Contemporary Issues In International Political Economy 9811364613, 9789811364617

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Contemporary Issues in International Political Economy

Edited by

f u-l a i t on y y u di a n a s. k wa n

Contemporary Issues in International Political Economy

Fu-Lai Tony Yu  •  Diana S. Kwan Editors

Contemporary Issues in International Political Economy

Editors Fu-Lai Tony Yu Hong Kong Shue Yan University North Point, Hong Kong

Diana S. Kwan The Chinese University of Hong Kong Shatin, Hong Kong

ISBN 978-981-13-6461-7    ISBN 978-981-13-6462-4 (eBook) https://doi.org/10.1007/978-981-13-6462-4 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Singapore Pte Ltd. 2019 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-­01/04 Gateway East, Singapore 189721, Singapore

Acknowledgements

Chapter 7 is modified from Yu, Fu-Lai Tony and Kwan, Diana S. (2008) “Social Construction of National Identity: Taiwanese versus Chinese Consciousness”, Social Identities, volume 14(1/January), pp.33–52. Chapter 8 is adopted from Yu, Fu-Lai Tony (2017) “Neo-Mercantilist Policy and China’s Rise as a Global Power”, Contemporary Chinese Political Economy and Strategic Relations: An International Journal, volume 3(3/December), pp.1043–1073.

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Contents

Part I Political and Religious Conflicts in the Middle East   1 1 Religious Conflicts in the Middle East: Christianity Versus Islam and Sunni Versus Shiite  3 Diana S. Kwan and Fu-Lai Tony Yu 2 An Iran Nuclear Deal Without the United States? Chinese, European, and Russian Interests and Options After the US Withdrawal from the Joint Comprehensive Plan of Action 35 Moritz Pieper 3 Islam and Nationalism with Special Reference to the Muslim Brotherhood in Jordan 55 Yoshiyuki Kitazawa 4 Origins of the Property Rights of the “Holy” Land and Religious Conflicts in Jerusalem 75 Rita Yi-Man Li 5 Who Wants to Talk to Terrorists? 91 Peter J. Phillips vii

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CONTENTS

Part II Tensions in East Asia 111 6 The North Korean Crisis: Proliferation of Nuclear Weapons and the Threat of Nuclear War113 Richard W. Mansbach and Kirsten L. Taylor 7 Interpreting the Taiwan Strait Conflict: Taiwanese Versus Chinese Consciousness149 Fu-Lai Tony Yu and Diana S. Kwan 8 Neo-Mercantilist Policy and China’s Rise as a Global Power175 Fu-Lai Tony Yu 9 China’s Belt-Road Initiative: The Political Economy of Coordinated Coalitional Cooperation197 David W. K. Yeung and Aloysius W. C. Lui

Part III Political, Social and Environmental Challenges to Human Progress 227 10 Globalization and Populism229 Oscar Bajo-Rubio and Ho-Don Yan 11 Brexit and the Future of the European Union253 Edward Gotham 12 Same-Sex Marriage in China, Hong Kong and Taiwan: Ideologies, Spaces and Developments289 Joseph M. K. Cho and Lucetta Y. L. Kam

 CONTENTS 

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13 Global Warming, Climate Change and World Environmental Degradation307 Edward C. H. Tang

Part IV The Fourth Industrial Revolution and Its Threats 331 14 The Fourth Industrial Revolution and the Development of Artificial Intelligence333 Simon Chien-Yuan Chen and Ming-Chan Shen 15 How Realistic Is a Sustainable World?347 Gunter Pauli 16 Cryptocurrencies: The Future of Finance?359 Claire Wilson 17 The Role of Bitcoin in the Monetary System: Its Development and the Possible Future395 Aries Kin Ming Wong  pilogue: Towards a Happier Global Village or the World E War III?413 Index417

Contributors

Oscar Bajo-Rubio  Department of Economics, Universidad de Castilla-La Mancha, Ciudad Real, Castilla-La Mancha, Spain Simon  Chien-Yuan  Chen Department of Land Management, Feng Chia University, Taichung, Taiwan, Republic of China Joseph  M.  K.  Cho The Chinese University of Hong Kong, Shatin, Hong Kong Edward  Gotham Department of Economics, Feng Chia University, Taichung, Taiwan, Republic of China Lucetta  Y.  L.  Kam  Department of Humanities and Creative Writing, Hong Kong Baptist University, Kowloon, Hong Kong Yoshiyuki Kitazawa  Department of International Relations, Faculty of Foreign Studies, Kyoto Sangyo University, Kyoto, Japan Diana S. Kwan  Office of Medical Education, The Chinese University of Hong Kong, Shatin, Hong Kong Rita  Yi-Man  Li  Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong Aloysius W. C. Lui  SRS Consortium for Advanced Study, Hong Kong Shue Yan University, North Point, Hong Kong Richard  W.  Mansbach Department of Political Science, Iowa State University, Ames, IA, USA xi

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Contributors

Gunter  Pauli  Shaw College, The Chinese University of Hong Kong, Shatin, Hong Kong Peter  J.  Phillips School of Commerce, University of Southern Queensland, Toowoomba, QLD, Australia Moritz  Pieper School of Arts and Media, University of Salford, Manchester, UK Ming-Chan Shen  Center of Public Policy Analysis, Feng Chia University, Taichung, Taiwan, Republic of China Edward  C.  H.  Tang  Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong Kirsten L. Taylor  Department of Government and International Studies, Berry College, Mount Berry, GA, USA Claire Wilson  Department of Law and Business, Hong Kong Shue Yan University, North Point, Hong Kong Aries Kin Ming Wong  Department of Economics, Hong Kong Baptist University, Kowloon, Hong Kong Ho-Don  Yan Department of Economics, Feng Chia University, Taichung, Taiwan, Republic of China David  W.  K.  Yeung Department of Business Administration, Hong Kong Shue Yan University, North Point, Hong Kong Fu-Lai  Tony  Yu  Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong

List of Figures

Fig. 4.1 Fig. 4.2

Israelis’ views on a solution to the Israeli-Palestinian conflict 83 Palestinian views on a solution to the Israeli-Palestinian conflict84 Fig. 4.3 To what extent do Palestinians understand Islam? 85 Fig. 4.4 Question about how much Palestinian interviewees hate Israel 86 Fig. 4.5 Reasons why Jews hate Palestinians 86 Fig. 5.1 Terrorism in Germany (West Germany 1970–1990 and Germany 1991–2016) 92 Fig. 5.2 Terrorism in Western Europe and North America 1970–1990: Incidents per year 97 Fig. 10.1 The political trilemma of the world economy 236 Fig. 10.2 Cumulative real income growth between 1988 and 2008 for various percentiles of the global income distribution 238 Fig. 11.1 Mundell-Fleming economic trilemma 258 Fig. 11.2 Impossible trinity of a monetary union 260 Fig. 11.3 Rodrik’s global political trilemma 262 Fig. 11.4 Real GDP growth, EU28 (contribution by member states) 278 Fig. 11.5 Employment expectations, Euro area  279 Fig. 11.6 Real GDP by component, Euro area 280 Fig. 11.7 ISG developed market growth forecasts 280 Fig. 13.1 PM10 levels by region, for the last available year in the period 2008–2015312 Fig. 13.2 World CO2 emissions in 2014 (kt) 313 Fig. 17.1 Market price of Bitcoin 401

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List of Tables

Table 1.1 Table 1.2 Table 3.1 Table 4.1 Table 7.1 Table 9.1 Table 9.2 Table 11.1 Table 11.2 Table 11.3 Table 11.4 Table 13.1 Table 13.2 Table 17.1

Major religious conflicts in the Middle East 5 Major players in the Syrian war 22 Modern Islamic states in the Middle East: classification by regime and sovereignty 61 Palestinians’ opinion on Islam and Israel, on a 1–10 scale 85 Unification versus independence (% distribution) 166 Country data and coalition blocs 206 Coalition blocs and cooperation choices 210 UK political remain/leave preferences and guarantees (1970–present)254 HSBC soft and hard exit 256 Chronological list of post-war European treaties 266 Chronological list of post-war European alliances 266 Percentage share of national concern for global issues 309 International negotiations on climate change 311 Statistics of Bitcoin: market price and capitalization 2015 and 2018396

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List of Boxes

Box 13.1 Africa and Climate Change Box 13.2 Examples of Environmental Justice Box 13.3 Global Palm Oil Companies Fail to Prevent Indonesian Fires Box 13.4 Boycott America?

308 315 317 322

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Editors’ Introduction

Human race cruises into “brave new world” in the age of millennium. This new world is by no means cohesive but full of puzzles. On the one hand, we are living in a world of political and religious conflicts that bring miseries worldwide. On the other hand, it is a world with remarkable advances in technology that enhance well-being. As humans struggle to survive, they make history and, at the same time, create political, social and economic institutions that they do not know in advance. History perhaps repeats itself. In the Middle Ages, “holy” wars were launched by the Christian states of Europe against the Saracens (Moslems). Just like the old Crusaders, today some Western Christian nations, acting as modern crusaders, troop into the Middle East from Afghanistan, Iraq, Turkey to Syria. Adding fuel to tensions in the Middle East, on December 6, 2017, the US President Donald Trump announced to relocate the US embassy from Tel Aviv to Jerusalem, symbolizing a de facto recognition of Jerusalem, east and west, as the capital of Israel. The announcement ignites a new wave of violent protests in the region. On July 19, 2018, Israel passed the new State-nation Bill, which enumerates three basic principles that (1) the Land of Israel is the historical homeland of the Jewish people, in which the State of Israel was established; (2) the State of Israel is the national home of the Jewish people, in which it fulfills its natural, cultural, religious and historical right to self-determination; and (3) the right to exercise national self-determination in the state of Israel is unique to the Jewish people. Previously, both Hebrew and Arabic were official languages. The bill specifically states that Hebrew is the official language of Israel, downgrading the status of Arabic. The bill also establishes Israeli xix

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settlements in the occupied Palestinian territories as a “national value” that the state must encourage. The bill officially affirms Israel’s Jewish character. It turns non-Jewish citizens of the country into second-class citizens, further marginalizing some 1.8 million Palestinians with Israeli citizenship and other minorities. As a result, tens of thousands of Palestinian citizens of Israel led a mass protest in Tel Aviv against the bill. Religious and political conflicts in the Middle East are not only confined to the confrontation between Christianity and Muslim, but also further complicated by sectarianism within the Islamic community. The Islamic world is subdivided into Sunni, Shiite and Sufi. In terms of population, Sunni believers largely settle in Egypt, Jordon and Saudi Arabia, while Shiite followers mostly scatter across Iran, Iraq, Yemen, Azerbaijan and Bahrain. Political conflict within Muslims escalated when the Saudi Arabia–led bloc launched a boycott on Qatar, accusing Qatar of sponsoring terrorism and committing other wrongdoings. In June 2017, Saudi Arabia, the United Arab Emirates and Egypt abruptly cut off diplomatic relations with Qatar. The Washington Post reported on June 21, 2018, that Saudi Arabia plans to build a canal along its 38-mile border with Qatar, thus isolating the tiny Qatar into an island. The Qatar diplomatic crisis signifies the complicated linkage between politics and religion in the Middle East (see chapters in Part I). In East Asia, tensions have never been lessened. Defying American sanctions, North Korea executed a series of nuclear and missile tests. In July 2017, Pyongyang launched an intercontinental ballistic missile toward the Sea of Japan, with the potential of reaching Alaska. In August 2017, North Korea warned that it considered launching mid-range ballistic missiles toward Guam, following an exchange of verbal threats between the governments of North Korea and the United States. It seems that the world is on the brink of nuclear war. Dramatically, the US President Donald Trump and North Korean leader Kim Jong-un shocked the world by holding a historic summit in Singapore on June 12, 2018. They signed a joint declaration, seeking to establish a new relationship to pursue the “complete denuclearization of the Korean Peninsula”. According to Mingpao editorial on June 13, 2018, the joint declaration contains four main points: (1) Both sides commit to establish new US-DPRK (the Democratic People’s Republic of Korea) relations; (2) both nations attempt to build a lasting and stable peace regime on the Korean Peninsula; (3) reaffirming the Panmunjom Declaration on April 27, 2018, North Korea commits to work toward complete denuclearization of the

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Korean Peninsula; and (4) the United States and North Korea commit to recovering prisoners of war (POW) and armed forces missing in action (MIA) in North Korea. In a summit held in Pyongyang (North Korea) on September 19, 2018, South Korean President Moon Jae-in and North Korean leader Kim Jong-un announced in a joint press conference that North Korea would close a key missile test facility in the presence of “international experts” and potentially destroy its primary nuclear complex if the United States agreed to corresponding measures. The two countries also pledged to, among others, end military drills aimed at each other along the Military Demarcation Line by November 1, 2018. They also agreed to remove 11 guard posts in the demilitarized zone by the end of 2018 and normalize the Kaesong Industrial complex and Kumgang tourism project as soon as the conditions allow.1 The unprecedented historic US-North Korea and South and North Korea summits testify the insight from the Austrian school of economics that human agents, given their creative minds, produce surprising results to participants and observers. Human interaction in real time produces unintended and hence unforeseen consequence (see Chap. 6 for the North Korea Crisis). The situation in the Taiwan Strait is equally vulnerable. Relations between Beijing and Taipei have deteriorated since Tsai Ing-Wen from the Democratic Progressive Party became the island’s president in 2016. In order to push Tsai to recognize the “1992 Consensus”, the Beijing government has increased its diplomatic pressure on Taipei. The cross-strait relation looks dim as long as the island’s pro-independence movement continues to escalate, while the Beijing government stays tough in fighting against secessionist campaign. A top official from Beijing remarks that “the Taipei government refused to endorse the “1992 consensus”, obstructed and limited cross-strait exchanges and indulged the pro-independence forces to further push the de-Sinicization process”. He further warns that the Beijing government will not tolerate Tsai’s government to erode peaceful reunification. Any kind of “Taiwan independence” activities will be crushed.2 The Beijing government has increased military pressure on the island, with advanced bombers and fighters conducting “encirclement” patrols (see Chap. 7 for the Taiwan Strait conflict). China plays a crucial role in both Korean Peninsula and Taiwan Strait crises. Since the economic reform in the late 1970s, a series of national development strategies and policies, architected by a strong and effective ruling party, played an important role in China’s miracle growth in recent decades. Strategic investments have been poured into crucial areas like

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infrastructure, communication, science and technology, which facilitate the “Chinese dream of rejuvenation”. As a result, China emerges as the second-largest world economy. It is also at the forefront of many modern lifestyle innovations, like mobile payments, electric vehicles and high-­ speed rail, to name a few. China nowadays has become a major player in world political and economic affairs. Whether China’s growth experience can be a model for Asian and African developing nations sparkles a new debate in political economy (see Chap. 8). Most importantly, John J. Mearsheimer in his classic treatise The Tragedy of the Great Power Politics (updated edition 2014) argues that the most powerful nations seek to establish regional hegemony in the world while also ensuring that no rival power dominates another area. In Mearsheimer’s view, if China continues to grow as it has been in last several decades, it will attempt to dominate Asia the way the United States dominates the West. The United States will attempt in every way to prevent China from achieving regional hegemony. It is most likely that China’s neighbors, including India, Japan, Singapore, South Korea, Thailand and Vietnam, will join with the United States to contain China’s threat. The result will be an intense security competition with considerable potential risks for war. In short, Mearsheimer predicts a pessimistic view that China’s rise is unlikely to be peaceful (see chapters in Part II). The world also witnesses a wave of populism across Europe. Populism can be situated in left-right political ideologies. In history, populist movement in the United States and Latin America has generally been associated with the left, whereas populism in Europe is more associated with the right. A sense of loss of national sovereignty, migrant and refugee crisis, financial fluctuation, unemployment and terrorism prompt the revival of populism across Europe. The British citizens voted to leave the European Union after the 2016 EU Referendum. Some scholars claim Brexit as a victory for populism. Brexit leads to call for similar referendums by populist political parties in other EU countries such as Germany, France and Italy. The rise of populism will reshape the political landscape of Europe in the future (see Chaps. 10 and 11). With the advances in technology, humans explore Mars, clone sheep and monkeys, design intelligent robots, manufacture autonomous vehicles, develop neurotechnology and conduct genome editing. These dazzling technological advances coined by Professor Klaus Schwab as “The Fourth Industrial Revolution” are happening at an exponential speed. The fourth wave of the industrial revolution is expected to see the implementa-

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tion of emerging technologies with a high potential of disruptive effects and fundamentally change the way we live, work and relate to one another. However, Professor Schwab also takes a pessimistic view on the future technological development. He perceives that human organizations may be unable to adapt to new technologies. Governments may fail to regulate new technologies for the sake of the whole society. Technological power may also create security and privacy crises. Global inequality may intensify and the world will further segregate. Even worse, we may risk into the future that we don’t know ourselves. Human race may be ultimately controlled by robots that people create. The world-renowned physicist Stephen Hawking has warned us that artificial intelligence (AI) has the potential to destroy civilization and could be the worst thing that has ever happened to humanity (see Chap. 14). Apart from scientific and technological exploration, humans also create many social and economic institutions. In finance, humans create virtual money, which is defined by the European Banking Authority in 2014 as “a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically”. Specifically, Bitcoin, a decentralized, peerto-peer (P2P) network-­based virtual currency, provides a channel for people to generate, transfer and launder money with some degree of anonymity. The value of 10,000 Bitcoin was only worth of two pizzas in its first realworld transaction in Jacksonville, Florida. It rose to a dramatic peak of US$19,340 on December 6, 2017. Bitcoin offers many challenges to the central governments around the world. Its emergence signifies what F.A.  Hayek claimed in 1976 that we should denationalize money and deprive the government’s monopoly power to supply money. Hayek advocated the establishment of competitively issued private money. Whether private money will intensify or stabilize business cycle remains to be an important theoretical issue in monetary economics (see Chaps. 16 and 17). Same-sex marriage is another emerging institution in our society. It imposes severe threat and challenge to the authority of religious groups in general, and to the Roman Catholic Church in particular. Denmark was the first country to recognize legal relationship for same-sex couples and establish “registered partnerships” in 1989. This allowed those in samesex relationships “most rights of married heterosexuals, but not the right to adopt or obtain joint custody of a child”. In 2001, the Netherlands was the first country to permit same-sex marriage. In Asia, Taiwan was the first

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Asian nation to legalize the same-sex marriage. On May 24, 2017, the Constitutional Court in Taiwan ruled that same-sex couples have the right to marry under the Taiwanese Constitution and that the Legislative Yuan has two years to amend the marriage laws to align with the Constitution. If this is done, same-sex couples may have their unions registered as marriages and be treated as such by law. Apart from law court, religion plays a significant role in the same-sex marriage dialogue. Religious views on same-sex marriage are closely related to homosexuality. While a majority of religions in the world oppose this kind of marriage, a growing number of autonomous Christian churches accept and conduct same-sex marriage. With different interpretations on their holy scripts, religious arguments for supporting same-sex marriage begin to emerge too (see Chap. 12). To search for a better living on Earth, human race attempts to preserve the environment and creates regulations and institutions governing the way we live. Notably, the concept of sustainable development that has appeared in recent years consists of balancing local and global efforts to meet basic human needs without destroying or degrading the natural environment. The 2005 World Summit on Social Development identifies three pillars of sustainable development, namely, economic development, social development and environmental protection. These three pillars of sustainability are not mutually exclusive. Instead, they are interdependent, and in the long run, none can sustain without the others. The three pillars give rise to sustainability standards and certification systems in recent years. An example is Rainforest Alliance, Fairtrade and UTZ Certified in the food industry. While the world is putting effort to tackle with the climate change, on June 1, 2017, Trump announced that the United States would pull out the Paris Accord, which has put the United States at a permanent disadvantage and jeopardized the American economy. The United States’ withdrawal from the agreement gives a pessimistic outlook on the world efforts to combat global warming and environmental degradation (see Chap. 13). This book is a collection of chapters on current issues in international political economy. The volume is divided into four parts. Each part consists of the most important and controversial issues in world economic and political affairs, including Christianity-Islam and Sunni-Shiite confrontation in the Middle East; terrorism; North Korea and the proliferation of nuclear weapons; Brexit and the future of European Union; Bitcoin, AI and the brand-new IT world; same-sex marriage and the challenge of the traditional social values; global warming, climate change and environmental degradation; happiness, global village and well-being. We thank the

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anonymous referees of Palgrave publisher for their valuable suggestions. We are also grateful to Professor Mei-Chih Hu of National Tsing Hua University and Professor Yu-Chen Kuo of Feng Chia University for their constructive comments. Of course, none of them bear any responsibilities for the errors that remain.

Notes 1. CNN (September 19, 2018) “North and South Korea commit to ‘era of no war’”, https://edition.cnn.com/2018/09/18/asia/north-korea-southkorea-summit-intl/index. html; access 20 September 2018. 2. See Kristin Huang (January 1, 2018) “Beijing warns of pro-independence turmoil in ties with Taipei in 2018”, South China Morning Post, http:// www.scmp.com/news/ china/policies-politics/article/2126377/china-­ taiwan-­relations-grave-state-2018-says-beijing, access on 1 March 2018.

PART I

Political and Religious Conflicts in the Middle East

CHAPTER 1

Religious Conflicts in the Middle East: Christianity Versus Islam and Sunni Versus Shiite Diana S. Kwan and Fu-Lai Tony Yu

1   Religious Conflicts and Violence in the  Middle East “No violence without (some) religion; no religion without (some) violence…. ‘religion’ is the relation between the self (or some selves) and the other— some other.” (de Vries 2001: 1)

Religious and political conflicts are multifaceted, interrelated and recurrent. The Middle East remains as the world’s least peaceful region. In particular, the Jasmine Revolution began in Tunisia in 2011. It was D. S. Kwan Office of Medical Education, The Chinese University of Hong Kong, Shatin, Hong Kong e-mail: [email protected] F.-L. T. Yu (*) Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_1

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f­ ollowed by revolutionary protests and demonstrations in the Arab world, including Egypt, Libya, Syria and Yemen. The Arab Spring marked revolutions against secular rule, dictatorship, corruption and poverty. Islamic parties gained legitimacy and achieved significant success in free elections in Tunisia, Egypt and Morocco. Conflicts between religious, orthodox, fundamentalist and secular groups become a new norm in the Middle East. Violent conflicts bring adverse effects on human settlement and economic development. The human costs of violence are insurmountable in terms of forced displacement, health and environmental hazards (Human Security Report Project 2011; United Nations Development Programme 2011; World Bank 2011a: 59–60; UNICEF 2018). Economically, the more likely the country is affected by armed violence, the lower the level of its economic development. On average, between 1981 and 2005, countries which experienced major violence had poverty level 21 percent higher than countries without violence (World Bank 2011a: 60). If armed conflicts persist, the gap between rich and poor countries will widen. One form of religious and political conflicts is terrorist attack.1 It is a major threat to global peace and security in the twenty-second century. Most terrorist attacks are armed attacks or suicide bombings against unarmed civilians by lone wolves, state or organized non-state militant groups. In 2016, there were over 4736 terrorist attacks in the Middle East and North Africa, especially in Iraq and Syria (Institute for Economics and Peace 2017: 45). Radical fundamentalist organizations play an important role in terrorist attacks. Sunni extremists account for almost 56 percent of all terrorist attacks (Geneva Declaration Secretariat 2011). The Islamic State of Iraq and the Levant, known as ISIL or ISIS, is the deadliest terrorist group, and is responsible for most of deaths that occurred in Iraq (Institute for Economics and Peace 2017).2 It is a Salafist jihadist terrorist group that follows fundamentalism and Wahhabism. It pursues to expand the Islamic State (IS) by hostage-taking, terrorist attacks and territorial conquest. With regard to all kinds of conflicts around the world, religion plays a prominent role on hostility and tension. Religious conflicts “sound the alarm” to world peace and security.3 Major religiously motivated attacks in the Middle East include Islamabad Marriott Hotel bombing in 2008 and Palm Sunday church bombings in Egypt in 2017, to name a few (for major religious conflicts in the Middle East, see Table 1.1). Sectarian, radical fundamentalist and religious extremist organizations carry out violence, atrocities, terrorism and warfare. Larsson (2004: 106) argues that

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Table 1.1  Major religious conflicts in the Middle East Country

Local intergroup conflict

Iran

Iraq

IsraelPalestine

Syria

Sectarian and ethnic violence between Sunni Muslims, Shiite Muslims and Kurds

‘Conventional’ political conflict

Transnational religious conflict

MEK (Mujaheden-e-­Khalq) (1991–2001) PJAK (Free Life Party of Kurdistan) (2005–present) Jondullah (2006–present) KDP (Kurdish Democratic Party of Iraq) (1991–93) PUK (Patriotic Union of Kurdistan) (1991–96) Fatah (1991–2002) Palestinian Islamic Jihad (2002–present) Hamas (2001–present) Hezbollah (1990–present) Syrian Armed Forces Shabiha Free Syrian Army Syrian Liberation Army

Al-Qaeda links with Jondullah

Al-Qaeda, ISIS

Cross-border Islamic militant links

ISIL

Source: Adapted from the World Bank (2011b) and Institute for Economics and Peace (2012)

“religious violence is on any levels more logical and rational than purely secular forms of political violence, and its intensity further supports this argument” (italics original). Why do religious conflicts occur? Also, on what basis do religious believers claim holy duties in conflict? This issue is of utmost importance. Understanding the nature of the issue allows us to avoid conflict and violence and maintain global peace. Unfortunately, the nature of the issue is not properly understood. This chapter attempts to understand contemporary religious conflicts in the Middle East. It has two objectives. It puts forward a theory of social construction of religious belief and explains the origin of religious conflicts as knowledge conflict. The argument is applied to Christian-Muslim and Sunni-Shiite confrontations. This chapter begins by reviewing theories of religious conflicts (Sect. 2). A new theory of social construction of religious belief will be formulated (Sect. 3). The new theory is illustrated by three cases of religious conflicts in the Middle East, namely, (1) Christian-Muslim confrontation (Sects. 4 and 5), (2) Sunni-Shiite sectarian conflicts (Sect. 6) and (3) the Syrian War (Sect. 7). The chapter ends by suggesting a solution to religious conflicts (Sect. 8).

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2   A Search for an Explanation of Religious Conflicts Religion legitimates action in the name of God. Religious people believe that they are chosen by an absolute deity. Sacred actions are sanctioned and mandated by God. People who sacrifice themselves in the name of deity shall be blessed and rewarded. Religion is ambivalent as the source of peace and war (Appleby 2000). Believers struggle with the confrontation between God and Satan, sacred and profane, truth and evil, justice and injustice. In this section, we review the reasons underlying religious conflicts in terms of evolutionary, primordialist, psychoanalytic and scarce resource perspectives. 2.1  Evolutionary Perspective Humans struggle to survive through competition. Evolutionary theories view religion as an adaptation of human agents to their environment. Religion emerges as an institution and evolves to enhance cooperation and cohesion within groups and hence a greater chance for survival. To compete for survival, between life and death, members within a religious group can sacrifice themselves for the common good (Dawkins 2004). Believers in a religious group develop belief and practices as a means to compete. Members of some religions are even empowered with the right to use violence against “pagans” (Juergensmeyer 2000: 218). Believers who use violence against pagans are to be freed from sins, bring eternality to themselves, families and communities (Elster 2006). If the religious faith is under threat, it is possible to develop “holy war, i.e., a war in the name of god, for the special purpose of avenging a sacrilege” (Weber [1925]1978: 473). Holy warriors fight in the name of God. After victory, believers convince non-believers the legitimacy of religion. 2.2  Primordialism Group identity exists because there are traditions of belief toward primordial objects such as biological factors and territorial location. For example, in the concept of kinship, members of an ethnic group feel they share characteristics, origins or even blood relationship. Faith and family, blood and belief are “what people identify with and what they will fight and die for” (Huntington 1993: 192–194). Primordialism, in explaining religious

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conflicts, stresses on the commonalities and differences of religions. The rise of fundamentalism can be said to restore a sense of authenticity of religion by religious legitimization and moral justification. It is “a necessary prelude to the decisive intervention of God and the final vanquishing of the apostates” (Appleby 2002). Nations with common religion accommodate each other and form an alliance against those which are different. It is the origin of religious conflict. 2.3  Psychoanalytic Dimension Religious faith provides people with a feeling of something true, complete and absolute. Religion helps people find fellowship and some control over their lives. It is a defense against feelings of their loneliness and powerlessness. People who turn to religion do so not out of devotion but in search of security. Furthermore, human is born with lust, anger and aggression. The society uses norms and institutions to suppress human basic instincts. Religion is an alternative for humans to release anger and aggression without destroying the society. It is a defense mechanism against psychotic anxiety (Freud 1964). In practice, believers “set boundaries, protect the group from contamination, and preserve purity” (Marty and Appleby 1991: 821). They ­imitate each other in sacred text, sermons and rituals. Those people who do not believe in their God are regarded as pagans or even blasphemous. When religious purity is threatened, religious devotees seek sanctification, maintain religious purity, separate the sacred from the evil and demon by scapegoat mechanism (Girard 1977). However, psychoanalytical perspective neglects the fact that religious confrontation is deeply embedded by cultural and historical factors. It does not fully explain religiously motivated violence in socially embedded environment. 2.4  Scarce Resource Theory4 Religious belief produces scarce resources. There are four kinds of religious resources, namely, inscripturation, sacred place, group privilege and salvation (Avalos 2005). Devoted believers compete for scarce religious resources. They fight and even die for holy praise, prestige and rewards through salvation. As they try to acquire sacred resources at all costs, conflict in the name of God will occur. In particular, the murder of Abel by his brother Cain is known as the first murder in the Bible. God

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accepted the offerings of Abel from the flock but rejected those given by Cain from soil. Schwartz (1997: 3) notes: “This God who excludes some and prefers others, who casts some out, is a monotheistic God  – Monotheistic not only because he demands allegiance to himself alone but because he confers his favor on one alone.” Monotheism believes in one deity, one people, one nation. Monotheistic religion is intolerant with those people who believe in other gods. Divine blessings are scarce and given to particular groups or religious devotees. Believers compete for scarce resources through salvation in hostile and deadly rivalries. When people devote themselves to one religion, they are keen to compete, fight and even die for religious resources. When believers try to acquire scarce religious resources at all costs, conflicts in the name of God will be imminent. Notwithstanding the contributions of the above four arguments, we feel that hitherto religious conflicts have not been viewed from a human agency perspective. We shall fill in this gap below.

3   Religious Conflict as a Conflict of Knowledge In this section, we formulate a new theory of social construction of religious reality based on the arguments given by Alfred Schutz’s sociological philosophy (Schutz 1976), which was later developed by Berger and Luckmann (1966). This theory will be applied to explain the origin of religion and hence understand religious conflicts. 3.1  Everyday Religious Experience in the Socialization Process Human agents go through a process of socialization since they were born (Weick 1969). They experience the outside world, receive religious preaching and participate in church activities. These everyday life experiences will accumulate into a stock of knowledge for them to interpret incoming events. At the beginning, little toddlers learn religious teaching and activities from their parents at home. They take what their parents have told them. Later, children learn religious literatures or teachings from Sunday school or church during the “secondary socialization” (Berger and Luckmann 1966). They further learn religious teaching and holy scripts from their peer groups after they leave school and work in the society. With the advancement of information technology, people practice religious rituals through mobile app and social media. They worship god

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online and attend religious services in virtual reality (VR) church, temple or mosque. Hence, people socialize and share a common stock of religious knowledge in their everyday lives. Moreover, experience from everyday religious life is taken as unconditionally as real and would not be questioned. For example, Christians go to church on Sundays without asking why. They don’t challenge such religious practice because they take this practice for granted. In other words, people are certain that they perceive the religion as told as the others perceive it without any doubt. They share the same religion by including the others in their consciousness.5 To be sure, the common stock of religious knowledge shared by people is neither static nor homogeneous. It continues to be constructed, interpreted and transformed over time. Collective religious consciousness defines a religious community (Wentz 1993).6 3.2  God and Satan: A Social Construction of Religious Conflict Given that holy mystery is beyond human apprehension, how is religion constructed as a social reality in a meaningful way? It can be said that religion is a collective mind construct through social interaction. In other words, believers construct and experience religiousness in their everyday life (Berger 1967) through family teaching, churches, sacred texts, rituals, customs and so forth. They religify social reality “out of a context and made conscious as an authoritative memory” (Waugh 2005: 251, italics original). Religiousness is a biographically determined experience which is internalized as a scheme of relevance. It legitimates the way believers interpret the world and the way they experience in the world. Religiousness is a social reality in the sense that believers take religious experience for granted. Selengut (2003: 100) rightly points out that believers reject the social world in which they reside and already live in an alternative world of their own making, with its own sense of time, space, and values. They are no longer of this world, and the logic and truths of ordinary reality do not restrain them. … their behavior, possibly including violence, makes sense to them in the context of their apocalyptic reality.

Religion constructs cosmic conflict between God and Satan, right and wrong, truth and evil. Conflict is religified as an “interfaith phenomenon”. Monotheists … have no monopoly on violence. But it is true that scripturally revealed monotheism can serve those minded to be lethal in distinctive

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ways. Believe in one all-powerful God. Believe that this God has enemies. Believe that you are charged to serve the purposes of God against those enemies. Believe that a unique and absolute holy book gives you directions, impulses, and motivations to prosecute war. You have, then, the formula for crusades, holy wars, jihads, and, as we relearned in the year just passing, terrorism that knows no boundaries. (Marty 2002)

If an action is sanctioned or mandated in the name of God, religious violence will no longer be violence in sacred time.7 Believers forsake and deny themselves to God by “masochistic surrender” (Berger 1967: 56). Human suffering, pain and even death are divine ordained. Pain and suffering is not a curse but sacred blessing, redemption and faithfulness. Believers who struggle and fight in the name of God will be blessed and heavenly rewarded. 3.3  Religion as a Source of Knowledge Conflict As mentioned, religiousness is a socially constructed reality and believers take religious experience for granted without challenging it. When believers are living in two separate environments or regions, each group of people enacts its own religious future according to its own imagination. Over time, two religious communities will emerge. In-group (believers) will differentiate itself from out-group (pagans or non-believers). In other words, if believers growing up a certain environment share the same pools of religious belief is in-group (believers), then people sharing other different pool of religious belief becomes out-group (pagans). Different stocks of religious knowledge, if confronted, may result in conflict. This is the origin of religious conflicts.

4   Christian-Muslim Confrontation and World Hegemony Christians and Muslims comprise over 40 percent of the world population. They are monotheistic to the same God.8 They have common understanding on prophecy, revelation and moral obligations. They have the same sacred duty to convert non-believers into authentic faith. Those who do not believe in God are regarded as infidels. As a saying goes, “if they are not with us, they are against us”. Christian-Muslim confrontation is regarded as a product of “Judeo-Christian conspiracy”

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(Esposito 1995: 19). It is identified as the confrontation between crusaders and green peril, occident and orient, Satan and mullah (see e.g. Beeman 2005; Kimball 2011; Nelson-Pallmeyer 2003). The following section elucidates Christian-Muslim confrontation in the struggle of global hegemony. 4.1  The Confrontation Between Christianity and Islam in History The confrontation between Christianity and Islam began in the Medieval Ages. Between the eleventh and twelfth centuries, the Crusades, the expulsion of the Moors from Spain and the Inquisition showed the determination of the Catholic Church to maintain Catholic orthodoxy and liberate the Holy Land from the Muslim rule. After the fall of the Byzantine Empire and the siege of Vienna, Ottoman Muslims built up hegemony over Eastern Europe and posed a threat to Christendom’s political and religious positions. During the nineteenth century, the legacy of Christian superiority began when European colonialism and imperialism took place in Africa, India and Southeast Asia. Christianity was introduced in colonies and Muslims called for “the true and uncorrupted Islam as opposed to European political and cultural hegemony” (Saikal 2003: 34–35). Muslim countries accused European colonialism and Western ideologies as decaying and corrupting Islamic ethical and moral values. From the twentieth century onward, the United States has become the world superpower. For Muslim countries, “[w]hat is universalism to the West is imperialism to the rest” (Huntington 1996: 184). Muslims turned to Islamic revival and (re)-Islamization to restore authentic Muslim community at home and around the world. Islamization movement was developed in the Middle Eastern countries like Iran and Egypt. Islamic fundamentalist organizations and militant groups were established. They included the Muslim Brotherhood and Hezbollah. After the September 11 attacks in 2001, President George W. Bush called for “Holy War” with War on Terror or Global War on Terrorism.9 The Islamic State militants abducted, killed and operated terrorist attacks against Christians in Egypt, Syria and Iraq. Islamophobia and counterterrorism discriminated against Muslims. The Christian-Muslim confrontation in the pursuit of world hegemony has occurred in the Iranian Revolution, Iran-Iraq war, Gulf War, Israel-Palestine conflict and Syrian War.

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4.2  Religious Consciousness: Christians Versus Muslims The United States and Western allies exemplify Christian values namely liberty, equality and democracy as the golden rule. On the other hand, Islamic countries follow sharia and strengthen theocratic state under Islamic doctrine. Following Islamization movement worldwide, Christianity, Western culture and values are interpreted as heresy. As Christians and Muslims take different religious experiences for granted, they distinct themselves as in-group (believers) and the others as out-­ group (pagans). 4.2.1 Constructing Christianness in the Western Societies Christianity has been nourished in the United States since English Puritans and Pilgrims crowded aboard the Mayflower, settled in Plymouth, Massachusetts, in 1620 and established the Massachusetts Bay Colony in 1630. Another group of the settlers were known as the Quakers who advocated Christian faith and the equality of humanity. Both groups sought religious freedom, tolerance and pluralism in North America. Under ancestral legacy of Christianity, Americans constructed their national consciousness with liberal and democratic principles in everyday life. It was the beginning of Christian America.10 Americans take Christianity as their religious belief. In the United States, Christianness is constructed in such a way that nation, law and institutions are based on the principle of Christianity. About 78.4 percent of American adults are Christians (Pew Forum on Religion and Public Life 2008). They read the Bible in schools, attend church services and sing hymns. The name of God is mentioned in important speeches such as presidential inauguration and solemn speeches. “In God we trust” has been the national motto since 1956.11 On national holidays, like Easter, Thanksgiving Day and Christmas, Americans give thanks to the Almighty God for blessings and mercies. The doctrine of Christianity is also the motto of the state. The founding fathers were culturally Christians (Meacham 2006; Guétin 2009). Paine (1776/1998: 43) argues that there are “various denominations among us to be like children of the same family, differing only in what is called their Christian names”.12 Christianity is the cornerstone of democracy, freedom and tolerance. The Declaration of Independence (1776) affirms Christianity on the state as universal values. It stresses on equality, natural law and natural rights according to Christian faith: “[A]ll Men are created equal, that they are endowed, by their

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CREATOR, with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness”.13 People pursue for “appealing to the Supreme Judge of the world for the rectitude of our intentions” and affirm their “firm reliance on the protection of divine Providence” (ibid.). The United States with Christian faith manifests the excellence of divine order. It is destined to be an invincible nation and a worldwide model of equality, liberty and democracy.14 Americans take the Christian way of life for granted. 4.2.2 Islamization in the Muslim Countries Islam is monotheistic. Muslims believe in Shahada, “there is no god but the God and Muhammad is the messenger or prophet of God”. They follow the Qur’an and Sharia as a way to build a Muslim community, ummah. Muslims think that they are “the best of peoples, evolved for mankind, enjoining what is right, forbidding what is wrong” (Qur’an 3: 110). They are obliged to pray five times a day at fixed times, give 2.5 percent of one’s wealth as alms, exercise fasting from dawn till dusk during the month of Ramadan and perform the annual Hajj pilgrimage to Mecca. The five pillars of Islam construct collective consciousness of Muslims. Muslims have greater jihad for individual spiritual struggle and smaller jihad as an act to defend Islam. They have sacred obligation to offer their wealth and, if necessary, their lives in the struggle against the enemies of Islam. Facing hegemonic Western “imperialism” and culture, Muslims strive to regain authentic Islamic faith and international dominance. They claim to preserve and revive true Islamic identity by Islamization which “reinforces cultural pride and self-esteem as well as consciousness of an Islamic history which once bore the signature of superior cultural tradition” (Hassan 2002: 224). In Islamic world, Muslims construct themselves as the superior rulers whereas Christians are inferior communities known as dhimmi. Whilst the conversion to Islam is encouraged, the conversion from Islam to Christianity is a sin and can be a capital offense. The 1979 Iranian Revolution marks the success of Islamization. Islamic fundamentalist organizations emerge around the world. Conservative and fundamentalist Muslims regard the United States as the most aggressive, hostile and hypocritical power toward Islam and its support on democratic transformation in Islamic lands (Esposito and Mogahed 2007: 80–84). The United States is “the archenemy, the incarnation of evil, the diabolic opponent of all that is good, and specifically, for Muslims, of Islam” (Lewis 1990). It is regarded as the “Great Satan” who is the source of cultural

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contamination of Islamic sacred land.15 Islamic fundamentalists select and manipulate sacred texts and Islamic history for divine mandate to act chauvinistically. They condemn the United States as infidels who try to corrupt and even destroy sacred Muslim land. When the external world is dominated by the pagans, “the subjective interior intention of the believers is the last resort of divine truth” (Kippenberg 2011: 157). Osama bin Laden, the late leader of al-Qaeda, strongly criticized American policies in the Middle East, including Iraq, Israel, Palestine and Saudi Arabia.16 He declared jihad that “the ruling to kill the Americans and their allies – civilians and military – is an individual duty for every Muslim who can do it in any country” (bin Laden 1998). In what follows, we illustrate our arguments by three cases of religious conflicts in the Middle East, namely, (1) the religious conflict between the United States and Iran, (2) the Sunni-­ Shiite sectarian conflict and (3) the Syrian War.

5   The United States Versus Iran Islam arrived in Iran during the seventh century. From the early sixteenth century onward, Islam has been the official state religion and deeply embedded in Iranian culture and society. Around 90 percent of the total population are Shiite Muslims and remaining 9 percent Sunni Muslims. During the 1950s, the American and British governments supported a new government led by Mohammad Reza Shah Pahlavi. The United States and Iran established bilateral military exchanges and diplomatic relationship until the Iranian Revolution of 1979. Pro-Western Pahlavi introduced socioeconomic reforms in education, land, health and agriculture.17 Many Iranian students were sent to study abroad including the United States. After graduation, they defied traditional Iranian norms and developed Western attitudes. As Islam was deeply rooted in the society, local Iranians perceived that Pahlavi was a puppet of America and rejected his reform policies. Protests and demonstrations were taken place in Iran. After the 1979 Iranian Revolution, Ruhollah Khomeini overthrew Pahlavi’s regime and became the supreme spiritual and political leader of Iran. Ayatollah Khomeini advocated freedom from “US-backed Satanic” Pahlavi’s regime and established a theocratic republic under Islamic doctrine. The United States was constructed as “Great Satan” and Americans were infidels who brought evils such as poverty to Muslims. Khomeini said, “[T]hose who are against us are like cancer tumors that need to be removed surgically; otherwise they will corrupt everything … All these

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voices are blasphemy and are atheistic.”18 He disapproved Western culture and introduced Islamization. He called for uniting Muslim countries to fight against the United States and its Western allies “so that they may assume the reins of world leadership of mankind once again and place the world under the protection of the esteemed Islamic civilization” (The Islamic (Student) Association of Cairo University 1982: 246). Islamic teachings, norms and institutions were encouraged. Holy warriors were recruited and trained. Encountering the rise of Islamic state, the United States accused Iran of terrorism and human rights abuses on religious minorities and women. It implemented economic sanctions against Iran since then. Ali Khamenei succeeded as the supreme leader of Iran in 1989 after the death of Ayatollah Khomeini. He regarded America as “global arrogance” which desired for global hegemony and corrupted sacred Islamic land. The United States was “an enemy and an intolerable rival … trying to establish a global dictatorship and further its own interests by dominating other nations and trampling on their rights” (Sadjadpour 2009: 20). The only way to seek global hegemony was to revive, unite and defend Islamic nations by sacred militias. After the 9/11 attacks in the United States in 2001, President George W. Bush regarded Iran as “axis of evil”. The US government imposed nuclear sanctions against Iran. Tension escalated between the United States and Iran over the Israeli-Palestinian conflict on the Jerusalem issue. 5.1  The United States and Iran on Jerusalem Jerusalem is a sacred place of both Christianity and Islam. According to the canonical Gospels, Jesus, the central figure of Christianity, preached and healed people with sickness and disease all over the Galilee and, more importantly, in Jerusalem. He was crucified by the Romans outside the city walls of Jerusalem and rose from the dead. Muslims regard Jerusalem as a sacred space along with Mecca and Medina. According to the Qur’an, Prophet Muhammad took a night journey from Mecca to Jerusalem where he ascended to the heaven. Sacred places like Jerusalem are “coherent monolithic spaces that cannot be subdivided, they have clearly defined and inflexible boundaries, and they are unique sites for which no material or spiritual substitute is available” (Hassner 2003: 13). After Israel proclaimed its independence in 1948, Jerusalem was divided into two parts. West Jerusalem was a part of the new state Israel and East Jerusalem was

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occupied by Jordan. In the 1967 Six-Day War, Israel defeated Arab armies and seized control of East Jerusalem, the West Bank and Gaza Strip. The international communities largely insisted that Israeli annexation and settlement of East Jerusalem after 1967 was illegal. They also refused to recognize Jerusalem as Israel’s capital. When Mahmoud Ahmadinejad was elected as Iranian President in 2005, the US government identified Ahmadinejad as “Mad Mullah”. Iran referred Israel, an ally of the United States, as the “Zionist regime” which had “no roots” in the Middle East and “must be wiped off the map” (Reuters 24 September 2012; New York Times 27 October 2005). Iran provided financial and military support to Hamas in Palestine and Hezbollah in Lebanon which claimed the destruction of Israel. On the other hand, the US government provided Israel financial and military aid. Israeli President Netanyahu said, “Americans know that Israel and the United States share common values, that we defend common interests, that we face common enemies. Iran’s leaders know that, too. For them, you’re the Great Satan, we’re the Little Satan. For them, we are you and you are us. And you know something, Mr. President – at least on this last point, I think they’re right. We are you, and you are us, … Israel and American stand together” (The Guardian 5 March 2012, italics by authors). In December 2017, US President Donald Trump decided to relocate the US embassy from Tel Aviv to Jerusalem. The announcement symbolized a de facto recognition of Jerusalem, east and west, as the capital of Israel. The US decision was recognized as a “kiss of death” to the Israel-Palestine conflict (BBC 6 December 2017). The Israel-Palestine peace process was impeded. The Iranian government showed its support to Palestine and declared Jerusalem as the permanent capital of Palestine. It called for Islamic unity and the liberation of Palestine. On the day of the opening of the US embassy in Jerusalem, Israeli forces used live ammunition against Palestinian protesters in the Gaza Strip. It was the bloodiest day for the Palestinians in Gaza since the 2014 Gaza War (Washington Post 15 May 2018). Anti-American extremism fueled in the Middle East. The US-Iranian hostility threatens international peace and security in the twenty-second century.

6   The Sunni-Shiite Sectarian Conflict Religious conflict is not only confined to Western Christianity and Islam. The political landscape in the Middle East is made complicated by the fact that religious conflicts occur within Muslims themselves. Sunni Islam and

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Shiite Islam are the two major Muslim sects. Ironically, they believe in Prophet Muhammad and have many similarities on Islam (see Sect. 4.2.2.). More than 85 percent of the world’s Muslim population is Sunnis and about 25 percent of them are living in the Middle East (BBC 19 December 2013). In particular, there are more than 90 percent Sunnis in Saudi Arabia and Egypt whereas almost 90 percent Shiites in Iran. The Sunni-­ Shiite sectarian conflict has continued throughout a thousand years after the death of Prophet Muhammad. It began on the succession of Prophet Muhammad, followed by different interpretations on sharia. At least 40 percent of Sunnis call Shiites as unbelievers (Pew Research Center 2012). After the 1979 Iranian Revolution and the Iraq War in 2003, the emergence of Shiite Crescent led by Iran stretched from Iraq, Syria and Lebanon. The tension between Sunni and Shiite escalated over the Arab Spring and Syrian War. 6.1  Constructing Religious Consciousness of Sunni and Shiite Islam Nasr (2006: 82) rightly notes that sectarian conflict in the Middle East “is rather the old feud between Shi’as and Sunnis that forges attitudes, defines prejudices, draws political boundary lines, and even decides whether and to what extent those other trends have relevance”. After the death of Prophet Muhammad in 632, no legitimate successor was designated to lead Muslims around the world. Since then, Islam has been split into many sects. Sunni and Shiite are the two major Muslim sects. They develop into different stocks of knowledge through their own interpretations on sharia. In practice, after Muhammad’s death, the majority of Muhammad’s followers supported Abu Bakr, father-in-law and a friend of Muhammad, to be the first caliph. The caliph was taken only as the selected or elected successor of Muhammad rather than being the chosen one by Muhammad. He was a political and military leader rather than a prophet. Some followers regarded themselves as Sunnis who follow the true traditions and teaching of Muhammad. On the other hand, Shiites believe that Muhammad’s successor must come from the prophet’s ­bloodline. They believe Muhammad’s cousin and son-in-law, Ali, was the rightful successor of Muhammad and chosen by Muhammad as the legitimate leader of Islam. Shiite Imam should be divinely appointed from the Prophet’s family. Shiite Imam is a political leader and infallible spiritual prophet of the Muslims.

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No single legitimate religious leader or authority can declare which interpretation of Islam is supreme. Sunni regard themselves as the orthodox sect of Islam. It is a religious obligation for Sunnis to “obey Allah and obey the Messenger and those in authority among you”. Supreme religious authority is based on the traditions of Muhammad and the Qur’an. Shiites believe that Ali and his following ten successors were killed by the Sunni caliphs. God hid the Twelfth Imam alive in a cave. For Shiites, God will divinely appoint Imam and restore his rule on earth. The doctrine of the Imamate is taken for granted. Under Shiite clerical hierarchy, ayatollah is the guardian of the faith. He is the authoritative interpreter of Islamic law and implements Islam as God intended. There is no common jurisprudence (fiqh) for all Muslims worldwide. Sunni and Shiite construct different religious consciousness. Aisha was the daughter of Abu Bakr and one of Muhammad’s wives. Some Shiites insist that she committed adultery even though the Qur’an states she did not have extramarital affair. Sunnis perceive Shiites are apostates because they do not believe in the Qur’an. Ali, the first Shiite Imam, was killed by the Sunni caliphate. His two sons were poisoned to death and killed in the battlefield respectively. After the battle, his daughter was held captive in the caliphate. Sunnis focus on victory and survival in the battlefield. They are obliged to keep good deeds, stop evils and repent. Shiite Islam develops the rituals of grieving and the concept of martyrdom. Shiites are taught with the tragedy of Ali. Ali’s daughter is a role model of Shiite martyrdom. Shiites are discriminated, oppressed and persecuted by Sunni majority. Militants are recruited as jihadist to resist against injustice, humiliation and tyrannical rule by the Sunnis. 6.2  Sectarian Rivalry and Regional Dominance: Saudi Arabia Versus Iran Saudi Arabia and Iran are two major regional powers in the Middle East. Their rivalry is to a great extent religified. Saudi Arabia is the leader of Sunni Islam whereas Iran is the heart of Shiite Islam. Saudi Arabia is said to be the home of Islam. It controls the most sacred shrines in Mecca and Medina respectively, that is, Al-Masjid al-Harām (the Sacred Mosque) and Al-Masjid an-Nabawi (the Prophet’s Mosque). Saudi Arabia follows puritan Sunni Islam and believes it is the real Islamic nation. In the eighteenth century, the Saudi dynasty encouraged

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Sunni Wahhabism, which is based on the Qur’an and embodied the life of the Muhammad. Wahhabism became the state ideology in 1932. Wahhabi clerics were “the kingdom’s de facto rulers” (Yamani 2008: 146). They were hostile toward Shiite Islam over true interpretation of Islam. Iran is a Shiite nation. From the sixteenth century onward, Iran has made Shiite Islam as a state religion and established a Shiite theocratic state. After the 1979 Iranian Revolution, Iran spreads Shiite theocracy. It pursues religious supremacy in the Middle East by “portraying the Shi’a as victims, with Iran as their saviour” (Abdo 2017: 146). Iran claims Saudi Arabia as a fraudulent and un-Islamic state. Saudi Arabia perceives Shiite revival as a real threat to the Muslim world. It returns to rigid Wahhabi interpretations of Islam of the eighteenth century. Shiites are “considered to be traitors by nature, as they have betrayed Sunni Islam in the past and will not hesitate to do so again if given the opportunity” (Ismail 2016: 134). Saudi Arabia points to Iranian government for supporting terrorism and calls for Muslim unity against terrorism led by Iran. After the Arab Spring, young Saudis were impressed by the mass mobilization by young Shiite leaders and charismatic leadership of Iranian President Mahmoud Ahmadinejad. Crown Prince Mohamed bin Salman advocated moderate Islam to get more support from the young. He initiated to relax social restrictions and curb the power of religious hardliners. Women were allowed to drive and watch live soccer matches in stadiums. The government lifted 35-year ban on cinemas. At the meantime, although Iranian President Hassan Rouhani claimed to be a moderate Shiite, most policies were still under the control of the ayatollah. The Iranian authorities adopted repressive internet censorship and banned the access of social media. Under Iran’s mandatory headscarf law, women who did not wear their hijab properly or even removed hijab would be sentenced into prison. People who engaged in public protests were un-Islamic and jailed for anti-­ state propaganda. As long as Muslim sects continue to take their religious experience and interpretation as real, the Saudi-Iranian tension will persist. In the past, the tensions can be seen in the Iran nuclear deal (2015), the execution of a Shiite cleric convicted of terrorism offense in Saudi Arabia (2016), the resignation saga of Lebanon’s Prime Minister (2017) and the Syrian War (2011–ongoing).

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7   The Syrian War: Religious War and Superpowers’ Wrestling The Syrian War started in 2011 and shows no sign of peace after seven years. It was regarded as one of the top ten global conflicts.19 The Syrian War was said to be triggered by a peaceful protest in Deraa in 2011. Young Syrian protesters were arrested and reportedly tortured in custody. Anti-­ government protests erupted nationwide. They were brutally suppressed by the government. The US government wanted to remove the Assad regime. However, President Bashar al-Assad refused to resign. He consolidated his regime with the loyalty of minority Alawites (a sect of Shiite Islam). It aroused the resentment of Syria’s majority Sunnis after decades of government religious repression policy. Violence spread out across Syria. As Abdo (2013: 2) claims, the Syrian War “provided a mechanism for amplifying traditional sectarian conflict”. The war shattered the lives of the Syrians. During 2011–2017, 343,511 people were killed (Syrian Observatory for Human Rights 2017, 24 November). Many Syrians fled from their hometown and became refugees. Others vanished without a trace or were presumed dead. In Syria, atheists apparently do not exist.20 Syrians claim their own religion by birth, marriage or conversion. There are Sunni Arabs (64 percent), Alawites (12 percent), Christians (9 percent), Druze (3 percent), ethnic minorities (10 percent, primarily Sunni Kurds) and others (mostly Shiites) (Phillips 2015). Alawites represent a sect of Twelver Shiite Muslims and regard themselves as Muslims. They believe in reincarnation and do not practice the five pillars of Islam. Sunni Muslims believe Sunnis are the real Muslims but Alawites and Shiites as apostates. Syria is inherited as Sunni patrimony and the emergence of Alawites is a usurpation (Kramer 1987: 237). Budka (2012: 162) argues that the Assad regime, which relied on the loyalty of the Alawites, was ruled by a “heresy of a heresy”. The tension between Sunni Muslims and Alawites began in the 1970s. The Assad government declared Alawites as Shiite Muslims. It adopted pro-Alawites favoritism, including favorable treatment of Alawites in bureaucracy, the expansion of Alawites-based community, recruitment of Alawites officers in national military and security forces. Sunnis were discriminated and discontented with the Assad regime. They were restricted to the study of Islam in mosques. The appointment of clerics was intervened by the government. In foreign policy, the Assad regime built good relationships with the Iranian government and Lebanese Hezbollah.

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Sunnis were anxious of the Shiite revival and the downfall of regional dominance of Saudi Arabia. When the Syrian Army and Lebanese Hezbollah won the Battle of al-Qusayr in 2013, the Sunni-Shiite tension intensified and the Syrian Civil War became “overtly sectarian” (CNN 20 December 2012). The sectarian confrontation is not only confined to Syria, but also encompassing the whole Middle East and the world. Syrian and foreign religious-driven groups were split into pro-Assad groups and anti-government rebel groups (see Table 1.2). 7.1  Pro-Assad Groups (i) Syrian pro-government forces: They were loyal to the Assad regime. They accused Sunni Muslims of seeking to persecute Syria’s minority sects, especially Alawites. Most of the chief positions of the Syrian army and security officers were held by Alawites. The National Defense Force (NDF) was formed by pro-Assad militia groups and Popular Committees. It was an auxiliary force of the Syrian army. The members were mainly minority groups including Alawites, Christians and Druze. The NDF was reportedly funded and trained by the Iranian government and Hezbollah. The Syrian Resistance also supported the Assad government. It acted as an Alawite sectarian group along with Twelver Shiite communities. Some Alawites groups joined another pro-Assad militia known as Shabiha. They were allegedly responsible for kidnappings, massacres, barrel bombings and chemical attacks on Sunni Muslims. They raised the fears of sectarian tension. (ii) Foreign pro-Assad groups: Foreign pro-Assad groups fought against Sunni-majority opposition forces. The members were mostly Shiite partisan and anti-America under the domination of Iran. The Iranian government acted as the “predominant regional and global representative of Shiism” (Smyth 2015: 3). It legitimized jihad in Syria by protecting Shiite sacred shrines and regarding those who killed in the Syrian War as martyrs. It tried to restrain Saudi Arabia amid the Shiite-Sunni sectarian tension. The Iranian government provided financial support, military training, weapons and intelligence to the Syrian government forces. Iran’s Islamic Revolutionary Guard Corps (IRGC) and Quds Force recruited soldiers and foreign fighters to defend the Syrian government. The

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Table 1.2  Major players in the Syrian war Pro-Assad groups

Characteristics

Syrian pro-­ government forces

Parties involved

Loyal to Assad’s regime Members mainly from minority groups Fighting against Sunni-­ majority opposition Foreign Fighting against Sunni-­ pro-Assad groups majority opposition Acting as Shiite partisan of Iranian domination Protecting Shiite sacred shrines and Shiite-inhabited towns in Syria

Syrian Armed Forces National Defense Force Syrian Resistance Shabiha

Anti-Assad groups Characteristics

Parties involved

Syrian anti-­ government groups Foreign support on anti-­ government groups

Islamic Front Free Syrian Army (Supreme Military Council) Syrian Islamic Liberation FrontJihadist: ISIS and al-Qaeda’s affiliated groupsSyrian Democratic ForcesSaudi Arabia: supporting Syrian Islamic Liberation Front and Islamist rebel groups; sending Arab Army to SyriaQatar: supporting al-Nusra FrontTurkey: stopping ISIS along with non-Kurdish rebels in northern Syria and Kurdish militants from westward expansionThe United States: supporting Syrian Democratic Forces; preventing Iran and Lebanese Hezbollah from building strongholds in Syria; leading anti-ISIS coalition

Anti-Shiite Establishing Sunni Islamic state in Syria Moderate Islamist and ultraconservative SalafismBlocking Iran’s Shiite expansionismEstablishing Islamic stateCounterterrorism against the Islamic state and al-Qaeda affiliated militantsStopping Assad’s regime from using chemical weapons

Iran’s Islamic Revolutionary Guard Corps (IRGC) and Quds Force Lebanon’s Hezbollah Iraq’s Shiite militias, e.g. Asaib Ahl al-Haq and Kata’ib. Hezbollah Russia: helping Syrian government to retake territories; competition for influence in Syria

IRGC also helped Syria reconstruct by huge investment in infrastructure (Reuters 20 January 2017). Lebanese Hezbollah was another major pro-government force in the Syrian War. It was an ally of Iran and fought against predominantly Sunni rebel groups. It protected Shiite holy shrines and Shiite-inhabited towns in Syria.

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As Shiite-dominated Iraq was also a close ally of Iran, Iraq’s Shiite militias were deployed to fight for the Assad government, including Asaib Ahl al-Haq (League of the Righteous) and Kata’ib Hezbollah (Hezbollah Brigades). Russia is another major international player in the Middle East. Russia, taking advantage of the religious conflicts in the Middle East, supported Syria from the beginning of the Syrian conflict in 2011. After the Syrian government offered Russia an official request for military aid against rebel and jihadist groups, Russian military intervention began in the Syrian Civil War in September 2015. On October 11, 2015, Russian president Vladimir Putin said that Russia’s goal in Syria was to “stabilize the legitimate power in Syria and create a condition for political compromise” (Dailymail 23 February 2017). Apart from fighting terrorist organizations such as ISIL, Russia aimed to help the Syrian government retake territory from various anti-government groups that were backed by the United States. Russia’s broader geopolitical objective was to roll back the US influence (Bloomberg Business News 19 October 2015). By the end of 2017, Russian intervention produced significant gains for the Syrian government, including recapturing Palmyra from ISIL in March 2016, recovering Aleppo in December 2016, breaking the three-year-long siege of Deir ez-Zor and establishing full control over Deir ez-Zor in November 2017. The United States condemned Russian intervention and imposed economic sanctions against Russia for supporting the Syrian government. The Syrian War is still continuing without a sign of peace. 7.2  Anti-Assad Groups (i) Syrian anti-government groups Syrian anti-government rebels were Sunnis who were anti-Shiite and anti-Alawites. They believed that Shiite Muslims and Alawites were heresy. It was a religious obligation for Sunnis to bring true Islam in Syria. They advocated to build an Islamic state in Syria. Syrian rebels refused to recognize the Assad regime as a legitimate state. When Alawites were innately pro-Assad, Sunni anti-government groups concluded all Alawites were a threat to Muslim world and deserved to be attacked and killed. A young Alawites who did not join the Syrian army said if he was kidnapped by the

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opposition group, they “would kill me for simply being an Alawite”.21 Some defectors from the Syrian army and civilians formed the Free Syrian Army (FSA), later as to the Supreme Military Council (SNC). The members were overwhelmingly Sunni Muslims. They supported armed resistance against the Syrian government. However, the SNC weakened due to poor coordination and infighting. The Islamic Front was an alliance of Sunni rebel groups in Syria. It included hardline Islamist militants and moderate Islamists and Kurdish Muslims. It planned to overthrow the Assad regime and build an Islamic state in Syria. Ahrar al-Sham was a key component of the Islamic Front. It followed hardcore Sunni Salafism and advocated jihad as mandatory holy obligation of Muslims. (ii) Foreign government support on anti-government groups Foreign governments supported Syrian opposition groups via financing, training, military weapons and foreign fighters. They included Saudi Arabia, Qatar, Turkey, the United States and its allies. Traditional Sunni-­ Shiite sectarian confrontation continued between Saudi Arabia and Iran. When the Iranian government supported the Assad government, Saudi Arabia pursued to replace the Assad regime by a pro-Sunni government, block Iran’s Shiite expansionism and fight against Islamic State militants in Syria. Saudi Arabia gave money to the Syrian Islamic Liberation Front and provided military weapons to Islamist rebel groups, such as Jaish al-Islam (the Army of Islam). It sent an Arab army to Syria. Secondly, Qatar facilitated the rise of Sunni radicals who sought to build a caliphate in Syria. The Syrian War was a “holy crusade” in the sense that pro-Assad Iranians “continued massacres to kill Sunnis” and Lebanese Hezbollah was the “party of Satan”.22 Qatar provided weapons to Islamist fighters, for ­example, al-Nusra Front. Turkey was the third major foreign supporter of opposition groups. It described its military operation in Syria as jihad.23 When US-backed Syrian Kurdish militants fought against ISIS, Turkey ousted ISIS along with non-Kurdish rebels in northern Syria but stopped Kurdish militants from westward expansion.24 Turkey believed that Syrian Kurdish militants were allied with the People’s Protection Units (YPG), a militant group linked with the Kurdistan Workers’ Party (PKK) that engaged in insurgency against Turkey for decades. It pursued to devastate ISIS and other extremist groups from making terrorist attacks in Turkey. Last but not the least, the United States opposed the Assad regime and deterred the Syrian government from using chemical weapons by air-

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strikes. The United States provided training and military weapons to the Kurdish-dominated Syrian Democratic Forces along with about 2000 American troops. It sought to prevent Iran and Lebanese Hezbollah from building strongholds in Syria and threatening Israel. It also led anti-ISIS coalition to destroy the Islamic State in Syria.

8   Can Christianity and Islam Peacefully Coexist? This chapter iterates the point that religion as a reality is socially constructed. In the process of socialization, people construct “sacred cosmos” in their everyday life experience (Berger 1967: 25). Religious belief and practice are then taken for granted as a reality. Believers take whatever they have been taught as real and right without challenge. If believers of other religions do not give way for what they have taken for granted, conflicts then arise. Given “divine command” and “exclusive truth”, religious violence becomes legitimate. Believers who sacrifice themselves in the name of deity will be blessed. They will be offered thanksgiving after victory. Conflicts between believers and pagans bring violence, bloodshed and even war. In particular, Christianity and Islam take the same god but with different interpretations on scriptures and prophets. Socially constructed reality makes difficult for both sides to learn from each other. Such confrontation will persist for years to come. However, this does not mean that things will never change. If there is a strong religious leader with Schumpetarian entrepreneurship,25 who is able to bring out a radically new divine concept acceptable by both groups of believers, then a “change of system” can be possible. As a charismatic leader, he or she is capable of convincing people to believe that, say, sacred scripts in Christianity and Islam are indeed referring to the same meaning, free from contradiction. If this is the case, there is a chance that people with different religious belief can live in harmony. To be sure, this charismatic and powerful leader has the capabilities to implement the novel concept. In other words, the leader is able to get [new] things done (Schumpeter 1934: 93). With the emergence of the transformative leader, peaceful coexistence among religious groups in the Middle East may not be a fairytale. As followers of the charismatic leader, Christians and Muslims are willing to learn new concepts and unlearn old thinking. In simple terms, they redefine their religious reality. The two religious beliefs, namely Christianity and Islam, need to be socially constructed as one. Until that strong leader appears, religious conflicts continue to erode humanity.

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Notes 1. See Chap. 5 on terrorist issues. 2. ISIL was rooted in Iraq. In 2004, the Islamic State of Iraq (ISI) emerged as an al-Qaeda sect against the Iraqi government and foreign occupation forces in Iraq. During the Syrian Civil War in 2011, ISI joined with the Islamic militants (the Islamic Front) and al-Qaeda affiliated group (alNusra Front) in Syria. It declared itself as the Islamic State in Iraq and the Levant (ISIL). 3. In the midst of violence in Syria, Afghanistan and Africa, nuclear program of Iran and the rise of extremism, Ban Ki-moon, the former General Secretary of the United Nations, raised the issues of “widespread insecurity and injustice, inequality and intolerance”. For full text of the opening address in the 67th United Nations General Assembly, see http://www. un.org/apps/news/infocus/sgspeeches/statments_full.asp?statID=1660, retrieved on 26 September 2012. 4. Thomas R.  Malthus initiated scarce resource theory in  An Essay on the Principle of Population in 1798. In his view, in a perfect condition, the means of subsistence is more or less equal to the number of inhabitants in  a  region. However, in  reality, population growth exceeds the  means of subsistence. Scarce resources and the growth of population result poverty and famine. The competition for scarce resources causes conflict. 5. The intersubjective reality experience can be mapped in four ways, namely space-time, symbolic patterns, values and communication (Holzner 1968: 6–9). 6. For a full elaboration of this theory, see Chap. 7. 7. Religious violence is categorized as hierocratic domination, interreligious competition, state hegemony and martyrdom under the conditions of apocalyptic war (Hall 2003). 8. For the Christians, “Do not have any other gods before me” is the first commandment (Exodus 20: 3). The Muslims believe that “He is God, the One. God, to Whom the creatures turn for their needs. He begets not, nor was He begotten, and there is none like Him” (Quran 112: 1–4). 9. The former US President George W. Bush was a conservative evangelical. He proclaimed the United States as the world superpower. He developed a faith-based American policy (Smith 2006). During his presidency between 2001 and 2009, Bush intended to exemplify Christian values at home and aboard and divide the world into good and evil. He anticipated “Holy War” with War on Terrorism, 9 days after the September 11 attack in 2001. The United States joined with the Western allies to defeat and destroy Osama bin Laden, al-Qaeda and other terrorist organizations around the world. As al-Qaeda was believed to set a base in Afghanistan,

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the United States led the war in Afghanistan in 2001. In 2002, Bush declared preemptive attack on “axis of evil”, namely, Iraq, Iran and North Korea. These countries were alleged with possessing weapons of mass destruction. The conflicts between the United States and other countries, specifically the Arab world, are the struggle between Christianity and Islam for global hegemony. 10. In a message written by President Harry Truman in 1947, he claimed that “[t]his is a Christian Nation” (http://www.presidency.ucsb.edu/ ws/?pid=12746, retrieved on 30 August 2012). Later, President Woodrow Wilson spoke to the public that “America was born a Christian nation” (quoted in DeMar 2008: 3). 11. Salmon P. Chase, the former Secretary of the Treasury, said, “No nation can be strong except in the strength of God, or safe except in His defense. The trust of our people in God should be declared on our national coins.” For history of “In God we trust”, see http://www.treasury.gov/about/ education/Pages/in-god-we-trust.aspx, retrieved on 30 August 2012. 12. http://www.ushistor y.org/paine/commonsense/singlehtml.htm, retrieved on 19 July 2012. 13. h t t p : / / m e m o r y. l o c . g o v / c g i - b i n / q u e r y / r ? a m m e m / b d s d c c : @ field(DOCID+@lit(bdsdcc021 01)), retrieved on 30 August 2012. 14. Under the influence of Manifest Destiny in the nineteenth century, the Americans believed that the United States was destined by God to expand across North America. In early twentieth century, Theodore Roosevelt and Woodrow Wilson expanded the ideology as “America’s mission” to support American hegemony. The United States has an obligation to make world peaceful and safe for democracy, equality and liberty. 15. From Salmon Rushdie’s The Satanic Verses published in 1988 to antiIslamic video Innocence of Muslims of 2012, Muslims condemn the West of blaspheming Allah and corrupting Islamic communities. 16. Osama bin Laden founded al-Qaeda in 1989. He was the 17th son in a building contractor family. He believed that sharia’s law and caliphate should be (re-)established and all Muslims had a sacred duty to establish sharia rule in the world by jihad. He accused the United States for subverting Islamic doctrine and institutions around the globe. He issued two fatwas in 1996 and 1998 and declared a holy war against the infidels in the West. On September 11, 2001, al-Qaeda launched four suicide attacks in the United States. The event marked the confrontation of the West and the Muslim countries. 17. Mohammad Reza Shah Pahlavi studied in Switzerland and graduated in a Tehran military school in 1938. 18. Ayatollah Khomeini (in a talk to the Representatives from Tabriz and Qom, 19 Sept. 1979), http://www.iran-heritage.org/interestgroups/ government-article2.htm, retrieved on 10 October 2012.

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19. https://www.crisisgroup.org/global/10-conflicts-watch-2018, retrieved on 7 February 2018. 20. Syria claims to be a secular state but, under the Syrian Constitution, the religion of the President has to be Islam and Islamic jurisprudence is the source of legislation. 21. https://www.newyorker.com/news/news-desk/the-dilemma-of-syriasalawites, retrieved on 18 April 2018. 22. https://www.theguardian.com/world/2013/jun/08/middle-east-fullblown-religious-war, retrieved on 23 January 2018. 23. h t t p s : / / w w w. w a s h i n g t o n p o s t . c o m / n e w s / d e m o c r a c y - p o s t / wp/2018/02/16/in-long-secular-turkey-sharia-is-gradually-takingover/?utm_term=.dc9f4350ee5e, retrieved on 15 June 2018. 24. ISIS recruited Sunni jihadists. It claimed that Alawites were heretics who prepared to destroy Muslims. ISIS had seized control of northern part of Syria and established the Islamic State. After the demolition of the Islamic State in 2017, some ISIS fighters joined the Free Syrian Army and Turkish army. ISIS began to attack in northern and eastern Syria again. 25. Yu (2014) classifies leadership into two types, namely transformative and adaptive. With the contributions of Joseph Schumpeter, the two modes of leadership are associated with “creative response” and “adaptive response” in history. Transformative leaders create new ideologies, bring about breakthrough and transform traditional religion into a brand-new society. Adaptive leaders enhance a better coordination among religious and sectarian leaders, thus entailing peace in concord with different religions.

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CHAPTER 2

An Iran Nuclear Deal Without the United States? Chinese, European, and Russian Interests and Options After the US Withdrawal from the Joint Comprehensive Plan of Action Moritz Pieper 1   Introduction On 8 May 2018, the US President Donald Trump pulled out of the Iran nuclear deal that had been reached roughly three years before, in July 2015. What was astonishing about this decision was how little it was based on the evidence regarding Iran’s compliance with the terms of this multilateral agreement. As a White House fact sheet on the US stance on the Joint Comprehensive Plan of Action (JCPOA) makes clear, besides the debate about the agreement’s ‘sunset’ clauses, the Trump administration primarily critiques the agreement not for failing to do what it intended to, but for what is not included in it, such as Iranian regional policies, Iranian ballistic missile tests, Iranian domestic politics (White House 2018 May 8)—and we can assume, because it was a key foreign policy accomplishment of his much-hated predecessor. During many years of nuclear M. Pieper (*) School of Arts and Media, University of Salford, Manchester, UK e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_2

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­ egotiations, the insulation of other policy domains from the nuclear file n had proven to be the only realistic means of reaching a diplomatic breakthrough on one of the most pressing international nuclear proliferation crises. The result was the JCPOA, a nuclear agreement that was never meant to address the full range of US-Iranian foreign policy disagreements. But its potential went further: Rather than merely being a transactional deal, so the hope of the optimists, this agreement might serve as a confidence-building measure and a stepping stone for a transformational new phase in Iranian-Western relations. In January 2017, however, a new US president entered the White House who regards any foreign policy interaction as part of a general transactional pattern that constitutes international relations. Already on his campaign trial during the 2016 US presidential election, Trump had repeatedly been calling the 2015 nuclear agreement with Iran ‘one of the worst deals’ he has ever seen negotiated (BBC 2018 April 26). This view, however, does not reflect the assessments in Moscow, Beijing, and those European capitals that had been involved in the P5+1 format.1 As EU High Representative for Foreign and Security Affairs Federica Mogherini put it in her remarks following Trump’s announcement on the JCPOA, ‘the nuclear deal is not a bilateral agreement and it is not in the hands of any single country to terminate it unilaterally’ (EEAS 2018a May 8). Indeed, the agreement has been endorsed unanimously by the UN Security Council in its Resolution 2231 on 20 July 2015 (UN 2015). Mogherini’s written statement on behalf of the EU further states: ‘As long as Iran continues to implement its nuclear related commitments, as it has been doing so far and has been confirmed by the International Atomic Energy Agency in 10 consecutive reports, the EU will remain committed to the continued full and effective implementation of the nuclear deal’ (EEAS 2018a May 8). The EU was not alone in this assessment. Besides the three European delegations of Germany, the United Kingdom, and France, which had led diplomatic efforts on Iran ever since the outbreak of the nuclear crisis in 2002, China and Russia have been involved in Iran’s nuclear file since 2006, when the dossier was referred to the UN Security Council (Pieper 2017b). Deploring the US decision, the Russian foreign ministry’s statement on Trump’s withdrawal announcement emphasised the effectiveness of the agreement, which binds not only the United States, but the entire international community (Russian Foreign Ministry 2018 May 8). The Chinese foreign ministry, traditionally more restrained in its public reactions, said that it ‘regrets the decision made by the US side’, underlined that China is a contract partner

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of the JCPOA and that all ‘relevant parties should implement the JCPOA in good faith and ensure its integrity and sanctity’ (Ministry of Foreign Affairs, PRC 2018 May 9). These five countries, together with the United States, have negotiated with Iran over its nuclear programme, and they sit together on the ‘Joint Commission’ set up to oversee the implementation of this agreement. Russia’s state-owned nuclear energy agency Rosatom, in addition, took on the task of aiding Iran in the conversion of its uranium enrichment facility at Fordow into a production centre for medical isotopes and continues to supply the nuclear fuel for civilian nuclear energy usage (Khlopkov 2016), while China is ‘in the lead’ on the conversion of the controversial heavy-­water plant at Arak (Tabatabai 2016). Trump’s talk about ‘fixing or nixing’ the Iran deal obscures the complexity of a multilateral agreement that is endorsed by the UN Security Council and that has verifiably served to put the lid on Iran’s nuclear crisis. Provisions have been put in place in case of Iranian non-compliance, when the reimposition of sanctions would become an eventuality again. The JCPOA established a ‘Joint Commission’ consisting of the E3+3 and Iran ‘to monitor the implementation of this JCPOA’ (Preamble ix). If a consultation among the JCPOA participants about a possible breach of the agreement by any one participant fails to resolve the issue, this issue can be referred to the Joint Commission, which operates according to an elaborate dispute-resolution mechanism (Para 36 JCPOA). The reimposition ‘of the old UN Security Council resolutions’ (Para 37) has been kept as an eventuality, but only as the result of a lengthy institutional review process (UN 2015: Para 11–13). What the negotiating delegations did not foresee, however, was a defection of the agreement’s most important Western sponsor, the United States. It will be the subject of this chapter to first outline the European, Russian, and Chinese positions in Iran’s nuclear file in order to give a brief overview of the political investment these actors have made in the nuclear agreement with Iran. A second part then sheds light on the options of these administrations for the survival of the nuclear deal without the United States. Disagreements about ‘sunset’ clauses within the deal notwithstanding, the choice is between having elaborate control mechanisms detailed in the JCPOA in place and the unravelling of a functioning nuclear non-­ proliferation agreement with potentially dangerous consequences for the nuclear non-proliferation treaty (NPT). Whatever the political m ­ otivations behind the Trump’s White House, including his National Security Advisor John Bolton and State Secretary Mike Pompeo, who have a track

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record of calling for war with Iran, the US decision to terminate its participation in the JCPOA has implications for the credibility of international law and the global non-proliferation regime beyond the Iran file.

2   EU Stances in the Iran File In the absence of US-Iranian bilateral relations, it fell to the ‘E3’ (i.e. France, United Kingdom, and Germany) to lead negotiations with Tehran when Iran’s nuclear programme was uncovered in 2002. The choice reflected a certain understanding of the weight of the ‘Big Three’ in intra­EU power arrangements (Patrikarakos 2012: 196). The format of the ‘E3’ was joined by the EU High Representative for the Union’s Common and Security Policy (CFSP), Javier Solana at the time, in late 2003. The ‘E3’, an essentially ad hoc and extra-CFSP mechanism created by crisis management, gradually became accepted as an indicator for an EU-wide approximation of positions on the Iran nuclear issue. The EU had a history of engagement with the Islamic Republic of Iran, dating back to the phases of ‘critical dialogue’ and ‘constructive dialogue’ during the Rafsanjani administration, and it was hoped that EU diplomacy could reconnect to these earlier contacts to de-escalate the emerging nuclear crisis. The Iranian perception of the EU was that of a more impartial balancer to the aggressive stance of the Bush administration at the time (Mousavian 2012: 152–156; 175–179). The E3’s diplomatic initiative deserves credit for laying out conditions for diplomatic compromises that would later serve as a basis for negotiations in the extended E3+3 format (Alcaro and Tabrizi 2014: 16). The US position at the time uncompromisingly insisted on the complete dismantling of Iranian nuclear facilities and ‘zero enrichment’ (Patrikarakos 2012: 197). In this early phase of nuclear diplomacy, at least until the November 2004 agreement, the Europeans’ negotiating credibility lay in their potential to block the Americans from pushing the case to be referred to the Security Council and in serving as a ‘human shield’ against possible American or Israeli unilateral attacks on Iranian nuclear facilities (Porter 2014: 141). Developments from 2005 then led to the breakdown of EU-led diplomacy and the eventual referral of the Iranian nuclear dossier from the IAEA Board of Governors to the United Nations Security Council (UNSC) according to Art. XII.C of the IAEA Statute after Iran had resumed previously suspended uranium enrichment in August 2005. The referral to the Security Council in February 2006 by an IAEA board vote

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of 27-3 paved the way for the eventual imposition of Chapter VII sanctions on Iran, and a closer alignment of EU positions with the United States regarding the Iran file (Pieper 2017a). The EU began to adopt sanctions in parallel to UN as well as US unilateral sanctions. In July 2012, the Council adopted an EU oil embargo on Iran. This came after its decision in March to disconnect Iranian banks from the SWIFT banking system (EU Council 2012). The actors calling for moderation and voicing scepticism about the use of sanctions had now become Russia and China in the extended E3+3 format. Russia and China critiqued the rhetoric of the United States and some EU delegations regarding Iranian intentions. Their public diplomacy sought to balance between good relations with Iran, braking the Western drive for sanctions, and displaying a willingness to accommodate US concerns (Pieper 2017b). EU diplomacy acquired new relevance after the 2009 Lisbon Treaty again which saw the setting-up of the European External Action Service (EEAS). The EEAS was at the helm of the nuclear talks in the final years leading up to the diplomatic success that marked the signing of the JCPOA in July 2015. The EEAS facilitated, coordinated and chaired the nuclear talks, and the European contribution to this diplomatic dossier has been widely acknowledged as being critical to the success of the negotiations.

3   Russian Interests in the Iran File In contrast to the Europeans, Russia only got involved when the Iran nuclear file was referred to the UN Security Council in 2006. In P5+1 meetings, Russia found itself in a camp with China arguing for an approach to Iran that did not assume sanctions could coerce Iran do forego its nuclear activities, and emphasised the utility of diplomatic negotiations to find solutions agreeable to all parties (Patrikarakos 2012: 224; Mousavian 2012: 235f.). Moscow rejected a military solution to the crisis (thereby resisting voices emanating from the United States, including now US State Secretary Pompeo and now National Security Advisor Bolton). In one of his newspaper articles published prior to the 2012 presidential elections, Putin wrote that a military attack on Iran would have ‘catastrophic’ consequences (Putin 2012). In addition to braking the sanctions momentum at the UN before 2010, Moscow has worked (in tandem with China) towards weakening their impact by watering down provisions contained in the UNSC

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r­ esolution drafts (Kuchins and Weitz 2009: 176). But Russia also called on Iran to comply with the IAEA (thereby pressing Iran to collaborate). In an attempt to broker a political solution to the crisis, Russia proposed a plan in 2006 by which Iran would have to transfer its enrichment programme onto Russian soil while still benefitting from its output.2 The idea of such a transfer was quickly rejected by the Iranians. This decision signalled to Moscow that Iran would not accept indefinite reliance on Russia in the field of nuclear technology and constituted a watershed both for Russia’s perception of the Iranian goals and for US-Russian cooperation over the Iranian nuclear file: Not only did this episode prove the ‘total failure of the “looking to the East” policy’, it ‘opened a new chapter in the nuclear standoff in which Russia began to move closer to the West’, as former Iranian negotiator Houssein Mousavian (2012) writes in his memoirs (256–7). And after the failure of renewed P5+1 initiatives to reach a politically acceptable compromise in the following months, Russia did not make use of its veto right and approved of UNSC Resolution 1696 in July 2006 under chapter VII (article 40), which made the suspension of uranium enrichment mandatory. Russia then also voted for UNSC Resolution 1737 in December 2006, approving for the first time the imposition of chapter VII sanctions on Iran. The sanctions regime was intensified and reaffirmed by UNSC Resolution 1747  in March 2007, followed by Resolution 1803 in March 2008 and Resolution 1835 in September the same year. While Russia aimed at averting or at least slowing down international pressure on Iran, it aimed at using the Bushehr project as a leverage to use in Iran’s nuclear conflict at the same time. This was evidenced by the constant pushing back of the date of completion of the Bushehr power plant, which, on the surface of it, was attributed to ‘technical’ issues (Katz 2010: 64, 2012: 58), but was also read as a Russian sensitivity to US concerns—or at least of the then minister of Atomic Energy Alexander Rumyantsev (Stent 2014: 150–51). It equally prolonged the Iranian dependence on Russian technology.3 In Tehran, the impression was fuelled that the Iranian nuclear programme constituted a ‘bargaining chip’ for Moscow and that ‘Russia is intentionally stalling in dealing with Iran to wring concessions from the United States’ (Mousavian 2012: 93). The approval of sanctions also had to be read as a frustration with Iran’s rejection of Russian technical proposals to de-escalate the tensions in 2006. Especially the revelation of the Fordow facility in 2009 set the stage for a momentum towards a P5 compromise on a new sanctions round in 2010. This was also a tangible outcome of the Obama-Medvedev ‘reset’ policy.

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Russia’s role within the nuclear talks, however, oscillated between cooperation with the West and a viewpoint sympathetic to certain Iranian arguments at the same time. Russia’s experience on Iran’s nuclear energy market during the 1990s also gave it more of an insight into Iran’s nuclear calculus than any of its E3+3 partners. Russia was thus even being ascribed the role of an intermediary and facilitator of talks between Iran and the West by some observers (Aras and Ozbay 2006: 139).4 Seyed Hossein Mousavian (2012) even writes that it was a strategic mistake of the West not to have given the Russian ‘step-by-step’ plan more consideration (457). Russian officials stress that Moscow has introduced several constructive proposals throughout the process (like Lavrov’s ‘step-by-step’ plan in 2011 or the proposal for an international fuel consortium in 2006). The unprecedented progress in nuclear talks following the Iranian presidential election in June 2013 that led to a historic first interim deal between Iran and the P5+1 were publicly welcomed and appreciated by the Russian foreign ministry, as was the progress made in Vienna, Lausanne, and Geneva leading up to the successful negotiation of the JCPOA, which was seen in no small part due to Russia’s active contributions.5 Russia’s cooperation with the West on Iran was not even affected by the deterioration in Western-Russian relations in the wake of the 2014 Ukraine crisis, which was testament to the high importance that Moscow had attached to a political solution of the simmering Iranian nuclear conflict (Meier and Pieper 2015). Moscow’s subsequent approval of UNSCR 2231 that endorsed the JCPOA meant that Russia gave its full backing to the solution of one of the most ardent international security problems, despite arguments that it might stand to lose economically from an altered international standing of Iran that could result from this, especially if Iran was to become an alternative energy supplier for Europe.

4   Chinese Interests in the Iran File Like Russia, China’s involvement in the nuclear diplomacy with Iran dates back to the extension of the negotiation format to the P5+1. Here, China reiterated its talking points of the principle of non-interference and the inviolability of Iran’s sovereignty as reflected in its ‘Five Principles of Peaceful Coexistence’ as guiding principles of foreign policy. An additional discursive undercurrent in China-Iran relations, even if rarely articulated, was the aspect of ‘civilisational’ solidarity that captures the joint historical experience of humiliation at the hands of Western imperialism.

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On this basis, there was an obvious public diplomacy utility for Iran of ‘keeping China as a friendly voice in the negotiations’, as one E3 official put it.6 However, this must not be confused with an ideological stylisation of an ‘Eastern bloc’ policy as pursued by the Ahmadinejad administration—which did not meet much enthusiasm on the Chinese side (Mousavian 2012: 84; 141). Conveying its discontent with international sanctions as legitimate instruments to pressure Iran, China has engaged in a ‘delay and weaken’ strategy regarding sanctions resolutions in the UNSC.  In pursuing this strategy in sanctions negotiations, cooperation with Russia was crucial, as China sees ‘isolation in the Security Council as something to be strictly avoided’ (International Crisis Group 2010: 15; see also Wuthnow 2010: 66; Ferdinand 2013: 17). Before P5+1 meetings, the Russian and Chinese negotiation teams convened to agree on joint approaches on the proposal of amendments to sanctions resolution texts (as did the E3+1, i.e. the E3+the United States, dialogue partners). Besides the material effect that international sanctions regimes would have on the extensive Sino-Iranian trade,7 China’s criticism in addition was targeted at the heavy bias towards non-proliferation efforts on the part of the Western nuclear powers, while the unwillingness on the part of nuclear powers to effectively engage in nuclear disarmament was uncovered as hypocrisy and a lack of credibility (International Crisis Group 2010: 4).8 With this discourse, China’s position resembled those of the non-aligned movement (NAM) more than any other nuclear-weapon state (NWS). China’s official ‘Five Principles for a Comprehensive Solution of the Iranian Nuclear Issue’, outlining China’s understanding of the necessary approach to a successful closure of the Iranian nuclear file and set forth by Deputy Foreign Minister Li Baodong in 2013, picked up the tone and spirit of the ‘Five Principles of Peaceful Co-existence’ referred to above: Reiterating the importance of dialogue, respect for Iranian legitimate rights, reciprocity, good will, and a holistic approach to security, China’s government called for a gradual lifting of all unilateral and multilateral sanctions imposed on Iran (Ministry of Foreign Affairs, PRC 2014 February 19; Hua 2014). The call to act with restraint and ‘on the basis of mutual respect’, however, was a stance that had conflicted with efforts to impose international sanctions on Iran just three years before, when China did not veto UNSC Resolution 1929 in June 2010. Factors influencing China’s ultimate approval of international sanctions have included US flexibility towards China (exempting China from

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­ nilateral sanctions, introducing China to alternative oil suppliers), the u character of Iranian non-compliance with the IAEA, and international market (dis)incentives. The first is a political aspect and is subject to behind-the-­ doors bargaining between Chinese and American counterparts in the administration. The second is a security argument: China is a nuclear-­weapon state and has an in-built desire not to see the number of nuclear-­weapon states grow. Such a development could potentially entice other states to follow suit and unleash a dangerous proliferation dynamic. It also endangers stability conditions in the Middle East and beyond. The aspect of market disincentives relates to the argument put forward by Chinese officials that market dynamics are out of the hands of the central government. Companies decide to stay in or out of Iran business faced with sanctions, so the argument. The fact that Chinese companies operating in Iran are big state-owned companies (e.g. CNPC, Sinopec, CITIC), however, casts a certain damp on this line of reasoning. It also explains the reproach that ‘China’s compliance with multilateral sanctions has been selective, reluctant, and intermittent, often relying on linguistic and behavioral contortions to justify inconsistencies’ (Solingen 2012: 333). This nurtured the point often made by non-Chinese experts and officials that China actually stood to benefit from Western embargoes against Iran (and might well do so again if US sanctions fall back in place). On non-proliferation aspects of the JCPOA, China’s involvement in the reconstruction of the Iranian nuclear facility at Arak as a technical element of the nuclear accord means that China is a participant co-­responsible for its dutiful implementation, and indicates the Chinese government’s commitment to a successful closure of the Iranian nuclear file. Beijing’s P5 membership also makes it a crucial member of the ‘Joint Commission’ set up as a dispute-resolution mechanism.

5   A Nuclear Deal Without the United States? On 25 May 2018, representatives of the P4+1 (the five permanent Security Council members plus Germany minus the United States) met in Vienna to discuss the continued implementation of the JCPOA following the reimposition of US financial sanctions in the wake of Trump’s pull-out of the agreement. This constituted the first meeting of the Joint Commission after the United States had withdrawn its participation. This was an important signal for the determination of the EU, Russia, China, and Iran to continue working on the implementation of the deal without the United

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States, despite lingering concerns about the power of US financial penalties. Iran’s Deputy Foreign Minister Abbas Araqchi told his European counterparts to ‘specifically tell us how they can guarantee Iran’s interests’, informing them that the Iranian leadership had not made up its mind yet whether it should stay in the JCPOA or leave it (Farsnews 2018 May 25). Iran’s President Rouhani and Foreign Minister Zarif are closely associated with the nuclear deal of 2015, having invested considerable personal and political capital into its coming into being. The pull-out of the United States strengthens domestic critics who have all along criticised the negotiation team for placing trust in the United States during the nuclear negotiations. Arguing the case for a continued Iranian compliance with the terms of the agreement despite a prior US violation is therefore not an easy task. The European Commission took an important step towards fencing off legitimate European business interests with Iran from US financial sanctions when it agreed unanimously on 16 May 2018 (following the EU leaders’ informal summit in Sofia) to formally launch a process to activate its blocking statute. This statute prohibits European entities from complying with US secondary sanctions, which is hoped not only to give political reassurance to European companies active in Iran, but also to ‘guarantee Iran’s interests’, as Abbas Aracqui called for at the Joint Commission meeting. The European Commission further discussed allowing the European Investment Bank to consider finance activities in Iran. The Commission also encouraged states to ‘explore the possibility of one-off bank transfers’ to the Central Bank of Iran, which could facilitate oil payments (European Commission 2018 May 18). The Joint Commission convened again on 6 July 2018 to reconfirm ‘their commitment to full and effective implementation of the nuclear deal’, and emphasised that updates to the EU’s ‘Blocking Statute’ and the ‘protection of companies from the extraterritorial effect of US sanctions’ are measures ‘aimed at preserving the nuclear deal’, as the published Statement from the Joint Commission reads (EEAS 2018b July 6).  In January 2019, the French, German, and UK Foreign Ministers then launched the ‘Special Purpose Vehicle’ INSTEX, a payment system intended to facilitate trade with Iran and European companies at a time when US financial sanctions endanger legitimate European commercial operations in Iran (UK Government 2019). China and Russia may be commercially in a more advantageous position in a context of increased financial uncertainty regarding business investments in Iran: If a Foreign Financial Institution (FFI) trades in US dollars, in addition, it becomes subject to US jurisdiction. The sheer size of the US capital market and the fact that many of the biggest clearance

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banks operate in New  York thus have introduced a powerful structural leverage to coerce both governments and private sector actors into compliance. In the Chinese case in particular, Chinese companies operating in Iran are usually big state-owned companies (CNPC, Sinopec, and CNOOC) with less links to the US capital market than European ­companies.9 This shields them off better from attempts by the US Treasury Department to penalise them for commercial activities with Iran. European companies in general fear much more being denied access to US financial markets, loss of current accounts in US banks, or loss of US operating licences. Violations of US unilateral financial sanctions carry high penalties, and the fines levied against the French bank BNP Paribas in 2014 for having executed money transfers of companies, including Iranian ones, that are on US sanctions lists, was but the most publicised example among a plethora of others (Lohmann 2014: 6). The US Treasury imposed penalty payments on the British banks Lloyds, HSBC, Standard Chartered, Barclays, against Dutch ING and ABN Amro, against Swiss bank UBS and against the Royal Bank of Scotland (Lohmann 2014; Taylor, 2010: 71). During the times of international and unilateral sanctions imposed on Iran, China made use of the economic vacuum created by the Western selfimposed embargo situation and sold its products that were unavailable to Iran otherwise. An Iranian diplomat puts it in an interview with this author as follows: ‘Whether it was the Tehran-Mashhad railway connection, the Tehran-Isfahan railway connection, or the Tehran metro, China completed infrastructure projects, China sent its products when Iran couldn’t get material from Germany during the sanctions phase. China filled that vacuum.’10 China therefore has benefited from the embargo situation created by Western Iran sanctions, as it has enlarged the Chinese share in the Iranian market. China could more comfortably go back to the pre-JCPOA sanctions regime than European companies which were hoping for a new business environment following the JCPOA’s ‘Implementation Day’ in January 2016 and the subsequent lifting of nuclear-related sanctions. The lifting of nuclear-related Iran sanctions as part of the implementation of the JCPOA has ‘legalised’ the Chinese-Iranian oil trade: US unilateral sanctions penalising third-country business with the Iranian oil economy do not apply anymore. ‘Significant reductions’ of Chinese oil imports from Iran in order to pre-empt US financial penalties under the 2010 CISADA were now no longer needed (US Department of the Treasury 2016: 13). It would be bad news for Sino-Iranian energy trade if such a requirement were to be reimposed, as President Trump has ­indicated in June 2018. China’s reaction was telling: A foreign ministry spokesperson

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noted that China’s energy ties with Iran are ‘beyond reproach’ (Maloney 2018 June 29). Iran is also a key partner in China’s ambitious Belt and Road initiative, which seeks to link East and West Asia in a string of economic corridors that would facilitate interregional trade. The reapplication of US financial sanctions exacerbates the business environment with Iran, which could have knock-on effects on the link between infrastructural investments in the Persian Gulf and the transit potential of the economic corridors thus envisaged. Asked about the implication of US financial sanctions for Chinese investments in Iran by this author, a representative of China’s Export-Import Bank was unequivocal: ‘I want to drive this point home: The geopolitical uncertainty in Iran will not be an issue.’11 Russia has also carved out a market niche in Iran that is likely to remain unaffected by a worsening of the business climate for international investments in Iran. Cooperation in the nuclear technology area (Bushehr) has been the flagship of Russian-Iranian economic cooperation, despite mutual accusations and frustrations as described above. Beyond Bushehr, Rosatom has signed agreements with Iran to build additional nuclear power units (Tehran Times 2017 March 15). Spent nuclear fuel will be returned to Russia for reprocessing and storage, while Russia will produce and deliver the nuclear fuel. It is not always clear, however, whether the furtherance of nuclear technology cooperation is a purely commercially driven project (by Rosatom), or whether Rosatom’s Iran projects are not at least partially co-decided by Russia’s political leadership.12 ‘There is a strong perception in Moscow’, Arbatov and Sazhin (2016) write, ‘of the indispensable importance of Russia’s military and civilian nuclear energy for its global status, defense, economic development, and foreign policy’ (10). Western apprehensions about business with Iran could guarantee Russia an advantageous market position that results from the absence of Western competition. Irrespective of these commercial considerations, however, China, Russia, and Europe share a commitment to upholding the credibility of the global nuclear non-proliferation regime. It is the latter which is at risk following Trump’s withdrawal from a well-functioning multilateral agreement. If Europe, Russia, China, and Iran manage to continue to work together in the Joint Commission in order to keep the JCPOA alive, Trump’s decision to terminate the US participation in the deal will be seen as just that: a unilateral withdrawal that isolates the United States, not Iran (Squassoni 2018 May 8). This would serve to send a signal of international support for the UN system but also the nuclear non-proliferation

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regime. If not, Trump’s decision will have lit the fuse that slowly kills the Iran deal, but which also could have as yet unforeseeable consequences for the credibility of international law and the NPT regime. Inevitably, this process involves a distancing of European administrations from the United States. As this author has argued elsewhere (Pieper 2017a), ushering in a ‘new chapter’ in relations with Iran that Mogherini spoke about after the conclusion of the nuclear agreement (EEAS 2015 July 14) will require the disentanglement of EU Iran policies from US policy preferences at a time where both the EU and the United States take an active part in the implementation of the JCPOA. Now that the United States is no longer a participant in the implementation of the JCPOA, the EU has to carve out a foreign policy autonomy, while the P4+1 will have to salvage the Iran deal without an actor uniquely positioned to sabotage it from without.

