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From: Office of Terje Rod-Larsen <[email protected]> 
Subject: August 28 update 
Date: Thu, 30 Aug 2012 14:01:51 +0000 
28 August, 2012 
Article 1. 
Reuters 
New Egypt leader seeking "balance" 
Samia Nakhoul and Edmund Blair 
Article 2. 
Foreign Policy 
The Talkfest in Tehran 
David Bosco 
Article 3. 
Los Angeles Times 
Isolating Iran? 
Najmedin Meshkati and Guive Mirfendereski 
Article 4. 
Washington Institute 
Fresh Concerns about Health of Saudi King 
Simon Henderson 
Article 5. 
Asia Times Online 
China's Challenge: Balancing State and Market 
James A. Dorn 
Article 6. 
NYT 
New Book in Battle Over East vs. West 
Jennifer Schuessler 
Article 7. 
NYT 
The Man in the Moon 
Lydia Netzer 
Arlicic I. 
Reuters 
New EgypIleadostpsnt i
w0Awmds
l
tage
seeking "balance" 
Sarnia Nakhoul and Edmund Blair 
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Aug 28, 2012 -- CAIRO (Reuters) - Egypt's new Islamist president said 
on Monday he would pursue a "balanced" foreign policy, reassuring Israel 
its peace treaty was safe, hinting at a new approach to Iran and calling on 
Bashar al-Assad's allies to help lever the Syrian leader out. Mohamed 
Mursi, who was elected in June and consolidated his power this month by 
dismissing top military leaders, is seeking to introduce himself to a wider 
world ahead of a trip to Iran - the first by an Egyptian leader in three 
decades - and China. 
"Egypt is now a civilian state ... a national, democratic, constitutional, 
modern state," he told Reuters in his first interview with an international 
news organisation since taking office as the candidate of the once-banned 
Muslim Brotherhood. "International relations between all states are open 
and the basis for all relations is balance. We are not against anyone but we 
are for achieving our interests," said the U.S.-educated engineer, 
appearing confident and assertive in the marble-lined presidential palace. 
The first leader Egyptians have elected in a 5,000-year history dating back 
to the pharaohs, he spoke in a room for visiting dignitaries surrounded by 
monarchy-era furniture, oil paintings and a grand tapestry on the wall. 
Mursi, 61, came to power after the fall of Hosni Mubarak, who served for 
decades as a loyal U.S. ally and the guarantor of Egypt's status as the first 
Arab country to make peace with Israel. His emphasis on balance 
suggests he is seeking a less explicitly pro-American role in the region, 
but he has also been at pains to reassure traditional allies. 
Mursi's Brotherhood describes Israel as a racist and expansionist state, but 
he resigned from it on taking power and has avoided inflammatory 
language. He repeated his position that Egypt will continue to abide by 
international treaties, including its 1979 peace deal. Without mentioning 
Israel by name, he indicated Egypt's neighbour had nothing to fear from a 
new military campaign in the Sinai Peninsula, which he ordered after 
gunmen attacked an Egyptian border post, killed 16 guards and tried to 
burst across the frontier into Israel. "Egypt is practicing its very normal 
role on its soil and does not threaten anyone and there should not be any 
kind of international or regional concerns at all from the presence of 
Egyptian security forces," he said, referring to the extra police, army and 
other forces moved to the area. The military campaign was in "full 
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respect to international treaties", he said. The Egypt-Israel peace deal 
includes limits on Egyptian military deployment in Sinai. 
Officials in Israel, already concerned that Egypt's Islamists will support 
the Brotherhood-offshoot Hamas in Gaza, have voiced worries about 
Egypt's build-up of heavy armour in Sinai to quash militants. Mursi 
would not say if he would meet Israeli officials. Mubarak regularly 
received top officials although only went to Israel once for a funeral. In 
an effort to increase Egypt's role in regional affairs, Mursi has called for 
dialog ue between Egypt, Saudi Arabia, Turkey and Iran to find a way to 
stop the bloodshed in Syria. Notably, the initiative has been welcomed by 
Iran, the only country in the group that supports Assad. During his 
interview, Mursi gave a particularly strong call for Assad to be removed 
from power, suggesting that he is comfortable taking a high profile role in 
regional affairs. It is a message he will tak e on his trip to Iran and China, 
which, along with Russia, are the main countries backing Assad. "Now is 
the time to stop this bloodshed and for the Syrian people to regain their 
full rights and for this regime that kills its people to disappear from the 
scene," Mursi said. 
"There is no room to talk about reform, but the discussion is about 
change," Mursi said, adding Egypt had repeated that "the friends of the 
Syrian people in China and Russia and other states" need to back ordinary 
Syrians. However, Mursi said he opposed foreign military action in Syria 
"in any form". 
