East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Thu, 23 Oct 2014 23:00:47 +0000 en-US hourly 1 Infrastructure spending is the medicine Thailand’s insecure economy really needs http://www.eastasiaforum.org/2014/10/24/infrastructure-spending-is-the-medicine-thailands-insecure-economy-really-needs/ http://www.eastasiaforum.org/2014/10/24/infrastructure-spending-is-the-medicine-thailands-insecure-economy-really-needs/#comments Thu, 23 Oct 2014 23:00:47 +0000 http://www.eastasiaforum.org/?p=43957 Authors: Pisit Leeahtam, Chiang Mai University & Cynn Treesraptanagul, Chiang Mai

In May 2014, the Thai army, known as the National Council for Peace and Order (NCPO) staged a coup d’état to prevent civil war breaking out after months of political deadlock and administrative paralysis. Since then, the interim constitution has been enacted, the new cabinet has received royal endorsement, and the National Legislative Assembly and the National Reform Council have been established. The NCPO has asked to stay in power for one to two years to restore stability. While Thailand’s national reform has so far been on schedule on the political front, the Prayuth government now confronts another serious challenge as it faces pressure to revive Thailand’s struggling economy.

Thai military junta head and new Prime Minister General Prayuth Chan-ocha greets in the traditional Thai way as he leaves after a meeting of the instruction on the procedures of members of the national reform council at the Army Club in Bangkok, Thailand, 4 September 2014. (Photo: AAP).

Before the coup, GDP growth contracted 0.6 per cent year-on-year for the first half of 2014, almost entering technical recession. Consumer confidence was at its lowest in April and the household debt-to-GDP ratio was as high as 82 per cent. The NCPO responded quickly after the coup, repaying rice farmers for their crops sold during the previous government and ordering speedy disbursement of compensation. Consumer confidence gradually picked up and reached a one year high in September thanks to the greater political clarity.

It’s not all good news, though. August imports plunged 14.2 per cent year-on-year. The decline was broad-based, led by fuel, machinery, automobile parts and consumer goods. This shows that investment is still lacklustre while domestic demand remains weak. The manufacturing production index and capacity utilisation have yet to pick up. Tourism remains sluggish due to the continued imposition of martial law. The export sector, which accounts for 74 per cent of GDP, continues to be a drag on the recovery of the Thai economy. August exports fell 7.4 per cent year-on-year. Demand from Europe and Japan, Thailand’s third and fourth major export destinations representing 9.81 per cent and 9.72 per cent of total exports respectively, remains weak.

By the end of 2014, Thailand will no longer be eligible to benefit from Generalised System of Preferences (GSP) privileges with the EU since it is now considered an upper-middle income country. As a result, Thai exports will lose competitiveness to countries that still receive GSP privileges such as India, Vietnam, Indonesia and the Philippines, or to countries without GSP privileges but with FTAs with the EU such as Malaysia, as well as to a more competitive China. Despite Thailand resuming negotiations on a FTA with the EU, the process won’t be completed until 2017 at the earliest, and ratification will only take place when Thailand has a newly elected government.

Timely government spending is vital. The country’s inflation has been subdued and public debt is currently at 45.7 per cent of GDP, thus leaving room for stimulus. Recently, the government announced a 364 billion baht (approximately US$11.2 billion) fiscal stimulus package for the fourth quarter of 2014 to create jobs and help rice farmers. The package covers delayed investment projects from the 2014 financial year, public facilities repair, refurbishing and anti-flood maintenance projects and a one-off payment to farmers. It is expected that revived government expenditure will boost sentiment and eventually lead to stronger business investments. At the same time, the government has expedited approvals of many projects that applied for the Board of Investment’s investment promotion privileges and concessions. Since the coup, projects worth 458.59 billion baht (US$14.1 billion) have been approved out of the 700 billion baht (US$21.6 billion) worth of projects awaiting approval.

Since Thailand is currently undergoing national reform, public spending should be geared towards repositioning the country’s economic fundamentals while honouring long-term fiscal stability. Infrastructure improvement is a must for Thailand to fully benefit from its geographical advantage at the heart of ASEAN. The NCPO made moves in the right direction when it approved a 2.4 trillion baht (US$73.9 billion) infrastructure development plan. The plan includes projects to improve the highway and water transport networks and Thailand’s air transport competitiveness, as well as a 127 billion baht (US$3.9 billion) project to construct six dual-track rail lines with a combined length of 887 kilometres. To deal with the upcoming integration with the ASEAN Economic Community, Thailand also needs to address supply-side challenges to increase competitiveness. For example, the agricultural sector should embrace integrated crop and harvest planning and improve post-harvest management to reduce reliance on government subsidies and create value-added products.

The Prayuth government has on its shoulders the public’s high expectations to carry out reforms that cannot be done under normal elected governments. Some government policies have a clear direction whereas some policies require further public debate. Whether the government will be successful in restoring growth and introducing reform within the expected time frame and amid increasing movement from Thaksin’s camp remains to be seen.

Dr Pisit Leeahtam is Dean of the Faculty of Economics at Chiang Mai University. Cynn Treesraptanagul is Dr Leeahtam’s research assistant.

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Renminbi stepping in right direction toward internationalisation http://www.eastasiaforum.org/2014/10/23/renminbi-stepping-in-right-direction-toward-internationalisation/ http://www.eastasiaforum.org/2014/10/23/renminbi-stepping-in-right-direction-toward-internationalisation/#comments Thu, 23 Oct 2014 11:00:42 +0000 http://www.eastasiaforum.org/?p=43950 Author: Thierry de Longuemar, ADB

Over the past several decades, we have seen how China’s high economic growth and increasing economic integration with other countries have led to a dramatic increase in its clout in global output and trade.

Just look at the facts. China is now the world’s second largest economy, accounting for 12 per cent of global gross domestic product in 2013. It is also the world’s largest exporter and second largest importer, accounting for about 12 per cent of world trade in 2013. Attracting more than US$110 billion in FDI in 2013, the PRC is the world’s largest developing-country recipient of FDI inflows. It is also the world’s largest holder of foreign exchange reserves, with a total of US$3.8 trillion in reserves at the end of 2013.

View of a branch of China Construction Bank (CCB) in LinAn city, east China's Zhejiang province, 1 September 2014. (Photo: AAP)

The PRC may be a globally significant economic and trading power, but the market share of its currency, the renminbi (RMB), lags well behind the US dollar and the euro.

