Lowy Institute

More details emerged over the weekend about two Chinese big-ticket initiatives, 'One Belt, One Road' and Asian Infrastructure Investment Bank (AIIB).

Speaking at the Boao Forum for Asia, President Xi Jinping outlined his vision for the region in a keynote address titled 'Towards a Community of Common Destiny and A New Future for Asia'. 

The Boao Forum, held annually since 2001 in Hainan, has moved from being primarily a business and finance gathering to being regarded as a platform for Chinese leaders to make significant foreign policy announcements. It was attended by leaders from more than 15 countries including Indonesia's President Jokowi, Russia's First Deputy Prime Minister Igor Shuvalov, Sri Lankan President Maithripala Sirisena and Swedish Prime Minister Stefan Lofven. Australia sent its Governor-General and Finance Minister. The Opposition Leader Bill Shorten was also there.

In his speech, Xi Jinping outlined four principles that underlay his vision. To build a community of common destiny, he said:

  • we need to make sure that all countries respect one another and treat each other as equals.
  • we need to seek win-win cooperation and common development.
  • we need to pursue common, comprehensive, cooperative and sustainable security.
  • we need to ensure inclusiveness and mutual learning among civilizations.

The rhetoric is familiar and it is easy to be dismissive. However, this vision espoused by the Chinese President is an attempt to assuage fears among China's neighbours about its growing power and influence. China is not winning hearts and minds through its bilateral efforts, so is now framing its engagement as a shared regional vision.

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It explicitly connects the futures of China's neighbours with China's own future. In doing so, Xi Jinping is trying to convince other countries that their own peace and prosperity will best be secured by becoming even more intertwined with China.

The much promoted 'Belt and Road Initiative' is the hallmark of this vision. There are obviously domestic economic imperatives for the Belt and Road, but it is also being framed as an example of China's regional leadership. Chinese leaders speak of the Initiative as being a 'public good China provides to the world' and the effort of a 'big country' to shoulder 'greater responsibilities'. This is an attempt to demonstrate that China's intentions are benign and should be welcomed.

The Chinese Government knows that its own successful development is linked to the economic growth of others, and that it cannot achieve its 'great national rejuvenation' without peace, stability and growth in its neighbourhood. But countries are becoming wary of being too dependent on China. And China's bilateral efforts in places like Sri Lanka and Myanmar are hitting roadblocks. So instead President Xi is trying to reframe China's inroads as part of a regional vision shared by all.

Coinciding with Xi Jinping's Boao speech, the Chinese Government released its 'action plan' for the Belt and Road Initiative. The plan was jointly issued by the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and the Ministry of Commerce, indicating it is both a domestic and foreign policy initiative. 

Light on details, it purports to be 'open', 'harmonious' and 'inclusive'. It covers road, sea and air transportation, energy infrastructure, and optical cables, removing trade barriers, improving customs clearance processes, cooperation in agriculture, forestry, and fisheries, trade facilitation, free trade zones, e-commerce, and renewable energies, to name but a few! For those who want to know more, Xinhua has a dedicated website with links to all the statements, policies, news and activities. 

It appears to be an all-encompassing initiative that basically anything can fit under. Indeed, we will see projects that are already underway being rebranded as part of the 'one belt one road'. And existing financing pledges for development projects will also be subsumed and re-announced.

The Belt and Road Initiative will be financed through a range of mechanisms. The AIIB, the BRICS New Development Bank, the Silk Road Fund, as well as China-ASEAN Interbank Association and SCO Interbank Association have all been explicitly mentioned. The Chinese Government increasingly speaks of the Belt and Road and AIIB together, linking them to its vision of a common (Asian) destiny.

In a clear case of the US shooting itself in the foot, the AIIB now looks like it is becoming a global institution. With the UK joining up, others did not want to be left out. Russia, Australia, Denmark, Brazil and the Netherlands are the latest to signal intentions to join. In addition to jumping on the bandwagon, there has been recognition that commercial and development cooperation interests will be affected by the AIIB and so it is better to be involved to try and influence the bank's investment decisions from the beginning. 

But in signing onto the AIIB, countries have implicitly agreed to support China's regional vision. The challenge will be to make sure that infrastructure investments really are 'win-win'.

Alongside the policies and investments, China wants to embark on a publicity campaign to gain public support for the initiative. So expect to see cultural exchanges, sporting events and 'maritime silk road tourism cruises', being promoted under the banner of the One Belt One Road initiative. 

The initiative is clearly a priority for Xi Jinping. The Central Government has established a special 'leading group' under the National Development and Reform Commission to oversee implementation of the initiative. We should expect to see and hear a lot more about it. China's neighbours will certainly embrace the new economic development opportunities, but time will tell whether they are convinced of China's intentions and persuaded by the 'common destiny' idea.

Photo courtesy of the Boao Forum.

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  • A wonderful collection of bizare gaffes from Thailand's junta leader, General Prayuth. This week he wryly joked that he could 'just execute' journalists that don't 'report the truth'. Australian journalist Alan Morison is among those  currently fighting charges of criminal defamation. 
  • In Myanmar, KIA General Gun Maw said 'signing the ceasefire does not mean achieving peace'.
  • After last week's comments about China's nine-dash line, Jokowi this week clarified Indonesia's position, emphasising that it remains neutral in the South China Sea dispute. 
  • The Economist looked at how, almost a year on, Thailand's reforms are faring; there's also a series of infographics on the Thailand's volatile politics. This week, Thailand brought in the death penalty for human trafficking.
  • A Philippines Senate Committee Report on the botched police operation that left 44 police dead  (police report here) indicated that the US had a role in the operation. Gregory Poling wrote on the impact the failed raid may have on the US. Meanwhile, Malaysia says it is prepared for an influx of refugees if the peace process in the south breaks down.
  • Vietnam ramped up defence spending by 113% between 2004 and 2013. Murray Hiebert and Phuong Nguyen examine the increase.
  • A Justice Trust report accuses Myanmar's hardliners of being the 'hidden hand' behind the 2014 Mandalay riots.
  • The BBC examines Myanmar's one hundred languages in this podcast, while The Economist looks at Myanmar's burgeoning startup culture
  • The week was dominated by coverage of Lee Kuan Yew's death. There was a steady stream of obituaries (including this excellent piece by Milton Osborne) and some LKY contrarianism (h/t Sam). The Straits Times reported on the tens of thousands that joined the three-hour queue to pay their final respects to him in Singapore. This is what it looked like (hyperlapsed):

