As bright as the future may seem for China, crucial reforms are needed in order to maintain its current rate of economic growth and prevent the Chinese economy from falling over like a house of cards.

Some of the most imminent challenges that China faces in the near future include environmental pollution, income inequality, uneven development between rural and coastal areas, and a risky financial system. The central government has already identified these problems, and reforms are now in place — including those contained within China’s twelfth five-year plan announced in March 2011. But widespread corruption continues to undermine the effectiveness of any potential reform.

China’s domestic wealth has increased dramatically. But for some, the limits of transformative growth already seem to have been reached. Even conservative estimates suggest that the 54 million people currently unable to find work will remain in this position for at least another four years. China also runs on a risky financial system. Its banks are hiding piles of non-performing loans — piles built on the prediction that growth will continue to increase indefinitely. Income disparity, unbalanced growth and the need to reform the financial system were issues the IMF emphasised in their Chinese sustainability report. China also faces a grim battle against pollution. The price of rapid economic development is high; water, soil and air contamination puts the health of countless people at risk.

With the Twelfth Five-Year Plan, the Chinese government is setting out an ambitious proposal to put more money in the pockets of the poor and provide incentives to increase domestic consumption. It is also addressing economic restructuring, and tackling pollution by conserving energy and cleaning up the environment.

But corruption has the power to essentially nullify the government’s reform efforts. It is hindering development in remote areas and marginalising the poor. Often, money tagged for environmental programs disappears without making any noticeable impact. Corrupt officials are also obstructing individuals and groups reporting on pollution, and state-owned commercial banks are at the disposal of bureaucrats who exploit their position to benefit themselves. Above all, the biggest danger of corruption is that it undermines the very legitimacy of the government and key reformers.

One of Hu Jintao’s first addresses to party leaders in 2012 included an order to fight harder against corruption. The fight is crucial, but a poor record of success gives little reason for optimism. There are different views on why this battle is not being won. While some say it comes hand in hand with the benefits of an otherwise successful system, others say it is the legacy of extreme poverty during the Cultural Revolution. And others just believe it to be a part of Chinese culture. Be that as it may, the corrosive effects of corruption on government reforms, the economy and the reputation of the party are undeniable.

China’s previous efforts to curb corruption have focused on toughening related penalties, even resorting to capital punishment. But this approach has proved unsuccessful. Rather, transparency and public accountability are more effective in fighting corruption. And while China’s authoritarian leadership provided fast and comprehensive reforms, which turned the impoverished state into a superpower, accountability has little place within authoritarian regimes. This is why reform in China is so difficult.

China does not have to become a Western-style democracy; it should find a way to implement the idea of public accountability within its own system to allow for public scrutiny and expose corruption where it thrives. Channels that encourage credible and accurate reporting without fear of being labelled ‘anti-government’ have to be built. China will need to implement these reforms without forgoing the very characteristics that allowed for its economic development.

Failure to effectively curb corruption risks widespread public dismay with the country’s political leadership. Corruption is skimming away the resources allocated for China’s urgently needed reforms, and while it may not be the country’s biggest problem, it is seriously hindering efforts to tackle more-imminent ones. Consequently, success in curbing corruption is vital not only for China but also for the rest of an increasingly China-dependent world.

Michel May is a MEXT scholar and a Masters student in international relations and Asia-Pacific studies at the Graduate School of Asia-Pacific Studies, Waseda University.

1. Indian corruption: Time to fight back
2. Markets and corruption in Indonesia
3. Vietnam’s endless corruption campaign

China’s vice president, Xi Jinping, is set to make a hugely important visit to the US next week, prior to succeeding President Hu Jintao as China’s next president later this year.

The visit will set the stage for interaction between the next generation of Chinese leaders and American political leadership and help to shape how the most important bilateral relationship in the world will be managed over the medium-term future.

In recent times, the political-security dimension of the Sino-American relationship has received increasing attention, as the US ‘pivots’ toward Asia. But core and immediate challenges concern the economic relationship and how rapid change in the Chinese economy plays into US and global interests. These matters will be at the forefront of Mr Xi’s meetings when he visits Washington.

In a recent interview in the Wall Street Journal Nick Lardy argues that ‘if China does not accelerate the pace of reforms that support rebalancing, when global growth resumes a more normal pace, China’s external surplus likely would expand again. That would mean that China again would be subtracting from economic growth in the rest of the world, including the United States. That would make it more difficult for the United States to reduce its budget deficit to put its government debt on a more sustainable path’.

Lardy’s lead essay this week reflects the view set out in his new book that correcting the numerous imbalances is necessary to propel China toward a new and sustainable growth path.

Among the problems, Lardy says, are: a low share of private consumption expenditure and a super-elevated share of investment in GDP; an outsized manufacturing sector and a diminutive service sector; an unprecedentedly large hoard of official holdings of foreign exchange; and an increasingly high and probably unsustainable rate of investment in residential property. Mitigating these imbalances will require fundamental market-oriented reforms. The pace of reform will need to be accelerated to achieve sustainable, domestically driven growth and harmonious relationships in the international economy, notably with the United States.

