Kadima's Win: Prospects for a Territorial Divorce

By Peter Zeihan

Preliminary results from Israel's March 28
elections indicate that a Kadima-Labor alliance captured 50 seats between
them in the Knesset, enough to anchor a center-left coalition capable of
ruling effectively.

Israel's electoral system has ensured that the
country never has a pure majority government; proportional representation
with a mere 2 percent floor encourages a proliferation of parties and makes
deal-making (and by extension deal-breaking) a regular feature of Israeli
governance.

A Kadima-Labor alliance, however, likely will be able to
secure support from one or two other like-minded parties in order to break
this trend. And in giving the alliance that opportunity, Israeli voters
appear to have elected the most authoritative government the country has
seen since the 1973 Yom Kippur war.

The Memory of 1973


While it is true that, due to peculiarities of its electoral system,
Israel has never had a pure majority government, the country was more or
less dominated politically by the Labor Party until after the 1973 war. That
is not to say that government policy was always sound or forward-looking,
just that it was broadly decisive as only a government with parliamentary
seats to spare can be.

The war had a profound impact on the Israeli
psyche, and brought to an end the period of political "stability" that had
endured since the founding of the state in 1948. A surprise attack by Egypt
and Syria, something that up to that point had been thought to be an
impossible feat, was fought off only by heavy and near-panic fighting.
Whereas previous wars -- the war for independence in 1948, the Suez crisis
in 1956, the Six Days War in 1967 -- had been fought largely on Israel's
terms, the 1973 war nearly succeeded in overwhelming the state's defenses.
The result was evisceration of public confidence in the government and, by
extension, the Labor Party.

Out of the ensuing combination of
disaffection, instability and fear was born the Likud
Party.

Ultimately, Likud's power has stemmed from a belief not only
that Arabs are not to be trusted, but also that Israel's national security
hinged on its ability to control a buffer zone of Arab territory. From this
belief came policies such as the encouragement of Jewish settlements
throughout the occupied Palestinian territories, as well as the 1982
invasion of Lebanon. For the Israeli left, land was just another issue up
for negotiation; the real issues were domestic, social and secular (an
attitude that obviously contributed to the left's fall from grace after
1973). For the right, land was something that could never be abandoned --
whether for religious reasons or others.

The emergence of Likud
certainly redefined the Israeli political scene, but the party was never
truly able to dominate the landscape as Labor had. Likud never formed a
stable majority government, even in coalition; at every turn, it ruled
either in a "national unity" coalition with Labor, or at the head of a
smattering of smaller parties that tended to be strongly religious or
right-wing, or both. The result, since Likud rose to power in 1977, has been
a succession of weak Israeli governments plagued by infighting --
particularly over policies that concerned Israel's borders, both formal and
de facto.

In other words, Israel has experienced a generation of
unstable governments that for the most part were unable to negotiate
coherently with anyone on anything. For all practical purposes, the Jewish
state was in the same position at the beginning of 2001 that it had been
since Likud rose to prominence.

And then came Ariel Sharon.


From Peace to Divorce

Unlike other leaders of the Israel
right, Sharon was neither bureaucrat nor businessman, nor was he an academic
or armchair strategist. He was a soldier who knew precisely what it meant to
order an attack, pull a trigger and plan an invasion.

When he
became prime minister in 2001, Sharon held views very similar to those of
most Likud leaders. However, a combination of frustration with the overall
peace process, cold demographic facts -- with the Palestinian territories
included, Jews were about to become a minority in Israel -- and the public
malaise that derived from living in constant conflict with Palestinians led
him to develop a new strategy.

In Sharon's mind, Israel -- as wedded
to the Palestinian territories -- had become an indefensible entity, and no
number of armored bulldozers or IDF raids would change that. He saw the need
not to bring peace to the territorial marriage between Israel and Palestine,
but to bring about divorce instead.

Sharon's policy marked a
dramatic departure from those of both the peaceniks and the land-grabbers.


Sharon ultimately believed that Yasser Arafat and other Palestinian
National Authority officials could not be trusted. This had less to do with
any beliefs about their personal sincerity when making promises than with a
lack of faith that Palestinian officials could deliver on said promises. As
such, from Sharon's point of view, talking with the Palestinians at all was
a sheer waste of time.

