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Anxious about China, unsure about the US: Australians and the 2016 Lowy Institute Poll

It's likely 2016 will be remembered as a year of polls: the Brexit poll this week, the Australian election on 2 July, the US presidential election in November, and even a UN poll to select the next Secretary-General by year end.

The 2016 Lowy Institute Poll, released today, may not be quite on the same scale, but it's an important touchstone on how Australians are thinking about the world. This year, those views appear to be at a critical juncture.

Over the 12 years of Lowy Institute Polling (the first Lowy Poll was taken in 2005), Australians have generally been warm on our close friends in the English-speaking world when asked to rank their feelings towards various countries on a 'thermometer' scale of 0 to 100 degrees. New Zealand, the UK, the US, Canada and Ireland always come top or close to the top when we include them on the thermometer. We have been warm on like-minded nations in Europe and in our region: France, Germany, Japan, Netherlands, Spain, Singapore. We have warm to warmish feelings towards our Pacific neighbours: Fiji, Solomons, East Timor, Papua New Guinea. We have had middling to lukewarm sentiments about a bunch of countries in our region such as Indonesia, India, Malaysia, Vietnam, Taiwan and South Korea. We are cold on the usual suspects: North Korea, Iraq, Syria, Afghanistan, Pakistan, Iran, and Libya. 

And then there is China.

When we ask Australians about China it's always a complicated story. This year, however, it's more complicated than ever, and Australians' attitudes seem to have reached a turning point.

China, our largest trading partner since 2007, is now our 'best friend in Asia', according to Australian adults: 30% nominate China and 25% nominate Japan when we ask them to name our best friend in Asia. Two years ago, when we last asked this question, China and Japan  tied for first place. Yet on the 'feelings thermometer', Australians have always expressed warmer feelings towards Japan than towards China. This year, Japan is rated at 70° and China at 58°. This prompts the question: what exactly do Australians mean by 'friendship', where China is concerned?

China may be our best friend in Asia as of this year, and our largest trading partner since 2007, but it's a friend about which Australians have some serious reservations.

When asked about positive and negative influences on their views of China, Australians are overwhelmingly positive about the Chinese people (85% saying 'Chinese people you have met' are a positive influence), China's culture and history (a positive for 79%), and China's economic growth (a positive for 75%). However, there are some strong negatives too: 86% say 'China's human rights record' is a negative, 79% say 'China's military activities in our region' are a negative, and 73% say China's system of government is a negative. Its environmental record and investment in Australia are also negative influences.

As an illustration of this high level of anxiety about China, a substantial 74% of Australians are in favour of Australia conducting freedom of navigation operations in response to China's activities in the South China Sea.  

On the other side of the Asia Pacific is our other important partner, the US. Australian support for the US alliance has been one of the most consistent features of our polling. The proportion of the Australian population saying the alliance is either 'very', 'fairly' or 'somewhat' important for Australia's security has never slipped below 90% since we first asked this question in 2005. Australians always rate the US quite warmly on the feelings thermometer, with results ranging from a high of  73° last year to a low of 60° in 2007 (towards the end of the George W Bush presidency). This year, it's 68° — down 5°, making the US the only country to record a fall of any significance on the 2016 Lowy Institute thermometer. The alliance too has lost support: 71% say the alliance is 'very' or 'fairly' important for Australia's security. Still high, but down nine points on last year to a nine-year low in Lowy polling history.

Two years ago, when we asked Australians for the first time which relationship was more important — that with the US, or that with China — the US was the clear leader; 48% said the US, and 37% said China was the more important relationship in 2014. Two years later, however, it's a dead heat: in 2016, exactly the same number say China (43%) as say the US (43%) is the more important relationship.

But it's complicated. The Australian population is split down the middle on this question. Younger Australians (under 45) lean towards China, 51% saying it's the more important relationship, with 35% of that age group saying the US is more important. Older Australians (45 and over) see the US relationship as more important, with only 36% of them choosing China.

While we are divided between China and the US and many of us are anxious about China's intentions, we also appear to be quite concerned about what's going on in US politics at the moment. Nearly half (45%) of us say Australia should distance itself from the US if Donald Trump becomes president. Around half (51%) say we should remain close regardless of who is elected president; not a decisive vote of confidence and a result which suggests that the Trump factor may be having an impact on Australian support for the alliance.

Trump is not at all popular here: only 11% of Australians say they would prefer Trump as president, in results from separate Lowy polling in June; 77% prefer Hillary Clinton. And nearly six in ten (59%) say they would be less likely to support Australia 'taking future military action in coalition with the US under Donald Trump' if he wins the presidency. 

Our 2016 polling also has results on the other big votes this year. On the Australian election, the Liberal-Nationals Coalition wins hands down on foreign policy, with Australians preferring it to handle seven of eight key foreign policy issues including national security, the alliance, the economy and asylum seekers. Labor is preferred only on the issue of climate change. 

Australians are also decidedly against Brexit, with 51% in the 'remain' camp, against only 19% on the side of the  'leavers'. And on the last of the big votes this year, Australians are in two minds about Kevin Rudd as UN Secretary-General: 46% saying he would make a good Secretary-General, and 49% saying he would not.

Drawing on the last 12 years of data, this year's Poll highlights some important shifts in the way Australians are thinking about the world and our major global relationships. Our political leaders have their work cut out for them after 2 July.