Chinese economists, such as Yiping Huang at Peking University, have made the same point about the distortions in Chinese markets that need to be addressed to correct imbalances in the economy.

Lardy worries about the tardy pace of reform in China. ‘Market-oriented interest rate liberalisation, eliminating the under-pricing of energy and other factor inputs used predominantly in manufacturing, greater flexibility of the exchange rate and an even more rapid expansion of the social safety net are essential to moving China onto a consumption-driven growth path. Many of these reforms have been on the agenda for a decade or more’, he says, ‘yet with the exception of increased social expenditures, progress has been painfully slow’.

According to Lardy, the explanation is that financial repression, the undervaluation of the currency, and factor price distortions advantage some sectors and regions of China at the expense of others. The benefits of unbalanced growth flow to export- and import-competing industries (which enjoy elevated profits at the expense of firms in the service sector), coastal provinces (which have enjoyed supercharged economic growth at the expense of inland regions), the real estate and construction industries (which have benefitted from interest rate policies that have made residential property a preferred asset class), and China’s banks (which enjoy lofty profits that come with the high spread between deposit and lending rates set by the central bank) who have acquired disproportionate influence over economic policy. And to date they have been able to block much-needed policy reforms. These reforms are necessary if China is to move toward a more balanced, sustainable growth path.

Lardy also argues that there are immediate dangers to strong growth in China from excessive investment in housing and real estate. The share of residential investment in GDP has doubled to more than 10 per cent between 2003 and 2010, a share far higher than that in countries with comparable per capita incomes. This was induced, Lardy argues, in part by households channelling their savings into housing in the face of negative real deposit rates in the state-owned banking system.

While Huang sees less immediate risk of collapse in the housing market, residential housing has become the single most important driver of China’s economic growth since the middle of the last decade. Lardy is right in observing that this cannot last indefinitely, although how long it lasts is a very important question.

Peter Drysdale is Editor of the East Asia Forum.

1. Sustaining economic growth in China
2. Reform in China: Experience with economic system reform
3. Chinese economic risks

Indonesians have reason to be both optimistic and pessimistic coming into 2012. The question is: which outlook is more likely to prevail?

In his New Year message, President Susilo Bambang Yudhoyono (SBY) requested that all Indonesians work to maintain order. Acknowledging that the country’s political landscape is becoming more heated due to the upcoming general election — scheduled for 2014 — SBY urged Indonesia’s political parties and politicians not to inflame tensions.

Yet, problems in Indonesia are mounting. Hoping not to have more heated situations is not enough; the President is expected to do more. In 2011, many persistent problems were not dealt with, and corruption is still the biggest challenge in the country. Though Indonesia’s rating in Transparency International’s Corruption Perception Index improved slightly from 2.8 in 2010 to 3.0 in 2011, deep problems remain. Junior bureaucrats were found to possess billions of rupiahs in their savings accounts; wealth which is largely incompatible with their standard salaries. The wife of a former deputy police chief facilitated billions of rupiahs worth of grafts for members of Indonesia’s House of Representatives (DPR). And the head of a public elementary school stole huge amounts of public money which was supposed to be used for the school.

Mahfud M.D., the chairman of Indonesia’s Constitutional Court, in December 2011 noted that many state institutions appear to have been ‘contaminated’ by corruption viruses. Out of the several judicial authorities dealing with anti-corruption legal actions — the National Police, the Attorney General’s Office and the Corruption Eradication Commission — only the latter stands strong, even though it is also under attack by many lawmakers, who wish to weaken it.

In 2012, Indonesia should look to its neighbours, including Singapore and Australia, in its effort to deal with corruption. Indonesia should not feel awkward about learning from other countries. It is better to ‘lower’ the country’s dignity for some time in order to subsequently reach a more dignified status.

Human rights also demand greater attention, particularly after the recent bloody clashes involving citizens, corporations and police authorities. State authorities have been found guilty of human rights abuses in some recent cases, such that national and international attention remains focused on Indonesia. Some progress has been made, with reforms instituted since 1998 increasing the freedom of the press, and the public have also become more critical of human rights abuses perpetrated by the authorities.

This year may also see a possible breakout among the governing coalition parties, with the potential to shake the foundations of SBY’s government. This could be sparked by the Bank Century saga — the bank for which Indonesia’s previous government authorised a large bailout. Even though Indonesia survived the financial crisis — due perhaps to its bailout policy — some politicians in the DPR remain committed to prosecuting the policy makers responsible for the move, of whom are members of the current government. Interestingly, the strongest critics of the policy are members of the Golkar Party and Prosperous Justice Party, which are both members of the governing coalition. Either way, Indonesian politics will undoubtedly become more heated in 2012. Even though the next general election is two and a half years away, campaigning has already started. Some parties have announced their presidential candidates, whereas others are still in a wait-and-see mode.

Internationally, 2012 will be less hectic than 2011, with Cambodia chairing ASEAN after Indonesia’s stint last year. Another issue that may prove difficult for policy makers is the protection of Indonesian migrant workers abroad. Last year, an Indonesian citizen was beheaded by Saudi authorities, to strong public criticism in Indonesia. The government must nevertheless be commended for its ability to save a number of other workers through its diplomatic missions in Riyadh and Jeddah. But others are still waiting to face court proceedings, with many confronting potential death penalties.