To align the RMB with its growing global stature, the PRC has embarked on a strategy to internationalise the RMB. Typically, it is taking a gradual approach. In this, it has embarked on a number of initiatives designed to encourage the wider use of the RMB and raise its status in the international monetary system.

These measures include allowing foreign investors access to domestic capital markets, through programs like the Qualified Foreign Institutional Investor and the RMB Qualified Foreign Institutional Investor. It has also increased flexibility of the exchange rate — the RMB trading band has been widened to plus or minus 2 per cent. Also, through the use of RMB as a settlement currency for cross-border trades, the PRC has been gradually expanding the use of RMB in bilateral trade settlement agreements.

There are other steps being taken, such as the development of RMB deposit accounts and the opening of the offshore RMB market. The PRC has also opened offshore RMB centres, such as in Hong Kong, Singapore and London.

The result has been the emergence of the RMB in the international monetary system. For example, the RMB is beginning to play a role in international trade transactions. In December 2013, the RMB overtook the euro to become the second most used currency in global trade finance after the US dollar. China’s international trade has also grown at a compound annual growth rate of 19.1 per cent between 2001 and 2013.

The rapid expansion of RMB trade settlement together with other policy and regulatory steps have bolstered the growth of the RMB bond market in Hong Kong (also known as the dim sum bond market). From only 10 billion yuan (US$1.6 billion) in 2007 — the year when the first dim sum bond was issued — RMB-denominated bond issuance in Hong Kong significantly increased, to 372.1 billion yuan ($60.7 billion) in 2013. In the first three months of 2014, bond issuance reached 338.8 billion yuan ($55.2 billion).

The number of bond issuances has likewise climbed steeply from just 5 in 2007 to 891 in 2012 and 1,160 in 2013, while the number of bond issuers increased from just 3 in 2007 to 132 in 2013. From January through May 2014, 890 bonds were issued by 107 issuers.

While the bulk of RMB bond issuances still originate from companies based in the PRC and Hong Kong, issuances from other economies have also grown through the years. In 2010, issuances by firms outside PRC and Hong Kong accounted for only 5.4 billion yuan ($880 million). By 2013, their RMB bond issuances amounted to 76.1 billion yuan ($12.4 billion). As a share of total RMB bond issuance, their share has varied from about 13–35 per cent.

Trade settlements have contributed to the rise of the RMB as a global currency. According to the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the RMB only had a 0.31 per cent share in world currency payments in 2011. In March 2014, however, its share had increased to 1.62 per cent. The RMB’s ranking in world currency payments has also increased. In October 2011, it was ranked 17th in terms of usage but by March 2014, its ranking had shifted to 7th position. Indeed, the RMB is gaining on the Canadian dollar (which held a share of 1.83 per cent, ranking 6th) and the Australian dollar (with a share of 1.84 per cent and 5th in rank).

So while good progress has been made, there is plenty of work still to be done. Trade settlements and bond issuance have increased, but from a low base. There have been some relaxation in restrictions on capital flows, but the capital account is still largely controlled. The exchange rate is still controlled.

There is a positive trend in RMB as a reserve holding, but it is still small compared to other global currencies. Financial markets are still not as deep and liquid as those in developed countries, and are much less than those with global currencies. While the accomplishment is impressive, the RMB is still far from being a full-fledged international currency.

The PRC is moving in the right direction with these measures and producing positive results. But these developments with the RMB are more a result of the PRC opening up its capital account and deepening its financial markets rather than the pursuit of specific policy goals. All these trends will develop a critical mass over time and have the potential to start transforming the global monetary system.

Thierry de Longuemar is the Vice President (Finance and Risk Management) of the Asian Development Bank.

This article was originally published here at the Asian Development Blog, the blog of the Asian Development Bank, on 15 September.

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Looking for a plus-one, Japan turns to Vietnam http://www.eastasiaforum.org/2014/10/23/looking-for-a-plus-one-japan-turns-to-vietnam/ http://www.eastasiaforum.org/2014/10/23/looking-for-a-plus-one-japan-turns-to-vietnam/#comments Wed, 22 Oct 2014 23:00:35 +0000 http://www.eastasiaforum.org/?p=43906 Author: Kensuke Yanagida, Japan Institute of International Affairs

As Japan seeks to diversify its investments beyond China, an opportunity arises for Vietnam to attract greater international investment.

Over the past few years, firms invested in China have started diversifying their investment destinations and reducing their overreliance on China, in what is called the ‘China Plus One Strategy’. This is a result of rising labour costs and ongoing structural reforms in China. In this context, Vietnam appears to have great potential for attracting the interest of foreign firms looking for a destination for their next investment — to become the ‘plus one’. Vietnam is blessed with a young and highly-educated workforce, a sizeable domestic market and geographical advantages. If Vietnam could create the right conditions it could achieve what newly industrialising economies and China have in terms of greater economic development.

In recent years, Japanese firms have been more actively pursuing the ‘China Plus One Strategy’. While the inflow of Japanese FDI into China dropped in 2013, inflows into ASEAN have been increasing over the last decade — now annual Japanese FDI inflows into ASEAN exceed investment in China. According to a survey conducted by the Japan Bank for International Cooperation in 2013, China lost its top place for the first time as a promising destination for investment as perceived by Japanese firms. The top destination is now Indonesia — followed by India, Thailand, China and Vietnam. But this does not necessarily mean that Japanese firms are withdrawing from China: they are simply seeking out new investment destinations while continuing to uncover market opportunities in China.

Vietnam is one of the more favoured destinations for Japanese outward investment. The volume of Japanese investment in Vietnam has been rapidly increasing, particularly since the Japan–Vietnam Economic Partnership Agreement came into effect in 2009. The industries in which Japan invests the most are transportation equipment and electric machinery for the manufacturing sector. Vietnam is the world’s fourth largest market for motorcycles, so Japanese auto makers such as Honda and Yamaha as well as parts and components suppliers have been investing as well. Japanese electronics companies have also increased their investments, partly due to Samsung establishing a mobile phone factory to produce the Galaxy smartphone series. Panasonic is seeking market opportunities for home electric appliances and regards Vietnam as an important part of a broader emerging markets bloc. As for non-manufacturing sectors, significant investments have been made in the financial and insurance industries.