6   Conclusion Policy arguments and the specifics of the Joint Comprehensive Plan of Action count for little in the face of a US president hell-bent on ending the nuclear deal out of a conviction that Iran is a malicious actor. Ten IAEA reports have confirmed that Iran is abiding by the terms of the agreement. Trump’s announcement to reimpose sanctions has now set up the United States to violate the deal first. It was telling that he based his justification to pull out of the deal on the arguments reheated a week before by Israeli Prime Minister Netanyahu about past Iranian ‘weaponisation’ studies before 2003, something long already dealt with by the IAEA (Porter 2014). And it was precisely because of the content of Netanyahu’s presentation that the Iran nuclear deal was negotiated in the first place. Trump’s abrogation of a deal that has verifiably restricted Iran’s nuclear activities calls into question the credibility of good faith negotiations with the United States, isolates the United States from key allies around the world, and opens up a rift between the United States and Europe. The Europeans, having failed in their last-ditch efforts to keep the United States in the agreement, have announced their intention of keeping the deal alive without the United States, together with China and Russia, the other key participating states to the agreement. The reimposition of US financial sanctions, however, is likely to scare off European businesses that may shy away from investing in Iran under the dangling Damocles’ sword of US extraterritorial sanctions, even if the EU makes good on its counter-­ threat to impose Blocking Regulations. Trump’s decision is therefore

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about more than a unilateral withdrawal from a multilateral deal (endorsed by the UN Security Council). It has far-reaching implications for global trading networks as well. The decision may also polarise Iran even further domestically, increasing the political cost to keep the Iranian government committed to the agreement’s implementation for domestic reasons: Hardliners have already alluded to the possibility of Iran exiting from the nuclear nonproliferation treaty altogether, and moderate political forces will have a harder time arguing their case, seeing as the sceptics’ warnings that the United States are not to be trusted have come true. Iran’s President Rouhani has already announced that Iran will not renegotiate the deal (Majidyar 2018). Against this background, the remaining signatories of the JCPOA have signalled their continued commitments to the agreement. The EU has adopted a Blocking Statute, a policy instrument that has already been used in the 1990s against the Iran-Libya Sanctions Act (ILSA) adopted by the Clinton administration. Following EU threats to initiate formal counter-­action in the WTO, a compromise between the US and EU administrations was found in 1997 (Katzman 2006). This is less likely in a context where the current US President continues to pour scorn over multilateral institutions and dispute-resolution mechanisms. Russia and China might be in a more advantageous position commercially, as most of their companies involved in business with Iran are large state-owned companies with lesser ties to the US capital market than European companies have. These diverging economic starting positions notwithstanding, the survival of the Iran nuclear deal in the face of US resistance presents a unique challenge for Europe, China, and Russia alike, not least because of its symbolic value for the kind of normative underpinnings of international diplomacy, but also because of its very concrete importance for international security.

Notes 1. The five permanent Security Council members plus Germany. 2. Referred to as ‘the Russian plan’. 3. With Bushehr, Moscow held leverage over Iran as far as fuel and the technical operation of the plant was concerned. Fuel fabrication and insertion is a technically difficult process and is best carried out by the actual producer of the plant. In addition, Iran needed the Russian technicians to

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operate the plant, as was also evidenced by the informal prolongation of the initially contracted two-year period during which Russian technicians were supposed to work in Bushehr. In this sense, through its nuclear technology cooperation, Moscow had channels through which it was able to make its voice heard in Tehran. Author’s interview with Dr. Anton Khlopkov, Director of CENESS, Moscow, 17 April 2013. 4. Author’s interview with Dr. Anton Khlopkov, Moscow, 17 April 2013. 5. Author’s interview with Russian foreign ministry official, Moscow, 12 November 2013, Author’s interview with Russian diplomat, Brussels, 15 April 2016. 6. Author’s interview with E3 official, London, 10 March 2015. 7. China has built bridges, railways, dams, and tunnels in Iran, and has invested in upstream operations in Iranian oil and natural gas fields such as the Azadegan and Yadavaran fields. As from 2009, China had become Iran’s most significant foreign trade partner. The Chinese-Iranian trade volume is extensive. In 2014, it reached a record high of 52 billion US$ (compared to a Russian-Iranian trade volume of only 1.6 billion US$ and a trade volume of 10 billion US$ between Iran and the EU-28 combined). In 2015, it somewhat dropped to 34 billion US$—still 26 times the size of the Russian-­Iranian trade volume. See http://comtrade.un.org/data/ 8. Justified as this reproach might be, it is somewhat misplaced as coming from nuclear-armed China. With this position, however, China is targeting the US and Russia as possessors of the world’s largest nuclear arsenals. 9. Even though The Chinese Kunlun bank, together with the Iraqi Elaf Islamic Bank, was the first foreign bank to be sanctioned under CISADA in July 2012 for having financed oil-related businesses with Iranian banks that had been blacklisted before (Lohmann 2015: 5). 10. Author’s interview with Iranian diplomat, Berlin, 29 August 2016. 11. Zhao Changhui, chief country risk analyst, Export-Import Bank, Astana Finance Days, 3 July 2018, Astana. 12. Traditionally, Minatom, and since 2004 Rosatom, have had an important role in driving Russian Iran policy, as Belopolsky (2009) holds: ‘Given the economic rewards to be reaped in these markets, Minatom Ministers freelanced, developing policy towards these states [China, Iran, Iraq] which was not coordinated or necessarily in line with state policy’ (58). Yet, Fjodor Lukyanov argues that of all the Russian state companies, Rosatom is the least politicised, unlike Gasprom, which has been used for political goals before. Author’s interview, Moscow, 14 June 2016. Another Russian non-proliferation expert stated that ‘Rosatom does not do charity work for the sake of nonproliferation’ and is interested in commercial returns. Author’s interview with Dr. Alexei Arbatov, Moscow, 21 June 2016.

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References Alcaro, Ricardo and Tabrizi, Aniseh (2014) “Europe and Iran’s Nuclear Issue: The Labours and Sorrows of a Supporting Actor”, The International Spectator, 49(3): 14–20. Aras, Bülent and Ozbay, Fatih (2006) “Dances with Wolves: Russia, Iran and the Nuclear Issue”, Middle East Policy, 13(4): 132–147. Arbatov, Alexei and Sazhin, Vladimir (2016) “The Nuclear Deal with Iran: The Final Step or a New Stage?”, Carnegie Article, 20 April 2016. BBC (2018 April 26) “Trump on the Iran deal: ‘Worst, horrible, laughable’”, https://www.bbc.co.uk/news/av/world-us-canada-41587428/trump-onthe-iran-deal-worst-horrible-laughable; retrieved on 11 July 2018. Belopolsky, Helen (2009) Russia and the Challengers. Russian Alignment with China, Iran, and Iraq in the Unipolar Era, Basingstoke: Palgrave Macmillan. EEAS (2015 July 14) “Joint statement by EU High Representative Federica Mogherini and Iranian Foreign Minister Javad Zarif Vienna”, Press statement, http://www.eeas.europa.eu/statements-eeas/2015/150714_01_en.htm; retrieved on 4 August 2015. EEAS (2018a May 8) “Remarks by HR/VP Mogherini on the statement by US President Trump regarding the Iran nuclear deal (JCPOA)”, https://eeas. europa.eu/headquarters/headquarters-homepage/44238/remarks-hrvpmogherini-statement-us-president-trump-regarding-iran-nuclear-deal-jcpoa_ en; retrieved on 6 June 2018. EEAS (2018b July 6) “Statement from the Joint Commission of the Joint Comprehensive Plan of Action”, Joint Statement, https://eeas.europa.eu/ headquarters/headquarters-homepage/48076/statement-joint-commissionjoint-comprehensive-plan-action_en; retrieved on 11 July 2018. European Commission (2018 May 18) “European Commission acts to protect the interests of EU companies investing in Iran as part of the EU’s continued commitment to the Joint Comprehensive Plan of Action”, Press release, http:// europa.eu/rapid/press-release_IP-18-3861_en.htm; retrieved on 11 July 2018. EU Council (2012 March 23) Council Regulation No 267/2012 of 23 March 2012 concerning restrictive measures against Iran and repealing Regulation (EU) 961/2010, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:O J.L_.2012.088.01.0001.01.ENG&toc=OJ:L:2012:088:TOC; retrieved on 16 September 2016. Farsnews (2018 May 25) “Iran Pushing for EU Guarantees in Vienna”, http:// en.farsnews.com/newstext.aspx?nn=13970304000665; retrieved on 11 July 2018. Ferdinand, Peter (2013) “The positions of Russia and China at the UN Security Council in the light of recent crises”, Briefing Paper, March 2013. Directorate-­ General for External Policies of the European Union.

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Hua, Chunying (2014 February 21) “Foreign Ministry Spokesperson Hua Chunying’s Regular Press Conference on February 21, 2014”, MFA Spokesperson’s Remarks, http://www.chinamission.be/eng/fyrth/t1131024. htm; retrieved on 23 April 2014. International Crisis Group (2010) “The Iran Nuclear Issue: The View from Beijing”, Asia Briefing Nr. 100, 17 February 2010. Katz, Mark (2010) “Russia-Iranian Relations in the Obama Era”, Middle East Policy, 17(2): 62–69. Katz, Mark (2012) “Russia and Iran”, Middle East Policy, 19(3): 54–64. Katzman, Kenneth (2006 April 26) “The Iran-Libya Sanctions Act (ILSA)”, CRS Report for Congress, http://fpc.state.gov/documents/organization/66441. pdf; retrieved on 27 September 2014. Khlopkov, Anton (2016) “JCPOA: Early Results. A View from Russia”, https:// csis-prod.s3.amazonaws.com/s3fs-public/160714_Anton_Khlopkov_ JCPOA.pdf; retrieved on 12 July 2016. Kuchins, Andrew and Weitz, Richard (2009) “Russia’s Place in an Unsettled Order: Calculations in the Kremlin”, in M. Schiffer and D. Shorr eds. Powers and Principles. International Leadership in a Shrinking World, Plymouth: Lexington Books: 165–196. Lohmann, Sascha (2014) “Minenfelder der US-Außenwirtschaftspolitik. Unilaterale Finanzsanktionen im Dienst nationaler Sicherheit“, SWPAktuell 71: 1–8. Lohmann, Sascha (2015) “Zwang zur Zusammenarbeit”, SWP-Aktuell 54: 1–8. Maloney, Suzanne (2018 June 29) “Trump tightens the screws on Iran’s oil”, Brookings, https://www.brookings.edu/blog/order-from-chaos/2018/06/ 29/trump-tightens-the-screws-on-irans-oil/; retrieved on 11 July 2018. Majidyar, Ahmad (2018 May 7) “Rouhani rejects JCPOA renegotiation, hints Tehran may remain in deal without US”, The Middle East Institute, http:// www.mei.edu/content/io/rouhani-rejects-jcpoa-renegotiation-hints-tehranmay-remain-deal-without-us; retrieved on 11 July 2018. Meier, Oliver and Pieper, Moritz (2015) “Russland und der Atomkonflikt mit Iran. Kontinuitäten und Brüchen bei den russischen Interessen im Zeichen der Ukrainekrise“, SWP-Aktuell 38, April 2015: 1–4. Ministry of Foreign Affairs, PRC (2014 February 19) “China’s Five Principles for a Comprehensive Solution of the Iranian Nuclear Issue”, News, http://www. fmpr c.gov.cn/mfa_eng/wjb_663304/zzjg_663340/jks_665232/ jkxw_665234/t1129941.shtml; retrieved 11 July 2018. Ministry of Foreign Affairs, PRC (2018 May 9) “Foreign Ministry Spokesperson Geng Shuang’s Regular Press Conference on May 9, 2018”, http://www. fmprc.gov.cn/mfa_eng/xwfw_665399/s2510_665401/t1558096.shtml; retrieved 11 July 2018.

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Mousavian, Seyed Hossein (2012) The Iranian Nuclear Crisis. A Memoir, Washington: Carnegie Endowment for International Peace. Patrikarakos, David (2012) Nuclear Iran. The Birth of an Atomic State, London, New York: I.B. Tauris. Pieper, Moritz (2017a) “The Transatlantic Dialogue on Iran: The European Subaltern and Hegemonic Constraints in the Implementation of the 2015 Nuclear Agreement with Iran”, European Security, 26(1): 99–119. Pieper, Moritz (2017b) Hegemony and Resistance around the Iranian Nuclear Programme: Analysing Chinese, Russian and Turkish Foreign Policies, London: Routledge. Porter, Gareth (2014) Manufactured Crisis. The Untold Story of the Iran Nuclear Scare, Charlottesville: Just World Books. Putin, Vladimir (2012 February 27) “Rossiia i meniaiushchiisia mir (Russia and the changing world)”, Moskovskie novosti, 27 February 2012, http://www. mn.ru/politics/78738; retrieved on 9 June 2016. Russian foreign ministry (2018 May 8) “Foreign Ministry statement on developments around the Joint Comprehensive Plan of Action on Iran’s nuclear programme”, http://www.mid.ru/web/guest/adernoe-nerasprostranenie/-/ asset_publisher/JrcRGi5UdnBO/content/id/3212053; retrieved on 3 June 2018. Solingen, Etel (2012) “Ten dilemmas in nonproliferation statecraft“, in E. Solingen ed. Sanctions, Statecraft, and Nuclear Proliferation, Cambridge: Cambridge University Press: 297–351. Stent, Angela E. (2014) The Limits of Partnership. U.S.-Russian Relations in the twenty-first century, Princeton and Oxford: Princeton University Press. Squassoni, Sharon (2018 May 8) “Trump’s undoing of American influence”, Bulletin of the Atomic Scientists, https://thebulletin.org/commentary/ trumps-undoing-of-american-influence/; retrieved on 20 June 2018. Tabatabai, Ariane (2016 April 19) “Iran issues first progress report on nuclear deal”, Bulletin of the Atomic Scientists, Column, http://thebulletin.org/iranissues-first-progress-repor t-nuclear-deal9350?mkt_tok= eyJpIjoiWVRNNE1UbGlPRFZpTTJGaSIsInQiOiJTOFpReDM3Q1c5MFZtUGhqZzJWXC94Njd6MHB0TFJRN2ZjTzV4YWpTNUl0V0tXT2pB bmxHUDFrVEJNa3pranpwXC9DRDBoWFg2cWZBU29FMDg1NjI5cERRTTl2NkZXejhIeWp2YitVM1BKczZNPSJ9; retrieved on 27 June 2016. Taylor, Brandan (2010) Sanctions as Grand Strategy, Adelphi series, International Institute for Strategic Studies. Abingdon: Routledge. Tehran Times (2017 March 15) “Construction begins on Iran’s Bushehr-2 Nuclear Power Plant: Rosatom”, http://www.tehrantimes.com/news/412015/ Construction-begins-on-Iran-s-Bushehr-2-Nuclear-Power-Plant; retrieved on 11 July 2018.

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UK Government (2019) “New mechanism to facilitate trade with Iran: joint ­statement”, https://www.gov.uk/government/news/joint-statement-on-thenew-mechanism-to-facilitate-trade-with-iran; retrieved on 18 March 2019. UN (2015 July 20) “Resolution 2231”, http://unscr.com/en/resolutions/2231; retrieved on 4 June 2018. US Department of the Treasury (2016) “OFAC FAQs: Iran Sanctions”, https:// www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx; retrieved on 28 September 2016. White House (2018 May 8) “President Donald J. Trump is Ending United States Participation in an Unacceptable Iran Deal”. Factsheet, https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-ending-unitedstates-participation-unacceptable-iran-deal/; retrieved on 11 July 2018. Wuthnow, Joel (2010) “China and Cooperation in UN Security Council Deliberations”, The Chinese Journal of International Politics, 3: 55–77.

CHAPTER 3

Islam and Nationalism with Special Reference to the Muslim Brotherhood in Jordan Yoshiyuki Kitazawa

1   Why Islam? Islam attracts attention in international politics. The image of Islam in general and a series of international crises create Islamophobia in the West. Firstly, Islam is assumed to be bound by the principle of theocracy. It affects the perception of Islam by those who are interested in Islam and Muslims. In particular, the caliphate system has already been abolished and many Islamic countries are under the influence of the modern state system of the West. Furthermore, many residents in these countries strive for secular goals. However, the Islamic world is still under a strong influence of traditional theocratic framework. Secondly, several political incidents reproduce the perception of the re-­ emergence of historical crises among the international community, especially from Western Europe. For instance, in 1973 oil crisis, Arab/Muslim oil-producing countries confronted with the Western countries. The crisis triggered global recession and shook the foundation of the world ­economy. Muslims recalled the memory of former powerful Islamic ruling in Europe. Y. Kitazawa (*) Department of International Relations, Faculty of Foreign Studies, Kyoto Sangyo University, Kyoto, Japan e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_3

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Thirdly, Iran is a major oil-producing country. Given the influence of the second oil crisis on the world economy in 1979, the 1978 Islamic Revolution in Iran imposed a major impact on international politics. Iran was originally a constitutional monarchy. It moved toward modernization by adopting an Islamic republic system which advocated Islamic politics based on the Qur’an. Iran denounced the enemies of Islam and exported the Islamic Revolution to other ‘corrupted’ Islamic states. This made a great impact on the international community. The United States closely watched and contained the Iranian regime which represented Islamic politics. The tension between the United States and Iran has continued until now. Fourthly, the 1978 Islamic Revolution and Russia’s invasion of Afghanistan in 1979 brought about great impacts to international politics. The United States sent billions of dollars of secret aid through Pakistan to the Afghan Mujahideen who fought against the pro-Soviet regime with other tribal groups. Mujahideen also hired about 200,000 foreign fighters from other Muslim countries. Together, they fought against the communists in the name of ‘holy war’. The United States, which showed strong vigilance against Iran, fell into a contradictory position to support jihad (of Mujahideen) in the context of the Cold War. Furthermore, Arabian soldiers returning from the holy war in Afghanistan became a group of Islamic radicals and terrorists conducting al-Qaeda activities (for details of extremists, see SESRIC 2017, pp. 1–49). As mentioned above, Islam in general and Iran in particular often attract attention from the international community in association with several international crises. These incidents created prejudice and misunderstanding of Islam in the Western world. They not only disturbed pluralistic understanding of Islam, but also jeopardized national security (Buzan et  al. 1998, p.  25). Concerning excessive preventive measures from the West, Walt (2015) criticizes the responses to terrorism from a pragmatic point of view. The main issue is the recognition of Islam’s distinctiveness. It is well known that modern international politics after Westphalia is based on the separation of religion and politics. Accordingly, human action is considered to be ‘homo economicus’, which argues that humans act by reasonable calculation exclusively. Hence, the Islamic world is believed to be full of incomprehensive behavior. However, the process of pursuing unreasonable behavior taken in the Islamic world is not scrutinized. The Islamic world is still a black box.

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It must be iterated that the political process of Islamic countries is by no means monolithic. The interpretation of Islamic jurisprudence is diverse. Political system and its relationship with Islamic world vary among the Muslim nations. Therefore, it is necessary to grasp the development of Islam in a pluralistic manner according to the actual situation of Islamic countries. Also, overlooking the uniqueness of the Muslim world obscures the understanding of the dynamic development of Islam. As a result, misunderstanding and bias toward the Islamic world in general and fundamentalism1 exist. Many Muslim countries in the Middle East were directly influenced by Western modernism and colonial rule. They take on nationalism because of the confrontation with Western countries over modernization path. They are forced to embark on nationalist movement. In summary, to understand Islamic politics, it is necessary to acknowledge the diversity of political transformation of Islamic nations. The Muslim Brotherhood shows the first Islamic movement in the Middle East.

2   The Emergence of Modern States and Nationalism in the Middle East 2.1  Nationalism in the Middle East Nationalism in the Middle East emanates from the decline of the Ottoman Empire and expansion of imperialism from the West. The Ottoman Empire undertook national integration through pan-Islamism which eventually failed to prevent the decline of the Empire. Many Middle East countries were colonized or semi-colonized by Western powers and the Islamic principles were not adopted for unification and integration in the Middle East. Hence, these nations revert to nationalism as a new political movement to revitalize their lost glories. Turkish nationalism first took place in the Republic of Turkey. However, Arab nationalism was developed in opposition to Turkish nationalism (Kitazawa 2016, pp. 1–9). There are two types of Turkish nationalism. The nation-centered Turkish nationalism led by Kemal Atatürk emphasized unity within the country. The pan-Turkish nationalism went beyond the Turkish State but did not gain power. Another example is Iran. Nationalism went beyond the Iran’s territory and yet failed to gain ground under the Pahlavi Dynasty. A plausible reason seems to be that Turkey and Iran were not colonized before (Baram 1990, pp. 427–428). Unlike Turkey and Iran where fully

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secured as independent nations, Arabian states in the Middle East developed into culture-based Arab nationalism and domain-based nationalism. For the former, the term ‘qawmı̄yah’ integrates culture-based peoples (qawm). For the latter, the term ‘wat ̣anı̄yah’ is applied on integrated territorial unit. After World War II, qawmı̄yah became a powerful thought while waṭanı̄yah was rooted in Lebanon, Egypt and Palestine. There are three reasons why the three places were able to maintain the original waṭanı̄yah. They are the distinctiveness of the Nile Basin, the unique identity of Maronite Christians in the mountain range of Lebanon and the recovery of the stolen Palestine. However, from contemporary view, waṭanı̄yah had only limited power in these three countries in the twentieth century (Kosugi 1994, pp. 220–2). Furthermore, using wat ̣anı̄yah as an integration policy of a nation was not easy in a nation such as Jordan where borderlines were drawn under British Mandate and its citizenship was clearly defined. In other words, if an Arab country was previously colonized or semi-colonized, it would not be easy to form a nation-state by waṭanı̄yah. In particular, if an Arab country is under the strong influence of qawmı̄yah, waṭanı̄yah will encounter a big problem in national integration. Radical Arab nationalist countries such as Iraq and Syria rejected wat ̣anı̄yah and conservative monarchy also opposed waṭanı̄yah on the basis that citizenship was a part of the Greater Arab Nation (‘Arab ummah’) (Rajai and Enloe 1969). In order to maintain its identity as a state, Jordan is ruled by the Hashemite family, which claims to be a direct descendant of Prophet Muhammad. The Hashemite initiated the Great Arab Revolt against the Ottoman Empire as a pioneer of the Arab nationalist movement. During World War I, the Sharif of Mecca, Hussein bin Ali, who was a Hashemite Arab leader, launched a revolt against the Ottoman Empire, aiming to establish an independent and unified Arab State. Arab tribes led by the Hashemite family won the battle against the Ottoman army with the support from the British Empire. In the end, the Ottoman Empire broke up. After the battle, the land of the Arab was divided under the British and French Mandates. However, the Hashemite’s regime is regarded as the sword of Damocles (‘fame of the people’). The Hashemite came from Hijaz (now a region of Saudi Arabia) instead of Jordan. As a newcomer to Transjordan, Britain guaranteed the Hashemite to control Jordan. Even though the population of Jordan was only about 7 million, the Hashemite tried to integrate Palestinian population which represented half of the total population and the East Bankers in Jordan as citizens. National

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integration became difficult further because the Bedouin did not live in harmony with the Palestinian immigrants. The Bedouin were traditionally nomadic tribes living in the desert area of Jordan. They engaged in farming mainly in the northwestern region. They were indigenous people against Palestinian residents who came to Jordan as refugees. Palestinians settled mainly in urban areas. They possessed Jordanian nationality and became an important force in modernizing Jordan. Politically, the Bedouin strongly supported the Hashemite and Palestinians were regarded as weak support for the Hashemite. In this way, wat ̣anı̄yah was not an appeal to the people of Jordan like those in Egypt and Lebanon. Jordan became an ‘artificial state’.2 2.2  Islam and Nationalism What is the ideological relationship between Arab nationalism and Islam? Sāt ̣i’ al-Ḥ usrı̄ (1879–1969, abbreviated as Ḥ usrı̄ hereinafter), an Arabian thinker, is known as a pioneer of Arab nationalism to integrate the Arab world into a single Arab state. In 1947, he moved from Iraq to Egypt. In the Arab League’s Cultural Bureau, he implemented a uniform educational policy based on Arab ethnic consciousness in all Arab countries. In 1953, he established the Advanced Arab Research Institute to promote nationalistic education in the League of the Arab States. He was the director of the institute and taught Arab nationalism. He wrote most of his publications in Cairo. His publications were ‘must-read’ books in schools, universities and nationalist political parties. He was influential in the Arab world and regarded as the ‘philosopher of Arab nationalism’ (‘Fichte of Arab’). The origin of Ḥ usrı̄ ’s nationalism theory was the critique of colonialism. Ḥ usrı̄ strove to remove dominance by Western Europe. His view heavily influenced the modern Islamist movement (Kitazawa 2016, pp. 35–50). However, Ḥ usrı̄ cited Ibn Khaldun, who was controversial with pan-­ Islamism, asserting that religion only played a secondary role in the formation of nation. Relying on German-Romanticism in the nineteenth century, he insisted that religion had its true value only after it became a national religion. Ḥ usrı̄ believed that religions such as Christianity and Islam could not achieve political unity of people speaking different languages. He contended that even if a religion could unite people, unity would only achieve a short period of time in history. He concluded that if a nation relied on religion for unity, irredentism would not succeed. On

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the contrary, the unification of a nation would succeed if it was based on common culture, language and historical tradition (Kitazawa 2016, pp. 39–41). In the Middle East, Islam and Arab nationalism share the same goal of achieving independence, aside from ideological differences. Also, special relationship between Islam and Arab culture encourages cooperation. Nationalism, which originates in Western Europe, emphasizes rationalism and tends to get rid of religion. Therefore, under the influence of Western nationalism, Arab nationalist thought is conscious of the conflict with Islam. However, Arab nationalism and Islam share common grounds in many ways. Arab ethnic culture cannot be excluded from Islam, while Islam strongly emphasizes Arabic culture. The Qur’an was originally written in Arabic language and there are linguistic difficulties in translating the Qur’an. The translation of the Qur’an cannot be considered as the Qur’an though it is considered to be an interpretation of the Qur’an. Rida’s Salafism is an Islamic idea of the Muslim school of thought and argues that Islam should go back to the fundamental religious interpretation as the role model of reform.3 It is not a nationalist thought. As early generations of Salaf (or predecessors) is practically almost Arabic and hence indirectly highlight Islam of Arabs. Islam contributes to Arab nationalism. Sometimes, nationalism adopts the Islamic concept, for example, the concept of ‘umma’ (Muslim community). Originally, the term ‘umma’ is referred to the Islamic community, but is used as ethnic community in Arab nationalism. However, if nationalism tends to be secular, it may not have a smooth relationship with Islam. According to Ṭ āriq al-Bishrı̄ (1989, p. 37), one of the opinion leaders of Egypt, ‘the conflict between Islam and Arabism (‘urūba) is about secularism. Arabism gets closer to Islam as it goes away from secularism. Conversely, if you approach secularism, you will move away from Islam’. Then, what is the political position of Islam in modern Middle East? The relationship between Islam and political system based on Kosugi (1994) is formulated. In the Middle East, Turkey is the only country that defines itself as a secular state in the constitution. Regarding modernization, Lebanon, which is honorary regarded as an ‘Islamic member’, is not Islamic. It has laid a ‘sectarian system’ by balancing power among various sects. Other countries in the Middle East specify that Islam is the state religion or official religion in the constitution. Islam is also regarded as the state religion in Iraqi Republic. Exceptionally in Syria, the constitution

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states that ‘the religion of the President of the Republic is Islam’. As the Syrian draft constitution did not mention Islam as a source of legislation, there were intense protests of the Islamic revivalist movement (Kosugi 1994, pp. 220–33). Even though some nations position Islam as ‘state religion’, it does not mean that governance systems and legislative processes depend on Islam. There are cases where ‘state religion clause’ is inserted in the legislation mainly for the purpose of control. In Table  3.1, the United Arab of Emirate (UAE) is in the same category as Saudi Arabia but the positions of Islam in the two countries are different. In addition to the ‘state religion clause’, it is necessary to compare the position of the Islamic law in each country. Regarding inheritance and private property law, when the Islamic law is adopted, the implementation of the Islamic law can be different among Islamic countries. In the case of South Yemen and Iraq, state religion is indicated in the constitution but the constitution does not ­mention the Islamic law. In Syria, the Islamic law merely refers as to ‘fiqh’, the interpretation for Islamic law, instead of Islam law (sharı̄’a). Therefore, in South Yemen, Iraq and Syria, Islam appears in the constitution in consideration of the religious feelings of the people (Kosugi 1994, pp. 220–33). In Egypt, the ‘state religion clause’ shows a contradictory phenomenon. Until the 1960s, Egypt was an Arab socialist country. However, since Anwar Sadat became the President of Egypt in 1970, the government promoted de-Nasserization and began to use Islam for strengthening legitimacy. However, as a matter of fact, Egypt is a secular state. Among the countries with ‘state religious clauses’ in the constitution, Jordan, South Yemen and Iraq have no ‘Islamic law clauses’ in their constitution. Table 3.1  Modern Islamic states in the Middle East: classification by regime and sovereignty Regime

Sovereignty National sovereignty

Islamic sovereignty

Monarchy

Qatar, Kuwait, Bahrain, Jordan

Republic

Yemen, Iraq, Egypt, Syria, Sudan, Turkey, Lebanon

Saudi Arabia United Arab Emirates (UAE) Iran

Source: Kosugi (1994), p. 232

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It is important to point out that the King of Jordan comes from the Hashemite family which is the descendant of Prophet Muhammad. However, the state symbolizes Arab royal family rather than Islamic succession (Kosugi 1994, pp. 220–33).

3   Development of the Muslim Brotherhood The Muslim Brotherhood was founded in Egypt in 1928. It is a mass organization which aims for the revival of Islam and spreading Islam to the Arab countries. It has international influences and is regarded as a representative of the Islamic revivalist movement in the twentieth century. It provides an important example of contemporary features and the issues of Islam and politics. Also, the comparison of the Muslim Brotherhood in different countries brings a better understanding of Islam and political practice. 3.1  Founding of the Muslim Brotherhood in Egypt The Muslim Brotherhood was founded by Hassan al-Bannā in Ismāʻı̄lı̄yah city (northeastern Egypt). It spread to towns along the Suez Canal and rural areas of the Nile Delta. After moving the headquarters to Cairo in 1932, the Muslim Brotherhood became a national organization with members from different social classes, including civil servants, workers, students and farmers. It became the largest political organization in Egypt in the late 1940s. At that time, the organization had 500,000 members. The Muslim Brotherhood sought to gain power, but after the Egyptian Revolution in 1952, it received intense repression by the Nasser administration. Hassan al-Hudaybi, the second murshid ‘āmm (supreme leader), failed to expand the organization and died in 1973. After the assassination of al-Banna in 1949, Abd al-Qadir Awdah led the group as a thinker and leader, but radical Sayyid Qutb became an influential leader of Islamism. In the face of fierce crackdown, Qutb delineated the organization by Islam and anti-Islamic dichotomies. He condemned the latter as ‘the era of modern Jahiliyyah (uncivilized era)’. Qutb attempted to rebuild the organization in the mid-1960s but was executed in 1966. With this as a trigger, Kutbuism emerged after sharpening the Qutb’s thought. From the 1970s, the Sadat regime in Egypt further assisted Islamic revival after the defeat of the Six-Day War in 1967. The regime dismantled the leftists4 and settled with the Muslim Brotherhood. By Sadat’s amnesty,

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many leaders of Muslim Brotherhood were released. Umar al-Tilmisani became the third murshid ‘āmm in 1973 and tried to rebuild the organization in coordination with the Sadat regime. He strove to exclude Qutb’s principle from the Muslim Brotherhood but several small organizations were rapidly established as branches of the Muslim Brotherhood. These subgroups included Takfir wal-Hijra (Excommunication and Exodus), Al-Jihad and Jama’at al-Muslimin. Jama’at al-Muslimin originally started as a student movement of the university. In the 1980s, people with moderate views working in Cairo joined the Muslim Brotherhood while the radicals became influential in rural areas. Mustafa Mashhur (the fifth General Guide), the supreme leader of the Muslim Brotherhood, was subsequently inherited with Muhammad Hamid Abu al-Nasr (the fourth General Guide). Both were the members of the leadership bureau in the 1950s and began to be disconnected from the younger generation. When Mubarak ascended to the power in 1981, the Muslim Brotherhood began to cooperate with other political parties as a moderate Islamic movement and participated in parliamentary elections. The Muslim Brotherhood dominated in the elections of professional associations such as doctors and lawyers. However, after the 1990s, the Mubarak regime put the Muslim Brotherhood under state control and took repressive measures against the organization and its associations. Even though the organization reached its limits, moderate Islamic thought in the Muslim Brotherhood was widely accepted in Egypt. 3.2  Expansion of Overseas Branches The Muslim Brotherhood established branches in neighboring Arab countries. Each branch worked independently, while the headquarters in Egypt became ineffective due to government repression. Following the rebuilding of the organization in Egypt, the Muslim Brotherhood established branches in Syria, Jordan, Palestine, Saudi Arabia, Kuwait, UAE, Algeria and so on. The supreme guide (al-murshid al-’am) appointed the supervisors (al-murāqib al-’am). Local organizations were autonomous in policy making and the International Organization of the Muslim Brotherhood served as a mediator if disputes arose. During the Gulf Crisis (1990–1991), the Kuwaiti Muslim Brotherhood was dissatisfied with the neutral position of the headquarters in Egypt and refused to participate in the international assembly of the Muslim Brotherhood. In addition, the Sudanese branch of the Brotherhood took its own line from the headquarters in Egypt.

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Although Jama’at al-Muslimin in Lebanon was influenced by al-Banna’s thought, it did not join in the Muslim Brotherhood systematically.

4   Development of the Brotherhood in Jordan: A Case Study After the First Arab–Israeli War in 1948, several Brotherhood branches were established in northern Jordan. From 1954, the Brotherhood began to organize domestic activities. The Muslim Brotherhood of Jordan initially set its goals from the perspective of Islamic liberation, but later focused on the development of Islam in Jordan. Its goals included: • preaching the doctrines of the Qur’an; • bringing Muslim individuals and groups together by familiarizing them with the principles of the Qur’an; • developing, protecting and liberating the national wealth and boosting the standard of living; • realizing social justice and combating poverty, disease, vice and ignorance; • restoring Palestine and liberating the Nile Valley, the Arab countries and the Muslim countries from foreign powers, assisting Muslim minorities, supporting the unity of Muslims, and working for Islamic federation; • creating a righteous state, which will implement Islamic doctrines and teachings internally and propagate them abroad; • supporting international cooperation and participating in the consolidation of peace and human civilization. These general principles which embarked on the Jordanian character of the movement were augmented on April 3, 1954. The principles stipulated that • Jordan is an inseparable part of the Islamic world; • the Muslim Brotherhood rejects any regime which is not based on Islam; • the Muslim Brotherhood will not support any government unless it implements Allah’s law (Shari’a);

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• the Muslim Brotherhood in Jordan is part of the Islamic movement in the Islamic world;5 • the Muslim Brotherhood regards the Palestinian problem as an Islamic problem and will concentrate all its material and moral resources to liberate Palestine from world Jewry and the international crusaders (Bar 1998, pp. 16–17). The Jordanian government accepted the activities of the Muslim Brotherhood for defending the King, preventing Muslim radicalization and opposing the left wing. In 1950, when Jordan annexed the West Bank of the Jordan River, the King of Jordan faced strong criticism from Arab countries. Jordan was disturbed by the occupation of the West Bank by Israel and the influx of Palestinian refugees in 1967. In 1970, Jordan had a big political crisis due to the civil war with Palestinian Liberation Organization. At that time, the Muslim Brotherhood consistently came to the King of Jordan. In addition, the Muslim Brotherhood won many seats in the 1984 parliamentary election. In the 1980s, the Jordanian Muslim Brotherhood cooperated with the Syrian Brotherhood in anti-government activity. The relationship between Syria and Jordan worsened and the Jordanian government wanted to restore the relationship with Syria by temporarily cracking down on the activities of the Muslim Brotherhood. In the 1989 Jordanian general election which was held for the first time in 23 years, the Muslim Brotherhood in Jordan won 22 out of 80 seats and became the largest political party in the country. In the Gulf Crisis, Abdul-Latif Arabiat from the Brotherhood was elected as the chairperson of the House of Representatives. The influence of the Brotherhood further expanded and anti-American sentiment increased. Ibrahim Zeid Keilani was also appointed as the Minister of Awqaf and Islamic Affairs in 1990. In this way, the Muslim Brotherhood had gained momentum immediately after the democratization in Jordan in 1989, and it kept its influence since then. However, there were internal conflicts between radicals and moderate factions over the revision of the election law (which was regarded as a disadvantage to opposition forces) and the establishment of diplomatic relations with Israel. The Jordanian Brotherhood cooperated and established a close cooperative relation with Hashemite’s regime. It developed activities based on the framework of a modern Jordanian state.6 However, the Jordanian Brotherhood had its difficulties. The conflicts between the Brotherhood and the Jordanian regime often occurred due to Arab nationalism and

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Palestinian issues. In addition, the Brotherhood advocated democratic processes, civil liberties and human rights with respect to important policy decision making. For instance, even Jordan fell into ‘theatrical performance’ due to Jordanian authorities’ restrictions on democracy, the moderate group of the Brotherhood claimed that they could get benefits by staying in the game rather than out of the game. In contrast, the essentialist group of the Brotherhood took the opposite. They believed that democratic character brought about a big disarray to the Brotherhood. There were intense debates in the Brotherhood over the participation of the elections, election law and the relationship with Jordan’s royal family (Tamimi 2000, p. 7). 4.1  Democratization Process and Muslim Brotherhood of Jordan After the Arab Spring, Islamic political organizations worked on the domestic affairs (Boulby 1999, pp. 158–60). Since the collapse of Egyptian authoritarian regime, Islamic political parties such as the Muslim Brotherhood expanded their power through elections. The Ennahdha Party in Tunisia and the Justice and Development Party in Morocco were indirectly influenced by Islamic political parties though not being directly related with the Brotherhood. The Ennahdha Party won the 2011 general election in Tunisia, and Hamadi Jebali, the secretary general of the Party, became the Prime Minister of Tunisia. The Justice and Development Party won majority seats in the 2011 parliamentary election and formed a coalition government. Abdelilah Benkirane of the Party became the Prime Minister of Morocco. The Muslim Brotherhood of Jordan played the role in domestic affairs rather than foreign affairs. During the heyday of Arab nationalism, it cooperated with the Hashemite family and acted as a shield against Arab nationalists who often attacked the monarchy. For the Hashemite, the Muslim Brotherhood was considered to be a pillar of protection as well as tribal support. On the other hand, the cooperative relationship with Jordan’s royal family was important to the Muslim Brotherhood which was treated as an illegal organization in Arab countries such as Egypt and Syria. As a result, the Jordanian Muslim Brotherhood expanded its influence on trade unions, student organizations and state-sanctioned political parties. However, when Jordan signed a peace treaty with Israel in 1994 as a result of downturn of Arab nationalism and the end of the Cold War, the

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Muslim Brotherhood of Jordan lost its influence. As the Brotherhood was hostile to Israel, the Jordan-Israel Peace Treaty led to a confrontation between the Brotherhood and Jordan’s royal family. In addition, as the King of Jordan began to take strict countermeasures against Hamas, the Brotherhood members were deeply associated with Hamas and encountered difficulties with the government. Furthermore, King Abdullah II succeeded King Hussein in 1999. He took the same policies as his predecessor but a more stringent response to Islamic political parties. He closed down the office of Hamas in Jordan. As the conflict between the Muslim Brotherhood of Jordan and Jordan’s royal family intensified, the former opposed the government policies on the Palestinian issues, election and political party laws. Since the Political Parties Law of 1992 stipulated to restrict overseas funding to local organizations, the Muslim Brotherhood in Jordan formed the ‘Islamic Action Front’ (IAF), which was strictly domestic based and participated in the election. The IAF pointed to the contents of the election law. Specifically, the Brotherhood criticized the change from the ‘multiple non-transferable voting system’ to ‘the one person one voting system’. They also disagreed with the setting up of the electoral districts which were favorable to the government. They often boycotted the ­election. Also, on the Palestinian issues (in associated with Israel) and the application of Shari’a (Islamic law), conflicts between hawks and doves occurred within the Muslim Brotherhood. The former (hawks) was a principle school in the Brotherhood and claimed to maintain coordination with Hamas. The latter (doves) aimed to participate in democratization in Jordan and took the position to continue negotiations with the government. After the Hamas regime was established in Palestine in 2006, a crisis of the division of the Palestinian national authority emerged. The Hamas regime was boycotted by Israel, the United States and the international community for nearly a year after its formation, resulting in malfunction. These issues provided important discussions on democratic review of the international community, Islamic political development and the Algerian elections at the end of the 1980s. To understand the recent movements of the Jordan’s Brotherhood, it is necessary to understand the Arab Spring and the influence of the emerging Islamic State (IS) in Jordan. The Arab Spring brought about many changes in social and political situations of Arab countries, especially Tunisia, Egypt, Libya, Syria, Iraq and Yemen. However, it did not have much impact in Jordan, Morocco and Gulf Cooperation Council (GCC).

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The activities of IS and other radical Islamic organizations brought negative image to Islam. The Jordanian Muslim Brotherhood refused the government’s request for political participation. Learning from the experiences and failures in Egypt and Tunisia, it boycotted Jordan’s general elections in Amman and other major cities in 2010 and 2013. It called for political reforms. At the time of the Arab Spring, the democratization movement in Jordan was cleverly suppressed by the government. In response to the demands of the opposition parties, the government skillfully created disagreements and divisions among protesters. It also succeeded in controlling resistance movement using soft power by removing seats in public places. In dealing with domestic conflict, the government carried out divide and rule policy. It controlled the situation by directing conflicts among the oppositions themselves, for example, the Jordanians versus the Palestinians, Islamism versus secularism, the Hirak movement in the south versus the Hirak movement in the north (Kitazawa 2016, pp.  69–90; Alsoudi 2015, pp. 41–57). Currently, the Jordanian Muslim Brotherhood lost its exposure and influence due to the Egyptian coup d’etat in June 2013, the expansion of the civil war of neighboring countries, the influx of Syrian refugees and the emergence of Islamic extremists. Internal conflict within the Brotherhood escalated. In 2015, some members of the Muslim Brotherhood withdrew the organization because they wanted it to connect with the Brotherhood in Egypt, rather than with the Jordanian organizations. The Muslim Brotherhood Association was established and showed its eagerness to negotiate with the government. It registered as an ‘official’ Muslim Brotherhood in Jordan. Hence, Jordan’s Muslim Brotherhood was divided into two rival groups, namely, radical leaders of the Palestinians and moderate Jordanian leaders. In the general election of 2016, the IAF led the National Coalition for Reform (NCR) encompassing women, Christians, Jordanians of Circassian origin and others as members. The IAF secured 15 seats in the Parliament, which accounted for half of the 30 seats gained by political parties. Despite the achievement of the IAF, the election result was poorer than expected (i.e. 20–30 seats). It was difficult to evaluate the election result on the Coalition (Jordan Times 2016, September 24; Al Jazeera News 2016, September 20). The NCR won 160,000 votes from 20 national lists and most of the votes came from the urban areas of Amman, Zarqa and Irbid. On the other hand, 50% of the candidates from the NCR were

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defeated. Many of them were defeated in the southern region where the Coalition expected a boost in tribal votes. On the other hand, the Muslim Brotherhood Society (MBS) formed by the members who left the Muslim Brotherhood failed to win a seat. On the other hand, Zamzam, which was established by the former members of the Muslim Brotherhood, won five seats, while a moderate Islamic party, Wasat Party, won another five seats. It is noteworthy to see whether these two parties would join with the NCR in parliamentary elections in future. Meanwhile, it is difficult to say that Islamic forces have regained their political power in the Parliament due to the decrease in the relative influence of the Muslim Brotherhood in Jordan. The Muslim Brotherhood was divided into cooperative groups with and opponents against Jordan’s royal family. Hence, its political influence no longer compared with the one in the 1989 election. In addition, King Abdullah II criticized Islamic fundamentalism and public criticism against IS was intensified. Regarding the electoral system, the IAF representative, Mohammad Zyoud said that in the past, IAF participated and boycotted some elections. He said the IAF supported the election and hoped that the new election law could remove the ‘one-man one-vote’ system and made it possible for candidates to face parliamentary elections with the possibility of winning in local seats. The IAF also boycotted elections in 2010 and 2013 because of the ‘one-man one-vote’ system, while it boycotted election in 2007 because of the intervention by the authorities and the fabricating results of the election. 4.2  Muslim Brotherhood in Jordan: Review and Challenge Since the general election after the Cold War, the Muslim Brotherhood in Jordan has made a leap forward, though it did not take power in the general election. However, the Brotherhood faced a crisis due to a split over ideological route. It reflected a decline of the organization. However, the review of Jordan’s Muslim Brotherhood provides important implications on Islamism in general and the Muslim Brotherhood in other countries in particular. First, it is important to understand the relationship between politics and the organization based on Islamic values. In general, the Muslim Brotherhood had a strong character as a strong social movement, and gradually gained ground as a political organization. However, the Brotherhood often showed cautious and conservative stance in politi-

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cal activities. In particular, the Muslim Brotherhood in Jordan decided on its own political stance, staying aware of the political development in Egypt and other neighboring countries, and the position of the Jordanian monarchy. It survived as a political organization till the end. From a fundamentalist perspective, it was impossible for the organization to compromise on many Islamic issues. In fact, struggle with policy directions led to the break-up of the Jordanian Brotherhood. However, internal conflicts are common in the Muslim brotherhood when it comes to the questions of whether a policy should embark on reformist or revolutionary/progressive approach. From experience, the Islamic organization can explore the art of compromise and transformation. Initially, the Egyptian Brotherhood sought to promote popularity of Islamic value at large through social activities rather than being self-interested. Hamas of Palestine developed into an armed organization and advocated a radical movement against Israel. In fact, in the 1970s, when the Palestine Liberation Organization (PLO) and its leftist power started the national liberation movement, they focused on social and welfare activities. Hence, they were regarded as a conservative political party. As a result, the Muslim Brotherhood was criticized by the radicals for the indirect responsibility for the Israel’s occupation. This may be the case for the Muslim Brotherhood in Palestine (Yokota 2009, pp. 94–9). Most of the appraisals on the Muslim Brotherhood claim that it is a political tool of the government. As democracy in most Islamic countries was limited, the Muslim Brotherhood ­functioned as a social safety device for the public, which gained social support and trust from people. This explains why the Muslim Brotherhood members gained many seats in the general election of 1989. The moral ingredient of the Muslim Brotherhood as an Islamic social organization gains public confidence. Jordan has experienced a transitional period in democratic process. In other words, encountering the changes in the social structure (e.g. volatile relationship between the monarchy and tribal societies, massive refugee influx), leftist and nationalist political parties representing social discontent declined and the Brotherhood faced organizational crisis. Under such conditions, the key to keep the Muslim Brotherhood alive is to seek the collaboration with other groups to promote democracy in line with national circumstances. After all, the Brotherhood is required to improve the daily living of people rather than focusing on building an ideal society based on Islamic values.

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5   The Present State of Arab Politics and Future Islamism Historically, Arab nationalism and Islamic movement moved toward the same direction. Depending on different occasions, they cooperate or reject each other on struggling independence from imperialists. Now, what are the new challenges for Arab and Islamic world? Regardless of Islamism or secularism, it is necessary to understand the basic issues in the Arab society, which were barely shown in the Arab Spring. In addition, the predicament is related to the IS problem. The IS problem seems to have been resolved militarily, but it is hard to say whether an actual solution has been reached. Many young people still support the IS. In the Arab region, it is significant to understand the present situation of young people who were the main players of the Arab Spring and the majority population in the society. According to Arab Youth Survey 2017 (ASDA’A Burson-Marsteller 2017), many young Arab people in Mashriq7 are pessimistic about the present condition of the state in the eastern Mediterranean. In response to the question ‘Do you think that your country is headed in the right direction?’, 85% of the sample in Mashriq including Jordan and Yemen, 42% in Maghreb8 and 13% in Gulf Cooperation Council (GCC) countries do not think so. Regarding the Arab countries as a whole, people are dissatisfied with government policy. In response to the question that ‘my country needs to make more efforts to meet the demands of young people’, 71% of the sample in Mashriq, 85% in Maghrib and 85% in GCC agree. Even young people who are better off and positive toward the national direction are dissatisfied with the government policy toward adolescents. For the Arabs as a whole, the top three concerns are unemployment (35%), IS expansion (35%) and terrorism (34%). Other concerns include soaring living expenses (27%), civil war (19%), lack of strong political leadership (17%), lack of democracy (17%), the Israeli-Palestinian conflict (16%), lack of Arab unity (16%), stagnation of economic growth (16%), Iran’s nuclear threat (14%), loss of traditional value (11%) and anti-Muslim feeling (6%) (ASDA’A Burson-Marsteller 2017). The criticism that school education is not practical reaches 66% of the sample in both Mashriq and Maghrib. In response to the question ‘Is school education connected to future occupation?’, only 34% and 33% of the sample in Mashriq and Maghrib, respectively, agree, compared with GCC (80%) (ASDA’A BursonMarsteller 2017).

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In order to understand Islam and the politics of the Middle East, we should focus not only on extremists, but also on Islamic powers in the context of political reform. Further research on the actual political situation in Arab countries and redefining Islamism is called for. This, of course, does not mean to separate Islamism from politics. Moderate factions such as the Muslim Brotherhood have a role to play in the democratization process. According to Zubaida (2009:38), ‘terms such as “Islamism” and “Islamic fundamentalism” are usually employed to indicate “modern political movements and ideas, mostly oppositional, which seek to establish, in one sense or another, an Islamic state”’. This view overemphasizes political goals of Islamism at the expense of socioeconomic and cultural dimensions (Atzori 2015, p. 3). Acknowledgment  This study is supported by JSPS KAKENHI Grant Numbers JP 16K03538, JP 18K02322, and NIHU Transdisciplinary Project ‘Area Studies of the Modern Middle East’.

Notes 1. Adhering the universal value of Islam extremely. Sometimes, the use of this term is controversial. 2. According to National Bureau of Economic Research (NBER), ‘artificial states’ are those nations in which political borders do not coincide with a division of nationalities desired by the people on the ground (see www.nber. org/papers/w12328; access 17 September 2018). 3. In other words, interpretation should stick to the first three generations’ views, including the Prophet Muhammad and his companions (the Sahabah), their successors (the Tabi‘un), and the successors of the successors (the Taba Tabi‘in). 4. The leftists became a political enemy to the Sadat regime. 5. According to a different version, it is part of the Islamic movement in Egypt. 6. It is not too exaggerated to say that it is similar to the behavior of Hassan al-Banna in Egypt. 7. The Mashriq is the historical region of the Arab world to the east of Egypt. This encompasses the modern states of Egypt, Sudan, Saudi Arabia, Yemen, Oman, Kuwait, the United Arab Emirates, Israel, Jordan, Lebanon, Syria, Palestine and Iraq. 8. Maghreb is a major region of North Africa that consists primarily of the countries Algeria, Morocco, Tunisia, Libya and Mauritania.

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References Alsoudi, Abdelmahdi. (2015). “The Impact of the Arab Spring on the Political Future of the Muslim Brotherhood in the Middle East: Jordan as a Case Study”, in Middle East Review of International Affairs, Vol. 19, No. 3:41–57. ASDA’A Burson-Marsteller. (2017). “The Middle East  – A Region Divided: A White Paper on the Findings of the ASDA’A Burson-Marsteller”, Arab Youth Survey, http://asdaabm.com/en/; Retrieved on August 18, 2018. Atzori, Daniel. (2015). Islamism and Globalisation in Jordan: The Muslim Brotherhood’s quest for hegemony, London and New York: Routledge. Bar, Shmuel. (1998). The Muslim Brotherhood in Jordan, Tel Aviv: The Moshe Dayan Center for Middle Eastern and African Studies. Baram, Amatzia. (1990). “Territorial Nationalism in the Arab World,” Middle Eastern Studies, Vol. 26, No. 4, pp. 425–448. al-Bishrı̄, Ṭ āriq. (1989). “Ḥ awla al-‘Urūbah wa al-Islām(Arabism and Islam)” in Markaz Dirāsāt al-Waḥdah al-‘Arabı̄yah (ed.) Al-Ḥ iwār al-Qawmı̄ al-Dı̄nı̄ (nation-religion dialogue), Beirut: Markaz Dirāsāt al-Waḥdah al-‘Arabı̄yah. Boulby, Marion. (1999). The Muslim Brotherhood and the Kings of Jordan 1945–1993, Atlanta: Scholars Press for the University of South Florida. Buzan, Barry, Wæver Ole, and de Wilde, Jaap. (1998). Security: A New Framework for Analysis, Boulder: Lynne Rienner Publishers. Al Jazeera News. (2016 September 20). “Syria: Deadly aid convoy bombing as ceasefire ends”, https://www.aljazeera.com/news/2016/09/syria-deadlyaid-convoy-bombing-ceasefire-ends-160919194433498.html; retrieved on 18 September 2018. Jordan Times. (2016 September 24). “Jordanian NGOs call on UN to boycott G4S”, https://jordantimes.com/news/local/jordanian-ngos-call-un-boycottg4s; retrieved on 18 September 2018. Kitazawa, Yoshiyuki. (2016) League of Arab States: Crossing of Nationalism and Islam, Tokyo: Yamakawa (text in Japanese). Kosugi, Yasushi. (1994) Contemporary Middle East and Islamic Politics, Kyoto: Showado; (text in Japanese). Organisation of Islamic Cooperation, Statistical, Economic and Social Research and Training Center for Islamic Countries (SESRIC). (2017). Towards Understanding Radicalism & Violent Extremism in OIC Countries, Ankara: SESRIC. Rajai, Mostafa, and Enloe, Cynthia H. (1969) “Nation-States and State-Nations” International Studies Quarterly, Vol.13 (2/June): 140–158. Stephen M. Walt. (2015 November 16). “Don’t give ISIS what it wants”, Foreign Policy: https://foreignpolicy.com/2015/11/16/dont-give-isis-what-it-wantsunited-states-reaction/; Retrieved August 18, 2018.

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Tamimi, Azzam. (2000). Islam and Democracy: Jordan and the Muslim Brotherhood, Tokyo: Islamic Area Studies Project. Yokota, Takayuki. (2009). The Tide of Fundamentalism: Muslim Brotherhood, Tokyo: Yamakawa (text in Japanese). Zubaida, S. (2009). Islam, the People and the State: Political Ideas and Movements in the Middle East, London: I.B. Tauris.

CHAPTER 4

Origins of the Property Rights of the “Holy” Land and Religious Conflicts in Jerusalem Rita Yi-Man Li

1   Introduction Land rights are essential concerning economic consequences. That is particularly so among the developing countries. Weak land rights deter investment, lower the ability of borrowers to use land as collateral and hinder land transactions, which means that the potential gains from trade vanish. That encourages landowners to divert valuable resources to guard the area. Land is also a vital asset for the rural poor because it constitutes a major source of their livelihoods. Secure land rights significantly increase the assets of poor people, influencing their capacity and incentives to produce and invest. Moreover, insecure land rights regularly lead to overlapping claims to plots, which are often alluded to as a source of conflict (Isaksson 2015). As Bruce (2013) notes, When land lacks adequate legal, institutional, and traditional or customary protection it becomes a commodity easily subject to manipulation and abuse. Weak governance leads to weak tenure systems, often depriving R. Y.-M. Li (*) Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_4

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i­ndividuals and communities of essential rights and access to land and other natural assets and contributing to poor land and resource management practices, which further degrades the limited resource base. Resolving land injustices may be a stated objective of war or civil violence.

Wars are rarely initiated due to pure land property conflict. They usually start due to a bundle of factors such as religion, politics and ethnicity. Previous research on six civil wars demonstrates that conflicts are caused by economic factors, including property rights, political considerations and ethnicity. In Kosovo, regional security issues and ethnicity played essential roles. In Nepal, the grievances due to extreme landlessness and the bonded labour system caused the civil war, while economic and political factors led to civil wars in Colombia, Angola, Sierra Leone and the Democratic Republic of Congo (Ballentine and Sherman 2003). Situated between the Mediterranean Sea and the Dead Sea, Jerusalem is located in Israel and Palestine. It is a holy place of three religions: Judaism, Christianity and Islam. Western Jerusalem is the centre of modern Israel, while Eastern Jerusalem was conquered by Palestine (Masalha 2016). As both Israelis and Palestinians want to claim the sovereignty of Jerusalem, severe land conflict has occurred (Gal et al. 2015). In this chapter, we explain and illustrate the land property rights of Jerusalem based on historical, religious and political factors.

2   Research Methods and Data Sources To study the causes of the conflict, this chapter adopts a qualitative research method with media analytics and content analysis on literature. In this study, we search through the internet to solicit the articles and books which study the causes of land-use conflict in Jerusalem. By content analysis of these literatures, similar arguments are grouped into the same categories to create a systematic analysis (Li 2013). Similar approach in soliciting academic viewpoints and content analysis has been adopted by other studies, for example, Li (2015). While many of these studies shed light on historical reasons, using YouTube video clips as a source of research material is a new research method. Given the fact that the new generation watches more YouTube videos than books, journals, newspapers and so on, YouTube video clips can provide a new perspective on the issue. Admittedly, reliability of YouTube video clips should be established.

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3   Conflict Analysis from Property Rights Perspective Land property rights form a key constituent of an institutional setting which establishes the rules for land use and access. High levels of informality facilitate illegal activities in conflict areas and increase social tensions (Muñoz-Mora et al. 2018). “State of nature” models of conflict and production capture the notion of an “institutionless” state with no enforcement of claims to property except coercive force, and redistribution is achieved via aggression. This, however, provides the proper context for the rise of property rights (Hafer 2006). 3.1  Data Sources: Literature In this section, we go through literature which studies the causes of land-­ use conflict in Jerusalem. The analysis of these articles will provide us some insights into the conflicts of the “holy” land. 3.1.1 Historical Factors In Jerusalem, there are various types of hedges and walls which separate the land into East Palestine and West Jerusalem where Israel holds that the city has been open since 1967. Jerusalem is divided into Jewish and Arab towns with thick walls of religion, politics, community and culture. Likewise, the domain of the land ownership and building is full of barriers and conflicts. Due to the array of walls in Jerusalem and countless passage regimes and control, the relations between Israelis and Palestinians in the city were more complicated than in other parts of the West Bank. This status quo has changed from permeable walls to an Israeli gate-keeping and limited crossing policy since the 1990s. In 2002, Israel separated the West Bank and East Jerusalem, constituting the most dramatic change in East Jerusalem since 1967 (Klein 2005). Over the decades, the Israeli-­ Palestinian conflict has experienced numerous changes. The crucial moment of the conflict was the victory of Israel against the Arab armies in the 1967 Six-Day War. Israel controlled the Egyptian Sinai and Syrian Golan Heights, the West Bank, East Jerusalem and the Gaza Strip, whereas Palestinian national movement staked its claim for the heartland of its future state (Waldman 2014). It led to the scramble of the right of Jerusalem. Palestinians stated that Jerusalem belonged to them because of historical and religious backgrounds. As Alfasi and Fenster (2005) write,

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“Jerusalem acts as the capital of Israel, a city with religious, historical and national significance in which the state, via its different governmental ministries, interferes in  local matters”. The Jews’ attachment to Jerusalem dates back to the eleventh century BC, when King David conquered the city; for Christians, the city’s holiness derives from Jesus’ life and his crucifixion there, while for Muslims, its primary religious significance springs from Muhammad’s miraculous voyage from Mecca to Jerusalem, and from Jerusalem to heaven. 3.1.2 Holy War for the Holy Land Arabs and Jews have strong religious beliefs and Jerusalem is a holy land for both. As a result, they claim the sovereignty of Jerusalem. Hence, a considerable land conflict has occurred (Gal et al. 2015). For Palestinians, although they have a moderate attitude towards the dispute over Jerusalem, they want to claim the sovereignty of the city as they consider it important for the religious revival. These are best represented by the following viewpoints: The resulting portrayal depicts the emergence of three synchronic identity orientations within the generation of Christians who came of age during and after the first intifada… the second advocates for a religio-communal revitalization similar to the Islamist one; …The emergence of these tendencies sheds new light not only on the Palestinian situation today, but also on identity formation processes, generally …These individuals increasingly look inward to the religious community, seeking its revival through more stringent religious education to better counter Islamization in the wider society. (Lybarger 2007) Religion inspires many in the conflict. Many Israelis, to support their right, advocate the Bible, the word of God, the promise of the land by God to the Jewish people. And some Muslim Palestinians also give a religious dimension to the land, and consider it entirely Muslim land… the conflict has become a fight for God and religion. Some Christians, too, the world’s Evangelicals and pro-Zionists, add their religious input and pro-Jewish advocacy to the fight. (Sabbah 2015) As a sacred city, Jerusalem is arguably the single most important place in the Middle East: for Muslims, the Haram al-Sharif is a symbol of victory; for Jews the Wailing Wall a symbol of loss, and for Christians, the Holy Sepulchre a symbol of victory through loss. Religion and politics have interacted in

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every sacred story encompassed in the idea of this Holy City. Political theologies remain at least implicit in the histories of all major faith communities, and at the centre of every sacred story is at least one sacred place, which in turn carves out of the cosmos a space held to be inviolable and safe for believers…For the Christian community and in particular for the Christians of Jerusalem, the prime holy spaces are the Church of the Nativity in Bethlehem, the Churches and Holy Places in Nazareth, and especially, the Church of the Holy Sepulchre in Jerusalem, which remains an important symbol of Christian presence and custodianship. (O’Mahony 2005)

3.1.3 Zionist Ideology From the Israeli point of view, Zionist ideology identifies religious reasons of the land conflict over Jerusalem. The intense battle can mainly be contributed to the Zionist ideology of Israelis, by which the Jews claim to be the occupants of the land and extend their nation aggressively. It has led to the scramble for Jerusalem. As Alfasi and Fenster (2005) write, “with the conflicting aspirations of Zionism and Arab nationalism, the struggle for Jerusalem intertwines with religious beliefs and symbols to make the city a major focus of contestation”. Elkins (2016) also notes, These structures were finally revealed to be set in a cultural attitude, which fundamentally values the principles of Zionist ideology over the prospect of a Palestinian state, and the wellbeing of Jews over equality between Arabs… The Zionist agenda to secure a Jewish majority in Israel at the expense of the rights of others enables politicians to exploit fears of terrorism and ambition to claim the West Bank as an integral part of the Greater Israel project.

Israelis believe that Jerusalem belongs to them and publicly claim that Jerusalem is their “eternal, undivided capital”. Yousef and Yousef (2017) observe that “this process has intensified after the initiation of the Oslo Agreements in 1993. Israel has also perused its proclamation of Jerusalem as Israel’s ‘eternal, undivided capital’ and hammering this meretricious idea… via the many channels …, trying to make this vision a reality”. 3.1.4 National Identity and Dignity The Israeli-Palestinian conflict can be described as the conflict of two national identities. Both Israelis and Palestinians fight for territorial ­identity expression by which they are the only owner of Jerusalem (Baskin 2016). Palestinians consider the Israeli-Palestinian conflict as a “zero-sum

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game between two national movements struggling for exclusive ownership of the same piece of land” (Waldman 2014). Rosen and Shlay (2014) argue that “Jerusalem is a city mired in spatial conflict. Its contested spaces represent deep conflicts among groups that vary by national identity, religion, religiosity, and gender… Space-based cultural conflict exemplifies urban divisions and exacerbates claims to ‘my Jerusalem’, not ‘our Jerusalem’”. As noted by Cohen and Frank (2002), The negotiations over Jerusalem have faltered over the issue of the Temple Mount, a particularly significant site for Israelis and Palestinians… The problem, for both sides, is the official control over the Temple Mount, with that space seen as a vital component of national and religious dignity. For both communities, as they currently argue it, national identity will be hollow without being able to claim sovereignty over their particular holy sites.

Kelman (2007) concludes that these dynamics have led to a view of the conflict in zero-sum terms, not only concerning territory but also for national identity and existence. Acknowledging the other’s identity has been tantamount to jeopardizing one’s own identity and existence. Each side has espoused ‘the view that only one can be a nation: Either we are a nation, or they are. They can acquire national identity and rights only at the expense of our identity and rights… The conflict reflects the division within each group between the maximalist or rejectionist elements, who  – for religious or ultranationalist reasons  – want to hold out for total victory… for the sake of peace, as long as their group’s national existence is assured. (italics original)

3.1.5 Interwoven Factors Factors leading to conflicts are seldom independent but often mixed together. Cohen and Frank (2002) rightly argues that “[r]iparian conflicts emanate from deeply held spiritual, religious, national and ideological commitments to water”. Similar to the disputes about Jerusalem, conflicts over water include “religious animosities, ideological differences, arguments over borders, and economic competition” (Gleick 1998: 124). The armed struggle is a conflict against an occupying power instead of a classic anti-colonial struggle because it is the dispute between two groups over land (Cohen 2011). Moreover, “despite there being several political

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trends among East Jerusalemites, what unites them is a desire to maintain Arab life and preserve the city’s Arab nature” (Cohen 2011). 3.2  Using Data from YouTube and Online Video Clips In this section, we shall utilize Internet sources to reinforce our arguments. These sources include YouTube and online video clips. 3.2.1 Historical Reasons For historical reasons, both Israelis and Palestinians consider Jerusalem as their capital. Israel controlled West Jerusalem since 1949 and annexed East Jerusalem after the Six-Day War. Palestinians wish to split the city and make East Jerusalem as the capital of Palestine, but Israelis want a unified Jerusalem to be their capital.1 Jews believe that they formerly owned the land, but the Arabs took it; then it was taken back by the Jews.2 3.2.2 Freedom of Movement After the Six-Day War in 1967, Jerusalem has been occupied by Israel, even though several Arab Palestinians are living in East Jerusalem. Besides, some Arab refugees are now living in refugee camps outside Jerusalem and they wish to return to the lands taken by Israel after 1967. In the video “Palestinians: How Much Do You Suffer Under Occupation?”, six Palestinians were asked to rate the suffering under the Israeli occupation on a scale of 1–10. Except one interviewee who did not respond, three gave 10 points, and another two gave 8 points. This shows that Palestinians are satisfied with the Israeli occupation.3 Under the Israeli occupation, Palestinians are not allowed to move freely through Israel, especially Jerusalem. They need to get prior permission, which is hard. Besides, there are security checkpoints in and around Jerusalem, which require a long waiting time for Palestinians. Five interviewees thought that freedom of movement had been restricted. One interviewee felt that it imposed difficulty in doing business as the resource import was hard to create under occupation and awkward movement. Import costs were high. Also, if Palestinians want to travel to other countries by plane, they need to transit at Jordan airport as they are refused entry to Israel. Israel’s occupation of Jerusalem makes it difficult for Palestinians to move wherever they want.4

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3.2.3 Religious Views Jerusalem is a sacred centre. It is well known that “for Christians, this is where Jesus was crucified and resurrected. For Muslims, this is from where Prophet Muhammad journeyed to heaven. For Jews, the Temple of Solomon stood right here”.5 Israelis have worshipped in Jerusalem for 3000 years. They believe that God intervened and saved Isaac. They call this place the Temple Mount and believe it is the centre of the earth. Jews mourn the horrible past history and pray for a better future at the Western Wall. They think that prayer notes left on the Western Wall will be answered (https://www. youtube.com/watch?v=wg1unr6eNpQ, accessed on 31 May 2018). Because of religious reasons, both Jews and Muslims consider Jerusalem as the homeland of their religion and a precarious power share exists. Judaism’s two sacred temples in the Temple Mount/Haram al-Sharif stood there, while Muslims believe the Great Mosque is the place where Prophet Muhammad ascended to heaven (https://www.youtube.Com/ watch?v= p3x8yZwZRDI, accessed on 2018). 3.2.4 Property Rights Concerning property rights, Israelis think that Jerusalem is their root. They will never cease fighting for property right in Jerusalem no matter what happens. Palestinians believe that Israel is using their land and Palestinians should hold the ownership of the land. The land ownership of Palestine has shrunk since the state of Israel was established in 1948. The question is why Palestinians need to leave and give up the land in Jerusalem to Israelis when they and their families were born and raised there. However, they also believe that granting property rights to Palestine and Israel is impossible and it will only lead to war (https://www.youtube. com/watch?v=wg1unr6eNpQ, accessed on 31 May 2018). One Israeli interviewee stated that “Jerusalem is like a wife, you can’t share a wife. You already got married to Jerusalem 3,000 years ago. So, this is a ridiculous demand by the Palestinians” to give Jerusalem to Palestinians.6 After the US government recognized Jerusalem as Israel’s capital, it is more difficult to reach a peaceful agreement between Israel and Palestine.7 In another YouTube video clip, “Israeli Jews: What Is Your Solution to the Israeli-Palestinian Conflict?”,8 seven Israelis were asked to propose solutions to solve the conflict between Israelis and Palestinians (Fig. 4.1). Three interviewees indicated that there was no solution at all as it was hard

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Fig. 4.1  Israelis’ views on a solution to the Israeli-Palestinian conflict Source: https://www.youtube.com/watch?v=d9aQARe-Ftg; accessed on 25 Dec. 18

to meet the needs of both sides. One interviewee pointed out that the solution could only go through a peace talk and dialogue amongst Israelis and Palestinians. One interviewee thought that anti-hate education was fundamental. He mentioned that under the current education system, Arab children and Jewish children were taught to hate each other. Therefore, education about respecting people is the most important. Another interviewee believed that the first step should be to return the occupied areas to Palestinians. 3.2.5 Nationality Conflict Palestinian views on Jews: Twelve Palestinians were interviewed about the perception of the word “Jew”. More than half (seven) of the interviewees believed that Jews stole or occupied their property, mainly land, while another half of them thought Jews were evil and violent. A quarter of the sample felt that Jews exploited the rights and freedom of movement of Palestinians by building checkpoints and preventing Palestinians from praying, travelling and studying in Jerusalem.9 A Palestinian Christian revealed that Palestinian families told their children to kill Jews because Israel was evil. As a Christian, Mazzen believed that Jerusalem was the capital of Israel.10 In another video clip, five Palestinians were asked if the Palestinians would take back the land in Israel. They said it was the land of Palestine and had the right to claim the land. Around half of the sample responded that taking back their land in Israel was for God’s sake.11 Husam Zomlot, the chief representative of the Palestine Liberation Organization and envoy to Washington, stated that Jerusalem was the land of Palestine. Nevertheless, Palestinians need to accept Israel’s expansion, colonialism and appropriation of Palestine’s land. Palestinians want to establish a state, call it as home and see an end to the conflict at no cost.

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Palestinians were asked for their views on the solution to the conflict between Israel and Palestine (Fig. 4.2). Two interviewees believed there was no way to solve the Israeli-Palestinian conflict, while another one interviewee thought that only God could make peace for Jerusalem. Two interviewees thought that Israelis should return the occupied territories to Palestinians. One interviewee thought that there should be only one state, Palestine, but not Israel. One interviewee suggested that Palestinians sought for the right of protection to the land and stopping the violence and required the lands. This interviewee believed that the International Court of Justice could provide Palestinians with those rights. In another online interview video, “Palestinians: If the Occupation Ends, Will There Be Peace?”, 10 out of 15 interviewees thought that there would be peace if the Israelis left the occupied territories and returned them to Palestinians. Five interviewees believed that it would not be peaceful because the conflict began in 1948. They considered that all the lands taken by Israelis since 1948 should be returned to Palestinians. The major problem was that the refugees were not allowed to go into Jerusalem. If the occupation ended, there would be more places for the Palestinian people to live, and all these interviewees believed that the refugees would like to return home. It would be more peaceful.12 A YouTube video clip, “Palestinians: How Much Do You Hate Israel?”, showed the interviews of around 15 Palestinians about the understanding of Islam and opinions on Israelis (Table 4.1). The second part of the video clip concerns the level of resentment against Israelis. There were 15 interviewees: 13 Muslims, 1 religious and 1 Christian. Most interviewees, except one Christian who did not answer the question, rated fairly high points (≥5) on the understanding of Islam (Fig. 4.3). Except three interviewees who did not hate Israel, the rest hated Israel at the highest score and two hated Israel to death. Among those who rated 7 or above on the

Fig. 4.2  Palestinian views on a solution to the Israeli-Palestinian conflict Source: https://www.youtube.com/watch?v=NFVzEPtvu4k; accessed on 25 Dec. 18

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Table 4.1  Palestinians’ opinion on Islam and Israel, on a 1–10 scale Interviewee To what extent do you (Palestinian) understand Islam?

How much do you (Palestinian) hate Israel?

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th 13th 14th 15th

5 0 10 10 10 10 10 10 10 10 3 10 10 Hate the Israel to death Hate them

6 5 8 5 8 5 7 8 8 9 5 8 7 9 Christian

Source: https://www.youtube.com/watch?v=2pjFJ0HPt5g; accessed on 21 May 2018

Fig. 4.3  To what extent do Palestinians understand Islam? Source: https://www.youtube.com/watch?v=2pjFJ0HPt5g; accessed on 27 Dec. 18

understanding of Islam, they were hostile to the Israeli people (Fig. 4.4). In contrast, those who had low level of anti-Israel attitude had moderate self-understanding of Islam. This shows that the higher the interviewees’ self-perceived understanding of Islam, the more they hated Israel. Jewish views on Palestinians (see Fig. 4.5): Jews think that they have the right to own Jerusalem with historical evidence. They came and developed this place modern like today, rather than Palestinians. Jews believed that the Bible showed that Jews owned the land authority of Israel. It is the place that God gave to Jews. Besides, they deem that they have already given Gaza to meet the Arab demand. One Israeli described Islam as “a dreadful disease” due to historical reasons, territories, religion, safety and

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Fig. 4.4  Question about how much Palestinian interviewees hate Israel Source: https://www.youtube.com/watch?v=2pjFJ0HPt5g; accessed on 27 Dec. 18

Fig. 4.5  Reasons why Jews hate Palestinians Source: https://www.youtube.com/watch?v=1e_dbsVQrk4; accessed on 31 May 2018

refugees. Some Jews thought Muslims were too aggressive as they would kill unbelievers. Jews gave strong anti-Arab attitude and thought that Israel was holding back (https://www.youtube.com/watch?v=1e_ dbsVQrk4, accessed on 31 May 2018). The situation of refugees causes a conflict between Israel and Palestine. Jews believe that there are too many refugees. The territories created by Palestinians made some Jews angry. They would like to make a strong response to the hate from Palestinians. Palestinians hate Jews and create trouble for them by creating territories. It makes the conflict more severe. Jews ask for more security as they think Palestinians are dangerous. Jews believe that they have tried to solve the conflict in a peaceful way, like offering Gaza to the Arabs. Nevertheless, that move does not stop the attack from Palestinians. Therefore, some Jews believe that they need to “throw back a bigger stone” (https://www.youtube.com/watch?v=1e_ dbsVQrk4, accessed on 31 May 2018). Twelve out of 15 Palestinians said they hated Israelis. Five interviewees gave the reason why they hated Israelis. Such response was associated with the hostility from the Israeli people, political conflict and nationality issue.

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Concerning Palestinians who hated Israelis, they believed that Israelis hated Palestinians and treated Palestinians badly. One interviewee said Israelis killed Palestinian children and innocent people. To these interviewees, the reason why Palestinians hate Israelis is a response to the hostility from Israelis. Apart from this reason, it could also be nationality issue. An interviewee described that it was a national duty of Palestinians to hate Israelis in order to get freedom. Moreover, the resentment against Israelis stems from political conflict between Israel and Palestine. One interviewee responded that Palestinians did not hate Israelis as people, but hated the Israeli government because it did not want peace (https:// www.youtube.com/watch?v=1e_dbsVQrk4, accessed on 31 May 2018).

4   Conclusion The Israeli-Palestinian conflict arose due to the Six-Day War in 1967 and the subsequent occupation. After the Six-Day War, Israel occupied Jerusalem when many Palestinians lived in East Jerusalem. Since then, Israel and Palestine pursued Jerusalem as a struggle for national identity, freedom and existence. Besides, both countries insist they are the landowner of Jerusalem. Jews claim that they have the right to own Jerusalem with historical reason. Jews came and developed and changed it as modern city. Meanwhile, they occupied Israel before Palestinians took the place from their hands. The Bible shows that Jews own the land authority of Israel. It is the place that God gave to them, while they believe that they have a special relationship with God. Palestinians state that Jerusalem belongs to them and they hate Israelis in response to the resentment from Israelis. Above all, each nation has its own views and opinions towards the ownership of Jerusalem. Hostility complicates the conflict. Acknowledgement  The author thanks the contributions of Chair, S., Chan, K.L., Poon, T.I., Liu, C.S., Au, T., Chin, L.W., Yu, B., Chow, H.M. and Hu, B. to this study.

Notes 1. Vox. (2017 December 26) “Why Jerusalem can make or break peace between Israelis and Palestinians?” https://www.youtube.com/ watch?v=p3x8yZwZRDI (accessed on 21 December 2018).

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2. TeleSUR English. (2017 October 1) “Empire files: Israelis speak candidly to Abby martin about Palestinians”. https://www.youtube.com/watch?v= 1e_dbsVQrk4 (accessed on 31 May 2018). 3. Gil-Shuster, C. (2015 October 31) “Palestinians: How much do you suffer under occupation?”. https://www.youtube.com/watch?v=dpDqZujEFAk (accessed on 31 May 2018). 4. https://www.youtube.com/watch?v=dpDqZujEFAk, accessed on 31 May 2018. 5. Steves, R. (2014 November 7) “Rick Steves’ the holy land: Israelis and Palestinians today”. https://www.youtube.com/watch?v=wg1unr6eNpQ (accessed on 31 May 2018). 6. RT. (2017 December 7) “Jerusalem is like a wife, you can’t share it – Israeli debates Arab on RT”. https://www.youtube.com/watch?v=77YyPxxjXY0 (accessed on 31 May 2018). 7. PBS NewsHour. (2017 December 6)”How Israelis and Palestinians see Trump’s Jerusalem move”. https://www.youtube.com/watch?v= LnxzTG_kUB8 (accessed on 31 May 2018). 8. Gil-Shuster, C. (2014 March 2) “Israeli Jews: What is your solution to the  Israeli-Palestinian conflict?” https://www.youtube.com/watch?v= d9aQARe-Ftg (accessed on 30 June 2018). 9. Gil-Shuster, C. (2014 December 20) “Palestinians: What do you think when you hear the word ‘Jew’?” https://www.youtube.com/watch?v= iTgoB6tKy5o (accessed on 31 May 2018). 10. Naftali, H. (2017 September 2) “A Palestinian REVEALS the truth about Israel”. https://www.youtube.com/watch?v=Ce4bvcDCgAg (accessed on 31 May 2018). 11. Gil-Shuster, C. (2018 February 17) “Palestinians: Will you take back your land in Israel? How?” https://www.youtube.com/watch?v=ahTI_Jyv1fs (accessed on 31 May 2018). 12. Gil-Shuster, C. (2017 June 10) “Palestinians: If the occupation ends, will there be peace?”. https://www.youtube.com/watch?v=ngNpmIs2xWk (accessed on 31 May 2018).

References Alfasi, N. and Fenster, T. (2005) “A tale of two cities: Jerusalem and Tel Aviv in an age of globalization”. Cities, 22, 351–363. Ballentine, K. and Sherman, J.  (2003) The political economy of armed conflict: Beyond greed and grievance. Lynne Rienner Publishers: Boulder and London. Baskin, G. (2016) “The blessing of Jerusalem”. Palestine – Israel Journal of Politics, Economics, and Culture, 21, 15–20.

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Bruce, John. (2013 March 27) “Land and conflict: Land disputes and land conflicts”, the U.S.  Agency for International Development, https://www. land-links.org/issue-brief/land-disputes-and-land-conflict/ (access pm 31 May 2018). Cohen, H. (2011) The rise and fall of Arab Jerusalem: Palestinian politics and the city since 1967. Routledge: London. Cohen, S.E. and Frank, D.A. (2002) “Jerusalem and the riparian simile”. Political Geography, 21, 745–765. Elkins, C. (2016) Conflict transformation and human rights in Israel-Palestine. Peace, mediation and conflict research. University of Tampere. Gal, M.B., Kreiner, N.C. and Shmueli, D.F. (2015) Framing spatial-religious conflicts: The case of Mormon development in Jerusalem. Department of Geography and Environment Studies, University of Haifa. Gleick, P. (1998). The world’s water 1998–1999: the biennial report on freshwater resources. Washington, DC: Island Press Hafer, C. (2006) “On the origins of property rights: Conflict and production in the state of nature”. The Review of Economic Studies, 73, 119–143. Isaksson, A.S. (2015) “Unequal property rights: A study of land right inequalities in Rwanda”. Oxford Development Studies, 43:60–83. Kelman, H.C. (2007) “The Israeli-Palestinian peace process and its vicissitudes”. American Psychologist, 62, 287–303. Klein, M. (2005) “Old and New walls in Jerusalem”, Political Geography. 24, 53–76. Li, R.Y.M. (2013) “The usage of automation system in smart home to provide a sustainable indoor environment: A content analysis in web 1.0”. International Journal of Smart Home, 7, 47–60. Li, R.Y.M. (2015) Construction safety and waste management: An economic analysis. Springer: Switzerland. Lybarger, L.D. (2007) “For church or nation? Islamism, secular-nationalism, and the transformation of Christian identities in Palestine”. Journal of the American Academy of Religion, 74, 777–813. Masalha, N. (2016) “The concept of Palestine: The conception of Palestine from the bronze age to the modern period”. Journal of Holy Land and Palestine Studies, 15, 143–202. Muñoz-Mora, J.C.; Tobón, S. and d’Anjou, J.W. (2018) “The role of land property rights in the war on illicit crops: Evidence from Colombia.” World Development, 103, 268–283. O’Mahony, A. (2005) “Christianity and Jerusalem: Religion, politics and theology in the modern holy land”. International Journal for the Study of the Christian Church, 5, 86–102. Rosen, G. and Shlay, A.B. (2014) “Whose right to Jerusalem?”. International Journal of Urban and Regional Research, 38, 935–950.

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Sabbah, M. (2015) “Religion and the Palestinian-Israeli conflict”. Palestine-Israel Journal of Politics, Economics & Culture, 20/21, 7–11. Waldman, S. (2014) “The Israel-Palestine conflict: The view from Jerusalem”. Journal of International and Global Studies, 3, 73–77. Yousef, T. and Yousef, N. (2017) “Edward said on Jerusalem”. Journal of Literature and Art Studies, 7, 1489–1501.

CHAPTER 5

Who Wants to Talk to Terrorists? Peter J. Phillips

1   Introduction In 1979, shortly following the German Autumn of 1977 when terrorism dominated the news cycle in the Federal Republic (West Germany), the academic psychiatrist Wilfried Rasch (1979) published an account of terrorist psychology based on first-hand psychiatric evaluation of subjects suspected of involvement in terrorism. The account, which generally concluded that terrorists are not clinically ill, included Rasch’s psychiatric assessments of the four principal members of the first generation of the Red Army Faction (RAF): Andreas Baader, Ulrike Meinhof, Gudrun Ensslin and Jan-Carl Raspe.1 Through a psychiatric study of the individuals involved in terrorism, together with a careful consideration of the context, Rasch concluded that actions that appeared to be incomprehensible without there being some element of psychological illness at play come to be understood as motivated and rational, at least among ‘serious’ perpetrators. Rasch (1979, p. 80) says, ‘They were convinced that their position was right while still being able, principally, to look at themselves from distance and to recognise and reflect upon reality. None of the men and women I encountered could have been diagnosed as “paranoid”’. P. J. Phillips (*) School of Commerce, University of Southern Queensland, Toowoomba, QLD, Australia e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_5

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Terrorism in West Germany was a persistent problem throughout the 1970s. There were more than 400 attacks perpetrated between 1970 and 1980 (Fig. 5.1).2 Almost 100 people were killed and more than 800 were wounded. Not surprisingly, given the magnitude of the problem, Rasch’s study was quickly followed by a similar but much more extensive investigation. In one of the most comprehensive studies of terrorist psychology yet undertaken, between 1980 and 1983, 250 left-wing and right-wing terrorists were interviewed in an attempt to discern any patterns in their demography, life history and psychology (Jäger et al. 1981). Like other attempts before and since, no single defining characteristic was identified, and indeed, the study concluded that terrorists are characterised by either of two very different personality traits: extroverted/stimulus-seeking on the one hand and hostile/suspicious on the other. The failure of the investigations to yield defining characteristics for terrorist offenders was in itself an important finding, and the systematic interviews undertaken with known terrorists provide some of the first glimpses about what might be learned by asking questions directly of the terrorists themselves. The 1970s had also been a particularly active period for terrorism in the United States. Between 1968 and 1972, there were 124 hijackings of aircraft in the United States. Although the probability that an aircraft would 180 160 140 120 100 80 60 40 20

Fig. 5.1  Terrorism in Germany (West Germany 1970–1990 and Germany 1991–2016)

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be hijacked on any given day was still very small (0.000007), this was still 30 times greater than the probability that an individual would be murdered on a given day (0.0000002) (Landes 1978, p. 1). And this at a time when crime in American cities was very high. Hubbard (1971) undertook a series of unstructured interviews with incarcerated hijackers in order to explore the psychological profiles, if any, that they held in common. Hubbard concluded, unlike Rasch in his study of the German terrorists, that the hijackers were indeed psychologically ill. Importantly, however, none of the offenders that Hubbard interviewed held any political ideology. In this respect, the hijackers interviewed by Hubbard resemble the type of individuals that Rasch calls ‘imitators’. These are individuals who hold no genuine political ideas, who may indeed suffer from some form of psychological illness, and whose ‘terrorist’ actions are clumsy imitations of the (rational) politically motivated terrorists (Rasch 1979, p. 80). Interest in hearing from the terrorists themselves (or from those who have talked with them) oscillates with the nature of the terrorism context and the degree to which the existing body of knowledge satisfies or fails to satisfy the demand for explanation. During the 1970s, terrorism studies itself was in its infancy3 and many of the contributions that the field would receive from other disciplines such as economics, psychology and criminology still lay in the future. Nevertheless, by the end of the 1970s a fairly persuasive theme dominated terrorism research. This was ‘terrorism as theatre’ (Jenkins 1975, 1981; Weimann 1983, 1987, 2005; Weimann and Winn 1994; Wilkinson 1997).4 This cast terrorism as a symbolic act of communication with its explanation to be found in symbolic communication theory (Weimann 2005), a characterisation that, not surprisingly, fit the most highly publicised acts of terrorism very well. The kidnapping of Israeli athletes at the 1972 Munich Olympics by the Palestinian terrorist group Black September was undertaken with full knowledge that most of the major news networks would be represented (Ross 2007, p. 216).5 As one would expect, the attack received a tremendous amount of media attention, and who could doubt that this was indeed the underlying motivation? Media attention is certainly a primary ‘payoff’ to terrorist activity but many other questions still remained to be answered. For example, what sort of person wants the publicity associated with being a terrorist? Who would go to such lengths? And how does the lure of media attention shape terrorist choice?6 Following 1980,7 in the search for deeper understanding of terrorist behaviour, decision-making and motivations, terrorism studies

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began a period of continuous expansion that shows no signs of slowing down. A number of new disciplines ventured into terrorism for the first time. Each new perspective emphasised some aspects of terrorism and pushed others into the background. All the while, the terrorism context itself evolved. The left-wing revolutionary groups of the 1970s gradually faded away as Islamic terrorism became a more pressing concern, though a distant one until the 9/11 attacks. The early 2000s brought a new wave of research to help understand and explain the unique characteristics of the ‘new’ terrorism.8 The twenty-first century has witnessed the rise of the lone wolf (Spaaij 2010, 2012; Phillips 2011, 2013; Gill 2015; Simon 2016; Hamm and Spaaij 2017), the emergence and defeat of Islamic State (ISIS) (Warrick 2016; Cockburn 2016) and the growing recognition of the threat posed by both radical Islam and extreme right-wing movements in various parts of the world. These changes, both in the terrorism context and in the scientific study of its elements, are the backdrop against which there has been an increasing interest in what terrorists have to say for themselves.

2   The Fourth Wave If it is true that terrorism comes in waves and that a fourth wave began in 1979, then the beginning of the fourth wave of terrorism also marks the emergence of terrorism studies as a distinct field of inquiry within the social sciences. According to Rapoport (2001), the third wave of terrorism emerged during the Vietnam War when the success of Vietcong tactics suggested the possibility of combatting the resources of Western governments. The third wave was characterised by a revolutionary ethos, and terrorist groups held fast to the belief that they were vanguards for the masses of the third world (Rapoport 2001, p. 421). The major events of third-wave terrorism usually involved hostage-taking, hijacking and kidnapping of prominent persons. For example, the Symbionese Liberation Army (SLA), a domestic American terrorist group, kidnapped heiress Patty Hearst with the objective of using her family’s political connections to arrange the release of two imprisoned SLA members (a demand that was not met). Another prominent kidnapping was that of Aldo Moro, former Italian Prime Minister, who was kidnapped by the Italian Red Brigades and later killed when the demands to release prisoners was refused. The Red Army Faction (RAF), the Palestinian Liberation Organisation (PLO), the Irish Republican Army (IRA) and the Basque

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Homeland and Liberty (ETA) were all prominent third-wave groups (Weinberg et al. 2004). Towards the end of the third wave, as mentioned previously, terrorism studies began to emerge as a distinct field of study. The media-oriented nature of terrorism, especially during the 1970s, was a dominant theme in the emerging literature alongside an interest the psychology of terrorists. According to Weinberg et al. (2004, p. 785), ‘Third wave terrorism also engendered widespread discussion of such phenomena as the “Stockholm syndrome”, brain-washing, the process of hostage negotiations, and the role of the mass media in reporting the events which came to be labelled terrorism. In short, the late 1960s through the early 1980s was a time during which terrorism seemed to elicit the discussion of psychological issues’. We have seen that on a few occasions during the 1970s researchers decided to delve deeper into these psychological issues by interviewing terrorists directly. From a purely psychological or psychiatric point of view, however, the terrorists exhibited few consistently common traits or demographic characteristics and no signs of psychopathy (Crenshaw 1981, 1986; Victoroff 2005). By this time, terrorism had entered a fourth wave and the psychology of terrorists was put to one side, though not discarded, as researchers explored terrorist behaviour from new perspectives. The Islamic revolution in Iran and the Soviet defeat in Afghanistan ushered in the fourth wave, finding its foundations in religion as revolutionary movements faced widespread defeat (Rapoport 2001). The hijackings that had become a popular choice of action during the third wave were surpassed by suicide bombings, a type of action with murkier motivations and a demanding wholly new analysis. Does publicity matter when you are dead? If the hijackers, bombers, bank robbers and assassins of the 1970s were not psychopathic, perhaps the suicide bombers of the 1980s were? The objective of terrorist groups to inflict as many casualties as possible on their victims also seemed much different to what had happened before. Furthermore, in at least one case, the new tactics appeared to work. Hezbollah’s suicide bombing campaign in the period 1983–1985, forced the withdrawal of America, France and Israel from parts of Lebanon (Victoroff 2005, p.  15). Against this fairly rapid evolution in terrorism, research in terrorism studies was quickly directed to the most pressing problems. Like always, however, there were natural limits to this application stemming from the regular pace of developments in the underlying social sciences.

