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India, boasting robust GDP growth of 7.8% in the first quarter of the 2023-24 fiscal year, positioning it as the fastest-growing nation in the Group of Twenty, is on track to achieve its ambitious US$5 trillion economy target by 2026-27.
At this critical juncture, India is undergoing a significant economic transformation, influenced by a dynamic interplay of factors that reshape both its economic terrain and demographic structure.
Several notable aspects define India’s current economic scenario. Projections from the Economic Survey 2022-23 highlight anticipated GDP growth ranging from 6.0% to 6.8% in fiscal 2023-24, with baseline growth of 6.5% in real terms.
However, inflation remains a persistent concern, prompting recent fiscal and monetary policies, including the central bank’s increase in key interest rates in 2022 to curb inflation. The government has implemented fiscal measures to address economic challenges.
India’s primary sector presents diverse opportunities to drive economic growth. The agricultural sector, a significant source of employment, not only contributes to poverty reduction but also ensures overall financial stability.
Initiatives like the National Mission for Sustainable Agriculture underscore the importance of technological advancements to make Indian agriculture future-ready, incorporating scientific warehousing practices.
Recognizing the sector’s pivotal role in India’s gross domestic product, recent government measures, including increased investment, long-term growth focus, and policy reforms, aim to enhance its economic contribution.
Global integration with food markets and productivity gains further emerge as avenues for economic development in agriculture. Addressing critical issues such as sustainable practices becomes paramount, given the large population dependent on agriculture for food security.
These opportunities align with the overarching goal of achieving economic growth and self-reliance in the agricultural sector.
While the manufacturing sector holds promise for integration into global value chains (GVCs), it grapples with the task of balancing scale with labor requirements. Navigating this challenge is crucial for India to leverage opportunities and address associated challenges, ensuring sustainable economic growth and increased employment for its growing population.
Opportunities abound for domestic manufacturing to strengthen its position within GVCs, enhancing the scale of its operations. However, the sector is poised to become more capital-intensive, leading to a subsequent reduction in demand for labor. Striking a balance between scaling up operations and managing the surplus labor force will be a critical challenge in the coming decade.
Labor-intensive sub-sectors within manufacturing can play a pivotal role in achieving a net increase in productivity during this transition. India’s export basket, including electronics, automobiles, iron and steel, signals increased manufacturing capacity and competitive refining services.
Labor-intensive export sectors such as toys, textiles, footwear and furniture have significant potential to generate domestic jobs and should be prioritized for growth and development.
The service sector, though employing a smaller percentage of the population compared with East Asian counterparts, consistently contributes to the national gross value added (GVA). The construction industry has shown remarkable promise within the industrial sector, with its workforce steadily expanding over the last two decades.
With 1.6 million employees, the banking sector sees a significant portion (49.1%) working in the public sector. Additionally, the emergence of gig workers, currently constituting 1.5% of the workforce, is expected to increase their contribution to total employment to 4.1% by 2029-30.
The synergy between government initiatives and policies and a dynamic workforce can foster a conducive environment for job creation in India.
Noteworthy government programs include the Digital India Program, launched in 2015, which seeks to transform the nation into a knowledge economy through initiatives promoting digital literacy, expanding digital infrastructure, and enhancing e-government services.
The Pradhan Mantri Kaushal Vikas Yojana (PMKVY), also initiated in 2015, concentrates on skill development by offering free, short-duration skill training programs and providing monetary incentives upon skill certification.
The Startup India Initiative, launched in 2016, supports startups by simplifying registration, offering tax exemptions, and creating a dedicated fund, generating more than 900,000 jobs.
The Production-Linked Incentive in strategic sectors, launched in 2020, aims to strengthen manufacturing in critical sectors, leading to a substantial increase in foreign direct investment and the potential creation of 6 million jobs in five years.
Last, the Pradhan Mantri Vishwakarma Yojana, launched this September, extends financial assistance and skill-development support to traditional artisans and craftsmen, preserving traditional industries and fostering entrepreneurship.
Finally, as of January this year, India became the world’s most populous nation, surpassing China’s population of 1.417 billion. This demographic shift underscores the importance of harnessing India’s extensive human resources, particularly its young population, to strengthen its economy and establish itself as a global presence.
With more than 52% of its population below the age of 30 and a substantial Internet penetration rate of 43%, India holds significant potential.
Leveraging this demographic dividend through education, skill development, and job creation can boost economic growth, presenting both opportunities and challenges that require effective resource management and provision for the growing workforce.
Nightlife outlets in Orchard Towers ceased operations earlier this year after the police stopped granting and renewing their licences.
Numerous bars and massage parlours that once dominated the building’s shopping levels have since moved out.
Replacing them are more family-friendly businesses including furnishing stores, pharmacies and eateries. Tuition centres and dance studios have also registered their interest in available spaces.
The building’s management said it hopes to attract startups and young entrepreneurs to set up shop so as to inject new blood and bring a different crowd to the vicinity.
New tenants said they are attracted to the building’s revitalising efforts and upgrading plans, as well as the affordable rent, which is about 15 per cent lower than its competitors along Orchard Road.
One antique shop said its owners spent some time surveying the premises to ensure that the area’s sordid reputation would not affect its business, before moving in three months ago.
Mr How Ta Tuang, an advisor at The Antique Room, said the prime location was a major consideration, and is confident that the building’s rebranding efforts would pay off.
“In time to come, Orchard Towers is going to turnaround, once they revamp this area. A lot of people will be keen to find out what is happening with this place,” he said.
Another shop specialising in carpets said that since moving in in May this year, it has seen business improving about 10 to 20 per cent each month.
“The number of people that we are getting (has improved) and the type of clients walking in has changed. The profile (of the building) has become a bit higher. All in, there has been improvement,” said Mr Abi Bagheri, managing director of Orientalist Woven Art.
He added that if the branding of the building could be brought up to par with nearby malls, Orchard Towers will be able to attract more tenants and footfall.
“The first look and impression of the building is so important for them (people) to walk in. A bigger and better variety (of shops) in the building will definitely change the atmosphere and the vibe here, and (entice visitors to) spend longer time here,” he said.
Despite efforts to clean up Orchard Towers’ image, some problems remain.
The management said it receives a complaint every two or three days on vice activities taking place in areas around the building, including from nearby residents who were allegedly offered sexual services.
While areas outside the building are beyond the management’s jurisdiction, it hopes that the revamp will in time discourage such people from loitering around the vicinity.
Within the building, the management receives up to five public complaints per week on issues such as touting or dubious services. It has sought legal help and is determined to straighten out the mall for good.
“We’re going to reverse that. But we need time, and we hope that the general public can understand and try to help us to bring change to our building,” said Mr Stevenson Goh, the building’s management representative.
Industry observers said Orchard Towers needs a deeper transformation and refresh more than just its building’s appearance to truly stand out along the stretch of malls.
