Saturday, February 25, 2012

Scientific and economic diplomacy a pressing agenda

Ferry Akbar Pasaribu, Brussels | Fri, 02/24/2012 10:55 AM A | A | A|-Klipping The Jakarta Post

This week every Indonesian ambassador from across the world will gather in Jakarta for consultative meetings with various senior government officials, including the President himself.

One of the main agenda items to be discussed during the meetings is how to optimize the use of economic diplomacy for the acceleration of Indonesian development.

The government hopes to see Indonesia evolve as the 12th biggest economy in the world by 2025 by implementing its planned economic development strategy and programs to boost domestic growth and regional connectivity.

This was revealed in the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), aimed at developing infrastructure in six priority regions across the country.

This plan so far has been in line with what happened after the Asian economic crisis in 1997-1998. If we look at various reports by several international organizations and banking institutions we see that having so far weathered the global financial crisis the outlook for the Indonesian economy is promising.

In 2011 its full-year growth stood at 6.5 percent, more than half of which was driven by strong household consumption and capital investment. Investments are lured by a huge domestic demand from the expanding middle class.

The recent upgrade in Indonesia’s credit ratings to investment grade by Moody’s Investors Service and Fitch Ratings will likely boost the inflow of investment.

Despite the global economic slowdown, led by the financial crisis in the eurozone, the World Bank still forecasts Indonesia will grow by 6.2 percent in 2012. So far the picture has been very rosy.

However, if we delve deeper, Indonesia needs to pay attention to its economic structure. The national output still relies heavily on resource-based products.

Growth has been possible partly due to the booming price of commodities over the last two years. This fact could affect Indonesian economic growth as global commodity prices remain highly volatile.

Also, resource-based industries do not create jobs as much as manufacturing and services do. As revealed by the World Bank Report (Indonesia Economic Quarterly) released last December, Indonesian exports of resource-based manufactures, such as rubber and palm oil, increased significantly between 2003 and 2008. The proportion of resource-based products in total non-oil and gas exports rose from 34 percent in 1995 to 47 percent in 2010.

Some economic experts opine that a resource-based economy will bring fewer transfers of technology as against one based on manufacturing. Further, such an economy does not promote productivity-enhancing structural changes.

The World Bank Report also underlines Indonesia’s low spending (by public and private agencies) on research and development (R&D) with a mere 0.08 percent of GDP in 2009. This is substantially lower than other Asian countries such as Thailand (0.26 percent in 2006), Malaysia (0.63 percent in 2006), China (1.44 percent in 2007), Singapore (2.5 percent in 2007) and South Korea (more than 3 percent in 2007).

Those countries which spend more on R&D also have a robust manufacturing sector and are turning themselves into knowledge-based economies.

From 1990–1996, the Indonesian manufacturing sector (mostly dominated by low-technology products) grew by 12 percent per year, contributing to one-third of Indonesia’s GDP growth. During that period of time Indonesia witnessed average economic growth of 7 percent per annum.

Following the crisis in 1997-1998, the Indonesian manufacturing sector steadily declined. It only started to pick up from 2009 until 2011, when it grew by 5.6 percent, still far below the pre-crisis level.

This growth has been driven by the domestic market with growing demand for manufactured products such as basic metals, food, chemicals and automotive parts.

The World Bank Report shows that developing the manufacturing sector could help create more jobs, higher wages and reduce unemployment.

In the end, it would lead to a larger middle class to serve as a lucrative market for manufactured goods.

Therefore Indonesia needs to restructure and modernize its economy. The manufacturing sector has to be developed through more comprehensive and generous R&D spending.

Knowing that R&D is quite a risky and expensive endeavor, Indonesia needs to minimize risk by pursuing technology transfers from more advanced economies. This could take place through foreign direct investment (FDI), technology licensing or imports of capital goods.

As long as R&D investment is securely linked to the manufacturing sector, new technology adoption within the Indonesian economic structure can be accelerated.

At this point, the Indonesian Foreign Ministry could lend its services to the country by establishing and delivering scientific and economic diplomacy.

Some Indonesian missions abroad are accredited to countries where hard capital, such as technology, expertise and capital investments or soft capital such as corporate culture, are abundant. Let us take Europe for instance.

Regardless of the fact that some European countries are experiencing an economic slowdown, Europe is still home to advanced and green technology innovations, a large number of private investors, as well as many of the world’s most advanced and profitable companies.

Europe needs Indonesia, and other developing economies, as a source of growth if it is to weather the economic woes within its borders.

By carrying out market intelligence, a link and match role, Indonesian diplomats abroad could gain access to technology and FDI for government agencies as well as the private sector in Indonesia.

On the hard capital side, the Foreign Service could help Indonesian R&D institutions, be they public or private, gain access to R&D institutions abroad.

Diplomats could also help find investors to participate in the Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development, provided there are foreseeable profits, investment guarantees, law enforcement, as well as a hospitable tax regime. FDI could bring R&D and expertise to Indonesia.

On the soft capital side, diplomats could also help Indonesian companies get exposure to the professional corporate culture established in many foreign companies, through internships or professional training.

Indonesian State-owned Enterprises (SOEs) are a very significant part of Indonesian economic capitalization (with total assets of around US$ 292.5 billion, roughly 39 percent of GDP in 2010), but as President Yudhoyono has pointed out, these SOEs have not yet contributed to their full capacity due to structural and cultural problems.

That is why they could be slated as targets to be exposed to advanced technology, modern management and FDI. These efforts might help transform those SOEs into world leaders.

Therefore, Indonesian diplomats need to be equipped with sophisticated knowledge on technology and economics through training and education, so that they will be able to play the link and match role.

With a clear and comprehensive strategy based on individual strength and excellence, Indonesian diplomats could become accelerating agents in Indonesian economic development.

The writer is a diplomat. The opinions expressed are personal

Asean urged to pursue reforms ahead of AEC

Asia News Network, Bangkok | Sat, 02/25/2012 6:21 AM A | A | A |-Klipping The Jakarta Post

Speaking at the Department of Trade Negotiations' Annual Symposium 2012 on "AEC 2015 & Beyond", Asean secretary-general Surin Pitsuwan urged governments and all involved sectors to modify rules and open up more to facilitate investment and trade.
"The amendment of laws and regulations is a challenge for all Asean members now. Although Asean members have committed themselves to be more open to investment from each other, their stringent laws and regulations have obstructed the growth of trade and investment in the region," Surin said.
The Asean chief added that due to the slowdown in the global economy, more foreign investment is coming to Asean as they are seen as dynamic markets with potential. Of the total foreign direct investment worth US$78 billion (Bt2.35 trillion) in Asean in 2010, more than 70 per cent was in the service sector.
This showed that the region has moved to another stage in development, where people want a better quality of life, while the manufacturing sector is reaching its crest. Surin said that Asean would see less investment in manufacturing but more in the service sector to facilitate manufacturing that is already here.
He added that intra-Asean trade is still small at only 25 per cent, compared with other economic groups. To ensure sustained development of the region, Asean needs to considerably boost internal trade.
He urged the setting up of a fund to support technology and help increase management efficiency of enterprises to ensure competitiveness under the single market.
Surin said Thailand should look ahead of the political conflict and concentrate more on development of the country and the region.
Deputy Premier and Finance Minister Kittiratt Na-Ranong said Asean would now be prompted to move rapidly following the fast developments in Burma and the change in the mindset of the Burmese people, who are ready to embrace development.
Mohamed Ariff bin Abdul Karim, professor from the Malaysian Institute of Economic Research, said that Asean needs to strengthen intra-regional trade amid the volatile global economy. To adjust to the sluggish global economy, Asean must accelerate structural reforms to facilitate trade growth among member states.
"Intra-regional trade will gain greater prominence for Asean in the face of slower extra-regional export growth. Domestic and regional demand will be the main drivers for the economic growth of Asean," said Ariff.
Mathew Verghis, World Bank lead economist in Bangkok, said Asean is moving to a new stage of growth and strong economy as more service investments are coming to the region following Asean integration.
He suggested that Asean should move to high value-added regional trade, improve the quality of human resources by focusing on education development, and facilitate more service investment as the global trend is to grow through the service sector.
Thai Commerce Minister Boonsong Teriyapirom said the government is striving to increase the efficiency of Thai enterprises to ensure their competitiveness in the upcoming seamless Asean market.