As Vietnam strives to create a stable and conducive environment for foreign investment, certain obstacles stand in the way. These include a lack of supporting industries, inadequate infrastructure, unstable macroeconomic conditions and a lack of transparency in regulatory and legal systems. Among these challenges, the lack of supporting industries and unstable macroeconomic conditions are closely interconnected. Vietnam has followed the typical pattern of East Asian production by engaging in intra-regional trade in primary and intermediate goods and exporting final goods to advanced markets. But exporting firms in Vietnam are mostly foreign companies that procure their raw materials and intermediate goods from abroad. There is little value-chain integration between large exporting firms and domestic supplier firms. As a result, Vietnam’s increased manufacturing exports do not contribute much to alleviating the current account deficit. Nurturing competitive domestic suppliers is therefore a key challenge facing Vietnam.

Japanese small and medium enterprises (SMEs) seeking business opportunities abroad could find themselves in win-win relationships with Vietnam. Japanese SMEs face various challenges in the domestic business environment: shrinking domestic markets due to an ageing population, large firms that contract with SMEs shifting overseas, and increasing competition with emerging foreign companies, to name a few. After the global financial crisis in 2008, Japanese SMEs accelerated their migration abroad to survive.

Vietnam should promote measures to accommodate these SMEs from Japan. Vietnam could benefit from the technological diffusion brought by Japanese FDI. Japanese SMEs are already looking to Vietnam. One such initiative is the Kansai Supporting Industry Complex built in the Long Duc Industrial Park in Dong Nai Province in 2013. The complex is designed to support and facilitate the establishment of foreign subsidiaries by SMEs from the Kansai region in Western Japan. Vietnam’s successful accommodation of Japanese investment will help domestic supporting industries grow and, in turn, Japanese SMEs will be able to enjoy local partnerships and access to local markets.

Both Japan and Vietnam are also involved in the Trans-Pacific Partnership (TPP) negotiations. When concluded, the TPP will help promote trade and investment, and it will also compel domestic economic and industrial structural changes. This will be difficult, particularly for developing countries like Vietnam that will need a process for strategically upgrading their industrial base.

In this context, Japan and Vietnam will be important partners. Both countries would benefit from closer economic relations and greater cooperation.

Kensuke Yanagida is Research Fellow at the Japan Institute of International Affairs, Tokyo.

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Business as usual in post-election Suva? http://www.eastasiaforum.org/2014/10/22/business-as-usual-in-post-election-suva/ http://www.eastasiaforum.org/2014/10/22/business-as-usual-in-post-election-suva/#comments Wed, 22 Oct 2014 11:00:33 +0000 http://www.eastasiaforum.org/?p=43931 Author: Nicole George, UQ

Fiji’s new parliament, led by Commodore Voreqe (Frank) Bainimarama, was sworn in on 6 October. In 2006, Bainimarama led the military coup that rendered the parliament inactive for eight years. Back then, Bainimarama promised that Fiji would return to electoral democracy, but not to the allegedly corrupt and ethnically discriminatory governance practices of the past. Rather, the new post-coup government would work to undo the relationship between the church, the state and indigenous customary authority, which has shaped Fiji’s political landscape since the country achieved independence.

Historically, debates on governance have regularly focused on recognition of indigenous paramountcy (for example in land management policy or in political and economic participation) or the legitimacy of declaring Fiji a Christian state. Racial divisions between the country’s Fijian and Indo-Fijian populations have become sharply politicised as a result. Bainimarama’s election win now suggests he has a mandate to revoke these longstanding principles.

Fiji waited many years for the promised elections and in the meantime lived with government by decree. These decrees included a suite of restrictive media decrees which have attracted wide regional criticism, but also large public spending programs improving public and village infrastructure, and more progressive decrees calling for a ‘zero tolerance’ approach to violence against women.

Even these progressive ‘achievements’ have not been without criticism. The government’s infrastructure projects have been subsidised by Chinese ‘soft loans’, which have increased as a result of Fiji’s Look North policy and its eagerness to build closer aid and development relationships with China. But China’s loans are said to come with high interest rates and on the condition that Fiji import Chinese materials and labour. Critics say these infrastructure projects have done little to build local business and employment opportunities.

Critics have also scrutinised government programs on women’s advancement. Shamima Ali from the Fiji Women’s Crisis Centre claimed that the way the zero tolerance decrees were implemented downplays state responsibilities to protect women from violence. Instead, they encourage women to reconcile with violent family members, and uphold the sanctity of marriage and the family. Christian and cultural norms continue to pervade the policing of gendered ‘crimes’ in post-coup Fiji, despite government rhetoric on the importance of breaking the link between church, customary authority and the state.

But these critical views were not reflected in the results of Fiji’s general elections on 17 September. Fiji First, Bainimarama’s party, won 32 seats in the 50 seat national assembly. This is a sizeable majority, but not the landslide some had predicted. The Social Democratic Liberal Party, led by Ro Teimumu Kepa, won 15 parliamentary seats. Their slogan, ‘Reclaim Fiji’, reflects a commitment to protect indigenous paramountcy, although this policy platform has been dismissed as regressive by Fiji First.

The opposition ranks also include three representatives of the National Federation Party, including former vice president of the Fiji Law Society, Tupou Draunidalo, and former University of the South Pacific Dean and Professor of Economics, Biman Prasad. These representatives will contribute to the opposition presence in the parliament and ensure that the government does not have things all its own way.

But even if Bainimarama’s ‘revolution’, as he terms his challenge to ‘race politics’, seems mandated by popular vote there is good grounds for questioning how far the promise of revolutionary change will be fulfilled.

The pervasive presence of military authority in the country seems unlikely to recede. At least six members of Fiji First are ex-military officers and many senior officials in the public service have been seconded from the military. The authoritarianism that has been a default response to the management of ‘dissidence’ inside the country is likely to continue. In the two weeks following the election, state security force brutality has again been in the spotlight, with members of the Fiji Police Force allegedly perpetrating extra-judicial violence against a retired school teacher.

On gender there is evidence of some concrete gains for women but also subtle indicators of policy backsliding. Eight women won seats in the new parliament, the opposition leader is a woman and all female members elected to the government benches have been allocated ministerial responsibilities. Dr Jiko Luveni, former Minister for Women, was elected unopposed to the position of Parliamentary Speaker. This is the first time a woman has held this role in Fiji. These are notable achievements in a region where women’s representation in institutional decision-making hovers under 4 per cent.

