How does a Cold War organisation like the OECD respond to the end of the Cold War? Does it try to hang on to its former identity? Or does it embrace the new ‘age of globalisation’?

The end of the Cold War in 1989 represented a victory of values and ideology — the triumph of pluralistic democracy, respect for human rights and the market economy — for the OECD and its member countries. At the time, Asian economies were also emerging rapidly, based on a complex cocktail of export promotion, strong state intervention and non-democratic politics.

Before the fall of the Berlin Wall, a number of these Asian economies were ‘economically qualified’ for OECD membership in terms of GDP per capita. But politically, there was never any suggestion that they might join.

Politics has always trumped economics at the OECD, even though economics is its core business. In the 1990s, for example, four central European countries were rushed in as members (following Mexico’s 1994 membership), while they were still fledgling market economies and democracies. They were the lost sheep of the North Atlantic community, having been occupied by the Soviets, and Western Europe and the US strongly supported their membership ambitions.

But Korea’s membership was very much a different case in point. It was economically better qualified, with a GDP per capita more than 60 per cent higher than the other five new members. It was perhaps even more qualified politically. Nevertheless, it is widely recognised that the OECD went soft on Mexico and the central European countries during the membership process, and went much tougher on Korea.

By 2007 when it came to inviting other countries to join the OECD, none of the most interesting possible members — Brazil, China, India, Indonesia and South Africa — had expressed interest in joining. They were offered and accepted a program of ‘Enhanced Engagement’, which was designed to prepare them for possible future membership.

Today the OECD finds itself with 34 members, with some 24 from Europe and only two from Asia. In contrast, the WTO’s list of the world’s 34 leading exporters includes 10 Asian economies. Many of these Asian countries are also internationally significant in areas such as investment, finance and carbon emissions — and school students from Shanghai now outperform all OECD countries in the organisation’s Programme for International Student Assessment, which measures literacy, numeracy and scientific ability. But while the Enhanced Engagement countries participate in a wide array of OECD activities, none of them are interested in membership. A very senior OECD official once described this program as a ‘one-way love affair’.

So the OECD, which has sometimes called itself a ‘hub of globalisation’, seems destined to have a membership which accounts for an ever-declining share of the world economy. It stands at a crossroads, bypassed by Asian-led globalisation at a time when the G20 has more member countries from Asia than Europe.

What are the main problems and solutions?

Even though it is essentially an economic organisation, the OECD has retained a strong North Atlantic political identity. This is partly because it is governed by foreign ministries and also because of the US’ dominant role. And as the recent UN vote on Libya showed, there are still vast political gulfs between the Enhanced Engagement and OECD countries.

New members are also forced to accept and align their policies with a now vast array of instruments and conditions they had no role in creating. From an OECD point of view, this means becoming a ‘responsible stakeholder’. From an emerging country point of view, it means being a ‘rule-taker’, that is, swallowing an OECD agenda now increasingly questioned in light of recent financial crises.  The OECD also has too many European members.  Something must be done about this ‘eurocentricity’, such as establishing constituencies, to improve the organisation’s effectiveness.

Overall, the OECD must adapt much more radically to the changed world and offer a more flexible and pragmatic approach to the application of its values and instruments through its membership. It must then launch a major campaign to recruit the Enhanced Engagement countries as members. The OECD Secretariat and its membership have not yet managed to convince emerging Asian economies of the organisation’s manifest benefits. But the OECD is still in many ways the best idea in town, with its excellent analysis and opportunities for policy dialogue. And emerging Asia has much to learn from the OECD experience in many areas, like developing social safety nets, economic upgrading, dealing with ageing populations, and public-sector reform.

As well as revitalising the OECD, this strategy could contribute to improving relations between the two major blocs which divide the world today — the OECD countries and the Enhanced Engagement countries.

John West is Editor-in-Chief at MrGlobalization.  This article is based on his paper ‘The OECD and Asia: Worlds Apart in Today’s Globalization’, published in Revista de Economia Mundial No. 28 (2011), 67–92.

1. OECD policy brief on emerging economic giants
2. Engaging Central Asia: the EU-Shanghai Cooperation Organisation (SCO) axis
3. The South Asia Cold War ‘quadrilateral’ redux?

It is wrong to assess the Trans-Pacific Partnership Agreement (TPP) against its short-term benefits — these may very well be non-existent. Instead, the deal’s true value hinges upon its chances of a medium-term expansion into Asia.

The TPP is an ambitious regional trade agreement under negotiation between ten economies: Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, the US, Vietnam and as of early November, Japan. The Agreement has concluded its ninth round of negotiations in Lima, Peru, with an unofficial round also occurring recently at the 2011 APEC summit in Hawaii.

Despite its many illustrious members, the gains to be had from the deal are not as great as might appear at face value. Australia already possesses existing FTAs with all but two of the nine other participants (Japan and Peru; and Peru is second-last on the list in terms of the value of Australian exports — less than A$100 million in 2010).

Such pre-existing links suggest there will be, at best, modest economic benefits for Australia resulting from the deal. But even if effects to the bottom line are marginal, other aspects of the TPP may be important.

Furthering the coherence of relationships between its members is one benefit the TPP seeks to achieve. The current group of FTAs throughout the Asia Pacific (the ‘spaghetti bowl’) lacks consistency, at times overlap, and often generate criticism regarding what the agreements do and do not cover, their text and their implementation.

A combination of modest gains and a step toward regional convergence in relations to trade does not quite warrant the TPP being named as Australia’s ‘highest [trade] negotiating priority’, as the government describes it. It is irrational to invest significant time, effort and resources into an initiative which has a low and largely intangible payoff. It appears there is more to the story here.

