Economics

This is how Grexit happens. Following the collapse of negotiations between Greece and its creditors, the European Central Bank (ECB) has halted emergency liquidity assistance. Facing an intensified bank run, the Greek government on Sunday introduced banking controls and declared a bank holiday. With substantial wage and benefit payments due this week and local banks out of cash, economic conditions are likely to deteriorate quickly in Greece ahead of a planned referendum for July 5 asking Greek voters whether the government should accept a creditor-backed reform plan. Creditor governments have left the door open for an agreement, one that if fully implemented and coupled with debt relief could be transformative for Greece. But that deal never seemed close and now seems out of reach. I am skeptical that economic or political conditions exist to allow a prolonged period of controls (e.g., Cyprus). Pressures to exit the euro and monetize government spending will become acute, and could outpace the sort of political transition or realignment within Greece that would allow a deal. Where are we? First, here’s a quick review of the weekend. On Friday, the Greek government surprised creditors by rejecting their compromise proposal and announcing their intent to hold a referendum on the plan on July 5 (with a “no” recommendation from the government). Markets had rallied on expectation of a deal, and even deal skeptics thought negotiations would continue up to and after the June 30 deadline for making payments to the International Monetary Fund (IMF). Eurozone finance ministers reacted sharply, announcing that negotiations had ended and that discussions had turned to “Plan B." This led several ministers (perhaps alluding to Greek Finance Minister Yanis Varoufakis’s frequent references to game theory) to suggest it was “game over." Late Saturday night, Parliament approved the referendum for next Sunday, July 5, and the proposal now goes to Greece’s president, Prokopis Pavlopoulos, for approval. Unless the vote is called off, and given the escalating rhetoric domestically against creditor governments, it is difficult to see the Greek government returning to the table before that vote. Given these developments, on Sunday the ECB suspended the provision of additional liquidity under its emergency lending facility (ELA). It is hard to fault the ECB: the additional liquidity provision (€9 billion in past week alone) had required forbearance under their rules, and had been justified by continuation of the negotiations. It is my understanding that should there be formal finding that Greek banks are insolvent, the ECB would need to end the program, but for now a freeze in access at current levels is a significant forcing event. Lastly, Greek Prime Minister Alexis Tsipras this evening announced the imposition of broad banking and capital controls. All banks--including branches of foreign banks--will remain closed for six business days, until after the referendum.  ATM withdrawals will be limited to €60 per day (foreign bank cards would be exempted, presumably as a concession to the tourism sector).  Wages can be paid online, but there will be tight controls on transfers abroad. This leaves unanswered the extent to which payments can be made electronically within the country.  The Athens stock exchange also will be closed for an indefinite period. What’s next: Four Points Banking controls and a banking holiday will cause a rapid deterioration in the Greek economy. Economic activity in Greece has already been badly damaged by arrears and a loss in confidence, and disintermediation of the banks has been reflected in greater reliance on cash-based transactions. Households reportedly have hoarded euros, but firms have been stretched by the crisis. Going forward, reduced expectations for a deal, concerns about currency redenomination, and limited availability of euros all work to trigger a cascade of business failures, rising numbers of non-performing loans, and further reduced tax compliance. Moreover, around 75 percent of Greek primary government spending is for pension, wages, and benefits, and large payments are due in coming days. Without an operating banking system, the dislocation from non-payment of these obligations will be substantial even without the panicked bank lines that formed Sunday night. External default will have a lesser effect in the near term. There is little doubt now that on Tuesday the Greek government will miss its €1.6 billion payment to the IMF, and the Fund’s board likely will move quickly to enact its normal procedures for arrears. I do expect European governments to show restraint and not call their loans in default based on the IMF move, but it will make any program in the future more difficult to negotiate and finance. A Cyprus-like extended period of capital controls