TIME indonesia

The Big Challenge for Indonesia’s New President: Proving Democracy Works

Indonesian presidential candidate Jokowi sits on a bench while waiting for the announcement of the results from the Elections Commission at Waduk Pluit in Jakarta
Indonesian presidential candidate Joko "Jokowi" Widodo, now president elect, sits on a bench while waiting for the announcement of election results by the Elections Commission at Waduk Pluit in Jakarta July 22, 2014. Beawiharta Beawiharta—Reuters

Joko Widodo’s election victory was a big win for Muslim-majority Indonesia, the world's third largest democracy and fourth most populous nation. Now the incoming President has to deliver much-needed reform

When Indonesia’s election commission announced late Tuesday that Jakarta Governor Joko Widodo had won July’s presidential election, the transition of the world’s fourth-most populous nation to democracy was finally made complete.

Sixteen years ago, when autocrat Suharto fell from power amid street riots and a financial crisis, it seemed the sprawling archipelago nation could break apart as politics in Jakarta descended into chaos. However, the victory of Joko Widodo, affectionately called “Jokowi,” shows how mature and stable the country’s new democracy has become. Jokowi is the first leader in Indonesia who is not affiliated with the old ruling class, but a self-made man, who built a political career with his honesty, smart policies and good results.

Now he faces an entirely new challenge: Proving that new democracies in the emerging world can govern effectively. Indonesia has become a rising star in the global economy, propelled by its increasingly wealthy 250 million people and government policies that are friendlier to investment. However, Indonesia, like many other emerging economies, is slipping. The IMF expects Indonesia’s GDP to grow by 5.4% in 2014 — not bad, but the rate has been declining steadily from 2011, when it was 6.5%. The problem is the same that is dragging down developing nations everywhere, from India to Brazil: Politicians, mired in factional fighting and lacking the necessary will, have failed to implement the reforms critical to keep growth going.

Awaiting Jokowi is a long list of difficult reforms that economists believe are needed to restore Indonesia’s growth. Restrictive labor laws must be loosened up to attract more job-creating manufacturing and the nation’s inadequate infrastructure needs a serious upgrade. The education system could use one, too. Expensive fuel subsidies that are straining the budget have to be reduced. Jokowi will have to manage these changes in an unfavorable global financial environment. With the Federal Reserve moving to end its stimulus programs, the flow of dollars sloshing around the world will be curtailed, and Indonesia, with a large current-account deficit, might find financing itself more costly. The country’s currency and stock market were among the hardest hit when the Fed first announced it would “taper” its program in 2013.

The reforms waiting for Jokowi are almost identical to the ones the new Prime Minister of India, Narendra Modi, needs to implement. The similarities between the two don’t end there. Both were successful on a local scale but now have to implement policy on a more challenging national level. Both will have to navigate reforms through fractious democracies and sell hard change to protest-prone publics.

But Jokowi has it worse. While Modi’s Bharatiya Janata Party won a mandate in a landslide, Jokowi’s political party, the Partai Demokrasi Indonesia Perjuangan (which translates as Indonesian Democratic Party of Struggle), garnered only a minority in the nation’s parliament in April elections, which means he’ll have to govern in a potentially messy coalition. Jokowi’s own victory was more muted as well. He won 53% of the vote to best his chief rival, former general Prabowo Subianto, who may contest the results and drag out the election’s conclusion. “A narrow victory for Jokowi may not be sufficient to empower the newly elected president to carry out all the desired reforms,” worries Societe Generale economist Kunal Kumar Kundu.

There are also doubts about Jokowi himself. In comments on policy, he promised to raise Indonesia’s growth by tackling the nation’s toughest issues – from corruption to red tape – and make the country’s more open to investors. “We need to get our economy growing,” he recently said in one interview. “To do that, we must have more investment and also deliver in terms of infrastructure.” At the same time, Jokowi is new to national politics and policymaking and therefore unproven. “It is clearly too early to tell whether Jokowi will be the man to get Indonesia’s economy back on track,” says Gareth Leather, Asia economist at research firm Capital Economics. “There is no magic bullet to reviving growth.”

If Jokowi succeeds, however, he’ll offer yet another counterpoint to Asia’s other rising power, China. In Beijing, President Xi Jinping and his team seem to believe that tighter and tighter political control is necessary to guide the country forward. A Jokowi government could prove just the opposite – that open democracies can produce real reform and better lives for their citizens. The world will be watching.