Thursday, February 23, 2012

What the euro means for Asia

Paul Donovan, London | Thu, 02/23/2012 9:47 AM A | A | A | - Klipping The Jakarta Post

The euro should not exist. In a perfect world (run by economists) the euro would never have been created. Sadly, however, the world is not perfect — and it is run by politicians. The result is an entirely dysfunctional monetary union.

The Spanish economy has youth unemployment approaching 50 percent. The Greek economy is in its fourth consecutive year of negative GDP growth and is likely to embark on a fifth year of negative growth later in 2012. Euro area countries have to share a common interest rate and a common exchange rate with Germany — where unemployment is at a 20-year low and growth is positive if unspectacular around 2.5 percent. This is an unworkable situation — what Greece needs is very different from what Germany needs.

Will the euro break up? We must hope not. The consequences would be devastating (a weak country could see its economy halve in size on exit). The social unrest we have today is minor compared to what could take place if the euro were to fragment. As the euro was essentially a political creation, it must be political will that keeps it together — and it would be wrong to underestimate that political will.

So what will happen? Because so much rests on political decision making, the path for the euro area is hard to determine. But it seems highly likely that there will be a recession this year. How bad that recession is depends on what happens to the banking sector.

Euro area banks are increasingly reluctant to lend money — and with all the risks that they have been through over the last six months, this is hardly a surprise. Slower bank lending growth will hit some economies particularly hard.

Fiscal austerity is being urged by Germany. In the wake of France’s downgrade (and with the UK outside the euro and unlikely to ever join) it is Germany’s voice that is loudest in setting the euro policy agenda. When the slowing credit creation is combined with further fiscal austerity, the consequence is likely to be negative GDP growth. Not all countries will be negative, of course, but Italy, France and Spain all seem likely to see a drop in economic activity.

So why do the convulsions of the euro area matter to Asia? There are three reasons why Asian companies and investors need to follow the Euro drama.

1. The euro area is big

The euro bloc is the second-largest economy in the world. Over a third of APEC’s exports go to the euro bloc, making it the second-most important market for Asia after the United States. If the euro area is to have a recession — falling demand — followed by poor growth — slow demand — then Asia needs to adjust its growth model accordingly. Of course, Asian dependence on export led growth has faded in the wake of the global financial crisis, but there can be no complacency about exports to the euro area.

2. The euro area is globally integrated

Euro financial institutions have been involved in the global economy for decades. Global trade, in particular Asian trade, has been financed by euro area banks. As euro banks retrench and the importance of the home market is emphasized, Asia will have to look elsewhere for funding. That is not to say that alternative sources are impossible to find — clearly they are not. But it means that Asia must change.

Similarly, the euro area as a globally integrated market will have an impact on other economies in the world. The euro bloc is over 20 percent of US exports outside of the NAFTA trade bloc. The US may not be an export led economy, but there is potentially an impact from a euro area slowdown on US growth, which in turn has implications for Asia. In a globalized world economy with a complex web of trade and financial links, what happens in Athens can clearly have global ramifications.

3. The euro area is rich

The wealth of the euro area can be discovered in surprising places (Italy, for instance, is a wealthier country than Germany). Overall, the Euro area is wealthy. Thus the euro area has a role as an investor in the rest of the world. The political pressure on euro area banks and financial institutions to concentrate their investment efforts in their home markets is increasing. Popular hostility to overseas investment by multinational companies has also increased. Investment from the euro area into Asian stock markets, bonds and companies may well slow in the years ahead.

The euro area is an economic mess — but it is a mess that the rest of the world must pay attention to. The slow growth that will accompany euro area reform and the changing relationship between the euro area and the rest of the world will be critical to global economics. Now might be a good time to start taking an interest in euro politics.

The writer is managing director and deputy head for global economics at the UBS Investment Bank. The opinions expressed are his own.

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Ron Real, Leesburg va usa | Thu, 23/02/2012 - 15:02pm

You might have heard "Never trust a Greek bearing gifts," but today what is relevant is not to trust a banker on Greece. The European banks are broke, helplessly bankrupt. None of any so-called aid to Greece touches Greece, but flow right in the rather empty coffers of the British, European and American banks that have been running a massive swindle, very similar in nature to the "sub-prime" real estate scam. Most Indonesians have a sense of how this works. There are certain types of loans that Indonesia has gotten, where for every million dollars face value of the loan only about 1/10, $1000,000 ever reached Indonesia, and that goes into 4 start hotels and restaurants, and the servile industry built up around them; but Indonesia owes all the money back plus interest and fees. Sound familar, talk to the Greek people about it.
All the bad debt of the international banks MUST be written off immediately, saving the small but vital actual commercial banking section. After that step, Europe can be begin to be fixed.

I'll be happy to explain it to Paul Donovan, once he is secure in his must delayed jail cell.

Wednesday, February 22, 2012

SBY calls on RI ambassadors to be “agents of change”

Bagus BT Saragih, The Jakarta Post, Jakarta | Thu, 02/23/2012 1:52 PM A | A | A | - Klipping The Jakarta Post

President Susilo Bambang Yudhoyono met on Thursday with hundreds of diplomats, including 85 ambassadors and 28 consuls general stationed in 88 countries, to deliver his directives on bolstering Indonesia’s diplomacy.

The President told the diplomats to be confident, smart and effective when maintaining Indonesia’s political stance in international forums.

“Be confident, have a global view, know your mission, be achievement-oriented, and always be ready, active, and creative,” the President told the diplomats.

Yudhoyono also warned that all ambassadors, as well as other high-level state officials, needed to have the same perspective when it came to making statements in foreign countries.

“Don’t let two ambassadors make contradictory statements because that will confuse both allies and enemies, although we don’t have any enemy. If you make statements that are not in line with the President’s policy, that will be embarrassing,” he said.

Several Cabinet members also attended the meeting, including Foreign Minister Marty Natalegawa, Defense Minister Purnomo Yosgiantoro, Cabinet Secretary Dipo Alam and Home Minister Gamawan Fauzi.

“Our ambassadors need to play roles of agents of change who are capable and anticipative in pushing forward positive global change,” Marty said on the sidelines of the meeting.