and restructuring within the eurozone does not look economically or politically viable for long. In a situation of severe financial stress, the government will quickly have to decide whether to issue IOUs to cover its expenses. In this case, a de facto "dual currency" would start to circulate domestically. If there was a creditor-backed program in effect, and the ECB was providing liquidity (as for example, was the case in Cyprus), this situation could be sustained for a period of time while debt is restructured and banks recapitalized. IOUs would trade at a discount, but those in critical need of liquidity could find it. That will not be the case here, and further the existence of a primary deficit means that the government will be unable to finance high-priority social spending. There may be some useful lessons to be learned from the Argentina default, where dislocations were reduced by developing a secondary domestic payments system that allowed for transfers within the country between frozen accounts. Even in this case, the government paid a high political price for reneging on their commitment to protect depositors.  From this perspective, the focus should be on what happens in the week after the referendum, as cash balances are exhausted and when pressures to reopen the banks will be strong.  In this environment, the incentive to turn to the printing press will be substantial. Contagion will be less than in 2010, but we should still be worried. European policymakers are at least publicly sanguine that there will be limited contagion from this weekend’s developments. No doubt, we are in better position than 2008 and 2010, given European rescue facilities that have been put in place, other reforms (e.g. banking union) and the existence of the ECB’s quantitative easing program (QE). Further, there is limited bank exposure and most of the debt is owed to the official sector, limiting the risks from financial market interconnectedness. The Eurogroup and the European Central Bank have both signaled their intent to “make full use of all available instruments to preserve the integrity and stability of the euro area.” Taking a page from the U.S. crisis playbook of 2008, that indicates a willingness to bring overwhelming force in coming days. At a minimum, it suggests aggressive purchase of periphery sovereign debt (which is already allowed under the existing QE, though statements suggesting an extension of the policy may make sense), additional liquidity operations, and perhaps even the activation of swap lines. Still, I suspect markets have underpriced the risk of dislocations in coming days. In addition to poor positioning by investors that came back into risk assets on hopes of a deal and limited market liquidity, markets can now no longer avoid acknowledging that substantial loses will need to be borne on Greek assets. Questions may also be raised about debt sustainability in other periphery countries. Any sense of a loss of political resolve elsewhere in the periphery also will be a source of contagion. My expectation is that the rise in sovereign spreads will be modest, with the main contagion seen on assets the ECB does not buy under its QE program. That could include bank stocks and high yield bonds. The euro should see a significant depreciation against the dollar, reflecting expectations of extended monetary easing from the ECB with a safe-haven effect towards the United States. This safe-haven effect could be counterbalanced if markets believe the turmoil in Europe will delay the Fed’s plans for an interest rate increase. The referendum freezes negotiations, but neither a “yes” nor a “no” vote creates a clear path to a deal. Early polls suggest a small advantage for the yes position–that Greece should agree with creditors on a package—but local analysts caution against reading too much into these early reads. In particular, it may be much easier to campaign against austerity (with government support) than for tough reforms. Much will depend on the reaction to the bank controls, and opinion polls will drive markets in coming days. There is a broad consensus that a no vote on July 5 would strengthen the government’s resistance to a deal and make an eventual Grexit more likely. Even if the referendum passes on July 5, it is unclear that it would lead to rapid agreement on a new package. First, the government has rejected the terms on the table, so that trust that they would implement any agreement is low. Further, the financial package offered last week would have expired once the current program ends on June 30. Of course, creditors could offer those terms again, but that would require a new program and new parliamentary approvals, substantially raising the political impediments to a deal. In sum, time is short to avoid exit. The week after the referendum could be decisive.