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Perhaps there is no better illustration of this than the economic analysis of terrorism. In the 1940s, game theory was one of the brightest of the new fields of mathematics and quickly became a hallmark of mid-­twentieth-­ century economics. Von Neumann and Morgenstern’s (1944) monumental Theory of Games and Economic Behaviour marks the real beginning, though there had been prior contributions here and there (including by von Neumann himself in 1928). Nash’s (1950, 1951) equilibrium concept and non-cooperative game structure added an important extension. Relatively quickly, in fact, almost immediately, game theory was put to use in analysing nuclear defence and offense strategies as the Cold War began to heat up. Much of this work was undertaken at the RAND Corporation. Soon after, a specialised literature dealing with conflict and conflict resolution in game theoretical contexts emerged. In 1960, Thomas C. Schelling published his The Strategy of Conflict. Gradually, an economics of defence emerged too. In 1970, McKean and Hitch published their The Economics of Defence in the Nuclear Age. Building on developments in game theory and on Becker’s (1968) theoretical analysis of criminal behaviour, the first papers specifically applying economic analysis to terrorism emerged towards the end of the 1970s and at the beginning of the 1980s. Once all the pieces were in place, ten years passed before a specialised economic analysis of terrorism can be identified in the literature. The Cold War had drawn most of the analytical focus. For example, in an early paper on the economics of defence and alliances, Olson and Zeckhauser (1966) refer to NATO 47 times, Soviet Russia several times and terrorism not at all. When it did finally appear, most of the analysis was suited only to a small fraction of the terrorist incidences that were being experienced in the West. If we consider, for example, Sandler et al.’s (1983) theoretical analysis, it is almost solely focussed on negotiation models that revolve around a hostage-taking incident. The bombings and assassinations, which in more than 90 per cent of cases involved no issuance of demands (Sander et al. 1983, p. 37), fall outside the scope of the negotiation models. Yet, Hezbollah was at the time waging a successful suicide bombing campaign against American forces in Lebanon and bombings and armed assaults had long been by far the most prevalent attack methods, if not the most spectacular (Fig. 5.2). Bargaining models dominated economic analysis of terrorism throughout the 1980s (Corsi 1981; Sandler and Scott 1987; Atkinson et al. 1987; Lapan and Sandler 1988; Sandler and Lapan 1988). This was both a reflection of the time it takes a new field of study (the economic analysis of terrorism) within social science to develop and the

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800 700 600 500 400 300 200 100 0 Hostage-Taking and Hijacking

Armed Assault and Bombing

Fig. 5.2  Terrorism in Western Europe and North America 1970–1990: Incidents per year

general themes and trends of terrorism studies in which a conventional wisdom has been that terrorists want something and can, therefore, be bargained with. By the 1990s, Defence Economics, a journal dedicated to the economic analysis of defence, including terrorism, had been established and a new generation of analytical models gradually began to emerge. Despite the controversy attending it, the rational choice model was applied by economists to an expanding range of terrorist actions.9 Analysis was still hemmed in by the orthodoxy of both economics and terrorism studies. Models of rational choice still identified ‘political influence’ as the most important payoff to terrorism and the models were still based on an assumption that ‘terrorism’ and ‘legitimate action’ are substitutes and that terrorists would willingly switch from one to the other if the incentives were different (Frey and Luechinger 2003). Phillips’ (2009) paper, in which the choices of terrorists are analysed under the assumption that the operational objective of terrorists is the infliction of injuries and fatalities, was met with some scepticism that terrorists really wanted to inflict harm. Interviews with third-­ wave groups that had survived well past 1979, particularly members of the IRA and Provisional IRA (PIRA), might have supported this scepticism to some degree (Horgan and Taylor 1999, 2003), but the terrorism context had changed significantly during this period. If the actions of fourth wave

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terrorist groups for the preceding two or three decades were not enough evidence, the words of these terrorists themselves can testify to the infliction of fatalities as a primary operational objective of terrorism. Below are two excerpts from Post, Sprinzak and Denny’s (2003) series of interviews with 35 Middle Eastern terrorists: The more an attack hurts the enemy, the more important it is. That is the measure. The mass killings, especially martyrdom operations, were the biggest threat to the Israeli public and so most effort was devoted to these. The extent of the damage and the number of casualties are of primary importance. The various armed actions (stabbing, collaborators, martyrdom operations, attacks on Israeli soldiers) all had different ratings. An armed action that caused casualties was rated highly and seen to be of great importance. An armed action without casualties was not rated. No distinction was made between armed actions on soldiers or on civilians; the main thing was the amount of blood. The aim was to cause as much carnage as possible.

Post et al. (2003), unlike the earlier psychiatric interviews with imprisoned terrorists, were interested in the pathways that led individuals to radicalisation, extremism, terrorism and a willingness to kill.10 This is indicative of a change in both our understanding of terrorism and a change in the nature of terrorism. The turn towards more violent extremism was not seriously entertained to be the result of psychopathy or psychopathology. Although Ariel Merari’s (Merari 2010; Merari et al. 2010a, b) interviews with failed suicide bombers led him to conclude that these individuals often suffer from serious depression, this finding has been challenged by Brym and Araj (2012), who conducted interviews with immediate family members and close friends of Palestinian suicide bombers. As a result of their investigation, Brym and Araj (2012, p. 432) recommend focusing on the political and social roots of suicide bombing rather than on its psychological roots. Even suicide bombing came to be understood as having a ‘strategic logic’ (Pape 2003).

3   Post 9/11 and the Surge of Interest in Terrorist Interviews In the 1970s, in Western Europe and North America, 2919 people were killed in 6263 terrorist attacks. In the 1980s, 2664 were killed in 5325 attacks. There was, then, an 8.70 per cent increase in lethality per attack

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during the 1980s. After rising in the 1980s, lethality declined considerably during the 1990s, when there were 4632 attacks in Western Europe and North America that killed 1509 people. In the 2000s, the data are impacted by 9/11. Although there were ‘just’ 1669 terrorist attacks, 3500 people were killed. This represents a more than 300 per cent increase in lethality per attack compared to the 1980s and demonstrates the impact that the single devastating attack on September 11 had on the historical record of terrorism. Between 2010 and 2016, there were 1765 attacks that killed 767 people. This represents a decline in lethality per attack to just below 1970s levels but still above the 1990s level. In the West, terrorism remains, as it has been for a long time, a constant a low-level threat from the perspective of any individual citizen. This stability over time is contrasted with the rapid increase in published terrorism studies since the turn of the century. The number of papers published each year on the topic of terrorism increased fourfold after 2001, from about 100 per year to 400 (Miller and Mills 2009). To place this in perspective, however, it is important to recognise that there was an explosion in publication across all areas in the first decade of the twenty-first century. According to Scimago’s Journal and Country Rank (2018), the number of papers published in the United States (all fields) in the year 2000 was just over 300,000. By 2010, more than 500,000 papers per year were being published. The rise of open-access publishing contributed to the increasing volume and the rising tide of publication has been observed in most fields. Terrorism studies could have naturally expected some increase from this system-wide trend in publishing. But it is true that the 9/11 attacks attracted new researchers to the field and led to an increase in the volume of terrorism research. For example, the Journal of Conflict Resolution published 29 articles on terrorism between 1980 and 2008. Only five of these were published before 2001. This is a trend that is mirrored across a number of the major political science journals (Young and Findley 2011, p. 413). Although this increase in volume might have resulted in some short-­ term decline in the quality of scholarship, especially when researchers whose expertise resided in a different field decided to write about a topical problem, contemporary terrorism studies is far richer than it was two decades ago. There are more published papers to draw on and the increasing interest in the field has attracted research into niche problems that might not have seen the light of day during the 1990s. There is also more volume in each of the underlying fields. For example, economic analysis

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was once focused almost entirely on game theoretical analysis of negotiation scenarios and time-series data analysis of incidents. Now one can find economic analysis of terrorist choice in which important developments in decision theory are used to explore such problems as the choice of attack method when, among other things, a terrorist seeks to equal or surpass a predecessor (Phillips and Pohl 2014, 2017; Azam and Ferrero 2017). Similarly, in criminology there has been such an increase of interest in terrorism research that terrorism studies itself might be said to be undergoing a criminological ‘turn’ (LaFree and Dugan 2004; Rausch and LaFree 2007; Freilich and LaFree 2015). Even the budding field of investigative psychology has directed some attention to terrorism (Canter and Youngs 2009). Despite this growth and expansion, some researchers have been somewhat pessimistic. For example, Sageman (2014) laments the ‘stagnation of terrorism research’ despite ‘thousands of new researchers’ being attracted to the field. Sageman’s arguments are certainly debatable. He only addresses one particular aspect of terrorism research: why does someone turn to political violence? And one might point out that he does not mention even once any research from either economics or criminology, which have real answers to this question (though not necessarily ‘the’ answer). More surprisingly, one of the most comprehensive reviews of the psychological literature (Victoroff 2005) is also overlooked, and although Jerrold Post’s work is mentioned, Post et al.’s (2003) interviews with terrorists is not. Schmid (2014), in his reply to Sageman’s ‘polemic’, launches a more detailed critique. Putting this to one side, Sageman’s main point is that intelligence agencies need to share information about terrorists with researchers so that they can better answer the question as to why someone turns to political violence. If this was a somewhat roundabout way of saying that asking terrorists themselves about their motivations might turn up the ‘answers’ for which we seek, then this was already well and truly a burgeoning enterprise by the time Sageman’s paper was published. Harris et al. (2016) realised that the growth in studies relying on interviews with terrorists or violent extremists had been so rapid, in fact, that there was a very real need to take stock of the methodologies underlying those studies with a view to ensuring the rigour of this type of work. As part of the background to their discussion, Harris et al. (2016) identified 48 articles whose findings relied on interviews with terrorists. Only a handful of these had been published before 1999. The reported results contain a lot of information about the thought processes and emotions

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that extremists attest to having experienced, including their reasons for turning to political violence and, later, turning away from it. For example, in their overview article, Webber and Kruglanski (2018) note, ‘Individuals are motivated to join terror organisations as a mechanism to gain feelings of personal significance. Should there come a time in their tenure when the organisation no longer satisfies this need, or the need could be better satisfied through alternative sources, this should demotivate radicalisation’. They go on to cite several studies in which violent extremists from ISIS, ETA and Far Right movements in Germany all state in interviews with researchers that extremism was boring, not fulfilling, riddled with hypocrisy or simply a waste of time (Speckhard and Akhmedova 2005; Atran 2010; Reinares 2011; Barrelle 2015; Neumann 2015; Speckhard & Yayla 2016). In short, they joined to find or enhance their identities and their lives and found the experience dissatisfying. Of course, as Harris et al. (2016) highlight, we must be circumspect in interpreting these results because methodological transparency is sometimes lacking. The same calls for methodological clarity have been made by Horgan (2012). Khalil (2017) argues that some interviewers accept what interviewees say uncritically. Terrorists might also be liars.11 One could ask what they would have to gain from lying to a researcher but this implies that lying always needs some plausible motive. In his long-running investigations into violent offender behaviour, Raine (2013, p.  172) reports the apparently unmotivated deception that subjects exhibit: For example, one day our research assistant was struck by the fact that a participant walked on his toes. Upon questioning, our participant told a detailed and convincing story of how he was in a motorbike accident resulting in damage to his heels. The very next day, he was being assessed by a different research assistant on a different floor of our building and he walked perfectly normally. The con only came to light when our research assistants traded notes. A typical pathological lie: deception without any obvious gain or motivation.

More likely perhaps, is that interviewees will be unable to trace their decision processes. Even experts have difficulty tracing the cues that led them to particular judgements (Kahneman and Klein 2009). This raises one of the more potentially counter-productive outcomes of studies based on interviews with terrorists. That is the tendency to overlook key theoretical insights (Khalil 2017). For example, in their analysis of what terrorists

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have said in autobiographies or manifestos, Gill et al. (2018, p. 7) quote the following excerpt from Ann Hansen’s12 memoir, Direct Action: A steady diet of small illegal activities had boosted my confidence in our abilities to get away with things. I no longer imagined a cop hiding behind every obstacle and actually found myself feeling quite relaxed out on a mission. Still a certain level of fear is a good thing in these matters—it keeps a healthy flow of adrenalin coursing through the bloodstream, which tends to heighten awareness. I think I had finally reached this healthy medium.

Gill et  al. (2018, p.  7) conclude from this that prior success decreases averseness to risk. While such a conclusion might appear to be a fair one to reach, it is a naïve one in the sense that it is detached from the theoretical frameworks developed in economics, behavioural economics and psychology for decision-making under risk. There are two different types of risk aversion, relative and absolute, both of which can be constant, decreasing or increasing. Is the decreased averseness to risk inferred from the Hansen quote a decrease in relative or absolute risk aversion? We would only expect one of these types of risk aversion to be decreasing and even then, the matter is not completely clear-cut. In orthodox economic theory, decreasing absolute risk aversion (DARA) is an intuitive and acceptable assumption alongside constant relative risk aversion (CRRA).13 This is not the only subtlety. As gains accumulate, DARA implies that the decision-­maker will increase his or her absolute resource allocation, including time, to riskier prospects (e.g., to terrorist actions with more variable outcomes, like bombing, vis-à-vis actions with less variable outcomes, like assassination). However, as gains accumulate, the decision-maker also faces a greater overall risk. A failed action can undo the gains that have been hard earned. This will tend to lead to a lower allocation of resources to riskier prospects. There are, then, two effects, not one. Behavioural economics sheds some more light on this particular problem. In behavioural decision theory, as the decision-maker experiences gains and accumulates payoffs, he or she becomes more risk averse in order to protect and consolidate those gains. By contrast, decision-makers who experience losses exhibit risk-seeking behaviour in order to recoup those losses. Risk aversion, not risk seeking, is associated with gains. This is a core feature of Kahneman and Tversky’s (1979) prospect theory. This example illustrates how much deeper the conclusions that are drawn from interviews with terrorists or other primary sources that record their

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thoughts can be when placed in the context of the available theoretical frameworks. Needless to say, the precision and rigour is also improved and safeguarded by theory. Ultimately, though, interviews without theoretical frameworks are merely interesting, not informative, and can be misleading even when the terrorist’s account is true and honest.

4   Concluding Remarks We have to be careful in writing about terrorism not to downplay or exaggerate the threat. Western countries in the twenty-first century do not face an unprecedented terrorism crisis. In Western Europe and North America, the number of attacks and the lethality per attack are lower now than they were in the 1970s, though not as low as they were during the 1990s. The fourth wave terrorist groups have different ideologies than the third-wave groups, and the tactics that they use have evolved, but so too have police practices, security and intelligence capability. Perhaps, the one thing that distinguishes the contemporary terrorism context from all others is the knowledge that something like 9/11 can be accomplished, that it is possible, and that in all likelihood some terrorist group somewhere would like to replicate an attack of that scale if only they could. As a result of possessing this knowledge, though, we are in a much better position to prevent it. Notwithstanding the possibility of another attack on such a scale, it is ‘mundane’ terrorism that is the lingering problem that society continues to face. On this front, the growth in terrorism studies since the turn of the century has provided a collection of theoretical frameworks and empirical findings that have allowed us to develop much deeper narratives for terrorist behaviour than was possible before. The missing, though rapidly appearing, piece of the puzzle is the connection between these frameworks and empirical findings and first-hand narratives, statements, stories, testimonies and autobiographical material from the terrorists, extremists and violent offenders. Viewed through the lens of the newly developed theoretical frameworks, what terrorists have to say can be placed in the context of the existing narratives that have already been built and, in the process, enhance those narratives. Furthermore, and just as importantly, the theoretical frameworks work as filters of what terrorists say. Statements that are at odds with theories that have found empirical support in other contexts can be questioned or researched in more depth, and nuances, like the subtleties of the risk aversion concept, can help us draw more nuanced

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inferences from the terrorists’ accounts. We must be cautious not to overvalue what terrorists say. Nevertheless, a combination of theory, empirical research and field research that documents the results of interviews with terrorists is important to the ongoing development of terrorism studies.

Notes 1. The RAF emerged from the student movements of the late 1960s. The group was active in Germany until at least 1992 and was only formally dissolved in 1998. According to Melzer (2009, p. 55), ‘The number of active members in the RAF during the 1970s remained small; they lived underground and operated in individual cells responsible for separate political actions. The RAF bombed US military facilities, kidnapped and assassinated influential businessmen and state representatives, robbed banks and worked with the militant wing of the Palestinian Liberation Organization (PLO)’. A popular history of the RAF can be found in Aust (2008). 2. All data sourced from the Global Terrorism Database (GTD) unless otherwise noted. 3. The first course on terrorism to be offered at an American university was developed by David Rapoport in 1970 (Rapoport 2001). Rapoport also founded one of the major journals in the field, Terrorism and Political Violence, in 1989. The journal Studies in Conflict and Terrorism had been established much earlier, in 1977. 4. According to Delli Carpini and Williams (1987, p.  47), not one month passed between 1969 and 1980 without the major news networks devoting at least one story to the topic of international terrorism. Also see Crelinsten (1997). 5. According to Wilkinson (1997, p. 52), the Munich Olympics action was broadcast to a worldwide audience of more than half a billion people. 6. This matter has only been explored recently. See Pohl (2015, 2017). In older studies, if media attention were considered the primary payoff to terrorism, then it was implied that terrorists would select the single action designed to maximise it. However, terrorist groups do not always choose in this way and often engage in a variety of different actions. Pohl (2015, 2017) explains how such choices are consistent with a desire to maximise media attention. 7. The number of articles published in ‘terrorism studies’ increased from essentially 0 to around 100 per year during the 1970s. This level was maintained for much of the next 20 years before another exponential increase during the early 2000s took the number of articles per year to more than 400 (Miller and Mills 2009, p. 416).

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8. According to Kurtulus (2011, p. 477), the ‘new terrorism’ refers to a qualitative change that took place in the nature of terrorism some time during the 1990s. The term was used, for example, by Laqueur (1998, 1999) in the late 1990s, though he had earlier used the label ‘post-modern terrorism’ in the same sense (Laqueur 1996). Also see Duyvesteyn (2004). 9. Rationality in economics has many different meanings but ultimately means only that action is purposeful. It does not mean that calculation always underlies choice (rather than emotion) and it does not imply that calculation is always perfect. What the orthodox model of decision-making under risk and uncertainty, the expected utility theory, does do is provide a clear benchmark for optimal choice. If the objective of an agent is to inflict harm, who could argue that the optimal, most damaging, action or combinations is not worth knowing? 10. Pathways to radicalisation are also studied by Horgan (2008). 11. People who interview criminal suspects are given special training at detecting deceit. Traditionally, this training focused on visible cues. More recently, training has focused on techniques designed to elicit cues to deception. Vrij et  al. (2013) discuss these techniques and their specific application to terrorist suspects. 12. Ann Hansen was a member of the Canadian anarchist guerrilla group called Direct Action. The group is known for its 1982 bombing of Litton Industries, an arms component manufacturer in Toronto. Hansen served eight years in prison. Her memoir was published in 2001 (Hansen 2001). 13. It is also possible, for example, that the risk aversion coefficients are very high in the early stages of a terrorist group’s life cycle. As the group accumulates resources, its risk aversion starts to decline. This decreasing risk aversion is not so much a function of successes as a function of maturity and resource acquisition. This is analogous to households that initially operate at subsistence and gradually accumulate wealth (see Ogaki and Zhang 2001).

References Atkinson, S.E., Sandler, T., & Tschirhart, J.T. 1987. Terrorism in a Bargaining Framework. Journal of Law and Economics, 30, 1–21. Atran, S. 2010. Talking to the Enemy: Faith, Brotherhood and the (Un) Making of Terrorists. Harper Collins, New York. Aust, S. 2008. The Baader-Meinhof Group: The Inside Story of a Phenomenon. The Bodley Head, London. Azam, Jean-Paul & Ferrero, M. 2017. Jihad Against Palestinians? The Herostratos Syndrome and the Paradox of Targeting European Jews. Defence and Peace Economics, Forthcoming.

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Barrelle, K. 2015. Pro-Integration: Disengagement From and Life After Extremism. Behavioural Sciences of Terrorism and Political Aggression, 7, 129–142. Becker, G. 1968. Crime and Punishment: An Economic Approach. Journal of Political Economy, 76, 169–217. Brym, R.J. & Araj, B. 2012. Are Suicide Bombers Suicidal? Studies in Conflict and Terrorism, 35, 432–443. Canter, D. & Youngs, D. 2009. Investigative Psychology: Offender Profiling and the Analysis of Criminal Action. John Wiley and Sons, Chichester. Cockburn, P. 2016. The Age of Jihad: Islamic State and the Great War for the Middle East. Verso, London. Corsi, J.R. 1981. Terrorism as a Desperate Game: Fear, Bargaining and Communication in the Terrorist Event. Journal of Conflict Resolution, 25, 47–85. Crelinsten, R.D. 1997. Television and Terrorism: Implications for Crisis Management and Policy-Making. Terrorism and Political Violence, 9, 8–3. Crenshaw, M. 1981. The Causes of Terrorism. Comparative Politics, 13, 379–99. Crenshaw, M. 1986. The Psychology of Political Terrorism. In Political Psychology, Edited by M.G. Hermann, 379–413, Jossey-Bass, San Francisco. Delli Carpini, M.X. & Williams, B.A. 1987. Television and Terrorism: Patterns of Presentation and Occurrence. Western Political Quarterly, 40, 45–64. Duyvesteyn, I. 2004. How New Is the New Terrorism? Studies in Conflict & Terrorism, 27, 439–454. Freilich, J.D. & LaFree, G. 2015. Criminology Theory and Terrorism: Introduction to the Special Issue. Terrorism and Political Violence, 27, 1–8 Frey, B.S. & Luechinger, S. 2003. How to Fight Terrorism: Alternatives to Deterrence. Defence and Peace Economics, 14, 237–249. Gill, P. 2015. Lone Actor Terrorists: A Behavioural Analysis. Routledge, Abingdon. Gill, P., Marchment, Z., Corner, E. & Bouhana, N. 2018. Terrorist Decision-­ Making in the Context of Risk, Attack Planning and Attack Commission. Studies in Conflict and Terrorism, Forthcoming. Hamm, M.S. & Spaaij, R. 2017. The Age of Lone Wolf Terrorism. Columbia University Press, New York. Hansen, A. 2001. Direct Action: Memoirs of an Urban Guerrilla. Between the Lines, Toronto. Harris, D.J., Simi, P. & Ligon, G. 2016. Reporting Practices of Journal Articles That Include Interviews with Extremists. Studies in Conflict and Terrorism, 39, 602–616. Horgan, J. 2008. From Profiles to Pathways and Roots to Routes: Perspectives from Psychology on Radicalization into Terrorism. The Annals of the American Academy of Political and Social Science, 618, 80–94.

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Merari, A., Fiugel, J., Ganor, B., Lavie, E., Tzoreff, Y. & Livne, A. 2010b. Making Palestinian ‘Martyrdom Operations’/‘Suicide Attacks’: Interviews with Would-Be Perpetrators and Organisers. Terrorism and Political Violence, 22, 102–119. Merari, A. 2010. Driven to Death. Oxford University Press, Oxford. Miller, D. & Mills, T. 2009. The Terror Experts and the Mainstream Media: The Expert Nexus and its Dominance in the News Media. Critical Studies on Terrorism, 2, 414–437. Nash, J. 1950. Equilibrium Points in n-Person Games. Proceedings of the National Academy of Sciences of the United States of America, 36, 48–49. Nash, J. 1951. Non-Cooperative Games. The Annals of Mathematics, 54, 286–295. Neumann, John von, 1928. Zur Theorie der Gesellschaftsspiele. Mathematische Annalen, 100, 295–320. Neumann, John von & Morgenstern, O. 1944. Theory of Games and Economic Behaviour. Princeton University Press, Princeton, NJ. Neumann, P.R. 2015. Victims, Perpetrators, Assets: The Narratives for Islamic State Defectors. The International Centre for the Study of Radicalisation and Political Violence. Ogaki, M & Zhang, Q. 2001. Decreasing Relative Risk Aversion and Tests of Risk Sharing. Econometrica, 69, 516–526. Olson, M. & Zeckhauser, R. 1966. An Economic Theory of Alliances. Review of Economics and Statistics, 48, 266–279. Pape, R.A. 2003. The Strategic Logic of Terrorism. American Political Science Review, 97, 343–361. Phillips, P.J. 2009. Applying Portfolio Theory to the Analysis of Terrorism: Computing the Set of Attack Method Combinations From Which the Rational Terrorist Group will Choose in Order to Maximise Injuries and Fatalities. Defence and Peace Economics, 20, 193–213. Phillips, P.J. 2011. Lone Wolf Terrorism. Peace Economics, Peace Science and Public Policy, 17, Article 1. Phillips, P.J. 2013. In Pursuit of the Lone Wolf Terrorist. Nova Science, New York, New York. Phillips, P.J. & Pohl, G. 2014. Prospect Theory and Terrorist Choice. Journal of Applied Economics, 17, 139–160. Phillips, P.J. & Pohl, G. 2017. Terrorist Choice: A Stochastic Dominance and Prospect Theory Analysis. Defence and Peace Economics, 28, 150–164. Pohl, G. 2015. Media and Terrorist Choice: A Risk-Reward Analysis. Journal of Applied Security Research, 10, 60–76. Pohl, G. 2017. Terrorist Choice and the Media. PhD Dissertation, University of Southern Queensland, Unpublished. Post, J.M., Sprinzak, E. & Denny, L.M. 2003. The Terrorists in Their Own Words. Terrorism and Political Violence, 15, 171–184.

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PART II

Tensions in East Asia

CHAPTER 6

The North Korean Crisis: Proliferation of Nuclear Weapons and the Threat of Nuclear War Richard W. Mansbach and Kirsten L. Taylor

1   Introduction In November 2017, after Pyongyang had threatened to launch missiles toward Guam, President Donald Trump visited Asia to marshal support for additional sanctions against North Korea (Democratic People’s Republic of Korea [DPRK]). It was already becoming clear that U.S. intelligence agencies had grossly underestimated how rapidly the DPRK would acquire the capability to attack the United States with nuclear weapons. Many observers across the United States and the world began to discuss the very real possibility of a nuclear exchange out of concern that Trump, who is unpredictable, holds the U.S. nuclear codes and that, as U.S. president, is unchecked in his power to initiate a nuclear exchange. R. W. Mansbach Department of Political Science, Iowa State University, Ames, IA, USA e-mail: [email protected] K. L. Taylor (*) Department of Government and International Studies, Berry College, Mount Berry, GA, USA e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_6

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North Korean officials have provoked Trump with personal insults, declaring that his Asia visit was “nothing but a business trip by a warmonger to enrich the monopolies of the US defense industry.” Trump, they said, had “laid bare his true nature as destroyer of the world peace and stability.” North Korean leader Kim Jong-un himself described Trump as a “mentally deranged dotard” (old and possibly senile), having a month earlier called him “a frightened dog” and “a gangster fond of playing with fire.”1 While in South Korea, Trump directed a portion of his speech before the National Assembly to Kim Jong-un: “The weapons you are acquiring are not making you safer, they are putting your regime in grave danger. Every step you take down this dark path increases the peril you face.”2 Later in the visit, the official newspaper of the DPRK communist party denounced the president for “[t]he worst crime for which he can never be pardoned,” having “dared [to] malignantly hurt the dignity of the supreme leadership.”3 After returning to the United States, Trump repeated his description of Kim as “Lil’ Rocket Man,” adding, “He is a sick puppy.”4 Such exchanges are hardly diplomatic. They reflect the reckless and unpredictable nature of two bellicose leaders who control weapons of mass destruction. They act as though the world were zero-sum and they view their relations as a game of chicken. Neither, the authors believe, want to initiate a nuclear war, as evidenced by a historic summit that took place in Singapore in June 2018, yet both have indicated from time to time that they are not unwilling to do so. Kim, for example, called Trump a “war maniac” who could be “tamed only with fire.” Trump, in turn, threatened to rain “fire and fury and frankly power, the likes of which this world has never seen before”5 on North Korea and asserted that “all options are on the table,”6 presumably including a U.S. preventive nuclear strike. This chapter focuses on the evolution of the dangerous crisis between North Korea and the United States and the sudden shift toward diplomacy in mid-2018. It begins by discussing the origins and evolution of Pyongyang’s nuclear arsenal and then turns to America’s efforts to denuclearize the Korean Peninsula by negotiations involving regional actors. It then examines how the issue affects key actors including South Korea, Russia, Japan, and, most importantly, China and their relations with North Korea and the United States. Finally, this chapter analyzes the alternative approaches available to Washington in dealing with the Korean problem and the prospects they offer as well as the dangers they entail.

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The Korean situation is extremely complicated, and the possibilities for escalation so diverse that Anthony Cordesman compares the situation to “a very complex game of “three-dimensional chess in terms of tic-tac-­ toe.”7 Few observers believe that North Korea would launch a first-strike nuclear attack on the United States because they think Pyongyang has developed nuclear weapons to preserve its current regime, which would be destroyed after such an attack. North Korea’s nuclear weapons exist to deter the United States.8 Additionally, Pyongyang wants to be recognized as a “nuclear power.” DPRK leaders may regard nuclear weapons as a source of prestige and international legitimacy, an instrument to coerce others,9 and most dangerously to reunite the two Koreas. In any event, mutual mistrust and misunderstanding arising from the undisciplined rhetoric of the leaders of both countries might create conditions that could escalate to a nuclear war.10 “We will use” military forces, “if we must,” declared Ambassador Nikki Haley in June 2017, but even if it were limited to a conventional war, as Secretary Mattis reminds us, such a conflict “would be probably the worst kind of fighting in most people’s lifetimes.”11 Even a conventional war would cause massive casualties during the first day. And after President Trump declared that “[m]ilitary solutions are now fully in place, locked and loaded,” one observer suggested that hundreds of thousands of South Koreans, many in the capital city of Seoul which is near the Demilitarized Zone (DMZ), “would die in the first few hours of combat … and if this war would escalate to the nuclear level, then you are looking at tens of millions of casualties.”12 Although America and its allies would triumph, it would be a “bloody, Pyrrhic victory,”13 especially if China or Russia became involved or if the combatants resort to weapons of mass destruction (WMD).

2   Going Rogue: Origins and Development of North Korea’s Nuclear Weapon’s Program The Korean War, which was fought between 1950 and 1953, ended in an armistice agreement, but no peace treaty. The end of the war was facilitated by President Dwight Eisenhower’s threat to use nuclear weapons, which, as Joseph Bermudez argues, had “a truly profound impact on the North Korean leadership’s thinking that cannot be overstated.”14 The Korean situation is thus among the last vestiges of the Cold War. The

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presence of 28,500 U.S. troops in South Korea under the flag of the United Nations (UN), which had authorized intervention to end North Korea’s invasion, bears witness to this. So do the annual joint military exercises of South Korea and the United States, which North Korea regards as a provocation and possible prelude to an invasion of the north. U.S. troops and their families still serve as a tripwire to deter North Korea. Kim Il-sung began seeking nuclear weapons after the Korean War, and Washington introduced U.S. nuclear weapons into South Korea at roughly the same time. During the 1950s, even as the DPRK laid the foundation of a nuclear scientific infrastructure by sending scientists to the Union of Soviet Socialist Republics (USSR), it massed forward-deployed troops and artillery, much of which is in hardened sites along the DMZ in range of Seoul. Pyongyang also developed a chemical industry to produce weapons to deter Washington, especially after America deployed tactical nuclear weapons in South Korea.15 In 1959 the USSR and North Korea signed a bilateral agreement on the peaceful use of nuclear energy, and Moscow helped North Korea build a nuclear research reactor. In 1962 the DPRK established two atomic energy research centers at Pakchon and Yongbyon, which produced medical and industrial isotopes.16 In 1974 North Korea joined the ­ International Atomic Energy Agency (IAEA), and in 1985 it joined the Nuclear Nonproliferation Treaty (NPT) because Moscow had demanded that Pyongyang do so as a condition for providing nuclear reactors for electricity. Bermudez contends that during the period between 1976 and 1989, the DPRK’s nuclear program “had transitioned to the production of weapons-grade plutonium and the design of a weapon” and “a rudimentary deterrence strategy had been developed that focused on the political and diplomatic utility of nuclear weapons rather than as tools to fight a war.”17 That transformation began in the 1970s with the support of Pakistan. That country became an important source of technological knowhow for North Korea, as did an international cartel to sell and buy other countries’ illegal nuclear technology, created by Abdul Qadeer Khan, the father of Pakistan’s nuclear weapons program. Pakistan also supplied centrifuges and drawings that aided Pyongyang to develop a capacity to produce enriched uranium by 2002. Pakistan in turn gained North Korean missile technology. North Korea’s nuclear program continued during the 1980s with relatively modest foreign assistance, and its effort focused on producing ­

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­ lutonium needed to fuel a nuclear device. Around 1990 U.S. satellite p imagery revealed that the DPRK was developing nuclear weapons, after which the IAEA carried out a number of unscheduled inspections that found evidence that North Korea had more plutonium than it had declared and the United States and South Korea resumed joint military exercises. In 1993 North Korea declared it would leave the NPT, citing the U.S.South Korean joint military exercises and IAEA pressure to conduct special inspections of suspected nuclear facilities. However, it continued to allow regular IAEA inspections and would not leave the NPT for another decade. Accusing the Clinton administration of appeasement, U.S. hardliners pressed for action to end North Korea’s nuclear program, but Kim Il-sung only agreed to halt the country’s nuclear development program after China informed him that it would not veto the economic sanctions Washington proposed to the Security Council. North Korea’s decision opened the possibility of direct negotiations with the United States.

3   The Contemporary North Korean Threat Bermudez argues that the North Korean strategy was further refined between 1989 and the early twenty-first century owing to America’s rapid victory over Iraq in the first Persian Gulf War, which led Pyongyang to conclude that chemical weapons18 alone would not deter the United States. Nuclear weapons were seen as crucial to credible and effective deterrence. Thus, the DPRK reorganized and upgraded its Ballistic Missile Training Guidance Bureau into the Strategic Forces Command, developed the Musudan intermediate-range missile and the KN-08 intercontinental ballistic missile (ICBM), expanded uranium enrichment and plutonium production, and conducted an increasingly frequent number of missile tests. These developments lead Bermudez to conclude that the DPRK was seeking to ensure deterrence by acquiring a credible assured retaliation capability.19 An alternative interpretation is that its nuclear capability is intended “to deny the US access to the region in support of its alliance commitments. By holding US cities hostage, the DPRK could work to impede the ability of the US to flow forces and materiel to critical nodes and bases in defense of South Korea or Japan.”20 A more frightening interpretation is that it is to “conduct preemptive strikes against the United States.”21 An additional question is whether the DPRK might resort to the use of tactical nuclear weapons in the event of a conventional war with South

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Korean and U.S. forces stationed there. The superiority of U.S. conventional naval and air strength as well as highly trained army units was ­exhibited in the two wars with Iraq, which reinforced the North Korean effort to acquire weapons of mass destruction. Kim Jong-un has sought to advance and diversify that capability by developing not only “powerful and sophisticated nuclear weapons,” but also smaller, more precise nuclear weapons.22 Although North Korean forward-deployed conventional forces could do fearful damage to Seoul, its own conventional forces depend upon obsolete aircraft and other arms, and Pyongyang would probably succumb to the superior South Korean and U.S. forces in a conventional war. North Korea has the world’s fourth largest armed forces, some 1.1 million or 5 percent of its population. Although North Korea remains among the world’s poorest countries, it spends about a quarter of its gross domestic product on its military forces. It also has significant cyberattack and cyber-­ theft capabilities, which can disguise its activities by using infrastructure in other countries, especially China.23 Cyber-weapons are part of North Korea’s asymmetric approach to countering conventional inferiority,24 along with WMD and as many as 200,000 Special Operations Forces.25 Under Kim Jong-il, the father of the country’s present leader, North Korea conducted its first nuclear weapons tests in 2006 and 2009. The pace of Pyongyang’s development of weapons of mass destruction has accelerated under Kim Jong-un and is considerably faster than U.S. authorities had predicted. “Fatty Kim the Third” (as many Chinese call him)26 assumed power in December 31, 2011; North Korea had conducted about 80 missile tests and four additional nuclear weapons tests by December 2017 (in February 2013, January and September 2016, and September 2017), the last of which was 17 times more powerful than the atomic bomb that the United States dropped on Hiroshima and may have been a hydrogen bomb small enough to be launched by a missile. Estimates of North Korea’s nuclear bombs and/or warheads vary significantly, but the number has increased rapidly during the past year. Pyongyang may have as many as 60 bombs made with enriched uranium or plutonium.27 The DPRK has also tested short-range, medium-range, intermediate-­ range, and intercontinental ballistic missiles28 as well as submarine-­ launched missiles.29 Although it remains uncertain at this chapter time whether the warheads of the long-range missiles can survive reentry, it is believed that North Korea has mastered the ability to miniaturize nuclear warheads although their potential payload remains unclear.30 The issue of

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reentry vehicle technology is viewed as crucial. “Re-entry is a question North Korea must solve to boost its negotiating leverage and for its military and technological purposes,” wrote a South Korean observer. “For North Korea, there is a big difference between entering negotiations with the United States after acquiring full ICBM capabilities and starting such talks without them.”31 Nevertheless, 2017 saw major and unexpected advances in the DPRK’s missile development. In 2017 Kim Jong-un tested six new missile systems, far more than his predecessors. “I’ll give credit where credit is due. That is impressive as hell,”32 argued one knowledgeable observer. “From the late 1980s until 2016, all we saw were variant of Soviet Scuds,” declared another analyst, “but North Korea’s missiles were now starting to look like modern missiles,” and two of the missiles tested in 2017—the KN-15s—used solid fuel, rather than liquid fuel. Solid fuel is more stable and may be stored in the missile, enabling the use of mobile launchers and allowing for faster launch times—characteristics that improve the survivability of North Korea’s arsenal and strain “the ability of missile defenses to get an early track on the missile.”33 “That’s where I think it’s really impressive—the innovation by necessity that they’ve had,” declared Vipin Narang. “It’s a country under sanctions. It’s a country under threat.” And, he added, “it suggests … they are willing to have higher tolerance for failure and for less reliability.”34 In July 2017 North Korea tested its first ICBM, raising the specter that it was approaching the point when it could launch a nuclear attack on the United States. U.S. officials concluded that the DPRK would have a “reliable, nuclear-capable ICBM” by 2018.35 In fact, the time remaining to prevent this development was probably even shorter. The new Hwasong-15 ICBM that was tested in November 2017 is believed to have a potential range of 8100 miles, which if fired on a flat trajectory could strike virtually all of the United States.36 Thereafter, America’s UN Ambassador Nikki Haley declared: “If war does come, it will be because of continued acts of aggression like we witnessed yesterday,” and “if war comes, make no mistake, the North Korean regime will be utterly destroyed.”37 China’s official newspaper responded: “The clock is ticking down to one of two choices: learning to live with the DPRK having nuclear weapons or triggering a tripwire to the worst-case scenario,”38 while suggesting that the test might have been in reaction to the Trump administration’s labeling North Korea a sponsor of state terrorism. It was also reported that the Central Intelligence Agency (CIA)

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had told President Trump in December 2017 that he had a “three-month window” before Pyongyang would be able to launch a nuclear attack against most U.S. cities.39

4   Living with a Nuclear Neighbor: The North Korea Policies of South Korea, Russia, Japan, and China Major actors besides the United States also have a stake in the North Korean problem, namely China, Russia, South Korea, and Japan. 4.1  China Among all of North Korea’s neighbors, China, as Pyongyang’s leading source of energy and food, is the most significant. North Korea’s nuclear advances are “a result of sustained Chinese support (or at least acquiescence),” and China “continues to shield the regime from international pressure and to provide it with support that enables its illegal and ­dangerous behavior.”40 China’s involvement is intended in large part to buttress a regime whose collapse would produce a massive refugee problem in China and, even worse, the possibility of a united Korea under American control. At a minimum, China would wish North Korea to remain a buffer between itself and foes to the south. China sees itself as a mediator, wishing stability in and denuclearization of the Korean Peninsula and seeking a peaceful resolution of the Korean issue. It claims to have become deeply involved in what was previously a bilateral North Korean-U.S. issue at Washington’s request in 2003. And Beijing denies that it has sufficient leverage to persuade the DPRK to dismantle its nuclear facilities or give up its nuclear aspirations.41 According to Fu Ying, a Chinese official who was directly involved in several of the negotiations, both the DPRK and the United States repeatedly violated or failed to implement the various agreements and commitments they have made. They are, she argues, trapped in a vicious cycle of rounds of North Korean violations of Security Council resolutions and U.S.-sponsored sanctions. In her view, North Korea embarked on its effort to acquire nuclear weapons and delivery systems in the 1990s after the collapse of its protector, the Soviet Union, and the expiration of their mutual alliance. Thereafter, Pyongyang had genuine concerns for its security owing to

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U.S.-South Korean joint military exercises and repeatedly but unsuccessfully sought direct negotiations with Washington42 and developed nuclear weapons to deter Washington. Fu Ying argues that China played a key role in establishing the Agreed Framework and the Six-Party talks (preceded by Three-Party talks among China, the United States, and the DPRK), which she believes on several occasions came close to resolving U.S.-North Korean differences, only to fail owing to actions by one or both of them and/or changes in their leaders.43 “It was clear,” she writes, “that both the U.S. and North Korea had entered the talks with dual tactics: the U.S. could talk but would attack if the talks did not work; North Korea wanted to talk and get results, but would otherwise develop nuclear weaponry to protect itself from a possible attack.”44 In fact, China plays a crucial role in sustaining the North Korean regime. It is the country’s leading trading partner, provides Pyongyang with scarce currency, employs North Korean laborers, and most importantly is a crucial source of energy exports. Beijing, therefore, plays a vital role in implementing economic sanctions and applying diplomatic pressure that might force North Korea to negotiate seriously about denuclearizing the Korean Peninsula. Persuading China to do so is a key objective of U.S. and South Korean foreign policy, and success in getting China to tighten the screws on North Korea by curbing the export of oil and consumer goods across their Tumen River border and ending their use of Chinese networks to prevent North Korean cyberattacks would mark a major improvement in U.S.-Chinese relations. Nevertheless, China’s position is complex. Former Secretary of State Henry Kissinger captured some of this complexity when he wrote: “Too much of the commentary … has concerned the deus ex machina of Chinese pressures on North Korea and complaints that Beijing has not implemented its full arsenal of possibilities. For China, the issue is not so much a negotiating position as concern about its consequences. If the Pyongyang regime is destabilized, the future of Northeast Asia would then have to be settled by deeply concerned parties amid a fast-moving crisis. They need to know the American attitude and clarify their own for that contingency. A sensitive, thoughtful dialogue with China, rather than peremptory demands, is essential.”45 In fact, Beijing has become increasingly angry about Kim Jong-un’s refusal to end Pyongyang’s nuclear weapons program and reckless provocations. Thus, China, which accounts for 90 percent of North Korea’s

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external trade,46 has banned imports of North Korean lead, coal, and iron. Although Chinese implementation of the ban remains unclear, Beijing claimed that imports from the DPRK fell to $880 million in the six months that ended in June 2017, down 13 percent from a year earlier, and its coal imports from North Korea were down 75 percent from 2016.47 In January 2018, China announced it would limit “oil supplies to North Korea and ban imports of North Korean steel.”48 According to one analyst, China’s President Xi Jinping “despises the North Korean regime” and Chinese military officers have suggested “that Beijing and Pyongyang may not take the same side in the event of a new Korean war.”49 Moreover, China has already planned to seal its border if needed to prevent refugees from flooding across and is prepared to intervene to prevent others from controlling the country in the event the regime collapsed, but “is no longer wedded to North Korea’s survival.”50 China’s Global Times also noted that Beijing may not honor the 1961 Sino-North Korean Treaty of Friendship, Cooperation, and Mutual Assistance, in which China promises to intervene if North Korea is attacked but not if that country initiates a war. A blunt 2017 editorial in China’s Global Times declared “China should … make clear that if North Korea launches missiles that threaten U.S. soil first and the U.S. retaliates, China will stay neutral.”51 Indeed, China’s impatience with North Korea’s truculence became more and more apparent. Thus, after intense U.S. and Chinese consultations, China and Russia voted in favor of the harshest set of sanctions against North Korea to date in December 2017. Although China repeatedly condemns North Korea’s WMD program and has voted in favor of Security Council sanction resolutions, there are numerous accounts of goods moving across the North Korean-Chinese border and of Chinese banks and companies evading the sanctions.52 China’s unwillingness (or inability) to exert real pressure on North Korea frustrates U.S. officials, but President Trump’s efforts to link U.S.-Chinese trade to Beijing’s willingness to implement sanctions on the DPRK are likely to be counterproductive, reducing U.S.-Chinese cooperation regarding North Korea and worsening U.S.-Chinese relations more generally. Instead, Washington should engage in intensive consultation with Beijing about the future of North Korea, especially about the possible collapse of the current regime or in the event of North Korean military action involving U.S. allies. The United States should assure China of its willingness to negotiate under suitable conditions and its willingness neither to seek control over a reunified Korea nor to move U.S. forces

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­ orthward for any length of time in the event of regime implosion in the n DPRK. Such commitments must be coordinated with South Korea.53 To this end, then-Secretary of State Tillerson revealed that Washington had assured China that if U.S. Special Forces had to enter North Korea to deactivate nuclear weapons in the event the Kim regime collapsed, those forces would withdraw as soon as possible. Tillerson declared that the United States and China “have had conversations about in the event that something happened—it could happen internal to North Korea; it might be nothing that we from the outside initiate—that if that unleashed some kind of instability, the most important thing to us would be securing those nuclear weapons they’ve already developed and ensuring that they—that nothing falls into the hands of people we would not want to have it.” He added that U.S. officials were not looking for a reason to invade North Korea, but “we have had conversations that if something happened and we had to go across a line, we have given the Chinese assurances we would go back and retreat back to the south of the 38th parallel” after North Korea’s WMD were neutralized.54 Consequently, Beijing would be able to control North Korea’s future. Despite Tillerson’s interest in working with China “to develop a plan for the safe disposition of North Korea’s nuclear weapons were the regime to collapse,”55 several changes in 2018, including Tillerson’s ouster, renewed Chinese-North Korean diplomacy, and a historic Trump-Kim summit meeting, suggest such discussion will not be forthcoming. 4.2  Russia Russia, one of the participants in earlier multilateral talks, also has a complicated relationship with North Korea. President Vladimir Putin, who seeks to revive Russian influence in Northeast Asia, has pursued an independent policy similar to China’s. Russia may have aided North Korea to avoid UN sanctions. It also employs and exploits large numbers of North Korean workers who remit earnings home, thereby providing the DPRK with a key source of scarce funding. Although Russia has repeatedly joined China in trying to moderate sanctions, it has also condemned the regime’s nuclear tests. Nevertheless, President Trump has tried to gain Russia’s assistance along with China’s to denuclearize North Korea. According to a Russian spokesperson, in a telephone conversation Trump initiated with Putin in mid-December 2017, the two presidents “discussed working together to

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resolve the very dangerous situation in North Korea,” and they “spoke in favor of establishing dialogue and setting up contacts with the North Korean side, and agreed to exchange information and initiatives” regarding these objectives. Putin, however, accused Washington of “aggravating the situation” with North Korea and said any nuclear attack on Pyongyang would be “catastrophic.”56 Trump declared that “the primary point” of his phone conversation with Putin on December 14, 2017, “was to talk about North Korea, because we would love to have his help on North Korea. We’re going to see what happens with North Korea. We have a lot of support,” Trump said. “China is helping. Russia is not helping. We’d like to have Russia’s help—very important.”57 Nevertheless, only a few days later, after North Korea’s missile tests heightened fears of impending war, Russia along with China supported the most recent sanctions against Pyongyang and activated three early-warning missile attack radars covering its southeastern frontiers, including its border with North Korea.58 4.3  South Korea and Japan South Korea has been a military ally of the United States since the Korean War, and both South Korea and Japan regard North Korean as a threatening foe. It would, therefore, make sense for the countries to collaborate with the United States to increase their security. This has, however, proved difficult owing to long-standing differences between Seoul and Tokyo. Japan is within easy range of existing North Korean nuclear-armed missiles. Like South Korea, it has a mutual defense treaty with the United States. In addition to the military threat it faces, it is concerned by North Korea’s abduction of Japanese citizens, ostensibly to train spies to infiltrate U.S. military bases in Japan, and Pyongyang’s refusal to return them. With U.S. encouragement, Prime Minister Shinzō Abe has been beefing up Japan’s Self-Defense Forces (SDF) in recent years. The defense budget that Abe has increased since taking office in 2012 will reach a record-high in 2019, with significant expenditures on missile defense. The SDF are limited by Article 9 of Japan’s postwar constitution that renounces the use of force, which Abe is committed to changing. He has already expanded the interpretation of Article 9 but seeks formally to revise it by a process requiring two-thirds majority support in both houses of parliament, followed by majority support in a public referendum. At present, it is unclear whether there is sufficient public support for such a referendum

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to pass, but ongoing threats on the part of North Korea could turn the tide in Japan. Complicating matters, both Koreas have grievances with Japan dating back to Tokyo’s occupation between 1905 and 1945 (and annexation after 1910) and the atrocities committed by Japan during World War II, in particular getting Japan to admit and apologize for its actions and reimburse surviving victims, especially those called “comfort women.” Although Japan and South Korea normalized diplomatic relations, the two countries also have territorial differences, notably over Tsushima Island in the Korean Strait and the Dokdo Islands in the Sea of Japan.59 However, after a four-year freeze in relations, former South Korean President Park Geun-hye met Prime Minister Abe in November 2015, and the two fostered a thaw in relations. Although Japanese leaders had previously apologized, Abe, who had long refused to admit Japanese atrocities, thereafter apologized for using “comfort women” during the war and agreed to provide reparations to survivors with Japanese government funds (unlike a previous fund) through a foundation administered by South Korea.60 According to one observer: “what’s just as important … is that Japan and South Korea face a common set of regional challenges, including the North Korean nuclear threat and an increasingly assertive China, and need to work together to respond to them. The question is whether South Korea, which has deepened relations with China under Park, also sees the benefit of closer ties with Japan. Seoul and Tokyo are Washington’s closest allies in the Indo-Pacific region, and the freeze in their relations in recent years has complicated efforts to get the three countries working more closely on security issues.”61 Although the three countries have exchanged intelligence information regarding North Korea, a more formalized trilateral partnership is deemed crucial in deterring Pyongyang. Abe has pursued a “pragmatic security strategy centered on increased defense spending and enhanced security cooperation with the United States and other partners.”62 A nighttime aerial exercise involving the three countries in October 2017 represents an effort in this direction63 as did cooperation in a 2016 missile defense exercise that involved sharing tracking data but not shooting down a missile.64 Suspicion of Japan in South Korea still lingers, however. Trump’s trip to Asia in late 2017 was partly intended to accelerate trilateral security cooperation. Although South Korea’s current President Moon Jae-in65 reluctantly accepted U.S. installation of its THAAD (Terminal High Altitude Area Defense) antimissile system in his country, the country

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refuses to join a trilateral U.S.-South Korean-Japan missile defense effort as part of the larger U.S.-led regional ballistic missile defense (BMD) system. “Robust trilateral military cooperation with South Korea and Japan could be a major force multiplier for the United States, in missile defense as least as much as in other areas of security. A trilateral partnership could improve defense policy coordination to shape the regional security environment and share the burdens of crisis response.”66 Although Japan joined the BMD system in 2006, South Korea’s foreign minister declared that Seoul would not do so and viewed trilateral cooperation “through a peninsular lens, not as a trilateral military alliance extending beyond the North Korean threat or Korean Peninsula.”67 South Korea has also explored a potential trilateral relationship among North Korea, China, and the United States. This was on display in President Park’s visit to Beijing in September 2015 for Beijing’s annual Victory Day celebrations. (No North Korean representative was present.) Victor Cha termed the event “Diplomacy 2.0 on the Korean peninsula: a nuanced three-dimensional foreign policy strategy designed to alter Chinese strategic thinking, engage U.S. interests, and ultimately build Northeast Asian cooperation where there was little in the past.”68 Cha argues that Park was “looking to build a trilateral dialogue among China, South Korea, and her key ally the United States about the peninsula’s future.”69 Thus, Park and Xi jointly declared that their countries would “not tolerate any future North Korea action that raises tensions, a statement that complies with the September 19 Joint Statement from 2005 that prohibits North Korea’s nuclear and ballistic missile tests, as well as U.N.  Security Council resolutions on North Korea that have imposed sanctions on the isolated country.”70

5   What Options Remain on the Table? American options for dealing with the DPRK are limited.71 Reflecting on the events of 2017, former diplomat Evans J. R. Revere declared: “Only immediate and overwhelming measures to cut off the regime’s economic lifeblood, starve it of foreign exchange, prosecute its human rights abuses, threaten it militarily, isolate it diplomatically, and sow dissent internally can force Pyongyang to choose between nuclear weapons and survival.” If that is not sufficient, another approach, he suggests, to resolve the nuclear issue would be “bringing about the end of the North Korean regime.”72 And yet in spring 2018, the options were not so clear. In March, Trump

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ousted Tillerson and U.S.  National Security Advisor H.  R. McMaster, respectively replacing them with CIA Director Mike Pompeo and former U.S. Ambassador to the UN John Bolton, both known for their hawkish views on North Korea and Iran. Also in March, North Korean officials, having demonstrated nuclear and advanced missile technologies, expressed a willingness to negotiate with the United States, setting off a series of events that culminated in an unprecedented summit meeting between United States and North Korean leaders in June. At the time of this chapter it remains highly uncertain how the North Korean nuclear crisis will unfold. Thus, we consider the range of options available, beginning with the possibility of continuing or enhancing sanctions and then examining the likely utility of negotiations or military force. 5.1  Sanctions Previous sanctions have not worked, but they have ratcheted up the costs that North Korea must pay for pursuing its present course. Eight earlier UN sanctions resolutions against North Korea and those aiding that country’s acquisition of nuclear weapons and U.S. unilateral measures since the George H. W. Bush administration have failed to make the DPRK denuclearize.73 Homeland Security adviser Thomas P.  Bossert admitted that: “President Trump has used just about every lever you can use, short of starving the people of North Korea to death, to change their behavior,” and “so we don’t have a lot of room left here to apply pressure to change their behavior.”74 Indeed, some analysts have concluded that no level of sanctions will alter North Korea’s policies.75 Nevertheless, several days after Washington proposed stiffer sanctions,76 the Security Council unanimously endorsed a new and harsher set of sanctions in December 2017 (Resolution 2397), the third set imposed in that year alone. The resolution included reducing DPRK imports of refined petroleum by 90 percent and limiting crude oil deliveries to their current (reduced) level. Although the resolution does not permit boarding North Korean vessels as the Trump administration sought, it recommends that other countries inspect North Korean ships and halt ship-to-ship transfers of fuel,77 a practice Pyongyang has used to evade sanctions. The resolution also goes beyond an earlier sanction that banned the DPRK from sending additional workers overseas, by demanding that North Korea recalls thousands of overseas workers within two years, many in China and Russia, who provide cash remittances home.78 Indeed, even

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the European Union (EU) had provided work permits to North Koreans until October 2017. “If the international community, including countries like China and Russia, implements these measures fully, faithfully and quickly,” declared Revere optimistically, “it will apply an unprecedented and irresistible level of pressure on the North Korean regime,” and that would force North Korea “to make a choice between continued defiance of the international community on the one hand and a return to the negotiating table on the other.”79 Pyongyang responded angrily: “We define this ‘sanctions resolution’ rigged up by the U.S. and its followers as a grave infringement upon the sovereignty of our republic, as an act of war violating peace and stability in the Korean Peninsula and the region, and categorically reject the ‘resolution,’” and declared that its ICBMs and nuclear weapons posed a “substantial nuclear threat to the U.S. mainland.”80 With few attractive options remaining, McMaster commented that U.N. sanctions against North Korea “might be our last, best chance to avoid military conflict,” adding later that if North Korea persisted in developing its nuclear capability: “I don’t think we can tolerate that risk.”81 In February 2018, the administration imposed still-more sanctions targeting 27 companies and 28 ships “aimed at shutting down North Korea’s illicit maritime smuggling activities to obtain oil and sell coal.”82 The question remains whether the sanctions can persuade the DPRK to enter into meaningful negotiations. “If the sanctions don’t work, we’ll have to go to phase two … a very rough thing … [that] may be very, very ­unfortunate for the world,” Trump said.83 Given the alternatives, the effort surely must be made. 5.2  Negotiating with a Rogue Kissinger has argued that “the issue for diplomacy has become whether the goal should be to manage North Korea’s nuclear arsenal or to eliminate it.”84 America’s major objective is the latter: “stability and the peaceful denuclearization of the Korean peninsula.”85 However, reviewing the numerous efforts to negotiate a solution to the Korean imbroglio, one group of analysts identified what it called “a brutal and familiar pattern: the regime carries out a dangerous and often fatal provocation and escalates tensions near to the point of war, following which both sides deescalate the crisis and often agree to talks.”86

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After earlier periods of growing tension, during which President Bill Clinton had considered military options,87 the Agreed Framework (1994–2002) and the Six-Party Talks (2003–2009) produced optimism only to bring disappointment in the end. The Agreed Framework, which was highly controversial in the United States,88 involved ending construction of two graphite-moderated reactors, closing the gas-graphite Yongbyon reactor, which was then producing plutonium for nuclear weapons, and reintroducing IAEA inspections, while an international ­consortium called the Korean Peninsula Energy Development Organization (KEDO) replaced it with two light-water reactors to produce electricity at the cost of $4 billion. The United States also agreed to provide the DPRK with 500,000 tons of heavy fuel oil every year to make up for the loss of the reactor while the new ones were being built by the consortium.89 However, the agreement collapsed after the George W. Bush administration discovered that the DPRK was cheating by developing nuclear material using highly enriched uranium rather than plutonium,90 and in his 2002 State of the Union speech, the president included North Korea along with Iran and Iraq, as part of what he termed the “Axis of Evil.” The United States was also partly responsible for the failure of the Agreed Framework. Washington fell behind in the promised deliveries of fuel, and the construction of the light-water reactors was far behind schedule, with the first reactor, scheduled for completion in 2003, unlikely to become operational until 2008 at the earliest. Pyongyang confirmed its activities in 2002 and resumed production using the 8000 radioactive fuel rods previously removed and reopened the Yongbyon installation.91 The Six-Party talks92 involved intermittent negotiations to denuclearize the peninsula. The initial negotiations opened in Beijing in August 2003. Pyongyang demanded a normalization of relations and a non-aggression pact with the United States before which a dismantling of its nuclear ­program would be out of the question. Washington refused. However, the participants had agreed to resolve differences peacefully and seek denuclearization of the Korean Peninsula. Prior to the next round, which opened in February 2004, South Korea, China, and the United States tried to coordinate their negotiating position. North Korea apparently agreed to end its nuclear weapons program but would continue its peaceful nuclear activities, but the United States, Japan, and South Korea demurred, insisting that Pyongyang eliminates all of its nuclear programs that might be used secretly to obtain nuclear weapons. A third set of talks began in June prior to which Washington ­suggested

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that Pyongyang has three months to freeze its nuclear activities, and the DPRK agreed to consider a freeze in return for “compensation.” Talks were not resumed until July 2005. Washington offered to recognize the DPRK as a sovereign state, renounce any intention to invade that country, and allow Pyongyang to pursue peaceful uses of nuclear energy while discussing the prohibition of testing, production, and deployment of nuclear weapons. In September, the six parties issued a statement on steps toward denuclearization “in a phased manner in line with the principle of commitment for commitment, action for action.”93 Pyongyang agreed to abandon its nuclear weapons program and reenter the NPT with IAEA inspections; the other five participants agreed to North Korea’s right to peaceful uses of nuclear energy. Washington and Seoul also promised not to deploy nuclear weapons on the peninsula and expressed their willingness to provide the DPRK with energy and food. Talks resumed again November 2005 but proved fruitless, and relations with North Korea rapidly worsened as Washington moved to sever Pyongyang’s links to offshore financial and trading institutions. And in 2006 the DPRK conducted its first nuclear test as well as several missile tests, in response to which the Security Council passed Resolution 1718, which prohibited all such tests. Washington also forced the Macau-based Banco Delta Asia, which it believed was illegally laundering funds to Pyongyang, to freeze that country’s accounts. An agreement was reached in February 2007 under which the DPRK agreed to close and seal the Yongbyon reactor within 60 days in return for which North Korea would receive fuel shipments and the United States and Tokyo would enter into talks to normalize relations with Pyongyang. Talks resumed the following month, but North Korea left shortly ­afterwards because it still could not access its funds in Macau. Nevertheless, the IAEA confirmed that the Yongbyon reactor had been disabled and when talks resumed in the autumn agreement was reached on implementing the steps consented to earlier in the year. In April 2008, Washington and Pyongyang negotiated measures to increase the transparency of North Korea’s nuclear program and terminate North Korea’s export of nuclear and missile technology to other countries.94 Although President George Bush removed North Korea from the Trading with the Enemy Act and from the list of state sponsors of terrorism, the issue of verifying the DPRK’s commitments proved divisive. And after refusing U.S. demands that inspections be permitted elsewhere than Yongbyon, Pyongyang announced that it would resume activity at that

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facility and in April 2009 tested a long-range missile in defiance of Security Council Resolution 1718. The following year, Pyongyang revealed a new uranium enrichment facility to visiting U.S. scientists. Thereafter, additional multilateral sanctions were imposed on North Korea, which announced that it would no longer participate in the Six-Party talks or be bound by any of the previous agreements. The Obama administration sought to resume negotiations, but North Korea’s missile tests and its underground nuclear test in May 2009 persuaded Washington to seek tougher multilateral sanctions. Thereafter, North Korean provocations in 2010 included an attack on a South Korean naval vessel, the disclosure of a new uranium enrichment facility and light-­ water reactor at Yongbyon, and the shelling of the South Korean island of Yeonpyeong. Efforts to resume the talks in 2011 failed owing to North Korean preconditions. In 2012, the DPRK agreed to suspend nuclear tests and allow the IAEA back in to monitor activities at Yongbyon, but a North Korea test of a potential ICBM triggered additional UN sanctions. In response, Pyongyang initiated a still-more powerful nuclear test, leading to new sanctions in March 2013 that further limited North Korean banking, travel, and trade, while calling for a resumption of talks. Alternating between threats and offers to talk, in December 2017 Washington presented a new formula when Tillerson, only three days after offering talks with Pyongyang “without precondition,” declared to the UN Security Council that, “A sustained cessation of North Korea’s threatening behavior must occur before talks can begin.”95 Simultaneously, consultations among the United States, China, and South Korea occurred concerning what might happen in the event of either North Korean provocations or regime collapse in the north. South Korea could, for example, assure China that it would respect Beijing’s interests in North Korea including border control, refugees, and economic assets or even that it would permit Beijing to determine the nature of a new regime in the north after the DPRK. At a minimum, the United States and South Korea have to coordinate their responses in such situations including the number and disposition of U.S. forces in Korea to ease Beijing’s anxiety. For its part, North Korea appeared unwilling to enter into talks with the United States as 2017 came to an end. In response to an effort in December by UN undersecretary for political affairs, Jeffrey Feltman—the first visit in six years by a senior UN official—North Korean officials indicated it was “too early” to start negotiations. Carrying a letter from

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Secretary-General António Guterres that had been reviewed by the other members of the 2006–2009 Six-Party Talks, Feltman tried to persuade Pyongyang to revive military-to-military channels and indicate a willingness to participate in negotiations and to abide by UN Security Council resolutions. Their apparent disinterest was described by one observer as “convincing diplomatic theater, if it was theater”96 and suggested that additional North Korean nuclear tests were still to come despite Pyongyang’s statement in November that it had completed building its “state nuclear force.” And yet, suddenly in early 2018, the DPRK shifted its position, possibly seeking to divide Washington and Seoul, by expressing a desire to negotiate.97 After Seoul welcomed Pyongyang’s willingness to join the Winter Olympics and reopen a border hotline in January 2018,98 Trump tweeted, “Perhaps that is good news, perhaps not—we will see!” Only a few hours later he tweeted: “Will someone from his depleted and food starved regime please inform him that I too have a Nuclear Button, but it is a much bigger & more powerful one than his, and my Button works!”99 Pyongyang described Trump’s comment as “a spasm of a lunatic” and the “bark of a rabid dog.”100 Nevertheless, the two Koreas agreed to reopen a dialogue that might lead to a thaw in their relations101 even as America’s secretary of state declared: “We must increase the costs of the regime’s behavior to the point that North Korea comes to the table for credible negotiations,” and “The North Koreans know our channels are open, and they know where to find us.”102 Thus, it was all the more surprising when in March 2018 Kim Jong-un issued an invitation, through South Korea’s national security advisor, to negotiate. Trump agreed to meet Kim Jong-un within two months, a hurried timetable under the best of circumstances. Days later, Trump fired Secretary of State Tillerson, announcing that he would be replaced by CIA Director Mike Pompeo, who though more-hawkish on North Korea had already been working through back channels to arrange a meeting between Trump and Kim.103 Negotiations will be tricky. “First they have to decide whether to make the summit an action-forcing event or if they are aiming at a grand statement of principles. … My guess is the latter,” said Victor Cha, as “they don’t have time or experience” to compel denuclearization.104 A meeting between Kim and China’s Xi Jinping in late March further complicates matters. “We’re seeing a carefully crafted North Korean strategy on diplomacy unfold on the world stage, starting with

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Beijing,” states North Korea expert Jean Lee.105 And China “is reasserting itself and looking to shape the agenda for the upcoming summits,” notes Adam Mount of the Federation of American Scientists, adding improved ties with Pyongyang will weaken “Trump’s hand in negotiations and diminish further the effectiveness of U.S. military threats.”106 As the summit approached, comments by National Security Advisor John Bolton, later echoed by Vice President Mike Pence in late May, that Libya’s denuclearization should serve as a model for negotiations with North Korea created a crisis that briefly led to the summit’s cancelation. Libya willingly gave up all its nuclear weapons, nuclear fuel, and ballistic missiles in 2003—a process that ultimately enabled Western powers to intervene in that country in 2011 and rebel forces to overthrow and kill Muammar Gaddafi. Speaking to Fox News, Pence promised, “this will only end like the Libyan model ended if Kim Jong Un doesn’t make a deal.”107 A North Korean official called the remarks “ignorant and stupid,” and Pyongyang threatened a “nuclear-to-nuclear showdown.” Hours later, Trump canceled the summit on account of North Korea’s “open hostility,”108 even as that very day North Korea destroyed (without expert confirmation) its nuclear testing site at Punggye-ri. Both sides then backtracked and on June 1 Trump announced the summit was back on. The meeting was held with much fanfare in Singapore on June 12 and concluded with a joint statement along the lines predicted by Cha, committing both governments to “build a lasting and stable peace regime” and “complete denuclearization” on the Korean Peninsula. Additionally, Trump provided a security guarantee to North Korea and announced a halt to joint U.S.-South Korean military exercises. The following day, the president declared on Twitter, “There is no longer a Nuclear Threat from North Korea.”109 While the agreement brought a quick end to tensions and, at the time this chapter is written, removes the threat of war, it has nonetheless been the subject of broad criticism. To start, it is short on details for how or when denuclearization will be achieved. Complete denuclearization, which requires halting nuclear fuel production and uranium enrichment, disabling nuclear reactors, and closing nuclear test sites, will likely take years—particularly with so much of North Korea’s nuclear infrastructure hidden. Pompeo optimistically speculated that “major disarmament” would be completed by January 2021, the end of Trump’s term.110 And, while Trump’s security guarantee and pledge to end U.S.-South Korean

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military exercises (concessions long sought by Pyongyang) were significant, North Korea made no new promises at the conference. With the exception of weapons-testing, North Korea’s nuclear activities continue.111 Trump’s concessions have also raised concerns about Washington’s longterm commitment to the region among allies there, especially Japan which views joint U.S.-South Korean military drills as “important” to East Asia’s security.112 Furthermore, the agreement risks undermining the sanctions regime that many view as necessary to pressure North Korea to negotiate. Indeed, shortly after the summit, China called for easing sanctions now that North Korea is at the negotiating table. Nonetheless, administration officials remained optimistic about the prospect for ongoing cooperation. Speaking to reporters in Seoul the day after the summit, Pompeo declared: “there’s still some work to do, but there was a great deal of work done that is beyond what was seen in the final document that will be the place that we’ll begin when we return to our conversations.”113 5.3  Force If neither sanctions nor talks make progress toward denuclearization, the United States and its partners South Korea and Japan should prepare to reinforce their military cooperation and preparedness and may be persuaded that only the use of force can solve the crisis. The use of force can take many forms, with varying degrees of risk. Enhancing deterrence may be prudent. Strengthening allied forces by prepositioning equipment, increasing troop levels, and even deploying additional nuclear weapons in the region may increase the credibility of deterrence against the possibility of either a North Korean nuclear or conventional attack and help contain Pyongyang, much as North Atlantic Treaty Organization (NATO) deterred and contained the USSR during the Cold War.114 This option comes with the political risk of communicating that nuclear weapons maintain strategic value and could justify further proliferation in the region. Another course would be to shoot down North Korean ICBM and satellite missiles when they are tested or even destroy them on their launch pads. Those who wish to go even further by launching a preventive strike to destroy the DPRK’s ICBM and nuclear facilities contend that it is the only way to eliminate a threat that is getting worse and would also ­probably

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destroy the regime itself. A military strike to achieve regime change—a policy that has been advocated at times by both Pompeo and Bolton—is especially risky when dealing with any nuclear weapons state, and even more so in this instance, given North Korea’s proximity to China. Those who oppose military strikes argue that the threat or use of force actually strengthens the Kim regime at home, may trigger a North Korean preemptive nuclear attack, or may be inadequate to prevent a retaliatory strike by North Korean missiles hidden in caves and submarines or on mobile launchers.

6   Conclusion During America’s 2016 campaign, candidate Trump offered a confusing array of comments about the DPRK nuclear threat. He suggested that Japan and South Korea might consider developing nuclear weapons if they were unwilling to pay more for U.S. protection.115 This would involve abandoning America’s nonproliferation policy and destabilizing the entire region. Trump also mixed bellicose comments about North Korea with expressions of admiration. “This guy, he’s like a maniac, OK? And you have to give him credit. How many young guys—he was like 26 or 25 when his father died—take over these tough generals, and all of a sudden, you know, it’s pretty amazing when you think of it,” he said, adding, “He wiped out the uncle. ... I mean, this guy doesn’t play games. And we can’t play games with him. Because he really does have missiles. And he really does have nukes.”116 Trump also commented he would be “honored” to meet Kim “under the right circumstances,”117 perhaps over a hamburger. Those circumstances finally occurred in June 2018 and February 2019. As this is written, the negotiations are ongoing. At a minimum, they should seek to achieve verifiable denuclearization of the Korean Peninsula and a treaty formally ending the Korean War. However, Trump’s antics make it difficult for either allies or foes to comprehend American foreign policy. There is good reason to believe that talks may break down without a substantive agreement, given the long history of mistrust and actions by both sides that undermine their credibility, including evidence that North Korea is commissioning a new reactor118 and Trump’s decision in May 2018 to abandon the nuclear deal previously negotiated with Iran. If talks fail this time, following the peak of a cycle of provocation described earlier, Washington and Pyongyang might have to choose between peace and war. At least at present, though, the threat of a nuclear war has retreated.

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Notes 1. Cited in Faith Karimi, “Trump sarcastically responds to Kim Jong Un insults,” CNN politics, November 13, 2017, http://www.cnn. com/2017/11/11/politics/north-korea-trump-asia-trip/index.html, accessed December 12, 2017, and Cristiano Lima, “Trump: North Korea’s Kim a ‘sick puppy’,” Politico, November 29, 2017, https:// www.politico.com/story/2017/11/29/trump-north-korea-kim-jongun-sick-puppy-270135, accessed December 12, 2017. 2. Cited in Karimi, “Trump sarcastically responds to Kim Jong Un insults.” 3. Cited in “North Korea ‘sentences Trump to death’ for insulting Kim Jong-un,” The Guardian, November 15, 2017, https://www.theguardian.com/us-news/2017/nov/15/north-korea-sentences-trump-todeath-for-insulting-kim-jong-un, accessed December 12, 2017. 4. Cited in Lima, “Trump: North Korea’s Kim a ‘sick puppy’.” 5. Cited in Joby Warrick, Ellen Nakashima and Anna Fifield, “North Korea now making missile-ready nuclear weapons, U.S. analysts say,” Washington Post, August 8, 2017, https://www.washingtonpost.com/world/nationalsecurity/north-korea-now -making-missile-ready-nuclear-weapons-usanalysts-say/2017/08/08/e14b882a-7b6b-11e7-9d08-b79f191668ed_ story.html?utm_term=.2364fcffed02, accessed December 13, 2017. 6. Cited in John Wagner and Anna Fifield, “‘All options are on the table’ after North Korea launched missile over Japan,” Washington Post, August 29, 2017, https://www.washingtonpost.com/news/post-politics/ wp/2017/08/29/trump-all-options-are-on-the-table-following-northkorea-missile-launch-over-japan/?utm_term=.e2c09fe069f6, accessed November 16, 2017. 7. Cited in Motoko Rich, “In North Korea, ‘Surgical Strike’ Could Spin into ‘Worst Kind of Fighting’,” New York Times, July 5, 2017, https:// www.nytimes.com/2017/07/05/world/asia/north-korea-south-usnuclear-war.html, accessed December 1, 2017. 8. See, for example, Anna Fifield, “Kim Jong Un wants to stay in power— and that is an argument against nuclear war,” Washington Post, August 10, 2017, https://www.washingtonpost.com/world/asia_pacific/kimjong-un-wants-to-stay-in-power%2D%2Dand-that-is-an-argumentagainst-nuclear-war/2017/08/10/52b6ae7c-7d2e-11e7-b2b1aeba62854dfa_story.html, accessed November 9, 2017, William J. Perry, “North Korea Called Me a ‘War Maniac.’ I Ignored Them, and Trump Should Too,” Politico Magazine, October 3, 2017, https://www.politico.com/magazine/story/2017/10/03/north-korea-war-maniac-donald-trump-215672, accessed November 9, 2017, and Jack K.  Warden,

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“North Korea’s Nuclear Posture: An Evolving Challenge for U.S. Deterrence,” Proliferation Papers, Ifri, March 2017, https://www. ifri.org/sites/default/files/atoms/files/warden_north_korea_nuclear_ posture_2017.pdf, accessed December 31, 2017. 9. Max Fisher, “North Korea’s Nuclear Arms Sustain Drive for ‘Final Victory’,” New York Times, July 29, 2017, https://www.nytimes. com/2017/07/29/world/asia/north-korea-nuclear-missile.html, accessed November 10, 2017. 10. See, for example, Siegfried S. Hecker, “Time to insert the control rods on North Korea,” Bulletin of the Atomic Scientists, October 17, 2017, https://thebulletin.org/time-insert-control-rods-north-korea11198, accessed November 9, 2017. 11. Cited in Rich, “In North Korea, ‘Surgical Strike’ Could Spin into ‘Worst Kind of Fighting’.” Such a conflict might involve North Korea’s stockpiles of chemical and biological weapons, also considered weapons of mass destruction (WMD). 12. Zachary Cohen, “The Last Resort: How a US Strike on North Korea Could Play Out,” CNN, August 11, 2017, http://www.cnn. com/2017/08/11/politics/us-north-korea-strike-first/index.html, accessed December 9, 2017. See also Franz-Stefan Gady, “What Would the Second Korean War Look Like?” The Diplomat, April 19, 2007, https://thediplomat.com/2017/04/what-would-the-second-koreanwar-look-like. 13. Chetan Peddada, “A Sneak Peek at America’s War Plans for North Korea,” Foreign Policy, September 7, 2017, http://foreignpolicy. com/2017/09/07/a-sneak-peak-at-americas-war-plans-for-northkorea, accessed December 28, 2017. 14. Joseph S.  Bermudez Jr., “North Korea’s Development of a Nuclear Weapons Strategy,” U.S.-Korea Institute at SAIS, 2015, http:// www.38north.org/wp-content/uploads/2015/08/NKNF_NuclearWeapons-Strategy_Bermudez.pdf, 8, accessed December 20, 2017. 15. Although U.S. nuclear weapons were withdrawn from South Korea by 1991, at present some South Koreans argue they should be redeployed there. Robert S.  Norris, “A history of U.S. nuclear weapons in South Korea,” Bulletin of the Atomic Scientists 73:6 (2017), 349–357. 16. Bermudez, “North Korea’s Development of a Nuclear Weapons Strategy,” 9. 17. Ibid., 10. 18. It is believed that the DPRK has between 2500 to 5000 tons of chemical weapons including sulfur mustard, chlorine, phosgene, sarin, and VX nerve agents as well as some biological weapons. Eleanor Albert, “North Korea’s Military Capabilities,” Council on Foreign Relations, updated

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November 30, 2017, https://www.cfr.org/backgrounder/northkoreas-military-capabilities, 10, accessed, December 16, 2017. 19. Bermudez, “North Korea’s Development of a Nuclear War Strategy,” 12–13. 20. Victor Cha, “Countering the North Korean Threat,” Statement before the House Foreign Affairs Committee, February 7, 2017, http://docs. house.gov/meetings/FA/FA00/20170207/105527/HHRG-115FA00-Wstate-ChaV-20170207.pdf, accessed December 31, 2017. 21. Evans J. R. Revere, “2017: Year of Decision on the Korean Peninsula,” paper presented at the 5th Korea Research Institute for National StrategyBrookings Institution Joint Conference on “The Trump Administration in the United States and the Future of East Asia and the Korean Peninsula,” February 8, 2017, https://www.brookings.edu/wp-content/uploads/2017/03/fp_20170208_evans_revere_krins.pdf, 3, accessed, December 21, 2017. 22. Alexandre Y. Mansourov, “Kim Jong Un’s Nuclear Doctrine and Strategy: What Everyone Needs to Know,” NAPSNet Special Reports, December 16, 2014, https://nautilus.org/napsnet/napsnet-special-reports/kimjong-uns-nuclear-doctrine-and-strategy-what-everyone-needs-to-know, accessed March 16, 2017. 23. Albert, “North Korea’s Military Capabilities,” 10–12. 24. With few internet links, North Korea is less vulnerable to cyberattack than either the United States or South Korea. 25. Anthony H. Cordesman, The Military Balance in the Koreas and Northeast Asia (Washington, DC: Center for Strategic and International Studies, 2017), 130. 26. See “China websites block searches for ‘Fatty Kim the Third’,” Reuters, November 16, 2016, https://www.reuters.com/article/us-china-northkorea-internet/china-websites-block-searches-for-fatty-kim-the-thirdidUSKBN13B19C, accessed December 13, 2017. 27. Warrick, Nakashima, and Fifield, “North Korea now making missileready nuclear weapons, U.S. analysts say.” 28. For analysis of the evolution of the DPRK’s ballistic missile program, see Daniel Wertz, “North Korea’s Ballistic Missile Program,” The National Committee on North Korea, updated December 2017, https://www. ncnk.org/resources/briefing-papers/all-briefing-papers/north-koreasballistic-missile-program. 29. Joseph S. Bermudez, Jr., “Underwater Test-fire of Korean-style Powerful Strategic Submarine Ballistic Missile,” 38 North, May 13, 2015, http:// www.38north.org/2015/05/jbermudez051315/, accessed December 17, 2017.

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30. Albert, “North Korea’s Military Capabilities,” 2. Also Kathleen J.  McInnis, et  al., “The North Korean Nuclear Challenge: Military Options and Issues for Congress,” Congressional Research Service, November 6, 2017,  1, https://fas.org/sgp/crs/nuke/R44994.pdf, accessed December 27, 2017. See Anna Fifield, “North Korea Says It Can Fit Nuclear Warheads on Ballistic Missiles,” Washington Post, March 8, 2016, https://www.washingtonpost.com/world/south-koreaimposes-new-sanctions-on-north-tells-pyongyang-it-mustchange/2016/03/08/15b0d29e-490a-4697-9742-3c81dde5eb5f_ story.html?utm_term=.8bf61da9ed28, accessed November 7, 2016. 31. Cited in Choe Sang-Hun, “North Korea Won’t Stop Its Arms Tests Anytime Soon, South Warns,” New York Times, December 26, 2017, https://www.nytimes.com/2017/12/26/world/asia/north-koreanuclear-missile-tests.html, accessed December 26, 2017. 32. Cited in Adam Taylor and Tim Meko, “What made North Korea’s weapons programs so much scarier in 2017,” Washington Post, December 22, 2017, https://www.washingtonpost.com/news/worldviews/wp/2017/ 12/21/what-made-north-koreas-weapons-programs-so-much-scarier-in2017/?utm_term=.bf5314588fcb, accessed December 22, 2017. 33. Cited in ibid. 34. Cited in Krishnadev Calamur, “How Did North Korea’s Missile and Nuclear Tech Get So Good So Fast?” The Atlantic, September 6, 2017, https://www.theatlantic.com/international/archive/2017/09/northkorea-tech/538959/, accessed December 18, 2017. 35. See Ellen Nakashima, Anna Fifield and Joby Warrick, “North Korea could cross ICBM threshold next year, U.S. officials warn in new assessment,” Washington Post, July 25, 2017, https://www.washingtonpost. com/world/national-security/north-korea-could-cross-icbm-thresholdnext-year-us-of ficials-warn-in-new-assessment/2017/07/25/ 4107dc4a-70af-11e7-8f39-eeb7d3a2d304_story.html?utm_term=.f7ae4c16acf8, accessed December 2, 2017. 36. Justin McCurry and Julian Borger, “North Korea missile launch: regime says new rocket can hit anywhere in US,” The Guardian, November 29, 2017, https://www.theguardian.com/world/2017/nov/28/northkorea-has-fired-ballistic-missile-say-reports-in-south-korea, accessed December 13, 2017. See also Michael Elleman, “North Korea’s Third ICBM Launch,” 38 North, November 29, 2017, http://www.38north. org/2017/11/melleman112917/, accessed December 13, 2017. 37. Cited in Josh Smith and Michelle Nichols, “U.S. warns North Korean leadership will be ‘utterly destroyed in case of war’,” Reuters, November 28, 2017, https://www.reuters.com/article/us-northkorea-missiles/u-

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s-warns-north-korean-leadership-will-be-utterly-destroyed-in-case-ofwar-idUSKBN1DS2MB, accessed December 13, 2017. 38. Cited in ibid. 39. See Mark Seddon, “Have we got just three months to avert a US attack on North Korea?” The Guardian, December 4, 2017, https://www.theguardian.com/commentisfree/2017/dec/04/three-months-avert-usstrike-north-korea-nuclear-missile-kim-jong-un, accessed December 25, 2017. 40. Mike Mullen, Sam Nunn, Adam Mount, and Amy Schmemann, “A Sharper Choice on North Korea: Engaging China for a Stable Northeast Asia,” Council on Foreign Relations Independent Task Force Report No. 74, September 2016, https://www.cfr.org/sites/default/files/ pdf/2016/09/TFR74_North%20Korea.pdf, accessed January 22, 2018. 41. Fu Ying, The Korean Nuclear Issues: Past, Present, and Future – A Chinese Perspective Brookings Institution, May 2017, 1–2, https://www.brookings.edu/wp-content/uploads/2017/04/north-korean-nuclear-issuefu-ying.pdf, accessed December 30, 2017. 42. Ibid., 4, 8, 11. 43. Ibid., 5–16. Fu Ying emphasizes that among the most important leadership shifts was that from President Bill Clinton to President George W. Bush in 2001 (6–8). 44. Ibid., 10. 45. Henry A. Kissinger, “North Korea’s Nuclear Program Cannot Be Stopped by America Alone,” Washington Post, June 8, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/06/07/ AR2009060702097.html?hpid=opinionsbox1, accessed December 29, 2017. 46. Samuel Ramani, “China’s Approach to North Korea Sanctions,” The Diplomat, January 10, 2018, https://thediplomat.com/2018/01/chinas-approach-to-north-korea-sanctions, accessed March 165, 2018. 47. Simon Denyer, “China bans North Korean iron, lead, coal imports as part of U.N. sanctions,” Washington Post, August 14, 2017, https:// www.washingtonpost.com/world/china-bans-north-korea-iron-leadcoal-imports-as-part-of-un-sanctions/2017/08/14/a0ce4cb0-80ca11e7-82a4-920da1aeb507_story.html?utm_term=.14357aaa1108, accessed December 29, 2017. 48. Ramani, “China’s Approach to North Korea Sanctions.” 49. Oriana Skylar Mastro, “Why China Won’t Rescue North Korea,” Foreign Affairs 97:1 (January/February 2018), 60. See also Oriana Skylar Mastro, “China’s Evolving North Korea Strategy,” Peace Brief, United State Institute for Peace (September 2017), https://www.usip.org/

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sites/default/files/PB231-Chinas-evolving-north-korea-strategy.pdf, accessed, December 31, 2017. 50. Mastro, “Why China Won’t Rescue North Korea,” 64. 51. Simon Denyer and Amanda Erickson, “Beijing Warns Pyongyang: You’re on your own if you go after the United States,” Washington Post, August 11, 2017, https://www.washingtonpost.com/world/china-warnsnorth-korea-youre-on-your-own-if-you-go-after-the-us/2017/08/11/ a01a4396-7e68-11e7-9026-4a0a64977c92_stor y.html?utm_ term=.8bde7c4b86a0, accessed December 18, 2017. 52. Carol Morello and Peter Whoriskey, “U.S. hits Chinese and Russian companies, individuals with sanctions for doing business with North Korea,” August 22, 2017, https://www.washingtonpost.com/world/nationalsecurity/us-sanctions-chinese-and-russian-companies-and-individualsfor-conducting-business-with-north-korea/2017/08/22/78992312-8 743-11e7-961d-2f373b3977ee_story.html, accessed December 30, 2017. 53. Mullen, nunn, Mount, and Schmemann, “A Sharper Choice on North Korea: Engaging China for a Stable Northeast Asia.” 54. Cited in David E.  Sanger, “A Tillerson Slip Offers a Peek into Secret Planning on North Korea,” New York Times, December 17, 2017, https://www.nytimes.com/2017/12/17/us/politics/tillerson-northkorea-china.html, accessed December 18, 2017. 55. Cited in ibid. 56. Cited in “Trump, Putin Discuss North Korean Crisis While Voicing Mutual Praise,” Radio Free Europe/Radio Liberty, December 15, 2017, https://www.rferl.org/a/trump-putin-discuss-north-korean-crisiswhile-voicing-mutual-thanks-praise/28919524.html, accessed December 18, 2017. 57. Cited in “Trump Says ‘Russia Not Helping On North Korea; Russia Fires Back,” Radio Free Europe/Radio Liberty, December 16, 2017, https:// www.rferl.org/a/trump-says-russia-not-helping-north-korea-russianebenzya-fires-back-tillerson-slave-labor/28921440.html, accessed December 22, 2017. 58. Damien Sharkov, “Russia Activates Three New Antimissile Early-Warning Systems Near North Korea Border,” Newsweek, December 20, 2017, http://www.newsweek.com/russia-launches-three-new-anti-missileearly-warning-systems-within-range-753371, accessed December 22, 2017. 59. Choe Sang-Hun, “Desolate Dots in the Sea Stir Deep Emotions as South Korea Resists a Japanese Claim,” New York Times, August 30, 2008, http://www.nytimes.com/2008/08/31/world/asia/31islands. html?pagewanted=all, accessed December 26, 2017.

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60. Choe Sang-Hun, “Japan and South Korea Settle Dispute Over Wartime ‘Comfort Women’,” New York Times, December 28, 2015, https:// www.nytimes.com/2015/12/29/world/asia/comfort-women-southkorea-japan.html, accessed December 26, 2017. Many Koreans and Japanese did not accept the reconciliation. See Jonathan Soble and Choe Sang-Hun, “South Korean and Japanese Leaders Feel Backlash From Comfort Women Deal,” New York Times, December 29, 2015, https:// www.nytimes.com/2015/12/30/world/asia/south-korea-japan-comfort-women.html, accessed December 26, 2017, and Choe Sang-Hun, “Deal With Japan on Former Sex Slaves Failed Victims, South Korea Panel Says,” New York Times, December 27, 2017, https://www. nytimes.com/2017/12/27/world/asia/comfort-women-south-koreajapan.html, accessed on December 27, 2017. 61. Michael Auslin, “A new era in South Korean-Japanese relations begins,” National Review Online, December 30, 2015, http://www.aei.org/ publication/a-new-era-in-south-korean-japanese-relations-begins, accessed December 26, 2017. 62. Nicholas Szechenyi, “Japan Has a Better Chance Tackling the North Korea Threat with Shinzo Abe,” Forbes, October 25, 2017, https:// www.forbes.com/sites/insideasia/2017/10/25/japan-has-a-betterchance-tackling-the-north-korea-threat-with-shinzoabe/#2bad40944d37, accessed December 26, 2017. 63. Christine Kim and Eric Beech, “U.S. flies bombers over Korea as Trump discusses options,” Reuters, October 10, 2017, https://www.reuters. com/article/us-northkorea-missiles/u-s-flies-bombers-over-korea-astrump-discusses-options-idUSKBN1CF368, accessed December 27, 2017. 64. K. J. Kwon and Dugald McConnell, “South Korea, Japan to join U.S. for missile-defense exercise,” CNN, May 17, 2016, http://www.cnn. com/2016/05/16/asia/south-korea-japan-missile-defense-exercise/ index.html, accessed December 27, 2017. 65. Moon was elected South Korea’s president in May 2017 after the impeachment of President Park. 66. Ian E. Rinehart, Steven A. Hildreth, and Susan V. Lawrence, “Ballistic Missile Defense in the Asia-Pacific Region: Cooperation and Opposition,” Congressional Research Service, April 3, 2015, 20. The U.S.-Japanese BMD system includes Aegis-equipped destroyers, Patriot batteries, early warning sensors, and advanced radars. https://fas.org/sgp/crs/nuke/ R43116.pdf, accessed December 26, 2017. 67. Clint Work, “The View From Seoul: Trump’s Visit and the ‘Illusion of Achievement’,” The Diplomat, November 10, 2017, https://thediplo-

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mat.com/2017/11/the-view-from-seoul-trumps-visit-and-the-illusionof-achievement/, accessed December 26, 2017. 68. Victor Cha, “A Path Less Chosun,” Foreign Affairs, October 8, 2015, https://www.foreignaffairs.com/articles/china/2015-10-08/path-lesschosun, accessed December 10, 2017. 69. Ibid. Thereafter, Chinese-Korean relations were roiled by Beijing’s opposition to the installation of THAAD in South Korea, but after a chill in relations China’s President Xi renewed the thaw in their relationship. 70. North Korea’s nuclear program in joint statement,” United Press International, September 2, 2015, https://www.upi.com/Top_News/ World-News/2015/09/02/South-Korea-China-oppose-North-Koreasnuclear-program-in-joint-statement/7331441208150/, accessed December 10, 2017. 71. See Michael Paul and Elisabeth Suh, “North Korea’s Nuclear Missiles: Options for the US and its Allies in the Asia-Pacific,” SWP Comments, German Institute for International and Security Affairs, August 2017, https://www.swp-berlin.org/fileadmin/contents/products/ comments/2017C32_pau_suh.pdf, accessed December 31, 2017. 72. Revere, “2017: Year of Decision on the Korean Peninsula,” 1, 2. 73. Most recently during the Obama and Trump administrations, Congress expanded U.S. sanctions to encompass North Korean economic activities, including trade and financial ties between Pyongyang and third countries. 74. Cited in Carol Morello, “U.N. imposes new sanctions on North Korea over missile tests,” Washington Post, December 22, 2017, https://www. washingtonpost.com/world/national-security/un-imposes-new-sanctions-on-north-korea-over-missile-tests/2017/12/22/0929b926-e74a11e7-a65d-1ac0fd7f097e_stor y.html?utm_term=.020d38cbca81, accessed December 23, 2017. 75. See Atsuhito Isozaki, “Understanding the North Korean Regime,” Wilson Center (April 2017), 35–36, https://www.wilsoncenter.org/ sites/default/files/ap_understandingthenorthkoreanregime.pdf, accessed December 30, 2017. The author emphasizes the impact that Libya’s surrender of nuclear weapons and NATO’s attack in 2011 had on Pyongyang’s determination to retain WMD. 76. Rick Gladstone, “Proposed U.N. Resolution Would Toughen Sanctions on North Korea,” New York Times, December 21, 2017, https://www. nytimes.com/2017/12/21/world/asia/us-un-north-korea-sanctions. html, accessed December 22, 2017. 77. In December 2017, South Korea seized two Hong Kong-flagged vessels that may have transferred oil to North Korean ships. Choe Sang-Hun, “Kim Jong-un’s Overture Could Drive a Wedge Between the South

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Korea and the U.S.” Russian tankers have done the same. Guy Faulconbridge, Jonathan Saul, Polina Nikolskaya, “Exclusive: Russian tankers fueled North Korea via tankers at sea  – sources,” Reuters, December 29, 2017, https://www.reuters.com/article/us-northkoreamissiles-russia-oil-exclus/exclusive-russian-tankers-fueled-north-koreavia-transfers-at-sea-sources-idUSKBN1EN1OJ, accessed January 6, 2018. 78. Rick Gladstone and David E.  Sanger, “Security Council Tightens Economic Vise on North Korea, Blocking Fuel, Ships and Workers,” New York Times, December 22, 2017, https://www.nytimes. com/2017/12/22/world/asia/north-korea-security-council-nuclearmissile-sanctions.html, accessed December 22, 2017. 79. Cited in ibid. 80. Cited in Russell Goldman, “North Korea Calls U.N. Sanctions an ‘Act of War’,” New York Times, December 24, 2017, https://www.nytimes. com/2017/12/24/world/asia/north-korea-un-sanctions.html, accessed December 24, 2017. 81. Cited in David Ignatius, “What North Korea told a U.N. envoy trying to prevent war,” Washington Post, December 19, 2017, https://www.washingtonpost.com/opinions/global-opinions/what-north-korea-told-aun-envoy-trying-to-prevent-war/2017/12/19/2cdef370-e50d-11e7 -av50-621fe0588340_story.html?utm_term=9c2a839153cf&wpisrc=nl_ todayworld&wpmm=1, accessed December 20, 2017. 82. Cited in Steve Holland, Christine Kim, “U.S. imposes more North Korea sanctions, Trump warns of ‘phase two’,” Reuters, February 23, 2018, https://www.reuters.com/article/us-northkorea-missiles-trump/u-s-imposesmore-north-korea-sanctions-trump-warns-of-phase-twoidUSKCN1G71RD, accessed March 16, 2018. 83. Ibid. 84. Kissinger, “North Korea’s Nuclear Program Cannot Be Stopped by America Alone.” 85. Office of the Spokesperson, “Joint Statement by Secretary of State Rex Tillerson, Secretary of Defense James Mattis, Director of National Intelligences Dan Coats,” U.S. Department of State, April 2017, https:// www.state.gov/r/pa/prs/ps/2017/04/270464.htm. 86. Mullen, Nunn, Mount, and Schmemann, “A Sharper Choice on North Korea: Engaging China for a Stable Northeast Asia,” 12. See “Figure 1. North Korea’s Cycles of Provocation,” in ibid., 13. 87. See former Secretary of Defense William Perry’s comments in William D.  Shear and Michael R.  Gordon, “How U.S.  Military Actions Could Play Out in North Korea,” New York Times, August 11, 2017, https:// www.nytimes.com/2017/08/11/world/asia/north-korea-trump-mili-

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tary.html, accessed December 29, 2017, and Scott Stossel, “North Korea: The War Game,” The Atlantic (July/August 2005),  https://www.theatlantic.com/magazine/archive/2005/07/north-korea-the-wargame/304029, accessed March 14, 2019. 88. Clinton issued an executive agreement, thereby avoiding a fight in the United States about ratifying a formal treaty, and the agreement was facilitated by former President Jimmy Carter who traveled to Pyongyang as a private citizen. 89. See Mark E. Manyin and Mary Beth D. Nikitin, “Foreign Assistance to North Korea,” Congressional Reference Service, April 2, 2014, https:// fas.org/sgp/crs/row/R40095.pdf, accessed December 31, 2017. 90. David E. Sanger, “North Korea Says It Has a Program on Nuclear Arms,” New York Times, October 17, 2002, http://www.nytimes. com/2002/10/17/world/north-korea-says-it-has-a-program-onnuclear-arms.html, accessed December 29, 2017. 91. Glenn Kessler, “History lesson: Why did Bill Clinton’s North Korean deal fail?” Washington Post, August 9, 2017, https://www.washingtonpost.com/news/fact-checker/wp/2017/08/09/history-lesson-whydid-bill-clintons-north-korea-deal-fail/?utm_term=.3549f42daa92, accessed December 29, 2017, and Maria Ryan, “Why America’s 1994 deal with North Korea failed  – and what Trump can learn from it,” Independent, August 4, 2017, http://www.independent.co.uk/voices/ north-korea-missile-test-us-1994-agreed-framework-pyongyang-programme-kim-jong-un-donald-trump-a7876446.html, accessed December 29, 2017. 92. This discussion is based partly on Jayshree Bajoria and Beina Xu, “The Six Party Talks on North Korea’s Nuclear Program,” Council on Foreign Relations, Updated September 30, 2013, https://www.cfr.org/backgrounder/six-party-talks-north-koreas-nuclear-program, accessed December 27, 2017, and “The Six-Party Talks at a Glance,” Arms Control Association, updated July 2017, https://www.armscontrol.org/ factsheets/6partytalks, accessed December 17, 2017. 93. Bajoria and Xu, “The Six Party Talks on North Korea’s Nuclear Program.” 94. Despite the agreement North Korea is till suspected of sending nuclear weapons and military technology to countries like Iran and Syria for hard currency and to obtain their technologies. 95. Cited in Somini Sengupta, “Tillerson, in Apparent U-Turn, Says North Korea Must  ’Earn’ Its Way to Talks,” December 15, 2017, New York Times, https://www.nytimes.com/2017/12/15/world/asia/tillersonnorth-korea.html, accessed December 16, 2017. 96. Cited in Ignatius, “What North Korea told a U.N. envoy trying to prevent war.”