TIME

The Factory in the China Food Scandal Is Foreign-Owned. That Could Have Made It a Target

A 24 hour McDonalds restaurant in a shopping mall. KFC,
A 24-hour McDonalds restaurant in a shopping mall. KFC, McDonalds, Pizza Hut and other Western brands are suffering food safety crises in the Chinese market. Zhang Peng—LightRocket via Getty Images

No company should be allowed to get away with unsafe products, but the harsh spotlight shone on multinational enterprises in China could be part of an effort to undermine them in favor of local businesses

Another day in China, another food scandal. This time the accused is a meat supplier to KFC and McDonald’s in China. An undercover investigation by a Chinese TV station, which aired on Sunday, claimed that a factory in Shanghai owned by Illinois-based OSI Group was shipping the fast-food giants expired meat. Later, coffee-shop chain Starbucks in China and McDonald’s outlets in Japan got dragged into the mess, as they, too, had meat from the suspect factory in their products.

The report sent the U.S. companies into full crisis management. Yum! Brands, which operates KFC, garners more than 40% of its total operating profit from China, while McDonald’s considers the country one of its most important growth markets, so neither can afford tainting their brands with tainted food. KFC and McDonald’s issued apologies to their customers, while suspending shipments from the Shanghai factory. Starbucks said it removed all products with meat from the supplier from its stores. OSI, meanwhile, is undertaking an investigation into the practices at the factory. On Wednesday, Chinese police detained five people in connection with the scandal.

The allegations, if proved true, reveal just how rotten China’s food supply really is. If such shenanigans are taking place at OSI, a supplier with a long history and good reputation, one can only shudder to imagine what’s happening elsewhere in the industry. Yet that raises another question almost as uncomfortable. In a country where companies routinely flout the law and officials — by the government’s own admission — are grossly corrupt, we’re forced to ask why some corporations and people find themselves in Chinese newspaper headlines or investigated by regulators, and not others. In other words, why was OSI the target of a time-consuming TV exposé and not another company?

TIME attempted repeatedly to pose that question to Dragon TV, which aired the investigation, but did not receive a return phone call. The focus on a foreign-owned factory, however, is part of a trend. Foreign companies do seem to figure prominently in state-media critiques and government investigations. The revelations about KFC and McDonald’s are just the latest in a series of attacks on popular foreign brands and established foreign companies in the country.

Since June, Chinese state media have claimed U.S. technology companies such as Microsoft and Yahoo can be used by Washington to spy on China. Earlier this month, Chinese state TV claimed that the Apple iPhone was a threat to national security. Alleged bribery by drugmaker GSK in China has been paraded in national headlines for months. American restaurant brands have been targeted before. Last year, Chinese media accused Starbucks of overcharging Chinese customers, while in 2012, state TV conducted another undercover investigation into McDonald’s, which it claimed exposed unsavory practices at a Beijing outlet.

Obviously, if foreign companies are engaged in illegal or improper practices in China, they must be held accountable. Yet the spotlight shone on the activities of foreign firms is so bright that it can be seen as part of another, more disturbing trend: an effort by the government to undermine foreign brands and business in China.

We can speculate why that might be happening. The government could be trying to reel in a few “big fish” to try to scare smaller fry into better behavior. Officials might be attempting to win points with the public by appearing to address issues of great public concern like food safety without roiling any Chinese interests. And in the process, the Chinese government might believe it can aid Chinese companies in their competition with foreign firms by undercutting the reputation of international brands. The latest exposé on KFC and McDonald’s could have serious repercussions for the American fast-food chains. In 2012, KFC’s business in China suffered badly when news broke that some of its chicken suppliers were pumping excessive antibiotics into their birds.

The Chinese government has a long history of attempting to tilt the local playing field in favor of its own firms. Foreign carmakers, though very successful in China, are still forced to manufacture in the country only through joint ventures with Chinese firms — a restriction most other emerging economies don’t impose. Reports from chambers of commerce accuse Chinese bureaucrats of routinely hampering the expansion of foreign business by taking a “go-slow” approach when issuing mandatory permits and licenses. There is a feeling among foreign businessmen in China that the government regularly discriminates against them. The latest survey conducted by the European Union Chamber of Commerce in China revealed that 55% of the respondents believed that they are treated unfavorably compared with Chinese companies.

The process of opening the China market wider to foreign business has also stalled. More than half of the respondents in the E.U. survey said there had been no opening of the market in their industries over the past one or two years, while 9% believed that the market had become more closed. Such restricted access and other regulatory hurdles cost European companies nearly $29 billion in lost business in 2013, according to the survey. Generally, foreign businessmen feel that China has become a more hostile environment. A similar survey by the American Chamber of Commerce in China found that 41% of its respondents felt less welcome in the country than they had been before.

Such an attitude by China’s government runs counter to the oft-repeated pledges by the most senior Chinese officials that they remain committed to their long-standing policy of opening up to the world. But it is also representative of a more assertive Chinese attitude toward the West in many aspects. Beijing is standing up for what it sees as its rights in various territorial disputes with its neighbors, as it tries to re-establish its traditional political and military dominance in East Asia. After decades of reliance on foreign investment to drive growth and introduce technology, China, now the world’s second largest economy, wants to rely more on its own companies and innovation.

