Lowy Institute

What is best practice for the governance of the Chinese-initiated Asian Infrastructure and Investment Bank (AIIB)? Australia says this remains a major concern, even though it has finally agreed to become a prospective founding member of the bank.

2014 Annual Meetings of the Board of Governors of the IMF and World Bank Group. (Flickr/World Bank.)

Appropriate governance arrangements are important, but as Susan Harris-Rimmer has noted, Australia handled the issue of AIIB membership badly. At first it appeared to be succumbing to American pressure. Then it appeared to be caught out by Britain's decision to join in defiance of the US, quickly followed by other European countries. We signed on just before the end of March deadline.

This is not really the image of an independent country showing international leadership. Australia appeared flat footed and totally reactive.

But Australia was right to emphasise the importance of good governance arrangements. The debate seems to have focused on whether the AIIB should have a full-time, resident board of directors representing shareholders. This is the arrangement in the World Bank, IMF and some other international bodies. Australia appears to be supporting a resident board for the AIIB. 

The president of the Asian Development Bank (ADB), Takehiko Nakao, said the AIIB has to follow 'best practice'. In response, Chinese Finance Minister Lou Jiwei said arrangements in the existing multinational banking institutions 'do not necessarily represent best practice'.

He is right.

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In fact, there is a lot of scope to reform the governance of the Bretton Woods institutions. The recent focus on the reform of the IMF and World Bank has been on relatively small changes, and mainly in the distribution of their quotas/shares. While important, the real challenge is to change the way these institutions think, make decisions and relate to their shareholders. This will depend on reforms to internal governance – particularly the role and operation of their boards.

The issue of whether international institutions should have resident or non-resident boards is not new. It was the focus of a major debate in 1944 between the founding fathers of the IMF and World Bank – John Maynard Keynes and Harry Dexter White. 

Keynes wanted a high-level, part-time non-resident board which would focus on the strategic direction of the institutions and not be immersed in day-to-day operations. Keynes also thought if directors divided their time between the headquarters of the institutions (he failed to have them based in London or New York rather than Washington DC) and their capitals, this would help avoid undue influence by the US Government

But White prevailed and the World Bank and IMF were established with a full-time resident board that met in continuous session. The US wanted the board to be a political check on every decision taken by management and staff.

The ease of travel and communications was also a factor in this debate. In the mid-1940s, international travel was by sea and took many weeks, while communications were mainly by telegraph. There was no opportunity for capitals to closely monitor what was happening in the international bodies.

Things have changed. Capitals can have almost instant access to every policy paper produced by the institutions and can quickly relay their views, questions or concerns.

Notwithstanding the advance in communications, the governance structure of many subsequent multilateral institutions — such as the Inter-American Development Bank, African Development Bank, ADB and European Bank for Reconstruction and Development — followed the Bretton Woods model. 

But not all international bodies have a resident board. The European Investment Bank (EIB) has a non-resident board that is removed from day-to-day affairs. The EIB also has 'outside 'directors who are appointed as experts rather than a representative of a specific country.

The arrangement selected for the AIIB board structure should depend on what is considered to be the role of the board. If the shareholders want the board to be the political counterweight to management and seek to ensure that every decision is consistent with each shareholder's interest, then a resident board deeply engaged in day-to-day activities may be in order. 

But there are trade-offs and inefficiencies. In this set-up, there is a confusing mix of roles and responsibilities between management and the board. Also, a board deeply engaged in the details does not have the same capacity to consider the strategic issues confronting the institution or monitor its overall performance. Moreover, staff know the best way to neuter directors is to swamp them with paper and details.

Best-practice governance arrangements for the AIIB should involve articulating the roles and objectives of the AIIB, preparing clear operating principles and guidelines to achieve these objectives, outlining the roles and responsibilities of management and staff, and having robust review and accountability mechanisms. 

Such an approach is more in line with a high-level, non-resident board. Capitals will need to take a close interest in the activities of the bank, but with modern technology this no longer requires a full-time resident board.

It is to be hoped that the AIIB does adopt best-practice governance arrangements. Who knows, it may be a catalyst to reform the governance of the other development banks.

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We have heard much about Malcolm Fraser's foreign-policy record since his recent death — his stance against Soviet expansionism, his engagement with China, his opposition to South African apartheid and white minority rule in Zimbabwe, and his welcome to tens of thousands of Indo-Chinese as refugees. What is less known was Fraser's prime ministerial focus on India, where he established a relationship of significance with Indian Prime Minister Morarji Desai.

Desai and Fraser met at a Commonwealth meeting in London in 1977. Fraser recognised a kindred spirit and sought Desai's support for a new initiative to regionalise the Commonwealth by creating a sub-set to include the small island states of the Pacific plus India, Australia, New Zealand, Singapore, Malaysia, Sri Lanka and Bangladesh. And so CHOGRM — the Commonwealth Heads of Government Regional Meeting — was born. Four were held: Sydney in 1978, New Delhi in 1980, Suva in 1982, and Port Moresby in 1984.

By then Fraser and Desai had lost office and new governments in New Delhi and Canberra brought CHOGRM to an end. In his 2010 memoirs, Fraser expressed disappointment that the Hawke Government lost interest, citing the Solomon Islands and Fiji as small states that could have benefited from 'regular meetings with democracies like India'.

Of most significance was Fraser's 1979 trip to India. He had been invited by Morarji Desai as the official state guest to the Indian Government's Republic Day celebrations, held annually on 26 January. This was quite an honour. The 2015 special guest was US President Barack Obama, and last year's was Japanese Prime Minister Shinzo Abe. Fraser's eight-day visit, with Tamie and three children, was packed with tourist and official engagements, stopping in five Indian cities plus a tiger-watching safari at Corbett National Park in Uttar Pradesh. By any measure it was a success.

So why did Fraser seek closer ties with India?

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First, he wanted to inject substance into a relationship where he felt, correctly, the political impetus had been lacking. But his thinking was more imaginative than this suggests. He saw Australia and India as 'committed to moderation...not at the extreme end of any spectrum'. He felt that, even as aligned and non-aligned countries, they had little significant difference between them, and hence could work well together to resolve world tension. It was an arresting view, and his observations on non-alignment were unusual for a conservative Australian leader.