On taking up her new role in the parliament, Luveni expressed a hope that her example would inspire other women to follow a political career. But she, too, has been criticised for voicing opinions which reflect conservative ideas about appropriate conduct and dress codes for women. Under Luveni’s watch, conservative religious and cultural protocols continued to shape state policing responses to gender crimes and cases of violence against women. This is little reason to suppose this will change under the new government.

The challenge for the government will be to match its progressive policy rhetoric with positive tangible outcomes achieved through genuine political engagement. Despite his majority, many people did not vote for Bainimarama. For them his revolution is an imposed one. A continuation of the authoritarianism of the past eight years will only enhance their sense of ‘business as usual’.

Nicole George is a lecturer in Peace and Conflict Studies in the School of Political Science and International Studies at the University of Queensland.

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Why ‘womenomics’ is the way forward for Japan http://www.eastasiaforum.org/2014/10/22/why-womenomics-is-the-way-forward-for-japan/ http://www.eastasiaforum.org/2014/10/22/why-womenomics-is-the-way-forward-for-japan/#comments Tue, 21 Oct 2014 23:00:46 +0000 http://www.eastasiaforum.org/?p=43917 Author: Naohiro Yashiro, International Christian University

‘Womenomics’ is a key pillar of Prime Minister Shinzo Abe’s economic growth strategy. In 2013, just 64 per cent of Japanese women aged 15–64 were participating in the labour force — a low rate by OECD standards. As Japan’s labour force is already in decline, it is wasteful that women, and particularly those who have a higher education, have been underutilised. To address this, Abe has set a target to increase the ratio of female managers to over 30 per cent by 2020. In response, several large firms have set similar numerical targets.

But some are sceptical. As the ratio of female managers (including section chiefs) in Japanese firms was just 11 per cent in 2012, it will be difficult to triple this figure in eight years. If firms randomly increase the number of female managers regardless of their ability, this may be costly or discouraging to their male counterparts.

Why is raising the percentage of female managers so important for economic growth?

The current one-to-nine ratio between female and male managers indicates a serious misallocation of human resources, given that male and female management abilities do not differ. It is often said that the lack of female managers is not attributable to discrimination on an individual basis, but that there simply are not enough female candidates. But such logic depends on the nenko jyoretsu system, whereby seniority within the firm is largely determined by how long one has worked there rather than merit.

So current employment practices, such as women being forced into temporary or secretarial streams and out of work when they have children, have resulted in significant underutilisation of female human resources.

The extremely low female manager ratio is a result of outdated labour market practices. Seniority-based promotions used to be efficient when the industrial structure was dominated by the manufacturing industry. This is no longer the case, but the memory of Japan’s successful economic past has led to a strong inertia in Japanese firms. The older generation also has a vested interest in maintaining seniority-based wages.

Japanese employment practices are based on the need for multi-skill formation in the firm. Employees are frequently shifted from one job to another in the process of climbing up the occupational ladder to managerial positions. This is accompanied with on-the-job training, which is time consuming and, in the case of large firms, often means that an employee must relocate. Most Japanese employees have an implicit employment contract that guarantees long-term employment and seniority-based wages on the condition that employees are subject to the firm’s decision on what jobs they will do and where they will work. This employment style is a hangover from the social norm that husbands would earn money while wives would manage the household. Until the end of the 1980s most Japanese families followed this ‘social norm’. Today this model is still subsidised by the tax and social security system.

Current employment practices are a major obstacle for married women who wish to work full time. ‘Full-time work’ in Japan does not mean eight hours per day — it requires constant overtime. This practice has been an important means of adjusting down labour inputs during recessions in order to avoid lay-offs. But if both the husband and wife are working overtime, who will take care of the children? In this sense, under current employment practices, there is a trade-off between increasing women’s workplace participation and raising birth rates. In addition, when a firm orders either partner to relocate, families have to choose between family separation and one partner quitting their job. In most cases women leave their job.

A major factor behind the extremely low ratio of female managers in Japan is that it is necessary to stay in a particular firm for a long time to secure a promotion. The average length of female employment is shorter than that of their male counterparts, due mainly to women’s disproportional responsibility in the home. Thus if promotions were not based on seniority the gender disparity among managers would be smaller.

Whether or not a move away from seniority-based promotions is feasible depends on the type of skills required. If the necessary skills are firm-specific and can be formed only through on-the-job training, age-related promotion is inevitable. But if the necessary skills are general, or will easily become obsolete through information technology changes, seniority need not matter. Though general skills are becoming more prevalent as information and communication technologies develop, many Japanese firms still find it difficult to change traditional promotion practices.

Thus the easiest way to ‘achieve’ the target of 30 per cent female managers, and unfortunately what some firms are doing, is to create ‘nominal female managers with no authority’ while maintaining current employment practices. But the alternative would be better — discarding the current internal promotion system and recruiting qualified managers, either male or female, Japanese or foreign, from outside of the firm.

Abe’s 30 per cent female manager ratio is not a target for its own sake: it aims to transform Japanese employment practices to a more market-based system. This would entail promoting the principle of the same wage for the same job instead of the seniority based wages; establishing a compensation scheme for professional jobs that is independent of the length of working hours; and developing a tax and social security scheme that does not implicitly support a particular division of labour within the family. These policy targets can only be achieved through structural reform of Japanese labour markets.

Naohiro Yashiro is a visiting professor of economics at the International Christian University, Tokyo.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes”.

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Balancing the short and long term in Indonesia fuel subsidy debate http://www.eastasiaforum.org/2014/10/21/balancing-the-short-and-long-term-in-indonesia-fuel-subsidy-debate/ http://www.eastasiaforum.org/2014/10/21/balancing-the-short-and-long-term-in-indonesia-fuel-subsidy-debate/#comments Tue, 21 Oct 2014 10:46:21 +0000 http://www.eastasiaforum.org/?p=43921 Author: Keoni Indrabayu Marzuki, RSIS

Despite having won the president and vice-president posts respectively, Joko Widodo and Jusuf Kalla will possess little control, if at all, on the formulation of the next Indonesian budget for fiscal year 2015–16. One particular issue that concerns the new administration is the large portion of funds for energy subsidies, particularly fuel subsidies.

