Lowy Institute

On Tuesday New Zealand Prime Minister John Key announced in parliament that New Zealand would deploy a non-combat military mission to Iraq as part of the US-led coalition against ISIS. The 'Building Partner Capacity' mission to help train the Iraqi Security Forces will be part of a joint (albeit not an ANZAC badged) mission with Australia.

US soldiers receive a warriors welcome from New Zealand military personnel,  Afghanistan, 2004.

Notwithstanding the unresolved issue of the legal status of New Zealand defence personnel and valid concerns about force protection (more on both issues below), the critical questions relate to the nature of New Zealand's contribution: what can New Zealand do that differentiates from previously unsuccessful security sector reform efforts? And can New Zealand deliver meaningful success within the 9-24 month deployment timeframe? 

New Zealand's contribution, outlined by Chief of Defence Force General Tim Keating, is modest. It includes training in basic weapons, individual and unit-level military skills to prepare Iraqi Security Forces for combat operations, operational planning, medical and logistics training and the 'training of trainers'. Indeed, the successful training of Iraqi Security Force personnel to take over the role of delivering the training program lies at the core of the New Zealand mission.

The success of ISIS in Iraq is widely acknowledged as a testament, in part, to the failure of a decade-long security sector reform (SSR) process at a cost of over US$100 billion. As academic Andreas Krieg said last year:

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Western SSR in Iraq after the 2003 invasion has created a security sector infested with the same diseases as those that mar the security sectors in neighbouring countries, defined by politicization, patrimonies, and patronages. Widely, ISIS' success is the testimony to a failed policy of the interrelated political and security sector reform in Iraq.

General Keating said New Zealand defence personnel have an aptitude for building the capacity of indigenous forces 'from Malaya to Afghanistan'. That is true. New Zealand has an excellent reputation in international peacekeeping circles for effective engagement with local populations, including local security forces. But this is due in large part to personalities, an emphasis on relationship building and culture, rather than a clear institutional doctrine.

This is, however, Keating's point of differentiation and which underpins his vision of a 'true partnership...not a them and us approach'. Keating's core distinction between previous SSR activities in Iraq compared with New Zealand's mission is the degree to which Iraqi personnel will be integrated into the development and delivery of training, including agreement on the objectives and outcomes. 

This approach is critical to success with SSR. Local participation is fundamental to establishing the legitimacy of the mission. Without inclusive local participation from the planning phase through to monitoring and evaluation, local ownership of the training program will be difficult to achieve and sustain. Moreover, it is the sustainability of successful outcomes after the mission has left which is the ultimate benchmark of success. 

Keating has outlined what success will look like for this mission: success is an Iraqi Security Force able to undertake combat operations at a level as agreed by Iraqi and Coalition trainers. Success has also been directly linked to New Zealand's deployment timeframe, so the matching of timeframe with ambition and environment which will be critical. 

The 'training of trainers' component, if successful, will enable New Zealand to develop a transition strategy as opposed to an exit strategy. Transition strategies enable capacity builders to integrate the succession plan into the overall mission, which will influence local ownership and long-term sustainability. It will be critical that the impact and sustainability of the program be addressed even beyond the deployment to ensure that the real contribution of the mission is a reflection of broader issues of peace and stability rather than the end of the deployment cycle. 

Of course, SSR does not occur in a vacuum. There are wider dynamics which will impact upon the success of the New Zealand mission, and in fact the majority of factors which will ultimately influence the success of the mission are beyond the control of New Zealand and Coalition defence planners. Capacity development of the security sector in Iraq will be conducted in a socio-political, historical, cultural and security environment broadly (but not exclusively) defined by the legacies of the two Gulf Wars, 10 years of failed SSR programs, broader endemic Middle East dynamics and the emergence of ISIS. National will is therefore critical and is likely to shift over the duration of the mission. The success of New Zealand's mission depends on maintaining political will, which means politics is centre stage.

The outstanding issue now is the legal status of the New Zealand Defence Force personnel, a point that certainly should have been clarified before the announcement.

The options are either diplomatic immunity or a Status of Forces Agreement (SOFA). The Iraqi Government is reluctant to sign a SOFA and Australia has agreed ADF personnel will carry diplomatic passports. This is the weaker of the two options and one that led the Obama Administration to pull troops out of Iraq in 2011 because the Iraqi Government refused to give US soldiers immunity from prosecution. The legal implications of any agreement less than a SOFA requires deep scrutiny before a final decision is made. 

The issue of force protection also demands attention. Camp Taji, the military complex where New Zealand defence personnel will be based, lies at the northern entrance to Baghdad, 15km from the capital. The Camp was the focus of ISIS's efforts to secure Baghdad in June 2014. It is likely that Camp Taji, the symbol of the international coalition, will be a primary target as ISIS becomes more desperate and increasingly bold. Other equally serious threats to New Zealand defence personnel include rogue Iraqi Security Force attacks on Coalition forces – the 'green on blue' attacks that have become synonymous with SSR in Afghanistan.

Photo courtesy of Flickr user Morning Calm Weekly News.


The Indo-Pacific is a strategic system encompassing the Indian and Pacific oceans, reflecting the expanding interests and reach of China and India as well as the enduring role of the US. The Lowy Institute's International Security program presents a weekly selection of links illuminating the changing security picture in this increasingly connected super-region.