The diplomatic highlight of the trip was his speech to the Indian parliament, the first by an Australian prime minister. It was elegantly expressed and strongly argued, a speech that remains curiously unexamined by Australian foreign policy historians. Indeed, it contains the threads of many of the future interests that would define Fraser's post-prime ministerial years.

For example, Fraser received loud applause when he declared that 'Australia is Australia, not an appendage of Europe'. Describing Australia in this way, in particular his subsequent reference to Australia as 'Western with a difference', was conceptually innovative, even path-breaking, and hinted at what was to come in 2014 with his radical call for explicit strategic independence from the US.

The speech was noteworthy too for its focus on racial discrimination as a 'basic affront to human dignity'. He said countries like Australia and India should work against southern Africa's 'repugnant, dangerous and self-destructive policies'. His language echoed that of Gough Whitlam's 1973 visit to India. Whitlam too had focused on the need for an independent Australian narrative not open to suggestions of racism. Like Whitlam, Fraser's refusal to tolerate racism in any guise was central to who he was. He never compromised on this principle. It was on display in India and was well received.

Even in 1979 then, Malcolm Fraser was urging 'not to leave everything to the great powers'. Later in the year however, the Soviet invasion of Afghanistan overwhelmed most other foreign policy concerns, and he called for a more aggressive Cold War stance by Western powers.

Nevertheless, Fraser's vision of drawing Australia and India together into a new regime of moderate, middle-power states remains a creative attempt to establish a new language of international co-operation, one he was still developing at the time of his death. Given the Abbott Government's focus on India, Fraser's commitment to a strong Australian bilateralism with India should not be forgotten.

Photo by Peter Morris.

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Milton Osborne's rebuttal to my piece on The worrying similarities between the Khmer Rouge and ISIS was a welcome prompt to flesh out my argument. Milton's wealth of expertise on Cambodia and the Khmer Rouge brings important nuance to my argument.

As Milton notes, David Chandler's excellent account highlights anti-Vietnamese feeling and resentment toward Sihanouk's consort's family as prime factors in his overthrow. I would cede to the scholarship of both on the root causes of his overthrow and more broadly on the motivations of the Khmer Rouge. As Milton rightly notes, the degree to which the bombing campaign impacted on the rise of anti-Vietnamese anger and desire for change is unknown. In its brevity, my post doesn't sufficiently acknowledge this fact.


Pol Pot with Nicolae Ceausescu, 1978. (Wikipedia.)

Between 1965 and 1968, 214 tons of bombs were dropped on Cambodia. This paled in comparison to the 2.75 million tons dropped on Cambodia until 1973. It may not be altogether surprising, then, that there were few rumblings of discontent in 1966, as Milton notes. That said, Kiernan and Owen's 2006 argument on the similarities between the bombing campaigns of Cambodia and Iraq still holds water, in that the destructive impact of the bombing campaign likely benefited Khmer Rouge recruitment. Milton and I disagree to the extent of this benefit to the Khmer Rouge, though we agree that it is extremely difficult to measure.

Similarly, in drawing parallels between the Khmer Rouge and ISIS, I have neglected mention of the immense impact of Prince Sihanouk in the coup and on the Khmer Rouge's rise. Prince Sihanouk, who was revered in the Angkor tradition as a deva-raja (god-king), fell out of favour with the army and the Cambodian right, who would lead the coup against him in March 1970. His policies were often contradictory, which may be explained by his attempts to keep his country neutral in the Vietnam War. He had allowed the Vietnamese to use Cambodian territory and Chinese arms were flowing from the Cambodian port in Sihanoukville to Vietnamese forces, including to the Viet Cong. Unsurprisingly, this angered many in the country and the US; the latter supported his ouster in favour of a pro-American government. In the fall of Sihanouk, we may glean some loose similarities with power vacuums and change in 'stability of the status quo' that emerged in post-Saddam Iraq.

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Milton rightly points out the origins of the 'Year Zero', which was applied as a tidy catch-all name in 1978 in Ponchaud's book and the following year by a John Pilger documentary of the same title. The term itself draws reference from the French Revolution's turning back of the calendar in 1792. Pol Pot was exposed to both this revolution during his time studying in Paris and to Mao's Cultural Revolution during a trip to China in 1965 and 1966. The brutal 'Cultural Revolution' Pol Pot oversaw in Cambodia during the Khmer Rouge's reign have all the trimmings of the 'Year Zero' concept, even if this name was only assigned after the fact.

I certainly agree with Milton's final assertion that we need to highlight differences as much as the similarities. There is, of course, a wealth of difference between ISIS and the Khmer Rouge. Milton has rightly highlighted some of the details concerning the Khmer Rouge, yet the obvious differences between the groups should not dissuade us from searching for lessons from the heinous crimes of the past to stop crimes of the present and future. But exploring similarities in motivations (and to a lesser degree, actions) of past extremist actors can help inform counter-actions against current groups. 

This brings me to the underlying theme of my post. Both groups emerged as anti-progress movements in the shadows of larger geopolitical events. These permissive environments were the oxygen that birthed both groups. In my view, the success of their ideologies (short-lived in the case of the Khmer Rouge) was secondary; rather it was their free-riding on popular discontent that mattered most.

Most importantly, in drawing out similarities with past genocidal groups, we deflate some of the awe that surrounds current extremist groups. By remembering earlier 'big idea' extremist ideologies that failed, we tackle the narcissistic notions of those drawn to such groups expecting to participate in an 'end of time' event.

Lastly, comparisons between extremists groups can demonstrate that this is not a religious problem or an ideological one, but something far more profound and far more human. This helps us think more deeply about extremist groups such as ISIS and thereby gives us a stronger hand in tackling root causes of recruitment and the motivations of those joining such groups.

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'Camp out on the school oval under the stars like the ANZACS did 100 years ago,' says the flyer sent home from my son's school last week.

On 24 April 2015, 100 years after the ill-fated Gallipoli landing, our school children are invited to bake damper around the camp fire, make craft poppies and even learn how to play two-up.