Indonesian motorists wait for their turn to fill up their motorbikes with subsidized fuel at a gas station in Yogyakarta, Indonesia, 27 August 2014. (Photo: AAP).

To ensure his administration would have more fiscal space to fund new government projects and minimise the budget deficit, President-elect Joko Widodo (Jokowi) asked outgoing president Susilo Bambang Yudhoyono to increase the price of subsidised fuel as his final policy gesture before stepping down. President Yudhoyono turned down the request on the grounds that increasing the price of subsidised fuel would increase the economic burden on the Indonesian people.

Amending the fuel subsidy budget would be an important step towards fuel subsidy reform. The government allocated 300 trillion rupiah (about US$25 billion) to energy subsidies in 2014. Around 80 per cent of the energy subsidy fund, or about 250 trillion rupiah, is spent on fuel subsidies alone. In his proposed 2015-16 budget, Yudhoyono allocated 290 trillion rupiah for fuel subsidies.

The new budget also forecasts a relatively large fiscal deficit: 2.32 per cent of GDP. Finance minister Chatib Basri estimated that by increasing the price of fuel and thereby reducing the subsidies, the government could reduce the deficit ratio to 1.32 per cent.

External influence such as the end of quantitative easing by the US Federal Reserve may negatively affect the rupiah in the coming months. The weakening of the currency would mean that the new administration would have to spend more to buy oil on the international market. Consequently, fuel subsidies may impose a severe burden on the budget.

Fuel subsidies are ineffective. They were initially intended to help the poor access affordable energy supplies. But as the economy grew, fuel subsidies benefited the middle and upper classes instead. The Ministry of Energy and Mineral Resources estimated that around 70 per cent of subsidised fuel is consumed by the middle and upper classes.

Fuel subsidies also hinder much-needed infrastructure development. As fuel subsidies consume about 20 per cent of the state budget, it constrains the remaining fiscal allocation for infrastructure development. Consequently, Indonesia still suffers from basic infrastructure deficiencies in numerous public sectors, including clean water, sanitation, health, public transportation, communication, education and electricity despite the booming economic growth in recent years.

Ultimately, fuel subsidies undermine Indonesia’s energy security by encouraging extravagant demand as fuel prices are relatively low. With Indonesia’s oil production output stagnating, the government would have to import more oil. Dependence on foreign sources renders Indonesia’s energy security vulnerable to supply disruptions and rapid price fluctuations.

In addition, heavily subsidised fuel consumption also undermines Indonesia’s effort to diversify its energy intake, as demand for cheaper fuel will undermine demand for other forms of available energy. Furthermore, excessive consumption could also lead to a supply crisis as it boosts fuel consumption far beyond the allotted quota.

The path to reallocating fuel subsidy funds is politically difficult. First, Jokowi would have to convince the opposition to pass the proposed revision to the budget, which was approved by parliament in September. The government’s coalition would have to secure an additional 20 per cent of parliamentary votes to acquire a simple majority. Golkar and the Democrat Party (PD) would be ideal allies. However, political developments in Golkar, combined with the Indonesian Democratic Party of Struggle’s (PDI-P) rivalry with PD, may have closed this opportunity in the short term.

The infancy of the new administration will also be a challenge. Putting forward such a bold program so early in the life of the government may invite a severe public backlash. Anger would be directed at the PDI-P as the party has always rejected President Yudhoyono’s policy to increase the price of fuel. Such a flip-flop would weaken PDI-P’s popularity in the future.

Ultimately, time is not on Jokowi’s side. The primary concern is how to cushion the poor from the negative implications of expected price hikes. The new administration would have to introduce temporary relief to minimise such impacts. Finding a solution within a tight deadline may be challenging for the administration.

There are a series of steps to enact fuel subsidy reform, but considering the challenges Jokowi faces, it is of utmost importance to develop a plan to cushion the poor from the adverse economic effects.

Direct cash assistance schemes may be a viable short-term option. But such a policy would not tackle the fundamental problem of economic empowerment, as the poor will face the same economic hardship after the cash assistance program ends.

The best solution would be to redirect the fuel subsidy fund into infrastructure development to encourage job creation, thus increasing the purchasing power of the poor. Unfortunately, such a program would take too long to materialise. The new administration would have to find a balance between short and long-term measures to alleviate potential negative consequences.

Most importantly, the public needs to be assured that the fuel price hike does not mean that fuel subsidy funds are being reduced, but rather reallocated into other sectors essential for the people’s social welfare.

Keoni Indrabayu Marzuki is a research asociate of the Indonesia Programme at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University.

This article was first published here, as RSIS commentary CP14198.

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Very few limits in tough Australian anti-terror laws http://www.eastasiaforum.org/2014/10/21/very-few-limits-in-tough-australian-anti-terror-laws/ http://www.eastasiaforum.org/2014/10/21/very-few-limits-in-tough-australian-anti-terror-laws/#comments Mon, 20 Oct 2014 21:43:58 +0000 http://www.eastasiaforum.org/?p=43913 Author: George Williams, UNSW

Australia, like other nations, is facing an enhanced threat to its national security from citizens who travel to conflicts in Iraq and Syria, and then return home with a radical outlook and training in terrorism. This has led the government to raise the nation’s terrorism public alert level to ‘high’, which indicates that a ‘terrorist attack is likely’.

The Australian government, led by Prime Minister Tony Abbott, has embarked on the biggest expansion of Australia’s anti-terror laws since the 2005 London bombings. In doing so, it is building upon the extraordinary number of anti-terrorism laws already enacted in Australia.

Prior to this latest round of law-making, the Australian Parliament had enacted 61 anti-terrorism laws. Australia’s output of anti-terrorism laws exceeds that of nations facing a higher threat level. In an analysis spanning a number of democratic nations, Professor Kent Roach of the University of Toronto has described Australia’s response as being one of ‘hyper-legislation’.

Australia’s anti-terrorism laws are striking not just in their volume, but, more significantly, in their reach. In particular, the laws include three regimes not currently found in any comparable country, such as the United States, the United Kingdom or Canada.

The first regime enables the Australian Security Intelligence Organisation (ASIO) to question and detain any person, including Australian citizens not suspected of terrorism. They can be held in secret for a week and jailed if they refuse to answer any question put to them by ASIO. Journalists can also be jailed if they report on the operation of the regime. No other democratic nation permits its domestic spy agency to carry out this kind of action.