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Australia cares about infrastructure investment in Asia. So why didn't we join the new China-led Asian Infrastructure Investment Bank (AIIB) last November when we would have received the most political benefit? And why are we still asking the wrong questions about the AIIB?

The Abbott Government made infrastructure investment a headline for the G20 Summit in Brisbane. A legacy outcome of the Summit was the establishment of a Global Infrastructure Hub in Sydney with a four-year mandate. Australia is now part of the troika for the upcoming G20 summits in Turkey and China, and it is clear infrastructure investment is a priority for all three nations, in particular for financing the New Silk Road.

So why on earth did we take so long to join the AIIB? There are three plausible reasons.

First, many of our closest allies and comparators have joined already, so we could shuffle in behind and avoid US censure. India and Singapore, then the UK and New Zealand, now France, Germany and Italy have all announced plans to join the AIIB. A 'safety in numbers' approach, then, which is disappointing in terms of Australian leadership.

Second, there were some legitimate concerns about bank governance.

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Among infrastructure experts, bankers, economists, business groups, foreign policy experts and governance advisers, there is barely a word of dissent about the low risk and general reward of being involved in the AIIB at a strategic level. No Australian seems unduly concerned about China taking a stronger leadership role in economic governance. It is simply expected of the globe's second-largest economy.

Nevertheless, the US was asking the right questions about safeguards and governance, even if for the wrong reasons. Infrastructure investment for macroeconomic growth does not automatically benefit people living in extreme poverty, as they can be affected by displacement, environmental damage or by being forced to pay more for basic services. But those attuned to human rights and social protection concerns in China felt that early accession might give more opportunity to push for the same level of environmental and social safeguards as have been hard-won in the World Bank and Asian Development Bank, but which need to go further. We do need to ask about AIIB plans for transparency, human rights standards, alleviation of extreme poverty, and climate change mitigation and adaptation in project selection and design.

Heaven knows, it is not that existing multilateral development banks have been so perfect in their interventions in our region all these decades. They have improved because they were forced to change by civil society actors. And the governance of those banks has not represented the reality of shifting power for about a decade. The US and Japan have only themselves to blame for that.

China should take the safeguards concerns on board, improve them where possible. In the AIIB, China's global governance reputation will be on the line, and at the same moment China assumes the G20 presidency with the world watching.

Third, Australia put enormous diplomatic effort into its G20 year, and with the Infrastructure Hub in Sydney such an important legacy, we needed time to examine the synergies with the AIIB.

Asian Development Bank estimates suggest Asia will need $8 trillion in national infrastructure and $290 billion in regional infrastructure through 2020 to sustain the region's growth trajectory. The AIIB in not a sufficient response to that deficit, but it is a response, and a creative one. In AIIB's case, the consensus seems to be that the initial target is around $100 billion of new capital. The test is how that capital will be employed. Most development experts agree there is an underinvestment in pro-poor infrastructure globally. The International Energy Agency also estimated that adapting to and mitigating the effects of climate change over the next 40 years out to 2050 will require around US$45 trillion or around US$1 trillion a year. Will the AIIB invest in pro-poor, green infrastructure?

For the first time, China is not joining a global institution, it is creating one. The issue is not to stop China taking a leadership role in global economic governance. The issue is to do everything possible to make sure China benefits the rest of the world in its new role. 

A longer version of this article appeared in Mandarin in the Global Times, People's Daily on 21 March 2015.

Photo by Flickr user Jason Tabarias.

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Short of a full-blown ground invasion, the Saudi-led (and US-UK-supported) aerial bombardment of Yemen – Operation Decisive Storm – was probably the most dangerous of the available international responses to the Yemeni political crisis. That a ground invasion apparently remains on the table is either an indication of how misunderstood the drivers of the crisis are, or of a cynical willingness by neighbouring states to drag Yemeni civilians through another round of struggle for reasons of domestic legitimacy and regional dominance. Or both.

Civilian casualties from the bombings are already mounting, but the consequences will spread beyond this sad tally. Yemen imports around 90% of its wheat and all of its rice. With its runways bombed and airports closed, Yemen's already food-insecure population is in a dire humanitarian predicament.

At its heart, the Yemeni crisis is a continuation of a domestic power struggle that has been underway for more than a decade over the rightful successor/s to President Ali Abdullah Saleh, and the basis for their legitimacy. From a Yemeni perspective, the sectarian and regional geopolitical aspects to the crisis have been a sideshow to the local politics at play. However, Operation Decisive Storm risks unleashing a hell still (only just, and very imperfectly) contained by domestic power balances.

The military campaign is ostensibly to force the return to power of a weak and isolated president, Abdo Rabo Mansour Hadi, after he fled the country following a slow-motion coup by the northern rebel group, Ansar Allah.