One positive from December 2011 was an increase in Indonesia’s sovereign credit rating. Fitch Ratings increased Indonesia’s ranking from BB+ to BBB- with a stable outlook. The upgrade should provide for increased foreign investment, which in the future can create more jobs. This opportunity shall not be missed or wasted, but it is up to Indonesia’s elites to determine the country’s longer-term direction. Indonesia can move forward, or embrace the status quo. But it is also possible to go backward if care is not taken.

Yasmi Adriansyah is a PhD student at the School of Politics and International Relations, the Australian National University, and Executive Director of Projecting Indonesia. 

1. Markets and corruption in Indonesia
2. Indonesia’s struggle with reform
3. Asia’s mixed outlook for 2012

On 14 January, Taiwan’s incumbent president, Ma Ying-jeou, won a second term in office, obtaining 51.6 per cent of the popular vote while Tsai Ing-wen, his Democratic Progressive Party (DPP) opponent, managed 45.6 per cent.

Ma’s party, the Kuomintang (KMT), thus retained control of the Legislative Yuan, securing 64 of the 113 seats. Based on the numbers, President Ma will be able to govern with both a clear majority of popular support and legislative freedom over the next four years. Beijing and Washington were also visibly relieved by the KMT’s success, as Tsai’s appointment may have created a new source of instability in East Asia that neither the US nor China was keen to face — given the current state of their own domestic politics. In autumn 2012, China will undergo a leadership succession during the 18th Party Congress, and in November, the US will face its own presidential elections.

The election campaign and results in Taiwan highlight two emerging dynamics. First, figures from Taiwan’s Central Election Commission reveal that although President Ma won, the total number of votes he received dropped by more than 767,000 compared to 2008, when he received 58.45 per cent of the total vote. Conversely, votes for the DPP’s presidential candidate increased by 648,000, a growth of 4.05 per cent. The KMT coalition also lost 18 seats in the Legislative Yuan, a significant portion of its majority, while the opposition DPP coalition gained 16 seats. These gains signify that the KMT’s second term may not be as smooth as the first; President Ma will likely be constrained by increased opposition in the legislature, and this is likely to limit how much he can offer Beijing in enhanced cross-strait relations.

Second, the voting landscape looks to be evolving beyond the generational colour-coded political divisions, which have traditionally divided Taiwanese society into Pan-Blue (pro-unification) and Pan-Green (pro-independence) camps. This was illustrated by the addition of James Soong’s orange-coloured People First Party, which focused on campaigning in the ‘neglected’ central provinces and to Taiwan’s rapidly aging population. Moreover, socio-economic concerns dominated the campaign more so than in previous elections. Consequently, the issue of cross-strait relations became inseparable from the question of Taiwan’s economic security.

Ma’s economic policies — in particular the 2010 signing of the Economic Cooperation Framework Agreement — were juxtaposed with Taiwan’s slow economic growth, regressive taxation system, declining public investment, reduced job opportunities for new graduates, and a widening income gap between rich and poor. On the one hand, Ma argued that Taiwan’s future prosperity and greater regional stability both required a reduction in cross-strait tensions — and this would be achieved by promoting pragmatic economic and socio-cultural ties with the mainland. On the other hand, Tsai argued that further integration should be approached with caution; that it will lead Taiwan down the path of becoming a Chinese ‘special administrative zone’ and threaten its de facto independence.

As such, Ma’s slipping popularity and the increased public concern over his cross-strait economic policies suggest that many Taiwanese remain suspicious of Ma’s ties with mainland China. So while the election may not have reconfigured cross-strait relations, the risk remains that Beijing could become impatient with its limited influence over Taiwan’s democratic government, especially with the re-election of a pro-China KMT-dominant legislature.

Ma’s victory has almost certainly raised Beijing’s expectations; China’s leaders may pressure Ma to begin formally discussing Taiwan’s political future, and among other measures, Beijing may call upon Taiwan to halt the purchase of arms from the US and phase out its military ties with Washington. Rather than stabilising the cross-strait status quo, the KMT’s election victory may usher in a new period of instability — not one in which Taiwan calls for de jure independence and recognition as a sovereign nation — but one in which China may intensify its demands on Taiwan.

Sheryn Lee is Project Officer and Research Assistant at the Languages of Security in the Asia-Pacific project, and Research Assistant at the Strategic and Defence Studies Centre, Australian National University.

1. Taiwan and Hu Jintao’s end-year overtures
2. Taiwan, China, and the WHO
3. Taiwan: The Democratic Progress Party’s ‘China Syndrome’

In selecting his first cabinet and party executive line-up in September 2011, the most important motivation for Japan’s Prime Minister Noda was intra-party harmony.

His ministers were largely selected to appease political strongman Ichiro Ozawa, who maintains a well-deserved reputation for either running parties or destroying them. Noda’s approach contrasted with his predecessor, Naoto Kan, who followed a ‘datsu Ozawa’ line and sought to exclude Ozawa’s influence from his administration. The result was a series of furious internecine disputes. Ostensibly the fights were about policy; in reality they arose from Ozawa’s grievances about the distribution of power within the party.