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97. Choe Sang-Hun, “Kim Jong-un’s Overture Could Drive a Wedge Between South Korea and the U.S.,” New York Times, January 1, 2018, https://www.nytimes.com/2018/01/01/world/asia/kim-jong-unoffer-talks-south-korea-and-us.html, accessed January 1, 2018, and Choe Sang-Hun, “Kim Jong-un Offers North Korea’s Hand to South, While Chiding U.S.,” New York Times, December 31, 2017, https://www. nytimes.com/2017/12/31/world/asia/north-korea-kim-jong-unolympics.html, accessed, January 1, 2018. 98. Choe Sang-Hun, “North Korea Opens Border Hotline with South,” New York Times, January 3, 2018, https://www.nytimes. com/2018/01/03/world/asia/north-korea-hotline-south.html, accessed January 3, 2018. 99. Cited in Peter Baker and Michael Tackett, “Trump Says His ‘Nuclear Button’ Is ‘Much Bigger’ Than North Korea’s,” New York Times, January 2, 2018, https://www.nytimes.com/2018/01/02/us/politics/trumptweet-north-korea.html, accessed January 2, 2018. 100. Cited in Kimiko de Freytas-Tamura, “Days After Hawaii’s False Missile Alarm, a New One in Japan,” New York Times, January 16, 2018, https://www.nytimes.com/2018/01/16/world/asia/japan-hawaiialert.html, accessed January 16, 2018. 101. Choe Sang-Hun, “South Korea’s Leader Credits Trump for North Korea Talks,” New York Times, January 10, 2018, https://www.nytimes. com/2018/01/10/world/asia/moon-jae-in-trump-north-korea.html, accessed January 10, 2018. Trump has taken credit for restarting talks, and Moon was almost certainly stroking his ego. 102. Cited in Carol Morello, “North Korean nuclear weapons crisis at a ‘tenuous stage’, Tillerson says,” Washington Post, January 16, 2018,” https:// www.washingtonpost.com/world/national-security/tillerson-openssummit-with-a-vow-to-keep-up-pressure-on-north-korea/ 2018/01/16/b04bbac8-d95b-4115-97ed-9ed7b451cda3_stor y. html?tid=pm_world_pop&utm_term=.de8dd6823f44&wpisrc=nl_ daily202&wpmm=1, accessed January 17, 2018. 103. John Bowden, “Pompeo taking lead role in planning Trump’s North Korea meeting: report,” The Hill, March 17, 2018, http://thehill.com/ homenews/administration/378917-pompeo-taking-lead-role-in-negotiating-trumps-north-korea-meeting, accessed March 20, 2018. 104. Cited in Navid Nakamura, “No location, no agenda: Trump administration scrambles for North Korea talks,” Washington Post, March 19, 2018, https://www.washingtonpost.com/politics/no-location-no-agendatrump-administration-scrambles-for-north-korea-talks/2018/03/19/6 15453b8-2895-11e8-874b-d517e912f125_story.html?utm_term=. b6225685f17b, accessed March 20, 2018. Cha had been named Trump’s

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ambassador to South Korea in 2017, but was withdrawn following a policy dispute over North Korea. 105. Cited in Emily Ruahala and Anna Fifield, “Kim-Xi meeting presents a new challenge for Trump on North Korea,” Washington Post, March 28, 2018, https://www.washingtonpost.com/world/asia_pacific/kim-ximeeting-presents-a-new-challenge-for-trump-on-north-korea/2018/03 /28/55e7e8a6-31f9-11e8-b6bd-0084a1666987_story.html?utm_ term=.f9fe24a7ec65, accessed March 28, 2018. 106. Ibid. 107. Cited in Rick Noack, “How Kim-Trump tensions escalated: The more the U.S. said ‘Libya’, the angrier North Korea got,” Washington Post, May 24, 2018, https://www.washingtonpost.com/news/world/ wp/2018/05/24/the-more-pence-and-trump-say-libya-the-angriernorth-korea-gets, accessed June 13, 2018. 108. Ibid. 109. Cited in Peter Baker and Choe Sang-Hun, “Trump Sees End to North Korea Nuclear Threat Despite Unclear Path,” New York Times, June 13, 2018, https://www.nytimes.com/2018/06/13/us/politics/trumpnorth-korea-denuclearization.html, accessed June 14, 2018. 110. Karen DeYoung and John Wagner, “Trump and Kim declare summit a big success, but they diverge on the details,” New York Times, June 13, 2018, https://www.washingtonpost.com/politics/trump-says-korthkor ea-no-longer-a-nuclear-thr eat-as-he-r etur ns-to-washington/2018/06/13/b1d69566-6ef0-11e8-bf86-a2351b5ece99_story. html?utm_term=.1c1caa5bab4c, accessed June 14, 2018. 111. Joby Warrick, “North Korea’s Dispersed and Hidden Weapons Complex Highlight the Challenge of Denuclearization,” Washington Post, June 13, 2018, https://www.washingtonpost.com/world/national-security/ north-koreas-dispersed-and-hidden-weapons-complex-highlights-thechallenge-of-denuclearization/2018/06/13/2ed6486c-6f47-11e8bf86-a2351b5ece99_story.html?utm_term=.a10298563dbe, accessed June 14, 2018. 112. Motoko Rich, “Trump-Kim Summit Creates New Anxieties for Asian Allies,” New York Times, June 13, 2018, https://www.nytimes. com/2018/06/13/world/asia/trump-kim-summit-asian-allies.html, accessed June 13, 2018. 113. Cited in Adam Taylor, “Pompeo was grilled by reporters about North Korea’s nukes. This was his testy response,” Washington Post, June 13, 2018, https://www.washingtonpost.com/news/worldviews/wp/2018/ 06/13/pompeo-was-grilled-by-reporters-about-north-koreas-nukes-thiswas-his-testy-response/?utm_term=.d3edb513becf, accessed June 14, 2018.

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114. Harry J. Kazianis, “The Case for Containing North Korea, The National Interest, October 15, 2017, http://nationalinterest.org/feature/thecase-containing-north-korea-22727, accessed December 31, 2017. For analysis of the DPRK’s motives, see Denny Roy, “Misunderstanding North Korea,” Asia Pacific Issues, East-West Center, No. 133 (August 2017), https://www.eastwestcenter.org/system/tdf/private/api133. pdf?file=1&type=node&id=36236, accessed December 31, 2017. 115. Stephanie Condon, “Donald Trump: Japan, South Korea might need nuclear weapons,” CBS News, March 29, 2016, https://www.cbsnews. com/news/donald-trump-japan-south-korea-might-need-nuclear-weapons/ accessed December 21, 2017. 116. Cited in Stephen Evans, “How might Donald Trump deal with North Korea’s Kim Jong-un?” BBC News, November 11, 2016, http://www. bbc.com/news/world-asia-37932923, accessed December 21, 2017. 117. Cited in Julian Borger, “Donald Trump: I’d be honored to meet Kim Jong-un under ‘right circumstances,” The Guardian, May 1, 2017, https://www.theguardian.com/us-news/2017/may/01/donaldtrump-kim-jong-un-meeting-north-korea, accessed December 21, 2017. 118. Rebecca Lai, William J.  Broad, and David E.  Sanger, “North Korea is Firing Up a Reactor. That Could Upset Trump’s Talks With Kim,” New York Times, March 27, 2018, https://www.nytimes.com/interactive/2018/03/27/world/asia/north-korea-nuclear.html, accessed March 28, 2018.

CHAPTER 7

Interpreting the Taiwan Strait Conflict: Taiwanese Versus Chinese Consciousness Fu-Lai Tony Yu and Diana S. Kwan

1   Introduction The struggle to break away from the parent state and claim for independence by people in Kashmir, Kurdistan, Aceh, Chechnya, the Turkish Republic of Northern Cyprus, the Basque Country and Northern Ireland have led to political conflicts, violence and bloodshed. Moreover, secessionist movements often result in terrorist activities, abuses of human rights and ethnic cleansing. In East Asia, the Taiwan Strait is said to be one of the most vulnerable spots in the world. High tension in the Taiwan Strait has been caused by some people in Taiwan striving for independence while Communist China insists to unify Taiwan and curb Taiwan’s secessionist movement. Why do separatists want to detach themselves from their original state and claim to be a new independent nation? On the F.-L. T. Yu (*) Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] D. S. Kwan Office of Medical Education, The Chinese University of Hong Kong, Shatin, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_7

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other hand, on what basis can unificationists deny the independence claim and block secessionist campaign? This issue is of utmost importance. Understanding the nature of the issue does not only preserve national unity for people who do not want to see their nation falling apart, it can also avoid conflict and violence and maintain peace globally. Unfortunately, the nature of the issue has not been properly understood. This chapter has two objectives. We first construct a theory, namely, the social construction of national reality, which allows us to explain the origin of national identity. We then apply our theory to Taiwan’s case. It attempts to explain that the confrontation between separatists in Taiwan and unificationists in mainland China is caused by the conflict of knowledge taken for granted. This chapter starts with a theory of social construction of national reality (Sect. 2). This theory will be applied to Taiwan’s case (Sects. 3, 4 and 5). This chapter argues that the Cross-Strait conflict is originated in the two kinds of identity, namely traditional Chinese consciousness and emerging Taiwanese consciousness, which result in a conflict of knowledge. Policy implications and conclusions are presented in Sects. 6 and 7.

2   Toward a Theory of Social Construction of National Reality In this chapter, we use phenomenological analysis to explain the origin of national identity and hence the existence of a nation. In this chapter, we attempt to formulate a theory of social construction of national reality. We first introduce a theory of human agency given by Max Weber and Alfred Schutz. Then, we apply this theory to explain the origin of national consciousness. We shall argue that national identity, the product of a mind construct, comes from experience taken for granted during socialization. In other words, we apply Thomas’s and Berger’s social construction of reality to establish a theory of national identity. We call it a theory of social construction of national reality. 2.1  Human Action, Sensemaking and ‘I-We’ Relationship Human agents act in everyday life. They act on the basis of thinking (Knight 1956:123). Each action has a meaning attached to it. Actors do not live alone but experience with the existence of other people. In other words, they make sense of the social world (Weick 1969). Sensemaking

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implies interpretation. Actors try to understand other people and expect other people to understand them (Weber 1964; Goffman 1969). In Weigert’s words (1981:74), ‘Interpretation is a process of perceiving the other and his or her interaction within symbolic frameworks so that we can make some sense out of what the other is doing. … If we cannot make any sense out of the other’s interaction, it may be that there is no sense in it, or worse, it may be that there is no sense in me.’ In simple terms, action is intersubjective. Human agents identify similarities and distinguish themselves by the presence of the ‘significant others’. There is no ‘I’ without the existence of ‘you’. Walker (1993:174) rightly points out that ‘Knowing the other outside, it is possible to affirm identities inside. Knowing identities inside, it is possible to imagine the absences outside.’ ‘I’ is then expanded into a ‘we’ relationship in a common environment (Schutz 1976:32). People categorize ‘we’ as in-group and ‘they’ as out-group (Tajfel and Turner 1979). This is the foundation of collective consciousness, the origin of national identity. 2.2  Experiences Taken for Granted, Socialization and Consciousness People act, experience and learn from their everyday lives. Their experiences accumulate into a stock of knowledge for them to interpret the outside world. The stock of knowledge is gained through a process of socialization. At the beginning, a child interprets and experiences from family members. Primary social world implies familial identity. Children accept their father and mother as parents without challenge. They take what their parents have told them and learnt from their parents. As children grow up and go to school, they learn and interact with schoolmates and teachers. They gradually experience and accept the outside world. Hence, ‘secondary socialization’ (Berger and Luckmann 1966) occurs. School life is not as intimate as familial relationship but more complicated and influential. After finishing school, adults enter the workforce. They spend most of their time in their workplaces. Working people socialize with their colleagues. In general, as people grow up in the same environment, they socialize together and share a common stock of social knowledge. Their actions and interpretations are then socially constructed. Human agents take experiences from everyday lives for granted. In other words, the knowledge they gained is taken unconditionally as real and will not be challenged. This is the theory of social construction of

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reality first given by William I.  Thomas and later extended by Thomas Luckmann, Peter Berger and Brigitte Berger. As early as 1928, William I. Thomas (1923:571–572) made a famous statement on human action: ‘If men define situations as real, they are real in their consequences.’ What Thomas really argues is the way in which what people ‘know’ and believe to be true or false is always related to their social situations. Knowledge has social effects which have nothing to do with whether that knowledge is ‘true’ or ‘false’ in any absolute sense. Knowing the world is just like ‘knowing’ yourself by your image in a mirror. Thus, ‘things are what the acting people think they are’ (Kirzner 1979:137). This theory implies the subjective nature of knowledge. Human society is ‘an association of consciously purposive individuals’ with shared experience taken for granted (Knight 1956:124–5). Group consciousness has something related to national identity. National identity is the community’s incoherent sense of common self (Wheelis 1958:19). Hence, collective consciousness, the origin of national identity, does not come from substance. Rather, it is a collective perception of self.1 In other words, it is the perception of the difference between ‘we’ (in-group) and ‘they’ (out-group). 2.3  Social Construction of National Identity People take experience for granted. They accept their society and culture as reality without challenge. Experience taken for granted is thus the fundamental source of legitimacy and power. A nation arises because people in the community share a common stock of knowledge. They accept other ‘they’ in the community as ‘we’. A nation is the consequence of their subjective construction of reality. It arises out of a unified identity perceived by its people. National identity is a foundation of an independent state. Different nationalities emerge because national identities evolve from different stocks of knowledge. People within a country compare themselves with those in other countries. The origin of national identity is the common stock of knowledge which is biographically determined. Each territory has an absolute and respectful state authority on a particular group of people within a demarcated space. A sovereign state is then socially constructed. In line with the concept of sovereign state given by Biersteker and Weber (1996:11), we argue that a nation emerges out of intersubjectively human actions during social interactions. It is socially constructed,

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reproduced, reconstructed and deconstructed. A nation, as an identity or institution, constantly undergoes change and transformation. 2.4  Knowledge as a Source of Conflict People within a nation share a common stock of knowledge. The stock of knowledge has its own origin and meaning. This consists of ‘a complex of values, interests, and ideologies overlying a set of ontological assumptions, collective purposes, knowledge claims, and prescriptions’ (McNeely 1995:23). The stock of knowledge is neither static nor homogeneous. Rather, it is ‘incoherent, only partially clear and not free from contradiction’ (Schutz 1976:80). It is continuously constructed and transformed. Human agents do not only respond to the prescribed external environment, but also enact on their external world. Whilst adapting the existing world, actors also create a situation to which they can adapt (Weick 1969). If people of same culture, race, religion and ancestry are living in two separate regions, then each group of settlers will adapt and enact to the new environments. Hence, new interpretation, experience and stock of knowledge will germinate in these two regions, though two groups of people may still partially share some pools of knowledge. Over time, a divergent pool of knowledge will emerge between both regions. In-group and out-group differentiation will arise. Different stocks of knowledge, if confronted, often result in conflict. 2.5  Result of Conflicting Knowledge Conflicting knowledge may lead to two consequences, namely discriminatory strategy and cooperative approach. Unless there is constructive mutual interaction, human agents will be biased by moving in-group toward themselves and keeping out out-group. The gap between ‘Us-Them’ categorization is widened. Conflicting schemes of knowledge intensify misunderstanding and prejudice. Subsequently, perceived threat, moral superiority and power politics are overestimated (Nye 1987; Wendt 1992). Aggressive strategies such as intervention and military action are likely adopted. International cooperation is an alternative way to deal with conflicting knowledge. Interaction and learning promote a new understanding and expectation (Adler 1997; Checkel 2001). Cognitive process directs toward a more positive attitude to each other. Residents of a territory do not need

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to give up their own national identity but enrich their knowledge by encompassing others as one commonality. Us-Them identity distinction is re-interpreted as an inclusive ‘we’. National identity is socially reconstructed. In the following, we shall apply our theory to understand the Taiwan Strait crisis.

3   Taiwan’s Search for National Identity A nation arises out of collective consciousness. Since the arrival of Portuguese in 1582, Taiwan has continued to search for its collective identity. The problem of national identity in Taiwan has remained the most controversial issue over the past two decades. The national identity of this island remains ‘divisive, uncertain and explosive’ (Jiang 2001:21). Recognizing the fact that national identity is multi-dimensional and multi-­ layers, Wang and Liu (2004:568–590) distinguish four types of national identity in Taiwan, namely Taiwanese nationalist identity, the pro-Taiwan identity, the mixed identity, the greater China identity. Wong and Sun (1998:247–272) identify five discourses on national identity as devised by Taiwan residents: Chinese nationalism, status-quoism, confused identity, Taiwan-prioritism and Taiwanese nationalism. Our main purpose is to examine the Cross-Strait conflict, and so this chapter highlights and examines two political movements in shaping national identity in Taiwan, namely, Sinicization and Taiwanization. The former calls for reunification of the territory while the latter attempts to separate Taiwan from mainland China. Taiwan’s future development is crucially dependent on these two forces—the struggle between Chinese identity and Taiwanese identity. 3.1  Sinicization in Taiwan Under Ming and Ching Dynasties Prior to the seventeenth century, Taiwan was a rather isolated island and largely been neglected by the outside world (http://www.gio.gov.tw/ taiwan-website/5-gp/yearbook/P033.htm). Tribes of indigenous peoples, plus some Han people from mainland China, were already living in Taiwan when the Portuguese first visited the island in 1582 after a shipwreck. In 1622, the Dutch came to Taiwan for its abundant natural resources and strategic location. Around 1661, endless wars, famines and robberies severely threatened the lives of Chinese people in mainland China. Consequently, thousands of Chinese people, especially from the coastal provinces of Fujian and Guangdong, migrated across the Strait to

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Taiwan. About 40,000 Chinese people were living in Taiwan in 1662. These immigrants brought their Chinese culture with them to the island. Though they lived in Taiwan, they took their Chinese experiences in the Mainland for granted.2 They still accepted China’s emperor as their government without query. More importantly, they took China as their country unconditionally. These Fujian people in Taiwan living and thinking in a Chinese way served as a foundation for Chinese identity developed in later days. The Chinese consciousness, which was already embedded in the migrants’ minds, was further reinforced by the establishment of the Chinese governments in the island.3 Taiwan was politically related to Imperial China via Mr. Cheng Chen-Kung, a general who was loyal to Ming Dynasty, defeated the Dutch in Taiwan in 1662 and set up a government in Taiwan. The Manchus later conquered China. In 1683, the Ching’s army led by Mr. Shih Lang, a rebellious general of General Cheng Chen-Kung, took over Taiwan and convinced the Ching government to incorporate Taiwan into the territory of Manchus as Taiwan was considered as a ‘protector of the inner provinces’ of China. Henceforth, Taiwan became a prefecture of the Ching Dynasty for 212 years until 1895 when it was ceded to Japan. As a whole, under the ruling of Ming and Ching dynasties, building upon the Chinese heritage taken for granted by Chinese migrants in the island, Taiwan had steadily undergone Sinicization until the First Sino-Japanese War, when Taiwan was ceded to Japan in 1895 for 50 years.4 3.2  Reinforcement of Sinicization in Taiwan Under Chiang Kai-Shek’s KMT Rule Following the surrender of Japan at the end of the Second World War, Taiwan was handed over to the Republic of China (ROC). Losing mainland China to the Chinese Communist Party in the Civil War, General Chiang Kai-Shek and his followers fled to Taiwan. From then onward, Taiwan is politically synonymous with the Republic of China. The Republic of China then started de facto sovereign state rule in Taiwan. From 1950 to 1975, President Chiang Kai-Shek and his government transplanted and reinforced Chinese values in Taiwan. Chinese culture in the slogans of ‘Cultural Renaissance’ and ‘Cultural Reconstruction’ was promoted in Taiwan to counter the Cultural Revolution in mainland China (1966–1976) (Chun 1996). The ideology of Chineseness was diffused. The Kuomintang (KMT or the Nationalist Party) told people in

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Taiwan that they were Chinese and claimed that the Party was the sole legitimate government of the whole of China. It also claimed that the KMT would unify and rule mainland China again. During the 55-year KMT rule (1945–2000), political, economic and socio-cultural environments in Taiwan were severely restricted. The government censored all information between Taiwan and other countries. Sinicization was implemented. National language policy was imposed to strengthen socio-cultural unity between mainland China and Taiwan. Students were required to learn and speak Mandarin only. Those who “disobeyed and spoke Hokkien (Fujian), Hakka or aboriginal tongues could be fined, slapped or subjected to disciplinary actions” (Dreyer 2003:2). Education curriculum and mass media were China-oriented instead of Taiwan-oriented. National Palace Museum, being an icon of Chinese culture, was opened in Taipei in 1965.5 Universities were set up in Taiwan using the names operated in mainland China. Examples are National Tsing Hua University in Hsinchu and Soochow University in Taipei.6 They named one of the mountains in Taiwan as Lao Shan, as the one in mainland China. In short, Taiwan was ruled by the KMT according to China’s image. Taiwan is designed as a ‘miniature’ of mainland China. In general, through strong government policies and education, people in Taiwan were socialized as Chinese and Taiwan was socially constructed as China. 3.3  The Chinese Identity: Sacred Territory and National Unity In order to understand the effect of Sinicization of Taiwan brought about by the KMT on national unity, it is necessary to know the meaning of being a Chinese. Chinese people regard themselves as ‘the descendants of the dragon’ or ‘the children of Yellow River’.7 Chinese identity implies searching glorious past and striving for international status (Zhang 2004). Furthermore, the Chinese society was embedded with five types of inter-­ personal relationship which considers being the characteristics which differentiate human beings from animals. These five types of inter-personal relationship are those between sovereign and minister, between father and son, between husband and wife, between the old and the young and, last but not least, between friends. The latter one is subordinate to the former one (superior). Violation of the five relationships is a sin and will be punished to death. Among the five, the relationship between sovereign and minister comes the first. Chinese people have been taught to be loyal to

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their emperor. The ultimate loyalty can be seen in the statement that: ‘if the emperor wants his servant to die, the servants have to die, even though the servant involves no wrong doing’. In Chinese legends, national heroes such as Mr. Qu Yuan, Mr. Wen Tianxiang and Mr. Yue Fei,8 are praised as brave, righteous, noble, loyal and patriotic servants of the homeland. Their legends have been compulsory readings in Chinese literature and history courses in school curriculum. As a result of such socialization, Chinese people are taught to protect the homeland at all costs. It is a responsibility for each Chinese to preserve China’s territorial integrity and unite the nation under one empire. This ideology is taken for granted. If a nation collapses, each individual has the responsibility. It is a shame if one betrays his or her motherland. Traitors will be disgraced by many generations in history. 3.4  Identical National Identity and the Struggle for Hegemony Between the Kuomintang and the Chinese Communist Party The nation-defining conceptual framework designed by the settler-state KMT’s regime in Taiwan was that of a nation encompassing the whole of China. Despite the fact that the KMT’s regime had long abandoned its territory in the mainland, it took that mainland China as its homeland as well as a basis for national identity. Vowing to once more ‘revive and recover the mainland’, the KMT composed stories based on ancient feudal era of Chinese history, such as ‘Tien Tan recovers the Kingdom (referring to General Tien Tan of the state of Chi during the Warring States period, who recovered his homeland from the hands of Yen invaders), in order to ‘educate’ Taiwan’s people, urging them ‘don’t forget the time at Chu’ (referring to a battle in Chinese history whereby the hero turned the near defeat and humiliation of the state of Chu into a glorious victory). The entire content of its educational and value systems took China as its foundation of thought, without the least vestige of native Taiwanese identity. Its aim was to instill in the public an affection for their Chinese homeland and filial loyalty to the paramount leader. On the diplomatic front, the KMT’s regime claimed to be the sole legitimate government of the whole China. In sum, after the exile to Taiwan, the KMT’s regime, under the leadership of President Chiang Kai-Shek, ruled the island with political obsession of ‘overthrowing the Communists and reviving the country’ for 26 years (Li 2001).

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Sinicization policy under KMT ruling taught people in Taiwan that they were Chinese. They were the seeds of the dragon. As a result, many people in Taiwan, which already take China as their country for granted (no matter how loose the form is), have been reinforced by the KMT that they are ‘in fact’ the seeds of the dragon. Being a Chinese, each of them has the duty of reunifying the nation and avoiding the nation to break into pieces. As mentioned above, ‘if the empire collapses, each citizen has the responsibility’.9 Given that mentality, both people in Taiwan at that time and Mainlanders wanted to see one unified nation. In other words, there is no conflict of knowledge between people in mainland China and Taiwan at large. Both regard Taiwan and the mainland as the only one China. Given two sovereign states (the Republic of China [ROC] and the People’s Republic of China [PRC]), this is a dilemma. Chinese people take the principle that ‘Han and the rebellious traitor will never coexist together, the royal empire will never be let falling apart’—a sense of Han ethnocentric mentality. In other words, there can only be one legitimate state. The ROC considered the Chinese Communist Party in the mainland as the traitor or rebellious villain. Hence, the ROC and PRC at that time were struggling for orthodox status. Such struggle was highlighted in the international affair. During the United Nation (UN) Resolution in 1957, it was recommended that both ROC and PRC would enter UN membership as two separate Chinas. However, the Chiang’s government refused the arrangement outright, because it regarded itself as the only legitimate government and would not coexist with the rebellious villain. President Chiang Kai-Shek would not let the nation split into half. The only solution under this situation is to have one entity to eliminate another party. The Chiang’s government always wanted to remove the Communist Party in mainland China and reclaimed its territorial right there. The slogan ‘recovering mainland’ was the national goal of Chinese people in Taiwan at that time. It was reported that during the Cultural Revolution (1966–1976), President Chiang wanted to take a military assault to take the advantage of chaotic situation in the mainland. However, the United States government was very rational in this political calculation. Experiencing the Korean War, the United States would not want to start another similar battle with Communist China. Without America’s backing, Chiang’s plan to revive the mainland faded and hence the splitting situation remained until now. On the other hand, Communist China always takes Taiwan as part of China. Ever since Chairman Mao Zedong addressed to the people at the

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Tiananmen Square that ‘the Chinese people have stood up!’ during the establishment of the PRC on September 21, 1949,10 China has taken its national pride. Nationalism has been widely accepted in the society due to the humiliation experienced during late Ching Dynasty. During the Cultural Revolution, nationalism had been pushed to the peak. Communist leaders in the mainland always want to see China reunify with Taiwan in their lifetime. They would not allow Taiwan to break away from the ‘sacred’ territory. They would not tolerate any call for Taiwan’s independence. Recently, they passed an Anti-Secession Law to counter combat the growth of independence movement in Taiwan. In summary, during Chiang’s ruling, in general, there was no conflict of knowledge between people in China and Taiwan in terms of one China. Both sides agreed that the mainland and the island had to be unified. The only conflict was that which the legitimate government was. It may be said that during this period, President Chiang Kai-Shek and his followers, using the KMT’s flag and Dr. Sun Yat-Sen’s Three Principles of the People, considered that their government as the only legitimate government. As a matter of fact, before withdrawing the seat from the United Nations, the ROC was internationally recognized as the only legitimate government. 3.5  Emerging Taiwanese Consciousness Political situation in Taiwan has changed rapidly after the death of Chang Kai-Shek. Taiwanese consciousness has emerged since Chiang Ching-Kuo (son of Chang Kai-Shek) allowed democratic freedom in Taiwan. We argue that Taiwanese consciousness has evolved out of (A) collective everyday life experience, (B) collective action against the ‘outsiders’, (C) against communism mentality and (D) Taiwanization. A. Collective Everyday Life Experience Collective everyday life experience has profound influence on the emergence of national identity. Some scholars in political sciences (such as Renan 1996; Bauer 1906/1996; Anderson 1991) even argue that a nation exists or not depending on whether people share common consciousness, created out of imagination. When the Portuguese arrived in Taiwan in 1582, they named the island as Formosa (‘the beautiful island’). Hence, life in the island of Taiwan can be envisaged as not too bad. When Chinese migrants from mainland China move to the island, indigenous people

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(Austronesian Peoples) in Taiwan regarded these mainlanders as outsiders. The Chinese migrants also regarded these indigenous people as ‘outgroups’. The two races spoke completely different languages and each race had its unique culture. However, after social interactions and a long process of mutual understanding (i.e. a process of typification), both groups were able to understand each other. As time passed, they shared similar stock of knowledge and exhibited a mixed form of cultures which is uniquely Taiwanese. Many single Fujian or Hakka males in Taiwan even got married with indigenous females (Shih 1998:178). They farmed there and regarded Taiwan as their home. Taiwanese consciousness was slowly built up as people settled and regarded the land as their home. Most of them spoke Min Nam Yu (Fujian language). They were Han people but regarded Taiwan as their home. Taiwanese consciousness changes from pure native language to include Min Nam Yu, as against Putonghua which is used in the mainland. Thus, Shih (2004) observes the change and contends that ‘Taiwanese consciousness is based on the consensus that Taiwan, as a setters’ society, has been largely territorialized, naturalized, and indigenized’. B. Collective Action Against ‘Outsiders’ as National Consciousness Building Otto Bauer in 1924 brought out the term ‘national communities of fate’. In his Austro-Marxist theory of the nation, he claimed ‘a nation is a totality of men united through community of fate into a community of character’ (Shin 1995:53). Rather than saying they share the same fate, it can be said that people try to protect their wellbeing by collectively constructing a nation (Shafer 1972:14–15; Gellner 1983:49; Shih 1997:673). Taiwan people have experienced several confrontations with the ‘outsiders’ (Dutch, Portuguese, Japanese and Mainlanders11) in their history. In September 1652, frustrated Chinese farmers in Taiwan revolted against the Dutch. The rebellions were violently suppressed by the Dutch, who slaughtered about 3000 peasants. The Ching government ceded Taiwan to Japan after being defeated by the Japanese in Sino-Japanese War of 1894. Taiwan people felt as an orphan being abandoned by their parents for Chinese people in Taiwan took it for granted that their parent government in the mainland had the obligation to take care of her fellow citizens. After the Second World War, the KMT government did not take good care of those ‘orphans’. On the

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contrary, the KMT acted as a conqueror in Taiwan, resulting in the 228 Event. This event made Taiwan native people feel that they could only help themselves. Some commentaries take this event as the origin of Taiwanese consciousness (The Liberty Age:198). In 1947, due to bad administration, ethnic tension and other factors, an islandwide uprising, known as the February 28 Incident, broke out. The February 28 incident of 1947 marked the conflict between native people in Taiwan and Mainlanders.12 Taiwan people were alienated by Chinese brutal repression. From then onward, the incident becomes a collective memory of Taiwan people (e.g. Corcuff 2000; Edmondson 2002). Taiwan native people believed that the KMT’s rule was more or less the same with the Japanese occupation in the past.13 Furthermore, the KMT used tokenism to manage Taiwan indigenous people. Political segregation made indigenous people feel they were different from Kuomintang Chinese. During the 1980s, they started to push forward a ‘pan-indigenous movement’, including a search for a correct name, claiming their own land and autonomous governance (Shih 1998:179). Anti-outsider movement has made Taiwan people feel a sense of ‘a national community of fate’. During the process, local consciousness has been created. As Shih (2004) argues, ‘structurally, Taiwanese consciousness carries a strong nativity color in the form of primary resistance to alien rulers, such as Manchurians, Japanese, and Chinese. Henceforth the cry for “Taiwan for the Taiwanese”. It is doubtful whether this nascent nationalist sentiment would have emerged if the colonial government or ethnicized state had not employed discriminatory measures against the native Taiwanese.’

C. Against Chineseness as Against Communism During the Cold War, most of the people in Taiwan were afraid of their island being taken over by Communist China. Before China’s Open-Door policy, the gap between mainland China and Taiwan’s living standards was wide. Though in recent years, the economy of mainland China has caught up with the world, young elites and intellectuals in Taiwan still believe that Taiwan is superior to mainland China both politically and economically. More importantly, after the death of Chiang King-Kuo, Taiwan has slowly evolved into a democratic society. Universal suffrage and partisan politics are adopted. Political parties have active roles in local and national politics. On the other hand, Communist China still remains on one-party rule. As

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a result of huge political differences between two sides, more and more second or third generation of Taiwan-born Mainlanders started to refer themselves racially and culturally as Chinese, but politically Taiwanese (Chu 2000:316). Taiwan people refuse to be ruled by the Chinese Communist Party. They have felt that Taiwan should distant itself away from mainland China and not to be united with the Communists. In order to isolate Taiwan from mainland China, Taiwan people have to reject Chineseness. For example, they exclude the history of China from the history of Taiwan in national curriculum. They speak Min Nam Yu rather than Mandarin. Only by removing Chineseness that they can feel they are Taiwanese. D. Taiwanization: Re-education and Localization Movement President Chiang Kai-Shek died in 1975. His son Chiang King-Kuo became the successor. At his later days, Chiang King-Kuo realized that he and Mainlanders had been qualified as Taiwanese. To prevent any revenge from the native Taiwanese, he designated Mr. Lee Teng-Hui (a native of Taiwan) as his successor and created a space for ethnic reconciliation. Since Lee came to power unexpectedly in 1988, the KMT had gradually undertaken its naturalization process (Shih 2002). President Lee began to hand over the power to people. He advocated localization movement. Taiwanese consciousness was then raised and democratization was implemented. The government adopted Taiwan-oriented school curriculum. Students were taught local history and culture. The Three Principles of the People, being the doctrine of Dr. Sun Yat-Sen, ‘the Father of the Nation’, was replaced by indigenous culture and history. Memories of Chiang Kai-­ Shek gradually disappeared in the society. Min Nam Yu has gradually gained ground. National television (Formosa Television Corporation) has used Min Nam Yu (Rawnsley 2003). Social solidarity was built on blood relationship and territorial-based indigenization process (Chen 2001). Furthermore, young Taiwanese elites finished overseas studies and exposed to western liberal and democratic ideas. When returning Taiwan, they were working on the propaganda that Taiwan was for and of the Taiwanese. Mainlanders in Taiwan were encouraged to naturalize with indigenous people. The Taiwan government encouraged integration between indigenous people and Mainlanders. New Taiwanese was identified to those Mainlanders who reconciled with indigenous people.

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The emergence of Taiwanese identity calls for secession from mainland China. Thus, Shih (2002) summarizes, Lee Teng-Hui endeavored to engineer the construction of a community of fate for all of the residents of Taiwan by resorting to the principle of people’s sovereignty in a communitarian fashion. In his cardinal contemplation, all policy priorities would be given to the whole residents of Taiwan, which implicitly made him a territorial Taiwanese nationalist since a nation would be conceived as a community of fate embedded on its sovereign state.

4   Conflict of Knowledge as a Result of Taiwanization: Chinese Consciousness Versus Taiwanese Consciousness There are two dimensions in the conflict of knowledge: first, conflict between Taiwan and mainland China and second, conflict within Taiwan. The first and the second are inter-related. 4.1  Mainlanders’ View on Taiwan: Great Han Chauvinism The government in mainland China perceives that the reunification of Taiwan with China is taken for granted on the ground of common origin, history, blood lineage and culture (Schubert 1999). For Chinese people, the glory of Chinese identity would be redeemed by unifying Taiwan, the ‘lost territory’. If Taiwan has succeeded in separating from the motherland, Chinese ‘sacred’ territory would be falling apart. With great Han chauvinism, the mainland government insists on the reunification between Taiwan and mainland China at all costs. It insists on One-China principle and defies any attempt on secessionist movement in Taiwan.14 To achieve the unification goal, the mainland government would exercise military intimidation, diplomatic isolation and Anti-Secession Law. Military intimidation by mainland China has recurred in terms of high-­ tech military exercises and the development of missile defense system. In mainland government’s view, military provocation would threaten people in Taiwan not to pursue secessionist campaigns. To further tighten One-­ China policy, the Chinese Communist Party passed Anti-Secession Law on March 14, 2005. According to the law, Taiwan is not an independent sovereign state but a part of China. If all means of peaceful reunification

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are failed to detect secessionist movement in Taiwan, China can employ non-peaceful means and other necessary means to protect sovereignty and territorial integrity. 4.2  Taiwanese Consciousness: Against Unification and Call for Secession Chiang Kai-Shek’s regime rushed into exile in Taiwan, bringing about over 50 years of estrangement between Taiwan and mainland China. As a result of historical evolution, the Cross-Strait has developed into two different national identities (Li 2001), enhanced by Chinese consciousness and Taiwanese consciousness. Taiwanization is a way of being Taiwanese and diluting Chineseness. People in Taiwan live in the island economy and share experience with each other in Taiwanese way. Over time, Taiwanese identity is then emerged, transformed, re-engineered and actualized (Wang 2000; Chu and Lin 2001). More and more Taiwan people identify themselves as Taiwanese instead of Chinese or Chinese and Taiwanese (Baum and Sherry 1999; Hoh 1999; Ho and Liu 2002). Taiwan has evolved into a society based on its own environment and culture. The transformed stock of knowledge held by many Taiwan people is obviously conflicting with that held by traditional Chinese in the island who take on Chinese values, history and culture for granted. Many people in Taiwan start to query their original Chinese identity imposed by Chiang Kai-Shek’s regime. They now identify themselves as in-group whereas Mainlanders as out-group. Many new generations of Taiwan are now having two overlapping identities: Chinese and Taiwanese. On the one hand, they are brought up and socialized with Chinese customs, culture and values. On the other hand, Taiwanese identity continues to diffuse into their minds. Many of them now refuse to identify themselves as the Chinese in the Communist regime. Such knowledge also comes into conflict with people in the mainland who always take Taiwan as part of China. When Mr. Chen Shui-Bian, the leader of the Democratic Progressive Party (DPP), took the presidency in 2000, he and his Party have advocated radical movement on Taiwanization and independence. The second consecutive victory of the Democratic Progressive Party in Presidential Election in 2004 is regarded as a ‘face-off’ on national identity between advocates of ‘Taiwan first’ or ‘Taiwanization’ and people who retain ‘Great China’ mentality and are in favor of reunification with China (Taiwan

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News.com, March 11, 2004). The mainland government is vigilant in Taiwan’s secessionist movement. Conflicting stocks of knowledge on national identity is the underlying cause of conflict. The division of ‘being Taiwanese’ and ‘being Chinese’ underlies different understanding of past and present experiences and anticipated future.15 It triggers the Cross-Strait conflict which is all about perception differences between Taiwan and China (Copper 1997). Though Taiwan people are racially Chinese, they deliberately separate themselves from being Chinese by history, socio-cultural and political developments. Taiwanization encourages indigenization and intends to eliminate Chinese influences. Consequently, in 1999, President Lee described the Cross-Strait situation as ‘special state-to-state relations’ with the People’s Republic of China (Mainland Affairs Council 1999). After the end of the KMT’s rule in 2000, President Chen Shui-Bian further consolidates Taiwanization campaigns and Taiwanese identity has been boosted a step further.16 Secessionist movement has been carried on.

5   Current Struggle Between Taiwanese and Chinese Consciousnesses: ‘The Brave Formosans’ Versus ‘The Offspring of the Yellow Emperor’17 Using a theory of social construction of national reality, this chapter has argued that the Cross-Strait tension arising out of the conflict between traditional Chinese consciousness and emerging new Taiwanese consciousness. Both consciousnesses have their origins in everyday life experiences. Hitherto, people in Taiwan seem still not so sure about their national identity. In a survey done by the Election Study Centre (National Chengchi University), in 2005 December, though 46.5 percent of the total population in Taiwan regarded themselves as Taiwanese, about 42 percent of people in the survey still regarded themselves as both Chinese and Taiwanese (see Table 7.1).18 This means that a unique national identity has not yet developed. Given their vague national identity, people in Taiwan are currently not willing to push forward for independence. Nor they want to unify with Communist China. They are stationed at the crossroad. This hesitation can be again observed from another survey done by Election Study Centre.

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Table 7.1  Unification versus independence (% distribution)

Unification as soon as possible Maintain status quo, decide at later date Maintain status quo, move toward independence Maintain status quo, move toward unification Maintain status quo indefinitely Independence as soon as possible No response

2005/Dec.

2017/Dec.

2.1 38.2 13.7 12 18.8 6.6 8.6

2.2 33.2 17.2 10.3 25.1 5 6.8

Source: Election Study Center, National Chengchi University (NCCU), http://esc.nccu.edu.tw/newchinese/data/tonduID.htm; access June 25, 2018

At the end of 2017, around 33.2 percent of people in Taiwan preferred to maintain status quo and decide the issue later, as compared to 38.2 percent in 2005. About 25 percent of them still wanted to maintain status quo indefinitely in 2017. Pushing for independence as soon as possible had only 5–6.6 percent of support between the two periods. Though a unique national identity in Taiwan has not yet established, more people in Taiwan wants to move toward independence (17.2 percent in 2017 vs. only 13.7 percent in 2005). The vague national identity is also reflected in Taiwan’s party politics. The Democratic Progressive Party representing Taiwanese consciousness tends to opt for secession. The Kuomintang representing traditional Chinese consciousness calls for closer tie with mainland China. Though Taiwanese consciousness gains ground over time, it still cannot dominate the foreign policy. In 2004, President Chen Shui-Bian aspired to put independence to a referendum in 2006 but failed. The Executive Yuan withdrew legal revisions to the Referendum Law at the last minute (Taipei Times, December 2, 2004). However, in February 2006, under President Chen’s leadership, the National Unification Council ceased to function. On the other hand, Chinese consciousness still remains a stronghold in Taiwan. In 2005, Mr. Lien Chan, the leader of the KMT, and Mr. James Soong, the leader of the People First Party, visited mainland China consecutively. In the mainland, both Taiwanese politicians expressed their common wish to find hereditary identity as Chinese, the descendants of ‘Chunghua Nation’ (Great China). Their visits have stirred up China heat in Taiwan, implying a vigorous struggle between two kinds of consciousnesses in Taiwan. In short, Taiwan’s future political development, whether

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uniting with or breaking away from mainland China, hinges on two kinds of consciousnesses evolving in the island.

6   Looking Ahead: Will Taiwan Go Unification? Our theory suggests that socialization by education is important in knowledge and consciousness formation. On the one hand, the mainland government continues to educate Mainlanders that Taiwan is part of China. On the other hand, education and the society in Taiwan continue to promote Taiwanization. Taiwanese consciousness continues to spread in the island. In long term, the divergence in knowledge (Taiwanese vs. Chinese consciousness) among people in Taiwan and mainland China will create a dead knot. In other words, the longer the time the Taiwan’s future unsettled, the more difficult the Cross-Strait solution is, unless other unexpected change such as successful democratization in mainland China occurs. Cross-Strait interaction is a significant way to change peoples’ minds in the two regions. Since China’s Open-Door Policy in 1978, business people in Taiwan have made enormous investment in mainland China. Between 1991 and 2003, 44.5 percent of Taiwan’s total foreign investments to mainland China were approved by Taiwan government (Mainland Affairs Council 2003). In 2002, about 7.4 percent of total foreign directed investment in China came from Taiwan (Mainland Affairs Council 2002). Many business people from Taiwan even establish families in the mainland and have children born there. Such integration will make many Taiwanese families feel the difficulty of identifying themselves as pure Taiwanese. Unofficial Cross-Strait relations have already been established. Non-­ governmental organizations between two regions organize regular meetings. Mutual Cross-Strait exchanges involve in social, cultural, transport and economic areas. Socio-economic exchanges are carried out between semi-government and non-governmental organizations and business sectors. Mainland Affairs Council and Straits Exchange Foundation are set up.19 Other Cross-Strait communications include ‘three direct links’ (postal, trade, maritime and air transport) and ‘four exchanges’ (academic, cultural, economic and sports). Cross-Strait exchanges provide an opportunity for people in the two regions to create and share a common scheme of interpretation. During business, political and social interactions, peoples’ knowledge from both sides will be redefined and new experience will be taken for granted. It leads to re-interpretation of external events. Such new knowledge can

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have the effect of calling for unification. Cross-Strait interactions reconstruct a greater China identity, hence, diluting Taiwan identity. Although at the moment, a common stock of knowledge has yet been shared between people in Taiwan and mainland China, mutual understanding can be reached by negotiation, bargaining, cooperation and collaboration.20 Re-interpreting knowledge is necessary to reach a common scheme of national identity.

7   Conclusion This chapter argues that a nation is socially constructed, as a result of evolving consciousness in peoples’ minds. People make sense of their world in everyday life and attach a meaning to their action. They create and enact an environment and interpret the world intersubjectively. People holding a common scheme of knowledge are identified as in-group and others without it as out-group. This is the origin of national identity. Socialization by education and political campaigns has brought divergent stocks of knowledge between people in Taiwan and mainland China. The struggle between Chinese consciousness and Taiwanese consciousness is the fundamental source of conflict within Taiwan and in the Cross-­ Strait regions. National identity in Taiwan has been transformed over time in the process of Taiwanization and Sinicization. The confrontation between emerging Taiwanese consciousness and traditional Chinese consciousness has escalated the Taiwan Strait tension and threatened East Asia’s stability. Cross-Strait trades, cultural exchanges and communication encourage learning and understanding among people from both sides, and thus provide an opportunity for them to re-define their stocks of knowledge. Re-interpretation of diverse knowledge toward commonality is necessary to reach a peaceful political resolution between Taiwan and mainland China.

Notes 1. John Locke’s chapter XXVII ‘On Identity and Diversity’ in An Essay Concerning Human Understanding (1689) has been said to be one of the first modern conceptualization of consciousness as the repeated self-identification of oneself. According to Locke, personal identity (the self) ‘depends on consciousness, not on substance’ nor on the soul. We are the same person to the extent that we are conscious of our past and future

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thoughts and actions in the same way as we are conscious of our present thoughts and actions. If consciousness is this ‘thought’ which doubles all thoughts, than personal identity is only founded on the repeated act of consciousness: ‘This may show us wherein personal identity consists: not in the identity of substance, but … in the identity of consciousness’ (http:// en.wikipedia.org/wiki/Consciousness# Consciousness_as_the_basis_of_ personal_identity_.28John_Locke.29); retrieved on February 28, 2006. 2. For a detailed discussion of the meaning of being a Chinese, see Sect. 3.3. 3. Especially the influence of the policies implemented by the KMT government. See Sect. 3.2. 4. During the 50 years of Japan’s occupation, Taiwan has been Japanized by the Kominka Movement conducted in the island. For example, Lee TengHui, the former President of Republic of China, was found to have strong mental ties with Japan. Lee went under the Japanese name Iwasato Masao during his youth. Lee has never tried to hide his pro-Japan sentiment in the public. He often mentioned his Japanese education and nurture. Lee also repeatedly assured the public that Japan will support Taiwan if Taiwan were to announce her sovereignty. At one point, Lee even stated that he was a Japanese (Imperial) citizen when he was a youth, implying his partial Japanese consciousness (http://en.wikipedia.org/wiki/Lee_Teng-hui, retrieved on April 21, 2007). This Japanese consciousness has been diffused into and merged with the Taiwanese consciousness. This can be seen by the fact that Lee later becomes the spiritual leader of the pro-independence ‘Taiwan Solidarity Union’ which calls for Taiwan to be separated from China (We thank the referee for bringing out the idea of the Kominka movement). 5. Many collections in National Palace Museum were moved around China during the Second Sino-Japanese War (1937–1945) and finally shipped to Taiwan in 1948. See http://www.npm.gov.tw/ch/a010101.htm. 6. Tsing Hua University and Soochow University were also established in Beijing and Suzhou, China respectively. 7. Yangtze River was said to be the cradle of the Chinese civilization. 8. There are many national heroes in Chinese history. Three patriotic heroes are glorified in Chinese history. (1) Mr. Qu Yuan was a minister of Chu state during the Warring States Period (475 B.C.–221 B.C.). The emperor of Chu and his government were corrupted and jealous with Mr. Qu Yuan. He was in exile and wrote a number of poems to express his concern on the country. Later, he killed himself for the country. From then onward, the Dragon Boat Festival commemorates him. (2) Mr. Wen Tianxiang was the Prime Minister of Southern Song Dynasty and later captured by the Mongol emperor. He did not give in to the Mongol emperor but asked for death wish instead. (3) The story of Yue Fei is equally deep in Chinese

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peoples’ hearts. During Southern Song Dynasty, although General Yue Fei and his soldiers had won brilliant victories for their nation and recovered most part of the Southern Song’s territory, the capitulationists of the Southern Song Dynasty (Emperor Song Kao-Chung and Mr. Qin Hui) wanted to remove him from the military power. General Yue Fei was then accused of ignoring the emperor’s orders. When he refused to plead guilty, he was executed at the age of 39 with a charge of ‘no charge is proven’. General Yue Fei’s execution and his most famous patriotic poem (Man Jiang Hong or ‘River of Blood’) gain him one of the three legendary ‘patriotic figures’ in Chinese history and were used in teaching many generations. 9. In Chinese saying: ‘if the sacred land sinks, it is not necessarily due to flooding, but due to the fact that no one cares about the territory’. 10. Opening address by Mao Zedong, the Chairman of the Chinese Communist Party, at the First Plenary Session of the Chinese People’s Political Consultative Conference. 11. For some Taiwan people, Mainlanders come from provinces in mainland China and are not outsiders. 12. On February 28, 1947, a group of government agents suspected a local woman sold illegal cigarettes and confiscated all her money and cigarettes. They beat her badly when she tried to get her possessions back. One of the government investigators shot to a crowd of people who came to intervene. The incident of February 28 provoked a widespread protest in Taiwan on March 8 in that year. The KMT troops brutally suppressed the riot and slaughtered up to 20,000 people. Many intellectuals and elites were prosecuted, killed and exiled. For details, see Lai et al. (1991). 13. The situation was similar when the Americans were furious with British brutal suppression in Boston Massacre (1770) before the American Revolution. Thomas Paine’s Common Sense (1776) condemned that Britain, being a ‘mother country’ of the America, should be shameful on her ‘cruelty’ and ‘tyranny’ on Americans. He criticized Britain as ‘being false, selfish, narrow and ungenerous’. (http://usinfo.state.gov/usa/ infousa/facts/loa/commse.htm) 14. For the One-China policy, see State Council 1993; Ministry of Foreign Affairs 2000. 15. Broadly speaking, it is said to have four solutions of Cross-Strait relations (Marsh 2000). ‘Taiwan nationalists’ prefer independence of Taiwan and oppose the reunification of China even though China becomes a democratic and economic state like Taiwan. ‘China nationalists’ favor the reunification of Taiwan with China. They argue that democracy is equivalent to the membership of a state. ‘Pragmatists’ think that the option of reunification and independence should be consistent with the general public.

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Finally, ‘Conservatives’ would like to maintain status quo instead of choosing reunification or independence. 16. ‘Taiwan has already been an independent sovereign country. Currently, Taiwan is already a country, an independent sovereign country. There is of course no question of declaring independence, because it is already a country. This is reality. This is the status quo. There is no doubt. It is not to be questioned whether you admit it or recognize it or not. It is an existing fact.’ (Time Asia [February 16, 2004]: Interview of President Chen Shui-Bian). 17. The term ‘The Brave Formosans versus the  Offspring of  the  Yellow Emperor’ was used by Jiang (2001: 23). 18. However, Taiwanese consciousness is gaining ground over time. The same survey shows that in 1992, only 17.3 percent of the population regard themselves as Taiwanese. 19. National Unification Council was also set up but declared ‘cease to function’ in February 2006 by Chen Shui-Bian. See http://esc.nccu.edu.tw/ newChinese/data/TaiwanChineseID.htm, access February 18, 2006. 20. According to the ‘1992 Consensus’ between Taiwan and mainland China, a common interpretation of One-China policy was reached: Taiwan would not declare independence, not to change its official name and not to work on state sovereignty by constitutional reforms. For details, see Xu 2001.

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Chu, Jou-Juo (2000) ‘Nationalism and Self-determination: The Identity Politics in Taiwan’, Journal of Asian and African Studies, 35(3): 301–321. Chu, Yun-Han and Jih-Wen Lin (2001) ‘Political Development in 20th-Century Taiwan: State-building, Regime Transformation and the Construction of National Identity’, The China Quarterly, 165: 102–129. Chun, Allen (1996) ‘From Nationalism to Nationalizing: Cultural Imagination and State Formation in Post-war Taiwan’ in Jonathan Unger (ed.) Chinese Nationalism, New York: M.E. Sharpe, pp. 126–147. Copper, John F. (1997) ‘The Origins of Conflict Across the Taiwan Strait: The Problem of Differences in Perceptions’, Journal of Contemporary China, 6(15): 199–228. Corcuff, Stéphane (2000) ‘Taiwan’s “Mainlanders”’, China Perspectives, 28: 71–81. Dreyer, June Teufel (2003) ‘Taiwan’s Evolving Identity’, Asia Program Special Report, 114(August 2003): 4–10. Edmondson, Robert (2002) ‘The February 28 Incident and National Identity’ in Stéphane Corcuff (ed.) Memories of the Future: National Identity Issue and the Search for a New Taiwan, New York: M. E. Sharpe, pp. 25–46. Gellner, Ernest (1983) Nations and Nationalism, Oxford: Blackwell. Goffman, Erving (1969) The Presentation of Self in Everyday Life, Garden City, N.Y.: Doubleday. Ho, Szu-Yin and I-Chou Liu (2002) ‘The Taiwanese/Chinese Identity of the Taiwan People in the 1990s’, American Asian Review, 20(2): 29–74. Hoh, Erling (1999) ‘Soul Searching’, Far Eastern Economic Review, 162(36): 70–72. Jiang Yi-huah (2001) “Between Modern and Postmodern: A Reading of Arendt’s Political Theory in the 1990’s”, paper delivered at the conference on “Politicizing Arendt’s Political Thought: In What Way She Has Been Read in the 1990’s”, Ritsumeikan University, Kyoto, Japan. Kirzner, Isreal (1979) Perception, Opportunity and Profit, Chicago: The University of Chicago Press. Knight, Frank H. (1956) On the History and Methods of Economics, Chicago: The University of Chicago Press. Lai, Tse-han, Ramon H. Myers and Wei Wou (1991). A Tragic Beginning: The Taiwan Uprising of February 28, 1947, Stanford, CA: Stanford University Press. Li Hsiao-Feng (2001) “Exile of the Chiang Kai-Shek Regime to Taiwan” (http:// www.twhistory.org.tw/20011210.htm). Mainland Affairs Council. (1999) Parity, Peace, and Win-win: The Republic China’s Position on the ‘Special State-to-State Relationship, August 1. (http:// www.mac.gov.tw). Mainland Affairs Council (2002) PRC Contracted Foreign Direct Investment. (http://www.mac.gov.tw/english/english/foreign/19.gif)

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CHAPTER 8

Neo-Mercantilist Policy and China’s Rise as a Global Power Fu-Lai Tony Yu

1   Introduction China pursuing Neo-Mercantilist policy in global expansion is generally known (Beeson 2009; Ayittey 2010; Atkinson 2011; Zhang 2016). In particular, Hawkin (2005) argues that China’s economic development strategy is a new version of Mercantilism. Likewise, Beeson (2009) observes that “China is actively embracing elements of Neo-mercantilism and state interventionism” in international economic affairs. Verma (2016:5) comments that “China is the modern world’s most successful Mercantilist state”. Ayittey (2010) even regards China’s involvement in Africa as “Chopsticks Mercantilism”. Though there are numerous commentaries on Chinese Mercantilism, an in-depth study on China’s Neo-­ Mercantilist policy in its national development and global expansion is lacking. This study fills this gap. This chapter starts with an introduction of the doctrine of Mercantilism and is followed by a comprehensive account of China’s Neo-Mercantilist policies in its national development. The last section will summarize the arguments. F.-L. T. Yu (*) Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_8

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2   The Doctrine of Mercantilism The term “Mercantilism” was coined by Victor de Riqueti, marquis de Mirabeau in 1763, and was popularized by Adam Smith in 1776 (Verma 2016). Mercantilism is an economic and political doctrine developed in Western European countries between 1500 and 1800 in which statesmen, policymakers and merchants seek to increase wealth through state action. According to Encyclopedia Britannica, Mercantilism is described as an “economic theory and practice common in Europe from the 16th to 18th century that promoted governmental regulation of a nation’s economy for the purpose of augmenting state power at the expense of rival national powers”. Similarly, McCusker (n.d.) defines “Mercantilism as a set of policies, regulations and laws, developed over the sixteenth through the eighteen centuries, to support the rising nation states of Atlantic Europe by subordinating private economic behavior to national purposes”. It can be said that Mercantilism is a national policy of building up a wealthy country via strong state and armed forces. In a seminal work entitled Mercantilism, Heckscher (1935) reports in detail how Western European nations (especially France, England, the Netherlands and Spain) pursued Mercantilist policies during the sixteenth to eighteenth centuries. 2.1  Nationalism Mercantilism is often viewed as economic nationalism for the purpose of building a wealthy and powerful state (LaHaye 2008). In Rees’ view (1929:561), “Mercantilism was the economic expression of the militant nationalism which sprang out of the social and political changes of the sixteenth century”. Mercantilists believe that without a strong central government, the society would revert to the dark age of feudal period. It follows that “the balance in society must be tipped in favor of the central government in order to avoid such a sorry fate. The interests of business and workers were secondary; everything had to be channeled to the interests of the nation. In pursuit of the common good, the nation must come first” (McCusker: n.d.). For example, in 1549, England imposed “Political Lent” in order to preserve cattle for supporting team of seafaring men. During the Lent period, people were forbidden by law to eat meat to ensure sufficient supply of meat for sailors and armed forces. For Mercantilists, wealth and prosperity were a zero-sum game in global competition (McCusker 1996:339). One country can increase its

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wealth only at the expense of another and “no profit whatever can possibly be made at the expense of another” (Montaigne 1580). Mercantilist policies “sought to strengthen one state economically and politically to the disadvantage of others” (Magnusson 1994:4). 2.2  Bullionism Mercantilist thinkers believe that a strong and healthy nation is measured by the amount of precious metal (gold and silver) which it possesses. Philipp von Hörnigk (1684), a German civil servant and one of the founders of Cameralism, sets out his Mercantilist view on precious metals in 1684 as below: Gold and silver once in the country, whether from its own mines or obtained by industry from foreign countries, are under no circumstances to be taken out for any purpose.

With a large volume of gold and silver reserves, the country would be able to acquire goods and services that might be needed to win in the international conflicts which are inevitable in international conflicts (Ebeling 2016). 2.3  Favorable Balance of Trade Mercantilists believe that a favorable balance of trade is needed to obtain precious metals. To obtain a favorable balance of trade, a nation must achieve economic self-sufficiency. Those who founded new industries should be rewarded by the state. Agriculture should be carefully encouraged. Farming does not only prevent imports of food and raw materials, but also provides a base for taxation. Most importantly, commerce should be regulated to produce a favorable balance of trade. Mercantilists argue that the nation can be benefited from trade if the value of goods imported from other countries is minimized and the value of goods exported to other countries is maximized. Hence, Mercantilists argue for the government to control and ensure a “positive” balance of trade. Tariffs should be high on imported manufactured goods and low on imported raw materials. Monopoly grants can be adopted to restrict competition. Import of luxury goods are to be avoided because such consumptions take money (gold and silver) out of the economy.

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2.4  On Population For Mercantilists, population is an important asset. As Eli Heckscher (1935, volume 2: 158) observes, countries in the Mercantilist period possess “an almost frantic desire to increase population”. A large population size is considered to be an essential in building up economic and political power of a country. Population should be increased by methods such “as (a) placing various disabilities on celibates; (b) encouraging marriages directly; (c) encouraging fertility; (d) making punishment for illegitimate births less severe or abolishing such punishment entirely; and (e) encouraging immigration and preventing emigration” (Strangeland 1901:123–137). Furthermore, population must be a pool of hardworking labor. In England, the Act for the Relief of the Poor (1597) punishes all lazy people. “Poor Laws” was passed in 1601 to move paupers toward “correction”. The Act provides poorhouses for the disabled poor, House of Industry for the abled poor, apprenticeship for pauper children and correction or prison for the idle poor and vagrants. 2.5  On Colonization Mercantilists call for the “mother country” to possess colonies around the world. The sovereign state can have full control of useful resources and raw materials in its colonies that are essential for the sovereign state to boost economic growth and wage war with other nations. Furthermore, colonial territories must be made subservient to the “mother country”. For instance, the British government attempted to make her colonies to depend on the “mother country” for manufactured finished goods in exchange for colonial raw materials. It also assured that the “mother country” could make a net gain from the colonies (Ebeling 2016). Between 1651 and 1673, the English Parliament passed four Navigation Acts to ensure the proper trade balance. The acts declared the followings: • Only English or English colonial ships carried cargo between imperial ports. • Certain goods including tobacco, rice and furs were prohibited from shipment to foreign nations except through England or Scotland. • The English Parliament would pay “bounties” to Americans who produced certain raw goods, while raising protectionist tariffs on the same goods produced in other nations.

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• Americans could not compete with English manufacturers in large-­ scale manufacturing. To sum up, Mercantilist thought arises between the sixteenth and eighteenth centuries when each nation attempts to build a wealthy and powerful state. The pragmatic principles of Mercantilism fit into the needs of the kings, government officials and merchants at that time. Mercantilism has been modified and adapted through the passing of time. In history, Asian nations which successfully adopt Neo-Mercantilism are Meiji Japan during 1868–1912,1 the three Asian newly industrialized economies (South Korea, Taiwan and Singapore) during the 1960s and contemporary China in the era of globalization.

3   Neo-Mercantilist Policy of China in the Era of Globalization China has been regarded as a nation which pursues Neo-Mercantilism (Verma 2016). Comparing the degree of Mercantilism around the world, Wein et al. (2014) ranked China (scoring 35.5) on the top of all 55 nations in the Global Mercantilist Index. China’s Neo-Mercantilist strategies include promoting nationalism, patriotism and technologicalism, stockpiling gold and foreign reserves and striving for a favorable balance of payment via exchange rate manipulation, tariff, export subsidies and other trade protections. The Chinese government also controls population growth for national development and social control, initiates “Belt and Road” project and the Asian Infrastructure Investment Bank (AIIB) to counter American and Western influences and deploys strategic expansion in Africa, South Asia and Latin American countries. 3.1   Promoting Nationalism and Patriotism Nationalism and patriotism have their roots in China’s imperial history. In the late Ch’ing Dynasty, Empress Dowager Cixi used nationalism and patriotism to divert people’s attention away from the corrupted l­ eadership. Chairman Mao exploited nationalism and patriotism to the extreme during the Cultural Revolution. Since Deng Xiaoping embarked on the “Open Door Policy” in 1979, Chinese people have had the chance to

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experience Western culture and democracy. Deng’s economic reform brought along a lot of domestic problems, including corruption, poor quality of life and income inequality between rural and urban areas. The Beijing government utilizes national sentiment as an instrument that shifts public attention away from domestic problems by reinforcing the Party’s role as the guardian of China’s national sovereignty and honor. The Chinese government attempts to re-position itself as the supreme agent responsible for rebuilding a strong and prosperous nation. The Chinese leaders question the Western modes of democratization and theories of development. They argue that the Western value is the cause of China’s national and cultural identity crisis. Hence, China’s modernization should be different from the West and the future development of China should rely on “Chinesenization” (Jiang 2012: 52). The exploitation of nationalism and patriotism is fabricated into the great “Chinese Dream”. Early in November 2012, Chinese leader Xi Jinping articulated a vision for the nation’s future that he called “the Chinese Dream”. The “Chinese Dream” integrates national and personal aspirations, with the goals of reclaiming national pride and achieving national well-being. Xi’s task is to lead “the Party and people to fulfill the great dream of revitalizing the Chinese nation”. The “Chinese Dream” emphasizes on economic prosperity, national pride and free from foreign domination. Media and schools in China stress patriotism, with “love of the Communist Party” as “love of the nation”. Foreign ideas such as democracy and human rights are modified with the “Chinese characteristics” to fit into Chinese values. For the Chinese leaders, “the Chinese model of economic development” can offer other developing countries an example of an authoritarian route to economic progress. China’s nationalism has been observed in the Taiwan Strait relationship, disputes in South China Sea, the Japanese history textbook controversies, as well as Prime Minister of Japan Junichiro Koizumi’s visits to the Yasukuni Shrine, to cite a few. 3.2  Bullionism and Hard Currencies Accumulation For the old Mercantilist thinkers, gold and silver are regarded as wealth and power of a nation. Today, gold is still important to the Chinese ­government but used as national strategy to encounter American domination in world affairs. China is a member of BRICS.2 Since 2009, China officially reports that her gold holdings have jumped by 60 percent

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(Gleason 2016 September 1). World Gold Council’s data indicates that China’s official gold holdings are 1843 tons at the end of 2016, with the value of gold accounting for 2.2 percent of China’s foreign reserves. China is the sixth biggest gold reserve country in the world (Wu 2017). The huge gold stockpiles held by the People’s Bank of China helped China win ascension into the International Monetary Fund (IMF)’s elite Special Drawing Rights (SDR) currency basket in 2016. When the Chinese Renminbi is an SDR currency, the world witnesses a new multi-polar currency regime with the Greenback declining in stature (Gleason 2016 September 1). Moreover, China and Russia have mutual global strategic interests in fostering de-dollarization. Toward that end, the two great powers are engaging in bilateral trade deals that bypass the US dollar (Gleason 2016 September 1). Gleason (2016 September 1) comments that the world monetary order is changing. Global trade and currency markets become less dollar-­ centered. Renminbi now becomes a competitor to US dollar dominance. Foreign Exchange Reserves Apart from stocking up gold, China has accumulated foreign exchange reserves at an unprecedented rate over the last two decades and is now the world’s largest holder of international reserves. It is reported that China accumulated US $3.12 trillion of foreign reserves in 2016 (Wall Street Journal 2016 February 7). Atkinson (2012) argues that the purpose of accumulating huge foreign reserves stems mainly from the fact that China has practiced economic Mercantilism on an unprecedented scale in recent decades. 3.3   Maintaining a Favorable Balance of Trade China engages in a series of Mercantilist policies to boost its trade surplus, enabling it to accumulate huge foreign reserves. According to Atkinson (2012: 28), Chinese Mercantilist policies in trade work in two ways: the first type is through policies designed to spur exports and reduce imports. They include currency manipulation, high tariffs and tax incentives for exports. However, such policies benefit both Chinese firms and foreign firms in China. The second type is through policies designed to help Chinese firms while discriminating against foreign companies in China. These policies include land grants and rent subsidies to Chinese-owned firms; preferential loans from state banks; tax incentives for C ­ hinese-­owned

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firms; and benefits to state-owned enterprises and generous export financing. To help Chinese firms catch up with foreign technology, the Chinese government controls foreign purchases and joint-venture requirements to force foreign firms to transfer technology to China (Atkinson 2012: 7). With a weak and discriminatory patent system in China, industrial espionage allows many Chinese firms to grow quickly. In this chapter, our discussion focuses on exchange rate manipulation, tariffs and export subsidies. (i) Exchange rate manipulation: Rodrik (2013) points out that Mercantilism remains largely in place in China. In particular, the Chinese government manages the exchange rate to maintain Chinese manufacturers’ profitability, resulting in an impressive trade surplus. China systematically devaluates its currency. Given huge trade surpluses prior to devaluation, Bhalla (1998:14–15) contends that China adopts a Mercantilist trade policy. In particular, Dooley et al. (2004, 2005) argue that China, on the one hand, attempts to absorb unskilled surplus labor in the manufacturing sector, and, on the other hand, builds up domestic capital stock. To achieve those goals, China deliberately undervalues its real exchange rates to support export-led growth. Likewise, Robert Cassidy, the US Trade Representative for Asia and China, argues in 2008 that “China has adopted an export-led development strategy, the centerpiece of which is a currency that is undervalued by 20 percent to 80 percent, with the consensus leaning toward 40 percent. Thus, China’s wages in U.S. dollar terms are 40 percent cheaper than they would be if the currency were allowed to freely float. Similarly, foreign investors receive a 40 percent subsidy to develop operations in China” (Atkinson 2012:29). As Krugman (2010) observes, “the more depreciated China’s exchange rate—the higher the price of the dollar in yuan—the more dollars China earns from exports, and the fewer dollars it spends on imports”. He ­concludes that “Mercantilism works: countries that subsidize exports and restrict imports actually do gain at their trading partners’ expense”.

(ii) Tariff: China uses tariff, the most important Mercantilist weapon, to achieve favorable trade balance. Despite being a World Trade Organization (WTO) member, China places tariffs on a wider range of products at a higher rate. Specifically, in 2009, China’s tariff application on imports was 9.6 percent on average. In

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c­ ontrast, the US rate was just 3.5 percent. In 2009, there were 46 percent of foreign goods entering China with duty free, compared to 76.3 percent of foreign goods entering the United States (Atkinson 2012: 29–30). Regarding Information Technology (IT) products, China places 30 percent tariffs on magnetic-tape-­ type video recording or reproducing apparatus, 24.5 percent on computer monitors and 20 percent on printers, copying machines, facsimile machines and video recording and reproducing apparatus. Furthermore, China restricts imports through non-­transparent trade barriers on customs regulations, heavy documentation requirements and randomly applied product certification requirements (Atkinson 2012: 29–30).3 ( iii) Export subsidies: Even though export subsidies are illegal under the WTO, China uses them to support Chinese firms. In 2005, more than $2.4 billion of export subsidies by the Chinese government was reported (Atkinson 2012). In 2007, China devoted more than $15 billion on export-enhancing subsidies to its steel industry (Atkinson 2012: 29–30). The United States took legal action at the WTO against China’s support of its steel industry, alleging that China unfairly offers cash grants, rebates and preferential loans to its steel exporters. However, Chinese subsidies go far beyond steel. The Chinese government also subsidizes the country’s clean energy industries, particularly solar and wind power industries. As Ben Santarris, a German solar panel manufacturer, complains, “pervasive and all-encompassing Chinese subsidies are decimating our industry” (Atkinson 2012: 29–30). In short, the Chinese government successfully adopts Mercantilist weapons including exchange rate manipulation, tariff and export subsidies to boost its industries and export and restricts foreign competition. 3.4  Technologicalism The Chinese leaders believe that a strong and powerful nation can be enhanced through science and technology. China’s 15th National Congress set the goals and tasks of invigorating China through science and education. Action Scheme is formulated to push forward educational reform so as to enhance China’s innovative capacity (Ministry of Education, P.R.  China 1998 December 24). Nationalism in China’s technological

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development picked up the pace after the government introduced two key policies: the medium- and long-term program for science and technology development in 2006, and the “strategic emerging industries” initiative in 2010 (Hansen 2014 October 14). Former Chinese president, Hu Jintao was the architect of China’s technology development. His “scientific development concept” paves the way for modern technology development in China. China focuses on “pragmatic techno-nationalism”, with technology policies designed to favor domestic firms while keeping close collaboration with international partners (Hansen 2014 October 14). In 2015, national expenditures on scientific research and experiments totaled 1.42 trillion yuan (US $213.4 billion). They accounted for the world’s second largest number of published international science and technology papers and national comprehensive innovation capabilities ranked 18th in the world (State Council 2016). In 2016, China’s State Council issued a national scientific and technological innovation plan to steer China into an innovative country and a scientific and technological power. The plan is a blueprint designed for technological innovation development for the 13th Five-Year Plan (2016–2020). The plan aims to enhance the country’s innovation capabilities into the world’s top 15. It calls for accelerating major national scientific and technological projects (State Council 2016). Over the decades, China has witnessed technological advances in areas such as manned space flights and lunar probes, manned deep-sea submersible, deep earth exploration, super computers and quantum communication. As a result of the government’s effort in promoting technology and industries, China is able to export its goods and services consisting of a wide range of technological skills. For example, in export of high-tech know-hows, China sells high-speed-rail to Indonesia and nuclear electricity plant to the United Kingdom. In mid-tech products, it sells mobile phones to India and African nations and household electrical appliances to the United States and Western European nations. In lowtech products, markets and stores in the Central and Southeast Asian countries are flooded with simple household goods such as clothing and plastic toys and footwear made in China. Such a huge export success allows China to gain impressive foreign reserves, international status and global influences.

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3.5  Strategic Global Expansion China pursues a government-led globalization strategy to accumulate capital and wealth for the nation (Zhang 2016). Specifically, China initiates two grand projects, namely “One Belt One Road” and the Asian Infrastructure Investment Bank in 2013 for strategic global expansion. (i) “One Belt One Road Initiative” for trade and global expansion: In 2013, Chinese President Xi Jinping proposed a development strategy that focused on connectivity and cooperation between China and Eurasian countries. The strategy underlines China to take a larger role in global affairs and coordinate manufacturing and development capacities with other countries in areas such as steel, oil, coal, transport and communication and so on. Referring to the initiative, Li and Yuan (2016) claim that China is assuming a new role in the world economic order. It moves from “the workshop of the world” to “the architect of the world”. The project will provide China and its strategic partners with plenty opportunities for the development along the new “Silk Road”. However, Zhang (2016) argues that the Belt and Road Initiative is a product of Chinese Neo-Mercantilist thinking. Wong (2017 July 20) even refers the project as “global financial Leninism”. The Belt and Road Initiative serves as a vehicle for creating a new global economic and political order (Zhang 2016). Zhang (2016) concludes that the project marks the beginning of a new economic diplomacy of China that moves toward being an active leader of the global economy. (ii) The Asian Infrastructure Investment Bank (AIIB): In October 2013, Chinese President Xi Jinping announced the establishment of a new China-led multilateral development bank, the Asian Infrastructure Investment Bank (AIIB) to “promote interconnectivity and economic integration in the region”. The aim of the bank is to provide financing for infrastructure needs throughout Central and South Asia, the Middle East and Europe (the Silk Road Economic Belt) and, along a maritime route, from Southeast Asia to the Middle East, Africa and Europe (Weiss 2017). The AIIB was formally established on December 25, 2015. The bank has 57 founding members, including four G-7 economies (France, Germany, Italy and the United Kingdom) and began operations in

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mid-2016. The creation of the AIIB is said to be “part of a broader reorientation of Chinese foreign and international economic policy that has taken place since Xi Jinping became Chinese Communist Party General Secretary in 2012 and president in 2013” (Weiss 2017:2). In contrast to his predecessor Hu Jintao, Xi pursues “an ambitious foreign policy agenda to deepen economic, security, and political ties with neighboring countries” (Weiss 2017:2). The Chinese government wants greater influence in global affairs. So far, international establishments such as the International Monetary Fund, World Bank and Asian Development Bank are dominated by American, European and Japanese interests. To counter this situation, China initiates the AIIB which allows China to have a greater voice in global finance. As Anderlini (2014 June 25) of the Financial Times reported in June 2014, “China feels it can’t get anything done in the World Bank or the International Monetary Fund so it wants to set up its own World Bank that it can control itself”. In short, the Belt and Road Initiative, facilitated by the AIIB, allows China to extend its ambitious mercantile trade and political and economic influences around the globe. ( iii) Strategic Expansion in the Third World countries: China increases its influence in the developing regions including Africa, Latin America, Middle East and South Asia via trade, infrastructure investments, technology export and foreign aids and so on. Expansion in Africa Holslag (2006) observes that China pursues a pragmatic Mercantilist policy in Africa that combines a wide array of diplomatic and economic devices. China is Africa’s second largest trading partner after the United States, importing a third of its crude oil from Africa. It spends billions of dollars securing drilling rights in Angola, Nigeria, Sudan and Angola. It has exploration deals with Chad, Gabon, Mauritania, Kenya, the Democratic Republic of Congo, Equatorial Guinea and Ethiopia. China invests in the copper extraction in Zambia and Congo as well as buying timber in Gabon, Cameroon, Mozambique, Equatorial Guinea and Liberia. Chinese companies win contracts in Africa to pave highways, build hydroelectric dams, upgrade ports, lay railway tracks and build pipe-

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lines. China supplies jet fighters, military vehicles and guns to Zimbabwe, Sudan, Ethiopia and other African governments (Ayittey 2010 February 15). However, Chinese economic involvement in Africa is regarded as predatory and brutish (Ayittey 2010 February 15). The former president of South Africa, Thabo Mbeki claims that China’s interest in Africa is a “new form of neo-colonialist adventure” with African raw materials exchanged for inferior manufactured imports and pays little care to the poor Africa. China is criticized as performing “chopsticks Mercantilism” (Ayittey 2010 February 15). Expansion in Latin America Latin America is another example of “how Chinese Neo-mercantilism is assuming a neo-colonial pattern in which the dominant country secures markets for its manufactured goods in exchange for raw materials from its partners in Latin America” (Hawkins 2005 February 3). In November 2004, China re-enforced the “strategic partnership” with Brazil. China offered between $5 billion and $7 billion worth of investments to improve roads, railways and ports in Brazil. Brazil also ordered at least ten Embraer aircrafts. In this deal, China keeps the advanced industrial project in their own hands, relegating its partners to a subordinate supplier status (Hawkins 2005 February 3). China builds another “strategic partnership” with Argentina. She promised to invest US $20 billion in Argentina over the next decade, mainly on the development of telecommunications, railways and hydrocarbon fuels. Hawkins (2005 February 3) claims that Argentina is being turned in a “neo-colonial direction” by China. China’s imports primary goods from Argentina whereas China exports manufactured goods to Argentina. In Chile, China invests heavily in the island’s nickel mines. It is predicted that Cuban exports of nickel would double from expanded shipments to China (Hawkins 2005 February 3). In Venezuela, Chinese firms are allowed to operate 15 mature oil fields in the east of Venezuela, which can produce more than one billion barrels. Chinese firms are invited to bid for natural gas exploration contracts in the Western Gulf of Venezuela. Other agreements cover agriculture, railways, mining and telecommunications (Hawkins 2005 February 3).

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From Middle East to South China Sea In national defense, China adopts a series of strategies to seize naval bases and ports from the Middle East to the South China Sea. These bases include a new dock under construction at the Pakistani port of Gwadar, where China already has an electronic spying device to monitor the Persian Gulf. Other “docks” include a container port at Chittagong, Bangladesh; a naval base under construction in Burma; and intelligence gathering facilities in the Bay of Bengal and near the Strait of Malacca. China helps Cambodia construct a railway line from southern China to the sea. China also discusses with Thailand to build a canal or railroad across the Kra Isthmus, which allows shipments to bypass the narrow Strait of Malacca (Hawkins 2005 February 3). Hence, China’s global strategic expansion through the Belt and Road Initiative and the AIIB can be facilitated by these strategic ports and naval bases. 3.6  Population Policy for a Strong Nation During the fifteenth to sixteenth centuries, most European nations were hungry for a pool of working population. Hence, it is not surprised that old Mercantilism calls for a large population. For Mercantilists, growing population can provide abundant supply of labor for production, lower wages and human resource for navy. More importantly, a large population supports the state with stronger stakes to engage in direct confrontations with countries where there are disputes. Nowadays, China is overpopulated. Instead, Neo-Mercantilist China adopts a population strategy for the sake of building up a strong national state. Specifically, one-child and naturalization policies are solely for national development. (i) One-child policy: China’s rapid increase in population from 1949 to 1979 was largely the result of Maoist pro-natal policies (Howden and Zhou 2015:228). Mao believed that population growth empowered the country and he launched a campaign to encourage families to have more children, leading to a birthrate of over four children per family. When Mao died in September 1976, the population of China was already 930 million, which means that ­population had doubled in China during 1949–1976, despite acute food shortage due to the Great Leap Forward and drought. By 1980, a new band of Chinese leaders believed that forcibly restricting population growth would lead to greater economic prosperity. As a result, one-child policy was introduced in 1979. In 2007, 36

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percent of China’s population was subject to strict one-child restriction, with an additional 53 percent being allowed to have a second child if the first child was a girl. After adopting coercive birth control, China exhibits a drastic change in demography. The 2010 census reveals an alarming total fertility rate of 1.18 percent, falling into the extremely low fertility bracket. Gender imbalance due to couples preferring male children also falls for the sixth year in a row, down to 115.88 males for every 100 females in 2014 (ChinaDaily 2015 July 10). The fall in the birthrate has pushed up the average age of the population. The Chinese government foresees an aging population crisis because the policy reduces the young labor pool that is needed to support a strong and prosperous nation. It hence announced on October 29, 2015, that the country would allow all families to have two children, abolishing an unpopular policy that limited many urban couples to only one child for more than three decades (CBCNews 2015 October 29). It can be concluded that, unlike old Mercantilism which called for a larger population, Neo-Mercantilist China controls the population growth for its national development. ( ii) Stringent naturalization policy for the sake of Chinese nationalism and social control: China’s economic nationalism is also reflected in its stringent naturalization policy. The nation wants a population of pure Chinese blood so that the government can convey Chinese nationalism to people effectively. First of all, China defies dual nationality for any Chinese national. It is also generally known that Chinese citizenship is the most difficult to acquire in the world. Naturalizing as a Chinese national is rare. During the Fifth National Population Census of the People’s Republic of China (2000), only 941 naturalized citizens not belonging to any of China’s recognized 56 indigenous ethnic groups were recorded in China. According to the 2010 Chinese Census, China had only 1448 naturalized Citizens (Economist 2016 November 19). It is hard to get naturalized in China without being Chinese in the first place. If a foreigner is not born to be Chinese, he or she can never gain a full Chinese citizenship and only permanent residency is granted. Even marrying a Chinese does not grant citizenship. The Chinese government may give a married spouse a permit to stay and work only. Furthermore, national certificates are granted in limited amount every year. In other words, even if a person is

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­ ualified for Chinese citizenship, he or she could most probably be q denied a certificate if the quota is full. Unlike the Unites States which welcomes people from all over the world and cultivates a melting pot, the Chinese government wants a pool of population with pure Chineseness in its territory for the sake of easier social control and governance.

4   Conclusion This chapter has explained and illustrated how China utilizes Neo-­ Mercantilist policies to boost its national development and global expansion. Mercantilism in Chinese style starts from nationalism and patriotism which fit into Chinese minds embedded with the old imperial glory. With nationalism, the Chinese leaders believe in a strong and authoritative state to manage and coordinate domestic and foreign affairs. In domestic economy, the Chinese government finetunes its population policy with the aim for national development and social control. It also boosts its production and technology via government tax, subsidies and other industrial policies. Together with the manipulation of exchange rate, China is able to export its good and services with different levels of technology in an unprecedented scale. In global finance, China attempts to enhance its Renminbi to an international monetary status to counter the influence of American dollar. China also helps developing nations build infrastructure in order to extend China’s influences in these regions. China’s domestic and foreign economic policies reinforce each other. Internally, the Chinese government enhances its production and technological capabilities to boost export. Successful export boosts foreign exchange earnings as well as international status. Consequently, China’s rise as a global power gives pride to Chinese people. Hence, the Chinese government gains its legitimate ruling and popularity which justify for a stronger and authoritative state, and in turn pursuing Neo-Mercantilist policy further. China promotes nationalism and patriotism and uses these sentiments as an instrument to divert the public attention away from domestic problems by reinforcing the Party’s role as the guardian of China’s national sovereignty and honor. The Western value is considered to be the cause of China’s national and cultural identity crisis. For the Chinese leaders, China’s modernization should rely on “Chinesenization”. The “Chinese Dream” initiated by the Party leaders integrates national and personal

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aspirations, with the goals of reclaiming national pride and achieving national well-being. Like old Mercantilism, China is stocking up gold and becomes the world’s sixth biggest gold reserve country in the world. Unlike old Mercantilism, China increases gold reserve to counter the American influence in global finance. With huge gold stockpiles by the People’s Bank of China, Renminbi became an SDR currency in 2016. Thus, the world witnesses a new multi-polar currency regime with the US dollar decline in stature. Global trade and currency markets become less dollar-centered while Renminbi becomes a keen competitor to US dollar dominance. To gain gold and hard currencies, China has maintained a favorable balance of trade. China’s Mercantilist policies in trade include exchange rate manipulation, high tariffs and export subsidies. Other policies enhancing Chinese firms’ competitiveness in export include land grants and rent subsidies to Chinese-owned firms; preferential loans from state banks; tax incentives for Chinese-owned firms; benefits to state-owned enterprises and generous export financing; and controls on foreign purchases and joint-venture requirements to force foreign firms to transfer technology to China. Thus, China is able to accumulate US $3.12 trillion worth of foreign exchange reserves in 2016 and enjoys the world’s largest current account surplus. In order to boost its national development, China focuses on “pragmatic techno-nationalism”, with technology policies designed to favor domestic firms while keeping close collaboration with international partners. National expenditures on scientific research and experiments account for the world’s second largest number of published international science and technology papers and its national innovation capabilities ranked 18th in the world. Unlike old Mercantilism which calls for large population growth, Neo-­ Mercantilist China adopts a population strategy for the sake of building up a strong national state. Its control on fertility rate and naturalization policy is solely for national development and social control. China’s Neo-Mercantilism is also seen in global expansion. In 2013, the Chinese government initiates “One Belt One Road” project and the Asian Infrastructure Investment Bank for strategic global expansion. The two projects serve as a vehicle for creating a new global economic and political order. Attempting to increase its influence in Africa, Latin America, Middle East and South Asia, China pursues a pragmatic Mercantilist policy that combines a wide array of diplomatic and economic

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devices. China is ambitious in exploiting the Third World nations’ resources that China has been regarded as pursuing “chopsticks Mercantilism”. In explaining China’s rapid economic growth after the “Open Door Policy” announced by Deng Xiaoping in 1979, most scholars in development economics employ a Neoclassical growth model via total factor productivity analysis (e.g. Li et al. 1998; Aziz 2006; Ito and Krueger 2007). Gumede (2010:4) points out that Neoclassical economists explain “the success of the East Asian economies, with its focus on minimal state prudent and conservative macroeconomic policies, was debunked as being too simplistic”. Instead, East Asian economies have developed “through the active involvement of the state in determining strategic national agendas”. Rejecting the analyses from Neoclassical economic paradigm, scholars from political economy adopts the concept of “developmental state” (Johnson 1995) to explain China’s recent growth (e.g. Knight 2012; Mabasa and Mqolomba 2016). Our Neo-Mercantilist explanation on China’s growth has in many ways share with the notion of developmental state. However, we have argued and illustrated that China’s rise as a global power are more adequately explained by Neo-Mercantilism, a set of modified economic and political doctrines that led to the rise of Western European nations including England, France, Spain and the Netherland in the eighteenth century. As shown in this chapter, China’s recent economic policies on national development and international relations are strikingly similar to Mercantilism and are in line with Frederick List’s notion of “Economic Nationalism” (List 1928).4 Regarding whether the “Chinese model” can be transferable to other economies, Dellios (2005) concludes that China’s rise as a global power provides an alternative to the US development model by incorporating capitalism into a socialist polity. China’s economic success through Neo-­ Mercantilist strategies may become an incentive for other Asian developing nations such as Philippines5 or African nations (Gumede ­ 2010) to follow.

Notes 1. It has been argued that the international economic policy of Meiji Japan was “a combination of Hideyoshi’s Mercantilism and Friedrich List’s Nationale System der politischen Ökonomie” (Linebarger et al. 1954:326).

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2. BRICS countries (Brazil, Russia, India, China and South Africa) are countries with large reserves of gold and an impressive volume of production and consumption of gold. 3. Encountering a large trade deficit, US President Donald Trump pointed to China taking away American jobs and “ripping” the US economy. On July 6, 2018, the United States imposes tariff of 25 percent on $34 billion in Chinese goods, sparking a trade war between the two nations (Washington Post 2018 July 6). 4. For a discussion of Frederick List’s notion of “economic nationalism”, see Shin (2015). 5. Alejandro Lichauco, a Filipino political economist recommends the Philippines to pursue nationalist economics to invigorate his country. See Lichauco (1988).

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Ito, Takatoshi and Krueger, Anne O. (2007) Growth Theories in Light of the East Asian Experience, National Bureau of Economic Research, Volume 4. Jiang, Ying (2012) Cyber-nationalism in China: Challenging Western Media Portrayals of Internet Censorship in China. North Terrace: University of Adelaide Press. Johnson, C (1995) Japan, Who Governs? The rise of the Developmental State. New York: Norton. Knight, John (2012) “China as a Developmental State”, CSAE Working Paper, WPS/201213. Krugman, Paul (2010 March 14) “Taking on China”, http://www.nytimes. com/2010/03/15/opinion/15krugman.html; retrieved on 26 June 2017. LaHaye, Laura (2008) “Mercantilism” The Concise Encyclopedia of Economics, Library of Economics and Liberty, http://www.econlib.org/library/Enc/ Mercantilism.html; retrieved on 26 June 2017. Li, H., Liu, Z. & Rebelo, I. (1998) “Testing the Neoclassical Theory of Economic Growth: Evidence from Chinese Provinces”, Economics of Planning, 31(2–3/ May): 117–132. Li, Haoran and Yuan, Xiaohang (2016) “From ‘the Workshop of the World’ to ‘the Architect of the World’: China’s New Role in ‘the Belt and Road Initiative’”, Hong Kong: Joint Publishing (text in Chinese). Lichauco, Alejandro (1988) Nationalist Economics, Quezon City: SPES Institutes, Inc. Linebarger, Paul M.  A., Chu, Djang and Burks, Ardath W. (1954) Far Eastern Governments and Politics: China and Japan, Princeton, NJ: D. Van Nostrand, 2nd., 1956. List, Frederick (1928) The National System of Political Economy. London: Longmans, Green and Co. Mabasa, K. and Mqolomba, Z. (2016) “Revisiting China’s developmental state: Lessons for Africa”, Strategic Review for Southern Africa, 38(1): 69–84. Magnusson, Lars (1994) “Eli Heckscher and Mercantilism: An Introduction”, Uppsala papers in economic history, Research report no. 35. McCusker, John J.  (n.d.) “Review on Heckscher’s Mercantilism”, Economic History Association, http://eh.net/book_reviews/mercantilism/; retrieved on 26 June 2017. McCusker, John J.  (1996) “British Mercantilist Policies and The American Colonies in Stanley L. Engerman, Robert E. Gallman edited, The Cambridge Economic History of the United States, pp. 337–362. Ministry of Education, People’s Republic of China (1998 December 24) “Action Scheme for Invigorating Education towards the 21st Century”, http://ie. china-embassy.org/eng/whjy/t112959.htm; retrieved on 15 July 2017. Montaigne, Michel de. (1580) “That the profit of one man is the damage of another.” in The Essays of Michel de Montaigne, by Michel de Montaigne, Trans.

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Charles Cotton; https://ebooks.adelaide.edu.au/m/montaigne/michel/ essays/index.html; retrieved on 3 July 2017. Rees, J.F. (1929) “Mercantilism and the Colonies,” in J.  Holland Rose, A.P.  Newton, and E.  A. Benians eds. The Cambridge History of the British Empire, Cambridge: Cambridge University Press, volume 1: 561, 576. Rodrik, Dani (2013) “The New Mercantilist Challenge”, www.ilsole24ore.com/ art/economia/2013…/mercantilist-challenge-145839_PRN.shtml; retrieved 26 June 2017. Shin, Hee-Young (2015) “Revisiting Friedrich List’s National System of Political Economy”, Economic Thought, http://etdiscussion.worldeconomicsassociation.org/wp-content/uploads/Hee-Young-Shin-13-april-15.pdf; accessed on 8 November 2017. State Council, People’s Republic of China (2016 August 8) “China to boost scientific and technological innovation”, http://english.gov.cn/policies/latest_ releases/2016/08/08/content_281475412096102.htm; retrieved on 3 July 2017. Strangeland, Charles Emil (1901) “Pre-Malthusian Doctrines of Population”, MA Thesis, Department of Political Science, The University of Minnesota. Verma, Krishna K. (2016) “Impact of Chinese Mercantilism State on India”, Journal Global Values, 7(2):1–8. Wall Street Journal (2016 February 7) “China’s Forex Reserves Plunge to More-­ Than-­Three-Year Low”, https://www.wsj.com/articles/chinas-forex-reservesplunge-to-more-than-three-year-low-1454816583; retrieved on 26 June 2017. Washington Post (2018 July 6) “The U.S.-China trade war has begun”, https:// www.washingtonpost.com/news/worldviews/wp/2018/07/05/; access 2018 July 9. Wein, Michelle A.; Ezell, Stephen J.  and Atkinson, Robert D. (2014 October) “The Global Mercantilist Index: A New Approach to Ranking Nations’ Trade Policies”, Washington: The Information Technology and Innovation Foundation (ITIF). Weiss, Martin A. (2017 February 3) “Asian Infrastructure Investment Bank (AIIB)”, Washington, D.C.: Congressional Research service; https://fas.org/ sgp/crs/row/R44754.pdf; retrieved on 3 July 2017. Wong, Bryan Pak-Nung (2017 July 20) “The Future of One Belt One Road”, Hong Kong Economic Journal (Newspaper), Page A36 (text in Chinese). Wu, Wendy (2017 February 5) “China stocked up on Swiss gold as turbulent year came to a close” South China Morning Post, http://www.scmp.com/news/ china/economy/article/2068101/china-stocked-swiss-gold-turbulent-yearcame-close; retrieved 16 July 2017. Zhang, Junhua (2016 September 2) “What’s driving China’s One Belt, One Road initiative?” Eastasiaforum, http://www.eastasiaforum.org/2016/09/02/ whats-driving-chinas-one-belt-one-road-initiative/; retrieved on 3 July 2017.

CHAPTER 9

China’s Belt-Road Initiative: The Political Economy of Coordinated Coalitional Cooperation David W. K. Yeung and Aloysius W. C. Lui

1   Introduction The global economic and political landscapes are not short of headline news in the last several decades since China implemented the Open-Door Policy in 1978. We have witnessed the admission of China to the World Trade Organization (WTO), the Iraq War, the uneasy “marriage” of the European Union (EU), territorial conflicts in many parts of the world and the global financial crisis. Last but not the least, China has achieved rapid economic growth over three decades, a celebrated and unprecedented accomplishment in contemporary Chinese history.

