Lowy Institute

Budgets are always pretty boring. Any controversial issues have been leaked (and spun) beforehand. Last night's was no exception. But it does provide an opportunity for a stock-take on longer-term debates about how the economy is travelling.

In a world which has been 'too slow for too long', the Australian performance has been pretty good, especially considering the collapse of commodity prices since 2011 (the graph below shows just how big this terms-of-trade shock has been). On the usual aggregate GDP measure, Australia has grown 22% over the eight years since 2007, just before the crisis. This compares with 10% for the USA, 7% for the UK and 12% for Canada, a rather similar economy. This looks even better against the dismal performance of Europe, where France is up just 3%, Germany up 7% and Italy down (yes, down!) 8%. Among the mature economies, New Zealand is closest, with 16% expansion. (all data from IMF WEO April 2016 database ).

If we look at per capita GDP, Australia is less of a stand-out, with an increase of 7% over these eight years. On this measure the out-performance narrows: even Japan is up a couple of percent. But Australia still has twice the growth of the US.

RBA Chartpack http://www.rba.gov.au/chart-pack

It's too early for a definitive assessment of how the transition from the resources boom is going, but so far the cautious optimists like John Edwards are ahead. There is now a wider acceptance that the impact of the resources boom was exaggerated. Half the increase in resource investment was spent on imports rather than in the domestic economy; the calculation of the terms-of-trade impact on income left a lot of room for different interpretation; and so much of the resources sector is foreign-owned that the big swings (both up and down) are felt more by foreign investors than by locals. Coal miner Peabody is now in Chapter 11 insolvency and Xstrata-owner Glencore is restructuring its balance sheet, but these are wholly foreign-owned.

None of the predicted disasters have come to pass. The banks were said to be vulnerable because of their dependence on foreign funding but this was given a real-life ultimate stress-test in 2008 and they came through untroubled. Anyone predicting a repeat of the freezing of the New York money markets hasn't noticed what prudential supervisors have been doing since then. Another popular alarmist prediction was a house-price bust (with the knock-on effect this might have on the banks' mortgage-heavy balance sheets). Again, so far so good: asset-prices seem to be levelling out and even if they drop back, the biggest exposures are with well-placed borrowers. Unless there is a big rise in unemployment, all this seem a case of scare-mongering — or commentators without enough real issues to talk about.

Moody's has put the government on notice that it must do more to get the budget into surplus. It's a puzzle why anyone would take any notice of the credit-rating agencies after their pre-crisis performance in handing out AAA securitization ratings on demand. Certainly the markets didn't take any notice of past down-grading of Japan and the US. But Australian politicians have made a rod for their own backs here, by using the threat of downgrading as an impetus for budget stringency.

In the global context, this pressure for a quick return to budget surplus has been the driver of austerity in the crisis-affected countries. This macro-economic mistake is perhaps the main explanation for 'too slow for too long'. The crisis expanded deficits, more because of the economic downturn rather than the need to support failing banks. Winding these deficits back greatly weakened the recovery: even with a conservative estimate of the fiscal multiplier, each percent reduction in the deficit-to-GDP ratio takes a percent off the growth rate. Look at this graph to see the contraction applied by austerity in 2011-13 and weep.

Source: IMF WEO April 2015 Figure 1.7

Australia had the same debate, with successive governments vying with their opposition in promising faster return to surplus. This was, in fact, unnecessary here. With no recession or bank failures to cause a huge deficit blow-out, moderate government debt levels and time-bound fiscal stimulus, there was no pressing need to return quickly to surplus. Fortunately, the austerity needed to achieve a surplus was never applied. The promised surplus has progressively receded into the future. We were saved by prevarication.

Long-planned resources projects (including LNG) have kept the level of investment from dropping precipitately, and housing investment has helped fill the gap. Total investment has fallen from 28% of GDP in 2007 to 26% in 2015, still strong by international comparison. Unemployment is fairly low, thanks to wages restraint. The slowing has been softened by exchange rates and interest rates. The real (inflation-adjusted) exchange rate is more than 20% lower than its peak in 2012 (the largest fall among mature economies). Interest rates are low in historic terms, but the RBA has not had to resort to the desperation-driven near-zero (and even negative) rates prevailing overseas. Ross Garnaut's advocacy for still-lower rates to get the exchange rate down further seems misplaced in an inflation-targeting regime which has served Australia well.

Of course further structural transition is still needed. While productivity is notoriously hard (maybe impossible) to measure, there is not much doubt that Australia is mimicking the global weakness. At some stage, the budget has to be brought back to surplus.

The valid criticism of past policies is not that they have been seriously wrong, but that the political process has not only failed to take desirable options: it has also blocked them off in the future. The government ignored the main lesson of the successful reforms of the 1980s: when your political opposition advocates good policy, you should seize it as your own. In the current context, trimming back the excesses of negative gearing is an example. Labor's total hash of a resources super-tax in 2010 has put that option off the agenda for as long as memory lasts. Combined with a sovereign wealth fund, this would have been a powerful automatic counter-cyclical instrument for Australian's chronic problem of commodity cycles. The current government botched sensible climate-change policies just as decisively. A carbon-tax was labeled as a 'big new tax' and scuttled forever, ignoring the opportunity it provided to lower other taxes which distort, rather than offset a distortion, as a carbon tax would have done.

Economic reform requires patient gathering of support through rational argument and sensible compromise, not the now-standard point-scoring negative politics. Parties pander to their constituencies. The modest cut in company tax this budget responds to vested interests, ignoring the fact that Australia's imputation policy fully offsets company tax for domestic shareholders. Foreign multinationals are the target of a potentially budget-fixing 'Google' tax, with the actual collection being a problem conveniently in the future. South Australia's political blackmail on ship-building succeeds brilliantly, as industry policy disappears down a dead-end.

Economists, for their part, should be ready to offer compromise second-best solutions, rather than incomprehensible optimality (as was Treasury's proposed resources super-tax).

The key issues for the economy's future are not to be found in last night's door-stop of budget documents. Far-sighted initiatives (such as an infrastructure fund, financed outside the budget) were left for another day. Tinkering has prevailed over structural reform. The strategy which will in due course return the budget to surplus remains uncertain.

On the resources debate, John Edwards' measured assessment of the not-too-disastrous impact of the resources boom is proving correct, but Ross Garnaut's somber message of lost opportunities resounds. With all the advantages of resource endowment and proximity to the globe's fastest-growing region, we should do better than just muddling through. The overall assessment is: 'Lazy: could try harder'.

Photo by Stefan Postles/Getty Images

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We face 'extraordinary' times, 'very sensitive' times, international headwinds and fragility. But the overarching message we are meant to take away from this year's Budget with is a positive one.

In his 2016-17 Budget speech, delivered tonight, Australian Treasurer Scott Morrison stated that the Turnbull Government understands the economic challenges Australia faces. And indeed there is a comprehensive range of measures and policy announcements intended to assure us that the government is responding to our challenges and successfully navigating the transition away from the mining boom.

Unfortunately, the Treasurer's words have been undermined somewhat by his extremely light treatment of the global challenges and risks that are materially important to the Budget figures.

The avoidance of international context is particularly worrying on the back of the Treasurer's decisions not to attend the IMF, World Bank and G20 meetings in Lima last October and in Washington last month, as well as other recent international gatherings.

The scant international content in the Treasurer's remarks is particularly striking in light of the 0.25% interest rate cut announced this morning by Reserve Bank of Australia Governor Glenn Stevens. In justifying the interest rate decision, the key factors cited by the Reserve Bank Board were primarily global in nature. Weighing on the Board was a confluence of downgrades in global economic forecasts, uncertainty about the economic outlook, difficult conditions in emerging-market economies, and the divergence in monetary policy settings.

The Treasurer cited precisely none of these factors in his speech.

He had much to work with. Digging into the details of the Budget papers suggests a prudent, middle-of-the-road set of estimates about the global economy, awareness of the risks, and broad alignment with the international economic discourse and the Reserve Bank Board decision.

