East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Fri, 27 Feb 2015 12:22:19 +0000 en-US hourly 1 India–US relations face hurdles http://www.eastasiaforum.org/2015/02/27/india-us-relations-face-hurdles/ http://www.eastasiaforum.org/2015/02/27/india-us-relations-face-hurdles/#comments Fri, 27 Feb 2015 12:22:19 +0000 http://www.eastasiaforum.org/?p=45394 Author: Biswajit Dhar, Jawaharlal Nehru University

Economic relations between India and the United States seem to be going well. This was recently reinforced in New Delhi with Prime Minister Modi and President Obama endorsing the India–US Delhi Declaration of Friendship. But beneath the friendly joint statement of a new economic partnership lie considerable differences on critical issues of economic significance. These hurdles need to be overcome in order to strengthen bilateral relations.

US President Barack Obama and Indian Prime Minister Narendra Modi interact during the India-US business summit in New Delhi, India, 26 January 2015. (Photo: AAP).

India has repeatedly voiced concerns that its IT-driven services sector faces several barriers to entry into the US market. And recently proposed policy changes are threatening to exacerbate the problem. India has consistently raised these issues with the World Trade Organization (WTO), but its demand for a less restrictive regime for service providers has failed to cut any ice with countries like the US.

US domestic policies have become significantly more unfavourable since the economic downturn in 2008. Now, the US Congress is debating immigration reform, which could have far reaching implications for Indian IT firms. The 2013 Border Security Economic Opportunity and Immigration Modernization Act proposes to cap the share of employees holding H1B visas in any firm at 15 per cent. While the bill has passed the Senate, it has yet to be cleared by the House of Representatives.

From India’s point of view, President Obama’s offer to support India’s transition into a low carbon economy is an important step. India has previously considered adopting green technologies, especially in the energy sector. In 2010, the Singh government introduced the ambitious National Solar Mission, which aimed to provide 20,000 MW of grid-connected solar power by 2022. In its attempt to reduce the cost of power generation, the government promoted the use of domestically produced solar panels.

But these plans are now in serious jeopardy. The US has objected to the use of ‘Made in India’ solar panels, labelling it as a violation of India’s national treatment commitment to the WTO. India is now busy defending itself against the complaint made to the WTO’s Dispute Settlement Body. Now that the leaders of the two countries have agreed to work in a spirit of cooperation, India should expect the US to support the plans it had enacted to generate affordable solar power in the country.

But this is not the only area in which India’s economic policies have met with serious challenge from the US administration. In December 2014, the US International Trade Commission (USITC) unveiled the findings of a yearlong survey of the effects of India’s trade, investment and industrial policies on the US economy.

The report concluded that that a wide range of restrictive Indian policies have adversely affected US companies doing business in India. The USITC reports that its investigations (covering a large number of US business lobbies) showed that tariffs, as well as taxes and financial regulations, have had the heaviest effects on US companies. Foreign direct investment and intellectual property policies have also negatively affected specific industries in the agricultural, service and manufacturing sectors.

The USITC announced that ‘if tariff and investment restrictions were fully eliminated and standards of [intellectual property] protection were made comparable to US and Western European levels, US exports to India would rise by two-thirds, and US investment in India would roughly double’.

The message is unambiguous: India must undertake a significant change in its policy orientation so that it meets the expectations of the business interests in US and Western European countries.

This broad affront on India’s economic policies by the USITC, which closely followed the investigation of India’s intellectual property laws by the US Trade Representative, seem to undermine the new found warmth in the relations between the two countries. It is clear that the various wings of the US administration need to understand the spirit of the New Delhi dialogue on economic issues, else the economic partnership will be all for nothing.

Dr Biswajit Dhar is Professor at the Centre for Economic Studies and Planning School of Social Sciences, Jawaharlal Nehru University, New Delhi.

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China’s nine-dash line still infringes international law http://www.eastasiaforum.org/2015/02/27/chinas-nine-dash-line-still-infringes-international-law/ http://www.eastasiaforum.org/2015/02/27/chinas-nine-dash-line-still-infringes-international-law/#comments Thu, 26 Feb 2015 23:00:47 +0000 http://www.eastasiaforum.org/?p=45380 Authors: Huy Duong, and Tuan Pham, UNSW

Suggestions that China could claim historic fishing rights within the nine-dash line misinterpret international law. While Sourabh Gupta’s arguments, outlined in a recent Forum article, relating to the UN Convention on the Law of the Sea (UNCLOS) Articles 62 and 123 have been disputed elsewhere, we argue that his argument regarding Article 56 is also incorrect.

A Chinese government ship trails a Vietnamese Coast Guard vessel with reporters aboard in the South China Sea on July 15, 2014.  (Photo: AAP)

The exclusive economic zone (EEZ) regime is outlined in UNCLOS Article 56, which states that a country has within its EEZ ‘sovereign rights for the purpose of exploring and exploiting, conserving and managing […] natural resources’. UNCLOS and its subsequent interpretations imply that the right of exploitation is exclusive, as the name implies: other countries can participate in the exploitation of this country’s EEZ only with its agreement. When a country becomes an UNCLOS signatory it gives up any claims to any rights to fish within other countries’ EEZs, regardless of historical fishing activities. In return the country gains the exclusive right to fish in its own EEZ.

Gupta misinterprets the Permanent Court of Arbitration’s (PCA) ruling in the Eritrea–Yemen maritime territorial dispute as support for the view that an UNCLOS signatory has the right to continue its traditional fishing activities in other countries’ EEZs. When the PCA awarded sovereignty over some islands to Yemen but also let the fishermen of Eritrea continue the traditional fishing regime in the vicinity, the ruling was in regard to sovereignty over the islands not the EEZ. In international law, the acquisition of sovereignty and the rights over resources within a country’s EEZ are governed by two different legal regimes.

The PCA took into account ‘Islamic tradition’, ‘regional legal traditions’, ‘the Islamic system of international law’, the fact the islands had had characteristics of res communis — a common area not subject to the legal title of any state — for centuries, and Yemen not acquiring sovereignty over them until towards the end of the 20th century. When it awarded sovereignty of the islands to Yemen but also gave free access of the surrounding waters to Eritrea’s artisanal fishermen, that was a ruling tailored to the particular history of sovereignty over those territories. It was not a general rule of international law. The PCA was not required to strictly apply the concept of sovereignty, primarily a creation of the West.

