Lowy Institute

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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Even for long-time watchers of the Middle East like myself, the region's enmities and alliances have become very difficult to keep track of.

This has just been taken to a mind-bogglingly new level by Saudi Arabia's decision to launch a military campaign in Yemen against the Houthi movement.

Last September the Houthis, backed by Yemen's deposed president, Ali Abdullah Saleh (whom the Houthis fought against in 2009), stormed the Yemeni capital Sana'a. Since then they have captured large parts of the country, forcing President Abd Rabbuh Mansur Hadi to flee to the southern city of Aden.

The Houthis are Zaidi Shia, and are seen as closely aligned with Iran, which is a key reason why the Saudis, backed by other Gulf allies and seemingly by the US, have now intervened. But the Houthis are also fighting al Qaeda elements and Islamic State supporters in Yemen.

So in Iraq and Syria, the US, backed by Saudi Arabia (at least nominally), is fighting against al Qaeda and Islamic State, and both groups are also being fought by Iran. But in Yemen, Saudi Arabia, backed by the US, is fighting against the Houthis, who are supported by Iran but who are fighting al Qaeda and Islamic State. 

Confused? So am I.

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In a speech to the National Press Club yesterday, Foreign Minister Julie Bishop said she is 'scoping the opportunities for our next term on the United Nations Security Council.' 

Australia performed well during its 2013-2014 term on the Security Council, and the time has come for a decision to be made about the next term. It would be a welcome change if a bid were to be launched under a Liberal government.

It is a commonly held perception that the Labor Party is friendlier to the UN than the Liberal Party. Australians themselves are largely supportive of the UN: 63% hold a favourable view of the organisation. Labor stalwart Dr HV Evatt was the great agitator on behalf of medium and small nations at the founding conference in San Francisco, 1945. He later served as the fourth president of the General Assembly.

The Liberal Party, on the other hand, is seen as being more conflicted over the UN. The Howard Government worked ably with the UN on Timor, while it later rode roughshod over the rules-based order when it joined with allies the UK and the US to invade Iraq.

In 2000, Alexander Downer famously derided the UN, saying that, 'if a United Nations committee wants to play domestic politics here in Australia, then it will end up with a bloody nose.' He was later appointed UN Special Envoy to Cyprus.

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But there is a healthy pro-UN camp within the Liberal Party. Dr Russell Trood founded the UN Parliamentary Group while serving as a Liberal senator. The group is now co-chaired by Melissa Parke MP (Labor) and Senator Chris Buck (Liberal). Trood is now chairman of the UN Association of Australia, succeeding the former Liberal senator Robert Hill (former defence minister and former Australian permanent representative to the UN).

Other voices in the party tap into the anti-UN sentiment, which runs deep on the hard right (ie. the 28% of Australians that hold an unfavourable view of the UN). But this sentiment is born mostly of ignorance of the UN system and its limitations. But it is not as suspicious a minority as that in the US, where the positively unhinged 'black helicopter' conspiracy theorists continue to irrationally oppose the Arms Trade Treaty and Agenda 21 (a non-binding pact on sustainable development) for fear that the UN will one day take over the world.

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A couple of weeks ago, Prime Minister Abbott suggested that Australians were 'sick of being lectured by the UN.' In opposition, the Liberals also opposed the bid for a seat on the Security Council, citing issues of cost and timing.

In keeping with the Liberal Party's contradictory approach to the UN, Foreign Minister Julie Bishop actually took advantage of the seat, and performed admirably on numerous occasions (on MH17 and during the presidencies of 2013 and 2014). During her speech yesterday, Bishop espoused the virtues of Australia's term on the Council: 'I believe we exceeded expectations of the impact that we could have as a non-permanent member.' By all accounts, the P-3 (France, US, UK) enjoyed Australia's company on the Council, while the Russians found us a worthy adversary.

Bishop also took the opportunity to focus more broadly on the question of how Australia would look to build a post-Council legacy. She signaled Australia's intention to support 'efforts to strengthen the effectiveness of both United Nations peacekeeping and peacebuilding.' This support is timely. Jose Ramos-Horta's High Level Independent Panel on Peace Operations delivers its report in the middle of the year and Obama hosts his summit on peacekeeping at UN HQ in September.

Bishop also made mention of the need to 'ensure women are more deeply engaged' in the UN's efforts towards peace. This flags ongoing Australian support for the women, peace and security agenda enshrined in resolution 1325.