The US, Japan and Euro area are expected to grow at modest rates or remain subdued out to 2018 the forecast years. As for our emerging-market trading partners, the ongoing Chinese transition means moderating growth and ongoing risk to the global economy, India's title as fastest growing major country in the world will continue to present opportunities, and other East Asian countries are expected to grow slowly relative to history.

The overall picture is one of moderating global growth, reflecting unresolved crisis legacies, low productivity growth and unfavourable demographics.

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Table 1: International GDP growth forecasts

Given the Budget papers’ claim that risks to growth are broadening and are evident in both advanced and emerging economies, it is also worth paying attention to the uncertainty around the estimates. For interested wonks, Budget Paper 1, Statement 7 details forecasting performance and scenario analysis and is worth a read. It is technical but rich in detail about the uncertainty of numbers.

I’ve produced, with a couple of tweaks, an Aussie version of the ‘most depressing chart in the world’, an honour bequeathed to a chart from the 2016 Economic Report of the US President which explains the succession of World Real GDP growth forecast downgrades by the IMF.

Australian Major Trading Partner GDP forecast, 2010-2018 

Source: Various Australian Budgets and Mid-Year Economic and Fiscal Outlooks (MYEFOs)

The graph explains how well, or rather how poorly, Australia has forecast the performance of our major trading partners – those of particular importance to domestic economic activity – in recent Budgets. We have gotten into a routine of projecting a rosy recovery, which has failed to materialize by the time forecasts become actual, known figures. 

It is an observation entirely consistent with the experience of other forecasters, such as the IMF, and is unsurprising given the tendency for Australian forecasts of the international economy to benchmark our international projection, for very understandable reasons, against credible global and national forecasts. But it means we inherit their mistakes, and this has meant downgrades so far this decade.

What continued downgrades in the international economy means is a very real thing for the Budget. It is a material contributor to the ‘parameter and other variations’ (changes in Australian economic conditions not associated with policy) that are collectively responsible for around $13.5 billion in net tax receipts downgrades since MYEFO out to 2018-19, a smaller downgrade than in recent budgetary documents. In comparison, though, the net impact of policy decisions on the budget bottom line across the same four years (which admittedly covers a range of actions that impact on the budget bottom line) is just $1.2 billion.

In all, this is very much the Budget of a salesperson, one that allows Morrison to distance himself firmly from his predecessor and the highly optimistic tone on the global economy that was a hallmark of last year’s Budget.

A side effect, though, is that when it comes to the big picture, the impression is that Australia’s Treasurer is completely focused on a fraction of the change that drives our nation’s bottom line.  The action by the Reserve Bank, and what it implies about the trajectory of the Australian economy, is therefore likely to steal some of the headlines away from this unusually early Budget.

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Australia is sending one of its submarines, the HMAS Rankin, to Japan this week for joint training and to promote the bilateral relationship, following news last week that the Japanese company Mitsubishi Heavy Manufacturing lost its bid to build Australia's 12 new submarines. Some commentators in Australia have criticised how the government treated Japan during the bidding process, but what’s the view in Japan?

The Japanese media has taken an active interest in the submarine saga, particularly now that the bidding process has concluded. Japan had enacted reforms to allow for the export of military hardware, and building Australia's submarines would have been the first big project under these reforms. Furthermore, building submarines collaboratively was emphasised in the context of closer strategic Australia-Japan cooperation and Australia-Japan-US cooperation.

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Japan expected that its bid was going to be successful. One Yomiuri Shimbun commentator likened the government’s surprise at the outcome to a fall from heaven to hell. Writing in The Australian, Greg Sheridan's recent article based on interviews with Japanese politicians and foreign affairs commentators, paints a stark picture of how Japan now sees Australia as a strategic partner, particularly in the context of Australia's relationship with China. 

While elements of that view are expressed in Japanese media, by and large Australia's acceptance of the French company DCNS' bid is viewed independently from the broader Australia-Japan strategic relationship. However, it should be noted that the Japanese media tended to focus on why Japan lost the bid, rather than the resulting implications. 

Lack of enthusiasm and experience

One of the most prevalent views in the Japanese media is that Mitsubishi Heavy Industries lacked experience and did not commit to building the submarines in Australia until it was too late. Whereas the French and German bidders actively lobbied the defence and political community in Australia, the Japanese bid was promoted by the Japanese ambassador to Australia. Reluctance by some in the Japanese Defense establishment to export sensitive military technology was a reason given for Japan's apparent lack of enthusiasm. 

Domestic politics 

A majority of articles surveyed identify domestic politics as being a factor in the Japanese bid’s rejection. Some reference is made to former Australian Prime Minister Tony Abbott's decision in early 2015 to introduce the 'competitive evaluation process’ but there is arguably greater emphasis on the impact from changing prime ministers from Abbott to Malcolm Turnbull in late 2015. 

The China factor 

Roughly half of the articles surveyed questioned China’s influence on the bid outcome. [fold] For instance, the Yomiuri Shimbun stated that 'if Australia had paid undue regard to China and rejected that Japanese bid, that cannot be overlooked'. The Nikkei Shimbun stated that the view that Australia did not want to irritate China will spread in the Japanese government. An article published in Newsweek highlighted the short period of time between Turnbull’s trip to China and the submarine announcement, as well as his familial and business ties in China. 

Implications for the Australia-Japan Strategic Relationship

While there is little commentary on the broader implications for the bilateral strategic relationship, a few articles do consider the issue. 

The Sankei News warns that a split in Australia-Japan and Australia-Japan-US cooperation could spur on China’s militarization of the South China Sea. The author considers that joint maritime patrols in the South China Sea are worth considering if it both Australia and Japan want to deepen security ties, and advocates that Japanese Prime Minister Shinzo Abe should maintain and strengthen the bilateral relationship with Australia, as to avoid the perception that Australia-Japan and by extension Australia-Japan-US cooperation is faltering.

The Yomiuri Shimbun notes that 'Abbott recognised the importance of Australia-Japan-US cooperation. The Turnbull administration must explain what kind of role it will play in the stability of the Asia Pacific region'. 

What the future holds

While the media expressed shock and disappointment at the result, there was no overt criticism of Australia’s handling of the bidding process. Although Turnbull’s policies towards Japan and China were viewed in Japan as being largely consistent with Abbott, who was regarded as very pro-Japanese, the Japanese media will likely see this decision as a point of departure and this view will be reflected in future commentary.

Photo courtesy of Getty Images/JTB Photo

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It is timely to consider the legal implications of last week's ruling by the  Supreme Court of Papua New Guinea which held the detention of asylum seekers at Manus Island Processing Centre (MIPC) breached their constitutional rights to personal liberty and freedom.

The Supreme Court also found that the purported Constitutional Amendment to legalise the detention of asylum seekers was invalid and of no force and effect, and ordered that:

both the Australian and PNG governments take all steps necessary to cease and prevent the continued unconstitutional and illegal detention of the asylum seekers or transferees constitutional and human rights.

So what are the legal implications of this ruling?

1. Compliance with Supreme Court order

The Australian government may argue that it is not a party to the proceeding, and therefore should not be subject to the court orders made. This situation can be remedied by an application to join the Australian government as a party to this proceeding. If such an application is made and granted, specific orders may be sought outlining what steps need to be taken by the Australian government to end the ongoing illegal detention of the asylum seekers.

Although no timeframe was set by the Supreme Court for these orders to be complied with, the PNG Government has already started to take the steps necessary to end the illegal detention. Last week PNG Prime Minister Peter O’Neill said the centre would be closed and released a statement that said his government would immediately ask the Australian government to make alternative arrangements for the asylum seekers. While the Australian Government has suggested the PNG Court decision is not binding on Australia, it has also indicated would provide assistance to resolve the situation. 

Given the serious nature of the matter, and taking into account the initial procedural delay by the State in settling the agreed and disputed facts, any  delay in resolving the illegality may attract the wrath of the Supreme Court.

