Lowy Institute
US presidential race 2016

Avowed 'democratic' socialist Bernie Sanders and unashamed arch-capitalist Donald Trump were the big winners in today's New Hampshire presidential primary. The Sanders win will lead to a huge, albeit probably temporary, loss of confidence for the Hillary Clinton campaign while there is now even less certainty about who, if anyone, can challenge Trump for the Republican nomination later this year.

What mattered most in the Democratic contest was the winning margin, with Sanders besting Clinton by more than 20 percentage points, according to latest indications, and gaining a resulting preponderance of delegates. He has proved himself a formidable opponent for the former secretary of state who was long thought to have the nomination sewn up.

In the Republican field, the identity of the second place-getter was of the most interest. Here, unheralded moderate John Kasich's return of about 16% of the vote was not unexpected in the somewhat atypical and nationally unrepresentative New Hampshire electorate. However, the strong showing by Kasich is still a big setback for other GOP candidates who sought a confidence and momentum boosting surprise as Trump consolidates. This is particularly the case for Marco Rubio, who came in fifth with barely 10% of the vote.

In fact, save for the worse-than-predicted Rubio performance — possibly a result of his cringeworthy showing in the last debate before the vote — the results on both sides of the political divide largely belied the reputation of New Hampshire as a graveyard of pollsters.

In comparing the two results, it's clear that Clinton is being punished for several years of what seemed like ineluctable electability. She must often look wistfully at the still massive and divided Republican field that dilutes opposition to Trump.

Clinton's enduring popularity with non-white voters in much of the rest of the country is still expected to carry her through to November's election, but the Vermont senator's cosiness with Wall Street is hurting her campaign. There is also the continuing saga of her use of private email while secretary of state. The Sanders campaign has refused to exploit this as an election issue, but it may not have to with the FBI on the case. Regardless, Clinton is still given a quite incredible 80% chance of winning the Democratic nomination according to collated betting odds.

Turning, as all things inevitably must, to Trump, the New Hampshire result has seen his chance of winning the GOP nomination reach 42%, according to those same betting odds. This must come close to confirming the worst nightmares of many mainstream Republicans and others outside the camp.

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Yet still many pundits nurse a statistics-defying belief that some sense of normalcy will eventually return. This would take the form of an establishment candidate — likely Rubio, a somehow resurgent Jeb Bush, or even the hyper-conservative Ted Cruz, who is at least an experienced politician — seeing off the other challengers and mounting a sustained challenge against the frustratingly popular and id-driven New York billionaire.

So, as the Nevada caucus and the South Carolina primary beckon for the Democrats and Republicans respectively, it is essentially still all to play for. Nonetheless, there are two potential major developments on the horizon that could shake up both contests in the near future.

The first is the possibility that former New York City mayor and businessman Michael Bloomberg will run for president as an independent, seeking to capitalise on the loss of faith many voters have expressed in both mainstream political machines. As well as sitting outside the process altogether, the centrist Bloomberg (who confirmed this week he is considering a run) combines what are considered to be the more appealing elements of the various existing candidates, including the self-funded campaigning ability and business bona fides of Trump, and the socially progressive leanings of Clinton and Sanders. The increasing momentum for this campaign could  prove destabilising for red and blue voting blocs alike.

The second potential disruption is the growing chaos in global financial markets and the looming threat of a worldwide recession. This recalls the closing stages of the 2008 presidential campaign between Barack Obama and John McCain. With the global financial crisis still unfolding, Obama, already in the ascendancy, was able to effectively portray the Republican party as culpable through policies that had favoured deregulation of financial markets.

Should the instability continue to mount and exact a heavy toll on Americans — there are already signs of a jobs slowdown — there is a chance it could have a dramatic impact on the narrative of the primaries, and likely the election. As compared to 2008, however, the culprits will not so easily be identified. Sanders could make a case against Clinton's Wall Street ties while the Clinton camp could warn about the risk of dallying with socialism in uncertain times. On the Republican side, Trump will no doubt continue to champion his job-creating credentials while the likes of Rubio and Cruz could double down on conservative ideology.

So, just as the waters seem to be clearing, there is a potential for plenty of muddying yet.

Photo by Alex Wong/Getty Images

US presidential race 2016

Marco Rubio should drop out of the White House race and become Donald Trump’s vice presidential nominee.

Rubio devotees; hear me out. First, some facts:

  1. Every Republican candidate who has been the frontrunner for as long as Trump has gone on to win the nomination.
  2. Never has a Republican candidate who has lost both Iowa and New Hampshire become the nominee.
  3. Trump won New Hampshire convincingly. New Hampshire has a 2-1 lead over Iowa when it comes to predicting the Republican nominee.
  4. Trump came second in Iowa, yet won more votes than any previous winner of that caucus.

The last point is worth delving into a little. Trump's popularity is lowest among voters who consider 'values' to be the most important issue (as opposed to 'jobs', 'economy' or 'national security'). In Iowa, a majority of Republican caucus-goers identify as ‘evangelical Christian’, and 40% consider themselves ‘very conservative’. Given Trump’s relatively weak religious and/or conservative credentials, and his oft maligned lack of ‘ground game’ in Iowa, where retail politics is at a premium, gaining the second highest vote count in Iowa caucus history is not a terrible result.

In the days after the Iowa caucus, pundits and media piled on Trump to talk down his chances of winning the nomination. This was partly Trump’s own doing. The candidate failed to frame his real chances of winning Iowa, and lost some momentum when the result did not reflect the inflated expectation. The reverse was true for Rubio, even though he came in third.

Yet that criticism was largely catharsis masquerading as analysis. It was the yearning of failed pundits for vindication and an emotional purge by those desperate to see Trump falter. In other words, the importance of the Iowa result was massively overstated. The predictions of Trump’s imminent demise did not reflect reality.

Enter Rubio: a young, articulate, first-term Senator from a minority background who shows great promise. He has a compelling personal story of overcoming adversity to reach public office. He looks, sounds, and behaves like someone who might have succeeded as president after eight years of George W. Bush.

That’s why he won’t win the nomination. Rubio is the Republican Obama, at a time when GOP voters can’t think of anything worse. He’s clearly a tremendous political talent and the future of the Republican party. But the future is not the present.

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Now is not Rubio’s time, and timing is everything. Despite the media hysteria after Iowa, Rubio had a very poor period between Iowa and New Hampshire. At the GOP debate, Chris Christie had Rubio totally on the ropes, reducing him to repetitive robotics. Earlier on, Rick Santorum could not think of a single accomplishment of the candidate he was endorsing. Rubio's opponents used that footage to devastating effect.

Exit polls are showing a thumping victory in New Hampshire for Trump. If they are reflected in the final count, Trump will sweep up half of all the delegates. This is because in New Hampshire any delegates awarded to candidates who gain less than 10% of the primary vote are redistributed proportionally to the remaining candidates (and yes, at the time of writing a vote for Jeb Bush looks like a vote for Trump).