According to the media, President Muhammadu Buhari said on June 23 that Nigeria’s treasury is “virtually empty.” In order to document this he has promised to release a report on the size of Nigeria’s revenue and debt in about four weeks. He also says that he will recover billions of dollars that have been stolen under previous administrations, and that the United States and other countries will assist Nigeria in the recovery of the stolen money. The president also noted that some federal civil servants are going unpaid and said that his government would look at the possibility of drawing on the Excess Crude Account (essentially a sinking fund for oil revenue) to pay civil servants. That account has a balance of $2.078 billion as of June 23, according to the finance ministry. Governors are saying that some civil servants in the states have gone for as long as ten months without being paid. Vice President Yemi Osinbanjo says that two-thirds of state employees are owed back salaries. The problem is not entirely due to waste, fraud, and mismanagement. Most of the state governments are dependent on oil revenue distributed by the federal government to the states according to a set formula. With the fall in oil prices there is less government revenue to distribute. Federal, state, and local revenue were at a five-year low due to depressed oil prices and shutdowns of export oil pipelines and terminals. The national currency, the naira, continues to fall. The size of Nigeria’s federal and state debt is contentious. Vice President Yemi Osinbanjo is telling the media that the country’s local and foreign debt is about $60 billion. He also said that debt service for 2015 is about 21 percent of the budget. The chairman of Buhari’s transition committee, the highly respected Ahmed Joda, is reported by the media as saying that Buhari inherited a deficit of at least $35.2 billion from the Jonathan administration. On the other hand, former finance minister Ngozi Okonjo-Iweala says that the vice president’s figures include state and federal debts that largely predate the Jonathan presidency. According to the media, the country’s financial situation is prompting some members of the National Assembly to suggest a voluntary pay cut, though few observers think that will happen. Shortage of revenue will constrain what the Buhari administration can do to address the chronic issues in the northeast that feed the Boko Haram Islamist terrorist insurrection, as well as in the oil-rich Niger delta, where the current amnesty, which includes payments to “community leaders,” ends in December. Buhari has promised those payments will be replaced by government investment in the region. Right now, it is hard to see where the money will come from.

With Tuesday’s vote in the U.S. Senate to give President Obama fast track negotiating authority on trade deals, the president is likely to be able to help complete the Trans-Pacific Partnership (TPP), with the United States in the deal, by the end of the year. With fast track authority completed, the United States will be positioned to resolve remaining bilateral hurdles with Japan, the key to moving forward with the TPP. Four Southeast Asian nations—Brunei, Singapore, Vietnam, and Malaysia—currently are negotiating to be part of the TPP. (The Philippines has expressed interest in joining the negotiations.) Singapore and Brunei were two of the founders of the predecessor to the TPP, long before the agreement was enlarged and the United States decided to join negotiations, and Vietnam decided to participate in TPP negotiations very early on. These four countries’ economies are extremely varied. Unlike a potential free trade deal involving the United States and countries in Europe, the TPP contains both developed and developing nations, including Vietnam, which has a GDP per capita of less than US$2,000. For Singapore and Brunei, joining the TPP negotiations was a no-brainer. These are countries with miniscule domestic markets, no significant agricultural sectors, and highly open economies. Singapore in particular is one of the most trade-dependent economies in the world; when the 2008-9 global financial crisis hit, Singapore’s economy suffered one of the worst contractions of any developed nation, though it eventually bounced back. And although the Singaporean population has in recent years become more skeptical of high immigration into the city-state, most Singaporeans understand that the city is dependent on trade, and there is little antitrade rhetoric in Singapore. Yet because Singapore is already so open, having been at the forefront of regional and bilateral Asian trade deals, it has less to gain from the TPP than a more closed economy like Vietnam. In fact, according to some analyses, Vietnam would benefit the most from the deal of any of the countries currently involved in negotiations. Vietnam would gain tariff-free access to U.S. and Japanese markets for its rice, seafood, textiles, and low-end manufactured goods. Vietnamese officials and academics also are convinced that more liberal members of the leadership in Hanoi see the TPP as a way to force the reduction of loss-making state enterprises and to open sectors of the Vietnamese economy. Hanoi used WTO accession in a similar fashion, to help push forward economic reforms. Although Vietnam has recovered from the slowdown in growth that began in the late 2000s, it has not returned to the same turbocharged growth rates it posted in the early 2000s, and bloated state enterprises remain a major drag on the economy. Because Vietnam is run by a highly repressive regime, it is very difficult to gauge public sentiment on any important issue. However, from anecdotal conversations with Vietnamese