Lowy Institute

This column will appear fortnightly on The Interpreter. 

National security 

If one thing is clear from the foreign investment debate after the rejection of Chinese bids for NSW power distributor Ausgrid it is that this issue can’t be treated like an 'on water matter'. That’s the phrase Treasurer Scott Morrison popularised in his old job as immigration minister when refusing to talk about the operational details of turning back of asylum seeker boats to Indonesia.  The sheer weight of money made from China by some of the Australia’s richest people from mining to property means Morrison’s old pull down the shutters approach can’t apply to the sudden sea change in what Chinese investment is now acceptable. But more significantly, two of the country’s top security strategists and protagonists in the China debate are both calling for more openness about the reasons for national security-based foreign investment decisions. Read the Australian Security Policy Institute’s Peter Jennings here and listen to Australian National University’s Hugh White on Radio National Saturday Extra here. When these security insiders want the public brought more into the discussion, Morrison’s comment at his press conference that he was the only person present cleared to know what was going on looks out of the money.

Refugees

 And on the subject of on water matters, 12 August may well be the day the ground shifted under 15 years of divisive and deadly debate about asylum seeker boats. That was the day an unusually introspective former prime minister Tony Abbott conceded in a speech he had been wrong to destroy the then Labor government’s proposed Malaysia refugee swap deal when he was the opposition leader. But on the same day in a joint op-ed piece four of the country’s highest profile advocates of the refugee cause – Frank Brennan, Tim Costello, Robert Manne, and John Menadue (again on his own blog separately here) – supported  the controversial, John Howard-era policy of turning back boats to Indonesia. The plan to swap asylum seekers for official refugees from Malaysia arose from the Houston report which, while dated, is still a good place to start charting a way through this mess. Abbott's mea culpa on the swap deal just as the Brennan group tells the liberal left the Australian community wants the security of turnbacks has paved the way for a new approach. That would see more regional cooperation, the resettlement in Australia of some people from the troubled and costly Manus Island centre in Papua New Guinea and less political sparring over firm action to deter the people traffickers.

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Going abroad

Despite Chinese investment into Australia grabbing all the headlines, there has been a flood of new research on that other sort of foreign money – outbound investment.  This is timely given how returns from offshore investment may play a greater role in national wealth given slower growth at home. It also raises questions about data collection and aid priorities under commercial diplomacy. The latest findings from the third International Business Survey run by Austrade, the Export Council of Australia and the Export Finance Insurance Corporation shows the most popular markets for international business are the US, China, New Zealand and the UK. But the countries with the best growth potential are China, US, India, UK and Indonesia. This survey is now a bountiful source of information about how Australian business sees the world. It follows this other very useful Austrade work which goes beyond Australian Bureau of Statistics numbers on offshore investment by looking at the results of 2000 companies. And rounding this out Ian Satchwell at the UWA/Curtin Centre for Exploration Targeting says in this study that government data doesn’t properly capture the scale of Australian mining interests abroad particularly in the equipment, technology and services area. He says these METS businesses are more resilient amid the commodities bust. And he says better understanding of this mining company global reach would help inform commercial diplomacy activity in countries needing help with sustainable mining and better governance.

Bougainville

Resource management now looks set to be the key to a peaceful self-determination vote in this province which has been estranged from PNG over three decades. Rio Tinto and PNG prime minister Peter O’Neill have injected new tension into the vote with Rio exiting the Panguna copper mine and O’Neill possibly undermining the prospect of it being revived under a new government. Australia will inevitably carry the can for a failed state if Bougainville tries to break away but can’t reap the benefits of its most valuable resource.  Dan Flitton reports Bougainville rebels are already demanding Australia pay the bill for remediation work for which Rio is refusing to take responsibility. O’Neill’s rhetoric about giving former Rio shares to landowners rather than a future Bougainville government is ironic given the tensions over paying LNG royalties to landholders closer to Port Moresby, including from Exxon.

Stepping up

Foreign minister Julie Bishop has been rattling the tin with business ever since she decided to make corporate participation a hallmark of her new commercial diplomacy. Now we have a scoreboard of sorts with the first round of joint government-business investments under the Business Partnerships Platform. Business has invested $10.2 million alongside $3.8 million from the government aid program in Indonesia, Papua New Guinea, Myanmar, Vietnam, Pakistan, Nepal and Kenya.  Look forward to some nice compliments from the foreign minister for Cotton Australia, Mastercard, Unilever, Base Titanium, Cotton On, Digicel, Pou Chen Group, TPS Food and Intrepid Group.

Photo courtesy of Ausgrid

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Iran’s relationship with Russia has been characterised as many things, ranging from a ‘marriage of convenience’ to a ‘long-lasting alliance’. In reality it's a  pragmatic working relationship forged between two countries that  have faced similar political and economic pressures from the West. The increasingly vitriolic exchanges of the past week, however, suggest that both are finding the relationship harder to manage.

As two leading anti-US states with an alternative vision of a world order, Russia and Iran developed ties in multiple sectors. For both countries, working with the other has been a useful counter-balance to US dominance. Economic ties between the two helped each to weather Western-imposed sanctions. In the military sphere, Moscow provided Iran with equipment it couldn’t get from the West and conducted joint-military exercises in the Caspian Sea. Shared foreign policy goals in the Middle East – including keeping Assad in power in Syria and pushing back ISIS in Iraq – led to intelligence cooperation. Russia is also Iran’s sole nuclear provider, committed to completing Iran’s Bushehr power plant and supplying fuel for its first 10 years of operation. A number of other plants are planned.

But now it seems leadership in each country is weary of the other.

The Russians are not perceived well in Tehran. In the nuclear field for example, Iran has repeatedly accused the Russians of being unreliable. Moscow also firmly supported efforts to prevent a nuclear-armed Iran, despite its feelings towards the West. In the military sphere, Moscow dragged its feet in the sale and delivery of the S300 air defence system: signing a contract in 2007 but not making its first delivery until April this year. Economically, and particularly in the energy sphere, the two countries are competing for a bigger slice of a shrinking pie. Both want to increase oil exports and Iran has long-term plans to boost natural gas exports to Europe in particular: traditionally, Russia’s market. Iran’s negative feelings toward Russia were part of the reason why it pursued the nuclear deal to begin with: it needed other partners.

But it was the conflict in Syria that simultaneously brought Russia and Iran closer together and highlighted the differences between them. Their shared goal of preserving the Assad regime saw them work more closely together; coordination and dialogue increased. But each sides perceived the relationship differently. Read More



Tehran thought it had the upper hand; that in Syria at least, it was dictating the terms of the cooperation. After all, it was Iranian men involved in the fight on the ground and gathering intelligence. From Iran’s perspective: Russia ‘only’ provided air cover for their fight. For its part. Moscow  felt it was useful to cooperate with Iran because it didn’t want to lose the privileged position it had pre-nuclear deal. But it firmly (and perhaps more accurately) saw its role as that of a bigger, more powerful and more capable friend coming to the aid of Iran, a regional powerhouse that needed help in its own backyard.

When it became apparent that Tehran wasn’t in charge, the Iranians were taken aback. They were surprised when Russia did not inform them that it had agreed to a ceasefire with the US, when Russia temporarily halted airstrikes against the al-Nusra Front in May, and again in July when Secretary Kerry and Foreign Minister Lavrov announced an agreement – the contents of which were not shared – to cooperate on respecting the ceasefire.

This trend was only reinforced when Russia announced that Iran had allowed it to use the Hamedan base for its bombers on the way to Syria. Given the Iranian constitution explicitly prohibits the establishment of a foreign military presence on its soil, some in Iran, including parliament, were less than impressed. Defense Minister Brigadier General Hossein Dehqan criticised Moscow for 'showing-off' when it leaked the news, and said that the decision to sign a treaty for strategic military cooperation with Russia was made by the 'system', and was none of the parliament's business. Various officials have since downplayed the event; the Foreign Ministry announced activities were halted, while the speaker of parliament Ali Larijani stated Russians were just refuelling their bombers.

Why, given Iran’s frustrations with Russia, did Tehran give Russia permission to use its base? Likely because it was counter-balancing recent Gulf Arab efforts to court Moscow into their camp and because, ultimately, Tehran knows it needs Moscow in Syria. But the very public spat following the leak demonstrates this is not an easy relationship.