While that viewpoint was anathema to the
thinking of the peace crowd, other aspects of his assessment were viewed as
sacrilege by the land crowd. For Sharon, it was not the ideal of
security that was paramount, but rather the exercise of security that
mattered. When Sharon looked at a map of Israel he saw, not land that could
never under any circumstance be abandoned, but rather security commitments
that were irreconcilable with lines of defense. He saw Israeli settlements
that had to be removed, forcibly if necessary. He saw the need to redraw
Israel's borders in a way that would guarantee security -- and in reality,
that meant giving up whatever territory was difficult to hold.

In
practice, that would mean, among other things, blocking all Palestinian
access to Israel proper, a decision with very real economic implications. It
would mean annexing sections of the settlements in the territories that
served Israel's strategic purposes, while evacuating those that did not --
with the end goal of a more consolidated Jewish entity. It would mean
withdrawing security forces from the remaining Palestinian territories and
refixing Israel's official borders to reflect a new reality that would not
be negotiated, but imposed. Within this manufactured reality, Sharon would
alter the very geography of the West Bank; he sought to sequester the
Palestinians in a series of disconnected enclaves, build hermetically sealed
walls around them, and quite simply leave them to rot.

Thus it was
that when Sharon rose to power, the nature of the debate over Israel's
borders changed. Fissures began forming among the Israeli right. Benjamin
Netanyahu and his allies could accuse Labor leaders of being soft on the
Arabs and of being willing to blithely and treasonously sign away Israel's
security. But they could never hurl such accusations at Sharon, whose plan
has at times been referred to as a form of cultural genocide.

The
change in the border debate changed Israel, in several ways.

First,
Sharon's rise fractured the Israeli right and slowly disemboweled Likud as a
major political force.

Second, the stream of supporters of the
Israeli right who felt as Sharon did -- or came to support his policy --
followed him into forming a new political force: The Kadima party, which was
dedicated to achieving, at long last, a solution of sorts to the border
problem.

Third, the combination of Kadima's practical stance and
Labor's flexible stance on land-for-peace means that on the issue of the day
-- Israel's final borders -- the country now has for all practical purposes a
single party that seems poised to achieve majority control of the Knesset.
For the first time since before the 1973 war, the prospect of a stable
majority government for Israel is now in sight.

Finally, while it
was Sharon's political emergence that set this chain of events into motion,
the process is now self-sustaining and will not be fundamentally endangered
by his incapacitation. Between the rifts on the Israeli right, the formation
of Kadima and the pending emergence of a new Kadima/Labor government, Israel
is a step away from having a government that might not be subject to
frequent no-confidence votes it cannot ignore. Sharon probably wanted to see
his plans through to fruition, but his dominance in the past had sufficient
impact on Israel's political system that his absence in the future will not
be a significant impediment.

Unlike the Oslo Accords, the current
peace plan has a chance of working because it does not depend on political
promises made by governments or the dominance of certain towering
personalities, but rather because it meshes with the geographic realities in
place on the ground. Those realities have been ignored by every other
agreement to date. Kadima's goal is to complete the divorce by the end of
2010, just before the next government's term ends. That goal and that
timeframe are, uniquely among Middle Eastern "peace plans," achievable.


The Flip Side

The Israelis were not the only people who
were fundamentally changed by the outcome of the 1973 war. So were the
Palestinians. Before the Yom Kippur War, the Palestinian belief was that
sooner or later the Arab states would succeed in destroying Israel, and they
would then be able to leave their refugee camps in Lebanon, Jordan, Gaza and
the West Bank and return "home." The war of 1973 shattered that dream.


In 1974, then, the Palestinians began to take matters into their own
hands. In the years that followed, the Palestine Liberation Organization
(PLO) adopted terrorism as a tool. The abandonment of that policy, at the
close of the Reagan administration, helped to launch the Oslo peace process,
but it also heralded the slow descent of Arafat's PLO/Fatah faction into
corruption, nepotism and, ultimately, irrelevance. With the official
Palestinian leadership increasingly incapable of commanding the respect of
its constituents, Hamas slowly gathered strength as a social, political and
military force -- a process that culminated with its election victory
earlier this year.

Now, just as the new Kadima/Labor coalition
appears poised to command a confident centrist majority in the Knesset,
Hamas also commands a confident majority in the Palestinian National
Authority (PNA).