2. Reinforced that constitutional amendments should not be made on a whim 

One of the first things PNG law students learn is that the PNG Constitution is the mama law (mother of all laws), because it is the foundation upon which all other laws are built. It should not be amended on a whim.

In contrast, however, the majority of Papua New Guineans fail to appreciate the importance of this document. Therefore, when proposed constitutional laws are rushed through parliament without proper debate or public consultation, it is only the knowledgeable few who take issue and try to rally the masses to protest and question the proposed amendments.

How then do we keep our government accountable, when so many do not understand enough about their constitutional rights and the parliamentary process?

At present, it is our judiciary which has continued to act independently, and kept the other arms of government accountable. This decision serves as an important reminder that the judiciary will continue to uphold the PNG Constitution, and will not bow to external pressure to legitimise rushed, illegal arrangements made by parliament. 

Drawing from a healthy body of PNG case law on constitutional amendments, the Supreme Court was able to summarise the criteria that needs to be met for a law that purports to regulate or restrict a qualified right under the Constitution to be valid.

In this case, the 2014 Constitutional Amendment failed to meet the full criteria set out under s.38 of the constitution. The amendment failed to specify the purpose of the amendment and the rights it purported to restrict, and failed to state that the restriction was 'reasonably justifiable in a democratic society having a proper respect for the rights and dignity of mankind', as the constitution requires.

It is now imperative that the knowledgeable few, which may include civil society, legal professionals, and political experts, create avenues to communicate the importance of this decision to every Papua New Guinean and advocate that they also have a major role to play in keeping their government accountable. 

3. Opportunity for legal reform in PNG 

It seems obvious from the Supreme Court’s judgment that PNG has insufficient legal framework in place to address the treatment of refugees seeking asylum. Read More

  Having identified these deficiencies in domestic legislation, and depending on PNG’s political relationship with the Australian government, two scenarios could follow:

i.  Short term: The PNG Government could quickly draft up new laws, and remedy the flaws highlighted in the decision that rendered the asylum seeker arrangement unconstitutional.

ii. Long term: The PNG Government may take the view that this is an opportunity to consult all stakeholders, and develop a considered policy to address how refugees seeking asylum are treated during detention and processing in the future, and then draft and enact the appropriate legislation to give effect to the rights and freedoms guaranteed under international conventions and the PNG Constitution.

The PNG judiciary and legal profession have gone through some challenging times in the past few years, so this well-considered landmark decision was a welcome event. We should all stand and applaud the ruling of the Supreme Court and its fearless defense of our constitution and the human rights enshrined in it.  Let us hope that our nearest neighbors will respect PNG’s sovereignty and abide by the decision handed down by the highest court in our land.  

Photo: Recep Sakar/Anadolu Agency/Getty Images

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When he rejected the bid by Chinese company, Dakang for an 80% share of S Kidman and Co, Australian Treasurer Scott Morrison offered three reasons why it wasn’t in the national interest.

Each of these three sits uncomfortably with previous deals that have cleared the approvals process. 

This makes the Treasurer vulnerable to criticism that it is not threats to the national interest he is responding to but, rather, populist pressures around investment from China.

The Treasurer's first objection is that Kidman’s portfolio is big. Even with the property at Anna Creek carved out, there are still 11 cattle stations up for sale that cover 77,000 square kilometres. 

Yet in 2009 London-based private equity group, Terra Firma had no trouble taking a 90% stake in Consolidated Pastoral Company (CPC), another Australian business with sprawling cattle station holdings. CPC’s portfolio includes 20 properties, covers 57,000 square kilometres and has more than double the herd carrying capacity of Kidman. And several decades ago, UK company, Vesteys held cattle stations covering an area of Australia more than twice that now for sale by Kidman.

The second reason the Treasurer gave for rejecting the proposed acquisition is that the 11 properties were being offered as a single aggregated asset and this made it difficult for an Australian investor to make a competitive bid.

To be sure, Dakang’s $371 million offer is a big wad of cash. But it is less than the $425 million that Terra Firm paid when it received regulatory approval to acquire CPC’s portfolio. And just two weeks ago The Australian Financial Review reported that Queensland Investment Corporation (QIC) was in due diligence on a likely $400 million dollar deal for the North Australian Pastoral Company, which has cattle stations spread across Queensland and the Northern Territory.

With local billionaires such as Gina Rinehart and Twiggy Forrest also getting into the cattle game, it seems awkward to suggest that Australian suitors lack the funds to compete. 

Indeed, Treasurer Morrison conceded an independent review of the Kidman bid process led by Professor Graeme Samuel had confirmed local bidders had been given an opportunity to make an offer. He added that the review found there 'remains significant domestic interest in Kidman'. No doubt there is. But unlike QIC and the North Australian Pastoral Company, local investors didn’t show the same level of interest in Kidman that Dakang did.

The final reason given for not allowing the deal to go ahead was that it could undermine public support for foreign investment in Australian agriculture more generally.

Here it might seem the Treasurer has a point. Read More

The 2014 Lowy Institute Poll found 60% of Australians are against the government allowing foreign companies to invest in agriculture.

But let’s also be clear about what exactly the Australian public objects to.

In 2015, research by the Australia-China Relations Institute and the Centre for the Study of Choice at UTS found that what most concerns the Australian public when foreign companies invest in Australia’s agricultural sector is the share of foreign ownership that will result, not the dollar value of the deal or the country the money is coming from.

So it’s true that many Australians would not be happy to see Dakang’s bid for Kidman go ahead because it would result in 80% foreign ownership.  But they also wouldn’t be happy with CPC being 90% foreign- owned either, or with any number of other Australian agricultural assets that are entirely foreign-owned.

So why single out Dakang’s bid, if not for political opportunism?

In the end, it will be up to foreign investors to manage the political risk that now seems unavoidable when investing in Australian agriculture. One way they could do this is by partnering with a local investor and restricting themselves to a minority stake.

For some the commercial calculus of a minority holding might still work. But no doubt others will seek to mitigate the risk by simply investing elsewhere. With Australia producing less beef output than it potentially could, countries that compete with us in international markets — such as Brazil, India and the US — will be delighted. 

Photo by Lisa Maree Williams/Getty Photos

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US presidential race 2016

With the outcome of this week's primary in Indiana generally expected to be a key indicator in the GOP nomination (The Hill suggests a win for Donald Trump would  put him on 'a glide path'), perhaps it's time for a bit light of relief.

Here some jokes about the election from White House Correspondents Association Dinner that took place on Saturday night, featuring President Barack Obama and comedian Larry Wilmore:

The ractcheting up of the vitriol between Obama and Trump has been one of the more diverting aspects of the long primary season. Here's a compilation of some of the high points (and plenty of low ones), including a grab from last year's correspondents dinner. 

And finally, an oldie but a goodie. Saturday Night Live's take on Trump interviewing Hillary Clinton:

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By Brittany Betteridge, an intern in the Lowy Institute's East Asia Program.

In February, President Joko Widodo visited Silicon Valley to meet with US technology power players including Google, Facebook, Twitter and the start-up technology investment firm Plug and Play. It was his bid to show that Indonesia is serious about expanding its digital economy and promoting technological entrepreneurship.

Indonesia has an enviable social media presence with the 4th largest Facebook community in the world and the 5th highest number of Twitter users; the challenge lies in how to harness the digital economy for Indonesia's own economic benefit. Jokowi's Administration has taken steps in the right direction by partnering with financial authorities to support small and medium technological enterprises and launching a 4G/LTE telecommunications network.

However, the Administration's proposed new legislation towards foreign e-commerce companies in Indonesia is detrimental to the realisation of a fully liberalised digital economy.

Streaming services like Netflix and Spotify, without a legal presence in Indonesia, have frustrated officials both through their hosted content as well as their capture of advertising revenue streams. As they pay no taxes in Indonesia, Jakarta is unable to gain revenue from the estimated US$800 million value of digital advertising.

Indonesian Minister for Communications and Information Rudiantara has recently proposed a new law requiring foreign companies to have a legal entity in Indonesia or joint-venture partnership with an Indonesian company. The newly proposed law would allow Indonesia to collect tax from these providers.

