East Asia Forum http://www.eastasiaforum.org Economics, Politics and Public Policy in East Asia and the Pacific Tue, 27 Jan 2015 11:00:45 +0000 en-US hourly 1 Kim Jong-un secure as North Korean economy picks up http://www.eastasiaforum.org/2015/01/27/kim-jong-un-secure-as-north-korean-economy-picks-up/ http://www.eastasiaforum.org/2015/01/27/kim-jong-un-secure-as-north-korean-economy-picks-up/#comments Tue, 27 Jan 2015 11:00:45 +0000 http://www.eastasiaforum.org/?p=45019 Author: Chung-in Moon, Yonsei University

The longevity of Kim Jong-un’s regime in North Korea has been subject to widespread speculation by outside observers. Several factors led some to predict an early downfall for the regime: young and immature leadership, a potential factional struggle, a stagnant economy and a hostile external environment. But this prediction has not yet been realised. The Kim Jong-un regime is alive and well. It has been surviving, if not thriving, with stable political leadership and a gradual economic recovery.

The purge and execution of Kim Jong-un’s uncle, Jang Sung-thaek, then the second in charge, sent shockwaves through the world in 2013. Some pundits saw it as a prelude to a new power struggle that would foster the coming collapse of Kim’s regime. But since then, the opposite seems to have occurred. Kim Jong-un is in firm control of the Workers’ Party of Korea (WPK), the military, and the state. With Jang’s removal, he is not only reigning, but also ruling the daily operation of the North Korean system. Consolidation of power through new personal and institutional arrangements has further strengthened his grip over national governance.

Kim Jong-un’s father, Kim Jong-il, ruled the country rather arbitrarily with his own personal charisma, emphasising Songun (military-first politics) ideology — while downplaying the party-centred governance system. In contrast, Kim Jong-un has completely restored the primacy of the WPK over the military and the state. This move has been evidenced by the take-over of the military by civilian party officials: first by Choe Ryong-hae and later by Hwang Pyong-so, appointed as head of the General Political Bureau of People’s Army that oversees the entire military. Kim has also created a troika system composed of his loyalists that assists his rule. The troika includes party secretary Choe Ryong-hae, Vice Marshal Hwang Pyong-so, and Prime Minister Pak Pong-ju. Choe manages the WPK, Hwang is in charge of the military and Pak runs the cabinet. North Korea under Kim Jong-un’s leadership is likely to be stable for the time being, because, at least so far, there are no opposition blocs. Political rivals or popular dissenting groups have not yet emerged.

The North Korean economy has also performed better since Kim Jong-un’s inauguration. According to the Bank of Korea (the central bank of South Korea), North Korea’s growth rate recorded 0.8 per cent in 2011, 1.3 per cent in 2012, and 1.1 per cent in 2013. Given its chronic negative growth rates before 2011, such records are quite impressive. And outsiders who travelled to North Korea have commonly acknowledged that the overall living conditions of its people, including food and other consumer goods, have significantly improved. This can be attributed partly to an increase in exports of coal, minerals, and fishery products to China; growth in foreign earnings through manpower exports to China, Russia, and the Middle East; and a relatively good harvest over the past three years.

Equally crucial are economic reform measures. On 28 June 2012, Pyongyang introduced an incentive driven new economic management system known as the ‘June 28 measure’. The measure stipulates that those who produce more are entitled to have more. For example, a collective farm is now subdivided into several farm households each of which is composed of three or four families. Those farm households retain about 30 per cent of the crops they harvest, while 70 per cent goes to the government. The produce that is retained by farm households can now be traded in 380 farmers’ markets throughout the country. This represents a substantial change. (In the past, the government took the entire harvest and rationed portions to farmers through a public distribution system). A similar incentive system is now being applied to state firms. In this way, a more competitive market system is slowly being adopted.

Kim also instructed the cabinet to exercise unified leadership in economic management, and, at the same time, banned intervention by the party and the military — which was a major source of policy discord and confusion. In addition, the North Korean government has designated 19 special economic development zones in addition to five state-level special economic zones (such as Rajin-Sonbong and Kaesung). Such institutional reforms have played a positive role in boosting the nation’s otherwise stagnant economy.

But despite these reforms, it will be impossible for North Korea to revitalise its national economy and to improve its people’s living standards without the injection of external assistance and foreign capital. As long as Kim Jong-un adheres to the simultaneous pursuit of two overarching political goals (the ‘byungjin’ line) — economic development and nuclear weapons — it will be nearly impossible to attract foreign capital and assistance. Apart from the nuclear issue, its human rights violations and cyber hacking will further jeopardise its external relations.

Unless the North Korean leader takes decisive measures towards denuclearisation, improving of human rights and good cyber behaviour, it will be quite difficult for North Korea to break the vicious circle of external sanctions and economic hardship. Pyongyang’s rigid stance and a hostile external environment are likely to make 2015 another year of isolation and hardship.

Chung-in Moon is a professor at the Department of Political Science, Yonsei University.

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Falling fossil fuel prices create a climate change opportunity http://www.eastasiaforum.org/2015/01/27/falling-fossil-fuel-prices-create-a-climate-change-opportunity/ http://www.eastasiaforum.org/2015/01/27/falling-fossil-fuel-prices-create-a-climate-change-opportunity/#comments Mon, 26 Jan 2015 23:00:43 +0000 http://www.eastasiaforum.org/?p=45010 Author: Andrew Elek, ANU

The recent and sharp fall in fossil fuel prices, thanks to new extractive techniques, will not last forever. It is high time to think about its threats and the opportunities.

In the short term, lower fossil fuel prices are terrible news for autocrats and kleptocrats whose survival depends on the resource rents created by higher prices. On the other hand, they are great news for the world’s users of energy. At the same time, as Martin Wolf has explained the lower cost of fossil fuel threatens to reduce significantly the incentive to switch to energy sources with lower greenhouse gas emissions. That danger can be averted if the governments of major economies use the opportunity of a lull in fossil fuel prices to put a price on carbon with no short-term pain to users.

