Author: Peter Drysdale

Since President Hu Jintao’s visit to Japan in May, Japan and China have been working hard to strengthen ties on many fronts including in the defence and security field (see the maritime visit and earthquake aid). But entrenched security attitudes in Japan die hard. Masashi Nishihara, formerly of the Japanese Self Defence Force College, and a long time interlocutor with Australia defence specialists, thinks that Japanese defence strategies against China need stiffening up.

While Nishihara welcomes the first visit of a Japanese destroyer to a Chinese naval port since post-World War II and other confidence-building steps, he reckons that Japan cannot afford to neglect what is happening in the Western Pacific.

China, he says, is engaged in robust military build-ups while Japan’s Ministry of Defence ‘hardly has a defence strategy at all’. Senior officials as well as the annual Japanese Defence White Paper stress the importance of China increasing the transparency of its military budgets and activities. This is nice talk, he suggests, but the time has come for action.

Why now? Read more…

Author: Shiro Armstrong

Hugh White on the solution to peace in Asia:

…Crispin suggests that the best solution is for China and Japan to learn to get on. Of course that is right, and we should all hope that they do. But how likely is that? And what if they don’t? Hoping for the best is not a policy.

Indeed, as the Republicans would say to the Obama camp, ‘hope is not a plan’, well, here is a step in the right direction (from Xinhuanet on Friday):

A senior official of the Communist Party of China (CPC) said here Friday that the CPC is willing to work with the Japanese Liberal Democratic Party (LDP) to promote the Sino-Japanese strategic and reciprocal partnership.

Read more…

Author: Ryan Manuel

There were different visions in the debate about the response to global challenges from China’s rise at the ANU China Update. In focusing on the challenge of sustainable development, Jeff Sachs argues for focus on creating a technological solution and worrying afterwards about how the costs will be distributed. Wing Thye Woo, on sustainable development, and Fan Gang, on international economic imbalance, see a more multipolar world requiring better international institutions to deal with the challenges. Richard Rigby sees Chinese policymakers coming to these global challenges through managing domestic politics and coming to appreciate the feedback of international impact on successful domestic politics.

Is Development Sustainable?
Jeffrey Sachs sees the world as having to move from industrial development to sustainable development.

Wing Thye Woo is bullish on the need for global cooperation and solutions. He says solutions can only come from global cooperation, based on ‘enlightened self-interest’ A reformed and invigorated UN still provides the best chance of effecting a global bargain on climate change and sustainable development. Read more…

Author: Peter Drysdale

The tiddlywinks club is coming out all over on climate change including down at Lowy where Sam Roggeveen says he’s ‘finding his thinking on this issue evolving rapidly over the last few weeks, towards a greater scepticism of large-scale, long-term initiatives like carbon trading.’

As the Nature op-ed last year recommends, he says, the more effective answer might be a massive investment in clean energy R&D, ‘though you could argue that a carbon price would be a good way to pay for such investment.’

You could, indeed, Sam, argue that.

All the evidence (during the oil crisis of the 1970s and now) is that it is the change in the relative price of carbon fuels that leads to their economisation and the investment in the new technologies that reduces their use. When pressed, even Jeff Sachs admits that there is no technology fix for unsustainable development without a change in the price we pay for carbon emissions one way or another [Sachs video here and summary of speech here].

A higher carbon price is central to getting incentives right to encourage the massive investment in carbon fuel alternatives that the science, the economics and the politics recommend if not sufficient to doing all the heavy lifting on carbon ameliorating R&D (see previous posts on this here and here).

Author: Christopher Findlay and David Parsons

ASEAN members have a strong interest in the outcome of Australia’s great carbon debate.

Australian participants in the policy debate have been concerned with the uncertainties about the costs of meeting commitments under an ETS.

These costs would be lower if the field of options were greater.

A rule which says that carbon-reducing or offsetting projects can only be based in Australia (which might suit some of vested interests now putting their hands up) limits the options.