In short, the key value driver of the TPP is the potential for its future extension to other regions within the Asia Pacific.

For example, consider Australia’s top three export markets in 2010: China, Japan and South Korea. All three are powerhouses and none currently have FTAs with Australia. This description holds for the overwhelming majority of the TPP’s potential participants.

If a working TPP can be expanded successfully to other nations, conditional upon an initial success, then the potential for and size of future gains to all parties is large. Importantly, the broad realisation of this outcome is only possible with an initial agreement.

Press statements and present descriptions of the deal support this hypothesis. Language from the Australian Department of Foreign Affairs and Trade, describing the TPP, features terms including ‘living’, ‘building block’ and ‘21st century’. Japan’s recent request in early November to join the talks also cements this view with action.

It is difficult to assess whether such a valuation is the correct one. Trade is complex, and many experts in numerous fields are divided as to just how feasible or profitable a strategy of expansion may be. In any case, it is clear that the contemporary debate and discourse regarding the TPP should not be solely centred on the present — the deal should be recognised as both dynamic and speculative.

Hubert Wu is a student at the University of Melbourne and was a Global Voices delegate at APEC 2011.

1. Are there real dangers in the Trans Pacific Partnership idea?
2. The Trans-Pacific Partnership
3. Trans-Pacific Partnership talks in Singapore: Now it gets difficult

Global climate policy reached a turning point at the 2009 Copenhagen conference.

Expectations of a binding global climate treaty were dashed; instead, all major countries made unilateral pledges to cut or restrain their greenhouse gas emissions. In reality, that was probably a more significant outcome than a binding, but weak, agreement — what counts is what countries do, not what they sign up to.

The next conference, Cancun 2010, was of value largely because it ratified the 2009 agreement, which, due to the blocking action of a small number of countries, had been noted but not formally agreed to at Copenhagen.

And so the annual climate conference circus rolls on, this year to Durban, South Africa. What should we expect of Durban?

Two points, often overlooked, need to be kept in mind. The first is that we now have an agreement on the way forward for the world to combat climate change. Countries representing 80 per cent of emissions have signed up to emissions control targets, and developed countries have promised billions in assistance to poorer countries for both mitigation and adaptation. There are still details to be worked out (and there always will be), but it is more than the current framework.

The second point is that we now have a way of regularly updating and developing the agreements already in place. For better or for worse — and one can argue the case both ways — the world has decided, at least for the foreseeable future, not to negotiate a new treaty for climate change. Instead, it depends on the less formal, but also less binding, approach of relying on decisions made at these annual meetings, as they are officially recorded and agreed to by all parties.

These two points imply that there will be no major breakthrough at Durban — because there is no major breakthrough to be had. Successful annual climate change conferences would be those which enable further detailing of agreements already in place, and, increasingly, countries to report on efforts aimed at meeting their self-imposed targets. It is a process of building confidence and trust.

The expectations of many in the media and some in politics are very different. There is no shortage of commentators who want to build up Durban, or rather set it up for failure, by saying that it will be a success only if there is a breakthrough.

Although we should not expect a breakthrough, and should not require one in order to judge Durban as a success, this does not mean Durban cannot fail.

The progress over the last few years has only been possible because disagreements on other issues have been set aside. In particular, there is a fault line in the negotiations between those who want to see a second commitment period for the Kyoto Protocol (a so-called Kyoto II), and those who do not. As the first commitment period (that is, the first period in which countries commit to reduce their emissions) expires in 2012, this issue is pressing.

Developing countries, including the powerful BASIC group (Brazil, South Africa, India and China) want to see a second commitment period. They view the Protocol as the cornerstone of international action on climate change, which should be sustained rather than allowed to fade away.

Those who disagree are largely those to whom the first commitment period applied, namely, the rich countries. The US has not ratified Kyoto. Canada, Japan and Russia did, but have already declared they will not take on a second commitment period. That leaves Europe, Australia and New Zealand. They have not ruled out a second commitment period, but their support is conditional on other major emitters also promising to take on legally binding commitments. There is no sign of this happening.

EU climate commissioner Connie Hedegaard stated recently: ‘Some seem to think that if only Europe took a second commitment period, that would make Durban a big success. The world should not fool itself. It’s only interesting to keep Kyoto alive if somebody is following. Europe represents only 11 per cent of global emissions. What will the other 89 per cent do?’

Europe will only sign onto Kyoto II if other countries follow suit, and agree to sign on to a similarly binding agreement in later years. But there is no sign that either the US or the BASIC countries are willing to make such a commitment. Moreover, Europe faces the possibility of severe recession, and there are even fears that Europe might break apart politically. It seems impossible that the EU would promise to sign on to Kyoto II at this point in time. And without the EU, Kyoto II simply will not happen.

China has signalled preparedness to consider a legal framework for developing-country targets at some point in the future. But this is conditional on Kyoto II and the US taking on legally binding targets. And whether China is prepared to go beyond domestic laws to a binding international treaty is still unknown.

All in all, there are so many ifs and buts that an agreement on Kyoto II is not a likely scenario, nor is it the outcome by which Durban should be judged. The real test for Durban is whether the world can continue to entrench and progress its newfound, bottom-up approach to climate change. This requires Durban to avoid an implosion over disagreements concerning Kyoto’s future and its alternatives. Avoiding this will in itself mean success.

Stephen Howes is Director at the Development Policy Centre, the Australian National University. Frank Jotzo is a Senior Lecturer and Director at the Centre for Climate Economics and Policy, the Australian National University.

Earlier versions of this article appeared here on the Development Policy Blog and here in The Australian

1. Measuring the success of Indonesia’s involvement in Durban
2. Durban climate talks bring mixed results for Indonesia
3. The politically possible: How to achieve success in Copenhagen

Even before the announcement that ASEAN member states had awarded the 2014 rotating chairmanship to Burma, it was already a foregone conclusion.

