danger that Japan might further withdraw. Japan's "Galapagos syndrome," a phrase originally coined to describe Japanese cell phones that were so advanced they had little in common with devices used in the rest of the world, could potentially spread to other parts of society. Indeed signs suggest it is happening already.

The first sign is the current generation of Japanese in their 30s and 40s who have been distinguished by market experts for their adeptness at online shopping and generally avoiding the rest of society. More dramatic is the number of hikikomori or shut-ins who have given up on social life. According to a Japanese government website, the figure may stand at 3.6 million or about 3 percent of the entire population. This figure is far larger than the previous estimate of 1 million by renowned Japanese psychologist Tamaki Saito.

As I argued earlier this year, Japan as a nation seems to be withdrawing and giving up on the world. Akiko Ikeda-Wei, a Japanese sociologist based in New York told me recently, "I am saddened by Japan's economic slump that has caused misery: the record-high unemployment rate and extremely unsettled and insecure feelings among thousands of Japanese employees."

Echoing many of the Japanese professionals I have met in New York, Ikeda-Wei advised her countrymen to look for opportunity away from home--and don't look back. "If I were one of them, I would forget about seeking employment in Japan and leave, and look for a volunteer job somewhere in Africa or in the Middle East and try to use this opportunity to explore something new and innovative that can help others who are in great need."

The problem is that the attitude of Japanese younger people today results in just the opposite. While her advice might be apt for many Japanese, "The fact is actually the other way around. Young people especially have become more inward-looking than ever, totally not interested in going abroad to work or to study," she said.

An odd expression of this phenomenon is in the puzzling decision this month by Japan's largest business newspaper Nikkei to dissuade readers from linking to its website. As part of its strategy to require readers to pay for access, Nikkei has stipulated that people who wish to link to its website must fill out a written application. Nikkei's print circulation surpasses that of the New York Times and even The Wall Street Journal. But in the Internet world, the move looks as if the company were saying, "We are doing just fine with our print edition, so go away, Internet."

Jean-Pierre Lehmann, a Japan expert at IMD Business School in Switzerland, has noticed a shift in attitude at companies such as Toyota Motor. In the 1980s, Lehmann would accompany Western managers to Japan to learn about its venerable production techniques. But over the course of the decade, he noticed "a subtle change." As he wrote this month in the Taipei Times, "Western management delegations continued to be politely received, but more often than not professional guides were appointed to show them around, and there was no dialogue with the Toyota managers, who previously had been keen to teach and learn. On the contrary, there was an undisguised sense of condescension toward the visiting foreign executives."

Most distressing is that, like the creatures of Galapagos, the products of Japanese research and knowledge generation are becoming increasingly evolved yet nonetheless separate from global society. As recently chronicled by Japanese economy experts Hajime Ito and Jun Kurihara, Japan leads in number of patents in solid waste management and is number two after the United States in air pollution control, water pollution control, medical technology, pharmaceuticals, and biotechnology. Yet despite these impressive accomplishments, the country lags in cited research or core articles in the same fields, not even making the top ten. Why is this the case?

Ito and Kurihara point to one possible cause: Japan's lack of international cooperation in the area of knowledge creation and the falling number of Japanese students attending U.S. universities.

At elite American universities like Harvard and Berkeley, the number of Japanese students is falling and relatively small compared with their counterparts from South Korea and China. Japanese enrollment at Harvard has been declining for 15 years while enrollment from China and India has more than doubled. Only five Japanese students attended Harvard as undergraduates in 2009, and only one of them matriculated as a freshman. According to a study by the Institute for International Education, overall India is the leading sender of students to the United States, and while Japan was the fourth largest sender, its number was down by 4 percent to 33, 974 in 2008, down for a third straight year. Since 2000, undergraduate enrollment in U.S. universities has dropped 52 percent. These are figures incommensurate with the world's second largest economy.

In March, Harvard President Drew Gilpin Faust even made a special trip to Japan to encourage more Japanese high school students to apply to the university. Faust met students in Japan who preferred to stay in the comfort of their own homes rather than going abroad. A Washington Post article this month featured students from Japan who passed up degrees from top U.S. universities to stay in Japan.

To be sure, Japan's population is shrinking and the number of children under 15 has declined for 28 consecutive years. But these trends don't entirely explain this more inward-looking attitude, which comes from a combination of domestic political dysfunction and economic malaise that has crept into popular culture. While Japan was once a larger consumer of American degrees, "an international degree is not as valued" in Japan, Faust is quoted as saying in the Washington Post article. While U.S. college degrees are becoming ever more expensive, enrollment from developing countries India and China have nevertheless led the pack and have risen in 2008 by 13 and 20 percent respectively.