The creation of the EEZ regime bears no resemblance to Yemen’s acquisition of sovereignty over the islands. This regime was not a creation of the West but negotiated by the international community. China voluntarily subscribed to it when ratifying UNCLOS. Therefore, the international courts are unlikely to uphold the view that China has the unilateral right to fish in other countries’ EEZs. Overwhelmingly, they do not give any country the right to fish in another’s EEZ unless there is an agreement between them to that effect.

Drawing lessons for the South China Sea, if an international court was called on to resolve the disputes, it might award sovereignty over the different islands to different countries together with clauses to award access to these islands and their 12-nautical-mile territorial seas to artisanal fishermen from other countries. But it is extremely unlikely to give China the right to fish in the entire nine-dash-line area, and it is very difficult to characterise modern fishing in the South China Sea as artisanal fishing.

It is doubtful if China itself shares Gupta’s view. While China claims to have a historically-established right to unilaterally fish within approximately 50 nautical miles of the uncontested coasts of other countries, does it accept that they have the same right within 50 nautical miles of its uncontested coast? It is worth mentioning that since 2009 China has been using force to drive Vietnamese fishermen out of their traditional fishing grounds around the still-contested Paracel Islands.

The ‘historic fishing rights’ argument is in fact a late tack-on and has nothing to do with the original purpose of the nine-dash line. According to Taiwanese President Ma Ying-jeou, when China’s Kuomintang Government published the eleven-dash line map, which later became the nine-dash line, it was only a claim to the enclosed islands, not to rights over maritime space.

But as China’s power grew after Deng Xiaoping’s reforms, its ambitions in the South China Sea also grew. This gave rise to the view that this line was not just a claim to the islands but also a claim to rights over the maritime space enclosed by it. The problem is that, according to international law regarding maritime delimitation, this line cannot possibly be a valid claim to an EEZ.

Faced with this, Chinese scholars have argued that ‘historic rights’ are the basis for China to make maritime claims well beyond what would be consistent with jurisprudence on EEZ delimitation. However, leading international scholars have convincingly shown that that argument is flawed. The view of the US Department of State on this question remains far more convincing. Historic fishing activities by the peoples around the South China Sea in what was at that time international waters cannot give China the right to fish in other countries’ EEZs today.

One of the best possible avenues for fairness and stability in the South China Sea is for China to recognise the meaning of the nine-dash line map as clarified by Taiwan’s President Ma. It should recognise that of the islands enclosed are the subjects of territorial disputes and negotiate with the relevant countries the EEZ belonging to these islands on the basis of international law.

Huy Duong is a UK-based IT consultant.

Tuan Pham is Associate Professor at the University of New South Wales.

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Some Malaysian inequality measures more equal than others http://www.eastasiaforum.org/2015/02/26/some-malaysian-inequality-measures-more-equal-than-others/ http://www.eastasiaforum.org/2015/02/26/some-malaysian-inequality-measures-more-equal-than-others/#comments Thu, 26 Feb 2015 11:00:25 +0000 http://www.eastasiaforum.org/?p=45375 Author: Hwok-Aun Lee, University of Malaya

Is inequality in Malaysia going up or down? Answers differ. Official statistics unambiguously show household income inequality going down in the past decade, but almost everyone seems to think it has gone up. So what’s going on?

 A boy runs at a temple casted with shadows of traditional Chinese lantern decorations ahead of the Chinese Lunar New Year in Kuala Lumpur, Malaysia, on Tuesday, 17 Feb 2015.  (Photo: AAP)

The most common measure of income inequality is the Gini coefficient. It suggests falling inequality in Malaysia. The Gini coefficient fell from 0.46 in 2002 to 0.43 in 2012. This Gini coefficient series was calculated using Malaysia’s Household Income Survey — a large sample, consistent and nationally representative dataset. Statistics derived from this source carry substantial weight.

But popular perception and anecdotal accounts view the issue differently. Most people seem to think that inequality has been rising, or at least persisting at high levels. The dissonance between the official figures and public perception warrants further investigation.

Rising inequality also loomed large in Malaysian popular discourse in the 1990s. But across that period, official statistics backed up popular perceptions — Malaysia’s Gini coefficient increased.

Public policy has for decades been preoccupied with targeting and monitoring reductions in inequality between ethnic groups. But the data and the policy direction seem to be at odds. Since 2010, some ethnicity-blind programs have been introduced to target the exclusion and lagging socioeconomic progress of the bottom 40 per cent of households. But this group actually had the highest income growth in the preceding decade. From 2002 to 2012, mean household income for the bottom 40 per cent grew by 6.1 per cent annually, compared to 5.6 per cent for the middle 40 per cent and 4.6 per cent for the top 20 per cent of households.

Why are low income households still considered to be in great need of assistance when their incomes have improved significantly?

Inequality is a zeitgeist issue that has resonance materially, politically and emotionally, regardless of official Gini coefficients. The notion that inequality has risen is believable because of a wider malaise in Malaysia. Malaysians are dissatisfied with rising prices, sluggish wage growth and economic insecurity. Many also resent the concentration of wealth among elites, especially through political-business connections or suspiciously corrupt means. Continual reports of misappropriation of public funds and the lavish livelihoods of corporate, financial and political elites tend to reinforce perceptions of unfairness and unequal opportunity.

Surveys by the Merdeka Center offer some insight into public opinion. In recent years, concerns over economic conditions, especially inflation, employment and wages, have grown. In April 2005, the top concerns were crime and public safety (16 per cent of respondents deemed this the biggest national problem), inflation (10 per cent), business opportunities and economic growth (9 per cent), with unemployment/lack of job opportunities (4 per cent) further down the list. In October–November 2012, the majority considered price hikes/inflation/rising cost of living to be the most pressing issue (23 per cent), followed by crime (7 per cent), unemployment/lack of employment opportunities (6 per cent) and unfavourable economic conditions (6 per cent). It is possible that Malaysians are simply conflating the general economic environment with inequality.