What is essential is the difference between Fatah
and Hamas. Fatah consisted of a corrupt old guard that was unable to impose
its will upon the Palestinian population in general, and upon the
Palestinian militants in particular. When Fatah promised that suicide
attacks against Israelis would stop, there were only stern bulletins and
more attacks. But Hamas directly controls most of those militants that Fatah
could not control. When Hamas promises that attacks will stop, they stop.


Which brings us back to Kadima and Sharon's successor, acting Prime
Minister Ehud Olmert. Like Sharon, Olmert has publicly noted the weakness of
the Palestinian leadership under President Mahmoud Abbas, directly referring
to the Palestinian government as a failure. More important, he has noted
that Hamas now calls the shots in the PNA. The sense of Arafat's nomadism is
not there; Olmert recognizes that Hamas is the powerbroker that three
successive Israeli governments vainly sought out as a negotiating partner,
and that -- now in power -- it has no intention of going anywhere.


Unlike past Israeli governments, a Kadima/Labor government could be
expected to speak with authority and consistency. Unlike past Palestinian
representatives, Hamas can both negotiate in good faith and deliver on what
it promises. (There are certainly reasons to distrust Hamas, but they are an
entirely different set of reasons.) And there are signs that talks -- real
talks -- are possible. Though still reflexively shouting "Death to Israel"
between sound bites, Hamas has raised the possibility of speaking with the
Israelis on the issue of establishing a "just peace."

But what is
truly promising about the direction the current process is that talks are
not even necessary.

Kadima's plan is to impose a settlement that
includes withdrawing Israeli forces from most of the West Bank. Hamas' plan
is to get the Israelis out of the West Bank. While it is true that the two
differ on the endgame -- Kadima sees withdrawal and border imposition as the
end of the issue, whereas Hamas sees it as just the beginning -- the process
we anticipate over the next four years will have the two actors, for the
first time, reading from the same script. Sharon's wall, and all it
represents, will be an issue for another day.

It appears the
Israelis and the Palestinians will have peace in our time ... for four
years.

At that point, we will find out just how airtight Sharon's
wall really is.

Send questions or comments on this article to analysis@stratfor.com.

Putting Cards on the Table in Iraq

By George Friedman

The clouds couldn't have been darker last
week. Everyone was talking about civil war in Iraq. Smart and informed
people were talking about the real possibility of an American airstrike
against Iran's nuclear capabilities. The Iranians were hurling defiance in
every direction on the compass. U.S. President George W. Bush seemed to be
politically on the ropes, unable to control his own party. And then
seemingly out of nowhere, the Iranians offered to hold talks with the
Americans on Iraq, and only Iraq. With the kind of lightning speed not seen
from the White House for a while, the United States accepted. Suddenly, the
two countries with the greatest stake in Iraq -- and the deepest hostility
toward each other -- had agreed publicly to negotiate on Iraq.

To
understand this development, we must understand that Iran and the United
States have been holding quiet, secret, back-channel and off-the-record
discussions for years -- but the discussions were no less important for all
of that. The Iran-Contra affair, for example, could not have taken place had
the Reagan administration not been talking to the Ayatollah Ruholla
Khomeini's representatives. There is nothing new about Americans and
Iranians talking; they have been doing it for years. Each side, for their
own domestic reasons, has tried to hide the talks from public view, even
when they were quite public, such as the Geneva discussions over Afghanistan
prior to the Sept. 11 attacks.

What is dramatically new is the public
nature of these talks now, and the subject matter: Iraq.

Not to put
too fine a point on it, but the real players in Iraq are now going to sit
down and see if they can reach some decisions about the country's future.
They are going to do this over the heads of their various clients.
Obviously, the needs of those clients will have to be satisfied, but in the
end, the Iraq war is at least partly about U.S.-Iranian relations, and it is
clear that both sides have now decided that it is time to explore a deal --
not in a quiet Georgetown restaurant, but in full view of the world. In
other words, it is time to get serious.

The offer of public talks
actually was not made by Iran. The first public proposal for talks came from
U.S. Ambassador to Iraq Zalmay Khalilzad, who several months ago reported
that he had been authorized by Bush to open two lines of discussion: One was
with the non-jihadist Sunni leadership in Iraq; the other was with Iran.
Interestingly, Khalilzad had emphasized that he was authorized to speak with
the Iranians only about Iraq and not about other subjects. In other words,
discussion of Iran's nuclear program was not going to take place. What
happened last week was that the Iranians finally gave Khalilzad an answer:
yes.

