Assessing the ASEAN Economic Community


March  24, 2017

Assessing the ASEAN Economic Community

by Somkiat Tangkitvanich and Saowaruj Rattanakhamfu

http://www.eastasiaforum.org

Image result for asean economic communityMaking Progress Slowly–The ASEAN Way

East Asia continues to sustain a high level of economic integration, yet a significant proportion of intraregional trade is still uncovered by agreements to guard against current and possible future protectionism. Without multilateral movement under the World Trade Organization, further regional integration can proceed only through agreements that reduce trade barriers within the region.

ASEAN appears to be leading the Asia Pacific in FTA formation. The ASEAN Free Trade Area was implemented in 1993 and the ASEAN Economic Community (AEC) was officially launched in late 2015. The AEC aspires to go beyond typical trade agreements, aiming to create a single market and production base with equitable development across its 10 member countries.

 

ASEAN will celebrate its 50th anniversary in August, 2017. While ASEAN has made some significant political achievements during the past five decades, its economic integration project is still very much a work in progress, and could remain so for many years or even decades to come.

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The ASEAN Secretariat claims that the implementation of the AEC Blueprint 2015 — the community’s formal agenda — has been substantively achieved in many areas. In reality, the levels of integration vary greatly by sector. The only clear success ASEAN can claim is the reduction of tariffs among member countries. Since the implementation of the Common Effective Preferential Tariff agreement in 1990s, about 99 per cent of tariff lines between member countries have been reduced to zero.

Still, the free flow of goods among ASEAN member countries continues to be hindered by the use of non-tariff measures (NTMs). These may have adverse consequences on the sourcing decisions of firms and the structure of trade and related industries.

Countries such as Indonesia or Malaysia that employ active ‘industrial policy’ apply more NTMs. Car assemblers in Thailand, for example, have long complained about Malaysia’s restriction of the number of cars imported into Malaysia.

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While minimising non-tariff barriers is an action target in the AEC Blueprint, ASEAN has relied on a voluntary approach to reduce them — with very limited success. Under the voluntary approach, member countries can have an adverse incentive to under-report the barriers they are using. What’s more, there is no effective monitoring system to keep track of the changes of NTMs among member countries.

ASEAN has been negotiating services liberalisation since the creation of the ASEAN Framework Agreement on Services in 1996. The AEC Blueprint has established clear targets to remove all restrictions on trade in services by 2015. But some ASEAN countries, including Thailand, the Philippines and Indonesia, could not meet their targets by the deadline.

Critically, service liberalisation under ASEAN contains no commitment to address behind-the-border issues, such as interconnection for telecom services or access to ATMs for banking, which are crucial to the creation of competitive markets. The difference in laws and regulations among member countries is also problematic.

Service liberalisation under ASEAN in its current form would fail to create a single service market. Thailand, the Philippines and Indonesia, still could not meet the targets by the 2015 deadline. Indonesia and Thailand’s specific commitments under the latest offer contain many services that are inconsequential or even useless.

In terms of promoting cross-border movement of labour, ASEAN has achieved very little. From an economic development perspective, the opening up of unskilled labour markets through FTAs would be a useful policy option, given the relative abundance of unskilled labour in many ASEAN countries, but the AEC Blueprint attempts to facilitate only the mobility of skilled professionals, currently comprising just eight professions. The arrangement to facilitate the movement of these professionals is also problematic. In the case of Thailand, for example, the requirements imposed on ASEAN professionals are the same as those of the non-ASEAN countries.

To critical observers, ASEAN integration has so far produced very few tangible results. The Asia Trade Centre’s Deborah Elms concludes that ‘ASEAN officials shifted the rhetoric as the deadline loomed to argue instead that the AEC itself should be viewed as process and not a destination’. In September 2016, The Economist mockingly wrote that ‘[w]hen it comes to elevating form over substance, and confusing a proliferation of meetings and acronyms for a deepening of ties, ASEAN is the Zen master’.