But it is also important to remember that everyone experiences inequality differently. For example, household income inequality need not move in the same direction as personal wage inequality or household wealth inequality. And the Gini coefficient isn’t the only way of measuring income inequality, either.

Malaysia’s official inequality statistics are calculated based on gross household income — that is, adding together all forms of income from multiple sources, including earned income (wages and self-employment earnings) and non-earned income (rent, dividends, transfers, remittances, and so on). It also counts multiple earners in the same household. This highly aggregated calculation can mask the effects of wage growth and asset accumulation, and other factors that affect inequality.

The full Household Income Survey datasets are also not available, meaning research in this field must assemble data from other sources.

One of these sources is data from the Employees’ Provident Fund (EPF), which allows us to calculate wage inequality over time. Formally employed private sector workers maintain accounts with the EPF, which had 6.5 million active members in 2013. Members regularly contribute to their accounts from basic wages and receive dividend payments, at uniform rates regardless of the size of the account. So changes in the distribution of EPF accounts will likely reflect changes in the distribution of wages. And the Gini coefficient of EPF savings accounts has been rising, giving us grounds to believe that wage inequality has increased in the past decade or so.

Other sources concur with a broad picture of steadily rising inequality. In the public sector, the number of managers and professionals at the upper regions of the wage distribution has grown disproportionately faster. Luxury cars constitute an increasing share of passenger vehicle sales, while property sales show rising concentration at the upper end.

Popular perceptions of rising inequality, it turns out, are supported by empirical evidence. Household inequality may be falling, as the data suggests, but other forms of inequality are rising.

Malaysia needs to pay more attention to wage distribution and labour market dynamics as well as wealth inequality. There are indications that wage inequality is rising, as well as widespread concerns over wage growth, household livelihood and housing affordability.

And the rich Household Income Survey datasets need to be made available for exploration — again, to investigate earnings and wealth, and to disaggregate personal and household dimensions. Only then can we really begin to untangle the complexities of inequality in Malaysia.

Hwok Aun Lee is Senior Lecturer in the Department of Development Studies at the University of Malaya. This article draws on a working paper co-written with Muhammed Abdul Khalid.

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Revitalising Japan’s security policy: Between pacifism and the modern world http://www.eastasiaforum.org/2015/02/26/revitalising-japans-security-policy-between-pacifism-and-the-modern-world/ http://www.eastasiaforum.org/2015/02/26/revitalising-japans-security-policy-between-pacifism-and-the-modern-world/#comments Wed, 25 Feb 2015 23:00:06 +0000 http://www.eastasiaforum.org/?p=45371 Author: Hitoshi Tanaka, JCIE

This year marks the 70th anniversary of the end of World War II. Such milestones offer an opportunity to reflect on the progress made and the steps needed to ensure that such tragic events are never repeated.

Thus it is unfortunate that so many decades on debates surrounding Japan’s wartime history are still stirring controversy in the region. While Japan has issued a number of apologies, the most significant came on the 50th anniversary of the end of the war, when then Prime Minister Tomiichi Murayama made the now famous Murayama Statement. That statement offers a straight-forward apology and squarely acknowledges that Japan followed ‘a mistaken national policy…and, through its colonial rule and aggression, caused tremendous damage and suffering to the people of many countries, particularly to those of Asian nations’. It has been maintained as the official position of all successive Japanese governments under both the Liberal Democratic Party (LDP) and the Democratic Party of Japan. The basic nature of the statement leaves no room for equivocation, and it is critical that Japan adhere to this statement if it is to maintain its standing in the international community.

Prime Minister Shinzo Abe has indicated that he will make a commemorative statement on 15 August, the anniversary of Japan’s surrender. Following the recent controversy in Japan over the references to comfort women in American history textbooks, there has also been speculation that Abe may seek to undercut the Murayama Statement. But any move to contradict Murayama’s words seems unlikely since doing so would undermine the Abe administration’s national security agenda as well as Japan’s hard-earned reputation as a nation committed to peace.

In fact, the path that Japan has followed over the last 70 years is nothing short of extraordinary. After the war, Japan reinvented itself as a peaceful nation by going through a remarkable democratisation and by promulgating a new constitution that included the famous Article 9 ‘peace clause’. Japan built an egalitarian society, achieved rapid economic recovery to become the second largest economy in the world in less than 25 years, utilised its wealth to establish itself as a leader in technological innovation, and became one of the world’s leading providers of official development assistance — all the while never firing a single bullet. Japan’s peaceful identity and its contributions to global public goods have been recognised around the world, as evinced by its positive image in global opinion polls.

Looking forward, Japan must make clear to the world that it is continuing to face up to its wartime conduct; that it recognises the pivotal role of US support, which enabled Japan to reinvent itself; and that, based on its proud record over the past 70 years, it will continue to work for the peace and prosperity of the region in the future.

To best position itself for future regional cooperation, the Japanese government must pay more attention to how its foreign policy is perceived among its neighbours. Most critically, it must clarify where it is moving with the reinterpretation of Article 9 of the constitution, which it is undertaking in order to allow the Japan Self-Defense Forces (SDF) to engage in collective self-defence. While the contemporary security environment makes it important to move forward with a common-sense reinterpretation of Article 9 that will allow limited forms of collective self-defence, more rigorous explanation is required to demonstrate that the reinterpretation set out in the cabinet’s July 2014 decision will maintain the constitution’s original spirit.

The Abe cabinet’s reinterpretation names three new conditions for the use of force beyond cases where the Japanese homeland is under attack: ‘When an armed attack against a foreign country that is in a close relationship with Japan…threatens Japan’s survival and poses a clear danger to fundamentally overturn the [Japanese] people’s right to life, liberty and pursuit of happiness’; when there are ‘no other means to repel the attack’; and when the use of force is limited ‘to the minimum extent necessary’.

These conditions appear restrictive, but since they do not come with any geographical limits, there is significant potential to push the envelope toward a more expansive interpretation. For instance, the Islamic State of Iraq and the Levant (ISIL) could theoretically be interpreted as posing a threat to the Japanese people’s constitutional right to life, liberty, and the pursuit of happiness. Some may argue that this would open the door for the SDF to participate in coalition air strikes against ISIL in Syria and Iraq, a scenario that goes well beyond the spirit of the constitution.