Trump is now a winner again and heading into primary states that favour him and Ted Cruz. Rubio is unlikely to be competitive in many of these early southern bastions, and he will be a long way behind in the delegate count before any chance of clawing back ground presents itself. Even if other establishment candidates drop out, Rubio has little chance of staging a serious comeback.

Yet, if Rubio cuts a deal now, he might have a chance to become Trump’s vice presidential nominee. If the opportunity presented, Trump would surely jump at it; the nomination would be sewn up against Cruz, and a Trump–Rubio ticket would be well positioned for the election.

To state the obvious, Trump and Rubio are everything the other is not. The two could gain a great deal from other, both in terms of campaigning and in being able to govern effectively.

Most importantly for Rubio, after four or eight years serving as the US vice president, never again would the accusation be levelled that he doesn’t have the experience to be president.

Rubio’s political career has not yet peaked. This is an opportunity for him to occupy the second-highest office in the most powerful nation on Earth; and there is every possibility he could one day take the step up.

The alternative for Rubio is a grinding, expensive war of attrition and probable defeat; at which point Trump (and certainly Cruz) would have no reason to want him on the ticket. .

It's possible there may already be an understanding. Trump and Rubio have gone out of their way to avoid criticising one another during the campaign; each picking their fights with others in the race. After the last debate journalists lined up to give Trump a free kick at Rubio which Trump pointedly refused to take. While that might just be realpolitik campaigning at work, it could be Trump has already made his vice-presidential pick.

Photo: Scott Olson/Getty Images


By Alastair Davis, an intern in the Lowy Institute's Melanesia Program

  • The lobbying underway in Vanuatu to form a new coalition government is reported to be reaching a conclusion, with the proposed prime minister and ministers expected to be announced soon. The Pacific Institute of Public Policy has  posted a visual representation of Vanuatu's political history that puts the recent election in context.
  • The political uncertainty in Vanuatu  has slowed repairs to Port Vila's Bauerfield Airport. The tourism industry, already weakened by last year's cyclone, is feeling the strain with flights suspended from Australia and New Zealand.
  • In Fiji, the SODELPA opposition party is protesting the suspension of NFP opposition members from parliament and the state of Fiji's democracy by wearing black armbands to parliament.
  • The Lowy Institute's Euan Graham discussed the projection of Russian influence into the Pacific and its ramifications for Australia on the ABC's Pacific Beat. Russian soldiers have recently arrived in Fiji to provide weapons training.
  • Denise Fisher examines stresses and strains in New Caledonia as the planned referendum on independence in 2018 comes into view.
  • This piece from Transform Aqorau on DevPolicy argues that the instability and unintended federalism of Pacific Islands' politics distracts from the business of governing.
  • The Seasonal Worker Programme for Pacific states has been expanded to include the broader agricultural sector. The changes have been welcomed by the Australian cattle industry.
  • ANU has released two pieces with a legal bent. One discusses the case against jailed MPs in Vanuatu, and the other explores the extraordinary experiences of John Logan who sat on the Supreme and National Courts of Papua New Guinea in 2011.
  • Australia and New Zealand are considering how best to assist Pacific states in combating the Zika virus. The Cook Islands, Samoa and Tonga are all concerned about outbreaks.
  • Rosie Delmah, a 14-year-old Solomon Islander, is receiving huge international attention and nearing 15 million views on YouTube for her cover of  the Adele song Hello:


Ulugh Beg Madrasah, an important centre for astronomical study in the 15th century. (Photo by the author.)

Once the heart of the Timurid Empire, the city of Samarkand now sits in the middle of Uzbekistan, relegated to a splendid tourist attraction. Sitting atop the city with a clear view in every direction is the great astronomer Ulugh Beg's observatory, from where he mapped the stars while his grandfather's empire ebbed away.

Samarkand was at the heart of the ancient silk trading routes, which went cleanly around Russia, crossing Central Asia, Afghanistan and Iran to reach Turkey and Europe's shores. Track forwards to today, and this straightforward route across the continent is being replicated by China. The first freight train left from Yiwu in China's Zhejiang province en route to Tehran in the wake of President Xi Jinping's recent visit to Iran.

Beijing, it seems, has the ancient silk routes in mind.

My recent visit to Uzbekistan was part of a longer trip that included stops in Islamabad, Beijing and finally Tashkent. With conferences and workshops at each stop, the goal was to understand China's Silk Road Economic Belt strategy from the ground up. This particular trip was aimed at trying to understand some of the recent shifts around the vision, now that President Xi has so clearly thrown his institutional weight behind it.

While no such trip is every wholly conclusive, I walked away with two clear impressions. First, in Pakistan, China is uncertain about how it is going to mitigate the complicated local political dynamics it is getting dragged into as local authorities quibble over where different strands of the China Pakistan Economic Corridor (CPEC) should go. Second, in Tashkent, Uzbekistan is hesitant to completely fall into China's embrace, but prefers it to Russia's entreaties.

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The lesson from Tashkent was hammered home at Ulugh Beg's monumental observatory. Built in the 1400s, it was a testament to Timurid ambition. Inheriting a weak tribe, the great Timur the Lame turned their fortunes around and built an empire that spanned the ancient Silk Road from Beijing to Turkey's Asian shores. As our guide pointed out, this meant that he was able to levy taxes along the entire route. He left a mighty inheritance to his sons which meant his grandson, Ulugh Beg, could build his monument to the stars. The ancient routes brought prosperity, scientific advance and grandeur that lived through the ages.

Nowadays, Beijing's long-term ambitious are less clear, though the short-term direction is obvious. Having decided that China's west needs to be reconnected to the world, Beijing has poured massive investment into Xinjiang and across the border into Pakistan and Central Asia. While the exact route of the CPEC through Pakistan is not certain (hence the bickering in Islamabad), the general path, linking Kashgar to the seas, is clear. Similarly, in Uzbekistan, the plan to develop train lines from Tashkent through Ferghana to Kyrgyzstan points to a project that will help develop faster train links across Central Asia to China. And sending a train down the route from Yiwu to Tehran shows that these routes through the region exist already.

The loser in all of this Eurasian connectivity is Russia. A historical player in the region (and one which Timur attempted to dominate a number of times), Moscow has chosen to express itself through the establishment of the Eurasian Economic Union, an attempt to re-create the Soviet economic space whereby fiscal rules and customs tariffs in the heart of Eurasia are determined by the Kremlin. But the EEU is largely seen as a paper tiger; policy-makers I spoke to in Beijing are uncertain it will survive. they point to tensions between powers in the Union (eg. blocked trade between Kazakhstan, Belarus and Russia), and they say it seems unlikely the already faltering Kyrgyz or Armenian economies will welcome higher tariffs on their external trade while their domestic markets are opened up to Russian monopolies. Anyway, seen from Beijing, the single customs and trade bloc is actually a convenient trading and transit partner, offering one clear market from China's western borders to Europe's eastern flank.