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Earlier this month Aung San Suu Kyi, Myanmar's foreign minister and de facto leader, wound up her first state visit to China. During the five-day trip, Suu Kyi met with President Xi Jinping and other senior government officials, and discussed an agenda crowded with a range of pressing issues including trade, development cooperation, the resumption of the controversial Myitsone dam project, and the ethnic conflicts engulfing the two countries' shared border.

The most significant thing about the trip might well have been the timing ,and not the modest outcome of the talks (enshrined in a typically colourless official joint press release). The trip was Suu Kyi's first outside Southeast Asia since she led the National League for Democracy (NLD) to a stunning victory at last November's election. It also preceded her first state visit to the United States (slated for September), a country which has done much to encourage the political and economic opening that has transformed Myanmar since 2011. The decision sent a clear message about the priority Myanmar's new government places on repairing its frayed relationship with Beijing.

During Myanmar's decades of military dictatorship and international pariah-status, China enjoyed a privileged status in the country, dominating trade and investment. All that came to an end in 2011, when President Thein Sein's government initiated an ambitious program of political and economic reform, distanced itself from China, and opened a new era in relations with Western governments.

The turning point (arguably) was the government's September 2011 decision to suspend work on the giant Myitsone hydropower dam, a $3.6 billion Chinese-funded project that had provoked fierce and widespread public opposition. To Beijing's chagrin, other significant Chinese investments were later cancelled or put on hold. Investment from the mainland nosedived.

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Suu Kyi's China visit, however, put a seal on the NLD's slow but palpable 'rebalance' back towards the east. When the NLD government took office in April under Suu Kyi proxy Htin Kyaw, the first high-level diplomatic caller was none other than Chinese Foreign Minister Wang Yi, who pledged renewed Chinese support for vital infrastructure developments.

At the same time committed investments from China have rebounded, spiking to $3.3 billion in the fiscal year to April 2016, up from just $56 million in 2014. In December 2015, two consortia led by the state-owned CITIC Group Corp won bids to construct a strategic deep-water port and special economic zone at Kyaukphyu on the coast of Rakhine State.

Both nations have a great deal to gain from a close relationship. Myanmar's rich mineral deposits and geographic proximity (the two countries share a 2,204 kilometer border) make it a logical and necessary part of China's sphere of influence in mainland Southeast Asia. Myanmar's access to the Bay of Bengal also offers a shortcut for oil and gas imports from the Middle East, potentially reducing Beijing's reliance on seaborne shipments through the Straits of Malacca.

Aung San Suu Kyi, more of a pragmatist than some of her Western admirers might wish, has likewise expressed a willingness to accept Chinese help in realising her domestic goals. Chinese cash, distributed via bilateral loans and grants or multilaterally through the new Chinese-led Asian Infrastructure and Investment Bank, could help rebuild Myanmar's moribund infrastructure and jumpstart economic growth.

Beijing's cooperation will also be vital if Suu Kyi is to achieve what she has described as her top priority: ending the state of near-permanent conflict between the central government and Myanmar's raft of ethnic armed groups and rebel militias.

In practice, Suu Kyi faces thorny challenges in handling what is probably her country's most important and most delicate bilateral relationship. Anti-Chinese sentiment has been a simmering constant in Myanmar since the country's independence from Great Britain in 1948, a tendency that has been inflamed in recent times by perceptions of Chinese high-handedness and the lack of accountability surrounding Chinese mega-projects signed by the old military government. During a visit to Kachin State in May, local residents told me of their deep resentment over Chinese involvement in the rampant trade in jade and timber from conflict zones in Shan and Kachin states; an opaque business that has done little benefit to the people of Myanmar and has arguably perpetuated the conflicts there.

Suu Kyi's challenge is encapsulated by the question of what to do about the suspended Myitsone dam. Of the three main options (cancel the project, resume construction, or do nothing), none are immediately palatable for Suu Kyi. Halting the project outright would be a popular move, but would risk jeopardising Chinese support on economic development and the peace process. Likewise, resuming construction risks provoking a domestic backlash. Veteran Myanmar watcher Bertil Lintner has described such a move as 'political suicide for any Burmese government'.

But Suu Kyi's trip to Beijing showed that the two sides are slowly beginning to wiggle out of the impasse. Just before her departure, the state counsellor appointed a 20-member commission to review the dam's suspension and scrutinise other large-scale hydropower projects, communicating to Beijing that she will evaluate the project on its merits. China has also softened its stance on the dam, raising the prospect that China might agree to a mooted fourth option, in which the dam is cancelled but replaced with other smaller projects of benefit to both sides.

As an incentive, China has also shown that it is willing to help promote peace and stability along its border with Myanmar. During the talks in Beijing, China persuaded a number of stubborn rebel groups, including the armed-to-the-teeth United Wa State Army, to join a peace conference that Suu Kyi will convene in Naypyidaw on 31 August. In remarks reported by Xinhua, Xi Jinping promised Suu Kyi that his government 'will continue to play a constructive role in promoting Myanmar's peace process and work with the country to safeguard peace and stability in their border areas'. This came on top of a $3 million donation made by China to the peace process earlier this year; a recognition that peace and stability in Myanmar's borderlands are in both countries' interests.

Despite the warm tenor of the talks, Myanmar is unlikely to slip fully into China's orbit. While China is a reality that Myanmar's leaders can't afford to ignore, good relations with Beijing are merely one part of a balanced diplomatic diet that also includes strong ties with powers like the US, Japan, and the European Union. How Myanmar manages to balance these ingredients will form one of its main long-term foreign policy challenges.

Photo: Getty Images/Pool/Rolex Dela Pena

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By David Gruen, Deputy Secretary, Economic and Australia’s G20 Sherpa, and Sam Bide, Economic and G20 Policy Adviser at the Department of the Prime Minister and Cabinet

When the Prime Minister goes to the G20 Leaders’ Summit in Hangzhou late next week, it will be against the backdrop of an underperforming global economy. A key indicator of this is the marked slowdown in global trade. In the two decades before the global financial crisis (GFC), international trade grew at roughly twice the rate of economic growth. Since then it has barely kept pace (see Figure 1).

Figure 1: Average Global GDP and Trade Growth Source: IMF World Economic Outlook (September 2011 and April 2016)

This matters not only because trade is a driver of global growth, but also because it is a key contributor to economic development. Many emerging economies owe their high growth rates to their participation in an open global trading environment. Trade is a harbinger of globalisation. Where trade goes, investment, ideas, new technologies and poverty alleviation tend to follow. But few countries have as much riding on maintaining an open global trading environment as Australia.

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Weakness in global economic growth since the GFC is part of the reason why trade growth has been so sluggish. During the GFC, trade volumes plummeted and have since failed to return to their pre-GFC growth rates. Yet a lack of demand cannot explain all of the trade slow down. Since the GFC the global economy has returned to modest growth, but trade growth has remained unusually subdued (see Figure 2).

Figure 2: World Merchandise Trade Volume*

*2005=100, seasonally adjusted. (Source: World Trade Organisation and UNCTAD)

This may partly reflect the fact that investment goods are traded more across national borders than consumption goods (see Figure 3), and investment in advanced economies has been particularly weak. Yet investment as a share of global output was steady during the rapid growth of the 1990s – if investment can’t explain the earlier rapid trade growth, it’s hard to see how it can now explain the slowdown. Some of the slowdown may reflect difficulties in measuring services relative to goods trade, as services become an increasing proportion of global trade.

Figure 3: Investment and Consumption Shares of Global GDP and Goods Imports, 2014

Sources: UN COMTRADE, World Bank

If we want a more convincing explanation for the global trade slowdown, we need to also consider ‘supply-side’ explanations. Some important economies – particularly emerging economies – appear to be turning inward to domestically generated sources of growth. China’s growth is shifting towards domestic consumption, and is thereby less dependent on exports. As its economy moves up the value-added chain, China is likely to produce a lot more of the things their consumers want to buy.

Further, the effects of previous rounds of substantial global trade liberalisation have probably worked their way through the global economy by now. The Uruguay Round of multilateral trade negotiations and the subsequent creation of the World Trade Organization (WTO) date from 1995, China acceded to the WTO in 2001, and the expansion of the European Union from 15 to 25 countries happened over a decade ago. And since then, the GFC has spurred protectionist pressures that have been difficult to resist.