But another centenary of war is taking place on 24 April. Effectively hidden behind the allied landing on the beach, and indelibly linked to the ANZAC story by geography and timing, the Armenian Genocide is largely forgotten in Australia, overshadowed by tragedies that are felt more as 'our own'. 

While Australian soldiers were landing on Turkey's shoreline, the longstanding community of Armenians in Anatolia was being persecuted, arrested and murdered in the early stages of what would become one of the 20th century's most systematic and far-reaching genocides. During April 1915, Armenian community leaders and the intellectual elite were being rounded up, beaten and hanged, leaving the remainder of the community unable to defend itself against the waves of systematic violence that were about to be unleashed. 

The Armenian Genocide does not feature strongly in our nation's history, yet Australia was well aware of the atrocities at the time, and among the eyewitnesses were some of our own ANZAC soldiers. Australian prisoners of war were held captive in Armenian churches and homes; servicemen not only saw the mass graves and deportations but even occasionally assisted Armenian civilians, as in the case of Arthur James Mills,  who wrote of having carried a four year-old girl to safety on his camel. The Armenian Genocide is, despite its invisibility in the contemporary Australian consciousness, closely linked to the story of Gallipoli.

So why won't Australia talk about it?

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The International Genocide Scholars Association recognises denial as the final stage of genocide, and it is this stage that successive Turkish governments have pursued ferociously. Today, Turkey continues to deny that these crimes happened at all, and prosecutes citizens who call the genocide by that name. It reduces the numbers of deaths so that 'only' some hundreds of thousands died rather than over a million; and in a classic strategy of genocide denial, blames the victims by claiming that the deportations of thousands of civilians through deserts, naked and starving, were 'justified' on the basis of military exigencies. 

Worse still, the Turkish denial industry has coerced the governments of its allies into giving credence to such denialism, even into participating in this final, painful phase of genocide.

Genocide scholar Professor Colin Tatz, has written that 'The entire apparatus of the (Turkish) state is attuned to denial'. This means that any perceived slight by another nation, even inconspicuously referring to the genocide, is met with threats of suspending diplomatic relations. In fact, in 2013 when the New South Wales Parliament had the temerity to pass a motion reiterating its 1997 recognition of the Armenian Genocide, along with a new acknowledgement of the Assyrian and Greek genocides by the Ottoman Empire, MPs were threatened with being prohibited from attending ANZAC Day events in 2015.

According to the website of the Department of Foreign Affairs and Trade, the relationship between Australia and Turkey is 'close and productive'. It is unquestionably the allied landing at Gallipoli, this shared moment in our respective histories and the way its memory has united us, that is central to our relationship. Our diplomatic relations with Turkey are almost entirely predicated on it. It is within this context that we must view Foreign Minister Julie Bishop's correspondence to the Australian Turkish Advocacy Alliance in June 2014.

Likely concerned by threats about Australia's participation in Turkey's 2015 commemorations, Bishop aimed to assuage any Turkish anxieties about Australia's position. While asserting that the Australian Government's position was not to become involved in this 'sensitive debate', she proceeded to do just that by stating that the Government does not 'recognise these events as "genocide"'.

In a history where forced deportation is euphemistically called 'relocation', where murder is reduced to 'death' and crimes described only as 'tragedies', choice of words is extremely important. By calling this a 'debate', Bishop chose to ignore the consensus among historians and genocide scholars, and implicitly accepted that there are two sides to this history, each equally valid. In doing so, she fell into the denialist trap of 'manufactured controversy' which relies on pointing to those few scholars who doubt the claim of genocide. But, as with Holocaust denial, this 'other side' need not be legitimised by granting it a place in the discussion.

In fact, the vast majority of scholars have determined that the evidence clearly supports a claim of genocide, in terms of both intent and implementation. There is quite simply, 100 years after the fact, no 'other side'. As Geoffrey Robertson QC has written in his recent publication An Inconvenient Genocide, 'There can be no doubt...that the crime committed against the Armenian population of the Ottoman Empire in 1915 was what today would be legally classed as genocide.' A host of nations, including Germany, The Netherlands, Canada and France have formally taken this position, despite threats and reprisals from Turkey. Switzerland not only acknowledges the Genocide but has outlawed its denial.

Mustn't Australia do the same, regardless of the consequences? 

In terms of diplomatic relations with Turkey, the Australian Government is stuck between a rock and Mt Ararat, the snow-capped volcano that is imbued with cultural and national meaning for the Armenian community, but which lies physically in Turkey. The Australian Government cannot risk offending the nation that jointly commemorates our most significant national day, or it may jeopardise Australia's ability to mourn our soldiers where they fell. Given the ANZAC legend is so key to Australian identity, this is a risk too great for Australia's foreign policy. From an ethical standpoint, however, the position of the Australian Government not to acknowledge what is absolutely irrefutable according to academic and legal opinion means that it is not only condoning Turkey's denial, but may even be contributing to the final stage of the Genocide itself. 

On ANZAC Day 2015, silence will be observed and sunrises witnessed at dawn services. But as the day ends, as my son and his classmates return home after a night of camping in honour of our soldiers, who will remember the brutal and systematic genocide of the Armenians? Australia has a moral imperative to acknowledge the connection between our ANZAC story and the Armenian Genocide and to stop acting as a partner in denial.

Photo courtesy of Flickr user MichaEli.

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While the world focuses on the dangers that a nuclear-armed Iran could present in the Middle East, a potentially more dangerous and unstable nuclear proliferation is occurring in the Indian Ocean.

In the coming years India, Pakistan, and perhaps China will likely deploy a significant number of nuclear weapons at sea in the Indian Ocean. This could further destabilise already unstable nuclear relationships, creating a real risk of a sea-based exchange of nuclear weapons.

Observers have long seen India-Pakistan nuclear rivalry as the most unstable in the world, and South Asia as the most likely location of nuclear conflict. This is not just academic speculation. Foreign diplomats have been evacuated from Islamabad on several occasions from fears of an impending nuclear exchange with India.

India has a 'no first use' (NFU) nuclear-weapons policy of sorts, although it is increasingly subject to caveats and exceptions. But Islamabad refuses to adopt an NFU policy and indeed has announced a long list of actions that it claims would justify a nuclear response against India. Pakistan is also busy miniaturising its nuclear weapons for tactical use, thus reducing the threshold for Pakistani nuclear action.