That’s only natural. But at the same time, China, as a developing nation still in need of jobs and technology, can’t afford to chase off foreign investment, either. The fact is that China is becoming a less desirable place to invest, for reasons ranging from the slowing economy to rising costs to ambiguous government regulation. Only one-fifth of the companies queried in the E.U. Chamber survey said China was their top investment destination in 2013, down from one-third just two years ago. Meanwhile, the percentage of respondents who said they intend to expand their current operations in China, dropped sharply to 57% from 86% just last year. Beijing may see benefits in targeting foreign firms, but it should also be aware of the costs.

— With reporting by Chengcheng Jiang / Beijing

TIME Aviation

Malaysia, the World’s Unluckiest Airline, Will Now Struggle to Survive

Malaysia’s national carrier was already in a weak financial position. Now its future is highly uncertain

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Only four months after Malaysia Airlines Flight 370 vanished somewhere in the Indian Ocean with 239 passengers on board, Flight 17 was shot down over Ukraine, causing the loss of another 298 souls — an unprecedented blow to a major international airline. Even a robust operator would have trouble overcoming twin disasters like that. But the fact is that Malaysia’s flag carrier is in no financial shape to absorb these catastrophes. In fact, analysts wonder if it will ever be able to recover.

“The outlook is very dire,” says Mohshin Aziz, an aviation analyst at Kuala Lumpur–based Maybank. The airline, he fears, “won’t be able to survive beyond the year in its current form.”

The next months could prove humbling for an airline that had grand ambitions. The Malaysian government had high hopes that its national carrier would compete with the region’s best, and invested much money and emotion into building it. But Malaysia Airlines got badly squeezed in the fiercely contested Asian airline industry. Its cost base is too high to compete with lean and mean budget carrier AirAsia, also based in Kuala Lumpur. At the same time, it lacks the prestigious brand image to raise its ticket prices and take on East Asia’s more premier airlines, such as Singapore Airlines and Hong Kong’s Cathay Pacific. As a result, the company has been bleeding for years. The airline’s Kuala Lumpur–listed parent, Malaysian Airline System, has racked up losses of more than $1.4 billion since 2011. Management has tried cutting costs and improving service to turn around the airline’s fortunes, but such efforts were making only minimal progress.

Now whatever hope remained may get dashed by the two crushing tragedies. Analysts are concerned that the fallout will scare passengers away from flying on the airline, or force management to discount tickets to convince them to book — reducing revenue either way. That could push the airline’s fragile finances to the breaking point, causing “the ticking time bomb to explode,” says Daniel Tsang, founder of consultancy Aspire Aviation in Hong Kong. That reality will likely force Malaysia Airlines to take more drastic measures to stay afloat. Even before the latest crash over Ukraine, CEO Ahmad Jauhari Yahya told shareholders in June that the MH370 incident “sadly now added an entirely unexpected dimension, damaging our brand and our business reputation, and accelerating the urgency for radical change.”

There are options, but all are equally unsavory. Mohshin believes that Malaysia Airlines will have to greatly shrink its business, perhaps eradicating most of the international routes it flies, to focus on the more profitable parts of the operations. “It will never get back to the large size it was before,” he says. “The sooner they accept that fact, the better off they will be.” Tsang says that bankruptcy proceeding would be a “pretty good option” for Malaysia Airlines. That process would make it easier to strip out more of the legacy costs and make the airline more competitive.

What happens next ultimately depends on the Malaysian government. A state-controlled investment fund owns a majority of the shares in the carrier’s parent company, and that makes the future of Malaysia Airlines a political issue. The airline’s powerful union has been able to fight off previous efforts at radically overhauling the carrier and analysts say that rescuing Malaysia Airlines this time will require a high degree of political commitment. Still, if Malaysia Airlines manages to streamline its operations, it may live to fly another day.

“The restructuring will be painful for a lot of people,” Tsang says. “But a phoenix can rise from ashes.”

TIME brics

The BRICS Don’t Like the Dollar-Dominated World Economy, but They’re Stuck With It

World For Money
Thomas Trutschel—Photothek/Getty Images

The latest summit of the world’s leading emerging markets took more steps toward replacing the U.S.-led global financial system. But change will come very, very slowly

When the BRICS get together for their annual summit — as they did last week in Brazil — they always make a lot of noise about changing the way the global economy works. They have good reason to be frustrated. The BRICS (Brazil, Russia, India, China and South Africa) are gaining in economic power and crave the political clout to match, but standing in the way is a global financial system organized by the West and dominated by the U.S. They’re forced to conduct their international business in the unstable U.S. dollar, making their economies swing back and forth with the winds of policy crafted in Washington, D.C., and New York City. The West has ceded influence in institutions like the World Bank and the International Monetary Fund (IMF) only grudgingly. To them, today’s financial system is out of touch with the changing times, and ill-suited to support the world’s up-and-coming economic titans.