Burma’s campaign to be reinstated as a regular member of ASEAN gained steam when Indonesia’s Foreign Minister, Marty Natalegawa, began hinting at approval before his visit to Naypyidaw, Burma’s capital, last month. And once Indonesia was on board, other regional players joined in. Still, it is very uncertain what — if anything — ASEAN will achieve through this move.

Burma is the only current ASEAN member never to have chaired an ASEAN Summit meeting. In 2004, regional powers — including Indonesia — pushed Burma to relinquish its chairmanship scheduled for 2006, acting under immense pressure from the US and EU. At the time, Burma was facing intense scrutiny for the circumstances surrounding Aung San Suu Kyi’s re-incarceration. Leaders of major ASEAN dialogue partners refused to attend summit meetings convened by the Burmese military government. And they made the convincing case that it was in ASEAN’s best interest to back up the organisation’s talk of supporting human rights with punitive action on Burma. Indonesia, as a newly democratised power in ASEAN, was particularly keen to burnish its international credentials by playing into Western concerns about the impact Burmese chairmanship would have on ASEAN credibility.

Burmese officials began campaigning for the 2014 regional chair position earlier this year, in a widely recognised bid to accord the newly elected government a sense of legitimacy. Yet, although the new Burmese government has taken steps to rectify past mistakes in releasing scores of political prisoners and hosting several visits by US Special Envoy to Burma Derek Mitchell, Burma is still far from meeting international standards on political conduct.

Are these signs of progress enough to warrant any such move to grant Burma’s recycled leadership regional and global legitimacy? The short answer is, no. Despite Aung San Suu Kyi’s tentative support for the move, and a well-timed warning by Zay Htay, Director of Burmese President Thein Sein’s Office, these national leaders are playing their own domestic game. In his statement urging support for reinstating Burma in the regular ASEAN leadership rotation, Indonesian Foreign Minister Marty Natalegawa spoke passionately about moving forward. But Burma’s track record is depressing and ASEAN is exposing itself to a lot of risk by jumping into the fray of Burma’s domestic politics and international reputation.

So, why would ASEAN members support this move? Western criticism of Burma over the years has been an obstacle to a stronger partnership with and within ASEAN. The US, particularly during the second Bush administration, did not want to be seen as sanctioning engagement with the country. Even the Obama administration’s decision to re-evaluate its behaviour with regards to Burma was a controversial one. So far, the US has rightly reiterated the need for continued Burmese progress on human rights and democratisation ahead of stronger ties with the US or the annulment of harsh sanctions. And although the putative meet is still more than two years away, even a surprise announcement that Secretary of State Hillary Clinton will visit the country in December does not guarantee that a US president would attend an ASEAN Summit in Burma in 2014.

ASEAN is gambling with the progress it has made over the past decade in consolidating its relationship with key dialogue partners and regularising its global interactions. ASEAN members may still decide that the organisation is now so central to Asian regional architecture that it is the US that cannot afford not to attend a meeting. But a decision by US leaders to boycott attendance for one year of ASEAN meetings is unlikely to destroy its relationship with the bloc, or to undermine ASEAN members’ interest in deeper bilateral partnerships with the US. In other words, the US has relatively little to lose.

It is a bit different for Indonesia. For years, ASEAN members have worried that the organisation would lose relevance over the coming years through the combined effects of a string of chairmanships by relatively weaker powers and China’s continued rise on the international scene. As such, Indonesia was left to use its own chairmanship this year to lay out a coherent regional agenda through the implementation of the ASEAN Community in 2015. And as the emerging ASEAN mediator par excellence with Burma, Indonesia arguably has a decent shot at prying open its doors. But Indonesia’s reputation is becoming more bound up in Burma than ever before, and it may bear the brunt of international criticism for this collective naïveté.

In the lead up to 2014, ASEAN powers, like Indonesia, whose international reputations are at stake in this gamble may need to convince Western partners that expending additional political capital on Burma is worth the investment. Currently, that investment looks quite risky, but one can only hope it pays off, and is not the beginning of the end for enhanced regional unity and integration.

Julie Sheetz is a graduate student at Harvard University.

1. Washington changes gears on Burma
2. ASEAN and the Burmese elections: What are the options?
3. Imagining a new human rights strategy for Burma

While in Honolulu for the APEC summit recently, President Obama announced a 12-month timeframe to complete negotiations for the Trans-Pacific Partnership (TPP).

Some have welcomed this development, but, in truth, it is a disappointing one. It fails the TPP’s basic aim of creating a substantial agreement and a clear timetable for tackling outstanding issues in the negotiations — and it ignores the distractions likely to swamp the US in late 2012.

Attention will now turn to Bali and the East Asia Summit (EAS), widely regarded as focused on political and security issues and without an economic agenda — but that is mistaken. Asian economic integration has progressed a great deal due to the EAS process. For example, the EAS has been important in helping to facilitate debates over the relative importance of ASEAN+3, with its associated East Asia Free Trade Agreement, and ASEAN+6, with its Closer Economic Partnership for East Asia.

While financial and non-financial integration are yet to be combined in Asia, continued preoccupation with trade in the vein of 1950s tariff debates is a clear sign of outdated thinking. Economic integration will go beyond market access issues at the border to several aspects of regulatory cohesion whether it is pursued in Asian or Asia Pacific venues. Tariffs, for example, remain important to particular exporters, but most international businesses are more concerned with other barriers to their operations across national borders.