FIRST VISIT TO IRAN 
In what could be an important sign of a shift in the region, Mursi's visit to 
Iran this week will be the first by an Egyptian leader since Iran's 1979 
Islamic revolution. The two countries broke off diplomatic relations at the 
time over Egypt's support for the ousted Iranian Shah and its peace with 
Israel, and have yet to formally restore ties. 
Officially, Mursi's visit is to attend a summit of the 120-nation Non-
Aligned Movement, and he would not be drawn on whether Egypt would 
resume full diplomatic ties with Iran. 
Asked whether he saw a threat from Iran, whose nuclear programme has 
sparked fears in the West and Israeli warnings that it could consider a 
military action, Mursi said: "We see that all the countries in the region 
need stability and peaceful co-existence with each other. This cannot be 
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achieved with wars but through political work and special relations 
between the countries of the region." 
After Iran, Mursi will travel in September to the United States, which still 
gives the Egyptian military $1.3 billion in aid a year. 
Asked how the outcome of the U.S. election in November might change 
ties, Mursi said Egypt works with the United States as "a stable 
institution" rather than dealing with personalities. 
TRANSFORMATION 
Stocky and well-dressed, Mursi spoke in good humour in the palace 
where Mubarak held court for decades. 
Criticised at the start of his election campaign as a stiff politician who 
seemed more of a Brotherhood functionary than statesman-in-waiting, he 
has warmed to the role. His dramatic move against the army on August 12 
stamped his authority on the nation far more quickly than many had 
expected. 
Mursi's rise to the presidency is not only a transformation for Egypt but 
also for him personally, climbing from a poor Nile Delta village to study 
in California before joining the Brotherhood. Like many members of the 
group, he was jailed for periods under Mubarak. They have swapped 
places and the 83-year-old former president is now serving life in jail. 
Mursi sealed his rise to power this month with his audacious move to 
pension off military leaders who had ruled the country during the long 
transition after Mubarak was toppled last year. In his interview, he took 
care to praise the army in its transitional role and describe it as part of 
Egypt's "national fabric." 
Liberals worry that the rise of Mursi and his Brotherhood group could 
lead to the imposition of Islamic sharia law, which they fear will impose 
social restrictions in a country where a tenth of the 82 million people are 
Christians and tourist visits to its beaches and pharaonic ruins are a vital 
source of income. 
Mursi said tourism would grow under his rule. 
When asked whether the new constitution, now being drawn up by an 
assembly before being put to the nation on a referendum, would seek to 
implement the Islamic code, he said it was up to the Egyptian people to 
decide. 
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Artick 2. 
Foreign Policy 
The Talkfest in Tehran 
David Bosco 
August 27, 2012 -- This week, Iran will be more than the country 
struggling under the weight of U.N. sanctions, imposed for its 
controversial nuclear program. It will be more than a potential target for 
Israeli airstrikes. It will be something other than the home of a theocratic 
government routinely pilloried by leading human rights groups. On 
Sunday, Iran became host to the 16th summit of the Non-Aligned 
Movement (NAM), heralding the start of a three-year turn for Tehran at 
the group's helm. 
Dozens of world leaders and foreign ministers, reportedly including U.N. 
Secretary-General Ban Ki-moon, new Egyptian President Mohamed 
Morsi, India's Prime Pinister Manmohan Singh, Pakistani president Asif 
Ali Zardari, and Venezuela's Hugo Chavez are descending on the Islamic 
Republic for the summit. Sudan's Omar al-Bashir, subject of an 
International Criminal Court warrant, will also attend -- and it's a fair bet 
that he won't be dragged from Tehran in handcuffs. North Korea is 
sending its nominal head of state, Kim Yong Nam, instead of new leader 
Kim Jong Un. In all, as many as 7,000 delegates are expected. 
The spectacle of Supreme Leader Ali Khamenei and President Mahmoud 
Ahmadinejad playing host to such a major international gathering has 
caused heartburn in Western capitals. The United States publicly 
discouraged the U.N.'s Ban from attending and none too subtly urged 
others to stay away. "[W]e frankly don't think that Iran is deserving of 
these high-level presences that are going there," said a U.S. State 
Department spokesperson. 
There is no doubt that Iran's leadership will seek to deflect international 
pressure and to showcase the diplomatic support it still enjoys in some 
parts of the world. The Iranian authorities have announced a tour of 
scientific and technical sites designed to simultaneously demonstrate 
Iran's scientific prowess and its peaceful intentions. The regime will have 
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a largely sympathetic audience. Most states in the NAM are skeptical of 
what they see as a double standard that permits only certain powers to 
maintain nuclear arsenals. The last NAM summit document chastised the 
current nuclear-armed states for a "lack of progress ... to accomplish the 
total elimination of their nuclear arsenals." In 2006, the movement 
approved a statement lauding Iran's cooperation with the International 
Atomic Energy Agency and warning against any military strikes on 
peaceful nuclear facilities. 