As the Abe government seeks to pass the legislation needed to implement collective self-defence, the debate is bound to be influenced by ISIL’s recent killing of two Japanese hostages. Abe has hinted at the possibility of new legislation to permit the SDF to engage in rescue operations for Japanese nationals abroad with the consent of host nations. This debate goes to the very heart of Japan’s post-war identity. On the one hand, liberals argue that Japan plays a unique role as a pacifist nation and that, as a country not directly party to any conflicts, its Middle East policy and humanitarian assistance significantly contribute to regional stability. On the other hand, conservatives argue that Japan cannot isolate itself from the global phenomenon of terrorism and must be prepared to use the SDF to safeguard Japanese interests. While there are merits to both arguments, Japan’s national security policy must be determined in a calm and rational manner. The danger now is that Japan’s security policy and postwar identity may be shifted by a wave of emotional nationalism following these tragic deaths. In shaping new policy, a careful balance must be maintained between clarifying the legitimate roles of the SDF and maintaining Japan’s identity as a pacifist nation.

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

This article is an extract from East Asia Insights Vol. 10 No. 1 February 2015, which is available in full here, and is reprinted with the kind permission of JCIE.

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Shanghai experiment is a major step towards financial liberalisation http://www.eastasiaforum.org/2015/02/25/shanghai-experiment-is-a-major-step-towards-financial-liberalisation/ http://www.eastasiaforum.org/2015/02/25/shanghai-experiment-is-a-major-step-towards-financial-liberalisation/#comments Wed, 25 Feb 2015 11:00:47 +0000 http://www.eastasiaforum.org/?p=45365 Authors: Daqing Yao, SASS and John Whalley, UWO

Since September 2013 China has been operating a new form of free trade zone (FTZ) based in a small area of Shanghai, called the China (Shanghai) Pilot Free Trade Zone (SPFTZ). Only 28 square kilometres in area, the SPFTZ is a concrete first step to China’s new development model, the so-called ‘new normal’. China’s adjustment to growth at a relatively lower but still increasing rate will be assisted by the SPFTZ’s substantial steps towards financial liberalisation.

Pedestrians walk at the China (Shanghai) Pilot Free Trade Zone in the Pudong International Airport bonded area in Shanghai, China, 9 December 2014.  (Photo: AAP)

From the beginning, the SPFTZ has been a pilot zone not only for trade but also for broader reform. There have been four major areas of institutional reform over the past year. This includes reform of the foreign investment, financial, trade, and legal and regulatory systems. Of these, financial innovation attracts the most interest.

The People’s Bank of China and three regulatory commissions on banking, securities, and insurance have adopted 51 new regulations underpinning a new financial architecture in the SPFTZ. These include a free trade accounts system that enables eligible organisations and individuals to enjoy the same regulatory rules on their yuan as apply to foreign currencies. Cross-border payments, receipts, and exchange related to direct investment by enterprises can be processed directly by banks. Eligible individuals can now make various kinds of overseas investments, including securities investment. Financial institutions in Shanghai can also independently price the foreign currency deposits of enterprise clients. And banks can directly provide cross-border RMB settlement services in current accounts and direct investment accounts to their clients.

All these features are aimed at loosening capital controls in the SPFTZ, while maintaining them for now in most of the rest of China. Similar arrangements are in place in Tianjin, Fujian and Guangdong FTZs. But the impacts of financial market changes cannot be confined to small geographic areas. As such, they will likely affect the capital controls in China as a whole.

In fact, research by the authors shows that the impact of capital controls in China is lower since the SPFTZ. Capital flows have increased rapidly since the SPFTZ. The price spread between the CNY (the onshore exchange rate of RMB) and CNH (the offshore exchange rate of RMB in Hong Kong) has also shown a tendency to diminish. Furthermore, a formal price test — analysing the combination of onshore RMB interest rates, offshore US dollar interest rates and non-deliverable forward (NDF) exchange rates — indicates that there was a regime break in China’s capital controls when the SPFTZ started.

These spill-over effects are more as the result of intentional policy design than of a careless failure of planning. Chinese reform is generally characterised by its evolutionary strategy, where tentative policy experiments in confined areas are only replicated in other areas when they succeed. Although financial architecture usually occurs organically, in that it gradually results from a myriad of individual agreements, China can still find ways to trial reforms while avoiding an unfavourable impact on its whole economy.

That the SPFTZ is expanding to 120 square kilometres and three similar FTZs in Tianjin, Fujian and Guangdong are operational proves that loosening capital controls is in accordance with the purpose of the central government. Beijing may gradually abandon its current policy of a stable RMB and capital controls to a floating currency and liberalised capital market.

A liberalised capital market is a part of the broader objective of the new generation of Chinese leaders, whose aim is to create a more structurally balanced, domestic demand driven, environmentally friendly, and equitable form of economic development. In this sense, the SPFTZ heralds the ‘new normal’ that will characterise China in the coming decades.

Daqing Yao is an Associate Research Professor at the Institute of World Economy at the Shanghai Academy of Social Sciences.

John Whalley is Professor in the Department of Economics, Western University.

The authors are grateful to the Ontario Research Fund and the Centre for International Governance Innovation for financial support. This article refers to the materials from the authors’ recent paper: Daqing Yao and John Whalley, ‘An Evaluation of the Impact of the China (Shanghai) Pilot Free Trade Zone (SPFTZ)’, NBER Working Paper No. 20901.

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Modi’s BJP no longer invincible http://www.eastasiaforum.org/2015/02/25/modis-bjp-no-longer-invincible/ http://www.eastasiaforum.org/2015/02/25/modis-bjp-no-longer-invincible/#comments Tue, 24 Feb 2015 23:00:19 +0000 http://www.eastasiaforum.org/?p=45348 Authors: Purnendra Jain and Peter Mayer, University of Adelaide

The tale of the recent February Delhi assembly elections shows how quickly political fortunes can decline. Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) recorded a landslide victory at the 2014 national elections and won a majority of seats in three subsequent state elections. But his party suffered a crushing defeat in Delhi, winning just three of the 70 seats. The unexpected defeat dents the image of electoral invincibility of both the BJP and Modi.