Some even suggested a name change to help the building shed its boisterous past.
“The very mention of Orchard Towers immediately brings back the imagery of its notorious past. A total change of identity and repositioning exercise (could help),” said Mr Eugene Lim, a key executive officer at real estate agency ERA Singapore.
However, the building’s management said a large number of occupants rejected the move, citing sentimental value in the name.
Hubris begets nemesis, as the ancient Greeks opined. It is thus incredibly telling that in early October, a Jewish-American woman destroyed a statue of a griffin holding a wheel of fate, representing the Roman god Nemesis, on the basis that it was “idolatrous and contrary to the Torah.”
The very next day, Hamas launched its murderous incursion into Israel.
Israelis, having recently basked in a glow of technological prowess and presumed military dominance, have now been painfully reminded that pride cometh before the fall. But it is hard to say that this was unforeseen: Numerous high-level Israel Defense Force generals warned for years that a slaughter was coming.
Yitzhak Brick, the IDF’s former ombudsman, has long argued that the Israeli army “is not ready for war,” declaring as recently as August that “the army is disintegrating. After the volunteering is stopped it will be crushed. Our enemies are waiting for the right moment, they will not wait much longer.” A few months ago, he ominously and specifically predicted that a massacre was practically inevitable.
Brick was not the only general who recognized Israel’s faltering security apparatus, its unhealthy reliance on technology and even a certain arrogance. Yehuda Vach, commander of the IDF’s Officer Training School, noted in 2019 that reliance on a high-tech border fence provided a false sense of security while handing Hamas the initiative.
Even Herzl Halev, the IDF’s former military intelligence director and now commander in chief, warned in 2015 of Israel’s declining technological prowess.
The failure of Israel’s military and intelligence apparatus to foresee this attack is only a symptom of a deeper malaise. The uncomfortable reality is that the essential political, diplomatic, economic, demographic and cultural conditions that enabled the founding and maintenance of the Jewish state have weakened. The country’s future is in doubt, and it is clear that a new national strategy is necessary.
An analysis of the situation leads to a troubling conclusion: For Israel to survive, it must pursue broader economic integration with its neighbors, carefully positioning itself as an essential node in the evolving trade corridors of the twenty-first century.
Israel has, since its inception in 1948, depended upon a trifecta of conditions to secure its survival. These are internal unity, external disunity and Western support.
The first is the most obvious: The bedrock of Israel’s resilience has been its ability to maintain a semblance of domestic demographic cohesion coupled with a united political culture adept at adjusting to the fluid nature of geopolitical threats.
This unity has been pivotal for Israel to leverage its limited resources with maximum efficiency. However, the Israel of today reveals cracks in this foundation.
Demographic shifts, such as the growing numbers and influence of the ultra-Orthodox community, who often eschew secular education and military service (along with being wards of the state), and the increasing assertiveness of Arab-Israeli political groups, have started to strain the fabric of national consensus.
Politically, the country is in a constant state of flux, as seen in the revolving door of general elections, each failing to produce a stable and decisive government. This constant political instability, worsened by the country’s still-ongoing constitutional crisis over reforms to its Basic Law, undermines the nation’s capacity for long-term strategic planning.
A state facing mass protests and even the prospect of civil war cannot survive a dangerous neighborhood, much less fight a multi-front war with full force.
This brings us to the second condition necessary for Israel’s existence: the relative weakness and fragmentation of Israel’s neighboring adversaries. This external disunity has historically provided the country with a buffer of security. Indeed, the Jewish state’s military victories and diplomatic strategies often capitalized on inter-Arab rivalries and the lack of a cohesive threat.
Now, however, we are witnessing a regional realignment. Many Arab states, once embroiled in internal turmoil, are gradually stabilizing and becoming more assertive.
The Abraham Accords, which opened new diplomatic doors for Israel and signified the waning of Arab leaders’ animosity towards Israel, means that Israel now has a significantly reduced ability to play its neighbors against one another, particularly if many of them are united as a bloc in engaging the Jewish state.
Meanwhile, the ascent of Shia Iran, with its nuclear ambitions and proxy networks across Lebanon, Syria, and Yemen, consolidates a new kind of threat that is far more unified in its enmity towards Israel than the fragmented Sunni Arab states of yesteryear.
Third, and most crucially of all, Israel’s qualitative geopolitical and military edge has been underwritten significantly by Western, particularly American, support. The geopolitical dimension is based on diplomatic assistance either at the United Nations or in dealing with Arab states. America’s longstanding relationship with Saudi Arabia, for example, helped provide cover on more than one occasion over the years.
The military dimension is even more important: between 1951 and 2022, Israel received $225.2 billion in U.S. military aid, which is approximately 71 percent of its aid from all sources. Moreover, according to the U.S. Congressional Research Office, since 2000 around 86 percent of annual US aid to the Jewish state has funded military endeavors, funding about 16 percent of the Israel military budget.
This, along with various research & development collaborations, intelligence sharing, economic aid, and other measures has allowed Israel to field a military establishment that is disproportionate to its financial base and available natural resources.
Moreover, this doesn’t include billions in non-governmental economic and political support from Jews in both Europe and the United States, particularly the latter.
However, there are increasing signs that this critical support is no longer a given. The inward-focused populist movements, the frustration with decades of wasteful nation-building engagements and wars abroad, the declining economic conditions – all have sapped Western leaders’ political capital.
Calls for disengagement with the Middle East, including Israel, abound. The United States’ ties with Saudi Arabia have been strained, especially in light of increasing Saudi engagement with China.
Likewise, the once ironclad support for Israel is weakening in the United States and the West. Demographically, younger generations (including Jews) in the United States are less attached to Israel.
Politicization is also having an effect, with significant voices on the left growing increasingly critical of Israeli policies, particularly over the Palestinian issue. Democratic administrations’ engagement with Iran, culminating in the 2015 JCPOA, was perhaps the most apparent manifestation of this, up until October 7.
Hamas’s attack and the now-ongoing Simchat Torah War have not only brought all three of these weakened conditions to the fore but also illustrate how these conditions seem likely to only worsen.
Domestically, though the conflict has temporarily weakened the Israeli left and united the country in confronting Hamas, underlying tensions and problems persist.
The constitutional crisis, the divide between conservative and liberal Jews, the matter of Arab participation in the political system, and other issues remain. Worse, Hamas’ attack has shattered the sense of peace and stability upon which Israel’s economy depended.
Tech workers and startups, already unnerved by the country’s political and culture wars and besieged by the effects of rising interest rates, are increasingly considering relocation. Economist Adam Tooze lists some of the war’s more onerous effects on the national economy:
The tech lobby in Israel estimates that a tenth of its workforce has been mobilized. Construction is paralyzed by the quarantining of the Palestinian workforce in the West Bank. Consumption of services has collapsed as people stay away from restaurants and public gatherings are limited. Credit card records suggest that private consumption in Israel fell by nearly a third in the days after the war broke out. Spending on leisure and entertainment crashed by 70%. Tourism, a mainstay of the Israeli economy, has come to an abrupt halt. Flights are canceled and shipping cargo diverted. Offshore the Israeli government ordered Chevron to halt production at the Tamar natural gas field, costing Israel $200 million a month in lost revenue.