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However, tech entrepreneurs have criticised the proposal as not having been developed in consultation with digital stakeholders and as causing regulatory confusion. Large tech companies such as Twitter and Facebook, which have had representative offices in Indonesia for several years, could be exposed to higher taxation under the draft, especially if back taxes are pursued, as suggested by Finance Minister Bambang Brodjonegoro in April.

Indonesia needs to revise the current draft to allow it to collect more tax revenue without creating disincentives to new tech investment, or damaging investor sentiments by changing the rules of the game on companies that have already established legal entities in Indonesia.

Jokowi's Administration also plans to create a national payment gateway that facilitates rapid e-commerce payments that Indonesian banks can profit from, as opposed to profit being accrued to foreign banks. The payment gateway would also increase consumer data for e-commerce companies who will be able to track public spending data to better target Indonesian consumers. While the initiative targets an important goal of improving interoperability between different financial institutions and making it easier for Indonesians to make integrated e-commerce transfers, there are questions over how the nationalised system would impact foreign companies.

Under Rudiantara's new business entity regulations, it would  be mandatory for national and foreign companies to use the national payment gateway. But established companies, such as Visa and MasterCard, are likely to provide a more efficient and secure service for this goal than a nationalised payment gateway. The enforced usage of this scheme by foreign companies will be another regulatory barrier to pursuing business in Indonesia. This initiative seems at odds with the Jokowi Administration's broader narrative for the liberalisation of the Indonesian economy, and for an Indonesia moving away from a commodities-based economy to one with robust service infrastructure that is attractive to foreign investment.

For Jokowi, supporting innovation in the context of Indonesia's internet censorship regime might also prove a challenge. Indonesia's controversial 2008 Information Law prohibits use of technology that offends religious or community values, and provides for the enforcement at the national level. Foreign start-ups looking to invest in Indonesia can run afoul of these regulations over the content they host or features of their applications.

Recently, Netflix was blocked by state-owned Telkomsel for objectionable content and its failure to have a business permit to operate in Indonesia. Messenger apps such as LINE were also challenged under the legislation in February, with the service forced to remove all emoji stickers depicting LGBT lifestyles. Having to adapt to regional censorship requirements is not unique to Indonesia, but the new business entity regulations will also make it easier for the Indonesian Government to enforce adherence to censorship regulations. Specific content deemed objectionable can be more easily taken down, as opposed to blocking the entire service.

As Jokowi paves the way for a digital revolution, Indonesia still has a ways to go. A strong digital economy needs a technologically skilled workforce to fill these emerging industries. Investments in technology need to be coupled with strong investments in higher education and research/training. Bureaucracy needs to be streamlined to promote business competition in an environment of government-owned infrastructure and to encourage entrepreneurs to build new products and applications.

Large tech firms must negotiate Indonesia's current digital censorship regulations and uncertain business incorporation entity rules, which are barriers to these companies entering and expanding in Indonesia. The time is right for Jokowi to streamline bureaucracy for technological start-ups and increase investment in digital entrepreneurs and higher research/education to ensure young Indonesians are ICT job ready.

Indonesia is moving from 'main internet' (playing internet) to incorporating it as a fundamental to its plans for economic growth.

Photo courtesy if Flickr user Global Panorama.

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German Chancellor Angela Merkel is paying a high political price for spearheading a European Union deal with Turkey aimed at stemming the flow of refugees from the Middle East to Germany and northern Europe.

The deal, which is based on Ankara taking back refugees arriving in Greece from Turkey, has sparked widespread criticism across Europe with the agreement seen as providing Turkey’s autocratic president Recep Tayyip Erdogan with leverage over the EU.

The result has been to send Ms Merkel’s poll numbers tumbling, while placing at risk her authority as Europe’s pre-eminent political leader amid increasing concerns the refugee deal could unravel.

The agreement with Ankara faces a crucial test this week when Brussels considers a key part of the accord, which calls for the EU to grant 78 million Turkish citizens visa-free travel in the EU from June.

'The issue of the visa waiver is vital for Turkey,' Turkish Prime Minister Ahmet Davutoglu said at a joint news conference earlier this month with Merkel and top European officials during a trip to Turkey aimed at easing tensions over the deal.

The number of migrants making the perilous journey across the Aegean Sea from Turkey to Greece has dropped sharply since March when Ankara and the EU signed the deal, which also involves reviving Ankara’s long-stalled EU accession talks and providing Turkey with €6 billion ($9 billion) in EU aid to arrange refuge for the 2.7 million migrants stranded in the nation.

But the plan for sending asylum seekers back to Turkey has not been fully implemented as a result of concerns expressed by groups including the UN and European humanitarian organisations about a range of issues, notably the treatment of non-Syrian refugees. Ankara does not apply the Geneva Convention on refugees in full. 

Resistance to the visa waiver is also running high in both Ms Merkel’s conservative, Christian Democrat-led bloc and several EU member states. Those opposed fear the move would pave the way for a new wave of Muslim migration into Western Europe, which is already battling its biggest refugee crisis since the Second World War.

Among the sceptics is Berlin’s number one ally, France, where French President Francois Hollande faces a tough reelection fight in the first half of next year.

But then it was tensions unleashed by the arrival last year in Germany of more than one million refugees fleeing wars in the Middle East and Africa that forced Ms Merkel to agree to Turkey’s requests —  to speed up its EU accession talks and obtain the visa waiver — so as to stanch the flow of asylum seekers.

Turkey’s political leadership might have distanced themselves from last week’s comments from the Turkish parliament speaker, Ismail Kahraman calling for the nation’s constitution to reflect its Islamic identity.

Still, for many in Western Europe, Mr Kahraman’s remarks have only added to worries about the sense of change underway in Turkey.

'The introduction of Islam as a state religion would result in further divisions in Turkey’s already highly polarised Turkish society and threaten social peace,' said Cem Ozdemir, co-chairman of the German political party Alliance '90/The Greens, who is of Turkish origins.

But even before Brussels decides whether to grant Turkey the visa waiver, German prosecutors could rule on whether a German comedian should face criminal charges as a result of a crude poem he read out on public TV about Mr Erdogan, which the Turkish leader claimed insulted him.

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A decision by prosecutors that the comedian, Jan Boehmermann, has a case to answer, could pile on the pressure on Ms Merkel's after she agreed to allow prosecutors to consider the issue, sparking a bitter row in Germany about free speech and artistic freedom.

Mr Erdogan had demanded Mr Boehmermann face charges under an antiquated law, which prohibits insults against foreign leaders and which has been untouched since the 19th century when slights of honour could settled by drawing pistols at dawn. 

The Boehmermann case and the EU refugee deal have come just as Ankara’s human rights record and its crackdown on the media — along with reports of a black list of foreign journalists — have helped to fuel worries that Turkey is increasingly out of step with western European values. 

Ms Merkel herself has in the past been one of the prominent opponents of Turkey’s long-held quest for EU membership.

But her decision in the Boehmermann case has left her open to claims that she has allowed Mr Erdogan to export his clampdown on freedom of speech to Europe. 

Up until recently, Ms Merkel’s personal approval ratings have remained remarkably high despite the concerns about the refugee crisis and a sharp slump support for her conservative Christian Democrat-led political bloc in the wake of a deep split among her supporters about her handling of the migrant drama.  

If Ankara meets its side of the bargain, the EU has promised to recommend on Wednesday that EU states approve visa-free travel for Turks. A recent Politbarometer poll suggested 80% of Germans believed the chancellor had made too many concessions to Turkey in her negotiations with Ankara over the refugee crisis.

Most doubted that Ankara is a reliable partner, while 62% of those polled said they were deeply unhappy with the chancellor's decision to ask prosecutors to rule whether Mr Boehmermann had case to answer for.

Ms Merkel has already announced that the section of the criminal code which Mr Erdogan had taken his legal action would be removed by 2018.

But the sudden plunge in her support appears to have rattled the chancellor who has acknowledged she made mistakes in the handling of the Boehmermann case, a rare admission for a political leader.