opinion leaders, there seems to be less of the sentiment that state enterprises must be preserved as national champions than exists among Chinese opinion leaders; Vietnam’s state companies, with a few exceptions, are not global giants like China’s biggest state firms. In addition, a recent Pew poll of Vietnamese suggests that the Vietnamese population views the TPP more favorably than people in any other country negotiating the deal—far more favorably than Americans view the TPP. Malaysian leaders, of all the four Southeast Asian nations, face the toughest test in negotiating the TPP and then convincing the Malaysian public to accept it. Vietnam is an authoritarian regime, as is tiny Brunei; in Singapore there is significant public support for trade. But Malaysia is a hybrid regime, and the Malaysian government has sold TPP to members of the ruling coalition—and conservative Malay supporters—in part by repeatedly assuring them that the government will essentially protect certain state enterprises and programs to support ethnic Malays, even if these protections violate the norms and rules of a free trade deal. With the ruling coalition having gained a relatively narrow victory in the 2013 elections, and now splintering amidst a public fight between Prime Minister Najib tun Razak and former Prime Minister Mahathir Mohamad, it will be very difficult for Malaysian negotiators to return from TPP talks without securing these protections—which they are unlikely to obtain. Fortunately for Najib, the opposition also is in disarray, its unwieldy coalition split apart at the federal level over differences around religious and social issues. However, the opposition, and Malaysia’s vibrant online media, has raised questions about whether Malaysia has done a comprehensive cost-benefit analysis of the deal before joining TPP negotiations. So, in addition to a group of conservative Malays skeptical of the TPP because of fears it will endanger pro-Malay affirmative action policies, the agreement may not have strong support among urban, liberal Malaysians—the bastion of the opposition. In the Pew poll, a large percentage of Malaysians simply said they did not know enough about the TPP to have an opinion, but the percentage of Malaysians who viewed the TPP favorably also was lower than in most other TPP nations. Perhaps unsurprisingly, Prime Minister Najib, fighting for his political life, has gone from voicing staunch support for the TPP to announcing that the government’s trade negotiators will only accept a deal “on our terms.”

This is a guest post by Emilie Sweigart, an intern here at the Council on Foreign Relations who works with me in the Latin America Studies program. Even as Brazil pushes forward austerity measures and entitlement reductions, the administration of President Dilma Rousseff is hoping to increase infrastructure investment. The recently announced Programa de Investimentos em Logística (PIL) would launch nearly R$200 billion (USD$64 billion) in concessions for rail (R$86.4 billion), roads (R$66.1 billion), ports (R$37.4 billion), and airports (R$8.5 billion). Roughly a third would be completed by 2018, when Rousseff will leave office. There is no question about the need. The World Economic Forum ranked Brazil’s infrastructure 120th out of 144 countries, alongside Mongolia (119th) and Zimbabwe (121st). With few railroads, coffee, sugar, soybeans, cotton, and other export bound commodities travel on run-down roads from the interior to the coast. Once there, trucks can line up for days at the port. Of the tens of billions spent for the 2014 World Cup and now the 2016 Olympics, much has gone to stadiums and sports venues, less to long-term transportation infrastructure. Airport terminal renovations in São Paulo and Curitiba and Rio’s promised subway extension and port expansion remain unfinished. Previous efforts to boost infrastructure spending haven’t turned out particularly well. Rousseff managed to invest just a fifth of the announced R$210 billion in the first phase of the PIL that was launched in 2012. Auctions for 14 railways and over 160 port terminals attracted no bidders, and the vaunted R$35 billion high-speed train linking São Paulo and Rio de Janeiro was shelved indefinitely. This time around, the government promises less regulation and less involvement from the national development bank, the BNDES, opening up more space for private capital. The Chinese in particular sound interested. During a May visit, Chinese premier Li Keqiang promised a joint 50 billion dollar infrastructure fund between Chinese and Brazilian banks for just such opportunities. And the Chinese have already signed onto the single biggest project in the PIL, a R$40 billion railway from Brazil’s Atlantic coast to Peru’s Pacific coast. Still, the political and business climate is difficult. Rousseff’s approval ratings continue to fall, now at just 10 percent. The construction industry remains under the Petrobras scandal cloud, and the recent arrests of Marcelo Odebrecht of Odebrecht SA and Otávio Azevedo of Andrade Gutierrez, the CEOs of Brazil’s largest construction firms, may scare potential international partners. Brazil’s lagging economy, stubbornly high inflation, and significant public debt levels combined with U.S. tapering expectations later in 2015 suggest the government can’t fund much of this ambitious project on its own. Against this backdrop, Rousseff arrives in New York on June 29 to woo the financial crowd before heading to Washington, DC, to meet with President Obama the next day. Most investors believe in her finance minister, Joaquim Levy. Rousseff’s challenge is to convince them about her support for a more market directed and friendly path for Brazil.  