Better known as the Houthis (after the family that has led the movement since 2002) the group has ties to Iran, though the duration and strategic depth of their association is a matter of conjecture. Both Saudi Arabia and Iran have overstated the level of coordination between Iran and the Houthis to their domestic audiences. For example, members of the Iranian elite have touted Sana'a as the fourth Arab capital to join the Iranian revolution, while both Saudi Arabia and the Yemeni president have framed Operation Decisive Storm as saving Yemen from Iranian hegemony, calling the Houthis 'puppets of Iran'.

In reality, Iran's ability to drive events in Yemen through the Houthis is limited; hard evidence of Tehran's capacity to issue orders is scant.

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That dearth of evidence is underlined by Saudi Arabia's willingness to assign geopolitical significance to symbolic or commercial ties, such as the new commercial flight route between Sana'a and Tehran.

The Houthis' success in Yemen is almost entirely a product of local political factors, military capacity, and support. The Houthis steadily gained influence by articulating widespread anger over the failures of Hadi's government, such as when it cut fuel subsidies in August 2014. The following month, Houthi militias overran the capital Sana'a with the acquiescence of factions of the military loyal to former President Ali Abdullah Saleh, who was ousted in 2012 but was granted immunity from prosecution (of whom more in a moment).

Tensions continued to build between the Houthis and President Hadi over an appropriate power sharing arrangement, and in January the Houthis surrounded the presidential palace and placed the president and other senior government figures under house arrest. In an apparent attempt to call the rebels' bluff, President Hadi and his cabinet resigned, leaving the Houthis militarily dominant but politically overstretched and increasingly unpopular. Hadi fled to the southern city of Aden, declaring it to be Yemen's new capital, and withdrew his resignation. On 25 March the Houthis, again drawing on parts of the military still loyal to Saleh, captured the al-'Anad air base just north of Aden and took Hadi's defence minister hostage. Hadi subsequently fled to Saudi Arabia from where he now praises the Kingdom's willingness to conduct air strikes in support of his leadership.

This snapshot of Yemen's political alliances makes some sense if one follows the fairly linear 'Saudi v Iran' script that permeates regional politics at the moment, but then it deviates and ties this logic in knots.

Former president Ali Abdullah Saleh and his family have been informally affiliated with the Houthis since Saleh's removal from office following the 2011 protests. But prior to that, his regime fought six brutal wars against them between 2004-2010. For now, Saleh and the Houthis share a common enemy in President Hadi, although even that may have been put up for sale by Saleh over the weekend. Saudi Arabia has come and gone with the Houthis as well, invading northern Yemen to fight them briefly in 2009-2010, only to apparently investigate a closer collaboration with them last year against Yemen's Islah Party, elements of which are affiliated with Saudi Arabia's other bête noire, the Egyptian Muslim Brotherhood.

Meanwhile, both the Houthis and Saudi Arabia are declared enemies of al Qaida in the Arabian Peninsula (AQAP). Former president Saleh, on the other hand, repeatedly released its members from prison and had his military abandon their posts and relinquish territory to them in an apparent attempt to illustrate just how chaotic Yemen could become if protests against his rule continued.

Despite the international tone to recent events, Yemen's predicament is very much a product of domestic political tensions and failures, the threads of which have been woven through the country's rivalries, palace intrigues, and humanitarian calamities for over a decade. Each of Yemen's contenders to power have sought political advantage by attaching their cause to wider regional preoccupations, whether sectarian rivalry, the war on terrorism, the rise of Iran, or a fear of the Muslim Brotherhood.

Saudi Arabia's Yemen intervention is part of the broader regional trend of narrowly-based regimes shoring up their domestic legitimacy through external posturing – the Iran-Iraq war (1980-88), the Saudi invasion of Bahrain (2011), Iran's support of Hezbollah and Hamas, regional support for/against the Muslim Brotherhood in Egypt and, of course, more recently the civil war Syria and Iraq. The list goes on.

The notion that outsiders now need to 'pick a side' between Saudi Arabia and Iran in Yemen is extremely dangerous. The Houthis may well have imploded as they tried to govern the country, and been forced back into negotiations. But we will never know, so great is the desire for outsiders to be seen to be doing something. Anything.

Photo by Flickr user RA.AZ.

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Last week I was one of many who highlighted an old Lee Kuan Yew quote in which he argued that Singapore's development had a lot to do with air conditioning, because it made 'development possible in the tropics. Without air conditioning you can work only in the cool early-morning hours or at dusk.'

Paul Krugman also noticed the quote, and blogged on it for the NY Times, with evidence from the American south backing up LKY's claim about the link between air conditioning and development in warm climates. Tyler Cowen at Marginal Revolution pushes back gently at Krugman's argument, citing this paper which argues that Krugman's argument may be backwards: as consumers have become wealthier, it argues, they have placed a higher premium on 'nice weather', so they move to warmer climates and buy air conditioners. There's also this post, which argues that air conditioning may have been an important early factor in the development of America's south, but not so much lately.

Lastly, my thanks to Elliot Brennan, who points out that there was an entire book written on LKY's theory about air conditioning and Singaporean development. 

(PS. On the broad subject of unexpected reasons for major social trends, check out some recent articles on the link between lead exposure and crime.)

Photo by Flickr user Choo Yut Shing.

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  • Why is Australian aid funding so frequently in the cross-hairs? Kylie Bourne on why we need to talk about aid.
  • Bled dry: an ICRC report on how war in the Middle East is bringing the region's water supplies to breaking point.
  • Bill Gates reviews the world's response to Ebola and what might be the next global epidemic.
  • New report from the OECD on the world's 50 most vulnerable countries.  
  • UN backs out of deal with Uber due to concerns over female driver protection.
  • Roads are a key aspect of the development agenda, but at what environmental cost?
  • The Economist reviews the four big meetings to occur in 2015 that will decide global governance outcomes.
  • Startling graph below from CARE Australia: Australian foreign aid as a percentage of national income.