Asian processes are likely to have a greater focus on infrastructure development and a greater commitment to narrowing development gaps. The latter will likely result from the adaptation of supply chains to local circumstances and by encouraging innovation throughout these supply chains, rather than through continued flows of aid. Significantly, with political gridlock in the US and the rigidity of US ‘trade’ diplomacy, Asian countries should have plenty of room to coordinate and control their own Asia Pacific institutions and focus on such initiatives.

Still, many think the TPP has an advantage over the processes associated with the EAS, since the former has proceeded to a negotiating stage; and even some Asian officials affirm that American-led processes — negotiations — generate quicker and clearer conclusions than Asian processes. Some rebalancing away from Western-oriented negotiations to Asian consensus building should nevertheless be expected.

APEC’s founding purpose, for example, seems to have been a desire to link the West Pacific with the East Pacific by reconciling Asian processes of consensus building and Western notions of reciprocity through binding commitments and monitoring. Managing the tension between consensus and commitment has been an enduring theme throughout APEC’s history.

Today, several global trends are starting to push the emphasis toward consensus building.

First, wider participation in international economic processes and modern communications technology mean that international negotiations occur in national capitals, rather than plenipotentiaries meeting in seclusion (as in the early GATT rounds). The idea of ‘single undertakings’ was a device to promote compromise among likeminded negotiators and to socialise the concept of binding in the 1950s. Despite still having some merits, this approach is often a barrier to achieving widespread agreement among economies. Selecting members of a club is much more a matter of consensus than negotiating reciprocity.

Second, the width of the integration agenda contrasted with reciprocal agreements on tariffs is another point in this same direction. Several observers, most recently the Pacific Economic Cooperation Council in its statement to APEC this year, have concluded that the offer and acceptance modality of conventional negotiations is not appropriate for the barriers which are important in retarding services trade.

Third, events in the last year have raised questions over the West’s emphasis on concepts such as binding, agreements, monitoring and verification, and sanctions. While many observers are still sceptical of ‘voluntary cooperation’, consensual objectives and peer-review, recent events in Europe cast serious doubt over any unqualified preference for black-letter negotiated agreements.

Though a completed piece of paper, signed and dated, is an easy way to denote success, the term ‘negotiation’ should also signal each party’s commitment to reaching an agreement — and the relative commitment of participants in Asia Pacific and Asian processes is yet to be tested.

Some observers believe the US promotes ‘deep’ agreements with ‘massive political commitments’, while the only alternative is a ‘China-led model’ which is ‘relatively shallow and easier for governments to join’. They are likely to be wrong on several fronts. The current models are shallow and deep in different ways, but it is the Asian model which best accommodates supply chains and the importance of innovation. The sole notions of ‘US-led’ and ‘China-led’ are both superficial. Instead, the challenge for the US and its political institutions will now be to accommodate other TPP members. For Asia, its processes often draw on all members — and its challenge will be to regulate this approach.

Gary Hawke is a Senior Fellow at the New Zealand Institute of Economic Research and Professor Emeritus and former Head at the School of Government, Victoria University of Wellington, New Zealand.

1. U.S. trade policy in Asia: Going for the Trans-Pacific Partnership?
2. Obama in Asia
3. Institutional architecture in Asia: Challenges for the US and Russia

The 2008 global financial crisis catalysed a long-overdue transformation in the oversight of global affairs, bringing large emerging Asian economies to the G20 table.

A transition in the role of Asian countries at the G20 — from cautious and sometimes defensive to visionary and exemplary — was expected to unfold slowly, possibly taking a decade or more. Yet the renewed threat to recovery arising from the self-created problems of the US and EU has created an urgent demand for Asian leadership in 2011.

As in 2008, the world is looking to the G20 to deal with the renewed threat of recession.

The US and EU are certainly not going to boost global demand. Asian and other emerging economies have some scope to stimulate domestic demand, but not nearly as much as in 2008. By the time G20 leaders met in France in November 2011, the short-term prospect was, at best, to avoid recession in the US and EU.

Such an outcome may be adequate for one year but risks the future of the G20. Continued stagnation of mature economies will accelerate the ongoing shift of economic power and influence towards emerging economies. Economies with growing shares of wealth and dynamism will be blamed for not doing more. But aggressive attempts to attribute blame to dynamic economies, China in particular, just makes it politically harder for these economies to implement reforms.

To avoid falling into a swamp of unproductive recrimination, the G20 needs to find a strategy to stimulate effective demand which all its members can support.

At a time of deficient global demand, substantial savings generated by emerging economies are locked up in excessive foreign exchange reserves alongside vast potential for investment in economic infrastructure. Much of the vast unmet demand for infrastructure is in the emerging economies of Asia, which are also the source of much of these savings.

Asian governments have recognised the costs and risks of continuing to accumulate reserves. Those risks include significant capital losses, ongoing blame for inadequate global growth, and the costs of prolonged weak global demand on their own economies.

Now is a good time to address a global financial market failure in order to reduce these growing risks. Bringing forward some badly needed investments in infrastructure could be a decisive circuit-breaker to spark sustained global recovery.

Asian governments can put the challenge of fixing the current massive market failure squarely on the G20 agenda. A concerted effort by all members of the G20 to gradually make better use of Asia’s huge accumulated savings will allow them to work constructively to solve a shared policy problem, rather than blaming each other for there being too little growth and too many exports.

Channelling more of Asia’s savings into productive investment in infrastructure will not happen quickly or easily. G20 leaders can challenge their officials, financial-sector managers, and international financial institutions to use their expertise to find creative ways to intermediate savings to finance more investment in infrastructure.

The Asian Development Bank (ADB) and other multilateral development banks can step up their roles. They can be sound borrowers of Asian savings; they can invest them in productive projects, including projects to improve connectivity among economies. Commercial banks can also do more in credit-worthy emerging economies.