The G20 is the premier international forum for cooperation on global economic governance and trade is a key driver of global economic growth. Trade is – and should be – central to the G20 agenda. The G20 represents around 85% of the world economy and more than three-quarters of global trade. G20 members are making trade commitments as part of their growth strategies, including measures to reduce barriers in trade-enabling services (such as transport, logistics and port services) and measures to finalise or ratify free trade agreements, and reduce non-tariff barriers. Given the longevity of the global trade slowdown, the G20 needs to vigorously prosecute the case for an open global trade regime.

There are signs around the globe of rising protectionist sentiments. Partly, this reflects the perception that the gains from trade have not been broadly distributed, particularly in some advanced economies. China has elevated trade as a key issue for leaders to discuss at Hangzhou. G20 Trade Ministers have also called for improved communication of the benefits of trade and are seeking analytical support from relevant international organisations. A key part of this is improving the evidence for how trade lifts GDP, and also how key groups, industries and regions are impacted. Such evidence helped Australia open up our trading system in the 1980s and 1990s, and to develop policies to help those most affected.

Improved economic modelling and analysis can help prioritise those trade reforms that make the greatest contribution to raising output and make sure trade reforms are inclusive. Understanding how much we benefit as nations, and also how those within our nations are affected, will help ensure we all benefit from a more open trading environment. 

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In May this year, the INS Kalvari – the first of six French-built Scorpene-class submarines – was put to sea for the first time, marking the first step in the long journey to rebuild India’s depleted and creaking undersea fleet.

Diesel-electric submarines like these are typically quieter than their nuclear-powered counterparts, with particular advantages in shallow littoral waters – such as the waters off Pakistan’s port of Karachi or chokepoints like the Malacca Strait. 'The albacore shaped hull', boasted the Indian Express, 'is ideal for silent operations'. Television channel NDTV declared that 'they are so silent underwater that they are extremely difficult, if not impossible to detect'. France’s embassy in New Delhi hailed the boat as 'virtually undetectable'. 

But these acoustic advantages of the boat, along with others, might be somewhat blunted after a massive leak of technical data, running to over 22,000 pages, revealed by The Australian this week:

The leaked DCNS data details … what frequencies they gather intelligence at, what levels of noise they make at various speeds and their diving depths, range and endurance — all sensitive information that is highly classified. The data tells the submarine crew where on the boat they can speak safely to avoid ­detection by the enemy. It also discloses magnetic, electromagnetic and infra-red data as well as the specifications of the submarine’s torpedo launch system and the combat system. It details the speed and conditions needed for using the periscope, the noise specifications of the propeller and the radiated noise levels that occur when the submarine surfaces.

The newspaper noted that it had 'seen' – rather than 'obtained' – the documents, indicating that its access might have been limited. But this is little reassurance to the French or Indians. If The Australian’s investigative reporter is correct in asserting the raw data passed from French shipbuilder DCNS to companies in Southeast Asia and Australia, there can be little doubt that it is, or will soon be, in the hands of Chinese intelligence and, soon thereafter, Pakistan. Vice-Admiral A.K. Singh, a retired Indian submariner who served as head of the Eastern Naval Command, told The Wire that, in his view, 'this has saved the Chinese and Pakistanis 20-30 years of espionage'. This is a serious blow for New Delhi, but it also presents problems for Malaysia and Chile, which operate the Scorpene-class, Brazil, which will soon, and Australia, which chose DCNS over Japanese and German rivals to build its next generation of submarines.

Why have these document been leaked? After all, they have no public interest aspect whatsoever. The Australian reveals no design flaws, corruption, or other wrongdoing. Indian Defence Minister Manohar Parrikar has blamed 'hacking', and China has a long, successful, and well-known record of cyber-espionage in the defence sector. But it would be highly unusual for state actors to acquire and then publicise military secrets that could more usefully be kept private and exploited in wartime or to enhance intelligence collection at sea. DCNS itself has hinted, darkly, of corporate espionage – 'the competition is … hard and all means can be used' – and this certainly can’t be ruled out. France boosted its own measures against this activity in May, and both the German and Japanese intelligence agencies, among others, have in the past spied on private-sector targets, though almost always with the intention of aiding their national firms in private rather than the public revelation of information.

While the Scorpene documents are labelled 'restricted', a comparatively low level of secrecy in most official classification systems, this is likely a designation by the shipbuilder DCNS rather than either the French or Indian governments, and probably doesn’t reflect the value of the data. Some of the parameters listed here – acoustic and IR signatures in particular – would normally be held by sub-operating states at Top Secret or above, with a very small number of people in the loop. As my RUSI colleague Peter Roberts, a former Royal Navy officer, told the Hindustan Times, 'acoustic intelligence – the fingerprint of a submarine – is the Holy Grail' of anti-submarine warfare (ASW). But he also warned that pre-construction design data would be imperfect. 'Modelling might provide the parameters that you expect, but the hulls and internal equipment are usually different in reality, and actual noise ratios, frequencies and signatures will be different once built'. In line with this, NDTV has reported that, following an overnight review by the Indian Navy, Parrikar was told 'the specifications in the leaked documents didn't match' those of India’s submarine. It is unclear whether this is accurate, or an effort at saving face over an issue that the opposition has already latched onto.

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At the very least, this leak will probably torpedo (sorry) any order for three more Scorpenes, as had seemed likely in December. This comes at a time when India’s submarine fleet has dwindled to dangerously low levels, worsened by a series of accidents, while Chinese naval activity into the Indian Ocean has grown substantially. India has built up its maritime surveillance capability on the Andaman and Nicobar Islands, close to the Malacca Straits, explored the possibility of cooperating on a sound surveillance sensors (SOSUS) chain with Japan and the US, and signed an agreement with Germany to bolster the ASW weapons on its older diesel-electric submarines. Any erosion in the stealthiness of the Scorpene class will complicate these efforts, which India sees as crucial to the maritime balance of power in the region.

Photo courtesy of Flickr user Keerthivasan Rajamani

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Among US analysts, war with China is no longer a taboo subject. RAND Corporation has now tackled the issue head on, publishing a lengthy analysis titled: 'War with China: Thinking through the Unthinkable'. So far, Paul Dibb and Mike Scrafton have provided two excellent assessments on what this means for Australia. This review evaluates RAND’s assessment itself.

RAND presents four conflict scenarios over two different time periods: low-intensity and high-intensity, short and long duration, and occurring either in 2015 or 2025. The low-intensity conflicts are fairly straightforward; however, RAND’s high-intensity 2025 scenario draws a number of contestable conclusions, namely that:

  • Escalation to the nuclear level in any US-China conflict, however intense, is very unlikely;
  • War would be far more devastating for China, with an estimated 25%-35%  reduction in GDP after one year, as opposed to a 5%-10% reduction for the US;
  • A long conflict would test the internal stability of the Chinese state; and
  • The prospect of major land operations is low, unless the war was on the Korean peninsula.

RAND’s ultimate conclusion is summed up by this quote: 'China could not win, and might lose, a severe war with the United States in 2025.'

The authors note that Chinese policymakers are one of their intended audiences. This aims to ensure that miscalculation owing to overconfidence in China’s military capacity is avoided. Unfortunately, in attempting to enhance the deterrent effect of America’s Pacific forces, RAND makes a number of assertions that paint an overly rosy picture for the US. It must be stressed that these criticisms can only be made due to RAND’s willingness tackle this important subject.

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1. RAND seriously underestimates the probability of a high-intensity conflict escalating to the nuclear level

The authors all but exclude the possibility of nuclear use from either side, especially if the US avoids targets that would threaten China’s nuclear deterrent. In reality, China would have significant incentives for nuclear use if it was greatly disadvantaged in a conventional conflict. For instance, China could use nukes as counterforce weapons against US staging areas in the Western Pacific, calculating the US won’t respond at the strategic level. In extremis, China could even detonate a strategic warhead over a civilian population of a non-nuclear US ally (such as Japan) as a direct challenge to US nuclear assurances and to demonstrate absolute resolve, without forcing America’s hand by attacking the homeland directly. Indeed, I would argue that these outcomes are far more likely than what RAND assumes: China accepting total military defeat. 

In other words, the fact that America enjoys overall nuclear superiority appears to have led to dubious assumptions about US-China nuclear dynamics. It would have been better for RAND to simply assume a high-intensity conflict that does not escalate to the nuclear level, without attempting to justify that assumption. After all, it is just as dangerous for US decision-makers to be presented with an unrealistic appraisal of nuclear risk as it is for Chinese leaders having unjustified confidence in their conventional forces.