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There has been much fretting about China's growth over the past five years. One special focus for hand-wringing has been the Chinese financial system and its non-banking component – the shadow banking system – in particular.

Financial growth in China has certainly been rapid since 2007, a classic warning of impending trouble. In the decade before 2007, credit grew only a little faster than GDP, reaching 187% of GDP, which is about normal for an emerging economy.

Then China applied a huge stimulus in 2009 in response to the global financial crisis, mainly in the form of easing the constraints on credit expansion. As a result, China sailed through the crisis with double-digit growth. But by 2014 the credit to GDP ratio had risen to 282%, a bit more than Australia or the US and much more than is normal in emerging economies. The shadow banking component led the expansion, growing at 37% annually since 2007.

This issue received special attention in the recent McKinsey Global Institute report on global debt. The Fung Institute in Hong Kong has also recently produced a couple of excellent papers on the topic. 

The shadow banking sector is harder to delineate than the core banking system because its precise size is confused by fuzzy definitions, double counting of some institutions and under-reporting of others. Based on Chinese central bank data, the Fung Institute puts shadow banking assets a little over 50% of GDP, or less than one-third the size of bank credit. McKinsey estimates that the sector is a bit larger.

This is much smaller than the American shadow banking sector, and the Chinese institutions are much less complex.

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In China, as in most countries, the expansion of shadow banking is the result of controls and distortions on the core banking sector which prevent banks from meeting the needs of savers and borrowers. They take their unsatisfied financing requirements to the informal financial sector, which expands to meet these needs. Depositors left the banking system because government controls made the interest return unattractive for savers. Borrowers went to the shadow banking systems because banks would not give them loans, or offered only unattractive short-term funding. 

With this in mind, the rapid expansion of the shadow banking system should be seen as a phase in the ongoing development of China's finances. There are benefits as well as dangers.

The answer is not to shut it down, but to develop the benefits and minimise the dangers. In the pre-2007 world, much of China's enormous savings ended up funding the expansion of state-owned enterprises, with this investment (or over-investment) becoming less and less efficient over time. Private sector enterprise (the dynamic element in the economy) was starved of funds, receiving only 20% of bank credit. 

The growth of the shadow banking sector is the transitional means for correcting this – imperfect, but a step towards a better financial system.

An efficient financial system provides finance across the full range of risks, offering safety for risk-averse depositors while also offering high-risk funding for the most dynamic entrepreneurs. The shadow banking sector's proclivity for excess and mindlessly low credit standards (also demonstrated in America and Europe in the period leading up to the 2008 crisis) needs to be reined in while at the same time retaining the dynamism and flexibility. Finding the right balance for the less-regulated non-bank institutions is a challenge for financial policy-makers everywhere, not just China.

So is this a worry?

China's central government has the resources and administrative capacity to prevent a serious macro-economic financial crisis. The central government starts with modest debt levels – 27% of GDP. Even if it had to absorb the losses envisaged in McKinsey's most extreme disaster scenario, this would take official debt up to around 75% of GDP – less than in most advanced economies. Many borrowers also have substantial deposits to offset against their liabilities. While there are substantial credit risks in the housing industry (property developers and builders), most homeowners have little or no debt.

China's huge foreign reserves are not available in any substantive way for domestic financial problems. But these reserves (and the current-account surplus) ensure that China cannot be affected by the flight of foreign money that made the 1997-98 Asian crisis so disastrous.

All that said, it is quite possible, even likely, that there will be numerous bankruptcies (a property crash would be serious, as McKinsey estimates that housing-related credit accounts for 40-45% of lending). The central government would have to bail out some local governments (it has already begun taking over small amounts of their debt). As well, the links between shadow banking and the mainstream banks would precipitate balance sheet strains for the banking system. 

Financial history tells us that countries which undergo financial deregulation always experience a crisis, to a greater or lesser degree. In China, the deregulation is taking place in a carefully staged fashion. But policy-makers can make mistakes. Markets can lose confidence and growth can be knocked off trend. China's low official debt, substantial government ownership of banks and enterprises, and enormous foreign reserves don't give it immunity from financial troubles, but they do mean that when things go wrong, they can be fixed with less disruption and quicker bounce-back. A Chinese 'Lehman moment' still seems unlikely.

Photo courtesy of Flickr user Sharon Hahn Darlin.

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Two events over the past week leave an observer to conclude that change will only come slowly in Cambodia so long as Hun Sen is prime minister. The first relates to the Khmer Rouge Tribunal (the Extraordinary Chambers in the Courts of Cambodia, ECCC), the second to Michelle Obama's visit.

On 5 March I recorded in The Interpreter that Judge Mark Harmon, one of the international judges at the ECCC, had charged two former Khmer Rouge figures with crimes against humanity. My post noted that, for these charges to progress to indictment, it was necessary for judge Harmon's decision to be endorsed by his Cambodian counterpart on the tribunal, judge You Bunleng.

During the past week judge Harmon has charged another former Khmer Rouge figure, former Central Zone deputy secretary Ao An, better known as Ta An, and again judge You Bunleng has so far not joined with Harmon to move to indictment.

The Cambodian Government, and particularly Hun Sen, has made clear its opposition to the ECCC continuing to work towards indicting additional defendants, so it is not surprising that judge You Bunleng has not acted to support judge Harmon. What is not clear is what happens now. So far judge You Bunleng is reported as saying that he will 'continue the discussion' with his counterpart. That discussion could go on for some time.