Iran's Slow Play

As we have discussed many times,
Iraq has been Iran's obsession. It is an obsession rooted in ancient
history; the Bible speaks of the struggle between Babylon and Persia for
regional hegemony. It has some of its roots in more recent history as well:
Iran lost about 300,000 people, with about 1 million more wounded and
captured, in its 1980-88 war with Iraq. That would be the equivalent of more
than 1 million dead Americans and an additional 4 million wounded and
captured. It is a staggering number. Nothing can be understood about Iran
until the impact of this war is understood. The Iranians, then, came out of
the war with two things: an utter hatred of Saddam Hussein and his regime,
and determination that this sort of devastation should never happen again.


After the United States decided, in Desert Storm, not to move on to
Baghdad and overthrow the Hussein regime -- and after the catastrophic
failure of the Shiite rising in southern Iraq -- the Iranians established a
program of covert operations that was designed to increase their control of
the Shiite population in the south. The Iranians were unable to wage war
against Hussein but were content, after Desert Storm, that he could not
attack Iran. So they focused on increasing their influence in the south and
bided their time. They could not take out Hussein, but they still wanted
someone to do so. That someone was the Americans.

Iran responded to
the 9/11 attacks in a predictable manner. First, Iran was as concerned by al
Qaeda as the United States was. The Iranians saw themselves as the vanguard
of revolutionary Islam, and they did not want to see their place usurped by
Wahhabis, whom they viewed as the tool of another regional rival, Saudi
Arabia. Thus, Tehran immediately offered U.S. forces the right to land, at
Iranian airbases, aircraft that were damaged during operations in
Afghanistan. Far more important, the Iranians used their substantial
influence in western and northern Afghanistan to secure allies for the
United States. They wanted the Taliban gone. This is not to say that some al
Qaeda operatives, having paid or otherwise induced regional Iranian
commanders, didn't receive some sanctuary in Iran; the Iranians would have
given sanctuary to Osama bin Laden if that would have neutralized him. But
Tehran's policy was to oppose al Qaeda and the Taliban, and to quietly
support the United States in its war against them. This was no stranger,
really, than the Americans giving anti-tank missiles to Khomeini in the
1980s.

But the main chance that Iran saw was getting the Americans
to invade Iraq and depose their true enemy, Saddam Hussein. The United
States was not led to invade Iraq by the Iranians -- that would be too
simple a model. However, the Iranians, with their excellent intelligence
network in Iraq, helped to smooth the way for the American decision. Apart
from providing useful tactical information, the Iranians led the Americans
to believe three things:

1. That Iraq did have weapons of mass
destruction programs.

2. That the Iraqis would not resist U.S.
operations and would greet the Americans as liberators.

3. By
omission, that there would be no post-war resistance in Iraq.

Again,
this was not decisive, but it formed an important part of the analytical
framework through which the Americans viewed Iraq.

The Iranians
wanted the United States to defeat Hussein. They wanted the United States to
bear the burden of pacifying the Sunni regions of Iraq. They wanted U.S.
forces to bog down in Iraq so that, in due course, the Americans would
withdraw -- but only after the Sunnis were broken -- leaving behind a Shiite
government that would be heavily influenced by Iran. The Iranians did
everything they could to encourage the initial engagement and then stood by
as the United States fought the Sunnis. They were getting what they
wanted.

Counterplays and Timing

What they did not count
on was American flexibility. From the first battle of Al Fallujah onward, the
United States engaged in negotiations with the Sunni leadership. The United
States had two goals: one, to use the Sunni presence in a new Iraqi
government to block Iranian ambitions; and two, to split the Sunnis from the
jihadists. It was the very success of this strategy, evident in the December
2005 elections, that caused Iraqi Shia to move away from the Iranians a bit,
and, more important, caused the jihadists to launch an anti-Shiite rampage.
The jihadists' goal was to force a civil war in Iraq and drive the Sunnis
back into an unbreakable alliance with them.