  • Shortly after the Obama Administration cleared the way for the sale of armed drones to some US allies, it has been revealed that Australian military personnel are already in the US training on the Reaper. Australia is also attempting to expand its involvement in the further development of the maritime surveillance Triton drone, of which it has committed to buy seven.
  • Indonesia has threatened to  're-evaluate' its defence procurement deals with Brazil after a major dispute over the execution of a Brazilian national charged with drug smuggling.
  • India is pushing ahead with construction of another aircraft carrier, with its two existing carriers under strain; the 56-year old INS Viraat will be decommissioned in 2016 and the MiG-29Ks of the INS Vikramaditya are experiencing engine trouble.
  • Beijing has reportedly accelerated construction on islands it occupies in the South China Sea. The debate continues over whether this is to bolster a legal claim or for more strategic reasons.
  • Also, an interesting argument in Information Dissemination for placing US military personnel on allied ships in the South China Sea.
  • Stephen Hadley and Paul Haenle examine the trajectory of US-China bilateral ties, and the attempt to move towards a 'strategic partnership'. 
  • Lastly, there are further reports that North Korea is experimenting with submarine-launched ballistic missile technology.



To everyone's surprise, it was announced on Monday that Australian Foreign Minister Julie Bishop intends to travel to Tehran in April 2015. The visit isn't about the nuclear negotiations with Iran. After all, while Australia would rather not see Iran go nuclear, it isn't exactly a foreign policy priority for Australia.

The trip will instead be about guaranteeing Australia a place in the running should the large Iranian market open up after a nuclear deal. It will also be about engaging Iran on the ISIS threat.

It's a smart move by the Government, yet Bishop's visit is surprising for a number of reasons.

First, no senior Australian official has set foot in Iran in over a decade. In fact, no senior Western official other than Catherine Ashton, the lead negotiator for the EU, has been to Iran in that time. Secondly, Iran is not a foreign policy priority for Canberra. The little communication that has existed between Canberra and Tehran focused on addressing concerns about 'boat people'. The only other way Iran figured on Canberra's radar is because of Tehran's importance to the US, Australia's most important ally.

But things have changed and Canberra is exploring its options.

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While a nuclear deal with Iran is by no means guaranteed, the P5+1 and Iran are making significant progress towards a political framework agreement. Should they sign a comprehensive agreement by mid-2015, the complex web of sanctions imposed on Iran will then begin to be untangled. This won't be easy and will likely take a number of years. But it will result in Iran's market of over 77 million people opening for business. Australia and Iran's Gulf neighbours already share a significant economic relationship, but trade with Iran is negligible: $302 million in 2013-14. It's a far cry from the early 1990s, when Iran was Australia's largest export market in the Middle East.

The potential economic relationship is not the only issue on the table. Today, the Middle East is filled with security concerns for Canberra, even after the end of Australian military operations in Afghanistan. The Government estimates that 110 Australians are fighting in Iraq and Syria (a conservative estimate compared with numbers floated by others, which go up to 205), who pose domestic security risks when they return from overseas. 

Australia was one of the first countries to respond to the US call for assistance in building a Coalition to fight ISIS. In September, Tony Abbott pledged 600 military personal and aircraft to the coalition, and more may be on the way. While the reasoning might be questionable, the decision was made and Australians are once again back in Iraq.

Why is this important? Because Iraq is a high stakes effort for Iran, more so than for the Coalition. Iraq is Iran's backyard. It is strategically significant to its national interests for economic, energy, political and religious reasons. What's more, ISIS cannot be defeated with just airstrikes. But that's the only significant contribution the West is prepared to make. The coalition needs local and regional support. 

Whether we like it or not, Iran is a large, resource-rich and a potentially powerful partner. It has the capacity to pursue a serious foreign policy in the Middle East, and it shares a 910-mile border with Iraq. What's more, only Iran has the means and the willpower to send in a large number of ground troops for a long time should it be required.

Today, Canberra is uniquely positioned to engage Tehran on this issue and to create a space for Australian businesses that could be interested in Iran.

While the US no longer needs a go-between to talk to Iran on the nuclear issue, other questions remain taboo and hardliners on both sides remain mutually suspicious. Canberra faces no such constraints. While other countries cut off diplomatic relations with Iran, Australia quietly kept its embassy open. Australian officials are not viewed with as much suspicion as other Western officials despite Canberra's sanctions on Iran. Building on the somewhat favourable view of Australians within the Iranian leadership is also important for future economic relations; it's no secret that the Iranian market is opaque and difficult to navigate. Entering it requires Iranian goodwill and assistance. Australia knows this, given the exchanges between the two countries in the 1990s. 

Accepting Foreign Minister Zarif's invitation to Tehran was a smart move by Canberra. Bishop will be the first high-level Western leader in the last decade to travel to Iran to talk to her counterpart on a range of issues unrelated to the nuclear question. It will allow Australia to register its interest in the potentially lucrative Iranian market, build trust with the leadership in Tehran and contribute to Canberra's leadership in a surprisingly unlikely, but nonetheless significant, area of international affairs.

Photo courtesy of Flickr user UN Geneva.




Mike Callaghan and Stephen Grenville recently reminded us of the debate around Australia's potential future global GDP ranking, and what that implies for our place at the G20 table in 2050. As Melissa Conley Tyler noted in October last year, this kind of debate is valuable if it leads to improved public policy that help sustain Australia as a 'top 20 country'.

But what about long-term relevance of the G20 itself? In the most recent Lowy Institute G20 Monitor, I suggested that the G20 walks a tightrope of relevancy. The G20 remains the premier forum for international economic cooperation, and is coming off a successful 2014 Australian presidency where it reminded the international community that it can focus on collective solutions to major economic challenges. However, in which there is disillusionment with the slow progress the forum has made in recent years on key global governance issues, the G20 needs to keep showing its relevance or alternative forums will be sought out. So it is important that Turkey's 2015 G20 presidency is a success. This is more than just as a matter of Turkish national pride.