The meeting was held at the Pancasila building in the Foreign Ministry complex where, last week, Yudhoyono met with 128 foreign envoys assigned to Indonesia.

Monday, February 20, 2012

'India’s decision to import Iran oil a slap on US face'

The Statesman, The Asia News Network | Tue, 02/21/2012 9:47 AM A | A | A | - Klipping The Jakarta Post

India’s decision to continue importing Iranian oil is a slap on the face of the United States, which is galvanizing the international community to isolate Teheran, according to a former US diplomat who was Bush Administration’s pointman on Indo-US civilian nuclear deal.

“This is bitterly disappointing news for those of us who have championed a close relationship with India. And, it represents a real setback in the attempt by the last three American Presidents to establish a close and strategic partnership with successive Indian governments,” former Under secretary of state for political affairs Nicholas Burns wrote in an op-ed in current-affairs magazine The Diplomat.

“India’s decision to walk out of step with the international community on Iran isn't just a slap in the face for the USA it raises questions about its ability to lead,” said Burns.

India, which relies on Iran for 12 percent of its oil imports, has refused to scale it down. Only recently, Burns had written an op-ed in The Boston Globe arguing that the US should commit to an ambitious, long-term strategic partnership with India. “I remain convinced of its value to both countries and to the new global balance of power being created in this century,” he wrote.

“With its unhelpfulness on Iran and stonewalling on implementation of the landmark US-India Civil Nuclear Agreement, however, the Indian government is now actively impeding the construction of the strategic relationship it says it wants with the United States,” Burns said.

North Korea after Kim Jong-il’s death

Ko Young-hwan, Seoul | Thu, 02/16/2012 10:31 AM A | A | A | - Klipping The Jakarta Post

On Dec. 17, 2011, Kim Jong-il died suddenly of cardiac arrest, just like his father, Kim Il-sung. After Kim Il-sung transferred his control of the North Korean Workers’ Party, the backbone of the country’s power hierarchy, to his son in 1973, Kim Jong-il ruled the nation with an iron fist for 37 years.

On Dec. 30, the day following his funeral, Kim Jong-un, the 28-year-old son of Kim Jong-il, became the supreme commander of the Korean People’s Army, marking the country’s hereditary succession of power to the third generation.

The first decision by the new leadership of North Korea following Jong-il’s death was to embalm and permanently preserve his body and to raise his statues and “portraits” all over the country. This was very much a replay of events 18 years earlier.

Upon Kim Il-sung’s demise in July 1994, Kim Jong-il mummified his father’s body to “enshrine him eternally,” and changed Kumsusan Assembly Hall, which served as an office building for his late father, into Kumsusan Memorial Palace at a cost of US$890 million.

After Kim Il-sung passed away, Kim Jong-il resorted to both a reign of terror and “politics of giving hope” in an attempt to maintain control over the North Korean people amid their suffering from food shortages and extreme hardship.

On one hand, Kim Jong-il created an atmosphere of fear all around the nation by ordering his subordinates to “make a gunshot sound all around the country”.

On the other hand, he attempted to give the North Korean people a ray of hope and expectation. This partly entailed his putting forward an “enormous goal” of making North Korea one of the world’s “strong and prosperous nations” by 2012, the centennial year of Kim Il-sung’s birthday.

Kim Jong-il promised to transform a poor and devastated nation where people die of hunger into a world-class power in fourteen years, but this proved to be an utter falsehood.

For 13 years following the promulgation of the goal of emerging as a “strong and prosperous nation,” the North Korean economy moved backward again and again.

As of the end of 2011, national industrial output, including steel, machinery, electric power, and fertilizer, was down 80 to 90 percent from the 1980s, when Kim Jong-il maintained a total monopoly on power.

What Kim Jong-il bequeathed upon his third son, Kim Jong-un, is a poverty-stricken country on the brink of collapse. It is in an even more parlous state than many African countries.

Even the North Korean leadership, a “master” of propaganda, had no alternative but to make a pitiful mention in the Rodong Sinmun (the official mouthpiece of the Central Committee of the Workers’ Party) that the “achievements left by Kim Jong-il for the benefit of the people” were “nuclear weapons, artificial satellites, and mental power.” Nuclear weapons of unknown sophistication and readiness, and North Korean “artificial satellites” deemed non-existent in this world represent all the accomplishments of Kim Jong-il.

He not only drove the country onto the verge of collapse, but also handed over power to his son, as in a feudalistic dynasty.

As according to the old saying “Like father, like son,” the first thing Kim Jong-un did after he became the heir apparent was to construct his KRW170 billion mansion in Pyongyang.

Following Kim Jong-il’s death, Kim Jong-un initially embalmed his father’s body just like his grandfather’s and ordered the raising of statues and portraits of Kim Jong-il all over North Korea. Statues and portraits of Kim Il-sung remain in every corner of the country today.

His successor, Kim Jong-un, will not be able to adopt Chinese-style reform and opening, which Kim Jong-il vehemently opposed. Instead, he will keep alive his late father’s “military-first ideology.” This implies that he will consolidate the military and men in uniform while neglecting the economy and the people. Limited state property will be funnelled into his personality cult and the military, which in turn will put North Korea even deeper into crisis and spark a strong backlash against the third-generation power transfer of the Kims.

There is one problem. The North Korean people are more aware than they were at the time of Kim Il-sung’s demise. South Korea’s popular culture and news of its progress and China’s rapid development driven by reform and opening are percolating through like seeping water to the North Korean people through the Sino-North Korean border, North Korean farmers’ markets, and cell phones.

The people’s resistance is getting stronger, making it difficult for agents of the State Security Department and Public Security Ministry and cadres of the Workers’ Party to clamp down on the farmers’ markets

What’s worse, North Korea is celebrating Feb. 16, the birthday of the deceased Kim Jong-il, as the most magnificent “festivity” at this juncture where the entire international community is criticizing North Korea’s hereditary power succession over three generations. North Korea is a country where one dead person assumes more importance than countless living people.

The writer is senior research fellow, Institute for National Security Strategy.

Wednesday, February 15, 2012

Asean, India reaffirm 20-year ties

Supalak Ganjanakhundee (The Nation), The Asia News Network, New Delhi, India | Wed, 02/15/2012 9:45 AM A | A | A |- Klipping The Jakarta Post

Ministers attending the Association of Southeast Asian nations or Asean's fourth dialogue session with India suggested measures to forge closer ties and strengthen the two sides' partnership for progress and development.

As part of the celebration of two decades of India-Asean relations, the dialogue sought ways to increase engagement and consolidate the relationship.

Indian External Affairs Minister SM Krishna hosted the dialogue with his colleagues from Asean, including Cambodian Deputy Prime Minister and Foreign Minister Hor Namhong, whose country currently holds Asean's rotating chair, and Thai Foreign Minister Surapong Towichukchaikul.

Officials, academics and representatives of the private sector participated in the dialogue Monday and Tuesday at a New Delhi hotel. They discussed economic integration, non-traditional security challenges, the traditional security architecture in the Asia-Pacific region and ways of building a knowledge and science network.

Krishna told journalists from Asean that the regional grouping is an important part of India's Look East policy, and that relations with the 10-member bloc had gone well so far. India has participated in many Asean frameworks including the Asean Regional Forum and East Asia Summit, he said.