There will be some risks. One or two governments may act irresponsibly and make a mess of some investments. But, with care, most investments in infrastructure will prove to be viable. There is a lot of international experience on designing public-private partnerships and shaping policies to set prices and contain project risks within acceptable limits. And the risk of some projects being less successful than expected is far less than the risks of prolonged recession.

An effort to create more effective demand for investment will need to be accompanied by ongoing efforts to cope with long-term problems of debt in mature economies and structural adjustment in emerging economies. These complementary efforts can restore confidence in the world economy.

In the meantime, G20 leaders might delay thinking about other significant global problems. Unfortunately, the window of opportunity to avoid disastrous climate change is closing fast, and the future of an open non-discriminatory WTO-based regime for international commerce is being undermined by misplaced faith in preferential trade deals.

It will take a long time to find consensus on how to contain, let alone resolve, such problems. In a voluntary process of cooperation like the G20, there will be no big breakthroughs in any one year. It will not be possible to deal with these big problems in sequence. A more prudent option is to start a discussion of these issues in a patient, non-confrontational manner.

Right now, the US and EU are both caught in a vicious circle of acrimony and repeated attempts to defer hard decisions. They cannot be expected to lead the consensus-building needed to deal more adequately with global warming or rescue the WTO. Nor can Asian governments rely on them to deal wisely with global issues, respecting differences and searching for consensus rather than confrontation.

At a time of weak global governance the challenge of leadership is being thrust on Asia sooner than it had hoped.

The agenda of Asian institutions for regional cooperation can move beyond preoccupation with local issues and trade negotiations to an outward-looking effort to address important matters which require global solutions. Forums like ASEAN+3 and the East Asia Summit can be used to consult on how Asia can use the G20 opportunity — an opportunity which may not be repeated — to defend, then reform, the international economic order in ways needed to complete their emergence from poverty.

Andrew Elek is a Research Associate at the Crawford School of Economics and Government, the Australian National University. 

This article was first published in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact’.

1. How can Asia help fix the global economy?
2. Asian leadership and the global economic crisis
3. Asia’s challenge: to rebuild the global economic order in a generation

The founding institution within the World Bank Group is the International Bank for Reconstruction and Development (IBRD).

The only part of the institution that was established by the 1944 Bretton Woods conference, the IBRD is the World Bank’s bank. Importantly, the IBRD is not an aid agency. It borrows on global capital markets — cheaply because of its triple-A credit rating — and passes on the funds, at these cheap but commercial rates, to its member developing countries. The International Development Agency (IDA) is the World Bank’s aid arm: it was created later, in 1960, and gets its funds from rich country tax-payers rather than the capital market.

The IBRD started small, but expanded rapidly in the seventies under President McNamara. There was another surge in the eighties as the Bank started to provide budget support or adjustment lending. But total commitments reached US$15 billion in the mid-eighties, and then stopped growing. The average for 2006-08 was about $13.5 billion.

Stagnant lending in nominal terms meant declining lending in real terms. In the context of a globalising world — with massive increases in everything from remittances to international capital flows and from exports to the size of developing country economies — it meant a less relevant and influential World Bank.

This in turn led to the widespread conclusion that the future of the World Bank was not as a bank. The World Bank, it was argued, needed to expand its role as an aid agency, a global problem-solver, or a multilateral think-tank (a knowledge bank), or some combination of all three.

But not as a bank. The World Bank’s banking role was seen as a legacy from the past rather than a priority for the future. In 2007, leading US development commentators Nancy Birdsall and Arvind Subramanian argued that the World Bank should become ‘a more reluctant lender to governments’. Jessica Einhorn, writing in Foreign Policy in 2006, went further, proposing that the IBRD should be shut down.

In the last few years, however, the World Bank has become not more but less reluctant to lend. Total IBRD lending catapulted from US$13.5 billion in 2007-08 to US$33 billion in 2008-09 and US$44 billion in 2009-10, before falling to US$27 billion in 2010-11.

Of course the World Bank always lends more in a crisis, as do all of the international financial institutions. Lending from the IMF and the Asian Development Bank, for example, is also up sharply. But the rapid expansion this time round can hardly be satisfactorily explained solely in terms of the global financial crisis. A comparison with the Asian financial crisis of the late nineties is telling. Then IBRD lending also went up but only from that historic average of US$15 billion to about US$22 billion for a couple of years before falling back to average levels. More tellingly, this comparatively small and temporary increase was all in quick disbursing budget support. Project lending, the IBRD’s traditional fare, in fact continued to decline throughout the Asian financial crisis, falling in 1999 to about US$7 billion — the lowest since the mid-seventies.

This time around is very different. Not only is the total increase much bigger (a tripling rather than a 50 per cent increase), but project lending has also gone up dramatically, from US$9 billion in 2007-08 to US$24 billion in 2009-10 and US$17 billion in 2010-11. This suggests a deeper role for the IBRD than simply the provision of liquidity.

What is going on? One obvious explanation is that the IBRD can lend more. It has recently benefited from a general capital increase, the first in over 20 years. The more capital reserves the IBRD has from its members, the more it can borrow and lend.  The developed countries have also encouraged the IBRD to lend as part of a global stimulus strategy.

And developing countries, this time round, are in a better position to borrow. Finding it more difficult to raise private capital, they have turned to the IBRD both for short-term cash and longer-term projects.

Another explanation are the reforms put in place by the World Bank to make it a more attractive source of funds. In the last few years, it has embarked on an effort to reduce transaction costs, as well as margins to borrowers. The World Bank has also shifted power in its governance structure from developed to developing countries.