If Noda’s first cabinet was selected to keep Ozawa at bay, his recently appointed second cabinet aims to placate the opposition by getting rid of offending ministers. Defence Minister Yasuo Ichikawa and Consumer Affairs Minister Kenji Yamaoka, against whom the upper house passed censure motions last year, were both demoted. By these actions, Noda has kept alive the possibility of constructive negotiations with the opposition on a proposed consumption tax and social welfare-reform legislation. But the opposition will find it hard to agree on any legislation unless they see direct political advantage in doing so. Their primary objective is to bring down the Noda government and force a general election.

Noda paid the price for intra-party harmony the first time round. He appointed Ichikawa and Yamaoka not on the basis of their policy experience or political nous but because of their strong political connections to Ozawa. He also went for political balance in the party, choosing not only Azuma Koshiishi — one of Ozawa’s major supporters and defenders — as DPJ secretary-general, but also anti-Ozawa stalwart Seiji Maehara as chairman of a strengthened DPJ Policy Affairs Research Council.

Noda has also continued the trend begun under Kan toward decentralising the policy-making process, thus strengthening the role of the party as a separate policy organ. These changes reversed earlier reforms instituted under the Hatoyama administration, which sought to centralise policy making in the cabinet and reinforce the prime minister’s executive powers by establishing entities such as the National Policy Unit. By prioritising consensus within the government and the ruling Democratic Party of Japan (DPJ), Noda successfully undercut the executive policy-making power of the Kantei and the cabinet. Unfortunately, Noda soon realised that his administration needed more executive power to carry out difficult tasks such as increasing the consumption tax and engineering Japan’s membership of the Trans-Pacific Partnership. Ozawa’s cronies had begun using the consumption tax issue as an excuse to jump ship and form another political party (New Party Kizuna), in addition to another new party led by former Diet member and convicted felon Muneo Suzuki (New Party Daichi-True Democratic Party), which has enlisted two key ex-DPJ Ozawa supporters to its ranks. All the while, Ozawa’s previously muted criticisms have been growing louder and his behind-the-scenes machinations for possible party realignment more apparent.

Now Noda has sought to swing the pendulum back the other way with the appointment of Okada as Deputy Prime Minister and simultaneously to a whole host of other ministerial positions. Okada’s selection signals that Noda feels the need to buttress his policy leadership, but his elevation may also be a sign that Noda recognises his own policy leadership is weak. Okada is the DPJ’s Koizumi — someone who acts on the basis of policy conviction, rather than from the careerist mentality of so many other Japanese politicians.

Okada will certainly add some ballast to the Noda administration, but the downside is that Okada’s policy convictions can lead him to act unilaterally, without clearance from fellow members of the government. Moreover, Ozawa is implacably opposed to Okada given their past dealings: Okada was the principal architect of Ozawa’s suspension from the DPJ in 2011. And even though Ozawa is engaged in a long-drawn-out trial over an alleged money–politics misdemeanour, a wounded lion can still be dangerous. His criticism of the Noda administration may now become stronger after the reshuffle, although it is unlikely to reach the intensity with which he sought to bring down the Kan administration.

It is possible that Noda has repeated his earlier mistake in appointing Naoki Tanaka to replace Yasuo Ichikawa as Minister of Defence. Both Tanaka and Ichikawa have strong connections to Ozawa. Noda made both appointments to appease Ozawa, but Ichikawa’s incompetence on the job came back to bite him. Tanaka has had a singularly undistinguished political career, with his biggest claim to fame being his connection to the Tanaka family — his father-in-law is a former prime minister and his wife Makiko also has a long career in politics. And though Tanaka’s most recent position was as a member of the Special Committee on Okinawa and Northern Problems, he is completely untried and untested in dealing with security issues involving the US.

Normally, cabinet reshuffles are undertaken to breathe new life into governments. It remains to be seen whether Noda’s new line-up achieves this objective. The overwhelming impression is that both Noda and his cabinets are only temporary. The new cabinet is not going to save the Noda government, just extend its life briefly. Its effect will be palliative rather than curative.

Aurelia George Mulgan is Professor at the University of New South Wales, Australian Defence Force Academy, Canberra.

1. Noda’s cabinet reshuffle: does it give him a stronger hand?
2. Indonesia’s cabinet reshuffle: how low can it go?
3. Japan: Hatoyama delivers an impressive cabinet

The political fortune of Pakistani cricketing superstar-turned-politician Imran Khan is on the rise.

Since he founded his Tehreek-e-Insaf party, or Movement for Justice (MJP), in 1996, Khan has remained a fringe player. But his political rallies, both in Lahore and Karachi, recently attracted huge crowds. If these rallies translate into votes at the next election, his party should take seats mainly from President Zardari’s Pakistan Peoples Party (PPP) and Nawaz Sharif’s Pakistan Muslim League (N) (PML-N). Khan’s MJP may not gain an absolute majority, but it would certainly emerge as one of three big players.