America’s politics have been broken for so long that it is rather shocking when things go right. But President Obama’s careful work across the aisles with the Republican congressional leadership to pass a new Trade Promotion Authority (TPA) bill this week shows that good governance is still possible. The passage of TPA greatly strengthens the Obama administration’s foreign and economic policy position for its final 18 months. In Asia, it clears the way for a successful conclusion this year of the Trans-Pacific Partnership (TPP) with Japan and 10 other Asian countries. The TPP, while fairly modest in its economic impact, is the biggest U.S. trade agreement since the NAFTA with Mexico and Canada two decades ago. And it puts the United States in the lead in writing the rules for trade in the region, just as an increasingly assertive China is trying to take that role away. If Congress had failed to grant Trade Promotion Authority, the TPP talks at best would have limped along and at worst collapsed, severely weakening U.S. economic influence in the region. No less important is Europe. As I wrote recently in Politico, the Transatlantic Trade and Investment Partnership (TTIP) with Europe gives the world’s two biggest markets a historic opportunity to set strong standards for trade and investment that could become global standards. But European leaders face every bit as much opposition as President Obama faced in pushing TPA through Congress; the European Parliament was recently forced by opponents to delay a crucial vote setting down its goals for the talks. The failure of TPA in the United States would likely have made it impossible for Europe to stay on board. Obama rightly deserves much of the credit for TPA’s passage. To push the bill through, he had to endure a revolt from his own party, including House Democratic leader Nancy Pelosi (D-CA). Faced with unprecedented pressure from organized labor--which is saying something--the Democrats pulled out every weapon at their disposal to try to defeat their own president, including voting against a program that provides income support and retraining for workers who lose their jobs to trade competition. Defying a friendly president on trade had worked once before for labor, when it defeated President Bill Clinton’s request for trade negotiating authority in 1997. But President Obama refused to bend in the face of labor’s scorched earth tactics, and managed to hold on to just enough Democrats to push the bill through both the House and Senate. The GOP deserves as much credit as the president. They could have played the trade issue for political advantage, encouraging the internal divisions among Democrats and then blaming the president for TPA’s failure. Instead Senate leader Mitch McConnell (R-KY) worked tirelessly with both sides to fashion a compromise that could gain the necessary 60 votes. He did it well enough that the last-minute reversal by Senator Ted Cruz (R-TX)--making a characteristically cynical effort to pander to far-right opposition to “Obamatrade”--only proved how thankfully irrelevant Mr. Cruz has become. House Speaker John Boehner (R-OH) and Ways & Means Committee chairman Paul Ryan (R-WI) similarly handled the issue masterfully in the House to make an end run around Democratic opponents. Hopefully the Republicans will learn from Obama's example when it comes to other issues. If Speaker Boehner had shown the same courage in standing up to his Tea Party wing on immigration -- an issue that divides the GOP the same way trade divides the Democrats  – the Congress would have passed a historic immigration reform bill last year. There is still a long road ahead on trade. The final stage of the TPP negotiations will be the hardest, with tough issues still to be resolved on agriculture with Japan, labor standards with Vietnam, poultry and dairy imports with Canada, and how fast the United States is willing to cut tariffs on cars and SUVs. The politics of trade remains a mess in the Democratic Party. Presumptive nominee Hillary Clinton--an enthusiastic supporter of the TPP when she was Secretary of State--has backed away and taken an equivocal stance to avoid alienating her union supporters. But labor’s embarrassing defeat on TPA, one can hope, might finally force the unions to find a more sensible middle ground in which they work with the Democrats to improve trade deals rather than trying to use their political muscle to defeat them. Several years ago, Australia’s then foreign minister Bob Carr pushed back again the narrative that has become so common in Asia--that the United States is a declining power unable to rise above its own political divisions. Nonsense, Carr argued: “America is just one budget deal away from ending all talk of being in decline.” That budget deal may still be elusive, but the deal on trade is a huge step in the right direction.