In other words, the war
was not going in favor of either the United States or Iran. The Americans
were bogged down in a war that could not be won with available manpower, if
by "victory" we mean breaking the Sunni-jihadist will to resist. The
Iranians envisioned the re-emergence of their former Baathist enemies. Not
altogether certain of the political commitments or even the political savvy
of their Shiite allies in Iraq, they could now picture their worst
nightmare: a coalition government in which the Sunnis, maneuvering with the
Kurds and Americans, would dominate an Iraqi government. They saw Tehran's
own years of maneuvering as being in jeopardy. Neither side could any longer
be certain of the outcome.

In response, each side attempted, first, to
rattle the other. Iran's nuclear maneuver was designed to render the
Americans more forthcoming; the assumption was that a nuclear Iran would be
more frightening, from the American point of view, than a Shiite Iraq. The
Americans held off responding and then, a few weeks ago, began letting it be
known that not only were airstrikes against Iran possible, but that in fact
they were being seriously considered and that deadlines were being drawn up.


This wasn't about nuclear weapons but about Iraq, as both sides made
clear when the talks were announced. Both players now have all their cards
on the table. Iran bluffed nukes, the United States called the bluff and
seemed about to raise. Khalilzad's request for talks was still on the table.
The Iranians took it. This was not really done in order to forestall
airstrikes -- the Iranians were worried about that only on the margins. What
Iran had was a deep concern and an interesting opportunity.

The
concern was that the situation in Iraq was spinning out of its control. The
United States was no longer predictable, the Sunnis were no longer
predictable, and even the Iranians' Shiite allies were not playing their
proper role. The Iranians were playing for huge stakes in Iraq and there
were suddenly too many moving pieces, too many things that could go wrong.


The Iranians also saw an opportunity. Bush's political position in
the United States had deteriorated dramatically. As it deteriorated, his
room for maneuver declined. The British had made it clear that they were
planning to leave Iraq. Bush had really not been isolated before, as his
critics always charged, but now he was becoming
isolated -- domestically as well as internationally. Bush needed badly to
break out of the political bind he was in. The administration had resisted
pressure to withdraw troops under a timetable, but it no longer was clear
whether Congress would permit Bush to continue to resist. The president did
not want his hands tied by Congress, but it seemed to the Iranians that was
exactly what was happening.

From the Iranian point of view, if ever a
man has needed a deal, it is Bush. If there are going to be any negotiations,
they are to happen now. From Bush's point of view, he does need a deal, but
so do the Iranians -- things are ratcheting out of control from Tehran's
point of view as well. For domestic Iraqi players, the room to maneuver is
increasing, while the room to maneuver for foreign players is decreasing. In
other words, the United States and Iran have, for the moment, the unified
interest of managing Iraq, rather than seeing a civil war or a purely
domestic solution.

The Next Phase of the Game

The
Iranians want at least to Finlandize Iraq. During the Cold War, the Soviets
did not turn Finland into a satellite, but they did have the right to veto
members of its government, to influence the size and composition of its
military and to require a neutral foreign policy. The Iranians wanted more,
but they will settle for keeping the worst of the Baathists out of the
government and for controls over Iraq's international behavior. The
Americans want a coalition government within the limits of a Finlandic
solution. They do not want a purely Shiite government; they want the Sunnis
to deal with the jihadists, in return for guaranteed Sunni rights in Iraq.
Finally, the United States wants the right to place a force in Iraq --
aircraft and perhaps 40,000 troops -- outside the urban areas, in the west.
The Iranians do not really want U.S. troops so close, so they will probably
argue about the number and the type. They do not want to see heavy armored
units but can live with lighter units stationed to the west.

Now
obviously, in this negotiation, each side will express distrust and
indifference. The White House won the raise by expressing doubts as to
Tehran's seriousness; the implication was that the Iranians were buying time
to work on their nukes. Perhaps. But the fact is that Tehran will work on
nukes as and when it wants, and Washington will destroy the nukes as and
when it wants. The nukes are non-issues in the real negotiations.


There are three problems now with negotiations. One is Bush's
ability to keep his coalition intact while he negotiates with a member of
the "axis of evil." Another is Iran's ability to keep its coalition together
while it negotiates with the "Great Satan." And third is the ability of
either to impose their collective will on an increasingly self-reliant Iraqi
polity. The two major powers are now ready to talk. What is not clear is
whether, even together, they will be in a position to impose their will on
the Iraqis. The coalitions will probably hold, and the Iraqis will probably
submit. But those are three "probablies." Not good.