Meanwhile, in a speech that will not be welcomed by Washington, Prime Minister Hun Sen has chosen to express a critical judgment on Michelle Obama's visit to Cambodia, reported in The Interpreter on 23 March. According to the Phnom Penh Post, Hun Sen argued that the US should pay for scholarships for the ten students the First Lady met in Siem Reap. Hun Sen accused the first lady of making false promises about paying for the scholarships, a claim denied by the US Embassy:

Her [Obama's] mission is very good, but I suggest the United States should help completely and not play like this,' he said. 'It is just playing around ­ it is not good. What if she chose 300 students? It would be death. I don't have that money to give.

Although the tone of Hun Sen's speech is not really surprising in the light of his sometimes critical view of the US, his readiness to make these observations so soon after the Michelle Obama visit is puzzling to the extent that it undermines any sense that the visit might have involved a rapprochement between the two countries.

Photo by US Embassy, Phnom Penh.

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 Bringing together the best Interpreter articles you were too busy to read this week.

Former Australian Prime Minister Malcolm Fraser and former Singaporean Prime Minister Lee Kuan Yew both passed away this week. James Curran reflected on Malcolm Fraser's principled foreign policy legacy:

It is too often forgotten that Fraser was one of the first on his side of politics to welcome the advent of a new, multi-racial Commonwealth in the 1950s and 60s. Not for him the morbid recital of Kiplingesque odes as the sun set on the British Empire. In 1961 he supported the expulsion of South Africa in order to make the Commonwealth a 'stronger moral force'. That put him directly at odds with Menzies' position, which was to refuse comment on the internal affairs of another Commonwealth country.

Elliot Brennan offered his take on the LKY's legacy in Singapore and the region:

Lee was a man of strong convictions. His pragmatism was arrived at through empirical study and driven by expert consultations, earning him the accolade of being a 'one-man intelligence agency'. He was of course not alone in the building of his big ideas. Sinnathamby Rajarathnam and Goh Keng Swee were just two who played a pivotal role in the creation of Singapore, as Lee would himself attest. (He was known for publicly deriding the idea of statesmanship, once saying that 'anyone who thinks they're a statesman should see a psychiatrist'.)

Dina Esfandiary responded to a recent op-ed in The Washington Post which argued that war with Iran over its nuclear program, rather than negotiations, is the better option. Dina doesn't think so:

Instead, military action will play beautifully into the hands of the Iranian Government. It will give them a legitimate excuse to forgo its non-proliferation commitments and go hell for leather on the nuclear program. It will encourage Tehran to drive the program underground and cease all transparency. Muravchick argues that if Iran currently has hidden facilities, they'll be hidden from an agreement too. Perhaps, but the aim of an agreement is to ensure that Iran submits to the most stringent inspection regime devised to date. Surely that's a step up from nothing, which is what we would be left with if force is used.

Are there contradictions in Australia's foreign fighter laws? Lauren Williams pointed some out:

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But just as the US-led alliance is providing arms and training to the Iraqi armed forces, so the Iraqi Army is partnering with the Peshmerga. And in turn, the Peshmerga is teaming up with the YPG. This reporter has witnessed YPG-Peshmerga cooperation in northern Syria, and it is safe to say that arms directed to the Iraqi Army will end up in YPG hands. They may even end up in the hands of Matthew Gardiner as he battles ISIS.

Alan Dupont and Hugh White continued their debate over the future of the ADF and strategic policy. First, Alan Dupont:

Yes, I do cast my net wider than Hugh in thinking about the variables that should shape the future ADF. That's because the ADF is required by governments to do much more than defend Australian territory against a particular kind of military attack coming from a specific location or direction. Future governments will expect a richer suite of military options from the ADF than ever before, including an enhanced capacity to deploy and sustain significant forces at considerable distance from Australian shores in defence of our interests, not just our territory. So our strategic reach must be longer, and our capacity for autonomous operations – what we used to call self-reliance – correspondingly greater. All the more so in a post-American world.

And Hugh's response:

More importantly, the fact that governments use the ADF for purposes other than that for which it was designed does not mean it has been designed for the wrong purposes. It often makes sense to use something for a purpose for which one would not buy it.

There is a separate question, of course, about whether the strategic objectives that have been laid down as force structure determinants in recent white papers are the right ones for Australia over coming decades. I do not think they are, because they assume that Australia's strategic risks will remain much the same in the next few decades as they have been in the last few. What objectives we should adopt instead is a question for another time.

Former army major-general Jim Molan thought Hugh White's comments on strategic thinking in the ADF to The Saturday Paper were generalisations:

But I don't dismiss these fine people just because they have no idea about military operations and therefore stay at the vague level of clever strategic posturing. Still, if professors are permitted to be arrogant in their generalisations, then permit me to at least be blunt in my reply: no one should be permitted to give strategic advice involving the military unless they have at least a familiarity with military operations and tactics. The uniform currently or once worn is irrelevant. I know civilians who can and have done it, but not many. The greatest gift of anyone who calls themselves a strategist must be the ability to align policy, strategy and its implementation.

Again, Hugh White responded:

My primary point to Sophie was simply that serving in the ADF, perhaps at quite a junior level, does not in itself guarantee that a parliamentarian will have special expertise in the defence and strategic policy decisions discussed and made at the political level.

But the broader point remains true too: the ADF as an institution does not generally (with some notable exceptions) excel at the strategic-level tasks of advising governments about when and how they should use force to achieve policy objectives, and about what capabilities Australia needs.

Mike Callaghan on globalisation and the future of the Australian tax system:

The breakdown of the production process across many countries and the increasing importance of services and intangibles in international trade makes it easier for firms to shift profits to zero or low tax jurisdictions. Combating corporate 'base erosion and profit shifting' is a G20 and OECD priority. But the resilience of the corporate tax base is particularly important for Australia given its high reliance on corporate tax. From 1983 to 2011, the OECD average corporate tax rate as a percent of total revenue remained around 8.5%. But Australia's corporate tax revenue rose from 9% of total revenue to 20% over the same period.

