The Japanese Ministry of Finance announced on 25 January that the country logged a trade deficit of 2.5 trillion yen (US$31.4 billion) in 2011, its first in more than three decades.

Japan’s imports rose 12 per cent while its exports fell 2.7 per cent compared with the previous year. The March 2011 earthquake and tsunami damaged supply chains, causing a decline in exports, and the Fukushima nuclear disaster shut down a number of nuclear power plants, increasing Japanese imports of energy. Many have speculated that the trade deficit is emblematic of Japan’s declining competitiveness, but a closer inspection reveals this is not the case.

If we consider the trade balance and per capita GDP for selected countries in 2009, China shows a huge trade surplus while the US shows a large trade deficit. Given this data, one could conclude that China became more competitive than the US over this period. Using the same logic, France — with a trade deficit running into the billions — would also appear to have become less competitive than Nigeria, despite the fact that French income levels are more than 30 times higher than Nigeria’s.

To understand the nature of Japan’s trade balance, it is important to recall that a country’s GDP is measured by adding together its consumption spending, private investment, government expenditure and exports, before then subtracting its imports. GDP can also be measured by adding together a country’s consumption spending, private savings and its government revenue. This in turn signifies that a country’s trade balance (exports minus imports) is equal to net private savings (private savings minus private investment) plus net government expenditure (government revenue minus government expenditure).

This shows that if a country’s investments exceed savings, or government expenditure exceeds its revenue, the country will face a trade deficit. So, at the country level, trade balances are not attributable to the competitiveness of the country but to the balance between net private savings and net government expenditure.

As Paul Krugman said, ‘Trade between countries is so much unlike competition between business that many economists regard the word “competitiveness”, when applied to countries, as so misleading as to be essentially meaningless’.

Put differently, even if countries lose their competitiveness in the sense that they lag behind in productivity growth, they are still able to balance their trade. This is because what drives trade is comparative advantage rather than absolute advantage. So, Japan’s recent trade deficit does not mean the country is losing its competitiveness.

In fact, Japan’s aging population is more likely to worsen its trade balance. As the number of retirees and the elderly dependency ratio increases savings rates are likely to significantly decrease. Holding other domestic factors constant, such as private investment and net government expenditure, the decline in savings could in turn aggravate Japan’s trade balance. Similarly, irrespective of a country’s competitiveness, if its government deficit becomes large, its trade balance also tends to be in deficit.

Because Japan is facing an aging population, together with a rapid expansion of social security expenditure, it may have experienced a trade deficit in the near future even without the earthquake and tsunami last year. A country’s trade balance is important not because it reflects competitiveness but because it reflects domestic private and sovereign balance sheets. Changes to the trade balance, then, need not elicit nervous responses about competitiveness. But given Japan’s huge public debt, a more important question is whether or not the country’s net private savings can finance government deficit, and how Japan can reduce the government deficit itself.

Kozo Kiyota is Associate Professor of Economics at Yokohama National University.

1. India’s trade deficits with China and Australia
2. Doha: US shifting the goal posts in international negotiations
3. China’s trade surplus down 8.5% – good timing!

Over the next half a century and beyond, two major, contrasting shifts in population health will affect the social and economic burdens of disease and the causes of premature death in the Asian region.

Pervasive and disruptive population-health developments could also affect the movement of people, social stability and geopolitical security. These projected shifts will have major implications for Australia.

The first health-related shift is the continuing rise in non-communicable diseases (NCDs) experienced in middle to later adulthood, owing to rises in wealth, middle-income consumerism, dietary changes and urbanisation. The World Health Organization now views this as a global epidemic (and a drag on social development), with 63 per cent of global deaths in 2008 attributable to NCDs, including cardiovascular diseases, cancers, diabetes and chronic lung diseases. These four diseases are growing disproportionately in low-income countries, a trend that is well underway throughout Asia. As infectious diseases recede and life expectancies rise, the burden of NCDs is increasing — along with related national economic burdens.

The second health-related shift will come from a continued deterioration of and changes to environmental and climatic conditions — changes that affect the foundations of population health. With the population of most Asian countries still growing, pressure on natural resources is escalating. Asia is also exposed to ongoing global environmental changes, particularly climate change. This category of risk is largely borne of ongoing threats to food yields, freshwater supplies, the instability of infectious-disease agents, and the diverse health consequences (physical and mental) of extreme weather events. Knock-on health impacts also occur in internally displaced groups and in those seeking refuge in neighbouring countries — and this can pose a health risk to receiving populations.

The combination of demographic, environmental and climatic stresses is likely to increase food insecurity in much of Asia. China, India, South Korea and others are now acquiring land in foreign countries outside Asia as insurance against domestic land and food shortages. And along with changes in food production and procurement methods, these stresses are likely to mobilise still more ‘emerging infectious diseases’ in the Asian region and further afield. Several have recently materialised in Asia and others have made their transit through the region to Australia. Recent examples include the outbreak of SARS and the H5N1 bird flu. New viral diseases from bats, displaced from their natural habitat and with wide regional fly-paths, have also infected humans in Malaysia, Bangladesh and Australia over the past 15 years.