2. RAND’s assessment of US economic resilience is unrealistic

RAND calculates the relative harm inflicted on each economy based on the estimated disruption to trade, and the relative reliance on imports for each belligerent. The study notes that China is more reliant on imports, and that trade would be severely curtailed during wartime throughout the Western Pacific. Bilateral trade between the US and China would broadly cease.

While it’s true that China is dependent on seaborne imports and that, from a military standpoint, energy disruption would be a severe hazard for China, RAND’s economic assessment is incomplete. 

First, in addition to the cessation of bilateral trade with China, US trade would be adversely affected with every other country whose own economy is dependent on Chinese trade. Moreover, it is not only the raw value of bilateral trade, but the total value of American goods for which Chinese manufacturing is an indispensable component. This would hardly be made up domestically, as any resurgence in domestic manufacturing in the long term would likely to be directly supporting America’s war effort.

Second, and more important, is the impact of cyber attacks. It is impossible that America’s own cyber weapons would deter such threats if China faced kinetic attacks on its own territory. It must be assumed, therefore, that China would successfully disrupt critical American infrastructure on a large scale, including (but not limited to) transportation, energy, telecommunications, financial services, and research. 

The safest assumption (which RAND does make) is that in 2025 China’s cyber capability will be broadly equivalent with that of the US. While the US would be able to respond in-kind, the relative economic impact of cyber warfare would not be the same. America’s economy is larger than China’s due to the productivity afforded by widespread access to high technology. Unrestrained cyber warfare would therefore disadvantage America’s economy disproportionately. Accordingly, it is not possible to accurately predict the relative impact on each country’s GDP after one year of warfighting (as RAND attempts to do), but the overall gap in economic effect between China and the US is likely to be narrower than RAND has assumed.

3. Disruption of China’s internal stability is wishful thinking

RAND’s supposition that a prolonged conflict could precipitate a crisis of stability for the Chinese leadership is unsubstantiated. Certainly a severe military defeat resulting in a harsh peace would present a major crisis of legitimacy for the Communist Party. Indeed, this could militate against the cessation of hostilities, even when faced with a ruinous military situation, and increase the probability of nuclear use. In my view it is highly unlikely, however, that even a prolonged conflict would sufficiently embolden separatist forces in ways that could undermine the integrity of the state while such a war was still ongoing. To the contrary, faced with the memory of ‘the century of humiliation’, the will of the Chinese to resist demands of external powers would likely overwhelm any internal dissent for the foreseeable duration of any conflict. 

4. RAND’s conclusion about the use of land forces is incorrect

RAND assumes that a major land conflict is unlikely,  occurring only in the event of a war breaking out on the peninsula. RAND bases this on the (correct) assumption that North Korea no longer has the capacity to overrun the South on its own, and because South Korea is likely to avoid being dragged into a war against China otherwise. 

Nevertheless, RAND underestimates the likelihood of conflict breaking out on the peninsula during war. This is irrespective of whether hostilities commenced over the South China Sea, East China Sea, or Taiwan. 

This is because the North Koreans, seeing their opportunity, would invade the South knowing the Chinese will have no choice but to support them. Were North Korea to be defeated, China would be faced with the intolerable situation of US forces on their border during a time of war.

The correct military decision for China would be to place enough pressure on the South to force America to commit large scale forces to the defence, without overwhelming it immediately and presenting the US with a fait accompli. Once committed, the US would be in a diabolical military situation. Hundreds of thousands of US land forces would be engaged against an enormous number of enemy combatants, supported by vulnerable supply lines in highly contested waters near the Chinese mainland. Indeed, it is perfectly likely a war that started in the Spratlys could be lost by the US at Busan. 

Of course the US could simply abandon South Korea, but doing so would end its alliance credibility in the Western Pacific. Here even a military defeat could prove a major strategic victory for China, while occupation of Seoul would be a significant bargaining chip in negotiating a favourable peace.

Conclusion 

In addition to these four key areas, RAND makes a number of other assumptions that seem overly generous for the Americans: the willingness of European NATO allies to deter Russian aggression; the extent to which China’s capacity to replenish early losses would be constrained; and the presumed incapacity of China to manage shortages created by disruptions to regional trade. Moreover, other likely Chinese responses have not been considered, such as sponsoring non-state actors hostile to the US, or threatening American interests overland in the Middle East. Finally, the ability of the US to sustain offensive operations in the Western Pacific is questionable given the vulnerability of US aircraft carriers and bases located within the first island chain. 

Having said this, it is hard to argue with RAND’s assessment of the overall military balance in 2025. America will enjoy decisive advantages in undersea capability for the foreseeable future, and China’s surface fleet would be unlikely to survive. If China’s primary military objective was to control the South China Sea or the East China Sea, then war with the US would not be successful. 

Nevertheless, it is entirely possible that in a lengthy high-intensity conflict, economic losses would be equivalent, decisive military engagements would be elusive, and China’s post-war recovery would be faster. Combined with the benefit of regional proximity and a weakened allied presence in the Western Pacific, this means the possibility of a Chinese strategic victory in 2025 or beyond cannot be excluded.

Photo: Getty Images/Kevin Frayer and Chung Sung-Jun 

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By Harriet Smith, an intern with the Lowy Institute's Melanesia Program

  • The PNG Supreme Court has ruled both PNG and Australian governments are responsible for closing the asylum processing centre on Manus Island, after deeming the centre unconstitutional in April. Last week the two governments announced they would close the centre but gave no timeline or suggestion on what would happen to the detainees. The joint statement came five months after PNG’s Prime Minister Peter O’Neill called for the centre to close. 
  • PNG’s opposition leader Don Polye has described a government decision to raise the cost of election nominations fees ‘ridiculous and undemocratic’. The cost will rise from 2000 kina to 10,000 kina, or more than $A4000. 
  • Students in PNG have prioritised reconciliation with the University of PNG management in preparation for the resumption of studies next week. Classes had originally been cancelled for the year after the bloody conflict between students and police in June, but were reinstated after the university council opted to lift the suspension. 
  • Fiji’s Prime Minister has announced that plans to change Fiji’s flag have been postponed in order to prioritise the continuing recovery from Tropical Cyclone Winston.
  • New books featuring local stories have also been created to assist Fijian children traumatised by the disaster.
  • In light of Fiji’s Olympics rugby gold, The Economist attempted to explain why Pacific Islands nations have a particular talent for rugby.
  • Pacific Island countries have condemned ‘misleading’ statements on the PACER Plus trade deal which allege it will diminish sovereignty.
  • Tony Hiriasia from ANU has released a paper on kin-based politics in the Solomon Islands. It looks at how kin relationships are more central to political alliances in rural constituencies than gifting.
  • Australia has selected Tanna, a drama set in Vanuatu, to be its entry in the Oscar's foreign-language section. The film, made in the Nauvhal language, won the audience prize at Venice Critics Week last year.
  • A recent episode of ABC's Q&A featured heated debate on the issue of climate change but, as newly elected Federal MP Linda Burney pointed out on the program, the Pacific Islands nations are already seeing the impact, a reality highlighted in this news report from PNG.

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On 1 August, the new president of Taiwan, Dr Tsai Ing-wen, offered an apology to Taiwan’s indigenous peoples. In the presidential building, the apology began with a rite of offering of millet and spirits. Bunun community elder Hu Jin-niang blessed the ceremony, and Taiwanese religious leaders followed with an interfaith prayer. In Tsai’s speech, she said:

Let me put in simple terms why we are apologising to the indigenous peoples. Four hundred years ago, there were already people living in Taiwan. These first inhabitants lived their lives and had their own languages, cultures, customs, and domains. But then, without their consent, another group of people arrived on these shores, and in the course of history, took everything from the first inhabitants who, on the land they have known most intimately, became displaced, foreign, non-mainstream, and marginalised.

The apology to Taiwan’s indigenous peoples comes as the culmination of many decades of political and legal activism. A modern indigenous rights movement began in the 1980s, in the final years of Taiwan’s authoritarian era from 1945 to 1987 under the Chinese Nationalists (KMT). Activists campaigned on many specific issues, such as the cultural stereotyping of indigenous peoples in school curricula, the nuclear waste site on Orchid Island, home of the Yami people, and the expropriation of the traditional lands of the Taroko people by the Asia Cement Corporation. They also campaigned for legal and constitutional changes to protect and support indigenous rights. In 1994, Taiwan’s legislative assembly passed constitutional amendments that accorded Taiwan’s indigenous people specific protections under law and, in response to a long and vociferous campaign, institutionalised the term in Chinese 原住民 to refer to indigenous peoples, instead of the prevailing pejorative terms 山胞 and 山地人.