So in their summit, from July 14 to 16, the five BRICS announced two major initiatives aimed squarely at increasing their power in global finance. They announced the launch of the New Development Bank, headquartered in Shanghai, that will offer financing for development projects in the emerging world. The bank will act as an alternative to the Washington, D.C.—based World Bank. The BRICS also formed what they’re calling a Contingent Reserve Arrangement, a series of currency agreements which can be utilized to help them smooth over financial imbalances with the rest of the world. That’s something the IMF does now.

Clearly, the idea is to create institutions and processes to supplement — and perhaps eventually supplant — the functions of those managed by U.S. and Europe. And they would be resources that they could control on their own, without the annoying conditions that the World Bank and the IMF always slap on their loans and assistance. Carlos Caicedo, a Latin America analyst at consulting firm IHS, noted, for instance, that the New Development Bank “has the potential to match the role of multilateral development banks, while offering the BRICS a tool to counterbalance Western influence in international finance.”

In theory at least, the BRICS possess the financial muscle to make that happen. Four of the BRICS — China, India, Brazil and Russia — are now ranked among the world’s 10 largest economies. (South Africa, not a member of the original constellation of BRICs as conceived by Goldman Sachs, comes in a distant 33rd.) Yet the reality is more problematic. The BRICS at this point are simply not committing the resources necessary to make anything but a dent in global finance.

Research firm Capital Economics estimates that the New Development Bank, with initial capital approved at only $100 billion, could offer loans of $5 billion to $10 billion a year over the next decade. Though that’s not an insignificant amount, it’s far lower than the $32 billion the World Bank made available last year. The situation is the same with the currency swaps. Set at a total size of $100 billion, the funds available would be a fraction of those the IMF can muster.

That’s assuming these initiatives ever get off the ground. This sixth BRICS summit is the first to produce anything beyond mere rhetoric, and it remains to be seen if they can cooperate on these or any other concrete projects. Despite their common distaste for the U.S.-led global economy and desire for development, the BRICS share as many differences as similarities. They have vastly diverse levels of development and types of political systems, and the bilateral relations between some of them are strained. India and China, for instance, routinely spar over disputed territory, while Brazil sees China as much as an economic competitor as partner.

Beyond that, all of the BRICS have serious economic problems to deal with at home. The new government in India led by Prime Minister Narendra Modi will be hard pressed to implement the reforms necessary to jumpstart the country’s stalled economic miracle. Growth in Brazil, South Africa and Russia has been even more sluggish. China’s growth has held up, but it suffers from rising debt, risky shadow banking and excess capacity. And now Moscow has to contend with sanctions imposed by the U.S. and Europe over its aggressive policy toward Ukraine. It may soon face even greater isolation as the world probes its connections to the separatists in Ukraine, who reportedly downed Malaysian Airlines Flight 17 with the loss of nearly 300 lives.

Meanwhile, whether they like it or not, the BRICS will be stuck operating by the rules of the U.S.-led world economy for the foreseeable future. There is simply no other currency out there that can replace the U.S. dollar as the No. 1 choice for international financial transactions. China has dreams of promoting its own currency, the yuan, as an alternative, and has made some progress. But the yuan can’t truly rival the dollar until China undertakes some fundamental financial reforms — liberalizing the trade of the yuan and capital flows in and out of the country. That’s far-off. And until then, China’s massive reserve of dollars forces it to continually invest in dollar assets. Even as Beijing bickers with the U.S. over cyberspying and regional territorial disputes, it has been loading up on U.S. Treasury securities — buying at the fastest pace on record so far this year.

Still, the steps taken during this latest BRICS summit point to what may be the future of the global economy. Though their initiatives may be small and tentative now, they signal an intent to remake the global financial system in their own interest as they continue to grow in economic power. Perhaps one day it’ll be the U.S. that does the complaining.

TIME Asia

China’s Economy Continues to Defy Gravity. That May Not Be a Good Thing

A container truck drives past the container area at the Yangshan Deep Water Port,  part of the newly announced Shanghai Free Trade Zone, south of Shanghai
A container truck drives past the container area at the Yangshan Deep Water Port, part of the Shanghai Free-Trade Zone, on Sept. 26, 2013 Carlos Barria—Reuters

China announced better-than-expected growth over the second quarter. Despite optimistic official figures, there's plenty to worry about in the world's second largest economy

China announced its GDP figures for the second quarter on Wednesday and — surprise, surprise — they were better than expected. Growth clocked in at 7.5% — which just so happens to be the government’s official target. The statistics will likely give a boost to sentiment globally. Investors have been worried that a slowing China would hit the entire world economy. More buoyant Chinese growth will probably calm those jitters.