This year, other issues on the agenda will likely include equitable 
economic development, the reform of major international organizations, 
and the Israel-Palestine conflict -- a perennial topic at NAM meetings. It's 
also certain that the assembled leaders will discuss Syria, whose regime 
Tehran strongly backs. Russia's envoy to the NAM reportedly expressed 
hope that summit decisions "will lead to the development of a political 
solution to the Syrian crisis." 
That seems highly unlikely, and the subject will be a tricky one for the 
hosts. Syrian Prime Minister Wael al-Halqi and Foreign Minister Walid 
Muallem will attend the summit -- but as Reuters's Marcus George points 
out, a majority of NAM members have already voted to condemn the 
Syrian regime at the United Nations. 
The impact of the Tehran summit on most major issues will likely be 
minimal, but it will nevertheless be an important moment for the NAM 
itself. The organization has endured a several decades-long identity crisis: 
It was, after all, a movement born early in the Cold War to provide 
diplomatic shelter and support for states not clearly identified with either 
the United States or the Soviet Union. The 1955 Bandung summit 
document, which, among other things, urged participants not to serve the 
"particular interests of any of the big powers," was the movement's 
ideological breakthrough. The 1961 Belgrade summit represented its 
formal coming-out party. The prime movers of that era were giants from 
large and populous non-Western states: India's Jawaharlal Nehru, 
Indonesia's Sukarno, Egypt's Gamal Abdel Nasser, and Yugoslavia's Josef 
Broz Tito. 
As decolonization speeded up in the 1960s, the NAM became a sprawling 
collection of diverse states with heavy representation from Africa and 
Asia. Particularly at the United Nations, it had a significant diplomatic 
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impact. The movement was instrumental in the 1965 expansion of the 
U.N. Security Council to 15 members, which gave its members more 
weight in that body. In the early 1970s, the NAM marshaled support for a 
"New International Economic Order," which emphasized the obligation of 
former colonial powers to redistribute wealth to the global south. Along 
the way, Washington came to see the NAM as a mostly hostile movement 
that, for all its protestations of independence, tended to line up with 
Moscow. Cuba's active role in the organization -- Havana hosted the 1979 
summit -- only intensified U.S. skepticism. 
The end of the Cold War -- and the rigid diplomatic alignments against 
which the NAM supposedly militated -- posed an existential challenge for 
the movement. At its 1992 summit in Jakarta, key players in the NAM 
claimed that the end of the Cold War vindicated their worldview, but they 
also recognized that the organization needed to generate a new sense of 
purpose. Indonesia's Suharto warned that NAM "cannot afford to be 
passive" in the face of new challenges. 
He need not have worried. Multilateral organizations often endure even 
when their initial purpose has expired (witness NATO's post-Cold War 
activism). Right on cue, the NAM found its new raison d'être in the 
outsized economic, military, and diplomatic power of the West that 
persisted throughout the 1990s. In many respects, the movement shifted 
from being a voice for Cold War neutrality to serving as a rhetorical 
bulwark against what many members saw as U.S. hegemony and 
interventionism. 
NAM members condemned U.S. airstrikes against Iraq in the late 1990s 
and opposed the 2003 invasion. In 2004, South Africa's deputy foreign 
minister exhorted a NAM gathering to "heighten awareness of the threats 
to multilateralism through the imposition of unilateralism and it ought to 
galvanize us into concrete courses of action." 
Given the diversity of its membership, the NAM's pronouncements tend 
to be stem-winders that give everyone something; the last summit 
document totaled more than 100 pages. But a persistent and distinct 
worldview permeates the verbiage: NAM members remain skeptical of 
the leading Western powers, watchful for all forms of incipient 
neocolonialism and racism, mostly hostile to Israel's policies, and 
animated by the vast gulf between the world's rich and poor. 
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This week's summit in Tehran poses distinct tactical challenges for the 
movement. Not only does Syria badly divide its members, but some 
Western diplomats have speculated that moderate states won't be pleased 
about being used as a foil in Tehran's nuclear struggle with the West. But a 
deeper question is whether even Nonalignment 2.0 makes sense in a world 
where many see U.S. and European power in decline relative to that of 
India, South Africa, and China (a NAM observer state). In small but 
notable ways, these states have acquired new standing and weight in 
bodies like the World Bank and International Monetary Fund. The United 
States has even backed India's bid for a permanent Security Council seat. 
The NAM has often claimed to speak for the world's weak and 
marginalized. But it's increasingly hard to put the likes of India and 
Indonesia in that category. What happens when some of the NAM's most 
important players become part of the global establishment? 
David Bosco, a Foreign Policy contributing editor and author of 
the FP blog The Multilateralist, is assistant professor at American 
University's School of International Service. He is at work on a book 
about the International Criminal Court's first decade. 
Ankle 3. 
Los Angeles Times 
Isolating Iran? 