Pointing to the falling enrollment of Japanese in U.S. top universities, Ikeda-Wei told me, "Economic difficulty is already sad enough but I am even more saddened by this very short sighted, pessimistic, and unproductive attitude of young Japanese." She concluded, "If young people's attitude remains as such, it is very difficult to hope for Japan's bright future."

Okada's play Enjoy whose endearing characters brought the world of Japan to audiences abroad was made possible by support from Japan Foundation and Japan Society, as well as the U.S. National Endowment for the Arts. With a declining population and exploding government debt, the future of Japanese military or "hard" power is uncertain. That is why for Japan to remain relevant, prosperous, and influential, institutions like the Japan Foundation, which is supported by the Japanese foreign ministry and promotes international exchange, and the Japan External Trade Organization (JETRO), which is supported by the economy ministry and promotes international trade and investment, have become increasingly important. (Full disclosure: I have worked with both institutions.)

"Isolation hurts Japan's economy, especially in services," Robert Dujarric of Temple University Japan has recently noted. "If so few Japanese conglomerates have managed to establish themselves in the premier league outside of manufacturing, it is partly due to their mono-cultural and exclusively Japanese management. It puts them at a severe disadvantage when competing with foreign rivals run by multinational and multicultural staffs." Japanese language, which is considered by experts to be among the most difficult to learn, is highly adaptive to the Japanese high-context culture but irrelevant in most of the world outside this island nation.

Institutions like the Japan Society in New York can act as powerful vectors of positive influence, coalescing Japanese innovators abroad to bring change to Japan. Unfortunately, just as the role of these cultural and economic institutions has become more critical, the mood in Japan for spending has unsurprisingly turned sour. While the government's approval rating has fallen to 24 percent, the one bright spot for Prime Minister Yukio Hatoyama has been the public spectacle he has made of the budget review process or "shiwake." Like corporate restructuring or "risutora" years ago, "shiwake" has become a word laden with controversy in Japan today--to some it is the democratization of the country's spending process, bringing openness and transparency; to others it is a sign of the country's decline and malaise. The fears were epitomized by a now-infamous comment downplaying scientific spending by a Japanese lawmaker who asked, "What's wrong with being number two?"

For Japan to slow its Galapagos syndrome, it will need to support its soft power and foreign engagement institutions. The question mark in my mind is: Do the majority of Japanese want to slow their country's withdrawal from the world or would they prefer a comfortable decline? That's to be determined.

Reposted from the Huffington Post.
Photo by Strana.

The Meaning of Google's Exit from China

Google announced today it will close its China-based search engine, redirect users to an uncensored site based in Hong Kong, and pull out its flagship business in response to cyber attacks by China-based hackers. Even though Google will shut down its local search engine, it will maintain some businesses in China. I have been thinking about the significance of this episode. I think it has implications at least for Google, China, and the international system. Here are few thoughts on each.

I have two themes to convey:

1. Openness is critical to economic development and global influence. My view here based on hundreds interviews I have conducted over the past six years in East Asia as part of an ongoing research project on the future of Asia.

2. We will increasingly see a future of convergence and negotiation in the international system as power gaps between states shrink. My view is based on an event series I have been running at Carnegie Council that started at the Nixon Center in 2007 that we call the "Rise of the Rest" after Fareed Zakaria's expression to describe what I see as biggest question in international relations of our time: What does the rise of China and other emerging countries mean for international norms and power?

1. What it means for Google and other companies

Google has opened up the range of options for companies operating in morally questionable environments.

From Google's perspective, being in China was a trade off. It was a question of doing some evil in order to do some good and make some money. They put it on a scale and decided that the amount of good it could do in China was worth it. That is no longer the case. During my trip to China last winter, everyone, including Chinese, complained about corruption, arrogance, fakery, and a lack of trust in that society. The common global business question about China (how do we get in?) has now been turned upside down (is China worth it?). Google's move has expanded the debate. Meanwhile, U.S. Chamber of Commerce's Myron Brilliant said this week that the "wolves can no longer be kept at bay:" U.S. companies will begin to push for retaliation against mercantilist industrial policies in China. It is no longer a given that you have to be in China to succeed. Companies and people can take into account ethical implications of their actions.