Yet China is also something of a puzzle. Somehow the economy continues to power through all sorts of issues that should be slowing it down. The all-important property sector, which accounts for some 16% of its GDP, is undergoing a major downturn. For most of the year, the government has tried to control dangerous levels of debt in the economy and clamp down on “shadow banking,” which encompasses alternative financial networks and lending practices. Tighter credit should translate into slower growth. Beijing is also supposedly on a mission to streamline bloated industries like steel by eliminating excess capacity, which, though healthy for the future prospects of the economy, should also act as a drag on short-term growth. So should President Xi Jinping’s ongoing anticorruption campaign, which in theory should be disrupting policymaking and creating uncertainty.

So how is China defying gravity once again? There is always the perennial suspicion that the numbers are inflated. Capital Economics looks at statistics that aren’t as easily manipulated as GDP, such as freight shipments and electricity output, to gauge the economy’s performance, and figures GDP has probably been expanding more like 6% in recent quarters. But economists are crediting the latest growth rate to government stimulus, carefully targeted at infrastructure and public housing, both investments the economy still needs.

This is a smart move. The Chinese government has ample ability to keep growth humming while it attempts to implement more substantial reforms. However, the reliance on stimulus also raises doubts about what might be ahead. Some economists see growth “bottoming out” and a revival continuing through the rest of the year. Others believe continued headwinds, especially the struggles of the property sector, are too strong for the government to counter — without even greater largesse. That might be on its way. New loans made in June were the highest in five years, according to research from Barclays, which suggests that the government is loosening up credit once again.

That begs the most important question facing China’s economy right now: Will Beijing sacrifice reform for growth? So far, China’s leaders have controlled their usual urge to pump up growth rates, an indication they realize the dangers lurking in the economy. Since the 2008 financial crisis, debt in China has risen to dizzying heights. A recent report from Standard & Poor’s calculated that China’s corporate sector has more debt outstanding than any other in the world. Combined with tremendous excess capacity, a risky increase in shadow banking and signs of a property bubble, the Chinese economy is rampant with problems that threaten its future. Some economists believe Beijing needs to address these ills and resist efforts to use credit and other stimulus to rev up growth — or else face a possible financial crisis.

Yet the reforms necessary to fix these problems are coming very slowly. Beijing has pledged to undertake a bold slate of measures — to liberalize interest rates and other prices, improve the performance of bloated state-owned enterprises, open protected markets to competition, strengthen the financial sector and allow private enterprise greater sway in the economy. All of these steps, if implemented, would make the Chinese economy healthier and more advanced. But so far, only the most minor of experiments have started, such as the approval of a handful of small private banks and the opening of a free-trade zone in Shanghai to tinker with more open capital flows. Even more, once the greater reforms fall into place (if they ever do), it could take years before they have an impact on the economy.

There are two ways of looking at what’s going on. One is that China’s policymakers are wisely going slow on potentially painful reforms while the economy works out some of its messiest problems in an environment of relatively stable growth. The other, less optimistic, view is that the problems rotting away at the Chinese economy are so complex and entrenched that policymakers are prioritizing continuing growth over tough reforms. In that scenario, China’s broken-down growth model will be kept alive with debt and government spending, while the fundamental change necessary to take China to the next level stalls.

I continue to be afraid of the latter. And with China the world’s second largest economy, we all should be too.

TIME China

The U.S. Has Good Reason to Be Fed Up With China’s Economic Policy

U.S. Treasury Secretary Jacob Lew listens during a panel discussion at the North American Energy Summit in the Manhattan borough of New York
U.S. Treasury Secretary Jacob Lew listens during a panel discussion at the North American Energy Summit in the Manhattan borough of New York, June 10, 2014. Adam Hunger—Reuters

Talks in Beijing between American and Chinese officials made little progress on key economic issues

No one expected big breakthroughs from the latest round of the annual U.S.-China Strategic and Economic Dialogue, held this week in Beijing. But the results didn’t even meet those lowly expectations. After two days of talks with Chinese officials, U.S. Treasury Secretary Jacob Lew left empty-handed. A much-coveted but long-discussed treaty to boost investment between the two countries only inched forward. Nor did China offer firm commitments to further liberalize its currency — an issue of great importance to Washington. That apparently left Lew searching for something positive to say to his Chinese hosts. “The commitments China has made here in Beijing over the past two days reflect the economic reform goals set forth” previously, Lew said on Thursday, “and we look forward to future progress.”