Najmedin Meshkati and Guive Mirfendereski 
August 28, 2012 -- The 16th summit of the Non-Aligned Movement in 
Tehran this week will draw dignitaries and representatives from more than 
100 countries — 35 heads of state, including Mohamed Morsi, the current 
chair of the movement and the first democratically elected president of 
Egypt, as well as U.N. Secretary-General Ban Ki-moon. For the next three 
years, Iran will serve as the chair of the movement, which was formed in 
1961 to counterbalance the superpowers. In early August, Iran hosted a 
high-level meeting that included Russia on the crisis in Syria. All this 
points to the abject failure of the U.S. policy in the last 30 years to 
"isolate" Iran. 
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Policies of restriction or containment through sanctions and economic 
mechanisms do not work. In a porous world, sanctions are largely 
ineffective. Sanctions didn't change the behavior of Saddam Hussein or 
Moammar Kadafi (despite what some think, other factors forced Kadafi to 
disarm his nuclear program) or affect North Korea, and Cuba has survived 
in spite of comprehensive U.S. sanctions. Where a U.S. sanctions policy 
has been successful, it has been coupled with constructive or positive 
engagement: the ending of apartheid in South Africa and of communism 
in Eastern Europe, Arab-Israeli peace (through U.S. engagement of Jordan 
and Egypt), protection of intellectual property in China — all have come 
about because of influence through involvement. 
Proponents of further tightening of the so-called crippling sanctions or the 
oxymoronic "smart sanctions" on Iran point to the significant drop in 
Iran's oil exports, shortage of foreign currency and the economic hardship 
in Iran as evidence of the effectiveness of sanctions. However, the sole 
intended consequence of all these sanctions has been zero insofar as 
scaling back or curtailing Iran's nuclear program. 
The underlying rationale for Iran's pursuit of nuclear technology is a need 
to achieve self-sufficiency in production of fuel for its planned nuclear 
power industry and a desire for prestige that goes with technological 
advancement. The fact that nuclear power capability might be weaponized 
acts also as deterrence against Iran's adversaries. The Iraq-Iran war of 
1980-88, in which the West backed Saddam Hussein and his Arab allies, 
showed Tehran the need for strong deterrence if the country were to 
survive in a secure and stable environment. But for the United States, 
Iran's nuclear "issue" is a political matter. 
As Homi Jehangir Bhabha, father of India's nuclear technology, said in 
1965, "a way must be found so that a nation will gain as much by not 
going for nuclear weapons as it might by developing them." 
During the Truman administration, Secretary of State Dean Acheson's 
policy of containment of China pushed Chairman Mao Tse-tung to greater 
extremes and arguably led to the Chinese invasion of southern Korea that 
produced the Korean War, ensnaring the United States. Likewise, his 
treatment of President Gamal Abdel Nasser and refusing to fund the 
construction of the Aswan Dam further radicalized the Egyptian leader, 
pushing him into the arms of the Soviet Union. 
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Likewise, imposing more sanctions on Iran would result in further 
radicalization, adding fuel to the fire of hard-liners and eventually 
marginalizing the democratic forces in Iran. Instead of sanctions, the West 
is better advised to support and promote the Iranian private sector, which 
is the engine of economic growth and social change. 
When it comes to building relationships, the recipe for Iran should be the 
same one that the U.S. followed in overcoming its ideological angst with 
respect to the Soviet Union, China and Vietnam. In the case of Iran, the 
U.S. could take a baby step by allowing the Iranians to purchase goods, 
know-how and other services that enhance the safety of Iran's civil 
aviation. This confidence-building initiative, which is powered by science 
and engineering-enriched diplomacy, is a correct approach and promotes 
global aviation safety. 
To begin the process, there must be a willingness on the part of the U.S. or 
Iran to admit that one day there could be a meaningful relationship 
between the two. Then we must consider the circumstances that can bring 
about the relationship — not conditions precedent to talks or the like but 
rather to imagine what the relationship itself would be. In that 
relationship, all other external issues, such as terrorism, regional concerns 
and weapons of mass destruction, could be discussed. 
The U.S. needs to see Iran as part of the solution to its strategic challenges 
in the Middle East, which have little to do with Iran itself. For example, 
the Syrian quagmire, which is fueled by the Sunni governments, mostly 
dictatorial monarchies, is not of Iran's making. But, first, Washington and 
Tehran must be able to communicate directly and reciprocally on matters 
of mutual interest. Resolving their differences can come later, much later. 
As the gathering of the Non-Aligned Movement in Tehran demonstrates, 
Iran is isolated mostly in the minds of some U.S. policymakers and their 
cheerleading pundits. It is U.S. interests that suffer as a consequence. By 
not reckoning with Iran as a major player in the Middle East, the U.S. 
deprives the American private sector of a lucrative market, indirectly 
keeps Israel's security in a state of limbo and deepens the stagnation in the 
Arab-Israeli peace process. A fresh and bold approach to U.S.-Iran 
relations is not only desirable but imperative for the United States' 
national interests in the Middle East, Central Asia and Africa. 