On the other hand, the Aam Adami Party (AAP or the Common Man Party) under the leadership of Arvind Kejriwal registered a sweeping victory capturing 67 of the 70 seats. The once-dominant Indian National Congress that ruled Delhi for 15 years from 1998–2013 did not even win one seat.

All exit polls had clearly indicated a victory for AAP with the BJP running second. But none of the polls showed the extent of damage that the BJP suffered. At the last Delhi assembly elections, held in December 2013, the BJP had won 31 seats, AAP 28 seats and the Congress eight seats. With no clear majority, AAP formed a minority government with support of the Congress.

But AAP’s leader Kejriwal walked out of office 49 days after he was elected on the grounds that opposition parties did not support his anti-corruption bills. Delhi voters and his many of his supporters criticised Kejriwal and he was harshly dubbed a bhagoda (deserter).

Kejriwal’s position was further weakened by his decision to run against the BJP prime ministerial candidate Narendra Modi for the seat of Varanasi at the 2014 general election. Kejriwal suffered an expected crushing defeat, as the people of Varanasi were unwilling to trust a politician who ran away from his duty in Delhi in the pursuit of greater ambitions at the national level.

Given Kejriwal’s past reputation for neglecting responsibility and Modi’s previous electoral success, even a few months before the Delhi elections no one imagined such a landslide victory for AAP and disastrous results for the BJP.

What changed so soon?

By resigning over an issue of principle, the AAP convincingly distinguished itself from the usual run of politicians who cling to the perks of office at any cost. Kejriwal was honest and upfront with Delhi voters and apologised on numerous occasions for resigning from office after only 49 days. In retrospect, there were positive consequences, which emerged from this much-criticised action. Working class individuals, who often face harassment from the police, experienced a month of welcome relief while the AAPs anti-bribery hotline was in operation. Once Kejriwal resigned, things quickly reverted to the way they had been.

The February election results were clearly a vote for Kejriwal and his policy agenda rather than a vote against the BJP. In 2013 there was a three-way contest between the AAP, the BJP and the Congress Party. In 2015 the BJP share of the vote was virtually unchanged from the earlier election but the Congress’ share of the vote fell to less than 10 per cent. Most Congress voters, particularly the Muslims and minorities, transferred their support to the AAP, giving them a decisive absolute majority of the overall vote. Under India’s ‘first past the post’ electoral system, that ensured an electoral victory for the AAP.

The resounding victory for the AAP poses a serious problem for the BJP, not least because Modi was such a prominent part of the party’s campaign strategy. It also poses a life and death question for the Congress. The desertion of its former supporters and its consequent failure to win a single seat will inevitably raise the most profound consequences for the Gandhi dynasty.

For the BJP there are different issues, some of which may only emerge in the coming years. In his rise to power, Modi has turned the BJP into a highly personalised organisation. Former senior leaders, including L.K. Advani and Jaswant Singh, have been sidelined and their places filled by Modi loyalists. But the traditional power-base of the party has resided in the disciplined cadres of the Rashtriya Swayamsevak Sangh (RSS or National Volunteer Organisation) and the saffron-clad members of the World Hindu Council.

The latter in particular has been pushing aspects of its ‘hindutva’ (Hinduisation) agenda. This includes campaigns against ‘love jihad’ (marriages between Hindus and Muslims) and in favour of ‘ghar wapsi’ (a code for conversion of Christians and Muslims to Hinduism).

If the BJP is to have any chance of making itself India’s most important political party, Modi will have to find a way to distance himself from his extremist supporters. There is an emerging clash between Modi’s highly centralised personal machine and the desires of the more extreme elements of the party. These elements seek to have him implement policies that could make the BJP un-electable in future elections.

Professor Purnendra Jain is a Professor in the Department of Asian Studies at the University of Adelaide.

Associate Professor Peter Mayer is a Visiting Research Fellow at the University of Adelaide

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China needs to address the effects of dams http://www.eastasiaforum.org/2015/02/24/china-needs-to-address-the-effects-of-dams/ http://www.eastasiaforum.org/2015/02/24/china-needs-to-address-the-effects-of-dams/#comments Tue, 24 Feb 2015 11:00:34 +0000 http://www.eastasiaforum.org/?p=45360 Author: Bryan Tilt, Oregon State University

As China shifts its focus to curbing carbon emissions, hydropower is becoming central to its alternative energy plan. But while the potential for renewable power generation cannot be ignored, the potential for costly environmental degradation is also high.

Water is released from the Three Gorges Dam, a gigantic hydropower project on the Yangtze river, in Yichang, central China's Hubei province, after heavy downpours in the upper reaches of the dam caused the highest flood peak of the year. (Photo: AAP).

In late-2014, US President Barack Obama and Chinese President Xi Jinping released a joint statement on climate change, announcing both countries’ intention to curb greenhouse gas emissions. The US will reduce overall emissions by at least 26 per cent below 2005 levels by 2025. China will cap its carbon dioxide emissions by around 2030. This joint statement does not have the binding authority of a treaty, nor does it enjoy the support of the new Republican majority in both houses of the US Congress. So, while it has succeeded in raising the profile of climate change on the international agenda, it is too early to tell whether the statement will result in material changes to either country’s policies.

But one thing is certain: reducing China’s carbon emissions will require weaning the nation’s economy away from fossil fuels, especially coal, which currently accounts for three-quarters of China’s electricity generation. Top Chinese officials appear willing to do just that. In its new Energy Development Strategy Plan, the State Council has laid out ambitious goals for developing alternative and renewable energy sources, including wind, solar, geothermal and hydropower.

Hydropower dams have become a centrepiece of the discussion on renewable energy. In addition to high-profile projects like the Three Gorges Dam, hydropower facilities have already been built on nearly all of China’s major river systems. Hydropower output is growing at an annual rate of 12.9 per cent, faster than any other electricity-generation source. Over the past several decades, China has far outpaced all other countries in hydropower development. It is now home to half of the world’s approximately 50,000 large dams.