Perhaps the ideological pendulum has also swung. In the 1990s, public-sector lending for infrastructure was seen as passé, and something which should be the domain of the private sector. No longer.

Another deep change is the adoption by the G20 of the IMF and World Bank. The G20 does not have its own secretariat, and the IMF and the World Bank end up doing a lot of the background work for it. A significant part of the G20’s deliberations are also addressed to multilateral issues. For example, the G20 has driven the recent governance reforms at the World Bank, and also the capital increase.

It is quite remarkable that these two institutions of the old world order, the World Bank and the IMF, the so-called Bretton Woods twins, should now be adopted by the emblematic institution of the new world order, the G20. This must give them a new energy, and a new legitimacy.

It remains to be seen if the recent increase in lending will be sustained. There are also risks. The big scale-up of lending under McNamara came at the cost of quality. But there is also a strong argument that a diminishing role as a borrowing and lending institution was making the World Bank much less relevant to its clients.  Yes, the World Bank has a number of other important functions, from aid agency to think tank, but so do the UN agencies. It is arguably its ability to combine its intellectual firepower with a lending role that gives the World Bank its unique character. From this perspective, the recent revival of the IBRD, the World Bank’s bank, is to be welcomed.

Stephen Howes is Director at the Development Policy Centre, Crawford School of Economics and Government, the Australian National University.

This article was originally published here at the Development Policy Blog.

1. Zai jian – Goodbye – See you again: A look back on China’s progress upon leaving the World Bank
2. Private Chinese firms don’t get bank loans? Think again
3. The removal of Muhammad Yunus from Grameen Bank

In much of the world the Six-Party Talks represent a futile attempt to rein in North Korea’s nuclear weapons program and deter it from a path of belligerence.

But in China the talks offer hope for a new regional security arrangement. While observers took keen interest in China’s resistance to condemn the North’s two attacks on South Korea in 2010, few paid attention to Chinese rhetoric on the Korean peninsula, apart from expressing surprise at Xi Jinping’s revival of Chinese support for the North in the ‘glorious’ Korean War. Since 2008, Chinese coverage of South Korea has grown far more negative while discussion of North Korea has revealed an agenda quite different from what it appeared to be pursuing at the time of the talks in 2003–08. Given China’s support for North Korea’s objectives in restarting the talks, it is important to consider other parties’ strategic thinking regarding the Korean peninsula.

In the summer of 2011 there was more manoeuvring over the prospect of talks than many anticipated. Russia moved into the forefront, echoing China’s support for resuming the talks without North Korea having to meet preconditions (other than suspension of nuclear and missile tests), such as freezing its uranium enrichment activities. Russia joined China in moving forward with economic cooperation — preparing to forgive nearly all debts from the days of Soviet assistance, agree to a joint military drill, and, above all, press ahead with North Korea on the construction of a gas pipeline down the peninsula, which South Korea had supported in the event of genuine cooperation from the North. But South Korea seemed unlikely to agree to the pipeline anymore given its newly confiscated Kumgang resort was advertised as the North’s new Mecca for tourism, and the North ignoring its calls to apologise for the 2010 attacks. Yet facing the prospect of progressives regaining power in the December-2012 presidential election, Lee Myung-bak began to waver on how hard a line to maintain on the North. He was unlikely to reject Russia’s overtures without exploring them, and, as US-North Korean discussions were renewed, Lee Myung-bak was under pressure from the United States to at least test the North’s intentions.

In the Obama administration, in-party fighting over China’s policies concerning Taiwan and North Korea was intensifying. While the US State Department and Defence Department were intent on keeping the focus on de-nuclearisation, the National Security Council wanted to test China’s support of regional stability — exploring further the possibility of a new round of Six-Party Talks and minimising the fallout from the sale of upgraded equipment for planes to Taiwan. The US was unlikely to make a decision until North Korea proved more forthcoming on the preconditions.

Japan’s shaky political leadership was also in doubt as it contemplated a more active diplomatic stance after years of marginalisation and then months of inward-looking policies since the disaster in March. The DPJ leadership took up power in 2009 eager to boost relations in Asia. But then-Prime Minister Yukio Hatoyama alienated Washington over base relocation in Okinawa and failed to win China’s cooperation for an East Asian Community. And successor Naoto Kan’s regional policies were very timid, even prior to the disaster. Japan was least prepared for strategic thinking over Korea, even for restraining rhetoric that would alienate South Korea. New Prime Minister Yoshihiko Noda spoke strategically about US relations, but expectations remained low.

Thus the divide over North Korea has sharpened in 2011 and the Northeast Asian balance of power is at stake. China seeks a Sino-centric regional order and regards the Korean peninsula as its frontline. Russia aims to become the energy power in the region, revitalising its Far East region in time for the 2012 APEC summit in Vladivostok with plans for a north–south corridor extending to Busan in South Korea. All this has left South Korea scrambling, reliant on the US, but uncertain about its own political direction. And Japan’s lack of focus is one more reason US policy is becoming harder to formulate in the midst of a fierce domestic political struggle that is spilling over into foreign policy. 

Dr Gilbert Rozman is Musgrave Professor of Sociology at Princeton University. He spent 2010–11 at the Woodrow Wilson International Center, concentrating on current Chinese writings on national identity and international relations.

This is an abridged version of a seminar presented by Dr Gilbert Rozman at The Australian National University, 17 August 2011.

1. A Northeast Asian nuclear weapon-free zone is unrealistic
2. Russia-North Korea: Denuclearisation of the Korean peninsula
3. North Korea: a victory for Obama’s Asian diplomacy

Participation in preferential trade agreements (PTAs) has grown rapidly in recent years.