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Najmedin Meshkati is a professor of engineering at USC and was a senior 
science and engineering advisor in the Office of Science and Technology 
Advisor to the Secretary of State (2009-2010). Guive Mirfendereski is an 
international lawyer and lecturer in legal studies at Brandeis University; 
he is the author of "A Diplomatic History of the Caspian Sea: Treaties, 
Diaries and Other Stories." 
Artick 4. 
Washington Institute 
Fresh Concerns about Health of Saudi King 
Simon Henderson 
August 27, 2012 -- This morning, King Abdullah of Saudi Arabia left the 
country for an undisclosed destination after deputizing Crown Prince 
Salman to take over his responsibilities in his absence. The reason for the 
trip has not been revealed, but there is widespread speculation that the 
eighty-eight-year-old king will head to New York City for medical 
treatment, perhaps after a brief stop in Morocco. He had operations for a 
back complaint in 2010 and 2011, and he was almost bent double while 
standing during an Islamic summit in Mecca two weeks ago. Photographs 
showed him in obvious discomfort as he left the kingdom today. 
Despite the lack of information about the trip, now is a good time to 
examine Saudi Arabia's regional role and relationship with the United 
States. The Obama administration sees King Abdullah as a crucial ally in 
several fields. In Syria, Riyadh is providing arms to the anti-Assad rebels. 
In the oil market, it has expanded production to offset the drop in Iranian 
exports caused by nuclear sanctions. Although Riyadh was reportedly 
disappointed with Washington's swift removal of support for longtime ally 
Hosni Mubarak in Egypt, the kingdom appears to share many policy 
objectives with the United States. Washington undoubtedly views Saudi 
leadership of the Arab and Muslim worlds as useful, not to mention its 
role as a major oil supplier. 
Having Crown Prince Salman stand in for the monarch is no particular 
relief. Although he serves as defense minister and is, at seventy-six, 
significantly younger than Abdullah, some have expressed concerns about 
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his own health and his ability to focus on detail. An additional worry is 
that the House of Saud has no obvious crown-prince-in-waiting behind 
him. The need for such a candidate has become more urgent in the past 
year given the deaths of no fewer than two crown princes, Sultan and 
Nayef, who were half-brothers of Abdullah and full brothers of Salman, 
yet died within eight months of each other. 
Saudi foreign policy capacity is already strained due to the ill health of 
longtime foreign minister Prince Saud al-Faisal. In his absence, the 
kingdom is being represented at this week's Non-Aligned Movement 
summit in Tehran by the king's son and deputy foreign minister Prince 
Abdulaziz bin Abdullah. It is unclear to what extent Prince Bandar bin 
Sultan's recent appointment as intelligence chief has boosted Saudi 
capabilities. 
Meanwhile, the continuing threat of al-Qaeda terrorism in the kingdom 
became apparent this weekend with the announcement of arrests targeting 
terrorist cells in Riyadh and Jeddah. The suspects were mainly from 
Yemen, but the cell leaders were said to be Saudi. Police displayed a 
considerable amount of seized explosives for the press. The discovery of 
the cells, which were said to be targeting "security men, citizens, foreign 
residents, and public facilities," can probably be credited to Prince 
Muhammad bin Nayef, the assistant interior minister for counterterrorism. 
He is reportedly very capable but has yet to be promoted to the vacant 
position of deputy interior minister, in part due to apparently intense 
competition for promotion among the sons of the current generation of 
leaders. The deputy interior position remains open after its previous 
incumbent, Prince Ahmed, was made interior minister after the death of 
Prince Nayef, who held that post while serving as crown prince. 
Saudi help for Washington in terms of oil policy is another issue 
demanding attention. Although the kingdom has increased production to 
its highest level in many years, global prices remain stubbornly high, 
apparently because of Riyadh's preference to store extra volumes rather 
than put them on the market. 
The short-term challenge is to work out who is the main point of contact: 
King Abdullah or Crown Prince Salman. In the longer term, Washington 
must ensure that it develops a good working relationship with whoever 
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might emerge as a future crown prince -- and one day, probably sooner 
than later, as a future king. 
Simon Henderson is the Baker fellow and director of the Gulf and Energy 
Policy Program at The Washington Institute, specializing in energy 
matters and the conservative Arab states of the Persian Gulf 
Artick 5. 
Asia Times Online 
China's Challenge: Balancing State and 
Market 
James A. Dorn 
August 24, 2012 -- The slowing of the global economy is forcing China as 
the world's largest exporter to confront the issue of rebalancing, which at 
heart is a problem of striking the right balance between state and market. 
State-owned banks still dominate the financial sector and are kept 
profitable by a positive spread between loan and deposit rates dictated by 
government policy. 
Financial repression has penalized savers while rewarding banks. The 
recent decision of the People's Bank of China (PBOC) to allow greater 
flexibility in interest rates is a welcome sign. 