Even if Moscow chooses to frustrate China's silk route strategy, the opening of Iran shows its increased viability. The ramifications are hard to predict. In ancient times, eventual overreach and imperial intrigue weakened the Timurids and they lost control of the Silk Road. Samarkand today is testament to their faded glories. For China, it may be too early to predict over-reach, but certainly the slowdown at home is having ramifications abroad.

Already, softening domestic gas needs have led to the suspension of the Line D gas line bringing hydrocarbons from Turkmenistan to China through Uzbekistan. In Pakistan, security concerns persist, but more intriguing is the possibility of China exploring opportunities in Chabahar, Iran, a port not far from Pakistan's Gwadar and in a far less sensitive part of the country, thereby suggesting a more convenient and cheap route to the seas.

While Chinese state planners declare there is room for all of these projects under President Xi's 'Belt and Road' vision, in truth it means China has options and has constructed a vision which can go in any direction it chooses. This keeps Beijing in the driving seat, careful not to over-promise to any one country while maintaining opportunities with all. It also provides Beijing with the perfect vehicle to keep its domestic capacity moving, with new markets and opportunities found over every hill and in every valley across its western borders.

The longer term problem for China is the responsibility that will eventually fall to it. While Beijing may see itself as a provider of goods and opener of markets, it is in reality reconnecting the continent in order to place itself at the heart of a new latticework of infrastructure and trade routes emanating from Urumqi. Not only is China going to be bound to these markets, it will also increasingly find itself in an awkward place when trying to sidestep involvement in local issues.

Already visible in Pakistan in complaints around routes planned by the CPEC, this haranguing is something which is going to become increasingly common as Chinese planners and builders find themselves marching into difficult places with no clear understanding of local dynamics. And while such complications can be sidestepped in distant Africa, in neighbouring Eurasia it has ramifications with direct links home. 

In tracing the ancient Silk Road, China needs to find a way to navigate through the many cultures and civilisations that live along it. As China displaces Timur to become the guarantor of the ancient silk roads, the logic of non-interference can no longer hold.


Taiwan's incoming Democratic Progressive Party (DPP) administration is about to come face to face with unprecedented vulnerabilities in national security, thanks to a variety of factors which the new government is likely to find difficult to alter in the near future.

For more than 30 years from 1949, the modernisation of Taipei's armed forces, particularly its air force and navy investments, followed the lead of Beijing, as Taiwan sought to keep pace with its primary security threat. Then, following the democratisation movement of the 1990s, the Kuomintang gave way to the DPP. However, the Chen Shui-bian Administration (in power from 2000 to 2008), lacked a congressional majority, and opposing parties repeatedly rejected budget measures, including new submarines and other major military projects. The subsequent Ma Ying-Jeou Administration, which had a policy of cross-Strait integration, did proceed with a narrow range of military build-ups but with a defence budget that never tracked above 3% of GDP. The major programs of recent years, such as new P-3C anti-submarine aircraft and Apache helicopters, were largely planned before 2008 (with the exception of upgrades for Taiwan's F-16A/Bs and the Navy's two Perry class frigates).

Taiwan's indigenous defence industry has provided some local designs such as the Tuo Chiang-class stealth corvette and the CM-32 armoured vehicle, but limited budgets and domestic technological capacity have constrained the internal supply of arms.

All three of Taiwan armed services need modernisation. Taiwan's air force receives the most investment but still there is no plan to upgrade or replace its fleet of Mirage 2000-5 and F-5E/F fighters, which are due to be phased out of service over the next four years. The upgrades to Taiwan's F-16s and the Indigenous Defence Fighter notwithstanding, the loss of Mirages and F-5s would put Taiwan's air power in an even worse position against China's air force, with its J-10s, J-11Bs, J-16s and other advanced fighters.

As for Taiwan's navy, China's anti-access and area denial (A2/AD) capability, which deny the US and others militaries a maritime military presence in the western Pacific, have forced Taiwan to focus its  strategy on sea denial, most recently evidenced in launches of its stealth missile boats and corvettes. However, without any new submarines, Taiwan's small fleet, which includes two submarines that are more than 70 years old, Taiwan's sea denial capability is incomplete. Meanwhile, the the air/missile defence capability of the Navy's major surface combatants, unless improved, may not be adequate to match China's A2/AD capability.

Taiwan's army is most in need of modernisation. In addition to a range of World War II artillery pieces, its armoured vehicles, including tanks, lack modern protection such as reactive or layered armour, and would be vulnerable against most modern anti-tank weapons.

However, promises of economic development and social welfare made by Taiwan's newly elected president Tsai Ing-wen, especially when combined with the government's detoriating financial capacity, will not leave much room for increased military spending. Furthermore, most of the DPP's new legislators appear to have little interest in defence, which suggests it will be a low priority for the new administration. While the DPP Administration could begin some projects, such as the indigenous submarine and combat aircraft, these investments will take years to come to fruition. For the foreseeable future, it seems the mainstay of Taiwan's defence will remain its aging arsenal.

Taiwan is also exposed to the threat of irregular warfare. Through cross-Strait integration, the number of Chinese tourists, students and business travelers to Taiwan is growing. Chinese intelligence agencies can deploy agents under such covers. Chinese companies' extensive investments and business operations in Taiwan also provide opportunities to collect information and influence the local economy. Taipei has little capacity to respond to such threats, which would complicate a cross-Strait conflict. For example, Taiwan's air defence relies heavily on surface-to-air missiles (SAMs) to compensate for quantitative weaknesses. But those SAM systems could be easily paralysed by sabotage or attacks from light weapons, especially during their movement to tactical positions. If Beijing deployed its special forces in advance of a conflict, Taipei's air defence capability could be considerably degraded, making it easier for China to conduct an air campaign or secure air superiority.

Taiwan's armed forces also have a human resources problem. Unlike most countries shifting from conscription to a volunteer force, Taiwan is under threat from the second-strongest military power in the world, with firepower that covers the entire island. It is arguably unrealistic to expect an all-volunteer force made up of just a small portion of the population to shoulder the island's defence. Despite repeated failures to recruit sufficient soldiers, however, the official policy of transforming to a volunteer force is still unchanged.

Of course, any discussion of a military confrontation between Taiwan and China has to consider the US, which has has been a key player in the Taiwan Strait since 1950. Its regional military presence ameliorates China's strategic pressure on Taiwan. However, as the cost of military intervention into the Taiwan Strait increases, America's willingness to take action may become uncertain, and military response times could become longer as Chinese military capability improves.

So while Taipei's own defence capability is more critical than ever before, there are significant obstacles in the way of much needed improvements.