The first discussions by finance ministers under the Turkish presidency, held in early February in Istanbul, were underwhelming. Despite statements from Canadian Finance Minister Joe Olivier that global growth needs a kickstart and from Christine Lagarde that this year has the potential to be a special one for collective action, the Istanbul meetings were most notable for a lack of consensus. Even after a marathon communique drafting session that lasted more than 24 hours, countries could not agree on how to spur growth and were reluctant to commit to the Turkish hosts' plans for binding investment targets.

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In the areas where agreement was possible, results were lacklustre. The G20 needs to ensure that the call for countries to each implement only the key parts of the Brisbane Action Plan does not become a step back from the G20's main achievement of 2014. The Turkish presidency rightly pointed to the IMF Executive Board's decision to establish a new $100 million Catastrophe Containment and Relief Fund, which will assist West African countries most affected by the Ebola epidemic, as the communique's clearest and most concrete outcome. While this is commendable, the G20 missed the opportunity to address the larger underlying problems affecting global health governance (a subject I will return to in a future piece). There were also some relatively routine advances in lower-key items on investment, tax and financial regulation, although these were balanced against the lack of progress on IMF reform, something Mike Callaghan and I predicted ahead of the meetings.

In all, the four-page communique read as light on substance, and it is difficult to point to headline areas where the agenda has substantially progressed since Brisbane. There is a clear disconnect between the communique and a vision that will allow the G20 to achieve all of the Turkish presidency's three I's (investment, implementation and inclusiveness). The overall impression from Istanbul is that the G20 recognises the challenges but has run out of ideas for how to collectively address them. Attention is already starting to divert to 2016 and China's impending presidency.

As Mike Callaghan noted, economic size isn't everything. And nor is G20 membership, if the forum itself continues to drift.

Photo by REUTERS/Osman Orsal.


The Prime Minister's National Security Statement included a reference to the possible stripping of citizenship from dual citizens. There has been criticism that such a move will be ineffectual. Peter Hughes claimed it was of limited use because, even though the individuals would be prevented from returning to Australia, they 'would be free to pursue extremist causes and political violence elsewhere.' And in the Sydney Morning Herald yesterday, Professor Matthew Gibney from Oxford University argued against the move from a civil libertarian perspective, saying that 'Denationalisation is thus open to the same criticism that Voltaire made of the practice in 18th century France: namely, that it simply constitutes throwing into our neighbour's yard those stones that incommode us in our own.' This largely echoed a piece  from last year by Sydney University's Professor Ben Saul.

While I acknowledge these points, they would carry more weight if the proposal to strip citizenship rendered the person stateless. The subject's failure to renounce another citizenship they possess indicates that they must continue to hold some attachment to that country, and as a continuing citizen of it, they would continue to have an identity and the safeguards afforded by that country.

The civil libertarian argument, however, fails to address what I would argue is a more serious issue: the potential eradication of targeting constraints for Australian intelligence agencies and military forces in dealing with Australian citizens engaged in terrorist activities overseas. The possession of Australian citizenship rightly imposes limitations on how much information Australia's spy agencies can collect, and perhaps more importantly who they can share it with. There have already been legislative amendments to strengthen the intelligence-collection powers of these agencies, but dealing with non-citizens gives them much greater flexibility in sharing information.

So, rather than dual citizens simply becoming someone else's problem or able to undertake violent actions elsewhere, such a move may actually free up Australian authorities to address the problem by sharing information on foreign fighters or terrorists who were formerly Australian citizens.

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This may simply mean that the former dual citizen can be arrested and jailed, or deported to their remaining country of nationality. But it may also mean they are killed in a counter-terrorist military operation. In fact, there has been criticism in the UK that people stripped of their citizenship have been killed in drone strikes shortly after, and that the information that enabled their targeting was only released to the US after they were no longer UK citizens. I think this is the more appropriate discussion to be having, rather than a civil libertarian one. To take one possible example, would the Australian public be happy to see a former dual Lebanese-Australian citizen born and raised in Sydney, but now simply a Lebanese citizen because they are fighting for ISIS, killed in a RAAF bombing mission in Iraq based on intelligence gathered by Australian agencies? I think the public would accept this.

None of the steps proposed by the Government represents a silver bullet, but incremental changes to our ability to respond represent an appropriate answer to a unique challenge. Radical jihadists are not Islamic nationalists; they recognise no authority but their interpretation of what God commands them to do. They are by definition and by action intolerant and they are as far removed from the humanist traditions of the Western societies from which some of them emerged as it is possible to be. And while Australian dual citizens fail to recognise the authority of the Commonwealth and kill in God's name, they are protected by the fact that they are citizens of a Commonwealth whose authority they have plainly rejected.

For those relatively few to whom this situation applies, we should look at the stripping of dual nationality as a military and intelligence targeting issue rather than simply a civil libertarian issue.

Photo by Flickr user Ibrahim Khalil.


On 20 February, Defence Minister Kevin Andrews outlined for the first time details of the acquisition strategy for Australia's future submarine program. An authoritative press statement was long overdue and sorely needed to provide some clarity given the recent debate and confusion on the submarine issue.

Mr Andrews' statement sought to allay domestic concerns that a future submarine contract might not provide for any significant Australian involvement in the program (notably of ASC in Adelaide) and also explained the nature of the 'competitive evaluation process' to be used in choosing an international partner to be selected from not just Japan but also Germany and France.

Effective communication with the Australian public about such a huge and expensive project spanning decades is essential if there is ever going to be anything like a consensus that spans the community and the political divide.

The public understands the need for confidentiality due to commercial or diplomatic sensitivities, especially when sensitive defence contracts are involved. However, any sniff of secret or special deals or a perceived failure to follow due process is a recipe for controversy and heightens the risk that a decision might not be well understood or broadly accepted and therefore more vulnerable to being overturned by an incoming government. Any further delay in the future submarine program or the risk of an adverse impact on our diplomatic relationships caused by further change would not be in the national interest.