The opportunity for a bold move towards containing global warming was spotted some time ago. Prominent economists, including Kemal Derviş, Jeffrey Sachs and Larry Summers, are now making the case for shifting from a world of high net subsidies to producers and consumers of fossil fuels to one in which they pay for some of the damage their greenhouse gas emissions cause. Martin Wolf states the policy challenge succinctly: ‘Falling oil prices threaten to make economies more carbon intensive and less energy efficient. But they also give an opportunity to raise taxes on oil or at least cut wasteful subsidies to consumption permanently.’

Then he warns that while ‘any sensible government would seize’ this opportunity, ‘the supply of such governments is rather small’.

The prospects for good decisions can be improved if some governments set positive examples. Asia is most likely to show leadership in taking advantage of the opportunity created by lower fossil fuel prices. Indonesia has already taken a welcome lead. President Joko Widodo (Jokowi) promised to contain spending on a petrol subsidy before he was elected and has moved decisively to get rid of it — as soon as that could be done without raising prices at petrol pumps.

All governments can implement policies to achieve a combination of discouraging emissions, raising net revenue and still allowing some net gains to fossil fuel users. India and Malaysia have already acted to reduce fuel subsidies.

Encouraged by Indonesia’s bold decision, China and Korea may implement their planned national emissions trading systems promptly — launching them with a carbon price that provides a substantial incentive to move away from reliance on energy generated from fossil fuels.

Their leadership would help the EU to overcome political resistance to repairing their emissions trading system. The EU has so far failed to impose more than a token cost on polluters. In the foreseeable future, the US Congress will refuse to accept the excellent advice of Larry Summers. But individual US states now have an opportunity to step up their initiatives to curb emissions and their individual initiatives to set a carbon price.

Since the Cancun UNFCCC meeting on climate change, there has been a welcome trend of many economies setting worthwhile commitments to cut their own emissions and being willing to accept peer pressure to take these commitments seriously. Current unilateral commitments, however, fall well short of what is needed to contain global warming to no more than two degrees Celsius.

Right now global leaders have an opportunity to do more, at a potentially low political cost. Accelerating concerted unilateral decision-making to limit greenhouse gas emissions to meet the two-degree target has become a realistic ambition for 2015. The next meeting of G20 finance ministers could focus all major emitters of greenhouse gases on this opportunity.

If a critical mass of major emitters can set the necessary positive examples then world leaders should be able to announce a shared commitment to strong market signals at the Paris summit on climate change. Setting appropriate carbon prices on the way to a global emissions trading system is a far more realistic objective than another futile attempt to negotiate a binding international treaty.

It is a pity that the current Australian government and the US Congress will oppose a market-oriented strategy to contain climate change. But if the governments of some American states are willing to lead by example, President Obama could support presidents Xi Jinping and Jokowi to help create a consensus that leads to a successful Paris conference.

Andrew Elek is Research Associate at the Crawford School of Public Policy, the Australian National University.

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Where there’s a will there’s a way to reform http://www.eastasiaforum.org/2015/01/26/where-theres-a-will-theres-a-way-to-reform/ http://www.eastasiaforum.org/2015/01/26/where-theres-a-will-theres-a-way-to-reform/#comments Mon, 26 Jan 2015 11:00:05 +0000 http://www.eastasiaforum.org/?p=45003 Author: Zhao Changwen, DRC

The further reform of China’s state-owned enterprises has attracted a lot of attention and triggered debate since it was discussed last year at the third plenary session of the Chinese Communist Party’s 18th Central Committee (the Third Plenum). Three areas need to be addressed if reforms are to be meaningful and comprehensive: reforming the property rights system of SOEs by developing a ‘mixed ownership economy’; shifting from managing state assets to managing state capital; and promoting a modern corporate system.

At this stage the key to reforming the property rights system of SOEs under the ‘mixed ownership’ model lies in continuing the transformation from an old traditional enterprise system to the modern enterprise system. This will require a four-pronged approach.

First, corporatising the remaining wholly state-owned enterprises should be accelerated. According to the Chinese Ministry of Finance, 16 per cent of SOEs—more than 20,000— fall into this category, having not yet transformed into companies under China’s Company Law.

Second, the parent companies of the 113 central SOEs under the State-owned Assets Supervision and Administration Commission (SASAC) should be corporatised. Currently only seven of them have diversified equities, while in most the state is the exclusive investor. By contrast, the majority of these enterprises’ subordinate companies are now incorporated, and some are already publicly listed on the stock market.

Third, the state should reduce the average proportion of shares it holds in enterprises. In 2012, there were 54,000 wholly state-owned companies in China, accounting for 37 per cent of all SOEs. Their total assets reached RMB 36.7 trillion (US$5.9 trillion), or 41 per cent of the total. While a small number of industries related to national security can remain solely state-owned, most SOEs should diversify their equity structure and reduce their average percentage of state shares. This will improve governance structure by balancing the majority shareholder.

Fourth, the investment of state capital in major industries and key areas involved in national security and the economy should be redefined. More and more state capital should be distributed in the fields of public service, emerging and strategic industries, ecological protection, technological innovation and national security—instead of distributing in competitive fields. State-owned monopoly enterprises should also be encouraged to develop into mixed- ownership enterprises.

Another key area of reform is China’s current system for managing state assets, which needs to be transformed into a new system for managing state capital. It is important that policy guidelines for this new management system be developed at the national level and include the fundamental function of state capital and an operating earnings policy. The functions of capital owners and public administrators should be clearly defined. Separating the shareholder and regulatory functions of the State-owned Assets Supervision and Administration Commission will be crucial to avoid conflicts of interests. While the regulatory function can remain with the existing agencies, the investment arm must be assumed by the proposed government capital investment or operating company.

Efforts should be made to further explore the operational model of state capital to promote the idea of ‘capital management’, so as to increase the efficiency and performance of state capital. The next stage of reforms should focus on the authorised operational mechanism for state capital and establishing a number of specialised state investment and operational platforms. These proposed state capital investment and operational companies can take as examples the Temasek model in Singapore and the Central Huijin Investment model in Chinese state financial assets management which has improved corporate governance and reform in the banking sector.