A rule which says offshore projects can be counted greatly expands the options.

This view was accepted in the recent Green Paper which in its Chapter 6 on International Linkages said

A ‘least cost’ approach would draw on real abatement opportunities wherever they arose throughout the world.

The Green Paper goes on to recommend the acceptance of emissions reductions that result from projects in developing countries (preferred position 6.8, p. 238).

ASEAN members can jump onto this opportunity, but they have to grapple with the Australian debate.

The devil is in the detail of implementation. More on that shortly. Read more…

Author: Ryan Manuel

The keynote address to the China Update forum this year was given by Professor Jeffrey Sachs [see the video]. Sachs’ speech raised major questions: firstly, how does the world go from ‘industrial development’ to ‘sustainable development’? Secondly, what should then be expected of China?

Industrial development to sustainable development
On the first point, Sachs’ argument has two major tenets. The first is that global economic convergence will lead to Asia being central to global order. He thus envisages a highly multilateral world order. The reason for this shift is that the ‘keys to economic development have been solved’. Central to this premise is his belief in the ability of technology to achieve development. Development, he argues, in this sense was made possible through globalisation, growth and technology transfer. Our knowledge of this, and the adoption of this model by developing countries, means that the economic challenge of what has to be done to become rich has been addressed.

But, we have as yet failed to answer what we have to do about fixing the environment. Sachs believes that current economic models lack an integration of ‘nature’ with growth’. Our current models of development revolve around ‘using’ natural ‘resources’. Development has been industrial rather than sustainable. Rather than solving the Malthusian ‘ problem, we have postponed it and intensified it. Current high food and oil prices are thus a sign of structural problems rather than speculative behaviour.

Read more…

Author: Luke Nottage

With Non-Performing Loans finally under control and economic recovery underway since 2002, Japan has also experienced a revival in FDI outflows. Many commentators focus on the large stocks built up in China, but there has also been steady interest in investing in Australia. Rather than tourism and property developments, Japanese firms have been quietly investing in infrastructure projects, and Nomura is reported recently as a possible buyer of the Australian investment banking arm of ABN AMRO.

A more remarkable development is the expansion of inbound FDI, particularly under the former Koizumi government. Fueled by a broader boom in M&A world-wide, Japan’s inflow rebounded to US$22 billion in 2007, and foreign investment stocks doubled over the last five years. But flows and stocks are still low by OECD standards relative to GDP, especially compared to the US, the UK and now Australia.

The Fukuda government has also sent more mixed messages recently. The Transport Ministry tried to include a blanket one-third cap on foreign shareholdings in Japanese airports. But others including the Financial Services Agency objected that this would choke off other inbound FDI, so this provision was dropped in March. The government is now considering the introduction of measures that more directly regulate the understandable security concerns arising from operating airports. Macquarie Airports Management Ltd, which already owns 19.9 percent of Haneda Airport, will be following this ongoing debate especially carefully.

Read more…

Author: Andrew MacIntyre

Is politics in big democracies necessarily slow and messy?  I’ve found myself increasingly thinking so.  In the last couple of weeks I’ve been fortunate to have a series of up-close meetings inside the political engine rooms of the United States and India.  And for all the many and important differences between the world’s two largest democracies – from culture to constitutions – I have been struck by an underlying similarity.  Decision-making in both is fundamentally fragmented.

Forging the necessary agreement to achieve reform involves cutting deals among multiple and diverse players and is inherently difficult. Very occasionally rapid consensus is possible.  For instance, moments of great national emergency (as when US politicians united in response to 9/11), or when some powerful self-interest effecting all players is at stake (as when Indian politicians united in response to the threat of uncomfortably revealing campaign disclosure requirements).  But mostly the political process is grindingly slow as the numerous tactical deals needed to enact change get squared away, with marginal change or no-change being the default position in both places.

