Guest Author: Kim Sung-han, Korea University

A strong message was delivered from the White House Rose Garden to Pyongyang. ‘We agreed that under no circumstance are we going to allow North Korea to possess nuclear weapons,’ South Korean President Lee Myung-bak told reporters after he and President Obama held a morning long summit meeting on June 16. Obama was equally emphatic about the need to defang the North Koreans by saying that ‘we will pursue denuclearization on the Korean Peninsula vigorously.’

In addition, both leaders agreed that North Korea’s provocations have been ‘rewarded’ as the international community offered fuel, food and loans in exchange for promises of good behavior that are eventually broken. They said in a single voice that ‘we are going to break that pattern.’ President Obama also said that North Korea would not find security or respect through threats and illegal weapons. This was a firm warning message to North Korea which has been relying on the so-called ‘salami tactics’ that slice an issue into pieces so that benefits may be maximized through negotiations over each slice. In this light, the United States and other participating countries of the Six Party Talks are expected to explore a package deal, putting all issues on the table at once. They already purchased North Korea’s horse twice through the Geneva Agreed Framework of 1994 and the February 13 Agreement of 2007, which means they will never buy that horse (the ‘freezing’ of the nuclear weapons development program) three times. North Korea must dismantle nuclear facilities and eliminate nuclear weapons in a complete and verifiable manner.

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Guest Author: Louis Kuijs, World Bank

In a previous article I summarized the World Bank views on China’s growth prospects, developed while writing our recent China Quarterly Update economic report. We think that China is likely to continue to see respectable growth in a difficult global environment. At this important juncture for China and the world economy, what is the upshot of this for policymaking?

At any point in time, governments need to work on short-term macroeconomic policies and on more medium- and long-term policies. There are trade-offs. More attention to short-term policies typically means less attention to the policies and reforms that are important for the medium and long term. We think that, given China has already put in place a forceful short-term stimulus that seems effective in keeping growth respectable, China can put more emphasis on the structural reforms to promote continued, sustainable growth.

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Author: Satish Chand

Commodore Frank Bainimarama, the head of the Republic of Fiji Military Forces, the appointed Prime Minister (PM), and the Minister for another half a dozen ministries in his government, presented his vision for Fiji in an address to the nation on July 1st.  The Commodore espouses to have Fiji realise her potential, and possibly by September 2014 when the nation is gifted democratic rule.  Achieving the vision is a tall order, believing that Fiji is on the path to the above taller still.

There are many positives in this address titled the ‘strategic framework for change’.  For a start, the Prime Minister has covered hitherto uncharted economic territory.  Issues ranging from the deteriorating conditions within the global economy to the floods of February that had a devastating impact on sugarcane crop were canvassed.  Mention was made of the improving monetary and credit conditions to an ‘open skies’ policy to increase tourism inflows.  The PM emphasised that the focus of his government for the following three years would be the economy.

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Author: Frank Jotzo

The US House of Representatives has passed the Waxman-Markey bill, or American Clean Energy and Security Act. The bill mandates national emissions reductions using economy-wide emissions trading and various other policy measures. The bill is now entering the Senate process, and though the hurdles there are much higher than in the House, America could have in place comprehensive and not unambitious carbon emissions control in the near future. It would be a momentous change for the US, and it would catalyse action elsewhere.

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Author: Tobias Harris

How can the LDP govern Japan when it can barely govern itself?

The war of attrition that has been waged between the Koizumian remnant in the LDP and the rest of the party since Koizumi stepped down as prime minister in 2006 has entered a particularly bloody phase as the Koizumians have decided to launch a final offensive in the hope of toppling Asō Tarō before he can call a general election.

Yamamoto Taku, the lower house member collecting signatures to ‘recall’ Asō by forcing an early party election, has stepped up his effort in the hope of collecting the requisite 216 signatures (half the total number of LDP members of both houses and the chairs of the prefectural party chapters) by 13 July, the date of the general meeting of LDP members from both houses. Beyond Yamamoto’s signature drive, on Tuesday afternoon a new study group — the Manifesto Association — held its first meeting. The association is a collection of nine different Diet members’ leagues of the reformist stripe and plans to draft proposals for inclusion in the party’s election manifesto. The association wants the party’s manifesto drafted before the Diet is dissolved and an election called. Not surprisingly, many in the party suspect that this group has a not-so-ulterior motive of toppling Asō.
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Guest Author:  Barry Eichengreen

There has never been a question about the ultimate purpose of the Chiang Mai Initiative (CMI), the system of Asian financial supports created in 2000 in that Thai city. That purpose, of course, is to create an Asian Monetary Fund, i.e., a regional alternative to the International Monetary Fund (IMF), whose tender ministrations during the 1997-98 financial crisis have not been forgotten or forgiven.