The lack of momentum to deepen regional integration in ASEAN is largely a consequence of most member countries’ protectionist stances, perhaps with the sole exception of Singapore. Many ASEAN countries view one another as rivals in their pursuit of exporting to the global market or attracting foreign direct investment.

Domestic political conflicts, along with a lack of strong and stable government, have led political leaders in many ASEAN countries to look inward and lose their appetite for regional integration. Without confronting the core problems of its integration project squarely and urgently, ASEAN will not realise the AEC Blueprint vision of a single market and single production base.

ASEAN prides itself on being the ‘hub’ of bilateral FTAs in East Asia. The concept of ‘ASEAN centrality’ espoused in the group’s initiatives emphasises its role in facilitating economic integration in the region. But the economic integration among ASEAN countries has so far focused on creating a more attractive package for multinationals looking to operate in the region, rather than on creating stronger bonds between member economies.

When it comes to economic integration, ASEAN has to aim at achieving critical targets while ignoring trivial ones. In other words, ASEAN needs to be much more focused than it is now. Its current agenda is overly ambitious considering its limited resources.  The AEC Blueprint has established 17 core elements and set 176 priority actions, covering the free flow of goods and capital, movement of skilled labour, equitable development and protection of intellectual property rights, to name just a few.

A sharper focus would help ASEAN to deliver meaningful and tangible results without depriving member countries, especially less developed ones, of their limited resources. This requires ASEAN to return to the core missions of an FTA: reducing barriers to trade and facilitating cross-border trade in goods, services and the movement of labour and inputs to production.

Yet the real challenge for ASEAN is not economic but political. Full national sovereignty and economic integration are incompatible. The success of the European Union’s trade integration, for example, is based on pooled sovereignty.

The idea of ‘pooled sovereignty’ is not all-or-nothing in nature. When started, the EU was a comparatively modest project. It had few members and only one policy area for pooling sovereignty: a common market for coal and steel. Only gradually did it expand its membership and its mission.

Unless ASEAN countries are willing to increasingly pool their sovereignty and meet political challenges head on, the AEC project will go nowhere and ASEAN will be little more than a talking shop.

Somkiat Tangkitvanich is President of the Thailand Development Research Institute (TDRI). Saowaruj Rattanakhamfu is a Senior Research Fellow at TDRI.

This article summarises a paper prepared for the 2016 Pacific Trade and Development Conference in Australia.

 

APSIA Conference 2017 Keynote Address by Singapore’s DPM


March 5, 2017

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APSIA Conference 2017 Keynote Address by Singapore’s DPM Tharman Shanmugaratnam at LKY School of Public Policy

COMMENT:

Geo-Politics, Disruptive Social Developments and Technological Change: Has the Game Changed? Yes, that is easy part of the answer.  How we wish that life is simple and outcomes are predictable. But it is not. I  have been grappling a few questions. I asked myself questions like What has changed? How it has changed?  What is driving the change?What this change means to us in Asia.

China, North Korea, Islamic and Christian evangelism, terrorism and so on are making the headlines.I  also see increasing polarisation and the need for understanding and rebuilding trust. I expect our politicians to reconnect with people they are mandated to serve and  want leaders to lead with integrity, honesty and hope. Listen to DPM Tharman Shanmugaratnam for some insights.–Din Merican

 

 

Saudi King Salman’s Mission to Malaysia, China and Indonesia


March 4, 2017

What Saudi King Salman wants from his tour of China, Malaysia

Ignore the theatrics, the multibillion-dollar investment deals and even the uncertainty over US hegemony – when the leader of the House of Al Saud is in town, Iran, Islamic State and ultra-conservatism are never far from the surface.