In the context of commemorating two decades of relations, India and Asean will participate in many activities this year including a car rally across the region in December, the minister said.

Krishna launched a book, "Two Decades of India's Look East Policy", after an inaugural session on Monday to reaffirm India's policy towards countries to its east, notably in Southeast Asia.

"Our Look East policy has been a function of the interconnectedness that India has experienced over the centuries with Asean countries, our common developmental and strategic interests, and the processes of transformation and integration in our region," he said.

Through the policy, India seeks to make eastern neighbors Burma and Thailand a major gateway to the rest of the region.

Surapong proposed setting up a joint working group to push forward regional connectivity efforts. Such a group would explore ways and means of supporting the Asean Connectivity master plan and come up with new initiative to further regional integration within the group and with India, he said.

Surapong said Asean and India were speeding up work on a Thailand-Burma-India road link, as well as exploring an extension eastwards to Laos and Cambodia.

The development of the Mekong-India Economic Corridor could further enhance regional connectivity as it would create a short-cut trade route connecting Southeast Asia to the east coast of India linking Ho Chi Minh City, Phnom Penh, Bangkok, Dawei in Burma and India's Chennai, he said. Krishna agreed, telling Asean journalists that India was upgrading its road system to connect with Burma, while Thailand was also doing its part.

Hor Namhong proposed that leaders of Asean and India at their summit late this year should consider turning the Asean-India dialogue framework into a strategic partnership.

To promote trade, investment and tourism, and to support people-to-people exchanges, the sides should consider establishing an Asean-India Centre, similar to an existing body set up by China, Japan and South Korea, he said.

Malaysian Deputy Foreign Minister Kohilan Pillay said Asean and India should consult on global developments, as there were a number of international issues affecting the region. Pointing to the way Malaysia proposed a reform of the world financial system after the 1997 Asian financial crisis, he said India and Asean should promote such an initiative now, as global economic difficulties confront economies in the region.

Burmese Deputy Foreign Minister Myo Myint said his country had received support from India and members of Asean on political and economic reform. He urged India to support the Asean Connectivity plan to materialize physical links between Asean and India via his country.

Monday, February 13, 2012

Maritime security cooperation in Southeast Asia

Agus Haryanto, Purwokerto, Central Java | Wed, 02/08/2012 11:00 AM A | A | A |-Klipping The Jakarta Post

Energy security and trade between the economies in East Asia and ASEAN depend extensively on maritime security in the critical passages of the Malacca Strait and the South China Sea.

The Sunda Strait and the Lombok Strait are important secondary channels to link these economies to major markets in case of a catastrophe along the Malacca Strait.

While there has never been a terrorist attack or accident that effectively cordoned off the Malacca Strait, there is a need to prepare for such possibility to ensure that trade in and out of the region will not come to a near halt.

In view of the potential for disasters or security situations to affect vital waterways, there is a need for cooperation capable of averting and managing any potential crisis that could cause major economic damage to the region’s economy.

Data from the WTO underscores the urgency of the matter. Japan was the top importer of fuel from the Middle East in 2011 with US$116 billion worth of fuel passing through the Malacca Strait, while Korea and China imported $76 billion and $62 billion worth of fuel respectively from the same source and passing through the same channel.

The economies of Singapore, Malaysia, Indonesia and the Philippines also depend on fuel imports from the Middle East to meet the domestic needs of industries, for electricity generation as well as for the growing public use of motor vehicles.

Aside from fuel, ASEAN’s economies, China, Japan and South Korea also export textiles, clothing, electronics, cars and food products through the Malacca Strait and the South China Sea on daily basis.

These high-value products are transported by large bulk carriers though waters with elevated risks of piracy, terrorism and, more importantly, a high possibility of collision.

Despite measures taken by the Port Authority of Singapore, several collisions have taken place in the Singapore Strait, and the potential for larger collisions in the shallow Malacca Strait remains high.

While piracy has been under control, risks remain high that terrorists might be able to paralyze the economies of the region by striking at the flow of fuel hat support daily economic activities.

There is also a possibility that a more sophisticated attack might be planned on undersea gas pipelines and telecommunications cables that link the nations of the South China Sea and the Java Sea. We cannot ignore these scenarios as remote undersea vehicles could carry out such attacks.

At the moment, the ASEAN Maritime Forum and the ASEAN Regional Forum have gone into extensive discussions on strategies to manage piracy; the smuggling of goods, people and narcotics; terrorism and marine disasters.

China and Japan are two of the keenest participants in the forums, as their economies depend extensively on the ability of ASEAN to manage security of the vital waterways.

These forums have resulted in coordinated training and patrols among navies, arrangements to authorize “hot pursuit” into the maritime territory of other countries, streamlining port operations and security procedures and building a Maritime Electronic Highway that would monitor and identify the movement of all shipping along the Malacca Strait. All those preventive measures have been effective so far.

Now as ASEAN heads toward the formation of the ASEAN Economic Community and toward greater connectivity among the 10 member economies and the major economies in our region, there is a need for closer collaboration in upholding maritime security.

Threats to maritime security have been on the rise. Increased reliance on interconnected computer navigation and communication systems has led to new vulnerabilities. Any breakdown in such systems as a result of hacking or software failure could cause accidents at sea. The easy availability of small, low-flying planes to avoid protection could also pose a threat to the vessels carrying fuel.

As long as there are growing geopolitical tensions in the Middle East and a sustained agenda by terrorists groups to strike at governments and trade, the risks along the Malacca Strait remain high.

Further, there is an apparent rivalry in naval capabilities among nations contending for control of the South China Sea.

As China, Vietnam and other claimants of the Spratley Islands flex their naval muscles, there is a risk. While ASEAN is pushing for ratification of the Code of Conduct by all parties, there is still a need to take more proactive measures.

The writer is a graduate researcher at the international relations department at Jenderal Soedirman University in Purwokerto, Central Java.

Monday, February 6, 2012

Human rights and the ASEAN-China FTA

Iman Prihandono, Sydney | Tue, 01/12/2010 9:29 AM A | A | A | - Klipping The Jakarta Post

Entering year 2010 is marked by the entry into a free trade area agreement between ASEAN and China, also known as the ASEAN-China FTA. Little attention was given to the possible impact of this FTA agreement to fulfill human rights in Indonesia. Some rights include the right to health and a healthy environment, work and earn a decent livelihood, the access to natural resources, and other social, economic, and cultural rights.

The ASEAN-China FTA was first made in 2001 at the ASEAN-China Summit, which formulated a Framework on Economic Cooperation and established an ASEAN-China Free Trade Area. Under this framework, establishing a free trade area within 10 years time was agreed.

The ASEAN-China FTA is not the first trade liberalization agreement entered by Indonesia. Indonesia’s participation in regional and international trade agreements began with the ASEAN Free Trade Area (AFTA) in 1992, and followed its accession as a WTO member, as well as other agreements such as the ASEAN-Japanese FTA, the Korea-ASEAN FTA and a bilateral agreement with Japan, the Indonesia-Japan Economic Partnership Agreement (IJ-EPA). These agreements could possibly be added by the EU-ASEAN FTA. The same possibility may also happen with the ASEAN-Australia-New Zealand FTA, both agreements are now still in the negotiation process.

Critics said a number of trade agreements may potentially hinder the fulfillment of human rights.