The Shambaugh debate rages on. Nadege Rolland wonders if the Chinese Communist Party will be adaptable:

Is the Party able to acknowledge these problems for what they are, and not through ideological lenses? And most importantly, how will the ruling elite respond? Will they choose the path of reforms, and if so, will the regime be able to live with a growing contradiction between the need for good governance and the intrinsic limitations of a Leninist system? Will they revert to all-out repression and control? The Arab Spring showed us that growing tensions between the socio-economic situation and its political (mis-)management can produce unexpected outcomes. Despite its resilience so far, China may not be immune from such shocks.

Catriona Croft-Cusworth reported on an attempted terrorist attack in Indonesia that used chlorine gas:

A small explosion in a Jakarta shopping centre late last month has Indonesian authorities concerned that local radicals may be adopting tactics from ISIS. The explosion in ITC Depok, a tech shopping centre in the Greater Jakarta area, came from a poorly made device consisting of batteries, paint tins and wires inside a cardboard box. The homemade bomb, left unattended in a men's bathroom, appeared not to have detonated properly, and no-one was hurt. But what has alarmed police and anti-terror forces is that the device contained a substance known to be used by ISIS: chlorine gas.

What have we learned about migrant smuggling? Marie McAuliffe looks back on the publication of the book Illicit:

Firstly, there remain significant gaps in our understanding of migrant smuggling. Patchy data indicate that some smuggling routes are closely monitored while others are not; some smuggling routes have been effectively shut down while others appear to be flourishing. Improved data collection and targeted research is enhancing our understanding of smuggling but we still don't know the true scale and nature of many smuggling networks. We have a limited understanding of how inter-connected smuggling is with other forms of illicit activity; we may not yet appreciate the level of danger and insecurity experienced by those being smuggled.

Robert E Kelly reviewed the film American Sniper:

...All the unpleasant controversies are pleasantly avoided: no mention of pre-war intelligence failures; no hint of the mismanagement and incompetence of the occupation; no discussion of Abu Ghraib or America's heavy-handed search tactics, especially in the early days; no examination of Iraqi nationalism or suggestion that resistance to US occupation had any legitimacy whatsoever. It's all straight-up American hero stuff to balm neocons' frayed sense of American exceptionalism.

Photo courtesy of Flickr user Choo Yut Shing.

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This piece by Chinese academic Wu Quiang on the domestic and international politics of China's smog problem is compelling.

A few vignettes, the first of which goes to a topic I have touched on previously, which is that the chances of a meaningful international emissions deal in Paris at the end of this year are somewhat higher than many think, because Washington and Beijing seem to be on similar terms:

President Obama and President Xi Jinping reached a deal in which China promised to reduce carbon emission by 20% by 2030. The deal was almost the sole instance of progress the Obama administration has made in the US-China relation at a time when the relationship is becoming more difficult. During the Clinton administration, the Most Favored Nation Trade Status was the issue that bound the relationship. During the Bush administration, the bond was war on terrorism. Now that these bonds have gone, the emission promise is becoming the new bond that keeps the two countries in a cooperative relationship in which they clash often but not break up. The deal is also one of the few gestures China makes to the United States and to the world that it is a responsible power and that it recognizes the international rules.

Then there are internal factors, such as the increasing influence of the Ministry of Environmental Protection:

It is also possible that the MEP will be given law enforcement authority for the first time, for example, the authority of forced inspection, search, sequestration, fines, recall and closure. We shouldn’t be surprised if in the future the MEP establishes its own environmental police force and environmental procureratorate, similar to the Bureau of Alcohol, Tobacco, Firearms and Explosives in the United States, that merges the existing forest police force and fisheries regulatory body to form a new environmental law enforcement power. After all, the power redistribution and institutional reconstruction these changes bring is in line with the increasing trend of power concentration since Xi Jinping took power. It can also be put under the banner of “comprehensively deepening reform,” providing Chinese leaders with concrete evidence to show to the world that China is taking measures to reduce emission.

And finally, there's an internal security angle to China's smog problem that I had never considered:

As face masks people wear everyday render surveillance cameras meaningless, the security organs are said to be very uneasy, fearing that the situation can spin out of control and lead to a smog revolution.

(H/t Marginal Revolution.)

CORRECTION (30/3): The excerpt I quote above reads 'President Obama and President Xi Jinping reached a deal in which China promised to reduce carbon emission by 20% by 2030.' In fact, the commitments President Xi made in the joint announcement with Obama are (1) to peak China's CO2 emissions 'around 2030', with the intention of peaking earlier; and (2) to raise the non-fossil fuel share of its primary energy consumption to around 20% by 2030. (Thanks Fergus.)

Photo by Flickr user Nicolo Lazzati.

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Jim Molan is dismayed by my suggestion that strategic-level policy is not the ADF's strong suit. The offending line — in an article by Sophie Morris in last week's Saturday Paper — accurately reflects my remarks to her. Jim's robust response peppers a rather larger target, however.

Among other things, he attributes to me the view that Defence civilians are much better at strategy than their uniformed colleagues. So to be clear, I do not believe that civilians are any better at providing strategic policy advice than military officers. On the contrary, had I been asked, I would have said that the depth and breadth of strategic policy expertise among civilians in the Defence Department is just as inadequate as it is among their military colleagues. This is a major problem for our defence policy which, to be fair, I believe the senior leadership of the organisation understands.

My primary point to Sophie was simply that serving in the ADF, perhaps at quite a junior level, does not in itself guarantee that a parliamentarian will have special expertise in the defence and strategic policy decisions discussed and made at the political level.

But the broader point remains true too: the ADF as an institution does not generally (with some notable exceptions) excel at the strategic-level tasks of advising governments about when and how they should use force to achieve policy objectives, and about what capabilities Australia needs.