Importantly, Pakistan sees its nuclear arsenal not only as a deterrent but also as an enabler,  providing an umbrella under which it can sponsor sub-conventional attacks against India. In the face of terrorist attacks such as those in Mumbai in 2008, Delhi has found its options constrained by concerns about a possible Pakistani nuclear response. But few are confident that India's restraint can be maintained in the face of another serious cross-border attack that is proved to have been sponsored by Pakistan.

Both India and Pakistan are now in the process of moving their nuclear weapons capabilities into the maritime realm.

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India is the furthest down this track, having launched its first indigenous nuclear-powered ballistic missile submarine INS Arihant in 2009 (expected to be commissioned this year); it is also in the process of building two more so-called SSBNs. Further, India is developing nuclear-tipped Dhanush short range ballistic missiles for deployment on offshore patrol vessels. India has leased a nuclear-powered hunter-killer submarine and has plans to construct up to six more SSNs (unlike SSBNs, SSNs are not armed with nuclear ballistic missiles). Pakistan is following India's lead, having recently established a Naval Strategic Force Command Headquarters with the declared intention of developing a sea-based deterrent. This may involve nuclear-armed conventional submarines supplied by China, rather than SSBNs.

Some nuclear weapons states have created a nuclear 'triad' in order to have an assured second strike capability. While such an assured capability can help stabilise a nuclear relationship, according to a recent Carnegie report, taking the India-Pakistan nuclear dynamic into the maritime realm may in fact create greater instability.

One issue is an ambiguous mix of conventional and nuclear capabilities at sea, including the deployment of nuclear missiles on Pakistani conventional submarines and on Indian missile boats. Uncertainty over whether a platform is carrying nuclear weapons creates a risk of an inadvertent but highly escalatory attack on an opponent's nuclear capability. Another concern is that maritime nuclear capabilities could lower Pakistan's already low nuclear threshold. Islamabad may be tempted to conduct a demonstration nuclear attack at sea, believing it will not be escalated on land. A further problem is Pakistan's reported propensity to delegate nuclear authority to field commanders, which could create considerable risks if submarine communications are interrupted.

China is also a major player in the nuclearisation of the Indian Ocean. China's role in creating a nuclear-armed Pakistan is a big factor in the distrust that characterises the India-China security relationship. In the 1980s, China supplied Pakistan with weapon plans along with fissile material, and facilitated the supply of missile technology. Any further moves by China to develop Pakistan's maritime nuclear capability will only cement India's threat perceptions about China.

The India-China nuclear relationship is itself relatively unstable and is now also moving into the Indian Ocean. This is because India's land-based nuclear deterrent currently suffers from considerable geographical and technological disadvantages compared with China. China is able to deploy its nuclear missiles in sparsely populated territory close to India's border, providing it with nuclear missile coverage of the entire subcontinent. In comparison, India fields much shorter range missiles that can barely reach major population centres in eastern China.  

This gives India good reason to establish an assured second strike capability on SSBNs that could potentially be forward deployed into the western Pacific. Alternatively, India may deploy its SSBNs in a well-protected 'bastion' in the Bay of Bengal, although this may require further development of Indian missile technology.

There have been increasing detections of Chinese SSNs in the Indian Ocean in recent years, including the deployment of a Chinese SSN to the western Indian Ocean between last December and February, nominally as part of its anti-piracy deployment. According to Indian sources, these deployments are part of hydrographic 'profiling' of the region and will likely increase in frequency. But Beijing has less reason to deploy its SSBNs in the Indian Ocean; instead, they will likely be primarily deployed in the western Pacific, targeted at the US. This could create its own risks: the detection of an unusual transit of a Chinese SSBN into the Indian Ocean or an Indian SSBN into the Pacific could be seen as an escalation at times of tension.

The US also has a potentially significant role in facilitating nuclear stability in the Indian Ocean. In the 1980s, Washington helped construct India's only facility for communications with submerged nuclear submarines and the US might again support India's maritime nuclear capabilities. It might even be in Washington's interests to help Pakistan. The establishment of reliable communications links with Pakistan's nuclear-armed submarines could, for example, be critical in stabilising the India-Pakistan nuclear dynamic.

Despite concerns about superpower competition in the Indian Ocean during the latter half of the Cold War, there was relatively little nuclear competition in that theatre. The three-party nuclear rivalry we will soon see in the Indian Ocean is likely to be more unstable, and potentially far more dangerous. 

Photo courtesy of Flickr user UK Ministry of Defence.

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In mid-2009, with American finance reeling from the Lehman Brothers collapse, the nation's Treasury Secretary addressed his prestigious alma mater Peking University. 'How safe are China's investments in US Government debt?', challenged one student. 'Very safe', the Secretary answered to derisive laughter.

At the time, cynicism was understandable. But many Chinese experts still doubt the security of Beijing's official reserve holdings, which have been growing ever larger. These same people fret about the dollar's dominance and they reasonably wonder why the world can't be more multipolar, with several reserve currency alternatives.

A recent issue of the journal Red Flag Manuscript features a paper complaining that the US 'reaps profits without sowing' and lists no less than ten 'harvests' from the US dollar's reserve-currency status: seigniorage, 'inflation tax', foreign investment income, underwriting and transaction fees, unfair trade gains, currency manipulation, derivative and commodities profits, and IP royalties. The paper says that over 500 years, Portugal, Spain, Holland, England and then the US have successively exploited 'state hegemony' which has 'gradually developed from traditional territorial conquest to modern financial colonisation.'

A book recently launched at Renmin University, Sanctions and Global Asymmetric Power, makes a more direct warning that Western monetary power 'kills without a shot.' This concern is not unjustified, given that American pundits discuss 'weaponised finance' and how Russia and China are 'circumventing' the dollar system.

Such critiques are quintessentially Marxist-Leninist. But Beijing's real problem is not that America's imperialism (to use Marx's term) is unfair or immoral, but that China doesn't also enjoy such spoils. Beijing's perspective is straightforward: China wants what America has got. It is unhappy with its relative position rather than with its own vulnerability.