Photo by Alberto Buzzola/LightRocket via Getty Images


In a year that will be dominated by the will they/won't they issue of the UK's referendum on whether it should stay in the European Union, there should be plenty of scope for some detailed analysis of the state Britain will be in when it heads to the polls. However, amid all the bluster over runners and riders and analysis of what reforms Britain may be able to achieve, one particular area has received little attention; what the UK's status as a 'double deficit' economy means in the context of an EU membership referendum.

'Double deficit' nations are those with both a budget deficit and a current account deficit. The budget aspect refers to the difference between how much a government spends and how much it collects. Running a deficit requires a government to borrow money to plug the gap. The 'current account' bit takes into account all the money arriving in a country less what it sends abroad. That's the UK's earnings from exports, foreign investments and other one-way transfers minus the money spent on imports, payments to foreign investors, and anything else, like aid payments, sent abroad. On both accounts, Britain is in the red.

In the years following the financial crisis, the UK began to run a large budget deficit. As the economy stumbled and tax revenues shrank, the government carried on spending to try to prop up the economy.  The debt pile accrued over this period now stands at around 80% of Britain's GDP. The Chancellor of the Exchequer, George Osborne, has emphasised the importance of the UK 'living within its means'. This has principally meant eradicating the budget deficit in a bid to begin paying off Britain's debt. There is a growing sense of urgency about attacking the high level of debt. This is due both to the £46 billion the government is spending on interest payments every year — more than its entire defence budget — and the prospect of interest rates going up or quantitative easing (QE) ending in the next few years. QE is  important because the Bank of England owns £375 billion of UK Government bonds, or 'gilts', the interest on which is transferred back into the Treasury;  monetary policy is effectively subsidising fiscal policy, at least for the time being.

The high level of government indebtedness also weakens the UK's current account standing. When the UK government pays interest to foreign investors, it does so in the currency of the creditors' choosing. This reduces the Bank of England's foreign reserve stocks, and increases the current account deficit, which currently stands at 3.7% of GDP. This would usually not be too much of a problem unless markets begin to question the UK's ability to pay back its debt. Such questioning happens in times of uncertainty, for instance, in the run-up to a referendum. As with all currency runs, the cycle can become vicious as investors call in debts and the central bank uses up reserves, which further undermines confidence.

Nobody knows whether this will occur either in the run-up to the referendum or after the vote – whichever way it goes. However, like all good central banks, the Bank of England is taking no chances. Figures released this week revealed it had increased its foreign currency holdings by one-third to $98 billion in the last twelve months. Incidentally, the Bank's entire holdings are worth less than the amount the Chinese central bank, People's Bank of China (PBOC), sold off in January alone (although the PBOC took that action mainly to maintain an effective peg against the US dollar, not to guard against a currency run).

What is a particular worry for the current account as we gear up to the referendum is the UK's primary income balance.  Read More

This measures how much UK companies and assets pay out to foreign investors minus the amount the UK collects from foreign investments. This is largely out of the control of either the government or the Bank of England since it is a function of basic market economics; if more money wants to flock to the UK, then it runs a surplus, otherwise, it runs a deficit. Until recently, the primary income balance had been falling due to the strength of the UK economy, particularly compared to that of other EU member states. In a sense, the UK has been a victim of its own success. More people want to invest in the UK than other places, while British investors have themselves been shy about looking too far afield. This means, basically, that returns on UK investments have performed stronger than the returns on foreign assets. This belies the strength of  the UK economy, but does mean that money pours out from the UK to investors beyond its shores.

At the moment, a run on the current account doesn't look likely to be an immediate problem, thanks mainly to a gloomy global economy. Investors looking for both stability and decent returns are faced with a difficult task. Across Europe, government bonds are negative, including in Germany. In the US, an election later this year is adding a dose of uncertainty into the mix, and the Fed's recent rate hike does not look like it will be followed by another any time soon. Canada, too, has cut interest rates as their economy slows in the face of a plummeting oil price, while Australia has also suffered at the hands of a commodity bust.

In less advanced markets, the foundations appear even shakier. Chinese growth has slowed to below 7% a year, even as measured by official government statistics. Recent steps to liberalise the currency have rippled through financial stability in Asia as fears grow of a string of competitive devaluations in the region. In other emerging markets, countries such as Nigeria and Turkey, which both absorbed much investment during the era of low returns in advanced economies, face a range of problems. These include a low oil price, which accounts for 70% of government revenues in Nigeria, demographic upheaval caused by massive population movements in Turkey, and the threat of terrorist activity in both.

In one sense, the UK's current account looks very British. It will likely muddle through, contingent on exactly how much uncertainty markets perceive in the run-up to the referendum. What happens after the vote is anybody's guess, really. Markets and analysts are already crunching the numbers about both the likelihood of the result and what each would mean for the British economy. Sushil Wadhwani, a former member of the Bank of England's rate-setting Monetary Policy Committee, however, once said that 'current account deficits appear not to matter until, well, they suddenly do.' Nobody knows if the referendum — or any other unforeseen event — will result in a run. Should it occur, however, the UK may start to look very similar to an emerging market facing a balance of payments crisis.

Photo courtesy of Flickr user Jon Mould


Brookings senior fellow and and Chinese economy expert David Dollar is in town as the 2016 G20 Studies Centre Visiting Fellow. David was a World Bank country director for China and Mongolia, and the US Treasury Department's economic and financial emissary to China. He's had a busy few days, speaking at the Lowy Institute on China's economic outlook and economic governance, and featuring on RN's Breakfast and  ABC News 24's The Business.

Yesterday afternoon the Lowy Institute's International Economy Program Director Leon Berkelmans sat down with David to discuss the accuracy of Chinese economic data, capital flight and the possibility of a significant yuan devaluation: 

US presidential race 2016

On the eve of the New Hampshire primary Michael Bloomberg has confirmed he is considering a run for the White House this year. The billionaire's interview with the Financial Times verifies a report a few weeks ago in The New York Times. It has also given every other candidate something to think about as last minute campaigning in the granite state reaches its snowy crescendo.

So, what do we need to know about Bloomberg, the businessman, philanthropist and former New York mayor who's decribed by hedge fund manager investor Bill Ackman  as 'the best of Trump without the worst of Trump'? From The New York Daily News comes this handy list of 10 essential factoids. Among other things, it documents Bloomberg's support for same-sex marriage, tighter gun controls, smoking restrictions, and regulations to encourage healthier eating (though he did have to back down on his plan to ban really, really large cups of soft drink after it was found to be unconstitutional). He's also pro-choice, a position he shares with half the country, according to a 2015 Gallup poll.