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Pacific Island links: PNG protests, InterOil takeover, Vanuatu's female MP quota and more

  • Student protests across Papua New Guinea continue as Prime Minister O’Neill has refused  demands to step aside. Four weeks of protest has forced UPNG to suspend the teaching semester, with the Vice-Chancellor demanding students vacate the premises in 48 hours. Unitech remains hopeful that the Semester can still be salvaged. Meanwhile, students argue that they cannot back down.
  • Protests are also beginning to spread through the country, with a rally of over 6,000 people in Kundiawa, the capital city of the Simbu province in the PNG highlands, making similar demands to the students.
  • PNG’s opposition leader Don Polye has been reinstated to Parliament by the Supreme Court, which has ruled that several ballot boxes from the 2012 election must now be recounted to ensure he is the elected representative for the Kandep Open Electorate.
  • Elsewhere in PNG the InterOil board has approved a $US2.2 billion takeover by rival Oil Search. Hailed as yet another coup by Oil Search CEO Peter Botton, the deal has been slammed by a former InterOil CEO and is being questioned by the head of the ICCC, PNG’s corporate watchdog.
  • The date for the Bougainville referendum has also been set for June 15, 2019.
  • The Vanuatu government says it will pass a constitutional amendment to reserve seats in Parliament for women, months after a national election in which none of the nine female candidates were successful.
  • New reporting shows the Solomon Islands government set a record deficit of SBD$172 million (US $21.5 million), or 2% of GDP, largely driven by paying down domestic debt.
  • A new World Bank report argues that the business as usual approach to tourism in the Pacific will not result in substantial growth of the sector. With careful planning, however, the report argues that tourism in the region can generate 'as much as US$1.8 billion per year in additional revenues and create up to 128,000 additional jobs by 2040'.
  • And in case you missed our panel last week looking at new approaches to tackling gender based violence in PNG, the podcast is available here.

Yes, monetary policy does still work

Did you know that Australia once had a double dissolution election where the trigger was the conduct of monetary policy? It was our second double dissolution election, in 1951  (we are currently looking at our seventh), and the question at hand was the management of the Commonwealth Bank, which later in the decade had the Reserve Bank cleaved from it in an unrelated reshuffle.

Monetary policy matters. It has mattered for a long time. Tight monetary policy played a central role in the depths of the Great Depression. Even as far back as the early 1700s, monetary decisions caused the industrial sector of France to contract by 30%.

It would be quite a unique historical episode if monetary policy were ineffective. Some claim we are in that world now.

Let me explain why I think they are wrong.

First, let’s distinguish between two different types of economies: those at the zero lower bound for nominal interest rates (or near the lower bound, whatever it is, given some economies have negative rates), and those that are not.

Those not at the zero lower bound can still cut interest rates. I’m not sure why people think that the normal channels will not work properly. You often hear the claim that 'an extra 25 basis points (the amount of a usual interest rate cut) won’t have any effect'. Why would it have any less effect than usual? When I’ve looked at market and interest rate reactions to policy rate surprises lately, I haven’t seen any change in the effects of policy.* I don’t understand what evidence people are looking at when they say interest rate cuts don’t work anymore.

Another refrain I often hear is: 'if companies won’t invest at these low rates, they won’t invest at rates that are even lower'. But it is unlikely that the direct effect of interest rates on business investment has ever been strong. So, again, it does not look like the effects of monetary policy have changed.

Economies stuck at the zero lower bound can implement unconventional monetary policy, such as quantitative easing. Unconventional policy has been effective, as outlined by the Peterson Institute’s Joe Gagnon in a wonderful seven page brief on the topic.  Gagnon surveyed studies that looked at the effects of quantitative easing, and had this to say:

By and large, this research has attracted little attention from the public or even the financial press. Studies overwhelmingly agree that QE does ease financial conditions and there is no reason to doubt that it supports economic growth. QE can be especially powerful during times of financial stress, but it has a significant effect in normal times with no observed diminishing returns. Rarely, if ever, have economists studying a specific question reached such a widely held consensus so quickly. But this consensus has yet to spread more broadly within the economics profession or the wider world.

A stark example of the success of unconventional policy has been Japan…so far. Below is a graph of Japanese inflation and an indication of when quantitative easing began in Japan. We have gone from outright deflation of around 1% a year, to inflation of 1% a year (the spike up and down in 2014-15 is the effect of a tax increase, ignore it).  Some will counter that this is just the effect of a depreciating exchange rate, but wage inflation is up too, and so is the GDP deflator, so it’s not just the result of more expensive imported goods.

So the Japanese experience is encouraging. One problem, though, is that they want to get to 2%, and that line has stopped moving up.  That should call for more stimulus, but the Bank of Japan shied away from that during its last meeting. That left some observers, like Joe Gagnon, perplexed and worried that the BOJ does not have the will to get that line to where it needs to go.

Alright, so if monetary policy still has an effect, and if monetary policy settings are stimulative, why don’t we see more growth? One issue, I think, is that policy is not as stimulatory as it might otherwise be because the 'natural' interest rate has fallen.  The 'natural' interest rate is, basically, the interest rate the economy would face in normal times. The IMF wrote about a falling natural rate in its April 2014 October World Economic Outlook. If the interest rates in normal times are lower than in the past then expansionary monetary policy would also have to be associated with lower interest rates (and more unconventional policy) than in the past.

You could think about it in the following way. Economists often talk about something called the IS curve which, in a very crude way, shows the level of output you get for a given interest rate. What the IMF is saying is that the IS curve has shifted down, shown in the diagram below as a movement from r to r*. So the same level of interest rates do not give you as much output as it did before. That is not the same thing as saying monetary policy is ineffective. The effectiveness of monetary policy is given by the response of output to the interest rate, or the slope of the IS curve. The IMF, and I, think the IS curve has moved down, and there is evidence for that, but there is little evidence that the slope has changed.