Until recently Japan looked set to be awarded this contract with an initial agreement between Prime Ministers Abbott and Abe expected some time this year. The 'competitive evaluation process' seems certain to delay any such announcement at least until the end of the year and it also opens up the possibility that Japan may lose out to Germany or France. 

Notwithstanding what are likely to be strong bids from Germany and France, there is good reason to think that, despite the forebodings of some commentators about the high risks of buying Japanese submarines, Japan could still be awarded the contract in partnership with ASC.

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In fact the process outlined by Defence Minister Andrews makes it more politically manageable to award the contract to Japan than it was previously. This is because, if followed, the process outlined should help reduce public perceptions of any special deal.

Prior to the Defence Minister's announcement, there was certainly evidence of concern in Japan at recent developments in Australia. An article in the Nikkei Asian Review on 20 February penned by its Australia-based correspondent before the Andrews announcement reported that Japan is worried Prime Minister Abbott no longer wields the power he once did and that the closeness of relations between Japan and Australia seen during Mr Abbott's term so far as prime minister could be affected, particularly if he were to lose the Liberal Party leadership or the next election.

But although the formal announcement of a competitive evaluation process for Australia's future submarine program may be a short-term setback for Japan's aspirations to develop its defence export industry, Japan is still well placed to be awarded the contract, provided it is able to meet the terms of the process.

Why? Firstly, regardless of what might happen politically in Australia, Japan can be confident in its submarine technology and should be reassured by the fact that there is now a clear process. Secondly, there is a high degree of mutual trust in the bilateral relationship. What is sometimes overlooked is that this trust exists across the political divide including on defence and security issues. In other words, the relationship with Japan has long enjoyed bipartisan support.

Australia's defence and security links with Japan have certainly advanced strongly since Mr Abbott became prime minister, but this is taking place on the basis of ever-broadening cooperation that has been building up steadily over the past ten years or more. The Joint Declaration on Security Cooperation signed in March 2007 between prime ministers Howard and Abe (in Abe's first stint as prime minister) has provided the framework for rapidly expanding defence and security cooperation under not only the remaining months of the Howard Government but also under the six years of the Rudd and Gillard governments and now the Abbott Government. Australia is now solidly in position as Japan's second most important security partner. The respective alliance relationships which Australia and Japan have with the US underpin this growing security cooperation.

In Japan there is a similar degree of bipartisanship. Cooperation with Australia continued to grow strongly when the Democratic Party of Japan held office from 2009 to 2012. During this period the Acquisition and Cross-Servicing Agreement was signed and this facilitated the two countries working closely together in recovery from national disasters including the 2011 Japanese earthquake and tsunami.

There is no question that cooperation with Australia is being further facilitated by Prime Minister Abe's keen interest in regularising Japan's defence posture to enable its armed forces to take action beyond self defence (in strictly limited circumstances), and so that Japan can export its defence materiel and technology. But Japan is taking these steps because it sees them as being in its national interest, not simply because of the closeness of the relationship between the two current prime ministers.

Australia will also keenly pursue its national interests, and if that means a decision to purchase Japanese submarines then this should not, as some commentators argue, risk affecting our relations with China. Australia's national interests dictate that we place a high priority not only on our relations with Japan but also with the US, China, India, Indonesia, and other key Asian countries. Management of these relationships is not a zero-sum game. Each can be developed on its own merits and in ways that maximise Australia's national interests without making one contingent upon the other.

Photo courtesy of Wikipedia.


Last week, The New York Times relaunched its magazine, with a focus on global issues and voices. It looks promising, and the first long-form article it published was by Lauren Hilgers on Hong Kong's 'Umbrella Revolution'.

At the time The Interpreter followed the protests closely, and debated the economic and social causes of the mass sit-ins, the possible reaction of the Chinese Central Government and its prospects for success. There a few lines from Hilgers' piece that are worth pointing out. The first is on the well known, but still staggering, wealth disparity in Hong Kong:

Twenty percent of Hong Kong’s population is living under the official poverty line, but the city’s 50 richest people, according to the annual list compiled by Forbes, are worth a total of $236 billion (Hong Kong’s entire G.D.P. in 2013, by comparison, was $274 billion).

And this anecdote about President Xi Jingping:

 The only way to measure Beijing’s response has been through crackdowns. In mainland China, those thought to be supporters of the protest — even those who just expressed support online — have been thrown in jail. Late in the protest, when China’s president, Xi Jinping, made a trip to Macau on a rainy day, journalists were not allowed to carry umbrellas.

The article, and some of the commentary, have hinted at a clear generational divide that crystalized during the protest. HIlgers says:

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Nearly all the students started lying to their parents about where they were. “I would tell my boss I needed sick leave, and I would tell my parents that I need to go to work,” Wing recalled. Jodi told her parents she needed the time to work on a school art project. She would spend evenings in Admiralty, writing essays on her phone...

...“It matters,” Lau said, “although the movement is not successful because the government didn’t yield to any of our requests.” The importance of the movement, he explained, was to show that Hong Kong could do more. “All these protests that you guys find normal in the States or Europe or France, Hong Kong people detested it. They thought, We cannot have this kind of chaos in Hong Kong, we are an economic city.”...

...“You can’t treat the young people in Hong Kong as if their minds are a blank sheet of paper on which you can write at will,” she said. “The young people through this Umbrella Revolution have demonstrated that they have a mind of their own. Furthermore, they are no longer politically apathetic,” she said. “They’re prepared to stand up and be counted.”