Khan’s party, until now, was a one-man band. But with Pakistan’s latest round of political upheavals, all this seems to be changing. The retired Air Marshal Asghar Khan, another fringe player, recently merged his Tehreek-e-Istiqlal party with Khan’s MJP. Several other politicians from the PPP and PML-N have joined Khan’s party, including a former foreign minister, Shah Mahmood Qureshi. And there are even reports that a number of sitting parliamentarians from the PPP, PML-N and former President Musharraf’s party, PML-Q, are pleading with Khan to accept them into his party.

Given these political machinations, it is now highly pertinent to ask what kind of prime minister Imran Khan would turn out to be.

Khan, before going to Oxford (where he studied philosophy, politics and economics), was educated in Christian schools in Pakistan and the Royal Grammar School in England. He married English socialite and heiress Jemima Goldsmith, first in an Islamic ceremony and then in a civil ceremony in England — although they are now divorced and their two sons live with Jemima in England.

Does this background mean he would be sympathetic to the Western worldview?

It seems unlikely. Khan is viewed as one of the most virulently anti-American and anti-Western politicians in Pakistan today. In fact, until late last year, the biggest rallies at which Khan was used to speaking were those organised by Qazi Hussain Ahmad, a prominent sympathiser of the Taliban and Haqqani networks, and former President of Pakistan’s Islamist party, Jamaat-e-Islami. Khan inherited this anti-Western attitude from his political mentor, General Hameed Gul, an ex-head of the Inter-Services Intelligence (ISI), Pakistan’s notorious and all-pervasive intelligence agency.

Gul was responsible for recruiting, training, and providing funds and safe houses to the Mujahideen during the Soviet occupation of Afghanistan and later was a central player in the emergence of the Taliban. He still maintains very strong links with the Taliban. He also reportedly maintains strong links to terrorist outfits such as al-Qaeda, Lashkar-e-Taiba, Lashkar-e-Jhangvi and the Haqqani network. And though General Gul left the ISI some time ago, he — and his anti-Western ideology — still continues to dominate the worldview of the ISI and most of the Pakistani army. After being a fringe player for more than 15 years, these allegiances now seem to be bearing fruit for Khan, helping him attract the huge crowds witnessed in Lahore and Karachi.

Also indicative of his allegiances is the fact that Khan never criticised the military rule of President Zia-ul-Haq — a close ally of General Gul — and President Musharraf was disposed to appointing Khan to his cabinet although he refused to accept. Sources close to Musharraf have even stated that at one stage the former president considered making Khan prime minister. Now, all available evidence suggests the Pakistani military has adopted Imran Khan as its preferred candidate.

Khan has often talked about improving the lot of ordinary citizens and creating jobs for the young (his biggest support base), while remaining silent on the need to slash the military’s budget by at least 50 per cent in order to achieve this goal. Khan has also excoriated the US and its partners’ fight against the Taliban, but is mute on the Taliban’s atrocities. Similarly, there was little reaction after the killing of Saleem Shahzad, a journalist who was about to expose the extent of al-Qaeda’s infiltration of the Pakistani navy. And while Khan strongly criticised the US for its operation against Osama bin Laden, he failed to question how the world’s most wanted terrorist had been living in Abbottabad, a garrison town run by the Pakistani army.

The Pakistani defence establishment also likes Imran Khan because he is untainted by corruption, something which suits the present mood of the nation. In any case, the military has never liked the Bhutto family nor their party, the PPP. Khan also has strong ties to the ISI, is hostile toward the interests of both the US and NATO, supports the Pakistani military’s strategy in Afghanistan and is politically inexperienced. Perhaps they see him as a puppet who can be easily manipulated. Either way, Khan’s potential electoral success looks set to contribute even further to Pakistan’s increasing political instability and continuing dominance of the Pakistani military.

Vidya S. Sharma is based in Melbourne and advises on country risk management, inter-country joint ventures and market penetration strategies. 

1. Osama Bin Laden, Pakistan and the United States
2. Pakistan risks ethnic strife
3. The West must tackle Pakistan to fight Taliban

Consensus-based policy making is a salient feature of Vietnam, where important decisions are collectively made.

Consensus is needed not only for the formulation of a reform vision but also for the elaboration and implementation of this vision. Doi Moi, the most successful economic reform to date, would certainly not have occurred in 1986 if no consensus were reached at the VI Party Congress.

A series of events in 2011 indicate that a vital consensus for the acceleration of economic reforms has been attained. Vietnam’s first major economic event for 2011 was the Communist Party Congress held in January, which set out Vietnam’s development strategy for the next 10 years. Like its predecessor, the 2011–2020 Strategy adopted at the Congress places great emphasis on rapid economic growth, with a target of 7–8 per cent average annual GDP growth over the next decade. The strategy puts increased attention on the quality of growth, including targets on macroeconomic stability and requirements for clarifying the role of the state in a market economy. Nevertheless, the ambitious quantitative growth target suggests a continuation rather than a fundamental break with previous strategies.