In the past, people have thought monetary policy was ineffective. I wrote a piece last year discussing how some thought the high inflation of the 1970s could not be solved with monetary policy . During the Great Depression, Federal Reserve monetary policy was influenced by the flawed 'real bills doctrine', that led policymakers to conclude that monetary policy was easy, and not much could be gained by a loosening of it. Those who doubt the power of monetary policy have typically been wrong. I’m yet to be convinced why this time is different.

*For the wonks, there’s a subtle reason why cuts when interest rates are lower should give you MORE bang for your buck. One of the channels of monetary policy is the wealth channel. When asset prices go up, people feel more wealthy, and they spend more. An interest rate cut of a given size, say 25 basis points, should deliver a larger asset price response when interest rates are lower. Take, for example, the Gordon growth model for pricing a company’s stock. The divisor in that equation is the interest rate (well, cost of capital, but for argument’s sake, say it is the risk free interest rate) minus growth. The lower the interest rate, the larger proportional change you will get in the divisor for a 25 basis point cut, and the larger the stock price response. There’s a number of issues I’ve abstracted from in this example, for example, the interest rate in the model is fixed into the infinite future, but in general they shouldn’t change the conclusion.

The Middle East in 2016 (part 5): Cultivating order

Part 1 of this seven-part series is here; part 2 here; part 3 here: and part 4 here.

In February 2014 I visited Za'atari refugee camp in Jordan, near the Syrian border. According to official estimates it today houses around 80,000 refugees from the conflict in Syria, although in 2014, the Jordanian police commander of the camp put the population at some 110,000.

The thing that strikes you about Za'atari is how flat, arid, dusty, and white the terrain is. On an overcast day, such as the day that I visited, the terrain, the white UNHCR tents and the pale sky all fade into one another. In fact, were it not for the dark-coloured clothes of the refugees and the blue UNHCR logos on the tents the whole camp might disappear into the landscape.

Za'atari is a great metaphor for the Middle East at the moment, and not just because it is harsh and bleak. Walk through the camp and you find surprises such as the enterprising refugee I spotted who had somehow contrived a garden out of the chalkly white rubble on which the camp had been built. Rocket, mint, and other plants rose barely a foot above the soil, forming a dense lawn over a few square metres; green shoots among the uniform bleakness of the camp.

In my previous post I argued that the focus of Western policy needs to be on helping to build a new, more stable, political order in the region, as the old order decays and in some states, collapses. This will require changes to the way most states are run.

The best way to do this is not for the West to dictate some new order in the Middle East (even if this were possible, which it isn't); nor is it to try to replicate the type of liberal democratic societies that have taken decades and in some cases centuries to build in the West. Instead what the West should do is to identify and cultivate indigenous green shoots of political, economic and social change that will, over time, create a less violent, more stable and more durable regional order.

Like the little garden I found in Za'atari, these green shoots do exist and in some instances are already being supported by Western donors. For example, Tamkeen in Syria, which is supported by UK DFID and EU funding, is helping local communities in northern Syria deliver services, but most importantly develop experience in local governance.

Likewise, despite the upheaval caused by the Arab uprisings in recent years, the start-up sector seems to be growing, if from a very low base. Money for these start-ups is also being generated.

It may even be the case that some of the youthful energy that went into the Arab uprisings is now being directed into business as the space for political activism shrinks. As one young Egyptian activist noted to me a few years ago, the failure of the uprising meant that he and some of his friends were returning to their professional lives. In his particular case he was going from being a videographer of the uprising to setting up his own advertising and video production company.

There are also more substantial and more obvious green shoots. Tunisia is one of these. Whilst Tunisia's transition to democracy has been fitful and difficult it is still the only country whose uprising can still be described as a relative success. In the same way as its overthrow of the Ben Ali regime inspired uprisings in other countries, the success of its transition to a new more durable political order could serve as a model for other countries in the region.

Act short-term, think long-term

Western governments have a long history of supporting governance and economic reform programs in the Middle East. Some of these have been very effective, but the effort in sum has also been, variously, half-hearted, grandiose and all too often sacrificed at the altar of political expediency.

To be fair, encouraging, cajoling or even just nudging governments in the Middle East to undertake comprehensive economic, social or political reforms is hard work. Western governments do not have much leverage, or at least not much they are prepared to use. And it is relatively easy for even friendly Middle Eastern governments to portray these efforts as high-handed foreign interference, as has been the case in Egypt, for example. 

A 'green shoots' approach would have three main components.

The first would be a much more intensive, comprehensive and coordinated effort to identify green shoots of positive change. Rather than focusing just on emerging threats in the region, Western countries need to lend equal weight to identifying emerging opportunities, from local experiments in good governance to new sectors of economic entrepreneurship.

The second component would be a coherent and large-scale effort to support and protect these green shoots. This wouldn't necessarily mean, in the first instance, more money for the region. But it would mean in some cases a shift in where and how that money is spent.

Take for example US non-humanitarian (military and economic) aid to Egypt and Tunisia. The Obama Administration is planning to double its aid to Tunisia, and extend $500 million in loan guarantees, out of recognition that the country's political transition could be an important model for reform in the region. But excluding the loan guarantee, this is still less than a tenth of what the US is planning to give Egypt, which these days is not a model for anything in the region other than hyper-repression

The money and the expertise does not just have to come from Western governments, however. Foreign investment, for example, will be critical to the transformation of Middle Eastern economies. But Western governments and agencies can help ensure the money comes into the region by working with Middle Eastern government to reform investment and other economic regulations.