South Koreans have been among the world’s early adopters in globalization over the past two decades, going from outpost to “node” by embracing networks, connectivity, and economic interdependence in startling fashion in a very short period of time. It has been commonplace for most South Koreans to think of themselves as a small country, buffeted by geostrategic factors beyond its control, consigned to its fate as a “shrimp among whales.” This narrative, generally speaking, conforms with the twentieth century historical experience on the Korean peninsula, which witnessed annexation, colonization, subjugation, and a moment of liberation, followed by division, war, and marginalization as an outpost of the Cold War. Outsider impressions of late twentieth century Korea tended to view Koreans as defensive, self-absorbed, xenophobic to varying degrees, and only capable of viewing the outside world through a distinctively “Korean” lens. Given these circumstances, the early twenty-first century story of South Korea’s embrace of globalization on the foundations of its democratization and modernization is striking. The idea that South Korea should offer something to the world in return for the sacrifices made to defend South Korea from communist domination has had real pay-offs as South Korea’s reach and capacities has taken hold in South Korea. Korean conglomerates went global long ago. The younger generation is outward-looking: Korea’s “peace corps” ranks second only to the U.S. Peace Corps in terms of size; World Friends Korea (which falls under the Korea International Cooperation Agency, or KOICA) boasts over 3,000 volunteers at a given time, welcoming in 1,000 new volunteers each year into the program. Young Koreans are voracious consumers and top performers in the field of higher-level international education. A positive by-product of this shift is that South Korea has sought to make contributions to international leadership, both as a way of paying the world back for decades of international support and as a way of sharing with the world its unique experiences with development and democratization. Between 2010 and 2013, South Korea made a concerted effort to host a series of important multilateral forums, marking a new chapter in South Korea’s experience as a convener and contributor to the international agenda. But how has “hosting diplomacy” changed South Korea’s ability to influence global events, and what lasting impact might South Korea have as a G-20 contributor to international leadership? To examine twenty-first century South Korea’s contributions to the global agenda, I asked four authors, Colin Bradford, Toby Dalton, Brendan Howe, and Jill Kosch O’Donnell, to examine Korea’s contributions as a convener, host, and steward of the international agenda for international financial policy, development assistance and donor cooperation, nuclear security, and global climate finance. In addition, Andrew O’Neil evaluates South Korea’s middle power aspirations from an Australian perspective. Each of the papers tells its own story of Korean efforts to harness and provide thought leadership in the international arena disproportionate to Korea’s size and power. This set of papers (each available for download here) provides useful insights regarding what South Korea has done well, especially through its efforts to generate leadership through mobilization of ideas, personnel, and institutions. But the papers also reveal some challenges in terms of sustainability, transferability, and effectiveness of Korean contributions to international leadership. Some of these problems are organizational, but some are related to the challenge of establishing a vision and mobilizing “brand awareness” at a national level necessary to claim a particular slice of the international agenda as “the thing” Koreans are known for doing as well as or better than anyone else. The conclusion: Korea’s middle power efforts to date provide a good start, but they are still a work-in-progress. In the coming months, President Park will have opportunities to build on this foundation through UN efforts to promote sustainable development and in Paris at the UN conference on climate change.