These economic effects are producing political repercussions that may only further divide the country politically. In other words, Tooze says, the conflict over Gaza’s future is
entangled with inner-Israeli anxieties about the division of Jewish society between the Ultra-orthodox and non-ultra-orthodox Jews…. The war provides the growth-orientated Israeli mainstream with the chance to argue that the funding for ultra-Orthodox educational institutions that imposes no obligation to teach the core curriculum, should be slashed. The ultra-orthodox are of course dramatically underrepresented not only in the workforce but also in the ranks of the IDF. The war thus sharpens the resentment at funding their carve outs.
The world ought to expect further acrimony in Israeli politics over demographic changes, cultural attitudes, and budget allocations, all of which will hamper domestic unity in the face of mounting threats.
Speaking of mounting threats, regionally, the war only highlights Israel’s relative isolation. Shia Iran manifestly has built something akin to an empire in the Middle East via proxy networks and client states — including significant militias and forces in Lebanon, Syria, Iraq, and Yemen. The Houthis in Yemen are particularly active; as of the time of writing, they have launched ballistic missiles at Israel, fired upon U.S. naval vessels, and seized and continue to hold an Israeli-owned cargo ship.
Sunni Arab countries, meanwhile, are more divided in their attitude to the Jewish state. Qatar and Kuwait, for their part, are openly supportive of Hamas and Palestine. Saudi Arabia, the UAE, and Bahrain, meanwhile, would love nothing more than for Hamas — essentially the Palestinian branch of the Muslim Brotherhood — to cease to exist, opening the door for improved ties with Israel and access to valuable Israeli technology and expertise.
Yet support for the Palestinian cause is incredibly strong with these countries’ publics, and thus national governments are obligated to recall ambassadors, issue loud condemnations, and threaten this and that while waiting to see how matters play out in the immediate term. Jordan, Turkey, Algeria, and others have also adopted a similar stance for these reasons.
Finally, Egypt and Jordan are in a challenging position: not only is there significant domestic support for the Palestinian cause, but the two nations’ leaders perceive the current conflict and rhetoric emanating from Jerusalem as setting the stage for the expulsion of Palestinians from Gaza and the West Bank into their territories.
Overall though, Israel faces a much more united neighborhood than in recent years. The much-vaunted Abraham Accords, which laid the foundation for regional integration, are — at the very least — on hold. A recent Chinese-brokered detente between Iran and Saudi Arabia, though more a product of cold calculation rather than an enthusiastic desire for peace and friendship, is nonetheless significant and dampens Israeli options for stoking regional divisions.
At the end of the day, Israel is surrounded by tens, if not hundreds, of millions of Arab Muslims who believe the Jewish state to be a colonizer entity that lacks any legitimate roots in the region. These populations are not going anywhere, and this deeply held, widespread view cannot be addressed by military or otherwise forceful means.
Most visible and perhaps shocking to both Israeli and Western Jews has been the question of support from the West. Polling demonstrates that while support for Israel remains relatively high among older generations, younger generations are far more antipathetic to the Jewish state (if not openly against it). This significant gap in generational attitudes is having enormous consequences. As one Politico headline put it, the political left is tearing itself apart over the matter of Israel.
In the United States in particular, the picture is grim: The Biden administration is facing significant dissent within the US foreign policy apparatus. Rumors abound of tensions within nonprofit groups and think tanks, with younger program assistants, associates, and managers rebelling against organizational leadership.
Things aren’t much better within government institutions, from the State Department to USAID. Even within the White House extraordinary sessions are being held to address the separate concerns of Jewish and Muslim staffers. Of particular concern to Israel’s supporters is the realization that many of the pro-Palestinian staffers will eventually replace their superiors as the latter retire in the coming years, opening the door for a significant reorientation of US foreign policy towards Israel.
Meanwhile, quite literally outside of the building, massive pro-Palestinian rallies are taking place in Washington DC and other American cities, with some protestors yelling “Allahu Ackbar” and calling President Joe Biden “Genocide Joe.”
Biden’s support among Arab Americans and Muslims has cratered, and the country’s National Muslim Democratic Council issued an ultimatum.
More broadly, polling shows significant drops, especially amongst Democrats, who “believe Israel has gone too far in its military action in Gaza, and among voters ages 18 to 34, with a whopping 70% of them disapproving of Biden’s handling of the war. This is visible on college campuses and in the media, particularly a tidal wave of unexpected and often vociferous criticism that has shocked Jews, especially when most of it is coming from liberal friends and colleagues.
Across the Atlantic, Jews in Europe are facing “extraordinary levels” of antisemitism, with targeted attacks surging.
In the Middle East itself, American military bases and outposts have been attacked throughout the region. US diplomats, including Secretary of State Antony Blinken, are receiving cold receptions. The war is doing “profound reputational damage” to America’s reputation in the region, with a leaked diplomatic cable warning that the White House’s support for Israel’s war “is losing us Arab publics for a generation.”
As one unnamed senior official told the Washington Post, “We’re taking on a lot of water on Israel’s behalf.” The war, in short, is having a profoundly negative effect on American diplomatic efforts at a time when policymakers are worried about Iran, Russia, and China making gains in the Middle East. Strategically and diplomatically speaking, this is a disaster for US national interests.
On top of a shift in generational attitudes and damage to diplomatic efforts, with a looming recession, rising inflation, record levels of debt, populist politics oriented toward pulling back from global affairs, multiple other geopolitical challenges (particularly Russia and China), and a visibly weak industrial base, it is clear that Western support for Israel cannot be counted on in perpetuity.
Given this gradually worsening situation, the challenge for Israel lies in its ability to forge a new foundational basis that does not depend on the aforementioned and increasingly tenuous three conditions. It must seek innovative paths to national cohesion, regional integration and international alliance-building in an era marked by rapid and unpredictable change.
To a certain extent, Israeli policymakers and strategic planners have long recognized their reliance on Western support and their broader national predicament. If anything, much of Israel’s economic transformation in the past twenty-odd years has been a concerted effort to pivot away from such dependence and towards broader global economic integration.