IJ-EPA for example, was criticized for this agreement and is considered to facilitate the entry of hazardous toxic waste to Indonesia (The Jakarta Post, June 27, 2008).

Similarly, the ASEAN-Australia-New Zealand FTA is considered to be expanding the opportunity of the ownership of land by foreigners. This is due to a national treatment provision, in which foreign companies should be treated the same as those obtained by domestic companies in terms of land ownership (bilaterals.org, Feb. 4, 2009).

There have been many objections raised by industry associations and business on the implementation of this FTA, mainly because they are not ready yet to compete. Some analysts believe China’s international trade will only benefit more this FTA, this refers to Indonesia’s trade balance into deficit in China that has continued the past few years.

But this is more due to economic reasons. There area also fears the FTA will affect the fulfillment of human rights in Indonesia.

First, among the commodities that have to be liberalized are agriculture and fishery products. The majority of Indonesia’s population depended on these two sectors. Possible entry of agricultural and fishery products from China at a substantially lower price is a direct threat to the fulfillment of Indonesian farmers and fishermen rights to work and earn a decent livelihood. In fact, the effect of these cheaper agricultural and fisheries products from China has hit our farmers and fishermen even before this FTA enters into force (Antara, Dec. 30, 2009).

The same situation can occur in the manufacturing sector. The entry of cheap goods from China may make our key manufacturing industries unable to compete. Businesses may close or at least reduce production capacity. This situation will not only result in higher rates of employment termination, estimated to reached the figure of 7.5 million workers, but harder competition for jobs will lower the bargaining position of labor and workers. This situation will in turn make it too difficult for workers to obtain their basic rights, such as proper wages and compensation after termination.

Second, of course we remember when the Health Ministry issued a ban on the circulation of food products, beverages and cosmetics imported from China. This was because they proved to contain chemicals harmful to humans.

Likewise, it was also found that some elements in toy products from China were made from harmful chemicals. The lower cost of producing goods in China seems to have a direct relationship the poor health safety of these products. These experiences should become an important lesson for the government.

The government should then strengthen the health standards of a product. However, this measure alone is not enough, governments will also need to reinforce its control mechanisms, imposing effective fines for non-compliance and provide direct and appropriate compensation for victims.

Without these four measures in hand, it is suffice to say that the government may have ignored the rights of its citizens on healthy living and healthy environment.

Third, unlike the upcoming EU-ASEAN FTA, which in its “negotiating directive” clearly stating that the establishment of a free trade area between the EU and ASEAN will fully respect the implementation of “... international environmental and social agreements and standards”. Unfortunately, the same provision does not exist for the ASEAN-China FTA. The lack of guarantee in respecting environmental and social rights in this FTA may put the environment and society in a vulnerable position.

We certainly do not want the ASEAN-China FTA to open the way for the destruction of the environment and violations of social and cultural rights of the people by foreign investors.

The Indonesian government seems unlikely to back out of this agreement. Although it will feel a bit cramped, the human rights dress should be worn.


The writer is a lecturer and researcher at the Department of International Law, Faculty of Law, Airlangga University, Surabaya. He is currently undertaking PhD research in international law at the Macquarie Law School, Sydney, Australia.

A look into ASEAN-China’s DOC

Fahlesa Munabari, Melbourne | Tue, 02/07/2012 10:34 AM A | A | A | - Klipping The Jakarta Post

After the adoption of the Guidelines for the Implementation of the DOC (Declaration of Conduct) in Bali in July last year, ASEAN member states and China held follow-up deliberations in Beijing last month.

Apart from reiterating run-of-the-mill statements underscoring the noteworthiness of the DOC’s role in sustaining peace and stability in the South China Sea, both parties agreed to hold a set of workshops aimed at enhancing collaboration on marine research and activities this year, which marks the 10th anniversary of the signing of the DOC.

Holding workshops on marine issues would serve, at least for the time being, to allay tensions in the South China Sea, especially between the four ASEAN claimants (Vietnam, the Philippines, Malaysia and Brunei Darussalam) and China.

However, it, alas, would not address core problems in the area that must be resolved to bring about durable stability in the Asia-Pacific region.

Conducting effective joint marine research and activities would require that disputed and undisputed areas of the sea be defined.

Though it failed to gain support at the last ASEAN Summit in Bali, the Zone of Peace, Freedom, Friendship, and Cooperation (ZoPFFC) proposed by the Philippines would in fact be an effective way to address the core problems in the sea.

The proposal would segregate disputed from the undisputed areas, and it would not rule out bringing the dispute before the International Court.

Some ASEAN countries, especially those with close ties with China, have been wary of espousing the proposal, for they are disinclined to vex an increasingly powerful China, which is flexing its muscles in the South China Sea.

While the principles of the DOC, such as a commitment to resolve territorial disputes by peaceful means and to exercise self-restraint, need to be continuously upheld by ASEAN and China, it has been evident that the agreement cannot prevent clashes in the Sea.

Last March, the Philippines reported that two Chinese patrols boats threatened to ram a survey ship near its claimed territory, the Reed Bank. A few months later in May, Vietnam accused Beijing of violating its marine sovereignty after Chinese ships damaged a PetroVietnam exploration boat in the Sea.

Although such escalating tensions could have been eased through last year’s ASEAN meetings, not all claimants were satisfied with the guidelines, progress on which has progressed at a snail’s pace.

To the Philippines, a failure to secure support for the ZoPFFC from ASEAN would allow it to drum up more support from its close ally, the United States.

Top Filipino and American top defense and foreign affairs officials recently held intensive talks to significantly enhance maritime cooperation between the countries, resulting in an increased US military presence and joint military exercises in the Philippine archipelago.

Though the US said that it was not seeking a military base in the Philippines, its strategic stance reflects Washington’s shift in focus from Afghanistan and Iraq to the Asia-Pacific region.

Such a change was envisioned in the US Defense Strategic Review 2012 approved by US President Barack Obama last month, suggesting that China’s reemergence as a regional power has the potential to affect
the US’ economy and security in a variety of ways.

When ASEAN’s claimants are thwarted by a rising China in their attempt to exploit natural resources within their maritime sovereignty, mainly due to lingering uncertainty over disputed and undisputed areas of the South China Sea, increasing military cooperation between the claimants and the US is an inevitable and a realistic defense approach to strategically balance against China and to safeguard their political security and economic interests.

Although intensifying military cooperation between the claimants and the US is unavoidable, it is nevertheless not expected to last long, as it could exacerbate tensions between the US and China in the sea, posing a threat to political security of ASEAN member countries.

It is therefore critical for ASEAN to make a decisive breakthrough by spelling out guidelines oriented toward avoiding armed conflict in the sea.

To this end, defining disputed and undisputed areas is an overriding precondition for creating durable stability in the sea.

Lacking such precondition, joint marine development, which includes joint natural resources exploration, in disputed areas looks to be doomed to fail as it will likely face opposition from the public in the ASEAN claimant nations.

As chairman of ASEAN last year, Indonesia was lauded for its effort to ensure the adoption of the Guidelines for the Implementation of the DOC, deliberations on which started in 2005.

As the largest democracy in ASEAN and a non-claimant state to the dispute, Indonesia has a moral responsibility to ensure the guidelines are as feasible and effective as possible for the forseeable future.