So far, however, the CMI has been all horse and no saddle. Its credits and swaps have never been activated. The distress following the failure of Lehman Brothers would have been an obvious occasion. Yet, revealingly, the Bank of Korea, the central bank hit hardest, negotiated a $30bn foreign-currency swap with the US Federal Reserve, not with its ASEAN+3 partners.

Now, we are told, ASEAN+3 has achieved another great breakthrough, the so-called Chiang Mai Initiative Multilateralisation (CMIM), aimed at turning its bilateral swaps and credits into a regional reserve pool. The goal was set in 2005, and last month ASEAN+3 finance ministers negotiated the details.
They specified contributions to their $120bn pool, set down borrowing entitlements, and allocated voting shares.
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Guest Author: Jusuf Wanandi

In about a week’s time, on the 8th of July, the Indonesian presidential election will be held. All presidential contestants have been under intense scrutiny recently including the incumbent vice-president Jusuf Kalla. He had announced in February 2009 that he would not be returning as the running mate of the current President Susilo Bambang Yudhoyono (SBY). Instead, he would be jockeying for the coveted position himself under the covering fire of former military strongman General Wiranto.

Writing about Jusuf Kalla (JK) in the 2009 presidential election is an encore for me because I wrote an op-ed piece for the Financial Times on the 2004 presidential election. I remember my stance on Jusuf Kalla then was negative because there was popular belief that as a student activist, he was behind the burning of churches in Makassar in 1967. That is how he was branded as being anti-Christian.

Kalla inherited and developed the family business after the demise of his father, Hadji Kalla; and as a businessman he inevitably had to compete with other businessmen, be they Chinese-Indonesian or foreign. It was then that he was branded anti-Chinese and anti-foreign.

However, my view of Kalla gradually became positive because of the role he played in resolving the Muslim-Christian conflicts in Maluku (the Malino I Agreement) and Poso, in Central Sulawesi the (Malino II Agreement). He achieved this single-handedly during his time as coordinating minister for the People’s Welfare during Megawati Soekarnoputri’s presidency. Read the rest of this entry »

Author: Ron Huisken

Twenty years ago, Japan and Australia spearheaded a drive to create a forum for the states of the Asia Pacific to collectively consider how to advance their shared interests in a more liberal trading regime. This became Asia Pacific Economic Cooperation or APEC, the first official (or Track One) multilateral acronym in the region (other than the sub-regional Association of Southeast Asian States – ASEAN – which dates from 1967). Establishing APEC was a major, and difficult, accomplishment. The Asia Pacific was (and, of course, still is) a vast and diverse region. Moreover, it had little pedigree in, and weak instincts to, surrender of any sovereign rights to multilateral processes. The difficulties are manifest in the title of the forum – four adjectives in search of a noun, as one wit observed – and in the fact that it was a gathering of member economies, not of states, in order to finesse Taiwan’s participation. But APEC has endured. Since 1993, at the initiative of the US, it has involved Heads of Government. Even though its formal mandate has remained confined to trade liberalisation, HOGs have found the opportunity for low-key bilateral negotiations to be sufficiently attractive to continue to turn up.

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Guest Author: Brendan Kelly, former Country Director for China Affairs,  Office of the Secretary of Defense, United States

On June 16, the leaders of Brazil, Russia, India and China met in Yekaterinburg, Russia for the first formal BRIC summit.  The issue topping the meeting agenda was reform of the international financial and monetary system.   The BRICs offered a counterpoint and challenge to the G7/G8, which has served as the world’s economic ‘steering committee’ for the past few decades and meets next month in Italy.   Though light on substance, the BRICs’ message was clear: these growing economies want greater voice and representation in international financial institutions, and to a lesser extent, a greater role for their currencies in the international trade and monetary systems.

Over the past several months, leaders from Russia, China, Brazil and other countries have expressed concerns regarding the value and stability of the dollar, and have called for reducing the world’s dependence on the U.S. currency.  As the BRIC countries account for 42 per cent of global foreign reserves (and amount to about US$2.8 trillion), their pronouncements have produced strong market reactions.   Read the rest of this entry »

Guest Author: Nadeem Ul Haque

Egoism has led to a certain form of transparency in Pakistani government and it is disturbing. Most government offices now have nice wooden boards posted on the walls. These wooden boards have the names of officials who served in those offices as well as the dates of their tenure.