These shifts will have significant implications for Australia. Biomedical, educational and training programs will be needed for the prevention and management of NCDs. Asian countries are not currently well prepared to handle this burden, and there is an opportunity to make and sell appropriate health-care technology to help with its management. Emergent risks from infectious disease may also place new demands on Australia’s health-care institutions, professional training and wider social policies. Regionally, there is a need for stronger and more-coordinated surveillance of infectious-disease risks and patterns. This surveillance should include inter-country trade in livestock, given it is a potential source of infectious disease and carries the potential to spread to humans.

As the impacts of environmental and climatic changes increase, and as competition for river water, groundwater and arable land escalates, there will be adverse social and political consequences. This will demand greater regional research collaboration to better understand the sources, dynamics, control and management of these changes. Australia has a moral responsibility to contribute to this research, and the situation poses an opportunity for postgraduate training and bilateral scientific-exchange programs. Australia must also plan effectively for situations of social and political tension that will likely foment conflict and displacement. The health ramifications for those involved will be diverse, and Australia must choose and balance its political, economic, moral and self-protective responses.

Both of the emerging types of risk to population health will place increased stress on public health systems. Remedial strategies, including a reliance on doctors and hospitals, will not suffice — these are not exclusively health-sector issues. Rather, Asia and Australia face a number of population-level health consequences resulting from major shifts in the region’s environmental and social conditions. Many of the health consequences are foreseeable and (partly) preventable — depending on what pre-emptive multi-sectoral action is taken. With the prospect of increased population movement, regional food stresses, and the ever-present (and probably increasing) risk of novel epidemics, better coordinated public health strategies are needed in the region. These strategies should include monitoring, information sharing, collaborative research and coordinated disaster response.

Meanwhile, changes in the level and profile of population health will be the ultimate markers of how well Australia and its Asian neighbours are collectively managing the journey into their shared future.

Anthony J. McMichael is Professor of Population Health at the National Centre for Epidemiology and Population Health, Australian National University.

This post is part of the series on the Asian Century which feeds into the Australian government White Paper on Australia in the Asian Century.

1. Population prospects in East and Southeast Asia
2. Bearing the consequences of population policy in Thailand
3. Australia’s population policy and the resources boom

The imminent rebalancing of China’s economy has been forecast repeatedly over the past several years.

With the shrinking of China’s external surplus during 2011, proponents of this argument have all but declared victory. The decrease of the current account surplus, from 10.1 per cent in 2007 to less than 3 per cent in 2011, is a remarkable change. But despite progress on the external front, China remains internally unbalanced, with consumption occupying a critically low level of GDP. Moreover, the fundamental drivers of China’s economic imbalance are still in place and thus external imbalances may re-emerge in the near future.

Those who believe that China is rebalancing point to several trends. One frequently cited factor is rising wages. The argument is that increasing labour scarcity is leading to rapidly rising wages, thereby increasing the wage share of national income and the consumption share of GDP. Anecdotally, this view seems to be supported by the highly publicised labour strikes in southeast China in 2009 that led to large wage increases. Yet there is little systematic evidence that real wages for urban workers are increasing any faster than they have for the last decade: real wages seem to have been growing on average at an impressive 10 per cent per year during this time. Chinese manufacturers have shown a remarkable ability to offset more than a decade of wage increases with rising worker productivity. Unless worker productivity slows dramatically, wage increases, even if they have accelerated slightly over the past year, will not be enough to expeditiously rebalance the economy.

Others argue that while consumption is low, increasing the amount of consumer credit will quickly bring it back to normal levels. The problem with this argument is that the share of bank loans going to households has risen from next to nothing in the late 1990s to 36 per cent of all loans in 2010. Moreover, according to the IMF’s measure of consumer credit — which includes mortgages, credit cards, auto loans and consumer durable financing — credit availability in China is significantly higher than in countries at a comparable stage of economic development, such as the Philippines and Indonesia. That these countries maintain higher levels of consumption despite lower availability of consumer credit should cause us to be sceptical of claims that growing levels of consumer credit will rebalance China’s economy.

Finally, some economists have recently argued that official Chinese statistics significantly understate current levels of consumption. Implicitly this argument suggests there is no pressing need for policies aimed at rebalancing. The proponents of this viewpoint rely on two alternative measures of consumption to make their argument.

The first is retail sales of consumer goods, which have grown more rapidly than consumption for several years. If this statistic accurately represents consumer activity, then it would mean that the official consumption statistic is missing something. But when you take a closer look at what is included in the retail sales of China’s consumer goods statistic, it becomes clear that relying on this as a proxy for consumer activity is problematic. The statistic combines the sales of both retailers and wholesalers. Moreover, sales are recorded by the point of sale, not the type of buyer. Thus purchases of consumer goods by government agencies, social organisations, military units, schools, as well as by individuals from retail outlets will be included in this statistic. These are significant problems for data accuracy given that private enterprises and self-employed individuals have doubled over the past decade to 30 per cent of urban employment. A growing share of individual purchases of consumer goods in retail outlets is likely to be on behalf of small private businesses and self-employed workers. The employment share of state-owned enterprises, which are much larger and thus more likely to purchase directly through wholesale networks, has fallen from 42 per cent of urban employment to 19 per cent. Given such limitations, this statistic is an imperfect substitute for consumer activity.[1]

The second alternative measure of consumption used is a study by Wang Xiaolu of the China Reform Foundation. The Wang study asserts that the National Bureau of Statistics household survey is flawed because many of China’s wealthiest citizens are reluctant to report their full incomes, resulting in underestimates of household income by 66 per cent and household consumption by 20 per cent. To overcome this flaw, the Wang study has survey staff interview friends and family members. Additionally, unlike the official household survey, which requires participants to document in real time their consumption activities over a set period of time, the Wang survey gathers its information through participant memory.