Washington has been waiting for progress for quite a while. U.S. officials have been repeatedly pressing Beijing to open markets wider to American companies, improve the protection of intellectual property, and make the economy more transparent and market-oriented. But in return, Washington just gets vague pledges and expressions of caution. Meanwhile, the two continue to bicker over trade practices — most notably these days, Washington’s punitive tariffs on Chinese solar panels. The stalemate in economic ties between the U.S. and China is symbolic of the greater strain between the two nations. China has responded angrily to U.S. charges that its military cyberspies on American companies, while officials from both sides have exchanged hostile barbs over China’s territorial disputes with Japan and other neighbors. Relations between the U.S. and China are arguably at their lowest point in years.

That’s bad news. What happens between the world’s two largest economies has ripple effects around the world. Each country, furthermore, needs the other for its own economic growth. U.S. companies require access to Chinese consumers to keep their profits growing, while China badly needs advanced U.S. technology to upgrade its industry. Still, the two sides often look upon each other warily. As China’s clout increases, the U.S. is frustrated that Beijing is not making the Chinese economy more open or playing by the perceived rules of international commerce. Beijing’s policymakers get upset when Washington badgers them on reforms they consider none of America’s business.

But the U.S. has good reason to be annoyed. Many of the issues that matter to Washington have been dragging on interminably with no resolution in sight. Take, for instance, the sticky issue of China’s currency, the yuan. Washington has complained for many years that Beijing manipulates the value of the yuan to promote its own exports, and during this week’s meetings, Lew again pressed his Chinese counterparts to make the process by which it is valued more market-driven. Though I have written on many occasions that the U.S. has exaggerated the impact the yuan’s value has had on the country’s trade deficit with China, Lew has a right to be fed up with the slow pace of change. The Chinese have been blabbering about allowing market forces to determine the yuan’s exchange rate for ages, and the reform is considered an integral part of China’s greater goal of liberalizing capital flows in and out of the country. But the government still wields tremendous influence over the direction of the yuan — a degree of control is has been reluctant to relinquish, promises aside. In this week’s meetings, China offered only more excuses. “If we move too fast, we will be tripped by the demons of details,” Chinese Vice Premier Wang Yang cryptically responded to Lew. Instead, Wang said Beijing was looking for “balance.”

“Balance,” however, has become Beijing-speak for “do nothing.” Currency reform is only one of many changes Chinese policymakers have promised, but never seem to implement. President Xi Jinping and his team have pledged to liberalize markets, fix the financial sector and allow private businessmen a bigger role in the economy. Economists swooned over a bold policy document released in November that committed the leadership to a sweeping reformation of China’s economic system. No one should expect such major changes to happen overnight, of course. But the fact is we’re still waiting for the process to really get started. Meanwhile, the Chinese economy is facing a host of unresolved problems that threaten its future. Growth has slowed, debt has mounted to dizzying levels, the financial sector is fundamentally flawed, and a property bubble appears to be bursting.

What Lew wants to see from China is a true effort to overhaul an economic model that is badly broken. That would be good for China, the U.S., and everybody else.

TIME India

India’s Modi (Barely) Passes His First Big Test on Economic Reform

Indian PM Modi walks in front of a picture of former Indian PM Vajpayee after a news conference in New Delhi
Indian Prime Minister Narendra Modi walks in front of a picture of former Indian Prime Minister Atal Bihari Vajpayee after a news conference in New Delhi on July 9, 2014. Anindito Mukherjee—Reuters

The new Prime Minister indicated change will come in steps, not all at once

Narendra Modi and his Bharatiya Janata Party (BJP) rode into office in May on a tidal wave of support created by hopes he would revive India’s stumbling economy. India, once one of the world’s best-performing emerging economies, has witnessed growth shrink under 5% — too low to rescue the hundreds of millions of countrymen still trapped in desperate poverty. Business leaders have had high expectations that Modi would push ahead with the long-stalled but painful reforms necessary to restart the country’s economic miracle.

In his first major policy pronouncement, however, Modi indicated change would come — but slowly. On Thursday, Modi’s Finance Minister, Arun Jaitley, presented the new government’s budget in Parliament in New Delhi. Indian budgets are considered a bellwether for the direction of economic policy. What emerged was a very gradualist approach, with some encouraging tidbits, but no signs Modi is in a big rush to remake the Indian economy. In his speech, Jaitley said the budget was “only the beginning of a journey” to bring growth back up to 7% to 8% over the next three to four years. “It would not be wise to expect everything that can be done or must be done to be in the first budget,” he said.

Investors got some items on their wish list. The government pledged to open the defense and insurance industries wider to foreign investors, bring down the budget deficit more rapidly, press ahead with much needed tax reform, improve the country’s inadequate infrastructure and support manufacturing to create more jobs. Jaitley also promised an overhaul of costly food and fuel subsidies, which are a huge burden on the strained budget, to make them “more targeted” on the most needy.