D. W. K. Yeung (*) Department of Business Administration, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] A. W. C. Lui SRS Consortium for Advanced Study, Hong Kong Shue Yan University, North Point, Hong Kong © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_9

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In 2013, China made headlines when President Xi Jinping unveiled the Silk Road Economic Belt and the twenty-first-century Maritime Silk Road Initiative.1 On November 12, 2013, the Third Plenary Session of the 18th Central Committee of the Communist Party of China (CCCPC) adopted the “Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening the Reform.”2 It called for accelerating the construction of infrastructure connectivity with neighboring countries and regions and moving the Silk Road Economic Belt and the twenty-­ first-­century Maritime Silk Road Initiative forward. The initiatives, now officially named as the Belt and Road Initiative (BRI), were officially included in China’s national agenda. Since then, numerous conferences, books and articles have tried to articulate the BRI’s strategy, policy framework, detailed programs and projects. An official portal was set up to keep the world abreast of the developments and activities under the banner of the BRI.3 Many government-to-government bilateral agreements, MOUs, joint declarations and the like have been signed and commercial undertakings concluded.4 The strategic importance of the BRI in China’s national development agenda is clearly reflected in the people appointed to drive the initiative. In 2015, China’s Development and Reform Committee appointed Zhang Gao Li, a member of the Political Bureau Standing Committee, as the leader of the BRI Development Work Steering Group. At the same time, four senior officials were appointed as vice-leaders: Wang Hu Ning, Wang Yang, Yang Jing and Yang Jie Chi.5 Based on the gravity of the appointees, it is believed that the State Council is undoubtedly the supreme driving, coordination and execution forces behind the BRI, while state organs such as the National Development and Reform Commission, Ministry of Commerce and Ministry of Foreign Affairs continue to be heavily involved in the daily affairs of the initiative. It is said that China’s BRI is a transnational development initiative in response to China’s needs under a growing but somewhat imbalanced economy. China is also striving to increase its participation in global affairs  and governance. It is reported that China’s BRI is an aggressive move to challenge the existing world order and global governance structure, particularly the American dominance in Asia and the world. However,  the economic logics behind the BRI cannot be overlooked. After the global financial crisis, China faced growing imbalance in the domestic economy after decades of high economic growth attributable to the flourishing foreign direct investment and insatiable demand for con-

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sumer durables and high-end consumption goods. The high economic growth of the coastal regions or eastern provinces of China, which has sustained for over two decades, is unmatched by the western part of China.  It has resulted in vast disparities in income and productivity, although the government invested significantly in infrastructure in northwestern and western China after an ambitious plan was launched to develop these relatively poorer regions more than a decade ago. Thus, over the past two decades, we have witnessed a gradual transformation in the industrial structure and consumption patterns in China. Many ­labor-­intensive industries were shifted to the West due to lower labor cost, infrastructure improvement and income growth. Underlying all these economic outcomes, the contributing institutional factors, including the cascading of central authority to local governments, private ownership and interregional competition within a socialist market system, were paramount. To sustain high economic growth in future, China needs a stable political environment, amicable relations with neighboring countries, the adjustment of China’s industrial structure in favor of knowledge- and capital-intensive, advanced and strategically critical industries to reduce the reliance on imports. The recent U.S.-China trade dispute (and particularly the ZTE incident in which the Chinese telecommunications company faced a setback after being penalized for violating U.S. sanctions) is indicative of the strategic importance for China to reposition its technology and innovation priorities.6 China also needs to expand and improve its infrastructure in order to enhance its overall production efficiency, invest in education and upgrade its labor force, build connections with its ­neighbors and trading partners over land and sea to facilitate trade and investment, as well as lowering the associated transaction costs. China also needs to secure its raw materials and energy supply and ensure that trade routes are secure and unimpeded. It is against such background that the BRI was formulated. The BRI is therefore important to China’s internal development needs as well as growing integration into the global economy. Regardless of the position that one takes, what is beyond dispute is that the BRI calls for transnational cooperation, public- and private-sector partnership and massive support from the global and regional financial communities in general. Given the vision and scale of the projects involved, the BRI is a journey along which the “journey-goers” must remain committed

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and supportive, if such a grand vision were to be materialized. This requires that all nations at all times see that their interests are not compromised, and in fact they will gain from cooperation from both the national interest and economic perspectives. This chapter attempts to formulate a dynamic game-theoretic framework to explain how gains or payoffs from transnational cooperation can be shared among the nations so that cooperation can be sustained. Our scope of study lies within the remit of dynamic cooperative game and subgame consistency is the key to sustainable cooperation among the nations.

2   The Belt-Road Initiative: Competition and Cooperation China’s National Development and Reform Commission (NDRC) announced that, up to August 2017, a total of 69 countries and organizations had officially signed up for the BRI, and projects in the fields of infrastructure, education, health care, finance and more would be undertaken. The NDRC also said that Chinese companies were actively participating in the initiative. It cited the China-Myanmar crude oil and gas pipeline, trains to Europe and dozens of industrial parks and trade zones built abroad as key results of the Belt-Road cooperation efforts. China also signed currency swap agreements worth one trillion yuan (USD150 billion) with 22 countries and built 56 economic and trade cooperation zones worth USD18.5 billion in 20 countries along the BRI route. These 69 countries, when combined, account for roughly two-thirds of the world’s population and one third of the world’s GDP, and consist most of the highest growth economies in the world.7 What captured the immediate interest of most observers in the BRI is the magnitude of infrastructure development and the vast number and variety of projects the initiative entails. To others, geopolitical implications, global governance, sovereignty, oil and national security issues are the major concerns. Whatever the observations, no one disagrees that the very core of the BRI is the building of infrastructure facilities which provide an extensive network of connectivity on land and at sea. On land, according to the BRI proposal, a new Eurasia Land Bridge connecting China, Mongolia and Russia will be built. The China-Central Asia-West Asia and China-Indochina Peninsula economic corridors are planned to

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connect the core cities along the Silk Road Economic Belt. The planned China-Pakistan Economic Corridor and Bangladesh-China-India-­ Myanmar Economic Corridor are considered as crucial parts of the BRI. At sea, the initiative focuses on jointly building smooth, secure and efficient transport routes connecting major sea ports along the Belt and Road.8 The proposal also calls for people and cultural exchange and building of infrastructure to facilitate the electronic data flow. The latter will be made possible by the installations of cables and fiber optics which are in fact critical for economic activities envisaged under the umbrella of the BRI.  For implementation, infrastructure connectivity with neighboring countries was included in China’s 13th Five-Year Plan for Economic and Social Development (2016–2020).9 In 2015, China explicitly conceded that the BRI was far more than infrastructure. One of the early official documents on the subject clearly states that: [t]he Belt and Road Initiative aims to promote the connectivity of Asian, European and African continents and their adjacent seas, establish and strengthen partnerships among countries along the Belt and Road, set up all-dimensional, multi-tiered and composite connectivity networks, and realize diversified, independent, balanced and sustainable development in these countries.10

Specifically, the aim of the BRI is officially translated into five major goals. They are infrastructure development, strengthening of regional political cooperation, unimpeded trade, financial integration and people-to-people exchange.11 China obviously understands that the BRI will not succeed unless all the participating countries find that the cooperation project is consistent with their own national interest and economic development needs. Aside from the six economic corridors which require the building of bridges, railways, highways and seaports, the BRI also requires investment in telecommunication, education, agriculture, housing, social facilities and a lot more. Estimates of the total investment required on an annual or a longer-term basis can only be taken as “guesstimates”, since there are still tremendous uncertainties in the timing, scope and financing of the projects involved. However, few will challenge that the fund required in the investment lies in the range of USD1 to USD2 trillion per annum over the next 20 years and beyond. Such annual investment requirement is about

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5–10% of the total annual GDP of all the Belt-Road countries combined. Given the magnitude, it would not be possible for any single financier in the public or private sector to provide the funding. There must be incentives for both the public- and private-sector funds to participate in the BRI projects. Some of the funding can be made available from the Asia Infrastructure Investment Bank (AIIB), the New Silk Road Fund, the New Development Bank, the Asian Development Bank, the China Development Bank and the Export and Import Bank of China. However, such sources are far from adequate to meet the needs of the BRI projects. Private sector funds are necessary and in fact crucial. Commercial banks can provide financing strictly on commercial terms. Other forms of ­financing, both debt and equity, raised from capital markets within the Belt and Road countries as well as other mature markets, are also expected.12 What makes the “cooperation” complicated is the multilateral relationships involved, because this is no longer a bilateral game. For instance, neighboring nations need to be engaged in transborder projects. In some cases, trade arrangements require the participation of multiple countries in the region. Project financing is provided by multiple sources and in multiple currencies. The challenges thus comprise an array of prerequisites which must be fulfilled. Otherwise, it will be difficult to invite cooperation and sustain the relationships thereafter. The challenges include political stability, significant improvement in social and economic conditions of those less privileged countries in the BRI and a mechanism whereby “gain-­ sharing” among the various participating countries is considered or perceived as fair and equitable. Although there is a vast amount of literature and commentaries around the subject matter of the BRI, the topic of “gain-sharing” has not been explored in a systematic and vigorous manner, particularly when taking all the participating countries together for determining how investments and benefits can be shared initially and over time in a theoretically justifiable manner. The purpose of this chapter is to fill such a gap. For the formulation of a dynamic game-theoretic model, we identify the nations involved and systematically group them into what we call coalition blocs, in which countries with similar interests and similar stages of development are grouped together for modelling purposes. In President Xi’s speech at Nazarbayev University in 2013, no specific countries were identified for the BRI partnership. The BRI is meant to be nonexclusive and impartial. All countries are equally welcome to participate in the initiative. In fact, one can resort to economic geography and gain some

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insight as to the likely participants or countries to which China would allure initially. These countries include China’s western neighbors, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. They are developing economies and considered to be geographically important for China in that they are nodes to peripheral countries such as Russia, India, Pakistan, Iran, Iraq and Turkey. Ultimately, the “connectivity” of the BRI will be extended to include the mid-Asian, West European and African countries. Depending on the progress of the key infrastructure projects, all other countries are expected to participate in order to maximize their payoffs. To emphasize the nonexclusive nature of the BRI, President Xi in his keynote speech delivered at the Boao Forum for Asia Annual Conference 2015 on March 28, 2015, entitled “Towards a Community of Common Destiny and a New Future for Asia” reaffirmed that the BRI was an “open” initiative and all countries along the routes and in Asia as well as countries around the world were welcome to be part of the journey.13 No national initiative in the twenty-first century has ever had the vision of embracing so many countries which are so diversified in terms of political system, religion, language, ethnicity and cultural origins. The diversities entangle the considerations and concerns of national priorities, traditions, sovereignty, security and diplomacy. Therefore, unlike the EU, the design of the BRI does not require the participating countries to enter into a joint multiparty agreement. Instead, BRI partnerships are formed basically by way of bilateral (in some cases multilateral) agreements, MOUs and declarations between China and the participating countries. Entry and exit are nonrestrictive, subject only to the provisions of whatever agreements that might exist. The participating nations can therefore continuously assess their own payoffs and make their entry-stay-exit decisions accordingly. Of course, among other factors, political and sovereignty risks are implicit in their assessments. Since President Xi gave his Nazarbayev Speech as part of his state visit, many countries within the Belt-Road regions encounter internal security problems, social unrest, territorial and religious conflicts. For example, there are conflicts between Russia and Ukraine, the struggle of Iraqi government against the Islamic State, political and security instabilities in Afghanistan, the Rohingya crisis in Myanmar, territorial dispute between China and India and the India-Pakistan conflict. From an economic perspective, a rational investor requires a higher return for riskier projects. All nations inevitably compete among themselves for markets and resources on the one hand and cooperate to maximize the total gain from the BRI on the other (i.e. to make the pie as big

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as possible together). Trade is driven by the countries’ own competitive advantage, while infrastructure development under the BRI has significant impact on costs (notably transportation and logistics) and thus alters the existing trade patterns. Countries along the Belt-Road regions continue to compete for foreign investment and perhaps talent by improving social, telecommunication, business and legal infrastructures. In the long run, competition within the region will result in an overall improvement in the entire region’s global competitiveness. The success of the BRI also depends upon the cooperation of the participating states and the market forces which drive investment, trade and commercial activities in general across national borders. Of course, growing business and commerce also help facilitate people-to-people exchange in areas such as culture, education and sports, and vice versa. In promoting the BRI, China adopts different strategies for different countries and regions. For countries at the early stage of industrialization, bilateral trade, basic technology transfer and infrastructure development appear to be the priorities. For the advanced countries, China prepares to foster cooperation in advanced technology, R&D, product and process innovation.

3   Coalition Blocs The BRI can be regarded as a coalition of nations, each acting in accordance with its best national interest but collectively accomplishing a long-­ term regional development goal. If cooperation within the bloc is successful, each country in the bloc will have higher benefits than if it acted on its own. Intuitively, if a country participates in the BRI, it will also consider other factors, including risks, costs and returns (payoff). Specifically, sovereignty and political risks, initial capital outlay, social costs, economic and financial benefits are the key considerations. Additionally, the less privileged countries may consider aids and subsidies as well. In principle, public and private sectors have similar consideration except that shadow pricing is not relevant to private commercial undertakings. On the other hand, countries at similar level of development will probably share similar set of economic issues, and thus have many policies in common. For instance, advanced economies are more concerned about the environment, sustainability, equality, knowledge-based and innovation issues, whereas the less privileged countries are concerned about basic needs, education, health, mortality, industrialization and so on.

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Regarding these differences, we attempt to group countries into coalition blocs by using the Human Development Index (HDI), a widely ­recognized measure of development.14 The HDI is taken as positively related to the stage of development. Other figures can also be taken as the indicators of the levels of development and industrialization. They include per capita GDP, value added by service and industries and urbanization. Since there is no apparent contradiction between the HDI and the above indicators, the grouping of countries according to their stage of development is used in the game-theoretic analysis. Here, any grouping of this nature may not be totally scientific because the employment of different approaches and measures may yield different results.15 Table 9.1 lists all the BRI countries grouped by geography. Per capita GDP, value added by service sector and industry and urbanization are depicted. Table  9.1 shows there are underdeveloped economies such as Yemen, Timor-Leste and Tajikistan, and highly developed countries like Singapore and Qatar. The remaining countries will be grouped accordingly. Given the BRI is diverse in strategic and economic considerations, we shall explore different forms and levels of cooperation among the countries in the coalition blocs. In this way, modeling and computational complexities are greatly reduced. There are four country groups or coalition blocs in the analysis. Group A countries have HDI values of at least 0.8. They are advanced economies with relatively high GDP and developed or developing knowledge-based economy with research and innovation capabilities. Group B countries have HDI values between 0.7 and 0.8. They belong to the industrialized world, having a strong industrial base and a growing urban middle class with professional and managerial skills. Group C countries have HDI values between 0.6 and 0.7. These countries have a growing manufacturing sector and labor force can be trained for jobs in modern factories. Group D countries have HDI values below 0.6. They are the least privileged economies which struggle to raise their living standards through development and growth. Human conditions in these countries can be miserable by any standards. Table 9.2 depicts the four coalition blocs. Bloc A countries are in the far-right box and Bloc D countries in the far-left box. Blocs B and C countries are in between. With the development of infrastructures, significant increase in commerce and trade among the BRI countries can be expected for two main reasons. First, with a more mature and developed transport and technology infrastructure along the BRI, the costs of doing business

Country

China Russia Mongolia Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan Southeast Asia Brunei Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Timor-Leste Vietnam South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

East Asia Russia, Mongolia and Central Asia

Region

11,199,145.16 1,283,162.99 11,183.46 137,278.32 6551.29 6951.66 36,179.89 67,220.34 11,400.65 20,016.75 932,259.18 15,805.71 296,535.93 63,225.10 304,905.41 296,975.68 407,026.13 1782.97 205,276.17 19,469.02 221,415.16 2212.64 2,263,792.50 4224.21 21,131.98 278,913.37 81,321.88

2016 GDP (Current USD million)a

Table 9.1  Country data and coalition blocs

15,529.1 24,788.7 12,252.3 25,285.9 3552.1 2979.3 16,876.0 6512.7 77,420.6 3737.0 11,609.0 6549.7 27,682.6 5721.2 7804.2 87,832.6 16,913.4 2140.4 6295.6 1944.1 3579.8 8900.8 6570.6 15,348.0 2477.9 5235.5 12,312.9

2016 Per capital GDP, PPP b 51.6 62.8 50.5 61.3 55.9 45.9 47.7 49.5 41.5 41.6 45.3 48.0 53.0 39.5 59.5 73.8 55.8 31.3 45.5 55.4 56.5 39.2 53.8 82.0 52.3 56.0 62.2

39.8 32.4 36.7 33.9 29.2 25.5 44.9 32.9 57.3 31.7 40.8 32.5 38.3 35.0 30.8 26.1 35.8 57.8 36.4 22.7 28.8 43.5 28.8 11.2 14.8 19.4 29.6

2016 2016 Service value Industry added (% value added GDP)c (% GDP)d 57 74 73 53 36 27 50 36 78 21 54 40 75 35 44 100 52 33 34 27 35 39 33 47 19 39 18

2016 Urban population %e 0.738 0.804 0.735 0.794 0.664 0.627 0.692 0.701 0.865 0.563 0.689 0.586 0.789 0.556 0.682 0.925 0.740 0.606 0.683 0.479 0.579 0.607 0.624 0.701 0.558 0.550 0.766

(continued)

A,B,C,D A B B C C C B A D C D B D C A B C C D D C C B D D B

2015 Coalition Human bloc Development Index f

206  D. W. K. YEUNG AND A. W. C. LUI

Country

Bahrain Egypt Iraq Iran Israel Jordon Kuwait Lebanon Oman Palestineg Qatar Saudi Arabia Syria Turkey United Arab Emirates Yemen

Region

West Asia, Middle East and North Africa

Table 9.1 (continued)

51,000.0 11,128.8 17,348.9 19,948.8 37,258.2 9047.8 74,264.0 14,308.8 48,300.0 1997.3 127,480.5 54,416.6 2900.0 25,247.2 72,399.7 2507.5

27,317.61

2016 Per capital GDP, PPP b

32,179.07 332,791.05 171,489.00 418,976.68 317,744.78 38,654.73 110,875.58 49,598.83 66,293.37 8000.00 152,451.92 646,438.38 24,600.00 863,711.71 348,743.27

2016 GDP (Current USD million)a

42.2

59.9 55.2 57.7 55.0 77.9 66.8 51.1 79.5 50.5 26.1 49.5 54.0 60.4 61.0 58.8 48.1

39.8 32.9 37.3 35.0 20.8 28.9 48.4 16.7 47.5 27.1 50.3 43.3 19.6 32.0 40.4

2016 2016 Service value Industry added (% value added GDP)c (% GDP)d

35

89 43 70 74 92 84 98 88 78 72 99 83 58 74 86

2016 Urban population %e

0.482

0.824 0.691 0.649 0.774 0.899 0.742 0.800 0.763 0.796 0.684 0.856 0.847 0.536 0.767 0.840

(continued)

D

A C C B A B A B B C A A D B A

2015 Coalition Human bloc Development Index f

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Country

Armenia Albania Azerbaijan Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia Georgia Hungary Latvia Lithuania Macedonia Moldova Montenegro Poland Romania Serbia Slovakia Slovenia Ukraine

Region

Central and Eastern Europe

Table 9.1 (continued)

8832.8 11,540.0 17,256.6 18,066.3 12,172.1 19,242.6 23,422.4 34,749.2 29,743.3 10,004.5 26,700.8 25,587.4 29,862.3 14,942.2 5332.3 17,633.1 27,383.3 23,027.3 14,515.0 30,460.4 32,723.1 8269.6

53,237.88 50,714.96 195,305.08 23,337.91 14,378.02 125,816.64 27,572.70 42,773.03 10,899.58 6749.52 4374.13 471,364.41 187,592.04 38,299.85 89,768.60 44,708.60 93,270.48

2016 Per capital GDP, PPP b

10,572.30 11,863.87 37,847.72 47,407.22 16,910.28

2016 GDP (Current USD million)a

70.5 66.1 65.1 74.7 68.0 60.4 71.4 71.8 63.6 63.3 60.8 61.5 65.5 59.2

67.0 69.8 59.9

54.8 53.4 42.3 56.0 64.2

26.9 24.9 30.5 21.3 28.7 29.7 14.3 19.1 33.7 32.4 31.3 34.8 32.3 27.1

28.3 26.3 37.6

27.5 23.7 51.7 36.1 28.1

2016 2016 Service value Industry added (% value added GDP)c (% GDP)d

67 54 72 67 67 57 45 64 61 55 56 53 50 70

74 59 73

63 58 55 77 40

2016 Urban population %e

0.865 0.769 0.836 0.830 0.848 0.748 0.699 0.807 0.855 0.802 0.776 0.845 0.890 0.743

0.794 0.827 0.878

0.743 0.764 0.759 0.796 0.750

(continued)

A B A A A B B A A A B A A B

B A A

B B B B B

2015 Coalition Human bloc Development Index f

208  D. W. K. YEUNG AND A. W. C. LUI

Source: World Bank Data, except for Syria, whose figure is based on 2014 estimate from the CIA World Factbook

Source: http://hdr.undp.org/en/data, except for Macedonia, whose HDI is obtained from https://countryeconomy.com/hdi/macedonia

f

g

Palestine economic data for 2018 are obtained from https://tradingeconomics.com/palestine/gdp, except for urban population percentage, which is obtained from http://www.worldometers.info/world-population/state-of-palestine-population/

World Bank Data, except for Tajikistan, Turkmenistan, Tomor-Leste, Qatar and Syria data, which are 2017 estimates from the CIA World Factbook

Source: World Bank, https://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS

e

Source: World Bank Data, except for Tajikistan, Turkmenistan, Timor-Leste, Qatar and Syria data, which are 2017 estimates from the CIA World Factbook

d

c

b

World Bank Data, except for Bahrain, Oman and Syria, which figures are estimates obtained from the CIA World Factbook, https://www.cia.gov/library/ publications/the-world-factbook/, and Syria figure is 2015 estimate only

a

Table 9.1 (continued)

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D. W. K. YEUNG AND A. W. C. LUI

Table 9.2  Coalition blocs and cooperation choices Boost bilateral trade based on revealed comparative advantage Basic needs manufacturing, natural resources processing, and infrastructure development High tech and precision manufacturing and assembling R&D & advanced technology

Group D

China Cambodia Laos Myanmar Afghanistan Bangladesh Nepal Pakistan Syria Yemen

Group C

China Kyrgyzstan Tajikistan Turkmenistan Indonesia Philippines Timor-Leste Vietnam Bhutan India Egypt Iraq Palestine

Group B

China Mongolia Kazakhstan Uzbekistan Malaysia Thailand Maldives Sri Lanka Iran Jordan Lebanon Oman Turkey Albania Bosnia and Herzegovina Bulgaria Macedonia Serbia Armenia Azerbaijan Belarus Georgia Moldova Ukraine

Group A

China Russia Brunei Singapore Bahrain Israel Kuwait Qatar Saudi Arabia United Arab Republic Croatia Czech Republic Estonia Hungary Latvia Lithuania Montenegro Poland Romania Slovakia Slovenia

Financing and trans-border mega-infrastructure investment

and transporting goods and services across borders will be lowered, especially for those countries being accessible by sea or rail. The installation of cables and fiber optics also lowers communication and information costs in the long run.16 Secondly, as an economy expands, its per capita income rises, the demand for goods and services will increase including durable and nondurable consumer goods, education, medical and travel-related services. These activities will benefit all BRI countries. All the countries anticipate trade opportunities according to respective competitive advantage. Once basic infrastructures are built, the poorest countries will also benefit as goods and services will be able to move more efficiently and at a lower cost. For the countries in the coalition blocs, the expansion of the manufacturing base is one of the policy options for industrialization and development.

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According to the United Nation’s industrial classification, China is the only country in the world which has all the industrial groupings and subgroupings. For many developing economies, it would be an opportunity for them to absorb some of China’s manufacturing capacity and expand their industrial base. This will be a win-win situation as China will then be able to shift some industries to other countries or locations where raw materials and workers are available at lower costs. High-end precision manufacturing and processing involve products of high technology content. Robotics and precision manufacturing techniques are likely employed. Only those developed economies (Blocs A and B) possess the necessary hardware and software, and more importantly, the knowledge and skills required to operate advanced equipment for manufacturing high-tech products. Finally, there are the most developed economies where knowledge-based economic and innovative activities are flourishing. Countries such as Singapore and Israel are in this category. Finally, having a unique role as a promoter and facilitator, China is grouped in all coalition blocs. The grouping of coalition blocs will be applied to the game-theoretic model in the next section.

4   A Game-Theoretic Exegesis In this section, a dynamic game-theoretic exegesis of the BRI with four coalition blocs will be presented. In game theory, the formation of coalitions is driven by shared interests of nations within a bloc through (i) their common preference which is not shared by nations outside the bloc, (ii) resources exclusively owned by nations in the bloc, (iii) some state dynamics which can only be affected by the controls of nations inside the bloc, (iv) and similarity in technological background or economic structures. We first depict the basic structure of a dynamic Belt-Road network with coalition blocs. 4.1  A Dynamic Coalition Framework Following the analysis in Sect. 3, we set up four coalition blocs, that is, bloc A, B, C and D respectively. We use S A to denote the set of nations in bloc A, S B to denote the set of nations in bloc B, S C to denote the set of nations in bloc C, and S D to denote the set of nations in bloc D. The set A i A i A i A i of strategies of nation iA ∈ S A includes uk( ) A ∈ U ( ) A and υk( ) A ∈ Λ ( ) A. In A i A i particular, uk( ) A is a set of strategies not related to the BRI and υk( ) A is a

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set of coordinating strategies under the BRI. Similarly, for nation iB ∈ S B, B i B i uk( ) B ∈ U ( ) B is a set of strategies not related to BRI domestic strategies and υk( B )iB ∈ Λ( B )iB is a set of coordinating strategies under the BRI. Using C i C i similar notational connotations, we have uk( ) C ∈ U ( ) C and υk(C )iC ∈ Λ (C )iC C i C i for nation iC ∈ S C, and uk( D )iD ∈ U ( D )iD and υk( ) D ∈ Λ ( ) D for nation iD ∈ S D.

For notational convenience, we use uk( ) to denote the set of uk( ) σ , for σ all iσ ∈ S σ and σ ∈ { A,B,C ,D} . Similarly, we use υk( ) to denote the set of (σ )iσ σ υk , for all iσ ∈ S and σ ∈ { A,B,C ,D} . In addition, we denote the set of strategies of all nations as σ

(

uk ≡ uk( ) ,uk( ) ,uk( ) ,uk(



A

B

C

D)

σ i

) and υ ≡ (υ ( ) ,υ ( ) ,υ ( ) ,υ ( ) ) . A

k

B

k

k

C

k

D

k

Examples of strategies in uk include various industrial productions, natural resource extraction, manpower application, agricultural production, rural development, urbanization and capital investment, and so on. On the other hand, examples of strategies in υk include those BRI-­ coordinated strategies, such as transnational financing, transborder infrastructure building, foreign trade and investment, innovation and technology transfer, international joint venture and so on. The payoff of nation iσ ∈ S σ , for σ ∈ { A,B,C ,D} can be expressed as T



∑ g( t =1

t

σ ) iσ

(u( ) ,u( ) ,u( ) ,u( ) ,υ ( ) ,υ ( ) ,υ ( ) ,υ ( ) ,x ,yy ) r A

t

T



≡ ∑g

(σ ) iσ t

B

t

C

t

D

t

A

t

( ut ,υt , xt , yt ) r

t 1

B

t

C

t

(σ )iσ

+ qT +1

D

t

t

t

( xT +1 , yT +1 ) r

t 1

T +1 1

+ qT( +)1σ ( xT +1 ,yT +1 ) r1T +1 σ i

≡V

(σ )iσ

(1, x1 , y1 ) ,

t =1





(9.1)

where xt is the vector of states which include natural resources, financial assets, technology level, environmental state, and so on. And yt is the vector of cooperative states, such as financial participation in the AIIB, and aids and subsidies and so on, and r1t is the discount factor from stage 1 to stage t. The terminal stage T can be very large or even approaches infinity, σ i and qT( +)1σ ( xT +1 ,yT +1 ) is the terminal payoff of nation iσ at stage T +1. The evolution of the states xt and yt is governed by the dynamical equations

xt +1 = ft x ( ut ,xt ,yt ) , x1 = x10 ; and yt +1 = ft y (υt ,xt ,yt ) , y1 = y10 .



(9.2)

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The nations in coalition S σ would use uk( the coalition payoff

σ)

Val  ∑ V (  i ∈Sσ σ



σ ) iσ

213

to maximize the value of

(1,x1 ,y1 )  , for σ ∈ { A,B,C,D} 

(9.3)



under an optimal partition within the coalition bloc S σ and uncoordinated actions from the other blocs. σ  σ i We use Q S 1,x10 ,y10 = Maximal  Val  ∑ V ( ) σ (1,x1 ,y1 )   i ∈Sσ   σ 

(



)

  . (9.4) 

to denote the maximized payoff of coalition S σ in stage 1. An optimal partition within a coalition may include sub-coalitions in the bloc. A B C Under the BRI, the participating nations would use υk( ) υk( ) , υk( ) and ( D) υk to maximize the grand coalition joint payoffs W=

 (σ )iσ (1,x1 ,y1 )   Val  ∑σ V σ ∈{ A,B ,C ,D}  ∈ i S σ  

∑

 . 

(9.5)

We denote the optimal BRI-related strategies that maximize the joint payoff in (9.5) as ) ( ) ,u ) , ( ( ) ( ) ( ) ( ) = (υ υ ,υ ,υ ) .

uk∗ = uk( ) ,uk( ) ,uk( A∗



υk∗



B ∗

A∗

k

C ∗

B ∗

k

D ∗

k

C ∗

k

(9.6)

D ∗

k

Substituting the BRI-related strategies in (9.6) into (9.2) yields the dynamics of optimal state trajectory as

(

)

(

)

xt +1 = ft x ut∗ ,xt ,yy , x1 = x10 ; and yt +1 = ft y υt∗ , xt yt , y1 = y10.

{

}

T +1



(9.7)

We use xt∗ ,yt∗ to denote the solution to (9.7), which is the optimal t =1 state dynamics under the BRI. We denote the maximized joint payoff of the Initiative at stage 1 as W 1,x10 ,y10 , and use

(

)

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D. W. K. YEUNG AND A. W. C. LUI

(

  T (σ )iσ ∗ ∗ ∗ ∗ ς σ i uς ,υς ,xς ,yς r1 + qT( +)1σ xT∗ +1 ,yT∗ +1 r1T +1   ∑ gξ σ ∈{ A,B ,C ,D}  ς = t      (σ )iσ (9.8) = Maximal  (1,x1 ,y1 )    ∑  Val  ∑σ V ∈ σ A B C D , , , { } ∈ i S  σ    

)

W t ,xt∗ ,yt∗ =

(

∑

)

(

)

to denote the maximized payoff of the Initiative at stage t along the coop-

{

erative trajectory xt∗ ,yt∗

}

T +1 t =1

.

4.2  Subgame Consistency as Motivating Force The sustainability of dynamic cooperation throughout the cooperation trajectory requires the simultaneous satisfaction of individual rationality, group optimality and subgame consistency. Individual rationality is required to hold so that the payoff allocated to any nation under cooperation within the remit of the BRI will be no less than her noncooperative payoff. Failing to guarantee individual rationality will lead to the condition where the concerned participants would leave the cooperative initiative. Group optimality ensures that the joint payoff of all the nations under cooperation is maximized. Failing to fulfill group optimality will result in the situation where the participants prefer to deviate from the agreed-­upon solution plan in order to extract the unexploited gains. Although group optimality and individual rationality constitute two essential properties for cooperation, their fulfillment does not necessarily guarantee a dynamically stable solution in cooperation because there is no guarantee that the agreed-upon optimality principle is fulfilled throughout the cooperative duration. The question of dynamic stability in differential games has been explored rigorously in the past four decades. Haurie (1976) discussed the problem of instability in extending the Nash bargaining solution to differential games. To ensure stability in dynamic cooperation over time, a stringent condition is required: the specific agreed-upon optimality principle must be maintained at any instant of time throughout the game and along the optimal state trajectory. This condition is the notion of subgame consistency (see Yeung and Petrosyan 2004, 2010, 2012, 2016). Constructing a BRI satisfying subgame consistency would provide motivating force for voluntary participation throughout the cooperation period.

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215

A subgame consistent payoff distribution procedure (PDP) has to be derived to maintain sustainability of cooperation scheme in which the specific optimality principle chosen at the outset would remain in effect at any instant of time throughout the game along the optimal state trajectory. Hence, none of the participating nations would have an incentive to σ i depart from the collaborative scheme. Let ξ ( ) σ t ,xt∗ ,yt∗ denote the payoff of nation iσ ∈ S σ under the BRI covering the stages t to T under the agreed-upon optimality principle along the cooperative trajectories

(

)

{( x ,y )} ∗ t

∗ t

T +1

. To achieve subgame consistency, the agreed-upon optimality principle must be maintained at every stage of collaboration. Since nations are asymmetric and a large number of nations are involved, a reasonable optimality principle for gain distribution is to share the cooperative gain proportional to the relative sizes of the participants’ noncooperative payoffs. For individual nation within the coalition bloc S σ , the solution imputation to nation iσ ∈ S σ must satisfy: t =1

Condition 9.1

ζ

(σ )iσ

( t, x , y ) = Q ( t, x , y ) ∗ t

∗ t

Sσ

∗ t



∗ t

(

(σ )iσ V t , xt∗ , yt∗

 (σ ) 

∑V

∈Sσ

)

( t, x , y ) ∗ t

(σ )iσ

∗ t

(9.9)

,

(

)

t , xt∗ , yt∗ is pre-BRI for iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ ; where V σ noncooperative payoff of nation iσ ∈ S . In the grand coalition, the solution imputation to coalition bloc S σ has to satisfy: Condition 9.2 W

(σ )

( t,x ,y ) = W ( t,x ,y ) ∗ t

∗ t

∗ t

∗ t

( t,x ,y ) , ∑ Q ( ) ( t ,x ,y ) { } Q(

σ)

∗ t

j

j∈ A,B ,C ,D

∗ t

∗ t

∗ t

(9.10)



for σ ∈ { A,B,C ,D} and t ∈ κ . Using Conditions 9.1 and 9.2, the imputation to nation iσ ∈ S σ within the coalition bloc S σ under BRI has to satisfy:

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D. W. K. YEUNG AND A. W. C. LUI

Condition 9.3

ξ

(σ )iσ

V ( t, x , y ) ( t, x , y ) , ( t,x ,y ) = W ( t,x ,y ) ∑ Q( ) ( t,x ,y ) ∑ V ( ) ( t, x , y ) { } ∗ t

∗ t

∗ t

Q(

∗ t

σ)

∗ t

(σ )iσ

∗ t

∗ t

j

j∈ A,B ,C ,D

∗ t

σ 

∗ t

∗ t

∗ t

∈Sσ

∗ t

(9.11)

for iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ . The above cooperative imputation scheme is a bi-level arrangement (see Petrosyan and Gromova 2014 and Yeung and Petrosyan 2018) which involves sharing among the coalition blocs and sharing among nations within each bloc. Crucial to the derivation of a time-­consistent solution is the formulation of an imputation distribution procedure that will lead to the realization of Condition 9.3. This will be done in the next subsection. 4.3  Cooperative Gain Appropriation To design an imputation distribution scheme over time so that the agreedupon imputation in Condition 9.3 can be realized, we follow Yeung and Petrosyan (2010, 2018) and formulate an imputation distribution proceσ i dure. We use Bt( ) σ xt∗ ,yt∗ to denote the payment that nation iσ ∈ S σ will receive at stage t under the cooperative agreement given the states are σ i xt∗ ,yt∗ at stage t ∈ κ . The payment scheme involving Bt( ) σ xt∗ ,yt∗ constitutes an imputation distribution procedure in the sense that along the optimal state trajectories the imputation to nation i over the stages from t to T +1 can be expressed as:

(

(



)

)

(

ξ t(

σ ) iσ

T

( x ,y ) = ∑ B( ) ( x ,y ) r ∗ t

∗ t

k =t

σ iσ k

∗ t

∗ t

k 1

(

)

)

+ qT( +)1σ xT∗ +1 ,yT∗ +1 r1T +1 , σ i

(9.12)

for iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ . Theorem 9.1 The imputation in Condition 9.3 can be realized by providing a payment

Bt(

σ ) iσ

(x ,y ) = r ∗ t

∗ t

t

t +1

(

)

ξ (σ )iσ t , xt∗ , yt∗ − ξ (σ )iσ ( t + 1, xt∗+1 , yt∗+1 )  ,  

for iσ ∈ S σ and σ ∈ { A,B,C ,D} , to nation iσ ∈ S σ at stage t ∈ κ .

(9.13)

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217

Proof Making use of (9.12), one can arrive at:

ξ(



σ ) iσ

τ

( t, x , y ) = ∑B( ) ( x ∗ t

∗ t

σ iσ ζ

ζ =t

∗ ζ

)

yζ∗ , r1ζ + ξ (

σ ) iσ

(τ + 1, x

∗ τ +1

)

, yτ∗+1 ,

(9.14)

for iσ ∈ S σ , σ ∈ { A,B,C ,D} , t ∈ κ and τ ∈ {τ + 1,τ + 2, , T } . From (9.14) one can obtain Bt(



σ ) iσ

( x ,y ) r ∗ t

∗ t

t 1

= ξ(

σ ) iσ

( t,x ,y ) − ξ ( ) ( t + 1, x ∗ t

σ iσ

∗ t

∗ t +1

)

, yt∗+1 ,



(9.15)

for iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ . Hence, Theorem 9.1 follows. Under cooperation, nations would use the optimal cooperative strategies. ( D )∗ B ∗ C ∗ C ∗ B ∗ A∗ A∗ D ∗ uk∗ = (uk( ) , uk( ) , uk( ) , uk( ) ) and υk∗ = (υk( ) υk( ) , υk( ) , υk ), for t ∈ κ . Substituting these optimal cooperative strategies into the nations’ payoffs at stage t in (9.1), one can obtain the single-stage payoff of the nations along the cooperative trajectory as

π t(



σ ) iσ

( x ,y ) = g( ) ( u ,υ ,x ,y ) , ∗ t

σ iσ

∗ t

t

∗ t

∗ t

∗ t

∗ t

(9.16)

for iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ . According to Theorem 9.1, the single-stage payoff that nation i should receive in stage t under the agreed-upon optimality principle is σ i Bt( ) σ xt∗ ,yt∗ . Hence, a transfer payment

(



)

TPt

(σ )iς

( x , y ) = B ( ) ( x , y ) − π ( ) ( x ,y ) ∗ t

∗ t

σ iσ

t

∗ t

∗ t

σ iσ

t

∗ t

∗ t

(9.17)

has to be given to nation iσ ∈ S σ , σ ∈ { A,B,C ,D} and t ∈ κ . Given that all participating nations would be better off, and the initial agreed-upon sharing principle is maintained throughout the cooperation duration under the BRI, they would not have any incentive to deviate from the plan.

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5   Institutional Mechanism Design For the effective implementation of the BRI and allocation of gains, concepts from the theory of mechanism design provide the necessary guidance. The theory provides a coherent framework for analyzing institutions and allocation mechanisms, with a focus on the problems associated with incentives and private information. The use of gametheoretic tools shows that different institutional mechanism design will generate different outcomes when self-interested nations interact through the given institution whereby treatment of private information and incentives are crucial to the eventual outcome. In the context of the BRI, the self-interested nations are the participating nations who may have private information on economic or social variables which may have an impact on the formulation and implementation of strategies of other nations. Pioneer work in the field can be found in Hurwicz (1960), which defines a mechanism as a communication system in which the players send messages to each other or to a “message center”, and where a prespecified rule assigns an outcome for every collection of received messages.17 In 1972, Hurwicz introduced the key notion of incentive-compatibility, which allows the analysis to incorporate the incentives of self-interested players.18 A mechanism is considered as incentive-compatible if it incentivizes the players to disclose their private information truthfully. Further contributions of Hurwicz toward mechanism design can be found in his subsequent seminal papers (Hurwicz 1973; Hurwicz and Majumdar 1988). Other significant contributions in the 1970s include the formulation of the so-called revelation principle and the development of implementation theory, which led to great advances in the theory of mechanism design.19 The theory clearly suggests that information and incentive are crucial considerations for individual players and coalitions in a dynamic cooperative game such as the BRI.20 What follows is an attempt to articulate an organization framework for the BRI which is conducive to optimal eventual outcomes based on the latest development in mechanism design theory. First and foremost, China, as the architect of the BRI and the largest economy within the BRI nations, should initially assume a leading and coordinating role for implementing a governance and administrative mechanism. Initially,

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219

some administrative apparatus will be required for building and maintaining a global BRI platform for information gathering and sharing, processing enquiries and facilitating exchanges and cooperation, and so on. Detailed information on projects and investment opportunities should be made available to both qualified public and private investors, while basic and general information is made accessible to the public. Such a platform will ensure a high degree of transparency in all major BRI economic activities, including project commitment, progress and completion, signing of trade agreements, bulk movement of goods and services and so on. To capture all key BRI activities, a registration system based on a set of predetermined rules and criteria should be considered. An effective registration system will guarantee the traceability and auditability of targeted activities, making the imputation of aggregate economic impacts possible. On an annual basis, impact assessments and audits will need to be done on all the BRI activities based on methodologies and guidelines agreed upon by the participating nations. Similarly, postaudit and assessment are required each time a project is completed. The results can then be utilized to establish baselines for the computation of economic gains (or loss). Here, we must reiterate that countries are attracted to the BRI only if the expected gains from participation exceed those under which the countries choose to act on their own without cooperation. This is possible where there is synergy, and the pie will become bigger under cooperation. On the other hand, if a country considers the payoff not justifiable at any point in time, she will exit. Thus, a set of pre-agreed rules is necessary to impute the collective payoff, and therefrom the distribution of gains that follows. To an individual nation, the relevant questions become (i) how large the pie is, and (ii) how the pie is being shared. Any distribution scheme must first start with the total payoff which is supposed to be determinable provided sufficient information is available or at least can be estimated subject to certain probabilistic distribution. The composition of the payoff can be the aggregate of the incremental tax revenues from BRI activities, including corporate profit taxes, tariffs and individual income taxes. It can also be returns generated from the increase in capital stocks and service revenues due to the increase in tourism resulting from improved infrastructure and the increase in employment income due to improved employment opportunities, and so on. Any methodology used to impute

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the payoff should be consistently applied across all the nations. Shadow pricing, if used, should be made explicit. Double counting should be avoided under all circumstances. It is therefore important that computational models should be built to ensure transparency, accuracy and consistency in the computations. The net payoff from cooperation would be the difference between the aggregate payoff under cooperation and the sum total of each country’s payoff when acting independently. The latter, of course, is another set of estimates required to derive the incremental payoffs for each of the nations and thus the size of the pie. It is worth mentioning that in the computation of net payoff, factors such as imputed interest on capital outlay, economic externalities, distortions caused by market imperfections will be taken into consideration and properly accounted for. The second question concerns how the net payoff is to be shared on a fair and efficient basis. As expressed in the above section, we are inclined to adopt a bi-level gain-sharing arrangement to reflect the gains from strategies which are (i) unique to each of the coalition blocs, and (ii) common to the grand coalition (i.e. to all the nations). In both cases, the net payoff from cooperation will be shared on a basis proportional to the quantum of noncooperative payoff of each of the nations (in other words, “proportionate rule” applies). Inevitably, this will require a periodic r­ eallocation of payoff which can only be done by way of intercountry transfers. Finally, one must be cautious that the gainsharing scheme as such should remain unchanged over time to ensure certainty and consistency. However, the proportionality of the sharing among the nations will be constantly changing due to, for example, uneven growth and development over time, shift in capital flow and investment preferences, external factors beyond the control of the decision-makers and so on. Unless a body recognized by the grand coalition of nations is established to monitor and assess the BRI activities, and act as a conduit for the reallocation of payoffs, it would be difficult to attain collective optimality simply by relying on individual voluntary actions. A schematic institutional mechanism, which features all the required functions necessary for the implementation of the BRI gain-sharing scheme, is therefore proposed. Below is an organization chart for such a proposed body.

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221

Governing Council

Advisory Board

Secretariat

Planning & Policy Coordination

Economic & Environmental Impact Assessment

Engineering & Project Coordination

Project & Trade Financing

Post-audit & Compliance

Compensation Management

• Planning cycle management • Master plans • Sectoral plans • Pre-feasibility studies • Policy coordination

• Methodologies • Environmental impact analysis • Cost benefit analysis

• Technical & engineering studies • Project studies, scheduling & coordination

• Financing operation & coordination • Liaise with financiers, e.g., AIIB

• Project post-audit • Cost & benefit audit • Compliance

• Transfers & aids

First, a governing council needs to be formed. This will involve governing representation and voting issues. A couple of remarks on representation are necessary here. Prior to the Second World War, most international organizations had equal voting or “one nation, one vote” system. After the war, weighted voting, where a nation’s economic or military strength is reflected in its voting strength, was introduced. The two most prominent international organizations, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank), have had weighted voting since their inception. The weights, referred to as quotas, are based on a complex formula which incorporates economic criteria such as GDP, external reserves and exports, with basic votes allocated to each nation which is supposed to reflect the doctrine of equality of states, a doctrine strongly embedded in the history of international organizations.21 The challenge here is whether what has been or is applied today in terms of representation in international organizations is equally applicable to the proposed governing council of the BRI, or the current weighted voting system (and the formula thereof) warrants a critical review, is beyond the scope of this chapter. We presume that if all the nations are rational, optimal decision-making will result. Under the Council, there are functional bureaus which serve as the coordination bodies for all policy, economic, trade, environmental and engineering matters. Functional bodies such as audit and compliance and payoff computation are required to assess net payoffs and execute payoff reallocations. An advisory board, if properly represented, enhances both the decision-making and execution and governance capabilities of the

222 

D. W. K. YEUNG AND A. W. C. LUI

Council. A secretariat is necessary to provide all the secretarial and administrative support to the Council and the participating nations in general. Dispute settlement is another key area of the BRI. The initiative involves multi-jurisdictions with different legal systems, customs, law enforcement capabilities, business cultures and commercial practices. For projects, and in fact any commercial undertaking, under the BRI to proceed smoothly, a credible dispute settlement mechanism must be established to deal with disputes expeditiously and cost-effectively. This will contribute toward the overall economic efficiency of projects, investments and trade under the BRI. The Council therefore needs to consider establishing an arbitration or dispute settlement center as an integral part of the organization. Or else, the Council or the countries concerned can leverage upon regional and international arbitration expertise if necessary. Within Asia, Hong Kong and Singapore, for example, are suitable to assume such role. Finally, some mechanisms should be established to enable the creation of a diverse resource pool consisting of technical, managerial and professional expertise required by the BRI projects, such as project management, engineering design and construction, transport and seaport planning, environmental and geotechnical, economic feasibility, banking and financing, legal and logistics, and so on. A registration and validation system can be created to facilitate the sharing and flow of knowledge and skills. This will eventually become a regional data bank for all kinds of services required by the BRI activities, whether investment or trade-­related, public and private. As the BRI is meant to be nonexclusive and impartial, it should be able to attract resources worldwide if proper channels are being established to facilitate the movement of skills and professional expertise. The above suggestions are no more than some random thoughts on institutional design with special reference to the BRI.  It will take a full chapter or even an entire book to articulate the organizing principles, governance, structures and processes involved. In any case, the considerations around the institutional design principles should always be efficiency, transparency, credibility, ethics and justice, sustainability and political expediency.

6   Conclusion This chapter views the BRI as a dynamic cooperative game with multiple nations. Optimal solutions are formulated for the distribution of gains. Since the BRI is “nonexclusive” and “nonrestrictive”, nations will opt to

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participate in the initiative and stay on only if the gains (payoffs) justify. This study therefore proposes a bi-level redistribution scheme together with an institutional design mechanism to facilitate transnational redistribution. All these will serve to ensure that the BRI will generate optimal outcomes for all the nations at all points in time, provided the conditions of individual rationality, group optimality and subgame consistency are satisfied.

Notes 1. The former was unveiled by China’s President Xi Jinping at Nazarbayev University on September 7, 2013, during his state visit to Kazakhstan. The latter was announced before the Indonesian Parliament on October 3, 2013, during his state visit to Indonesia. 2. Full text can be retrieved from http://english.court.gov.cn/2015-10/08/ content_22130532.htm 3. See https://www.yidaiyilu.gov.cn/ 4. Ibid. 5. Wang Hu Ning (王沪宁) was the Director of the Central Policy Research Office and Director of the Central Reform Office. Wang Yang (汪洋) had oversight of foreign trade and economic affairs. Yang Jing (杨晶) was a member of the State Council and Secretary General of the State Council. Yang Jie Chi (杨洁篪) was a member of the State Council and had oversight of foreign affairs. 6. See CNBC, “US may soon claim up to $1.7 billion penalty from China’s ZTE,” June 4, 2018, and Reuters, “Exclusive: China’s ZTE signed preliminary agreement to lift U.S. ban,” June 6, 2018. 7. See GBTimes, “China signs Belt and Road deals with 69 countries and organizations,” August 18, 2017. Retrieved from https://gbtimes.com/ china-signs-belt-and-road-deals-69-countries-and-organisations 8. Ports are important to trade and development if we notice that around 90% of world trade is conducted by sea and 80% of the world’s total manufacturing output is produced within 100 km. from the coastlines. For port development projects, see Zheng et al. (2017). 9. Full text can be retrieved from http://en.ndrc.gov.cn/newsrelease/ 201612/P020161207645765233498.pdf 10. “Vision and Actions on Jointly Building Silk Road Economic Belt and Twenty-First-Century Maritime Silk Road” issued by the National Development and Reform Commission, Ministry of Foreign Affairs, and Ministry of Commerce of the People’s Republic of China, with State Council Authorization, March 2015.

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11. “Decision of the CCCPC on Some Major Issues Concerning Comprehensively Deepening the Reform,” retrieved from http://english. court.gov.cn/2015-10/08/content_22130532.htm 12. See also Ministry of Finance, PRC, “Guiding Principles on Financing the Development of the Belt and Road,” retrieved from https://eng.yidaiyilu. gov.cn/zchj/qwfb/13757.htm 13. Full text of the speech can be retrieved http://www.xinhuanet.com/ english/2015-03/29/c_134106145.htm 14. The Human Development Index (HDI) is a composite index developed by Pakistani economist Mahbub ul Haq for the United Nations Development Programme (UNDP). It incorporates per capita income, education, and life expectancy indicators. It is used to rank countries into four tiers of human development. The score of a country is positively related to the value of the individual indicators. 15. A different approach is to classify countries based on their stage of industrialization. See Wang Lei and Wang Li Qiang (ed.), The Belt and Road: Towards Win-Win Cooperation (in Chinese), Social Sciences Academic Press (China), May 2017, Chapter 3. 16. Currently submarine cables in the world mainly concentrate in the transAtlantic region. The digital linkage of a great majority of the developing countries is depended on the advanced countries. In the digital world, data and information exchanges have in fact created more value than the physical movement of goods. It is therefore vital that digital connectivity can be built as part of the BRI in order to enhance global competitiveness. See McKinsey & Company, “Digital Globalization: The New Era of Global Flows,” McKinsey Global Institute, March 2016; see https://www.thedigital-insurer.com/wp-content/uploads/2016/06/709-mgi_digital_ globalization.Pdf 17. See Leonid Hurwicz (1960). 18. See Leonid Hurwicz (1972). 19. See Eric Maskin and Tomas Sjöström (2002). 20. Prize Committee of the Royal Swedish Academy of Sciences (2007). 21. For a detailed treatment of the topic, see William N. Gianaris (1990).

References Gianaris, William N. (1990) Weighted voting in the International Monetary Fund and the World Bank. Fordham International Law Journal, 14(4), 910–945. Haurie, A. (1976) A note on nonzero-sum differential games with bargaining solutions. Journal of Optimization Theory and Applications, 18, 31–39.

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Hurwicz, Leonid (1960) Optimality and informational efficiency in resource allocation processes. In Mathematical Methods in the Social Sciences (Kenneth J. Arrow eds.), Samuel Karlin and Patrick Suppes, Stanford University Press. Hurwicz, Leonid (1972) On informationally decentralized systems. In Decision and Organization (C.B.  McGuire & R.  Radner eds.), Amsterdam: North-Holland. Hurwicz, Leonid (1973) The design of mechanisms for resource allocation. American Economic Review, 63(2), 1–30. Hurwicz, Leonid & Majumdar, Mukul (1988) Optimal intertemporal allocation mechanisms and decentralization of decisions. Journal of Economic Theory, Elsevier, 45(2), 228–261. Maskin, Eric & Sjöström, Tomas (2002) Implementation theory. In Kenneth Arrow, A. K. Sen & K. Suzumura (eds.). Handbook of social choice and welfare, Vol. 1, Amsterdam: Elsevier Science. McKinsey & Company (2016) Digital globalization: The new era of global flows. McKinsey Global Institute, March. Retrieved from https://www.the-digitalinsurer.com/wp-content/uploads/2016/06/709-mgi_digital_globalization.pdf National Development and Reform Commission, People’s Republic of China (2015) Vision and actions on jointly building Silk Road Economic Belt and 21st-century Maritime Silk Road,” first edition, March. Petrosyan, L.A. & Gromova, E.V. (2014) Two-level cooperation in coalitional differential games. Annals of Ekaterinburg Mathematical Institute, 20 (3), 193–203. Prize Committee of Royal Swedish Academy of Sciences (2007) Mechanism design theory. Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007, October 15. Wang Lei (王镭) and Wang Li Qiang (王立强) (eds.) (2017) The belt and road: Towards win-win cooperation (in Chinese), Social Sciences Academic Press (China), May, Chapter 3. Yeung, D.W.K. & Petrosyan, L.A. (2004) Subgame consistent cooperative solution in stochastic differential games. Journal of Optimization Theory and Applications, 120 (3), 651–666. Yeung, D.W.K. & Petrosyan, L.A. (2010) Subgame consistent solutions for cooperative stochastic dynamic games. Journal of Optimization Theory and Applications, 145(3), 579–596. Yeung, D.W.K. & Petrosyan, L.A. (2012) Subgame consistent economic optimization: An advanced cooperative dynamic game analysis. Boston: Birkhäuser. Yeung, D.W.K. & Petrosyan, L.A. (2016) Subgame consistent cooperation: A comprehensive treatise. Singapore: Springer.

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Yeung, D.W.K. & Petrosyan, L.A. (2018) Dynamically consistent cooperative solution of a dynamic game with coalitional blocs. Paper presented at 18th International Symposium on Dynamic Games and Applications, Grenoble, July 9–12. Zheng, Bingwen, Li, Wen & Liu, Mingze (2017) Ports and port cities in building of the belt and road (Translated from Chinese by Liu Bo & Wu Xiaona). Beijing: China Social Sciences Press, May.

PART III

Political, Social and Environmental Challenges to Human Progress

CHAPTER 10

Globalization and Populism Oscar Bajo-Rubio and Ho-Don Yan

1   Introduction “Globalization” and “populism” are terms that suffer from elusive definitions. Both are used freely by a wide variety of researchers and commentators to mean both negative and positive things. Sometimes globalization (or globalism) means lowering trade barriers, while other times it means an aggressive foreign policy through international organizations like NATO or supporting a global bureaucracy like the United Nations, the International Monetary Fund, or the World Trade Organization (McMaken 2018). Similarly, populism can be treated as the holy grail of democracy, which supports majority rule, while it can also be deemed as a political strategy to reap short-term gains, yet at the price of long-term pain (Rovira Kaltwasser 2016). This chapter intends to clarify the develop-

O. Bajo-Rubio Department of Economics, Universidad de Castilla-La Mancha, Ciudad Real, Castilla-La Mancha, Spain e-mail: [email protected] H.-D. Yan (*) Department of Economics, Feng Chia University, Taichung, Taiwan, Republic of China e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_10

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ment of both phenomena and analyze the influence of their interaction on the global social and political economies in the current era. The ongoing wave of globalization has helped increase growth in the world economy by promoting specialization and the division of labor, but it has simultaneously brought about social and economic insecurity. Globalization and its ensuing influences on trade in goods and services, capital mobility, and labor migration have mostly contributed and at times reinforced the inception of populism. The backlash against decades of international economic integration reflects discontent by its losers and left-behinds and instigates populist candidates who seek to obtain a mandate in order to change the direction of globalization. Two widely held arguments about the driving forces for today’s populism, that is, economic insecurity and cultural backlash (Inglehart and Norris 2016), have a relation with the gathering traction of globalization. Ferguson (2016) argues that globalization eventually entails a backlash from populism, and based on historical experience, he suggests five ingredients that lead to populism: (i) a rise in immigration; (ii) an increase in inequality; (iii) the perception of corruption; (iv) a major financial crisis; and (v) the demagogue, since populist demagogues react aggressively against the first four. Populism, in its many variants, is anything but new, as it can be traced back to the rise of fascism in Europe and related movements in Latin America (Argentina, Brazil, Chile) in the 1930s, Franklin Roosevelt’s New Deal in the US (Rodrik 2018c), or the “Mass Line” from China’s Mao Zedong (Dai and Shao 2016). More recently, some new political parties in Europe have been termed as “populists”, both in the right-wing, such as the Netherlands’ Partij voor de Vrijheid, Germany’s Alternative für Deutschland, France’s Rassemblement national (known as Front national until June 2018), Italy’s Lega Nord, or Hungary’s Fidesz, and in the left-wing, such as France’s La France insoumise, Greece’s Syriza, or Spain’s Podemos. Other recent events have also been labeled as being related to “populists”, such as the pro-Brexit movement in the UK, the election of Donald Trump as US President, the new wave of leftist movements in Latin America (Bolivia, Ecuador, Peru, Venezuela), or some Asian politicians such as the Philippines’ Rodrigo Duterte, Indonesia’s Joko Widodo, and Thailand’s Thaksin Shinawatra. Populism appears to be a worldwide phenomenon and encompasses many different parties and movements. Prolonged and deep economic insecurity, income inequality in particular, seldom ends peacefully and usually entails revolutions and wars. The immense inequality prior to the First World War was alleviated following

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the brutal shocks brought about by the two world wars, which led to the so-called Great Compression—a huge reduction of inequalities in income and wealth across developed countries between 1914 and the end of the 1970s (Scheidel 2017). The continuous pace of globalization in this era and its ensuing discontent appear to be fueling the return of populism. Will it overturn the trend of globalization? Will it damage the democratic system? Will this time be different whereby populism will come back but without grave disruption? These critical issues have drawn wide attention in academia and policy circles. In this chapter we shall discuss the relationship between globalization and populism. First, we show the main features of globalization and compare the disparate driving forces of the two waves of globalization that largely manifest themselves in the mobility of goods and services, labor, and capital. Along with the technological change and innovation in the organization of production championed by multinational enterprises, trade in goods and services allows agents to take advantage of intratemporal trade, and financial globalization makes it possible for them to benefit from intertemporal trade, both of which lead to potentially higher long-­ term economic benefits (Obstfeld 2012). However, the side effects of distribution have been normally neglected (Hawkins 2016). The inability to recognize the adverse impact of income inequality resulting from globalization could have devastating social, political, and economic consequences. Second, we discuss the concepts, causes, and consequences of populism from the historical perspective and investigate its importance from political ideology and political strategies under the democratic system. While populism seems much more observed in Western societies (Europe and Latin America), a similar phenomenon in Asian societies has been seldom noticed. Based on its fundamental binary division, that is, corrupt establishment and the depressed poor, Asia could in fact provide many similar phenomena, such as the cases of Thailand, Indonesia, the Philippines, China, or South Korea show (Mudde and Rovira Kaltwasser 2017). Whether populism could lead to positive or negative consequences is greatly associated with institutional factors. Under a weak institutional establishment, populism might develop and magnify political turbulence, as evidenced in the cases of Latin America and Southeast Asia (Dornbusch and Edwards 1991; Case 2016). Third, we analyze how globalization fuels populism. Even though free international trade has been supported by most economists on the grounds of expanding the economic pie, its distribution (or compensation to the

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losers) has been much less emphasized. While tariff barriers have been greatly reduced following the free trade stance initiated after the Second World War, their current very low levels shed some doubts about the economic benefits of further liberalization. Globalization has brought along a number of controversial effects, in which two prominent consequences have instigated populism. One is the economic insecurity resulting from income distribution. The other is the cultural insecurity mainly caused by immigration issues, which, compounded with the persistence of wars (in particular in the Middle East), fosters the mobility of people, with the subsequent cultural backlash resulting in the advent of populism (Inglehart and Norris 2016; Zakaria 2016).

2   Globalization Globalization can be defined as the process whereby markets liberalize and become more international, losing their national and local characteristics. In this sense, globalization amounts to increased integration. The ultimate reason would be the fall in transport and communication costs, which help facilitate the mobility of goods, services, technology, capital, and people. 2.1  Globalization: Some Main Features Globalization is not new. Two waves of globalization can be distinguished: 1870 to 1914 and 1960 to the present. Following Baldwin and Martin (1999), the first wave industrialized the North and deindustrialized the South, starting from similar income levels; whereas the second wave is deindustrializing the North and industrializing a part of the South, starting from enormous differences in income levels. On the other hand, the reduction in trade barriers has had different implications in both waves. In the first one, the reduction in transport costs led to increased trade in goods, whereas in the second one the reduction in communication costs led to increased trade in ideas. A brief comparison of the two waves of globalization can be summarized in the following points: • Trade in goods: in the first wave, this consisted of the exchange of industrial products for primary products between developed and developing countries; in the second wave, most of the trade involves the exchange of similar goods between developed countries (i.e., intra-industry trade).

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• Technology: in the first wave, the high costs of technology transfer led to long-term capital movements; in the second wave, the telecommunications revolution has led to a high mobility of very liquid assets. • Foreign direct investment: in the first wave, this occurred mostly from developed to developing countries and in primary products and transportation; in the second wave, it occurred mostly between developed countries and roughly two-thirds in services and one-­ third in manufacturing. • Migration: this has a much lower importance in the second wave, since the worsening income distribution for low-skilled labor has brought about anti-immigration pressures. What are the driving forces behind the two waves of globalization? According to Baldwin (2006), globalization means two great decouplings or “unbundlings”. The fall in transport costs, dating back to the late nineteenth century, caused the first unbundling; that is, there is no need for the place where a good is produced to be next to the place where it is consumed. More recently, the fall in communication and coordination costs raises the second unbundling; that is, there is no need for the different stages of the production process to be performed next to each other. The first unbundling relates to what Baldwin terms the “old” paradigm, where competition between firms or sectors entails all groups of workers within each industry sharing the same fate; hence, in terms of policy implications, increased globalization would lead to “winning” and “losing” industries. In turn, the second unbundling relates to a “new” paradigm, whereby decreasing communication and coordination costs, coupled with the existence of wage differentials across countries, mean that it is profitable for firms to separate geographically, that is, offshoring, the different tasks performed in the global production network. Accordingly, competition is no longer between industries, where each one produces a single good, but between tasks, which are performed in different industries, thus making it nearly impossible to identify “winners” and “losers” according to particular industries. In short, the first unbundling allowed for the spatial separation of factories from consumers, whereas the second unbundling allowed for the spatial separation of the factories themselves (Baldwin 2006). As in the first wave, the most immediate expression of globalization in the second wave is the increasing liberalization of trade exchanges, which can be termed as trade globalization. As is well known, the standard argu-

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ment holds that, according to the principle of comparative advantage, a country should export the good it produces relatively more efficiently and import the good it produces relatively more inefficiently. This will lead to a higher welfare for the country, as compared to the situation in which there is no trade. Even though the argument acknowledges the possibility that some countries may win and some may lose, the general principle is still valid as far as the winners can compensate the losers. However, as emphasized by Driskill (2012), the standard argument in favor of free trade “is incoherent or makes implicit value judgements in as much as the argument simply says free trade is good for the nation because it creates a bigger pie, even though some members of the nation end up with less pie” (Driskill 2012, p. 3). As trade liberalization advances, redistributive effects get larger and tend to offset the gains from trade (Rodrik 2018a). Governments have a political incentive to promise compensation to those harmed by liberalization, but not so much to carry it out afterward (Rodrik 2018a). The universal benefits from free trade have been called into question, as the nature of recent trade agreements shows. Indeed, after several decades of trade liberalization, trade agreements are less and less concerned with tariffs and quotas, and much more with regulatory and harmonization rules, designed with the purpose of caring about health, safety, the environment, and the like. For that reason, recent trade agreements are strongly influenced by politically well-connected firms (such as international banks, pharmaceutical companies, and multinational corporations), which might result in purely redistributive effects in favor of these interest groups under the disguise of free trade (Rodrik 2018b). Globalization has also manifested itself in a growing liberalization of capital movements, that is, what can be termed as financial globalization. In theory, financial globalization can complement domestic savings and allow for increased investment and technological spillovers or be used to smooth consumption, by offsetting the effects of temporary shocks to the domestic economy (Kose et  al. 2009). However, in practice, the protracted deregulation and liberalization of financial transactions are associated with a large degree of volatility in financial markets, leading to an increased frequency in economic and financial crises (Rodrik 2011). From a historical viewpoint, there is a very high correlation between the extent of international capital mobility and the incidence of banking crises, as shown in Reinhart and Rogoff (2009). In recent times, the financial ­sector, and Wall Street in particular, has gained a disproportionate influ-

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ence with strong connections to those with political power, which was evidenced in the origin of the 2008–2009 global financial crisis (Johnson 2009). We finally shall refer to another aspect of globalization that was more important in the first wave than in the second, that is, labor mobility. In fact, migration is the most obvious difference between the two waves of globalization (Baldwin and Martin 1999), with massive movements of population at the end of the nineteenth century and the start of the twentieth century, and no comparable flows until recently. For instance, annual migration rates fell from 660 per million world inhabitants in the nineteenth century to 215 per million world inhabitants during the period 1945–1980; migration rates increased in the 1980s and 1990s, reaching an average annual rate of 603 per million world inhabitants in the period 1990–2010 (Wynne 2015). Enhancing labor mobility provides larger gains than further trade and financial liberalization, as stressed by Rodrik (2011). In particular, it contributes to the reduction of poverty in emerging countries; and, for developed countries, it allows them to gain access to a pool of workers who can occupy certain jobs that are difficult to fill with domestic workers. However, it should be noted that a full liberalization of the barriers to immigration in advanced countries would lead to massive inflows of workers from developing countries, which would cause a serious disruption in the labor markets and social policies of advanced countries. This may also aggravate the social unrest already existing in some of these countries, due to the different cultural practices of some of these immigrants. For these reasons, Rodrik (2011) has proposed a temporary visa system in rich countries, so that a fixed amount of foreign workers from emerging countries would be accepted in the labor markets of developed countries for a fixed time period; the system should be complemented with some incentives and penalties so foreign workers can choose to return to their countries once the visas expire. Following the above developments, a new “conventional wisdom” on globalization, in Rodrik’s (2007) words, has emerged based on the following points: • Globalization entails growing inequality and insecurity in advanced countries. • Trade and financial openness do not lead to higher economic growth by themselves, in the absence of institutional reforms.

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• Globalization therefore needs to be complemented by a wide range of institutional reforms, in both advanced and emerging countries, which make possible to fully reap its potential benefits. This in turn relates to the so-called political trilemma of the world economy, first presented in Rodrik (2000) and then developed by the same author later on (e.g., Rodrik 2011). The political trilemma of the world economy states that deep economic integration (or, put differently, hyper-­ globalization), the nation-state, and democratic politics are mutually incompatible: we can have any two of them, but we cannot have all three simultaneously. Figure 10.1 illustrates the trilemma. What does this figure show? If we want full economic integration, then we should eliminate all existing transaction costs across borders that are mostly set up by the nation-states; this would be the case of global federalism, where the scope of democratic politics coincides with the scope of global markets (right side of the triangle). However, if we want to keep the nation-state, then we should make it responsive just to the needs of the international economy, getting rid of powers addressed to any domestic objectives; this is similar to the case of the gold standard during the first wave of globalization (left side of the triangle). Finally, if we want to preserve both the nation-state and democratic politics, then we should go for a limited version of globalization; this is similar to the case of the Bretton Woods regime after the Second World War (lower side of the triangle). The implication of the trilemma is that, for globalization to survive, it should create a policy space in order to cope with the tensions and disruptions that globalization entails (Rodrik 2007). In this sense, the inability to face the problems associated with the increasing liberalization of ­markets is the ultimate reason for the collapse of the first wave of globalization. What about the second wave of globalization? Rodrik (2007) envisions a Deep economic integration

Nation-state

Democratic politics

Fig. 10.1  The political trilemma of the world economy

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global federalism that would need to make international policymakers accountable through democratic elections, and ensure that the losers from globalization would subsequently be compensated. However, the ongoing series of financial crises and the failure of incumbent governments to deal with the distributive and governance difficulties posed by economic integration seem to lead the way toward increased protectionism, as shown by the current surge in populism.

3   Globalization and Inequality The past few years have witnessed a growing concern about wealth distribution and the extent of income and wealth inequality in the world economy, as shown by the success of the already classic book of Piketty (2013). The role of the rising income inequality in the origin of the current economic crisis has been also examined from different points of view (Kumhof et al. 2015; Stockhammer 2015). Rising inequality is also leading to significant harmful effects on long-term growth (Ostry et  al. 2014; OECD 2015). Atkinson et al. (2011) show that the top incomes (i.e., those pertaining to the highest quantiles of the income distribution) have increased their share of total income since the early 1980s. This outcome is greater in Western English-speaking countries, China, and India; somewhat less in Southern European and Nordic countries; and lower in Continental European countries. However, when looking at the evolution of real incomes across the world population, an interesting picture emerges. Figure 10.2 (the so-called “elephant graph”, due to its shape) shows the growth of real income at different percentiles of the global income distribution for the period 1988–2008 (Lakner and Milanovic 2016; Milanovic 2016). As can be seen, the largest growth occurs for incomes around the global median (point A) and for the top 1% incomes (point C); on the contrary, incomes around the 80–85th percentile have hardly experienced any growth (point B). Who are the people located at these three points? Regarding those undergoing real income gains, most of the people around the global median (point A) are from Asian countries, especially China and India, whereas the global top 1% (point C) corresponds overwhelmingly to people from advanced countries, in particular the US. Finally, most of the people at point B belong to the lower halves of the income distribution of the traditionally rich OECD countries.

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100

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80

A

40

60

C

20

mean growth

0

B

2

10

20

30 40 50 60 70 80 percentile of global income distribution

90 95 100

Fig. 10.2  Cumulative real income growth between 1988 and 2008 for various percentiles of the global income distribution Source: Lakner and Milanovic (2016)

We note in summary that in the last few years the decline in global income inequality, mostly due to the rapid growth of China and India, has occurred simultaneously with a rise in within-country inequality, both in developed and developing countries. However, people are more concerned with their relative position in national income distributions (Milanovic and Roemer 2016). This might be rooted not simply with most people being obsessed with “keeping up with the Joneses”, but rather from the feeling of some groups about a worsening in their relative positions as regards top income recipients. What does economic theory say about the effects of trade liberalization on income inequality? Here, the standard answer comes from the Stolper-­ Samuelson theorem. In a model of two goods and two factors of production, a tariff reduction decreases the real earnings of the factor used intensively in the importable good (Stolper and Samuelson 1941). According to the theorem, in developing countries, the wages of high-­ skilled workers should fall, thus decreasing income inequality; conversely,

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in developed countries, the wages of low-skilled workers should fall, thus increasing income inequality. These simple predictions should be applicable, notwithstanding, in a world with many goods and factors of production. However, the experience of the last few years shows that income inequality has increased in both developed and developing countries. Let us take some recent evidence from the case of the US.  Hakobyan and McLaren (2016) find lower wage growth for blue-collar workers in those regions and industries the most affected by Mexican imports following the inception of the NAFTA. In turn, Autor et al. (2013, 2016) analyze the effects from the surge in imports from China, finding higher unemployment rates and lower wages in those local labor markets where import-­ competing industries are located. We further see that not only has personal income distribution worsened, but so has functional distribution, that is, the distribution of income among the owners of the different factors of production. Specifically, the share of wages in total income has experienced a significant decline since the early 1980s, both within countries and within industries. The two concepts are closely related: provided that the distribution of capital is more unequal than the distribution of labor, an increase in the labor share of income will reduce personal income inequality (Daudey and García-­Peñalosa 2007). The ultimate reason for the fall in the labor share is the decrease in the bargaining power of labor, which is related to the lower mobility of labor as compared to capital (Rodrik 2018a). Firms now threaten workers about leaving the country or outsourcing certain tasks if they do not accept lower wages. Governments find it increasingly difficult to tax such increasingly mobile capital, which leads them to reduce corporate tax rates and to tax what is less mobile, mainly labor and consumption. This trend is reinforced by the increase in nonstandard work, that is, part-time and temporary work, and self-employment (OECD 2015). In addition to affecting mostly women and young people, this leads to “job polarization” in the sense that the share of workers in the middle of the workforce drops. This means a decrease in the number of standard work contracts, unlike workers with high- and low-skill jobs, whose proportion in the whole labor force rises and who are more likely to be either self-employed or part-time or temporary workers. Nonstandard jobs are not necessarily bad jobs, but they are usually associated with worse labor conditions (in terms of employment protection, wages, on-the-job training, precariousness, etc.) and most frequently are not a “stepping stone” to better jobs in the future (OECD 2015).

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Turning to the empirical evidence, there are several studies on the relationship between globalization and the decline in the labor share, and we shall now mention some of the most representative ones. One of the earliest is Jayadev (2007), who finds, through a sample of over 100 countries for the period 1972–1995, a robust negative correlation between the degree of openness and the labor share. Using a sample of up to 71 countries between 1970 and 2007, Stockhammer (2013) concludes that financial globalization is the main cause of the fall in the labor share, with substantial negative effects from trade globalization and welfare state retrenchment as well; the effect of technological change is small and negative for advanced countries, but positive for developing countries. Finally, we refer to Dao et al. (2017), who analyze 49 countries over the period 1991–2014. For advanced economies, the most important factor driving the decline in the labor share is technological advancement, reflected in the large fall in the relative price of investment goods (which decreases the cost of capital) as well as in the accelerated automation of routine tasks, with globalization playing a smaller role. In contrast, for emerging economies the most relevant driver is globalization through which they participate in global value chains, with a more limited role for technological factors. Apart from analyzing the labor share, another line of empirical studies on income inequality focuses upon the Gini coefficient. Jaumotte et  al. (2013) analyze the evolution of the Gini coefficient for 51 countries over the period 1981–2003. For the whole sample, the authors find that, while financial globalization has increased inequality, trade globalization has reduced it, and so their joint contribution to rising inequality is lower than that of technological change. In addition, increased access to education leads to lower inequality. The general results also apply to developing countries (even with a negative overall effect of globalization on inequality). However, in the case of advanced countries, globalization contributes slightly more than technological change to the rise in inequality. Finally, Furceri and Loungani (2018) relate inequality with the extent of capital account liberalization for 149 countries from 1970 to 2010. They find that capital account liberalization is associated with significant and persistent increases in inequality, which are stronger where credit markets lack depth and when liberalization is followed by a financial crisis. Capital account liberalization also comes together with a fall in the labor share of income. As can be seen, the results from the extant empirical evidence on the sources of inequality do not always coincide, and they depend, as usual, on

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the countries in the sample, the time period, and the definitions of the variables. However, there does seem to be a common conclusion; that is, globalization and technological change are the two main factors behind the rise in inequality experienced in recent years. The effect of these two factors is rather difficult to disentangle, though, since technological change is typically a response to the changing conditions of the world economy, which in turn is continuously shaped by the extent of the ongoing process of globalization.

4   Populism Populism is playing an essential part in the social and political economics at the beginning of the twenty-first century. With its binary moral distinction between corrupt elites and virtuous people, populism has become a phenomenal movement crisscrossing every continent of the world, as witnessed through the recent collections of concepts, theories, and regional development included in Golder and Golder (2016) and Rovira Kaltwasser et  al. (2017). However, populism is notoriously subjective, elusive to define, and badly defined when it is (Deist 2017). Even more so, the terms “populist” and “populism” are used quite often by “orthodox” political parties and politicians as pejoratives against their opponents. For any meaningful debate, it is important to start with a clear definition. The Oxford English Dictionary defines populism as “a political approach that strives to appeal to ordinary people who feel that their concerns are disregarded by established elite groups”. More specifically, Guiso et al. (2017) emphasize three components in the definition of populism: (1) “the populists’ claim to be on the side of the people against the elite −which we can label as ‘supply rhetoric’; (2) the ‘fears or enthusiasm’ of people −the demand conditions to which the populists pander; and (3) the disregard for future consequences −policy characteristics of the populists’ political supply which we summarize as short-term protection” (Guiso et al. 2017, italics in the original). The demarcation of these three components helps to shed light for researching and understanding the current issues of populism. Although meaning different things to different groups, all versions of populism share a suspicion of, and hostility toward, elites, mainstream politics, and established institutions. With its deficiency of any theoretical foundation, populism encompasses a diverse set of movements, and today it spans a wide range of political movements, both in the right-wing and

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the left-wing, in every part of the world. As in Rovira Kaltwasser (2016), in the following section, we present a discussion of populism in terms of concepts, causes, and consequences. 4.1  Concepts Populism considers society to be ultimately separated into two homogenous and antagonistic groups, that is, the pure people versus “the corrupt elite”, and that politics should be an expression of the general will of the people (Mudde 2004). A Manichean contrast between the corrupt elite and the morally pure people is the core of its theory (Stanley 2008). Based upon the experience of Latin America, Rovira Kaltwasser (2016) discusses four conceptual approaches in characterizing populism. The first one is the “structuralist” approach, which emphasizes that structural change, such as industrialization and rural-urban migration, influences some new patterns of class formation that enable the rise of populism. The second approach is related to economics, as purported typically by Sachs (1990) and Dornbusch and Edwards (1991), and claims that populism should be thought of as a specific pattern of macroeconomic malfunctioning, characterized by an excess of government spending financed by debt and accommodative monetary policies that lead to hyperinflation. The third approach is the “politico-institutional”, which considers populism as a strategy of some political leaders in order to get and stay in power by developing a direct link with large segments of the population previously unorganized. The fourth is the “ideational” approach, where populism is defined as a moral discourse that, by setting a sharp opposition between “the pure people” and “the corrupt elite”, claims that popular sovereignty should be respected by all means. However, as Stanley (2008) argues, the thin nature of populism is unable to stand alone as a practical political ideology in order to put forward a wide-ranging and coherent program to solve crucial political questions. 4.2  Causes The rise of populism is closely linked with the rise of democracy, that is, the rule of the people. Democracy is not a perfect system—as Winston Churchill once said, “Democracy is the worst form of government, except for all the others.” Given the inherent deficiency of democracy, populism always goes along with it. It can be said that “while populism and democracy were relatively rare at the end of the 19th century, they are both

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widespread all over the world today” (Mudde and Rovira Kaltwasser 2017, p. 40). In general, “there are at least two important triggers for the activation of populist sentiments across the population: political unresponsiveness and major failures of democratic representation” (Rovira Kaltwasser 2016, p. 74). A democratic regime needs to constantly take into consideration the opinion of the electorate. The periodic holding of free elections ensures that governments try to satisfy the expectations and wishes of voters, so that “the more political leaders and parties become unresponsive, the higher the odds are that voters will support populist forces” (Rovira Kaltwasser 2016, p. 74). When democratically elected governments have little capacity to enforce the rule of law, or to produce economic stability and some minimum levels of welfare, populist forces can obtain a large electoral support. Accordingly, “populists can plausibly claim that ‘the people’ have been robbed of their rightful sovereignty and the time is ripe to get rid of ‘the elite’” (Rovira Kaltwasser 2016, p. 75). Which arguments explain the surge of populism politics and rhetoric today? First of all, populism is not an inevitable after-effect of the global financial crisis. Although some studies show that votes for extremist, especially right-wing, parties tend to increase after a crisis, such parties rarely focus on financial issues. As will be discussed more extensively in the following section, the rise of populism in the recent years is rather associated with both the economic disruption entailed by globalization and the cultural insecurities induced by immigration and social change. Rodrik (2018a) stresses the first argument. Given the high extension already achieved by trade liberalization over the past decades, there is little room left for the contribution to higher global GDP from tariff reduction, while at the same time the resulting costs for certain workers and regions become more clearly identifiable. Regarding the second point, it has been argued that a worsening of white males’ subjective social status, resulting both from the economic disruption associated with globalization and an improvement in the perceived social status of women and certain minorities, might provoke the increased support for populist right-wing parties among the white (male) working class (Gidron and Hall 2017). 4.3  Consequences Populism can have both positive and negative effects on the democratic system (Mudde and Rovira Kaltwasser 2017; Eiermann et al. 2017). On

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the positive part, in contemporary Europe the populist radical left and populist radical right parties are forcing mainstream political actors to become more responsive. However, for those countries with serious problems of stateness, this can be harmful for democracy. This is the case for those countries with weak institutions, such as Thailand, Indonesia, the Philippines, Turkey, and so on (Rovira Kaltwasser 2016). The Latin American experiences of hyperinflation and ballooning debt show that populism, once in power, seems not to have any substantive prescription for dealing with social and economic issues (Sachs 1990). The recent events in Venezuela show the long-term pain that derives from a lack of correct answers from populism (Hausmann 2017). Even though there are positive and negative effects from populism, two distinct kinds of problems from the rise of populism are already observed, as Eiermann et al. (2017) notice. The first is in the realm of policy and refers to the rights of minorities. It echoes Zakaria’s (1997) argument that the rise of illiberal democracy exercises its power by using the majority voting rule to oppress minorities and to violate fundamental rights. The second is in the realm of institutions and refers to the long-term stability of democracies. When populists are able to obtain a sizeable share of the vote over time, mainstream political parties are forced to respond to the populist challengers. To a certain extent, this response tends to give more validity and visibility to the populist discourse, and at the same time political polarization can lead to the formation of a populism-antipopulism divide that overlaps the traditional left-right divide (Rovira Kaltwasser, 2017). It is becoming increasingly clear that populism is an important feature of modern democracies from Europe and the US to Latin America and beyond (Bonikowski and Gidron 2016). Except for Latin America, there are not many examples of populism having gained any prime office following political elections. However, its influence on the establishments is profound and pushes them to adopt their arguments. In fact, populist parties can influence mainstream parties, which might be tempted to adopt some proposals of those populist parties.

5   Globalization and Populism: Economic and Cultural Insecurity Populism can manifest in different forms. Discontent with trade and financial integration favors left-wing populism, which develops from class divisions; if immigration is seen as the main source of concern, then right-wing

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populism, which develops from ethnic or religious divisions, prevails. Empirical evidence from Inglehart and Norris (2016) shows that cultural backlash, not income inequality, is the driving force for populism. However, Gidron and Hall (2017) argue that the cultural backlash results from the change of social status, which is mainly disrupted by economic impact. Accordingly, economic insecurity and cultural insecurity cannot be isolated as two independent forces; both are closely related. 5.1  Populism and Economic Insecurity As long as the economy is growing, everyone gets a piece of the pie, whether large or small, and distribution issues are forgiven. However, when economic growth comes to a halt, inequality rises to the surface to become a matter of concern. According to Piketty (2013), once the exceptional growth rates associated with the Golden Age (roughly 1945–1975) vanished, if the real rate of return on capital is greater than the rate of growth of national income, then a change in the distribution of income in favor of capital follows. The growing inequality in the distribution of income and wealth can pave the way for the rise of populism. Rodrik (2018a) claims that the role of globalization in the making of populism cannot be ignored. As Stiglitz (2002) emphasizes, international institutions such as the International Monetary Fund, the World Trade Organization, or the World Bank lack transparency and accountability. When many pressing political challenges are global in origin and individual nation-states fail to find an adequate response, the national economy usually falls under the regulations developed by those international independent institutions. Populism thus becomes more attractive as global integration develops. As discussed above, in a world where tariffs have been greatly reduced, further reductions lead to lower benefits in terms of GDP and larger redistributive effects (Rodrik 2018b). Western middle classes have been the biggest losers in an increasingly globalized economy. As shown in the “elephant graph” (see Fig. 10.2), going along with globalization means the hollowing out of the ­middle-­income group (Milanovic 2016). “In Britain we call them the ‘left-­behinds’. In France, they are the ‘couches moyennes’. In America, they are the ‘squeezed middle’. A better term is the ‘precariat’  – those whose lives are dominated by economic insecurity. Their weight of numbers is growing. So, too, is their impatience” (Luce 2017, p. 12).

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Scheidel (2017) warns that, throughout history, civilization has not, by itself, led to a peaceful reduction in inequality. On the contrary, violent shocks are of paramount importance in order to narrow the gap between the rich and the poor. In particular, four different kinds of violent shocks have been central in reducing inequality: mass mobilization warfare, transformative revolution, state failure, and lethal pandemics. (See Scheidel (2017) for a more detailed exposition.) 5.2  Populism and Cultural Insecurity Once the benefits from creating a bigger pie from higher integration in the trade of both goods and services and capital become increasingly smaller, the most important unexploited reward from globalization comes from the mobility of people, which could increase global GDP from 67% to 147% if the remaining barriers to international migration are to be eliminated, as estimated by Clemens (2011). However, the mobility of people is different from that of goods and services and capital, as the surging cultural backlash compellingly shows. This cultural backlash results mainly from immigration. In particular, as a result of endless wars and instability in some countries (mostly the Middle East and sub-Saharan Africa), Western societies have been receiving in recent years a large and continuous inflow of immigrants with very different customs and cultural background. The resulting cultural clash has led to situations of racism and xenophobia that proved to be more appealing in the guidance of choices of some voters than questions related to the economic effects of the crisis (Zakaria 2016). Whereas economic insecurity can generate populist responses both from the right-wing and from the left-wing, cultural insecurity is intrinsically linked to right-wing populism. This can be seen behind Donald Trump’s victory in the 2016 US presidential election, the results of the Brexit referendum in the UK, or the strength of certain parties in continental Europe (in the Netherlands, Germany, France, Italy, Hungary, Poland, or even Scandinavia). These anti-immigration populist parties have been characterized as nativist, nationalist, far-right, and even ­neo-­fascists. However, according to Brubaker (2017), despite their strong nationalist and anti-immigration rhetoric, these parties neither reject the democratic constitutional order, nor are even consistently right-wing. Instead, they could be termed “civilizationists”; that is, their political stance is driven by the notion of a civilizational threat from Islam, which

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is understood to be a completely alien civilization. Accordingly, they advocate an identitarian Christianism defined by strong Islamophobia, while at the same time endorsing some liberal principles such as gender equality, gay rights, and freedom of speech (see Brubaker, 2017). It is true that the main component of the political stance of these right-­ wing populist parties is on anti-immigration (with a strong anti-Islam flavor), rather than the traditional arguments of the far-right; however, characterizing them as unambiguous supporters of traditionally liberal demands might perhaps sound a bit excessive. We live in democratic times, and in our globalized world, nobody seriously questions some basic principles associated with democracy, in particular holding elections (recall that even fascist parties contended elections in the 1930s). In addition, some of these parties have been accused of trying to pretend “moderation” in order to increase votes, as it was the case with France’s National Front in the 2017 French presidential election. In fact, the few times in which these parties have participated in a government in Western Europe (e.g., in Austria or Italy), they did it in coalition with “orthodox” rightwing parties. The situation is different in Eastern Europe, where two countries (Hungary and Poland) are solely ruled by right-wing populist parties, raising concerns from EU  authorities about the increasingly authoritarian trends. More generally, the agendas of such conservative, nationalist, anti-­ immigration parties seem to rather fit in with the label of illiberal democracy as popularized by Zakaria (1997); that is, a political regime where, despite the fact that democratic elections take place, some other features usually associated with liberal democracy (such as the rule of law, separation of powers, or the protection of civic liberties) are at risk of being restricted in the name of the nation’s will. Liberal institutions such as a free press, constitutional court, and individual rights have been deemed as obstacles to effective governance (Galston 2017, 2018). Respect toward minorities or advocating pluralism has been spurned as an excuse for sabotaging the function of democratic politics.

6   Conclusion In this chapter we have discussed the relationship between globalization and populism, by examining their main features as well as the interactions between both phenomena. In particular, we have stressed the role of two main explanations for the rise of populism—namely, economic insecurity,

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mostly driven by the increase in inequality, and cultural backlash, as a reaction to progressive social changes (Inglehart and Norris 2016). Rising social unrest and the lack of an effective response by the elites are two factors behind the increasing support of populist policies. On the other hand, the pressing political challenges faced by modern societies are global in origin, and seemingly exceed the ability of ordinary citizens and individual nation-states to find an adequate response. This has led to the rise of technocratic institutions that could manifest in different areas of public policies, such as bureaucracy, banks, courts, and trade treaties (Mounk 2018). While these technocratic institutions can promote higher efficiency and professionalization of public affairs, they also favor the interests of some particular, nonelected groups of people, resulting eventually in a rising estrangement of ordinary citizens. The EU is a case in point for its proclivity to invoke populism. Its inner workings exhibit some important flaws in terms of a “democratic deficit”, that is, the perception that EU institutions are inaccessible to, and lack accountability to, the ordinary citizens (Varoufakis 2017). This proliferation of technocratic and independent bodies that are insulated from democratic accountability is termed “undemocratic liberalism” (Mounk 2018). Since the end of the Cold War, liberal democracy has been championed as the ultimate ideal form of political system. However, as emphasized by Rodrik (2018d), liberal democracy is fragile and seems to suffer a double threat by one or the other of its perversions; that is, illiberal democracy on the one hand and undemocratic liberalism on the other. To some extent, Mudde (2015) argued that populism is not without merit, as it represents “an illiberal democratic response to undemocratic liberalism”, which is less an attack on democracy than a corrective to a deficit. The rise of populism can be justified as a response to the discontent present in modern societies that is associated with the current developments of globalization, along with a lack of any convincing response on the side of the elites. Despite the dearth of a homogeneous characterization of all the groups labeled as “populist”, the solutions they provide are mostly simplistic and short-sighted. For the immediate future, the ­question is whether democratic societies will be able to give an answer to the challenges and insecurities faced by modern societies, without falling into populist oversimplification. If liberal democracy is to survive, then it should provide an appropriate answer to the intricate relationship between globalization and populism.

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CHAPTER 11

Brexit and the Future of the European Union Edward Gotham

1   Relationship Problems “There are some in the country who fear that in going into Europe, we shall in some way sacrifice independence and sovereignty … these fears, I need hardly say, are completely unjustified.” Edward Heath 1973 Peter Sissons: The single currency, a United States of Europe, was all that in your mind when you took Britain in? Edward Heath: Of course, yes. (1990) Sissons (2012)

1.1  Overview The European Union (EU) is a Sisyphean project by the European nations that has been a monumental success, but a success that has necessarily come at the cost of national sovereignty. For some EU citizens, this

E. Gotham (*) Department of Economics, Feng Chia University, Taichung, Taiwan, Republic of China © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_11

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matters greatly, for others, less so. “True believers” in the EU’s aim of a Federated Union of States see this as an egg that must be broken to make the omelet; for others it has posed a major stumbling block to desired trade integration, but without the attendant political alignments. Because of this conflict with nationalism and bending of national policy, EU membership for the UK has become increasingly divisive within the local population. Despite nationalism being a driving force behind disintegration, it would be inaccurate to describe the UK’s opposition to EU membership as a product of working-class British xenophobia; however, neither is it the product of careful forethought and reflection on economic and political futures of the twenty-first century. The 2016 UK’s EU referendum was the first opportunity for British citizens to directly express any form of political opinion directly on the progression of European Economic Community (EEC) policy over the prior 43 years, when many voters still remember voting at the time. The EEC and its growing number of political commitments have transformed significantly in the interim. While the UK’s EU referendum had been promised many times, it was not carried out until 2016 (a full list of political parties offering a referendum in their manifestos is available in Table 11.1). The relationships between European nations are unusually longstanding and complex. Before 1918, many European nations were still operatTable 11.1  UK political remain/leave preferences and guarantees (1970–present) Prime Minister

Party

Date of office

Known EU preference (In/Out)

Referendum mentioned or promised in manifesto

Teresa May David Cameron Gordon Brown Tony Blair John Major Margaret Thatcher

C C L L C C

2016–present 2010–2016 2007–2010 1997–2007 1990–1997 1979–1990

In In In In In In (EEC) Out (EU)

N/A Yes Yesa Yes (×2)

James Callaghan Harold Wilson Edward Heath

L L C

1976–1979 1974–1976 1970–1974

C Conservative, L Labour a Based on 2005 Manifesto

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ing  monarchies. To obtain a better understanding of the situation, this chapter explores some of the historical, political, and economic wranglings between the UK and the EU. 1.2  Analytical Approach Economists tend to discuss events in terms of short or long run growth, GDP, labor, or fiscal effects, and sociologists prefer examining demographics, populations, public sentiment, or populism. But discovering root causes of the 2016 UK’s EU referendum requires a synthesis approach. Countless negative economic forecasts were disregarded by voters, and analysis shows that political party affiliation did not influence the referendum outcome, so no single method has successfully articulated the voter decision process for the UK’s 2016 referendum on EU membership. The single word populism is woefully insufficient as an explanation, but mainstream press did play a large role in agitating people to action. The UK press, by virtue of its own survival instinct, leans toward sensationalism and is generally less useful for research purposes, but the oleaginous mass must be traversed where populism is also under investigation. One area where mainstream news serves its purpose admirably, however, is in coining vernacular for significant events. For example, English now has the terms Europhile, Eurocrat, Europhobe, Brexit, Brexiteer, Brexodus, Regrexit, Remoaner, soft Brexit, and hard Brexit, to name just a few, and this says nothing of Leave movements for other countries. This is of interest because before the idea of soft or hard Brexit had been formulated by trade negotiators, the press had seized the idea and begun using it freely as though there were a definitive meaning. The Hongkong and Shanghai Banking Corporation (HSBC) restored decorum by putting financial analysis to the terms, and broadly speaking, Table 11.2 is what has emerged and remained the definition. However, as the date of the UK’s departure from the EU arrives, it seems increasingly likely the UK will face a choice of Prime Minister Theresa May’s Withdrawal Agreement or no deal, which would result in World Trade Organization (WTO) terms. Popular press and social peer groupings were found to be highly influential factors during the referendum. Commanding public sentiment became more difficult as traditional media impact declined, and as internet penetration increased (Dimmick et  al. 2004). Thus, social media transmogrified the nonacademic political-debate arena of the early twenty-first

Yes Yes Yes

Yes Yes, but reduced No No

Yes Yes No

Yes Yes Yes No

Duty free trade in goods Market access for services Free to negotiate bilateral trade agreements with non-EU trade countries? Must adhere to EU social and employment rule Makes EU budget contributions Part of Common Agricultural Policy Ability to restrict inward EU migration

Yes

EEA (Norway)

Yes

Source: Scutt (2016)

4

No

Yes, but reduced No

No

Yes Partial Yes

Partial

EFTA (Switzerland)

Yes

Yes, but probably reduced No

Likely partial

Yes, with possible labour market limits Likely Likely Probably not

Continental Partnership (Bruegel proposal)

Yes

No

No

No

Yes No No

No

Customs Union (Turkey)

Yes

No

No

No

Yes Partial Yes

No

FTA (Canada)

5

3

1

2

Hard exit

Soft exit

Access to single market?

Full EU membership

Table 11.2  HSBC soft and hard exit

Yes

No

No

No

No No Yes

No

WTO Rules

6

256  E. GOTHAM

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century (Shifman 2013). Citizens, beset on all sides by traditional media, social media, dinner-table arguments, relatives, and friends (perhaps former friends now), are subject to an outpouring of emotion on Brexit. For the UK polity, however, there is some middle ground where Leave and Remain can  agree, the outcome of the referendum was tantamount to beginning divorce proceedings.