The bottom line is that any estimate relying on a non-random sample composed of self-recollected income should be viewed with suspicion, as the margin of error is likely to be quite high. There may be problems with the official data on consumption, but this study is not sufficiently rigorous to act as a replacement.

The argument that China’s economy is rebalancing internally seems quite weak. Moreover, the current declines in China’s external surpluses are in large part the result of a weak global economy and a modest appreciation of the renminbi, not fundamental rebalancing. The underlying drivers of the surpluses that emerged during the boom years — negative real interest rates on deposits, cheap credit for business, and subsidised land and input prices — are all still in place. China remains unbalanced internally and its large external surpluses may return once the global economy recovers.

Nicholas Lardy is Anthony M. Solomon Senior Fellow at the Peterson Institute for International Economics. He is the author of Sustaining Economic Growth in China after the Global Financial Crisis.

1. China’s economic rebalancing already underway
2. Malaysia’s New Economic Model as a rebalancing strategy
3. Is China’s economy changing course?

Some Chinese astrologers have pronounced that 2012, the year of the dragon, will be particularly volatile.

But you do not have to believe in the Chinese zodiac to know that Southeast Asia is likely to have a tumultuous year. In 2012, Southeast Asia faces the prospect of increased economic uncertainty generated by the macroeconomic difficulties of advanced countries (particularly Europe, but also the United States and Japan) as well as the likelihood of a further slowdown in China. Not only are the Southeast Asian economies among the most open to trade and financial flows in the world, they are also tightly integrated through production networks with China, and via China with US and European markets. Openness to trade and finance has brought immeasurable benefits to Southeast Asian economies — but that openness now makes them vulnerable to the actions of others.

Southeast Asian leaders should be worried. There is a significant probability that Europe, Southeast Asia’s largest trading partner, will go into recession in 2012 — and that is if things go relatively well. The trade implications are well known, but may be underestimated — especially if a European recession snuffs out a tentative recovery in the US. Financial repercussions are more difficult to anticipate. Global financial markets have become so tightly integrated that a sudden increase in demand for liquidity following any unpleasant shock or surprise in Europe could easily translate into a capital reversal on the other side of the world.

Over the course of the last two years, the liquidity injected into the global financial system by the European Central Bank and the US Federal Reserve quickly found its way to the shores of Southeast Asia in search of higher returns. These flows could just as easily reverse direction. This is a phenomenon Southeast Asia has seen three times in recent memory — prior to the Asian financial crisis, then following the collapse of Lehman Brothers in 2008 and (to a lesser extent) toward the end of last year. If it were to happen again, the shock to liquidity, interest rates and exchange rates — and ultimately investment and growth — could prove difficult to manage. Indonesia has always been the most vulnerable in this regard, given the large share of short-term financial assets owned by non-residents, although this time around Thailand and Malaysia are also exposed.

China’s slowdown and rebalancing toward domestic sources of growth add another layer of uncertainty for Southeast Asia. China’s GDP is two-and-a-half times that of Southeast Asia and it is now the world’s second-largest importer. A misstep by Chinese policy makers as they seek to engineer a soft landing, or unanticipated consequences as the gradual real appreciation of the renminbi works its way through relative prices into the balance sheets of enterprises and banks, will have consequences that could easily spill over into Southeast Asia.

Most Southeast Asian economies are less well positioned to handle the economic uncertainties and surprises of 2012 than they were when the global financial crisis hit in 2008. True, inflation is on the wane, external reserves are plentiful and growth is resilient. But most Southeast Asian countries are running out of fiscal space, and this will limit public policy options to boost domestic demand in the event of yet another global slowdown. Moreover, there are serious doubts that China will once again come to the rescue with an outsized stimulus package, given that the government there is still cleaning up the mess left behind from the last one. Finally, with the exception of Singapore, Southeast Asian economies are dependent to varying degrees on commodity and natural resource exports, and commodity prices are likely to be particularly volatile this coming year.

Of course, each country in Southeast Asia is positioned differently. At one extreme is Indonesia, which has the most policy options available, given strong growth (6.4 per cent in 2011), low government and external debt burdens and a small fiscal deficit. At the other extreme is Vietnam, which suffers from periodic bouts of macroeconomic instability (inflation exceeded 18 per cent in 2011), continues to run high external current account and fiscal deficits, has a large state enterprise sector in desperate need of reform, and is now suffering from a rising number of unofficial labour strikes.

In between are the remaining economies of Southeast Asia, each with its own strengths and vulnerabilities: Thailand, where growth is going to climb from its nadir in 2011 as the economy rebuilds after last year’s devastating floods; Malaysia, where an expansionary budget in anticipation of an election year is expected to maintain growth at close to last year’s rate; Cambodia and Laos, which continue to be propelled by their abundance of natural resources (including hydro-power) and rapidly growing markets in their neighbourhood, notably China and Vietnam; and finally, Singapore and Brunei, Southeast Asia’s small but wealthy states, the former driven by the power of trade, innovation and high-end services, the latter by the power of oil.