By Lincoln Davidson Lincoln Davidson is a research associate for Asia Studies at the Council on Foreign Relations. Earlier this week, the Chinese government announced a set of policies aimed at encouraging migrants from rural areas to the cities to return to their hometowns and start businesses. The policy guidelines direct local governments to encourage migrant workers (as well as university graduates and discharged soldiers) to take the capital, skills, and experience they’ve acquired in urban areas back to underdeveloped rural areas and engage in entrepreneurship. These policies—think of them as the newest iteration of Deng Xiaoping’s “let some get rich first”—are a solid step towards promoting genuine market-driven development. People’s Daily reports that under the new policies local governments will employ the following five measures aimed at expanding rural entrepreneurship by returning migrants: Reduce “barriers to returning to rural areas” by providing training to returning migrants and reducing administrative fees for starting a business. Cut taxes for qualifying enterprises and individuals. Expand support for such enterprises, by providing subsidies, connecting them to local business networks, and helping them set up ecommerce platforms. Provide financial support for qualifying enterprises and individuals, by providing subsidized loans and expanding credit availability in rural areas. Increase support for entrepreneurial parks in rural areas. The policy comes at a time when the rate of migration to the cities is slowing. While migrant wages in China continue to grow, the rate of growth of the migrant workforce has declined for several years running, dropping from 5.5 percent growth in 2010 to just 1.3 percent in 2014. Government data also show that the number of rural residents employed near their hometown has grown at a faster rate than the migrant population over that time frame. Despite these trends in the labor force, these policies are long overdue. Although recent reforms have begun to liberalize China’s household registration system, known as the hukou system, movement to urban areas is still not always an option for rural residents. And in the countryside, where there’s less well-developed infrastructure, poorer access to credit, and strict rules about what land can be used for, it can be much harder to start a small business than in the city. By addressing the disparity between urban and rural residency, these policies are an important step forward in reducing the inherent inequality of being born in the Chinese countryside and a significant corrective to years of short-sighted development strategies in the Chinese countryside. Just as liberalization and the increased access to opportunities that accompanied it drove up rural incomes in the 1980s (and movement back towards state-driven development drove them down in the ‘90s), policies promoting rural entrepreneurship have the potential to significantly improve the economic situation of millions of Chinese rural residents today. At the same time, innovative agricultural ventures have an important role to play in China’s attempts to scale up its agricultural output. While this policy may not lead to more swimming pigs, it is aimed at upgrading agriculture and cultivating the services to support it. There has long been anecdotal evidence that potential income increases are not the sole—or even primary—factor motivating young Chinese to seek employment in urban areas. Among the many reasons that rural residents choose to head to the cities, a commonly seen one is a desire for self-improvement. Building on this, a 2013 study by researchers at the University of Pennsylvania found that the desire for personal development is a significant motivator behind the migration decisions of youth from rural areas in Gansu Province. The new policies also speak to these individuals. Having gone to the cities to learn and grow, they now have a chance to return home and use their know-how to start up a business, taking on new challenges (and new opportunities for personal development) in the process. By providing training and support services, the new policies can help these entrepreneurial individuals transition from laborer to small business owner. At the same time, it could mitigate the brain drain from China’s countryside that has drawn the best and brightest to urban areas, further sapping the already lagging rural regions of economic vitality. Of course, given how “uneven” and “selective” policy implementation by local governments tends to be in rural China, it remains to be seen what impact these new policies will have. Local governments already facing fiscal crisis will not be thrilled at the prospect of providing subsidized loans and additional services, and verifying the status of returned migrants could prove to be an additional outlet for corruption. However, with its focus on small, entrepreneurial ventures by individuals, this policy has the potential to move the Chinese economy away from state investment with minimal impact on productivity toward private sector investment in productive assets. And in the long run, that could mean higher standards of living for millions of rural Chinese.