The effort to support green shoots also needs to be coordinated to ensure that financial resources are well directed, and that lessons learned are exchanged. Donor coordination has been difficult to achieve in the past, not just in the Middle East. But if Western countries can coordinate military campaigns in the region there is no reason why they could not coordinate good governance ones.

Coordination is also important in terms of leverage. Middle Eastern governments are well versed at playing off one Western donor against another. Coordinated pressure may not work in every case, but it will provide Western countries more leverage than they currently have.

That is not to say, however, that this effort to support green shoots of change in the region would, or should, in every instance be pursued in opposition to regional governments. Some regional governments will welcome technical assistance in reforming their economies or bureaucracies or indeed investments in new industries that produce large numbers of new jobs.

In some instances changes to economic or social order will be resisted, perhaps quite vociferously, by elites who feel their interests threatened. In these cases using political or economic leverage may be necessary, especially where elites either threaten or are an obstacle to a green shoot growing. But in other cases it may be possible to work around those elites, especially when it comes to promising but small-scale projects that might not initially seem threatening to them.

The question of how you work with or around existing regimes, including some that may be allies, also relates closely the third component of a 'green shoots' approach: an effective communications strategy.

Western leaders will need to communicate in some overarching way that the West's approach to the region is changing, while avoiding the mistake of the grandiose rhetoric of the past.

None of what I am proposing means that current, short-term efforts to deal with the consequences of the Middle East's disorder should be abandoned. Western governments should still be conducting a military effort to destroy ISIS, and it will still be necessary to conduct drone strikes against other extremists in the region from time to time. Western governments will also need to continue managing, as best as they can, the humanitarian impact and refugee outflows caused by the region's conflicts.

But these short-term fixes need to be matched by some longer-term plan to deal with regional instability in a sustainable way. I would argue than an approach focused on cultivating green shoots over the longer term is better than the alternatives: on the one hand, some grand scheme for regional transformation; or, on the other hand, doing nothing.

Critics will argue that all this sounds neat, familiar and perhaps even naïve in exposition, but very tough in implementation. My counter is that the West no longer has a choice. The old domestic orders in the Middle East will continue to decay and will need to be replaced. The West can either help some citizens of the region build new, more positive, more stable domestic orders; or it can sit and watch other citizens of the region replace the old orders with something much less stable and far less savoury.

The 2016 Lowy Lecture: Exciting times ahead on a sombre day

When Australian Prime Minister Malcolm Turnbull launched the 2016 Defence White Paper one month ago he said that 'it sets out a clear eyed and unsentimental appraisal of our strategic environment, the threats and the opportunities.'

Last night’s Lowy Lecture, delivered by Mr Turnbull, was an attempt — perhaps overdue — to put his personal stamp on that appraisal. It was characteristically longer on the opportunities than on the threats.

Mr Turnbull takes his optimism seriously, even though last night’s lecture was arguably the first stump speech of what may be an unusually extended election campaign.

Asia’s growth story is not only a market opportunity, according to the prime minister. Its economic transition also serves a forcing function, requiring greater agility of Australia as it transitions from a commodities and construction-led boom to something more enduring. The prime minister’s economic upside lens was further evident in his efforts to sell the domestic innovation benefits of the Defence White Paper.

In this, Mr Turnbull's first real foreign policy speech on home turf as PM, terrorism was always bound to feature. After events in Brussels, he was obliged to open with it. Sympathies for Belgium aside, there were also some stinging words for 'European governments confronted by a perfect storm of failed or neglected integration', returning foreign fighters and an 'intelligence and security apparatus struggling to keep pace with the scope and breadth of the threat'.

Mr Turnbull contrasted this with the effectiveness of Australia’s security legislation, its integration model, effective border protection — and island geography. That rings true to some level, but also risks hubris, especially given the PM’s admission that Australia’s vital interests depend, in part, on our neighbours' ability to contain terrorism and breed religious tolerance, though Turnbull went out of his way to praise Indonesia’s President Widodo’s efforts in that regard.

On the use of military force, including by Australia, against Islamic State in Iraq and Syria, Mr Turnbull was notably unequivocal that the ability of IS to inspire and direct terrorism around the world would be 'largely eliminated if its so called caliphate is decisively defeated in the field', although an enduring solution requires a 'political settlement'.

The prime minister then warned, tellingly, that we should not view Australia’s strategic circumstances solely through the prism of counter-terrorism. When Mr Turnbull talks about the need to be 'clear eyed' about Australia’s security environment, an expression he used again last night, that is partly what he is getting at; a clear separation in emphasis from his immediate predecessor’s fixation on Islamist threats.

So, what then of China? Having laid out the Indo-Pacific’s economic upside so thoroughly, the prime minister seemed almost reluctant to spell out the strategic risks. Mr Turnbull said first that 'we look forward' to the outcome of the Philippines’ legal case under the UN Convention on the Law of the Sea. This was an oblique side-swipe to China’s non-participation at the Permanent Court of Arbitration and signalled Australia’s backing of international law in the South China Sea.

The prime minister's direct remarks on China’s actions in the South China Sea were purposefully brief, but pointed. It was 'undeniable', he said, that China’s actions, including creating 'land on water', were stoking regional anxieties, tensions and were therefore counter-productive to China’s interests.