Differently positioned though they may be, the Southeast Asian economies will certainly face shared challenges as 2012 unfolds. They will be keeping an anxious eye on Europe and the US as the year brings either  a tentative and sputtering recovery or yet another recession.  Either way, Southeast Asian policymakers should be prepared for a testing time ahead. .

Vikram Nehru is Senior Associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace.

An earlier version of this article was first published here by the Carnegie Endowment for International Peace.

1. Asia, Europe and regional cooperation in 2012
2. The financial crisis and what’s in store for Southeast Asia
3. Will Asia step up to the global challenges of 2012?

The Burmese government recently pardoned 651 prisoners, an act that international media greeted with positive fanfare and applause.

It may be thought absurd for a government to conduct such a mass amnesty, and the reaction of the media may seem even more out of place. But for Burma, absurdity has long been a staple. In 2008, for example, its fear of Western incursion saw it refuse much-needed aid in the aftermath of Cyclone Nargis, which killed tens of thousands of people.

Also, it did not escape notice in 2008 that the government’s release of 9002 prisoners included less than 10 political prisoners — a marginal concession unworthy of applause. This time around, the release of 299 political prisoners has finally tempered international criticism. The US will review its sanctions following by-elections in April and the EU has stated it will ease its sanctions.

But the pressure resulting from these sanctions and international criticism has already thrust Burma into the arms of Asia’s two emerging economic powerhouses, China and India. So, with relative economic stability already secured, what might be President Thein Sein’s agenda behind this sudden mass pardon? Many point to the hunger for credibility.

The government lost its modicum of credibility during the 2007 Saffron Revolution, when it violently responded to protesters and imprisoned thousands of activists. This resulted in a ramping up of criticism and international sanctions across the board. But even though the government’s current game plan remains hazy, it definitely seems to be changing course. The moves to liberalise Burmese society have reinvigorated the opposition party, the National League for Democracy (NLD), and have signalled a new willingness to open up and bargain with Europe and the US.

But the desire for respect as a liberal reformer seems to conflict with the government’s self-preserving conservatism.

NLD leader Aung San Suu Kyi, who enjoys free press coverage under the new reforms, has run into government red tape during her by-election campaign. In a recent example, she was denied use of a football stadium in central Burma to conduct a political rally. And while many of the monks who led the 2007 protests have since been released in the government’s effort to pursue liberalisation, 48 are still imprisoned. The government has also prevented a re-ordination ceremony for the released monks in Rangoon, accusing the monks of harbouring a political agenda. Tellingly, the 2007 religious boycott of government officials is still active.

Another challenge is that the military continues to maintain the same power structures. This creates a difficulty in enacting reforms; troops in the borderlands continue to attack civilians, deaf to President Thein Sein’s orders and peace talks, and do not exist within the same absolutist chain of command.

At this rate, will Burma be a fitting ASEAN chair in 2014? Aung San Suu Kyi is hopeful, stating: ‘We have to take risks. We need the courage to face a future that is really not known to us’. Foreign investors are also hopeful. Singapore has already signed a memorandum of understanding with Burma to deliver training for reforms in its financial and trade sectors. Japan has also been quick to promise economic support and lock down trade agreements.

The atmosphere in Burma is optimistic and the role of the media is expanding, an important development for a liberalising country. And while the number of Burmese who know how to use the internet is still extremely small, the increasing prevalence of cheap internet cafes may change this.

Although it is important to applaud Burma’s progress, we must remember that in the midst of recent reforms, the Burmese government has managed to evade accountability for its past crimes against humanity. States such as the US, which have vocally supported a UN inquiry into crimes against humanity in Burma, are now giving the government ‘a chance to demonstrate they have their own approach toward achieving [accountability]‘. Conflict continues in the borderlands and released dissidents still have a criminal record. Pardoned journalist Sithu Zeya said he had been ‘released with a rope around [his] neck’. Whether the Burmese government seizes this opportunity to face up to its past misdeeds and begin the process toward national reconciliation remains to be seen.

Sigourney Irvine is a graduate student in Japanese Studies at the Australian National University. She has previously conducted research in Burma and along the Thai-Burmese border.

1. Burma in 2008
2. Washington changes gears on Burma
3. Burma: a test that ASEAN may be failing

The household-electronics industry has long been equivalent in stature to Japan’s automotive industry, and is seen as a symbol of the country’s strong manufacturing sector.

But now its central product — television manufacturing — is on the verge of collapse and the major electronics firms are haemorrhaging red ink.

Last November, Sony announced a major retrenchment in its television operations and halved its yearly sales target from 40 million to 20 million sets. And Panasonic, which stands with Sony at the forefront of the industry, expects to incur a record ¥780 billion (US$10.2 billion) loss during the current fiscal year.

The decisive factor in the collapse of the Japanese television industry was a revolutionary transformation of manufacturing due to the modularisation of production and the spread of electronics manufacturing services — independent firms whose main purpose is to manufacture other companies’ products. With these developments, Japanese-style manufacturing lost its edge. Japan’s LCD panels and other major components were overwhelmed by South Korea’s bold use of capital investment to achieve economies of scale.