Her description of Mr Boehmermann's satirical poem — which implied the Turkish leader enjoyed child pornography and had sex with animals, among other insults — as 'purposefully offensive' could have given the incorrect impression that freedom of opinion and of the press were no longer important to her, Ms Merkel said.

'With hindsight that was a mistake,' she said attempting to set the record straight ahead of a visit to a refugee camp in Turkey and a meeting with Turkish Premier Ahmet Davutoglu.

Human rights and values would always feature in diplomatic discussions, 'but human rights, rights to freedom, the rights of the press are indispensable assets,' Ms Merkel said.

'And that a situation can arise where it is thought that such things would be abandoned because we just made a deal with Turkey — that was flawed,' she said.

Photo: Dan Kitwood/Getty Images

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The Modi Government’s quest to ensure women’s safety in India has resulted in a ‘panic button’ policy. From 1 January next year, all mobile phones sold in India must be equipped with panic button technology. From 2018, all mobile phones must have GPS tracking.

Indian government ministers were quick to praise Modi’s announcement. Women and Child Development Minister Maneka Gandhi, described the built-in panic button as a ‘game changer’. Communications and Information Technology Minister Ravi Shankar Prasad said: ‘technology is solely meant to make human life better and what better than using it for the security of women?’.

Women's safety rose to the top of the policy agenda in India after the globally publicised gang rape of Jyoti Singh on 16 December 2012. When the news of Singh’s assault hit the media, protests swept across New Delhi and India, enduring beyond her death two weeks after the attack. In a nation frustrated by pervasive patriarchal norms,  protesters angrily demanded the government take action.

The case triggered a series of legislative changes. In 2013, stricter laws including the death penalty were passed through the Lok Sabha (Lower House) and Rajya Sabha (Upper House). Six ‘fast track’ courts were established in Delhi to deal with crimes against women. A women-only police hotline was introduced, as were women-only counters at police stations. Reporting of sexual harassment (or, ‘eve teasing’, the euphemism common in India), sexual assault, and rape increased. Between 2013 and 2014 alone, reporting increased as much as 15 per cent.

But while the institutional environment for reporting crime by women had improved,  India’s archaic and under-resourced courts mean progress through the judicial system is slow, often resulting in no conviction. It is no surprise then, that Modi is scrambling for new solutions to the problem of women’s safety in India.

In a country where mobile phone ownership is the second highest in the world, ordering a mandated panic button is one way to ‘protect’ women across the country. In the event of an assault, a woman will be able to trigger the panic function by keeping a finger pressed on the number '5' or '9' on a phone's keypad. This will alert the closest registered emergency contacts who can raise an alarm with authorities. Little more detail about the panic button is known.

There has been much praise for Modi for his #DigitalIndia panic button solution, especially by the Ministry of Women and Child Development, which began advocating for the button two years ago. But it is not without its critics. Read More



Firstly, women’s rights activists argue that it is a reactive policy and makes no substantial contribution to improving safety for women. This is against a backdrop of politicians and police who have previously argued that women should not loiter after dark, should ‘dress decently’, and take self-defense classes. Activists argue that the government needs to do more to proactively address cultural challenges.

Secondly, there is the criticism of women’s access to phone ownership. In several villages in Modi’s home state of Gujarat, mobile phone use is at the discretion of the Gram Panchayat (village council). In the village of Suraj, mobile phone ownership and usage are banned for girls. In other villages, single women and teenage girls are banned. One villager argued: ‘Young girls get misguided. It can break families and ruin relationships’. With 250,000 self-governing Gram Panchayats across India, many women and girls affected by such attitudes will have no access to panic buttons. 

Finally, there is criticism that government is using women’s safety as a proxy for surveillance. The GPS localisation function is presumably so that authorities might easily locate victims of assault. However, there is increasing concern over the intention of this mandated function. Given the ferocity of the net-neutrality debate following internet.org’s arrival in India, it would be a paradox that a mandatory GPS function is so easily adopted.

Modi’s ‘panic button’ policy does little to address the cause of crimes against women in India. The high-profile Delhi gang rape sparked significant legislative change and ignited an increased pressure on the Government to address women’s safety. The Modi Government is desperate to implement policies that illustrate its commitment to reducing crimes against women to its domestic and international observers. However, critics have noted that the panic button is reactive and shifts the blame to women, that mobile phone ownership is often at the discretion of men, and that the GPS function is a proxy for surveillance. 

Photo courtesy of Flickr user World Bank

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By Chloe Hickey-Jones, an intern in the Institute's Melanesia Program.

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Over the last five or so years, Australia’s public policy discussions on borders have hardly been strategic. Discussions have instead coalesced on mandatory detention of irregular maritime arrivals, at-sea turn back policies, and Australian Border Force uniforms and accoutrements.

The Department of Immigration and Border Protection can’t be blamed for border security becoming so politicised around operational issues and strategy. But it is left to deal with the policy impacts of a dearth in border security strategic dialogue.

In 2015, the Department of Immigration and Border Protection produced its Strategy 2020 with a clear futures focus. It attempted to apply a couple of different strategic lenses: economic, demographic, geopolitical, technological, and that ever helpful category of ‘other’. But for one reason or another, this hasn’t generated much strategic policy dialogue about borders and their future significance.

Before we self-flagellate, lets contextualise our efforts with those of the US and Europe. The US public policy debate on border security is no more strategic than ours in its oscillation between demonising migrants and building walls. Europe’s frontline border agency Frontex’s Risk Analysis 2016 offers the world little in the way of strategic analysis with its pedestrian assessments of a unprecedented rise in migratory pressure, an increasing terrorist threat, and a steady rise in the number of regular travellers.

Recent conferences and symposia in the UK reveal that there are most definitely changes afoot in the strategic conceptualisation of borders, and these will have policy impacts. These discussions reveal that a greater emphasis on multi-disciplinary analysis of geopolitical developments is required to understand future border security challenges.

For the first time since the end of the cold war, the world is seeing the construction of an increasing number of border walls. But we are not seeing a return to a impermeable cold war type border security environment. In contrast the focus now is on keeping ‘bad things’ out: people and commodities. We are also seeing a continuation of trusted permeability, supported by assumptions about the safety of traditional hegemonies.

For those who are trusted, the crossing of international borders is becoming easier. For everyone else movement is being restricted. But even this selective or trusted partner permeability is challenged by the reality that assumptions about the safety of the hegemony are challenged. Automatic assumptions about the risk posed by travelers with European passports, for example, are challenged by events such as the recent Paris and Brussels attacks.

Border security measures, in terms of people and technology, are expensive. Slowing the movement of people or goods across borders can br economically catastrophic. So with increased threats, challenges to underlying trust assumptions, and associated economic risks, nations are struggling to find a border security 2.0 strategy that balances economic facilitation requirements with security. In the absence of innovation, militarisation appears to be winning in the short term.

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When it comes to border disputes, maritime borders is where it’s at. With only a few exceptions, the locations of major land borders are relatively stable. Growing global food protein shortage and the finite nature of metal and mineral resources will continue to motivate efforts from some nation states  to expand their maritime borders. In this kind of border dispute, there are going to be definite winners and losses; and no shortage of potential for miscalculation.

For the foreseeable future, bilateral disputes over maritime borders are going to be on the increase. At the centre of this trend are China and Russia. Both countries continue to test international law and resolve th

rough maritime domain expansion. In the process each is likely to be feeding the others successes or failures. The outcome of these expansion strategies will have long term strategic impacts on the future of maritime border disputes.

This expansionism isn’t just about the establishment of today’s physical maritime borders. It’s also about the exploitation of global commons through establishing uncontested practice. China’s expanding global fishing fleet serves is an example of this strategy in practice. The actions of the Chinese fishing fleet today expands access to much needed and highly profitable fish. But its fishing fleet, and its operations, serve as a middling strategy for access to marine resources more broadly.