Yet for a government that has pledged to control spending and unleash the country’s growth potential, the budget was still puffed up with plenty of populist pork. The budget reiterated Modi’s campaign pledge to provide toilets for all. Jaitley also decided to maintain the previous administration’s expensive and controversial program to guarantee jobs for rural workers, though he suggested its oversight would be strengthened to ensure funds got utilized more wisely. On other issues, Jaitley seemed to fudge a bit. Widely criticized efforts by the previous government to impose retrospective taxes scared foreign investors, and though Jaitley said the Modi administration would limit any such taxes and “provide a stable and predictable taxation regime that would be investor-friendly,” he didn’t emphatically close the door on them, either.

The most disappointing aspect of the Modi budget is that it was no bold statement that a new era of economic policy was coming. Details on many of Jaitley’s proposals were sparse. For example, he did offer many specifics on such key issues as reducing subsidies. Other important reforms weren’t addressed, such as loosening up the country’s restrictive labor laws, which hurt job creation. “Nothing that was announced today marks this government out as being significantly different from the last,” complained Mark Williams, chief Asia economist at research firm Capital Economics. “If market enthusiasm for Mr. Modi’s government is to be sustained, that will have to change.”

Ultimately, though, Modi’s incremental methods may be simply good politics. Even though Modi scored a landslide victory in the last election, many of the reforms most critical to the economy are certain to face stiff opposition. If he charges ahead too quickly, his entire reform effort could get derailed. Modi has already been forced to reverse course on one of his initial reforms. In late June, Modi partially rolled back a hike in train fares aimed at putting the strapped railway system on a stronger financial footing after protests erupted and the BJP’s political allies objected.

At the same time, Modi has to play a delicate political game. If he moves too slowly on reform, growth won’t improve, and his support could suffer. Fixing India’s economy will take a huge amount of political will. We’re still waiting to see if Modi has it.

TIME China

China Escalates Its War on American Tech Firms

Microsoft celebrates upcoming Windows 8 in China
Guests try out the Microsoft Windows 8 operation system on touchable screens of desktop computers during the preview show of the new operation system and tablet computer Surface in Shanghai, China, Oct. 23, 2012. An Tu—EPA

The Chinese government, angered by Washington's charge that Beijing engages in cyberspying, is looking for some payback

U.S. technology firms have often found China a tough market. Microsoft has struggled with widespread software piracy. Facebook, Twitter and YouTube are all blocked by Chinese censors. That costs the American Internet giants untold numbers of potential customers. Now, in the wake of Washington’s charges against five Chinese military officials for cyberspying, a riled Beijing has intensified its criticism of U.S. tech businesses.

Chinese media this week attacked numerous U.S. tech firms for, in effect, acting as agents of American espionage. A report in the state-run China Daily on Wednesday warned that a range of American companies, including Cisco, Microsoft, Facebook and Yahoo!, could be used by Washington to spy on China. “Foreign technology services providers such as Google and Apple can become cybersecurity threats to Chinese users,” the newspaper asserted. A post on the official microblog of another state-owned publication, the People’s Daily, labeled American tech firms “pawns of the villain” and vowed to take stern action against any nefarious deeds. “For anyone who steals our information, even though they are far away, we shall punish them!” the blog promised. (Although the post was subsequently removed.)

The consequences of any effort by the Chinese government to restrict American technology businesses could be huge. China is a major market for all sorts of such products, from smartphones to software, and sales to Chinese companies and consumers are an ever more important source of sales for foreign firms. In its last fiscal year, for instance, Apple earned 15% of its revenues —­ more than $25 billion — from Greater China.

Beijing could move beyond mere rhetoric into active steps to prevent Chinese companies from acquiring U.S. technology. In May, even before Washington’s charges of cyberspying were announced, China’s state procurement center banned the use of Microsoft’s Windows 8 operating system on government computers. The reason was not made clear, but Chinese state media cited possible security concerns after Microsoft discontinued its support for Windows XP. Separately, one press report claimed that government officials are pressing Chinese banks to replace IBM servers with local brands as a security measure. (A spokesman for IBM in China says the company is unaware of any such policy.)

The U.S. is somewhat guilty of taking similar measures against the Chinese. Citing the potential security risk, Washington has effectively blocked China’s Huawei from selling telecom equipment to major American service providers or making acquisitions in the U.S. For China, though, the situation is slightly different. China is still a technology laggard and badly needs American know-how. Nor in some cases are there viable domestic alternative to foreign technology. (It is not exactly clear, for instance, what government computers will use for an operating system if not Windows 8.) Those realities may ultimately limit Beijing’s ability to shun American technology firms.