Israeli economist Arie Krampf has cogently argued that, following the collapse of the peace process in the early 2000s and the resulting Second Intifada, Israel shifted from an economic strategy of consumption-led growth to export-led growth. He writes:
In April 2003, a month after his appointment as minister of finance, Netanyahu announced the Economic Recovery Plan, which included a budget cut, a lowering of government deficits, and severe reductions in social spending and allowances. He also reduced government subsidies to the private sector. For Netanyahu, private sector growth was a means to improve Israel’s economic power in a globalized world…. Privatization and liberalization were processes designed to improve Israel’s capacity to withstand external political pressure and pursue an independent foreign policy…. By late 2003, Israel’s current account had become positive and was growing, indicating that foreign currency was pouring into the economy. This change, which went unnoticed by the Israeli public, was nothing less than a transformative moment, a revolution in Israel’s economic history…. Ben-Gurion’s doctrine assumed dependency on foreign capital. This dependency … was a key element in the national vision and identity: the dependence of the state-building project on foreign assistance. By becoming a “surplus country” … Israel had become less vulnerable than it had been before.
In short, as Adam Tooze summarizes,
Netanyahu’s strategy was to make the modern segment of Israel’s economy so competitive that it would enable not just independence from American (or European) pressure, but turn Israel into a magnet for regional economic interests, above all of the Gulf…. Developing better relations with the growing Arab economies of the region would allow an ‘economic peace’ (one of Netanyahu’s favorite slogans) to be built over the heads of the Palestinians whose resentment and frustration would be contained through a strategy of divide and rule.
Up until the October 7 attacks, this approach appeared to be working. The Abraham Accords established the diplomatic foundations upon which economic integration with Arab states, particularly the Gulf States, could be built.
Israel Katz, Israel’s minister for energy, openly advocated for the country’s transformation into a regional transport hub through the construction of railways, ultimately creating “an Asian-European cargo link as an alternative to the Suez Canal.”
Distant Asian states, particularly China and India, have gotten into the action as well; Beijing has invested around $12.9 billion in Israeli infrastructure projects by 2020, including the Carmel tunnels and the Northern Haifa Bayport Terminal. Many of these projects have laid the foundations for a new logistical connection between the Red and Mediterranean Seas.
More broadly, improving Israeli diplomatic, defense and trade ties with China and India — essential to a long-term strategy of regional trade, along with diversifying away from economic dependency on the West — have yielded substantial results. To quote a recent report:
China’s bilateral trade with Israel grew from US$50 million in 1992 to US$15 billion in 2020, making it Israel’s largest trading partner in Asia and its third largest trading partner in the world after the European Union and the United States. From 2011 to 2021, the share of Israeli exports to Asia going to China rose from 25% to 42%. India’s trade with Israel too has grown, rising from US$200 million in annual trade in 1992 to US$7 billion in 2022, and these figures do not include India’s important but more secretive defense purchases from Israel.
Though the United States has expressed concern over improving relations with China, much of this has been offset by deepening ties with India. Moreover, the G20’s September proposal for an “India – Middle East – Europe Economic Corridor” (IMEC) — effectively a Western-backed effort to support a Belt and Road Initiative alternative — depends greatly upon Israel’s participation. If anything, IMEC could be interpreted as the Netanyahu administration’s crowning economic achievement, securing Israel’s place in the developing multipolar economic order.
Moreover, as a consequence of this effort, Palestinians would not only be diplomatically sidelined but turned into relatively accessible but geopolitically impotent low-cost labor that could support the Israeli economy. It could very well be argued that one of the objectives of Hamas’s assault was to derail Israel’s diplomatic outreach with Saudi Arabia and other Gulf states, thereby ultimately throwing the aforementioned geoeconomic strategy off course. This appears to have succeeded: normalization of ties is on indefinite hold, if not worse.
Israel thus is in a fiendishly complex situation: it cannot advance toward regional integration with its neighbors until the Palestinian issue — or at very very least, the current crisis over Gaza — has been resolved.
There are two ways this could occur.
The first is as simple as it is grim: completing the regional population transfer that was begun in 1948 by expelling Palestinians from Gaza, ultimately resulting in the de facto destruction of Palestine with the eventual annexing of Gaza and, in due time, the West Bank.
The logic here is as simple as it is merciless: Israelis regard the presence of an independent Palestinian entity, potentially liable to turn towards extremism like Hamas, as an existential threat to Israel.
Akin to how Russia invaded Ukraine in full force in 2022 rather than accept a Ukraine headed towards NATO membership, Israeli policymakers might decide that it is better to risk broad international condemnation, sanctions, and perhaps even setting off a regional war — with not just Iran and its proxies, but also potentially given that neighboring Egypt and Jordan — rather than let the situation continue.
Israeli leaders may be calculating that now is perhaps the best and only chance they will have. Future Western assistance will likely not be as strong as it is now. The United States is already redirecting supplies originally meant for Ukraine to Israel, cutting back on the former’s budget in Congress.
Such support cannot be assumed to continue given the myriad of other challenges that Washington faces on the horizon, from economic problems to strategic competition with China. As if to prove this point, on November 28 the Pentagon warned that, due to political and budgetary reasons in Washington, it lacked the funding for a Middle Eastern military build-up.
Meanwhile, in the region itself, support for the Palestinian cause was already relatively weak among the region’s leaders, with no one stepping up to pursue an alternative solution or serious support aside from calls for a return to the two-state peace process. The fact that the Abraham Accords were signed was, in itself, evidence of such.
Moreover, none of the region’s Arab countries particularly would want a war, and many simply cannot afford it. All four of Israel’s primary neighbors, for instance, face severe economic crises and have fragile domestic politics. Egypt and Jordan depend greatly on US military and economic support, which grants Washington significant leverage (especially for Egypt in light of the scandal involving US Senator Bob Menendez). Even regional archnemesis Iran has little appetite for a full war.
And furthermore, Israeli strategists may wager that a fait accompli may not necessarily have permanent repercussions. Diplomatic normalization with the Gulf states could be set back by half a decade or so, for example, but there are still too many political, military, and economic incentives for a permanent cessation of ties. Untapped gas reserves off of Israel’s coast are too tempting a bounty for European states and firms to ignore, especially in the context of rising energy prices, deindustrialization, and expected long-lasting energy sanctions imposed on Russia. The list goes on.
In short, many international leaders may make the cold calculation that the end of Palestinian statehood is a tragedy but ultimately an inevitable one given the changing geopolitical and economic environment. Better to loudly condemn Israel, let it catch diplomatic hell for its actions, but ultimately do little and return to business once the heat wears off.
The second option is the one that has always been on the table: a return to pursuing a two-state solution, likely along the 1967 border lines.
The resulting Palestinian state would be controlled by the Palestinian Authority, replacing Hamas in Gaza, and supported by the Arab League. Security for the new state, along with assurances, could be provided in the medium term by peacekeepers from Arab League nations, led by Jordan and Egypt.
There are, unfortunately, enormous hurdles to this approach that make it impossible in the immediate term and fiendishly difficult in the short, medium, and long term: the continued existence of Hamas, which will never recognize Israel; the transfer of Gaza back to the control of the Palestinian Authority; the Palestinian Authority itself, as it is even less popular than Hamas among Palestinians and widely regarded as an ineffective political authority (ruled by a leader whose time has come and gone); the enormous economic costs associated creating a Palestinian state and rebuilding Gaza, a part of which Israel would presumably be obligated to cover; the presence of Israeli settlements within the West Bank; and more.