Drafting the guidelines has become one of the country’s top priorities according to the annual address of Foreign Minister Marty Natalegawa.

Taking into account the idea of determining the disputed and undisputed areas of the South China Sea will be worthwhile, without having to offend our ASEAN partners and to deviate from the ASEAN way of mutual respect, non-interference, and mutual cooperation.

The writer is a lecturer at the International Relations Department of the University of Budi Luhur, Jakarta.

Time for fourth generation ‘bebas aktif’ to rise

Meidyatama Suryodiningrat, Jakarta | Thu, 12/22/2011 9:33 AM A | A | A |-Klipping The Jakarta Post

Bring together the most prominent foreign affairs commentators, senior diplomats, and even the odd high school student. What would their unscripted impulses be toward Indonesian foreign policy?

Without hesitation, those impulses would include two simple, yet profound, words that have defined the essence of what Indonesia is: ‘bebas aktif’ (independent and active).

So engrained is the notion, so well indoctrinated is the rhetoric, that former foreign minister and later vice president Adam Malik’s famous quip about the country’s non-alignment rings true in the heart of any educated Indonesian: “Indonesia has not opted for non-alignment, Indonesia was born a non-aligned country!”

Foreign headlines in November said Indonesia had responded warily to the US military buildup in the Australian city of Darwin.

But such wariness is perhaps the most natural, unimpulsive reaction one should expect from a country who prides itself on this motto, albeit sometimes failing in practice, and on the adherence of a principle which has stood the test of revolution, the Cold War and multilateralism.

First coined by vice president Mohammad Hatta in a speech on Sept. 2, 1948, the malleability of the ‘independent and active’ principle was proven in the way it was immediately embraced by succeeding opposition administrations.

When Masjumi Party — at the time the nation’s largest Islamic Party — took over from Hatta two years later, its foreign minister Mohammad Roem pursued a policy with similar parameters. Then, during the Sukiman Cabinet in May 1951, a like-minded foreign policy based on Pancasila was pronounced.

Following in the footsteps of Hatta, Haji Agus Salim, Roem, Adam Malik, Mochtar Kusumaatmadja, Ali Alatas and Hassan Wirayuda, foreign minister Marty Natalegawa and the current crop of dedicated stakeholders of Indonesian foreign policy represent the fourth generation of adherents to ‘bebas aktif’.

Some, like the late British scholar Michael Leifer, brushed off the 1948 speech as no more than an “ostensible declaration of non-alignment”. However, either by coincidence or design, Hatta’s “Mendayung Antara Dua Karang“ (Rowing between two coral reefs) address before the Central Indonesian National Committee reverberated the inclination of Indonesian behavior in a global community.

The vitality of ‘independent and active’ can be explained in the fluid character in which it is practiced. A character akin to Indonesia’s own. Hence Hatta’s advice of a principled foreign policy yet “executed in consonance with the situations and facts it has to face.”

Throughout the years it has been dressed in various political and scholarly jargons. From ‘non-alignment’, to ‘middle power’, to the updated ‘dynamic equilibrium’. Essentially, it is a foreign policy that seeks to build bridges, equitability among nations, and sovereignty in the face of hegemonic forces.

This latest manifestation has inherited the genes of the past.

Speaking before the United Nations General Assembly, Marty described ‘dynamic equilibrium’ as a vision for Southeast Asia, “where preponderant power is absent not by the promotion of bloc politics and often self-fulfilling geopolitical fault lines, rather, a new kind of international relations, with its emphasis on common security, common prosperity and common stability”.

The Asia-Pacific summits of 2011 indicated a parlous prognosis for regional relations. A likely era of competing preponderence, a playground for the dynamics of realpolitik. Despite the exculpation of disaster relief centers or traditional allies, the region is evolving into a familiar map of axis and containment.

Diminishing is the accord of ASEAN as a master in its own home.

There will be periods over the coming years where new domestic fault lines may be thrust to into sway, either for or against particular powers. Hence, the vigilance of the past is recalled, a call to arms for the fourth generation ‘bebas aktif’.

The lessons of 1948 rekindled, as ‘bebas aktif’ was as much about external relations as it was about maintaining a domestic balance at home.

In the immediately post-independence period, factions were developing, thrusting the nascent republic from one bloc
to another. Fearing that it would undermine negotiations to achieve diplomatic recognition, the likes of Hatta and Sjahrir were hesitant to the urging of Amir Sjarifuddin, who was eager to establish treaties with Moscow.

The stakes in 2012 may not be as grave as the Cold War past, but the gauntlet is no less consequential.

Why did President Susilo Bambang Yudhoyono feel it necessary in early December to warn his ministers to ensure their statements on international issues “fall within the broad national position”?

A friendly reminder, or a warning? Purely a lack of policy coordination, or insistence towards support for his own internaitonal outlook that is perceived incongruent with established dictums?

Indonesia received many acolades for its foreign policy participation in numerous high level meetings. In the last 60 days of 2011 alone there was the G20 in Cannes, APEC in Hawaii, ASEAN and East Asia Summit (EAS) in Bali and COP 17 in Durban.

Indonesian foreign policy in 2012 will be filled with less pageantry. No more ASEAN chairmanship, and fewer visits by celebrity statesmen/women. All for the better, substance can again be the core behavior rather than smiles and handshakes.

A debate will continue over Indonesia’s reaction as the US and its allies increase the rhetoric and symbolic action in response to a rising China. No domestic faction will specifically side one way or the other, but preferences will clearly emerge.

What course prevails as the country navigates the two symbolic reefs, will depend largely on the predilection of the President and his closest policy confidant.

Hence the rise of staunch fourth generation voices as a reminder in defense of ‘bebas aktif ‘, from the offices of Jl. Pejambon (the Foreign Ministry) to the established think tanks, from the House of Representatives to the pages of this, and other, newspapers.

The writer is Editor-in-Chief of The Jakarta Post

RI ‘straying’ from free and active foreign policy

Erwida Maulia, The Jakarta Post, Jakarta | Tue, 12/27/2011 10:33 PM A | A | A |-Klipping the Jakarta Post

Observers have suggested that Indonesia has strayed from its “free and active” foreign policy principle, citing President Susilo Bambang Yudhoyono’s dismissal of concerns over the US plan to deploy 2,500 marines in Darwin, Australia.

In an immediate response to US President Barack Obama’s announcement of the plan last month, Foreign Minister Marty Natalegawa said that it may have triggered tension in the region, but Yudhoyono quickly dismissed the statement, saying after a meeting with Australian Prime Minister Julia Gillard that he was assured Australia and the US meant no harm with the plan.

Backing up Marty’s position to strike a balance between major power engagement in the region, such as the US and China, analysts have criticized Yudhoyono for moving toward the US as the region faces an escalation of rivalry.

Bantarto Bandoro of the Indonesia Defense University said Yudhoyono’s gesture could be seen as leaning toward the US.

“Indonesia won’t of course blatantly declare its [inclination to the US]. But the President’s move indirectly suggests [the inclination],” Bantarto said in a phone interview with The Jakarta Post.

He said while Marty had responded rightly, considering the circumstances, Yudhoyono had used a weak excuse to support his trust in the intention of the US’ to cause no harm.