Google founder Sergey Brin has been the moral compass of Google. Drawing from his experience growing up in the Soviet Union, he has never been comfortable with censorship. He recently said that to him it wasn’t so much important whether the Chinese government was involved with the cyber attacks on Google. His point was that the Chinese government and the PLA have tens of millions of people in it. So even if there were a Chinese government agent behind this, it might represent "a fragment of policy." China's government is so big, you can't hang it on the government. But that is a problem: who is accountable? Are there rogues in the government? If so, can other countries safely trust this country?

Brin has said in a recent public speech "We from the outside provided notification when the local laws prevented us from showing information, and the local competitors followed suit in that respect. So I feel like our entry made a big difference. But things started going downhill, especially after the Olympics. And there's been a lot more blocking going on since then. Also our other sites, YouTube and whatnot, have been blocked. And so the situation really took a turn for the worse."

Brin and co-founder Larry Page have touted Google's ability to spread democracy through access to information. "At its best, Google is data-driven with an ethical trump card," says Larry Brilliant, who headed Google's philanthropy. Brin gives credit to Northrop Grumman, whose data were stolen about the F-35 fighter, for coming forward and helping with Google's investigation. He encouraged more companies to come forward.

My point is Google's mission and culture go beyond profits.

No one knows precisely how extensive the cyber attacks were but the FBI, Pentagon, and just about every single serious China watcher has been talking about China's cyber attacks for a long time. The nature of US-China relations and vulnerabilities is changing; it makes previous flare ups, for example over Hainan island, look quaint. The gravity has grown over the past year and culminated in December when more than 20 companies were attacked. It is very serious. Human rights organizations have used Gmail to communicate with people in China. If Gmail were compromised it would literally put people's lives in jeopardy.

2. What it means for China

This story shows a bad turn for China in terms of moral leadership in the world and economic development at home.

Can the Chinese government censor information and foster growth? Fareed Zakaria calls that the trillion-dollar question. So far China has been successful at embracing markets while maintaining a controlled political system. I share his view that that this system cannot last. China is still in the early stages of modernization. But it is it's difficult to imagine China being "a truly innovative country at the cutting edge of the information age, of global economics, if it has all these constraints on information, all this political control on human-to-human contact, which is what the next wave of the information age is all about."

Can China be a world leader that is admired, imitated and that shapes the global system and global values? Again I agree with Zakaria's doubts that "an insular, inward-looking China that maintains tight political control over information and human contact will end up being the country that becomes the model for the world."

In essence, China's stability right now depends on an ultimately self-defeating strategy. Both for its own advancement and for its soft power and influence in the world, China will eventually need to open up, which will create a new set of risks. Ma Yuanye, a 55-year-old biologist in Kunming in southwest China, was quoted by Washington Post as saying, "Without Google, our academic research will be seriously affected. If Google is blocked, we will see nothing but darkness."

According to the interviews I conducted last winter in China, one freedom is seen as the most crucial to economic development. That's freedom of speech. It is the only way Chinese society, companies, government, etc. can tackle its rampant corruption problem, which will impede the advancement of China. It is essential for the efficient use of capital, scientific development, effective market functions, fair trade, sound diplomatic relations, and intellectual property protection. Without freedoms or the provision of public goods, the China brand will remain weak.

Some may argue that information censorship keeps political unrest under control. To the contrary, without representational democracy, Chinese society is searching for some kind of valve to release its pressure and frustrations—over corruption, jobs, deadly product and building safety problems, pollution, and land rights. Right now without freedom of speech, the balloon is being squeezed into Wild West internet forums in which people spread rumors and gossip. The country would benefit from a professionalized media sector with incentives to break stories freely. We are seeing the emergence of citizen, online justice: So called human-flesh hunting, cyber-posses exacting justice on their own.

Comparing China today to Soviet-era Eastern Europe, Rebecca MacKinnon put it, "China's censored environment makes it easier for the Chinese government to lie to its people, steal from them, turn a blind eye when they are poisoned with tainted foodstuffs, and cover up their children's deaths due to substandard building codes."

One of the biggest questions of our time will be how we make the inevitable compromises in global business and international affairs. I see a convergence of ideas and moral values. The Chinese are taking some of what is good from the West and rejecting other things. The West might be able to take some things that are good in China. We have to assess the merit and ethics of all decisions and stick to what we believe is right because what is right is also a practical matter. In the long run, I feel China will come to that conclusion as well. It is a business concern, too. Another release valve in Chinese society can be people's relationship and connection with companies. Visits to China have suggested to me that building an ethical, trusted brand in the Chinese market would be a huge opportunity. Worldwide, people admire China, but it is shallow compared to the admiration they feel for the United States and its institutions, rule of law, openness, etc.