The provision of border security involves far more than creating a capability focused solely on keeping our borders secure from potential terrorists, illegal immigrants and illicit contraband. Reducing the concept of border security to a discussion of balancing between securing or not securing national borders from irregular migration is overly simplistic. The balancing metaphor in border security suggests that this policy debate involves a zero-sum game, where increased security measures will reduce the risk of negative consequences.

Border security policy deals with a unique operating space, where extraordinary measures are often required to provide a sense of security, whilst simultaneously maintaining the sense of normalcy that will allow economic interactions to flourish.

Arguably, borders now have a resurgent strategic relevance to national security and geopolitics. In response to this trend, it’s time to lift border security policy discourse to a strategic level. The best way of achieving this strategic border security discourse is through multi-disciplinary discussion and debate: involving subject matter experts from international relations, economic, geographic, environmental, international relations and national security.

With the closure of Manus on the cards, there is an excellent opportunity for an increased strategic focus to be applied in Australia’s border security policy response. Such a response should consider a broader range of options that include new third party resettlement options, reengagement with the United Nations Refugee Agency (UNHC) and further regional cooperation on forced migration. Strategic multi-disciplinary thinking won’t make the complex problem or irregular migration and asylum any easier to address. But it will ensure broader policy consideration and opportunities for policymakers to develop more innovative strategies.

Photo courtesy of Australian Defence Image Library

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With the first Turnbull Government budget this week, it is important to take stock of the impact the Coalition government has had to date on Australia's aid program. 

Perhaps the largest foreign policy legacy of the Abbott Government has been the impact it had upon Australian aid. Presiding over the biggest aid cuts in Australia's history, and a now-irreversible merger of AusAID into DFAT, the aid landscape in Australia today is vastly different from 2012 when, under Labor, aid flows were at their highest ever levels and projected to continue to grow.

In many ways this has been a return to trend for Australian aid and there has already been much discussion about the impact it has had on the aid industry. What has only recently become apparent, thanks to new statistics from the OECD, is the impact these cuts have had on our international donor standings. What's been happening in Australia comes into sharp contrast when compared with the rest of the world. 

Overall, 2015 was another bumper year for international aid flows, with official development assistance (ODA) from OECD countries rising for a third straight year to US$131.6 billion in 2015. After adjusting for inflation and the appreciation of the US dollar, this represented an increase of 6.9% in real terms, the largest single year increase ever achieved. Even when excluding expenditures relating to in-donor country refugee support —  Australia was a trailblazer in this kind of aid financing — aid still grew by 1.7% in real terms. This is surely good news for the international aid community, and those impoverished and in desperate need whom this industry ultimately serves. One country that cannot share in this revelry is Australia.

Figure 1: Falling out of synch with the aid industry

Source: OECD QWIDS database. Dataset here.

This chart highlights the collapse in Australian aid we were all expecting, one that is completely out of synch with global aid trends. When looking at a calendar year, Australian aid peaked at US$4.8 billion in 2012 before tumbling by 19% to US$3.9 billion in 2015. Given this is a calendar year measure, it doesn't even fully encapsulate the A$1 billion cut implemented in 2015/16 budget, or the expected 5% cut in next week's budget.

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Table 1: How far we've slipped

Future decline aside, Australia's international standings have already been significantly impacted by the existing cuts. In each of the measures listed in the table above, the first assessing volumes of aid, the second a country's aid generosity, and the third a country's ability to give aid, Australia has dropped three or more places. Given there are only 28 countries in the OECD donors club, this is a significant drop, especially considering Australia had the 8th largest economy and 4th highest GDP per capita of this group in 2014, according to the World Bank

Many would argue that we shouldn't compare ourselves to other countries as we all face different and competing domestic constraints. Another approach is to look back at our performance in the past. Compared to past years, however, our current efforts do not stack up particularly well. Based on Australian budget figures and after adjusting for inflation between 1971-72 and 2017-18, Australian aid will have increased by 68% while global aid more than tripled. Between 1980-81 and 2017-18, our aid per capita will be roughly 6% lower, implying our ability to give has remained about the same or, put differently, the amount we give has kept up with population growth. However, where our aid contributions have not kept up is when compared to the growth of our economy. As the graph below shows, by 2017-18 our generosity, as measured by aid as a proportion of gross national income, will be at an all-time low in 2017-18.

As we have become wealthier, our generosity has more than halved. 

Figure 2: Historical low points for Australian generosity

Source: DFAT Australian aid statistical summaries. Forward estimates based on these calculations.

For aid stakeholders and those that see Australian aid as an effective diplomatic and development tool, this is a sad state of affairs. One could argue that, given our geographic proximity to numerous developing nations, we now have an unbalanced set of foreign policy budget priorities. It could also be argued that voters, by and large, are supportive of the cuts. Our own Lowy Poll last year affirmed that sentiment, noting that 53% of Australians were in favour of the cuts. However more recent polling suggests Australians' enthusiasm for further cuts has waned, and also that the way the question is asked can have significant impact on respondents' answers, particularly when comparing Australia's effort to other countries. 

Whatever the case, Australia's international standings in the aid community are falling, and along with them our capacity to influence the regional aid architecture and global development debates. Not to mention the capacity of the government to do good in the region. 

We'll wait to see this week how much further pain the sector will suffer in the year ahead. I'll be taking a more forensic look at the 2016/17 budget figures as they are revealed, so keep your eyes glued to The Interpreter. 

Photo courtesy of Flickr user Department of Foreign Affairs and Trade.

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US presidential race 2016

Easy, Australia.

Don’t let some bombast and uncivil language from Donald Trump change your view of the United States and its intentions. We share a language, a set of values and too many common interests to be anything but friends and allies.

Cover your ears and bear with us for another six months. The rhetoric will only get worse as The Donald and Hillary Clinton square off in what will certainly be a nasty campaign for our presidency. But at the far end, you’ll find us a resilient nation that will continue to be a shining beacon for the world.

The American democracy looks particularly ugly from abroad. The view isn’t exactly pretty from inside the country either, but for people who tune into our melodrama on an irregular basis, it can appear scary.

Today, America has come to a fork in the road. We do this about once a generation. Sometimes the issues threaten to tear us apart; the Civil War, the Depression, Vietnam. Sometimes they unite us; World War I, World War II, 9/11.

For most of a generation, we’ve been on a zig-zag course;  from left-leaning Bill Clinton to a right-leaning George W Bush and back to a left-leaning Barack Obama. There’s simply been no clear mandate from the voters. The opposition has been able to slow and often block progress toward any decisive action.

Into this stalemate comes Trump, a wildly successful real estate developer with an out-sized personality and ego. He’s parlayed these assets into a television series that magnifies both his accomplishments and his style. He has flirted with running for president before but could never gain enough traction.

This time, the stars have aligned.

Trump’s politics have been fungible. He’s widely seen as a liberal on social issues but a hardliner on the military, trade and immigration. He’s not a classic fit for a Republican party long driven by a coalition of evangelical Christians and wealthy business interests. He offends both but he has struck a chord with a wide swath of disaffected middle class Republicans, who feel betrayed by the party’s inability to deliver fundamental change, and the swelling ranks of voters who identify themselves as independents.

His over-the-top rhetoric rallies his constituency which sorely wants a candidate who will blow up the roadblocks and make something happen. They seem willing to trust that Trump is such a character, even if they’re unsure where he is headed.

Trump is the author of a book called The Art of the Deal and, love him or hate him, his credentials as a negotiator are unquestioned. He has surrounded himself with a strong legal team that has allowed him to skate to the edge of the law without getting into serious trouble. Friend and foe acknowledge his use of bankruptcy laws has been masterful —and profitable.

He fills a perceived void as a strong and decisive leader, a CEO-in-chief, in a time when the country is tired of political correctness and compromise. Whether that style will work in the 21st Century world remains to be seen but a healthy cohort of Americans hope it will. 

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Opposing Trump is a familiar political name; Hillary Clinton. She comes with a wealth of classic credentials: Secretary of State for Obama; two terms in the US Senate; and a generation in the public eye. In many election cycles, she would seem a natural choice but this time she’s carrying a lot of baggage ranging from the sins of husband Bill to the furor over her sloppy use of a private email server while Secretary of State.