In June, the PBOC announced that banks will be allowed to offer loans at 
interest rates up to 20% below the benchmark rate and be free to pay 
savers a rate up to 10% above the ceiling rate. With CPI inflation at about 
2%, real rates on saving deposits are now positive. Wang Tao, chief China 
economist at UBS in Hong Kong, calls the deposit rate reform 
"unprecedented" and a "milestone for interest-rate liberalization." The 
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influence of the state in controlling key prices — notably interest rates, 
the exchange rate, and prices for refined energy products, water, and 
electricity — politicizes investment decisions, artificially spurs export-led 
growth, and favors manufacturing. China's challenge is to expand the 
scope of private markets and use competitive pricing to allocate resources 
efficiently. Once prices are right, China's growth path can be rebalanced 
toward greater domestic consumption. President Hu Jintao wants to build 
a "harmonious society" by creating a more extensive growth model that 
spreads growth to less developed regions and by decreasing income 
inequality. Yet, as Nicholas R Lardy, one of the world's leading China 
scholars, notes in his new book, Sustaining China's Economic Growth 
after the Global Financial Crisis (Peterson Institute for International 
Economics), present leaders have not done much to extend liberalization 
in the post-Deng Xiaoping era. Modest reforms are not sufficient to free 
interest rates and other key prices from the hand of the state. The new 
leadership team that is soon to take over will need to take bolder steps if 
China is to end financial repression and extend prosperity. 
China's 4 trillion yuan (US$586 billion) stimulus program was launched 
in 2008 to counter the global financial crisis. Monetary easing and 
infrastructure investment, financed primarily by loans from state-owned 
banks, helped keep real gross domestic product (GDP) growing by more 
than 9% in 2009 and more than 10% in 2010, while the United States, 
Europe, and Japan languished. 
Critics of that program, such as MIT economist Huang Yasheng, argue 
that state intervention during the crisis has set back the reform effort and 
harmed the private sector. In particular, it is claimed that the bulk of bank 
loans went to state-owned enterprises. 
Lardy does not accept that verdict. Relying on official data, he concludes 
that "the stimulus program did not lead to a wholesale advance of the state 
at the expense of either private firms or individual businesses." In 
particular, "state-owned firms did not increase their share of bank 
lending." Nevertheless, he recognizes that the state continues to retain 
control over the so-called pillar industries such as banking, finance, 
telecommunications, and petroleum. And he acknowledges the "stepped-
up level of state industrial policy", although he thinks it is premature to 
predict the impact on "the balance between state and market". 
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The question about the proper balance between state and market should be 
at the center of any debate regarding China's future. Promoting capital 
freedom — that is, the right to acquire and exchange titles to capital assets 
— would allow private individuals a wider range of investment choices 
and limit the power of state officials. Lardy and others argue that one way 
to increase consumption in China is to extend the social safety net to 
include rural residents, who now have to pay most of the costs of 
education, health, and retirement. What is neglected, however, is that 
reliance on private savings reduces one's dependence on government and 
thus fosters civil society. In contrast, expanding state welfare would tilt 
the balance between state and market toward more government power and 
less individual responsibility. Private firms, many of which are foreign-
funded, have been the most important contributors to growth in 
manufacturing, primarily in tradable goods. Exporters and import-
competing industries have benefited greatly from China's opening to the 
outside world, beginning in 1978. The existence of widespread shadow 
banking serving the private sector, however, indicates that state-owned 
enterprises have much easier access to credit. 
The recent Wenzhou experiment (based on a town in eastern China noted 
for its entrepreneurial activity), which officially recognizes and sanctions 
the informal banking sector, is an explicit admission of past 
discrimination. Also, the use of investment platforms (special investment 
vehicles) to fund local governments steers funds to SOEs involved in 
development projects, thereby affecting the balance between state and 
market. There is also the problem of identifying recipients of loans from 
state-owned banks by type of ownership. No official data exists on bank 
credit by ownership type. Thus, Lardy looks at bank loans by firm size, 
assuming private firms are mostly small enterprises, and finds that their 
share of new loans made under the stimulus program exceeded credit 
going to larger enterprises. He also finds that the share of industrial output 
produced by SOEs has continued to decline — from more than 80% in 
1978 to less than 28% today. Nevertheless, Lardy is critical of the lack 
of any significant progress in reforming the state sector by liberalizing 
factor prices, especially interest rates, during the stimulus program. The 
government continues to set a ceiling on deposit rates and a floor on 
lending rates. The positive net interest spread enhances bank profitability 
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and gives state-owned banks an incentive to favor financial repression. 
Low or negative real interest rates on deposits, including saving accounts, 
provides a low-cost source of funding for state-owned banks. Households 
appear to have a target rate of saving in order to meet expected 
expenditures for housing, education, healthcare, and retirement. Thus, 
Lardy finds that when interest rates decline, households tend to save 
more. Meanwhile, relatively low lending rates encourage investment, 
including in residential housing. 