2   The Trilemmas Attractively simple theories have misled economists in the past, ideas such as the Phillips Curve, or the labor theory of value are of note; trilemma represent another such risk. Phillip R. Lane, the Governor of the Central Bank of Ireland, notes that the Mundell-Fleming economic trilemma (MF trilemma) is “stark, but still useful in plotting directions” (Lane 2017). For this reason, the MF trilemma is commonly used for rule of thumb determinations. A three-point trilemma presents an entry point for understanding the power dynamic between forces, rules, and elements affecting an event space. Game theory literature shows us that real-world political relationships cannot be successfully modeled as a one-shot game; and international political relations are always of a repeating nature (McCarty and Meirowitz 2007). Thus, trilemma arguments should be seen as a repeating series of trilemmas occurring over time that each actor faces, where the decision to follow a policy creates political balance (or economic equilibrium), which then imbues a successive period of time with a set of inherited conditions, culminating in the actor’s new decision set. The scarcity of resources that causes the push and pull within a trilemma is what forces an economy toward equilibrium and provides a sense of economic “direction”. Thinking of economies as revolving round (not being at) stable equilibria is essential in economics at both micro and macro levels. The idea underlying the consistency of the principle of convergence is the decision path, which can be known by recorded data such as prices, exchange rates, or interest rates. For example, the UK’s MF trilemma  position can be determined conclusively as: free-floating ­ exchange rates since 1992 and free capital mobility (relative to some European counterparts, though that gap is narrowing (Wilson 2018)). Thus, the UK elects to maintain a higher degree of control over its monetary policy. This is in opposition to increasing requirements for fiscal control from the EU. A known decision path may be more simply referred to as national public policy. As a decision path becomes more ingrained nationally, it is costlier to change (Cechetti 1999). Industries, businesses,

258 

E. GOTHAM

individuals all become highly geared toward the prevailing incentive system, making the reach and implications of the MF trilemma greater over time. Michael Klein of the Tufts University writes that “[g]overnments face the (MF) trilemma; the rest is commentary” (The Economist 2016). 2.1   Mundell-Fleming Economic Trilemma In economic literature, the MF trilemma, shown in Fig. 11.1, was in economic literature  in some form from the 1960s, but was not formalized until 1976, when Mundell derived the relationship and Fleming extended the theory. It has already withstood rigorous testing over several decades (Obstfeld et  al. 2010). The trilemma relationship principally arises as a product of parity conditions that would lead to arbitrage opportunities through exchange rates or flows of capital if violated. With regard to the EU, Mundell’s work is of particular interest. In A Theory of Optimal Currency Areas, Mundell (1961) assesses which factors should determine the boundaries of monetary unions or currency areas. Many points Mundell makes were correct at the time and still require no revision, even with the many advances made in international finance over the last 50 years. Extending the maximal currency area theory in a ­subsequent paper, Mundell (1963) shows that the sole method for creating equilibrium in an international trade economy was stabilization through flexible exchange rates, a concept considered risky at that time. Previous tests on monetary policy or managing capital inflows with post– World War II (WWII) capital controls in place were onerous and capital inflow sterilization was not such a powerful tool. The exchange point of the MF trilemma depends on free-floating exchange rates as a form of release valve for errors produced by overuse or

Free Capital Flows a Fixed Exchange Rates

b

c

Fig. 11.1  Mundell-Fleming economic trilemma

Sovereign Monetary Policy

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dysfunction of the other two. This stabilization effect must be given up as one enters a monetary union, which by default impinges upon national sovereignty: [A] region is an economic unit while a currency domain is partly an expression of national sovereignty. Except in areas where national sovereignty is being given up it is not feasible to suggest that currencies should be reorganized; the validity of the argument for flexible exchange rates therefore hinges on the closeness with which nations correspond to regions. (Mundell 1961)

According to Mundell, sovereignty elements must be foregone for currency unity, but this is a double-edged sword. The Central and Eastern European Countries (CEEC) that joined the EU in 2004 and 2007 enjoyed the overwhelmingly positive effects of increased access to capital and monetary stability offered by adoption of the Euro in the wake of the Soviet Union’s collapse (Cuénoud 2012). However, giving up control of monetary policy and capital controls is a strict and nonnegotiable requirement (Globan 2014). This limits capital inflows from non-EU countries, but the trade-off for the CEEC entrants was net-beneficial due to the lowered costs of capital inflows from the members inside the bloc and increased intra-EU mobility of labor. The point is that this degree of success would not likely be reproduced by the UK if it adopted the Euro. The UK’s pursuit of monetary policy control since 1992 is now entering its 26th year. Making changes to that control by attempting to stabilize the currency, entering a channel, or otherwise managing capital inflows would cause a heavy restructuring of industry and finance, with costs that would be severe in the short run. Additionally, the last time the UK Chancellor of the Exchequer attempted to enter an exchange rate mechanism (ERM) it ended disastrously. Despite revised estimates of the cost of that event coming down to only £3.3bn (1992 pounds) (Tempest 2005), the ­likelihood of support for an ERM2 entry should be considered low and this is a fixed requirement of EU membership. Finally, with reference once again to the risk of oversimplification, the final note about trilemma in economic analysis should be that as decision paths converge on an event, or rapidly in a crisis, it is possible that a trilemma can collapse to become a dilemma. According to the Kansas Federal Reserve Bank, “[their] findings invalidate the trilemma and lead to a dilemma, an irreconcilable duo: [where] independent monetary policies are possible if and only if the capital account is managed, directly or indirectly via macro-prudential policies” (Rey 2018).

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E. GOTHAM

2.2  Monetary Union Trilemma Since 2008, pressure has emerged on the Eurozone to reform the relationship between fiscal sovereignty and Article 123 of the Lisbon Treaty (the no-bailout clause). The primary nature of controversy arises in degree of application and misunderstandings in the local populace (see Fig. 11.2). Opinion is separated by a North-South European area geographical divide. In the view of the South, bailouts do not improve the welfare of the crisis country, as creditor countries get the surplus from avoiding default, whereas the view of the North is that ex-ante, bailouts generate risk-­ shifting and moral hazard (Gourinchas and Martin 2017). The short description given here that reveals the in-built moral hazard, shows fiscal sovereignty and supranational monetary policy leaving the supranational entity as a lender of last resort; however, the problem may be not just the clause, but how it is applied and the terms on which bail-­ outs are granted  (Gourinchas and Martin 2017). This also ignores the element of political economy in the concept of debt sustainability, which began simply as a set of reference values (3% for deficit and 60% for debt/ GDP ratio) meant to be long term steady-state norms from which deviations were acceptable (Maastricht Treaty, Article 104c, 2a), to becoming hard and fast rules, not to be broken. Given historical wrangling over deficit numbers and hidden debt (Simkovic 2011), the North is justified in its skepticism. In its present state, the EU statutes do not permit large national purchases of debt by inflation. The Economic Monetary Union (EMU) is responsible for finding ways to make up any shortfall in national fiscal policies. Otherwise, national fiscal policy will dominate monetary policy. Beck and Prinz (2012) are unenthusiastic about the current arrangement of fiscal policy, but do not speak either for or against a federated union. Fiscal Sovereignty

d No Bailout Clause

e

f

Fig. 11.2  Impossible trinity of a monetary union

Sovereign Monetary Policy

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[A]n independent monetary policy, national fiscal sovereignty and a no-­ bailout clause cannot coexist at the same time. Recognizing this, it becomes immediately clear why the financial markets reacted with turmoil as European policy attempted to apply the no-bailout clause. … Although the investors in financial markets were obviously aware of this, it came as a surprise to politicians. Ignoring this impossible trinity of a monetary union will lead to its destruction, sooner or later. … the fate of the former Stability and Growth Pact shows very clearly that the national European states are unwilling to have their fiscal sovereignty restricted. (Beck and Prinz 2012)

It is hard to agree comprehensively with the authors’ sentiments regarding member nations’ unwillingness to be bound by fiscal sovereignty restraints given CEEC member benefits (Cuénoud 2012), as mentioned previously. However, as a northern state and net contributor to EU funds, the UK would be sensitive to states that exhibit signs of fiscal mismanagement. The UK does not have a spotless record in fiscal management. There is a compelling argument that the UK joined the EEC in 1973 only to stave off the financial decline it was in (Compos 2015), but recovery since then has generally shown a policy of more responsible fiscal planning, despite increasing debt. The monetary union trilemma however, does necessitate giving up control of aspects of fiscal sovereignty that the UK is well accustomed to, in addition to accepting the likely additional burden of southern state debts. 2.3  Political Trilemma of the Global Economy In 2011, McMillan and Rodrik (2011) argued that we cannot simultaneously pursue democracy, national determination, and economic globalization. If we want to push globalization further, we have to give up the nation state, or democratic politics. If we want to maintain and deepen democracy, we have to choose between the nation state and international economic integration. And if we want to keep the nation state and self-determination, we have to choose between deepening democracy and deepening globalization.

Rodrik (2016) sets out the trilemma and specifically gives mention of the UK’s EU referendum result, bringing in the balance between polity and economy (Fig. 11.3). As Rodrik surveys the result of the referendum, he acknowledges how the current EU’s system of governance is at odds with national sovereignty. Specifically, he notes “it is clear that the EU

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E. GOTHAM

Hyper-Globalization

g National Sovereignty

h

i

Democratic Politics

Fig. 11.3  Rodrik’s global political trilemma

rules needed to underpin a single European market have extended significantly beyond what can be supported by democratic legitimacy. Whether Britain’s opt out remains effective or not, the political trilemma is at work” (Rodrik 2016). This is exactly as it should be, according to his model, and what should be expected where a supranational body has representative heads, not direct democratic representatives. The third pillar of Rodrik’s trilemma, monetary sovereignty, is synonymous with national sovereignty as Mundell and Cuénoud also note. 2.4  Trilemma, Democracy and Capital Flows The various policy regimes covering monetary policy and allowance for free capital mobility are not true straitjackets, and intermediary solutions are usually available. Likewise, there is never pure free capital mobility, just as there are never truly free markets for goods or pure monetary autonomy (Bordo and James 2015). To find outside the box solutions in economics, however, is rare; seeing them successfully applied is rarer still. Things to consider that may trigger such events are the emergence of new technologies like cryptocurrencies, which effectively circumvent all international limitations and inflationary effects immediately, with the exception of gateways back to traditional currencies. The implication of cryptocurrency’s ability to entirely circumvent capital controls is understated, and research is still sparse; this, if nothing else, will have an eventual effect on capital flows, but effects on sovereignty are currently unknown. The removal of EU restrictions on internal capital flows created its own kind of risk because “the most extreme cases of the damaging effects of capital inflows occur in fixed exchange rate regimes … in a monetary union (in Europe in the 2000s)” (Bordo and James 2015). The authors refer to this as the destructive capacity of capital mobility booms. They

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observe that flexible exchange rates reduce the excesses that a balancing exchange rate mechanism provides. This balancing would also offset potential upsides though, which would then devalue the political gain that could be made; however, this is a political problem, not an economic one. According to Bordo and James (2015), the solution lies in not opening the capital account before sufficient development of the domestic financial system has taken place. This advice, if followed, would still not resolve the issue of where elements of the domestic system that would otherwise collapse, or not develop on their own, still gain access to capital at below market rates, thus presenting a risk of capital misallocation. Under all trilemma, the UK’s option to invoke Article 50 of the Treaty of Lisbon is an implicit not explicit option. The various trilemma as discussed here are discussed under the assumption that Brexit does not proceed. Furthermore, some flexibility in interpreting the UK’s position in the context of political trilemma is required as hyper-globalization may be construed as referring to the EU. This is possible because when a nation joins the EU, trade, taxation, capital flows, and immigration will be set for the whole bloc. Also, the possibilities of negotiation with the EU for exemptions from the rules are few. For example, mobility of labor, ­mobility of capital, and taxation arrangements are nonnegotiable and are prerequisites for membership, or at the very least, access to the common market. Together, these trilemmas show the following: (i) As a nation enters a monetary union, it loses its control in exchange rates and many aspects of fiscal and monetary planning. This is at odds with UK fiscal policy regarding exchange rates and capital inflows. (ii) The monetary union trilemma shows that aspects of fiscal sovereignty must be given up in order to create a currency bloc. Any ability of a state to engage in harmful fiscal behavior affects the group as a whole. It will impact monetary policy for the group, making membership less attractive for net EU contributors such as the UK.  The convergence on one set of tight fiscal rules will remove fiscal sovereignty further but allow greater group cohesion. (iii) The outcome of the UK’s  2016 referendum  on the EU indicates that the UK’s membership is not sustainable at this time. The referendum further shows that the (relatively) nationalist UK citizens are opposed to further globalization (in this case EU’s labor mobility). Additionally, the UK public perceives the national sovereignty aspects that must be forgone for the EU membership as too great a cost.

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E. GOTHAM

3   The Divorce: Long Run and Short Run Causes This section discusses the causes for the breakdown in the EU/UK relationship and how it is being dealt with. The causes for separation emerged as a product of both long- and short-run factors. For long-run factors, there is the evolution of the EEC, a trade device much welcomed and needed postwar, into a supranational political body with a growing power gap between voters and authority. For short-run factors, there is the aggravation of the sense of national identity, the release of the previously restricted document FCO 30/1048, and pressure on the UK’s lower income and marginal employment groups that compete for work and government subsidized homes, even as government figures produce rising GDP and employment data. 3.1  Long-run Causes During 1918–1945, Western Europe as a whole went through multiple shifts in treaty and agreement. In particular, after 1918, major changes occurred on the European continent: World War I (WWI) marks one of the great watersheds of modern history. With its end the transformation of the entire Western world from monarchical rule and sovereign kings to democratic-republican rule and sovereign people that began with the French Revolution was completed. Until 1914, only three republics had existed in Europe – France, Switzerland, and after 1911, Portugal; and of all major European monarchies only the United Kingdom could be classified as a parliamentary system, i.e. one in which supreme power was vested in an elected parliament. Only four years later, after the United States had entered the European war and decisively determined its outcome, monarchies all but disappeared, and Europe along with the entire world entered the age of democratic republicanism. (Hoppe 2011)

In the aftermath of WWI, Europe endured revolutions, pogroms, and mass expulsions, despite signing a peace treaty at Versailles. This treaty, perhaps worse than no treaty, contained the seeds of WWII and in effect was only a short breathing space between conflicts (Gerwath 2016). Even after WWII, many European nations took decades to recover financially, economically, and demographically. The Marshall Plan in 1948 provided fiscal support for damaged national economies, finances, and infrastructure. Economic hardships that previously prevented European cohesion were gradually eased. By the period 1945–1957, a new European era was emerging:

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In 1945, a family standing almost anywhere in Europe found itself in a country that was, or had recently been, (a) ruled or bombed by a brutal fascist dictator, (b) occupied by a foreign army, or (c) both. (Baldwin 2016)

Post-WWII Western Europe was vocally skeptical of communism (Sassoon 1992), but in practice moved rapidly towards socialist structures and centralized social management. The swift emergence of ideas from the Fabian Society in the UK after WWI, undoing classical liberal progress that had been made up until 1906, was then echoed on the continent after WWII by the Frankfurt School. During the interwar period, these societies (in effect front runners of modern thinktanks or NGOs) were established and able to assist in directing western and northern European collaboration efforts by 1945. With communist ideas still waiting to be definitively proven economically (Mises 1952) and morally (Solzhenitsyn 2003) misguided, a collectivist approach for European nations seemed a real and reasonable possibility in the twentieth century. Furthermore, with a still heavily armed communist state like Russia on Europe’s doorstep in 1945, a collectivist response was deemed a virtual necessity (Carleton University Center For European Studies (CES) 2009). During 1957–1972, the postwar economic boom was in full effect in Europe, but not in the same way or with the same force as in the US during the late 1940s and early 1950s (Foreman-Peck 2014). Europe had a decimated population, run down or destroyed infrastructure, and low-­ trust in neighboring countries, which had severe effects on trade and capital flows (Foreman-Peck 2014). To address these issues, European governments took steps toward unification, which at the outset involved regulating and coordinating coal and steel production under the European Coal and Steel Commission (ECSC). Power problems at the time were ubiquitous and the formation of the Organisation for European Economic Co-operation (OEEC) eased the problems of coordinating primary factors of production (Thompson 1952). The architect of this embryonic EU (if we discount the influence of Richard von Coudenhove-Kalergi) was the French Foreign Minister Robert Schuman, with his stated aim being to “not only make war unthinkable but materially impossible” (https://europa.eu/european-union/abouteu/symbols/europe-day/schuman-declaration_en). Treaties were stipulated to expand the areas of economic communication and collaboration (Table  11.3). Parallel to these predominantly economic treaties, which frequently overlapped in date but not scope, were a series of alliances (Table 11.4). These alliances, by 1957, had culminated in the Treaty of

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Table 11.3  Chronological list of post-war European treaties Treaty

Begun

Ended (or Superseded)

Dunkirk Treaty Brussels Treaty Paris Treaty Modified Brussels Treaty Rome Treaty & EURATOM Merger Treaty Council Agreement on TREVI Single European Act Schengen Treaty & Convention Maastricht Treaty (TEU) Amsterdam Treaty Nice Treaty Lisbon Treaty

1947 1948 1951 1954 1957 1965 1975 1986 1985+90 1992 1997 2001 2007

1947 1948 1952 1955 1958 1967 1976 1987 1995 1993 1999 2003 2009

Table 11.4  Chronological list of post-war European alliances Alliance

Begun

Ended (or Superseded)

Dunkirk Treaty (Franco-British Alliance) Brussels Treaty (Western Union) Modified Brussels Treaty (Western European Union) Lisbon Treaty (European Union)

1947

1947

1948

1954/5

1954

2011

2007

Present

Rome, which until it was supplanted by Maastricht in 1992, was a fundamental part of the European Constitution. For the writers of the Treaty of Rome, political integration was the objective, economic integration was simply the means (Baldwin 2016). Four other nations attempted to join the European Union in the late 1960s. The UK’s application for EU membership was vetoed by France. This came with caveats, one of which was that Britain would have to sever existing trade agreements with its colonies, which at the time caused severe financial hardship for some member states of the Commonwealth, in particular, New Zealand who shipped approximately 50% of its exports to the UK at that time. UK’s accession to the European Economic Community (EEC) in 1972 was based on economic collaboration arguments. In this way, it created little friction with fiscal and monetary governance, and so the MF trilemma

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and political trilemma appeared unaffected. Early on, politics was left out of the EEC as much as possible. Some British politicians such as Michael Foot noted that the EEC, even at this early time, was an undemocratic body, and despite members being given veto powers, it would inevitably result in a power shift away from Westminster due to the nature of “I veto you, you veto me” style negotiations (Thames Television Company 1975). While the relatively simple obligations to free trade (free meaning “carefully legislated”), free capital flow, and free movement of labor are politically expedient, and easy to execute if members can agree terms; deepening such economic ties while allowing nations to retain local control over policies, is not. As economic ties developed and facilitated integration and growth among the EEC members, the EEC expanded to welcome more nations. The UK joined the EEC in 1973 under a Conservative government, after the European Communities Act 1972 was passed by both the House of Commons and the House of Lords. By the time the referendum was held in 1976, the UK polity’s political attitude toward the EEC was described by The Telegraph as “cautiously enthusiastic” (The Telegraph 2012). The decision to join the EEC (Yes, 67.2%; No, 32.8%) (UK Parliament 2013) was passed by a greater margin than the 2016 UK’s EU referendum result to leave (Yes, 51.9%; No, 48.1%) (UK Parliament 2016). A 2016 study of the British media in 1975 states “analysis of the (1975) discourse showed that the Remainers’ (pro-Marketeers, as they were then called) case for EEC membership was largely based on fears: fears of economic meltdown, fears of unstable food supplies, and fears about the UK’s place in the world. This lack of a positive case for EEC membership is a phenomenon that persists currently” (Todd 2016). The incumbents achieved their desired result, and the initial support of the UK membership eased fiscal pressures, and improved post-WWII capital flows across Europe (Ludlow 2016). 3.2  Short-run Causes The 1986 Single European Act (SEA), signed by Margaret Thatcher drew the UK considerably closer to Europe as it included clauses creating informal intergovernmental consultation. Suggested extensions to this in 1990 were the reason for Thatcher’s famous No, No, No speech (UK Parliament 1990) which shortly preceded her departure from office. The agreement approved the creation of a larger internal market and closer relations regarding monetary, social, and environmental policies. This was the beginning of interference in the UK’s MF and political trilemma position which escalated until 1992, which marked the change over from the Treaty of Rome, to the Maastricht

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Treaty. The Maastricht Treaty adapted the SEA and created the first European citizenship which allowed citizens to reside in and move freely between member states. There was a common foreign and security policy. Cooperation between police and judiciary for criminal matters was improved. For the UK, the treaty put direct pressure on the globalization aspect of political trilemma. In addition, this period was where the conditions for creation of the Euro (currency) and requirements to join it were set out. It entailed the creation of the European Central Bank (ECB) and its affiliated organizations. This additional monetary integration and ERM requirement began to exert force through the MF trilemma mechanism as the UK became locked in a battle of attempting to defend the pound (control free-floating exchange rates) at the cost of drawing down on national reserves. The second referendum on membership of the EU was more closely contested. Citizens did not vote along party lines. London, Scotland, and Northern Ireland leaned heavily toward Remain, while the remainder of the country leaned toward Leave, showing an obvious geographical influence. Mainstream media tended toward holding uneducated older members of the population accountable for the result, and superficially this appears valid, however it fails to address the reasons why, or take account of changes in access to education at higher levels over the prior 20 years, or even the political inclinations of educators in the UK. Longitudinal studies were lacking until October 2018. Lu et al. (2018) used stated preference and discrete choice experiments to directly question constituents and determine what relationship British citizens want with the EU, quantify which aspects Britons think are important, and what trade-offs they would be willing to make in negotiations. The study does not address why they voted the way they did. However, the findings show the preferred option for future relationship with the EU is similar to the prior European Economic Area (EEA) arrangement. In agreement with other studies, but with more nuanced data, the authors conclude: Of significant interest is that, currently, none of the major political parties supports what is the most popular compromise in our study—namely, joining the EEA, the option chosen by 42 per cent of respondents from a set of unlabeled packages described by their key attributes. (Lu et al. 2018)

Other journal papers and reports are panel surveys which lack interviews or focus groups. All currently published sources either were by media discourse analysis (Graneng 2017) or contained a biased sample of the voting population (Mejias and Banaji 2017). Hobolt (2016) drew on a

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pre-­election dataset of 30,895 respondents and produced a result that was confirmed later by other quantitative approaches. She found that the older a voter was, the more likely they were to vote Leave, the more educated they were, the less likely they were to vote Leave, furthermore: A standard deviation increase in “Europeaness” reduces the probability of voting Leave by as much as 37 percentage points. In comparison, a one standard deviation increase in English identity increases the likelihood of voting Leave by 10 percentage points and 5 percentage points for British identity. (Hobolt 2016)

Of the 18–24 years old that voted, 27% were Leave, and this number increases with age to where 60% of voters aged 65 or over voted Leave. Leave voters were mostly below university degree level. However, this should not be surprising due to demographic shifts in the interim and policies under the Blair government that increased the number of people going to university. Leave voters were predominantly White (53%), while Black (27%) and Asian (33%) voters were not. Gender showed no disparity with men and women: 52% each voted Leave (Sampson 2017). Other quantitative studies (Clarke et al. 2017) used panel data and concluded that the outcome was essentially a cost-benefit decision. [U]niversity educated people and those in higher social grades were significantly less likely to see the benefits of leaving in the EU than were other people.

Another econometric study (Becker et al. 2017) modeled proxy socioeconomic groups by using disaggregated data. This was correlated with known area/ward demographics, EU spending in those areas, and primary industries (30 variables in total): Surprisingly … we find that relatively little variation in the Vote Leave share is explained by measures of a local authority area’s exposure to the EU (e.g., due to immigration and trade exposure). Neither is much variation explained by measures capturing the quality of public services and fiscal consolidation. Rather, a significant amount of the variation can be linked to variables that seem hardly malleable in the short run by political choices (variables such as educational attainment, demography and industry structure)…Our findings thus suggest that there is a disconnect between the key correlates of the vote outcome and the topics dominating the political debate in the run-up to the election. (Becker et al. 2017)

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The paper goes on to clarify that it measures variation of vote shares across local authority areas with respect to key variables such as immigration and education, a method that quantifies the relative support for Leave. The authors observe a tight link (though not necessarily causal) that runs with the evolution of the United Kingdom Independence Party’s (UKIP) support that may provide a locus for coming to grips with the causes. This is of interest as UKIP was formed between 1991 and 1993, around the time of the signing of the Maastricht Treaty, which greatly increased EU/UK political ties (and implications of the MF and Political trilemma). At its inception, the sole aim of UKIP was to have a single-issue party that could move the Overton Window for political discussion of the EU project and put pressure on the incumbent party. Becker and Fetzer’s (2016) study pursued the role of UKIP on the influx of immigrants in 2004 during Tony Blair’s Labour government. Using UKIP’s vote share in European Parliamentary elections in the years 1999, 2004, 2009, and 2014 as a proxy, the authors estimated anti-EU sentiment. Other factors included access to benefits, perceived welfare abuses, rental price increases, government subsidized housing shortages, and industry wages. Many effects were hardest on the lowest-income households, with the exception of welfare claims. The results show immigrants coming to the UK were among the lowest unemployment group of migrants across Europe (7.5%) and the least likely to be unemployed. Migration was found to lead to positive economic outcomes at aggregate economic levels for growth and net fiscal receipts. However, benefits did not filter down to local workers. For example, government housing saw a large rise in the share occupied by Eastern Europeans, between 81.1% and 189.3% and private rental demand increased by between 8.3% and 10.1% (Becker and Fetzer 2018). These results were generated by an average accession shock value for regions and performed by a robust difference in differences (DID) analysis. Most importantly, the authors showed that following the CEEC accession, more than 1,000,000 people immigrated to the UK, mostly to places that had little prior experience with immigration (note the geographical connection). The areas then experienced lower wage growth in the lowest-income group and simultaneously suffered a shortage of both public and private housing, even though GDP showed a strong economy. Compounding this was immigration from extra-EU sources, which voters may have conflated with EU policy. In 2004 Tony Blair promoted immigration to the UK (Blair 2004) seeking to persuade industry of the benefits of further conversion to a multi-racial country, when it was one

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already and had been since the large influx of Commonwealth citizens after WWII.  Between 1998 and 2016, non-EU net migration exceeded net migration from the EU every single year. The amounts of non-EU net immigration and EU immigration were 3.7 million and 1.5 million respectively. By 2015, foreign-born citizens were 85% of net population growth (Story 2017). Racial identity then, may be a cause of the Leave vote, even if the EU was unfairly held accountable. Additionally, Nairn (1977) shows an emerging  difference between English and British identities starting from the 1970s, partly as a reaction to the arrival of Scottish and Welsh nationalists in the British Parliament. This is relevant because  people in the UK that identify as English rather than British were more likely to be Eurosceptic (Wellings, 2010), this was shown by several studies before the UK’s EU referendum in 2016. Brexit has thus raised more questions than answers, which is a bitter irony for David Cameron whose aim was “to settle the European question” in British politics. London, specifically Westminster, was caught unawares by the UKIP/ independence resurgence. However, it should have been more predictable considering Labour (under Blair) knew that unfettered immigration in 2004 had been “a terrible mistake” (Philipson 2013). The polarization and communication gap between metropolitan and rural areas appears to be very real, and now it seems the underrepresentation of Euroskepticism in either of the two major political parties was a significant cause. Also, tactical voting is common in marginal areas and sentiment remains hidden in a normal election run where voters seem apathetic. However, when voters are faced with a clear-cut referendum decision, their underlying sentiment is revealed. 3.3  Populism In English Nationalism: A Short History, Black (2018) addresses the emergence of an English culture that is manifesting, even though there is no English state within the United Kingdom, no English passport, no English Parliament or English currency, nor any prospect of these things arising. He further notes how imprecise the term “populism” is, and its abuse as a pejorative, making the working class or elderly English seem backward. Meanwhile, separatist movements in Europe are increasingly commonplace and political parties frequently reform outside commonplace left/right political lines, as with Catalonia and the UK’s EU referendum. Referencing Spain and Catalonia, Bieri (2014) observes “the emphatic refusal to grant further autonomy rights has increased support for the independence movements” and explains that this is statistically predictable where culture

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or language is threatened. This element of the referendum also contributed to the political trilemma framework as demographic shifts result in changing voter bases in a way that may negatively impact the native group. Another cause of much consternation and mistrust between the UK public  and their elected officials also stems from the release of Foreign Consular Office (FCO) document 30/1048 (UK FCO 1971). In 2002, the document was declassified after a 30-year wait. It is lengthy but comprehensive in the EEC matters it addresses, including (i) sovereignty, (ii) perceptions of sovereignty, (iii) public awareness and trust, (iv) fiscal policy generally, (v) fiscal policy regarding balance of payments (BOP), (vi) fiscal policy regarding current account (CA) problems, (vii) monetary policy, and (viii) the idea of a unified European currency. It is a significant reference material for perspective on how far ahead the UK government had planned for entry into the EEC and the depth of knowledge about the eventual course to fiscal and monetary union that was to be expected. Most importantly, the Prime Minister at the time, Edward Heath, would certainly have had access to this information when the EEC agreement was signed in 1972. This would be galling to many citizens who remember voting in the 1975 referendum on the basis that it was an economic trade agreement only. 3.4  New Treaty Arrangements Determining the precise form of any UK-EU trade deal before it is signed is near impossible (Sampson 2017). Recently, Prime Minister Teresa May released an outline of a draft withdrawal agreement (WA) that provided more direction, however none of the prior projections fit the previous studies. In most cases, the economically optimistic outcomes depend on maintaining single market access which would only be an interim measure as the incumbent party’s manifesto ensured that single market access was rejected. In all projections, disintegration will make the UK poorer (VanReenen 2016). The 2018 Withdrawal Agreement (WA) has many points still to be defined. The most difficult negotiation areas include Northern Ireland, Gibraltar (off the coast of Spain), and Cyprus. The WA comes in several forms, that is, a full 585-page version, a reduced 26-page version, and a 7-page notes version. The terms of a single financial settlement are not explicit, except in Articles 56–73 in the Joint Report from the EU and UK negotiators (EU Council 2017). Terms were previously agreed upon and specifically calculated for commitments that would have been due up to 31 December 2020. The ending of free movement of EU citizens is

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covered first and the brief version is that EU and UK citizens will have visa access (visa free for short stay) and grandfathering for certain groups. The Irish border question remains contentious, primarily because the backstop is tied to a potentially unlimited transition period known as the backstop clause. The agreement for Ireland and Northern Ireland however is bilateral and the UK is unable to unilaterally leave without the permission of the EU. The interim transition period maintains EU law and keeps the UK in the single market and the customs union until 31 December 2020. Ostensibly, this is to protect supply chains and prevent supply shocks; however, for this period the UK will have no representation in EU institutions. As Daniel Hannan (British MEP) points out, this is equivalent to making the UK a vassal state that could be used as a trade chip where access to UK markets could be sold without reciprocation. It is a risky proposition, and extendable (once) for two years bringing the final deadline to December 2022. 3.5  The No-Deal Deal (WTO) The WTO trade arrangements are widely regarded as the “No-Deal” deal. This would see the imposition of tariffs on UK goods in the EU and a rise in barriers to UK service exports in the EU, which may also include the loss of passporting rights in banking and finance. The loss of passporting rights means that both sides (EU/UK) are required to set up companies within the other’s legal framework in order to conduct business. It also affects the right to advertise financial products. For the UK, access to the single market is important for all industries. While the information form with voters’ ballot papers (if voting by post) stated explicitly that the UK would be giving up access to the common market, it seems access is still being negotiated. Regardless, changes to equal treatment would be costly. Currently low market frictions with the EU would be lost under WTO rules; however, it would not be cost prohibitive for business. Collins (2018) writes that from a UK perspective this cost may even be offset by the trade opportunities that would be made possible by not being tied to the EU. The financial sector which is approximately 3% of jobs in the UK, 8% of the income and 11% of total UK tax revenue would survive, though other authors estimate a revenue fall of 12–18% and employment cut backs of 7–8% (Djankov 2017). The continuation of financial trade under WTO would be possible but the position of London’s financial district would be severely diminished. Currently, the

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UK trade surplus due to finance is over 3% of GDP and is the single largest industry to offset the deficit (Baldwin 2016). 3.6  UK as Inspiration One fear of the remaining EU27 is that UK departure may trigger more referenda, causing a growth in separatist attitudes. If the UK is granted special terms, it will be considerably more damaging. Grauwe (2016) says: When the UK joined the EU in 1973, arguably its main strategy was to prevent the union from becoming too strong. The UK political elite decided that this could best be achieved from inside the union. Now that the UK is departing, the century-old British strategy remains the same, i.e. to weaken the forces that aim to make Europe stronger. The UK can achieve this by insisting on a special deal with the EU whereby it maintains the benefits of the union while not sharing in the costs. Such a deal, if it comes about, would signal to other member countries that by exiting they, too, could continue to enjoy the benefits of the union without contributing to the costs. Such a prospect would fatally weaken the European Union.

This outcome, however, is unlikely. While it would set a poor precedent if the UK left and received special treatment, this does not consider the relative size and financial power of the UK, or the contributions that have been made during the period of the EU membership. The idea that smaller, less influential, EU members may follow suit, hoping to retain benefits but not the risks/costs is inconsistent, due to the relative negotiating power they hold. Further, the argument that the UK joined to increase political influence is tenable, but not as compelling as the argument that it joined for financial stability and access the common market. The fact that separatist groups have yet to gain serious traction at the polls is poor consolation for dedicated federal EU planners. This serves to highlight the deeper differences between European national attitudes toward Europeanization, and the effect it has on national democracies. Noting that the EU has a “democratic deficit” is one thing, but Schmidt (2004) writes: …major EU-related changes in national governance practices and challenges to national ideas about democracy … are comparatively more significant for some countries than for others, largely as a matter of institutional ‘fit’, … the EU has been more disruptive to the practices and ideas of

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‘simple’ polities such as France and Britain, where power, access, and voice have traditionally been channeled through a single authority, than to more ‘compound’ polities like Germany and Italy, where power, access, and voice have traditionally been channeled through multiple authorities, as in the EU.

Then, it may be that the UK is not a good fit for federated unions, perhaps because it is one already. Or the further implication is, that without first resolving these fundamental demographic outlook issues, the larger goal of political unity (all the way from 1957) would be a greater challenge than expected. Collectively, the ethnic concerns, uncertainty over trade arrangements post departure, and monetary and fiscal sovereignty ideals play major parts in the trilemma. These influences can be managed, but the UK public seems to be aware of the course the EU is following toward integration. Here we see that the MF trilemma would be in serious opposition to the free-floating exchange rate and fiscal policy of the UK since 1992. Furthermore, the monetary union trilemma which contains the bailout clause and cannot be opted out from if one adopts the Euro, further prevents fiscal collaboration with the EU.  Finally,  the political trilemma makes challenges to sovereignty that will be difficult to overcome given national sentiment that has been triggered.

4   The Future of the EU 4.1  EU Potential Paths Politically and economically, the EU’s future aims are bold. This section is an overview of plans announced by Jean-Claude Junker, President of the EU Commission. Junker aided in the composition of the White Paper on The Future of Europe (European Commission 2017a) in which there were five possible future outcomes. Junker (2014) also detailed his outlook on the EU when he took office, setting out ten points representing his vision for the bloc. The White Paper is essential preparatory reading for envisioning the political pathway and is strong evidence of Junker’s consistent attitude. Junker’s personal notes highlight the fact that “too often, the discussion on Europe’s future has been boiled down to a binary choice between more or less Europe. … There are many overlaps between each scenario given, and they are therefore neither mutually exclusive, nor exhaustive” (European Commission 2017b: 15). Junker’s written statements also align strongly with those of Martin

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Schulz, President of the EU Commission and German Chancellor Angela Merkel who are more insistent on the course toward unification. For example, Schulz calls for compliance with a constitutional treaty by 2025, which will “then have to be put to the member states and those that don’t approve it will automatically have to leave the EU” (Copolla 2017). This is a considerably stronger statement than the five possible scenarios offered by Junker: The scenarios are: i. Carry on ii. Nothing but the single market iii. Those who want to do more iv. Doing less more effectively v. Doing much more together “Carry on” implies that the remaining 27 members stay the current course, which continues the focus on reforms, jobs, growth, and investment. Progress on the Euro is “incremental” and citizens’ rights are upheld. As mentioned in Sect. 2.1, the progression on currency matters has a serious impact on monetary policy and capital flows. From the EU perspective, the sentiment regarding citizens’ rights is a reference to mobility of labor, migration, and settlement rights. The issues on EU citizens living in the UK are currently under discussion; that is a key point of contention within the EU as not all nations are fully reciprocal. “Nothing but the single market” is intended to be reminiscent of the former EEC, but without unwinding the processes that the EU has already been through. The Commission would free up resources to focus on single market activities and removing as many trade barriers as possible. Those who want to do more are the EU’s internal groups of actors that work within their own limits to harmonize tax rules and decide social policy. “Doing less more effectively” is the classical liberal approach, as the EU pledges to cease actions where it is perceived as having limited ability to add value or is unable to deliver on promises. In addition, more elements of responsibility will be delegated to national bodies, such as consumer protection, worker protections, and social legislation. “Doing much more together” is the commitment to increase the speed of the EU’s decision-­ making on policies. The note in this section regarding pros and cons reads:

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There is far greater and quicker decision-making at EU level. Citizens have more rights derived directly from EU law. However, there is the risk of alienating parts of society which feel that the EU lacks legitimacy or has taken too much power away from national authorities. (European Commission 2017a)

This shows an acute awareness of the populist or nationalist response such a course may trigger. This undercurrent is a dangerous one for an institution such as the EU, as the insecurity shown during 2016 after the UK referendum result, and during the election of President Trump is addressed in many private sector business reports as being a key factor in market instability. 4.2  Financial Forecasts After Brexit, a funding shortfall will appear in EU finances. The UK is the second largest financial element of the EU, constituting 16% of EU’s GDP in 2016 (Eurostat 2017) and the third largest net contributor, at 13.45% of income, to the EU (Eurostat 2018). The shortfall will have to be made up. It is hoped that the so-called Divorce Bill which is estimated at between £30 and £60 billion, and is still to be precisely calculated will provide a temporary offset to severe economic hardship, but this will primarily apply to areas where the UK had existing contribution commitments due to infrastructure projects within the EU. Official EU financial forecasts and summaries are issued quarterly. In the May 2018  economic forecast (European Commission 2018a), the overall tone is optimistic, despite the impending departure of the UK.  The EU28 still projects 2.3% GDP growth for 2018, easing back to 2% in 2019 (Fig. 11.4). The report specifically states however that these projections are based on the status-quo with the UK being maintained, which is far from certain at the time of writing. When the report was released, unemployment was near pre-2008 levels and inflation was expected to hover around 1.5–1.6%, through to 2019. The report also raised concerns over protectionism, but US President Donald Trump was not personally named. The GDP downturn still leaves the EU well within real-growth territory, despite the fact the EU is weaning itself off monetary stimulus and untangling fiscal bailouts. Fundamentals for growth remain, with inflation under control and unemployment decreasing, though mobility of labor is not what was hoped for as some areas have shortages and others have unemployment (Fig. 11.5).

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Fig. 11.4  Real GDP growth, EU28 (contribution by member states) Source: European Commission (2018a)

There are low financing costs for companies and governments following a successful, but fraught 2017, and largely positive export data (Fig. 11.6). However, the recent market stability has arisen after various anti-establishment parties were defeated in local elections. The defeat of Europe’s nationalist political elements (especially Marine Le Pen and Geert Wilders) is widely considered the cause of the sudden uptick in the EU’s GDP growth in 2017 (Allen 2017). 4.3  Banking Houses Major banking houses also release regular commentaries on the outlook for the Euro area economy. J.P. Morgan cites instability in 2016, followed by a 2017 resolution, as only a part of the bigger picture, and that “a lack of dynamism in the European corporate sector leaves many problems unaddressed” (Quinsee 2018). Furthermore, it is believed that while the EU has, until recently, benefitted from low oil prices, EU exports have also benefitted from exchange rate advantages vis-à-vis the strengthening USD. Figure 11.7 shows Goldman Sachs (GS) is in agreement with the neutral, to slightly downward sentiment, and this remains within reasonable

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Fig. 11.5  Employment expectations, Euro area Source: European Commission (2018a)

bounds of official EU projections. GS is far more explicit however about the disparity in trade data between the EU and the US. Mossavar-Rahmani (2018) notes that the performance of a basket of stocks that should be sensitive to trade wars (large sales volumes to US and China), actually ended up outperforming those with domestic sales by 11%.

5   Conclusion: Irreconcilable Differences I don’t want to belong to any club that will accept me as a member. (Groucho Marx (1959))1

In this chapter, we highlight the trilemma forces that governmental bodies are aware of and responding to at all times, forces which attain a measure of momentum across time. These directions may be disrupted entirely or converge in a dilemma at times of crisis, but such crises are unusual. The UK trilemma situation is unsuited to granting monetary or fiscal authority to the EU and the last attempt to enter the ERM had very poor results.

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Fig. 11.6  Real GDP by component, Euro area Source: European Commission (2018a) % YoY 4 Initial Forecast Range

New Forecast Range

Midpoint

3

2

1

0

US

Eurozone

Fig. 11.7  ISG developed market growth forecasts Source: Mossavar-Rahmani (2018)

UK

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The disparate elements of the existing EU’s fiscal program, with its unresolved bailout clause, will continue to be the cause of many problems while states are permitted to set their own fiscal policies. The most likely outcome of these trilemma forces for the EU is to encourage full monetary, fiscal, and currency unity. Jean-Claude Junker (President of the European Commission) and Martin Schulz (former President of the European Parliament) are both on record with this as a stated aim. Along the way, there will be nationalist or populist uprisings that will need to be carefully navigated in order for the EU’s plan to succeed. The history between the UK and the EU (and before that, its individual member states) is long and intricate, full of carefully brokered agreements and treaties that change over time. There are always disturbances when members join, or petition to join, such as with the CEEC groups in 2004, 2007, the UK’s ERM disaster in 1992, and the UK’s initial rebuttal in the 1960s. It is understandable that there should also be problems when countries choose to leave. Additionally, the long history European countries share, both good and bad, gives rise to the understanding that (i) UK’s departure from the EU need not be considered a large leap backward, (ii) the economic outlook for the UK will be heavily dependent on the type of trade agreement and political treaty reached, and (iii) all draft Withdrawal Agreements released in 2018 indicate full knowledge of the difficult and ongoing steps that will need to be taken in order to unwind some of the trade and social arrangements in a civil manner. Finally, even before the UK referendum, there existed an ideologically oriented, highly diverse Eurosceptic camp in the European Parliament, independent of British blustering in the EU parliament chambers. Analysis of these Eurosceptic elements showed that populist electoral successes (locally) cannot be dismissed as a protest vote against unpopular governance— there are fundamental identity concerns that need to be addressed. In particular, UK citizens are less receptive to considering themselves EU citizens, whereas other EU nations are more willing to be considered European. The fiscal outlook for the EU is far from bleak, though these projections predominantly still include UK data, incorporating little/no change to trade terms (see Sect. 4). There will be some kind of severance package (divorce bill), which may generate sour feelings, but the animosity will likely pass in a generation or two, and this is the timeframe that EU planners work on. For many members in the EU, monetary and fiscal unity cannot be achieved fast enough, and this aim is not to be scoffed at by Leave voters

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that value their national and ethnic identities. The difficulty is in how to navigate Rodrik’s political trilemma with monetary policy, international trade, and national identity, because as the supranational state grows, so does the power gap between “serf” and “king”. The Dunbar Number will not be ignored in politics any more than supply and demand will be ignored in economics; claiming just causes or laudable aspirations will not fill any gaps that appear. Discovering the correct degree of identity or autonomy to allow institutions, nations, and citizens will come sharply into focus as the EU increases in size and power. It is an understanding that must occur as a natural consequence of that growth, or else it will become the cause of its destruction.

Note 1. https://genius.com/Groucho-marx-famous-groucho-marx-quotesannotated; access 24 December 2018.

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Sassoon, D. (1992 July). The Rise and Fall of West European Communism 1939–48. Contemporary European History, 1(2), 136–139. Retrieved from https://www.jstor.org/stable/20081436 Schmidt, V. A. (2004). Europeanization of National Democracies: The Differential Impact on Simple and Compound Polities. (L’Harmattan, Ed.) Politique Européenne, 2(13). Scutt, D. (2016 October 6). This Table from HSBC Explains the Difference Between a ‘Hard’ and ‘Soft’ Brexit. Business Insider. Retrieved 10 25, 2018, from https://www.businessinsider.com/hsbc-table-explains-differencebetween-hard-and-soft-brexit-2016-10?r=UK&IR=T Shifman, L. (2013 March 26). Memes in a Digital World: Reconciling with a Conceptual Troublemaker. Journal of Computer-Mediated Communication, 18(3), 362–377. Simkovic, M. (2011). Powerpoint: Bankruptcy Immunities, Transparency, and Capital Structure. World Bank, Seton Hall Public Law, (p. 31). Sissons, P. (2012). When One Door Closes. Biteback. Solzhenitsyn, A. (2003). The Gulag Archipelago. The Harvill Press. Story, J. (2017). Brexit: a Certain Idea of Europe. politique étrangère, 2017(2), 1–12. Tempest, M. (2005 February 9). Treasury Papers Reveal Cost of Black Wednesday. The Guardian. Retrieved from https://www.theguardian.com/politics/2005/ feb/09/freedomofinformation.uk1 Thames Television Company, People and Politics the Common Market Debate (1975). [Motion Picture]. Retrieved 10 26, 2018, from https://youtu.be/ CuZrzwm6CJs The Economist. (2016, 08 27). The Mundell-Fleming trilemma, Two Out of Three Ain’t Bad. Retrieved from The Economist: https://www.economist.com/ economics-brief/2016/08/27/two-out-of-three-aint-bad The Telegraph. (2012). The EU: So Where Did It All Go Wrong? Retrieved from https://www.telegraph.co.uk/news/worldnews/europe/eu/9770633/TheEU-so-where-did-it-all-go-wrong.html Thompson, E.  M. (1952). Coal Supply and European Rearmament. Editorial research reports 1952 (Vol. I), Washington, DC.  Retrieved from CQ Researcher: http://library.cqpress.com/cqresearcher/cqresrre1952040400 Todd, J.  (2016). The British Discourse on Europe 1975: Wilson and the First Referendum. In The UK’s Relationship with Europe (Struggling over Sovereignty) (pp. 31–55). Palgrave Macmillan. UK FCO. (1971). Legal and Constitutional Implications of UK Entry Into EEC. London: FCO. Retrieved 10 02, 2018, from https://s3-eu-west-1.amazonaws. com/acft/FCO+30+1048.pdf UK Parliament. (1990 October 30). Thatcher: “No! No! No!”. Retrieved 10 02, 2018, from YouTube: https://youtu.be/U2f8nYMCO2I

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UK Parliament. (2013). The EEC and the Single European Act. UK HMG. Retrieved 10 02, 2018, from https://www.parliament.uk/about/living-heritage/evolutionofparliament/legislativescrutiny/parliament-and-europe/overview/britain-and-eec-to-single-european-act/ UK Parliament. (2016). Background to the UK’s EU Referendum 2016. Retrieved 10 02, 2018, from https://www.parliament.uk/business/publications/ research/eu-referendum/background-uk-eu-referendum-2016/ VanReenen, J. (2016). Brexit’s Long Run Effects on the U.K. Economy. Brookings Papers on Economic Activity, 47(2), 367–383. Retrieved from https:// econpapers.repec.org/article/binbpeajo/v_3a47_3ay_3a2016_3ai_3a201602_3ap_3a367-383.htm Wellings, B. (2010 June 25). Losing the Peace: Euroscepticism and the Foundations of Contemporary English Nationalism. Nations and Nationalism, 16(3). https://doi.org/10.1111/j.1469-8129.2010.00447.x Wilson, H. (2018 June 11). UK’s Lead on Foreign Investment Falls. The Times. Retrieved from https://www.thetimes.co.uk/article/uks-lead-on-foreigninvestment-falls-tzs0fvqp7

CHAPTER 12

Same-Sex Marriage in China, Hong Kong and Taiwan: Ideologies, Spaces and Developments Joseph M. K. Cho and Lucetta Y. L. Kam

1   Introduction The ruling in 2017 by the Constitutional Court in Taiwan that same-sex couples have the right to marry was widely reported and led to a heated discussion in the LGBTQI communities in China and Hong Kong. While the ruling has been overwhelmingly celebrated by activists and the LGBTQI communities both inside and outside Taiwan, it also directs us to look into the many different voices and political beliefs that do not join this celebration troupe. Same-sex marriage or other forms of legal recognition of samesex relationships are highly controversial. They not only stir up debates and massive mobilization between camps which differ in terms of their J. M. K. Cho (*) The Chinese University of Hong Kong, Shatin, Hong Kong e-mail: [email protected] L. Y. L. Kam Department of Humanities and Creative Writing, Hong Kong Baptist University, Kowloon, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_12

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antithetical moral evaluations of homoerotic sexuality but also create deep disagreement within LGBTQI1 groups as to whether marriage is a just institution worth joining. This chapter looks into the ideological landscapes, institutional space of campaigns and discourses of same-sex marriage in People’s Republic of China (hereafter “Mainland China” or “PRC”), Hong Kong and Taiwan and current developments and arguments of same-sex marriage in these three Chinese-speaking societies. We aim at demonstrating specific political, social and cultural contexts that shape the developments and debates of same-sex marriage in the three societies.

2   Ideological Landscapes Where Advocacy for Same-Sex Marriage Operates Ideologies are those ideas, beliefs, myths and unexamined assumptions that are often hegemonic and shape the way we understand and relate to ourselves and the others. They are repeatedly being reproduced across various social sites to maintain and naturalize power relations. With regard to same-sex marriage, the ideological landscapes in Hong Kong, Taiwan and Mainland China are paradoxically similar but at the same time different. As Chinese-speaking Asian societies, they share more or less the same cultural roots that give much weight to patrilineage and filial piety, and privilege family and marriage over individuality. They are also ideologically different to a great extent. Each country took a rather distinct course of modernity shaped by contingent historical, political and economic forces that came into play in the early nineteenth century. Altogether, the delicate blend of sameness and difference paints each place a unique ideological landscape so that ideological struggle in one place might be a nonissue in another while there are culturally specific obstacles that stand in the way of legal recognition of same-sex relationships. 2.1  Mainland China Marriage is one of the major sources of stress of tongzhi2 (同志) in Mainland China (Engebretsen 2009, 2014; Kam 2006, 2010, 2011, 2013; Kong 2011). Marriage is generally believed to be a necessary component of adulthood and is considered to be the “normal” way of life, type of person and implies emotional and physical maturity. In the aspects of family and state, marriage is a way to fulfill filial piety and to be a productive citizen. An adult life without marriage is still unimaginable to many people

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or ought to be publicly disapproved in Mainland China. There has been a heated discussion of “leftover women” (shengnü 剩女) in cities and single men in rural areas in China in the last decade. They are the two most stigmatized groups of singles. Tongzhi are doubly stigmatized as unmarried and sexually deviant people. Different coping strategies have been developed by tongzhi to tackle the marriage pressure. The most popular and also controversial way is cooperative marriage. A cooperative marriage (xingshi hunyin 形式婚姻 or hezuo hunyin 合作婚姻) is a consensual relationship formed and maintained by a lesbian and a gay man to cope with the pressure from family and society. It is a form of strategic marriage and family that needs long-term planning and negotiation between the two marital partners. In the past ten years, it has gradually become a popular practice among tongzhi under marriage pressure in Mainland China, though it remains a controversial practice in the community. In recent years, with the expanding of the tongzhi communities and the diversification of issues and voices, tongqi (同妻) or the wives of gay men have organized to tell their stories to the public. This formerly invisible and silenced group is comprised of women who are married to gay men without knowing this very fact before marriage. In 2013 they started to break the silence and appear in public as victims. Their experiences demonstrate women’s disadvantages in heterosexual marriage. If marriage is not so much a personal choice in contemporary Mainland China, divorce, especially to women, is even not a free choice either. The gender income gap (which leads to economic dependence of wives on husbands in many cases), the stigmatization of divorced women in China and the gender-­ biased property law that is unfavorable to women all contribute to the difficulties women encounter when they prepare for divorce. For tongqi, in addition to forms of gender disadvantage, they also share the stigma of homosexuality as their husbands are gay. Homophobia as a silencing force keeps them from telling their grievances and seeking help. 2.2  Hong Kong During the economic transition from manufacturing to services industry in Hong Kong in the 1970s, the rise of individualism in the wake of capitalistic consumer culture loosened the grip of family and marriage. It is culturally as well as economically easier for local people to remain single for a longer period by excusing themselves on the pretext that accumulation of wealth or focusing on career development is more important than

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romance in a highly competitive society. That said, sexuality is still subject to tight regulation in a different manner. During the 150-year British colonial rule, Judeo-Christian moral understanding of gender and sexuality became deeply ingrained in Hong Kong culture and institutions such as law and medicine. Not only does it uphold monogamy in form but also imposes stringent surveillance of sexual desires even before they have ever had a chance to be acted out. For example, while heterosexual sex before marriage could be pardoned in most occasions and heterosexual cohabitation was generally accepted with some hesitation, having a sexual desire for people of the same sex, however, was heavily criminalized before its decriminalization in the early 1990s, and was pathologized as a psychological abnormality. Fundamental to such ideologies is a deeply rooted belief in biblical interpretation that understands gender as an absolute dichotomy and each part of the binary is designed to be complementary to the other. As such, homosexuality disrupts the culturally assumed configurations of the gender, sexuality and the body that a man (gender) is a person who must be biologically male (the body) and sexually attracted to a biological female (sexuality) while a woman is a person who must be biologically female and sexually attracted to a biological male. In other words, same-sex desire calls into question the principal social division on which other social relationships are understood, constructed and legitimized (Scott 1999). These ideologies find expression in, for instance, laws that make same-sex sexual acts criminal and refuse to recognize postoperative gender for transgender people. Judeo-Christian ideologies are still hegemonic since the People’s Republic of China (PRC) resumed the sovereignty of Hong Kong in 1997. The influence and social capital that Christian churches ­accumulated in the colonial time are well extended after the handover because they have nearly dominated the educational, social welfare and institutional sectors in the early twentieth century. In the post-1997 Hong Kong, evangelical Christian churches reorganized themselves (Wong 2013). Some of them formed alliance and gave birth to a Christian Right group named Truth Light Society. Since then, it has become the leader of local Christian Right in combating any advancement of LBGT rights in Hong Kong. They have dramatically changed the sexual landscape by, for example, having the government tighten the law regulating pornography, disseminating the idea that homosexuality is still a mental disorder and promoting “reparative therapy” as a cure for lesbian women and gay men. In 2005, the government conducted a survey on the social acceptance of

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homosexuality. The Truth Light Society together with a number of churches, schools and professionals placed a four-full-page advertisement in a local high-circulating newspaper, opposing the legislation that outlawed discrimination against sexual minorities for they worried that it would lead to same-sex marriage. In 2007, when the government proposed to expand the coverage of protection under the Domestic Violence Ordinance to family relations other than heterosexual couples, they strongly opposed the inclusion of same-sex cohabitants in the amendment, even though heterosexual cohabitants had already been included long ago. In addition, before the release of the Policy Address by the Chief Executive Leung Chun Ying in January 2013, the Christian Right groups gathered at the government headquarters to exert pressure for stopping public consultation on the legislation of anti-discrimination ordinance. Since the Chief Executive of the HKSAR is not elected by universal suffrage but by a committee of 1200 voters of which 10 votes come from the Christian groups, the Chief Executive’s policy address is more likely to be skewed toward the constituencies. As such, together with high-level lobbying, Leung’s government changed its mind and took back the suggestion of a legislation consultation from the Policy Address. Worse still, pro-establishment parties, including the Democratic Alliance for the Betterment and Progress of Hong Kong and the Liberal Party, join the cause of the Christian Right groups to protect what they call the “family values” (Wong 2013). Against this ideological backdrop, anyone simply describing same-sex marriage and family, let alone campaigning for it, is susceptible to attack. In June 2018, upon complaints by a parents’ group, public libraries took off from the open shelves at least ten children’s books about diverse families. Among them were Daddy, Papa, and Me by Leslea Newman, Molly’s Family by Nancy Garden and The Family Book by Tadd Parr. The vehement opposition against same-sex marriage in Hong Kong is so palpable that LBGT activists choose to focus on legislation against discrimination for fear that a full-scale campaign for same-sex marriage would elicit a serious backlash against the hard-won rights. However, in such a highly capitalist society, another form of ideology supportive of same-sex marriage from the business sector is on the rise in Hong Kong. When QT v. Director of Immigration was about to be heard by the Court of Appeal in June 2016, a court case which will be discussed in greater detail below, 12 financial institutions, including Goldman Sachs Services (Asia) Limited and Morgan Stanley Asia Limited, for the first time joined and sought to intervene in the case to provide the court the

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perspective that granting same-sex spouses dependent visas is vital to attracting and retaining high-caliber people who are in same-sex marriage or civil partnership. In March 2018, Barclays Capital Asia Limited and others joined the group, adding up to 15 financial institutions, and applied to intervene in the case for the second time when it was about to be heard by the Court of Final Appeal. Although both applications for intervention were declined, their historic joint action speaks volumes for the fact that the cause for legal recognition of same-sex relationships in specific and LBGT rights in general is gaining support from billion-dollar transnational corporations. It is empirically proved that an LGBT-friendly organization that provides fringe benefits to same-sex partners, openly supports anti-discrimination legislation and sponsors LBGT activists such as Pride Parade is more likely to be seen in a positive light by higher-educated and younger people (Suen et al. 2016). 2.3  Taiwan Similar to Hong Kong, Taiwan underwent rapid industrialization in the 1950s and gradually turned to services industry in the 1970s. The economic restructuring, together with other fundamental social as well as cultural changes such as the provision of universal education and the emergence of popular culture, has slackened the original hold of family on individuals, especially young people who migrated from rural areas to look for new opportunities in cities. Romantic love since then has started to be associated with marriage as if they were considered two sides of the same coin. It predisposes a culture to accept nonconforming romantic relationships, be they heterosexual or homosexual, while, unintentionally, p ­ resuming crossborder marriages and other relationships that may involve exchange of money to be guilty unless proven otherwise (Wang and Chen 2017). However, not all LBGT groups endorse same-sex marriage. A small group of scholars and activists in Taiwan who identify themselves as left-wing queers are very critical of same-sex marriage. Dissent of this kind is seldom heard in Hong Kong and Mainland China. With the founding of the Taiwan Alliance to Promote Civil Partnership Rights in August 2012 and the release of an amendment bill that promotes pluralistic family arrangements by the alliance, the tension of Taiwan’s LBGT activists further grew into open debates. Positioning themselves as left-wing queers, some LBGT activists challenge the campaign for same-sex marriage from a class struggle

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perspective and argue that marriage and family as a labor-­reproducing unit are necessarily complicit with capitalist exploitation (Cho 2016).

3   Institutional Space for Same-Sex Marriage in Taiwan, Mainland China and Hong Kong Institutional space refers to the established scaffolding that is often of political and legal nature. It consists of stipulated procedures for containing power struggle in a benign manner and deliberating on and arriving at resolution of issues pertinent to the interests of the wider public. Subject to the way an institutional space is discursively and historically formed, the room within which each interest party can maneuver varies from one place to another. Specifically, which forms a polity takes, how its judicial system operates and relates to the administration, to what extent the legislative body is representative, and how open it is for civil society to intervene politically all add up to circumscribe the parameters of a given institutional space. In this light, Hong Kong, Taiwan and Mainland China differ substantially from each other. The institutional space of each has a unique composite and ecology for the struggle for and against same-sex marriage, as well as other forms of legal recognition of same-sex relationships. 3.1  Mainland China Identity-based tongzhi organizations and communities in China started to emerge in the late 1990s, around the time when there was a shift in the official paradigm of defining homosexuality. In 1997 and 2001 ­respectively, the abolishment of “hooliganism” from the criminal law and the removal of homosexuality from the medical category of perversion have paved the way for the public visibility and discussion of homosexuality, though social stigmatization and police violence against homosexuality are still prevalent in present-day China. The rise of tongzhi communities in China also resulted from a number of social, economic and political transformations during the economic reform era (since the late 1970s). They included introduction of the job market, rapid development of urban and metropolitan centers and the availability of Internet and mobile communication technologies. Tongzhi websites and groups began to emerge rapidly around year 2000.

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The politics of assimilation and normalization are usually applied in the lobbying for public support of same-sex marriage in China. There is a persisting effort by some legal experts, academics, tongzhi activists and parents with tongzhi children to demand same-sex marriage in China. However, given the tightening of control of grassroots activism in present-­ day China, even the visibility of homosexuality in media and the very survival of tongzhi organizations are under serious threat. The institutional space for realizing same-sex marriage in China is yet to be opened up. 3.2  Hong Kong Hong Kong, a former British colony whose sovereignty was taken back by the People’s Republic of China (PRC) in 1997, is quite institutionally distinct from Taiwan and Mainland China. Inheriting from its colonial history, the governance of Hong Kong consists of an executive-led government, an independent judiciary that adopts a common law system, and a legislative body. They are constitutionally set up in a way that there is separation of powers to ensure checks and balances. Nevertheless, as there is no universal suffrage, the Election Committee is still currently monopolized by 1200 members and is highly skewed toward commercial and business sectors. As such, same-sex marriage has never been on the election platforms of any candidate. Additionally, since the candidate requires at least 150 committee members’ nominations, it prevents anyone from turning the election into a social platform for or against same-sex marriage. Unlike presidential election of Taiwan, Hong Kong chief executive candidates are legally prohibited from being affiliated with political parties. This regulation basically rules out the chances that political parties advocate for or against same-sex marriage by leading the government. The compromised democratic system makes Hong Kong immune to many political maneuvers that are often deployed in the struggle for and against same-sex marriage in democratic systems of government around the world. In other words, the election of the chief executive is in itself a highly limited institutional space for groups to advance their stance on same-sex marriage, except using it to raise public awareness. For example, in 2017, local LBGT groups invited three qualified candidates to respond to a questionnaire to gauge their views about the issues that concern LBGTI community. Two of the candidates did not reply. The last and the least popular candidate showed support of, among others, the enactment of anti-discrimination law on the basis of sexual orientation and gender

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identity, provision of gender-neutral public washrooms, legalization of same-sex marriage and civil unions. These issues were sometimes brought up in televised election debates and their responses were widely reported in the media. However, they had little or no impact on the voting preference of the small-circle election in which committee members are far more concerned with the interests of their respective sectors. 3.3  Taiwan Since martial law was lifted in 1987, Taiwan has undergone rapid democratization and made the competition between political parties for presidency a mechanism that keeps power in check. Not only do periodic presidential elections materialize popular sovereignty, they also release a great deal of significant institutional space for different groups to struggle for power and shape society collectively. The political antagonism that often arises from truly democratic polity is taken to be the fuel that keeps democracy vibrant and self-correcting (Mouffe 1993, 2005, 2013). Even though it may lower administrative efficiency to fulfill the requirements of due process, democracy is considered as an antidote to dictatorship. In 1996, Taiwan had its first direct presidential election with each term being shortened from six to four years. To canvas as many votes as possible in direct and territory-wide presidential elections, candidates have more incentive to offer promises of various sorts to voters with diverse backgrounds and needs. They also formulate election platforms specifically targeted at social groups that their rivals do not consider important or doing so can help them stand out more from the others especially when their popularity differs by a margin. Political tension across the strait further complicates the political ecology of Taiwan and has a great bearing on institutional space as far as same-­ sex marriage is concerned. Being politically ostracized by the People’s Republic of China on the international stage, parts of the Taiwanese society endeavor to consolidate their own identity by drawing distinctions from Mainland China. One of the bases for the distinctions to be drawn is the extent to which human rights are protected or said to be so. For example, when Chen Shui-Bian of the Democratic Progressive Party (DPP) was elected as the sixth president of Taiwan in 2000, he championed “a nation founded upon the principles of human rights” (ren quan li guo). In his first term, the government drafted the Basic Human Rights Protection Bill that, among others, same-sex couples are granted the right to form family

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and adopt children. Despite the fact that the Legislative Yuan did not deliberate on the Bill, same-sex marriage and many other LBGT rights have since then become the issues about which Taiwanese politicians and candidates for presidency can no longer remain silent. The democratization in the late 1980s and the urge to shore up the Taiwanese identity by distinguishing itself from Mainland China through the discourse of human rights open up tremendous institutional space in Taiwan for civil society to thrive and intervene in the issues important to social justice. A recent example is Tsai Ing-wen of the DPP. On 31 October 2015, a few hours prior to the annual Pride Parade in Taipei, Tsai Ing-wen made a video on her Facebook showing her support for “marriage equality”, making herself the first presidential candidate who had ever publicly endorsed same-­ sex marriage. Even though Tsai was criticized by LBGT groups for failing to keep her promises after the election, Tsai Wan-fen, the chairperson of the Department of Women’s Affairs of the DPP, defended that it was Tsai who appointed the justices of the Constitutional Court that made the historic interpretation of the Constitution in favor of the right of same-sex couples to marriage in May 2017 (Tseng 2018). Instead of championing same-sex marriage proactively, Tseng (2018) argues that Tsai may have resorted to what she calls “euphemism” to get around the conflicts arising from head-on confrontation with patriarchy and heteronormativity. Being a single and childless woman, Tsai’s euphemistic and always well-tempered style may be a compensation for her lack of conventionally defined femininity. Nevertheless, the institutionalization of Taiwan’s democracy in general and the periodic and competitive universal suffrage provide multiple, concrete and feasible ways for LBGT groups to advocate for same-­ sex marriage within established political arena.

4   Current Developments and Arguments Mainland China, under the leadership of the Communist Party, adopts a substantially different political system from that of Hong Kong and Taiwan, resulting in the least institutional space to maneuver for power from bottom-up approach. Recently, the National People’s Congress of the People’s Republic of China voted to make amendments to the Constitution in March 2018. Among other changes, a line that reads “The leadership of the Communist Party of China is the defining feature of socialism with Chinese characteristics” was added to Article 1, effectively

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excluding the possibility of party rotation as seen in Taiwan as well as the institutional space it releases. An alternative to assuming state leadership or taking advantage of periodic universal suffrage is to influence representatives in the state’s organizations, be they legislative or advisory. One of the most prominent and outspoken scholars/activists of tongzhi rights in China is Li Yinhe. She has started her lobbying effort for same-sex marriage in China since 2001. Li has persistently lobbied for the legalization of same-sex marriage in China during the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference for many times without success, although it did increase the exposure of LBGT community. She believes that legal recognition will lead to more social acceptance of tongzhi in China. This view is also supported by some parents with tongzhi children (Fan 2012). They are eager to see their gay sons and lesbian daughters get married legally and be accepted by society as normal people. In recent years, there have also been individual attempts of same-sex couples challenging local government office for same-sex marriage registration. The first case for same-sex marriage was brought before a court for adjudication in Hunan Province in 2016. About a year before seeking judicial remedy, a gay couple applied for official registration for marriage but it was then rejected. They argued in part that because marriage law only defines marriage as a union between a husband and a wife without requiring them to be of different sexes, it should be open to male-female, female-female and male-male couples. In addition, the right to marriage is a constitutional right. Surprisingly, the court accepted the case but dismissed it in the three-hour trial on the ground that marriage law does prescribe the union of a male and a female as the condition for legally binding marriage. As the state leadership of Mainland China is tightly controlled and the power of the judiciary is heavily curtailed, the advocacy for same-sex marriage is very much institutionally constrained. In Taiwan and Hong Kong, however, the judiciary is often a significant source of power that gives considerable impetus for same-sex marriage. In the late 1980s, to appease public sentiment during the rounds of negotiation between the British Government and PRC about the transfer of sovereignty of Hong Kong, and to maintain the territory as an international city that serves economic benefits of Mainland China, the PRC made a number of provisions that protect human rights in the draft of the Basic Law, and

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even promised that the International Covenant on Civil and Political Rights and the International Covenant on Economic Social and Cultural Rights would continue to be in force after the handover in 1997. The common law system that Hong Kong inherited from the British colonial rule, together with other institutions and ways of life, is also guaranteed to continue under the constitutional framework of “One Country, Two Systems” for at least 50 years. The constitutional setting of post-­1997 Hong Kong serves to keep the judiciary connected to and open to influence of the latest legal developments in other common law jurisdictions. It makes the court a strategically significant arena for LBGT activists and community to challenge discriminatory laws and government decisions. The first court case about LGBT rights in Hong Kong is a judicial review filed by a self-identified gay man in 2004. He sought the court to declare that the disparity between the age of consent for anal sex between consenting men and that for vaginal sex between people of different sexes by five years is discriminatory and a violation of human rights protected by the Basic Law, the Hong Kong Bill of Rights and the two international covenants. The Court of First Instance and the Court of Appeal ruled in favor of him and for the first time interpreted “other status” in the Basic Law and the Hong Kong Bill of Rights to include sexual orientation as a protected ground.3 In the same year when the age of consent for sex between consenting men was challenged, a criminal case about public decency was heard by a Magistrate’s Court. Two gay men were prosecuted for having sex in a car in the public area. They defended by asking the court to declare unconstitutional the provision, 118F (1) of the Cap. 200 Crimes Ordinance, by which they were sued because it was one that only regulates sex between men in public while there is another provision on public decency applicable to all without specifying gender. Applying different sets of legal regulations on the basis of sexual orientation without justification, they argued, is discriminatory. This case finally reached the Court of Final Appeal, the highest court in Hong Kong. It ruled that as there has already been the offense of “outraging public decency” in the Crimes Ordinance, singling out people on the basis of sexual orientation for a separate legal regulation of the same offense, albeit attracting lower liability, requires the court’s close scrutiny. Modeling on the precedents in other common law jurisdictions, the court for the first time developed a justification test for adjudicating whether differential treatments on the basis of sexual orientation are justified and therefore constitutional.4 While the two gay men were acquitted in the end because the court considered

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that the justifications submitted by the government failed to pass the test, the ruling and legal construction of the justification test lend strong support to LBGT activists and community to pursue legal activism in relation to legal recognition of same-sex relationships. At the time of writing, a judicial review case, Leung Chun Kwong v. Secretary for the Civil Service and Commissioner of Inland Revenue (HCAL 258/2015; CACV 126/2017), about legal recognition of same-sex relationships in relation to the entitlement of spousal benefits and joint assessment of taxation, is pending for appeal in the Court of Final Appeal. QT v. Director of Immigration (FACV 1/2018), another judicial review case concerning the right of same-sex civil partners to obtain a dependent visa, was adjudicated in favor of QT by the highest court in July 2018. Both cases were dismissed by the Court of Appeal and by the same panel of judges, on the ground that differential treatment on the basis of marriage status is itself a justification and therefore requires no additional justification for preserving the uniqueness of heterosexual marriage as recognized in the Hong Kong law by confining core rights and obligations only to heterosexual marriage is of paramount significance. It worried that the uniqueness of heterosexual marriage as a legal as well as a social institution would be undermined if core rights and obligations associated with ­heterosexual marriage are no longer exclusive to heterosexual marriage itself. When hearing QT’s appeal, the Court of Final Appeal adopts a totally different approach than that of the Court of Appeal to adjudicate claims of discrimination on the basis of sexual orientation. It plainly dismisses the line of reasoning of the Court of Appeal and criticizes it for running into a logically unsound circular argument in which the challenged difference in treatment resulting from the difference in marital status is used as the very justification for the difference in treatment. It is as circular and fruitless as one says that because men and women are categorically different, they need to be treated differently when the other questions why there is such a difference in treatment on the basis of sex in the first place. Even after giving due weight to status together with other relevant factors, the Court of Final Appeal was not convinced that denying QT’s dependent visa was rationally connected to the legitimate aim and as such fails to pass the justification test. However, as preserving the uniqueness of heterosexual marriage as one of the legitimate aims for the difference in treatment was only advanced during the hearing of final appeal, the court declined to engage it in full upon QT’s objection for the lack of opportunity to prepare responses in advance. It remains for the Court of Final Appeal to decide to

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what extent this argument, the one on which the three judges who strongly relied to rule against QT’s and Leung Chun Kwong’s case, could stand when hearing Leung Chun Kwong’s final appeal in the near future. From such a brief overview of these two latest court cases, it can easily be discerned that there is a wide disparity between the Court of Appeal and the Court of Final Appeal in matters concerning legal recognition of same-sex relationships. Nonetheless, there has yet been a case that brings up a direct constitutional challenge to the current legal definition of marriage as a union of a man and a woman, one being heterosexual and monogamous. In some sense, it is very likely a strategy that activists are using to accumulate more successful court cases and guiding principles that recognize same-sex relationships in various marriage-related matters such as spousal benefits, joint taxation assessment and dependent visas before taking a full-blown legal action that aims at changing the legal definition of marriage in Hong Kong. This tactic is somehow well noted by the Court of Appeal and is described as “the back door” that would undermine heterosexual marriage. The ruling of the Court of Final Appeal on Leung Chun Kwong’s case will more or less have a final say in determining the legal parameters for how far legal activism for same-sex marriage can go. Similarly, the judiciary in Taiwan, or Judicial Yuan as it is called, also plays a significant role in the fight for same-sex marriage. While it is widely celebrated for the Justices of the Constitutional Court declaring in the Interpretation No. 748  in May 2017 that denying same-sex couples to form permanent union by way of marriage is unconstitutional,5 the legal fight for same-sex marriage has been going on for over three decades—Chi Chia-Wei, a self-identified gay activist, petitioned to the Legislative Yuan for legalization of same-sex marriage in 1986. With his petitions being turned down by the Legislative Yuan, and later the Ministry of Justice and the Ministry of Interior, Chi sought for judicial remedy from the Taiwan Taipei District Court in 1998 and lost his case in the end. In 2000, he applied for the same court with the same request for having a public samesex marriage ceremony approved. Without success, Chi then appealed to the Justices of the Constitutional Court for constitutional interpretation in 2001. However, his appeal was technically dismissed for he failed to specify which laws and regulations were in conflict with the Constitution. Two years later, after exhausting all the possible legal means, Chi started again the whole process by applying for marriage registration at the Household Registration Office at Wan-Hua District Taipei City. Being declined again, he took the case to the Supreme Administrative Court and lost it. In 2015,

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he made the second attempt to petition the Justices of the Constitutional Court for constitutional interpretation, which results in the widely acclaimed Interpretation No. 748 that makes Taiwan the first Asian society legalizing same-sex marriage. Chi’s success is attributed in part to his perseverance and in part to the changed ideological landscapes as a result of the longterm concerted effort especially by LBGT and women’s groups, which we have discussed earlier. Considering how complex it will be to reach a consensus as to the most appropriate way of protecting same-sex couples’ right to marriage, the court suspended its judgment for two years to allow the legislature to decide if it deemed fit to amend the existing Marriage Chapter, enact a special Chapter in the Civil Code or enact a special law. This flexibility that the Interpretation deliberately allows has unexpectedly opened up another round of heated debates in Taiwan. At the time of writing, a special law to allow same-sex marriage has been proposed and its draft bill is expected to be voted by Taiwan’s parliament in May 2019, while marriage in civil law remains defined as between a man and a woman. While very encouraging to Hong Kong and Mainland China, the historic constitutional interpretation by the Judicial Yuan happened in a social context which activists had been striving to shape for decades. Seizing political opportunities when Chen Shui-Bian employed human rights rhetoric for his nation-building project, a pro-LBGT councilor of the Legislative Yuan, Hsiao Bi-khim, planned to organize a public hearing about same-sex marriage in March 2006, but the bill was then put on hold by other councilors. Chien Tsu-Chief recalled that since then, some of the LBGTQ groups in Taiwan have held the view that it would be better to pursue civil partnership than same-sex marriage, for the former could accommodate the critique of marriage shared among some activists while being practical in terms of securing the legal rights of same-sex couples. In 2008, the Awakening Foundation organized a conference where activists gathered and explored what the next course of action would be. The conference led to the founding of the Taiwan Alliance to Promote Civil Partnership Rights (Chien 2012). With legal experts joining in 2010, the Alliance announced its proposed amendment bill to the existing ordinance that comprises of three components: (1) same-sex marriage, (2) partnership registration system and (3) pluralistic family arrangements, one that allows people to declare others as family members even if they are not tied by blood. Although institutional space is limited and legal revisions or reforms are unlikely to happen in the near future under the current political regime of tightened censorship and social control of homosexuality, diverse forms of

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tongzhi family and parenthood started to appear in China in the past decade, in addition to cooperative marriage and family. Exclusive same-sex relationship, that is not attached to a heterosexual marriage or relationship, has been increasing at least in the urban areas even though there is no legal protection for such relationship in present-day China (Kam 2013). The availability of same-sex partnership and marriage in an increasing number of countries and the transnational mobility of people in China have enabled tongzhi to look for legal registration of their relationship outside China, even though overseas recognition cannot extend to their home country. Some use overseas same-sex partnership or marriage as a way to plan for migration together with their same-sex partner. Migration emerges to be an option for tongzhi in China with cultural and economic capitals to obtain legal and social recognition of their relationship (Kong 2011; Kam Forthcoming). In the aspect of tongzhi parenthood, a new generation of “rainbow parents” appears and the number is growing steadily in China. They are same-sex parents who take advantage of reproductive technologies currently available in China or overseas countries. Owing to strict legal restrictions on reproductive technologies are strict in China—for example, only married couples are eligible for the service— and the severe population control through the household registration system, many unresolved legal issues of rainbow parents and their children persist. The absence of marriage rights makes their situation even more complicated and vulnerable.

5   Conclusion In this chapter, we have outlined and discussed the specific contexts, developments and debates of same-sex marriage in China, Hong Kong and Taiwan. In the global context of increasing number of countries granting same-sex relationship legal recognition and protection, and the persistent effort of some activists in Asia such as Taiwan to fight for equal marriage rights for lesbian, gay and transgender people, we cannot neglect the other part of reality that same-sex marriage per se is a controversial issue within LGBTQI communities in different societies. If equal marriage rights have become a normative struggle and dominant voice in our communities, those other different or disagreeing voices, politics and lived practices of alternative intimacy are worth the same amount of attention and support.

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Notes 1. About terminology, we use “LGBTQI” (lesbian, gay, bisexual, transgender, queer, intersex), “LBGT”, “LBT” and “tongzhi” in different parts of this chapter according to the historical relevance, cultural context of discussion and the term that is used in the cited articles. 2. “Tongzhi” literally means comrades in Chinese. It has been widely used to refer to lesbians and gays in China, Hong Kong and Taiwan since the late 1980s. 3. Leung TC William Roy v. Secretary for Justice HCAL160/2004 and Leung TC William Roy v. Secretary for Justice CACV317/2005. 4. “(1) The difference in treatment must pursue a legitimate aim. For any aim to be legitimate, a genuine need for such difference must be established. (2) The difference in treatment must be rationally connected to the legitimate aim. (3) The difference in treatment must be no more than is necessary to accomplish the legitimate aim.” Secretary for Justice v. Yau Yuk Lung Zigo and Another FACC 12/2006. 5. Interpretation No.748. https://www.judicial.gov.tw/constitutionalcourt/ EN/p03_01.asp?Expno=748. Accessed 1 August 2018.

References Cho, Man Kit (2016) Queer War: Debates on Same-Sex Marriage within LBGT Movement. Unpublished manuscript. Chien, Tsu-chieh (2012) “From Same-Sex Marriage to Pluralistic Family Arrange­ ments: The Legislative Movement for Democratic Intimate Relationship.” Taiwan Human Rights Journal, 1(3), pp. 187–201. (text in Chinese) Engebretsen, Elisabeth Lund (2009) “Intimate Practices, Conjugal Ideals: Affective Ties and Relationship Strategies Among Lala (Lesbian) Women in Contemporary Beijing.” Sexuality Research & Social Policy: Journal of NSRC, 6(3), pp. 3–14. Engebretsen, Elisabeth Lund (2014) Queer Women in Urban China: An Ethnography. New York: Routledge. Fan Popo (2012) 彩虹伴我心 (Mama Rainbow, documentary). Kam, Lucetta Y. L. (2006) “Noras on the Road: Family and Marriage of Lesbian Women in Shanghai”. Saori Kamano and Diana Khor (eds.) “Lesbians” in East Asia: Diversity, Identities, and Resistance. New  York: Harrington Park Press, pp. 87–104. Also published in Saori Kamano and Diana Khor (eds.). “‘Lesbians’ in East Asia: Diversity, Identities, and Resistance”. Journal of Lesbian Studies, Vol. 10, Nos.3/4, 2006, pp. 87–103.

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Kam, Lucetta Y. L. (2010) “Opening Up Marriage: Married Lalas in Shanghai”. Yau Ching (ed.) As Normal as Possible: Negotiating Gender and Sexuality in Mainland China and Hong Kong. Hong Kong: Hong Kong University Press. Kam, Lucetta Y.  L. (2011) 表面的微笑:上海拉拉的家庭政治 (“A Smile on the Surface: Family Politics of Lala Women in Shanghai”). In Liu Jen-peng and Ding Naifei (ed.) Querying Marriage-Family Continuum (置疑婚姻家庭連續 體). Taipei: Shenlou. Kam, Lucetta Y.  L. (2013) Shanghai Lalas: Female Tongzhi Communities and Politics in Urban China, Hong Kong: Hong Kong University Press. Kam, Lucetta Y. L. (Forthcoming) “‘Single’ and Mobile: Transnational Mobility of Chinese Queer Women.” Laila Abu-Er-Rub, Christiane Brosius, Jeroen de Kloet (eds.) Being Single in Urban Asia: Spaces and Mobilities, Pleasures and Precarities. Heidelberg University Press. Kong, Travis S.  K. (2011) Chinese Male Homosexualities: Memba, Tongzhi and Golden Boy. London and New York: Routledge. Leung Chun Wong v. Secretary for the Civil Service and Commissioner of Inland Revenue CACV126/20170. Leung TC William Roy v. Secretary for Justice HCAL160/2004. Leung TC William Roy v. Secretary for Justice CACV317/2005. Mouffe, Chantal (1993) The Return of the Political. New York: Verso. Mouffe, Chantal (2005) The Democratic Paradox. New York: Verso. Mouffe, Chantal (2013) Agonistics: Thinking the World Politically. New York: Verso. QT v. Director of Immigration FACV1/2018. QT v. Director of Immigration CACV117/2016. Secretary for Justice v Yau Yuk Lung Zigo and Another FACC 12/2006. Scott, Joan W. (1999) Gender and the Politics of History (Revised Edition). New York: Columbia University Press. Suen, Y. T., Wong, M. Y., Chan, R. C. H., Yeung, G. K. W. (2016) Study on Hong Kong Public and LGB People’s Attitudes towards LGB-friendly Business Organizations. Hong Kong: Sexualities Research Programme, The Chinese University of Hong Kong. Tseng, Hsunhui (2018) “The moment of feminist triumph? Examining gender and politics in Taiwan after the election of the first female president.” Asian Anthropology, Vol.17, No.2:85–99. Wang, Hong-Zen and Chen, Mei-Hua (2017) “Discourses on Non-Conforming Marriages: Love in Taiwan.” International Journal of Japanese Sociology No.26: 52–66. Wong, Wai Ching Angela (2013) “The politics of sexual morality and evangelical activism in Hong Kong.” Inter-Asia Cultural Studies, Vol.14(3):340–360.

CHAPTER 13

Global Warming, Climate Change and World Environmental Degradation Edward C. H. Tang

1   Introduction According to the World Bank, the global GDP rose from US$11.202 trillion (measured in terms of constant 2010 dollars) in 1960 to US$77.733 trillion in 2015. In the view of traditional neoclassical economics, it is doubtless to say that the world experienced continuing economic growth. However, the growth figures may not present a clear picture of the overall quality of life. For example, technological products certainly bring us much convenience, but they are fast-changing and soon obsolete. Improper disposal of electronic wastes may intensify pollution problems (Devika 2010). Hence, green economics emerges to promote sustainability through utilizing scarce global resources wisely, developing renewable resources and reducing pollution. Happiness is not solely dependent on quantity but quality as well (Cato 2009). Therefore, societies nowadays put more emphasis on saving the planet and achieving green living. In the twenty-first century, global warming is one of the urgent global problems that needs to be resolved. Because of excessive burning of fossil E. C. H. Tang (*) Department of Economics and Finance, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_13

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fuels, million tons of greenhouse gases are emitted to the atmosphere. These gases are able to absorb the infrared radiation and trap the heat. Since 1900, global temperature has increased by about 0.8 °C (Blobel and Meyer-Ohlendorf 2006). Climate change is then resulted from global warming. Scientists agree that global warming escalates heat wave, drought, sea surface temperature, rainfall intensity and hurricane. Less-­ developed countries, especially Africa, are severely affected (Box 13.1). Researchers, such as Bisbis et al. (2018), Frieler et al. (2017) and Ito et al. (2016), investigate the impacts of global warming and climate change. Climate change is considered as the third most important global issue by the world population (see Table 13.1). In fact, under a vision of global village, climate change should not be separated from other global issues. It is also associated with health and survival risks, including terrorism (Causevic 2017; Freeman 2017; Smith 2007), food security (Dawson Box 13.1 Africa and Climate Change

The Intergovernmental Panel on Climate Change (IPCC) concludes that Africa is one of the most vulnerable continents to climate change and climate variability, with negative impacts notably on food and water security, human health, ecosystems and low-lying coastal communities. The United Nations Educational, Scientific and Cultural Organization (UNESCO) therefore gives high priority in providing assistance to Member States in Africa in support of their mitigation and adaptation actions, in the overall context of promoting poverty reduction and sustainable development. This is done primarily through UNESCO’s extensive network of Field Offices spread out across the continent and in close cooperation with the African Union. The African Union has formulated a Climate Change Strategy which addresses adaptation and mitigation measures, with a special focus on the most affected countries in Africa. UNESCO has a long history of cooperation with Africa, and together with gender equality. Africa is a Global UNESCO Priority under which focus is placed on building peace by building inclusive, peaceful and resilient societies, and building institutional capacities for sustainable development and poverty eradication. Adopted from United Nations Educational, Scientific and Cultural Organization, http://unesdoc.unesco.org/images/0023/002336/ 233685e.pdf

16.2 13.0 16.6 16.2 15.5 18.3 12.4 20.1 12.8 15.6 14.3 11.8 16.0 13.2 17.7 13.3 15.2 15.2

31.0 18.6 22.5 22.4 33.7 28.3 21.9

19.8 24.7 26.7 20.1

28.4 22.4 27.2 24.5 26.1 28.3 25.1

Poverty, hunger, thirst

14.8 16.0 12.8 11.7 10.8 9.2 12.8

11.4 11.2 12.5 5.7

12.6 14.7 16.2 12.3 12.3 12.2 20.4

Climate change

7.9 14.9 4.8 11.9 11.2 9.2 10.6

10.0 11.2 10.7 25.8

8.9 5.5 9.7 11.5 9.5 10.8 6.3

Armed conflicts

10.5 5.5 17.0 11.4 7.8 11.4 10.0

15.9 17.4 7.2 9.5

7.9 11.8 5.8 7.4 7.8 4.2 11.1

Economic instability

5.1 8.5 5.1 5.1 12.4 5.6 7.0

4.9 3.5 9.9 2.9

8.2 7.4 10.3 11.0 5.7 5.6 7.8

Population growth

Source: YouGov (UK); https://yougov.co.uk/news/2016/01/29/global-issues; access 19 December 2018

Australia China Denmark Finland France Germany Hong Kong Indonesia Malaysia Norway Saudi Arabia Singapore Sweden Thailand UAE UK USA Average

Global terrorism

Table 13.1  Percentage share of national concern for global issues

8.5 5.4 8.5 5.4 4.7 5.4 6.1

5.5 7.7 5.1 7.4

4.4 8.0 5.7 5.8 3.8 5.1 7.3

Spread of diseases

5.4 3.6 6.5 4.3 5.7 3.4 5.3

6.8 4.3 3.3 2.1

4.4 15.2 4.5 4.3 3.9 5.1 7.7

Energy scarcity

4.7 5.0 3.7 5.3 3.8 6.1 4.8

4.1 4.7 4.7 7.1

4.6 4.6 4.3 4.9 4.2 6.4 3.3

Nuclear weapons

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et al. 2016; Lewis 2017; Tomoko et al. 2015), armed conflict (Lee 2009; Link et al. 2016; Theisen et al. 2013) and disease transmission (Ramirez 2017; Rohr et  al. 2011). Hence, nations call for actions to tackle climate change. Table 13.2 summarizes the key international negotiations on climate change. In 1979, the First World Climate Conference was held. It identified that climate change was an urgent issue and World Climate Programme was set up. In 1992, the United Nations Conference on Environment and Development established a new and equitable global partnership. In 1997, the Kyoto Protocol was adopted by industrialized countries. Each of them sets its own legally binding targets to curb the emissions of carbon dioxide (CO2) and other greenhouse gases. In 2001, it reached an outline agreement on the emissions trading system, Clean Development Mechanism, rules for accounting for emissions reductions from carbon sinks and compliance regime (Blobel and Meyer-Ohlendorf 2006). In 2009, the Copenhagen Climate Change Conference raised climate change policy to the highest political level. Up to 115 world leaders attended the high-level segment, marking one of the largest gatherings of world leaders outside the UN Headquarters in New York (UNFCCC). The Copenhagen Accord set a long-term goal of limiting the global average temperature increase to no more than 2 °C and provided US$100 billion for climate aid in developing countries. In 2015, 195 nations signed the Paris Agreement, which was a universal and legal global deal on limiting global warming to well below 2 °C. The rest of this chapter is organized as follows. Sections 2 and 3 take an overview of air and water pollution around the world. Section 4 discusses environmental justice in international context. In Sect. 5, economic theories are applied to explain the feasibility for all nations to adopt international agreements on tackling climate change. Section 6 is the conclusion.

2   Air Pollution The World Health Organization (WHO) defines air pollution as “a contamination of the environment by any chemical, physical or biological agent that modifies the natural characteristics of the atmosphere.”1 Air pollution can be classified into indoor and outdoor pollution. Typically, the former is found in low- and middle-income countries where clean fuels are still lacking. To cook and generate heat, people use solid fuels (e.g. wood, crop wastes, charcoal and dung) in open fires. In poorly ventilated

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Table 13.2  International negotiations on climate change Year (location)

Results

1979 (Geneva)

Issuing a declaration calling on governments to guard against potential climate hazards Establishing a new and equitable global partnership Working toward international agreements which respect the interests of all and protect the integrity of the global environmental and development system Recognizing the integral and interdependent nature of the Earth Hosting the First Conference of the Parties (COP 1) Providing innovative “flexibility mechanisms” to lower the overall costs of achieving emissions targets Enabling Parties to access cost-effective opportunities to reduce emissions or to remove carbon from the atmosphere Taking climate change into account in the relevant social, economic and environmental policies and cooperating in scientific, technical and education matters, as well as public awareness Reaching an outline agreement on: emissions trading system; Clean Development Mechanism; rules for accounting for emissions reductions from carbon sinks; compliance regime Outlining a package of financial and technological support to help developing countries contribute to global action on climate change and address its adverse effects Limiting the maximum global average temperature increase to no more than 2 °C Pledging US$100 billion for climate aid in developing countries Recognizing the need to draw up the blueprint for a fresh universal and legal agreement to deal with climate change beyond 2020 Government’s commitment to a comprehensive plan on climate change 195 nations signed the Paris Agreement, which aims to strengthen the global response to the threat of climate change by keeping global temperature rise this century well below 2 °C above pre-industrial levels and to pursue efforts to limit temperature increase even further to 1.5 °C

1992 (Rio de Janeiro)

1995 (Berlin) 1997 (Kyoto)

2001 (Bonn)

2009 (Copenhagen) 2011 (Durban)

2015 (Paris)

Sources: Harris et al. (2017); United Nations Educational, Scientific and Cultural Organization; United Nations Climate Change (http://unfccc.int)

environment, fine particulates are accumulated indoor and inhaled deeply into the lungs. It is estimated that 3 billion people suffered from indoor pollution and 4.3 million people die from air pollution-related diseases, such as pneumonia, stroke, heart disease, chronic obstructive pulmonary disease and lung cancer.

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PM10 (microg/m3)

Outdoor pollution, on the other hand, has caught a lot of international attention nowadays. It is mainly generated by the combustion from fossil fuels, industrial and agricultural processes, and incineration. Among all kinds of pollutants, PM10 has detrimental health effects. It is small enough to penetrate and lodge deep inside the lungs, resulting in lung cancer, cardiovascular diseases and respiratory diseases. The WHO (2006) estimates that lowering PM10 concentration from 70μg/m3 to 20μg/m3 can reduce air pollution-related deaths by 15%. Nevertheless, from Fig. 13.1, PM10 concentration levels in the world are far from this suggested standard. 260 240 220 200 180 160 140 120 100 80 60 40 20 0

Fig. 13.1  PM10 levels by region, for the last available year in the period 2008–2015 Source: World Health Organization, http://www.who.int/phe/health_topics/ outdoorair/databases/cities/en; access on 25 December 2018

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In addition, carbon dioxide (CO2) is another air pollutant that is considered under the US Clean Air Act2: “The term ‘air pollutant’ means any air pollution agent or combination of such agents, including any physical, chemical, biological, radioactive (including source material, special nuclear material, and byproduct material) substance or matter which is emitted into or otherwise enters the ambient air.”3 In Fig. 13.2, it is not surprising to observe that China, the United States, India and Russia emit the most carbon dioxide. As global CO2 emissions increase by around 3% per year, CO2 traps more heat and causes global warming. The world exposes to higher risks of drought, ocean warming and forest fires. Economically speaking, air pollutants4 are silent killers which reduce the productivity of an economy. Over the past decades, researchers investigate negative economic impacts that air pollution brings. Magazzino (2016) uses a panel vector autoregressive model to show that CO2 emissions significantly reduce real GDP. Xu and Sylwester (2016) find that air pollution is positively associated with the emigration of highly educated individuals. Mudarri (2014) comments that good indoor air quality improves job performance and learning performance. Therefore, attempts should be taken

Fig. 13.2  World CO2 emissions in 2014 (kt) Source: The World Bank, https://data.worldbank.org/indicator/EN.ATM. CO2E.KT; access on 11 October 2018

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by countries to reduce air pollutants by renewable energy, proper vehicle maintenance, public transportation and smoking cessation. In the long run, it is important for international communities to work on strategic plans on curbing air pollution.

3   Water Pollution Water is an important natural resource that nurtures human life. While water covers two-thirds of the Earth’s surface, water quality deteriorates as world population grows and industrial and agricultural activities expand. Water pollution occurs when more and more toxic substances enter and dissolve in water bodies. Especially in developing countries, the sewage systems are not properly installed, hence untreated sewage water contaminates the environment. The WHO estimates that contaminated drinking water causes 502,000 diarrheal deaths each year. By 2025, half of the world population will face water-stressed problems.5 Another eye-catching issue is ocean acidification. Due to rapid industrialization, more and more CO2 dissolves in water, resulting to a reduction of seawater pH level (LeMay 2016). More importantly, the concentration of aragonite, a form of calcium carbonate, decreases in most parts of the world.6 This disrupts the ability of marine organisms with skeletons and shells to grow, meaning that marine ecosystem is exposed at risk of collapse. Nevertheless, Harrould-Kolieb and Herr (2012) mention that “the problem of ocean acidification is largely absent from most policy discussions pertaining to CO2 emissions.” Overall speaking, there are two dimensions of tackling water scarcity. Domestically, improving sanitation7 can reduce the need to take long journeys to collect water and lower the chance of drinking contaminated water and exposure of waterborne diseases. The productivity of the economy can speed up (El-Ghannam et al. 2016; Scheierling and Treguer 2016). Internationally, multilateral agreement can govern the shared water resources in a reasonable manner. For example, the Convention on the Protection of the Marine Environment of the North-East Atlantic, signed by the UK, European Union and other signatory countries on 25 March 1998, aimed to prevent and eliminate pollution of marine ecosystem. In the long run, it is necessary for the globe to work out feasible international laws and policies for conserving water resources (Eckstein 2009). Otherwise, it may worsen water pollution, create more interstate conflicts on water resources and even put humans on the brink of extinction.