This year is a big year for the UN, which is celebrating its 70th Anniversary, and the options for meaningful engagement are plentiful.

On the immediate horizon will be the Palestinian Question (as it is known at the UN). Although Bishop made no mention of it in her speech, the recent Israeli election result could prompt a showdown at the UN some time this year. With the Obama White House signalling a potential change its stance at the UN, it remains to be seen whether Australia too will alter its policy. The UK and France are also likely to push for the recommencement of final status negotiations.

The Millennium Development Goals are up for renewal. The new post-2015 development agenda promises to be more inclusive and far reaching.

The UN's humanitarian architecture is also under immense strain brought on by a record number of IDPs and refugees (57.5 million), a result of the numerous crises afflicting the Middle East, North and Central Africa. US$ 16.4 billion will be required this year alone.

Despite the UN's growing needs, Australia's brand of niche diplomacy is likely to get more of a workout than its cheque book (or the boots of ADF personnel).

Photo courtesy of the Foreign Minister.

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Just over a decade ago Illicit: How Smugglers, Traffickers and Copycats are Hijacking the Global Economy, hit bookshops around the world. Written by the then editor of Foreign Policy and former Venezuelan Minister of Trade and Industry Dr Moises Naim, Illicit outlined how the 'black' economy risked undermining the regulated economy, reshaping politics to the detriment of societies and destroying lives around the world.

Illicit received widespread praise for its thoroughness and accessibility. Some reviewers, however, suggested that Naim had overstated the impact illicit actors were having on states' abilities to regulate the movement of goods and people. Other reviewers commended him for persuasively arguing that illicit trade patterns threaten 'the very fabric of society' itself.

Ten years on from Illicit, what has changed? Have responses been effective or is the threat Naim outlined still present?

Naim's book covered illicit industries ranging from small-arms trading to illegal drugs to money laundering, but this column focuses on one area: migrant smuggling. Back in 2005, Naim argued that smuggling and its more sinister manifestation, human trafficking, were both growing illicit trades. He cited UN estimates that the combined business in smuggling and trafficking was worth US$7-10 billion annually.

Today, there is little doubt that migrant smuggling continues to pose many challenges, including for migrants risking death and exploitation during their journeys, and for states seeking to manage their borders. The patchy data available on smuggling indicate the number of people being smuggled around the world appears to be increasing overall, albeit unevenly geographically. It also seems that an increasing number of illicit actors are making considerable profits from that exploitation. Some estimate that up to US$1 billion was paid to smugglers along the Mediterranean Sea route alone in 2014.

The latest EU data show that 2014 saw a massive increase in illegal cross-border detections, most notably by sea across the Mediterranean, with almost 100,000 people being smuggled by sea between July and October alone. The use of cargo ships to smuggle on a larger scale in the Mediterranean, such as the recent Ezadeen ghost ship abandoned at sea by its crew, is an ominous sign that migrant smugglers are reaching a new scale of operational capacity.

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African-based analysts have found that while the true scale of regional smuggling and irregular movement is difficult to quantify, the smuggling route to Europe via Libya continues to grow. They have also highlighted that in Libya migrant smuggling is directly linked to the smuggling of drugs and weapons, placing asylum seekers and refugees in the hands of criminal gangs.

US Border Patrol data stretching back several decades shows a big drop in illegal migrant apprehensions across the Southwest border with Mexico from the onset of the global financial crisis in 2007, however last year saw smugglers fill a soft market with extremely vulnerable migrants from Central America. The number of unaccompanied minors and families with minors who were apprehended in FY 2013–14 almost tripled to around 135,000, undoubtedly sending a collective chill through the spines of policy makers, international organisations and migrants' rights groups worldwide.

Closer to home, some of the largest migrant smuggling routes are thought to be in Southeast Asia, particularly between Indonesia and Malaysia. Analysts estimate the illegal migrant population in Malaysia to be around 2.2 million, with more than half from Indonesia.

Smuggling of asylum seekers to Australia is now in abeyance, at a time when factors enabling smuggling — modern transportation and communication networks; the growing prevalence of opportunistic unregulated actors — have perhaps never been greater. The current policy and operational framework in Australia has halted maritime migrant smuggling, but it is fragile in the face of such global forces, and it has come at a substantial cost.

Ten years on from Illicit and it's difficult to say whether the 'very fabric of society' has been irreparably harmed, though some communities in some societies have experienced just that. What is clear is that few inroads have been made in eradicating human smuggling globally in a substantive and sustainable way. There are at least three main reasons.