By James M. Dorsey

http://www.scmp.com/week-asia/geopolitics/article/2075774/what-saudi-king-salman-wants-his-tour-china-malaysia

The spectacle of Saudi King Salman’s tour of Asia is matched by its significance. Attention has focused as much on his 1,500-strong entourage and their 459 tons of luggage – roughly the weight of two Boeing 787 Dreamliners – as it has on expectations of billions of dollars in investment.

To be sure, economics is high on the Saudi leader’s agenda. Salman is looking at both strategic investments in Asia as well as Asian investments in the kingdom that will help it diversify its economy and strengthen ties to China and major Muslim nations in an era of uncertainty about the United States’ place in the world.

Yet Salman’s geopolitical concerns go far beyond whether the US remains a reliable guarantor of regional security. Saudi Arabia is locked into a global battle with Iran for dominance in the Muslim world. For the Al Sauds, the kingdom’s ruling family, the struggle with the Islamic republic is existential in nature.

A policeman prepares his patrol car ahead of Saudi King Salman’s visit to Bali. Photo: AFP

Iran not only represents an alternative form of Islamic rule that recognises a degree of sovereign legitimacy and was established by a popular revolt. It also has assets the kingdom lacks that are key to sustaining regional hegemony: a large population, a huge domestic market, an industrial base, a battle-hardened military, geography, and a deep-seated identity grounded in a history of empire.

An epic battle

The epic battle between Saudi Arabia and Iran is being fought not only on the international and Middle Eastern stage but domestically in Muslim and non-Muslim nations that span the globe. Saudi Arabia’s soft power effort, possibly the single largest public diplomacy campaign in history, has aligned itself neatly with Muslim governments that opportunistically play politics with religion and Muslim communities that embrace Saudi-style Sunni ultra-conservatism in lieu of feasible alternatives.

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Saudi King Salman with Chinese President Xi Jinping in Riyadh in 2016. Photo: AFP

China may not have a seriously sizeable Muslim community, yet the lure of ultra-conservatism has made its mark among Hui Muslims and Uygurs alike. Chinese concern about the impact of ultra-conservatism coupled with Iran’s strategic advantage has shaped Chinese policy even if Saudi Arabia is a major oil supplier and commercial partner as well as a military ally.

President Xi Jinping’s (習近平) visit to the Middle East last year, the first by a Chinese leader in seven years, saw the signing of billions of dollars’ worth of agreements with Saudi Arabia and a ten-fold expansion of trade with Iran over the next 10 years. The significance may go far beyond commerce as Chinese interests align more with Iranian interests than those of Saudi Arabia.

From Riyadh, Xi went to Iran to become the first foreign leader to do so following the lifting of international sanctions against the Islamic republic. Saudi leaders could not have been pleased.

Back to the future: Chinese President Xi Jinping’s Middle East visit … and his Middle Kingdom dream

Xi’s determination to gain a first mover advantage in Iran at a time that Saudi Arabia was seeking to increase rather than reduce the Islamic republic’s international isolation suggested that more than commerce was at play.

Chinese President Xi Jinping meets Iran’s supreme leader Ayatollah Ali Khamenei in Tehran. Photo: AFP

Xi’s visit to the kingdom was accompanied by talk of brotherly relations and strategic cooperation. The rhetoric, however, did little to mask serious differences on issues ranging from Syria – with Chinese support for President Bashar al-Assad – to Saudi propagation of ultra-conservatism and a relative decline in Chinese reliance on Saudi oil.

“Our biggest worry in the Middle East isn’t oil – it’s Saudi Arabia,” a Chinese analyst told the Asia Times. Religious affinity is not something China has to worry about with Shiite-majority Iran, which has long projected itself as a revolutionary rather than a sectarian power.

Consequently, China remains reluctant to clearly articulate its strategic interests or intentions in the Middle East and North Africa beyond its drive to secure resources, investments and people, and expand its influence through economic ties and its “One Belt, One Road” initiative to link economies into a China-centred trading network. As a result, China’s strategic dialogue remains focused on free-trade agreements with the six-nation, Saudi-led Gulf Cooperation Council (GCC) rather than the forging of broader strategic partnerships that go beyond economics.