How would a Bloomberg run affect the race? If you look at the polling available, you'd have to say the results are inconclusive. A Bloomberg Politics Des Moines Register poll of Iowa voters a few weeks ago found half of Republican caucus-goers didn't like him, or in pollster speak, had an unfavourable view. That fell to 26% among Democrat caucus goers  but only  17% indicated they liked the man. A nationwide poll conducted by well known pollster Frank Luntz, however, concluded 29% of Americans would support Bloomberg in a theoretical three-way race between the former mayor, Donald Trump, and Democratic front-runner Hillary Clinton.

The consensus view is the person with most to lose from a Bloomberg campaign (aside from the potential candidate himself who figures a campaign would cost a cool $1billion) is Clinton. The original NY Times report that tipped a Bloomberg run suggested he had had some unfavourable things to say about the former secretary of state in relation to her use of a private email server.  Daily Beast special correspondent Michale Tomasky pushed the speculation a bit further.

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'Let’s assume that Bloomberg was aghast at the email situation last year, but that it’s faded, and he’s now decided he’d be fine with a Clinton presidency even as he explores a bid of his own. OK. But even this brings us to another thought—that maybe Bloomberg thinks there’s some chance Clinton might be indicted sometime soon.'

Despite all the pooh-poohing from the Clinton camp, the email saga refuses to die. The latest development is confirmation from the FBI that it is indeed investigating Clinton's private emails.

While the FBI has merely stated what everyone knew, Clinton's many enemies will pounce. Even before the FBI confirmation, conservative voices, like Brian Darling, were hoping the scandal would bring Clinton down.

It will be very interesting to watch as her head to head numbers start to plunge whether Democrats toss Hillary under the political bus and look for a new candidate.

Odds are this will remain wishful thinking. And Bloomberg won't keep us guessing for long. In the FT interview, he confirmed his name would have to be on ballot papers by the beginning of March. Which means just a few more weeks of diverting conjecture about possible ballot sheets that could pit two billionaires against an evangelist and a socialist.

So how would you describe a contest between Sanders (D), Cruz (R), Trump (I) and Bloomberg (I). 'It'd be incredible,' tweeted @Zackbeauchamp, world correspondent at @voxdotcom. At best, it is also a remote possibility. But,  given the form demonstrated in this race to date, it would be foolish to rule it out. 

Photo by Spencer Platt/Getty Images 


In a previous century the Royal Australian Air Force (RAAF) did not always fly technologically advanced aircraft that gave it uncontested regional air superiority. That's a statement which anybody born since the mid-1970s probably has trouble believing, but not only is it true, these times are now also returning.

First, some history.

By the end of the Vietnam War, the RAAF operated more than 100 Mirage III fighters originally bought as point defence interceptors to counter Soviet-built bombers flying out of Indonesia. The trouble was that times were changing: Sukarno fell, others countries in the region became richer, and better jets were bought. For some time, RAAF pilots thought they still had the edge. But then they realised this was no longer the case, as a RAAF fighter pilot of the time Chris Mills notes: 'My personal experience of loss of air superiority occurred in 1975. I was flying an air combat mission in a Mirage near Butterworth, Malaya at the moment this happened.'

At that time, the Royal Malaysian Air Force had re-equipped with F-5Es that had good manoeuvrability, better missiles and avionics and a low radar cross section. At Mills recounts, their pilots might have had only 50 hours in the aircraft, but they proved superior in mock air combat to RAAF pilots with thousands of flying hours on Mirages.

This situation is now repeating. Other people are getting better jets. This in itself is no cause for concern, as Foreign Minister Julie Bishop recently said most countries in the Asia-Pacific are simply modernising as their military equipment ages. Moreover, most countries near us are democracies and if there is an iron law of international relations it is that democracies don't fight each other. Accordingly, the focus shifts to countries with more authoritarian governments, and in this our principal ally has sharpened our gaze for us. US Defense Secretary Ash Carter sees the return of geo-political competition in the shape of China and Russia driving future American defence planning and budgets.

In terms of thinking about regional air superiority, the rise of the People's Liberation Army Air Force (PLAAF) has been stunning.

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Over the last 20 years, the PLAAF has been transformed through an extensive but focused re-equipment program. As a result the PLAAF's fighter force has dramatically changed. It has gone from having an obsolete, 1950s technology fighter force to today having a highly capable, very large and up-to-date fighter force equalled only by the US Air Force and the Russians. For Asia-Pacific air forces, large and small, the PLAAF fighter force has become the benchmark.

This modernisation program to make the PLAAF a 'strategic air force' continues at a brisk pace. Indeed in 2014 Chinese President Xi Jinping declared that the country must 'accelerate [its] construction of a powerful people's air force… in order to support the realization of the China dream and the dream of a strong military'.

Let's get some perspective.

in 1995, 20 years after Chris Mill's epiphany, the RAAF's F/A-18 'classic' Hornet fighters were clearly technologically superior to the best fighters the PLAAF flew and had been for years. Today the situation is reversed and is worsening. In simple terms — and arguably a bit optimistically for the RAAF — the continuing development of the PLAAF means that by 2020 it will comprise about 1100 modern fighters as follows:

  • 650 4th generation (comparable to the RAAF's upgraded classic Hornets)
  • 450 4.5 generation (comparable to the RAAF's Super Hornets)
  • 24 5th generation (aspiring to match US Air Force's F-22 and beat the F-35)

Meanwhile in 2020, two-thirds of the RAAF's fighters will still be the 1980s classic Hornets. This was not as originally intended. The last of these should have left service last year but with the F-35 delayed, this now looks more like 2022. Well done, then, former Defence Minster Brendan Nelson in disregarding RAAF advice and acquiring 24 Super Hornets when difficulties with the F-35 program first became apparent. This purchase has allowed some semblance of regional technological air superiority capability to be maintained. 

Moreover in December 2020, No. 3 Squadron at RAAF Base Williamtown with 16 F-35A aircraft should finally achieve initial operational capability presaging the withdrawal of the aging classic Hornet fleet. With Government decisions made to acquire 72 F-35As, the only apparent obstacle to this seems to be if the F-35 slips again. In this regard, the latest DOT&E report highlights several troubling issues, in particular with software development – the bane of modern aircraft designers. 

Some will say I am being too hard on the RAAF's classic Hornet fleet as it is unlikely that the RAAF will ever need to combat fighters comparable to those the PLAAF operates. And even then, fighters operate within a complex air defence system where the RAAF's E-7A Wedgetail AEW&C aircraft will give superb situational awareness, allowing even outclassed fighters to win. Maybe. Maybe not. It greatly depends on the circumstances. But if you were flying the fighter, is that a risk you wish to take? Certainly a technologically better fighter force achieves higher kill ratios allowing a small air force much greater relative combat power. Conversely, an air force flying a technologically inferior fighter won't deter most adversaries.