While a number of state-owned capital operating companies needs to be established, some SOEs qualified in special industries could be reorganised into state capital investment companies. These two platforms could act as a firewall between the state capital owner and the enterprises. This would mean that SOEs had more room for development and ultimately improve the efficiency and performance of state capital.

The Third Plenum decision emphasised the importance of ‘promoting a modern corporate system for SOEs’. The question is: how to achieve that under the principle of ‘clearly established ownership, well-defined rights and responsibilities, separation of enterprise from administration, and scientific management’?

China’s existing SOEs can be classified into at least two categories: non-profit enterprises with policy intention and strategic objectives, and those which operate in fully competitive fields. According to the instructions of the third plenary session, China’s next stage of development will witness more input and support for the former. On the other hand, the latter will have to compete with non-SOEs on an equal footing under the principle of full competition for resources, markets and services.

Reform measures will differ across monopoly industries depending on their nature. Administrative monopolies—those that, by the grace of government, have had monopoly status conferred upon them—must be broken up. Reforms of natural monopoly industries will be aimed at separating enterprise from administration, government functions in managing public business, and state-owned capital management. For SOEs in competitive fields, the assessment and evaluation systems should be developed based entirely on market economy standards.

But even with all of this, traditional regulation—with the structure of SASAC—can only produce a traditional corporate system. Establishing a modern corporate system requires a functional, arms-length regulatory system.

Narrowing the focus, the ‘enterprise system’ at the micro level should also be improved. The first step is to reform and improve the current senior manager selection mechanisms, the salary system, and assessment and evaluation mechanisms—all of which are essential to a modern corporate system.

For example, in most cases, when selecting and recruiting senior managers for SOEs, the mechanism of party-cadre administrators is usually combined with the market mechanism. This is a special recruiting system. Unlike the professional managers that headhunting companies seek in the market, the senior managers of SOEs assume a dual identity: enterprise runner and leading cadre at a certain level.

This has both pros and cons. The upside is that these managers, as leading cadres, may have a stronger sense of responsibility and higher professional standards; the downside is the difficulty in efficiently combining these two systems and the effort required to improve them. The selection and recruitment of leading cadres also encounters the ‘revolving door’ problem. This occurs when the role exchange between government officials and enterprise managers introduces enterprise management experience into government departments and brings government management experience into enterprise operation—another pros-and-cons situation. The key problem lies in whether the departments concerned are willing to delegate powers.

The Third Plenum set out new tasks to deepen the reform of SOEs and made clear the key areas where change is needed. Though hardships are inevitable, as long as the reformers march in the right direction, with clear targets and appropriate methods, breakthroughs will be achieved. Where there is a will, there is a way.

Zhao Changwen is the General Director of the Department of Industrial Economy, part of the Development Research Center at the State Council of the People’s Republic of China.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The state and economic enterprise’.

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What will Abe deliver now? http://www.eastasiaforum.org/2015/01/26/what-will-abe-deliver-now/ http://www.eastasiaforum.org/2015/01/26/what-will-abe-deliver-now/#comments Mon, 26 Jan 2015 01:00:42 +0000 http://www.eastasiaforum.org/?p=44998 Author: Peter Drysdale, East Asia Forum

After a decisive election victory on 14 December, Japanese Prime Minister Shinzo Abe would seem to be in an extremely sweet spot to deliver on both his main domestic and international policy agendas.

Japan's Prime Minister Shinzo Abe bows after being re-elected, as lawmakers applaud in the Lower House of the Parliament in Tokyo, Japan, 24 December 2014. (Photo: AAP).

While the Liberal Democratic Party (LDP) did not increase its majority in the Diet, the governing LDP-Komeito coalition maintained its two-thirds majority needed to get major measures through both houses of parliament. The election which nobody wanted to have achieved just what Abe wanted it to: ending up pretty well with what he virtually had status quo ante — a gain of just one seat for the coalition (326 as opposed to 325 in 2012), a marginal loss for the LDP (291 seats in 2014 compared to 294 in 2012) and a small gain for the Komeito, the LDP’s coalition partner (35 seats as opposed to 31 in 2012). In rallying to Komeito, the electorate appears to have put a moderate liberal brake on the shift to the right. The other big winner from the election, the Japan Communist Party (JCP), which more than doubled its seat tally to 21 in the lower house, now has 32 members in both houses of parliament and won its first single member constituency (in Okinawa) this time round.

Abe’s approval ratings, which had been on a downward slide, have levelled out since the election, though this is likely to be a temporary development unless he’s able to reverse the underlying corrosion of confidence in his ability to deliver on his policy agenda. Abe had a massive 70 per cent approval rate at the beginning of his term in 2012, largely founded on the promise of delivering a way out of Japan’s economic stagnation via ‘Abenomics’. The intervening two years saw his approval rating steadily drop to below 50 per cent with the Yomiuri newspaper poll just before the election registering a 42 per cent approval rating, a mere 3 percentage points above his disapproval rating of 39 per cent.

With confidence beginning to fracture in the delivery of Abe’s economic reform program and uncertainties about where Japan is being led politically — and the normal election term two years out — Abe’s hard political calculation was that it was better to start afresh and try again while you were still ahead than to hope for a turnaround in the next two years. This assessment proved absolutely sound. The Japanese electorate — or those who thought it worthwhile coming out to vote —had nowhere to go except stick with the ruling coalition.

While Abe has his substantial electoral victory, what is far less clear is what his mandate is and whether what those at home and those abroad hope of his administration can or will be delivered.

If Abe wasn’t exactly wowing the Japanese electorate with confidence in his ability to deliver his agenda last time round, has anything changed now the election is done and dusted? There are good signs and there are signs that are not so good.