In the automotive industry too, although the paradigm change was not as harsh, the overpowering advantage of the Japanese production system has faded. Toyota was the world leader in automobile sales up to 2010, but dropped to third place in 2011. The Tohoku earthquake and tsunami dealt a brutal blow to Japan’s supply chain and greatly impacted sales. Reacting quickly, Korean cars caught up with Toyota and increased their market share by improving on quality, design and price. In addition, Toyota’s much vaunted ‘just-in-time’ production system is now a world-wide standard, and can no longer be relied on as the sole source of the Japanese automotive industry’s strength.

So, what steps are Japanese manufacturing firms taking to remain competitive in the years to come?

Japanese corporations are feverishly investing in expanded overseas operations. In 2011 they spent more than ¥5 trillion (US$65.2 billion) on mergers and acquisitions, a record high. This is in line with a common tactic of Japanese firms: taking domestic strengths abroad for horizontal development. For example, high-quality Japanese consumer goods that have been tested in the fierce domestic market are now being extensively promoted in Asia, where incomes are rising.

But the first wave of Japanese firms looking to further their reach had mixed results. Two decades ago, during the ‘bubble years’, Japanese corporations took their first commercial steps overseas. This investment boom ended in miserable failure as ‘easy’ business plans using surplus money failed in every case. The only companies that succeeded were those with production and personnel management structures as well as business models that were widely applicable beyond Japan. Toyota’s lean production system is one example. But how many companies will succeed in this second wave of overseas investment? And how will companies that already have a strong overseas presence win this next round of competition with companies from developing nations that are trying to catch up?

Komatsu, a company best known for its construction and mining vehicles, gives us a hint. It has started equipping all its vehicles with GPS systems. As a result, Komatsu and vehicle owners can now obtain an understanding of real-time operating conditions, and the former can offer customers timely information about the need for replacement purchases. The company is also building strong relationships with component manufacturers by giving them guidance in industrial technology and by offering management consulting. As the quality of the product improves, trade-in prices rise for second-hand construction vehicles and general price competitiveness is enhanced. Komatsu is thus maintaining the deep business relationship common in Japan and combining it with enhanced IT provisions.

Takahiro Fujimoto, a production management specialist at the University of Tokyo, believes that ‘strong overseas competitiveness will be possible if Japan has model production plants and a strong domestic developmental base’. As Japan uses the strong yen to advance overseas, this argument is coming to the fore. The company to watch is Toyota. It has given itself a high sales goal of 8.6 million cars in 2012. Yet it has not changed its basic policies and intends to manufacture three million cars onshore. Toyota asserts that its domestic plants will produce cutting-edge technology with strong productivity that will cancel out the higher costs. There will be a rationalisation of production controls, but, since this is Toyota, attention will also be paid to the needs of employees and the local community. To what extent Toyota can maintain this goal remains to be seen, but at this moment, with its push to emphasise process innovation, it is emblematic of Japan’s manufacturing sector.

Yoshisuke Iinuma is a contributing editor at The Oriental Economist.

This is excerpted from an article from the February issue of The Oriental Economist Report. For a copy of the full article, email the editor at rbkatz@orientaleconomist.com. 

1. Investment by Japanese automobile manufacturers in India – a win-win situation
2. Keeping Japan’s disaster-damaged auto supply chains competitive
3. Chinese manufacturing firms’ overseas direct investment

For the second time in ASEAN’s history, Cambodia has taken over the chairmanship of this ten-nation association.

It first chaired ASEAN in 2002–03, when the country had been a member for only three years. Yet the world and the region have changed considerably in the last 10 years.

One notable change is the entry into force of the ASEAN Charter in 2008. The charter provides that the ASEAN chairmanship coincide with the calendar year; that ASEAN Summits take place twice a year instead of only once; and that the chairmanships of most ASEAN bodies, to the extent possible, be bundled into the same country. Chairing and hosting ASEAN meetings means that Cambodia has much on its plate this year. But beyond the meetings, Phnom Penh must face up to a range of difficult issues as chair.

One issue is that the risk of more violent clashes between Cambodian and Thai armed forces, over the disputed border area around the 11th-century Preah Vihear temple, presents Cambodia with a potential conflict of interest. The most recent clashes erupted in 2008 when UNESCO listed Preah Vihear, which the International Court of Justice had awarded to Cambodia in 1962, as a World Heritage Site. In February 2011, the UN Security Council called on both sides to establish ‘a permanent ceasefire’ and ‘expressed support for ASEAN’s active efforts’ to pacify conflict along the border. Following the Security Council’s recommendation that both parties cooperate with ASEAN to end the armed conflict, Cambodia and Thailand’s foreign ministers agreed to allow a team of unarmed Indonesian observers to monitor the ceasefire on the ground. And in July 2011 the International Court of Justice in The Hague ordered the two sides to withdraw their forces from a designated demilitarised zone and to continue to cooperate within ASEAN. During its 2012 chairmanship, Cambodia will need to navigate between its status as a protagonist in the dispute with Thailand and its role as the chair of ASEAN.