In 2002, the Council of Indigenous Peoples was established and an indigenous public television service begin in 2005. Later that year, the legislative assembly passed the Indigenous People’s Basic Law, which further supported indigenous rights.

The history of activism that led up to President Tsai’s apology has been in response to the long history of dispossession of Taiwan’s indigenous peoples that has left a legacy of damaged communities and high rates of social, health and economic disadvantage.

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Indigenous Taiwanese have inhabited the island for at least 6000 years, and are part of a diverse group of societies known evocatively as the Civilisation of the Voyaging Canoe, after the huge ocean-going canoes that enabled migration to the islands across the Pacific Ocean. In 1624, a colonial outpost was established on Taiwan by the Dutch, bringing guns and missionaries and drawing it into the trading economy of the Dutch empire in Asia. Through politics and violence, the Dutch subdued indigenous resistance, creating the conditions for permanent settlement by people from southern China.

The Dutch were themselves expelled by the Ming loyalist naval commander Zheng Cheng-gong in 1662, fleeing the advancing Manchus, before Taiwan was incorporated into the Qing empire. Through the next two centuries, Taiwan was settled from Fujian, and indigenous Taiwanese lost their ancestral lands as they were forced higher into Taiwan’s extensive mountain regions or were assimilated into the settler communities.

In 1895, in its final years, the Qing empire ceded Taiwan to Japan. The Japanese colonial government was notably focused on what it saw as a civilising mission for Taiwan’s indigenous peoples. There were extraordinary periods of conflict, such as the 1930 Wushe Incident when 300 Seediq warriors began a guerrilla campaign against the colonial government that escalated until Japan deployed the full force of its military against them. Indigenous Taiwanese, the Takasago Volunteers, later fought in the Japanese imperial army in WWII. The last 'holdout' after the war, Private Teruo Nakamura, discovered in Indonesia in 1974, was actually Attun Palalin, a member of the Amis people.

Under the KMT from 1945, Taiwan’s indigenous peoples suffered discrimination and patrician indifference as the new government implemented aggressive anti-Communist and industrial development policies. During the 1947 Anti-Chinese Nationalist uprising, Tsou tribal leader Uyongu Yatauyungana protected many local non-indigenous Taiwanese from mainland KMT troops, and was executed in 1954 after he formed an organisation promoting indigenous autonomy.

Tsai Ing-wen faced this bitter history in her apology. She addressed specific issues such as the Orchid Island nuclear waste site, and of the need for further legal reform to protect land rights. She acknowledged the identity of the Pingpu ethnic groups, the indigenous peoples from western Taiwan who have been largely assimilated into Taiwan’s settler society over the last two hundred years.

She also spoke powerfully of the fundamental act of writing indigenous peoples fully into the history of Taiwan. This is at a time when all Taiwanese are addressing the legacy of their history as never before. The experiences of state terror under martial law, which have been held for years as unspoken secrets by countless individuals and families, have been moving into the public sphere through history-writing, memorialisation and art. In this way, the Taiwanese are rewriting their modern story of driving east Asian developmentalism into something quite different.

Tsai’s apology gave indigenous people a vital place in that process and vastly expanded its scope. Tsai said: 'I call upon our entire society to come together and get to know our history, get to know our land, and get to know the cultures of our many ethnic peoples.'

In the abstruse calculations of geo-politics, security and global trade in centres of power such as Beijing, Washington, Tokyo and Canberra, such a basic appeal may have seemed quixotic. Yet from it proceeds a reordering of social, economic and political priorities that affirms the singular course that Taiwan is on. The apology to Taiwan’s indigenous peoples will further the cause of indigenous rights, but also signals the distinctive modern society and polity that Taiwan has become. 

Photo by Ashley Pon/Getty Images

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By Bill Carmichael, former chairman of the Industries Assistance Commission, with the assistance of  economists named in the text below.

A debate has raged for a decade about what we have gained from Free Trade Agreements (FTAs). We are now able to assess their contribution to future prosperity.

The Productivity Commission developed an analytical framework to assess the economy-wide effects of the bilateral agreement with the US (AUSFTA) in 2010, but at that stage not enough time had passed to enable a reliable, evidence-based, assessment of the agreement's impact.

Shiro Armstrong, a respected ANU economist, has since used the analytical framework developed by the Productivity Commission, and the decade of performance data available since AUSFTA came into force, to conclude that 'the data shows that...Australia and the United States...are worse off than they would have been without the agreement.'

He has suggested that 'the agreement was responsible for reducing — or diverting — $53.1 billion of trade with the rest of the world'.

So the AUSFTA, so far from the picture painted by DFAT, has involved a substantial cost to Australia.

Along with other economists including the University of Adelaide's Paul Kerin and Richard Pomfret, Flinders University's Dick Blandy, and  the ANU's Glenn Withers, Greg Cutbush, Malcolm Bosworth and Martin Richardson, I believe a different approach is required.

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While we cannot now change how we negotiated the agreements with the US, Japan, Korea and China, we can ensure that it does not reflect how we approach future negotiations.

The governance model that should guide trade policy is based on Australia's conduct in the Uruguay Round of trade negotiations.

The negotiations in the Uruguay Round took place at a time when Hawke and Keating were liberalising our own barriers unilaterally, to secure the efficiency gains involved. These reductions were subsequently offered, and accepted, in Uruguay negotiations as our market-opening contribution to global trade reform. As a consequence, we secured all the gains available from trade negotiations – the major gains in efficiency from reducing the barriers protecting our less competitive industries, as well as those available from access to external markets.

That produced the win-win outcome we should be seeking from all trade agreements. It made a substantial contribution to the prosperity we have since enjoyed.

The opportunity to improve the performance of the economy in this way was missed in all FTAs concluded last year. In those negotiations our agenda was simply a market-access wish-list; negotiations were conducted in secret ; the outcome for domestic efficiency was determined solely by the market-access arrangements negotiators happened to agree on, rather than a central objective in deciding which domestic barriers to reduce ; and success was measured by whether the outcomes improved access to external markets.

When we fail to structure our market-opening offers to improve allocative efficiency, by reducing the barriers protecting our less competitive industries, we forgo the major gains available from negotiations. These efficiency gains strengthen the economy not by enabling us to 'produce more' (that is, not by doing more of what we are already doing) but because we move from things we do less well to those we do better.

There is no conflict between the need for secrecy during negotiations and a process that provides transparency and a negotiating agenda that secures the efficiency gains available. Both requirements can be met by following the model established in the Uruguay Round.

That would involve the Productivity Commission providing a basis for Australia's market opening offers, by conducting a public inquiry and report to government before future negotiations get under way. Its report would be released only when negotiations are complete.

This would preserve secrecy during negotiations while providing for parliamentary and public scrutiny of the outcome before ratification. It would reflect the transparency arrangements that prepared the way for the reforms of the 1980s and 1990s.

Most importantly, the modest change we suggest would allow the community into the debate about trade policy.

It deserves a place in any policy framework to facilitate the long transition from the resources boom to an uncertain future.

Photo James Morgan/Getty

A longer version of this article was published in The Australian 

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The internet is now so central to the world economy (McKinsey estimates it contributed US$2.8 trillion to world GDP in 2014) we forget how weak the norms are governing behaviour online. In several areas these behaviours threaten to degrade and limit the internet’s future contribution to global growth.

Happily the G20 has recently begun to weigh in. In 2013, the word ‘digital’ first entered a G20 Leaders’ communiqué (in relation to taxation) and in 2015 its communiqué referenced a wider range of digital issues.

The G20 now has the opportunity to build on some of the progress made in 2015 and expand its engagement into new areas. In the most recent Lowy Monitor, I propose three issues it could usefully grapple with.

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1. Commercial cyberespionage

State-led, or backed, commercial cyberespionage is imposing huge losses on business (a US Commission estimated US losses at US$300 billion annually) and threatens to lead to retaliatory sanctions or other disruptive measures such as the authorisation of offensive counter-attacks by the private sector.