If there were ever a time when a prime minister should have the clout to override special interests, one might have thought, this was, and still is, it. But so far Abe is showing little inclination to do so beyond paying the idea lip service. It’s not clear that a confirmatory victory can change things, and in their gut, experienced analysts think it’s unlikely. Economic figures continue to fall short of their targets and nothing less than a reversal in the outlook for recovery will lift the structural fall in Abe’s approval ratings over time. This will make him a nervous politician, exposed to more criticism from within and liable to resort to the old political games.

Abe’s interaction with President Obama at the Brisbane G20 summit (just before the elections) was defensive on US ambitions for a bold conclusion to the emblematic Trans-Pacific Partnership (TPP) negotiations. So, despite the promise of a shift in the politics on the US side, US-Japan negotiations could still flounder.

The TPP also plays directly into the challenge of building confidence in the Japan–US alliance relationship. As Nobumasa Akiyama argues in this week’s lead, there is the problem of dealing with the relocation of the US Marine Corps Futenma Air Base in Okinawa, resolution of which has not been assisted by the election outcome. As Akiyama explains, the ‘LDP was defeated in all four districts in Okinawa because of the issue of the base relocation. The frustration among the people in Okinawa is mounting. Abe must devote himself to closing the widening gap between Tokyo and Okinawa’. Failing to address the issue will undermine the confidence of Abe’s commitment to the alliance.

The atmospherics of the alliance relationship could also be affected by the way in which Abe deals with the 70th anniversary of the end of the Pacific War. Japanese diplomatic efforts in the past weeks to browbeat US publishers on textbook references to the ‘comfort women’, the Sea of Japan (East Sea) and even the Nanjing Massacre don’t bode well for the handling of this highly sensitive issue. If Abe is to reconcile and balance the domestic pressure from his nationalist political supporters with international expectations, as Akiyama says, he will need to expend political capital. But it should be politically easier for Abe, whose sympathy for the nationalist cause is well-known, to do this than for most other Japanese leaders — assuming, that is, that his political base would not desert him.

Friends and allies of Japan, like Australia and the United States, have put big bets on Abe playing their game, economically and politically. Whether these bets pay off will depend very much on whether the tactical politics of securing the second term presidency of his party (in September this year) and eventually the chairmanship of its Constitutional Research Committee (in 2018) don’t overwhelm the more important strategic policy decisions that now demand his action.

Peter Drysdale is Editor of the East Asia Forum.

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What now for Abe third time round http://www.eastasiaforum.org/2015/01/25/what-now-for-abe-third-time-round/ http://www.eastasiaforum.org/2015/01/25/what-now-for-abe-third-time-round/#comments Sun, 25 Jan 2015 11:00:09 +0000 http://www.eastasiaforum.org/?p=44994 Author: Nobumasa Akiyama, Hitotsubashi University

Shinzo Abe’s second term as prime minister of Japan, unlike his first, was a modest success through till 2014. But he will have to bring real and tangible outcomes for Japan and the Japanese economy if it is to succeed the third time round.

Japanese Prime Minister Shinzo Abe delivers a speech at a New Year party of business group Japan Association of New Economy, 22 January 2015. (Photo: AAP).

After Abe’s snap election on 14 December 2014, the rising star of the Liberal Democratic Party (LDP), Shinjiro Koizumi, accurately characterised the election as ‘the election with no enthusiasm, an overwhelming victory with no fanaticism’. Voter turnout was a record low at 52.8 per cent. Voters had no real choice in electing a new government, or in selecting alternative economic policy. The Democratic Party of Japan (DPJ) failed to present itself as a responsible, reliable alternative to the LDP. From the beginning, the election was destined to be a vote of confidence in Abe.

The election was a good result for Abe. But it still left a bitter taste. The good news was that the government coalition of the LDP and the Komeito kept its two-thirds majority in the lower house, which means that it will continue to control the Diet. Abe is also the first Japanese prime minister to win two landslide victories in a row since the introduction of electoral law reforms in 1994.

The bad news for Abe was the retreat of the nationalist cluster and the rise of the liberals. The LDP lost four seats, while the Komeito, its more liberal coalition partner, gained four. The LDP will be dependent on the Komeito’s cooperation in 2015 and 2016, when there will be nationwide local elections and an upper house election respectively. Behind the landslide victory of the coalition government, the nationalist Party for Future Generations (Jisedai no to) was almost wiped out. Meanwhile, the Communist Party was the greatest beneficiary, increasing the number of its seats from 8 to 21. The DPJ, despite leader Banri Kaieda losing his seat, also increased its seat count by 11.

Abe’s second term revealed amazing pragmatism in comparison with his first (2006–2007). He adopted two faces: a nationalist one at home (even more so on social networking services) and an internationalist one abroad, and with some success. At home, Abe visited Yasukuni Shrine and showed his unwillingness to compromise with China and South Korea over history issues (although he insisted that the door for dialogue was always open). Abe also introduced the Act on the Protection of Specially Designated Secrets. As an internationalist, Abe 2.0 raised expectations for Japan’s economic recovery on the economic policy front. He met 121 state leaders around the world, a total of 246 times, and visited 50 countries, making various commitments to economic cooperation. He also advocated concluding the Trans-Pacific Partnership (TPP), strengthening the US–Japan alliance, and seeking a greater role in regional security. He impressed upon the world that Japan was back, and that he himself was back. Then, without compromise, Abe eventually met with the leaders of China and South Korea — even though these meetings were more symbolic than substantial.

At the same time, Abe 2.0 was modest, cautiously getting things moving. He avoided contentious issues which would have required him to mobilise extensive political capital. For example, Abe quickly took a fall-back position on the amendment of the Constitution when he realised that it would not garner public support. Instead he moved towards reinterpreting the constitution to allow collective self-defence as a relatively minor change. He was also cautious in handling the restarting of Japan’s nuclear power plants, which were shut down after the Fukushima disaster. The government’s position on nuclear energy is to maintain nuclear energy as base-load energy. But Abe did not push this, and did not mobilise political capital to accelerate the process.

So what is the Abe cabinet likely to deliver in 2015?