I would offer as evidence the flawed advice that led to Australia's costly strategic failure in Afghanistan (and yes, I have no doubt that it was a failure), and the advice to acquire the amphibious assault ships (pictured), which I believe are now becoming widely recognised as the white elephants they are. I think the ADF's strategic-level advisers, along with their civilian counterparts, must take some share of the responsibility for these decisions, if indeed they spoke in favour of them or failed to speak to robustly against them.

Photo by Flickr user Crouchy69.

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 New Lowy Institute polling released today shows that the Australian Government's data retention ('metadata') laws, which passed the parliament last night, have the support of a clear majority of Australians.

When asked whether 'legislation which will require Australian telecommunications companies to retain data about communications such as phone calls, emails and internet usage, but not their content' is justified, 63% of the adult population say it is 'justified as part of the effort to combat terrorism and protect national security'. Only one-third (33%) say it 'goes too far in violating citizens' privacy and is therefore not justified.'

Younger Australians (18-29) are more likely to say the legislation is not justified (47%), but this age group is divided about the policy, with 50% saying it is justified. 

'Australians appear to accept some infringements on their privacy in the interests of fighting terrorism and protecting national security,' said Lowy Institute Executive Director Dr Michael Fullilove today. 'This result is consistent with 2013 Lowy Institute polling which found that most Australians believed the government had struck about the right balance between protecting the rights of citizens and fighting terrorism.'  

This result is drawn from the forthcoming 2015 Lowy Institute Poll, the full version of which will be released in June 2015. The Lowy Institute Poll is based on a nationally representative telephone survey of 1200 Australian adults between 20 February and 8 March 2015. The Poll's error margin is approximately +/- 2.8%.  For more information see Lowy Institute press release. 

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By Eva Westfield, who was an Australian volunteer based in Port Vila.

Consistently rated the most dangerous countries in the world in terms of disaster risk, Vanuatu is no stranger to the destruction caused by natural hazards.

Talk of Cyclone Pam hitting Vanuatu started about a week before it descended upon us on 13 March. Still, many were convinced that the cyclone would not hit Port Vila directly until it became clear, just two days before, that it would be one of the biggest storms to ever hit the Pacific.

Those who had sturdy housing were able to see out the storm in their own boarded-up homes. Others had to bunker down with friends, leaving their homes at the mercy of the storm. Villagers packed sandbags onto their corrugated iron roofs. Many prayed, believing that God would ensure the cyclone missed Vanuatu altogether.

As night fell, the winds picked up and it was clear that Pam had arrived. Winds would reach over 300km per hour in some parts of Vanuatu.

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Over the course of the night, the cyclone was ruthless as it ripped from the ground enormous banyan trees, bowled over towering coconut palms and lifted solid roofing from houses. Endless rain flooded homes and entire villages. 

Despite all of the preparation for the cyclone, nothing prepares you for the shock of the aftermath. By morning, fallen tree trunks had blocked every road, rolled shipping containers and beached yachts littered every part of Port Vila. Bridges between villages were totally washed away, with no way of crossing the overflowing rivers. While telephone communication in Port Vila was re-established by the afternoon, the rest of Vanuatu was silent for days to come. 

Though it is considered a developing country, the people of Vanuatu are extremely fortunate for the rich vegetation that envelops the archipelago, allowing them to live off the land sustainably. Seeing the almost total destruction of banana, coconut and cocoa plantations was the most confronting sight of all. 

Desperation was soon followed by disorder. Shops and resorts were looted, leading to a 6pm curfew. ATMs ran out of money and fuel became scarce. However, the response of the people who had experienced the wrath of Pam – villagers, expatriates, tourists – was united and overwhelmingly positive. And with a relatively low death toll of 11 people, hopes were high for a full recovery. 

Within hours, local people immediately began replanting their crops and rebuilding their homes. Locals on the island of Efate who own chainsaws took to the single road that connects villages with Port Vila and started to cut back the fallen tree trunks that had blocked the way.

Foreign aid has been pouring in from all over the world to support Vanuatu's recovery, including from Australia, France, the US and the EU. Australia has donated over $10 million in relief funding as well as $5 million to support locally-based NGOs. Over 2000 Australian military and aid personnel have also been deployed to support the effort. 

Locals, expatriates and tourists were lining up to volunteer with major NGOs that were preparing water, food and medical supplies to be delivered to those worst affected. Vanuatu's National Disaster Management Organisation coordinated the aid effort to ensure that those most in need would not miss out. 

At Port Vila Central Hospital, dozens of Australian and international volunteers have donated blood and helped local staff to restore the old wards and attend to the overwhelming influx of people. 

Shops and restaurants in town began to re-open after just a couple of days.

But while Vanuatu 'island life' seems to be back on its way to normalcy, the country faces some serious issues as a result of Cyclone Pam. Those living in more remote villages and islands waited for over a week to receive fresh water, food, medical assistance and shelter from aid vessels. These people will be relying on aid for weeks and perhaps months until their crops grow back and their rain tanks refill. 

Without local fruit and vegetables, many villages have lost their permanent food sources and their primary source of income, and soon the cost of feeding a family will be unaffordable. Tourism, an industry that Vanuatu's economy relies heavily upon, has come to a halt.

Dozens of fishing boats across Vanuatu that once provided a key part of the island diet were washed away or damaged beyond repair. Some living on more remote islands such as Tongariki and Boninga no longer have any fishing boats at all, and will have to rely on alternative sources of food until they source other boats. 

While the initial response from Australia and the international community has been encouraging, the road to a full recovery for Vanuatu will be a long one, requiring a sustained joint effort and the political will of the Vanuatu and supporting governments to re-build this beautiful country. 