Read more…

Author: Ross McLeod, ANU Indonesia Project

Bank Indonesia has announced that it is considering the use of a change in the required reserve ratio as a possible method of bringing inflation under control. This ratio specifies the amount of deposits commercial banks must hold at the central bank as a proportion of their own customers’ deposits. Banks’ deposits at BI are a component of base money, so increasing the ratio has the effect of artificially increasing the demand for base money. With a fixed supply, increasing the reserve ratio therefore creates an excess demand for base money, putting upward pressure on interest rates and, consequently, downward pressure on inflation.

The obvious question here is: why not simply increase official interest rates, such as those on Bank Indonesia Certificates (SBIs)? Increasing the SBI rate allows more SBIs to be sold, which decreases the supply of base money and likewise therefore creates excess demand for it, resulting in increased interest rates throughout the market. In terms of the inflation outcome, it really doesn’t matter which of these two instruments is used.

My guess is that the only reason why BI would consider reverting to the rather old-fashioned policy of varying the required reserve ratio is that this allows it to escape the odium attached to directly increasing interest rates.

But that is only a short term political gain. In the slightly longer run, it will be obliged to increase SBI rates to the now higher level ruling in the market. If it does not, it will find it difficult to sell sufficient quantities of SBIs, which will result in an excess supply of base money and a consequent further boost to inflation. The appropriate way forward is simply to increase SBI rates directly.

Author: Ryan Manuel

There has been a big shift in the structure of world power, away from the unipolar world, towards a world in which there are at least four major players including China.

This was the headline premise in the roundtable that launched the ANU’s China Update yesterday. What follows is a window on the main issues raised in the first round of discussion. There will be posts elaborating on these and other issues over the next week. Those wanting the full analysis should go straight to the famous book that traditionally accompanies the China Update each year.

The global economic system is going through a particularly complicated period of structural change.
The three major elements are:

• the US financial crisis
• the specific post-Bush domestic US challenges: trade imbalances and a weak dollar
• rising worldwide energy and food prices.

The third point is contested– largely due to an inability to pin down exactly what these high prices are driven by. Are they temporary supply and demand imbalances and speculative behaviour in markets or do they reflect emerging long term structural constraints?

The judgment is that while, the short term market behaviour interacts with longer term structural constraints, we now have to deal with fundamental changes in the structure of the world economy.

These changes are occurring in the context of other uncertainties. The need for energy security clashes with the need to deal with climate change. Economic growth in China (India and other developing countries) is a major factor in both. Complications arise from the interaction between domestic policy and international affairs, intertwined in a more open and globalised world. Read more…

Author: Peter McCawley, ANU Indonesia Project

How did it come to this? Blackouts are spreading across Java, and are increasingly common in the Outer Islands as well. But policy-makers in Indonesia have known for at least five years that a power shortage was looming. Why was so little done?

The short answer is that there has been an extended period (for over five years!) of foot-dragging in Jakarta over planning for new investment in power. It has been widely known that around 10,000 MW of new generating capacity is needed (compared to existing capacity of close to 30,000 MW). But there have been extended delays for all sorts of reasons – technical, financial, political – with different planners, financiers and officials all busy blaming each other. Strong ministerial intervention was needed to coordinate plans for new investments, but the required action was never taken.

This is all going to be very costly for Indonesia. The Philippines went through an electric power crisis in the early 1990s so we have a good idea from the experience in the Philippines of what is likely to happen. First, various “crash programs” will be announced (this has already occurred in Jakarta). Second, blackouts will become more and more common. In Manila, the “brownouts” (as they were euphemistically called) sometimes lasted for up to 10 hours across the capital. Third, the inconvenience and lost productivity caused will be great. Traffic lights, for example, will fail for long periods, and traffic jams will become worse. Food will go bad in restaurants and homes. Blood supplies in hospitals will warm up as refrigeration fails.

And there will be lots of black humour as people try to cope. In the Philippines in 1993 one popular joke was to ask: “What did people use for lighting in the Philippines before they used candles?” Answer: “Electricity.”