But events took a significant turn just a few weeks after the Congress. In late February the government issued Resolution 11, aiming to restore Vietnam’s macroeconomic stability and cool down an overheated economy. Specifically, the resolution sought to address high levels of inflation, tension in the foreign exchange market, high nominal interest rates and declining foreign exchange reserves. The implementation of Resolution 11 remained a top priority in the government’s agenda throughout 2011, and reviews of its implementation continue to take place regularly. Resolution 11 represents a decisive switch from growth to stability. For the first time, there is an official government policy document that completely neglects the term ‘growth’ in its targets. Its longevity signals a significant change in the mindset of Vietnam’s policy makers.

Signs of a radical shift in economic strategy became more evident when the new administration came into power in July. Several workshops and focus group discussions were held to facilitate policy dialogues regarding the restructuring of Vietnam’s economy to improve efficiency and competitiveness. From this process, consensus was reached on Vietnam’s strategic development priorities, identifying major areas for reform in the coming years. This consensus argues for radical transformation in three areas: state-owned enterprises (SOEs), the financial sector and public investment. The need for reform was also officially documented in the Socio-Economic Development Plan (SEDP) for the period 2011–2015, which was approved by the National Assembly in November.

Following these events, Vietnam recorded good economic growth in 2011, with an estimated rate of GDP growth at 5.8 per cent. Exports performed very well, increasing by 33 per cent despite a significant decline in global demand. This robust GDP and export growth prevailed over a significant contraction in fiscal and monetary policy, and Vietnam’s strong export performance contributed notably to the reduction of trade deficits and the foreign exchange market’s stabilisation. The rate of inflation also slowed in the last four months, largely due to the implementation of Resolution 11.

The adoption of Resolution 11 and the SEDP in particular indicate that Vietnam has achieved consensus on accelerating market-based reforms in ‘difficult’ reform areas, namely SOEs, the financial sector and public investment. The recent release of an ambitious proposal for SOE reform through to 2020, developed by the National Steering Committee for Enterprise Reform and Development, provides further evidence of this consensus. According to the proposal, about 44 per cent of the remaining 1300 full SOEs will be equitised in the next four years.

In this context, 2012 will be a very challenging year for Vietnam. The country still has to deal with an overheating economy, and inflationary pressures remain a genuine threat to the country’s economic stability. The banking sector is vulnerable, with a rising share of non-performing loans resulting from a long period of extraordinary credit growth. Challenges also lie in transforming the SEDP’s vision into specific actions. The plan calls for a fundamental restructuring of the economy, and while many agree on the vision of the reform, the formulation of a feasible action plan will take time, owing to the likelihood of resistance from economically strong interest groups.

The Vietnamese government is developing a detailed action plan for its ambitious restructuring strategy. It is expected that this plan will be approved by the end of the first quarter of 2012. The timeframe looks very ambitious as consensus for detailed actions still needs to be built. But there is a significant factor which may speed up the implementation process: while the market economy was an unfamiliar concept in previous times, it now receives strong support from the vast majority of Vietnamese people.

Dr Doan Hong Quang is a Senior Economist at the Poverty Reduction and Economic Management Unit, World Bank, Vietnam. This is part of a special feature: 2011 in review and the year ahead.

1. Malaysia’s economic transformation
2. Managing the risk of inflation during economic recovery – the case of Vietnam
3. Vietnam sails through the crisis but needs reform to sustain the growth

Visitors to New Zealand during the uneventful general election in November 2011, which returned John Key’s National Party to office, would be forgiven for thinking things were running smoothly.

This was helped by the fact that a few weeks earlier, New Zealanders gained the greatest prize they could wish for. This was not a Nobel Prize for their leading scientists; nor a temporary seat on the UN Security Council, which Mr Key’s government wants to secure; nor the competent hosting of the Pacific Islands Forum in Auckland, which came and went without much trace. No, that prize was the Rugby Union World Cup.

That the victory over France was so welcomed across the country said as much about the torrid last 12 months experienced by many New Zealanders as it did about their attachment to the sport. The effects of two disasters in the South Island were part of that difficult environment. In November 2010 a series of explosions at the Pike River coalmine on the West Coast took the lives of 29 miners. And as 2011 wore on, the Royal Commission’s grim findings told the sad story of this tragedy.

In February, Christchurch was struck by a massive aftershock from the September 2010 earthquake which had caused significant initial damage to New Zealand’s second-largest city. The 2011 event produced one of the country’s worst ever disasters. Nearly 200 lives were lost, and with many of the city’s historic buildings in ruins and many private homes uninhabitable the Key government created a special department to deal with the huge reconstruction effort.

The earthquakes have punched a multi-billion dollar hole in the public purse. These extra expenses would have been difficult to fund in an ordinary year. But 2011 was anything but ordinary. Aside from the continuation of healthy global demand and prices for New Zealand’s dairy exports, the economy was already struggling to recover from the international recession and cope with weak domestic demand. New Zealand’s credit rating was also marked down to AA — an indifferent outcome for a country whose prime minister built his career on the international bond market.

How, then, was Mr Key re-elected in November? Part of the answer lies in the informal tradition which sees newly elected governments often receiving a second three-year term. Part of the answer also lies in the time it has taken the Labour Party to recognise it can govern again even without Helen Clark as its leader. And part of the answer lies in the Prime Minister’s own popularity. At a time when New Zealanders recognise that global economic conditions are so perilous, he is still seen as optimistic and generally unflappable, without being unrealistic.