These words are encouraging, but as we have seen throughout the last four years, momentum is critical to any mass protest movement that wishes to enact change. The Chinese Government's strategy of waiting the protesters out worked. Some of the student leaders of the Umbrella Revolution are already moving on. It remains to been see if the momentum carries over to the next generation.

Photo by Flickr user Leung Ching Yau Alex.

  • Fighting in northeastern Myanmar has continued between the army and Kokang ethnic rebels. A round-up of both sides' positions can be found in these pieces: an interview with Kokang's MNDAA leader Peng Jiasheng and an interview with Ye Htut, Myanmar’s Minister for Information.
  • Further on Myanmar: concerning many this week was the report of a second Red Cross convoy being attacked (both sides deny involvement). The Economist also ran a good series of  infographics on Myanmar's peace process this week.
  • Singapore’s Lee Kuan Yew has been hospitalised with severe pneumonia.
  • The Lancet warned of the spread of drug-resistant malaria  across Asia, with great concern centred on Myanmar. Worryingly, it has been detected within 25km from the border with India.
  • A Transnational Institute report, The challenge of democratic and inclusive land policymaking in Myanmar, looks at the country's contentious draft land-use policy.
  • Anthony Fensom looks at what oil prices are doing in Southeast Asia.
  • In the midst of the rush to Yangon, Myanmar's biggest city will undergo an earthquake hazard assessment.
  • Greg Poling looked at Washington's Thailand PR problem.
  • To counter online hate speech promotion, a Myanmar organisation has come up with an excellent and innovative solution
  • As always, ANU's New Mandala has a trove of interesting posts on Southeast Asia, including this interview with Indonesian expert Greg Fealy on Jokowi's unfulfilled promise:


2015 has been heralded as the year when Papua New Guinea (PNG) will enjoy the highest GDP growth rate in the world, on the back of its first full year of liquefied natural gas production.

Confidence in the anticipated revenue from the ExxonMobil-led project has encouraged the O'Neill Government to commit itself to tackling a backlog of issues, such as decaying public infrastructure, upgrading education and health services (including free primary education and basic health access), reviving public goods at the district level, tackling corruption and restoring run-down law and order services.

These are widely accepted as critical priorities for fostering economic and social development.

Major budget increases have been directed to most of these priorities, but weak policy conception, planning and implementation capacity and even poorer accountability has handicapped achievement of the objectives. Progress is now further threatened by the recent drop in global energy prices.   

The plummeting price of oil and other hydrocarbons since late 2014 will have a heavy impact on the earnings of oil companies, and on oil and gas producing states worldwide. While PNG's modest oil production has diminished steadily over the past 20 years (to around 20 million barrels in 2014), lower LNG prices will have a much greater impact for the country, if sustained (many forecasters foresee an era of lower hydrocarbon prices).

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PNG's initial LNG production was sold substantially on the spot market, but now the majority is traded in longer-term sales and purchase agreements. This provides more reliability in supply and sales for all parties, but it doesn't mean PNG is immune from market trends. Although in the future, the stabilisation component of the planned sovereign wealth fund should reduce the short-term budgetary impact of a volatile energy market, this will only work as long as the fund is run transparently and in accordance with the Santiago Principles (as opposed to the furtive accountability of many of PNG's state-owned enterprises). 

Production from PNG-LNG, the co-venture between ExxonMobil and PNG, is unlikely to be affected by the lower market prices, but income to its investors, including the state, will be substantially reduced if prices remain subdued, with the period and cost of loan repayments also extended. The development of major new fields in PNG (notably Elk/Antelope and P’nyang) is likely to proceed.

Although the commencement of LNG production was forecast to stimulate 15.5% GDP growth for 2014 and 2015 according to the PNG Treasury, Government revenue from the production is expected to not build up until 2017. With limited direct economic stimulus and employment creation from LNG production (as opposed to the construction phase, which is now over), the main benefits of LNG production come from the revenue to the Government and local investors, and how productively this revenue is then reinvested in the local economy.

With dwindling revenue from the minerals sector overall, LNG was expected to provide a growing contribution to Government revenue and help restrain the accumulating deficit. Early production and sales, when prices were higher, will have boosted Government revenue due for 2014. But this will be countered by significantly reduced dividend and tax revenue since late 2014. 

Estimates on the impact differ. Government sources suggest minimal change and firm immunisation from short-term market conditions. Independent analysts have suggested a K$1.4 billion reduction in revenue from lower oil and gas prices alone (10+% of total revenue), compounding the reduction of revenue from other sources due to the sluggish economy. Although shorter term LNG revenue forecasts were relatively modest during 2014-2016, lower LNG revenue against forecasts later into 2015 will have a significant impact on PNG's budget. 

Continued interim (counter-cyclical) fiscal stimulus measures are therefore justified, but it is important to recognise that LNG prices might remain subdued for the medium and even longer term. PNG thus needs to avoid accumulating debt through unsustainable deficits or major further borrowing, particularly for activities which are marginal to government functions, such as equity acquisition (except under the auspices of the sovereign wealth fund). the Government should also be ready to make adjustments to avoid spending on lower priority activities (including some capital works) that squeeze out priorities in education, health (including TB prevention and control), infrastructure maintenance, and law and order.

LNG development in PNG has been hyped in the media and stirred up political and public expectations. Much of PNG's population has seen little change over the past two decades, except for mobile phone access and tall buildings (and traffic jams) emerging in the national capital. Although some provinces and districts have performed much better than others, much of the population has limited access to basic services, markets and economic opportunities, with many roads and airstrips closing down even during the past decade. Some of the most resource-rich provinces have the worst services and social indicators, as exemplified by the very high rates of drug-resistant TB now recorded in Western Province (and HIV/AIDS in Enga). 