The sources of the imbalances in China's economy are due to the 
distortions in the price system and the politicization of investment 
decisions. Unless those distortions are removed by ending financial 
repression and allowing a greater scope for private markets, China will 
face increasing disharmony. 
The most fruitful reform, notes Lardy, would be to end financial 
repression by liberalizing interest rates, which would increase real rates 
on deposits, thereby decreasing saving if the income effect is strong, and 
increasing consumption. That process now appears to have begun. 
Of course, if interest rates are to be market-determined, there must be 
fully competitive private capital markets, which would require privatizing 
state-owned banks and bringing shadow banking into the daylight not just 
in Wenzhou. In addition, the renminbi (also referred to as the yuan) needs 
to be convertible for all transactions, not only for trade in goods and 
services. Investors need to be free to choose both domestic and 
international assets for their portfolios. Using credit quotas and interest 
rate controls to allocate scare capital leads to corruption and inefficiency. 
The essential condition to normalize China's balance of payments, shift to 
a more service-oriented economy, slow investment growth, and increase 
consumption is to get relative prices right — especially interest rates and 
the exchange rate. Economists at the central bank and elsewhere have 
called for faster liberalization and restructuring, but the pace of reform 
will depend on political factors in a one-party state. 
The United States and others can put pressure on China for further reform, 
but such pressure is limited and could backfire. It would be better for 
Western debtor countries to get their own fiscal houses in order than to 
attack China for an undervalued exchange rate and threaten protectionist 
measures that would reduce world trade and wealth. 
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A capital-poor country like China should not be a net exporter of capital. 
By holding trillions of dollars of low-yielding foreign debt, China 
deprives its citizens of the wealth that could be created by relaxing capital 
controls and encouraging imports by allowing market-determined 
exchange rates and freely determined interest rates. 
China's challenge is to undertake institutional reforms that protect 
individual rights, strengthen the private sector, get prices right, and thus 
tilt the balance between state and market toward more freedom and less 
coercion. 
James A. Dorn is a China specialist at the Cato Institute in Washington, 
D.C., and co-editor of China's Future: Constructive Partner or Emerging 
Threat? 
NYT
New Book in Battle Over East vs. West 
Jennifer Schuessler 
August 27, 2012 -- In 1988 Pankaj Mishra was a recent university 
graduate in the northern Indian city of Benares with big literary ambitions 
he had little idea how to fulfill. But when he heard that a local library was 
going to be auctioning back issues of The New York Review of Books as 
waste paper, he knew exactly what to do. 
"I convinced a friend of mine who was a student to pose as a paper 
recycler," Mr. Mishra recalled recently. "He put in a very high bid and 
brought a whole bunch of stuff over in a rickshaw." 
It's an anecdote that might seem plucked from the pages of a novel by 
Balzac by way of V. S. Naipaul — or, for that matter, from the essays and 
reportage that, in the years since, have made Mr. Mishra, 43, a regular 
presence in the pages of not just The New York Review, but also The New 
Yorker, The London Review of Books, The Guardian and seemingly every 
other prestigious publication in the Anglo-American literary world. 
Mr. Mishra's flair for the grace note is matched by a sometimes ferocious 
instinct for the jugular. In 1999 a denunciation of Salman Rushdie's novel 
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"The Ground Beneath Her Feet" as "an alarming new kind of anti-
literature" helped establish him as a force to be reckoned with in India's 
fractious literary scene. More recently, a blistering takedown of the 
historian Niall Ferguson in The London Review last November prompted 
extensive coverage in the British news media — and threats of a libel suit 
from Mr. Ferguson. 
Now Mr. Mishra seems poised for a fresh round of intellectual battle. His 
latest book, "From the Ruins of Empire: The Intellectuals Who Remade 
Asia," has already been greeted by some in Britain as a fuller, footnoted 
riposte to Mr. Ferguson's sunny view of Western imperialism, with the 
historian Mark Mazower, writing in The Financial Times, praising its 
"power to instruct and even to shock." 
Some on the right have dismissed the book as a polemic, but Mr. Mishra 
brushes aside the term. "If your writing collides with the conventional 
wisdom, there's going to be some kind of friction," he said in a telephone 
interview from his home in London. And when it comes to the 
mainstream media, he added, "there are still very few people presenting 
perspectives other than that of the West." 
"From the Ruins of Empire," to be published in the United States next 
Tuesday by Farrar, Straus & Giroux, is a richly detailed account of late 
19th- and early-20th-century Asian intellectuals' often bitter responses to 
what one Japanese scholar quoted in the book called "the White Disaster." 
Mr. Mishra's own story, however, suggests a young man who fell hard for 
Western literature but was sometimes too shy to consummate the affair. 
He grew up in the northern city of Jhansi, the son of a railway worker 
whose prosperous Brahmin family had been impoverished by India's 1951 
land reform. At Allahabad University Mr. Mishra studied commerce but 
nursed dreams of publishing a novel in English, "a language that no one 
around me spoke well, if at all," as he put it. He sent pages of a novel in 
progress to Arvind Krishna Mehrotra, a poet on the English faculty, who 
later sought him out at his student hostel for what Mr. Mishra recalled as 
"the first literary conversation I had ever had." 