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Take Red Flag's first point, seigniorage, a reward for all currency issuers. It is most easily understood as the interest rate not paid on cash. The banknote in your wallet is a 'zero coupon perpetual' instrument: it pays no interest and can only be redeemed in kind. The Federal Reserve gets a free ride on all those bills it has issued. But then, so does every central bank. And the biggest of all money issuers by far is China, which fleeces its citizens of several percent of GDP in foregone interest annually. The 'exorbitant privilege' of the People's Bank of China's seigniorage is wholly at the expense of the Chinese people.

But what stings Beijing most is that America extracts its seigniorage from anyone holding greenbacks, including Chinese.

How the US dollar became so dominant is splendidly depicted in Adam Tooze's book The Deluge. A hundred years ago, the British Empire was stumbling towards insolvency. The Deluge explains how a reluctant, isolationist Wilsonian America shrugged off the mantle of global leadership, leaving behind a vindictive Versailles peace, a rampant Soviet Union, a bereaved China in chaos, and a predatory Japan. Bad things ensued. World War I had 'bequeathed an unprecedented problem of economic and political order, but no historical model of world hegemony with which to address it.' Only 30 years later, at Bretton Woods, did Washington acknowledge and self-interestedly embrace its financial pre-eminence, possibly for fear of any alternatives. America didn't initially seek the crown but got it by default when all other contenders lay shattered.

The British themselves recognised their shaky hold (then on the gold-pound). A Foreign Office memo in 1928 described the challenge starkly:

Great Britain is faced...with a phenomenon for which there is no parallel in our modern history -- a state twenty-five times as large, five times as wealthy, three times as populous, twice as ambitious, almost invulnerable, and at least our equal in prosperity, vital energy, technical equipment, and industrial science. This state has risen... at a time when Britain is still staggering from the effects of the superhuman effort made during the war, is loaded with a great burden of debt, and is crippled by the evil of unemployment.

Is there a senior adviser cautioning the American president with a similar assessment today? Possibly within several decades, but not yet. For the British, their zenith was already upon them. Chinese experts, too, know the history of hegemonic transition. Some have called for 'the management of America's decline.' Others are more circumspect, well aware of the burden of reserve issuers. As the late Ronald McKinnon has said, dissatisfaction with the dollar is widespread, including in the US itself.

No doubt there is potential demand for new reserve currencies in the world, and the establishment of a international renminbi – with a free capital account – would be welcome. De-pegging the renminbi from the dollar would afford Beijing greater monetary independence in the long term. Recently capital outflows have accelerated, and Beijing is selling dollars in order to hold its currency relatively firm.

After years of sterilising inflows, the Chinese now have an historic opportunity to escape their dollar dependence and attain the reserve status they crave. Even Peking University students, the future elite of the nation, know US T-bonds are unsafe. So keeping the Chinese currency strong and stable is easy: just sell them.

Photo courtesy of Flickr user Sharon Drummond.

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In what appeared to be a case of spectacularly bad timing, the Bank of England held a conference in September 2007 on 'sources of macroeconomic stability'.

You see, from the early 1980s the business cycle in developed economies had become much less volatile. A term had been coined for this stability: the 'Great Moderation'.

However, that picture, from all appearances, came crashing down during the financial crisis. Imagine what the senior Bank of England officials thought, listening to conference participants, only to be dragged from proceedings to authorise liquidity facilities for Northern Rock in an attempt to stem the first bank run in the UK since 1866!

With the onset of the global financial crisis (GFC), the Great Moderation was declared dead. It looked like volatility was back. The official website commemorating the Federal Reserve's centenary says the Great Moderation ran from 1982 to 2007. Phil Lowe, the Reserve Bank of Australia's Deputy Governor, said in a 2013 speech, 'Recall that prior to the crisis, there was the Great Moderation' (emphasis added).

But to paraphrase Mark Twain, I think reports of the Great Moderation's death have been greatly exaggerated.

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Check out the graph below. It shows rolling five-year standard deviations of GDP growth for Australia, the US and the UK. Basically, at any point on the graph, the level of the line shows the standard deviation of growth for the previous five years. The decline in volatility during the 1980s is plain to see. So is the spike up in the US and the UK in 2008, although volatility did not reach the level of the 1970s. Australia sailed through the crisis relatively smoothly, so volatility stayed low.

A funny thing has happened though. Now that 2008 and early 2009 has fallen out of the window of the rolling standard deviation, volatility is back down to the pre-GFC levels. While the level of growth may be somewhat disappointing, it has been stable.

I don't think the Great Moderation left us. The key question is: what drove the Great Moderation in the first place? In a paper published in 2008, Steve Davis and James Kahn looked at the numbers and concluded:

Our explanation for the aggregate volatility decline stresses improved supply-chain management, particularly in the durable goods sector, and, less important, a shift in production and employment from goods to services.

If they are right, there is no reason to suspect the Great Moderation has disappeared. Their arguments are buttressed by delving into the disaggregated data from the national accounts. They also note that, in fact, the Great Moderation appears just to be the continuation of a longer term trend. The decline of business cycle volatility in the US had dated back to at least World War II. The apparent abrupt nature of the fall in volatility in the 1980s is the result of an unusual spike in volatility in the 1970s.

What should we make of the GFC in this context?

It was a large shock, so large shocks can still happen. But another takeaway is that the consequences of such shocks are perhaps not as dire as they once were. Some think the shock that hit the global economy in 2008 was as big as the shock that caused the Great Depression, but improved policy – through monetary easing and other liquidity provision to the banks – staved off 20% unemployment in the US. If this interpretation is correct, it provides another reason – improved policy – for why volatility will be lower than it had been in the past.

There is a further wrinkle to this story. In the same speech mentioned above, Phil Lowe suggested that now that the Great Moderation was over, the rebound in volatility would be something that would hold back investment.

Given the evidence from the graph above and from Davis and Kahn, I'm inclined to disagree.

Photo courtesy of Flickr user Brookings Institution.

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Here is part 1 and part 2 in this series.

My thanks to Stephen Fallon for alerting me to the documentary series now getting a run on the ABC, How We Got to Now, which addresses the link between air conditioning and development:

Marginal Revolution has more links on this topic too.