I would like to propose something provocative. It's not a precise analogy but without free speech, will China suffer the stagnation of the USSR? Bad information, drying up of cheap labor, and decreasing marginal productivity gains led to USSR economic stagnation in the 1980s. Can China's market make right choices without a free press? We already see non-performing loans, a potential property bubble, and labor shortages and wage rises. Similarities in China and USSR include: Drying up surplus labor, centrally planned/managed economies, farming to urban industrialization, lack of innovation, and poor information. Side effects of censorship include wasted resources (as Natan Sharansky has argued), limited market power (inefficient capital use, corruption, etc), squeezed discourse into "human flesh hunters," and rumor. Without free press and open society, limitations abound.

3. What it means for the international system?

Some have described today's world as multi-polar or comprising a West and a Rest or two "worlds." I prefer Zakaria's "the rise of the rest." Given that global manufacturing is centered in China, the country will have more opportunities to build up its technology control capacity. It is also using industrial policy to encourage home-grown technology, pushing out opportunities for foreign companies. One question in my mind is whether we will see an increasing gap between two "worlds" with competing norms—between emerging markets or and rich countries or between state capitalist countries and free market democracies.

China scholar Harry Harding sees the world as an embryonic global community with two metaphorical political parties. One led by the United States as the elitist reform party that promotes democracy and self determination. The other led by China as the populist conservative party that promotes stability, harmony, and order in domestic systems. One wants democracy at the national level and hegemony at the international level while the other wants democracy at the international level and hegemony at the national level.

I see the Google story illustrating what I see as the likeliest resolution of these tensions in international affairs between these two worlds: a convergence of norms, governance, and practices. After two months of negotiations, Google will maintain some business in China, and other American companies such as Bing and Twitter will seek to gain market share in China. Similarly, we will see convergence and negotiation rather than dictates on issues like climate change, UNSC, Iran's nuclear program, corporate governance, and World Bank and IMF governance. This week, the Japanese government conceded to give technological data to Chinese government purchases of Japanese high tech products in a compromise. Cooperation will come from this process and an acknowledgment of shared interests. Looking at China's refusal to budge on censorship, what's certain is China won't be lectured to or bossed around--sometimes to its own detriment.

As for the United States, its strength over competitors remains its openness. Thomas Friedman on Saturday wrote about the 2010 Intel Science Talent Search, which honors the top math and science high school students in America. Most finalists hailed from immigrant families, largely from Asia. Alice Wei Zhao of a Wisconsin high school, who served as a spokeswoman of the finalists told the audience: “Don’t sweat about the problems our generation will have to deal with. Believe me, our future is in good hands.” (As long as we remain open.)

"Rise of the Rest III" (2010)

Earlier this month, we held at the Carnegie Council the third iteration of our ongoing series on the "rise of the rest" or the emergence of non-Western powers in international affairs. Our March 9, 2010 panel titled "Rise of the Rest III" was a follow up to a similarly themed event we held at Carnegie Council in 2008 and one that I participated in at the Nixon Center in Washington DC in 2007. Here is a summary from the original 2007 panel called "The World Without the West." Here is my summary and my speech from 2007.

Nicholas Gvosdev kicked off the panel this month by reviewing some of the points made at the last two panels.



A point I made in 2007 was that the BRICs (Brazil, Russia, India, and China) countries are not similar, nor are they a coherent alliance. But why the BRICs has been working as a group is that these countries are coordinating their actions and using theirs relationships as force multipliers, Gvosdev said. It allows the members to credibly speak for half the planet. Gvosdev pointed to embryonic groupings that can go around the United States if U.S. leadership is unsatisfactory.



The southern democracies, like Brazil and India, act as "independents" in international affairs. They will work with the United States when they see it in their interest and will work with other southern democracies, for example through the IBSA (India, Brazil, South Africa) Dialogue Forum when they don't. IBSA is coordinating on trade issues but is also making forays into military joint activities as well, Gvosdev said.



Craig Charney started by making the point that there is an international consensus among peoples that they want some sort of elected and accountable political leadership. "Democracy" broadly means "free expression" worldwide, and people want to choose their own leaders, according to Charney's extensive polling. It is "minimalist" support for democracy and not very deep. It is not a demand for "free and fair elections," but the desire to choose own's leader is a "very powerful trend at present," Charney said.