This poses a unique set of environmental and social challenges that must be addressed.

When a dam is installed on a river it fragments the riparian ecosystem, changing a free-flowing river segment into an expanse of still water. In the process, it disrupts sensitive habitats, alters the temperature, chemistry and sediment load of the water, and changes the geomorphology of the river itself. The Three Parallel Rivers Region in Yunnan Province is a case in point. Dozens of dams are now under development on the Jinsha (the headwaters of the Yangtze), the Lancang (Upper Mekong) and the Nu (Salween), even as international NGOs mobilise to preserve the region’s estimated 6000 plant species and numerous rare, threatened or endangered animals.

The social consequences are equally dire. In 2004, a Xinhua News report — based on research conducted by the Ministry of Water Resources — concluded that at least 15 million people in China have been displaced due to dam construction. This is the largest dam-related displaced population in the world. For the people who live along rivers targeted for hydropower development — many of whom belong to culturally or economically vulnerable groups — dams cause displacement and resettlement, lost farmland, unemployment, and disruption in social networks and community well-being.

China’s steep escalation in hydropower development is unlikely to slow anytime soon. So, how can China develop hydropower in a way that best protects ecosystems and people?

Here, the large body of research produced by ecological and social scientists, in China and elsewhere, over the past several decades is instructive. The research points to three basic principles on how to minimise or mitigate environmental and social costs.

First, comprehensive river-basin planning that focuses on environmental protection and socioeconomic well-being, along with hydropower development, can minimise the impacts of dams on ecosystems and communities.

Second, a clear process for social impact assessment can ensure that the needs of affected people and communities receive due consideration.

Third, an enforceable legal and policy framework for land requisition can ensure that displaced people receive adequate compensation, enabling them to rebuild their lives and livelihoods.

This is not just China’s problem. The repercussions of the current hydropower boom are being felt far beyond the country’s borders. Armed with the best hydropower engineering capacity in the world, and the backing of government financial institutions like China Exim Bank, Chinese firms are involved in the planning and construction of more than 300 dam projects in 70 countries, from Southeast Asia to sub-Saharan Africa and beyond. As hydropower development continues to build momentum as an important source of renewable energy, more public scrutiny is needed.

Bryan Tilt is an Associate Professor of Anthropology at Oregon State University. He is the author of the new book Dams and Development in China: The Moral Economy of Water and Power.

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Narendra Modi and the future of Indian politics http://www.eastasiaforum.org/2015/02/24/narendra-modi-and-the-future-of-indian-politics/ http://www.eastasiaforum.org/2015/02/24/narendra-modi-and-the-future-of-indian-politics/#comments Mon, 23 Feb 2015 23:00:47 +0000 http://www.eastasiaforum.org/?p=45342 Author: Amitabh Mattoo, University of Melbourne

When India opted for constitutional democracy in 1947, few gave it much of a chance. India’s diversity was overwhelming and it was home to some of the world’s poorest. But India’s democracy has succeeded beyond the expectations of even the most optimistic and faired far better than that of similarly placed countries.

The 16th general election held in 2014 once again demonstrated the faith of most Indian citizens in democracy.

For the first time ever, the Bharatiya Janata Party (BJP) won an outright majority. It was also the first time in 30 years that a single political party has won power on its own. The last five years had seen a particularly dysfunctional Indian National Congress led coalition, characterised by policy paralysis and allegations of massive corruption.

The BJP fought the election on a single issue: the personality and track record of its prime ministerial candidate, Narendra Modi, the three-time elected chief minister of the prosperous state of Gujarat. Modi spoke at nearly 400 public rallies during the campaign and was treated like a rock star. Modi had a simple message: replicating the magic of the Gujarat model of development under his decade-long administration.

He communicated this forcefully to an impatient and, crucially, young India angry with the establishment and the ruling Congress party for letting them down.

Caste has been an abiding feature of Indian politics, particularly in the northern states of Uttar Pradesh and Bihar. Political mobilisation and voting patterns in the past have tended to follow caste loyalties. The 2014 elections changed that: voters from all castes chose the decisive leadership and good governance promised by the BJP.

The BJP, traditionally seen as a party of upper castes, has rarely done well in Bihar and Uttar Pradesh. But in 2014 it won in both states. The BJP claimed 22 of 40 and 71 of the 80 parliamentary seats in Bihar and Uttar Pradesh, respectively, leaving behind caste-based parties. The marginalisation of caste politics is also evident nationally: the BJP won more votes among Dalits (lowest in the caste hierarchy) than the Congress, seen as a champion of lower castes.

It is too early to conclude that caste will play no further role in Indian politics, but the result does signal that fundamental issues of governance and basic needs are gaining in salience.

Indians, particularly the young, are becoming increasingly impatient with poor governance. The single most important plank of Modi’s election campaign was his promise to provide good governance, under the slogan ‘minimum government, maximum governance’. He made the Gujarat model of good governance the mantra of his campaign.

But it is not only Gujarat that performed well. Other BJP-ruled states such as Madhya Pradesh, Chhattisgarh and Rajasthan are considered far better in terms of governance than Congress ruled states.

If there was one negative about the election result, it was the lack of adequate representation for Muslims. The BJP has traditionally been seen as a pro-Hindu party. Modi himself invites adoration from his supporters but fear among his detractors, particularly within the Muslim population. While in this election Modi seems to have united more than 80 per cent of Hindus across caste, linguistic and regional divisions, few among India’s Muslims trust him.

Of the BJP’s 282 members of parliament, not one is a Muslim. Of the 80 seats in Uttar Pradesh, about 32 have 15 per cent or more Muslim voters. Yet because of the vagaries of India’s first-past-the post system, for the first time since independence Uttar Pradesh does not have a Muslim member of parliament.

As the Chief Minister of Gujarat and then as a prime ministerial candidate, Modi could afford to ignore minorities. As the Prime Minister of India he can no longer do so.

Now that his honeymoon period is over, Modi needs to reassure minorities that they can be safe, secure and successful in his India. This means focusing on the agenda for economic growth and good governance that has made Gujarat the envy of other states. Modi must pay little heed to the many who will want him to advance potentially divisive social and political issues.