Even then, Mr. Mehrotra said in a phone interview, Mr. Mishra struck him 
as bound for big things. "I told my wife: `I must meet this person. We will 
hear about him later,' " he said, adding, "He was someone who needed to 
know everything." 
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Which isn't to say that Mr. Mishra embraces the narrative of the young 
provincial who moves to the center of the literary world by sheer force of 
talent, at least not geographically. 
"I still hesitate to say I've moved to London," he said, noting that until his 
marriage in 2005 to Mary Mount, a book editor and the daughter of 
Ferdinand Mount, the former editor of The Times Literary Supplement, he 
was at best a "frequent visitor." The arrival of the couple's daughter, now 
4, has curtailed his travels somewhat, but Mr. Mishra still spends several 
months a year writing in a rented cottage in Mashobra, a sleepy 
Himalayan town of 2,000. 
His rise to prominence, however, does seem studded with lucky breaks 
and chance encounters that Mr. Mishra himself regards with wonder. The 
first came in 1994, when he was scraping by in Mashobra writing book 
reviews for Indian newspapers in the morning and reading and "filling 
notebooks like a crazy person" in the afternoon. 
One day he got a letter from David Davidar, the publisher of Penguin 
India, asking if he'd like to do a book for the princely advance of $125. 
"Butter Chicken in Ludhiana," a travelogue about small-town India based 
on six months of very bumpy bus travel, appeared in 1995 to good 
reviews and respectable sales. Next came a six-month stint as an editor at 
HarperCollins India in New Delhi, where Mr. Mishra quickly made a 
mark by acquiring Arundhati Roy's "God of Small Thing 
His next big break came in 1997, after he'd moved back to Mashobra to 
start writing again. One day he noticed that Barbara Epstein, an editor at 
The New York Review of Books, would be giving a lecture in Delhi, and 
he sent her a note asking to meet. 
After a friendly dinner Ms. Epstein invited him to submit a piece. His 
essay "Edmund Wilson in Benares," about discovering Wilson's books in 
the local library and finding curious echoes of his own chaotic world, 
appeared the next year, followed by a check for $4,000 — nearly 40 times 
the advance for "Butter Chicken." 
Next came a deal for a novel, "The Romantics," about a shy young Indian 
man's encounter with Western spiritual seekers, published in 2000 by 
Random House to strong reviews. Mr. Mishra seemed to be riding the 
global vogue for Indian fiction, but he turned his attention instead to 
nonfiction, filing long pieces of reportage for The New York Review, 
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along with investigative pieces about suspected human rights abuses by 
the Indian Army that did not endear him to Hindu nationalists at home. 
"Pankaj was one of the first people to write serious nonfiction from India 
at a time when everyone else was writing fiction," said Akash Kapur, the 
author of "India Becoming: A Portrait of Life in Modern India." "His 
work was a harbinger of the nonfiction boom we're seeing right now." 
Mr. Mishra, who has contributed articles and reviews to The New York 
Times, also began writing increasingly about non-Indian subjects, filing 
dispatches from Afghanistan, China and beyond, some of which appeared 
in the 2006 collection "Temptations of the West." 
But even as he has spent less time in India, he can still raise hackles there. 
In a 2010 speech to the Indian Parliament, the prominent pro-
globalization economist Jagdish N. Bhagwati denounced Mr. Mishra's 
harsh critiques of India's economic liberalization as "fiction masquerading 
as nonfiction." And last year the writer Patrick French, whose "India: A 
Portrait" had been dismissed by Mr. Mishra, published a riposte in the 
Indian magazine Outlook, charging him with self-righteously attacking 
any writer who dares to praise capitalism, even cautiously. 
As for the fracas with Mr. Ferguson, Mr. Mishra professes continued 
puzzlement. "I don't know why he took it so personally," he said. The 
review's provocative comparison between Mr. Ferguson and Theodore 
Lothrop Stoddard, the author of the 1920 best seller "The Rising Tide of 
Color Against White World Supremacy," Mr. Mishra insisted, was not 
meant to imply that Mr. Ferguson was a racist, as Mr. Ferguson charged in 
a long reply to The London Review, accusing him of "character 
assassination." 
In his new book Mr. Mishra — an ardent critic of the American-led wars 
in Afghanistan and Iraq — has disdainful words for unnamed "pundits" 
who substitute ideological certainties for the messiness of experience. And 
while he writes a regular column for Bloomberg News, he doesn't want to 
hang the label on himself. 
"It's a frightening, frightening word," he said. 
For all his success, Mr. Mishra still retains a bit of what, in "Edmund 
Wilson in Benares," he called "the furious intensity of a small-town boy 
for whom books are the sole means of communicating with, and 
understanding, the larger world." 
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