Action is being taken by Government, churches, business foundations, and development partners to address these challenges. For instance, there is a new rural airstrip agency and a major school of government planned. But action remains sporadic and ill-coordinated, with public sector capacity, performance and accountability the weakest link.

Another LNG construction project in the near future would briefly and usefully generate extra jobs and economic activity. But PNG needs to find practical ways for LNG production and exports to stimulate broader economic opportunities, such as through prudent investment of public funds into priority services.

Low oil and gas prices provide a sobering but potentially valuable reminder of the need to avoid the pitfalls of the 1990s. The PNG Government needs to avoid squandering funds on low priority activities and one-off events, establish and operationalise the long-delayed sovereign wealth fund, revitalise the anti-corruption and accountability effort, and focus policies on establishing favourable conditions for economically and environmentally sustainable activities, particularly in agriculture. It also needs to focus spending on the needs of all Papua New Guineans and not just selected parts of the community, especially by encouraging young men and women to participate actively in the economy.

Photo courtesy of Flickr user Jens Schott Knudsen.


The National Geographic has a great piece on why so many reasonable people refuse to accept the scientific consensus on issues such as water fluoridation, child immunisation and of course, climate change:

We live in an age when all manner of scientific knowledge—from the safety of fluoride and vaccines to the reality of climate change—faces organized and often furious opposition. Empowered by their own sources of information and their own interpretations of research, doubters have declared war on the consensus of experts.

So why do so many people cling to positions so contrary to science?

...Even when we intellectually accept these precepts of science, we subconsciously cling to our intuitions—what researchers call our naive beliefs...as we become scientifically literate, we repress our naive beliefs but never eliminate them entirely. They lurk in our brains, chirping at us as we try to make sense of the world...

...The “science communication problem,” as it’s blandly called by the scientists who study it, has yielded abundant new research into how people decide what to believe—and why they so often don’t accept the scientific consensus. It’s not that they can’t grasp it, according to Dan Kahan of Yale University. In one study he asked 1,540 Americans, a representative sample, to rate the threat of climate change on a scale of zero to ten. Then he correlated that with the subjects’ science literacy. He found that higher literacy was associated with stronger views—at both ends of the spectrum. Science literacy promoted polarization on climate, not consensus. According to Kahan, that’s because people tend to use scientific knowledge to reinforce beliefs that have already been shaped by their worldview...

There's also a social/peer group dimension:

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...Science appeals to our rational brain, but our beliefs are motivated largely by emotion, and the biggest motivation is remaining tight with our peers. “We’re all in high school. We’ve never left high school,” says Marcia McNutt. “People still have a need to fit in, and that need to fit in is so strong that local values and local opinions are always trumping science. And they will continue to trump science, especially when there is no clear downside to ignoring science.”

But this part is not quite right:

Meanwhile the Internet makes it easier than ever for climate skeptics and doubters of all kinds to find their own information and experts. Gone are the days when a small number of powerful institutions—elite universities, encyclopedias, major news organizations, even National Geographic—served as gatekeepers of scientific information. The Internet has democratized information, which is a good thing. But along with cable TV, it has made it possible to live in a “filter bubble” that lets in only the information with which you already agree.

Yes, people live in information bubbles, but they always have — Green Left Weekly has always been purchased mainly by people of the left, and The Spectator by people on the right. We all like to read things that reinforce our prejudices. But, if anything, this bubble is now easier to penetrate, given that contrary information and opinion is a single click away, and mostly free. In the days of the gatekeepers, one would have needed a subscription to break that bubble.

(H/t Browser.)


China faces a recurring problem along along its border with Myanmar. Beijing has repeatedly emphasised that it wants to play a constructive role in Myanmar's national reconciliation and economic development. But no matter what Beijing does to signal good intentions, on a local level the capacities, skills and willingness to implement these policies are lacking.


Two separate recent events have caused a stir about China in Myanmar's media and public debate.

First, in early January, news broke that over 100 Chinese nationals had allegedly been trapped behind conflict lines in Myanmar's northern Kachin state. As it turned out, the trespassers had been arrested for illegal logging activities in Waingmaw township near Kachin's capital, Myitkyina, en route from Sagaing Division on the Indian border towards China, a region that has not witnessed any major armed clashes for almost two years. In response, Chinese diplomats undertook a major effort to guarantee the humanitarian treatment and diplomatic access to the detainees, and to eventually broker their release.

Myanmar imposed a ban on timber exports in April 2014. The move has fueled resentment and a blame game about who is benefiting from resource concessions. Chinese traders have ignored the ban, and local authorities in Yunnan Province have done little if nothing to stop cross-border activity.

The second event occurred between December and mid-February. Battles between the Myanmar Armed Forces (MAF) and Kokang fighters were reported to have occurred around Muse, Laukkaing (Laogai) and Tamoenye in northern Shan state. The Kokang are an ethic Han-Chinese minority located on the China-Myanmar border. In 2009, during the so-called 'Kokang incident', clashes between the Myanmar National Democratic Alliance Army (MNDAA) and the MAF resulted in over 30,000 refugees crossing the border into China.

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The MNDAA split over disunity about a ceasefire agreement with the MAF. A renegade faction under former commander and drug kingpin Peng Jiasheng (Pheung Kya-shin) fled the country. Recent fighting has been ascribed to Peng and his son, who have revived the MNDAA abroad and returned to the country with the goal of retribution. According to reports, after recent events, Chinese authorities are worried about stability in the border region. A PLA delegation was sent to visit the Ministry of Defence in Naypyidaw.

The region has traditionally been important for drugs and trafficking of all kinds. Groups such as the Wa ethnicity have profited from cross-border support and (illicit) trade. Until the late 1980s China supported the Communist Party of Burma, a Kokang-based group that was led by Peng Jiasheng. The group was was key for Beijing's leverage in Burma.