Those who had expected Modi’s foreign policy to take a more muscular stance will probably be disappointed. Instead, Modi has emphasised using the carrots of economics and soft power.

The incipient Modi foreign policy doctrine has four main elements. First is pursuing a foreign policy of enlightened national interest. This is arguably the recognition that the narrow pursuit of self-interest in an interdependent world can lead to suboptimal policy outcomes.

Second is the idea that India will help to build and strengthen a democratic, peaceful, stable and economically interlinked neighbourhood. The presence of South Asian heads of government at the swearing-in of Modi and his cabinet was encouraging.

Third is Modi’s emphasis on soft power, explained through yet another Modi alliteration, the ‘five Ts’: trade, tourism, talent, technology and tradition. Translating this into reality will require real effort.

Fourth, the Modi doctrine suggests a policy of ‘multi-alignment’ with all the great powers: China, Japan, Russia, the United States and European Union.

If the government can deliver on the promises made, Modi will make history. If he lets himself be distracted by divisive social issues or is provoked into adopting zealous nationalism, he will prove his critics right.

India requires stability and peace within the South Asian neighbourhood and beyond for at least the next decade to emerge as a great power. During that period it is best not to get dragged into external conflicts, assume leadership or prominence on the international stage, or attract too much attention. That is Modi’s biggest challenge.

Amitabh Mattoo is Director of the Australia India Institute, Professor of International Relations at University of Melbourne and Professor of International Relations, Jawaharlal Nehru University, New Delhi.

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

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Revitalising sluggish FDI in Japan http://www.eastasiaforum.org/2015/02/23/revitalising-sluggish-fdi-in-japan/ http://www.eastasiaforum.org/2015/02/23/revitalising-sluggish-fdi-in-japan/#comments Mon, 23 Feb 2015 11:00:39 +0000 http://www.eastasiaforum.org/?p=45337 Author: Shujiro Urata, Waseda University

Japan’s inward foreign direct investment (FDI) is extremely low compared with that of other developed countries and even its Asian neighbours.

In 2013, the ratio of Japan’s inward FDI stock to its GDP was 3.5 per cent, the lowest among developed countries and far below the global average of 34.1 per cent. The US and Germany for instance have ratios seven to eight times higher than Japan, while China and South Korea have ratios three to four times that of Japan’s. Inward FDI in developed countries is characterised more by mergers and acquisitions (M&A) — involving buyouts of existing companies — than by greenfield investments entailing the establishment of new companies. In this context, M&A by foreign companies in Japan is sluggish.

Receiving direct investment from foreign companies promotes economic growth by increasing investment, production, and employment. But the benefits of receiving direct investment are not limited to these quantitative expansions. They also include qualitative improvements through transfers of advanced technology and management know-how to Japanese companies. Higher productivity also stems from intensified competitive pressure on Japanese companies. Similarly, consumers benefit from the availability of new products and services.

Aware of the contributions inward FDI could make to Japan’s economic recovery and medium- to long-term growth, the Abe administration — in a revised version of its Japan Revitalization Strategy released in June 2014 — advocated expanding inward FDI. The strategy aims to double the 2012 year-end inward FDI stock by 2020. This expansion is a key part of the third arrow of Abenomics’ approach to growth.

What factors hinder inward direct investment in Japan?

In opinion surveys of foreign companies conducted by the Japan External Trade Organization (JETRO), the Ministry of Economy, Trade and Industry and others, the problem most commonly cited by foreign companies seeking to operate in Japan is the high cost of doing business. Specifically, the high corporate and other tax rates applicable to businesses and high office rents. Among the other obstacles noted were: the closed and peculiar nature of the market and administrative procedures; the complexity of approval and licensing systems; the difficulty of securing needed personnel; and, in particular, the scarcity of personnel capable of communicating in English.

Surveyed companies pointed out that M&A in Japan is sluggish. They claimed that this is due in part to tax regimes and procedures that make it harder to pursue M&A than in other developed countries and in part to the significant barrier of closed corporate governance in Japanese companies that inhibits M&A.

Recognising the need to expand inward FDI, since the 1980s the Japanese government has been pursuing a variety of polices to encourage such investment — offering foreign companies low-interest loans, tax breaks, debt guarantees and useful information. The second Abe administration, inaugurated in 2012, sought to reduce or eliminate factors inhibiting investment in Japan by setting targets to double inward investment, creating a council for foreign direct investment promotion to help achieve these targets, and implementing regulatory reforms.

These latest measures to promote direct investment in Japan feature several characteristic elements. One is the connection with Japan’s National Strategic Special Zones (NSSZs), which are actively introducing regulatory reforms in designated areas. The Abe administration regards NSSZs as an extremely important policy measure. The establishment of such zones can be expected to produce an expansion of inward FDI. Another is the reforms to corporate governance being undertaken to encourage M&A. Ensuring that corporate governance is carried out openly and transparently will lead to greater inward direct investment via M&A.

The obstacles impeding greater FDI in Japan that would assist in Japan’s economic recovery and increase the benefits for consumers are apparent. The problem lies in developing and implementing the policies needed to reduce or eliminate these obstacles. Previous administrations have devised policies needed to expand direct investment in Japan, but these policies could not be implemented due to strong resistance from vested interests.

The Abe administration scored a major victory in the House of Representatives elections in December 2014. It now holds an overwhelming majority of seats in both houses of the Diet. But now the Abe administration must overcome the resistance put up by vested interests that prioritises short-term gains. It needs to implement the regulatory reforms needed to make Japan’s economy and society prosperous and dynamic.

If regulatory reforms can establish a business environment that facilitates the participation of foreign companies in the Japanese economy, foreign companies will expand their direct investment in Japan. Greater direct investment in Japan will speed up Japan’s economic recovery and boost its future economic potential, resulting in further direct investment in Japan. It will create a virtuous cycle in which expanded direct investment in Japan leads to economic recovery and growth that in turn attracts more investment.

But whether this virtuous cycle can be set in motion will depend on the Abe administration’s determination and ability to get things done.

Shujiro Urata is Professor of International Economics at the Graduate School of Asia Pacific Studies, Waseda University.