In many ways, she’s an ideal foil for Trump, who can cast himself as the outsider to her position as the ultimate insider. She speaks in diplomatic tones; he yells and his word choices are often over the top. He promises clarity while she seems to deal in shadows.

American voters certainly have a clear if not wholly satisfying choice. And many voters have already made up their minds. Both Clinton and Trump are household names. But polling reveals each of the candidates has a massive 'dislike/don’t trust' coefficient.

Many pundits see the match up as a chance for Democrats to win a broad mandate to lead the country further left. And a rational analysis of electoral math and demographic shifts suggests that is the most likely result.

The wildcard is Trump’s ability to rally the disaffected who have not always voted. The record turnout in primaries suggests that is a possibility.

The bottom line here is the American democracy is a system of checks and balances that can compensate for the vagary of unorthodox candidates. Minnesota elected wrestler Jesse Ventura as its governor; California elected actor Arnold Schwarzenegger as its governor. Neither state collapsed. Three decades ago, the US elected actor Ronald Reagan president and that went fine.

Having a candidate who is accustomed to playing roles and speaking in sound bites has its risks. One is misunderstanding and over-reaction abroad.

Please take the long view. Judges us on what we do, not on the internal rhetoric that gets us past this painful fork in the road.

Photo courtesy of Flickr user Peter Miller

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So we’ve decided to build twelve submarines in Adelaide, a decision which:

  • contradicts the only idea that economists unanimously endorse — free trade;
  • ignores opportunity cost i.e what else might be done with $50 billion of labour, capital and managerial talent;
  • had no apparent operational budget constraints, with the number of vessels determined by the need to create continuous construction and;
  • makes little sense in terms of industry policy; there is no hope of developing an industry exporting bespoke ships.

Perhaps the comprehensive failure of economics to achieve any traction in this debate could be understood (and forgiven) by simply observing that the decision was the inevitable result of Senate politics. But that would let the guardians of rational economists — particularly the Departments of Treasury and Finance — off too lightly. The all-too-common failure of economics in policy debates is its penchant for analytical purity. Economists promote economically uncompromising solutions. But there is no point in pushing pure-economics arguments that can’t fly politically. In the face of irrefutably-rational economic arguments, the politicians reply: ‘We all know what we should do: we just don’t know how to get re-elected after we have done it.’ 

Last week I reviewed Concrete Economics by Stephen Cohen and Brad De Long, who address this political economy dimension.  They see the essence of good economic policy as requiring governments to play a major role in determining the structure of the economy and setting broad direction, so they can’t be accused of being laissez-faire, free market ideologues. The authors also support the sort of dirigist economics pursued by East Asian economies, so they have no objection to industry policy as such. They approve of protecting domestic industry while subsidising exports (by whatever means, including an artificially competitive exchange rate), in order to obtain the scale economies needed to compete on global markets. Above all, they accept the need to step outside the narrow world of economic analysis in order to develop a political consensus. This consensus will involve compromise; placating and neutralising vested interests while accepting second-best outcomes, provided that the core economic component makes some sense.

While mainstream economics is often a poor fit with political realities, there is plenty of alternative economic analysis relevant for political economy synthesis. Read More

Three decades ago Paul Krugman analysed the benefits of alternatives to free trade, and got a Nobel Prize for his efforts.  Industry policy designed to promote specialisation could achieve economies of scale in sectors with increasing returns (the bigger the scale of production, the lower the per-unit cost). Comparative advantage, the lynch-pin of the simple free-trade case, can be over-ridden if comparative advantage can be changed over time through dynamic restructuring. This can justify protecting the domestic market from foreign competition and subsidising exports. But of course the industry has to be chosen on economic rather than political criteria: there has to be some prospect that the output can be sold globally.

Even if the political imperative is to manufacture submarines (rather than some more promising product) in Adelaide, economic advocacy might at least have headed off the prime minister’s open-ended commitment to make everything possible in Australia. This autarchy is a nineteenth century notion of production. The modern supply chain draws its components from whichever country can produce them efficiently. The supermarkets are full of goods ‘made in Australia from imported ingredients’. In the same way, during the great mining boom of 2004-2008, half the investment expenditure was on imports because components could be made cheaper and better in South Korea or Singapore and towed into place. In other areas of defence production such as aircraft, ‘offset agreements’ allow purchasing countries to participate efficiently in complex supply-chain manufacture.

But what about jobs? Don’t we need to make everything here (especially in Adelaide) to keep people employed? Overall, the economy is currently operating with a level of unemployment that matches the best periods in recent history. Within this aggregate, major transitions are underway, particularly to adjust to the end of the mining boom. This involves painful disruption, of the same kind which allowed the successful transformation of the Australian economy from its early agricultural base and then, over the past four decades, to restructure out of manufacturing in response to the inexorable rise of international competition. Adelaide was given the opportunity to be the exception to the inevitable decline of manufacturing: the eventual demise of the long-cosseted automobile industry and the dismal narrative of the Collins submarines are the result. While many across Australia go through painful transition, politics dictates that Adelaide should be protected. But if submarines have to be made in Adelaide, they should at least draw on the efficiency of the global supply chain.

Australia is likely to pay a heavy price for this failure to develop a political-economy solution, certainly in terms of cost of the submarines and, based on past experience with the Collins construction, in terms of the fitness-for-purpose of the finished product. As a small country with a limited defence budget in a world which may become more threatening, we can’t afford to leave sensible economics out of the decision.

This post has focused on the failure of economics to contribute effectively to a synthesis of politics and economics. But the main blame should go to the politicians of the two major parties, who have watched this state-based blackmail evolve over recent years. There is universal agreement that blackmailers’ demands should never be met, for fear of encouraging even larger demands. With the election pending, however, the major parties arrived at a formula for total surrender to the blackmail: both parties have been competing to make sure the other didn’t offer South Australia a more favourable deal. A bipartisan solution, in contrast, could have countered the blackmail. Both parties could have offered the same deal: build the submarines in Adelaide, but with a requirement to call international tenders for components.  This approach would have recognised the special requirements of South Australia within the Federation, while creating the competitive manufacturing environment that State needs if it is to succeed.

If the economics was lamentable, the politics has been abysmal.

Photo courtesy of Australian Defence Image Library

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The winning foreign bidder for Australia's long-anticipated future submarines was revealed on Tuesday – the French-owned DCNS. The announcement followed leaks in the Australian media last week that Japan had effectively been excluded from the deal, even while a Japanese Soyru-class submarine was visiting Sydney Harbour. Regardless, the press has latched on the potential geo-strategic pressure the Turnbull Government came under in choosing the French over the German, but especially the Japanese, bids.

But as Sam Roggeveen pointed out in his piece this week, the Defence White Paper is fairly unequivocal in what the government sees as the main strategic priority. First, Bruno Tertrais with the view from Paris:

Economic good news is rare these days for the current French Government. So earlier this week, when the announcement that Canberra had chosen the French option for what was termed in Paris the 'contract of the century', it made headlines throughout the day in French media...

Both Canberra and Paris understandably focused their initial comments on the economic dimension of the decision and the concrete domestic consequences in Australia and in France, and there is every reason to believe that these considerations — rather than international politics — were paramount in Australia's decision.

I would argue, however, that the broader political and strategic context of the bilateral relationship mattered, and, perhaps more importantly, that the submarine contract will cement and broaden this relationship.

Sam Roggeveen with an important contextual note on the announcement:

Over coming days we may well see stories emerge of Chinese relief at this decision, and maybe even implications that Australia has buckled to Chinese pressure not to choose the Japanese bid. But one thing to keep in mind as you read these stories is that Australia is still doubling the size of its submarine fleet from 6 to 12. Whether the contractor is French, German, Japanese or other, that is still a substantial statement of Australia’s strategic anxieties, which inevitably centre around China’s long-term intentions. 