In 1990, there were only about 70 PTAs in force. Thereafter, PTA activity accelerated noticeably; by 2010 the number of PTAs in force was close to 300. The average WTO member is party to 13 PTAs. PTA activity has transcended regional boundaries and levels of economic development. One half of the PTAs currently in force are not strictly ‘regional’ with the advent of cross-regional PTAs being particularly pronounced in the last decade. Two thirds of all PTAs in force are between developing countries, about a quarter are between developed and developing countries, and the remainder between developed countries only.

How preferential is trade?

This year’s World Trade Report shows that this explosion of PTAs is not being matched by an expansion of preferential trade flows. Based on data from the 20 largest importers, who account for 90 per cent of world merchandise trade in 2008, only 16 per cent of trade qualified for preferences. In other words, despite the proliferation of PTAs, 84 per cent of world merchandise trade still takes place on a non-discriminatory most-favoured nation (MFN) basis.

This result should not be surprising. First, there has been a huge reduction in MFN tariffs since the end of the Second World War. Half of world trade is already subject to zero MFN tariff rates. Second, PTAs tend to exempt high MFN-tariff items from preferential treatment. In a recent study involving four major trading countries and their partners, Damuri shows that about 7 per cent of tariff lines, mainly agricultural or food items and labour-intensive manufactured products, are excluded. Third, rules of origin have contributed to these low figures by making the costs of compliance higher than the perceived worth of the underlying preference margins. Fourth, preferential margins are small. The report shows that only 2 per cent of global imports are eligible for preferential tariffs where the preference margins are above 10 per cent. For most large exporters, preferential tariffs matter little for the bulk of their exports. This is not always true for individual sectors, especially in certain smaller economies exporting a narrow set of commodities (mainly sugar, rice, bananas, fish and garments) where preference margins may be more substantial. There is a possibility though that these preferences will be eroded over time as the countries to which they export enter into more PTAs.

Related to this point, the proliferation of PTAs means that the difference between the MFN rate and the PTA rate overstates the competitive advantage of a PTA member, since increasingly its competitors will also enjoy preferential access to the market. Once the preferential access enjoyed by other exporters is taken into account, less than 13 per cent of preferential trade benefits from a competitive advantage exceeding 2 percentage points. The implication of these results is that one has to look beyond tariffs to explain why countries enter into PTAs.

Deep integration

The coverage of policy areas in PTAs, particularly those of a regulatory nature, has been widening and deepening over time. Using a sample of almost 100 PTAs, the report classifies the provisions in PTAs into WTO+ areas and WTO-X areas. WTO+ areas refer to policies covered by the WTO, and WTO-X refers to policy areas not covered in WTO agreements. The report also distinguishes whether these measures were legally enforceable or not under the dispute-settlement mechanism of the PTA. As expected, WTO+ provisions universally include industrial and agricultural tariffs. An increasingly large number of PTAs now also include provisions on technical barriers to trade, services, intellectual property, and trade-related investment measures. WTO-X provisions commonly include competition policy, investment, and the movement of capital. About one third of the PTAs in the sample also include environmental laws, labour-market regulations, and measures on visa and asylum.

Why is deep integration gathering momentum? First, trade openness increases policy inter-dependency (spillovers) that makes unilateral decision-making inefficient compared with decisions taken collectively. A second reason is that deep integration agreements may be necessary to promote trade in certain sectors and economic integration more broadly. This second explanation applies to international production networks which require a governance structure beyond low tariffs.

Twenty-first century trade is a much more complex phenomenon than trade prior to the early 1980s. The rise in international production networks illustrates the complementarity between trade and governance which is at the core of successful deep agreements. For cross-border production networks to operate smoothly, certain national policies need to be harmonised or rendered mutually compatible to facilitate business activities in several countries. Empirical evidence and case studies presented in the report support this link between production networks and deep PTAs.

Deep integration may involve a trade-off between the benefits of common policies and the costs of harmonisation when policy preferences differ among member countries. Deep integration lowers trade costs and provides shared benefits, such as common rules and a stable monetary system that the market or national governments fail to offer. Deep integration with advanced economies may also create advantages for developing countries from importing best-practice institutions. However, costs may be involved if the common rules are distant from national preferences and the needs of developing countries.

Coherence between PTAs and the WTO

Deep PTAs present a different challenge to the multilateral trading system, allowing for the deeper integration sought by members of a PTA while maintaining compatibility with the non-discrimination principle of the WTO. The traditional building-bloc stumbling-bloc paradigm does not provide the appropriate analytical framework for deep PTAs since the underlying question behind this approach is whether preferential tariff opening would eventually lead to multilateral opening.

The existing literature suggests that deep integration is often non-discriminatory. By their very nature, some deep integration provisions are de facto extended to non-members because they are embedded in broader regulatory frameworks that apply to all trading partners. PTAs may also directly refer to WTO rules on deep integration measures, automatically supporting the multilateral trading system. However, some deep provisions in PTAs can contain discriminatory aspects, creating a tension with the multilateral trading system.

There are a number of options for increasing coherence between PTAs and the multilateral trading system.

One option would be for members of PTAs to extend their existing preferential arrangements in a non-discriminatory manner to additional parties. A second option would be to fix deficiencies in the WTO’s legal framework on PTAs by clarifying and improving existing disciplines. A third option would be to adopt a more nuanced and non-litigious approach to PTAs in the context of the existing transparency mechanism. This would allow WTO members to better understand one another’s interests and to make progress in the legal interpretation of WTO provisions on PTAs. Lastly, WTO members can accelerate their efforts at multilateral trade opening. An immediate step in this direction will be for WTO members to bring to a successful conclusion the long-standing negotiations under the Doha Round.

These are not mutually exclusive options and it is likely that all these options would have to be pursued.