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Lei Jun reckons he has what customers really need. Xiaomi's flamboyant chairman has declared his ambition to overtake Apple at the top of the smartphone industry within ten years, by which time he expects 'Chinese companies to lead the world.' Whether he will succeed is, obviously, up in the air. For that matter, by then Apple may no longer be the benchmark, nor smartphones a sexy category. But his basic point must be right: China will wield a large number of globally competitive companies within a decade.

Two academics, economist Ricardo Hausmann and statistician Cesar Hidalgo, performed a famous and extraordinarily detailed data crunch, 'The Building Blocks of Economic Complexity', comparing the current and potential national incomes (GDP) of the world's economies, and their trade patterns. Their findings were intuitively sensible:

Economies that export many types of products are more likely to be sophisticated; products exported only by sophisticated economies are more likely to be complex. Sophistication and wealth do not always go hand in hand. China and India are more complex than their incomes would suggest; When economies are relatively sophisticated but relatively poor, they often have the potential for quick growth, as we have seen in China and India.

Economic complexity is a measure of both 'non-ubiquity' (or exclusivity), and diversity (or breadth). Wealthy exporters like Japan and Germany make a broad spread of hard-to-copy technologies. They 'go wide and deep', so to say. By contrast, countries heavily reliant on undifferentiated commodity products tend to struggle to grow incomes.

As Mark Buchanan at Bloomberg has highlighted, other academics applying powerful Big Data techniques have shown limitations to the Hausmann-Hidalgo framework as a predictor of income for lower-complexity nations (where, say, resource endowments or governance could be disproportionately influential). But it remains a useful guide for the countries that matter most, those with an 'ability to produce a wide range of products, as well as specialized things – think iPhones and rocket boosters – that few other nations can match.' Specifically, Buchanan is referring to India and China. 'The two have been building capabilities in a wide range of new products and skills, and have thus graduated into the group of countries for which complexity does predict growth.'

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Still, there are a couple of wrinkles to using export classifications alone as a measure for complexity; on such a scale, Uganda (say) looks more advanced than soybean superpower America. China exports a lot of advanced goods (40% by some measures) but its own contribution is significantly lower, Apple's iPhone being the familiar example. Merchandise exports also ignore services (eg. IPR, branding, health care, consulting, financial and legal advisory) which are specialised, with high-entry barriers, and are therefore lucrative.

Chinese economists fully understand this. Zhang Monan has warned about the misleading signal of final exports. It is not enough simply to send abroad assembled 'high-tech' products and services if the most critical technologies and skills are already embedded in the components by others. In the recently concluded National People's Congress, Premier Li Keqiang delivered a workpaper re-prioritising domestic mastery of key capabilities – robots, high-end marine vessels, new-energy vehicles, high end medical devices, biologic pharmaceuticals, gas turbine aero-engines, integrated circuits, and advanced internet – within a decade.

Zhang lists her worries in a domestic opinion piece: China is 'big' but not efficient, innovation is still weak, the usual 'latecomer advantage' may not apply to its 'catch-up', the nation is losing talent to others, and the 'window of opportunity is closing rapidly.' This last argument is curious, made in an era of globalisation when the horizons for cross-border collaboration seem to be expanding. Yet Zhang sees other countries spurred (especially since 2009) to stimulate indigenous innovation programs, partly in response to China's ambitions. Beijing has long complained about Western technology export restrictions, and now it is playing rough itself: 'We just did what the Americans have already done; you can choose to leave, we have substitutes' seems to summarise the new line. Perhaps Zhang senses danger in such mercantilist industrial policy.

Xiaomi's chairman hopes to build a world-class Chinese enterprise. The question is not whether there will be such companies; it's whether there will be enough. China has only one path to getting rich: to have a very deep and very wide economy. I have noted before that China's rise to high complexity status must be disruptive. Trade isn't a zero-sum game; there can be more winners than losers. But there are losers, and they look like Detroit. The perpetual race for national power is, at its root, an economic contest. Rich, complex economies have many companies providing things that customers need, and can afford. From a developmental perspective, nothing else matters.

Photo by Flickr user David.

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The Asia Pacific is the most dynamic digital landscape in the world, home to the fastest adopters of new technologies and the largest concentration of mobile and social media users. An escalation in online activism, changing cyber dynamics, developments in digital diplomacy and the exploitation of big data are shaping the region's engagement with the world.

  • India's Supreme Court has struck down a law that made it illegal to spread 'offensive messages' on electronic devices. The presiding judge said the law, which had resulted in arrests over Facebook posts, had a 'chilling' effect on free speech.
  • University of Toronto's Citizen Lab has found that hundreds of members of the Tibetan community are being targeted by email-based malware attacks that are using the anniversary of the 10 March 1959 Tibetan Uprising as a disguise to infect individuals and organisations.
  • A fantastic report on Vietnam's social media landscape highlights internet censorship and outlines how social media is challenging the country's state-controlled broadcast and print media.
  • Indonesian neuroscientists have a developed a mobile app to help reduce the risk of accidents by using a brainwave sensor device to evaluate driver performance. The app pulls together vehicle data and real-time environmental data (traffic, weather), which is then meshed with information collected from the driver (stress levels, alertness) to make a call on whether you should drive.
  • Japan is reaping the benefits of an Asian-driven demand for robots (Taiwanese company Foxconn uses 20 million robots in its production of the iPhone 6 alone). India wants in, and is eyeing off opportunities for its tech industry (particularly programmers) to better collaborate with Japanese manufacturers.
  • And while Japan regularly capitalises on its robotics expertise via well rehearsed 'robot diplomacy', it's unlikely Germany's Chancellor Angela Merkel will be buying a personal robot anytime soon:

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