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Coalitions sound great at first blush. Groups of like-minded states tackling an issue of regional or international importance. And in the Middle East there is no shortage of such issues. But, just as with any wedding or birthday gift, one should not be distracted by the shiny wrapping. We should pay attention to what's inside the box. The so-called 'coalition of the willing' that invaded Iraq, for example, was certainly willing, but it only contained four countries.

Which brings us to the issue of the Saudi-led intervention in Yemen. The Saudis have put together a coalition they say is designed to reinstate the legitimate government under President Hadi, whose continued existence in internal exile in Aden was coming under threat from a coalition of Zaydi Houthi fighters and troops loyal to former president Ali Abdullah Saleh (the Saudis and pretty well every other Sunni Arab country would have you believe that Iran is a member of this coalition too, but the evidence is pretty thin).

Washington has said that it is providing unspecified support to the Saudi-led coalition, which sounds fair enough given Riyadh has, until now at least, enjoyed a special relationship with the US. But once we have a look at the rest of the Saudi-led coalition, some concerns start to appear.

To begin with, the Sudanese government is listed as one of the contributors to the coalition, even though its leader remains indicted by the International Criminal Court on charges of genocide. The thought of someone indicted for genocide helping to restore someone else's 'legitimate government' while being assisted by the US is richly ironic, even by the Middle East's high standards.

Then there is the contribution by Bahrain, whose discrimination against its own Shi'a majority population has been documented by the US State Department and led to the military intervention in the island kingdom by Saudi and Emirati forces.

Furthermore, one could argue that, in the time-honoured tradition of 'As ye sow, so shall ye reap', Saudi Arabia's predilection for seeking to spread its intolerant Wahhabist brand of Islam led to the Zaydi revivalist movement we refer to as the Houthis. Rather than being seen as agents of Tehran, as some commentators would have us believe, the Houthis could more accurately be described as a creation of Riyadh (or at least Saudi actions decades ago).

Yep, coalitions sure sound impressive, but they often disappoint on closer inspection.

Photo by Flickr user Khaled AlQubeli.

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More details emerged over the weekend about two Chinese big-ticket initiatives, 'One Belt, One Road' and Asian Infrastructure Investment Bank (AIIB).

Speaking at the Boao Forum for Asia, President Xi Jinping outlined his vision for the region in a keynote address titled 'Towards a Community of Common Destiny and A New Future for Asia'. 

The Boao Forum, held annually since 2001 in Hainan, has moved from being primarily a business and finance gathering to being regarded as a platform for Chinese leaders to make significant foreign policy announcements. It was attended by leaders from more than 15 countries including Indonesia's President Jokowi, Russia's First Deputy Prime Minister Igor Shuvalov, Sri Lankan President Maithripala Sirisena and Swedish Prime Minister Stefan Lofven. Australia sent its Governor-General and Finance Minister. The Opposition Leader Bill Shorten was also there.

In his speech, Xi Jinping outlined four principles that underlay his vision. To build a community of common destiny, he said:

  • we need to make sure that all countries respect one another and treat each other as equals.
  • we need to seek win-win cooperation and common development.
  • we need to pursue common, comprehensive, cooperative and sustainable security.
  • we need to ensure inclusiveness and mutual learning among civilizations.

The rhetoric is familiar and it is easy to be dismissive. However, this vision espoused by the Chinese President is an attempt to assuage fears among China's neighbours about its growing power and influence. China is not winning hearts and minds through its bilateral efforts, so is now framing its engagement as a shared regional vision.

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It explicitly connects the futures of China's neighbours with China's own future. In doing so, Xi Jinping is trying to convince other countries that their own peace and prosperity will best be secured by becoming even more intertwined with China.

The much promoted 'Belt and Road Initiative' is the hallmark of this vision. There are obviously domestic economic imperatives for the Belt and Road, but it is also being framed as an example of China's regional leadership. Chinese leaders speak of the Initiative as being a 'public good China provides to the world' and the effort of a 'big country' to shoulder 'greater responsibilities'. This is an attempt to demonstrate that China's intentions are benign and should be welcomed.

The Chinese Government knows that its own successful development is linked to the economic growth of others, and that it cannot achieve its 'great national rejuvenation' without peace, stability and growth in its neighbourhood. But countries are becoming wary of being too dependent on China. And China's bilateral efforts in places like Sri Lanka and Myanmar are hitting roadblocks. So instead President Xi is trying to reframe China's inroads as part of a regional vision shared by all.

Coinciding with Xi Jinping's Boao speech, the Chinese Government released its 'action plan' for the Belt and Road Initiative. The plan was jointly issued by the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and the Ministry of Commerce, indicating it is both a domestic and foreign policy initiative. 

Light on details, it purports to be 'open', 'harmonious' and 'inclusive'. It covers road, sea and air transportation, energy infrastructure, and optical cables, removing trade barriers, improving customs clearance processes, cooperation in agriculture, forestry, and fisheries, trade facilitation, free trade zones, e-commerce, and renewable energies, to name but a few! For those who want to know more, Xinhua has a dedicated website with links to all the statements, policies, news and activities. 

It appears to be an all-encompassing initiative that basically anything can fit under. Indeed, we will see projects that are already underway being rebranded as part of the 'one belt one road'. And existing financing pledges for development projects will also be subsumed and re-announced.

The Belt and Road Initiative will be financed through a range of mechanisms. The AIIB, the BRICS New Development Bank, the Silk Road Fund, as well as China-ASEAN Interbank Association and SCO Interbank Association have all been explicitly mentioned. The Chinese Government increasingly speaks of the Belt and Road and AIIB together, linking them to its vision of a common (Asian) destiny.

In a clear case of the US shooting itself in the foot, the AIIB now looks like it is becoming a global institution. With the UK joining up, others did not want to be left out. Russia, Australia, Denmark, Brazil and the Netherlands are the latest to signal intentions to join. In addition to jumping on the bandwagon, there has been recognition that commercial and development cooperation interests will be affected by the AIIB and so it is better to be involved to try and influence the bank's investment decisions from the beginning. 

But in signing onto the AIIB, countries have implicitly agreed to support China's regional vision. The challenge will be to make sure that infrastructure investments really are 'win-win'.