The second is preventative detention orders, which permit a person to be held without arrest or charge in secret detention for up to 14 days. The person cannot tell anyone they are being detained, or for how long. They can only contact their employer and one family member to say they are ‘safe, but not able to be contacted for the time being’. It has never been clear where Australia got the idea for this regime. Again, not even nations facing a long-term, higher threat of terrorism, such as the United States, have enacted such a law.

Under the third regime, control orders can be sought by the government to regulate almost every aspect of a person’s life, ranging from where they work or live to the people to whom they can talk. A person can even be subject to house arrest. All this can occur without a trial. Australia copied this scheme from the United Kingdom. But the United Kingdom’s scheme has since been repealed in favour of a less intrusive regime, leaving Australia alone in maintaining such a law.

These three regimes were enacted at the height of the ‘war on terror’ and are due to expire in 12 to 18 months. None has proven to be effective or necessary and all have been recommended for repeal by independent inquiries and reports.

Instead the Abbott government has announced that, as a response to the problem posed by foreign fighters, each of these regimes will be extended for a further 10 years.

In addition, new legislation will introduce a range of new measures. One Bill already passed by Parliament allows greater surveillance of computer networks, grants immunity from prosecution to intelligence officers engaged in special operations and exposes journalists to jail for up to 10 years for publishing even general information about such special operations.

A second Bill now in Parliament covers a wide range of matters, including the retention of biosecurity data from people entering or leaving Australia. It also introduces new criminal penalties for advocating terrorism and would allow Australians to be jailed for up to 10 years for entering any area declared by the government to be a no-go zone on the basis that a listed terrorist organisation is engaging in hostile activity there. A person could escape conviction only by proving that they went to the area solely for a reason identified by the government as being legitimate.

A third bill is also proposed. It will require telecommunications companies to retain metadata information on calls and internet use.

Law-making about terrorism is far from over. In Australia’s case, the fact that it is the only democratic nation in the world without some form of national Bill of Rights is telling. The absence of this check means that there are very few limits to the laws that Australia might pass in response to the threat of terrorism.

George Williams is the Anthony Mason Professor of Law at the University of New South Wales.

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Reconciling Japan’s security policy with Northeast Asian stability http://www.eastasiaforum.org/2014/10/20/reconciling-japans-security-policy-with-northeast-asian-stability/ http://www.eastasiaforum.org/2014/10/20/reconciling-japans-security-policy-with-northeast-asian-stability/#comments Mon, 20 Oct 2014 11:00:04 +0000 http://www.eastasiaforum.org/?p=43909 Author: Ben Ascione, ANU

On 1 July 2014, the Abe government made a cabinet decision to reinterpret the Article 9 peace clause of Japan’s constitution to recognise the exercise of collective self-defence under limited circumstances. While the scope of the proposed changes are an evolution rather than a revolution in Japanese security policy, especially due to the tough negotiations with Abe’s coalition partner New Komeito, furore and misconception have surrounded the move.

The cabinet decision addresses four areas. First is the remit for the Self-Defense Forces (SDF) to respond to grey-area infringements short of an armed attack against Japan. Second is narrowing the definition of activities which are banned because they constitute an integral part in the use of force. This would enable the SDF to provide more rear-area logistical support from non-combat zones to ‘armed forces of foreign countries engaging in activities for the security of Japan or for the peace and stability of the international community’.

The third area is the loosening of restrictions so that SDF personnel participating in UN peacekeeping operations will be able to use weapons in line with UN rules of engagement. The final area is allowing the SDF to come to the aid of a ‘foreign country in a close relationship with Japan’ if three conditions are satisfied: the attack threatens the Japanese people’s constitutional right to ‘life, liberty and pursuit of happiness’; there are no other means to repel the attack; and the use of force is limited ‘to the minimum extent necessary’.

So why the backlash, given the limited scope of these changes? The UN Charter declares that collective self-defence is a prerogative of all sovereign states, and the cabinet decision merely seeks to move Japan from a total self-ban to partial recognition of this internationally recognised right. Moreover, the Japanese Diet needs to amend a number of existing laws before the new interpretation can be implemented.

Abe has long called for formal revision of the constitution to abolish Article 9, but the military allergy — or anti-militarism — in Japan remains strong nearly 70 years after World War II. Defenders of Article 9 promote it as a model for Japan to hold up to the world, challenging the idea that the ability to go to war defines ‘normal’ state behaviour and confers prestige. They fear that Abe’s changes will provoke and entangle Japan in conflict rather than bolster the country’s security.

Japanese protesters also distrust Abe’s intentions and the ideology he represents. Ignoring popular sentiment, he recently forced through a state secrecy law and relaxed Japan’s weapons export ban. Abe also leads or participates in numerous parliamentary study groups with extreme revisionist convictions related to topics including history, patriotic education, the Yasukuni Shrine and the ‘comfort women’ issue. Abe does not have a broad mandate for change on any of these issues. The majority of the public would prefer him to focus on revitalising the economy.

There are pockets of support in Japan for Abe’s moves on security policy. Right-wing nationalists believe that Article 9 besmirches the honour of Japan’s imperial past and is a shackle to its just place as a fully sovereign state. But many moderate Japanese defence specialists have welcomed the cabinet decision on the grounds that the country’s security policy needs to respond to security challenges in the post-Cold War era.

Some have expressed frustration that the new move is a symbolic rather than a substantial recognition of the right to exercise collective self-defence. By their reckoning more should be done, including expanding the scope of permissible peacetime activities that the SDF can conduct with other nations to allow for enhanced contingency planning and joint military exercises. Legal inconsistencies due to the peculiarities of Japan’s positive list system of what functions the SDF may perform also need addressing.

But riding Abe’s wave to generate momentum and break through the military allergy and change Japan’s security policy has come with unwanted side effects. Japan’s relations with China and South Korea have hit unprecedented post-war lows, and the task of upgrading Japan’s security policy has been unnecessarily complicated by Abe’s stance on revisiting Japan’s history issues.

China and South Korea stress that Abe’s historical revisionism means he must not be trusted on collective self-defence. Such pronouncements, including during President Xi Jinping and President Park Geun-hye’s joint summit in Seoul in early July, offer an easy opportunity for cheap political point scoring at home. But Abe handed them the issue on a silver platter when he visited Yasukuni Shrine in December 2013, where 14 class-A war criminals are enshrined, and by his government’s ‘re-examination’ of the Kono Statement on the treatment of wartime ‘comfort’ women.