In recent visits to many of these offices, I did a quick calculation and found that the tenure of officials in a posting has been extremely short. Most officials are lucky if they remain in a position for more than a year. Secretaries are rotated out almost on a yearly basis, customs officials are lucky if they last a few months and the director cooperatives board is moved so rapidly that the poor director probably remains in a daze.

Why do we have such quick transfers? The explanation is a combination of the following 4 factors. Read the rest of this entry »

Author: Tobias Harris

On Tuesday the Council on Economic and Fiscal Policy (CEFP) released the 2009 Basic Plan for Economic and Fiscal Reform (known colloquially as the honebuto), available here along with other documents from the Tuesday meeting.

The plan is controversial because the Asō government appears to have sidestepped an existing agreement — originating in the 2006 honebuto — that social security spending would be capped at 220 billion yen, a figure that the general account budget is rapidly nearing. Social security spending is by far the largest portion of the budget and a major contributor to the government’s deficits, hardly surprising given Japan’s demographics. Needless to say, central to the fiscal crisis of the Japanese state is figuring out how to bear the burden of providing for Japan’s elderly without bankrupting the state or wrecking the economy. At the same time, the LDP has struggled to undo the damage done to the party by the Abe government’s mishandling of the 2007 pensions scandal — and so, as with many other recent government and LDP documents, the 2009 honebuto stresses economic security alongside economic vitality as a goal of reform. Years of polling show that the state of social security is the Japanese public’s top policy priority. The LDP cannot afford to look weak on social security as it did in 2007 if it is to have the slightest chance of winning this year’s general election.

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Author: Rajiv Kumar

All of us who are invited to the pre-budget meetings with the finance minister and his team of senior finance ministry officials must have at some stage wondered about what happens to our suggestions.

I know that industry organizations keep count of how many suggestions have been accepted, if only to impress their membership. Economists and other sundry experts should perhaps also attempt such a tally if only to recognize the gap between their understanding and that of the political leadership on the issue of budgetary allocation priorities. The finance minister can do us all a great favour by sending a list of all the suggestions received during these meetings to all participants.

It would be interesting to see how many suggestions get repeated over the years and for how long. A researcher could even one day discover patterns and correlations between the suggestions and the probability of them being incorporated. Here is a list of what I think should find a place in this year’s budget, and of course like all others, I am hoping that some of these will be reflected in the budget.

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Author: Tobias Harris

With the DPJ’s prospects on the rise and the LDP mired in what may be terminal disarray, the DPJ is receiving greater scrutiny when it comes to how the party will govern should it take power.

That, after all, is what this election is about: if seiken kotai [regime change], the DPJ’s longtime mantra is to have any meaning, the DPJ must be prepared to change how Japan is governed. A change of government must be more than a change of the name of the party wielding Japan’s shambolic administrative machinery.

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Author: Charles Prestidge-King

In 1996, Australia’s current Prime Minister Kevin Rudd wrote an article for a collection entitled ‘Australia and China: Partners in Asia’, edited by Colin Mackerras of Griffith University.

In it, he outlined the case for improving Australia’s cultural and linguistic literacy of Asia in general, and China in particular.

The popular view of China was, as Rudd put it, the ‘product of 150 years of conflicting and intersecting paradigms, which carry inaccuracies’, a curious mix of racism, vestigial or otherwise, strategic paranoia, and a sense of economic opportunity.

Improving Australia’s China literacy would help clear up those inaccuracies, and would give Australians a better understanding of the cultural factors behind key Chinese institutions. With China’s increasing economic significance, it would also give Australians a tremendous advantage in business.

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Author: Tobias Harris

Last Tuesday, Koike Yuriko, former defense minister and aspirant to the LDP presidency, announced her resignation as chair of the LDP’s special committee on base countermeasures.

She told the media that her resignation was intended as a protest against the decision to soften the language on preemption in the LDP Policy Research Council’s defense division in the recommendations for this year’s National Defense Program Guidelines (NDPG) sent to Prime Minister Asō Tarō this month. She sees the longstanding doctrine of ‘nonaggressive defense’ as injurious to the national defense, unacceptably tying the government’s hands in addressing threats to Japanese national security.