Alongside the policies and investments, China wants to embark on a publicity campaign to gain public support for the initiative. So expect to see cultural exchanges, sporting events and 'maritime silk road tourism cruises', being promoted under the banner of the One Belt One Road initiative. 

The initiative is clearly a priority for Xi Jinping. The Central Government has established a special 'leading group' under the National Development and Reform Commission to oversee implementation of the initiative. We should expect to see and hear a lot more about it. China's neighbours will certainly embrace the new economic development opportunities, but time will tell whether they are convinced of China's intentions and persuaded by the 'common destiny' idea.

Photo courtesy of the Boao Forum.

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  • A wonderful collection of bizare gaffes from Thailand's junta leader, General Prayuth. This week he wryly joked that he could 'just execute' journalists that don't 'report the truth'. Australian journalist Alan Morison is among those  currently fighting charges of criminal defamation. 
  • In Myanmar, KIA General Gun Maw said 'signing the ceasefire does not mean achieving peace'.
  • After last week's comments about China's nine-dash line, Jokowi this week clarified Indonesia's position, emphasising that it remains neutral in the South China Sea dispute. 
  • The Economist looked at how, almost a year on, Thailand's reforms are faring; there's also a series of infographics on the Thailand's volatile politics. This week, Thailand brought in the death penalty for human trafficking.
  • A Philippines Senate Committee Report on the botched police operation that left 44 police dead  (police report here) indicated that the US had a role in the operation. Gregory Poling wrote on the impact the failed raid may have on the US. Meanwhile, Malaysia says it is prepared for an influx of refugees if the peace process in the south breaks down.
  • Vietnam ramped up defence spending by 113% between 2004 and 2013. Murray Hiebert and Phuong Nguyen examine the increase.
  • A Justice Trust report accuses Myanmar's hardliners of being the 'hidden hand' behind the 2014 Mandalay riots.
  • The BBC examines Myanmar's one hundred languages in this podcast, while The Economist looks at Myanmar's burgeoning startup culture
  • The week was dominated by coverage of Lee Kuan Yew's death. There was a steady stream of obituaries (including this excellent piece by Milton Osborne) and some LKY contrarianism (h/t Sam). The Straits Times reported on the tens of thousands that joined the three-hour queue to pay their final respects to him in Singapore. This is what it looked like (hyperlapsed):

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Australia cares about infrastructure investment in Asia. So why didn't we join the new China-led Asian Infrastructure Investment Bank (AIIB) last November when we would have received the most political benefit? And why are we still asking the wrong questions about the AIIB?

The Abbott Government made infrastructure investment a headline for the G20 Summit in Brisbane. A legacy outcome of the Summit was the establishment of a Global Infrastructure Hub in Sydney with a four-year mandate. Australia is now part of the troika for the upcoming G20 summits in Turkey and China, and it is clear infrastructure investment is a priority for all three nations, in particular for financing the New Silk Road.

So why on earth did we take so long to join the AIIB? There are three plausible reasons.

First, many of our closest allies and comparators have joined already, so we could shuffle in behind and avoid US censure. India and Singapore, then the UK and New Zealand, now France, Germany and Italy have all announced plans to join the AIIB. A 'safety in numbers' approach, then, which is disappointing in terms of Australian leadership.

Second, there were some legitimate concerns about bank governance.

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Among infrastructure experts, bankers, economists, business groups, foreign policy experts and governance advisers, there is barely a word of dissent about the low risk and general reward of being involved in the AIIB at a strategic level. No Australian seems unduly concerned about China taking a stronger leadership role in economic governance. It is simply expected of the globe's second-largest economy.

Nevertheless, the US was asking the right questions about safeguards and governance, even if for the wrong reasons. Infrastructure investment for macroeconomic growth does not automatically benefit people living in extreme poverty, as they can be affected by displacement, environmental damage or by being forced to pay more for basic services. But those attuned to human rights and social protection concerns in China felt that early accession might give more opportunity to push for the same level of environmental and social safeguards as have been hard-won in the World Bank and Asian Development Bank, but which need to go further. We do need to ask about AIIB plans for transparency, human rights standards, alleviation of extreme poverty, and climate change mitigation and adaptation in project selection and design.

Heaven knows, it is not that existing multilateral development banks have been so perfect in their interventions in our region all these decades. They have improved because they were forced to change by civil society actors. And the governance of those banks has not represented the reality of shifting power for about a decade. The US and Japan have only themselves to blame for that.

China should take the safeguards concerns on board, improve them where possible. In the AIIB, China's global governance reputation will be on the line, and at the same moment China assumes the G20 presidency with the world watching.

Third, Australia put enormous diplomatic effort into its G20 year, and with the Infrastructure Hub in Sydney such an important legacy, we needed time to examine the synergies with the AIIB.

Asian Development Bank estimates suggest Asia will need $8 trillion in national infrastructure and $290 billion in regional infrastructure through 2020 to sustain the region's growth trajectory. The AIIB in not a sufficient response to that deficit, but it is a response, and a creative one. In AIIB's case, the consensus seems to be that the initial target is around $100 billion of new capital. The test is how that capital will be employed. Most development experts agree there is an underinvestment in pro-poor infrastructure globally. The International Energy Agency also estimated that adapting to and mitigating the effects of climate change over the next 40 years out to 2050 will require around US$45 trillion or around US$1 trillion a year. Will the AIIB invest in pro-poor, green infrastructure?

For the first time, China is not joining a global institution, it is creating one. The issue is not to stop China taking a leadership role in global economic governance. The issue is to do everything possible to make sure China benefits the rest of the world in its new role. 

A longer version of this article appeared in Mandarin in the Global Times, People's Daily on 21 March 2015.

Photo by Flickr user Jason Tabarias.

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Short of a full-blown ground invasion, the Saudi-led (and US-UK-supported) aerial bombardment of Yemen – Operation Decisive Storm – was probably the most dangerous of the available international responses to the Yemeni political crisis. That a ground invasion apparently remains on the table is either an indication of how misunderstood the drivers of the crisis are, or of a cynical willingness by neighbouring states to drag Yemeni civilians through another round of struggle for reasons of domestic legitimacy and regional dominance. Or both.