China has also long sought to tread carefully in its for now limited military contacts.

China was, for example, slow to engage in its security cooperation with Saudi Arabia that started in secret in 1985, five years prior to the establishment of diplomatic relations between the two countries. In a deal that was only disclosed three years later, Saudi Arabia in its first weapons deal with China bought in 1985 for US$3.5 billion 36 Chinese CSS-2 East Wind intermediate range ballistic missiles even though they were known to be highly inaccurate in conventional use.

Saudi Arabia’s King Salman is driven around in a golf cart by Indonesia’s President Joko Widodo in the presidential palace in Jakarta. Photo: AFP

The deal said much about the attitude of Saudi Arabia towards China. Saudi Arabia saw the deal as a way to counter Iran’s missile strength that in a twist of irony was built on Chinese technology and design, and as leverage to persuade the US to be more forthcoming with weaponry that had offensive capabilities. In a further indication that China was making only limited inroads and that Saudi Arabian arms purchases remained focused on Western suppliers, Saudi Arabia – even while engaged in a massive weapons buying spree – waited 30 years to acquire a more up-to-date Chinese missile system, the DF-21 East Wind ballistic missile.

A frontal assault

Ultra-conservatism – which complicates communal relations, changes policies towards minorities, and alters local culture as well as Saudi efforts to forge an anti-Iranian military alliance – loomed even larger in Malaysia and during the current Indonesian leg of Salman’s tour. In Malaysia, a supposedly pluralistic nation that bans Shi’a Islam, ultra-conservative Islamic scholars legitimise the United Malays National Organisation (UMNO), the country’s ruling party, raising concerns about a more intolerant society despite its multi-ethnic composition.

Saudi King Salman and Indonesian Parliament Speaker Setya Novanto in Jakarta. Photo: EPA

The state of Johor’s straight-talking Sultan, Ibrahim Ismail Ibni Sultan Iskander, didn’t mince words last year when he decried what he described as creeping Arabisation of the Malay language. He insisted that Malaysians use Malay rather than Arabic words when referring to religious practices and Muslim holidays.

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In a frontal assault on Saudi-inspired ultra-conservatism, Ibrahim advised his people who “If there are some of you who wish to be an Arab and practise Arab culture, and do not wish to follow our Malay customs and traditions, that is up to you. I also welcome you to live in Saudi Arabia. That is your right but I believe there are Malays who are proud of the Malay culture. At least I am real and not a hypocrite and the people of Johor know who their ruler is,” the Sultan said.

Saudi King Salman and Indonesian President Joko Widodo in Bogor, West Java. Photo: AFP

Both Malaysia and Indonesia have been reluctant to become too involved in a 41-nation, Saudi-led military alliance headquartered in Riyadh that officially was created to combat political violence and the Islamic State (IS). Many fear the alliance is also intended as a military bloc against Iran that would also bolster Saudi Arabia’s campaign in Yemen – where it is fighting Houthi militia and loyalists of the former president, Ali Abdullah Salleh, allegedly supported by Iran.

Ultra-conservatism

Saudi influence was nonetheless evident when Malaysian Defence Minister Datuk Seri Hishammuddin Hussein last year, to the consternation of his ministry’s civilians, agreed to let 300 Malaysian paratroopers participate in a 20-nation military exercise in the kingdom. Malaysia currently has up to 100 military personnel and C-130 Hercules transport planes in Saudi Arabia that provide the alliance with logistical support.

The Indonesian military, like its Malaysian counterpart, regularly trains with Saudi officers to counter IS. Nawaf Obaid, a Saudi policy analyst with close government ties, described last year’s exercise as a preparation for possible Saudi military intervention in Iraq and Syria.