In September 2015, China just managed to stave off US sanctions when a presidential-level agreement was reached to cease the practice. The G20 extended coverage of this bilateral deal to all its members when it endorsed the same prohibition against commercial cyberespionage in its 2015 communiqué.

Now that the norm against commercial cyberespionage has been agreed, the challenge for the international community is bringing state practice into line. It is here the G20 could fill a gap, encouraging compliance and maintaining political momentum for advancing the agenda. Although the G20 is not a naming and shaming venue, the Business 20 could report on overall levels of state-led, or backed, attacks with G20 Leaders responding to this in their communiqué. Leaders could also encourage a global body, such as the OECD, to provide regular reporting on state-backed, or led, commercial cyberespionage.

2. Peacetime state cyberattacks

State-led, or backed, cyberattacks during peacetime are also a potent challenge. They can impose huge costs on business and are a threat to civilian life.

Examples are numerous. For the G20, three developments make consolidation of this norm a recipe for chaos and a threat to the global economy. First, the threshold for acquiring offensive cyber capabilities is now so low, most states of a reasonable size can build them and strike back. Second, the growth of the ‘internet of things’ expands an already enormous range of targets. Finally, as the defence of government and critical infrastructure targets are improved, businesses and civilian institutions become the more attractive soft targets imposing large costs on businesses and civil society.

All G20 states have an interest in winding back this norm. I make a number of suggestions the G20 could consider, including measures to limit the operational freedom of the most egregious global offenders such as North Korea, endorsing various confidence-building measures (CBMs) and, more ambitiously, suggesting members implement domestic arrangements that allow them to sanction individuals or organisations that conduct or support cyberattacks as the US did after being caught unprepared in the wake of the North Korean attacks on Sony.

3. Free flow of data

Restrictions on data flows are another emerging impediment. They increase the cost of doing business, distort markets, and create inefficiencies.

Many states, including several G20 members, have begun to erect impediments to the free flow of data across borders. Data protectionism can take different forms including requirements that certain data categories (such as that relating to national security or healthcare) be stored and processed domestically or by imposing conditions on the cross-border transfer of personal data. For example, two Canadian provinces mandate that personal information held by public institutions be stored and accessed only in Canada.

This is justified using a range of reasons most of which are spurious, however, the consequences of this trend have far-reaching economic effects. Every business with an online presence is potentially affected, for example via increased data storage and processing costs, with multinationals most affected.

While several G20 members engage in data protectionism, limiting scope for wholesale reform, there are a few steps that the G20 could take to help wind back the trend. At an overarching level, the G20 should state a commitment to the free flow of data. To prevent every state developing unique flow-inhibiting standards that apply to its nationals’ personal data, the G20 could also endorse efforts to raise privacy protections to a global standard and extend mutual recognition of laws that reach this standard to achieve interoperability. To ease frictions arising from delays in processing legitimate government requests for data stored abroad (such as in criminal investigations), the G20 could explore options for improved sharing of information among authorities in G20 countries. This could include encouraging members to review domestic processes for handling requests from abroad with a view to improving responsiveness.

Photo courtesy of Flickr user Marcus Schwan

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US presidential race 2016

Five years ago in Rolling Stone, Tim Dickinson described Roger Ailes as 'one of the most skilled and fearsome' operatives in the history of the Republican Party.

As a political consultant, Ailes repackaged Richard Nixon for television in 1968, papered over Ronald Reagan’s budding Alzheimer’s in 1984, shamelessly stoked racial fears to elect George H.W. Bush in 1988, and waged a secret campaign on behalf of Big Tobacco to derail health care reform in 1993. 'He was the premier guy in the business,' says former Reagan campaign manager Ed Rollins. 'He was our Michelangelo.'

In recent years the 76-year-old Ailes was usually discussed in the context of Fox News, the television empire he founded and where he was largely given carte blanche by Rupert Murdoch because Fox made money hand over fist. That autonomy ended last month, when suddenly Ailes had to go.

There are many fascinating aspects to his bombshell exit from Fox. For those interested in the ongoing power struggles in the Murdoch empire, Australian journalist and long time News Corp watcher Neil Chenoweth has this blow-by-blow account of how the Murdoch sons manoeuvred to get Ailes out.

Meanwhile women the world over, especially women who work in TV, have been swapping the toe-curling stories of sexual harassment that emerged after former Fox anchor Gretchen Carlson took legal action against Ailes. One of the G-rated accounts came from Kellie Boyle, who told Fortune of her encounter with Ailes back in 1989:

He had a car and a driver. We got in the car and he said, "You know if you want to play with the big boys, you have to lay with the big boys".

But let's just concentrate on one aspect of the Ailes story; his ties to Trump. Pundits have spent much time trying to work out the extent of the Ailes involvement – past, present and future – in the flagging Trump campaign. We know there are solid links here: the two men share many common political views, have known each other for 40 years and, while there was a public spat over the Megyn Kelly episode earlier this year, Trump went into bat for Ailes over the sexual harassment claims.

Last month Ailes biographer Gabriel Sherman suggested that Ailes' fingerprints were all over the Trump campaign, telling Slate 'people who have known Ailes for decades say that when they hear a Trump speech they hear so many echoes of Ailes'.

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The Trump campaign insists Ailes has no official position but there seems to be too much smoke for no fire. This Media Matters report summarises who has said what over the last week or so.

Earlier this month, New Yorker editor David Reminck wrote of the turbulent relationship between the two men, one 'roiled by the differences of large narcissisms – two immense egos competing for the same ideological berth'.

Trump's acceptance speech at the Republican National Convention was also eerily close to Nixon's from the 1968, Remnick noted:

Nixon delivered a speech intended to heighten the fears of the delegates in the arena and of the “forgotten” majority of Americans at home—“the non-shouters, the non-demonstrators,” the “decent people,” who worked and saved and paid their taxes. His speech, pitched largely to white working-class voters anxious about law and order, was meant to make them even more anxious, more resentful, more tribal; his images and phrases presaged not only the rhetoric of Roger Ailes but also the unlikely rise of Donald J. Trump.

Of course it was this campaign, in which a young Ailes organised TV specials staged as town hall meetings for Nixon, that was immortalised in The Selling of the President by Joe McGinniss. Here's a reminder of the book from a 2011 Salon piece titled 'When Roger Ailes was honest about what he did':

“Let’s face it,” Ailes told McGinniss — and his book’s strengths come from its frank dialogue and McGinniss’ deadpan tone — “a lot of people think Nixon is dull. Think he’s a bore, a pain in the ass. They look at him as the kind of kid who always carried a bookbag … Now you put him on television, you’ve got a problem right away. He’s a funny-looking guy. He looks like somebody hung him in a closet overnight and he jumps out in the morning with his suit all bunched up and starts running around saying, ‘I want to be President.’ I mean this is how he strikes some people. That’s why these shows are important. To make them forget all that.”

Fast forward two decades on and Ailes was steering the Bush campaign. This ad from that time is a good example of his work:

With two and half months of campaigning to go, there is plenty of time for Ailes to get stuck in this time around. And after the election? Well, there is plenty of speculation about what might happen then too. 

Photo: Helayne Seidman/Getty

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On Friday at the United Nations in Geneva, Australian diplomats called a vote they knew they would lose, split their already modest support base in half, and enraged more than 100 other countries that had been ready to agree to a painstakingly negotiated compromise. For its trouble, Australia gained precisely nothing, and seriously damaged its credibility and influence. If it sounds like a diplomatic train wreck, it was. What on earth was going on?

The drama unfolded on the final day of the UN Open-ended Working Group on taking forward multilateral nuclear disarmament negotiations. This group has met intermittently throughout 2016; the principal goal for Australia and around 28 other countries in nuclear alliances (also known as ‘umbrella states’ or, more colourfully, ‘nuclear weasel states’) was to ensure that the group did not recommend the negotiation of a new treaty prohibiting nuclear weapons (Tim Wright covered the ban treaty proposal and the associated dilemmas for Australia in The Interpreter in June).

Australia’s manoeuvres on Friday were merely the latest in a series of ill-conceived efforts to try to stop the ban treaty, but which have only fuelled support for it. As the international movement to consider the humanitarian consequences of nuclear weapons gathered pace in 2014, Foreign Minister Julie Bishop wrote that ‘the horrendous humanitarian consequences of nuclear weapons are precisely why deterrence has worked’. This line, now mercifully retired, ensured a sceptical reception for subsequent Australian assurances that recognition of the humanitarian consequences of nuclear weapons was driving its efforts on nuclear disarmament.