Civilian casualties from the bombings are already mounting, but the consequences will spread beyond this sad tally. Yemen imports around 90% of its wheat and all of its rice. With its runways bombed and airports closed, Yemen's already food-insecure population is in a dire humanitarian predicament.

At its heart, the Yemeni crisis is a continuation of a domestic power struggle that has been underway for more than a decade over the rightful successor/s to President Ali Abdullah Saleh, and the basis for their legitimacy. From a Yemeni perspective, the sectarian and regional geopolitical aspects to the crisis have been a sideshow to the local politics at play. However, Operation Decisive Storm risks unleashing a hell still (only just, and very imperfectly) contained by domestic power balances.

The military campaign is ostensibly to force the return to power of a weak and isolated president, Abdo Rabo Mansour Hadi, after he fled the country following a slow-motion coup by the northern rebel group, Ansar Allah.

Better known as the Houthis (after the family that has led the movement since 2002) the group has ties to Iran, though the duration and strategic depth of their association is a matter of conjecture. Both Saudi Arabia and Iran have overstated the level of coordination between Iran and the Houthis to their domestic audiences. For example, members of the Iranian elite have touted Sana'a as the fourth Arab capital to join the Iranian revolution, while both Saudi Arabia and the Yemeni president have framed Operation Decisive Storm as saving Yemen from Iranian hegemony, calling the Houthis 'puppets of Iran'.

In reality, Iran's ability to drive events in Yemen through the Houthis is limited; hard evidence of Tehran's capacity to issue orders is scant.

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That dearth of evidence is underlined by Saudi Arabia's willingness to assign geopolitical significance to symbolic or commercial ties, such as the new commercial flight route between Sana'a and Tehran.

The Houthis' success in Yemen is almost entirely a product of local political factors, military capacity, and support. The Houthis steadily gained influence by articulating widespread anger over the failures of Hadi's government, such as when it cut fuel subsidies in August 2014. The following month, Houthi militias overran the capital Sana'a with the acquiescence of factions of the military loyal to former President Ali Abdullah Saleh, who was ousted in 2012 but was granted immunity from prosecution (of whom more in a moment).

Tensions continued to build between the Houthis and President Hadi over an appropriate power sharing arrangement, and in January the Houthis surrounded the presidential palace and placed the president and other senior government figures under house arrest. In an apparent attempt to call the rebels' bluff, President Hadi and his cabinet resigned, leaving the Houthis militarily dominant but politically overstretched and increasingly unpopular. Hadi fled to the southern city of Aden, declaring it to be Yemen's new capital, and withdrew his resignation. On 25 March the Houthis, again drawing on parts of the military still loyal to Saleh, captured the al-'Anad air base just north of Aden and took Hadi's defence minister hostage. Hadi subsequently fled to Saudi Arabia from where he now praises the Kingdom's willingness to conduct air strikes in support of his leadership.

This snapshot of Yemen's political alliances makes some sense if one follows the fairly linear 'Saudi v Iran' script that permeates regional politics at the moment, but then it deviates and ties this logic in knots.

Former president Ali Abdullah Saleh and his family have been informally affiliated with the Houthis since Saleh's removal from office following the 2011 protests. But prior to that, his regime fought six brutal wars against them between 2004-2010. For now, Saleh and the Houthis share a common enemy in President Hadi, although even that may have been put up for sale by Saleh over the weekend. Saudi Arabia has come and gone with the Houthis as well, invading northern Yemen to fight them briefly in 2009-2010, only to apparently investigate a closer collaboration with them last year against Yemen's Islah Party, elements of which are affiliated with Saudi Arabia's other bête noire, the Egyptian Muslim Brotherhood.

Meanwhile, both the Houthis and Saudi Arabia are declared enemies of al Qaida in the Arabian Peninsula (AQAP). Former president Saleh, on the other hand, repeatedly released its members from prison and had his military abandon their posts and relinquish territory to them in an apparent attempt to illustrate just how chaotic Yemen could become if protests against his rule continued.

Despite the international tone to recent events, Yemen's predicament is very much a product of domestic political tensions and failures, the threads of which have been woven through the country's rivalries, palace intrigues, and humanitarian calamities for over a decade. Each of Yemen's contenders to power have sought political advantage by attaching their cause to wider regional preoccupations, whether sectarian rivalry, the war on terrorism, the rise of Iran, or a fear of the Muslim Brotherhood.

Saudi Arabia's Yemen intervention is part of the broader regional trend of narrowly-based regimes shoring up their domestic legitimacy through external posturing – the Iran-Iraq war (1980-88), the Saudi invasion of Bahrain (2011), Iran's support of Hezbollah and Hamas, regional support for/against the Muslim Brotherhood in Egypt and, of course, more recently the civil war Syria and Iraq. The list goes on.

The notion that outsiders now need to 'pick a side' between Saudi Arabia and Iran in Yemen is extremely dangerous. The Houthis may well have imploded as they tried to govern the country, and been forced back into negotiations. But we will never know, so great is the desire for outsiders to be seen to be doing something. Anything.

Photo by Flickr user RA.AZ.

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Last week I was one of many who highlighted an old Lee Kuan Yew quote in which he argued that Singapore's development had a lot to do with air conditioning, because it made 'development possible in the tropics. Without air conditioning you can work only in the cool early-morning hours or at dusk.'

Paul Krugman also noticed the quote, and blogged on it for the NY Times, with evidence from the American south backing up LKY's claim about the link between air conditioning and development in warm climates. Tyler Cowen at Marginal Revolution pushes back gently at Krugman's argument, citing this paper which argues that Krugman's argument may be backwards: as consumers have become wealthier, it argues, they have placed a higher premium on 'nice weather', so they move to warmer climates and buy air conditioners. There's also this post, which argues that air conditioning may have been an important early factor in the development of America's south, but not so much lately.

Lastly, my thanks to Elliot Brennan, who points out that there was an entire book written on LKY's theory about air conditioning and Singaporean development. 

(PS. On the broad subject of unexpected reasons for major social trends, check out some recent articles on the link between lead exposure and crime.)

Photo by Flickr user Choo Yut Shing.

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