Recent skirmishes were preceded by an interview with Peng, which was published on 20 December 2014 in the Chinese Government mouthpiece the Global Times. The interview roused spectres of the past and stirred up deep sentiments. As well as announcing his intention to wage sustained guerilla warfare in an alliance with other armed groups, Peng suggested the option of a Crimea-style referendum for parts of northern Mynamar which would either lead to a high degree of autonomy or even integration into 'Greater China'. Overall, he pleaded for the greater involvement of China in northern Myanmar.

Although such scenarios are unrealistic, Beijing has done little to defuse suspicions and nervousness among Myanmar officials and the public. China has made efforts to improve relations by appointing a special envoy who made some half-hearted attempts to mediate in Kachin State, but mistrust prevails. The experience of a small state being trapped in great-power calculations still resonates among Myanmar's leaders. Beijing's grand designs for a geopolitical and economic regional linkages, including transport corridors towards India, raise concerns. Suspicion about ongoing support for armed groups, or at least connivance of arms trafficking and training such as for the Wa, still exists. The revamped MNDAA most likely directly or indirectly obtained its arms from China.

While Beijing has expressed its concerns about the stability of the border region, Naypyidaw has already called on Beijing to prevent local authorities from providing any unofficial support to armed groups. In order to improve relations and build trust, Beijing will have to go beyond mere 'concerns' about stability and put its house in order.

Photo courtesy of Flickr user K. Aksoy.


Leon Berkelmans is in good company in defending the policy actions which have come to be described as 'currency wars'. 

Ben Bernanke gave the same defence of the US Fed's actions while he was Chairman: while low interest rates and 'quantitative easing' (QE) may give the domestic economy an extra competitive advantage via a lower exchange rate, the whole world really benefits because of the extra growth in the domestic economy.

You could argue that the proper post-2008 settings for macro policy in the US (and other advanced economies) was to have less austerity (or better still, actual stimulus), rather than relying entirely on monetary policy.

Fiscal policy gives a more direct and powerful stimulus at the trough of the cycle without depreciating the exchange rate, while monetary policy is feeble in these circumstances. The extreme monetary settings (near-zero policy interest rates and huge excess central bank liquidity), while giving an abnormal boost to international competitiveness, distorted the longer-term price signals for both investors and savers.

QE was a desperate effort to compensate for recovery-sapping fiscal austerity, which was itself a product of political failings and serious macro policy misjudgments. QE might have been an admirable second-best policy, but it was still 'beggar-thy-neighbour'. 

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In any case, the 'currency wars' debate in the global setting has moved on.

Brazil, the leading complainant, has other more serious economic problems of its own making. India, whose central bank governor gave the most cogent criticism of the US depreciation strategy, is now recording the fastest growth of any major economy (quiet, sceptics!). And the US, whose QE set off the debate in the first place, is now in a stronger phase of the cycle, with its exchange rate substantially appreciating in the process.

The debate is not totally dead, however. It has reverted to an earlier phase, where US industry lobby-groups (and Fred Bergsten of the Peterson Institute) are once again targeting China's comparative advantage. The industry groups are insisting that a 'currency manipulation' chapter be included in the Trans-Pacific Partnership (TPP) treaty soon to be debated in the US Congress. 

To say the least, this is inconvenient for the success of the finely balanced TPP deliberations.

The attempt to include such a chapter is inappropriate, as it trespasses on the International Monetary Fund's territory. Moreover, at this late stage in the negotiations it would probably doom the whole exercise to failure. In any case, China has also moved on. With large capital outflows rather than inflows, its exchange rate is under downward (not upward) pressure against the greenback and its intervention is to support the renminbi, not to keep it from appreciating.

There are those as well who would turn this proposed amendment against its instigators. They would have a credible argument that the US itself was a 'currency manipulator' in the post-2008 recovery period, with the exchange rate held down by seriously imbalanced 'beggar-thy-neighbour' macro-policy settings.

Photo courtesy of Flickr user Tim Evanson.


A few initial reactions to Prime Minister Abbott's National Security Statement, delivered this morning at AFP Headquarters in Canberra.

'The terrorist threat is rising at home and abroad', said Abbott in his introduction: this claim is really the bedrock of the speech and the various policy measures announced in it — after all, none of this would be necessary if the terrorist threat was diminishing.

Let's focus on the 'abroad' part of the claim. According to the Global Terrorism Index, '17,958 people were killed in terrorist attacks last year, that’s 61% more than the previous year.' Which is horrific, of course, but 82% of those deaths occurred in just five countries: Iraq, Afghanistan, Pakistan, Nigeria and Syria. As you can see in the graph, deaths from terrorism in the rest of the world have been pretty stable since the peak in 2001:

Still, the PM's claim that ASIO has over 400 high priority cases under investigation — double the number from last year — is alarming. And of course the rate of deaths from terrorism does not take account of plots that were foiled, of which Abbott listed several. Note though the words of former National Security Legislation Monitor Bret Walker this morning, who said Australia was not facing a terrorism crisis, but rather that the terrorist threat was a permanent state of affairs that requires continuous effort to counter.

'In Australia and elsewhere, the threat of terrorism has become a terrible fact of life that government must do all in its power to counter', said Abbott. Just like when an airline tells you that 'safety is our number one priority', this is one of those reassuring statements which doesn't actually withstand much scrutiny. If airlines made safety their top priority, their planes would never leave the ground. And if governments did all in their power to stop terrorism, we'd be living in a police state with a dying economy. As Abbott acknowledges later ('We will never sacrifice our freedoms in order to defend them'), the fight against terrorism is, like all public policy, a trade-off. We can't have perfect security, just as we can't have perfect freedom. We would have a much saner public discourse on terrorism if our leaders acknowledged this simple fact from time to time.