Australia then led the efforts of nuclear alliance states in the UN working group to push their preferred ‘progressive approach’ (i.e. disarmament measures that have been tried unsuccessfully for twenty years) and to argue against a ban. These arguments were never very plausible, but their main flaw was their obvious insincerity. The real reason for Australia’s opposition to a ban treaty (that a ban will make it more difficult for Australia to continue its reliance on extended nuclear deterrence) was never mentioned. The transparent dishonesty in Australia’s rhetoric only increased scepticism of Australia’s commitment to nuclear disarmament.

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Undaunted, at the final session of the working group Australia raised yet another dubious argument: negotiations on a new treaty would burden small countries. This patronising contention again demonstrated Australian officials’ tin ear for the humanitarian concerns driving support for the ban. In a pointed riposte, Palau said that for Pacific island nations the burden of participating in treaty negotiations would be nothing compared with the burden of dealing with the consequences of more than 300 nuclear test explosions in their region.

Compounding Australia’s credibility problem has been the lack of any coherent strategy for dealing with the ban treaty proposal beyond knee-jerk reactions. It should have been obvious by the May session of the working group that support for starting negotiations on a ban was sufficient to pass a resolution at the UN General Assembly. This would have been the time to start positioning Australia to engage in the ban process, in order to steer it in the direction most compatible with Australia’s national interest.

Instead, the denial continued, culminating in a damaging tactical blunder when Australia’s representative questioned whether there really was a majority that supported starting negotiations on a ban treaty in 2017. The question was technically sound (until then, only a small number of delegations had specifically called for negotiations in 2017) but it didn’t take a diplomatic Nostradamus to predict what would happen. Within days, the Africa Group, the Community of Latin American and Caribbean States, ASEAN, and several European countries had all explicitly called for negotiations to start in 2017, putting majority support beyond doubt.

The working group report needed to reflect both the majority support for recommending the start of negotiations on a ban treaty, and the dissenting view of the nuclear alliance states, in a text that could be adopted by consensus. After days of back-room negotiations, a delicate compromise was reached which avoided using the term ‘majority’, and made clear the dissent of the ‘progressive approach’ camp. It was a typical multilateral solution: a deal that none liked, but that all could live with.

But when the group convened to adopt the report, Australia took the floor on behalf of 14 umbrella states to declare that the text was not acceptable. When the chair went ahead to try to adopt it, Australia intervened in its national capacity to block consensus and call for a vote.

Other delegations reacted angrily: Australia had acted in bad faith by using the prospect of a consensus report to extract concessions and negotiate a weaker text, and then when others thought all was agreed, pulling the rug from under them and calling for a vote. Evidently, a good number of nuclear alliance states (including Canada, Germany, Japan, the Netherlands and Norway) were ready to join consensus on the report, and prudently refused to join Australia’s group of 14. They presumably saw no point in needlessly antagonising the majority, and trashing their chances of influencing developments at the General Assembly later this year.

The outcome of the vote was never in doubt. Mexico’s ambassador described the adoption of the report as ‘the most significant contribution to nuclear disarmament in over two decades’. Two decades ago, Australia, in a daring and creative move, rescued the Comprehensive Nuclear Test-ban Treaty from the deadlocked Conference on Disarmament and took it to the General Assembly for adoption. Now it is reduced to waging a petty and futile rear-guard action that can achieve nothing beyond dividing its allies and depriving itself of any role and influence in the process ahead (and perhaps demonstrating to the US that it fought its corner to the bitter end).

If Australia is to be anything more than an impotent spectator of what lies ahead, surely it is time for a thorough re-evaluation of strategy. 

Photo: Flickr/UN Photo/Violaine Martin

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The IMF’s Independent Evaluation Office (IEO) recently released its assessment of the IMF’s handling of the euro crisis. It was a damming report.

The IMF has been heavily criticised for its response to the euro crisis, particularly its involvement in Greece. As Stephen Grenville has noted, you could fill a library with the commentary on the Fund’s failings. These include: ignoring the signs of an impending crisis; failing to understand the dynamics of a currency union; relying on excessively ambitious projections in the design of programs; not applying the IMF’s requirements for exceptional access to resources; and having a pro-Europe bias in lending decisions.

Among some of the most disturbing revelations in the IEO report are shortcomings in internal IMF governance. One media report concluded it was ‘unclear who is ultimately in charge of this extremely powerful organisation’. Was IMF management calling the shots, or was management a puppet to the European Central Bank (ECB) and European Commission (EC)? One thing is clear: the IMF’s executive board wasn’t in charge.

In describing its governance arrangements, the IMF states that the board of governors (consisting of finance ministers or central bank governors) is the highest decision making body, but most of its powers are delegated to the executive board who conducts the day-to-day business of the IMF and is responsible for all lending decisions. Yet notwithstanding that the IMF was dealing with a major financial crisis with global consequences, the IEO concluded that ‘the executive board played only a perfunctory role in key decisions related to the IMF’s engagement in the euro area crisis’. Important details were not provided to the board, and it was not consulted on some key policy issues.

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One criticism was that the IMF had a pro-Europe bias, a consequence of a European managing director and over 25 per cent of the executive board coming from Europe. Supporting this claim was the way the IMF ignored its own requirements for exceptional access to its resources in order to make additional loans to Greece. The IEO also points out that European directors were provided with information not available to other directors. It also appears that decisions on the use of IMF resources were effectively being taken by the ECB and EU. 

It is disturbing that the IEO had difficulty getting access to IMF documents; a sign of a major breakdown in internal governance. The IEO was clearly exasperated and noted that many documents on sensitive matters were prepared outside established channels and/or could not be located. Furthermore, the IEO was not able to determine who made certain key decisions, or the basis for those decisions.

In recent years the focus for reforming the IMF’s governance arrangements has been on increasing the quota share of emerging markets. The concern of the emerging markets is that developed countries have a disproportionate say in the IMF, which has biased decisions in favour of the developed countries. The process of changing quota shares and representation in the IMF to better reflect the changes in the global economy has been a tortuous affair. The G20 agreed on a change in quotas which would result in an overall 2.7 percentage point increase in the quota share of emerging markets, and this was to be the first instalment of bigger changes. However it took the US five years to endorse the initial change. Given political trends in the US, combined with its veto power over major changes in the IMF, it will be a long time before emerging markets get a further increase in their say.

But the IMF does not have to wait for changes in the distribution of quotas to reform its internal governance arrangements. In fact, given the concerns of emerging markets and the slow progress in changing quota shares, the IMF should be going out of its way to demonstrate evenhandedness in all its decisions. With the IEO report pointing to a clear pro-Europe bias, it is unfortunate that IMF Managing Director Christine Lagarde rejected the first recommendation by the IEO, namely that the executive board and management develop procedures to minimise the room for political interventions in the IMF’s technical analysis. Remarkably, Lagarde said that there was no basis in the IEO’s report supporting this recommendation. No wonder emerging markets are disillusioned with the IMF.

Lagarde may have baulked at the imprecision as to what constitutes ‘political intervention’, and the technical analysis of IMF staff is only one input to what will always be judgement calls. But the concerns of emerging markets over IMF bias are very real, and have been reinforced by the IEO report. 

What Lagarde should have done was to recognise the thrust of the IEO’s assessment and say reforms would be put in place to help ensure that all IMF members will be treated equally, both in terms of access to IMF resources and in surveillance. Designing such reforms would not be straightforward, but at least the IMF would demonstrate that it is trying to deal with identified problems.

Photo: Getty Images/Drew Angerer

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There are times when national and sporting narratives seem almost to be perfectly synchronised. America’s success at the 1984 Los Angeles Olympics, which presaged the Reagan landslide later in the year, offered golden proof that the country’s long national nightmare of Vietnam and Watergate had finally come to an end. The 2008 Beijing games confirmed China’s rise, and became a curtain-raiser on the Asian Century. What’s been noticeable this year, however, is the disconnect between the politics and sport of the game’s two most successful countries, the USA and UK, which came first and second in the medal table.