But Mr Key’s government and the rest of New Zealand face a challenging year ahead. Even if further disasters do not eventuate, the economic outlook remains mixed. Compared to some of its OECD partners in the northern hemisphere, especially in parts of Europe, New Zealand’s situation could be considerably worse. But New Zealanders still have a worrying habit of comparing their lot to their Australian counterparts, and as a consequence many have been heading across the Tasman for some years. But as they come to realise that even the ‘lucky country’ can be affected by slowdowns, and that even China’s mighty economy is not immune from dips in growth, a greater sense of perspective might be dawning.

Regarding foreign policy, the Key government will be hoping that New Zealand’s increasing network of FTAs, especially in Asia, will lead to greater economic resilience. This commercially driven foreign policy has meant, for example, a much greater emphasis on New Zealand’s place in the Trans-Pacific Partnership than in regional arrangements where economic motivations are less evident. Before Christmas, the government also announced that New Zealand’s special forces in Afghanistan would be returning home in early 2012. New Zealanders are not expecting the stationing of American forces on their soil as in Darwin. But their government can expect continuing interest from Washington in a closer relationship — at a time when New Zealand is also seeking to deepen its connections with Asia’s major powers, including China and India, and also with ASEAN.

In 2012 the newly re-elected Key government will be busy administering a very strong dose of the medicine that more-troubled economies are ingesting elsewhere. The public sector cuts which were made before the 2011 election will be redoubled in 2012, with many agencies needing to find savings of up to 20 per cent in their baseline budgets for the next financial year. Whether these cuts will sow the seeds for future problems caused by a lack of government capacity, only time will tell.

Mr Key and his colleagues may also find their wafer-thin majority in the House under threat. The Labour Party has a new leader, and the Green Party, which is heading cleverly toward the political middle ground, has seen its parliamentary representation strengthened as a result. And Winston Peters, the irrepressible comeback kid of New Zealand politics, is back in parliament with a handful of seats. For New Zealand, it certainly looks like an intriguing year ahead.

Robert Ayson is Director at the Centre for Strategic Studies, Victoria University of Wellington.

This is part of a special feature: 2011 in review and the year ahead.

1. New Zealand, Australia and China’s rise
2. It was time in New Zealand!
3. New Zealand and the Financial Crisis

Recent developments in Myanmar have generated considerable optimism about the country’s long-impending democratisation.

But will democracy foster ethnic reconciliation, essential for Myanmar’s domestic stability? A cross-country comparison with Sri Lanka and an examination of Myanmar’s demography and geographic distribution of resources indicate that despite sharing an otherwise similar trajectory with Sri Lanka, Myanmar’s emerging democracy could foster ethnic reconciliation, even after more than 60 years of ethnic insurgency.

Geographically, Myanmar belongs to mainland Southeast Asia. But culturally it belongs to the Theravada Buddhist world, along with countries like Thailand, Laos, Cambodia and Sri Lanka. These countries are all alike insofar as their constitutions symbolically link the legitimacy of the state to Buddhism or, at the very least, extend special treatment to the majority Buddhist community. But to the extent that each was affected by colonialism and communism/socialism, these Theravada countries can be classified into three groups: Thailand, which was never directly colonised and remained largely immune to communism; Laos and Cambodia, erstwhile French colonies, which were strongly influenced by communism; and Sri Lanka and Myanmar, former British colonies, where socialism had considerable appeal. More recently in Myanmar, Thailand and Sri Lanka minority insurgencies have contested the authority of the state. With these commonalities in mind (among others), Sri Lanka is clearly the Theravada country whose path most closely resembles that of Myanmar.

In Sri Lanka, the Sinhalese Buddhist-dominated state militarily defeated the Tamil ethnic minority insurgency, but then refused to honour its commitment to reconciliation. While the Sri Lankan Buddhist majority is unwilling to hold the government accountable in this regard, the Buddhist majority in a democratic Myanmar is unlikely to behave in a similar fashion. At the moment, it seems the process of democratisation in Myanmar is entirely controlled by the military regime. But the regime is introducing political reforms and trying to initiate peace talks with ethnic militias only because it is increasingly unable to sustain itself in the absence of popular support, while its legitimacy as the guardian of the majority Burmese Buddhists’ interests remains questionable. So, the democratisation of Myanmar, whenever that happens, will be a people’s victory against an authoritarian state — much different to the case of Sri Lanka.

There are two more structural reasons why majority–minority relations will not be overtly antagonistic in a democratic Myanmar. First, Myanmar’s population is not divided into two antagonistic camps. This is unlike Sri Lanka, where there remains a clear division between the Sinhalese majority and the Tamil minority in the north. In contrast, insurgents in Myanmar are divided along ethnic lines — and none of the groups has managed to establish its authority over the rest, as was the case in Sri Lanka, where the Liberation Tigers of Tamil Eelam dominated the scene for more than two decades. Moreover, the Burmese Buddhists are also divided into a number of camps with fundamentally different approaches to the ethnic question. Second, unlike Sri Lanka, the Burmese minority insurgent groups are not devoid of members from the majority community.