Charney also identified "connectedness," along with collective responsibility and national power, as another powerful trend and reality in international affairs today. "We are seeing the emergence of imagined communities," which is reinforcing national sentiment through electronic media, Charney said. He noted that 70 percent of humanity now lives in a family with a telephone, creating billions of communications possibilities and accelerating collective consciousness, collective action, and social movements.

As for China, Charney made a fascinating point that seems to resonate with my own research in Asia: Worldwide people admire China for its economic growth, but the admiration for the United States goes much deeper to include America's legal system, its movies, its popular culture, its educational system, its openness, etc. Recently, I have tried to make a somewhat playful point to some of my friends that until China creates modern equivalents to rock 'n' roll and Hollywood, I will be unconcerned about Chinese influence. Give me a Chinese Michael Jackson and "Avatar," I will be worried about a decline in U.S. influence.



Parag Khanna identified a widespread crisis of global governance--in power, norms, and institutions. The emerging powers or "the rest" do not yet have the appropriate voice in global goverance commensurate with their political and economic weight. In power relations, for example, there is no credible proposal on the table to expand the UN Security Council or reform the board of the IMF. For norms, the rules, for example over democracy or intellectual property or humanitarian intervention, are in question. As for institutions, the proposals have been unimaginative. "Meta global governance" has been uninspired, Khanna said.



"What is global governance?" Khanna asked. It is the sum of: multilateral bodies (like the UN), regional mechanisms (like the African Union), inter-regional functional activities (like bilateral climate change cooperation), and the huge array of public-private partnerships (like the activities of the Gates Foundation), Khanna answered. Global governance therefore has no center, Khanna said. So to capture the totality of globalization, "you have to think of global governance as radically decentralized," he said.



Stephen Young asserted that the epistemology of modern civilization is fundamentally nihilistic, and therefore there are no norms or values, only power. But power fragments unless you have a dominant power. So the world is guided by Hobbesian dynamics--"kill or be killed, eat or be eaten," Young said. You therefore need to find norms and values common to many traditions. He rejected the idea that America actually ever had hegemony in the international system but underscored the importance of the "rise of the rest" in a world that is fundamentally about power.

Nevertheless, the central and continuing importance of "the West" in international affairs actually makes "the rise of the rest" the "second rise of the West," Young said. He also asked whether what we might see if a "convergence of societies," as I have argued elsewhere, for example in relation to Google's exit from China. Young concluded that greed has been a perennial problem in the global economy and we have not much evolved since the Dutch tulip bubble of the 1600s. Young's group, the Caux Round Table, sees the need to promote corporate responsibility, use core (universal) values in corporate governance, and to find the right pricing in the economy even if it takes state intervention.



I asked the panel what I asked Harry Harding in 2008: In this new world of emerging powers is cooperation possible? (Harding's response is above.) This time, each panelist had slightly differing views. Young said cooperation is possible but it will be case specific and we therefore need to engage by acknowledging the identities of potential partners. Gvosdev said cooperation will require a real give-and-take, especially between the United States and China. We have to honestly ask ourselves, what kind of world do we want, said Gvosdev. The United States asks for more burden sharing from China but when China becomes more assertive Americans get suspicious. Like Young and many in the Obama administration, Charney said cooperation will depend on establishing a dialogue on shared interests. Khanna finished by saying we will see a world that is "to each his own. You will see more and more of what Charles Kupchan of Georgetown calls the autonomy rule—engaging with other countries in such a way that one can't push too far beyond the extent to which one is really respecting their own autonomy and self-directed evolution. I think we'll see more of that."

To view the transcript and the video in its entirety of the event, click here. A special thanks to our corporate sponsors Booz, HP, and Merck for making this event possible. We look forward to the next iteration of this ongoing series. Like any successful Hollywood movie, another sequel is expected--"Rise of the Rest IV," perhaps next time in 3D.

"A Rallying Cry for CSR" - The CSR Journal

Here is my summary from our "Top Risks" event last month at Carnegie Council, published in The CSR Journal (Volume 5), which is edited by Michael Levine, co-chair of the ABA's CSR Committee. It is republished here with kind permission.

A Rallying Cry for CSR?