University of Indonesia international law expert Hikmahanto Juwana agreed, saying it would be naïve of the President to believe that the US had no further agenda than that of stationing US marines for disaster relief purposes.

“Regardless of the difference [between Marty and Yudhoyono], we can’t easily believe that there’s nothing behind this,” Hikmahanto said.

He added among the reasons to remain alert was that the US had closed its military base in the Philippines, meaning it might need a new base for the region and that Darwin might well be developed into that new base.

“Not to mention that Obama and the Democrat-led US may be replaced by the Republicans, which have been more inclined toward war,” Hikmahanto said.

Bantarto said given recent events, Indonesia needed to reaffirm its free and active foreign policy, saying Yudhoyono’s gestures regarding the US’ Darwin plan no longer reflected the stance.

“It is in fact a pretty significant deviation,” Bantarto said.

Hikmahanto also reiterated Indonesia’s need to stay true to its free and active stance, given that most of the public still rejected the idea of a pro-US foreign policy.

He said Indonesia could remain good friends with the US, but deviating from its supposed neutral stance was out of the question.

US Ambassador to Indonesia Scot Marciel complained last week about the Indonesian media exaggerating the US military plan in Darwin, saying it was “not nearly as big of a deal” and that the number of US marines to be stationed there was “pretty small”.

Marciel added the US did not mind Indonesia further expanding its ties with China amid the archipelago’s growing relations with the US, saying it was not a “zero-sum” game.

An official close to the issue has said that Yudhoyono was merely playing a “good cop bad cop” game to handle both the US and China, with Marty expressing a tough stance on the US while Yudhoyono presented a calming influence.

“Just after the US announced the Darwin Plan, Yudhoyono gathered Indonesia’s top military officers, ordering them to stay alert to every possibility and if necessary, ordering them to mobilize Indonesia’s forces toward the country’s eastern borders,” he said.

Does Indonesia need a foreign policy white paper?

Yayan GH Mulyana, Jakarta | Tue, 02/07/2012 10:49 AM A | A | A |-Klipping The Jakarta post

One interesting feature in the ongoing Republican Party primaries in the United States is the readiness of candidates to tackle foreign policy issues. Mitt Romney, for example, has released a foreign policy white paper titled An American Century: A Strategy to Secure America’s Enduring Interests and Ideals.

The white paper covers a wide range of country-based issues as well as thematic issues such as the Middle East and the Arab Spring, disarmament, terrorism and human rights. It also outlines the need for reform in the institutional and legal aspects of US foreign policy.

Foreign policy white papers have been widely used by governments or people who are running for office to explain their views and beliefs on foreign policy issues. For candidates, it is important that a white paper be convincing and persuasive to voters.

White papers are also prepared to respond new challenges that might profoundly affect a country and its people. Australia, for example, through a task force, is currently preparing a white paper titled Australia in the Asian Century.

In countries such as the US and Australia, white papers are a critical part of national foreign policy management. White papers are part of a tradition that builds textual communication on foreign policy between the governments and the people or between politicians and voters. They are also part of educating the general public on foreign policy issues that affect their lives.

Romney’s foreign policy white paper was prepared by his foreign policy team, which is comprised of experts with blend of experiences, spanning academia and public service. It is guided by visions and a set of interests that go well with the traditional values of the Republican Party in foreign policy.

Meanwhile, Australia’s Asian Century white paper is being prepared through a public consultation process that includes an array of stakeholders, from the general community to business and academia and other interested parties. This process will encourage a wide sense of ownership and enhance the legitimacy of the white paper.

Does Indonesia need a foreign policy white paper?

Indonesian foreign policy is rich in written and spoken tradition. Since independence until today, the nation’s leaders have been very innovative in calibrating Indonesian foreign policy with the challenges of their time. One historic innovations is the bebas aktif (free and active) foreign policy. Prime minister Moh. Hatta introduced the doctrine in a speech before the Working Body of the Central Indonesian National Committee on Sept. 2, 1948.

During Sukarno’s presidency, Indonesia was quite inventive in its foreign policy: from pioneering in the birth of the Non-Aligned Movement to the use of the concept of Nefos (new emerging forces) and Oldefos (old established forces) as a working notion to look at the world of that time and efforts to use Pancasila as a normative basis for the international order.

President Susilo Bambang Yudhoyono has been active in strengthening the bebas aktif foreign policy through his directives. He introduced the idea of an “all-directions foreign policy” and “a million friends, zero enemies” to make foreign policy more relevant to the national interests and the challenges that Indonesia is presently facing.

As far as a foreign policy white paper is concerned, it is not a tradition yet in Indonesia that governments or candidates to develop such papers.

Perhaps, from a practical point of view, having a foreign policy white paper is not that urgent, despite efforts that have been made in the past few years. This is quite understandable considering that even without such papers, Indonesia has been doing well in foreign policy since independence.

For all that, a white paper on foreign policy would give us more benefits than harm.

First, it would helps organize all essential foreign policy directives in a more coherent, structured, and systematic manner. Indonesia would have a clear picture as to what should be prioritized and what strategic measures should be taken in foreign relations within a particular time frame.

If we believe that this century is the Asian century, it is important that we have forward-looking and crystal-clear vision as well as viable missions to embrace the spirit of the time.

Second, a white paper could help relevant institutions to generate derivatives from the nation’s foreign policy directives. This could help ensure coherence and consistency between presidential macro-foreign policy and ministerial micro-foreign policy.

This could also facilitate better cooperation among relevant institutions in the foreign policy business.

Third, a white paper made available through the media and accessible to the people would help increase the people’s awareness of foreign affairs and foreign policy. Thus, it would have an educational purpose.

Fourth, a widely consulted white paper would further our democracy. Amid many voices, a government white paper would have broader public legitimacy.

In this context, it would be something to be anticipated if candidates in 2014 could use white papers to express solid and coherent view of the foreign policy issues that affect Indonesians in the 21st century.

The writer works for the President’s special assistant for international relations. The opinions expressed are his own.

Economic dimensions in Myanmar’s opening

Simon Tay, Singapore | Tue, 02/07/2012 10:40 AM A | A | A | - Klipping The Jakarta Post

Just as Myanmar’s long-detained icon, Aung San Suu Kyi, began campaigning for a parliamentary seat, the country’s President Thein Sein made a state visit to Singapore.

Accompanied by a high-level delegation, the president’s visit concluded with an agreement for technical assistance and training in a number of key areas including finance, investment law and trade facilitation.

These two events over the same week demonstrate the ambitious pace of change and growing confidence in Myanmar. Reaching out to Singapore also brings into the spotlight an economic dimension to the ongoing political reform.

Businesses from many countries have been eager to explore investments in Myanmar. Considered the last, large and untapped market in Asia, many sectors of the economy have been underdeveloped or else dominated by Chinese firms.

ASEAN — the regional group to which Myanmar belongs — wants to be supportive and so does Singapore. This goes beyond the politics of having Myanmar assume the group’s chairmanship in 2014. ASEAN’s plan for a more integrated economic community in 2015 can also gain.

Much however depends on whether sanctions put in place by the West for more than two decades are lifted. The European Union has already begun to unwind its sanctions. In Washington DC, a complex legal process is gaining bipartisan support.

There is cause for optimism, but is Myanmar ready for business and investment? Can the country follow up its current political reform with parallel reforms to the economy and boost the country’s development?