Mr Turnbull also delivered a now customary airing for Xi Jinping’s mindfulness of the 'Thucydides trap' in Sino-US relations. Alas, if there is a rhetorical analogue to this classical metaphorical vice, the prime minister is apparently wedged within it.

He is known to be mindful of the challenges that the US faces in managing its side of the shifting strategic dynamic with China, notwithstanding last night’s backing for the 'continuing vital presence of the United States'. Perhaps that is why, to my mind at least, there was such emphasis on Australia’s thickening defence ties with Japan, India and a 'personal policy objective' to broaden Australia’s ties with Indonesia. It appears Mr Turnbull measures Australia’s diplomatic agility across these vectors, as much as on managing the US alliance relationship, or Australia’s ties with Beijing.

It was intriguing to hear the prime minister, in his conclusion, say that Australia 'embraces' this 'multipolar world'. So much for continuity — bring on the change, it seems.

Photo courtesy of Flickr user Wilco737

The Middle East in 2016 (part 2): The old order will continue to decay

Part 1 of this seven-part series is here.

One of the enduring myths of the Arab uprisings is that it was primarily a brave, noble but ultimately vain attempt by young liberals to overthrow the old authoritarian order in the Middle East. Many observers now dismiss the uprisings as a passing episode; a failed experiment with democracy that has mostly resulted in violence and disorder, and seen a return to repression.

Like all myths this one contains a kernel of truth. Young liberals and others deserve credit for the role they played in overthrowing long-time authoritarian regimes in Tunisia, Egypt, Libya and Yemen. But a closer diagnosis of the uprisings finds that these regimes were less overthrown than collapsed as a result of their internal frailties.

In this regard, the Arab uprisings did not precipitate the current regional disorder. The uprisings were instead one significant consequence of the gradual but terminal decay of the old political order in the Middle East. The Syrian civil war and the emergence of Islamic State have been other consequences. Most importantly, we need to understand that the decay of the old political order throughout the region is far from over.

One of the interesting things about the Arab Middle East in the modern era (post de-colonisation) is that all states, whether republican or monarchical, came to be run in more or less the same way. Strong, one-man, one-party or one-family regimes ruled through a combination of co-option and coercion. The state provided public goods in return for public loyalty, and when this did not work, the state used its security forces to preempt or discipline dissenters.

In the decades leading up to the uprisings, the ability of all Arab Middle Eastern states to co-opt their citizens deteriorated (to differing degrees, and with a few exceptions). Among other things, populations got bigger, economic rents declined and regimes atrophied. Moreover, new generations of citizens raised new demands for material improvements or political and social freedoms that the old order was incapable of accommodating.

The failure of the Arab state was anticipated in a series of Arab Human Development Reports published by the UN between 2002 and 2009. What wasn't predicted in these reports was when the moment of crisis would come. The fact that the trigger was provided by an isolated, desperate act of protest by an unassuming Tunisian street vendor underlines just how frail the old political order in many Arab states had become.

But the uprisings didn't just expose the old order's inability to co-opt, it exposed its inability even to coerce. We often forget this, but in every successful Arab uprising the military abandoned the long-time ruler. In cases where the military stuck with the ruler, as in Bahrain and Syria, the regime survived. This lesson has not been lost on other rulers in the region.

But coercion alone is not going to save the old order. Syria is the best illustration of this. Assad has had to destroy his country to save his regime, but it is still far from guaranteed that he will remain in power in the longer term. This is also true of Egypt.

Egypt's faltering autocracy

Ironically, the collapse of the old political order in the Middle East also partly explains the failure of the Arab uprisings, particularly in Egypt.

The standard narrative of the Egyptian revolt privileges the role played by media-savvy, twitter-wielding liberal activists. The truth is that the protests that precipitated the downfall of the Mubarak regime temporarily brought together a broad cross-section of Egyptian society that had lost confidence in the old order: liberals and young idealists seeking democracy; young thugs seeking confrontation; Islamists seeking an Islamic state; the poor and the aspirational middle class seeking material change; and of course the political opportunists.

Against this background it is hardly surprising that Egypt's transitional period proved to be tumultuous and violent. Egypt's post-uprising rulers and pretenders struggled to either meet or manage the diverse and often unrealistic expectations most Egyptians had for change. It was at this point that the current president, Abdel Fattah el-Sisi, launched a coup against then-President Mohammad Morsi of the Muslim Brotherhood, and then won popular endorsement in what was effectively a one-horse election.

Sisi capitalised on public exhaustion, a desire for stability, and well-founded fears about the Muslim Brotherhood's competence and commitment to democracy. In fact, Sisi seems to remain genuinely popular, although it is difficult to tell by how much and with whom.

But this is unlikely to last. Rather than trying to build a new, more durable, political order, Sisi, the Army and other elements of the old regime, such as the police and the judiciary, are trying to renovate the old one. They are trying to do this by cracking down on dissent and building up the economy. Neither approach is likely to work.

In the 12 months after the coup against Morsi, some 41,000 Egyptians were imprisoned, according to the Egyptian Centre for Economic and Social rights, or 'just' 22,000 if you believe Egyptian Ministry of the Interior. The Muslim Brotherhood has been banned and its leaders imprisoned. Non-Islamist political movements, such as the April 6 movement, suffered a similar fate. A previously relatively vibrant media and civil society are today harangued, arrested and largely domesticated.

But if Egypt is now more authoritarian than it was in Mubarak's time, and indeed even in Morsi's time, it is also less stable. There is a major jihadist insurgency in Sinai, a growing jihadist threat in the rest of the country and there are still regular strikes and small-scale protests.