The US, having long called for Japan to take on greater security roles commensurate with its economic capacity, has welcomed the cabinet decision as a positive step to strengthen US–Japan alliance cooperation and increase Japan’s contributions to regional peace and stability. America’s support should also be understood in the context of President Obama’s emphasis on multilateral cooperation and the US ‘rebalancing’ to Asia.

With this approach to security it is hoped that Japan’s exercise of collective self-defence can contribute to alleviating some of the US defence budget pressures after the billions spent on Afghanistan and Iraq, the global financial crisis and the US government shutdown in October 2013. A sense of urgency is involved, as the US and Japan have declared their intent to upgrade their defence cooperation guidelines by the end of the year.

But for Japan to be able to say yes to collective self-defence in a more meaningful way, where it will truly be able to make ‘proactive contributions to peace’, it has to convince more than its own defence specialists and the United States. China, South Korea and the broader Japanese public also need to be brought on board. The domestic political dynamics in China and South Korea make this a complicated task. But there are a number of measures Japan can take to lay the groundwork.

First, the Japanese government must not undermine but strengthen official positions, such as the Kono Statement and the Murayama Statement, which acknowledge wartime transgressions. This should include a moratorium on Yasukuni Shrine visits by Japanese prime ministers.

Second, Abe’s assertion that the door for dialogue is always open must go beyond political rhetoric, and greater efforts must be taken to realise bilateral leaders’ summits with China and South Korea. A bilateral meeting with President Xi Jinping while Abe is in Beijing for the APEC Leaders’ Meeting in November presents an excellent opportunity to start.

Third, Japanese, Chinese and South Korean leaders must publically acknowledge the mutual importance of the Japan–China and Japan–ROK bilateral relationships. The frame through which the public in each country perceives the bilateral relationship must be broadened to emphasise areas of cooperation rather than the relentless focus on the territorial disputes and history issues that dominate mainstream media. The Senkaku/Diaoyu Islands issue presents a particularly dangerous scenario and greater efforts from both countries are needed to reduce tensions and avoid an accident that could spark conflict. Establishing a military-military hotline to deal with emergencies would be a good first step.

Fourth, Japan’s cooperation with China and South Korea should be boosted in areas of mutual importance, such as the environment and energy efficiency.

Finally, military-level confidence-building among the three Northeast Asian states should be bolstered. The recent announcement of joint military exercises in Australia with China and the US under Exercise Kowari in October shows that such cooperation is possible. Such exercises could be expanded in the future to include Japan and South Korea.

China and South Korea have often interpreted Japan’s adherence to Article 9 as a message that the country is a non-actor in security affairs, with the underlying implication being that Japan might still be a dangerous country were it not for the strict legal barriers and the US cork in the militarist bottle. Japan must emphasise its post-war record as a peaceful nation and demonstrate that it can play a positive and active role in security affairs that can be reconciled with the interests of all regional actors.

Ben Ascione is a PhD candidate in international relations at the Crawford School of Public Policy, The Australian National University, an associate researcher at the Japan Center for International Exchange, and an associate editor at the EAF Japan and North Korea desks.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘A Japan that can say ‘yes’‘.

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The puzzle of Chinese political power http://www.eastasiaforum.org/2014/10/20/the-puzzle-of-chinese-political-power/ http://www.eastasiaforum.org/2014/10/20/the-puzzle-of-chinese-political-power/#comments Mon, 20 Oct 2014 01:00:37 +0000 http://www.eastasiaforum.org/?p=43899 Authors: Peter Drysdale, EAF, and Ryan Manuel, ANU

When Xi Jinping ascended to the Chinese presidency, he, Premier Li Keqiang and their streamlined seven-person Politburo Standing Committee faced serious economic challenges at home as well as increasingly complex issues to manage abroad.

Domestically, the Bo Xilai affair hovered over the leadership transition ominously, underlining the need to deal with disquiet among the Chinese public over corruption and the relationship between the state and economic power.

Chinese President Xi Jinping gives a toast during the National Day reception in a banquet hall at the Great Hall of the People in Beijing, China, 30 September 2014. (Photo: AAP).

If Xi wanted to secure the popular support, he needed to deal with state monopolies; but in dealing with the monopolies he ran the risk of undermining his power base if he wasn’t prepared to see off threats from some very powerful interest groups that were becoming a more and more important feature of the economic and political landscape.

Internationally, there was the issue of how China’s rising power played into the relationship with the United States, economically and strategically. In the distance, the looming territorial issues with America’s allies and partners in the neighbourhood had the potential to get out of control.

Seeing off these threats required considerable focus of power.

Some say that, as China’s President and Party Secretary, Xi is now the most powerful leader of China since Mao. This power comes partly from Xi’s personal character, lineage and image, and partly from the overt centralisation of power that has been put in place around his leadership. While holding the reins of power may make Xi’s job easier today, down the track it may make it more complicated, and urge on him more caution.

In the week’s lead, Shen Dingli of Fudan University suggests that the concentration of power around the presidency does not compromise the virtues of ‘democratic centralism’ that was put in place precisely to check Maoist-type excesses, but rather strengthens its accountability and guards against abuse by the likes of Zhou Yongkang. Bringing the monopolies, the military and the Party into line to assert the coherence and integrity of the state is one massive task, bound to elicit an image of authoritarian aggrandisement. But, Shen warns, to conflate centralisation with a return to authoritarianism is premature.

Xi’s ability to centralise power comes partly from his ability to project his image as a ‘man of the people’ — taking minibuses rather than motorcades, ordering tripe at Beijing restaurants without ceremony, riding on bicycles with his daughter — and his gifts in dealing with the public that previous leaders like Jiang Zemin and Hu Jintao can only envy. Praise of Xi’s’ genial personality is broadcast far and wide.

Xi’s popular image has helped to put him in charge. Two decisions in particular are of importance.