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4   Environmental Justice Climate change and environmental degradation are world’s common issue, but countries expose to different degrees of environmental hazards. For example, the WHO finds that “people living in low- and middle-­income countries disproportionately experience the burden of outdoor air pollution with 91% (of the 4.2 million premature deaths) occurring in low- and middle-income countries.”8 Clearly, it is unjust for low-income communities and countries to bear the most severe consequences of pollution. So, environmental justice emerges. It aims to ensure everyone has the same degree of protection from environmental hazards (see Box 13.2). In addition, environmental justice promotes equal distribution of environmental benefits and burdens (i.e. distributive justice), environmental conservation and sustainability, and the strengthening of environmental laws and regulations (i.e. procedural justice). In the United States, the Environmental Protection Agency9 gives a definition on environmental justice:

Box 13.2 Examples of Environmental Justice

1972: Pittston Coal The case by workers against the Pittston coal company is one of the successful environmental cases. It was after the workers strike following Pittston Company terminating health care benefits for retirees, widows and miners who are disabled and the displacement of thousands of people causing an environmental nightmare of epic proportions. The company’s sludge bi-products flowed from uphill creating sludge dams that were ignored by the company. In February 1972, however, the dams gave way and ended up displacing so many people by turning the ground to marsh. It is for these reasons that legal action was taken against Pittston Coal Company to settle the people. Federal and state resources are still being used in attempt to fix all the land there. 1989: Exxon Valdez disaster This is one of the most known environmental disasters and cases where environmental justice applied. An oil tanker, Exxon Valdex, containing 38 gallons of crude oil ran aground. This was at a Prince William Bligh reef which is offshore Alaska. It killed marine life for

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thousands of miles within the ocean and it continued for many years thereafter. Exxon Oil Company paid millions in fines and litigation in addition to taking care of cleaning up. 1993: Chevron refining In 1993, Chevron refining company wanted to expand its operations to Richmond in California. There was much opposition due to concerns for the health of the locals and environmental pollution. Chevron ignored these and still went ahead with operations. Citizens however formed a coalition called the county toxics coalition. The coalitions formed a judicial pact with Chevron refining company that allowed Chevron to continue operations as long as they provided a 5 million dollar grant to fund the city’s future environmental programs. The coalition is effective to this day. 2010: BP BP is an oil company that is known and operates internationally. In 2010, however, they caused the worst disaster ecologically speaking yet. While BP was pumping oil from the Gulf of Mexico at the ocean floor, the rig exploded resulting in a rupture of the highly pressurized pipeline fill of oil. Millions of gallons of oil spilled and since there was no known way to stop the spillage, there was massive leakage. The well head was eventually capped but the damage was done. Marine life was killed, ecological and even human fatalities were found. Despite the lawsuits, levies and clean up funds, the damages are still suffered up to date. 2016: Fracking A new technology called fracking is highly booming in the United States. It pumps highly pressurized liquids to create fissures on the shale rock from which oil and natural gases can escape. Its advocates had managed to ease the storm around fracking but a recent study by researchers from Duke Universities have stirred it up by presenting facts about the ecological impact of fracking. Facts show environmental pollution and direct impact on human lives around the areas of mining. Litigations and lawsuits are now gearing up—some successful while some still ongoing. Adopted from Conserve Energy Future, https://www.conserveenergy-future.com/environmental-justice-principles-importanceexamples.php

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Environmental justice is the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies. EPA has this goal for all communities and persons across this nation. It will be achieved when everyone enjoys the same degree of protection from environmental and health hazards, and equal access to the decision-making process to have a healthy environment in which to live, learn, and work.

Since the effects of pollution go beyond national boundaries, every nation should contribute to solve pollution problem. However, when it comes to the issue of “justice” in international context, it is hard to allocate the responsibilities of countries on climate change clearly (Box 13.3). Plenty of research documents that environmental justice issues are not always clear-cut. Hoffman (2017) comments that statutory law is not sufficient to address environmental justice problems along with product life cycles in a globalized world. Sinden (2010) finds that developed countries suggest efficiency and developing countries suggest justice and economic theory offers no guidance on “who-should-pay” question. West (2012) argues that the complexities of political, scientific, legal and social sectors hinder climate change mitigation. Mason (2009) tells that global obligations and environmental citizenship are far from ideal.

Box 13.3 Global Palm Oil Companies Fail to Prevent Indonesian Fires

A large number of forest fires have been discovered on Indonesian plantations owned by global palm oil companies Bumitama and Wilmar International. Despite new evidence that both companies violate their own “no deforestation” policies, major U.S. and European investors have not taken significant steps to address these problems, according to a new report released today. Developed jointly by Friends of the Earth Europe, Friends of the Earth Netherlands (Milieudefensie), Friends of the Earth US and Friends of the Earth Indonesia (WALHI), the “Up in Smoke” report is based on research into five palm oil plantations owned by Bumitama and Wilmar International in Indonesia. Fires were detected in all of the plantations. Wilmar and Bumitama denied they were responsible for starting them, but they failed to provide any evidence to support

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their position. According to Indonesian law, the companies are legally responsible for the fires. Anne van Schaik, campaigner at Friends of the Earth Europe, said: Banks and pension funds in the UK, Netherlands, France and the United States are providing direct financing to Bumitama and Wilmar, despite having publicly committed to good practice criteria that should prevent them financing such destructive activities. This report shows yet again that the Indonesian palm oil sector continues to be a high risk environment, as voluntary corporate commitments all-too-easily go up in smoke. (italics in original)

Despite both palm oil companies adopting their own “no burning and no exploitation on peat” policies, the report says they have systematically violated national laws by developing palm oil on peatland, destroying high carbon stock areas and allowing forest fires in their areas. It also provides evidence that the two companies are being financed by UK, Dutch, French and U.S. financiers, including a number of major international banks. Several of these financiers have their own policies on environmental and social sustainability which are intended to prevent them financing companies involved in forest fires and deforestation. Added to this, the report says that the Indonesia government has failed to prevent plantations from being developed on fragile peat lands, despite installing a moratorium in 2011 forbidding companies from developing plantations on peat deeper than three metres. With social movements, world governments and corporations currently gathered in Paris for the UN climate talks, the Friends of the Earth groups have stated that the voluntary policies of the companies and their financiers cannot be trusted. They have called on the EU and US governments to introduce and implement strong and binding laws in order to stop the fires. Arie Rompas, director Walhi Central Kalimanten—Friends of the Earth Indonesia said:

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The fires of 2015 caused enormous health and environmental problems for hundreds of thousands of people in Indonesia and neighbouring countries. On certain days our emissions from the fires alone soared to almost 97% of Indonesia’s total emissions. We need urgent action by our leaders who are gathering now in Paris to hold companies accountable for stopping emissions wherever they occur. (italics in original)

Based on the report’s findings, the environment organizations have called for a range of actions which they say must be taken to stop the forest fires: • The companies in Indonesia should obey regulations issued by the Ministry of Environment and Forestry regarding the prohibition to open up peatlands and ensure rehabilitation of forests and peatlands burned within their concession, and take responsibility for damages to the people and lands impacted by the fires and haze in the burned areas. • At local level, local governments in Indonesia must obey and implement regulations, the Indonesian authorities must tackle corporate crime, and the palm oil companies that have allowed burning within their concession areas must be held responsible for the fires. • At national level, the Indonesian government must review all of the permits given to palm oil developers, must implement the peat moratorium and ensure no palm oil plantations are developed on peat lands, and must strongly demand that the companies take responsible for the rehabilitation of the land and the people impacted by the haze in the area. • At global level, there must be solutions agreed at the UN climate talks in Paris that benefit people and the planet. Financiers linked to Wilmar and Bumitama should withdraw their financial services to both companies, the EU and US government should regulate these financiers, and new and binding rules on transnational corporations and financiers must be introduced. Adopted from Friends of the Earth Europe, http://www.foeeurope. org/global-palm-oil-companies-fail-prevent-Indonesian-fires

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Strategically, environmental justice is associated with sustainable development. Hence, it requires long-term efforts to promote environmental justice through several ways: (a) Green education should be carried out at schools, colleges and universities. It raises the awareness of environmental conservation, ecosystem, conservation of natural resources, waste management and forest protection (Tarabula-Fiertak et  al. 2004; Choudhury 2014; Bantanur et  al. 2015). Global sustainability depends on the future generations’ effort in achieving pollutionfree world. (b) The economy should strike a balance between economic and environmental sustainability. Companies that provide good examples of corporate social responsibility will have better corporate financial performance and higher consumer satisfaction (Loureiro et  al. 2012; Kakakhel et al. 2015; Xie et al. 2017). (c) Polluter pays principle can be adopted in the sense that consumers or firms should pay extra costs for waste management. A good implementation of this principle can prevent further damage to human health and environment. The framework of polluter pays principle are discussed by Bailey et al. (2012), Jephcote et  al. (2016), Rodrigues et  al. (2016) and Gu et  al. (2017), among others. (d) Through strengthening environmental rules and regulations, it can reduce high-carbon emissions (Zu et  al. 2018), improve eco-­ efficiency (Zhang et al. 2016; Ren et al. 2018) and promote green growth (Guo et al. 2017). (e) Ecological compensation programs should be implemented to reduce negative impacts from large development projects, maintain biodiversity and promote sustainability (Brown et al. 2014; Reid et al. 2015; Zhang et al. 2017). (f) Global environmental aid has to be provided to those poor countries suffered from deteriorating environment. The fund can be used for improving the livelihoods of low-income people. As Figaj (2010) mentions, poverty and environmental conditions are significant factors related to the allocation of environmental aids.

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5   Barriers to Climate Change in International Co-operation As described earlier, climate change is associated with human health and survival. Nonetheless, there are little incentives for nations to co-operate and work out a long-term solution for tackling climate change. One of the main reasons is that climate change policies are public good, having the nature of non-excludability and non-rivalry. Specifically, once a nation introduces climate change policy, it is impossible to prevent other nations from enjoying the benefits. The failure then arises because some nations are the free-riders which obtain the benefit without any participation. As a whole, nations adopt “wait and see” strategy, leaving the Earth at higher risks. The second reason relates to long-term impact of policies. Economically speaking, when the present value of benefits is greater than the costs, climate change policies should be carried out. However, the nations have to wait for a long period before the benefits are realized. In other words, existing generations bear high costs of implementation and future generations will obtain the benefits. Selfishness will result to actions against climate change policies. The third reason is about policy priorities. Policymakers have their own policy agendas, ranging from tackling child poverty to improving health care. They prefer to work on local policies that allow them to get high exposure to mass media and accumulate more political reputation in the short run. Therefore, from political point of view, it is unusual for policymakers to put much emphasis on implementing long-term climate change policies. The last reason concerns the prisoners’ dilemma in international co-­ operation. Under an ideal condition, nations are co-operative in working out feasible long-run solutions for tackling climate change, which will be benefited to the whole world. Nevertheless, in reality, each nation has an incentive to escape from the burden, because it can be benefited if others implement climate change policies. Without any sharing of information, nations are hard to enforce the self-enforcing agreements. Thus, the terms of agreements are usually weak and superficial. More importantly, countries that do not follow the agreements are not subject to heavy sanctions. In 2017, President Donald Trump withdrew the Paris Climate Accord which cost America trillions of dollars, lost jobs and hindered oil gas, coal

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and manufacturing industries. Even though transnational communities consider potential sanctions and boycott (Box 13.4), the negative consequences may be minimal. The United States, being one of the largest polluter in the world, is criticized to set a negative precedent and take reactionary and nonsensical policies, in which corporate greed is prioritized over global sustainability.

Box 13.4 Boycott America?

The catastrophic outcome of last November’s United States presidential election is now clear. President Donald Trump’s indifference to the risk of climate change, and the actions he is taking because of that indifference are likely to have consequences that dwarf the significance of his executive order on immigration, his nomination of an archconservative to the Supreme Court, and, should he manage to achieve it, his repeal of the Affordable Care Act (“Obamacare”). With the exception of launching a nuclear war, it is hard to think of anything a US president could do that is liable to harm more people than last month’s order canceling rules issued under former President Barack Obama to freeze the construction of new coal-fired power plants and shut down many old ones. Trump’s order followed his pledge to rescind stricter fuel-efficiency standards for cars and trucks, and his announcement that he wants to slash spending on climate science. Although Trump did not announce the withdrawal of the US from the Paris climate agreement, his actions are likely to prove incompatible with the US government’s pledge to reduce greenhouse-­gas emissions to 26% below 2005 levels by 2025. The Paris agreement, signed by 195 countries, is our last real chance of keeping global warming to less than 2°C above pre-industrial levels. Even 2°C is too much for the inhabitants of low-lying island states. Many of these states were pleading for a 1.5°C limit—without which some will disappear beneath the ocean. Any increase in global temperature greater than 2°C, scientists agree, risks triggering feedback loops that cause much greater warming and could render large parts of the planet uninhabitable. For

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example, further warming would release large quantities of methane—a more potent greenhouse gas than carbon dioxide—from thawing Siberian permafrost, leading to more warming, more thawing, and more methane in the atmosphere. Similarly, warming causes the loss of arctic ice, which means that less of the sun’s heat is reflected back rather than being absorbed by the ocean. During the election campaign, Trump described climate change as a “hoax” perpetrated by the Chinese to destroy American industry. Last month, Scott Pruitt, Trump’s appointee to head the Environmental Protection Agency, said that he did not believe that CO2 is the primary contributor to climate change. He added that “we do not know that yet,” and “we need to continue the review and analysis.” The American Meteorological Society promptly wrote to Pruitt saying that it is “indisputable” that CO2 and other greenhouse gases are the primary cause of global warming, and that it is “not familiar with any scientific institution with relevant subject matter expertise that has reached a different conclusion.” That is true. What many commentators failed to notice, however, is that even if, contrary to all the evidence, we were to accept Pruitt’s statement that “we do not know” whether CO2 is the primary contributor to climate change, the Trump administration’s actions would still be reckless. Unless the probability that CO2 is the primary contributor to climate change is vanishingly small, it is wrong to take chances with the future of our planet and the lives of hundreds of millions of people in order to reduce energy costs for Americans and preserve a few thousand jobs in the coal industry. (In fact, coal jobs are disappearing because of automation and competition from cheaper natural gas, not because of regulations to reduce CO2 emissions.) Perhaps, though, Trump does not see his policy as reckless because, as he has repeatedly proclaimed, he puts “America first.” And it is indeed America between now and the next election that he puts first, at the expense of Americans’ longer-term interests and the interests of everyone who is not American. In the short term, those who will suffer most from climate change are not Americans, but

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people living in tropical latitudes, and especially the poor, who will have nowhere to go when rain falls or the heat parches their crops. When sea levels rise, those island-state inhabitants, living just a meter or two above sea level, will be the first to be driven off their land, followed by tens of millions of people farming small plots in fertile delta regions in Bangladesh, Southeast Asia, and Egypt. The Paris climate agreement has no mechanism for sanctioning countries that fail to fulfill their pledges. The idea is that such countries will be “named and shamed.” Well before Trump was elected president, however, when the notorious video in which he boasted of groping women became public, it was obvious that he is immune to shame. What, then, can other countries, and individuals, whether in the US or beyond its borders, do about the fact that Trump is jeopardizing the future of us all, for many generations to come? The Year Ahead 2017 If the US uses the cheapest available fuels to produce energy, irrespective of the harm that burning those fuels does to others, it is giving its companies an unfair advantage over those elsewhere that are making a good-faith effort to reduce their greenhouse-gas emissions and meet their Paris pledges. That should be enough for the World Trade Organization to allow other countries to erect trade barriers against US goods. If, however, the WTO is not brave enough to take that step, the remedy is in the hands of foreign consumers, who should show the Trump administration what they think of its policies by choosing not to buy American. A boycott is a blunt instrument that would, regrettably, harm many US workers who did not vote for Trump and are in no way responsible for his policies. But with so much at stake, and such limited means of changing Trump’s policies, what else is there to do? Adopted from the Japan Times, 7 April 2017. https://www.japantimes.co.jp/opinion/2017/04/07/commentary/world-commentary/time-boycott-america/#.W1mM1U0naAg

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6   Conclusion The negative consequences associated with global warming and climate change have been highlighted in many studies. Severe air and water pollutions result in the disruption of ecosystem, poor living environment and shorten human lifespan. Over the past few decades, nations signed different agreements on tackling climate change. Actions include reducing the emissions of greenhouse gases, offering climate aids to developing countries and limiting the increase in temperature. This chapter shows that international co-operations are rather superficial and non-binding. Nations are shortsighted and reluctant to make huge investments for adopting policies for pollution-free planet. Instead, they would like to be free-riders and take a passive role in tackling the problems. Under an opaque disclosure system, it is difficult to ensure that each nation enforces green policies strictly. More importantly, the lack of international sanctions means nations may withdraw international agreements recklessly once they find that the marginal benefits outweigh the marginal costs. The US withdrawal from the Paris Agreement is a recent example to show that the US put their own benefits above global sustainability. In conclusion, the globe needs an environmental leadership to take the challenging role of tackling climate change in the twenty-first century.

Notes 1. https://www.who.int/phe/health_topics/outdoorair/en/; access on 26 November 2018. 2. h t t p : / / w w w. l a w. c o r n e l l . e d u / u s c o d e / h t m l / u s c o d e 4 2 / u s c _ sec_42_00007602%2D%2D%2D%2D000-.html; access on 30 November 2018. 3. https://www.law.cornell.edu/uscode/text/42/7602; access on 21 October 2018. 4. For pollutants’ impact on health, see Li (2014). 5. http://www.who.int/news-room/fact-sheets/detail/drinking-water; access on 26 November 2018. 6. https://www.epa.gov/sites/production/files/styles/large/public/2016-07/acidity-download2-2016.png; access on 26 November 2018. 7. The national standards on water quality are set by the WHO’s Guidelines for Drinking-water Quality (WHO 2017). 8. http://www.who.int/news-room/fact-sheets/detail/ambient-(outdoor)air-quality-and-health; access on 20 November 2018. 9. https://www.epa.gov/environmentaljustice; access on 11 November 2018.

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PART IV

The Fourth Industrial Revolution and Its Threats

CHAPTER 14

The Fourth Industrial Revolution and the Development of Artificial Intelligence Simon Chien-Yuan Chen and Ming-Chan Shen

1   Introduction With the advancements in technology, humans explore outer space, clone animals, design intelligent robots, manufacture automatic vehicles and develop genome editing. These dazzling achievements coined by Professor Klaus Schwab as the Fourth Industrial Revolution have happened at tremendous speed. As widely known, Industry 1.0 enables production automation and capital-intensive industry. Industry 2.0 begins with industrial automation and technology-intensive industry. Industry 3.0 starts e-­ business process and innovation-intensive industry. The concept of Industry 4.0 integrates newly developed technologies including the Internet of Things (IoT), big data, cloud computing, 4G/5G wireless S. C.-Y. Chen Department of Land Management, Feng Chia University, Taichung, Taiwan, Republic of China e-mail: [email protected] M.-C. Shen (*) Center of Public Policy Analysis, Feng Chia University, Taichung, Taiwan, Republic of China © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_14

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connection and revolutionizes production modes (Rifkin 2014). Industry 4.0 focuses on intelligence-intensive industry including signal sensor data collection, intelligent automation production and automating decision-­ making. These innovations help business forecasting to grasp the market demands in real-time. Inspired by the concept of Industry 4.0, China proposes the “Made in China 2025” in which Chinese industries will be comprehensively transformed and upgraded by 2025. In the era of the Fourth Industrial Revolution, rapid development of artificial intelligence (AI) has produced huge impacts on human society. The supporters of AI argue that new technologies are human’s important assistant. However, the skeptics argue that AI technology development may lead to uncontrolled condition and human society will be eventually governed by AI. The main purpose of this chapter is to analyze the debates on this issue. Our analysis will clarify the contrasting opinions about the future development of AI. This chapter also sheds light on the challenges in the Fourth Industrial Revolution including changes in job market, income disparities, the role of government and competitive patterns among firms, cities and nations.

2   The Fourth Industrial Revolution and Its Impacts on Urbanization and Industrial Structure Each industrial revolution creates huge impacts on human society. The First Industrial Revolution initiated large scales of urbanization and industrialization. Industrial restructuring and employment were interrelated. Industrialization brought about by technological revolution at that time caused massive urbanization and hence affecting the urban structure around the world. In the twentieth century, industrialization and technological advancement encouraged population migration and urban agglomeration. As a result, structural transformation occurred in rural and urban regions. Due to high production costs during the 1980s, manufacturers began to relocate their factories from industrialized countries to the four Asian newly industrializing economies, China and ASEAN (Association of Southeast Asian Nations) (Studwell 2014). However, technology and new business strategies (such as outsourcing) have changed the direction of plant relocation in the twenty-first century. The world moved from the traditional manufacturing industry to the Information Technology (IT) industry. During the transition period, manufacturers in many developed countries pursued profit opportunities enthusiastically. American manufacturers moved their factories back to the

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United States (Pisano and Shih 2012). Specifically, as a result of the rising labor cost and stringent government regulations in China, American manufacturers relocated their production plants back to the United States. When American and European firms brought manufacturing back home, they encountered low birth rate and aging population, which in turn affected the amount of productive labor force. At the same time, human-­ robot collaboration made a good progress in production (Greenfield 2015). The Fourth Industrial Revolution not only led to technological advancement in big data, robot industry and cloud computing, but also helped in solving social and economic problems such as labor shortage due to low birth rate and aging population. From this perspective, it brought a new era of manufacturing process and division of labor. At the beginning of the twenty-first century, in terms of intra-regional migration, world trade agreement stimulated the relocation of mature industry from cities to rural areas. For instance, following Apple’s strategy, many well-known manufacturers moved factories from urban to rural regions, and then from local to foreign regions. Many manufacturing factories owned by Americans were established in China at that time. It was because China had low labor and land costs and a relatively dynamic production structure that could meet the changing demand of markets (Moretti 2013). As mentioned, globalization and supply chain strategies bring social and economic impacts on urban development, industrial and employment structures. However, there is a paradox. On the one hand, globalization reduces the prices of many commodities and benefited the middle- and low-income classes most. On the other hand, in order to reduce labor and land costs, firms continue to integrate production and relocate their production plants. Their strategies influence the employment opportunities in the industrialized countries. In the United States, between 2000 and 2010, important industrial corridors like Detroit and Cleveland became the Rust Belt due to “hollowing out” of manufacturing industries. Many workers in non-basic industries lost their jobs. Furthermore, population migration led to high criminal rates, ghost cities and drug issues. These developments became a vicious circle (Moretti 2013). In comparison with the Rust Belt, high-technology industrial cities such as San Francisco, Seattle and Silicon Valley were not affected. When land and commodity prices continued to rise in the high-tech cities, job opportunities also increased. When old mature industry left the region, a newly formed industry would take over immediately. High-tech cities showed steady and

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sustainable urban industrial development. They were the winners in the Fourth Industrial Revolution. With internet and globalization, when a firm becomes a leader in a market, it would likely to be a global winner. This was the case of Google among search engines and Facebook in social media. In an economic sense, increasing return from economies of scale produces monopoly power which cannot be changed by firms themselves.

3   Development of Artificial Intelligence Recently, AI has received attentions from all academic disciplines. AI is expected to change human life drastically. Strictly speaking, AI is not a new innovation. The technology has been explored for a long time before it comes into the present dazzling form. Currently, AI technology has entered a new phase of development which is expected to radically shape human society and change the fate of humanity. Along with other IT development, such as cloud computation, big data, self-driving cars, 5G tele-communication, AI blossoms in the Fourth Industrial Revolution. Undoubtedly, AI and other state-of-the-art technologies change human life and yield great benefits to human beings. Moreover, the emergence of AI and information technologies, driven by the leading companies, such as Alphabet, Amazon, Facebook and Apple, provides room for imagination on how AI and the Fourth Industrial Revolution change our everyday life. A rational scholar may ask a sensible question, “will AI become ‘a level of existential risk for humanity’”? (Bostrom 2014). Some leading scientists and famous business gurus say, “yes”. As Hawking et al. (2014) warned, “success in creating AI would be the biggest event in human history. Unfortunately, it might also be the last, unless we learn how to avoid the risks”. Stephen Hawking claimed that “the development of full artificial intelligence could spell the end of the human race” (Hawking et al. 2014). Elon Musk, the founder of Tesla, referred the development of AI as “summoning the demon” and Bill Gates urged us to beware of AI (The Economist 2015). This study argues the otherwise. Like the past, if we know how to bridle innovations including the use of fire as fuel, stem cell technology, computer and nuclear power, then these state-of-the-arts, including AI, will bring huge benefits to human wellbeing. It will be illustrated by the development of AI.

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4   The Rise, Fall and Revival of AI Unlike other technologies, the development of AI is dramatic. The idea of AI emerged shortly after the invention of the computer. “Turing Test” proposed by Alan Turing in 1950 is a method to investigate whether a computer can possess thinking and intelligence like human (Turing 1950). In the summer of 1956, a group of researchers including Herbert Simon and John McCarthy initiated a research project on AI at Dartmouth College for six weeks (McCarthy et al. 1955). It marked the first wave of scientific exploration of AI.  LISP, the first AI program, came into existence (McCarthy 1978). The General Problem Solver (GPS) program was also created to solve single and explicit problems (Newell et al. 1959). The first AI chess program was invented, followed by the conversation program, ELIZA, in 1966 (Weizenbaum 1966). The US government saw the potential of AI development and invested a large amount of resources on the research of AI between 1960 and 1970. As successful as AI may be, scientists started to consider the risk and danger brought by AI. For example, Turing’s team suggested that an AI machine was able to generate a more advanced offspring that would eventually surpass humans (Good et  al. 1966). Therefore, when they designed the first AI machine, they thought about the way to control it at the very beginning. Specifically, Asimov’s Three Laws of Robotics aim to prevent AI machines from harming humans1 (Asimov 1950). As scientists were worried about the risks associated with AI, the development of AI program slowed down, even though a large amount of resources was poured into it at that time. Specifically, because of the “combinatorial explosion” problem, AI could not manage computer arithmetic nor process slightly complex problems. As a result, research on AI retreated from strong AI to expert-based decision support systems, which were based on the rule-based algorithm during the 1980s. By using the rule-­ based language, the cost of the system increased. Computer programmers worked hard to solve the problem but yielded little results. In addition, the Chinese Room Argument2 proposed by Searle in 1980 rejected the notion that the machine could complete the task of what strong AI was expected. Even the machine passed the Turing Test, it still did not possess intelligence. This was the second setback of AI development. In general, the development shifted from strong AI to weak AI.3 From 1990, the program design of AI headed toward genetic algorithm based on biometric technology. It was an alternative way to solve

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the deficiency of AI. Through trial and error, programmers accidentally found a hidden statistical pattern from the database and obtained a solution. They made significant progress. To be sure, such progress based on the early neural network led to the development of the convolutional neural network (CNN) and recurrent neural network (RNN). Both networks became the structural base for deep learning machine that stimulated AI development. In the twenty-first century, the revival of AI was triggered by a series of the successes of weak AI development, such as the search engine, big data analytics in e-commerce. There were also competitions between AI and humans. In the most famous “AlphaGo” game, AI defeated all top human players. The contest served as an overture for the return of AI after almost 50 years of research and development (Atlantic 2016).

5   The Impacts of AI: An Obedient Servant or an Uncontrollable Leviathan?4 Heaps of evidence show that AI is a very obedient and useful servant. For example, facial recognition technology has made huge progress with the capabilities of AI. With the assistance of AI algorithm, facial recognition technology evolves from static recognition to dynamic recognition. It tracks and recognizes multi-targets at the same time. Facial recognition technology was applied by customs and police force (Perala 2018). It saved manpower. By integrating facial characteristics, criminal data and crime hotspot and timing, when a suspect appeared, cross-section analysis could give a forecast and probability in crime pattern. Such technology was like a prophet character in the movie Minority Report in which crime was precisely predicted in advance. Furthermore, facial recognition technology was applied in retail industries. Amazon utilized facial recognition system and algorithm on AmazonGo, an innovative unmanned store, to grasp the consumer behavior immediately once customers took the products from the shelves (Wingfield 2016). When they left the store counter, the system would record the transactions at the same time. Nippon Electric Company, Limited (NEC) developed similar technology on NeoFace which was praised by the US National Institute of Standards and Technology (NIST) as the most precise facial recognition technology in the world and such technology might become future retail mode in every store (Mehrotra 2016).

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Similarly, with the development of AI, automatic translation improved significantly. Google adopted machine learning technology from phrase-­ based machine translation (PBMT) and neural machine translation (NMT). Google’s translation quality was significantly upgraded. In September 2016, the release of Google’s Neural Machine Translation (GNMT) allowed the entire input of sentence as a unit for translation (Wu et al. 2016). The system improved the quality of translation by learning millions of examples. In addition, Google applied machine learning to block spam mails. Google mail (Gmail) automatically checked spam mails with 99% correct rate and false alarm was reduced to 0.05% (Lardinois 2017). The success of Netflix also depended on AI algorithm. Through machine learning, Netflix calculated the viewing habit, preference of the subscribers, recent popular trend and ranking among the subscribers. For instance, once a subscriber logged in the homepage, the algorithm used by Netflix integrated his or her data and recommended favorite movies. AI algorithm also created personalized homepage for subscribers according to their viewing habits and preferences. Netflix saved around US$10 billion by using such a system. The system strengthened the customer-­ oriented of subscribers and AI performed a significant influence in the film and television industry (Jain 2016). Furthermore, the Microsoft Research Asia (MSRA) developed conversational AI, Xiaoice. In 2017, the 5th generation of Xiaoice published a Mandarin new poetry collection that created in the process of machine learning. AI also performed tasks such as drafting and writing financial reports, newspapers and magazine articles or even legal documents. A German retail firm adopted AI to operate and deliver goods and stocks. AI finished the tasks without human intervention (Markoff and Mozur 2015). Despite prosperous development of AI program, people begin to question whether AI triggers technological “singularity” that surpasses human intelligence and control humans (Kurzweil 2005). In other words, will the Terminator in the movie really happen in reality in the future? Fifty years ago, this worry seemed to be unrealistic. Now, top experts in technology and science have given serious warning. Jürgen Schmidhuber, the father and pioneer of deep learning neural networks, delivered a speech at WIRED 2016 and warned, “in 2050, there will be trillions of self-­ replicating robot factories on the asteroid belt … a few million years later, AI will colonize the galaxy” (Futurism 2016). However, a survey of AI experts reveals a different scenario of AI in future (Müller and Bostrom 2014). Most experts think that in the long

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term, AI gives positive impacts, whereas only few believe that it will bring crisis on the survival of human race. Specifically, Nilssons (2009) notes that there is only 10% chance that AI will reach human intelligence standard in 2030 and 90% chance in 2100. As a whole, AI experts believe that despite successful development of AI, there is still a long way for AI to possess the same standard as or even outperform human intelligence. The concern of AI threat on human survival seems to be exaggerated. Worrying about AI development is like worrying about overpopulation on Mars before humans land on Mars (Economist 2016). Moreover, the operation of AI is entirely different from the functions of a human brain. AI cannot be compared with humans directly. For example, a submarine can sink and surface. If we ask whether a submarine can swim like a fish, it makes little sense because the submarine has a complete different operation mechanism and it is hard to draw an analogy between the two. Furthermore, similar to an internal combustion engine and steam engine which were invented to prevent humans from extreme burnout if physical labor was adopted, AI helps humans reduce physical and mental stress. Before AI creates possible threat to humans, it has already made enormous contribution to human life. Any technological innovations or institutions (such as automobile, nuclear and military weapons and monopoly on violence) can cause massive threat on civilians or the whole human society. Technological advancement is a way of life. In order to tackle powerful technological tools, people need to set up appropriate regulations instead of banning AI due to panic or unrealistic imagination (Economist 2015).

6   Immediate Challenges of AI: Job Distribution, Government Regulations and Competition Instead of worrying about some unrealistic risk associated with AI in the future, it is better to examine the immediate challenges of AI in terms of job distribution, the role of government and competition. It is obvious that AI reduces tremendous costs of production. However, it leads to a new cycle of job redistribution. The application of AI imposes an impact on job market, including traditional blue-collar class and white-collar class. About 47% of American jobs will face potential impact of automation on employment in the next decade or two (Hawksworth et al. 2018). Yet, other studies estimate that less than 10% of people will actually leave their job. The McKinsey Global Institute claimed that “by 2030, up to 375m people, or 14% of the global workforce, could have their jobs auto-

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mated away” (McKinsey Global Institute 2017). At the same time, AI attracts massive amounts of equity investment into the industries. Forbes reported that the total annual investment in AI was between US$ 8 billion and US$ 12 billion in 2016 (Columbus 2017). A report of Goldstein Research predicted that AI industry would be worth US$ 14 billion by 2023. These massive investments would undoubtedly create huge amount of new jobs, such as training machine to learn, coding AI algorithm and so on. In the era of AI, upgrading of professional knowledge is necessary. Firms design new human resource systems to offer, pay and grant the time of new training program for the workers. Hence, workers need to develop new skills, but not necessarily at the employer’s expense. It is a foreseeable challenge of AI development. Another challenge is the regulation of AI technology so that the technology benefits human in a productive way. AI technology is expected to be extensively applied by different industries. For example, facial recognition system strengthens social security and crime prevention. However, if the technology was applied by a dictatorial government, it would become a tool for the government to intrude into citizens’ privacy or even attack opponents and dissidents (Economist 2018a). Firms might use facial ­recognition technology to monitor the performance of or intrude into employees too (Economist 2018b). It would create power imbalance between employers and employees. As mentioned above, through algorithm or data of the subscribers, Netflix customized its recommendation system in order to precisely grasp the preference and requirement of its subscribers. The Chinese government developed a social credit system based on people’s activities and behavior.5 It collected data from surveillance system, biometric recognition, social media, judicial administration, financial institution, transportation, image and video recording. Big data and AI algorithm were then analyzed to classify and manage people in the social credit system. People with bad social credit were barred from employment, loan or mortgage and public transport. Such policy intruded privacy significantly and easily. The application of AI must be regulated in the future. The application of AI must be coherent with the requirement of ethics and legal regulations in order to refrain from the misconduct of an individual, employer or government. AI is a powerful and yet very costly tool. The third challenge is that it requires massive amount of equity investment on AI development and upgrading. Only large firms have the resources to develop and reap the benefits of AI. As a result, they are more competitive whereas small and

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medium firms with limited resources cannot afford applying AI and may face the risk of being eliminated out of the market. In economics, large firms enjoy increasing returns from using AI technology. As a result, monopoly firms dominate the market and competition diminishes. Famous US technological firms such as Google, Apple, Facebook, Amazon and Microsoft are the market leaders in AI technology. They also extend the AI technology in other businesses. For example, Amazon applied AI in retailing. Google used AI technology in manufacturing self-driving cars and Apple expanded its online payment market by AI technology. Consequently, leading firms become stronger and larger with the application of AI. It is a challenge for the government to regulate and monitor these leading firms in the future. The central issue is the spillover effect due to the increasing power of knowledge and innovation. During the era of AI, knowledge effect is amplified in a large scale. It widens the income gap, competitive capabilities and power structure between firms, countries and individuals worldwide.

7   Conclusion In the era of the Fourth Industrial Revolution, knowledge as a “social capital” plays an important role in shaping social, political and spatial structures. In economic development, knowledge capital allows firms to enjoy increasing returns and hence grow larger. Because of path dependency, benefits brought about by advancements in technology will not equally spill over to the society, but accrue to organizations that have capabilities to apply these new technologies. This enlarges the income gap and competitive power among social classes, firms and regions. Class struggle may emerge like the case in the First Industrial Revolution. Government, society and individual should work together to avoid polarizing social classes. The rebirth of AI, like a phoenix rising from the ashes, creates an opportunity for humans to improve their wellbeing. On the bright side, AI technology brings us a promising future. On the other hand, AI may surpass human intelligence, dominate and eventually destroy human race. It may be too early to worry about the latter scenario. Instead, we should pay attention to some challenges which are likely to appear in near future. They include rapid redistribution of jobs, jeopardizing personal privacy or human rights and so on, due to the availability and applying of AI and modern technologies.

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Notes 1. The Three Laws of Robotics (Asimov’s Laws) are a set of rules which provide the fundamental framework to control the behavior of robots designed to be friendly to humans. These laws were proposed by Asimov in his 1942 short story “Runaround”: (1) a robot may not injure a human being or, through inaction, allow a human being to come to harm. (2) A robot must obey the orders given by human beings, except where such orders conflict with the First Law. (3) A robot must protect its own existence as long as such protection does not conflict with the First or Second Law (Asimov 1950). 2. According the Chinese Room Argument, AI is impossible to achieve as those supporters claim that computers do or at least can think. This implies that Searle’s experiment smashed the development of strong AI and directed the path of AI development toward weak AI (Searle 1980). 3. Strong AI (full AI) is an approach to construct AI with mental capabilities and functions that are like the human brain and emulate the actions of the human brain and human being. This includes the power of understanding and even consciousness. On the other hand, weak AI (narrow AI) is an approach to AI research and development with the consideration that computers can only just “simulate thought; their seeming understanding isn’t real understanding”. Weak AI simply acts by the rules imposed on it and cannot go beyond those rules (Chalfen 2015). 4. The term appears in the Hebrew Bible. It means “sea monster”. See also Thomas Hobbes’ (1651) Leviathan, Oxford University Press. 5. The Chinese government proposed to initiate a national reputation system namely the social credit system. It was designed to assign a social credit rating to every citizen based on government data regarding individual economic and social status by using big data analytics. Citizens having low credit scores were banned from using trains and planes, granting loans and so on (Fullerton 2018).

References Asimov, Isaac. (1950) “Runaround”. I, Robot. New York City: Doubleday. Atlantic. (2016) “How Google’s AlphaGo Beat a Go World Champion”, https:// www.theatlantic.com/technology/archive/2016/03/the-invisibleopponent/475611/ accessed on 8 Nov. 2017. Bostrom, N. (2014) Super-Intelligence, Path, Dangers, Strategies, Oxford, Oxford University Press. Chalfen, M., (2015) “The Challenges of Building AI Apps”, TechCrunch, https://techcrunch.com/2015/10/15/machine-learning-its-the-hard-problems-that-are-valuable/ accessed on 1 May 2018.

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Columbus, L. (2017) “McKinsey’s State Of Machine Learning and AI 2017”, Forbes, https://www.forbes.com/sites/louiscolumbus/2017/07/09/mckinseys-state-of-machine-learning-and-ai-2017/#7f7dae3c75b6, accessed on 5 April, 2018. Economist. (2015) “Clever computers the dawn of artificial intelligence”, https:// www.economist.com/news/leaders/21650543-powerful-computers-willreshape-humanitys-future-how-ensure-promise-outweighs, accessed on 5 Nov., 2017. Economist. (2016) “Artificial intelligence: March of the machines”, https://www. economist.com/news/leaders/21701119-what-history-tells-us-about-futureartificial-intelligenceand-how-society-should, accessed on 20 Dec., 2017. Economist. (2018a) “Two-faced: The sunny and the dark side of AI”, https:// www.economist.com/news/special-report/21739430-ai-will-mainly-begood-business-mind-pitfalls-sunny-and-dark-side, accessed on 5 April., 2018. Economist. (2018b) “AI-spy: The workplace of the future”, https://www.economist.com/news/leaders/21739658-artificial-intelligence-pushes-beyondtech-industry-work-could-become-faireror-more, accessed on 5 April., 2018. Fullerton, J. (2018) “China’s ‘Social Credit’ System Bans Millions from Travelling”, The Telegraph, https://www.telegraph.co.uk/news/2018/03/24/chinassocial-credit-system-bans-millions-travelling/, accessed on 4 April., 2018 Futurism. (2016) “AI will Colonize the Galaxy by the 2050s, According to Father of Deep Learning”, https://futurism.com/ai-will-colonize-the-galaxy-by-the2050s-according-to-the-father-of-deep-learning/, accessed on 13 July 2018. Good, I. J., Alt, Franz L. and Rubinoff, Morris (1966) “Speculations Concerning the First Ultra-Intelligent Machine”, Advances in Computers, Vol 6: 31–88. Greenfield, D. (2015) “Inside the Human-Robot Collaboration Trend”, Automation World, http://www.automationworld.com/inside-human-robotcollaboration-trend, accessed on 1 Jan. 2018, accessed on 1 Nov., 2017. Hawking, S., Russell, S., Tegmark, M., and Wilczek, F. (2014) “Transcendence looks at the implications of artificial intelligence – but are we taking AI seriously enough?” The Independent, 1 May 2014. Hawksworth, John, Berriman, Richard and Goel, Saloni. (2018) “Will robots really steal our jobs? An international analysis of the potential long-term impact of automation”, PricewaterhouseCoopers, http://pwc.co.uk/economics, access 13 July 2018. Jain, A. (2016) “How Netflix Saves $1 Billion A Year Using AI”, Value Walk, https://www.valuewalk.com/2016/06/netflix-how-saves-1-billion-year-ai/, accessed on 5 May 2018. Joseph Weizenbaum. (1966) “ELIZA — A Computer Program for the Study of Natural Language Communication between Man and Machine”, Communications of the Association for Computing Machinery, Vol 9(1), pp. 36–45.

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Kurzweil, Ray. (2005) The Singularity is Near: When Humans Transcend Biology, New York: Viking. Lardinois, F. (2017) “Google Says Its Machine Learning Tech Now Blocks, 99.9% of Gmail Spam and Phishing messages”, TechCrunch, https://techcrunch. com/2017/05/31/google-says-its-machine-learning-tech-now-blocks99-9-of-gmail-spam-and-phishing-messages, accessed on 5 Dec, 2017. McCarthy, J., Minsky, M. L., Rochester, N. and Shannon, C. E. (1955) A Proposal for The Dartmouth Summer Research Project, Artificial Intelligence, Vol 27(4), pp. 12–147. McCarthy, J. (1978) “History of Lisp, SIGPLAN”, Notices, 13(8), pp. 217–23. Müller, Vincent C. and Bostrom, Nick. (2014) ‘Future progress in artificial intelligence: A Survey of Expert Opinion, in Vincent C. Müller (ed.), Fundamental Issues of Artificial Intelligence, Berlin: Springer. Perala, A. (2018) “NEC to Highlight Facial Recognition Tech at Urban Transportation Exhibition”, Findbiometrics, https://findbiometrics.com/necfacial-recognition-urban-transportation-exhibition-503054/, accessed on 5 May, 2018. Pisano, G. P. and Shih, W. C. (2012) Producing Prosperity: Why America Needs a Manufacturing Renaissance, Massachusetts: Harvard Business Review Press. Markoff, J. and Mozur, P. (2015) “For Sympathetic Ear, More Chinese Turn to Smartphone Program”, The New  York Times, https://www.nytimes. com/2015/08/04/science/for-sympathetic-ear-more-chinese-turn-to-smartphone-program.html, accessed on 5 Jan. 2018. McKinsey Global Institute. (2017) “Jobs Lost, Jobs Gained: Workforce Transition in A Time of Automation”, McKinsey & Company. Mehrotra, K. (2016) “Retailers Experiment with Surveillance Tools Used by Police”, Bloomberg, https://www.bloomberg.com/news/articles/2016-03-03/ retail-stores-experiment-with-surveillance-tools-used-by-police, accessed on 5 Dec, 2017. Moretti, E. (2013) The New Geography of Jobs, New York, Mariner Books. Newell, A., Shaw, J.  C., Simon, H.  A. (1959) “Report on a general problem-­ solving program”. Proceedings of the International Conference on Information Processing. pp. 256–264. Nilssons, N. J. (2009) The Quest for Artificial Intelligence: A Historical Ideas and Achievement. New York: Cambridge University Press. Rifkin, J.  (2014) The Zero Marginal Cost Society: The Internet of Things, the Collaborative Commons, and the Eclipse of Capitalism, New  York: Palgrave Macmillan. Searle, J. R. (1980) “Minds, Brains, and Programs”, Behavioral and Brain Sciences, 3(3), pp. 417–457. Studwell, J.  (2014) How Asia Works: Success and Failure in the World’s Most Dynamic Region, London: Profile Books.

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Turing, A. M. (1950) “Computing Machinery and Intelligence”. Mind. 49(236), pp. 433–460. Wingfield, N., (2016) “Amazon Moves to Cut Checkout Line, Promoting a Grab-­ and-­Go Experience”, The New  York Times, https://www.nytimes. com/2016/12/05/technology/amazon-moves-to-cut-checkout-line-promoting-a-grab-and-go-experience.html accessed on 11 Dec., 2017. Wu, Y., Schuster, M., Chen, Z., Le, Qv. and Norouzi, M. (2016) “Google’s Neural Machine Translation System: Bridging the Gap between Human and Machine Translation”, arXiv:1609.08144.

CHAPTER 15

How Realistic Is a Sustainable World? Gunter Pauli

Quand les hommes se trouvent dans une situation nouvelle, ils s’adaptent et changent. Mais aussi longtemps qu’ils espèrent que les choses pourront rester en l’état ou faire l’objet de compromis, ils n’écoutent pas volontiers les idées neuves. As long as mankind finds itself in a new environment, all will adapt and change. But as long as they hope that things will remain as they are, or that there is a change to compromise, then they will not readily listen to new ideas. Jean Monnet, Honorary Citizen of Europe

One of the major tenets of Gunter Pauli’s philosophy is that the nature responds to basic needs of everyone and then evolves from sufficiency to abundance. In this chapter, Pauli identifies workable examples that reflected the essential systems used by nature. Pauli argues that his nature-inspired approach to doing business is both profitable and sustainable.

G. Pauli (*) Shaw College, The Chinese University of Hong Kong, Shatin, Hong Kong © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_15

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1   Who Is Building White Elephants? When Javier Morales, then the deputy mayor of the island El Hierro, part of the Canary Islands Region of Spain, asked me to support the design of a local economy that one day will be independent in water and fuel, it did not take long to propose a strategy based on wind energy, hydro-power and flywheels. The goal was to provide renewable energy and abundant water to stimulate agriculture and local industries. The total investment for this project at the outset in 1997 was estimated at €67 million. The response from the political and financial world was that if this little island of no more than 10,000 inhabitants would require an investment of so much money to achieve self-sufficiency, then we were out to build a “white elephant”. Spending €8 million on diesel each year is “normal”. Spending €67 on capital to convert all energy sustainable for 40 years is “crazy”. We often neglect how entrenched our thinking is! Let us look at the same logic from another angle. The island spent at the time €8 million a year on the importation of diesel fuel to generate electric power. The oil tankers cannot avoid spilling oil, and even though this is rather the exception that the rule, the risk remains high. The power installation was noisy and polluting leaving a cloud of black air on the east side of the island. Interesting that this economic and energy model is considered normal. However, it does not take an economist to realize that the total expense by the local population for importing fuel, while assuming major risks, over a decade amounts to €80 million. This is enough to fund the capital investment required to warrant four decades of energy independence. Now, that money goes straight to the oil producers—none of which are based in Spain. So we raised the question: “How can the import of polluting fossil fuels be considered normal, while the redirection of a guaranteed expense by everyone on the island into local renewable sources of energy that plough money back into the economy is considered a white elephant?” The idea to convert El Hierro into the first water and fuel self-sufficient island turned reality at a total cost of €86 million. The additional €21 million was imposed after a volcano eruption forced additional infrastructure. The facility was inaugurated in 2013! Now the islanders are very decided

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to embark on the next step: all 6000 vehicles must be electric within a decade. It is surprising that even after the successful implementation of the renewable grid opponents formulate the same “white elephant” comments. How can an island afford to spend €150 million in the conversion of a car fleet from fossil fuel to electric? And again, we formulated the same question as a response: “How can an island permit the annual expense of €12 million for the purchase of fuel and diesel to power vehicles on the island?” All this money is channeled outside the economy, and what would it mean if the €8 million for power and the €12 million for fuel were staying in the territory? The island of El Hierro has decided to create its own electric car leasing company. All taxis and rental cars will be electric with immediate effect, and as soon as there are 500 electric vehicles on the island, then the car leasing company will install a smart grid that stabilizes the network delivering micro-currents when demand so requires, and stores excess energy in car batteries. As soon as there are 2500 vehicles, the combination of wind, hydro, flywheels and batteries will offer a level of efficiency that further drives the cost of water down. Yes indeed, water is life and for centuries this island has suffered from a dramatic shortage of this most precious substance. Just imagine the turnaround thanks to renewables and a smart grid complemented by zero emissions mobility: double the amount of water on the island at half the cost. We all too often forget that energy is a medium, not a purpose. Our lives depend on water, food, housing, health and mobility, and each one of these core activities of life requires energy. It is therefore important to shift from a debate on “renewables or not”, or worse “for or against fossil fuels”, to a debate about our capacity to respond to the basic needs of everyone in our society. If we are prepared to transform our intentions to one that is focused on meeting needs, then indeed the debate of fossil fuel quickly shifts to a new content. Time has come to go beyond the “for or against”—this divisive approach to life where we pitch the good versus the bad forces people in society to take positions. We cannot neglect the fact that the convenience of fossil fuels and its abundance for decades has permitted too many to live in air-conditioned atmospheres, unaware of the unintended consequences caused by the excessive incineration of coal, petroleum and natural gas. We need to lift the debate toward one that discovers the tremendous opportunities to create a thriving local economy using what is locally available. It is a shift from cheap and easy fuel, which permits us to cut costs with an

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inconvenient truth, toward local energy sources that permit us to grow the economy of the territory with readily available resources—of course sustainably. If you pull a thread in Nature, you quickly realize that it is connected to everything else. (John Muir)

2   Unaware of the Consequences The shift to fossil fuel has hooked us on the habit of free spending on energy without any consideration of the amount of money that is drained from the local economy. Economists merely notice the impact on the balance of payment of a nation but seldom realize the profound leakage this causes and the need to start generating export revenues in order to pay the bill. A country like Argentina produces enough food for 400 million people on the world, or ten times more than its own population needs. However, the country has 750,000 children under 18 malnourished. How do you explain this blind focus on growth, increased output and the neglect of food and nutrition? Argentina’s drive toward food exports exacerbated energy consumption, and at a rate of 100,000 barrels per day (4 million per day, or 1.5 billion per year) it is responsible for the trade deficit even when petroleum prices are at an all-time low. Fossil fuel is like a drug; it blinds us of its impact and consequences. Even if we know—we do not want to know. One of the well-documented unintended side effects of burning fuel are emissions, not just carbon but also nitrogen and sulfur oxides, popularly known as SOx and NOx, which not only contribute to climate change but also affect the health of every breathing species on earth. We needed a scandal of the magnitude of Volkswagen to realize that the maximum levels of pollution set by European and Californian authorities to safeguard the respiratory health of children is openly defied by the industry, up to the point that car executives of the leading German maker installed deceiving software cheating the public at large, and until recently with impunity. While we are slowly awaking to the collateral damage created by these emissions, we have no idea how we have unraveled the web of life on Earth from a permanent and diligent cycle of carbon sequestration and storage to one that permanently emits all carbon. Let us take the example of silk.

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A century ago, the world production of silk hovered around one million tons per year. Today output hardly reaches the 100,000 tons level. The arrival of nylon, this synthetic polymer developed by scientists at Dupont de Nemours, introduced the knockout phase for this natural polymer produced by the mulberry caterpillar (which the English mistakenly call a worm). The traditional ecological economist would enter the debate and calculate the amount of carbon emitted by one million tons of petroleum used to produce nylon, and compare this with the carbon sequestered in the process of silk. While this is a correct approach, it is incomplete. When the Chinese embraced the farming of silk 5000 years ago, their first interest was not the silk, rather the conversion of savannas into fertile areas. Indeed, it was quickly noted that the symbiosis of a caterpillar that would devour about 50% of the canopy of the mulberry tree left on the floor a rich mix of excrements so nutritious to micro-organisms that it triggered the creation of top soil. An area considered infertile would be ready for planting watermelons within a decade when planted with mulberry trees. What few people realized is that the caterpillars triggered a soft and unnoticed chemistry that fixes carbon massively into the soil, creating a black earth that would continue to serve humanity for centuries. This ecosystem service was the real success of the mulberry/caterpillar symbiosis. Silk was only a by-product. Now, with the arrival of nylon, we are not only substituting a natural silk with petroleum derivatives at high energy expense, much worse, we are depriving the creation of top soil and the sequestration of organically bound carbon and nitrogen. The lack of a continuous cycles of top soil generation with a blend of minerals and nutrients through the creation of additional “ecosystem services” leads to the mining of carbon and nitrogen up to a point that there is none left. As soon as carbon is less than 5% or 6%, then the farmer is obliged to maintain production by irrigation since carbon-poor soil cannot retain water, and by adding synthetic fertilizers and nitrogen since the core feedstock (carbon) is too depleted. Of course, this is only viable with the infusion of a massive input of fossil fuels. Silk is natural and resistant, and has a useful life of at least three generations or 100 years. Nylon is a typical throwaway product symbolized by ladies’ stockings which are thrown away in the bin the day a minor damage is visible. Never is any nylon recycled. Once we realize that the petroleum-chemistry is not only about substituting a natural fiber (silk) with a synthetic one (nylon), it is about substituting a system that cycled carbon with long retention and storage systems,

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into one that leads to the permanent spewing of carbon into the atmosphere due to this throwaway culture. This makes our addiction to petroleum even more debilitating. It is like a drug addict who is not only endangering his or her own life, but destroying the whole social tissue around it by promoting illegal production and trade that enriches a few and leaves society with all costs for rehabilitation, violence and the cost of the penitentiary services.

3   Reverse the System The key question is how to reverse this trend. We cannot go back in time and suggest that silk has to pick up its past glory as a fashion. It is difficult to imagine the substitution of nylon and all of its synthetic varieties by silk. However, once we take the time to study the real chemistry of silk, then we realize that there is an exceptional product portfolio at our feet that could not only serve humanity, but also revive the silk farming, even beyond the levels of production practiced a century ago. The new fields include medical and cosmetic applications. Silk has unique tensile strength, permits cells to grow on and in it, and is a natural inhibitor against the growth of fungus and specific bacteria. Actually, we have forgotten that silk protects a cocoon with a caterpillar inside against the tiniest predators around and has done so very successfully for millions of years. This natural design at the molecular level has been studied in great detail by scientists. It is an amazing reality that unfolds before our eyes: silk can regenerate cartilage and thus avoids knee replacement based on titanium; silk provides the scaffolding for the regeneration of nerves after trauma including the potential to make quadriplegics walk again. And, while these are only small volumes that we can foresee for medical applications, the big market will be in cosmetics where synthetic emulsifiers have become the standard, causing massive marine pollution with micro-beats that end up in our food chain. Everything from shaving creams for men to emulsifiers in night creams to reduce wrinkles can now substitute the non-degradable plastic beads with silk, and that would—conservatively—require 2 million tons of silk. We have to realize that while our addiction to petroleum is causing havoc to the atmosphere and debilitates our ecosystems of its capacity to perform ecosystem services, the reverse is also true. Wherever there is bad news, we can find very good news. In other words, if the medical and cosmetics industry—realizing the documented challenges that it is facing

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today—were to revert to silk as an option, then we will have to embark on the same massive scale of tree planting that the Chinese, the Turkish and the Italian societies had embarked on throughout history. In those days it was to please the rich and wealthy with the finest clothing. Now it is to design better products with better qualities at competitive costs while offering a chance to increase soil fertility and offer a response to the urgent need to have sustainable agriculture with a wealth of nutrition in the soil. Once we realize that renewables are not white elephants and that natural system are capable of strengthening “The Commons” that provide ecosystem services, then we still have a challenging task before us to expand these interconnected insights to the hard realities of this continuous search from more of the same that will never lead anywhere. As Lester Brown, founder of the Worldwatch Institute stated: “the end of the stone age was not a lack of stones; the end of the petroleum age may well not be a shortage of petroleum”. However, we are stuck with a tremendous institutional-­technological lock-in. While silk may create some inroads in niche markets that are quickly making a pervasive impact, the tenacity of the petroleum and gas industry to do more of the same is not only a proof of insensitivity to the reality of climate change, and its damaging effects on life on earth, it is ignoring the hard facts that are known but deliberately covered up and then fiercely contested. Worse, it is forgetting that every coin has two sides, and we have yet to discover with both our heart and soul.

4   Silent Chemical Reactions The battle for a healthy and sustainable world is not fought out through hard political battles in national parliaments or international conventions; it is turned into a reality through silent chemical reactions and transparent physical effects. The molecular structure of a few gases like carbon dioxide, nitrous oxide and methane gas traps heat in the atmosphere. So the more you have these simple yet stable molecules covering the Earth, the more that heat is prevented from radiating out. This is basic physics. We have seen that carbon reductions to date have made insufficient impact, and we need systemic solutions where we transform from one system to another system (e.g. convert the nylon and silk challenge to a titanium and silk opportunity). The drama we have now is that in the light of dwindling reserves of petroleum that are cheap to exploit (deep seas and extreme climate conditions), attention has diverted to natural gas which is

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c­onsidered cheap and abundant with at least one trillion cubic feet of reserves enough to supply the world for decades to come. The promise of cheap energy in abundance is supposed to fuel the economy. Even President Obama was tricked into believing that the private sector would invest an additional $100 billion in factories that are attracted by low cost and less-polluting natural gas. This magic would create not less than 600,000 new manufacturing jobs. This sugar-sweet perspective made the President promise to cut red tape to facilitate the transformation of the energy mix from coal to gas. The promise was hard to refuse, even by the environmentalists. Carl Pope, the long-serving director of the Sierra Club, after receiving a $25 million donation, was prepared to promote natural gas, even from doubtful sources such as fracking. Robert Kennedy Jr., one of the icons of environmental stewardship stated in 2009 that the “energy revolution over the past two years has left America awash in natural gas and has made it possible to eliminate most of our dependence on deadly, destructive coal practically overnight”. Bill McKibben correctly points out in his article in The Nation (March 2016) that the substitution of coal with natural gas is like shifting your diet from a high fat to a reduced fat. Have people not realized that after years of excesses we should not be having fat? Should we not be reducing carbon emissions and then feel a sense of pride since natural gas only emits half of the carbon compared to coal? The bad news is that we cannot only compare coal with natural gas on a ton-per-ton basis incinerated to produce power, but we have to look at the whole system. When the statistics emerged that gas fields are leaking methane (which is officially 21 times worse in trapping heat in the atmosphere than carbon dioxide even when scientists claim it is rather like 100 times), then it became clear even a minor escape of 3% would simply double the heat-generating effect in the atmosphere. Unfortunately, with all the computing power in the world, science and industry is ill-equipped to sense, take stock and calculate the impact of a whole system of energy consumption. So the proposed shift to natural gas is not that convincing, on the contrary it is confusing, and more likely just more of the same. Even Robert Kennedy Jr. changed by 2013 his mind when he was faced with the hard realities. The world of energy has to look for new sources. A small team of engineers around Marco Simeoni demonstrated that a 36-meter trimaran vessel can tour the world powered solely by 512  m2 of solar panels that convert seawater into hydrogen. The hydrogen so generated provides 6 days of propulsion, a performance that outstrips the storage of electricity

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in batteries which only guarantee one day of power. And if the boat does not have any sun for 6 days, then the 100-ton heavy boat can be pulled forward by a 40 m2 kite. As the hydrogen is powering fuel cells, the system produces drinking water. Now if this can be done for a boat, it could also be done for a community that has access to water, even dirty water. The transformation of the energy production and consumption is only the beginning. Recent scientific research was confirmed in living laboratories demonstrating that 3D platforms submerged in the sea could stimulate the growth of 1000 tons of seaweed per hectare per year good for the generation of 500 m3 of gas per day forever! And the 2% solids leftover produce 20 tons of fertilizers. The revival of the ecosystem, thanks to the intensive farming of the seaweeds brings back aquatic life. Not only does this provide zero emissions gas, it regenerates biodiversity. Thanks to the multiple revenues generated; the cost equivalent for this gas measured in barrels is approximately ten dollars, the cheapest energy source around. Why is this not mainstreaming today?

5   A Completely New Game Now enters the world of fracking. The discussions are transparent: the injection of chemicals and steam under high pressure releases oil but has side effects. The use of the word “side effect” or even unintended consequences is pejorative since the damage is well-documented. However, there is not only a high level of sensitivity to the exploitation of this abundant and cheap energy, there is a remarkable scientific rigor imposed on anyone who claims anything negative about fracking. Whatever is being documented and analyzed is quickly dismissed that the study has flaws or is insufficiently documented, or the study discovered nothing more than a correlation without a proof of cause and effect. It is remarkable that industry wants to have an immediate permitting without any real due diligence and a rapid deployment of capital as to enjoy positive cash flow without restraints. While getting started needs no in-depth proof that the process is benign, any critique will have to be substantiated with decades of research and data mining. Few policy makers who negotiated in Paris realize the vast difference between methane and carbon emissions. Carbonic gases are stable and stay in the atmosphere for centuries. That is the bad news. The good news is that these molecules trap a moderate amount of heat. Methane is a rather unstable molecule and degrades in decades. That is the good news. The

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very bad news is that the amount of methane pumped into the atmosphere since natural gas is the wave of the day is so massive, that this is accelerating the locking up of heat in the atmosphere. This causes rapid melting of ice caps, acidification of the seas and rising sea levels. Introducing fracking has a double-sided effect: the energy industry is closing coal mines but is opening methane geysers. This means that the oil and gas industry is riding the wave of more of the same, while the public and even the policy makers believe that there is a tangible improvement toward a lower carbon energy mix. Sometimes we should ask ourselves why we are so easily fooled. Statics based on satellite pictures demonstrate that natural gas in general but shale gas in particular (which is also sold under the label of natural gas) extracted in the United States is responsible for at least 30% of the increase in methane gas emissions around the world. In addition, fracking causes earthquakes as Josh Sandburn reported in March 2016  in Time Magazine. In 2007 the State of Oklahoma reported one earthquake with the power 3 on the Richter scale. In 2015 there were nearly 1000 earthquakes. The center state of fracking in the United States now has more earthquakes than California which lies on a known fault line. This is nothing new. Groningen, the center of natural gas extraction in the Netherlands, had no earthquakes before 1986, and now suffers from an average of 50 per year.

6   There Are Options: And We Know It Over the ten-year period that fracking has been practiced broadscale in North America, the cost price of solar photovoltaic has dropped 80%. That is good news, but it is not good enough. We need to go beyond the mere substitution of one source of energy for another. We will only succeed to create a fossil-fuel-free world if we change our system of production and consumption. The case of coffee is one of these obvious examples that surprises many, and demonstrates once more how ignorant we are of the opportunities before us or of the magnitude of the damage we cause. Coffee is a globally traded commodity. An estimated ten million tons of green coffee travels the world. Who is aware that only 10,000 tons are actually ingested, and a staggering 9,990,000 tons are discarded as waste. At best, this leftover from the brewing process is composted, even though we know that between the moment of brewing and the moment of disposal there is a vast generation of (once more) methane gas. We all know

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that agriculture causes major methane emissions. But what we do not know is that many of these emissions could easily be avoided. The coffee processing industry, from the makers of instant coffee to the chains of coffee shops, all have found their ecological solutions that unfortunately belong to the same category of “substituting high fat with regular fat, while we know we cannot have fat”. While the incineration of coffee waste, like so many other forms of agricultural residues, is often presented as a fine substitute to fossil fuels, we forget that the generation of methane gas and carbon emissions cannot be lost out of sight. It is not the mere burning instead of rotting, it is the whole supply chain that requires a fresh approach. So the substitution of fossil fuel with coffee leftovers is doing “less bad”. What we are in need of is to “do more good”. And here goes our logic: coffee is treated either by heat or by inert gases to extract the soluble part that offers us either a powder to produce an instant drink or a hot coffee to enjoy. Since the biomass has been pretreated, it is ideal for farming mushrooms. Do we realize that 60% of the cost of mushroom farming is the sterilization of the substrate—and this energy is not required anymore if we use processed coffee and use the grounds on site? The case of coffee is just one of the many examples that demonstrates that with a minor shift in handling and processing, we are able to create energy efficiencies that have not been considered viable. We can farm mushrooms with 60% less energy and no need to transport raw materials. The advantage is that most of these solutions do not require new technologies or complex engineering, neither heavy capital investments. These solutions are pragmatic and can be implemented by “you and me”. The only way that we will succeed in the creation of a fossil-fuel-free world is that we cascade matter, nutrition and energy just the way nature does. It is not difficult, but it is different. The greatest obstacle to achieve this will not be “the oil and gas lobby”. The greatest impediment to turn into a green society are the millions of MBAs (Master of Business Administration) who have been brainwashed to only consider a core business, based on a core competence and focus on cutting costs at all costs. MBAs believe that cheaper is better, and the solution to competitiveness, thus stimulating mergers and acquisitions. As long as we are entrusting our youth to academia who are teaching the next generation of managers that more and cheaper of the same is the model forward for society, then we will never have communities that will

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be capable of steering toward sustainability as El Hierro has done. However, when we are prepared to embrace business as nature, with ­interconnections, feedback loops, multipliers and clear ethics, including nothing is wasted and everyone contributes to the best of their abilities, then we will have no difficulties to achieve a fossil-fuel-free society.

CHAPTER 16

Cryptocurrencies: The Future of Finance? Claire Wilson

1   Introduction Interest in cryptocurrencies has blossomed since the arrival of bitcoin in 2009. New cryptocurrencies have emerged almost on a weekly basis, and in May 2018 there were more than 1600 different types in circulation (coinmarketcap.com). Despite the wild fluctuations in value, bitcoin and other cryptocurrencies remain popular around the globe. Some academics, financial reporters, investors and bloggers have suggested that cryptocurrencies could eventually replace traditional money (Draper 2018; Rooney 2018). This chapter analyses whether cryptocurrencies will challenge the current order of traditional financial institutions. Cryptocurrencies potentially have a wide-ranging utility and have been described as “a multi-faceted creation that means many different things to many different people” (Frisby 2014). Some people claim that cryptocurrencies offer a better method of payment than conventional modes. Some individuals are  against governmental control and favour of the financial freedom that cryptocurrencies offer. Cryptocurrencies provide some people with access to financial services that would not otherwise be available C. Wilson (*) Department of Law and Business, Hong Kong Shue Yan University, North Point, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_16

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to them via traditional banking methods. Others are interested in ­cryptocurrencies as a potential investment opportunity. More recently, the banking community has also started to invest in initial coin offerings (ICOs). In terms of raising funds, ICOs are starting to become an attractive alternative to traditional financing methods. In addition to the many benefits that cryptocurrencies offer, they also pose a number of risks which have generated enormous levels of criticism. Such criticism stems from their association with serious crime, money laundering schemes, illegal transactions, Ponzi-schemes and crypto-scams. Some critics have strongly argued that cryptocurrencies are nothing more than a speculative bubble (Kelly 2015). Others argue that they present a serious threat to the global economic order and should be “shut down” and declared illegal (Bloomberg 2018). Regulators across the globe have issued warnings to consumers about the risks of investing in cryptocurrencies, and the potential of being exposed to scams. In most jurisdictions, regulators are only just beginning to discuss publicly whether existing legislation is sufficient to govern cryptocurrencies or alternatively how they might regulate the industry. In the absence of any clear regulatory rules or guidelines, companies and private individuals are venturing into crypto-activities accepting unknown risks. Alternatively, others are taking their own action to avert risks. For example, internet companies, such as Google, have placed a ban on certain types of cryptocurrency advertisements (mainly relating to initial coin offerings, wallets and trading information) on their space in fear of incurring legal liability should their users be misled by any such advertisements. Cryptocurrencies are relatively new, and amidst the confusing regulatory landscape and price volatility, they remain popular. The pioneer cryptocurrency, bitcoin, increased from a value below US$0.01 in 2009 to a high of US$19,783 on 17 December 2017, and almost tripled its value in one month in December 2017 (data from coindesk.com). Such increases in value have captured the attention of many investors around the globe. For instance, trading in bitcoin futures was approved on 1 December 2017 by the United States Commodity Futures Trading Commission. Despite the decline in the value of bitcoin to around US$9,000 in May 2018 and US$3,800  in March 2019, the number of blockchain wallet users has continued to increase. On 1 December 2017, there were a total of 19,430,457 blockchain wallet users in existence. By 11 May 2018, this number had increased by 27% to 24,662,973 users (blockchain.info). The rise in blockchain wallets demonstrates the vast increase in cryptocurrency interest and usage.

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The unique terminology related to cryptocurrencies can be confusing, and some terms are often used interchangeably, which can complicate matters further. Establishing a “common language” is important for creating clarity and precision, which will ultimately lead to a better understanding of how cryptocurrencies operate. A list of universally agreed terms has yet to emerge; however, this chapter draws on sources published by international organizations to distinguish between “digital currency”, “virtual currency” and “cryptocurrency”. Digital currency is regarded as a digital representation of value which is denominated in legal tender. The term “digital currency” is wide in scope, and can refer to a digital representation of e-money (fiat currency) or a digital representation of a non-fiat currency. Virtual currencies are “digital representations of value, issued by private developers and denominated in their own unit of account” (He et al. 2016). The term “cryptocurrency” is more specific and refers to “a math-based, decentralized convertible virtual currency that is protected by cryptography—i.e., it incorporates principles of cryptography to implement a distributed decentralized, secure information economy” (FATF 2018). As a result of the underlying cryptography and blockchain technology, cryptocurrencies have the potential to represent value in lieu of money and to facilitate payments without central banks or financial institutions. The aim of this chapter is to analyse the resiliency of cryptocurrencies and to determine whether or not they are likely to become a permanent new financial institution in the future. The methodology comprises a simple SWOT analysis to assess the future durability and competitive positioning of cryptocurrencies. The SWOT analysis originates from Philip Selznick’s strategic planning initiative carried out in 1957, which matched an organization’s internal and external factors (Selznick 1957). The concept was developed in the 1960s by Stanford University researcher, Albert Humphrey, and other notable modifications were presented at a conference in Zurich in 1964 by Urick and Orr. A traditional SWOT analysis is a strategic analytical tool to assess the strengths, weaknesses, opportunities and threats of a business (Porter 1985). From a business perspective, it can provide insights into ways of crafting and maintaining a profitable fit between a commercial venture and its environment (Valentin 2001; Panagiotou 2003; Besharov and Khurana 2015). The SWOT analysis is not, however, limited in scope as a strategic planning tool for the general management of companies. Alternatively, the SWOT analysis can be utilized as an analytical tool for a wide range of

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fields such as the military, environment and economic policy (Ghazinoory et al. 2011; Helms and Nixon 2010). A small number of academics and other commentators have used the SWOT analysis to focus purely on bitcoin (DeVries 2016; Vassiliadis 2017), and some bloggers have briefly reviewed cryptocurrencies. This research adds to the small collection of existing literature and extends the scope of application of the SWOT analysis to evaluate the future durability and competitiveness of cryptocurrencies in detail. The SWOT matrix is adopted to contrast the internal strengths and weaknesses of cryptocurrencies against the external opportunities and threats. Four of the strongest factors in each component of the SWOT matrix have been identified and analysed in turn so as to provide a balanced evaluation of the internal and external elements. The main section of this chapter is divided into four parts. Section 2 identifies the strengths of cryptocurrencies from an internal perspective. In this regard it considers the peer-to-peer payment capabilities, blockchain technology and capacity as alternative investments and fundraising vehicles. Next, Sect. 3 of the discussion focusses on the internal weaknesses of cryptocurrencies, namely their volatility, transaction delays, transaction fees and the problems associated with mining. With regard to the opportunities, Sect. 4 of this chapter explores the effects of positive regulation, the global reach of cryptocurrencies, capacity for further innovation and potential to assist the unbanked. Section 5 explores the external threats posed by cryptocurrencies which are identified as restrictive regulatory policy, connection with nefarious activities, decline in consumer confidence and emergence of state-issued fiat cryptocurrencies. Finally, the chapter reaches the conclusion that cryptocurrencies will cause disruptions to the future of money. They are expected to become a permanent new institution in the future; however, they will be far more advanced than the current generation and will be heavily regulated. It is also likely that state-issued cryptocurrencies could replace the current generation of privately issued coins and tokens.

2   Strengths The strengths of cryptocurrencies are measured in terms of their internal characteristics that are unique in allowing them to function. The four key internal strengths of cryptocurrencies that are analysed in this section are  (1) peer-to-peer payment capabilities, (2) blockchain technology,

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(3)  capacity as alternative investments and (4) capacity as an alternative fundraising vehicle. 2.1  P2P Payment One of the most attractive features of cryptocurrencies is that they are “electronic payment system(s)… allowing any two willing parties to transact directly with each other without the need for a trusted third party” (Nakamoto 2008). Cryptocurrencies can be used to settle personal debts or purchase goods and services directly from anyone who is willing to accept it. This means that monetary value can be transferred without the use of banks or other intermediaries. Examples of privately issued cryptocurrencies include bitcoin, Ethereum, Litecoin and Monero and they do not have the status as legal tender in any jurisdiction. Until the arrival of cryptocurrencies, there was no suitable mechanism in place for making digital payments without reliance on a trusted third-party financial institution (Nakamoto 2008; Popper 2015). Bitcoin, the pioneer cryptocurrency, emerged in 2008 coinciding with the 2008 Global Financial Crisis. The first signs of economic distress appeared on 16 March 2008 when Bear Stearns averted bankruptcy as a result of a heavily discounted purchase by JPMorgan Chase. On 15 September 2008, however, Lehman Brothers was forced to file for Chapter 11 bankruptcy protection. Incidentally, Lehman Brothers still remains the largest bankruptcy filing in the history of the United States. After the collapse of Lehman Brothers, the debt contagion continued to spread within other financial powerhouses such as AIG, the Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley. Given the enormity of the mounting debt and the interconnectedness of such institutions, they were declared “Too Big to Fail” and were subsequently “bailed out” by a series of rescue schemes put in place by the United States Treasury and Federal Reserve (Greene et al. 2010). The introduction of the so-called bitcoin white paper, published on 1 November 2008 under the alias of Satoshi Nakamoto, states that an ­“electronic payment system based on cryptographic proof instead of trust” is “what is needed” (Nakamoto 2008). It is clear from the emotive language used throughout the white paper that bitcoin was created in response to the financial crisis. Later online postings also confirm this intention. For example, the following text relating to the desperate state of the economy “The Times 03/Jan/2009 Chancellor on brink of second

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bailout for banks” was included with the block code of the first 50 bitcoins launched in January 2009. The independence of cryptocurrencies from financial institutions and central banks was a key feature that attracted the attention of the cypherpunk community in 2009. Cypherpunks are best described as libertarians that believe in privacy and a decentralized state. The development of bitcoin can be attributed to prominent cypherpunks such as Sepp Hassilberger, Hal Finey and Mike Hearn (P2Pfoundation.net) before the level of public interest began to soar after 2013. Since the 2008 Global Financial Crisis, the reputation of financial institutions has deteriorated significantly among the general public. According to the results of a poll carried out in 2017 by Gallup to survey “confidence in institutions”, 27% of the general public surveyed have very little trust in banks (Gallup 2017). Public trust in computing technology, however, has increased significantly and physical cash is no longer king. Digital peer-to-­ peer (P2P) payments are becoming the new “social norm”. A recent study conducted by the Bank of America reveals that 53% of users feel that P2P is more efficient and 36% of users felt that no transfer is too small. The results of the Bank of America survey clearly demonstrate that P2P payments will replace traditional payment methods in the future. An overwhelming 71% of respondents believe that children under the age of ten will never use cheques, 42% predict they will not use credit cards, 36% think that they will only shop on their smartphone and 24% believe that they will only know a virtual currency (Bank of America 2017). Peer-to-peer payment is also an attractive option for merchandisers owing to the fact that chargebacks are not possible. A chargeback is a protective legal tool which allows a consumer to file a complaint with their credit card company to dispute a payment with the aim of cancelling or reversing that payment. However, cryptocurrency transactions such as bitcoin cannot be reversed. The ownership address of the cryptocurrency is changed to the new owner, and once the transaction is made, it is impossible to reverse it. Only the new owner has the associated private key, therefore, only he/she can change ownership of the coins. This design feature ensures that there is no risk involved when receiving cryptocurrency as payment. Chargebacks are a legitimate form of consumer protection for credit card holders where the customer’s credit card is used fraudulently by a third party. However, “friendly fraud” is becoming problematic for merchandisers in circumstances when chargebacks are used by customers as an

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illegitimate way of claiming payment back from merchants. Examples of such “friendly fraud” include circumstances when a purchase is made by a family member but the true bank customer does not want to pay the bill, or when the bank customer has made a purchase but the period of time for return has expired. Peer-to-peer payments via cryptocurrency could, therefore, prove to be an added strength for merchandisers due to the elimination of chargebacks. 2.2  Blockchain Technology The vast majority of cryptocurrencies, but not all of them, rely on cryptography and blockchain technology. It is opined by some commentators that the cryptocurrencies themselves are not the key innovative feature, but rather the cryptographic techniques and blockchain technology underpinning them (Clark 2013;  Vigna and Casey  2015; Crosby et  al. 2016). However, cryptocurrencies are the first and therefore the most developed application of blockchain technologies. The underlying blockchain technology means that cryptocurrencies can be circulated without the intervention of central banks, and payments can be facilitated without financial institutions. Cryptography refers to the science of creating coded messages for the purpose of keeping the message secure. In simple terms, the term “blockchain” describes an open, distributed ledger that can permanently record transactions between two parties efficiently so that payments can be verified. The distributed ledger is built by a series of data blocks generated by cryptographic techniques. Each block represents transaction records of that specific cryptocurrency over a period of time. In the case of bitcoin, the relevant period of time is ten minutes. The authenticity of the information presented is validated and new data blocks are generated. Each time a block is completed it gives way to the next block thereby establishing a cycle. The blockchain, therefore, creates an electronic ledger to verify the details of transactions. Blockchain is revolutionary in that it is decentralized and no one party controls or manipulates the data, yet it is synchronized and allows all users access to the same data. Such features enhance the simplicity and validity of transactions. Organizations and businesses will no longer need to depend on an intermediary such as a bank, which drive transaction costs. A single database means that anyone who has access can make monetary transactions easily and more efficiently. Blockchain technology could allow

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a transfer of funds from one bank to another on a single database rather than over multiple databases (Lansiti and Lakhani 2017). Blockchain technology also provides a solution to the double-spending problem adding further strength to the continued utility of cryptocurrencies. The double-spending solution was raised as a key factor in the bitcoin white paper (Nakamoto 2008). Double-spending arises when two separate transactions attempt to payout of the same account balance. Previously a third party was required to prevent the occurrence of double-spend. However, the blockchain-generated public ledger requires every transaction to be logged. An attempt to pay-out on a unit of cryptocurrency that has already been logged as paid in the public ledger cannot be verified as genuine and therefore the transaction cannot be added to the blockchain. Commentators have compared the potential take-up rate of blockchain technology to the public penetration of the internet in the 1990s and predict mass market adoption of blockchain in the same gradual level of adoption as the internet (Ito et al. 2017). Blockchain technology based cryptocurrencies offer independence from financial institutions and the potential to carry out more efficient transactions, which are key strengths that could boost the utility of cryptocurrencies. 2.3  Alternative Investment The pioneer cryptocurrencies, such as bitcoin, Litecoin and Monero, were launched as an alternative medium of exchange to fiat currency. However, over the past five years, cryptocurrencies have been considered as an alternative investment opportunity to traditional investments by some people. This point is illustrated by a recent study published by Blockchain Capital, which shows that 30% of respondents aged between 18 and 34  years would prefer to invest US$1000  in bitcoin as opposed to US$1000  in government bonds or stocks (Poll 2017). In the wake of the 2008 global financial crisis some investors still remain conscious of the importance of diversifying their investments. Alternative investments are considered as non-correlated assets, and their performance does not follow that of traditional asset classes such as bonds and shares. A number of private investors now believe that cryptocurrencies are non-­ correlated assets that offer an effective way to balance risk within the investment portfolio. It is opined by some commentators that cryptocurrencies are a distinct asset class. For example, Burniske and White’s discus-

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sion encourages investors to think strategically about including cryptocurrencies as a varied portfolio asset (Burniske and White 2017). The classification of cryptocurrencies is not clearly defined in terms of their legal treatment. Ultimately, the classification depends upon how they are used. In terms of their investment capacity, most jurisdictions, such as Hong Kong, classify cryptocurrencies as virtual commodities (HKMA 2015). Initial coin offerings (ICOs) are classified on a case-by-case basis and may be subject to existing securities and futures regulation. In Hong Kong the relevant regulatory body, the Securities and Futures Commission, warns against trading in “cryptocurrencies which are ‘securities’ as defined in the Securities and Futures Ordinance (Cap. 571) without a licence” (SFC 2018). Investors are also warned that any such investments are made purely at their own risk. Investing in cryptocurrencies is not risk-free and there are a number of cases where such investments have not proven to be fruitful. The bitconnect bitcoin investment platform is a classic example. Bitconnect offered multiple ways of investing such as investing in its own bitconnect coin and staking, mining bitconnect coin or trading in bitconnect coin (bitconnect. co). However, in 2018 Bitconnect dubiously closed down its operations without giving any credible reasons. Such risks are further explored in Sect. 5, which deals with the external threats of cryptocurrencies. Simple reports are, however, being published to inform potential investors how to mitigate such risks (Burniske and Tatar 2017). The issue is also capturing the attention of academics. A study conducted by Guo and Li, for example, aims to provide investors with more detailed guidance. They observe that some investments in cryptocurrencies are riskier than others and offer a formulae linked to the Power-Law model for predicting a more stable market (Guo and Li 2017). It is anticipated by the author that the availability of such guidance will encourage more people to invest in cryptocurrencies in the hope that they will provide a return on their investment. 2.4  Alternative Method of Fund Raising The use of cryptocurrencies to raise funds is providing new opportunities for start-ups. ICOs allow innovators and entrepreneurs to fund new ideas without having to rely on traditional systems and endorsements of financial institutions. In March 2018, the Merriam-Webster Dictionary added a definition of “Initial Coin Offering” which illustrates the level of popular-

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ity that ICOs have attained. According to the Merriam-Webster’s definition, an ICO is defined as “the first sale of a cryptocurrency to the public for the purpose of raising funds (as to support a start-up)” (Merriam-­ Webster 2018). The number of ICOs launched reached a boom during May 2017. The global revenue generated by ICOs is estimated to have surpassed US$25 billion according to a recent study (Zetzsche et  al. 2018). In terms of global distribution, 20.84% of ICOs originate from the European Union, 15.74% originate from the Asia-Pacific region, 12.2% from North America, 9.9% from other European states and Russia, 5.7% from Pacific and Indian Islands and 3.5% from Africa, the Middle East, Central and South America (Zetzsche et al. 2018). In December 2017, Forbes reported a slowdown in the number of ICOs which was attributed to a more cautious investment regime (Ameen 2017). ICO projects must therefore expend more effort to ensure that targets are met. A change in investment strategy has also been noted as more founders are combining traditional Angel funding with ICOs. It is reported that such a strategy may overcome exposing brand-new start-up teams with the pressure of providing price returns within short, unrealistic timelines (Ameen 2017). The use of ICOs in connection with nefarious activities, such as Ponzi-­ schemes and other fraudulent activities, has also resulted in a slowdown in ICO activity. Despite the maturing of the ICO market towards the end of 2017 the ICO space remains vibrant. Some commentators speculate that the next generation of ICOs will be more transparent and provide better protection for investors. It is also possible that a Decentralized Autonomous Organizations  model could be adopted which would allow investors to participate in the decision making process with regard to the spending of funds. Depending upon the response of regulators it is likely that ICOs will continue to adapt to meet the demands of investors and offer an alternative method of fundraising (Ameen 2017).

3   Weaknesses Weaknesses are identified as internal capabilities which present a competitive disadvantage (Porter 1985). In terms of the weaknesses of ­cryptocurrencies, this section focusses on: (1) their volatility, (2) transaction delays, (3) transaction fee spikes and (4) the problems associated with mining.

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3.1  Volatility Cryptocurrencies are subject to wild fluctuations in value, which is one of their greatest hurdles to becoming an established method of payment or rival to fiat currencies (Kelly 2015; Dwyer 2015; World Bank 2018). As a reference, in July 2010 one unit of bitcoin was worth around US$0.08. By 1 June 2017, bitcoin’s value increased to US$2452 and less than six months later on 16 December 2017 the value of one unit of bitcoin smashed the historic milestone of US$19,781 (Coindesk.com), representing a 707% increase in value. On 6 April 2018, bitcoin was subject to a price correction reaching a low of US$6620.41, representing a 67% decrease in value from the historic high price. By 15 May 2018, its value was climbing back towards the US$10,000 mark only to drop below US$6000 on 24 June 2018. According to the National  American Securities Dealers Automated Quotations exchange (NASDAQ), “volatility” is defined as “[A] a measure of risk based on the standard deviation of the asset return” (NASDAQ 2018). Volatility can be measured in terms of Price Volatility, Stock Volatility, Historical Volatility, Implied Volatility or Market Volatility. Historical Volatility is most relevant to this research and such calculations can quantify the risk associated with price variation of cryptocurrencies over a period of time. A number of resources are available to the general public which provide data related to the volatility of some cryptocurrencies. Bitcoin remains the most sought-after virtual currency and therefore most resources focus purely on the performance of bitcoin. Litecoin and Ethereum are, however, becoming popular and an increasing amount of data is now available to track the volatility of these coins. The Bitcoin Volatility Index provides the historical volatility of bitcoin prices derived by calculating standard deviation of daily returns in US dollars over the past 30 and 60 days (Buy Bitcoin Worldwide 2018). A higher percentage of volatility represents a higher level of risk in price difference. Since 2010, the 30-day volatility of bitcoin has ranged from a low of 0.81% recorded on 10 October 2010 to 16.11% recorded on 13 June 2011. In comparison, the volatility of the Euro ranged between 0.17% and 1.05%; and the Brazilian Real between 0.16% and 2.48%. The volatility of gold ranged between 0.37% and 2.83%. Similar volatility indices also provide data related to Litecoin and Ethereum. The lowest average monthly volatility returns for Litecoin was recorded on 11 April 2016 at 0.77%, and the highest was 22.95% on 16

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December 2013. The range of volatility for Ethereum proves to be lower than the ranges of both bitcoin and Ethereum. The lowest average monthly volatility return for Ethereum against the US dollar was recorded on 24 October 2016 at 1.79% and the highest was recorded on 9 November 2015 at 13.18%. In summary, the data presented above reveals that the historic volatility of Litecoin, Ethereum and bitcoin has a higher range than fiat currencies and gold. The reasons for such high levels of volatility are not fully understood and more research is required in this area. Most commentators suggest that investor sentiment is the prime driver of the high volatility of cryptocurrencies (Bianchi 2018). Volatility has also been connected with “Pump and Dump” manipulation schemes. Such schemes involve persons who have invested in a specific cryptocurrency and consciously inflate the reputation of the cryptocurrency by media or other means to attempt to artificially increase the price. The next step is to wait until the price and reputation reach a maximum before finally unloading their investment and claiming the profit. Dedicated groups, such as “PumpKing Community” with over 14,000 members, have recently been found to have been engaging in Pump and Dump schemes on a mass scale. For example, a recent pump order coincided with significant increases in the price and trading volumes of Magi on the Bittrex exchange (Williams-Grut 2017). Pump and Dump schemes have previously been used to manipulate the traditional financial markets. Most jurisdictions have now put in place regulation to govern market misconduct in traditional markets. However, there are no such regulatory schemes in place to govern market misconduct in the cryptocurrency market. Volatility is a problematic factor that may inhibit the future success of cryptocurrencies either as a commodity or as a token of payment. Investors would expect a commodity to increase in value over time so that they could collect a return on their investment. However, to function as a currency, the token must be sufficiently stable so that businesses can calculate their revenue stream and likewise consumers have confidence in its value. 3.2  Transaction Delays Slow transaction rates are highly likely to inhibit cryptocurrencies from becoming a conventional means of payment if significant advances are not made. There are striking differences between the rate of other electronic

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payment services and cryptocurrency transactions. A recent study demonstrates that Visa has the capacity to carry out 24,000 transactions per second. In comparison, only 7 transactions per second can be processed by bitcoin; 20 per second by Ethereum; 56 per second by Litecoin; and 60 per second by bitcoin cash. The study, however, concludes on a positive note reporting that Ripple was the most efficient cryptocurrency capable of processing 1500 transactions per second which is six times faster than PayPal (Williams 2018). This finding indicates that it is possible to improve the design of cryptocurrencies so that they are capable of processing faster transactions. However, more significant developments need to be made in this area before cryptocurrencies can compete with other electronic payment services. Cryptocurrencies such as bitcoin require approval from the network before each transaction can be settled. In February 2018, some bitcoin transactions experienced exceptionally long delays of 11,453  minutes, which is just under eight days (blockchain.info). A number of reasons have been attributed to increased transactional delays. For example, a significant shift of mining power from bitcoin to other cryptocurrencies occurred in November 2017, which resulted in a reduced mining power availability on the Bitcoin network. The practical effect of reduced mining power is that the hash power is lower so that there is less computational power available to process a transaction and secure the data in a data block. This process must be complete before a transaction can take place. Transaction speed is also affected by the ability of the network to match the demands for transactions  (Rosic 2017). A scalability problem was experienced in the Bitcoin network as a result of a limited maximum number of transactions that the Bitcoin network can process. For example, if the average capacity of the Bitcoin network remains fixed at 288,000 transactions per day and the number of transactions exceeds 300,000 per day the overload in transactions means that not all transactions can be processed that day. Scalability has proven to be a challenge for all cryptocurrencies. A number of research projects are ongoing which propose solutions to the scalability problem (Blockgeeks.com). The founders of a new cryptocurrency, Zilliqa, claim that this new introduction to the market has the potential to perform more transactions than Visa due to its infinite scalability (zilliqa.com). In summary, the slow transaction rate of the current generation of cryptocurrencies has previously proven to be a fundamental design fault. It is highly likely that delayed transactions could deter users from switch-

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ing from fiat currency to cryptocurrency. However, it is worth noting that cryptocurrencies are a relatively new invention and are still in their infancy. In the future, the design of cryptocurrencies needs to be modified so that the transaction output is able to meet the demand of transactions. 3.3  Transaction Fee Spikes Consumers frequently complain about the charges imposed by banks and financial institutions in handling their financial transactions. Key studies reveal that many people face barriers to accessing financial services as a result of high charges and minimum balance requirements (Ellis et  al. 2010). One of the objectives of using cryptocurrency as an alternative to a traditional digital payment is the potential reduction of transaction costs (Nakamoto 2008). Cryptocurrencies have therefore been touted as tools for providing access to the finance system for all (see discussion in Sect. 4 below). However, contrary to the “fairer finance” mission some cryptocurrency users have been subject to exceptionally high transaction fee spikes. Cryptocurrency value can be stored in a digital wallet. Many types of digital wallets allow a party sending a transaction to state the value of a transaction fee they are willing to pay for their transactions. It is possible in some cases for the user to adjust the transaction fee independently by using a “settings” function. Some wallets specify a predetermined value to ensure that all transactions are processed within a given time frame. A number of wallets only operate on the basis of the predetermined payment value for all transactions. Users that do have the option of stating their own transaction fee are subject to a “priority” of payment system. Lower transaction fees are given lower priority and are only processed after other higher fees (of a higher priority) are processed. The reason for this priority treatment is that ­miners are financially motivated to solve the block with the highest transaction fees first. As already mentioned above the number of transactions a blockchain network is able to process per second is limited. An increasing number of users mean that increasing number of transactions must be processed. Therefore, a transaction can only be given priority if it promises the reward of a higher fee than other transactions. Initially, the fees incurred to send bitcoin were near zero and low-­ denomination transactions could be made with ease from person to person. However, as a result of increasing network congestion and the issue

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of scalability (discussed above), transaction fees have soared. In December 2017, the bitcoin transaction fee reached a peak of US$54 (bitinfocharts. com). During this period some businesses, such as Stripe, stopped accepting bitcoin as payment claiming that “[E]empirically, there are fewer and fewer use cases for which accepting or paying with Bitcoin makes sense” (Karlo 2018). Other popular cryptocurrencies have suffered similar transaction fee spikes. In June 2017, the average transaction fees of Monero and Ethereum increased significantly. After February 2018, the median transaction fees of the most popular cryptocurrencies have been corrected. The median transaction fees of the top 20 cryptocurrencies are once again below US$1. The reduction in fees has been brought about by improvements to the specific cryptocurrency network. For example, work was carried out to reduce the Monero “range proof” size, which results in smaller transaction sizes (measured in bytes) and significantly reduces Monero’s transaction fees. The lightening network is also acclaimed to have reduced the transaction fees of bitcoin. Although the problem appears to have been temporarily solved, the limited scalability fault is still present. If demand exceeds output again in the future, it is likely that transaction fee spikes will reoccur. In order for cryptocurrencies to be sustainable as a unit of exchange in the future, the possible recurrence of transaction fee spikes must be eliminated. 3.4  Problems Associated with Mining The majority of cryptocurrencies, although not all, come into circulation as a result of a process known as “mining”. The gradual introduction of new cryptocurrencies through expending Central Processing Unit (CPU) time and electricity is analogous to gold miners expending resources to add more gold into circulation (Nakamoto 2008). To earn units of each specific cryptocurrency the miner is required to perform “work”, which involves verifying payment transactions and solving complex computer-­ assisted mathematical puzzles. In the case of bitcoin, a proof-of-work system is in place to perform irreversible transactions and provide evidence of the completion of the transaction (Nakamoto 2008). Incentives for performing the “work” are rewarded by a unit of bitcoin or via transaction fees (Nakamoto 2008). The maximum amount of bitcoin to be circulated has been predetermined at 21 million units. There are currently 16.523 million units of bitcoin in circulation, which means that 79% of bitcoin have already been

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mined (Bitcoincharts.com). The mining difficulty increases as more bitcoins are mined. The transaction fee incentive is therefore important to ensure that there is sufficient computer power to validate transactions in the future when mining becomes more difficult and costly. Bitcoin’s continued use of proof-of-work system however exhibits a number of underlying weaknesses. It is possible for mining pools to become so powerful that they could command significant mining ratios enabling them to engage in selfish mining. Selfish mining, also known as block withholding, operates when a pool uses their combined power to mine a block but one dishonest miner hides the block from honest miners rather than publishing the discovery of the new block on the network. The selfish miner then proceeds to mine the next block. If the selfish miner finds a new block before the other miners, then broadcasting the two blocks makes the forked chain the longest. The selfish miners will be ahead of the other miners, and can claim all the rewards (Eyal and Sirer 2015). Other attacks such as the Eclipse attack can also cause significant damage by invalidating transactions on the network. The Eclipse attack allows an adversary controlling an adequate number of IP addresses to monopolize all connections to and from a victim bitcoin node. The attacker is then able to exploit the victim by attacking bitcoin’s mining and consensus system, thereby allowing double-spending and selfish mining (Heilman et al. 2015). Mining cryptocurrencies has also received adverse publicity following reports that it involves the vast consumption of energy and is harmful to the environment. An increase in mining difficulty requires larger amounts of electricity to generate valid proof-of-work. Initially, mining was a hobby which could be performed on a desktop personal computer. However, today it is a billion-dollar industry which requires technical equipment. Data presented in a Cambridge Judge Business School study estimates that bitcoin alone currently consumes about 10.41 TWh per year. This means that the level of energy consumption of bitcoin mining is almost equivalent to the yearly energy consumption of Uruguay, which has a population of 3.3 million inhabitants (Hileman and Rauchs 2017). Due to the problems associated with mining there have been a number of commentators advocating that cryptocurrencies should abandon mining. Suggestions include using a proof-of-stake algorithm as an alternative to proof-of-work. Some developments are already beginning to take place in this space. As a result of intensive research that is currently ongoing, it is highly likely that new innovations in the future will correct the weaknesses associated with mining.