Abenomics and Futenma Marine Corps Air Base relocation pose serious challenges to Abe this year. These issues will require him to take more political risks and mobilise more political capital. This prime ministership needs the change to anew mode third time round and it will have to deliver tangible results beyond past expectation: consolidating economic growth and reaffirming Japan’s commitment to the US alliance and international security. Abe will have to revise security guidelines and enact national security laws for collective self-defence.

Abe must find a solution to the Futenma problem in Okinawa. Abe’s LDP was defeated in all four districts in Okinawa because of the issue of the base relocation. The frustration among the people in Okinawa is mounting. Abe must devote himself to closing the widening gap between Tokyo and Okinawa. In the meantime, failing to address the issue may undermine the confidence of Abe’s commitment to the alliance.

The 70th anniversary of the end of the Second World War will also pose a big challenge for Abe in 2015. It will require him to reconcile and balance strong domestic pressures from his nationalist political supporters with international expectations. The anniversary statement will require much from Abe: both in terms of his ability to handle the issue with care and balance and also in terms of expending his political capital.

In 2015 Abe’s success will be measured by his actions, far more so than his words and far more so than in the past. Actions will be the measure of Abe third term success.

Nobumasa Akiyama is Professor at the Graduate Law School and the School of International and Public Policy, Hitotsubashi University.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

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Asia’s growing ties with Latin America http://www.eastasiaforum.org/2015/01/24/asias-growing-ties-with-latin-america/ http://www.eastasiaforum.org/2015/01/24/asias-growing-ties-with-latin-america/#comments Sat, 24 Jan 2015 11:00:31 +0000 http://www.eastasiaforum.org/?p=44987 Author: Ganeshan Wignaraja, ADB Institute

Amid a recovering world economy beset by risks, the outlook for Asia–Latin America economic ties seems bright. Asia needs commodities for its dynamic global factory and Latin America has abundant natural resources. Asia needs food for its large population and Latin America has fertile agricultural land.

Trade officials of South Korea and Chile hold consultations on upgrading their free trade agreement in a video conference. (Photo: AAP)

Latin America also has an expanding regional market for Asian industrial goods and FDI. Technology transfer and marketing connections from Asian multinationals can assist Latin American firms joining global value chains and can promote internationally competitive industrialisation. Small and medium enterprises in both regions can also benefit as suppliers, subcontractors and service providers to multinationals.

Trade between the two regions has more than doubled over the past decade, reaching a historic high of over US$500 billion dollars in 2014. This figure is expected to grow to at least $750 billion by 2020.

Growth in interregional trade was visible during the global financial crisis of 2008-09, when the relationship provided a safe haven from declining markets in industrial economies. Another factor causing growth was buoyant demand for Latin American commodities from China, India and the ASEAN economies. Advances in information and communication technology, better logistics and falling trade barriers have also fostered economic ties between Asia and Latin America.

Before the 1990s there was little trade between the two regions. Latin America, whose goods were destined to the large North American market, used to view Asia as a poor region, riddled with economic crises and entailing high risks for business. Transport connections between these geographically remote regions were poor, trade barriers were high and few cultural, diplomatic and business ties existed. Also, Latin Americans largely speak Spanish or Portuguese, which most Asians do not.

One of the new drivers for business confidence is the spread of free trade agreements (FTAs) between the two regions. These agreements enhance market access, rules-based trade and business confidence. In 2004, only two FTAs (South Korea–Chile and Taiwan–Peru) existed. This figure increased to 9 in 2007 and to 22 in 2013. At least 25 FTAs are expected by 2020.

Taiwan is Asia’s most proactive Latin America trade pact negotiator, having concluded five FTAs. Singapore has signed four such deals with Latin American nations, and China, Japan and South Korea each have three FTAs. Meanwhile, Chile has eight FTAs with Asian economies and Peru has five. Japan’s FTAs with Peru and Mexico are also very important. The Japan–Mexico FTA provides access to the US via the North American Free Trade Agreement.

But much still needs to be done before Asia and Latin America can reach their full trade potential. The two regions have to increase the number of economies participating in free trade schemes like the Trans-Pacific Partnership. Their economic ties need to cover more sectors, such as services. Cross-regional policy cooperation needs to be enhanced, and structural reforms need to be accelerated.

APEC is a useful institution for creating business confidence. But few Latin American countries are in APEC. Instead, a newer institution, the Forum of East Asia Latin American Cooperation, has agreed to set up a business body to promote cooperation in trade and investment.

Latin America’s giant, Brazil, must strengthen ties with Asia. But Brazil only has one trade agreement with Asia and concerns have been expressed about its protectionist tendencies. Another key player could be Argentina, if it can untangle itself from financial crisis and escape going into default.

Mexico, Peru, Chile and Columbia have formed the Pacific Alliance and are attempting to become more market-friendly. Chile in particular has undertaken many reforms and has several FTAs with Asia. While the Pacific Alliance members proactively pursuing reform, with an interest in doing business with Asia, they are not as open as some outward-oriented Asian nations like Singapore.

In contrast to growing trade between Asia and Latin America, FDI has remained lacklustre during the past decade. Annual average greenfield investment flows from Asia to Latin America were $14.1 billion while those from Latin American to Asia were only $1.2 billion. Geographical remoteness, cultural differences and the business climate in Latin America partly explain the low levels of FDI.

Cumbersome domestic regulations are a problem. It takes relatively more time for multinationals to start a business in Latin America than in Asia, and it is more difficult to fire workers when adjustments are needed. Furthermore, Latin American workers are perceived to have lower productivity and poorer work ethic than Asian workers. These issues discourage Asian FDI flows into Latin America.

Governments across both regions should emphasise the growth potential for Asia–Latin American trade. There should be concerted efforts to open up markets, cut redundant regulations, boost education and promote cooperation in trade and investment between the two regions.

Ganeshan Wignaraja is Director of Research at the Asian Development Bank Institute, Tokyo. He is co-author of the recently published book New Frontiers in Asia-Latin America Integration: Trade Facilitation, Production Networks and FTAs.