Nadia Rocha is Economic Affairs Officer in the Economic Research and Statistics Division at the World Trade Organisation.

Robert Teh is Counsellor in the Economic Research and Statistics Division at the World Trade Organisation.

This article was first published here by VoxEU.org

1. Multilateralising Regionalism: Australia’s Role in ‘Taming the Tangle’ of Preferential Trade Agreements
2. The Vietnam-EU Preferential Trade Agreement
3. A closer look at East Asia’s free trade agreements

The balance of power in East Asia is shifting, presenting new risks to regional stability.

In order to mitigate these risks and maintain and strengthen regional peace, stability, and prosperity, it is critical that regional cooperation be consolidated. East Asia has seen a proliferation of multilateral forums, primarily through the ASEAN-led processes, but consensus building and principles of noninterference have often dominated at the expense of deeper cooperation. It is time for East Asia to reinvigorate regional cooperation. To this end, ASEAN must be encouraged to take measures to strengthen its role, especially in addressing domestic governance issues, and the three big players in northeast Asia — China, Japan, and South Korea — should take a more proactive approach, providing greater input and substance to East Asia regional cooperation.

In order to consolidate East Asia cooperation, a sophisticated network of regional partnerships should be established among the EAS members. The key features of this network should be the dual pillars of a strengthened ASEAN on the one hand and China–Japan–South Korea trilateral leadership on the other. A stronger ASEAN and more proactive leadership by China, Japan, and South Korea will allow for more meaningful interaction to consolidate regional cooperation. China, Japan, and South Korea have made some significant progress in strengthening their cooperation. For example, rather than meeting on the fringe of ASEAN+3 summits they have started to hold independent trilateral summit meetings, and they are now creating a joint secretariat to coordinate trilateral cooperation. The three nations are likely to have more opportunities to consult, not just on trilateral issues but also on broader issues of regional cooperation.

Giving China a share of the driver’s seat can be seen as a strategy for bringing it into the fold as a regional stakeholder while recognizing its rapid economic growth and increased military power. China would then be balanced by Japan and South Korea, both of which have strong alliances with the United States. For ASEAN, this approach balances its high stakes in Chinese markets with its disputes with China in the South China Sea. By having the three northeast Asian nations take joint leadership to give substance to inclusive regional cooperation centering upon the EAS — which the United States and Russia will formally join this year — we will be able to address various concerns brought about by the changing balance of power.

Advocates of consolidating regional cooperation have debated various possible approaches. Of these, region-wide cooperation on resources is a practical and meaningful way forward that would allow the nations of East Asia to consolidate regional cooperation and mitigate the likelihood of conflict arising as a result of the shifting balance of power. This cooperation would be centered on the EAS, given that its membership comprises all the right countries, and might entail collaboration in four areas: joint development of energy resources, guidelines for nuclear safety and energy-saving measures, food security, and safety of sea lines of communication.

First, jointly developing energy resources can kill two birds with one stone: it not only helps address energy shortages, it also helps to build confidence among the nations involved. For instance, China and Japan were able to conclude a basic agreement for the joint exploration of natural gas in the East China Sea despite differences in their interpretations of international law. History has shown that when looked at through the lens of a bilateral issue, nationalistic tensions are liable to flare up on both sides, but if viewed through a multilateral lens and conducted as a regional project, the prospects become increasingly viable. For instance, Chinese and Japanese disagreements on oil pipeline routes from Russia might be managed more effectively if they are designed to meet regional needs rather than competing national interests.

Second, regional guidelines for energy safety and energy-saving measures should be developed. Reducing dependence on fossil fuels and fighting against climate change are challenges with implications that transcend borders. East Asia cannot survive without nuclear energy in at least the short term, so regional efforts should be made to strengthen international nuclear safeguards. At the same time, over-reliance on nuclear energy is also dangerous, as the Fukushima crisis has made all too clear, and regional efforts to develop new technologies to utilize renewable energy resources — such as wind, solar, and geothermal energy — should be developed to support the region’s energy needs over the longer term. This will also help to mitigate future resource conflicts as fossil fuel resources become exhausted.

Third, cooperation is needed to ensure regional food security. The population of Asia is growing, especially the middle class, which already numbers more than half a billion people and within the next 20 years is forecast to climb as high as 2.5 billion. This newly emerging middle class will demand more and higher-quality food, which in turn necessitates improved food production technology and the liberalization of agriculture across the region to boost food production efficiency.

Fourth, anxieties over the safety of the sea lines of communication need to be managed to guarantee resource transportation. More than 80 percent of Japan’s primary energy resources are imported from abroad, primarily through sea-based transportation. China heavily relies on energy resources, too, delivered through the Malacca Strait. Since the anxieties over maintaining the safety of the lines represent a shared interest in the region, it should be coordinated as a joint regional exercise.

The shifting balance of power in East Asia presents new risks to regional stability and necessitates the consolidation of regional cooperation. While ASEAN should continue driving, China, Japan, and South Korea should also share in the driving duties. By focusing on concrete areas of cooperation that will have widespread impact across the region, true multilateral cooperation should be able to overcome the challenges of competing national interests that often plague bilateral cooperation, particularly with and among some of the major powers in East Asia.

Hitoshi Tanaka is a senior fellow at the Japan Center for International Exchange (JCIE) and chairman of the Institute for International Strategy at the Japan Research Institute. He previously served as Japan’s deputy minister for foreign affairs.

This article is an extract from East Asia Insights Vol. 6 No. 4 August 2011, which is available in full here, and is reprinted with the kind permission of JCIE.

1. The East Asia Summit and regional financial cooperation
2. China-Japan-Korea trilateral cooperation and the East Asian Community
3. After the Arab Spring: A role for Northeast Asia?