But far and away the largest issue is that, following the October 7 attacks, a large number of Israelis (and some Western Jews) will refuse to ever countenance the existence of a Palestinian state. Given Israeli operations in Gaza right now, it is quite likely that many Palestinians feel the same finality about Israel. Frankly speaking, there is a reason why polling for a two-state solution was particularly poor amongst both Israelis and Palestinians even before the recent conflict.
In an early November interview with ABC News, Prime Minister Netanyahu declared that Israeli forces would handle security in the Gaza Strip for an “indefinite” period. His foreign minister, Eli Cohen, further indicated that Israel “has no desire to impose a civilian administration on Gaza after the war is over” and will seek to “turn over responsibility for governing the Palestinian enclave to an international coalition, including the US, the European Union and Muslim majority countries, or to local political leaders in Gaza.”
In effect, this may be the final chance for Palestinians to pursue a two-state solution. Hamas has always been the primary uncontrollable factor in negotiations. To quote a former US envoy to the Middle East, “Talk of a Marshall Plan for Gaza has never been credible because international donors and investors know that whatever is built is likely to be destroyed the next time Hamas decides to trigger a new conflict with the Israelis.”
Though the group’s removal won’t eliminate popular resistance attitudes toward Israel, it will create a brief window in which negotiations could be pursued.
Moreover, the Netanyahu government (or at least many of its cabinet ministers) may soon leave the stage. Government mismanagement over how the October 7 attacks were handled has sparked significant political outrage, meaning that Netanyahu — assuming he survives politically — will need a new coalition government that includes more progressive, left-wing parties and partners. These tend to be far more amendable to a two-state solution, negotiating with the Palestinian Authority, and restraining (if not pulling back) Israeli settlers in the West Bank.
Ultimately, it still may be possible to fulfill the hope of the late Palestinian leader Yasser Arafat: to turn the Gaza Strip into the Singapore of the Middle East and the crown jewel of the Palestinian state, a mirror version of Israel’s own Tel Aviv. The fulfillment of this vision could finally put the Palestinian issue to bed – at least for a sufficiently long period of time for Israel to integrate into the region’s economy and security architecture, along with addressing its demographic challenges.
Should this final effort at peace fail, however, then it is likely that Jerusalem will opt to finish what was begun in 1948. We should hope it need not come to that.
Carlos Roa is a Visiting Fellow at the Danube Institute. He is the former executive editor of The National Interest and remains a contributing editor of that publication. Follow him on Twitter (X) @CarlosRoa92.
On November 20, US Special Presidential Envoy for Climate John Kerry announced that he would present a new global strategy for fusion energy at the now-ongoing COP28 conference in Dubai.
In a high-profile visit to the headquarters of Commonwealth Fusion, one of the world’s leading private fusion companies, Kerry declared:
“Fusion energy is no longer just a science experiment. Benefitting from decades of investment from the [US] Department of Energy’s world-leading Fusion Energy Sciences programs, it is now also an emerging climate solution. I will have much more to say on the United States’ vision for international partnerships for an inclusive fusion energy future at COP28, during an event on December 5.”
Kerry also spoke of “The first ever modern strategy — fusion strategy — for the United States.”
Whatever the details of Kerry’s address, we have good reason to expect that it will be substantive and not simply a political gesture. It could literally change the world.
Kerry will be the first top-level US government figure to thrust fusion into the center of the global stage in this way. As former secretary of state under the Obama administration, Kerry is quite aware that his fusion initiative is de facto a foreign policy move. To us, it constitutes one of the few unambiguously positive such moves in a long time.
In narrow terms, Kerry’s forthcoming speech will signal the aim of the US to restore its leadership position in international fusion research – a position which has eroded progressively since the late 1980s.
At the same time, it will reflect the fact that realizing fusion as an economically viable energy source will require enormous resources, more effective cooperation between states and a new form of public-private partnership involving diverse technological approaches.
We expect Kerry’s proposal will extend the new “philosophy” of fusion research and development which has emerged in the US as well as the UK in the last decade, to the entire global fusion effort.
The implications go even beyond that. Whether he intends it directly or not, Kerry’s forthcoming announcement promises to redefine the entire issue of reducing human CO2 emissions, which is the central focus of COP28. In a sense, it amounts to turning the global warming campaign upside down.
In our view, fusion is far more than an unlimited energy source; it embodies the upward vector of human civilization, which has increasingly been lost over the last 50 years.
The specter of a global warming “doomsday” has fed dangerously into the environmentalist ideology, which sees human beings first and foremost as destroyers of the planet. Although many environmental problems have to be solved, human civilization cannot survive without upper and outward development. That is what fusion is all about.
Without nuclear energy – fission today, fusion tomorrow – the global anti-CO2 campaign translates into brutal economic austerity, especially for developing nations.
In the meantime, amid deep economic crises in many of these nations, we witness the farcical spectacle of the COP28 conference, with 80 000 representatives traveling from all over the world on a thousand CO2-spouting planes to one of the world’s largest oil producers in order discuss how to reduce CO2 emissions!
If Kerry succeeds in making the realization of fusion power a top global priority as an answer to the “climate crisis”, that alone could make this latest United Nations extravaganza worthwhile.
What is the background of Kerry’s forthcoming move? Where is this coming from? I and my co-author have a pretty good idea about that.
I have followed developments in fusion since 1977, promoted fusion research through countless articles, presentations and at one point even played a role in off-the-record “fusion diplomacy” between the US and the USSR.
My co-author is an active participant in the growing private fusion “ecosystem” in the US and has worked with Scott Hsu, now senior advisor to the US Under Secretary of Energy for Science and Innovation and Lead Fusion Coordinator for the Department of Energy.
Hsu is a central figure in the ongoing transformation of US fusion strategy and no doubt one of the main sources of the concepts Kerry will present in his forthcoming speech.
As readers of my Asia Times articles know, efforts to realize fusion as an energy source are moving forward at an accelerating pace, propelled by technological breakthroughs, powerful national commitments of nations such as the UK, Japan and China and not least of all by the skyrocketing growth of private investment into fusion companies.
Although the US has been the leading breeding ground for private fusion companies, there has been no decisive national commitment to fusion.
The US used to be the main fusion “superpower”, with the largest and most comprehensive fusion effort in the world. Not surprisingly, US fusion capability was centered on national labs with close military connections.
But starting in the 1980s the US fusion sector suffered from massive budget cuts, from which it has still not fully recovered. I experienced this firsthand. Participation in the International Thermonuclear Experimental Reactor (ITER) project served as a pretext for failure to pursue a serious national fusion effort.