Author: Peter Drysdale

The Six-Party Talks on North Korea over the last few days have confirmed consensus on the break-through on verification of North Korean undertaking de-nuclearisation. This is Phase I in a longer process of political settlement on the Korean peninsula and North Korea’s coming in from the cold internationally. But it is a critical step forward.

The Six-Party Talks have been on hold for nine months but there has been significant progress in negotiations between the US, led by US negotiator Chris Hill, and his North Korean counterparts in the interim.

Read more…

Author: Shiro Armstrong

Huge structural reforms have taken place in China over the past 30 years with remarkable success. The reform process was a result of a myriad of influences. It also involved changing and adapting the very institutions which organise and allocate resources in society.

The Chinese reform effort over the last 30 years focused on establishing an effective socialist market economy. The general approach to reform to achieve this objective has been one of gradualism. China has adopted a ‘scientific approach’ by sticking to the facts and focusing on economic development through pragmatic policy innovation. For example the introduction of the household responsibility system, the liberalisation of rural entrepreneurship, the establishment of Special Economic Zones, and financial market deregulations were all implemented in a gradual and incremental fashion yet brought about large benefits for society. However, not all reforms have been gradual. Many have required bold policy experiment and strong political leadership.

The ‘incrementalist’ approach often led to the establishment of dual economic systems (for example in pricing structures). This approach gave China the flexibility it needed to make progress with gradual reform and manage the costs of reform effectively. It provided time to learn the lessons from previous reform efforts.

Economic reform has also occurred hand-in-hand with political reforms. The introduction of the household responsibility system for example involved a big political, and not just economic, reform. China recognised that economic reform cannot leave the political system behind. For example, agricultural reforms also involved giving power to the farmers to give them autonomy in their operations to seek economic development. Read more…

Author: Luke Nottage

Australia’s Productivity Commission recommended in 2006 several ways to improve our consumer product safety regulatory regime, which dates back to the 1970s. This year it published a more comprehensive Inquiry Report to strengthen our entire consumer law and policy framework. Several recommendations, like an obligation on suppliers to report serious product-related accidents to regulators, will start to bring Australia up to the higher standards expected and implemented in Japan since the 1990s. Those track the higher priority given recently to consumer protection particularly in the EU.

Japan and the EU illustrate the thesis of ANU Professors John Braithwaite and Peter Drahos that “global business regulation” can accommodate both economic deregulation of protected sectors domestically, and improved “social regulation” or a safety net for vulnerable groups of citizens. Japan also shares with the EU a greater concern about risks potentially affecting consumers or the environment. By contrast, as Berkeley Professor David Vogel has pointed out, since the 1980s the US has become much more concerned about risks to national security. Australia seems to have gone the same way. Yet such differing risk perceptions remain under-appreciated particularly in the Australia-Japan context. Read more…

Author: Peter Drysdale

Warwick McKibbin reckons that emissions targets are the wrong way to address the global warming problem. Does anyone agree? Certainly not Garnaut (see the review) who sees emissions targets and trading as central to efficient market-based achievement of reduced carbon emissions that might insure against the worst effects of climate change.

Auctioning carbon permits and trading them, as well as a carbon tax, both result in a price on emissions and no amount of mumbo-jumbo should disguise the fact. And the strategy favoured by Australia’s climate change adviser involves working towards a global carbon price through linking emissions trading schemes.

For a carbon tax to work, you can’t escape negotiating a global tax regime. Mckibbin confesses as much:

I agree that we need a world price for carbon. This can be achieved by picking arbitrary targets for each country and then having each country trade until a world price is reached. Problem with this is that if one major country pulls out the global market will be undermined – or in the European ETS analogy if one country over-allocates the system price will collapse.

Or, he might have said, it has to be achieved through negotiating a global tax (read price) regime?

So everyone seems agreed that we need a market-based policy instrument to reduce CO2 emissions. There is only a question about whether to implement carbon taxes, tradeable emissions permits or some hybrid of the two.

John Quiggin cites three reasons for preferring the tradeable emissions permits route:

Read more…