Britain voted to leave the European Union partly because of fears about immigration. Yet its hero of the Rio games, as in London four years earlier, was Mo Farrah, a Somali-born athlete who has emerged over the past four years as the face of British multiculturalism. Brexit has fuelled Scottish nationalism, because voters north of the border wished to remain within the European Union, yet it was the Scottish tennis player Andy Murray, who favoured independence, who carried the Union flag at the opening ceremony in Rio.

Across the Atlantic, Donald Trump, in promising to make America great again, has repeatedly said that the US doesn’t win anymore. Yet Team USA dominated on the track, in the pool and at the gym. It came away with its biggest medal trawl since 1984, when its tally was artificially inflated by the Eastern bloc boycott. In the run-up to Rio, America witnessed its worst racial tensions since the Los Angeles riots of the early-1990s. Yet it was the wondrous Simone Biles, a 19-year-old African-American gymnast, who stole the country’s heart, and hoisted the Stars and Stripes at the closing ceremony.

In Britain and America, the Olympics have inevitably aroused patriotic and jingoistic sentiments. On both sides of the Atlantic, this has been a fortnight of feel good fun. But will Rio produce more lasting feelings of unity, togetherness and commonality?

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The extraordinary success of Team GB has brought about national rejoicing but not necessarily national unity. Rather, Rio has become a proxy battleground for Remainers and Brexiteers. 'Team GB’s Olympic medal haul is a blissful break from Brexit blues,' read a headline in The Guardian, playing to type. 'Britain’s Olympic success and post-Brexit vim are cause for celebration not cringe,' read an equally predictable headline in The Daily Telegraph. The Independent, focusing on the implications of a possible economic downtown on the funding of elite sport, asked: 'Could this be Team GB’s last great Olympics after Brexit?' When the anti-EU campaign group Leave.EU posted Tweets using the images of victorious British athletes to make a point about the UK’s national self-sufficiency, Team GB threatened to sue.

In other words, Rio gave the protagonists in the referendum something new to argue over. It also demonstrated the impossibility of conducting any kind of national conversation in Britain without it being dominated by Brexit. This will also be true, no doubt, when the flame is lit in Tokyo in four years time, and also in 2024, which two EU countries, France (Paris) and Italy (Rome) are competing to host.

So what of the USA? Has America’s Olympic success got a political dimension? Judging by the presidential candidate’s use of their social media accounts, it would seem that Hillary Clinton believes that Team USA’s feel good success is far more useful to her candidacy than Donald Trump. As Politico reported, the billionaire has been almost Trappist in his silence about the Olympics and America’s great success. His nativism also seems at odds with such an obviously multi-cultural Team USA, a group of athletes that looks like the country it represents.

What’s been striking about the advertisements airing in America during the Olympics is how many of them feel like rebuttals of Donald Trump. Coca Cola has run an ad called 'Together is beautiful' featuring Americans in hijabs as well as cowboy hats. Mini’s 'Defy Labels' features the American fencer Ibtihaj Muhammad, who says 'Muslim' down the barrel of the camera. Apple’s ad 'The Human Family' feels like a Benneton ad on steroids and features a poem read by Mayo Angelou, who took part in Bill Clinton’s inauguration. This has been a terrible few weeks for Donald Trump, and the Olympics, while not being the primary or even the secondary cause, have not helped. Clearly, America is great when it comes to sport.

As for the question of will the Olympics forge a greater sense of national togetherness, I suspect not. Somewhere, soon, there will be another multiple shooting, another racial flashpoint, another moment in the campaign that exposes that polarisation that is now a permanent feature of American politics. The Olympics was about red, white and blue success, but the broken politics is more about the deep divisions between red and blue.

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Desperate times call for desperate measures. The International Monetary Fund seems to have lost hope that monetary and fiscal policy can shift the Japanese economy out of its deflationary torpor. The IMF, usually the embodiment of conservative mainstream economics, has published this working paper and these consultation documents that suggest Japan should embark on a comprehensive incomes policy so that wages will rise strongly. 

Incomes policies are normally imposed in order to restrain wages, not to boost them. What’s going on?

Prime Minister Abe’s 2012 ‘three arrows’ program projected a speedy return to growth, 2% inflation and a balanced budget by 2020. The initial reaction to ‘Abenomics’ was favourable: the stock-market rose 60% and the exchange rate fell by more than 20%. This eased financial conditions, boosted corporate profits, and lifted actual and expected inflation into positive territory.

But this improvement was not sustained. The exchange rate has appreciated. The IMF expects the Japanese economy to grow by 0.5% this year, 0.3% next year and slower still thereafter. Core inflation is expected to decline and headline inflation, running at 0.2% this year, will rise to 0.6% next year – well short of the 2% target.

The economic conjuncture in Japan is special, perhaps unique. In the past 25 years (1990-2015) real GDP has grown at an annual average of 1%, which might sound slow, but demographics mean that Japan’s working population has been declining. Japan’s GDP growth per worker over these 25 years (the so-called ‘lost decades’) is about the same as America’s. And current unemployment is quite low: 3%. So maybe Japan is doing just about as well as should be expected for a super-mature economy with declining population. Read More

 

There are two abnormalities. The first is the chronic low inflation (the GDP deflator has fallen by 0.3% annually over the past 25 years). The result is that, even when the policy interest rate is set at zero (or a small negative, as at present), it does not provide a strong incentive to borrow. The second is that persistent budget deficits have built up a staggering level of government debt: the ratio of gross debt to GDP is 250%, well over twice that of other G7 countries. Japan is still adding to the debt by running a sizeable budget deficit (5% of GDP) so there isn’t room for much fiscal stimulus. In fact, Japan needs to get the deficit down just as quickly as possible.

Thus the two standard macro-instruments – monetary and fiscal policy – are both constrained. In response, the IMF proposes what might seem an outlandish approach: pressure businesses to give larger wage increases so that they will have to raise their prices, thus boosting inflation. The IMF says that ‘slow wage-price dynamics amount to a missing link in the transmission of rising corporate earnings to inflation (actual and expected)’.

If Japan did succeed in getting inflation up to Bank of Japan’s target of 2%, this would mean that the policy interest rate, already slightly negative in nominal terms, would be substantially negative in real terms, which might encourage more borrowing for investment. Then again, it might not: if demand in the economy is stagnant, even the most attractive borrowing opportunities won’t induce investment. Many argue that the near-zero rates prevailing in recent decades just discouraged necessary restructuring, keeping ‘zombie’ firms going rather than encouraging new investment.

The IMF suggests  income policy might help in other ways. A lift real wages might boost consumption spending. If it does succeed in raising inflation, this would make the debt burden seem smaller: higher nominal GDP lowers the debt/GDP ratio.

But all this is surrounded by pitfalls. Higher inflation might force up the interest rate on government debt, which would greatly increase the deficit. Other suggestions (examined in detail by the IMF) seem equally fraught. Paul Krugman has long argued that the Japanese authorities should undertake ‘irresponsible fiscal and monetary policy’, threatening to embark on such expansionary policies that inflation will rise. Lars Svennson (influential academic and former Swedish central bank board member) offers the Japanese a ‘foolproof’ method of getting inflation up: depreciate the yen enough to get inflation up via higher import prices. Adair Turner (former head of the UK Financial Services Authority) wants the Japanese to embark on substantial fiscal expansion, financed by central bank money creation.

All this is borderline-nuttiness. Rather than provoking inflation, the Krugman proposal is more likely to set off bond-yield rise, which would blow out the budget deficit. Svennson’s devaluation idea would require a huge forced devaluation, which would be hard to achieve operationally and would be totally unacceptable to Japan’s trading partners, who would suffer a counterpart appreciation. Adair Turner’s ‘helicopter money’ proposal doesn’t offer any advantages (in terms of debt/GDP ratio or interest cost of funding) over issuing more bonds to fund the fiscal expenditure. 

Meanwhile, the Japanese authorities seem ready to maintain current policies: strong quantitative easing; a mildly negative policy interest rate in the (so far unfulfilled) hope that this will cause a depreciation of the yen; postponing a fix of the budget deficit, as even modest attempts to raise the value-added tax cause consumers to go into a spending funk; and raise the minimum wage by a regular 3% annually. One tiny structural shift: more women are entering the workforce. The truly radical policy would be to ease immigration restrictions, but change here is likely to remain glacial.

The Japanese are travelling a narrow road with big risks on both sides and no safe haven in sight. The one clear lesson is that it’s much harder to run an economy with aging population and shrinking workforce. 

Photo: Flickr/Soumei Baba

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