Kerry has long been a strong supporter of fusion, going back at least to his term as senator of Massachusetts. In 2012-2013, for example, then-Senator Kerry mounted a major effort to prevent the shutdown of the Alcator-C-Mod reactor at MIT – one of the most promising innovative fusion projects in the US.
I remember meeting the mastermind of the Alcator program, the brilliant Italian physicist Bruno Coppi. Although Kerry’s effort succeeded in prolonging the life of the Alcator-C-Mod, the reactor was prematurely shut down in 2016.
Just two years later, however, the results and know-how of the Alcator provided the basis for the start-up company Commonwealth Fusion Systems, now one of the largest and most successful private fusion companies aiming to commercialize fusion.
It is no accident that Kerry chose his November 30 visit to Commonwealth Systems as the occasion to announce his forthcoming fusion initiative at COP28.
The process of “spinning off” a 100% government-funded research program into a private fusion company – with continued government support – has no doubt played an important role in forming Kerry’s vision for the future of fusion.
There is more to this tale, however. The last two decades have witnessed a momentous transformation in the philosophy and organization of fusion-related research and development in the United States.
In former times, fusion research was practically a monopoly of giant US national laboratories, specifically the Lawrence Livermore National Laboratories, Los Alamos National Laboratory, Oak Ridge National Laboratory, Sandia National Laboratory and the Naval Research Laboratory. Not by accident, all of these have a strong military background.
The US national labs’ contribution to the worldwide fusion effort cannot be overestimated. Without that and the work of a few analogous institutions in other countries, fusion would be nowhere today.
At the same time, problems inherent to such giant entities such as the tendency to fixate on a few large projects at the expense of smaller ones and conflicts of interests in the struggle for government funding have had a crippling effect. That applies especially to the post-1986 period when fusion research in the US was chronically underfunded.
Meanwhile, throughout the 2010s, the face of fusion research in the US has been radically transformed from insular research activities pursued by decades-old entrenched lab groups toward the cultivation of a topically and organizationally diverse research “ecosystem.”
The change reflects a new philosophy of fusion research, one that acknowledges that, in the absence of a single frontrunner among reactor concepts, a diversity of physical and technological approaches as well as a diversity of organizational forms is prudent.
National labs, universities and startups should not be seen as living in their own separate spheres, but can and should be brought together in complementary ways.
The key driver of this transformation has been the innovation agency of the US Department of Energy, ARPA-E, created in 2009. While ARPA-E’s budget for fusion is extremely limited, the agency’s influence goes far beyond just injecting funds into projects.
In fact, ARPA-E has played a critical role in coordinating across different fusion actors, providing a stage to present ideas and have them subjected to scrutiny and peer validation.
My co-author has participated in such discussions and witnessed how the role of ARPA-E has had a signaling effect and often led to investor commitments that far exceeded ARPA-E’s public funding amounts.
The creation and rise of ARPA-E coincided with another key development: the rise of the fusion startup and the growth of a private fusion industry – a process fueled by massive investor interest.
During the 2010s, the saturation of internet markets along with growing public concerns about climate change turned investor attention to new markets and fusion in many ways fit the bill.
A flagship among fusion startups is Commonwealth Fusion Systems (CFS), the Massachusetts-based startup that was spun out of MIT’s Plasma Science and Fusion Center in 2017.
CFS’s December 2021 announcement that it had raised US$1.8 billion in capital from private investors served as a signal for a wave of investment into new-founded fusion companies.
The Fusion Industry Association (FIA) was founded in 2018 as a lobby for the burgeoning private fusion sector. (Readers can learn more from the interview I conducted in December 2021 with the FIA’s CEO Andrew Holland.)
The latest 2023 survey of the Fusion Industry Association reported that private fusion companies had raised a total of $5.9 billion in private funds.
The contrast between fusion startups and traditional fusion players has created a clearly defined task for ARPA-E. Some degree of “sensemaking” was required to reconcile the two separate universes of fusion approaches and claims.
The emergence of the private fusion industry in parallel to the old incumbents created paradoxical situations. While there were groups that claimed net energy production could not be achieved until at least the 2040s, several private companies claimed to have already achieved it.
Companies like Helion, for instance, signed a power purchase agreement this year with Microsoft, claiming it would deliver fusion energy as early as 2025.
All of this screamed for some sort of independent referee who maintains an overview of the full range of activities in the fusion space and who keeps actors honest through rigorous and independent assessment of their claims. Such a process can then also help inform the distribution of resources with the goal of yielding the greatest societal returns.
That kind of referee emerged with the person of Dr Scott Hsu, who is today a high-level government employee with the Department of Energy but who is also a highly decorated physicist with a research history at Los Alamos National Laboratories.
Hsu has transitioned out of his research job to become a program director at ARPA-E, which served as a stepping stone to his current role in the DOE executive suite.
Hsu is known and respected across the US fusion community. He’s widely seen as an embodiment of ARPA-E’s core principles: deep technical as well as managerial and strategic acumen; understanding of policy and economic issues; curiosity and openness towards new approaches alongside rigor in their assessment and evaluation.
The significance of Hsu’s transition from affiliate of a research lab to a government position cannot be overemphasized. While many countries occupy their expert commissions with acting scientists laden with conflict of interests, the US provides a track for high-level government employees who can put deep technical expertise to bear in the interest of the general public.
In Hsu’s role today as lead fusion coordinator he acts as a central node connecting political decision-makers to those who devise and conduct fusion research at the lab level.
Educating and pulling along political decision-makers has become more and more critical. This relates to the size of the annual funding pool for fusion research as well as regulatory concerns.
A key worry was that a future fusion industry may face a similar fate as the fission industry, which has been burdened by inflated regulatory requirements.
To the great relief of many in the industry, the Nuclear Regulatory Commission decided in April this year to regulate future fusion reactors not like fission reactors but like particle accelerator facilities, greatly simplifying regulatory requirements,
To summarize, much momentum has been building in the US fusion space in recent years Many drivers have come together fortuitously – from investor interest to the creation of ARPA-E and the commitment to create a coordinated ecosystem. The resulting dynamics have turned basic research efforts into a mission-driven ecosystem.
The extension of this process on the international scale that we are seeing now represents a logical next step. Other countries have taken notice and are likewise aiming to support and align their fusion-related actors.
While the intention is clear, often such countries are overwhelmed on how to engage with difficult technical and strategic questions. A global strategy may provide guidance to them to coordinate and exchange information on an international level and to create an even vaster and more diverse ecosystem that identifies and exploits synergies and complementarities among different actors.
Whoever wants to fully appreciate the force behind Kerry’s fusion initiative should take a glance at some of the highlights of the process that went into it. The following chronology contains only some highlights but should be enough to get a sense of how the process builds up more and more.