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4   Opportunities Opportunities are regarded by Porter as “situations where performance would strengthen position” (Porter 1985). With regard to the opportunities that cryptocurrencies present, this chapter explores (1) the introduction of regulation which promotes cryptocurrency activity, (2) their wide global reach, (3) capacity to promote further financial innovation and (4) their potential to assist the unbanked. 4.1  Positive Regulatory Policy A number of jurisdictions support the continuation of cryptocurrencies recognizing the technological development that they could bring. Japan is widely known to be the global leader in the development of cryptocurrencies and is one of the few countries to have promulgated legislative provisions which encourage cryptocurrency usage. In April 2017, the Deputy Governor of the Bank of Japan announced its support for cryptocurrencies and further stated that Japan would make the “utmost efforts to advance our payment and settlement infrastructures with the changes in the economic environments in order to provide the optimum functions” (Nakaso 2017). Legislative provisions, collectively known as the “Virtual Currency Law”, came into force on 1 April 2017  in Japan to address three main issues: (1) the nature of cryptocurrencies, (2) the operation of cryptocurrency exchanges and (3) the prevention of financial crime via cryptocurrency exchanges. The Japanese Virtual Currency Law comprises revised sections of the Payment Services Act, Order for Enforcement of the Payment Services Act and Guidelines issued by the Financial Services Agency of Japan. It also includes the Amendment Act for the Prevention of Transfer of Criminal Proceeds, which provides that cryptocurrency exchange service providers should follow “know your customer” (KYC) procedures and other relevant procedures for the prevention of financial crime. Another key feature of the Japanese amended Payments Services Act is that it gives effect to cryptocurrencies as a legal payment method in Japan. In section 2(5), of the amended Payments Services Act, the term “Virtual Currency” is defined as “property value”. As such, it relates to value that is recorded on an electronic device or any other object by electronic means. Japanese currency, foreign currencies and currency-denominated assets are explicitly excluded.

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The introduction of legislation to deal with cryptocurrency in Japan has been a positive step allowing the cryptocurrency market to flourish. Japan is currently one of the leading bitcoin markets in the world with regard to trading volumes (tradingview.com). The regulatory framework is also likely to be developed in the future. Scams and other criminal activities still pose a threat to users. For example, the recent hack of Coincheck in March 2018 was larger in scale than the Mt. Gox hack. It was determined by the Financial Services Agency that the Coincheck hack occurred as a result of a weakness in Coincheck’s security system. Therefore, all 260,000 affected users are to be reimbursed their losses in full by Coincheck (Coincheck. com). As an immediate response to the Coincheck hack, a new self-­ regulatory organization was formed by merging the Japan Cryptocurrency Business Association and Japan Blockchain Association (which represents Japan’s 16 FSA-regulated crypto-exchanges). The new organization has the authority to investigate and sanction non-compliant members and, therefore, aims to strengthen the cryptocurrency business by enforcing its own standards. Australia is also a leading jurisdiction in cryptocurrency research and innovation. In 2017, a regulatory sandbox scheme was launched by the Australian Securities and Investments Commission (ASIC). The sandbox provides regulatory exemptions for companies that wish to test certain financial products (asic.gov.au). The long-term goal of ASIC is to build “a more mature sector that can sustain longer term public confidence” (Price 2018). Other jurisdictions such as the United Kingdom and South Africa have since created similar programmes. International monetary organizations have expressed the importance of international collaboration and the development of positive regulatory policies. A recent Staff Discussion Note published in 2016 by the International Monetary Fund recommends that “regulatory responses should be commensurate to the risks without stifling innovation” (He et al. 2016). The Staff Discussion Note also claims that “[m]ore can be done at the international level to develop an effective international framework for the regulation of virtual currencies” (He et al. 2016). An international collaborative approach to regulatory policy would ensure a tighter control on illicit conduct and could bring about a vast improvement in financial services on a global scale. The future success of cryptocurrencies heavily depends upon the reaction of regulators. A regulatory framework which provides for the legal use of cryptocurrencies is highly likely to promote cryptocurrency activity, which would in turn enable their success.

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4.2  Global Reach Cryptocurrency use is widespread and its global dimension is one of the strongest opportunities presented. Unlike fiat currencies, cryptocurrencies are not country-specific. Domestic and international transactions can be completed online from almost anywhere around the world. User-friendly peer-to-peer platforms allow anyone to electronically buy and sell cryptocurrencies online. Bitcoin, for example, can be exchanged online by users in 248 countries via the cryptocurrency exchange localbitcoins.com. San Francisco-based Coinbase is another popular exchange which allows merchants and consumers to transact with a number of digital currencies such as bitcoin, Ethereum, Litecoin and bitcoin cash. According to data presented on Coinmap the number of businesses that accept cryptocurrencies is increasing. In November 2013, the total number of businesses accepting cryptocurrencies was 722. These businesses were mostly concentrated in New York, California and Europe. In May 2018, Coinmap published the location of more than 12,600 businesses across the world that accepts cryptocurrencies. The majority of businesses are located in North America and Europe. However, businesses accepting cryptocurrency are also concentrated in Central America, South America, South East Asia (particularly Japan) and the East Coast of Australia (Coinmap.org). Although cryptocurrency currently has a wide global reach, whether it is accessible or not is largely influenced by the regulatory policy of states. Regulatory policy can either support the use of cryptocurrencies by providing a legislative framework for their operation, or be detrimental if states seek to ban or restrict cryptocurrency activity. The positive and negative regulatory factors are discussed further above as opportunities or below as threats, respectively. 4.3  Financial Innovation The introduction of cryptocurrencies  has  already  had a positive  impact upon the financial sector and has led to the development of new innovative financial products. Some commentators claim that they can provide a faster, safer, more efficient payment system which has driven the development of more traditional electronic payment systems. Blockchain-led initiatives have  also brought vast improvements. In 2018, for example, Santander became the first international bank to provide its customers

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with a blockchain-based application in order to conduct cross-border foreign currency exchange transactions. The initiative was inspired by the blockchain technology underlying bitcoin. The potential benefits of converting to cryptocurrencies have also been acknowledged by influential leaders of international organizations. Christine Lagarde, managing director of the International Monetary Fund, spoke on point recently stating that citizens may in the future hold virtual currencies rather than physical dollars, euros or sterling “[B]because it may one day be easier and safer than obtaining paper bills, especially in remote regions. And because virtual currencies could actually become more stable” (Lagarde 2017). Cryptocurrencies have proven to be an attractive alternative to devalued fiat currency. The 2009 Zimbabwe monetary crisis demonstrates the risks associated with entrusting the issue of currency with a central bank. During 2008, Zimbabwe encountered a daily inflation rate of around 98% meaning that almost every day the value of goods would double. The hyper-inflation was caused by printing money in response to a series of economic shocks. The issue of the 100-trillion-dollar note ($100,000,000,000,000) was the last desperate attempt to contain the economic collapse of Zimbabwe until the currency was effectively abandoned on 12 April 2009. Since 2009, the US dollar and South African rand have been used for most transactions. Zimbabweans also turned to cryptocurrency and the price of bitcoin surged in Zimbabwe towards the end of 2017. According to an article reported in Bloomberg, the bitcoin price in Zimbabwe was almost double the value in international markets in 2017 (Brand et al. 2017). Blockchain is the technology underlying most of the current generation of cryptocurrencies. Not all cryptocurrencies, however, rely on blockchain technology. For example, the novel cryptocurrency Internet of Things Application (IOTA) implements a data structure known as the tangle, a directed acyclic graph (DAG) for storing transactions. The tangle was developed as a successor to the blockchain as the next evolutionary step. IOTA provides a more self-sustaining network which relies on users verifying the transactions of other users (Popov 2018). The new technology is intended to address the problem related to micropayments by providing an alternative to charging fees for transactions of a nominal value. Cryptocurrencies are still in their infancy, yet they are a driving force in financial innovation. It is anticipated that financial innovation will continue to develop at a rapid pace. One of the strongest opportunities

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­ resented by cryptocurrencies is their potential to spur innovation to a p new level in the financial sector. 4.4  The Unbanked Some commentators opine that “The modern financial system is outdated. Transaction fees are just too high” (Pagliery 2014). One of the key opportunities presented by cryptocurrencies is their ability to provide accessible services to the unbanked population across the globe. A study published by the World Bank shows that there is a wide variation in account ownership among individual economies (Demirgüç-Kunt et  al. 2018). In particular, the report finds a high correlation between account ownership and high-income economies. In some developed countries, 94% of the population have a bank account. The share is lower in developing economies with only 63% of the population having their own account. In some developing countries such as Cambodia and Pakistan, the share of adults with a bank account can be as low as 20%. Almost 50% of all unbanked adults reside in China, India, Indonesia, Pakistan, Nigeria, Mexico and Bangladesh. On a global level, the study finds that a total of 1.7 billion adults do not have a bank account, which represents 69% of the adult population. The World Bank study also finds that a high percentage of unbanked adults either own their own smartphone or have access to the internet. Cryptocurrency transactions can be carried out almost anywhere around the world over the internet and could provide opportunities for a high proportion of the 1.7 billion unbanked persons to access the global financial economy. The extent to which the unbanked are currently utilizing cryptocurrencies is not known and more research is required in this area. However, there are a number of positive reports which confirm that many people in Asia have financially benefitted by using services provided by cryptocurrencies (Liu 2018; Eguienta 2017). More recently, however, other financial innovators are beginning to provide stiff competition to cryptocurrencies in this area. A number of start-up companies have recognized that there is a gap in the market with regard to the unbanked and are responding with solutions. Some innovative platforms have been developed which allow the unbanked an opportunity to participate in payments, savings and lending schemes.

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In Asia, a number of start-ups have developed platforms which facilitate fiat currency transactions bypassing banks and traditional financial institutions. Platforms such as TNG Wallet is licensed in Hong Kong as a Stored Value Facility to allow its users to lawfully make global money transfers, foreign exchange transactions and payments (tngwallet.hk). TNG users can add value to their wallet through traditional banking services such as an ATM or credit card. However, a bank account is not necessary since it is possible to add value at convenience stores such as 7-Eleven. The value stored can then be used in numerous ways. TNG Wallet has proved popular among low-income earners, for example foreign domestic workers, who do not have access to a bank account but can now make peer-to-peer payments and transfers to their country of origin at a low cost. Services such as TNG Wallet provide a viable solution for some unbanked persons and may prove to be a legitimate alternative to cryptocurrencies. Dependability of resources is an important factor that could affect access to cryptocurrencies. Cryptocurrency activities rely on a constant supply of electricity and regular access to the internet network. Lack of access to reliable infrastructure is therefore vital. Cryptocurrencies could provide a useful service to the unbanked who own a smart phone and have access to dependable resources. It is not, however, realistic to conclude that cryptocurrency could assist all unbanked persons. In reality, a large number of unbanked persons live in impoverished conditions with unreliable infrastructure. Although, it is possible that improvements to infrastructure in the future could allow to a higher percentage of the unbanked access to financial services via cryptocurrencies.

5   Threats According to Porter, threats are “situations where performance would weaken position” (Porter 1985). The main four threats posed by cryptocurrencies are identified by this research as follows: (1) uncertain or restrictive regulatory policy, (2) connection with nefarious activities, (3) decline in consumer confidence and (4) the emergence of state-issued cryptocurrencies. 5.1  Uncertain or Restrictive Regulatory Policy The most pressing threat to cryptocurrencies is the uncertain or restrictive regulatory policy that currently exists in the majority of jurisdictions.

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Cryptocurrencies are a relatively new phenomenon and have proven to be a huge challenge for regulators. Most regulators are still finding it difficult to identify what risks cryptocurrencies present, and are therefore not in a position to be able to make decisions on how to legislate. A further problem arises when distinguishing the nature of cryptocurrencies. Are they property, a commodity, money or investments? Most regulators, therefore, have not imposed any regulatory framework with regard to cryptocurrency activity. This approach is known as the “wait and see” approach. A lack of regulatory clarity is a concern for investors, and it is noted by some commentators that regulatory uncertainty will prevent cryptocurrencies from becoming a dominant force. The rules and regulations surrounding cryptocurrencies must be clear in order to gain the confidence of the masses (Stratfor 2016). Users fear that they could unwittingly break the law if the boundaries of use are not clearly set out. Alternatively, users recognize that if regulation to restrict or prohibit the use of cryptocurrencies is promulgated, at a later date it is likely that their investment would fall in value or even become worthless. The United States was one of the first jurisdictions to put in place a regulatory framework to manage cryptocurrency activity. In March 2013, the Financial Crimes Enforcement Network (FinCEN) issued guidance to provide that administrators and cryptocurrency exchanges are deemed to be money transmitters which fall under the money services business regulations. Such entities are required to register with FinCEN. They are additionally required to implement an anti-money laundering and counter-terrorist financing programme, maintain certain transaction records and file reports with FinCEN in relation to large cash or suspicious ­transactions. Other jurisdictions are beginning to impose a similar regime to ensure that cryptocurrency exchanges can be monitored and KYC regimes can be put in place. The regulatory sphere is still developing in the Unites States, and government agencies are facing challenges with how to deal with cryptocurrency fraud, market misconduct and other illicit activities. The Securities and Exchange Commission (SEC) recognize the need to protect consumers, yet are exploring ways of not stifling development. In the meantime, users need to ensure that their conduct is compliant with existing legislation. For example, the SEC have issued a warning that Initial Coin Offerings must not infringe securities regulation. Similar warnings have also been issued by the Hong Kong Securities and Futures Commission. However, applying the current securities and futures rules and regulations

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to cryptocurrencies is not a simple task. Cryptocurrencies take many different forms and their characteristics vary tremendously (Zetzsche et al. 2018). It is also important to note that existing securities and futures regulations were drafted with the intention that they would apply to traditional investments, not cryptocurrencies. Other regimes have placed an outright ban on cryptocurrency activity. In April 2017, the Central Bank of Bolivia (BCB) issued an official statement to warn the general public. The use of coins not issued or regulated by countries or zones, as well as the processing of electronic payment orders in currencies and monetary denominations not authorized by the BCB in the field of the national payment system, is prohibited. The statement explicitly provides that so-called cryptocurrencies, which are not issued by states or central banks, do not fulfil all the economic functions of money as a means of payment, unit of account and deposit of value. (Banco Central de Bolivia 2017). The People’s Republic of China (PRC) has issued a series of regulatory measures in the form of Circulars, Notices and Announcements issued by various government authorities to restrict cryptocurrency activity. In 2013, announcements were made to warn the public that cryptocurrencies are classed as “virtual goods” and they should not be circulated and used in the market as currencies (Yin Fa [2013] No. 289). More recently, China’s attention was diverted towards curtailing fundraising through the launch of ICOs. It was estimated that around 2.6 billion yuan (US$394 million) was raised through ICOs from January to June 2017, prompting authorities to take further action. Accordingly, a series of announcements were made to prohibit organizations and ­individuals from engaging in the exchange of legal currency and cryptocurrency/tokens with each other. Further re-enforcement on the prohibition of fundraising related to cryptocurrencies is set out in a Notice by the National Internet Finance Association (NIFA) on 14 September 2017. The NIFA Notice serves to warn the public of the risks of engaging in cryptocurrency trading activities and reminds them that “regulatory authorities have suspended the operation of all trading entities engaged in ICO activities. So there is no legal basis for platforms which engage in the trading of various forms of ‘cryptocurrencies’”. This explicit statement by PRC authorities makes it very clear that cryptocurrency trading is prohibited in the PRC.  Consequently, the major cryptocurrency exchanges have duly issued public notices detailing their formal exit from the market. BTC China, one of the largest bitcoin

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exchange platforms in the PRC, was among the first to announce that it would cease activities by the end of September 2017. Many others, such as VCCoin, ICO365, Huobi and OKCoin, followed suit by suspending trading and removing their websites from the internet. The prohibitive regulatory stance taken by states, such as the PRC and Bolivia, has significantly curtailed cryptocurrency activity within those countries (see data presented on Coinmap). However, reports have confirmed that Chinese investors continue to obtain bitcoin via thriving over-­ the-­counter trading platforms despite the state ban (Redman 2018). Such reports indicate that individual action by states may not be totally effective in eradicating cryptocurrency activity. However, prohibitive legislation is highly likely to deter the majority of law abiding citizens from engaging in cryptocurrency. It is worth noting at this point that the introduction of new laws in the United States brought about the demise of digital currency in the 1990s (Mullan 2016). Restrictive regulatory policies therefore remain a key threat to the future of cryptocurrencies. 5.2  Association with Nefarious Activities Another key threat to cryptocurrencies is their association with crime and other illicit activities. Cryptocurrencies could be misused in a variety of ways. For example, users could be duped by fraudsters, wallets could be hacked and the unscrupulous could use cryptocurrency to launder money, evade taxes and make illegal purchases  (European Banking Authority 2014). The association of cryptocurrencies with nefarious activities has become quite widespread, and there are too many past cases to discuss in them in detail in this chapter. The aim of the discussion below is to highlight the notoriety that cryptocurrencies have gained following some of the most prominent cases. In 2011, the online black market known as “Silk Road” was founded by Ross Ulbricht (operating under the pseudonym of “Dread Pirate Roberts”). Ross Ulbricht was eventually prosecuted by the Federal Bureau of Investigation (FBI) for selling illegal drugs and other illicit goods and services. In an attempt to protect the anonymity of all Silk Road transactions, the only form of accepted payment was bitcoin. The FBI estimates that over 9.5 million bitcoins were used to purchase illicit goods from the Silk Road website (USA v. Ross William Ulbricht). The Silk Road case received a high level of media coverage, which subsequently tarnished the reputation of bitcoin.

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Cryptocurrencies have also been subject to numerous attacks from fraudsters, which demonstrate their vulnerability. In February 2015, a Hong Kong bitcoin exchange known as “MyCoin” abruptly ceased activity, and approximately HK$3 billion in investor funds were declared “missing”. Reports claim that MyCoin presented itself as a bitcoin exchange, however, its activities were not consistent with such. Some investors reported that they were promised cash prizes or Mercedes-Benz cars if they recruited new “investors”. Despite cases such as the MyCoin incident, the Hong Kong authorities continue to maintain the view that virtual currencies do not pose a threat to the general public. Cryptocurrency use is reported to be low in volume in Hong Kong, therefore, the Securities and Futures  Commission (SFC) regards the risk of related crime to be low. It is not yet known whether the authorities in Hong Kong will adopt a different course of action in the future. In 2015, Mark Karpalès was charged with fraud and embezzlement of US$390 million from Mt. Gox, a Japan-based bitcoin currency exchange. In response to the Mt. Gox case, Japanese authorities have sought to protect consumers from any future fraudulent activities by introducing specific legislative protections within the Japanese Payments Act. However, despite the introduction of the new legislative measures a Japanese exchange known as Coincheck was hacked on 26 January 2018. In the Coincheck case, hackers made away with more than US$530 million, representing the most serious crypto-exchange hacking incident to date. Illicit money laundering schemes such as Liberty Reserve and Western Express International have also been exposed. It is likely that there are many other underground schemes in existence that have not yet been uncovered. The full extent to which cryptocurrencies have been misused for criminal activity is not known. Such incidents serve as a caution to investors, and provide justification for the regulation of crypto-activities. However, more data and research is needed in this area so that policymakers and regulators are better informed. 5.3  Decline in User Confidence The continued success of cryptocurrency depends largely on users’ perceptions of its current and future utility. The current level of optimism in cryptocurrency appears to be high. Cryptocurrency is, however, a new innovation and some commentators fear that it is nothing more than a passing craze.

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If users’ levels of optimism decline, it is plausible that they are unlikely to continue to use cryptocurrency, which would ultimately lead to a downturn. Cryptocurrencies have received a great deal of negative criticism and have been deemed to be worthless by a number of influential players in the financial world. The Godfather of investments, Warren Buffet, referred to bitcoin as a “mirage” in a CNBC interview in 2014. Janet Yellen has asserted that bitcoin is a “highly speculative asset” which is “not a stable source of value”. In 2017, Jamie Dimon, CEO of JPMorgan Chase, made a public statement claiming that bitcoin was a “fraud”. However, in January 2018 he retracted this statement and said that he regretted calling bitcoin a fraud, but still had no interest in cryptocurrency. One of the largest concerns for some commentators is that cryptocurrency does not have extrinsic value or external backing. The Governor of the Bank of England, Mark Carney, has opined that their value rests on nothing more than beliefs regarding their future supply and demand (Carney 2018). The current cryptocurrency movement is being compared to other speculative bubbles, which have failed in the past. For example, the Dutch tulip bulb market bubble occurred in the 1600s when speculation drove up the price of tulip bulbs to unsustainable values (Garber 1989). Nobel laureate winner, Robert Shiller, is one of the key authorities on economic bubbles. The latest edition of his award-winning treatise, Irrational Exuberance, also asserts that the current success of bitcoin relies on pure speculation (Shiller 2015). Other prominent economists such as Joseph Stiglitz have also challenged the utility of privately issued cryptocurrencies. In a Bloomberg video-broadcasted interview, Joseph Stiglitz claimed that cryptocurrencies “ought to be outlawed” because they “do not serve any socially useful function” (Bloomberg 2017). Cryptocurrencies have also been denounced as Ponzi-schemes. Bitconnect was launched as an open-source cryptocurrency in February 2016. In addition to providing the Bitconnect Coin, Bitconnect operated as an exchange platform and lending scheme (bitconnect.co). A multi-­level referral system was also a key feature of Bitconnect which encouraged users to promote Bitconnect among their contacts with the hope of increasing new recruits on their referral. Such a referral scheme has the classic features of a Ponzi-scheme. On 17 January 2017, Bitconnect made an announcement on its website that its lending activity was to cease immediately and trading activity would be wound up over the next five days. The Bitconnect

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Coin is still operating. However, its value has dropped significantly from US$300 to below US$0.61 (CoinMarketCap.com). The sudden closure of Bitconnect, and connections with nefarious activities, has raised the public awareness of the risks associated with cryptocurrency. An increase in the occurrence of similar scams would further tarnish the reputation of cryptocurrencies which would be likely to decrease the confidence of users. 5.4  State-Issued Cryptocurrencies Recently, some states have developed their own state-backed cryptocurrencies. This section explores whether the development of state-issued cryptocurrency could pose a threat to privately issued cryptocurrencies by undermining their existence. A Venezuelan state-issued cryptocurrency, known as the Petro, was the first state-backed cryptocurrency to be launched in 2018. One Petro is purported to be backed by one barrel of Venezuelan crude oil and is reported to have raised US$735 million in the first-day pre-sale. The Petro Whitepaper, issued on 15 March 2018, promises financial independence for Venezuela (Petro Papel Blanco 2018). However, it is suggested by commentators that the Petro will be used as a means of circumventing trading sanctions. Despite the arrival of the Petro, bitcoin is still mined and adopted as a medium of exchange in Venezuela as an alternative to the devalued national currency. There are no signs that Venezuela intends to impose a ban on bitcoin at the moment. The Petro appears to have inspired other countries such as Russia, Turkey and Iran to develop their own state-­ backed cryptocurrencies. The government of Dubai, an Emirate in the United Arab Emirates, has also created its own currency known as “EmCash”. It is anticipated that EmCash will be tied to a complementary wallet to allow contactless payment. Citizens of Dubai will be able to pay for a multitude of government and non-government services in Dubai by using the blockchain-­ based cryptocurrency. Despite the imminent launch of EmCash, private decentralized cryptocurrency activity is tolerated in the United Arab Emirates and mining is not regulated activity. Sweden is also in the process of exploring whether its national currency, the krona, could be issued in an electronic form (the e-krona). The e-krona project, which was initiated in March 2017, is still in the developmental phase. A decision has not been made on “what technical solution would

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be used” and what the role of the central bank would be (www.riskbank. se). The initial plan outlines that the e-krona is not intended to replace cash. It is currently proposed that it would function as a compliment to the existing fiat currency. Riksbank has determined that the introduction of e-kronas is not compatible with current legislation on monetary policy. It is also clearly stated in the project briefing that the relevant legislation will require amendment. The question of whether or not the e-krona would become legal tender is still to be decided by the legislators. An interim report is expected in October 2018, and the final results of the project are to be published in 2019 (Riksbank 2017). A number of governments, including Canada, the United Kingdom and the PRC, have also expressed an interest in developing their own state-issued cryptocurrency, but no firm plans have been revealed. Some commentators believe that state-issued currencies would bring about the demise of privately issued currencies. Kenneth Rogoff, a professor of economics and public policy at Harvard University, makes the following observations: “it is hard to see what would stop central banks from creating their own digital currencies and using regulation to tilt the playing field until they win. The long history of currency tells us that what the private sector innovates, the state eventually regulates and appropriates” (Rogoff 2017). The current situation in Venezuela and the United Arab Emirates shows that state-issued cryptocurrencies and private cryptocurrencies can operate side by side. However, such initial observations should be treated with caution. State-backed cryptocurrencies have only started to emerge this year. It is perhaps too early to be able to ascertain whether they do pose a serious threat to the future of privately issued cryptocurrencies. Given the current level of interest demonstrated by the various central banks, it is, however, highly likely that state-issued cryptocurrencies will play a huge role in the future of finance.

6   Conclusion This discussion has focussed on whether cryptocurrencies could challenge traditional financial institutions in the future. A SWOT analysis was carried out to identify the internal strengths and weaknesses against the external opportunities and threats of cryptocurrencies. On the basis of the analysis above, this chapter reaches the conclusion that cryptocurrencies will cause

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disruptions to the future of money and are likely to become a permanent new institution. The advantages that are presented by cryptocurrencies outweigh the disadvantages. Peer-to-peer payment is a highly sought-after feature by consumers which makes cryptocurrencies a desirable financial service. The opportunity to engage in alternative investment and fundraising is also an appealing feature that cryptocurrencies can provide over traditional financial institutions. One of the major internal weaknesses identified in this research is that the price and exchange rates of cryptocurrencies to traditional fiat currencies are exceptionally volatile. Yet, investors do not appear to be deterred by price fluctuations. Despite their volatility, cryptocurrencies are still increasing in popularity. However, it is expected that this trend will not continue in the long term. The problems associated with mining are also considered to be a significant weakness. The escalating energy outputs associated with mining have become a controversial topic. There is a great deal of pressure on all persons and corporates to reduce carbon footprints and reduce global warming. Cryptocurrency activity should also be required to conform with the rules and norms placed on all other corporate activity. The external opportunities and threats pose a number of critical factors that will affect the future of cryptocurrencies. Regulatory policy is identified in this chapter as both an opportunity and a threat. On the one hand, states such as Japan have supported the development of cryptocurrencies by implementing a positive regulatory framework to facilitate their use. On the other hand, some states have issued outright bans prohibiting cryptocurrency activity. Whether such bans will remain in place remains to be seen. The use of cryptocurrencies to conduct criminal activity poses a huge threat. It is highly likely, therefore, that some form of regulation will be put in place in most states to prevent cryptocurrency related crimes, frauds and scams. The question of whether cryptocurrencies will remain privately issued is difficult to predict. Given the unclear regulatory environment and lack of directional policy from states, it is too early to conclude precisely what form cryptocurrencies will take in the future. At the time of publication, most jurisdictions appear to be tolerating the existence of cryptocurrencies as a result of their own self-interest in promoting further innovation. Based on the past conduct of states, however, it is evident that most countries have not been willing to tolerate challenges to economic control. As

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an example, innovations such as digital currency in the 1990s were swiftly curtailed by legislative measures in the United States. Regulatory policy is, therefore, one of the most important external factors, and is likely to be the key determinant to the future of cryptocurrencies. Cryptocurrencies are a promising innovation. However, they are neither fully understood nor fully matured. There is no doubt given the vast pace of innovation and increasing levels of research that the cryptocurrencies of the future will be far more advanced than the current generation. For example, the new technology tangle claims to be a more sophisticated innovation than blockchain and could solve some of the weaknesses posed by the current cryptocurrency generation such as scalability and the problems associated with mining. This research supports the argument that cryptocurrencies will become a permanent new financial institution. However, it is likely that they will be far more advanced than the current generation and will be heavily governed by regulation. It is also highly likely that states will issue their own state-backed cryptocurrencies in future. However, it is uncertain at this point whether they will operate alongside privately issued cryptocurrencies or replace them entirely. Although the future of crypto-activity is not yet clear, cryptocurrencies are here to stay and if the appropriate safeguards are put in place they could provide more efficient and cost-effective financial services for all.

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Bloomberg. (2017), “Bitcoin ‘Ought to Be Outlawed’, Nobel Prize Winner Stiglitz says”, Bloomberg, available online at https://www.bloomberg.com/ news/articles/2017-11-29/bitcoin-ought-to-be-outlawed-nobel-prize-winner-stiglitz-says-jal10hxd Bloomberg, Jason. (2018), “We Need to Shut Bitcoin And All Other Cryptocurrencies Down. Here’s Why.” Forbes, 10 March 2018 available online at http://forbes.com Brand, Robert. Latham, Brian. Marawanyika, Godfrey. (2017), “Zimbabwe Doesn’t Have Its Own Currency and Bitcoin Is Surging”, Bloomberg. Burniske, Chris. Tatar, Jack. (2017), Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond, New York: McGraw-Hill. Burniske, Chris. White, Adam. (2017), “Ringing the Bell for a New Asset Class” ARK Invest and Coinbase. Carney, Mark. (2018), “The Future of Money” Speech given to the inaugural Scottish Economics Conference. available online at https://bankofengland.co. uk/speeches Clark, Jeff. (2013), “Bitcoin: Decentralized Virtual Currency”, Data Center Journal, 5 March 2013. Available online at http://www.datacenterjournal. com/bitcoin-decentralized-virtual-currency/ Crosby, Michael et al. (2016), “Blockchain Technology: Beyond Bitcoin”, Applied Innovation Review, Issue No. 2. Demirgüç-Kunt, Asli. Klapper, Leora. Singer, Dorothe. Ansar, Saniya. Hess, Jake. (2018), “The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution”, Washington, DC: World Bank. https://doi. org/10.1596/978-1-4648-1259-0. License: Creative Commons Attribution CC BY 3.0 IGO. Draper, Tim. (2018), reported by Rachel Wolfson, “Tim Draper on the Future of Cryptocurrency” Forbes Magazine, 2 May 2018 available online at https:// www.forbes.com/sites/rachelwolfson/2018/05/02/tim-draper-on-thefuture-of-cryptocurrency-his-new-book-and-why-bitcoin-will-hit-250000-by2022/#3c1268402d71 DeVries, P. (2016), “An Analysis of Cryptocurrency, Bitcoin and the Future” International Journal of Business Management and Commerce, Vol. 1(2): 1–9. Dwyer, Gerald P. (2015), “The economics of Bitcoin and similar private digital currencies” Journal of Financial Stability 17: 81–91. Eguienta, Claude. (2017), “Telecom cryptocurrency offers Asian investors and opportunity to diversify their portfolios.” Straits Times, 18 December 2017. Ellis, Karen. Lemma, Alberto. Rud, Juan-Pablo. (2010), “Investigating the impact of access to financial services on household investment” Overseas Development Institute, London. European Banking Authority. (2014), “EBA Opinion on ‘Virtual Currencies’” EBA/Op/2014/08.

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Eyal, Ittay. Sirer, Emin Gün. (2015), “Majority is not Enough: Bitcoin Mining is Vulnerable”, Department of Computer Science, Cornell University available online at https://www.cs.cornell.edu/~ie53/publications/btcProcFC.pdf Finanical Action Task Force. (2018), “Virtual Currencies: Key Definitions and Potential AML/CFT Risks” FATF/OECD. Frisby, Dominic. (2014), Bitcoin: The Future of Money? Unbound. Gallup. (2017), “Confidence in Institutions” available online at http://news.gallup.com/poll/1597/confidence-institutions.aspx Garber, Peter M. (1989), “Tulipmania” The Journal of Political Economy, Vol. 97(3): 535–560. Ghazinoory, Sepehr. Abdi, Mansoureh. Azadegan-Mehr, Mandana. (2011), “SWOT Methodology: A State-Of-The-Art Review For The Past, A Framework For The Future” Journal of Business Economics Management, Vol. 12(1): 24–48. Greene, Edward F. Mcllwain, Knox L. Scott, Jennifer T. (2010), “A closer look at ‘too big to fail’: national and international approaches to addressing the risks of large, interconnected financial institutions” Capital Markets Law Journal, Vol. 5, No. 2. Guo, L. Li, X J. (2017), “Risk Analysis of Cryptocurrency as an Alternative Asset Class” in Applied Quantitative Finance, 309–329. He, Dong. Habermeier, Karl. Leckow, Ross. Haksar, Vikram. Yasmina, Almeida. Kashima, Mikari. Kyriakos-Saad, Nadim. Oura, Hiroko. Sedik, Tahsin Saadi. Stetsenko, Natalia. Verdugo-Yepes, Concepcion. (2016), “Virtual Currencies and Beyond: Initial Considerations.” IMF Staff Discussion Note SDN/16/03, International Monetary Fund, Washington, DC. https://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf Heilman, Ethan. Kendler, Alison. Zohar, Aviv. Goldberg, Sharon. (2015), “Eclipse Attacks on Bitcoin’s Peer-to-Peer Network”, USENIX, available online at https://www.usenix.org/node/19089 Helms, Marilyn M. Nixon, Judy. (2010), “Exploring SWOT analysis – where are we now? A review of academic research from the last decade” Journal of Strategy and Management, Vol. 3(3): 215–251. Hileman, Garrick. Rauchs, Michel. (2017), “Global Cryptocurrency Benchmarking Study”, Cambridge Centre for Alternative Finance, available online at SSRN: https://ssrn.com/abstract=3040224 Hong Kong Monetary Authority. (2015), “The HKMA reminds the public to be aware of the risks associated with Bitcoin”, HKMA, available online at http:// www.hkma.gov.hk/eng/key-information/press-releases/2015/20150211-3. shtml Ito, Joichi. Narula, Neha. Ali, Robleh. (2017), “The Blockchain Will Do to the Financial System What the Internet Did to Media”, Harvard Business Review. Karlo, Tom. (2018), “Ending Bitcoin support”, Stripe, available online at https:// stripe.com/blog/ending-bitcoin-support.

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Kelly, Brian. (2015), The Bitcoin Big Bank: How Alternative Currencies Are About to Change the World, Wiley. Lagarde, Christine. (2017), “Central Banking and Fintech – A brave new world?” Bank of England Conference, London (29 September 2017). Available online at http://www.imf.org/en/News/Articles/2017/09/28/sp092917-centralbanking-and-fintech-a-brave-new-world; last viewed on 31 January 2018. Lansiti, Marco. Lakhani, Karim R. (2017), “The Truth about Blockchain”, Harvard Business Review. Liu, Coco. (2018 June 4), “How Bitcoin and Cryptocurrencies went from Wall Street to the High Street”, South China Morning Post. Merriam-Webster. (2018), Merriam-Webster dictionary online available at https:// www.merriam-webster.com/dictionary/initial%20coin%20offering Mullan, P. Carl. (2016), A History of Digital Currency in the United States: New Technology in an Unregulated Market, Palgrave Macmillan: New York. Nakamoto, Satoshi. (2008), “Bitcoin: A Peer-to-Peer Electronic Cash System”, first published online at http://www.mail-archive.com/[email protected]/msg09959.html now available at http://www.bitcoin.org/ bitcoin.pdf Nakaso, Hiroshi. (2017), “Future of Central Bank Payment and Settlement Systems: Under Economic Globalization and Technological Innovation”, Remarks at the Forum Towards Making Effective Use of the BOJ-NET. Pagliery, Jose. (2014), Bitcoin and the Future of Money, Triumph Books. Panagiotou, G. (2003), Bringing SWOT into focus, Business Strategy Review 14(2): 8–10. Petro Papel Blanco. (2018), “Propuesta Financiera y Technológica”, available online at http://www.elpetro.gob.ve/pdf/esp/Whitepaper_Petro_es.pdf Poll, Harris. (2017), Blockchain Capital, available online at https://www.survey. blockchain.capital/ Popov, Serguei. (2018), “The Tangle” Version 1.4.3, available online at https:// assets.ctfassets.net Popper, Nathaniel. (2015), Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money, HarperCollins. Porter, M. (1985), Competitive Strategy, New York: Free Press. Price, John. (2018), “ASIC update: Initial coin offerings and cryptocurrency” presented at Tyro FinTech Hub – Events Space, Sydney, Australia. Redman, Jamie. (2018), “Chinese Investors Continue to Obtain Bitcoin Using Thriving OTC Platforms”, Bitcoin.com, available online at https://news.bitcoin.com/chinese-investors-continue-to-obtain-bitcoin-using-thriving-otcplatforms/ Riksbank. (2017), “The Riksbank’s e-krona project: Action plan for 2018”. Rogoff, Kenneth. (2017), “Bitcoin’s price bubble will burst under government pressure”, The Guardian.

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Online Resources Australian Securities and Investments Commission – https://asic.gov.au Bitcoin.org – https://bitcoin.org BitcoinWisdom.com – https://bitcoinwisdom.com/bitcoin/difficulty Blockchain.info – https://blockchain.info Blockgeeks.com – https://blockgeeks.com Buy Bitcoin Worldwide  – https://www.buybitcoinworldwide.com/volatilityindex Charts.bitcoin – https://charts.bitcoin.com

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Coindesk – https://coindesk.com Coinmap – https://coinmap.org CoinMarketCap – https://coinmarketcap.com P2P Foundation  – http://p2pfoundation.ning.com/forum/topics/bitcoinopen-source NASDAQ – https://nasdaq.com TNG Wallet – https://tngwallet.hk TradingView – https://tradingview.com/symbols/BTCUSD

CHAPTER 17

The Role of Bitcoin in the Monetary System: Its Development and the Possible Future Aries Kin Ming Wong

1   Introduction Bitcoin has received increasing attention since its introduction in 2009 by Satoshi Nakamoto. Market capitalization of Bitcoin is now over US$100 billion, with a price of US$6000 and daily trading volume of US$3 billion (see https://www.blockchain.com/). This trading volume is still far from the US$1.7 trillion turnover in the foreign exchange market, but there is no reason to ignore the Bitcoin market in view of its nearly ten times annual growth. Bitcoin is not only traded in more than hundreds of exchanges around the world but also able to be hedged or speculated with its futures in Chicago Mercantile Exchange. Table  17.1 portrays the growth of Bitcoin. The success of Bitcoin brings in other cryptocurrency to the market. There are now nearly 1000 cryptocurrencies in the market. Bitcoin, followed by Ethereum, Ripple, EOS and Litecoin, is the major cryptocurrency in terms of market capitalization. Bitcoin as the pioneer in cryptocurrency enjoys a prominent network effect and is accounted for A. K. M. Wong (*) Department of Economics, Hong Kong Baptist University, Kowloon, Hong Kong e-mail: [email protected] © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4_17

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Table 17.1 Statistics of Bitcoin: market price and capitalization 2015 and 2018

In US$

2015

2018 (up to June)

Bitcoin minted Transactions number Transaction volume Market price Market capitalization

14 million 125,380 $62 million $272 $4 billion

17 million 207,381 1265 million $9211 $117 billion

Source: https://www.blockchain.com/ and author’s compilation Note: Figures are the averages except for Bitcoin minted

over 40% of the market share. Indeed, the main technological progress in other cryptocurrencies remains on the distributed ledger technology known as blockchain invented by Bitcoin even though consensus or other mechanisms may vary in some ways. Unlike other technological breakthroughs in computing, internet and artificial intelligence, which are going to directly influence the industrial organization and market competition, cryptocurrency can change economy through a substantial revamp in the monetary system. The purpose of this chapter is to shed light on the current development of Bitcoin as a medium of exchange and its possible future role in the monetary system. Section 2 will highlight the key mechanisms in keeping Bitcoin free from central authority. To understand the current functions of Bitcoin, an examination of its users, usage and value will be provided in Sect. 3. The possible revamp in the monetary system by Bitcoin will be discussed in Sect. 4. Section 5 is the concluding remarks.

2   Bitcoin Is More than Digital Currency Money has been used without physical form for a long time. The beginning of digitalization of money was dated back to 1860 when Western Union introduced electronic fund transfer. From the introduction of Mondex and other debit cards in the 1990s to Apple Pay, Alipay and WeChat Pay today, cashless transactions become a norm. Bitcoin and other cryptocurrencies, however, are far different from digital or electronic money. Electronic fund transfer, debit cards and digital wallets are best defined as electronic payment methods of money. A medium of exchange remains fiat money supplied by central banks. Distributed ledger technology makes cryptocurrency different from other money-based electronic payment methods. This feature, however, comes with challenges. Counterfeit is always a great concern for the

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s­tability of monetary system. As long as the face value of a currency is higher than its intrinsic value, it creates an opportunity for people to gain profits by counterfeiting. Counterfeit, in turn, will drive the value of the currency down to zero. Advances in anti-counterfeiting technology not only solves the big problem of small change1 but also becomes a necessary condition for modern fiat money system. Digital counterfeiting takes another form. Electronic money is merely a record of numbers (or technically speaking, strings of bits). This creates incentives for counterfeiters to manipulate the record in order to re-use the money which they have already spent. It is called double-spending. It can be addressed easily if a trusted third party manages a centralized ledger. The third party is responsible for ensuring the accuracy of users’ accounts and no single digitalized dollar is double spent. Double-spending in decentralized cryptocurrency system is a great challenge. For cryptocurrencies such as Bitcoin, users’ accounts are maintained in a distributed ledger without central authority for updating or maintaining the ledger. Instead, the ledger of Bitcoin is updated by the users in the distributed network. There is an obvious incentive for a payer to manipulate its account to spend Bitcoin more than once. The main tool of Bitcoin to overcome such risk is to induce competition for the right to update record in the distributed ledger. The right to update record is assigned to the winner of mining. In Bitcoin mining, participants of the Bitcoin network (miners) compete to solve mathematical puzzles. The first miner who solves mathematical puzzle updates the record and this record will be broadcasted to the rest of the network. Since the amount of Bitcoin kept in a user account can be verified by all past transaction history contained in the blockchain, a manipulation of account record requires an alternative history of transactions in the blockchain consistent with such manipulation. This, in turn, can only be done by a repeated winner of the costly mining process. Blockchain mechanism, together with the confirmation lag, makes double-spending very costly. Chiu and Koeppl (2017) provide a detailed discussion of blockchain mechanism.

3   Bitcoin Is Not Yet a Commonly Used Medium of Exchange To date, more than 190,000 transactions are made in Bitcoin, but most of them are not related to the purchase of product or service. Yermack (2015) estimates that only about 15,000 Bitcoin transactions involve in the

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­ urchase of a product or service each day, compared to billions of transacp tions in the real world. The market presence of Bitcoin as a medium of exchange is therefore extremely negligible. 3.1  Users and Usages of Bitcoin Microanalysis of Bitcoin’s public ledger on the types of users and usages of Bitcoin should shed more light on the existing role of Bitcoin. Even though transactions of Bitcoin are anonymous by design, all transactions including senders and receivers of Bitcoin wallet addresses are stored in the Bitcoin’s public ledger. User analysis is performed by various techniques in consolidating multiple wallets of individual users (Baur et  al. 2018; Athey et al. 2016). Baur et al. (2018) and Athey et al. (2016) show highly consistent findings. The share of total Bitcoin balance held as a medium of exchange is small and static, if not declining. In Baur et al. (2018), the share of currency users who hold smaller balances of Bitcoin and conduct more transactions in smaller amount declined from 5.1% to 2.25% between 2011 and 2013. Athey et al. (2016) further update that the share of users holding Bitcoin for frequent transactions was not growing up to 2015. Instead, there are clear evidences that Bitcoin is accumulated in recent years. Baur et  al. (2018) find that the share of passive investors who accumulated Bitcoin without making many transactions increased to nearly 30% of the total Bitcoin balance in 2013. In Athey et al. (2016), active usage did not grow quickly, and that investors and infrequent users held the majority of Bitcoins. Another piece of evidence on the accumulation of Bitcoin comes from the increasing “staleness”, which is the length of time each Bitcoin spends in the wallet as defined by Athey et al. (2016). If Bitcoin is increasingly used as a medium of exchange and is being used more and more frequently for transaction, staleness should be short and decreasing. Nevertheless, Athey et al. (2016) report that the average staleness of all user types from miners, investor to long-term infrequent users is growing steadily over time. Microanalysis results suggest that Bitcoin is unlikely held as a medium of exchange. Furthermore, the majority of Bitcoin transactions is said to be used for illicit activity. Since Bitcoin does not reveal user identity from wallet address, anonymity is a desirable feature for illicit activity. Indeed, it is well known that Bitcoin facilitates the transactions for illegal goods and services in darknet markets such as Silk Road by providing a reliable and

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anonymous method of payment. Foley et al. (2018) estimate that about one-quarter of Bitcoin users and one-half of Bitcoin transactions are actually associated with illicit activity. The large share of transactions using mixing services is also consistent with alleged illicit activity (Athey et al. 2016). Simply put, mixing services combine funds from a variety of wallet addresses and then redistribute funds to a set of new addresses to further mask the user identity in a transaction. Users who transact for illicit activity are therefore more likely to use mixed services. For example, it is found that contraband buyers are more likely to use mixed services than general users (19% vs. 12% of all buyers) (Athey et al. 2016). Using google trend data, Yelowitz and Wilson (2015) also find that the interest in illicit activity is statistically significant positively associated with the interest in Bitcoin. In some other cases, Bitcoin can provide a new channel for payment to get around government regulation. It is not surprising to see America has significantly more entities holding Bitcoin (Athey et al. 2016) since it is one of the regions which first accepted Bitcoin. The case of Asia is more interesting. Similar to America, there are also significantly more entities holding Bitcoin in Asia than Europe and Eastern Latin America. Meanwhile, the usage of Bitcoin in Asia increased significantly relative to the usage in America as of late 2013, and users in Asia actually held a greater balance of Bitcoins by 2015 as well. Such observations for Asia should have much to do with China. Indeed, Shanghai-based BTCChina was once the largest Bitcoin exchange in the world. Ju et al. (2016) argue that the mass adoption of Bitcoin in China can actually be a result of capital flight. Capital account flows remain strictly regulated by the Chinese government although capital flight using various means is well documented. Converting Chinese renminbi (RMB) to the US dollar (USD) via Bitcoin can be one way of capital flight. Instead of converting RMB to USD directly in the regulated open market, people may buy Bitcoin in RMB at Chinese Bitcoin exchange and then sell Bitcoin at a US Bitcoin exchange to serve the same purpose. Ju et  al. (2016) suggest that the exceptional strong demand for Bitcoin in China and the corresponding discount in the exchange rate implied by the Bitcoin channel represent a need of alternative channel for capital outflows. In this case, the long existing discount should be viewed as a compensation of legal risk involved. Moreover, the daily turnover in Bitcoin exchanges in China and the United States was highly correlated at 0.96 (Ju et al. 2016). This implies that the turnover in these two exchanges can be simultaneously driven by a common factor such as the transactions for capital flight. Ju et al. (2016)

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further show that such discount and high correlation disappeared after the People’s Bank of China, the central bank of China, tightened the regulation on Bitcoin transaction to avoid the use of Bitcoin for capital flight. The limited usage of Bitcoin may or may not relate to its desirable properties as a medium of exchange. There is a precedent in history. Currently, the US Dollar is well known as the most prominent international currency and solely accounts for over 40% of cross-border payments. Back to the nineteenth century, British Pound dominated international trade and was estimated to be invoiced for 60–90% of the world’s trade. The US economy surpassed the British economy in size in the late nineteenth century. In the early twentieth century, the United States overtook the United Kingdom in export. The heavy borrowing of the British government from the United States for the World War I also turned the United States from net debtor to net creditor. These economic indicators therefore suggest that the US Dollar should be a more desirable international currency than British Pound as early as the 1920s. Nevertheless, the level of foreign-owned liquid sterling assets, as one of the measures for its status as international currency, was still double the level of foreign-owned liquid dollar assets in 1940. The US Dollar took decades to gradually emerge as a world currency afterward. Based on historical experience, a number of studies such as Chinn and Frankel (2007) and Flandreau and Jobst (2009) confirm the sizable network effect for currency adoption. The strong network effect of money actually hints that it can be a long way for Bitcoin to become a major medium of exchange even it has more desirable properties than traditional fiat money. 3.2  Value of Bitcoin Figure 17.1 presents the trend of market price of Bitcoin since its introduction. The market price of Bitcoin is certainly volatile, but it is also obviously in an upward trend. Back to 2017, people were debating whether Bitcoin should be worth more than a US$1000. In less than one year, the price of Bitcoin stood at around US$6000. Should Bitcoin value so much? Where does the value of Bitcoin come from? 3.2.1 Convenience Yield Bitcoin is suggested to be valueless by some comments in view of its zero intrinsic value. This argument is obviously wrong. It has long been known that money is demanded to avoid the need of costly double coincidence of

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Market Price (USD) 22,500 20,000 17,500

USD

15,000 12,500 10,000 7,500 5,000 2,500

2009

2010

2011

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2018

Fig. 17.1  Market price of Bitcoin Source: https://www.blockchain.com/

wants in transactions. Search-theoretic models of money provide formal theoretical foundation that money, even without intrinsic value, can have a positive value by reducing search friction in transactions (Kiyotaki and Wright 1993; Trejos and Wright 1995; Lagos and Wright 2005). Cochrane refers the value of Bitcoin for such function to as “convenience yield”.2 Does the value of Bitcoin, at least partly, come from convenience yield? Needless to say, Bitcoin should be valuable at least for its convenience in making illicit transactions. To answer this question more completely, we need to first provide a relationship between the value of Bitcoin and its role as a medium of exchange. Following Athey et al. (2016), the value of Bitcoin in terms of its exchange rate against the US Dollar is determined as follows:



Exchange rate =

Transaction Volume Velocity Supply of Bitcoin

This identity simply replicates the quantity equation for money by Fisher and has the same economic intuition that the price of a medium of exchange (i.e. Bitcoin) should be a ratio of transactional demand and effective supply. It should be noted that transactions in the real world are

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mostly priced in US Dollar and therefore the transaction volume in the equation should be exogenous to the exchange rate. Clearly, an increase in transaction volume (excluding those from Bitcoin exchanges) should lead to a higher value of Bitcoin while an increase of supply has the opposite effect, given that velocity unchanged. Indeed, Athey et al. (2016) find a fairly stable velocity for Bitcoin. Prices predicted by a constant velocity, in turn, roughly tracked the actual price of Bitcoin from 2011 to 2015. Ciaian et al. (2016) report similar findings from regression analysis. They find that there is a statistically significant positive (negative) relationship between transaction volume (supply of Bitcoin) and the price of Bitcoin. These findings support that fundamentals related to Bitcoin’s role as a medium of exchange or the convenience yield should partly contribute to its current value. 3.2.2 Value as an Investment Asset Nevertheless, the current value of Bitcoin is hardly fully explained by its convenience yield in view of its current limited adoption as a medium of exchange as previously discussed. Other than those fundamental factors, Ciaian et al. (2016) find that the price of Bitcoin is positively correlated with proxies of its attractiveness as an investment asset, including the number of new posts on Bitcoin forums and page view statistics of Wikipedia. Investment demand for Bitcoin is a main driver for its current value with little doubt. Empirical evidences suggest that there are substantial diversification benefits from putting Bitcoin in an investment portfolio. Ciaian et al. (2016) and Baur et al. (2018) show that the price or return of Bitcoin is essentially uncorrelated with the price or return of other major traditional assets, including foreign exchange, stock and oil commodity. The current price of Bitcoin, of course, comes out a speculative bubble. Bubbles in financial markets are actually not rare. The most famous examples in economic history include Dutch tulip mania, the Mississippi Bubble and the South Sea Bubble in the seventeenth and eighteenth centuries. The dot-com bubble of the 1990s and the America’s housing bubble are more recent examples. Speculative bubbles in Bitcoin markets are found in most, if not all, empirical estimations including Cheah and Fry (2015) and Cheung et  al. (2015). The nature of speculative bubbles, on the other hand, is less understood. Interestingly, fiat money, which has zero intrinsic value but positive price, can actually be defined as simple as a bubble. Nevertheless, this argument is not true if convenience yield is included as a kind of return on

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holding fiat money. In this sense, the price of Bitcoin should be equal to the sum of discounted convenience yield in the future. Even though current convenience yield can be negligible due to the limited adoption of Bitcoin as a medium exchange, high price can still be supported by a large amount of convenience yield in the future. Obviously, there is a big uncertainty about the prospect of Bitcoin as a widely adopted medium of exchange, but it is difficult to deny that Bitcoin also receives increasing attention in recent years. As long as there are such possibility and substantial corresponding convenience yield (indeed, a note made with a piece of paper and ink can have a value of US$100), it may not be unreasonable for Bitcoin to stay at its current price. Given a failed technology is unlikely to survive by luck overtime, the longer the time, the higher probability for Bitcoin to succeed and so does the value of Bitcoin. The trend of increasing Bitcoin price is therefore qualitatively consistent with this explanation. Why are the bubbles in Bitcoin markets not (yet) corrected if they really exist? Behavioral biases such as overconfidence, inattention and social pressure are well documented (see DellaVigna (2009) for details). Camerer (1989) and Le Roy (2004), however, discuss that the bubbles in financial markets can also be rational. This is illustrated in the famous Keynesian Beauty Contest, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. (J. M. Keynes (1936, p. 156))

Similar to the beauty contest, it is important for investors to figure out what other investors think about the value of Bitcoin rather than what fundamental value of Bitcoin is. It is also well known that bubbles can exist as long as people expect such bubbles grow in the next period. Therefore, risk-averse investors can find it too risky to arbitrage the mispricing.

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Furthermore, it can be much better to fail together with others rather than lag behind the market. It is particular true for professional investors such as portfolio managers whose performance is always judged by the overall market performance. Constraints for investors in short selling also contribute to the formation of bubbles in financial market. Asset price in a market with short-sale constraints is upward biased since all optimistic investors can participate in the market while only information of those pessimistic investors holding the current asset can be reflected. It is a fact that Bitcoin price descended rapidly after the introduction of Bitcoin futures trading on Chicago Mercantile Exchange (Hale et al. 2018). Köchling et al. (2018) argue that the improvement of pricing efficiency after the introduction of Bitcoin futures market can come from the participation of institutional investors in the futures market. 3.2.3 Price Manipulation Bitcoin as an emerging asset is mainly traded in unregulated exchanges. Gandal et al. (2018) provide an evidence that the price of Bitcoin can be a result of manipulation by these exchanges. Mt. Gox, a leading Japanese-­ based Bitcoin currency exchange before bankruptcy, was found that price and trading activity of Bitcoin was significantly influenced by suspicious trading activity. There are two purposes of suspicious trading activity. First, Mt. Gox can benefit from higher transaction fees if fraudulent activity induces other traders to trade Bitcoin. It is highly possible since high trading volume can provide high liquidity for traders as well as a signal to the market that most people are investing in Bitcoin. Second, the exchange can use fraudulent trading and trader to conceal the fact of missing Bitcoins. It is reported and admitted by Mt. Gox later that approximately 650,000 Bitcoins were likely stolen by hackers from the exchange in 2011. One suspicious trader identified by Gandal et al. (2018) actually used to buy a large number of Bitcoins from other users to hide the missing Bitcoins. By purchasing Bitcoins, Mt. Gox turned the missing Bitcoins into a fiat currency deficit which the exchange can sustain as long as users had enough confidence on the exchange and keep most of their fiat currency balance at Mt. Gox. The increased trading volume is only a by-­ product of the manipulation in this case. Gandal et al. (2018) find that nearly 40% of daily volume of trades in Mt. Gox is fraudulent. Including trading activity in other three main exchanges trading Bitcoin in the United States, fraudulent trading still

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accounted for 18% of the total trade. Fraudulent trading significantly increased trading activities by two to three times (excluding fraudulent trading volume) in Mt. Gox. Moreover, fraudulent activity not only increased the likelihood of an increase in Bitcoin price, but also led to an additional percent price changes from 3% to 4% on average. Since Mt. Gox is found to be a prominent leader in price discovery of Bitcoin (Brandvold et al. 2015), it is not surprising to see that fraudulent activity in Mt. Gox also had similar influences on price and trading activity in other exchanges. Gandal et  al. (2018) argue that similar manipulations may also exist in other cryptocurrencies based on the analysis of extreme jumps in volume and corresponding price changes.

4   Bitcoin as a Privately Produced Money This is probably true that Bitcoin is currently far from widely adopted medium of exchange, but this has nothing to do with its potential. This is well known that money is not something invented by government or central bank. For the sake of transactional convenience, or more precisely to avoid the need of double coincidence of wants for a transaction to take place, different things were once used as money in different places around the world in history. Unsurprisingly, commodities, especially those precious metals naturally emerged as a typical choice of money because of their desirable properties in durability, standardized quality, divisibility and scarcity. Then, paper money backed by commodities came into the stage because of its ease of transportation. Fiat money and paper notes which are backed by the issuing institution without intrinsic value became a dominant form of money in almost all economies. Selgin (2015) argues that fiat money and banknote with no intrinsic value overcome the problem of nonmonetary use. One of major drawbacks of commodity money comes from nonmonetary use. Commodity money can be used for purpose other than that of being a medium of exchange. Using such commodity as a medium of exchange is therefore costly to the society as this forgoes the value that can be obtained in its alternative use. More importantly, it also makes commodity money vulnerable to nonmonetary demand shocks. A surge in nonmonetary demand for a commodity, no matter due to the change in preference or discovery of another valuable use of such commodity, can destabilize monetary regime based upon such commodity and lead to deflationary crisis. Compared to commodity money, however, the scarcity of fiat money can only be artificially imposed.

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4.1   Rule Versus Discretion in Monetary Policy In history, central banks use various anchors to preserve relative scarcity of fiat currencies. In other words, the supply of fiat money is restrained by one or more typical targets including the growth rate of monetary aggregates, exchange rate or inflation rate. Even though the operation of a targeting rule looks mechanic, the decision to be bound by such rule is less straightforward. Empirical studies on central bank policy show that it is not an uncommon practice of many countries to deviate from their announced targets. There is also a long list of events which countries abandon their announced targets in face of economic challenges. Such discretion can be a rational move to minimize the economic cost of monetary policy and thus can be preferred for its flexibility. The argument for rules over discretion, however, arises from time inconsistency problem of monetary policy. It may not be difficult for the central bank to identify policy target, for example, a specific level of inflation to maximize the expected social welfare. The problem is that once individuals form their expectations based on the announced target and behave accordingly, the central bank is tempted to renege on its target. An example is that the central bank may want to have inflation higher than the expected inflation in return for lower unemployment. Discretion, if it is allowed, surely opens the door for such temptation. Under rational expectation, time inconsistency of policy influences the expectation of i­ ndividuals and turns into a vicious cycle of inflation. Kydland and Prescott (1977) demonstrate that policymakers can achieve a better outcome on social welfare without their discretion. Unfortunately, it is difficult for central banks to make credible commitment in monetary system based on fiat money. 4.2  Private Provision of Money Bitcoin can be an ideal candidate for money, with both desirable properties in absolute scarcity and the absence of nonmonetary use as suggested by Selgin (2015). Rules, including the formula for money creation, embedded in cryptocurrency cannot be changed easily in such decentralized system, and this creates a strong confidence in privately issued currencies. Moreover, the pre-defined supply of cryptocurrency can ensure an even more stable supply than commodity money by avoiding supply shocks. Bitcoins are created when a user build a new block. The number Bitcoins created per block is pre-set to decrease geometrically and the total

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amount of Bitcoins would be limited up to 21 million. As of January 2018, about 80% of the total supply has been mined and the supply is expected to reach its limit by 2140. The total supply of cryptocurrencies is not necessarily fixed but some of them, like Bitcoin, impose rules of stable growth in money supply. Credible pre-determined rule for coin creation in cryptocurrencies does not only bring new hopes for a rule-based monetary system but also make a resurgence of private provision of money possible. It is not true to say money can only be produced by central banks. Indeed, A central bank is not a natural product of banking development. It is imposed from outside or comes into being as result of Government favours. (Adam Smith 1936, p. 148)

Currencies were once issued by competing private banks in the eighteenth and nineteenth centuries. At that time, there were relatively free entry to the banking sector, and private banks were allowed to issue their own notes backed by different forms of collateral. Such free banking era existed for decades in the United States (1837–1863), New England (1820–1860), Scotland (1716–1844), Canada (1817–1914) and other 60 countries. The free banking era is, however, usually described as a period of chaos and bank failure. Even though laws required banks to pay specie for their notes on demand at par value, noteholders suffered losses from holding notes issued by wildcat banks which located their note redemption offices only in areas where the “wildcat roamed” and then closed. However, this conventional understanding of the free banking era is not supported by quantitative evidence provided by Rolnick and Weber (1983). The authors examined the data of free banking era in the United States and suggested that the widely accepted view of bank failure at that time was overstated. Many banks actually did not go out of business. For those banks that failed, many of them redeemed their notes at par. The experience of the United States may not be a failure, but it is still far from a successful one. Instead of defending for the case of the United States, Selgin and White (1994) argue that the US free banking system is not a good showcase. Flaws in the US free banking system were actually the results of regulation rather than competition. According to Selgin and White (1994), the requirement of using government bonds as collaterals for notes caused a number of bank failures during the free banking era due to the falling prices of the government bonds. On the other hand, Selgin

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and White (1994) suggest that the banking system of Scotland in the eighteenth and nineteenth centuries was a real case of free banking. Moreover, free banking era coincided with a period of industrial growth and development in the Scotland.3 The experience of free banking is far from conclusive and debate remains. Even though competition in free banking largely reduces issuers’ temptation to cheat, time inconsistency problem still exists when the short-run profits from cheating outweighs the long-run profits from maintaining the value of notes. Indeed, private provision of fiat money, something which is simply a product of ink and paper without any natural scarcity, naturally creates serious doubt. Milton Friedman (1960), for example, argues that: So long as the fiduciary currency has a value greater than its cost of production—which under conditions can be compressed close to the cost of the paper on which it is printed—any individual issuer has an incentive to issue additional amounts. A fiduciary currency would thus probably tend through increased issue to degenerate into a commodity currency—into a literal paper standard—there being no stable equilibrium price level short of that at which the money value of currency is no greater than that of the paper it contains.

For the case of Bitcoin and other cryptocurrencies, the problem of oversupply and degeneration is prevented by the pre-determined rule in coin creation. Nevertheless, the threat of oversupply in private provision remains because of the nearly free entry to the cryptocurrency market. It is therefore not surprising to see DeLong’s comments on cryptocurrencies in his blog4 as follows: the money supply of Bit-Coin-like things is infinite because the cost of production of them infinitesimal.

Monopolistic competition in fiat currencies, however, exists in the foreign exchange market as argued by White (2015). In the foreign exchange market, governments around the world compete in producing their fiat monies with infinitesimal cost. Even though the entry to the foreign exchange market is not free, there are still over 100 currencies supplied by central banks around the world. However, the majority of international payments are made in a few currencies only. As of 2017, over 80% of international payments were made in US Dollar and Euro. The reason is the

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existence of network effect of money which persuades users to make payment in one or two currencies that are widely used. Such network effect, in turn, largely reduces the number of major issuers in the currency market. This conclusion is likely to hold in the cryptocurrency market as well. For example, the market share of Bitcoin is over 40% in terms of market capitalization among thousands of cryptocurrencies and the top five cryptocurrencies already represent 75% of the market share. The foreign exchange market also provides another important insight for private provision of money. While the pre-determined rule in coin creation is technically safeguarded, it is difficult to say that such rule can never be altered in view of rapid technological development. What is going to happen if it really happens? Oversupply in some fiat currencies such as Zimbabwe Dollars or Venezuelan Bolivars did happen in history, but it leads to a significant devaluation and loss in the market share of those oversupplied notes rather than a collapse of the whole foreign exchange market. This suggests that well-protected brand names and reputation of private issuers can be used to avoid the oversupply problem. In such case, private issuers have incentive to compete by keeping their currencies’ greater stability of purchasing power. On the other hand, an issuer which breaks its promise by oversupplying its currency (and cryptocurrency) will be punished by the market. Evidences in the literature on currency substitution are also consistent with this argument. An issuer, even one with monopoly right protected by law, can lose market share when it fails to hold the purchasing power of its money.

5   Concluding Remarks Technological progress in the twenty-first century has created a new context for the creation of cryptocurrency. Cryptocurrency is not simply digital money but it mainly improves the ease of transportation from tangible to intangible money. Instead, cryptocurrency comes with a breakthrough in removing record-keeping by central authorities. Of course, evidences strongly suggest that Bitcoin remains far from a medium of exchange at this moment. Transactions facilitated by Bitcoin are still limited to illicit activities. The majority of Bitcoin, on the other hand, is held as an asset for investment purpose. Nevertheless, the distributed ledger technology used by Bitcoin can be a strong mechanism to support a credibly committed rule-based monetary system, which is free from double-spending. The presence of such

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­ echanism, in turn, makes a resurgence of private provision of money m more feasible. The current monetary system, therefore, can be substantially revamped by the success of Bitcoin and other cryptocurrencies. It is believed to be one of the factors for supporting the present value of Bitcoin, even though speculative bubbles certainly exist in Bitcoin markets as well. It is important to note that cryptocurrency is only one of the applications of its underlying distributed ledger technology, blockchain. In the past decade, peer-to-peer markets become an emerging sector of the economy. The growth of these activities, however, is at least partly restricted by the need for central authorities or platforms. In this regard, blockchain is likely to bring further decentralization of economic activities. For example, automated execution of contingent terms through smart contracts and Internet of things (IoT) can minimize the need for trusted intermediaries in the product market and take peer-to-peer markets to a new stage. As discussed in Cong and He (2018), smart contracts will reshape the industrial organization and the landscape of competition.

Notes 1. Sargent and Velde (2014). 2. “Bitcoin and Bubbles”, The Grumpy Economist, John Cochrane’s blog (access 17 August 2018). 3. For a detailed review of the free banking experience in Scotland, see White (2002). 4. “Watching Bitcoin, Dogecoin, etc.…”, Grasping Reality with Both Hands: Bradford-delong.com; http://www.bradford-delong.com/; access 9 July 2018.

References Athey, S., Parashkevov, I., Sarukkai, V., & Xia, J.  (2016). “Bitcoin Pricing, Adoption, and Usage: Theory and Evidence”, Working Paper No. 17–033, Institute for Economic Policy Research, Stanford University. Baur, D.G., Hong, K., & Lee, A.D. (2018). “Bitcoin: Medium of Exchange or Speculative Assets?”, Journal of International Financial Markets, Institutions and Money, 54, 177–189. Brandvold, M., Molnár, P., Vagstad, K., & Valstad, O.C.A. (2015). “Price discovery on Bitcoin exchanges”, Journal of International Financial Markets, Institutions and Money, 36, 18–35.

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Cheah, E.T., & Fry, J. (2015). “Speculative bubbles in Bitcoin markets? An empirical investigation into the fundamental value of Bitcoin”, Economics Letters, 130, 32–36. Camerer, C. (1989). “Bubbles and fads in asset prices”, Journal of Economic Surveys, 3(1), 3–41. Cheung, A., Roca, E., & Su, J.J. (2015). “Crypto-currency bubbles: an application of the Phillips–Shi–Yu (2013) methodology on Mt. Gox bitcoin prices”, Applied Economics, 47(23), 2348–2358. Chinn, M., & Frankel, J.A. (2007). “Will the euro eventually surpass the dollar as leading international reserve currency?” in G7 Current account imbalances: sustainability and adjustment. Chicago: University of Chicago Press, pp. 283–338. Chiu, J., & Koeppl, T.V. (2017). ‘The economics of cryptocurrencies–bitcoin and beyond’, Working Paper, Department of Economics, Queen’s University. Ciaian, P., Rajcaniova, M., & Kancs, D.A. (2016). “The economics of BitCoin price formation”, Applied Economics, 48(19), 1799–1815. Cong, L.W., & He, Z. (2018). “Blockchain disruption and smart contracts”, National Bureau of Economic Research, No. w24399. DellaVigna, S. (2009). “Psychology and economics: Evidence from the field”, Journal of Economic literature, 47(2), 315–72. Flandreau, M., & Jobst, C. (2009). “The empirics of international currencies: network externalities, history and persistence”, The Economic Journal, 119(537), 643–664. Foley, S., Karlsen, J., & Putniņ š, T.J. (2018). “Sex, Drugs, and Bitcoin: How Much Illegal Activity is Financed Through Cryptocurrencies?”, working paper, University of Sydney. Friedman, M. (1960). A program for monetary stability. Fordham University Press. Gandal, N., Hamrick, J.T., Moore, T., & Oberman, T. (2018). “Price manipulation in the Bitcoin ecosystem”, Journal of Monetary Economics, 95, 86–96. Hale, G., Krishnamurthy, A., Kudlyak, M., & Shultz, P. (2018). “How Futures Trading Changed Bitcoin Prices”, FRBSF Economic Letter, 2018, 12. Ju, L., Lu, T.J., & Tu, Z. (2016). “Capital flight and bitcoin regulation”, International Review of Finance, 16(3):445–455. Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. New York: Harcourt Brace and Co. Kiyotaki, N., & Wright, R. (1993). “A search-theoretic approach to monetary economics”, American Economic Review, 63–77. Köchling, G., Müller, J., & Posch, P. N. (2018). “Does the introduction of futures improve the efficiency of Bitcoin?”, Finance Research Letters. Kydland, F.E., & Prescott, E.C. (1977). ‘Rules rather than discretion: The inconsistency of optimal plans’, Journal of Political Economy, 85(3), 473–491. Lagos, R., & Wright, R. (2005). A unified framework for monetary theory and policy analysis. Journal of political Economy, 113(3), 463–484.

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Le Roy, S.F. (2004). “Rational exuberance”, Journal of Economic literature, 42(3), 783–804. Rolnick, A.J., & Weber, W.E. (1983). ‘New evidence on the free banking era’, American Economic Review, 73(5):1080–1091. Sargent, T.J., & Velde, F.R. (2014). The big problem of small change. Princeton University Press. Selgin, G. (2015). ‘Synthetic commodity money’, Journal of Financial Stability, 17, 92–99. Selgin, G.A., & White, L.H. (1994). ‘How would the invisible hand handle money?’, Journal of Economic Literature, 32(4), 1718–1749. Smith, V.C. (1936). The rationale of central banking. Liberty Press. Trejos, A., & Wright, R. (1995). “Search, bargaining, money, and prices”, Journal of political Economy, 103(1):118–141. White, L.H. (2002). ‘Free banking in Scotland before 1844’, In Experience of Free Banking, pp. 169–198. London: Routledge. White, L.H. (2015). “The market for cryptocurrencies”, Cato Journal, 35:383. Yelowitz, A., & Wilson, M. (2015). “Characteristics of Bitcoin users: an analysis of Google search data”, Applied Economics Letters, 22(13):1030–1036. Yermack, D. (2015). “Is Bitcoin a real currency? An economic appraisal”, In David Lee Kuo Chuen edited Handbook of Digital Currency, pp. 31–43.



Epilogue: Towards a Happier Global Village or the World War III?

Will human race head for another world war or a happier society? According to Robert Farley (2017) of the University of Kentucky, there is a possibility of the World War III.  He identifies North Korea, Taiwan, Ukraine, NATO’s Southern Flank and the Gulf with the potential of igniting a world war. While it may be a bit exaggerated to envisage a world war, those five places are no doubt the hotspots of political and/or religious conflicts. As noted in Part I of this volume, in the Middle East, political conflicts and violence persist in the Gaza Strip and Syria. Unfortunately, Turkey has the potential of ending up like Syria. East Asia is also confronting a series of war crises that feed off and escalate one another—a similar pattern that occurred before the outbreak of the World War I and II. In his recent book entitled The Four Flashpoints: How Asia Goes to War (2018), Brendan Taylor, a geopolitical scholar at the Australian National University, highlights the four Asian political volcanoes most likely to erupt in sudden and violent conflict. They are the Taiwan Strait, the Korean Peninsula, the East China Sea and the South China Sea. In particular, Taylor describes Taiwan as a “ticking time bomb”. Equally vulnerable is the Korean Peninsula, though there are signs of cooling down after the two Korean leaders met on 12 April 2018, with North Korea voicing openness to denuclearization. Yet, in the Hanoi Summit held in Vietnam on February 27–28, 2019, the meeting between President Donald Trump and North Korean leader Kim Jong-Un was cut short and no agreement © The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4

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was reached. As a matter of fact, a major source of disruption to the world peace is from the United States which has the power to influence the world politics. Specifically, ever since Donald Trump became the President of the United States, he embarked on a series of policies which are said to protect American’s interests. Under his administration, the United States has withdrawn from the world treaties/agreements, including: • 23 January 2017: The Trans-­Pacific Partnership (TPP) • 1 June 2017: The United Nations Framework Convention on Climate Change (Paris Agreement) • 12 October 2017 (announced): The United Nations Educational, Scientific and Cultural Organization (UNESCO): effective 31 December 2018 • 8 May 2018: The Joint Comprehensive Plan of Action (JCPA: Iran Nuclear Deal) • 20 June 2018: The United Nations Human Rights Council • 17 October 2018: The Universal Postal Union It can be said that the world stability remained too long and too stagnated under Obama administration. It needs some fresh and radical policies to stimulate the world to move towards a new age.

A Happier Sharing Economy? Though political, religious and racial conflicts are scattered around the world, human race is moving towards a global village, based on the premiere that people share fortune and misfortune for the well-­being of each other. Humans do exhibit a caring heart regardless of social, cultural and political differences. To extend the notion of kindness, Simhony (1993:225) proposes that “negatively, that no one should gain by the loss of another and, positively, that the pursuit of the good by one must promote the good of others too”. Sharing behaviour is voluntary and altruistic. People share the goodness for the sake of the others with joy. They are the ones who make a better day by giving and sharing. Goodness-sharing brings pleasure, justice and the well-being of the humanity. In recent decades, human rights activists, non-­ governmental organizations and environmental agencies have made remarkable achievements on moving the world towards “one globe” based on goodness-sharing. Globaloneness encompasses all humanity based on sharing the goodness and

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­ isfortune for the welfare of each other. The United Nations advocates m global education to increase public awareness on goodness-­sharing. Thus, a narrow-minded concept of nationalism should be replaced with globaloneness approach. In other words, global-­oneness solution goes beyond national border and hence the concept of nation.

The Concept of Global-Oneness Learning and accepting global-oneness can be an alternative to resolve political conflicts. One-globe framework contradicts to nationalism and patriotism. Only if people are willing to forsake the idea of nation-state and move towards one globe, conflicts in many regions can be avoided. In other words, patriotism or love of the motherland that people take for granted has to be replaced by one-globe mentality or cosmopolitanism (‘citizen of the world’). People should unlearn patriotism and nationalism and learn one-globalism. This can be made possible on the argument that as long as people take global-oneness as real, then global-oneness in their minds is real in reality (see Chap. 7 for the theory). This requires people from different ethnicities and societies learn open-­hearted global-oneness and unlearn narrowly scoped concept of sovereign state. Global cultural exchanges and communication encourage learning and understanding so that people reconstruct and redefine the stocks of knowledge as one commonality. Civil education and re-socialization play vital role into this aspect.

Human Cruises into an Unknown Future What will be the likely scenario of human race in the future: towards a happier global community or world war? In Austrian economics perspective, the answer is unknown. F.A.  Hayek (1979) contends that human agents are creating something they never know in advance. In Hayek’s words (1979:150), “many of the greatest things man has achieved are the result not of consciously directed thought, and still less the product of a deliberately coordinated effort of many individuals, but of a process in which the individual plays a part which he can never fully understand”. Human history can be viewed as the result of a long-term evolutionary process of learning, creating and experimenting. Due to creativity, human agents are cruising a journey into the unknown future (Earl 1998).

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References Earl, Peter (1998) ‘Consumers Goals and Journey into the Unknown’, in Marina Bianchi (ed.), The Active Consumer, London: Routledge. Farley, Robert (2017) “5 Places World War III Could Start in 2018”, The National Interest, December 15. Hayek, F.A. (1979) ‘Purposive Social Formations’, in The Counter-­Revolution of Science, Indianapolis: Liberty Press, pp. 141–52. Simhony, A. (1993) “T.H.  Green: The Common Good Society.” History of Political Thought, 14(2): 225.

Index1

NUMBERS AND SYMBOLS 1967 Six-Day War, 16 1986 Single European Act (SEA), 267 A Abdullah II (King), 67, 69 Abe, Shinzo, 124, 125 Agreed Framework, 121, 129 AI algorithm, 338, 339, 341 Air pollution, 310–315 Algeria, 63, 72n8 Alien civilization, 247 Allah, 18, 27n15 Alphabet, 336 Amazon, 336, 338, 342 AmazonGo, 338 Anti-discrimination law, 296 Anti-immigration, 233, 246, 247 Apple, 335, 336, 342 Arabiat, Abdul-Latif, 65 Arabs, 77–79, 81, 83, 85, 86

Arab Spring, 67, 71 Araqchi, Abbas, 44 Argentina, 350 Armed conflict, 310 Asian Infrastructure Investment Bank (AIIB), 179, 185–186, 188, 191 Association of Southeast Asian Nations (ASEAN), 334 Australian Securities and Investments Commission (ASIC), 376 Awdah, Abd al-Qadir, 62 B Baader, Andreas, 91 Bahrain, 61 Ballistic Missiles, 118, 126, 133 Bangladesh-China-India-Myanmar (BCIM) Economic Corridor, 201 Beijing, 36, 43 Belt and Road Initiative (BRI), 197–210

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s) 2019 F.-L. T. Yu, D. S. Kwan (eds.), Contemporary Issues in International Political Economy, https://doi.org/10.1007/978-981-13-6462-4

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418 

INDEX

Benkirane, Abdelilah, 66 Berger, Peter, 150–152 Bin Laden, Osama, 14, 26n9, 27n16 Biodiversity, 320 Bitcoin, 359, 360, 362–367, 369–374, 376–378, 382–386, 395–410 Bitconnect, 367, 385, 386 Black September, 93 Blair, Tony, 269–271 Blockchain, 360–362, 365–366, 372, 376–378, 386, 389, 396, 397, 410 Blue-collar workers, 239 Boao Forum, 203 Bolton, John, 127, 133, 135 Bossert, Thomas P., 127 Boycott, 322–324 Bretton Woods, 236 BRICS countries, 180, 193n2 Brown, Lester, 353 Bubbles, 402–404, 410 Bullionism, 177, 180–181 Bureaucracy, 229, 248 Bush, George W., 129, 130 C Cameralism, 177 Capital flight, 399, 400 Capital flows, 262, 263, 267, 276 Carbon dioxide (CO2), 310, 313, 323 Central and Eastern European Countries (CEEC), 259, 261, 270, 281 Chargeback, 364, 365 China, 36, 37, 39, 41–48, 49n7, 49n8, 49n12, 114, 115, 117–129, 131–135, 143n69, 155, 158, 159, 165, 169n4, 197–210 China-Central Asia-West Asia corridor, 200

China-Indochina Peninsula economic corridor, 200 China-Pakistan Economic Corridor, 201 Chineseness, 155, 161–162, 164 Chopsticks Mercantilism, 175, 187, 192 Christianity, 76 Christian Right, 292, 293 Civilizationists, 246 Climate change, 307–325, 350, 353 Clinton, Bill, 117, 129, 140n43, 145n88 Coffee, 356, 357 Coincheck, 376, 384 Coinmap, 377, 383 Cold War, 248 Collective consciousness, 151, 152, 154 Communication, 232, 233 Conflicting knowledge, 153–154 Conservation, 315, 320 Convenience yield, 400–403 Convolutional Neural Network (CNN), 338 Cooperative marriage, 291, 304 Corporate social responsibility, 320 Corrupt elites, 241, 242 Corruption, 230 Criminology, 93, 100 Cross-Strait relationship, 150, 154, 164, 165, 167, 168, 170n15 Cryptocurrency, 359–389, 395–397, 405–410 alternative fundraising, 363, 367–368 alternative investment, 362, 363, 366–367, 388 circulation, 359, 373 consumer confidence, 362, 380 double-spending, 366 eclipse attack, 374

 INDEX 

Financial Crimes Enforcement Network (FinCEN), 381 mining, 362, 367, 368, 371, 373–374, 386, 389 nefarious activities, 362, 380, 383–384, 386 opportunities, 362, 375, 377–379, 387, 388 People’s Republic of China (PRC), 382 Petro, 386 proof-of-work, 373, 374 pump and dump schemes, 370 regulation, 362, 367, 370, 375–376, 380–383, 388 risks, 360, 381, 382, 386 selfish mining, 374 Silk Road, 383 state-issued cryptocurrencies, 362, 380, 386–387 transaction delays, 370–372 transaction fee spikes, 372–373 transaction speed, 371 virtual goods, 382 volatility, 362, 369–370, 388 Cryptography, 361, 365 Cultural backlash, 230, 232, 245, 246, 248 Cultural Reconstruction, 155 Cyber-weapons, 118 Cypherpunk, 364 D Darknet, 398 Decoupling, 233 Demagogue, 230 Democracy, 229, 242, 244, 247, 248, 261–263, 274 Democratic politics, 236, 247 Denuclearization, 120, 128–130, 132–135

419

Deterrence, 116, 117, 134 Digital currency, 396–397 Distributed ledger, 396, 397, 409, 410 Distribution of income, 237, 239, 245 Distributive justice, 315 Division of labor, 230 Double-spending, 397, 409 Dynamic game-theoretic model, 202 E East Jerusalem, 15, 16, 77, 81, 87 Eco-efficiency, 320 Ecological compensation, 320 Ecological economist, 351 Economic Monetary Union (EMU), 260 Ecosystem, 351–353, 355 Egypt, 58–63, 66–68, 70, 72n7 Egyptian Revolution, 62 e-kronas, 387 Electric vehicles, 349 Elephant graph, 237, 245 El Hierro, 348, 349, 358 EmCash, 386 Ennahdha Party, 66 Ensslin, Gudrun, 91 Environmental aid, 320 Environmental degradation, 307–325 Environmental disasters, 315 Environmental justice, 310, 315–319 Ethereum, 363, 369–371, 373, 377 EU High Representative for Foreign and Security Affairs, 36 European Coal and Steel Commission (ECSC), 265 European Union (EU), 197, 203, 248 Exchange rate manipulation, 179, 182, 183, 191 Exchange rate mechanism (ERM), 263, 268, 279, 281 Export subsidies, 179, 182, 183, 191

420 

INDEX

F Facebook, 336, 342 Fascist, 247 Five Principles of Peaceful Co-existence, 42 Foreign direct investment (FDI), 233 Fossil fuels, 348–351, 357 France, 36, 38 France’s National Front, 230, 247 Free banking, 407, 408 Freedom of speech, 247 Free-floating exchange rates, 257, 258, 275 Fujian, 154, 155, 160 G Gaddafi, Muammar, 133 Game theory, 96 Gao Li, Zhang, 198 Gay right, 247 Gaza Strip, 16, 77 Gender equality, 247 Gender identity, 296–297 Genetic algorithm, 337 German autumn, 91 Germany, 36, 38, 43, 45 Gibraltar, 272 Global federalism, 236, 237 Global financial crisis 2008, 235, 243, 363, 364, 366 Globalism, 229 Globalization, 229–248 Global non-proliferation regime, 38 Global partnership, 310 Global warming, 307–325 Golan Heights, 77 Golden Age, 245 Google Neural Machine Translation (GNMT), 339 Great Han chauvinism, 163–164 Green economics, 307 Green education, 320

Greenhouse gases, 308, 310, 323, 325 Gulf Crisis, 63, 65 H Haley, Nikki, 115, 119 Hamadi Jebali, 66 Happiness, 307 Hatan al-Sharif Haram al-Sharif, 78, 82 Health and survival risks, 308 Heckscher, Eli, 176, 178 Hezbollah, 95, 96 Hijacking, 92, 94, 95 Hirak movement, 68 Holy Sepulchre Church, 78, 79 Homosexuality, 291–293, 295, 296, 303 Human Development Index (HDI), 205, 224n14 Hunger, 309 Hyperinflation, 242, 244 I Ideational, 242 Identitarian Christianism, 247 Illiberal democracy, 244, 247, 248 Illicit activity, 398, 399, 409 Il-sung, Kim, 116, 117 Immigration, 263, 269–271 Incentive, 321 Income inequality, 230, 231, 237–240, 245 India, 203 Industrialization, 242 Initial coin offering (ICO), 360, 367, 368, 381, 382 International Atomic Energy Agency (IAEA), 36, 116, 117, 129–131 International cooperation, 308 International Monetary Fund (IMF), 229, 245

 INDEX 

Internet of Things (IoT), 333 Intersubjectivity, 151, 152, 168 Intrinsic value, 397, 400–402, 405 Investigative psychology, 100 Iran, 38, 203 Iranian Revolution, 11, 13, 14, 17, 19 Iraq, 58, 59, 61, 67, 72n7, 197, 203 Irish Republican Army (IRA), 94, 97 Islam, 76, 84, 85 Islamic Action Front, 67 Islamic fundamentalists, 11, 13, 14 Islamic Revolutionary Guard Corps (IRGC), 21 Islamophobia, 247 Israel, 76–79, 81–87 J Jae-in, Moon, 125 Jahiliyyah, 62 Japan, 114, 117, 120–126, 129, 134, 135 Jerusalem, 15, 16, 75–87 Jesus, 15 Jews, 78, 79, 81–83, 85–87 Jie Chi, Yang, 198, 223n5 Jihad, 10, 13, 14, 21, 24, 27n16 Jing, Yang, 198, 223n5 Job polarization, 239 Joint Comprehensive Plan of Action (JCPOA), 35–48 Jong-il, Kim, 118 Jong-un, Kim, 114, 118, 119, 121, 132 Jordan-Israel Peace Treaty, 67 Judaism, 76, 82 Judeo-Christian ideologies, 292 K Kai-Shek, Chiang, 155–159, 162, 164 Karpalès, Mark, 384 Kazakhstan, 203, 223n1 Khan, Abdul Qadeer, 116

421

Khomeini, Ruhollah, 14, 15, 27n18 King-Kuo, Chiang, 159, 161, 162 Klein, Michael, 258 Knowledge, subjective nature of, 152 Kominka Movement, 169n4 Korean Peninsula Energy Development Organization (KEDO), 129 Korean War, 115, 116, 122, 124, 135 Kosovo, 76 Kuomintang (KMT), 155–162, 165, 166, 170n12 Kurdish People’s Protection Units (YPG), 24 Kurdistan Workers’ Party (PKK), 24 Kutbuism, 62 Kuwait, 63, 72n7 Kyoto Protocol, 310 Kyrgyzstan, 203 L Land rights, 75 Lane, Phillip R., 257 Latin America, 230, 231, 242, 244 LBGT, 292–294, 296, 298–301, 303, 305n1 Lebanese Hezbollah, 21, 22, 24, 25 Lebanon, 16, 17, 19, 58–60, 64, 72n7 Lee, Teng Hui, 162, 163, 165, 169n4 Liberal democracy, 247, 248 Libya, 133 Left-wing, 230, 242, 244, 246 Lisbon Treaty, 260 Litecoin, 363, 369–371, 377 Localization movement, 162–163 M Maastricht Treaty, 260, 268, 270 Made in China 2025, 334 Manichean, 242 Mao Zedong, 158, 170n10

422 

INDEX

Mashhur, Mustafa, 63 Mass mobilization warfare, 246 Mattis, James, 115 May, Theresa, 255, 272 Mazzen, 83 McKibben, Bill, 354 McKinsey Global Institute, 340, 341 McMaster, H.R., 127, 128 Mecca, 13, 15, 18 Medina, 15, 18 Meinhof, Ulrike, 91 Mercantilism, 175–179, 181, 182, 188–191 Micro-organisms, 351 Microsoft Research Asia (MSRA), 339 Ministry of Commerce, PRC, 198, 224n10 Ministry of Foreign Affairs, PRC, 198, 224n10 Mogherini, Federica, 36, 47 Monero, 363, 373 Monetary system, 395–410 Mongolia, 200 Monnet, Jean, 347 Moscow, 36, 39–41, 46, 48–49n3, 49n12 Mt. Gox, 376, 384, 404, 405 Munich Olympics, 93, 104n5 Muslim Brotherhood of Egypt, 62, 63 of Jordan, 55–72 of Syria, 66 MyCoin, 384 N NAFTA, 239 National communities of fate, 160 National Development and Reform Commission (NDRC), PRC, 198, 200, 224n10

National identity, 150–154, 157–159, 164–166, 168 Nationalism, 176–177, 179–180, 183, 189–190 Nationalist, 246, 247 Nation-state, 236, 245, 248 Nativist, 246 NATO, 229 Negotiations, nuclear, 114, 117, 121, 131 NeoFace Watch, 338 Neo-mercantilist strategies, 179, 192 Netflix, 339, 341 Network effect, 395, 400, 409 Neural Machine Translation (NMT), 339 New Zealand, 266 9/11 attacks, 94, 99 The No-Deal deal, 273–274 Non-aligned movement (NAM), 42 Non-excludability, 321 Non-rivalry, 321 Northern Ireland, 268, 272, 273 North Korea (Democratic Peoples’ Republic of Korea), 113–123, 126–132, 134, 135, 137n18 Nuclear deal, 35–48 Nuclear Nonproliferation Treaty (NPT), 116, 117 Nuclear weapons, tactical, 116, 117 Nuclear-weapon states (NWS), 42, 43 Nuclear weapons, tests, 118, 134 Nylon, 351–353 O Obama, Barrack, 131, 143n73 Ocean acidification, 314 OECD, 237, 239 One Belt One Road Initiative, 185 See also Belt and Road Initiative (BRI)

 INDEX 

One-child policy, 188–189 Organization for European Economic Co-operation (OEEC), 265 P P4+1 Scheme, 43, 47 P5+1 initiatives, 36, 39–42 Pahlavi, Mohammad Reza, Shah of Iran, 14, 27n17 Pakistan, 116, 203 Palestine, 14, 16, 76, 77, 81–84, 86, 87 Palestinian Liberation Organization (PLO), 65 Palestinians, 76–87 Paris Agreement, 310, 322, 325 Park, Geun-hye, 125, 126, 142n65 Path dependency, 342 Patriotism, 179–180, 190 Peer-to-peer payment, 362, 364, 365, 380, 388 Pence, Mike, 133 People’s Republic of China (PRC), see China Petroleum, 349–353 Phenomenology, 150 Phrase-based machine translation (PBMT), 339 Pluralism, 247 Podemos, 230 Political lent, 176 Political trilemma, 236 Politico-institutional, 242 Polluter pays principle, 320 Pollution, 350, 352 Pompeo, Mike, 127, 132–135 Popular sovereignty, 242 Populism, 229–248 Precariat, 245 Price manipulation, 404–405 Prisoners’ dilemma, 321

423

Private provision of money, 406–410 Procedural justice, 315 Prophet Muhammad, the, 15, 17 Public good, 321 Putin, Vladimir, 123, 124 Q Qatar, 61 Quantity equation for money, 401 Qutb, 62, 63 R Rafsanjani administration, 38 Rainbow parents, 304 Raspe, Jan-Carl, 91 Recurrent Neural Network (RNN), 338 Red Army Faction (RAF), 91, 94, 104n1 Renewable resources, 307 Reparative therapy, 292 Republic of China (ROC), see China Right-wing, 230, 241, 243, 244, 246, 247 Riqueti, Victor de, 176 Risk aversion, 102, 103, 105n13 Rosatom, 37, 46, 49n12 Rouhani, Hassan, 19 Russia, 35–48, 114, 115, 120–128, 200, 203 Russia’s state-owned nuclear energy agency, 37 Rust Belt cities, 335 S Same-sex marriage, 289–299, 302–304 Sanctions, 321, 322, 325 Sandburn, Josh, 356

424 

INDEX

Satoshi Nakamoto, 363 Saudi Arabia, 14, 17–19, 21, 24, 58, 61, 63, 72n7 Schuman, Robert, 265 Schumpeter, Joseph, 25, 28n25 Schutz, Alfred, 150, 151, 153 Scotland, 268 Secessionist movement, 149, 163–165 Sexual orientation, 296, 300, 301 Shengnü (剩女), 291 Silicon Valley, 335 Silk Road Economic Belt, 198, 201, 224n10 Six-Party talks, 121, 129, 131, 132 Smart contracts, 410 Smith, Adam, 176 Social construction of reality, 150–152 Social status, 243, 245 South Korea, 114, 116, 117, 120–126, 129, 131, 132, 134, 135, 137n15, 142n65, 143n69, 143n77 Soviet Union, 120 Specialization, 230 Spread of diseases, 309 Squeezed middle, 245 Stepping stone, 239 Stolper-Samuelson theorem, 238 Sudan, 61, 72n7 Sustainability, 307, 315, 318, 320, 322, 325 SWOT analysis, 361, 362, 387 Syria, 60, 61, 63, 65–67, 72n7 Syriza, 230 T Taiwan, 149–168 Taiwanese consciousness, 149–168 Tajikistan, 203, 205 Tariff, 232, 234, 238, 243, 245 Technocratic institutions, 248

Technologicalism, 179, 183–184 Technology transfer, 233 Tehran, 27n17, 38, 40, 45, 46, 49n3 Tel Aviv, 16 Temperature, 308, 310, 322, 325 Temple Mount, 80, 82 Temple of Solomon, 82 Temptation to cheat, 408 Terminal High Altitude Area Defense (THAAD), 125, 143n69 Terrorism, 308 fourth wave, 94, 95 Islamic, 94 left-wing, 92, 94 lone wolf, 94 right-wing, 92, 94 as theatre, 93 third-wave, 94, 95 West German, 91, 92 Thomas, William I., 152 Three Laws of Robotics (Asimov’s Laws), 337, 343n1 Tillerson, Rex, 123, 127, 131, 132 al-Tilmisani, Umar, 63 Time inconsistency, 406, 408 Timor-Leste, 205 Titanium, 352 TNG Wallet, 380 Tongqi (同妻), 291 Tongzhi (同志), 290, 291, 295, 296, 299, 304, 305n1, 305n2 Tongzhi parenthood, 304 Transformative revolution, 246 Treaty of Versailles, 264 Trump, Donald, 35–37, 43, 45–47, 113–115, 119, 120, 122–128, 132–135, 321–324 Tunisia, 66–68, 72n8 Turkey, 57, 60, 203 Turkmenistan, 203 21st Century Maritime Silk Road initiatives, 198, 224n10

 INDEX 

U Ulbricht, Ross, 383 Undemocratic liberalism, 248 Unintended consequences, 349, 355 United Arab Emirates (UAE), 72n7 United Kingdom (UK), 36, 38 United Nations Security Council, 36, 37, 39, 48, 126, 131, 132 United States (US), 35–48 Universal suffrage (Hong Kong), 293, 296 U.S.-China trade dispute, 199 US-Iranian bilateral relations, 38 US National Institute of Standards and Technology (NIST), 338 Uzbekistan, 203 V Velocity, 402 Venezuela, 386, 387 Venezuelan, 386 Virtual Currency Law (Japan), 375 Volcano eruption, 348 W Wang, Hu Ning, 198, 223n5 Wang, Yang, 198, 223n5 Wasat Party, 69 Water pollution, 310, 314

425

West Bank, 16, 77, 79 Western Wall, 82 White elephant, 348–350, 353 WIRED 2016, 339 Withdrawal Agreements (WA), 255, 272, 281 World Bank, 245 World Trade Organization (WTO), 182, 183, 229, 245 World War I (WWI), 230, 258 Worldwatch Institute, 353 X Xenophobia, 246 Xiaoice, 339 Xi Jinping, 122, 132, 185, 186, 198, 202, 203, 223n1 Y Yemen, 61, 67, 71, 72n7, 205 Yongbyon, 116, 129–131 Z Zilliqa, 371 Zimbabwe, 378 Zionist ideology, 79 Zomlot, Husam, 83 ZTE, 199, 223n6