All wars end in
negotiations. Clearly, the United States and Iran have been talking quietly
for a long time. They now have decided it is time to make their talks
public. That decision by itself indicates how seriously they both take these
conversations now.

China: Riding the Rural Tiger

By Rodger Baker

Chinese President Hu Jintao and Premier Wen
Jiabao have been touting the "New Socialist Countryside" initiative. The
initiative is being painted as a priority for reducing China's widening
rural/urban gap in the near term, and for creating a more sustainable and
robust economic future in the long term. The problems of rural economic
reform, the social gap and rural unrest rank high on the agenda of China's
central leadership and in the current session of the National People's
Congress (NPC). Potential solutions to these problems form the heart of
China's 11th five-year economic plan (2006-2010).

Over the past
quarter century, China has made remarkable economic progress. By all
accounts, its cities are booming: The bicycle-clogged alleys of the past are
now traffic-clogged avenues, and construction cranes rise within cities as
part of a seemingly endless rejuvenation and modernization campaign.
Statistically speaking, China has never been stronger; gross domestic
product (GDP) has risen from $200 billion in 1978 to $2.7 trillion in 2005.
Foreign trade last year reached $1.4 trillion, with a trade surplus of
nearly $102 billion. Exports accounted for 18 percent of the 9.9 percent GDP
growth China reports for 2005. In the same year, the country utilized some
$60.3 billion in foreign direct investment and sent $6.92 billion overseas
in non-financial-sector investments. Foreign currency reserves at the end of
2005 registered $818.9 billion, rivaling Japan's.

But the growth has
been anything but even. Urban growth continues to outpace rural growth,
despite income increases across the board. In 2005, per capita disposable
income reached $1,310 in urban areas, compared to just $405 in rural net
income. Income disparity in 1984 was about a 2 to 1 ratio; now it is 3 to 1.
Overall, the poorest 10 percent of China's citizens hold only 1 percent of
the nation's wealth, and the wealthiest 10 percent claim 50 percent of the
money. Even in urban areas, there are massive disparities: The poorest 20
percent of urban-dwellers control just 2.75 percent of private income; the
top 20 percent control 60 percent of the total.

The gaps manifest in
other ways as well. China's registered urban unemployment stands at 4.2
percent, but rural unemployment -- which isn't measured officially -- is
anecdotally much higher, and even Beijing admits that some 200 million rural
workers have migrated to cities recently in search of employment. That
represents a substantial portion of the total rural population, which
numbers 800 million to 900 million. In the cities, these migrants are
treated as second-class citizens at best. In the countryside, they fare
little better: Measures of education and health care are substantially
lower. Moreover, there has been little legal recourse for farmers, who
technically don't even own the land they work, when local officials
confiscate the land for new industrial and housing projects.

The
central government is well aware of these problems and, perhaps ironically,
began issuing public cautions about social and economic tensions years
before the international business community bothered to notice. Unrestrained
economic growth no longer is viewed as a viable or sustainable option, and
Beijing has begun to reassert more centralized control over economic
development, with a particular emphasis on reducing the rural-urban gap.


But in seeking to address this problem, Beijing has exposed a deeper
issue: endemic corruption and self-interest at the local and provincial
levels of government. It is where economic disparity and government
corruption intersect that social clashes occur most
often.

Geography of Corruption

More than 25 years after
its launch by Deng Xiaoping, China's economic reform and opening program has
reached a critical juncture. Economic reforms have outpaced social and
political reforms, and historical strains between the coast and inland
regions, between urban and rural, and between the educated and less-educated
are threatening the fabric of social stability and the central government's
ability to rule. It is easy to see the frayed edges: Local protests turn
violent where urban development projects eat away at the rural land. As the
social instability moves closer to the coastal cities, there is a risk that
China's competitiveness as an investment destination will be harmed, thereby
triggering a spiral of economic and social degradation. Social instability
also lays bare the growing rift between the central government and the local
and regional leaders.

From a historical perspective, China's
apparently stunning economic success stems from the pursuit and
implementation of the quintessential Asian economic plan, which can be
summed up as "growth for the sake
of growth." Japan, South Korea, most of the Southeast Asian "tigers" and
China all facilitated their economic "miracles" by focusing on the
flow-through of capital, without regard for profits. As long as money was
flowing in, there could be jobs. As long as there were jobs, there was a
stabilizing social force. There was also an overall rise in personal wealth,
though rarely was it evenly spread.