Another issue is the dispute over the South China Sea, where four ASEAN members and China/Taiwan have overlapping claims. As a non-claimant, Cambodia needs to forcefully articulate the association’s position on regional peace and stability, the rule of international law, and freedom of navigation and overflight. This could be a testing task, as Cambodia is beholden to China for its valued investments and development aid.

There is also a disagreement within ASEAN on Timor-Leste’s application for membership. It will fall upon Cambodia to lead the efforts in resolving this apparent dispute.

In terms of ASEAN’s internal affairs, Cambodia may be required to preside over preparations for a review of the ASEAN Charter — something that is called for five years after its entry into force, or at the end of 2013. As chair of the ASEAN Economic Ministers Meeting and of ASEAN itself, Cambodia is expected to help member states carry out individual commitments outlined in the ASEAN Economic Community Blueprint by the self-imposed 2015 deadline.

Beyond Southeast Asia, on the international stage, Cambodian Prime Minister Hun Sen will likely be invited to the next G20 Summit in his capacity as ASEAN chair. He will be called upon to express ASEAN’s views on weighty questions about the global economy such as economic re-structuring and governance of international financial institutions.

Cambodia’s chairmanship of ASEAN also comes at a time of heightened US efforts to link up more tightly with East Asia, including with and through ASEAN. These efforts raise some vital questions, not least for Cambodia as ASEAN chair: Will the US’s refusal to be a party to the Comprehensive Economic Partnership for East Asia (CEPEA), which is based on the EAS, undermine the CEPEA or even the EAS itself? Will US interest in joining the Trans-Pacific Partnership (TPP) prevent a division of the Pacific ‘down the middle’, as Washington insists? And what will be the effects of China’s possible exclusion from the TPP?

With Cambodia as chair, ASEAN has to show its non-ASEAN East Asian partners that it can lead East Asian regionalism with useful and realistic ideas, instead of simply managing the process, setting up the administrative arrangements and negotiating the chairman’s statements.

Rodolfo C. Severino is Head at the ASEAN Studies Centre, Institute of Southeast Asian Studies, Singapore, and a former ASEAN Secretary-General.

A longer version of this article first appeared here in aSEAn Focus.

1. ASEAN and the Cambodia-Thailand Conflict
2. Thai-Cambodian conflict: an obstacle to the ASEAN Community 2015?
3. US-China-Cambodia Relations: The trilateral balance

The idea that the world has entered the Asian century has wide and credible currency.

Its foundation, of course, lies in the rise of Chinese and Indian economic power and the integration of the East Asian economy that has accompanied China’s spectacular growth.

In Australia the government has commissioned a White Paper which promises a major and comprehensive review of economic and strategic change in Asia and its implications and the opportunities it opens up for Australia. This interest, and the need to think about how best to manage the Asian century, is not unique to Australia.

The shifts in the structure of global economic power that are under way are bigger shifts in the locus of global output than those recorded after the industrial revolution, and they are taking place in much shorter timeframes. These are changes of type not just of degree.

When announcing the Australian White Paper, Australia’s Prime Minister, Julia Gillard, observed that ‘On the eve of Australia’s long run of economic growth, before our two decades of reform-driven prosperity, [Australia's] and China’s were economies of roughly comparable size in market exchange rate terms. Now, remember Australia’s been growing for twenty years since and yet on the same basis China’s economy is today close to four and half times bigger than ours. In twenty years, China and India have grown so fast they’ve almost tripled their share of the global economy — and increased their absolute economic size almost nine-fold. Just two countries, which have grown from less than a tenth of the global economy to almost a fifth, in just two decades — and which, over the next two decades, are projected to grow from a fifth to a third. This incredible economic growth in our region is driving economic and strategic change in our world too’.

Comprehending the scale and importance of what is going on in Asia, both economically and politically, and its already palpable impact on our region and on the structure of world economic and political power is no easy task.

Over the coming months around forty distinguished Asian and Australian analysts will comment through East Asia Forum on different dimensions of the challenge of the Asian century. This series provides a chance to engage leading regional thinkers in the assessment of the issues we face. It will be helpful to Australia as it tries to understand the impact of these changes on its future and hopefully it will be helpful also to our partners in the region.

We begin the series this week with Hugh White’s reflections on the implications of Asia’s rising economic power for the political-security environment. White has catalysed thinking on this question over the past few years, arguing that America and its friends and allies in Asia confront a new strategic choice. Will America, he has asked, agree to negotiate a new order with China that gives Beijing a bigger role and allows it to exercise more influence than it has for a long time? Or will it refuse to negotiate, and insist on preserving the old US-led order unchanged? In Washington last week, Chinese Vice President Xi Jinping, appeared to accept America’s role in Asia so long as America accepts China’s role. The implications of how this choice is made will shape Asian political and security affairs for decades.

‘We need to recognise and acknowledge that the economic shift to Asia does indeed have profound implications for the balance of strategic power as well’ White argues. ‘China is now strong enough to contest America’s leadership in Asia, and is plainly doing so. That means that the old days of uncontested American primacy, and the Asian order that has been built on this foundation, are already history. Our choices are about what kind of order we would like to see in its place’.