Koike has a point: if Japan is to acquire the capabilities to strike at ‘enemy bases,’ it might as well be straightforward about the circumstances in which it intends to use said capabilities. What is the deterrent value, after all, of capabilities that Japan may or may not use if faced with an imminent missile launch?

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Author: Peter Van Ness

The DPRK has now tested a second nuclear device, launched more missiles, and even nullified all of its agreements from previous negotiations, including the truce that ended the Korean War (1950-1953).  After the United Nations Security Council passed Resolution 1874,  more provocations followed. Clearly Kim Jong-Il’s first priority is to keep his regime in power, and it is very likely that Pyongyang sees nuclear weapons adventurism as the best way to do that. If so, what can be done to dissuade the DPRK and move to a new course?

None of North Korea’s neighbours want to see the regime collapse for fear of thousands of refugees and a fundamental destabilization of the region. But to permit North Korea to emerge as a nuclear-weapons power would probably produce a nuclear arms race in the region with serious implications for non-proliferation elsewhere in the world, including Iran and with respect to non-state actors. Compounding the difficulty in dealing with this situation, there are doubts about whether Kim Jong-Il is in complete control after apparently suffering a stroke last August – it is reported that he has chosen his youngest son, Kim Jong-Un, as his successor.

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Guest Author: Carlyle A. Thayer, UNSW and ADFA

In a speech delivered to the Shangri-la Dialogue in late May, Prime Minister Kevin Rudd once again advanced his proposal for an Asia Pacific Community this time calling for a one and a half track conference to be held in Australia later this year. There has been widespread academic and diplomatic scepticism of the proposal since it was first promoted in an address to the Asia Society in Sydney in June last year.

Veteran Singaporean diplomat Barry Desker declared the proposal ‘dead in the water’ shortly after Rudd spoke. More recently, the retired ABC foreign correspondent Graeme Dobbell, writing in a Lowy Institute blog, argued that the Prime Minister had cut his losses and ‘moved on’ by demoting the ‘c’ in community from upper to lower case. And, as the East Asia Forum has revealed, The Australian got it wrong when it asserted that Kurt Campbell, in his confirmation hearing for appointment as Assistant Secretary of State, had opposed the idea.

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Author: Kazumasa Iwata, ESRI, Tokyo

In 2005, former Federal Reserve Chairman Greenspan noticed the insensitivity of long-term interest rates to changes in short-term interest rates, and called it the ‘conundrum of the long-term interest rate’. His successor Ben Bernanke shed light on this puzzle by pointing out that the balance between saving and investment shifted towards a tendency to excess saving after the Asian Currency Crisis in 1997-98, despite the boom in the world economy after the IT bubble burst. High growth combined with low real long-term interest rates created the macro-economic circumstances that were conducive to the emergence of economic bubbles.

This gave rise to a controversy between the US and Chinese governments on the cause of sequential bubbles. The then Treasury Secretary Paulson pointed out that to the extent that the capital inflow from China contributed to lowering the nominal long-term interest rate in the US, China had joined the process of generating bubbles. The Chinese government blamed the US for its irresponsibility in allocating the flow of funds available to US investors. Chairman Bernanke admitted in April that the US should have used capital flow from abroad in a more productive way. If we look at the movement of the US long-term real interest rates (the interest rate on ten-year government bonds minus the rate of change in consumer prices, we see that it peaked out in the mid-1980s, and then declined gradually until 2008.

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Guest Author: Cielito Habito, Ateneo de Manila University

By all indications, the Philippine economy is already in recession. With last week’s announcement of an insignificant 0.4 per cent first quarter growth in the economy, government statisticians forthrightly described the economy as ‘teetering into recession.’

What they really meant is that based on the technical definition of the word— two consecutive quarters of falling output or negative growth — we are on the way to being officially in one. But how is this so, when the economy’s growth was still reportedly positive?

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Author: Tobias Harris

After a brief period of buoyancy, the bottom has finally fallen out of the Asō government.

In addition to the drops below twenty percent approval in the Mainichi and Kyodo polls, the government’s approval rating dropped 8.7 per cent to 17.5 per cent in the Sankei poll, with its disapproval rating rising ten points to 70.6 per cent, a poll in which respondents favored the DPJ over the LDP by nearly twenty points and in which nearly fifty per cent of respondents said they would vote for the DPJ in proportional representation voting in the forthcoming general election.

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