Air superiority in itself will not win a war, but it is essential to not losing one. When Australia first committed to the F-35, the RAAF had some 100 fast jets as good as any in the Asia-Pacific region. In the next few years this looks set to drop to only 36 fast jets, including the Gillard Government's purchase of 12 Growler aircraft derived from the Super Hornet. Australia does not need to keep the aged classic Hornet fleet in service any longer than it must. The Asia-Pacific has moved on, so should the RAAF. The new era of contested air superiority demands it.

Photo courtesy of Australian Defence Image Library.


It wasn't so long ago that China was being accused of holding its currency down to boost exports. So it's ironic that the issue likely to dominate the G20 Finance Ministers Meeting in Shanghai on 26-27 February is how to deal with the ongoing depreciation of the Chinese exchange rate.

On 9 November 2015 Donald Trump claimed that the worst of China's sins was 'the manipulation of China's currency, robbing Americans of billions of dollars of capital and millions of jobs'. He said that on day one of a Trump administration, the US Treasury Department would designate China a currency manipulator and impose duties on Chinese goods. Trump was a little out of date. The IMF had indicated in May 2015 that China's currency was no longer undervalued.

More recently there has been a major outflow of capital from China, putting downward pressure on the yuan. This reflects growing concern over China's growth fundamentals, unease over attempts by the authorities to intervene in markets and the increasing realisation that the currency has but one way to go; down.

Rather than intervening to hold the currency down, the People's Bank of China (PBoC) has spent a significant amount of its reserves in an effort to offset the fall in the renminbi. The PBoC spent close to US$500 billion in the past six months supporting the currency. While China continues to have the largest holdings of international reserves of any country at just over US$3 trillion, currency traders believe the intense intervention by the PBoC is unsustainable. There was once a view that China's reserves were so vast that the PBoC could set the value of the yuan wherever it liked. This is no longer the case. China cannot indefinitely burn through reserves at over $US100 billion a month.

So what can China do?

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Another irony is that within weeks of the IMF announcing that the yuan would join the basket of currencies determining the value of the Special Drawing Right, a sign that China's currency was now considered to be freely usable, the Governor of the Bank of Japan, Haruhiko Kuroda, led a series of calls on China to tighten capital controls to stem the outflow of money and reduce the relentless downward pressure on the currency.

Reintroduction of capital controls would have to be carefully handled, particularly given the recent less than successful attempts by the authorities to intervene in markets. Attempts by the authorities to control capital outflow may raise investor concerns over China's broader policy intent and result in even greater pressure for capital outflows.

Moreover, as Eswar Prasad, the former head of the IMF's China division, has noted, capital controls alone will not inspire confidence in the outlook for the economy and the authorities' policy intent. On that front, there is no substitute for policy action.

Another option China could follow is to let the currency go. It will overshoot, but will find its market level and in doing so will break the persistent expectation of a depreciation which is driving capital outflow. In addition, because China has not yet fully opened its capital account, corporate foreign debt is not large and currency mismatch is small. A large depreciation will not cause domestic financial concerns.

But a major depreciation in China's exchange rate would cause significant volatility in world capital markets and lead to accusations that China is pursuing a competitive depreciation at the expense of other countries. China has already been accused of being at the front line of a currency war.

A recent report from Bank of America Merrill Lynch called on the forthcoming G20 Finance Ministers Meeting to endorse a one-off devaluation of the Chinese exchange rate, a ‘commitment for a stable dollar’, new swap lines for emerging markets, and fiscal stimulus by France, Germany and the UK to prop up flagging world growth and avoid financial panic. However the authors are not hopeful of such an outcome, saying ‘our deep concern is that the macro and the markets may first need to worsen to inspire the correct policy response’.

Mike Dolan from Reuters is closer to the money in suggesting that the Shanghai G20 Finance Ministers meeting will likely stick to the well-established script in dealing with global currency tensions. Just like previous meetings, there will likely be commitments to ‘monitor financial market volatility and take necessary actions’, along with ‘carefully calibrated and clearly communicated’ policy settings in order to minimise negative spillovers and resist protectionism.  But notwithstanding the rhetoric, the meeting is unlikely to result in any country doing anything differently.

As chair, it is likely to be a difficult meeting for China. Premier Li Keqiang recently phoned the IMF Managing Director, Christine Lagarde, pledging to keep the Chinese currency ‘basically stable’ and improve communication with financial markets. China can certainly improve on how it communicates its policy intent, but regardless, 2016 will likely be a rocky year for the yuan.

Photo by Zhang Peng/LightRocket via Getty Images


The latest meeting of those charged with steering New Caledonia into its next stage of governance went some small way to resolving sensitive political issues but also demonstrated just how deep divisions run regarding the possibility of independence.

The Committee of Signatories that met in Paris last week is the steering group of the Noumea Accord which, by building on previous Accords, has presided over 28 years of peace in New Caledonia. The Accords ended the 1980s civil war over independence with promises to hand over significant responsibilities to the locally elected government, to re-distribute nickel wealth, and to hold an independence referendum by 2018.

Representation on the Committee now extends beyond the eight remaining signatories to the Accord. All of the major political powers were present in Paris, an achievement in itself after past non-attendance by one major independence group and one pro-France group. Apart from the French State delegation, led by Prime Minister Manuel Valls, the Committee included representatives of the four major party groups in New Caledonia (the Rassemblement and Calédonie Ensemble, both pro-France groups; and the FLNKS/Palika and Union Calédonienne, on the pro-independence side), along with key elected office-holders in New Caledonia (the President of New Caledonia, the Presidents of the three provinces).

The meeting addressed the five controversial issues at the heart of Kanak independence demands: the future status of New Caledonia, voter eligibility, transfers of responsibilities, opportunities for young Kanaks, and the sharing of nickel revenue. Given the depth of differences, and no doubt with a view to urging focused, concerted action in difficult areas, the French-drafted summary of conclusions makes repeated mention of the 2017 national elections in France that will interrupt the vital last year of the Noumea Accord.

Opinions diverged most sharply over the future of New Caledonia. The pro-France group is clearly opposed to independence demands. One group even floated the idea of a third Accord that would defer an independence vote yet again. This proposal was rejected outright by pro-independence groups. In the end, the meeting simply noted a French commission had visited New Caledonia to clarify the statutory implications of the major options for the future. These are: independence, some form of association with France, and continued integration. The Paris attendees agreed to set up a timetable aiming at significant progress by the next Committee meeting in October this year, well before the 2017 French national elections.
There are also profound differences of opinion over who should be eligible to vote on independence; so much so that Kanak leader Rock Wamytan has raised the issue of voter eligibility with the UN Decolonisation Committee. To preserve the rights of indigenous and long-term white settlers, the Accord restricts voting in provincial elections to those resident before 1988. Similarly, only those resident before 1994 are eligible to vote in the independence referendum. There have been allegations both that some ineligible voters have been incorrectly included on the electoral roll, and other eligible voters not included. In all, about 3000 people were thought to have been affected. The issue has so far prompted an exceptional Committee meeting in July 2015, and a report by a French expert. There was progress at last week's meeting, where agreement on an approach to managing the different views reduced the list of disputed names to 1062. But it is notable that Rock Wamytan has already expressed continuing concerns.