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Unregulated cyberspace a cause for concern http://www.eastasiaforum.org/2015/01/24/unregulated-cyberspace-a-cause-for-concern/ http://www.eastasiaforum.org/2015/01/24/unregulated-cyberspace-a-cause-for-concern/#comments Fri, 23 Jan 2015 23:00:00 +0000 http://www.eastasiaforum.org/?p=44984 Author: Zach Montague, Delma Institute

China and the US are entering a new and troubling phase of cybersecurity. The recent crash of North Korea’s internet network reveals just how inexperienced world leaders are in dealing with cyber conflict. It shows how one reckless act in the cyber realm can quickly devolve into a bigger international crisis. The confusion and ambiguity surrounding this sequence of events has left the US and China entangled in a high profile cybersecurity standoff.

The FBI director, James B. Comey, revealed new details Wednesday, Jan. 7, 2015, about the stunning cyberattack against Sony Pictures Entertainment Inc., part of the Obama administration's effort to challenge persistent skepticism about whether North Korea's government was responsible for the brazen hacking. (Photo: AAP)

An American comedy film, The Interview, allegedly provoked North Korea into hacking the Sony Entertainment Network, drawing attention from the FBI, the UN Security Council, the White House, and top officials in South Korea and Japan. Soon after, an FBI report formally implicated North Korea in the attack. While President Obama promised to ‘respond proportionally’, North Korea’s entire internet network suddenly went offline.

The FBI has stood by its accusation that Pyongyang was responsible but few outside experts are convinced. There is growing speculation that North Korea’s internet blackout was caused by a sophisticated cyber attack engineered by the US.

As leading experts on cybersecurity have pointed out, one of the biggest challenges with cyber attacks is attribution. Both state and non-state actors can launch attacks with intricately disguised origins, which can introduce uncertainty into the response process. It is hard and sometimes even impossible to respond appropriately when a major cyber attack takes place. The inherent uncertainty in US–China relations already makes for volatility. But with some of the world’s most sophisticated cyber war capabilities, conflict could escalate quickly over faulty intelligence.

The cause of North Korea’s internet outage may never be known. But what will matter more in the long term is what policymakers believe happened. This will inform future decisions regarding cybersecurity.

If Chinese and North Korean leaders believe that the US brought down an entire country’s internet network in response to an attack on one of its corporations, it will carry serious implications for international relations. The US has blamed Chinese and Russian hackers for targeting American companies on several occasions before. And the North Korean crash could be taken as a warning that the US is more willing to retaliate against attacks on private organisations.

But if it appears that the US retaliated impulsively based on false information, or worse yet, used the Sony hack as a pretext to showcase its cyber capabilities, this is guaranteed to put foreign leaders on edge.

This incident has dragged the US and China toward a potentially serious political standoff and rekindled North Korea and China’s historical partnership. Since North Korea’s internet is wired through China, the possibility of a US cyber strike may have felt too close for comfort for Beijing. The Chinese government has even started censoring coverage of the story and announced its own independent investigation challenging the FBI report. Meanwhile, a minor breach in the computer network of a South Korean nuclear plant caused brief panic that North Korea might actually be retaliating with a more serious act of cyber terrorism against a US ally, putting the entire region on high alert.

This is not the first time the US and China have taken different sides over a hacking incident. Both countries have been exposed conducting advanced cyber espionage against the other. And they have failed to reach an agreement that would define and limit cyber warfare. But the recent events are a remarkable reminder of how quickly cyber confrontations can escalate and the hugely destabilising effect this could have on US–China relations in the future.

In the absence of an international treaty regulating cyber war, norms and standards for its use are developing through precedent. When deciding what is fair game, policymakers will naturally consider what others have done — or appear to have done — in similar situations.

New precedents have been established after the attack on Sony and the apparent follow-up attack on North Korea’s internet network. Conventional wisdom has been revised on what the US will tolerate and how it will respond to an attack it deems unconscionable.

Instead of using this experience as a chance to open a dialogue, leaders have been secretive and disingenuous about what happened, leaving greater uncertainty about how future incidents will play out, what targets (if any) are off limits, and how state-sanctioned hacking can be distinguished from third party attacks. The Sony hack and North Korea internet crash should be scrutinised as an important study in conflict escalation. It should be the starting point for much-needed negotiations on controlling the use of hacking as a weapon in international disputes.

Zach Montague is a researcher at the Delma Institute, specialising in China and East Asian affairs. Follow him on Twitter @zjmontague.

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Why the Aussie dollar needs to devalue further http://www.eastasiaforum.org/2015/01/23/why-the-aussie-dollar-needs-to-devalue-further/ http://www.eastasiaforum.org/2015/01/23/why-the-aussie-dollar-needs-to-devalue-further/#comments Fri, 23 Jan 2015 11:00:13 +0000 http://www.eastasiaforum.org/?p=44980 Author: Janine Dixon, Victoria University

The Australian dollar depreciated significantly in the second half of 2014, losing around 14 per cent of its value against the US dollar and almost as much against the Chinese renminbi. But the Australian dollar needs to devalue by a further 15 per cent in the coming years if the Australian economy is to continue operating at close to full employment.People are reflected in the window as they walk past the Australian Securities Exchange (ASX) boards showing the Australian dollar has fallen to a four-and-a-half-year low after the release of very strong US employment growth figures, in Sydney on December 8, 2014. (Photo: AAP)

Glenn Stevens, governor of Australia’s central bank, has frequently commented on the need for the Australian dollar to devalue. In a recent interview he remarked that ‘a year ago I said probably 85 US cents was better than 95. And if I had to pick a figure now, I would say probably 75 is better than 85’.

Modelling conducted by Victoria University’s Centre of Policy Studies concurs with Stevens’ view, finding that over a period of several years the Australian dollar will need to fall to around 70 US cents.

After trading above 90 US cents for most of 2014, the dollar’s significant depreciation in the last four months has alleviated fears that it would remain stubbornly high. By the end of 2014, it had fallen to below 82 US cents.