A recent publication by the International Monetary Fund predicts the economy will grow at a rate of some 5.5 percent for 2012. Such projections — in line with neighboring Indo-Chinese economies — are significant given the weak global outlook. But there is potential for greater, sustained growth.

Consider the country’s ample natural resources of oil and gas, as well as forestry products and minerals. Factor in a strategic location that can link China, India and Southeast Asia. Add also that Myanmar has sizeable population of some 54 million, many of whom are of working age, and eager for jobs. The economy, among the region’s poorest at present, has the potential to grow.

There are of course concerns, many of which are typical of frontier economies — like the need for infrastructure and concerns about corruption and power shifts during this political change. But Myanmar also faces special challenges.

One key issue are exchange controls and currency stability. Officially, US$1 is exchanged for just 6 Myanmar kyats. But in the widespread black market, the rate currently hovers around 750 kyats and has been as high in recent years as 1250 kyats. Only with astute financial management can the country hope to liberalize its currency while maintaining macroeconomic stability.

Another issue important for businesses coming in is that investment protection laws need improvement, with stable policies to be put in place. Recall that in the mid 1990s, some companies invested in the country, anticipating its membership in ASEAN. Many investors of that period were however left stranded by circumstances and policy changes.

Another issue to watch will be the central government’s effort to settle decades of fighting with different ethnic groups. The recent cease-fire deal with the Karen is a prime example. The Karen have been active in the Dawei industrial zone in the south of the country and this is now undergoing a major overhaul worth $50 billion as a cornerstone of the government’s revitalization plan.

As economic opening moves ahead, it will be essential that gains go beyond the circle of those in power. If development is to be sustained in tandem with political reform, the government must give attention to educating and training its people, and meeting their basic needs, such as housing.

This sets the context for the agreement between the governments of Myanmar and Singapore. Tapping on Singapore’s expertise in finance, law and providing public services can help Myanmar kick-start economic development. The agreement was in many ways to be expected, given that the countries have long-standing ties in trade, as well as training programs for public officials.

The spotlight has understandably been on Myanmar’s dramatic political opening. Economic reform is now emerging as a twinned issue and the agreement with Singapore is but an early step on this path. Advocates for human rights and democracy will continue to watch developments in Myanmar but expect that businesses too will increasingly be part of the equation for change.

The writer is chairman of the Singapore Institute of International Affairs

Sunday, February 5, 2012

Asia resilient to global economic woes

Michael Hasenstab, The Jakarta Post, San Mateo, California | Thu, 02/02/2012 11:41 AM A | A | A |-Klippi8ng The Jakarta Post

Europe confronts a complex set of political and economic challenges. Recent weakness in asset markets in Asia shows that investors now believe Europe’s woes will put these regions at risk of a severe deterioration in economic and financial conditions.

Exploring two possible scenarios in Europe can help us understand if this fear is justified: (1) a complete eurozone breakup, and (2) a painful and long deleveraging which pushes the European economy close to or into a recession.

Those who strongly believe in the first scenario have reason to be worried. A eurozone break-up involving any of the major economies would have disastrous global consequences. We would see a domino effect on sovereign debt defaults; the collapse of the European financial sector with global shockwaves; and foreign exchange markets plunged into chaos by the sudden disappearance of the world’s second most important reserve currency. The overall impact on the global economy would likely be far worse than the impact after Lehman’s collapse.

But how likely is this scenario? Very unlikely. Recent moves towards establishing a stronger fiscal union in Europe, unprecedented and massive provisioning of liquidity through both the European Central Bank (ECB) and national central banks, the massive additional balance sheet capacity of the ECB, fiscal and structural reforms in Italy, and the prohibitive costs of an exit from the euro for any major member of the European Monetary Union, including Germany, should ensure that this first scenario does not materialize.

However, the second scenario of a painful deleveraging in many European banks and anemically weak European growth is very possible. This outcome would be bad for Europe, but not bad enough to undermine the outlook for stronger parts of the global economy, especially emerging Asia. Here’s why.

Europe was not the main engine of the global economy to start off with, and it remains a relatively closed economy. A European recession, especially if deeper and more protracted, would dampen world trade, including Asian exports; but nothing on the scale seen in 2008.

But trade only provides part of the linkage. The more important linkages come via the capital markets. The European Banking Authority’s requirement for banks to reach a tier 1 capital ratio of 9 percent by June of this year will require broad based deleveraging. As raising fresh capital is extremely difficult, one other avenue could be to shed assets, including assets abroad. Asia and other emerging markets, however, should not suffer unduly.

Most foreign banks are present in Asia via wholly-owned subsidiaries, which cannot simply siphon capital back to their parent companies. Many of these subsidiaries are some of the most profitable parts of their businesses, and growing profits provides one important way to recapitalize. Shutting down all business lines in emerging markets would leave these banks without this important source of profits and force an even greater reliance on a weak domestic banking market in Europe.

Furthermore, a plan to temporarily exit and reenter may not be possible, as a foreign company that leaves town during hard times would not be quickly welcomed or permitted back.

Lastly, should there be no other choice for a European bank but to sell and exit, there are other domestic and foreign banks that would gladly step in; as demonstrated recently where European banks have sold parts of their Latin American business to local institutions. Indeed, even at the height of the post-Lehman financial crisis Asia did not see a wholesale pulling out of assets.

But this deleveraging by many European banks is only part of the capital flow story. Meanwhile, the ECB has launched its version of quantitative easing which now augments the extraordinarily loose monetary policy of the US, Japan and UK. We now see the most aggressive printing of money in modern times. While this aims to address domestic conditions, most notably to ease the deleveraging of domestic banks, capital cannot be contained within national borders.

Given open capital markets, abundant global liquidity will continue to flow into Asian markets blessed with strong macro fundamentals — particularly as the region’s currencies still appear largely undervalued. Short term volatility excluded, monetary policy in these four major economies will ultimately facilitate net capital inflows into Asia and many other asset markets and thus avoid the risk of a recession-induced credit crunch in Asia.

Also, strong economic and political fundamentals support Asia. Many emerging Asian economies have built ample liquidity cushions through significant accumulation of international reserves. Unlike Europe or the US, Asia has built up plenty of room to provide fiscal stimulus and to lower interest rates in response to a worsening external environment as debt levels remain low and interest rates were preemptively hiked at the end of the recession.

For example, Korean government debt levels have been slashed over the last decade and international reserves now well exceed levels seen before the global financial crisis. And the largest countries like China, India and Indonesia can count on a robust and resilient domestic demand to counter external demand weakness. Also, consumers and corporations in Asia have broadly maintained strong balance sheets.

Eurozone disintegration would be as calamitous as it is unlikely. It would be a global disaster. On the other hand, the far more probable scenario of painful deleveraging by European banks and weak European growth, while a serious setback for Europe, will likely have far more modest and manageable global
spillovers than the current markets are assuming.

Disappointing European growth is nothing new. The current round of structural reforms will hopefully change this, but the world economy is used to powering ahead without much help from European demand. It will do so this time as well. Asian markets, with their current strong market fundamentals and unparalleled future growth prospects, will continue to lead the charge.

The writer is senior vice president, portfolio manager and co-director of the international bond department for Franklin Templeton Fixed Income Group.