Still, the war of words is not helping already strained relations between the world’s two largest economies. American and Chinese officials have exchanged barbs in recent days over escalating territorial disputes between Beijing and its neighbors, including U.S. allies Japan and the Philippines. Trade disagreements also continue. The U.S. Commerce Department said this week it intends to slap steep tariffs on certain Chinese-made solar panels this week. The danger is that these percolating problems will eventually stifle the economic cooperation both sides need to drive growth. More than U.S. tech firms may then find themselves targets.

TIME China

The Legacy of Tiananmen Is Holding Back China’s Economy

A security guard stands next to pictures of China's former President Jiang Zemin and late paramount leader Deng Xiaoping at an exhibition in Beijing
A security guard stands next to the pictures of China's former President Jiang Zemin, right, and late paramount leader Deng Xiaoping at an exhibition to celebrate the 90th anniversary of the founding of the Chinese Communist Party in 2011 Jason Lee—Reuters

To maintain its growth miracle, the Chinese leadership can no longer separate political and economic reform

As tanks rolled through the pro-democracy protesters on Tiananmen Square on June 4, 1989, the message from the Chinese Communist Party couldn’t have been clearer: Beijing would tolerate economic change, but not political change. A decade earlier, paramount leader Deng Xiaoping had embarked on the free-market reform that would spark China’s economic miracle.

But on that fateful June day, when he crushed the Tiananmen movement, Deng also eradicated any hope that political liberalization would accompany the government’s quest for prosperity. In fact, Deng believed political reform would undermine China’s economic progress, and the primary purpose of his shift towards “capitalism with Chinese characteristics” was to strengthen the Communist Party’s grip on power.

Twenty-five years later, the attitude of China’s leadership has remained unchanged. President Xi Jinping has proposed a sweeping slate of economic reforms that would hand more influence to private companies and free up flows of capital. On the political side, however, there are no signs that Xi feels any differently than Deng had in 1989. Xi has (arguably) grasped more power in his hands than any Chinese leader since Deng himself. The government tosses critics in prison, squashes any independent social movement, and has even intensified censorship of the Internet and social media. The Communist Party insists on reigning unchallenged.

Looking solely at China’s economic record, the Communist Party can make the case that capitalist success is not linked to democracy, as many in the West have always believed. Since 1989, China’s authoritarian leaders have engineered one of the greatest economic achievements in history. The economy is 20 times bigger today and now ranks as the world’s second largest. Hundreds of millions have been lifted out of poverty. Chinese companies, from telecom giant Huawei to PC maker Lenovo to e-commerce behemoth Alibaba, have become world-beaters. However, that fundamental question ­— can economic and political reform be separated? —­ has not gone away.

In fact, 25 years after Tiananmen, it is more relevant than ever. After three decades of rapid economic development, the Chinese economy is a vastly different place. Its growth has been based mainly on plentiful labor, low costs, and a (restricted) opening to foreign business. But that model has run out of steam. In fact, the economy is facing its biggest challenges since the start of Deng’s reforms more than three decades ago. Wages have escalated, eating into the competitiveness of China’s export machine. Debt has risen to dangerous levels. A property boom looks about to bust. An uncontrolled shadow banking sector has sparked widespread fears of a financial crisis.

Excess capacity haunts many industries. Private businessmen remain starved of capital and opportunities. Many of these dangers are the result of incomplete market reform. The bureaucrats of China’s “state capitalism” maintain too much control over the activities of banks and companies. They protect uncompetitive state enterprises and politically connected cronies, apply regulations erratically, and influence who gets bank finance and who does not.

To get itself out of this mess, the Communist Party is going to have to do what it doesn’t do so well: let go. Banks must be allowed to allocate money based on financial fundamentals, not political guanxi or bureaucratic fiat. Companies have to become more innovative and creative, which requires greater freedom of information. Protected and subsidized state industries have to be opened to private and foreign competition. Money must be allowed to flow more freely in and out of the country. Rule of law must be ensured to convince businessmen to take risks and invest in new ideas. That demands a more independent judiciary. The Communist Party is aware of the need for further reform.

In an important party plenum in November, Xi and his policy team pledged to loosen up capital markets, reform the financial sector and the courts, and support the private sector. Yet the pace of implementation has been glacial. The party has to make uncomfortable choices between holding fast to the levers of control and fixing a broken economy.

China’s leaders can no longer have it both ways. The banks cannot be expected to both allocate money more productively and still take orders from meddlesome cadres. Entrepreneurs cannot be expected to launch the next Google in an environment where the Internet is controlled, creative thinking is discouraged and the courts can’t protect them.

The verdict of Tiananmen, then, is coming under strain. If China is to lift itself into the ranks of the most advanced economies and rejuvenate its competitiveness, its people require the freedoms Tiananmen’s protesters fought for 25 years ago. The Communist Party has to wake to the fact that Tiananmen’s legacy is holding the nation back.

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