This article was first published here in AJISS Commentary No. 209.

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Crunch time in Papua New Guinea http://www.eastasiaforum.org/2015/02/23/crunch-time-in-papua-new-guinea/ http://www.eastasiaforum.org/2015/02/23/crunch-time-in-papua-new-guinea/#comments Mon, 23 Feb 2015 01:00:49 +0000 http://www.eastasiaforum.org/?p=45331 Author: Peter Drysdale, East Asia Forum

The talk in Canberra is that the priority in Australia’s diplomacy for 2015 will be its own backyard in the Pacific. This is long overdue, and may be too late. Mending diplomatic fences with Fiji may be one thing; Australia’s ability to have a positive impact on outcomes in Papua New Guinea is likely to be quite another thing altogether.

Papua New Guinea's Prime Minister Peter O'Neill arrives at an event in Port Moresby in 2013. (Photo: AAP).

Despite its significant aid program in Papua New Guinea, which delivers more than half a billion Australian dollars in assistance annually to its former colony, Australia’s influence on outcomes in Papua New Guinea has taken a remarkable dive. This is partly because the resource boom over the past decade has played a much more important role in the PNG economy, although that is now in jeopardy with the tanking of commodity prices More importantly it is because diplomatic initiative has been seriously compromised by Australia’s being beholden to the past two PNG governments over the delivery of its offshore processing strategy for refugees. The government led by Peter O’Neill would appear to have had the Australian government over a barrel with the deal it has done on refugees with recent Australian governments.

The last phase of Australia’s so-called ‘Pacific Solution’ — a response to the influx of asylum seeking refugees by boat through Southeast Asia — has seen first the Rudd government and then the Abbott government become totally reliant on Papua New Guinea as the final dumping ground for its unwanted refugees. Australia’s current policy is anchored on Papua New Guinea’s willingness both to host refugee processing facilities (the management of which have been subject to intense criticism) and to accept that all asylum seekers placed there only have access to re-settlement in Papua New Guinea or in countries other than Australia. Delivery of the Pacific Solution has burdened the Australian government with a huge political debt, one that has effectively silenced it on other issues of grave importance to its strategic interests in the stability and healthy development of the country.

While the economy and government revenues grew strongly over the past few years, and there was some progress in economic reform under the Morauta government earlier, the boom that is now coming to a rapid end with the collapse of oil prices impacted little on basic services and the living standards of the Papua New Guinean people.

At the core, Papua New Guinea’s challenge during the resource boom was the issue of how to capture revenue from the resource boom and transform it into effective development spending. A special challenge in Papua New Guinea was directing the revenue take to economic and social development purposes rather than wasting it as ‘grease’ money. In a small resource-dependent developing country the case in principle for using a sovereign wealth fund instrument for smoothing expenditure patterns is strong. The move to establish an SWF to manage the flows of dividends and tax revenue that were hoped to come on stream from its massive LNG project is still to be consummated and the time has passed where it might have been helpful.

Papua New Guinea was among the first developing countries to put in place a resource-rent taxation regime and it set up the PNG Sustainable Development Program (PNGSDP) in 2002 to manage revenues from the Ok Tedi mine prudently for investment in economic and social development. Yet the integrity of PNGSDP has been undermined since Prime Minister O’Neill nationalised Ok Tedi and sought to dismantle PNGSDP’s independent management structure, steps that are currently under challenge in international courts.

O’Neill came to power with the promise of being tough on corruption. He set up Task Force Sweep as a powerful instrument for investigating and bringing corrupt officials and practices to court. It had some wins. But over the past two years, O’Neill and his government has become mired in controversy and tainted by impropriety and corruption. Apart from the ongoing saga over control of PNGSDP, the legality of a US$1.2 billion loan to replenish the government’s equity in the gas company Oil Search (over which the treasurer resigned) is in question and O’Neill has been referred by the Ombudsman to the Leadership Tribunal. Task Force Sweep has been squeezed out of existence because it has levelled charges of corruption against O’Neill. While the brave remnants of legal and judicial authority cling on for survival in Papua New Guinea itself and the power of international courts over the affairs of PNGSDP might act as a constraint, there has been a gradual descent in the standards of governance in the country.

The Economist claims that Papua New Guinea runs the risk of turning into a fully-fledged kleptocracy. On Transparency International’s Corruption Perception index Papua New Guinea ranked 145 out of 175 in 2014, level pegging with Kenya, Guinea and Laos.

At every step in recent developments the Australian government has publicly remained silent on these central issues. With so much at stake in the stability of its neighbourhood, it can no longer afford to. Indeed, Australia’s silence on the issue of the standards of Papua New Guinea governance and its complicity in enterprises and behaviour that are inconsistent with the standards of a strong and moral state have begun to sully its own standing and image in the region.

As Stephen Howes observes in this week’s lead essay, the need for a sovereign wealth fund in this resource cycle may have disappeared with the collapse of oil prices. ‘The timing of this could not have been worse for PNG, with its liquefied natural gas (LNG) project coming on line in the second half of 2014, ahead of schedule’. With oil prices currently way below the budget assumption of US$90pb, the revenue from the PNG LNG Project will be much less than expected. This will impact adversely on the budget, on GDP growth and on the balance of payments.

Now is a time for decisive economic policy action. The exchange rate needs to depreciate significantly. The government needs to cut spending. Both measures will be painful but, as Howes says, possible. There has been incredibly rapid growth in expenditure over the last few years, so finding savings should not be difficult. But a political mess will complicate things.

From this month the prime minister will no longer be protected by constitutional provisions which, as amended by the parliament in 2013, prohibit a vote of no confidence for the first 30 months of a government’s term. Though it may be an unlikely prospect it would be ideal if such a vote were tied closely to the outstanding questions of national governance. The elections in 2017 are no longer that far away. If O’Neill is forced to stand down as a result of one or both of the cases now pending against him, there will be uncertainty in political leadership.

Whether there is a full-blown economic crisis in the making or not, it’s certainly crunch time for Papua New Guinea and, more than ever, Australia’s performance of its international and neighbourly diplomatic responsibilities will be crucially important to outcomes.

Peter Drysdale is Editor of the East Asia Forum.

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