Commodity prices on world markets are falling, driving the need for devaluation. Lower prices for important Australian exports such as iron ore and coal will lead to an expected fall in the terms of trade of around 20 per cent from its mid-2014 level. The timing of this fall is difficult to predict. The federal government’s latest outlook suggests that it will be achieved almost entirely by mid-2016, with the bulk of the fall occurring by the middle of 2015. Earlier projections had anticipated a slower fall.

Either way, real devaluation will be a necessary ingredient for an orderly adjustment to the end of the mining boom.

Why does the dollar ‘need’ to fall, and by how much? We can quantify this ‘need’ for devaluation by considering, with the aid of an economic model, the consequences of a persistently high exchange rate. Modelling at CoPS suggests that if the dollar was overvalued by 10 per cent in two years’ time the unemployment rate could climb to over 12 per cent, up from 6.3 per cent in November 2014.

This worrying result is based on several assumptions. Most notably, it supposes that the overvalued nominal exchange rate would not be compensated by real devaluation (through internal price adjustment). Consistent with recent history, the modelling assumes weak but positive growth in nominal wages of above zero but less than inflation— that is, a fall in real wages. With positive (albeit weak) growth in nominal wages and an overvalued currency, Australia’s competitiveness would suffer. GDP growth would stall and real per capita GNP would go backwards by 5 per cent over two years.

Another important assumption is that multifactor productivity grows slowly (after taking into account capital coming on stream from various major mining projects). Again, this is consistent with recent history in both Australia and other developed economies. Some observers may be more optimistic about productivity, but the modelling shows that higher productivity won’t help employment in the presence of an overvalued exchange rate.

Higher productivity coupled with wage restraint would certainly improve the GDP outcome. But productivity growth is not the antidote for an overvalued exchange rate. The balance of trade would be strongly constrained by the overvalued exchange rate, limiting the opportunities for GDP to grow more strongly. Demand would not increase sufficiently to absorb all of the extra GDP that could have been produced because of higher productivity. As a result, the unemployment rate would still increase to at least 12 per cent.

Throughout 2014, Australia’s unemployment rate crept upwards. At the same time, growth in real wages was non-existent, illustrating that with a persistently high exchange rate, some internal adjustment is possible.

But there is more to come, and internal adjustment alone will not be sufficient to maintain Australia’s competitiveness. World commodity prices are falling, but they are still at historically high levels. The dollar has passed Stevens’ first milestone of 85 US cents, but it will need to fall to 75 and beyond as Australia’s decade-long terms of trade bonanza draws to a close.

Janine Dixon is a Senior Research Fellow at the Centre of Policy Studies, Victoria University.

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Why Japan should follow Germany’s lead on war history http://www.eastasiaforum.org/2015/01/23/why-japan-should-follow-germanys-lead-on-war-history/ http://www.eastasiaforum.org/2015/01/23/why-japan-should-follow-germanys-lead-on-war-history/#comments Thu, 22 Jan 2015 23:00:53 +0000 http://www.eastasiaforum.org/?p=44977 Author: Jean-Pierre Lehmann, IMD

This year marks the 70th anniversary of the end of World War II in the Pacific. How does Japan and Germany’s postwar behaviour compare?

The ceremonies commemorating the 70th anniversary of the Normandy landings (D-Day) united not only the leaders of the allied powers, but also German Chancellor Angela Merkel. During the ceremonies German veterans embraced their French and British counterparts.

A group of Japanese lawmakers follow a Shinto priest to pay respect for the war dead at Yasukuni Shrine during an annual autumn festival in Tokyo, Friday, Oct. 17, 2014. The shrine enshrines war criminals, including wartime leader Hideki Tojo, among the 2.5 million war dead. (Photo: AAP)

The D-Day anniversary ceremonies demonstrated how peace reigns in Europe. The prospect of Germany, the United Kingdom and France (or other West European nations) fighting each other again is implausible.

I asked the class I was teaching at Hong Kong University, which included Chinese (from mainland China, Taiwan and Hong Kong) and South Koreans, but unfortunately no Japanese, when they thought the end of the war in the Pacific might be celebrated with ceremonies including the heads of government of China, South Korea and Japan. My students unanimously opined that it was unlikely to happen in their lifetimes. Or, perhaps, one quipped half-jokingly, only after another war.

There are many reasons why history post-1945 has evolved so differently in West Europe and East Asia. Ian Buruma’s excellent 1994 publication Wages of Guilt: Memories of War in Germany and in Japan provides a compelling framework and incisive analysis. One of the most recent incisive comments made on Germany, which stands in blaring contrast with the situation in Japan, was made in a book, Reluctant Meister: How Germany’s Past is Shaping its European Future, written by Stephen Green (the former CEO of HSBC) and reviewed by Quentin Peel in the Financial Times. For Green, Peel writes, Germany’s greatest achievement has been in coming to terms with its history: ‘for all its imperfections, this atonement has been more thoroughgoing than in most other countries where human evil has been rampant within living memory’.

While Japan has made numerous and sincere official apologies, most prominently the Murayama Statement in 1995, this is missing the point. It is the drowning out of these liberal voices by right-wing revisionists coupled with the failure of the Japanese establishment to truly come to terms with its history — and indeed the propensity to aggravate the wounds with outrageous remarks and visits to the Yasukuni Shrine — that makes Japanese wartime reflection appear insincere.

Among the outrageous remarks, some of the most egregious remain those of former Tokyo governor Shintaro Ishihara who denied that the Nanjing massacre occurred. Were the mayor of Berlin to make a comparable statement in respect to, say, Auschwitz, Germans in their thousands would be out in the streets protesting and demanding his immediate resignation.

It was not always like this in Japan. In the mid to late 1960s, trying to come to terms with why the Japanese Imperial Army had been so barbarous during World War II was a major theme in Japanese intellectual and literary circles. Scholars like Masao Maruyama, Shuichi Kato and Saburo Ienaga and contemporary novelists, including Shohei Ooka, Shusaku Endo, Jiro Osaragi and others, vividly evoked this theme in their work in a way that is comparable to Günther Grass and others in Germany.