By Devin Stewart

One day after Google's bold decision last month to stop censoring its Chinese search engine and possibly quit its operations in China, Carnegie Council held its annual "Top Risks and Ethical Decisions" panel for 2010. Google's announcement and the earthquake that hit Haiti, two unexpected events with moral consequences, guided much of the panel's discussion.



The salience of the Google announcement was heightened by the foresight of Eurasia Group president Ian Bremmer who had placed U.S.-China relations as the 2010's top risk in terms of likelihood of change. It also highlighted the ethical challenges of doing business in China and globally as well as the positive leadership role businesses can play. Bremmer told me before he presented his full list of risks that he predicted Google would indeed pull out of China given the company's wide range of appeal—from technologists to free marketers to human rights activists—and the Communist country's inability to credibly guarantee security from further cyber-attacks. Google, along with at least 20 other companies, had been hacked in December, and it is widely believed the attacks were in coordination with a Chinese government agency that was attempting to gather information on dissidents. If personal information were compromised, peoples’ lives would be at stake. Business ethics are a very practical matter.

Bremmer wondered whether Google's moral stand might serve as a rallying cry for other companies to follow suit in China. Since Google's announcement, the company has been lauded, and the U.S. government has had to reverse its direction by stepping up its rhetorical pressure on China. In U.S.-China relations, the news came against a backdrop of tensions over possible UN sanctions on Iran, U.S. arms sales to Taiwan, and a Chinese test of a missile interceptor. It also occurs amid the longer-term trends Bremmer sees, specifically the acceleration of divisions between the world's developing and developed countries; free market economies and state capitalist economies; and the U.S.-led and multipolar worlds. Bremmer sees U.S.-China relations as the biggest risk for the year because "U.S. and Chinese economic systems are fundamentally incompatible. Compromise is a possibility but let's not obscure the question." He also noted that it isn't clear how the world will square China's global responsibilities given its limitations and societal pressures.

The Google episode in China also underscores the gap between short-term profit-seeking and longer-term ethical concerns for companies and countries alike. Without an expansion of rights and freedoms in China, the government risks hindering economic development. Without free press, for example, China simply cannot stem corruption. Above all, Google's move has expanded the options and the debate on the Chinese market. Carnegie Council's approach toward exploring international issues has been precisely that: to expand the scope of options and to encourage people to ask ethical questions. In line with Andrew Carnegie's vision, the Council aims to create and disseminate knowledge and understanding in order to facilitate societal transformation toward world peace. The "Top Risks" event is part of an ongoing series that brings companies and civil society together to examine business ethics issues, such as human rights policies, the role of the media, trust in the financial system, green job creation, and the fight against corruption.



Michele Wucker, head of the World Policy Institute, posed one of these potentially transformational questions. Considering the ecological limits of the planet, how much consumption is enough? China has just become the largest automobile market in the world, but do we really believe that every person in China can own a car? If the United States moves away from naked consumerism, what will take its place? And, how do we avoid policy solutions that hurt the poor? Wucker also pointed to the extreme poverty in Haiti, which exacerbated the devastation from the recent earthquake, highlighting the fact that risk is often increased when more than one factor is in play. Wucker predicted that finding sustainable levels of consumption and a balance between short-term and long-term gains would be the most pressing moral questions facing businesses for the foreseeable future.



A major obstacle to finding this balance, however, relates to the very nature of individuals and institutions, something that strategy+business editor Art Kleiner has been following for years. He identified at least three "meta risks" for 2010. The first is that although the stakes are higher than ever, it is unclear whether governments possess the management capacity to deal with the riskiest challenges, such as climate change and terrorism. The second is what he called "the risk of transitional capability," meaning that not only are changes in the global business environment occurring more rapidly than ever, it is also uncertain whether organizations can adopt the best practices in time to keep up with the changes. Moreover, transition implies unintended consequences and thus more uncertainty. Finally, bringing it to the personal level, there is a plausible scenario in which the world addresses these problems, but it will require individuals to change their behavior. It is becoming increasingly difficult for people to lead a "normal life," so what do you do? Kleiner asked. "To the extent that human survival requires individuals to change, will enough people be willing to do it? Maybe," he said.



"Integration" has already become the buzzword in business and policy circles this year. In applying this concept, Georg Kell, head of the UN Global Compact, explained that integration means companies must be best in class in their products and services but that isn't enough. Companies must also be able to deal with non-financial risk, such as environmental, social, and governance risks. Ethics is the floor or baseline for international business because "going global means going local," and globalization has therefore become a test case for the question, "Can we live with one another?"