Sisi's efforts to revive the economy have delivered paltry results. There have been modest economic reforms, the launching of grandiose national projects such as the building of a new capital, and lots of money has flowed in from the Gulf. But tourism, a major source of income, remains stagnant because of terrorism. Economic reforms don't go nearly far enough, partly because they threaten the economic interests of the old Mubarak-era business cronies who are once again backing the regime. And as they did in the Mubarak era, mega-projects will fail either because of the incompetence of a still sclerotic bureaucracy or the corruption of business elites.

One effect of the current round of repression is the hollowing out of Egypt's moderate middle. Political activists who had drawn a line at violence have either withdrawn from politics or, as seems to be the case with the younger cadres of the Muslim Brotherhood, are turning to violence. 

There is a view that another uprising in Egypt is unlikely in the short term. This may be true. Egyptians may be growing less supportive of Sisi's promises but they are probably still wary of any return to revolutionary tumult. Nevertheless, we will probably see growing violent tensions between state and society this year. Indeed, one of the consequences of the regime's hyper-repression is that the fuse to violent confrontation is now much shorter than it used to be. And there is a lot of tinder lying around. The spark might be one of the regular protests or strikes, if it is repressed particularly harshly by the security forces; or it might be the rough treatment of an activist that becomes a cause celebre. But this time, rather than igniting the largely peaceful protest that Egypt witnessed in 2011, something far more ugly and violent could erupt.

Photo by Flickr user Dan H.

The Middle East in 2016 (part 1): Levantine limbo

This is the first post in a series of seven on the Middle East in 2016. The first three will look at what I think will happen in the region this year; the second three will discuss how I think Western countries should respond; and a final post will discuss Australian policy.

To understand what will happen in the Middle East in 2016 the most obvious place to start is Syria. Indeed, so many issues are bound up in the Syrian conflict that what happens there will determine a lot of what happens in the broader region, not just this year, but in coming years as well.

This conflict drives the current humanitarian and refugee crises. Its outcome will determine not just who rules Syria (or parts of it), but also the future of Islamic State and other extremist groups. It will decide whether Iran consolidates its position as the region’s ascendant power and what role other regional powers will play. It is shaping (negatively) perceptions of the West in the Middle East and it will largely define what role the US and Russia play in the region in coming years.

With so much at stake it is hardly surprising that shifts in the conflict have tended to be grinding to date. When one side makes gains, the other side, with the support of its external allies, fights back. The result has been less a stalemate than a see-saw of escalation and counter-escalation.

In recent months, however, the conflict has swung more decisively in the regime’s favour. Russia and Iran’s muscular intervention last year has saved Assad, caused massive new humanitarian suffering, but probably also helped to make possible recent moves to cease hostilities and resume peace talks.

More significantly, there is unlikely to be a military counter-move that will shift the momentum back in favour of the opposition. US military efforts will remain focused on Islamic State and other extremist groups. This will also mean that the US will continue to place pressure on Turkey, Saudi Arabia and other regional players to limit the amount and type of military aid they provide to the opposition lest it fall into the hands of the extremists. Any (unlikely) change in US policy would need to wait for a new administration next year.

Meanwhile, talk of a direct Saudi or Turkish military intervention is mostly just that; talk. Saudi Arabia lacks the capability and the will to make anything more than a token military intervention on the ground. Turkey has greater will and capacity, but probably does not want to fight a war with Russia (and its NATO allies certainly don’t want it to). But even if there were some significant new military intervention against the regime it would probably just see the saw again.

Against this background it is very difficult to see how the armed opposition could, on its own, shift the momentum of the conflict back against the regime. Indeed, the most extreme, and in some respects more effective, parts of the opposition will be targeted more intensively this year. So far the US-led effort to degrade and destroy Islamic State has been slow and fitful, with uneven results. But this doesn’t mean that this effort won’t work over time, especially as the Obama administration grudgingly agrees to requests from its military for more special forces on the ground.

In recent months Islamic State has suffered a series of serious military reversals: it lost control of Sinjar cutting the highway linking its capital in Syria, Raqqa, to its biggest outpost in Iraq, Mosul; it lost control of Ramadi in Iraq to the Iraqi army with strong US support; and its siege of the strategically important Kweiris airbase in Syria was broken by the Syrian army with heavy Russian support.
 
More military setbacks for Islamic State can be expected, perhaps punctuated by the occasional tactical gain. In particular, the US and its allies will focus on dislodging the group from Raqqa this year and maybe even Mosul. But any gains against Islamic State in Syria and Iraq will come at the cost of more terrorist attacks in the West and elsewhere as the group tries to compensate for its losses on the ground.

Who will pay for Russia’s facts on the ground?

Russia’s military intervention and the declining power of the opposition means that Moscow will continue to set the terms for any diplomatic moves to settle the conflict in 2016. Such a settlement seems unlikely at this stage, but for the Russians it does not really matter. They will use ceasefires and the diplomatic process to reinforce the facts on the ground established by their military campaign.

But the Russians are also at an interesting point in Syria. In some respects Moscow (and Tehran) are in the same position as Washington was in Afghanistan and Iraq. The Russians have secured their man, but having your client in the capital, or even in control of key cities, is not the same thing as having him govern the country over the long term.

The US invested billions of dollars and made a huge effort to extend the writ of the regimes it supported beyond the boundaries of Kabul and Baghdad, with very mixed results. It is hard to see Moscow putting the same resources and effort into trying to re-build governance, security and the economy in Syria, or even a rump of Syria (and not just because Moscow watched Washington’s efforts in Afghanistan and Iraq fail).