But, by the 1980s, these fires of historical enquiry seem to have been extinguished. The revisionist right hijacked history. The result is eerily displayed in the museum adjoining the Yasukuni Shrine, the Yūshūkan War Museum.

This is not some fringe issue. According to Ernils Larsson, the Shinseiren (Shinto Association of Spiritual Leadership), counts nearly 300 Diet members as supporters, including 16 of the 19 current Cabinet members. A number of these Shinseiren supporters in the Diet are also members of the Association of Diet Members for Worshipping at Yasukuni Shrine Together. Can you imagine an ‘Association of Members of the Bundestag for Venerating Nazi Soldiers’?

As the scholar and diplomat Tatsuo Arima pointed out in The Failure of Freedom there were liberal internationalists in Japan in the 1930s (as in Germany), but they were cowed into submission by the obscurantist forces of emperor-worship totalitarianism.

In the contemporary context it has to be stressed that there are many Japanese thought leaders and individual citizens who are critical of Japan’s role and committed atrocities during the war. Once again, however, their voices tend to be muted by the cacophony of the extreme right and the compliance of the mainstream parties.

Today, no amount of pressure from outside, whether from China, South Korea, Singapore or even the United States, is likely to transform Japan into coming to terms with history. It has to come from within. As in the title of Benedikt Buechel’s article, ‘liberal Japan needs to drown out revisionist voices’.

That is the only way to be sure that the commemoration of a genuine peace between Japan and its neighbours will occur before, rather than after, the next war.

Jean-Pierre Lehmann is Emeritus Professor of International Political Economy at IMD, Switzerland, Founder of The Evian Group, and visiting professor at Hong Kong University and NIIT University in India.

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Bright signs on the horizon for the Philippines http://www.eastasiaforum.org/2015/01/22/bright-signs-on-the-horizon-for-the-philippines/ http://www.eastasiaforum.org/2015/01/22/bright-signs-on-the-horizon-for-the-philippines/#comments Thu, 22 Jan 2015 11:00:12 +0000 http://www.eastasiaforum.org/?p=44966 Author: Cesar Virata, Manila

The economy of the Philippines hit some rough patches in 2014. The outlook for 2015, on the other hand, is fairly strong.

GDP growth slowed down to about 6 per cent. This was because government spending — in particular, infrastructure spending — did not meet its targets. Part of the reason for this was that legal challenges slowed down some spending programs — including a ruling by the Supreme Court that the accelerated spending violated the constitution. Rehabilitation and reconstruction after Typhoon Yolanda was slow because it took time to determine safety zones that would avoid storm surges and flooding along coastal and lowland areas. And in the high-lying areas, there were issues of ownership and the danger of landslides that had to be considered. In addition, the agricultural sector was greatly affected by a strong typhoon.

The growth of private construction for different real estate projects, the continued expansion of the business processing outsourcing (BPO) sector, the steady inflow of remittances, the surge of portfolio investments due to the credit upgrade and increasing investments in Export Processing Zones made up for the deficiency in government expenditure. But FDI levels remain below what has been witnessed elsewhere in the ASEAN region.

The trade deficit is currently adequately covered by service remittances and net investment inflows, resulting in a positive current account balance. Lower oil prices will also help reduce the trade deficit.

In 2015 trade will be the main element of the Philippines’ economic integration with ASEAN. The Philippines is on track to ensure that 87 per cent of its traded goods are compliant with the ASEAN Free Trade Area, as well as other trade agreements. But the necessary legislation to effect movement of services and people is still lagging behind.

The coming year will likely see higher GDP growth — probably at least 6.5 per cent, and between 7 per cent and 8 per cent according to government projections. The public-private partnership projects that have stalled will begin to be implemented, so both government outlays and private construction will increase substantially.

On the other hand, the Central Bank — which sped up the implementation of Basel III standards to 1 January 2014 — also recently issued a cautionary regulation on bank financing of real estate developments, which could slow projects down. This could affect the chain of industries and services directly associated with real property development. Additional capital requirements for the liquidity buffer and for the significant banks in the system will start to be implemented on a staggered basis. Insurance companies will also be required to raise capital. A rapid increase in capital requirements in a low interest rate environment and volatile interest movement will bring down the return on equity.

Another potential dampener on growth is the lack of electric power reserves during the dry season. Since hydroelectric dams cannot operate during the dry season, there could be interruptions of electricity during peak daytime demand.

But the BPO industry will continue to expand and foreign investment in special economic zones, which include tourism and medical services. It will remain attractive because of the availability of English-speaking workers and managers, and because of the good governance of such zones. Infrastructure investments by the government in roads, ports and airports will enhance the competitiveness of industries that rely on them.

Continuing discussions in Congress about rationalising tax incentives, competition policy, additional taxes on mining and changes in tax rulings have added to the policy uncertainty. But at least some of these matters could be resolved during 2015 since the following year will see a general election and Congress will adjourn early. The legislative agenda contained resolutions favouring the relaxation of constitutional restrictions on foreign ownership. A law was passed recently allowing foreign banks to own 100 per cent of domestic banks and establish their own branches.

Stock and bond exchanges will be unified early in 2015. Over the term of the Aquino administration, domestic savings have been in excess of investment by about 5 per cent of GDP. There is latitude for both equity capital raising and long term bond issuance by banks, insurance companies, and those involved in infrastructure and other projects — even if the government’s borrowing program relies more on domestic resources.

Turning to domestic politics, there has been a great effort by the government to enact the Bangsamoro law, which would replace the current law on the Autonomous Region for Muslim Mindanao. Before this proposed legislation can take effect, a plebiscite in the region will be conducted. There are likely to be constitutional challenges to the Bangsamoro Basic Law which will make the transition period longer. Hopefully this negotiated legislation will bring peace and political and economic development in Mindanao.

But all in all, economic prospects for the Philippines as a whole in 2015 look relatively good, with growth likely to exceed the pace of 2014.

Cesar Virata is Principal of C. Virata & Associates and is a former Prime Minister of the Philippines.

This article is part of an EAF special feature series on 2014 in review and the year ahead.

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