It would also help if governments stopped constantly elevating terrorists to a status they do not deserve. Why did Abbott need to refer to the Martin Place siege instigator as a 'threat to our country'? He was merely a criminal, and our leaders should take every opportunity to point this out, so that copycats get the message that there is no glamour attached to such acts. As Paul Buchanan has argued, terrorism should whenever possible be treated like a crime, not elevated to a war-like act.

On the proposal regarding dual citizenship, I would point readers to two Interpreter pieces from immigration expert Peter Hughes, who argues strongly that the policy is a weak weapon against terrorism.

Abbott's lines about Islam are going to make waves:

 I’ve often heard Western leaders describe Islam as a ‘religion of peace’. I wish more Muslim leaders would say that more often, and mean it. I have often cited Prime Minister Najib of Malaysia, who has described the Islamist death cult as ‘against God, against Islam and against our common humanity’. In January, President al Sisi told the imams at Egypt ’s al Azhar university that Islam needed a ‘religious revolution’ to sweep away centuries of false thinking.

Note the sceptical tone around that 'religion of peace' reference. Even George W Bush routinely used that line, yet Abbott can't bring himself to endorse it. Instead he calls for Islam to undergo a 'revolution', with a supporting quote from none other than that noted Islamic scholar and political moderniser, Egyptian military strong-man al Sisi.

Abbott closes with the claim that 'My government will never underestimate the terrorist threat.' Is that really a concern for anyone? For those worried about the erosion of civil liberties, about the growth of our intelligence agencies, about military adventurism in the Middle East, and about the distortion of our national security priorities (why is a speech billed as a 'National Security Statement' devoted solely to jihadist terrorism? Is that the only threat to Australian security?), overestimation of the terrorist threat is a more serious concern.

Side note: it's a dreadful shame this speech was not delivered to parliament. Abbott clearly saw it as an important and even solemn task. Why would he not honour Australia's most important national institution — its parliament — by delivering his remarks there? Our democracy is slightly diminished as a result.


'Once you start thinking about growth, it's hard to think about anything else', remarked the economist Robert Lucas, who won the Nobel Prize for his work on the topic. Policymakers in China agree.

Since 1979, GDP growth has symbolised the nation's dynamism, determination and confidence, and China's growth machine has spawned an industry of forecasters who jostle over decimal points.

In recent years, the totemic 8% has been gradually guided down to 7-7.5% as 'the new normal'. National GDP hit 7.4% last year, controversially missing the 7.5% official expectation. Policymakers are attuned to market reactions, so feel obligated to deliver '7-point-something.' Growth at all costs has become a dangerous obsession, without heed to prudent economic management. There is a law in economics stating that variables become meaningless once targeted; Chinese GDP might well qualify.

Of course China's GDP isn't meaningless. It's huge, it's real, and it's merely slowing 'from a very big base'. It represents a stunning 40% of total world growth and it seems churlish to question it. Still, there's always been something a little fishy about this dataset. It gets reported far sooner (in 19 days) than in any other major economy. In punctual Tibet they report even before quarter's end!

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More advanced economies regularly revise growth data retroactively; China's GDP is suspiciously accurate and seldom corrected. And it seems no longer to correlate well with other underlying indicators, suggesting officials or statisticians may be smoothing the data. 

Shanghai's recent removal of its target is likely to be followed by other provinces currently in thrall to 'GDP-ism'. The economy's high and rising dependence on investment has been criticised as unsustainable. '7.X' growth, like the magic formula for Coca-Cola, is seen as contrived. There are a few cynics who mutter that the Chinese growth number is a fiction, too good and too stable to be true.

There is another explanation: Beijing really is delivering the reported number but is straining to do so.


China's national balance sheet is starting to look ragged. Goldman Sachs thinks China's industrial debt is, at 240% of GDP, approaching American levels, but at a much lower development stage. McKinsey reckons China has piled on 83% debt/GDP in 2007-14. In this period, total debt has quadrupled, certainly the world's largest ever credit buildup but also one of the fastest. This latter point is significant. By Goldman's count, China is coming off a '97th-percentile' episode of credit accumulation. Historically about half of such events have culminated in a banking bust. Since China 'doesn't do crises', it must eventually correct through rebalancing.

China has much going in its favour.

It has excess savings, which are captive. Although foreign borrowing has soared, external liabilities are less than 10% of GDP. There is large 'catch-up' potential remaining. Goldman calculates cumulative capital return rate is 15%, double America's, meaning there is still much room to deploy investment. But as Greg Clark has noted, that doesn't mean it will be done efficiently in the future: 'a manager of the Eastern Bengal State Railway, touring the United States in 1901, remarked that most American railways were not up to European or Indian standards.' Clark's point is that long-term growth is derived from the efficient use of railways (to take a germane example), not how 'advanced' the locomotives are.

Much of China's capital is trapped in dud state companies that are all too capable of pursuing white-elephant projects. Many of these companies are local government entities, and stories of alarmingly leveraged municipalities (here and here) are surfacing. Undeterred, 14 provinces (of China's 31) have already unveiled US$2.5 trillion of new projects for this year 'to bolster economic growth.'

For now, total debt continues to outpace nominal GDP growth by 6-7% annually, meaning that debt/GDP keeps piling up. There is an insouciant view, expressed once to me by a Japanese central banker when discussing quadrillions of yen of public borrowing, that debt is 'just a bunch of zeroes.' It doesn't matter, since it's 'owed to ourselves.' But Japan's experience actually informs otherwise. And Goldman's historical database suggests that a growth hiccup of at least 2-4 percentage points would normally ensue. The days of 7-point-something growth may be over soon.

Photo courtesy of Flickr user Matthew Stinson.