Under the complex schedule by which France will hand over responsibilities to the local government, many transfers have been made, although the timing of the transfer of so-called Article 27, which covers security responsibilities, is still controversial. Those meeting last week agreed to refer the matter to the French State Council for judgment. The French State cautioned that an organic law may be required. This would be complex legislation that would have to be effected before the 2017 elections in France.

Further agreement was made on progressing the many development contracts financed by France that underpin the Noumea Accord process. In this context, greater attention is to be focused on the chronic social problems among youth (implicitly indigenous Kanak youth).

Finally, and unusually, a second day was added to consider the serious issues raised by the global collapse in the price of nickel.

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Together with technical problems, the nickel price has affected production in New Caledonia's two new multi-billion dollar nickel plants and this has had knock on effects on the financing of the economic re-balancing in favour of the Kanak heartland, which is at the core of the Noumea Accord. In a Common Declaration, the Committee last week agreed to 'political dialogue' within the next six months, and called for further 'solidarity' between the three major private company players (French SLN, Brazilian Vale, and Canada's Glencore). It agreed to address urgently the sensitive question of export destinations, given the recent demise of one of the principal export destinations, Australia's QNI. And the French State was urged to take a stronger role, given its role as shareholder in ERAMET/SLN, in addressing technical problems and investment in the one major current producer, SLN at Doniambo.

With so many differences to resolve, and so much work to do, before the all important 2018 referendum, it would be easy to underestimate the achievements of this latest Committee meeting. Bu while it only managed some small steps, they were forward steps; no mean feat in New Caledonia these days.

Photo courtesy of Flickr user Sekundo


Part 1 of this piece here.

Cubans have a good sense of humour – but I learned to my cost that Fidel is no laughing matter.

I was in Cuba as part of a Latin America trip, meeting with government officials and foreign diplomats, and getting a sense of the place. One day I spoke to the Cuban diplomatic academy about international developments. The academy's premises were ramshackle but the diplomats, almost all female, were razor sharp. Their questions were right on the money and I enjoyed the exchange. My only misstep was at the beginning, when I made a gentle joke about the Commander-in-Chief. 'I have been thinking of giving a four-hour lecture today in homage to Fidel,' I began. 'But then I decided that only Fidel could pull that off.' The gag was meant to be affectionate but it was met by complete silence and much uncomfortable shuffling. Everyone looked at the director of the academy, who looked severely at me.

Driving down Havana's famous Malecón esplanade it seemed to me very likely that President Obama will visit Havana this year. For a president in his final year of office, the lure will surely be irresistible. While full normalisation can only occur once the trade embargo is lifted (an unlikely prospect with the current Congress), Obama's relaxation of rules on remittances and travel have benefited Americans and Cubans – and improved the reputation of the US in Latin America. Obama deserves credit for bringing sanity to an area of policy that has long caused Washington's friends to scratch their heads.

My final glimpses of the island from the airplane window were of a largely agrarian landscape. Cuba is not without its social achievements, including a high literacy rate and free health care. But the country is sclerotic and undeveloped. Havana would blame the US blockade for all this whereas many observers point to the defects of Cuba's political system. Certainly, Cubans only need to look across the water to Mexico – which is, despite the media coverage of El Chapo and narco-states, increasingly prosperous and integrated into north America – to see an alternative future.

Change is coming to Cuba. What we don't know is whether it will be the controlled change imagined by the old revolutionaries or a rush of influence from the north that transforms Havana into a Little Miami. My guess is that in ten years' time, when both Fidel and Raúl have gone to the great revolutionary convention in the sky, Cuba will be unrecognisable.


The Washington Post editorial board, which has long argued for a vocal and uncompromising emphasis on democracy promotion in American foreign policy, has published an editorial criticizing the Obama Administration's decision to host Southeast Asian leaders at Sunnylands in California later this month.

The editorial rightly points out repressive steps recently taken by some Southeast Asian leaders, but in calling for American diplomacy to be more critical and more selective, it also misses two important dynamics in Southeast Asia, one regarding regional diplomacy and the other regarding the character of states in the region.

First, on regional diplomacy. As the editorial acknowledges, most of the heads of state and government coming to California are concerned about rising Chinese influence and power projection capabilities in the region, which they believe could constrain their ability to choose their own course in the world. They have sought to increase their economic, military, and diplomatic engagement with the US in order to avoid the loss of autonomy that would otherwise come with Chinese hegemony.

The Post understands this much, but objects to the invitation list. 'While the purposes are worthy,' the editorial reads, 'the result of Mr. Obama's initiative will be an unseemly parade of dictators at the Sunnylands resort, including a few long treated as too toxic to be granted the recognition that comes with an official visit to the United States.' Here, the Post errs.

President Obama is not inviting individual leaders to the summit in California; he is inviting the collective leadership of Association of Southeast Asian Nations (ASEAN), which has played a singular role in the development of East Asian diplomatic institutions. Its rotating presidency chairs the East Asia Summit, the first institution to include all of the region's leaders, and one which forces China to consult with smaller neighbors it might otherwise ignore in a bilateral setting. Moreover, ASEAN has fought off successive attempts by China (and in a particularly odd and less threatening episode, Kevin Rudd) to share or steal its leadership role. Were it not for ASEAN, regional institutions might already be dominated by China.

The Post's objection to the inclusion of leaders from undemocratic countries in the region overlooks ASEAN's importance, and by extension, the importance of institutions in American diplomacy. Beijing may see the region's future as merely a contest of economic and military power. Washington, for whom the institutions of the liberal international order are of critical importance, should not. It is not enough to trade, invest, and send military assistance to Southeast Asian countries. It is essential that we also support the institutions that bolster their autonomy, and thus the liberal order.

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With regard to the domestic political situation in the region, the Post makes some sound points, particularly with regard to Thailand and Cambodia. But the situation is not as bleak, or as black and white, as the Post would suggest. Vietnam, Laos, Thailand, and tiny Brunei are authoritarian countries, and the electoral and judicial systems in Myanmar, Malaysia, Cambodia, and Singapore remain stacked against the opposition. But each of the latter four has held free elections in the past five years that presented the real possibility of a change in government, a possibility that will become a reality in Myanmar on March 31. (In Malaysia, the government lost the popular vote but won a majority in Parliament due to malapportionment, a problem the Post will be familiar with).

Opposition parties remain strong and competitive in each of these illiberal democracies. Among the four noted above, Malaysia and Cambodia's leaders have become more repressive in the past year; but the military is about to hand over much of its power in Myanmar, and one could hardly call Singapore's Lee Hsien Loong a dictator. Indonesia and the Philippines, as the Post notes, are democracies.