Denise Fisher on the Australia-France strategic partnership:

Certainly the French see the contract as more than a commercial deal. French Defence Minister Drian said as much when he visited Adelaide in late February. In private comments to me yesterday, one senior French official noted with some emotion the timing of advice of the granting of the contract, on Anzac Day in the French capital, underlining the poignant historic foundations of the renewed Australian-French relationship that rests on the shared sacrifice of the past. Another has spoken of the news as a bright spot in a particularly morose period for the French, reeling from the terrorist attacks on its capital last year and so recently on Brussels. A little-reported consequence has been the major disruption to the tourism on which the French economy depends.

The decision from PNG's Supreme Court that the Manus Island Regional Processing Centre is illegal will be significant for the country's relations with Australia as well as the upcoming Australian federal election. Sean Dorney on the strength of Papua New Guinea's constitution:

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Once again, the Papua New Guinea Supreme Court has demonstrated its forthright independence by finding against the PNG Government over the legality of the Australian funded Manus asylum seeker detention facility.

In a five to zero ruling, the judges declared that the Manus Island Processing Centre (MIPC) breached the PNG Constitution by depriving people of their personal liberty.

And the judges were highly critical of the way Peter O'Neill's Government handled the case.

The Interpreter followed up the announcement of Australia's new cyber strategy with two views this week. Ana Stuparu had a critical look:

In scattered places, the Strategy ambiguously refers to international 'partners' and 'cooperation,' but leaves the reader wanting more substance. Will Australia pursue more formalised alliances to avoid cyber attacks and prosecute cyber crime with Five Eyes, or indeed other states, as part of its Cyber Security Strategy? Is an effort being made at aligning and facilitating legal cyber interests in this regard? Even in the Strategy's section on shutting down malicious cyber actors' safe havens, formal cooperation is not meaningfully discussed. One cannot help but wonder whether it actually is a priority at the national strategy level.

And Fergus Hanson drilled down into some of the details surrounding the implementation of the strategy:

At a government level, there are solid efforts to strengthen defences, including 'a rolling programme of independent assessments of Government agencies’ implementation of the Australian Signals Directorate’s Strategies to Mitigate Targeted Cyber Intrusions'. After the debacle at the Office of Personnel Management in the US, there is ample evidence this issue needs to be taken extremely seriously. And as the strategy admirably acknowledges, an audit of seven Australian government agencies found 'most fell well short'. 

What are the prospects for Mynamar's new government? Stephen Gray:

Broader ‘inter-ethnic’ reconciliation will require measures that the military will find more difficult to accept. The new government is inheriting a peace process that in September achieved a ceasefire agreement with only half of the country’s ethnic armed organisations. Conflict has escalated in the northeast to levels not seen since the 1990s. To get the peace process back on track, the new government must find terms that convince the Myanmar army that all of the ethnic armed organisations it is fighting should be included in a nationwide ceasefire.

Matthew Dal Santo on President Obama's visit to the UK, and what it says about Brexit:

Here the Eurosceptic counter-argument reaches its most passionate, seeing as the European project's ultimate aim the creation of a super-state that would collapse distinctive national histories into an undifferentiated pan-European narrative. Politically, they say, the supra-national Commission does this with its directives to national parliaments, while a European Parliament seeks to call into being a post-national 'European demos'. Culturally and socially, they argue, the unrestricted right of EU citizens to settle, work and draw public benefits in other member-states does this by diluting the link between citizenship, community and state.

The two following pieces are on the Panama Papers. First, Mike Callaghan on the possibilities of a global tax organisation:

While the Panama Papers are seen as further evidence of massive international tax avoidance and evasion, tax is really a subsidiary story. The Panama papers are largely about secrecy. They demonstrate how criminals — corrupt leaders, politicians and officials, organised crime bosses and drug lords — use shell companies and trusts to hide the proceeds of their crimes. Of course tax cheats also hide their income and assets, but avoiding tax does not seem to be the main motive of many of those caught in the Panama papers.

And Daniel Woker talked about letterbox companies:

Many are still in denial and much is being done to deny evil intent. Yes, it is true that both letterbox companies (in use pretty much all over the world) and offshore accounts are not illegal. But it is equally true that Panama, the British Virgin Islands and other exotic offshore centres are making it pretty easy to keep the secrets of the people and corporations who are the beneficiaries of assets held in such companies and accounts. That explains why a number of former clients of Swiss banks, once automatic exchange of information between national authorities was threatened, transferred their assets to a Panamanian account held by a letterbox company.

This past week, Crispin Rovere thought Ted Cruz's days were numbered as a Republican primary candidate:

Cruz has already lost the nomination, it's just that he and the so-called 'Never-Trumps' are yet to realise it. When awareness dawns, the agony will be fast, acute, and terminal.

Cruz's exposure came from his pyrrhic Colorado victory; his nausea followed the New York primary last week; and the Cruz-Kasich deal finalised on Sunday heralds his final demise.

Will China's island-building policies in the South China Sea 'lose it the peace'? James Goldrick:

If China ejects other nations from the area, Beijing will indeed be at risk of losing the peace. Contrary to suggestions that its dominion over the South China Sea would be accepted as a fait accompli, the reverse will be the case. It will not be forgotten and it will not go away. The other claimant nations will be forced to live with a boundary that cuts them off from their own historic areas of activity — a boundary that is barely out of sight of their own coasts. Resentment can only fester, both at a local level in the various nations' coastal communities, and at the national level in countries which are particularly sensitive to any perceived infringements of their national sovereignty.

Philippines-based journalist Inday Espina-Varona on recent comments made by presidential candidate Rodrigo Duterte:

Filipinos see Australia as a regional power, and the US as the world’s superpower. Both countries have heaped praise on President Beningo Aquino’s economic gains, which many citizens say they not benefited from.  Duterte’s supporters also  compare the reaction to Duterte's 'joke' with the silence or muted remarks that have greeted past accounts of grave human rights violations by government forces.

What has gone wrong with economic policy-making? Stephen Grenville:

Of course it is easy to find fault in this latest effort to pick apart what has gone wrong with economic policy-making. But each successive contributor to the debate — whether Piketty, Gordon, Summers or Cohen and DeLong — identifies three common themes. The pernicious influence of doctrine (and specifically the free-market ideologues); the insidious undermining of political consensus through income mal-distribution and the rise of politically-powerful vested interests; and the misallocation of our best talent into finance, with so little apparent benefit to society.

Tristram Sainsbury on recent developments with the global development banks:

When I attended the launch of the NDB in Shanghai a year ago, I was struck by the optimism of this policy experiment. This optimism was still there when it officially 'opened for business' last month. We still don't know how particular governments will want to intervene in bank activities, or how they would react to mistakes. With this in mind, starting small with discrete projects is sensible, as is the rhetoric of being independent from the influence of individual nations.

A very good piece from Sarah Logan on the evolving trade and censorship battle over internet regulations between the US and China:

In an unusually cruel twist for the likes of Google, then, the tech sector is one of the brightest stars of both the US and Chinese economies and is — thanks in no small part to earlier iterations of US policy — closely associated with national identity and values on the global stage. The latest round of battles has no clear outcome, but America's recent approach opens up a new flank. This time, it heeds the advice of its golden industries and seeks to ferry them through China's Great Firewall instead of demanding they stop at its borders, left to gaze longingly on the riches within.

And finally, Catherine Hirst looks at the Taliban three years on from the death of its leader, Mullah Omar:

There are many reasons for the recent resurgence of the Taliban, and Omar is not one of them. Although a significant amount of prestige, legitimacy and power were indeed concentrated in the former Taliban leader, the degree of this concentration and its long-term impact on the organisation has been overstated. Recent gains made by the Taliban show that experienced deputies (such as Mullah Mansour), a breadth of strategic expertise (as represented in the 21-man Rabari Shura or leadership council), multiple revenue streams, the support of foreign fighters (largely Uzbeks and Pakistanis), and a local support base are all important reasons why Jihadist groups can remain resilient despite leadership change.

Photo courtesy of Australian Defence Image Library.

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