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.

Secondly, it is clear that while migrant smuggling is big business and multiple factors underpin the phenomenon (including poverty and relative deprivation), we are now in the midst of the largest episode of human displacement due to war, conflict and persecution seen for two decades. This has a direct effect on smuggling. EU data show that Syrians currently make up the majority of those intercepted in the Mediterranean Sea. Greater support of countries hosting refugees, realising the end of conflict in places such as Syria, and expanding durable solutions to displacement are all high global priorities.

Finally, a transnational problem requires transnational solutions involving multiple sectors and stakeholders that complement national initiatives. Policies, practices and operational responses that can account for international smuggling patterns, industry-specific labour needs and better industry regulation, international monetary flows, migrants' rights and motivations, as well as transnational linkages, have a greater chance of reducing migrant smuggling, securing borders and enhancing protection. There remains much work to be done.

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Alan Dupont concludes his thoughtful response to my comments on his Lowy Analysis paper, Full-Spectrum Defence: Re-thinking the Fundamentals of Australian Defence Strategy, by posing some good questions.

First, he asks, should we see irregular warfare as the dominant form of future conflict, both between and within states? The answer depends on what we mean by 'dominant'. Do we mean 'most common' or 'most serious'? Irregular warfare is likely to be the most common form of conflict in future, as it always has been in the past. What I suppose we must call 'regular warfare' – large-scale conflict between the armed forces of states – has always been much rarer, and I expect this will remain true too.

But regular warfare is more serious than irregular warfare, at least for a country like Australia. If we were Yemen or the Congo or (for much of its history) Indonesia, then irregular warfare would pose a more serious threat than regular warfare, and it would make perfect sense to design our armed forces primarily for that kind of conflict.

But we face no credible or even conceivable risk of internal insurrection, and no risk of insurrections spilling onto our territory from elsewhere on anything but the smallest scale, a scale for which police are more relevant than armed forces. And the risk of state-sponsored irregular warfare against Australia by a neighbouring state was tested at length by the 'low-level contingency' concept which was so central to our defence policy in the 1980s. I think Alan would agree with me that the closer one looked at that concept, the more improbable it seemed.

Of course the risk of Australia being involved in a regular conflict is pretty low too. But I would argue that changes in the regional strategic order mean it is not as low over coming decades as it has been since the early 1970s, and that this risk is much more serious for Australia than risks of irregular warfare. And that is why I think it should predominate in our force planning.

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Second, Alan asks whether the 'force structure determinants' used in previous White Papers 'have any redeeming value'. By 'force structure determinants' Alan means the core strategic objectives which the Government decides the ADF should be built to achieve, and which therefore determine what kinds of forces we need and how much money we should spend.

I think setting these strategic objectives for the ADF does have value. Indeed I think deciding what we want our armed forces to be able to do is absolutely essential to making sensible decisions about what capabilities we need. In his paper, Alan says they are no use because governments sometimes ignore them in choosing capabilities, and often use the ADF for tasks different from the ones they identify as force structure determinants.

He is quite right about both of these, but that does not mean the idea of setting core objectives has no value. Governments do sometimes violate their own policy principles (the Howard Government did when it ordered the C-17s that Alan mentions), but the fault here might lie with government decisions rather than the principles they sometimes ignore.

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.

Third, Alan asks whether I still think we should have a primarily maritime military strategy, and if so how space and cyber fit into it? The short answer to the first part is 'yes'. Most of the core strategic objectives I would set for the ADF can be achieved most cost-effectively by maritime operations, and I would focus most of our capability there.

What about cyber and space? Let's clear up a muddle here: when we talk about cyber and space as new domains of warfare, are we talking about the impact of cyber- and space-based actions on the systems that support and enable the conduct of conventional military operations in the other three domains, or are we talking about the impact of such operations on society more broadly, to achieve a direct strategic effect?

If it is the former, then clearly we need to develop our maritime forces to operate in a contested cyber and space environment, based on a sober assessment of the risks involved. This might be hard technically, but it poses no conceptual challenges to policy.

If it is the latter, the issue is much less clear. Cyber attack on national information systems is a serious potential threat, but armed force is little or no use in responding to it, so it need not shape our defence planning. Space-based attack directly on civilian populations or systems? Unless we mean such familiar problems as ballistic missiles, I'm not sure what we are talking about here. Denial of satellite services, perhaps? Whatever it is, I doubt that armed forces are going to be the answer.

Photo by Flickr user DVIDSHUB.

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