The commencement of our Asia century series is also the occasion on which to announce the first three inaugural East Asia Forum Fellows: Professor Yiping Huang, of Peking, the ANU and Barclays, Hong Kong; Mr Sourabh Gupta, of Samuels International Associates Inc., Washington; and Professor Hugh White, of the Australian National University, Canberra.

EAF Fellows are honoured for their distinguished contribution to the discussion of Asian affairs. Professor Huang has been a leader in the discussion of developments in the Chinese economy and economic policy and his analysis on EAF and elsewhere is widely acknowledged to be at the cutting edge of commentary on Chinese economic affairs. Mr Gupta has been an insightful contributor to discussion of Indian, South Asian affairs as well as contributions on Asia Pacific affairs, and the implications of India’s economic rise and its strategic situation in Asia. Professor White has been at the forefront of thinking about the impact of the rise of Chinese and Asian economic power on political and security relations with the United States and the political and security order in Asia and the Pacific. His controversial but path-breaking analysis, including on EAF over the past few years to which he adds in this week’s feature, has stimulated global debate about strategies for managing the political changes taking place in Asia and the Pacific. Mr Gupta and Professor Huang will also contribute to the Asia century series in coming weeks.

Peter Drysdale is Editor of the East Asia Forum.

1. America and China: strategic choices in the Asian Century
2. Europe in the Pacific century
3. US, China and Australia’s Asian century: a view on Hugh White’s argument

Four months ago, as Australia’s parliamentarians rose to give President Barack Obama a standing ovation, it seemed they had already decided how best to navigate the profound strategic changes that must inevitably flow from the shift in relative economic weight from West to East.

Obama laid out in the starkest terms yet his determination that America will resist China’s challenge to US leadership in Asia, using all the elements of its power — including military force — to perpetuate a future for Asia framed by American values and interests. The Parliament’s applause, and the simultaneous announcement that Australia would host more US forces, seemed to show that Australians had made up their minds to back Obama’s forthright policy to the hilt.

That impression would be wrong. In fact, Obama’s speech was a wakeup call to Australians, signalling that a debate needs to be had on these issues, because some very big decisions need to be made.

Until recently, most Australians have been content to assume that Asia’s economic transformation, so central to Australia’s prosperity, had no implications whatsoever for the region’s strategic order or Australia’s strategic policy. They imagined that even as China’s economy overtakes America’s, China will either be happy to accept American leadership, or too weak to challenge it. They assumed therefore that American primacy would remain forever unchallenged and unchallengeable, and that Australia faced very few, if any, pressing decisions about this.

President Obama’s speech punctured this blithe optimism, confronting Australian leaders with the uncomfortable reality that Americans really do see China as their major strategic rival, and that rivalry between them is escalating fast. Suddenly it became much clearer that Australia will have to make some choices after all.

But there were some in Parliament listening to Obama that day who had already begun to understand the way that Asia’s economic transformation is forcing Australia to reconsider its strategic position. Earlier last year, several Opposition front-benchers discussed how China’s rise would affect the Asian order and Australia’s choices throughout a number of speeches, and Malcolm Turnbull offered a very substantial analysis and critique of the prevailing orthodoxy.

Most strikingly of all, Prime Minister Julia Gillard gave a major speech just a few weeks before Obama’s arrival in which she, too, acknowledged that the historic shift in economic weight to Asia has strategic consequences. Gillard conceded that Australia has choices to make about what kind of new strategic order would suit Australia best, and spoke of what the country’s leaders could do to help bring it about. Moreover, she announced the preparation of a white paper, Australia in the Asian Century, to explore these issues.

Foreign Minister Kevin Rudd has also been exploring these questions. Since Obama’s visit he has retuned to the issue in a series of speeches, making a cogent and forceful case for a comprehensive re-thinking of Asia’s future order, away from the Pax Americana of the past and toward a ‘Pax Pacifica’. He did not say much about what the Pax Pacifica should look like, but clearly he believes it should accommodate China’s ‘legitimate aspirations’.

All this is a long way from President Obama’s clarion call to perpetuate the Pax Americana at any cost. So it seems that, notwithstanding the rapturous reception Obama received, Australians have started to rethink their strategic future, and ask searching questions about the choices they face.

The scene is now set for a debate in Australia about Asia’s strategic future and Australia’s place in it, which may prove to be as momentous as any before in the country’s history. If that debate is to be productive, it should start from a clear understanding of what exactly is happening, what kinds of choices Australia has to make and the options it has to choose between.

First, Australia needs to acknowledge that the economic shift to Asia does indeed have profound implications for the balance of strategic power as well. China is now strong enough to contest America’s leadership in Asia, and is plainly doing so. That means the old days of uncontested American primacy, and the Asian order that has been built on this foundation, are already history. Australia’s choices are about what kind of order it would like to see replace this.

Second, Australia needs to recognise that there are several possibilities for the kind of new order that could emerge. One is a contested order framed by strategic rivalry between the US and China. Everyone can see that this option is risky and undesirable, but whether it might anyway be the best available option depends on the alternatives. If the only alternative is Chinese domination, then rivalry might be preferable, because no one wants to live under Chinese hegemony.

But there is another option: one in which the US stays engaged in Asia to balance China’s power, but does not try to dominate Asia itself. This is surely a better outcome than either of the others, if it can be achieved. That would not be easy, because the US and China would both have to agree to accommodate one another’s interests and share power.