King Salman and Malaysian Prime Minister Najib Razak in Putrajaya, outside Kuala Lumpur. Photo: AFP

Critics in the ministry were taken aback when Hishammuddin obliged them weeks later to endorse Saudi funding for the King Salman Centre for Moderation (KSCM). Under the auspices of the ministry’s think tank, the Malaysian Institute of Defence and Security (MIDAS), would seek to counter jihadist messaging in Southeast Asia. An internal ministry memo said MIDAS had a “strategic interest to be collaborating with various institutions internationally particularly from Saudi Arabia”.

A joint communique at the end of Salman’s visit described political violence as the most important issue discussed between the king and Prime Minister Najib Razak. Najib backed Saudi concerns about Iranian interference in the internal affairs of Arab countries and called on the Islamic republic to respect the sovereignty of regional states.

The two leaders also announced the establishment of the King Salman Centre for International Peace (KSCIP), a collaboration of Saudi and Malaysian defence institutions as well as the Muslim World League, a prime Saudi vehicle for the propagation of ultra-conservatism. It’ not clear if KSCM and KSCIP are separate institutions.

An Indonesian honour guard waits for the arrival of Saudi Arabia’s King Salman at the presidential palace in Bogor. Photo: AFP

In Indonesia, a country that prides itself on its tolerant interpretation of Islam, Saudi-style ultra-conservatism is similarly making itself felt. Major Islamic organisations with a history of opposition to Wahhabism, the ultra-conservative world view that governs the kingdom, see Shiites, who constitute 1.2 per cent of the population, and Iran as threats to national security. A former deputy head of Indonesian intelligence goes as far as describing Shiites as the foremost domestic threat to national security.

The plight of Chinese Indonesians: distrusted in Jakarta, forgotten in China

Saudi media reported that King Salman hoped during his visit to lay the ground for the opening of more Arabic-language Islamic schools in Indonesia. They said the king would also be increasing the number of scholarships available to Indonesians for study in Saudi Arabia. Many of those who return after completing their studies are imbued with Saudi-style ultra-conservatism.

All in all, Salman’s Asian official visit-cum-holiday is likely to reverberate far beyond the billions of dollars in economic and commercial agreements he signs. The visit also solidified cooperation between Asian nations and Saudi Arabia in the fight against IS. This, despite the fact that IS and the kingdom have the same ideological roots, even if the jihadists accuse Saudi Arabia of having deviated from the true path of Islam. At the same time, the tour could also well embed sectarian aspects of Saudi’s Arabia’s epic struggle with Iran ever deeper in the social and political life of the continent’s Muslims.

Dr. James M. Dorsey is a senior fellow at the S. Rajaratnam School of International Studies

Singapore Foreign Policy Update


March 3, 2017

Singapore Foreign Policy Update

by Dr Vivian Balakrishnan

https://www.mfa.gov.sg/content/mfa/media_centre/press_room/pr/2017/201703/press_201703021.html

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2016 was a tumultuous year for the world and a very busy year for (Ministry of Foreign Affairs) MFA staff. The previous global consensus on the benefits of free trade and, on economic integration is broken. And unfortunately, political discourse in many countries, unlike in this House, has become increasingly nationalistic, anti-incumbent and even sometimes xenophobic. The threat from terrorism, radicalism and extremism has increased, and new media has also amplified this threat far and wide.

Quite frankly, we have to anticipate even more of such external challenges and challenges that will test our resolve, our unity and our agility. As a small city state, Singapore has no option. Isolation and protectionism is not an option for us. In fact, the world is even more interconnected than ever before. So we have actually to double down on globalisation. The economic headwinds and the global protectionist sentiments are not going to go away soon, and they will have serious implications on our trade-dependent economy. We are probably the only country where our trade volume is three and a half times our GDP.  So for us, free trade is not a debating point – it is our lifeblood.  So if you think about it, the larger context of this budget debate, of the COS, and of the Committee on the Future Economy (CFE) is that we have to enhance the competitive position of Singapore and Singaporeans.  That is the only way we can survive and thrive in this uncertain world. Add to that, the fact that major power interactions and rivalry will impact the region, and will impact us and we have seen evidence of that.