But Moscow may also be thinking it can get others to do this job. Short of other options (at least ones that it is prepared to take), the West’s focus has been on building and maintaining the cessation of hostilities and providing some humanitarian relief to help stem refugee flows, while intensifying the assault on the extremists. The problem is that, even if all of this works, the limited triage now being applied in Syria won’t significantly stem the human suffering and refugee flows caused by the conflict.

Syrians will still be left sitting among the ruins of their broken society, economy and national infrastructure. The number of humanitarian refugees seeking to leave Syria may ease, but the flow of economic ones will probably increase. Indeed, even if Islamic State is destroyed other extremist groups will rise to take its place in the ungoverned and misgoverned spaces that will remain in the country. (Although, there will also be other communities in Syria that will continue to escape the control of either the regime or the extremists)

As Richard Gowan has argued, assuming that the current limited cessation of hostilities does not break down completely (a big 'if'), the UN could well be placed in the 'morally and politically invidious position of trying to consolidate peace on terms effectively set by President Bashar al-Assad and his allies in Moscow and Tehran'.

Western capitals are in a similar position. It seems unthinkable that the West would even consider making investments in post-conflict stabilisation in a way that might prolong Assad’s rule in Syria. But faced with a choice between consolidating the current fragile cessation of hostilities on Moscow and Assad’s terms, or a continuation of the fighting with all the consequences that this entails, Brussels, Washington and New York may gradually and grudgingly choose the former.

This is in effect the ‘Assad as the least-worst’ option argument. The problem is it's pretty hollow. It is true that for a while Assad may be able to count on some combination of defeat, exhaustion, consent and continued coercion to ensure his rule over a rump of the country. But this won’t last long. To remain in power, let alone extend to other parts of the country, he would need to rebuild infrastructure, reconcile warring communities and provide jobs, security and a new social contract with Syria’s citizens. If all this sounds fanciful, it’s because it is.

But even if it is true that Assad is not a viable option for returning stability to Syria, it does not mean that the Russians will quickly or easily abandon him. No-one will be more receptive to Russian interests in Syria than Assad because no-one owes the Russians (and the Iranians) more than Assad does. Moreover, jettisoning its chief client would be a strange way for Moscow to celebrate its victory on the battlefield and the reputation it has earned for sticking with its allies.

Indeed, hoping that the Russians will abandon Assad may repeat the mistake made by Western capitals at the outset of the conflict when they assumed Assad would quickly fall. Forced to accept Russian terms for re-launching the diplomatic process last year, this year Western capitals may find that Moscow is not only expecting them to accept its terms for a settlement in Syria, it wants them to foot the bill as well.

Photo courtesy of Flickr user David Axe

Iran election: A vote of confidence in President Rouhani

Results from Iranian parliamentary and assembly elections held over the weekend have not yet been finalised, however what we know so far is encouraging.

First of all, turnout is an important indicator of popular legitimacy.  Presidential elections normally see a much greater turnout than parliamentary ones in Iran, but this election also featured the Assembly of Experts.  So a turnout of around 62% of voters nationwide (50% in Tehran) for this type of election can be considered a strong one.

Second, the results reinforced the wider phenomenon of commercial and political capitals, such as Tehran, not being representative of the country as a whole.  There was without doubt a very strong showing for moderates in Tehran, with all 30 parliamentary seats going to  allies of President Hassan Rouhani. Some 15 of the 16 Assembly seats allocated to Tehran also went to moderates.  But in Iran, like nearly all countries, there is a political divide  between urban and rural areas. Those who study Iran understand that Tehran can be something of a mini political ecosystem, separate from the rest of the country.

Third, this is not so much an affirmation of reformists as a rejection of conservatives.  The widespread culling of most reformists and many conservatives by the Council of Guardians prior to the election meant that there was a limited ideological range of candidates from which to choose.  Despite this, conservatives suffered significant losses at the ballot box.  This is a vote of confidence by the public in the policies of President Rouhani, whose negotiation of the Joint Comprehensive Plan of Action (also known as the Iran deal) last July saw him deliver on the main electoral promise made in his presidential campaign.  The expectation is that he will have greater freedom of action to pass legislation to address the chronic unemployment and inflation from which Iran suffers. However, while there are more moderates than conservatives confirmed in parliament, there are also many independents, though we won't know the final numbers for some time. In more than 20% of seats, no candidate achieved the minimum 25% of the vote necessary to win so runoff elections will be held. This means that the true character of the parliament may not be known until May.

Even theocratic systems of government require popular legitimacy to survive and the mood of the electorate will certainly have been noted by the Supreme Leader and the conservative factions in Iran.  How both of them react to the electoral result, as well as how parliament forms, will determine how much progress moderates can make in shifting the tone and policies of the Iranian government.  It could be the change in the composition of the Assembly of Experts may, in retrospect, come to be viewed as more significant in the long term than the change in parliament. 

Photo courtesy of United Nations

Has Tony Abbott torpedoed the captain's pick?

Tony Abbott’s weekend speech in Tokyo, titled 'Against Strategic Pessimism’, was unsurprising in its robust advocacy of Australia’s 'special relationship' with Japan, based on shared values. Mr Abbott’s correspondingly cautious assessment of China should not shock either, notable though it was for including a starkly worded warning about 'countries which turn reefs into artificial islands at massive environmental cost, fortify disputed territory and try to restrict freedom of navigation… putting at risk the stability and security on which depends the prosperity of our region and the wider world'.