The Post is correct that some of the more autocratic leaders will use the photo opportunities at Sunnylands to bolster their legitimacy back home. That is unfortunate, but it is also an unavoidable consequence of diplomacy.

As part of that diplomacy, the US should address Southeast Asian countries' shortcomings on democracy and human rights in the most effective way possible: privately. Publicly dressing down Southeast Asian leaders who have flown across the Pacific to meet with President Obama, as the Post suggests, would hardly advance the cause. Effectiveness, not volume, is the standard against which the Obama Administration's efforts should be measured.

In inviting the collective leadership of ASEAN to Sunnylands, the US strengthens regional institutions and supports the liberal international order. Quiet but firm conversations at the summit could support liberalisation on the domestic level, too. The Posts' preference for selective engagement and loud criticism would achieve neither.

Photo courtesy of Flickr user Gemma I Jere


 By Jonathan Pryke, Research Fellow and Chloe Hickey-Jones, Intern in the Lowy Institute's Melanesia Program.

  • The 2016 Australasian Aid Conference is on this week in Canberra. The conference brings together a host of researchers from Asia, Australia and the Pacific who explore aid and development issues in the region. Selected plenary sessions and keynotes will be live streamed. Check out the full program here.
  • Formerly thought of as the breadbasket of Africa, Zimbabwe has declared a state of emergency due to severe food and water shortages from the ongoing drought caused by El Nino. Critics believe that it is a combination of the severe weather patterns and lasting effects of land reforms introduced by President Mugabe in 2000 that have resulted in food shortages. El Nino is wreaking havoc across Africa, the Caribbean, and Asia.
  • The World Bank turns 70 this year. Michael Clemens reviews two papers,'The New Role of the World Bank' and 'The World Bank: Why it is still Needed and Why it still Disappoints', that consider the changing role of the Bank and its relevance.
  • Related to this, specialists from The World Bank have a crash course for NGOs to measure their impact.
  • The World Bank also has nifty data visuals via Tumblr collecting all of the amazing websites out there using big data to visualise the fight against poverty.
  • The Guardian has released a picture series talking to the women of Somaliland, where an estimated 98% of girls endure Female Genital Mutilation.
  • As concerns over the Zika Virus outbreak mount, experts across the globe urge that this will not be an 'Ebola 2.0'. Why? Two reasons: 1. The virus' mode of transmission and 2. Government response locally, regionally and internationally has been far swifter than during the Ebola outbreak. Continual surveillance and adaptable, multi-level responses will be required in 2016 to contain and manage the Zika Virus.
  • Duncan Green returns from his brief digital hiatus with a whimsical critique of the Beatles' song Revolution written by John Lennon: 


Cuba, I recently discovered, is a highly popular destination. The US and Cuba have restored their diplomatic relations, and in January Habana Vieja (Old Havana) was crammed with European and Canadian tourists. It is just as charming as you would expect from the travel magazines, and just as unreal.

Habano Centro (central Havana) provided a more accurate reflection of the country: magnificent colonial buildings in severe decay, barefoot kids playing football, obvious poverty, the occasional working girl in a doorway, a miserable communist-era supermarket selling one product from each category.

Music was the common theme in both parts of the city. Salsa blares from windows. African beats blast from the ubiquitous vintage cars. Cuban jazz rises up to your hotel room and fends off sleep. Cubans boogie on the street corner. The food is not great, but sometimes the waiters shake their hips as they present you with it.

If Old Havana sometimes feels like a Hollywood set, there are still moments when you realise you are in a communist state. At one point a troop of Cuban soldiers appeared in the street in their distinctive uniforms and caps. My request to take their photograph was denied, but I snatched a sneaky shot from my hotel window.

On another occasion, I asked a senior Cuban diplomat what he thought of North Korea. He replied that the North Koreans are good friends: 'we are both on the road to socialism, even if we are taking different routes'.

I stayed at Hotel Ambos Mundos in Old Havana – Ernest Hemingway's accommodations, where he lived on and off for a number of years, supposedly with a number of different women.

By chance, I was staying in the room next to his. The advantage of this situation was a nice view eastwards towards Plaza de Armas (the best place in town to buy revolutionary kitsch) and Morro Castle, the Spanish-era fort that guards the entrance to Havana harbour. This is the same view Hemingway enjoyed while he wrote several of his novels. The disadvantage was the crowd of foreign tourists always to be found lingering outside my door waiting for a tour of Hemingway's room. They always seemed disappointed when I emerged into the corridor, rather than Papa.

Apart from tourists wanting to visit Hemingway's digs, Hotel Ambos Mundos also attracted groups of people wanting to access the internet.

Public internet access in Cuba is only accessible via WiFi hotspots at big hotels and offices of the national telco. Cubans have to buy a card for one hour's use at a cost of several days' wages. Whether due to malign intent or incompetence, the service is unbelievably bad. I don't think the Cuban government needs to worry about anyone fomenting counter-revolution online: by the time they come up with a good slogan, the WiFi will have dropped out. Personally I gave up trying to access the internet while I was in Cuba.

The regime leans heavily on the iconography of Fidel Castro, his brother Raúl (who currently serves as president) and their fellow revolutionary Che Guevara. The Museo de la Revolución (Revolutionary Museum) in Havana is full of relics of the Cuban revolution. These include the Granma, the vessel that took the revolutionary leaders from Tuxpan in southern Mexico to Santiago de Cuba, the country's old historical capital; parts of an American U-2 spy plane and the Soviet anti-aircraft missile-type that brought it down; and old jeeps driven by Fidel.

There are also relics of more dubious provenance, for example a coin that Raúl supposedly left at a farmhouse and boots that various revolutionaries wore in the jungle. The revolutionary forces were remarkably well organised to identify, retrieve and store all these artifacts while they were fighting a guerilla war.

Everywhere in Havana there are holy pictures of Che – handsome, hirsute and Christ-like. I couldn't resist a picture with a mural of Che outside the Terminal Sierra Maestra, the old shipping terminal. The Revolutionary Museum contains the stretcher on which Che's corpse was carried when he was killed in Bolivia. Tourists stood silently before the stretcher like it was the Shroud of Turin.

The Museum also has a picture of Fidel sitting in a tank during the attempted invasion at the Bay of Pigs. The caption on the photograph indicates that Fidel personally fired the shell that disabled the US vessel the Houston. What a shot!

Fidel often achieved superhuman performances in fields in which he was not expert. At the Hotel Ambos Mundos, there was a picture of Fidel and Hemingway at a fishing competition, holding several trophies between them. The guide informed us solemnly that Fidel won all the cups but generously gave one to Hemingway (who was no mean fisherman) as a keepsake.