Kell was optimistic about humanity's prospects because he believed the 2008 financial crisis brought ethics back into business decisions in at least three ways. First, it highlighted the need to move from short-term to long-term value creation. Second, it showed the importance of bringing non-financial issues into decision-making. Finally, he saw a general shared sense of ethics as underpinning these trends. His research has shown that there is a universal sense of fairness and justice around the world that can also be observed in religious traditions, philosophies, and law. Kell concluded by advocating for the "traditional values," such as cooperation, that made the free market work in the first place.

The panel seemed to agree that only human innovation can pave the path toward global salvation in the face of ecological, security, social, and economic risks. Thomas Stewart, Booz & Company’s chief knowledge officer, somewhat darkly concluded by encouraging people to find the courage to muddle through. He jokingly asked whether it is possible to avoid the future all together. Kleiner quipped, "There is always a way through by the skin of our teeth." The event also highlighted the large moral questions for the upcoming year, thus framing the fourth year of Carnegie Council's Workshops for Ethics in Business series programming, which is currently being expanded into a full-blown corporate membership program. If ethics matter to you and your organization, please contact us to get involved with this unique program.

Stewart is program director and senior fellow at Carnegie Council for Ethics in International Affairs and can be reached at dstewart@cceia.org

With China Rising, Moral Gaps Abound

Few people should have a regular column. I am not naming any names. But Newsweek's Fareed Zakaria is one of the handful of people who are smart, insightful, and original enough to deserve one. For instance, Zakaria rightly pinpointed "what is really at stake" in the recent Google vs. China episode. As we have argued here and Harry Harding has argued in Policy Innovations, it is about shaping global norms, or ethics. As he put in his Newsweek column, here is how Zakaria put it in CNN Opinion:

So far China has been remarkably successful at maintaining a system that has embraced markets, but also maintained a very controlled political system. My own view is that that cannot last forever, but that China is still in the early stages of modernization, and it is quite possible that it will be able to continue doing this for several decades. But I think it's very difficult to imagine China being a truly innovative country at the cutting edge of the information age, of global economics, if it has all these constraints on information, all this political control on human-to-human contact, which is what the next wave of the information age is all about. Ultimately the question is: Can China be a world leader that is admired, imitated and that shapes the global system and global values? There I have my doubts that an insular, inward-looking China that maintains tight political control over information and human contact will end up being the country that becomes the model for the world.

This is precisely what I heard last month during my month-long Asia trip, which took me to Singapore, Tokyo, Yokohama, Shanghai, and Nanjing. China's lack of openness broadly speaking is having a negative impact on its development. Specifically, the lack of free press and free expression is inhibiting the country's ability to tackle corruption and spur innovation. These ethical matters are not optional for civilizational advancement; they are essential for China to make the next leap, to be seen truly as a model, to emanate ideas, culture, brands, and enterprises that the world will seek.

In the coming years, assuming China's economy remains stable, the big picture question will be: How will China influence global norms?

As this expansive New York Times article put it, cataloging a decade's worth of China issues:

When the United States was snapping at the heels of the British empire, the global hegemon of the early 20th century, the situation caused plenty of friction, even though both countries spoke the same language, shared similar cultures and were liberal democracies. China, in contrast, is a Confucian- Communist-capitalist hybrid under the umbrella of a one-party state that has so far resisted giving greater political freedom to a growing middle class. Now its ascendancy is about to set off what many officials and experts see as a backlash on both sides of the Pacific.

My guess is that China's influence on the world will result in a convergence of norms. More equality among nations at the global level and eventually more equality among people at home in non-free countries like China. The Google episode in China seems to prove my point: Companies like Google and countries will seek compromise. As relative power equalizes between companies and countries, it will be a process of real negotiation. The alternative is conflict or even disaster.

During my visit to China last month, I presented to a Chinese university several of the ethical gaps I see emerging between China, the United States, poor countries, and the rest of the world in the climate change arena. These gaps, in my mind, will make the climate change mitigation and adaption process difficult.