2005: In a report for Congress, entitled “Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future” the US National Academies called for decisive action, warning policymakers that US advantages in science and technology – which made the country a world leader for decades – had already begun to erode. The report recommended that Congress establish the Advanced Research Projects Agency (ARPA) within the US Department of Energy (DOE) modeled after the successful Defense Advanced Research Projects Agency (DARPA), the agency credited with key innovations such as GPS, the stealth fighter and computer networking.
2007: Congress passes “The America COMPETES Act” which officially authorized ARPA-E’s creation. In 2009, ARPA-E received its first appropriation of $400 million, which funded ARPA-E’s first projects.
2010s: the US switched to an ecosystem approach. Commercial nuclear fusion start-ups that first appeared in the 2000s – Commonwealth Fusion, TAE Technologies, General Fusion, Tokamak Energy and others attracted more and more private investment and development of major capabilities in fusion technology.
March 19, 2012: US Senator John Kerry visits MIT’s Plasma Science and Fusion Center (PSFC) to tour the Alcator C-Mod tokamak and see first-hand how the experiment operated. The C-Mod fusion project was at risk of being terminated due to proposed cuts in the domestic fusion program in the fiscal year 2013 presidential budget. Kerry was already working to restore the project’s funding, writing a letter to the Senate Appropriations Committee strongly arguing against cuts to domestic fusion research.
2014: The American Security Project, a bipartisan think tank founded by John Kerry and Chuck Hagel in 2006, publishes a White Paper entitled “Fusion Power – a 10-year Plan to Energy Security”, declaring: “It is a national security imperative that America makes a dedicated commitment to fusion energy”, and calling for an investment of $30 billion over 10 years, “with the goal of producing demonstration levels of electric power within a decade.”
2018: Commonwealth Fusion Systems is founded as a spin-off from the MIT Plasma Science and Fusion Center with initial funding of $50 million in 2018 from the Italian multinational Eni. Not surprisingly, the CEO of Eni joined Kerry on his latest visit to CFS.
2018: Founding of the Fusion Industry Association (FIA) as a Washington-based lobby for private fusion companies.
2020: Creation of the Milestone-Based Development Program for Fusion of the US Department of Energy via the 2020 Energy Bill and the CHIPS and Science Act.
2021: US Representative Don Beyer founds the bipartisan Congressional Fusion Caucus, which has since grown to 50 members.
March 30, 2021: The first annual policy conference of the Fusion Industry Association in Washington, DC is held.
October 1, 2021: Publication of the UK government’s official Fusion strategy, a comprehensive program with emphasis on building up a domestic fusion industry capable of building fusion power plants.
March 17, 2022: White House summit meeting devoted to “Developing a Bold Decadal Vision for Commercial Fusion Energy.” The US Department of Energy launches an agency-wide initiative to accelerate the viability of commercial fusion energy in coordination with the private sector. Hsu, head of the fusion program at ARPA-E, is named new DOE Lead Fusion Energy Coordinator, joining the Office of the Under Secretary for Science and Innovation.
September 22, 2022: the US Department of Energy (DOE) launches the Milestone-Based Fusion Development Program to support the development and commercialization of a fusion pilot plant
March 9, 2023: President Joe Biden’s proposed Budget for the Fiscal Year 2024 contains a historic $1 billion request for increased government funding for fusion.
April 14, 2023: The Nuclear Regulatory Commission voted to regulate fusion under a different framework than fission, making it possible for fusion to avoid the licensing morass that has long plagued conventional nuclear reactors.
April 14, 2023: Japan’s Cabinet announces a full-scale national Fusion Energy Innovation Strategy.
August 18, 2023: Bipartisan consensus in the US Congress on the Nuclear Regulatory Commission’s decision to regulate fusion under the byproduct materials framework and amend the Atomic Energy Act of 1954 to include fusion.
November 8, 2023: US-UK Joint Statement between the UK Department for Energy Security and Net and the US Department of Energy, announces a strategic partnership to accelerate fusion energy demonstration and commercialization.
(I was not surprised to see this agreement. During my visit to UK fusion facilities in August 2023, I was struck by the particularly close connections between the national fusion laboratories of the two nations, which no doubt reflects the long-standing special relationship between the two countries in defense-related areas.)
November 20, 2023: US Special Presidential Envoy for Climate Kerry visited Commonwealth Fusion Systems (CFS) headquarters in Devens, Massachusetts, near Boston, along with CFS CEO Bob Mumgaard and Eni CEO Claudio Descalzi.
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Xi Jinping’s first public visit to Shanghai in three years signals a new effort to boost China’s private sector. Yet even more important, Xi’s team in Beijing chose this week’s occasion to unveil a series of reforms that are a bigger deal than might meet the eye.
The stocks of Shanghai-centered tech companies like Semiconductor Manufacturing International Corp, Hua Hong Semiconductor Ltd. and Will Semiconductor Co. rallied on the news Monday.
The visit, coupled with new policies to level playing fields and increase private companies’ access to capital, is seen by some as Xi following through on vows made in California earlier this month to make life easier for China’s beleaguered entrepreneurs.
To date, Xi’s attempts to restore investor confidence amid struggles to move past Covid-19 fallout have fallen short. More than US$1 trillion of foreign capital fled mainland share markets since Xi clamped down on Big Tech in late 2020. More recent fears about deflation haven’t helped.
In recent weeks, Xi restarted China’s stimulus machine amid calls for greater government action amid a property crisis and stalling economic recovery. In particular, the People’s Bank of China, China’s central bank, has channeled more liquidity to troubled property developers.
Analyst Zerlina Zeng at CreditSights speaks for many when she says “we expect China’s softening external stance and warming relationship with the US and other developed markets to set a more conducive geopolitical backdrop for China credit.”
But the reforms being outlined this week could be a game-changer. The PBOC and seven other government bodies have unveiled 25 steps to increase the role of the private sector.
They will apply to a broad range of private sector industries, including the ailing property market. Gavekal Research analyst Xiaoxi Zhang isn’t exaggerating when she warns that “debt strains from property developers and local government financing vehicles are spreading across China’s economy.”
There are concerns, too, that Beijing’s criminal probe into the wealth management unit of Zhongzhi Enterprise Group, one of China’s largest “shadow banks,” could soon spook Asian markets the same way China Evergrande Group’s default did in 2021.
Broader initiatives include setting clear and transparent targets for widening access to financial services for private enterprises.
With an emphasis on regular performance assessments and financial support, the plan is to increase the proportion of loans to private enterprises while improving organizational structures to increase efficiency.
Areas of particular focus include: supporting technological innovation amongst small and medium-sized enterprises, entrepreneurs in the green and low-carbon space and innovators keen to disrupt China from the ground up.
This will include a greater tolerance for risk-taking and the non-performing loans that startups can rack up. Beijing seeks to recalibrate lending and borrowing practices to increase private sector development while limiting risks.
This also includes increased support for first-time loans and unsecured loans. Financial institutions will be encouraged to develop a wider range of credit-financing products suitable for private enterprises.