The first is his re-entrenchment of idea of a ‘mass line’ — officially, a reminder to Party officials to ‘better understand, represent, and prioritise the wishes of the people'; unofficially, an efficiency and anti-corruption drive using Party offices rather than government ministries to make it work. The campaign ‘saved 586,000 meetings, removed 160,000 phantom staff, returned 115,000 vehicles to government use from private accounts and stopped 2580 unnecessary official buildings from being built’. It has also brought over 200,000 Party members (mostly government officials) to Party tribunals and disciplinary actions. This so-called ‘tigers and flies’ campaign appears very popular — and it’s caught some very big tigers, most notably Mr Zhou, but also many senior officials, generals, popular commentators and other important people.

While the ‘tigers and flies’ anti-corruption campaign is populist gold, it scares the rest of the fauna silly. The assault on Zhou broke what many considered an unspoken rule to not go after Party heavyweights or their families after they have retired from office. It’s reported that Jiang Zemin and Hu Jintao urged Xi to rein in the anti-corruption campaign for this reason. If, as the analysis right now suggests, the campaign is winding back on the hunt for tigers, reading about the capture of flies is likely to be less engaging.

But Xi’s other push towards centralisation may have effects that are more long-lasting. Unlike previous Chinese leaders, Xi has put himself in charge of a number of ‘leading small groups’ (like task forces) designed to push major reforms and tackle serious issues. So Xi is now leading the Economics Small Leading Group, and calling for ‘a revolution in the way the country produces and consumes energy’. Whether it’s foreign affairs, Taiwan, maritime security, internet governance, economics and finance, or ‘comprehensive deepening of reform’, the Presidency is in the middle of the action.

It appears that Xi has become the so-called Chairman of Everything, centralising authority for almost all policy to committees at the centre of the state. This has huge advantages in coordination of the affairs of the state and dealing with big issues that were threatening to get out of hand. On the other hand, it might yet prove what Sir Humphrey in Yes Minister would describe as a ‘courageous’ decision. The danger is one of the centralisation of failures in dealing with any among a myriad of these issues, in a system where the accountabilities are not exactly clear. That centralisation of failure could come at a big and personal political cost.

The puzzle is whether the personalisation of policy heft can translate into governance grunt. In the short term, moves like lifting the control of local courts up a level to remove them from local interference is likely to deliver better outcomes to Chinese citizens and taking the privileged down a peg or two likely to reassure them, but the climate of fear that constrains worthy activists as well as venal officials creates an environment in which a major policy misstep could unleash a tsunami of criticism from either side the political spectrum.

Let’s hope for success, as success could hopefully bring a major advance in Chinese political accountability.

The irony and the reality is, of course, that it is exactly the absence of Xi’s (and the leadership’s) broad representative legitimacy, in some form or another, that creates both the risks to its continuing authority as well as the hazards to its collective democratic exercise of authority.

Peter Drysdale is Editor of the East Asia Forum.

Ryan Manuel is Research Fellow in China in the World at The Australian National University.

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With Xi’s new power is collective leadership over? http://www.eastasiaforum.org/2014/10/19/with-xis-new-power-is-collective-leadership-over/ http://www.eastasiaforum.org/2014/10/19/with-xis-new-power-is-collective-leadership-over/#comments Sun, 19 Oct 2014 11:00:28 +0000 http://www.eastasiaforum.org/?p=43891 Author: Shen Dingli, Fudan University

There is currently much talk about whether China’s President Xi Jinping is shifting away from collective leadership. Western observers tend to conclude that, given his command of all powers since becoming Chinese communist party chief and state president, Xi is centralising power around himself. But that is a premature conclusion that bears more careful scrutiny.

Chinese president Xi Jinping leads the parade of present and past leaders, as they gather for the National Day reception at the Great Hall of the People in Beijing on 30 September 2014. (Photo: AAP).

China’s communist party has always claimed to adopt ‘democratic centralism’. And, at different times, the party has emphasised either the ‘democratic’ or ‘centralist’ aspect. The key has been to strike a balance. On the one hand, an overly democratic system may act with low efficiency. The recent inability of the US Congress to make a compromise on budgetary sequestration is a key example of this. On the other, an overly centralist system tends to push the paramount leader’s own agenda while ignoring the ideas of others. For example, George W. Bush’s pre-emptive war against Iraq in 2003 — without adequate intelligence or consensus in the United Nations Security Council — has, mistakenly and unnecessarily, led both America and Iraq in the wrong direction.

China’s overall system, by design, is more centralised than many in the west, so it has also been burdened by a number of frustrations in the past — such as the launch of the Cultural Revolution. China has adopted a series of political reforms to prevent such problems from arising again. For instance, China now employs a fixed five-year term system — instead of the lifelong system under Mao — to set its political cycles. More emphasis is also put on collective leadership by allowing for effective and more regular policy consultations and deliberations.

The division of jobs within China’s Politburo level seems to be an institutional means to attain collective leadership, but it hasn’t always been successful. Though policymaking behind the wall of the Forbidden City tends to be opaque, it is still possible to feel that members of the Politburo Standing Committee — such as Zhou Yongkang, who took charge of legal and judicial matters between 2007 and2012 — could abuse collective leadership for personal ambition. While Zhou never paralysed the system, his actions have adversely affected the efficacy of collective leadership.

With this in mind, China has to improve its leadership system to make it truly collective, and prevent any individual from monopolising power under the guise of collective leadership. Xi’s return to a more centralised system seems to be part of his efforts to manage effectively these power relations so as to prevent a situation like Zhou’s power trip from re-emerging. Looking from the outside, Xi has so far successfully managed this process.

The current domestic and international circumstances required that Xi move to centralise. In addition to the weak collective leadership of Standing Committees in the past, China’s rapid growth has rendered the present government organisation less effective in responding to the demands of economic and social reform. Meanwhile, the international response to China’s rapid ascendance also warrants cordial — yet decisive — Chinese leadership. During China’s own fast transformation and a period of regional, as well as global, power transition, China needs a determined leader who can command collective leadership domestically.

Obviously, in the course of strengthening the effectiveness of collective leadership the chance of shifting away from its original intent may actually increase. But as long as Xi allows policy consultation and deliberation before decisions are made, his revamped system may actually enhance China’s ‘democratic centralist institution’.

Given his expected ten-year tenure, Xi seems to be poised to make the democratic centralist system a stronger and more efficient institution. At the same time, to avoid the pitfalls of shifting away from collective leadership, he must — after two years of consolidating his power base — be aware of the importance of both leading his team and sharing his power.

Shen Dingli is Professor and Associate Dean at the Institute of International Studies at Fudan University.

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