Indeed the trends at present, typified by Obama’s tough talk in Canberra, all point the other way. So if Australia would like to see this outcome, it will need to find ways to encourage both the US and China in this direction, and have others in Asia do the same. This seems to be what both Malcolm Turnbull and Kevin Rudd are suggesting.

Third, Australia needs to recognise that urging America to work with China to build what Rudd calls a Pax Pacifica is not tantamount to abandoning the American alliance. America’s role in Asia and its alliance with Australia will change, but the enduring foundation of the alliance could and should remain.

These will never be easy issues for Australia to debate. In the Asian century, its Asian neighbours will for the first time be richer and stronger than its great and powerful friends. Australia will perhaps never again enjoy the familiar reassurance of being a very close ally of the world’s dominant power. But it can prosper in a stable, peaceful Asia if a new Pax Pacifica can be built that both accommodates Asia’s new power and keeps America engaged. How would that work? How can it be built? How can Australia help? These are the questions we really need to debate now.

Hugh White is Professor of Strategic Studies at the College of Asia and the Pacific, Australian National University, and Visiting Fellow at the Lowy Institute for International Policy. 

This post is part of the series on the Asian Century which feeds into the Australian government White Paper on Australia in the Asian Century.

1. US, China and Australia’s Asian century: a view on Hugh White’s argument
2. Asia’s century
3. The rise of the Asian century

Political and economic reforms and the lifting of international sanctions have set in motion Myanmar’s re-entry into the family of nations.

Already, the release of over 600 political prisoners and other economic and political reforms, including the re-registration of Aung San Suu Kyi’s National League for Democracy for the 1 April by-election, have paved the way for the restoration of diplomatic relations with the US and other Western countries. Myanmar’s government also recently signed ceasefire agreements with the Karen and Shan armed factions, and although no resolution has been reached with the Kachin Independence Army, the government has pulled back from its offensive.

An IMF-World Bank team was in Myanmar last month, working to assess the state of the economy, the need for international financial support and to identify priority reforms, including the process of unifying the official and unofficial exchange rates. One challenge is that Myanmar will need to make an arrangement to pay back arrears to the World Bank and Asian Development Bank in order to receive funds from these institutions. But if President Thein Sein maintains the trend of opening Myanmar economically and politically — and there is reason to believe he will — such bottlenecks could be removed, external finance could flow, and Myanmar could experience an economic boom as labour productivity and living standards catch up with its Southeast Asian neighbours.

While the reasons behind the timing of Myanmar’s political opening up will be debated and studied for years, three factors have probably played a key role. First, China’s large and growing economic presence in the country must have worried Myanmar’s generals — who earned their spurs fighting communism — and aggravated the country’s fiercely independent streak. The proximate reason provided for the postponement of the Myitsone Dam was environmental factors, in part because the issue had gained momentum with Aung San Suu Kyi’s support; but its timing suggested an exertion of sovereign authority that was part of a broader change in direction. Second, the leadership of ASEAN in channelling global aid to Myanmar following Cyclone Nargis in 2008 pointed to a constructive approach through which Myanmar could interact with the world. It also opened a policy space in which initial, small reform steps could be implemented. And third, ASEAN sent a clear message that progress was needed on human rights and democracy if Myanmar was to chair ASEAN in 2014 — a message that was echoed and supported by the United States.

It will be important, however, to keep expectations in check about the future speed of economic and political reforms, and to be mindful of limits to the government’s institutional and implementation capacity. Economic reforms should be introduced slowly and deliberately, and with careful attention to sequencing. Once donor funds start flowing, they should be directed through the budget, subjected to parliamentary oversight and aligned with country — not donor — priorities. The initial focus will need to be on maintaining macroeconomic stability, increasing rural infrastructure to support agriculture, gradually liberalising agricultural prices and developing a governance framework for natural-resource management. Trying to do too much too fast would be wasteful, potentially trigger macroeconomic instability and perhaps even retard long-term growth.

It will also be important to recognise that Myanmar’s abundance of natural resources requires a development path that uses this wealth prudently to build sustained and inclusive development for generations to come. A strategy to achieve this will require institutional change, sound macroeconomic management and a long-term vision for the country’s development that is supported by the majority of stakeholders. At the same time, the outside world will need to be patient and realistic in its demands for more political freedoms. The appropriate approach would be constructive engagement, helping to fashion a political or institutional framework that is tailored to Myanmar’s unique history and culture, rather than foisting a foreign framework on the country.

And finally, Myanmar’s ethnic problem cannot be overemphasised and will require prolonged internal negotiations. After all, the ethnic minorities account for a third of the population and half of Myanmar’s states. Without a durable sub-national framework for its ethnic minorities, appropriate political representation and an adequate voice in national policy formulation, Myanmar’s internal political reforms will count for naught.

Vikram Nehru is Senior Associate in the Asia Program and Bakrie Chair in Southeast Asian Studies at the Carnegie Endowment for International Peace.

A version of this article was first published here by the Carnegie Endowment for International Peace.

1. Toward real national reconciliation in Myanmar?
2. Why democracy will foster ethnic reconciliation in Myanmar
3. Détente and the Myanmar spring?