The coastal provinces and cities
became the focal points for international investments in manufacturing, as
investors exploited preferential government policies and cheap labor. The
rural areas -- traditionally the backbone of China's economy -- and the
petroleum and heavy industry of the northeast (which had been core to early
Communist Chinese economics) faded in relevance. Though Beijing occasionally
promoted more inland development and investment opportunities, geography and
a lack of infrastructure made these unappealing to investors. The
concentration of wealth in the coastal regions was a source of minor social
tensions, but restrictions on internal migration kept a buffer between rural
and urban populations, and social frictions remained comparatively low. These
restrictions, however, have been only selectively enforced as of late, and
many are being lifted.

The booming coastal economies created clear
opportunities for corruption. As provincial and local Party cadre and
political leaders became the gatekeepers for foreign investments, they also
became mini-emperors of their own economic fiefdoms. Collusion and nepotism
-- always a part of Chinese political society -- became even more entrenched
as the money flowed in. With the central government fixated on growth, the
best-performing local leaders were rewarded. The more foreign capital they
were able to attract, the greater their personal influence and takings.
These officials were not measured on efficiency or profitability, but on
total flow-through of capital, rates of growth, employment and social
stability.

This partly explains why attempts by the previous
government to address the unequal development in China failed. Each time
former President Jiang Zemin or former Premier Zhu Rongji tried to adjust
policies and financial flows to the interior, there were strong objections
from the wealthier coastal provinces. When they launched anti-corruption
campaigns, the graft their investigators uncovered was deep and wide, and in
some cases even threatened to reach up to the top echelons of power -- at
times implicating Jiang himself. This only further entrenched the problem
and removed incentives for Jiang and Zhu to act; after all, both were part
of the so-called Shanghai clique and derived their political support from
the coastal regions.

Under these two leaders, the government was
much more successful in reducing the independence of the military, as
neither Jiang nor Zhu had significant ties into the institution. But because
the economic and political elite in the coastal regions were the source of
the central leadership's power, they were able to repel reforms sought by
the central government.

This all changed with the coming of Hu and
Wen, both of whom are from rural areas. Wen, a perennial political survivor
known for his ability to connect with the "common man," has been practically
deified among rural-dwellers on account of his 10-year-old coat. That the
premier still wears the same coat after 10 years is a clear sign (according
to ample coverage by the news media and blog sites) of his care for the
people, rather than for himself.

Herein lies the secret of Hu and
Wen's strategy to regain control over the local and regional governments and
Party officials. Whereas Jiang and Zhu tried using anti-corruption campaigns
-- only to end up implicating themselves and their core supporters -- Hu and
Wen are moving to harness the power of China's rural masses. Depending on
which Chinese official you believe, this is a mass of humanity numbering
from 700 million to 950 million people. Even at the low end of the
estimates, however, rural-dwellers make up more than half of China's
population -- and greatly outnumber the 300 million middle- and upper-class
Chinese living mainly in Beijing and the coastal cities.


Harnessing the Masses

Chinese leaders have a long
history of using the masses as weapons when challenges to central authority
arise -- from the attempts to harness the Boxers at the turn of the 20th
century to Mao's communist revolution to the Cultural Revolution. In each
case, the process was chaotic and the outcomes were uncertain. Though Mao
eventually succeeded in rallying the rural populace to effect his communist
revolution, it simply served as a starting point for a new Chinese system.
The use of the Boxers led to the dissolution of the Chinese dynastic system,
and the Cultural Revolution wiped out whatever economic gains had been made,
leaving China to start nearly from scratch once again.

What Hu and
Wen intend to do is rally the masses to pressure local leaders into
returning authority to the center. From this, centralized economic direction
will, they hope, lead to more equalized development without significantly
undermining the country's growth (though a slight slowing will be expected).
Ultimately, the causes of social discontent would be mitigated and social
frictions reduced as money is shifted to the interior.

This is a
rather risky proposal, but China's core leadership sees this as the least
distasteful among a poor selection of options. The initiative is being
presented not as a disruptive social revolution, but as the duty of those
who got rich first to assist those who trail them. The initial details of
the official plan include greater spending in rural areas on infrastructure,
education, healthcare and agriculture, with funding coming primarily from the
urban centers. The plan already is meeting with mixed reactions from China's
regional leaders -- and while the NPC is expected to approve the plan, that
doesn't mean that they like it.