Most important of all, Xi’s reform team is eying a great leap forward for China’s corporate bond market. This has long been a stumbling block for smaller, less established corporate credits. In particular, China plans to expand the range of bond financing options — and the scale — to private enterprises.
Under a series of “innovation bills” under the National Association of Financial Market Institutional Investors and China Securities Regulatory Commission, new structures will be welcomed for stock-bond hybrid products, green bonds, carbon neutrality bonds, transition bonds, infrastructure bonds and other financing tools.
Support programs will seek to incentivize private enterprises to issue asset-backed securities to restructure and revitalize existing assets. Registration mechanisms will be streamlined.
And Beijing will prod state-owned entities like China Bond Insurance Co and China Securities Finance Corporation, and even non-government institutions, to adhere to global standards and raise their credit market games.
That means building world-class systems for credit guarantees, credit risk mitigation tools, credit analysis and ratings and expanding China’s universe of bond financing support tools for private enterprises.
At long last, the Communist Party finally seems serious about facilitating increased bond investment in private enterprises. In years past, Beijing worried about a “crowding out” effect if private issuers lured capital from the national and local governments.
Now, Beijing will encourage banks, insurance companies, pension funds, public funds, and other institutional investors to allocate capital to private enterprises. Regulators will be charged with internationalizing trading mechanisms, market pricing, compliance and disclosure procedures.
Xi’s team also is stepping up efforts to develop a high-yield bond market. Few steps might be more impactful for private sector development – especially tech-oriented SMEs – than creating a dedicated high-yield debt platform empowered by world-class trading systems. It would supersize capital-raising options and pull in new generations of overseas investors.
In June, local media reported that the PBOC and CSRC sought advice from market participants on setting up a high-yield marketplace. As of then, only four high-yield debt issues with coupons exceeding 8% had priced in 2023.
Authorities sought input from fixed-income players, investment bankers, legal experts, rating companies and accountants. This would channel greater financing to tech enterprises, startups and riskier borrowers.
The key, though, is implementation. The disconnect between Xi’s rhetoric since 2012 and execution helps explain why investors tend to be skeptical of China’s past efforts to reboot the reform process.
“Time will tell whether President Xi’s words will first stem the current large foreign direct investment outflows and eventually lead to a resumption of the net FDI inflows that China has enjoyed for more than four decades,” says Nicholas Lardy, senior researcher at the Peterson Institute for International Economics. “A safe assumption is that it will take more than words to accomplish this objective.”
It helps that the news dropped days after Xi’s government drafted a list of property developers eligible for large-scale support, including the troubled Country Garden Holdings. The property crisis remains a major turnoff for overseas investors.
New data, Lardy notes, “imply that foreign firms operating in China are not only declining to reinvest their earnings but – for the first time ever – they are large net sellers of their existing investments to Chinese companies and repatriating the funds.”
The outflows in question exceeded $100 billion in the first three quarters of 2023 and, as Lardy predicts, “are likely to grow further based on trends to date.”
Among the factors Lardy cites as repelling overseas investors and chieftains: tense Sino-US tensions; recent news of Beijing cracking down on foreign consultancy and due-diligence firms vital to evaluating investments; Beijing’s increasingly stringent regulatory environment; new national security laws; and restrictions on cross-border data flows.
Michael Hart, president of the American Chamber of Commerce in China, notes that “foreign business executives here are eager to continue in China. But boards back in the US are wary.”
Hence the importance of Xi and Li ensuring that these new private enterprise policies are implemented in credible and transparent ways. The good news is that Li, party secretary for Shanghai City from 2017 to 2022, has close ties with, and deep understanding of, China’s tech sector.
Veteran banker Zhu Hexin seems a solid choice as new party chief of the State Administration of Foreign Exchange (SAFE). He will assume management of China’s foreign exchange stockpile from PBOC Governor Pan Gongsheng. Zhu also was appointed as a member of the central bank’s party committee.
Prior to SAFE, Zhu helmed state-run financial conglomerate CITIC Group, meaning he comes to the job with deep market knowledge and industry contacts. Also, Vice Premier He Lifeng has been tapped to oversee economic and financial policy and trade talks with the US and Europe as head of the Central Financial Commission.
It now falls to Li, Zhu and He to ensure that President Xi’s recent pledges to top Western chieftains in San Francisco don’t fall by the wayside.
CEOs on hand to hear Xi speak included Apple’s Tim Cook, Bridgewater Associates’ Ray Dalio, Citadel Securities’ Peng Zhao, ExxonMobil’s Darren Woods, JPMorgan Chase’s Jamie Dimon, Microsoft’s Satya Nadella, Pfizer CEO Albert Bourla and Tesla’s Elon Musk.
There, Xi claimed that “China doesn’t seek spheres of influence, and will not fight a cold war or a hot war with anyone.” Xi also seemed to preview the next phase of reform, stating that “we should remain committed to open regionalism, and steadfastly advance the building of a free trade area of the Asia-Pacific. We should make our economies more interconnected and build an open Asia-Pacific economy featuring win-win cooperation.”
Xi added that “we should promote transitions to digital, smart and green development. We should boost innovation and market application of scientific and technological advances and push forward the full integration of digital and physical economies. We should jointly improve global governance of science and technology, and build an open, fair, just and non-discriminatory environment for the development of science and technology.”
Earlier this month, Xi presided over a private sector symposium in Beijing to highlight its central role in a more innovative and productive Chinese future. There, Xi stressed that private enterprises contribute more than 60% of gross domestic product, 50% of tax revenue, 80% of urban employment, 90% of new jobs and 70% of tech innovation.
“Over the past 40 years, the private sector of the economy has become an indispensable force behind China’s development,” Xi acknowledged.
Yet private enterprise has had a rough few years, from Covid-19 to Xi’s tech crackdown. A major concern now is that China falls into a Japan-like lost decade, so-called “Japanification.”
Economist Takatoshi Ito, a former Japanese deputy vice minister of finance, notes that the Chinese property sector’s “travails echo Japan’s experience” with bad loans and deflation.
But, Ito adds, “perhaps the greatest threat to China’s economic growth and development is Xi himself. Xi has spent the last few years tightening government control over all aspects of life in the country, including the economy. The regulatory crackdown on large tech companies like Alibaba, which began in late 2020, is a case in point.”
Though regulators “have since backed off somewhat, and China’s government is actively supporting high-tech industries like electric vehicles, Xi’s obsession with control continues to pose a serious threat to China’s prospects. Not only does it hamper innovation by domestic firms; it also discourages foreign investment.”
The good news is that the private sector reforms detailed in recent days suggest Xi is serious about bold economic disruption and recalibrating growth engines away from state-owned enterprises and public investment toward private sector innovation.
As long as implementation is swift and credible, 2024 could be a markedly better year for China than many investors now pulling their investments from Asia’s largest economy expect.
Follow William Pesek on X, formerly Twitter, at @WilliamPesek