In short, religious, ethno-linguistic and political divides are not co-extensive in Myanmar. This has two consequences. First, it is highly unlikely that one political party will emerge as the sole representative of all the major ethnic minorities. So, the ethnic minorities are unlikely to pose a unified political threat to the Burmese Buddhists. Second, one political party is unlikely to maintain a majority with only the Burmese Buddhist vote. Parties representing the majority community would also need the support of ethnic minority parties. Consequently, political contests are unlikely to divide the polity into two clearly demarcated camps.

In addition, unlike the stronghold of the Sri Lankan Tamils, which is resource poor and located in one corner of the country, the strongholds of ethnic minorities are distributed along the entire periphery of Myanmar. The strongholds of Burmese ethnic minorities are not only resource-rich regions that should attract major international investment following democratisation, but they also control Myanmar’s access to key neighbours like China, India and Thailand. Given the country’s decades-long economic stagnation, it is unlikely that the Burmese Buddhists will overlook this.

In sum, although demography and geographic distribution of resources failed to restrain ethnic conflicts immediately after independence, they will play a different role in a democratic Myanmar. A cursory acquaintance with Myanmar’s post-colonial history will convince the majority Burmese Buddhists of the impossibility and futility of any attempt to subjugate the minorities. This time, history should bear out the limits that demography and other factors place on ethno-political polarisation and help foster ethnic reconciliation.

Vikas Kumar is Assistant Professor at Azim Premji University, Bangalore.

1. Toward real national reconciliation in Myanmar?
2. Détente and the Myanmar spring?
3. India walks diplomatic tightrope over Myanmar

Contradiction is a mainstay in Burmese life. In downtown Rangoon, a giant new Toshiba TV screen hangs over the street, while rickety cars and taxis from the 1970s whir past below. Crumbling colonial-era buildings are mixed with shiny new Chinese-funded monoliths.

But nowhere is the country’s inherent contradiction more apparent than in the developments of 2011. Primarily, the new parliament’s formation must be juxtaposed against resumed violence in border regions. And we must decide which of the two dynamics to take as the year’s prevailing reality.

Following the excitement at the close of 2010 — with elections and Aung San Suu Kyi’s release — 2011 began in a more sombre way, with emphasis on the nitty-gritty of ‘discipline-flourishing democracy’. Parliament was formed and began sitting; the final government officials left Rangoon for the new capital of Naypyidaw; and Aung San Suu Kyi met with President Thein Sein and tested the limits of her new freedom by travelling outside Rangoon.

Later in the year, the suspension of the Myitsone Dam in Kachin State heated up the political atmosphere, injecting considerable optimism about the new government’s commitment to change. Responding to Aung San Suu Kyi and public opinion for the first time, the government suspended the dam’s construction and challenged Chinese patronage.

This action suggests the government is no longer preoccupied with the ‘threat’ of Aung San Suu Kyi and is, instead of dwelling on the past, forging a path forward. But the most vulnerable time for an historically oppressive and military-dominated government is often during the transition to democracy.

While Thein Sein is currently in charge, his control is yet to be truly tested. Following the suspension of the dam at Myitsone, can he withstand Chinese pressure to resume construction? Is he entrenched enough to resist a coup led by military hardliners opposed to his progressive tendencies? Or will he triumph over the very real threat presented, not only by Aung San Suu Kyi, but by the plethora of newly formed political forces rising in the tentatively liberalised political sphere?

In 2012 there is a chance the country will see a schism within the military, and a coup overthrowing Thein Sein. But unless Thein Sein loses favour with (retired) Senior General Than Shwe — who is rumoured to still wield control over the military from the back room — this is unlikely.

The most likely scenario — and we can only hope for Burma’s sake the one that plays out — will be the continuation and further entrenchment of ‘discipline-flourishing democracy’. While seemingly a contradiction of terms — and despite its countless detractors in the international community — a democratic system tempered by a constitutional requirement for military prominence is perhaps the most favourable outcome for the country’s short-term future.

Perhaps the deciding issue in 2012 will be the border conflicts. The Kachin Independence Army has demonstrated the military’s impotence when faced with a highly motivated guerrilla opponent. The Burmese population and international community — and the larger United Wa State Army further south — have undoubtedly noticed the difficulties which these combatants have presented to government troops.

Instead of viewing the resumed violence as undermining and contradictory to the new government’s progress, it can be seen as simply another way the military-aligned government is consolidating its control over Burma. Strengthening their popular support like never before through moves to placate the population and Aung San Suu Kyi — with the dam suspension and parliament formation — while crushing dissent from competing armies, shows the military is trying to get smarter. It remains to be seen whether this new style of ‘democratic’ dictatorship has longevity.

Jacqueline Menager is a PhD candidate at the College of Asia and the Pacific, the Australian National University.

This is part of a special feature: 2011 in review and the year ahead.

1. Aung San Suu Kyi and Burma’s change of heart
2. Burma: a test that ASEAN may be failing
3. Birthday blues in Burma