However, as the government's core
leadership has pointed out ad nauseum over the past year, the Chinese
economy is in a fragile state, and the rural/urban inequalities threaten to
undo everything China has built up since the economic opening and reform
program began. Unless the central government regains complete control over
economic strategy and tactics, there is a fear that China ultimately would
fracture into competing regions, largely independent of any central
authority -- a sort of economic warlordism reminiscent of the final days of
previous Chinese dynasties.

Beijing's choice, then, is between
taking no action against local governments, out of fears of triggering
massive capital flight or inadvertently crippling investment and export
activity, or rallying the rural masses -- which would be another avenue
toward recentralizing control.

Thus, the central government has made
a point of publicizing ever-more-dire statistics concerning rural and urban
unrest. The Ministry of Public Security reported 87,000 cases of public
disturbances in 2005, up from 74,000 in 2004 and 58,000 in 2003. (The
numbers are high, but the definition of "disturbance" remains ambiguous.)
The ministry has also warned of an imminent "period of pronounced
contradictions within the people" in which "unpredictable factors affecting
social stability will increase." Meanwhile, Wen has repeated that the cause
of many protests is the confiscation of rural land for development and
industrial projects -- projects that often are linked to corrupt local
officials or are local initiatives that don't match the central priorities.


The message to the local leaders, of course, is that China's masses
are on the move. In discussing the rural/urban gap, Chen Xiwen -- deputy
director of the Office of the Central Financial Work Leading Group -- noted
recently (and somewhat ominously) that 200 million farmers have left the
countryside; Chen warned that "to increase the living standard of these
farmers, China should spare no efforts to build the new socialist
countryside." In essence, Beijing is threatening the local leaders with the
spectre of a rural rising. The class struggle is on, and the farmers far
outnumber the city-dwellers. The implicit message is that, for the safety of
the city, the farmers must be funded and rural areas built up.

At the
same time, Beijing is looking at a wholesale change in the local leadership,
beginning with the Party secretaries and chiefs of China's 2,861 counties.
New regulations -- not altogether welcomed by the existing Party cadre --
will require new county-level Party secretaries and chiefs to be around 45
years old and possess at least a bachelor's degree. These individuals would
be less likely to have already built up their personal economic connections,
and be more beholden to the central government for legitimacy and support.
Beijing is also increasing supervision and admonition of Party and
government officials.

But to make these changes last, Beijing needs
to give the lower cadre some incentive to follow the central government's
demands -- even if it means a reduction in local investments or a rise in
local unemployment. Beijing must ensure that local officials are more
closely tied to the central leadership in Beijing than to foreign investors
and shareholders in Japan or the United States. For this, Beijing needs to
make it utterly clear what risks the local government leaders face. Threats
of prosecution and even the token executions of some officials have not
worked, but the potential for more and larger social uprisings might.


This means Beijing needs to allow, if not subtly encourage, more
localized demonstrations.

And that apparently is where Hu and Wen
intend to go. The central government's response to stories of rural unrest
has remained rather low-key thus far. In reference to the Dongzhou
protests in December 2005, where at least three were killed when local
security forces opened fire on the crowd, officials on the sidelines of the
NPC session recently made it a point to say the officers in question are
under detention and did not follow orders. In other uprisings, there even
have been suggestions of sympathy from the center. In the cost-benefit
analysis, Beijing apparently has determined that the risks of allowing the
current trend of growing regionalized power to continue outweigh the risks
of trying to manipulate popular sentiment against local officials.


This, perhaps more than anything, underscores the severity of the
economic and governing problems facing China's central leadership.


The strategy of unleashing the rural masses, allowing and even
subtly encouraging protests could quickly get out of hand. However, given
the wide array of localized concerns, there is a natural disunity that could
be expected to constrain protesters -- keeping demonstrations locally
significant but nationally isolated. So long as protesters don't join across
provinces and regions, so long as no interest is able to link the disparate
demonstrations, the central leadership will retain some leeway to implement
its policies.

But as history bears witness, any attempt to harness
protests and mass movements is a very risky strategy indeed.

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