Had Mr Abbott left it there, the speech would have been reported and remembered, perhaps as he intended, as a values-led spin on defending the 'rules-based order'. This is a signature phrase in the Australian Defence White Paper launched by Prime Minister Turnbull last week, but commissioned and drafted under Mr Abbott’s watch.

However, Mr Abbott did not leave it there. He went on to comment, in considerable depth, on 'the submarine partnership that Japan is prepared to enter with Australia':

Japan is offering to build a long range version of its Soryu submarine for Australia. This is the world’s best large conventional submarine specifically designed to match the nuclear submarines of other nations.
Japan’s willingness to share defence technology of such sophistication – and the United States’ willingness to work with both Australia and Japan on the installation of the most advanced weapons systems – is a sign of the complete confidence that our countries have in each other.

This intervention is potentially problematic for the Competitive Evaluation Process (CEP), from which the government will choose the international partner, from among French, German and Japanese bids, that will design and build Australia’s Future Submarine. The CEP is run separately to the Defence White Paper and the result is expected later in 2016.

Although Abbott is no longer premier prime minister*, he is still a member of the coalition government. Those in Cabinet, including Defence Minister Marise Payne and Foreign Minister Julie Bishop, have toed a studiously impartial line on the submarine bid in order to maintain the integrity of the CEP as a neutral tool 'to balance important considerations including capability, cost, schedule and risks'.

Mr Abbott’s comment that 'if Japan wins the submarine bid, Mitsubishi will be returning to Adelaide', arguably goes further even than promoting the strategic benefits of submarine cooperation with Japan, by specifically identifying with the lead manufacturer behind the Japanese bid. Most potentially damaging of all was Mr Abbott’s comment that 'For Japan, this submarine deal is strategic; for the other bidders, it’s commercial'.

Mr Abbott’s words obviously carry more weight than an ordinary backbencher, and by overtly revealing his partiality towards the Japanese bid he raises an obvious question whether the CEP initiated during his premiership was genuinely entered into in the spirit of fair and open competition. While the selection of the Future Submarine is ultimately for the government to decide, including on strategic as well as technical grounds, the French and German bidders, DCNS and TKMS respectively, might reasonably be expected to raise Mr Abbott’s apparent lobbying on behalf of Japan in the event that their bids are rejected.

For the government, even if the Japanese bid is currently ahead of the competition, this must surely shorten the odds on one of the European bidders going forward with Japan into the CEP, if only to counter impressions that the process is a fig leaf. That is likely to add further to the evaluation costs and potentially draw out a selection process that, according to the DWP2016, is unlikely to begin delivering the first submarines until the early 2030s.

For those who support the strategic arguments for Japan-Australia collaboration, it would be unfortunately ironic if Tony Abbott — the architect and champion of this emerging special relationship — has inadvertently sent a torpedo in the way of Japan’s submarine bid.

Photo by Lisa Maree Williams/Getty Images

*The term premier is often used to refer to the head of government. In Australia and Canada, it also refers to the the chief minister of a government of a state or province. To avoid confusion, this reference was changed after publication. 

Australia's national interest statement on TPP neglects capital control risks

Capital controls used to be taboo. The idea that a country would interfere with the free flow of capital across its borders was anathema to any right-thinking policy-maker.

That view has changed. Now there is a recognition that capital flows can be destabilising, as the rush to get money out of a country can exacerbate a crisis. Most famously, the IMF changed its tune, saying in 2012 that 'in certain circumstances, capital flow management measures can be useful'.

Trade negotiators, however, may have been slow to catch on; capital control measures may be inconsistent with various treaties. And if that’s the case, then any country imposing capital controls could be subject to action.

This action could be pursued through state-to-state channels, or even through Investor State Dispute Settlement (ISDS) channels, where private agents can take governments to tribunals to seek redress. Imagine if a large US bank were to seek damages from a small economy while that small economy was implementing measures to stave off a crisis. What a mess that would be.

Presumably in response to concerns about this possibility, the Trans-Pacific Partnership includes Article 29.3. This sets out various conditions under which countries can impose capital controls. But I reckon these conditions don’t go far enough.

For a start, there are time limits. The TPP allows for a country to impose these controls, but if they need to be implemented for longer than 18 months (Iceland’s capital controls have been in place since 2008 and counting), the other parties to the agreement need to give their blessing.

That could be a problem. If Australia were to impose capital controls at some point, what guarantee is there that we will see eye-to-eye on their rationale with the other TPP signatories? We’ve disagreed with our friends before on appropriate crisis responses — the Asian Financial Crisis comes to mind. There’s no good reason why it won’t happen again.

If that happens, and a financial behemoth then takes Australia to an ISDS tribunal…well, that is going to be awkward.

There are other issues with the carve-out. For example, it does not apply to foreign direct investment, which could open up all sorts of enforcement problems. If you want details, Michael Reddell, a former New Zealand economic mandarin, discussed potential problems in November.

I had hoped these issues would have been covered in Australia’s National Interest Analysis, released a couple of weeks ago.

But not a whisper. The Australian National Interest Analysis ran for only 19 pages (the Kiwis managed nearly 300). Just 19 pages to assess a 6000 plus pages agreement. Doesn’t seem adequate to me. And most of that was just a statement of what the TPP included. The issue of capital controls was not addressed.

So, we are all left wondering: do our top officials think this carve-out goes far enough? If so, why? And while we are on the topic, to what extent do our previous treaties limit our ability to impose capital controls? There is a potentially gaping hole here. And I have not seen any assessment of the risks.

Photo courtesy of Flickr user runran

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