- The countries least responsible for climate change are the most vulnerable to its effects

- Emerging economies, such as China and India, no longer represent the interests of the poorest and most vulnerable, which seek immediate solutions, and are using the poor as a shield

- The pace of the international political process of negotiation in Copenhagen (and in Mexico City this November) does not match the scientific urgency of climate change

- Most of the countries that will most need to adapt to climate change do not have the political or budgetary capacity to place adaptation in their spending priorities

- Similarly, the security implications of flooding, droughts, and cyclones are not being considered by the countries most vulnerable to extremism and militants who could take advantage of disasters

- The right to "dirty" development and poverty relief is in opposition to the devastating consequences of climate change

- Exiting the dirty development path through clean tech can run up against the protection of intellectual property rights on technology

- The benefits accrued to previous generations by polluting contrast with the current conditions in poor countries

- Nuclear energy promulgation bumps up against the security interests of nuclear nonproliferation

- Central government goals of emissions reductions can oppose the goals of local governments, which are concerned about job creation or are plagued by local corruption and vested interests

- A global ethic on climate change therefore is needed since "finger pointing" will likely derail climate change negotiations yet "naming and shaming" is expected to be the likely enforcement mechanism

As scholar Samuel Fankhauser described in his Dec. 7, 2009 article "If it warms up, who's going to pay?" it may be better to consider adaptation support as "a way to show solidarity, to fairly deal with a shared challenge. The strong should help out the weak."

Photo by vasilken.

Google's Rallying Cry in China

I was just interviewed with Daniel Gross by Newsweek On Air about Google's announcement that it may leave China due to hacking of Gmail accounts and censorship in China. Here are my comments from the interview today.

How essential do you see greater freedom to Chinese economic development, and how long can they continue their current influence on world markets without it?

One freedom is perhaps the most crucial to economic development. That's freedom of speech. It is the only way Chinese society, companies, government, etc. can tackle its rampant corruption problem, which will impede the advancement of China. It is essential for the efficient use of capital, scientific development, effective market functions, fair trade, sound diplomatic relations, intellectual property protection. Without freedoms or the provision of public goods, the China brand will remain weak.

Given that global manufacturing is centered in China, the country will have more opportunities to build up its technology control capacity. One question in my mind is whether we will see an increasing gap between two "worlds" with competing norms—between emerging markets and rich countries or between state capitalist countries and free market democracies.

What about the argument that without tight controls the pent up aspirations of China's 1.3 BILLION people could cause chaos? Is it ethical to stir that pot?

To the contrary, without representational democracy, Chinese society is searching for some kind of valve to release its pressure and frustrations—over corruption, product safety scandals, pollution, land rights. Right now without freedom of speech, the balloon is being squeezed into Wild West internet forums in which people spread rumors and gossip. The country would benefit from a professionalized media sector with incentives to break stories freely.

Even Americans who don't care much about internet freedom in China are worried about Chinese cyber-attacks on U.S. companies and the government. How extensive is it and what are they after?

No one knows but the FBI, Pentagon, and just about every single serious China hand has been talking about China's cyber attacks for a long time. The nature of US-China relations and vulnerabilities is changing; it makes previous flare ups, for example over Hainan island, look quaint. The gravity has grown over the past year and culminated in December when more than 20 companies were attacked. It is very serious. Human rights organizations have used Gmail to communicate with people in China. If Gmail were compromised it would literally put people's lives in jeopardy.

Leaving aside the cynical view of Google's move, is there a real ethical question about whether that particular company's presence in China—even if complicit with Chinese censorship—helps spread democratic values, slowly to be sure?

From Google's perspective, it was a trade off. How much evil would it have to do in order to do some good and make money. They put it on a scale and decided that the amount of good it could do in China was worth it. That is no longer the case. During my last trip to China last month, everyone, including Chinese, complained about corruption, arrogance, fakery, and a lack of trust in that society.

The question has now been turned upside down: Is China worth it? I think the biggest effect of Google's move is that it will expand the debate and increase the range of options. It is no longer a given that you have to be in China to succeed. Companies and people can now think in a broader framework that takes into account ethical implications.

In a panel discussion at the Carnegie Council last week, Ian Bremmer of Eurasia Group—a frequent guest on this show—said a major ethical challenge for many companies and Western governments will mirror Google's—how to co-exist with China despite very different value systems, respecting theirs and our own. How do we best approach making those inevitable compromises?

That is one of the biggest questions of our time. I see a convergence of ideas and moral values. The Chinese are taking some of what is good from the West. The West might be able to take some things that are good in China. The answer is that we have to assess the merit and ethics of all decisions and stick to what we believe is right. What is right is also practical. In the long run, I feel China will come to that conclusion as well. It is a business concern, too. Another release valve in Chinese society can be people's relationship and connection with companies. Visits to China have suggested to me that building an ethical, trusted brand in the Chinese market would be a huge opportunity.

Photo by gwydionwilliams.