So the question, therefore, that all of you have posed is: How will we navigate these challenges? Our fundamental realities remain.  We are still a tiny island in an uncertain neighbourhood, we still have to try our best to build a wide network of friends.  We have to be a relevant, valuable, reliable partner, and at the same time, be realistic about our place in the world.  As former British PM and Foreign Secretary Lord Palmerston once pointed out, nations have no permanent friends or allies, they only have permanent interests.

Tenets of Singapore’s Foreign Policy

Our key foreign policy principles therefore have not changed.  First, we conduct an independent sovereign foreign policy in order to safeguard our independence and the interests of all Singaporeans.  Second, we promote ASEAN unity and centrality.  And third, we have to remain committed to a rules-based international system.

Finally, foreign policy begins at home.  And the effectiveness of our foreign policy depends on us being a successful nation-state and on the continued support of a united citizenry. And one point which I want to commend today – I’ve listened to the very thoughtful speeches from Mr Low Thia Khiang, Mr Pritam Singh, and I am grateful for the bipartisan support that we have in this House.  This unity of purpose is essential for us to pursue our foreign policy goals in this uncertain and volatile environment.

So all the Members of this House understand and appreciate these key tenets of our policy.

Long-Term Value Proposition and Relevance to Other Countries

Many of you have asked questions on Singapore’s long term value proposition and the relevance of Singapore to other countries.  Ms Sun Xueling asked about Singapore-China relations.  Mr Cedric Foo asked about US-Singapore relations under the new Trump Administration.  Mr Amrin Amin, Mr Chia Shi Lu have asked for updates on our relations with Malaysia and Indonesia.  All of these are key relationships.

Singapore and China

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Let me deal first with China.  Singapore has been a steadfast and longstanding friend of China.  Our bilateral relationship, right now, I will describe it as in “good working order”.  In November 2015, when President Xi Jinping came here, we signed an agreement which characterised our relationship as an ‘All Round Cooperative Partnership Progressing with the Times’.  Putting aside the words, the point is historically, our relationship has been built on the strong foundations laid by Mr Lee Kuan Yew and Mr Deng Xiaoping.

And over the decades, Singapore has supported and demonstrated in action and investment in China’s peaceful development and its progressive engagement of the region and the international community.  And we do so because we believe that China’s success is good first for the citizens of China.  It is also good for the region and it is good for us.

I am always amazed that tiny Singapore currently is China’s largest foreign investor, and we have been so since 2013.  China is Singapore’s largest trading partner, also since 2013.

Several Cabinet members including myself just accompanied DPM Teo to Beijing.  We came back just two days ago.  We attended the Joint Council for Bilateral Cooperation (JCBC).  It was a very good meeting and it gave both sides opportunities to explore ways to deepen cooperation especially in this flagship project of President Xi Jinping’s, the “One Belt and One Road” initiative.  I also had a very good meeting with my counterpart, and I can say that this again is a reflection of the deep resilient nature of our relationship.

Our third and latest Government-to-Government project, the Chongqing Connectivity Initiative, has been designated a priority demonstration project for the “Belt and Road”, and will play a catalytic role in linking up Western China – both to Southeast Asia as well as across to Central Asia and beyond.

Besides the JCBC, we also have candid exchanges and sharing of experiences through established platforms such as the China-Singapore Forum on Leadership; and the Singapore-China Social Governance Forum.

The various projects, the business engagements, the people-to-people ties – you’ve heard 2.8 million Chinese tourists to Singapore and I think for us, it would be 800,000 or so Singaporeans who have travelled to China in a year.  The high frequency of interactions at senior leadership level have conferred a very high degree of resilience and I would add strategic trust in our relationship.

Therefore, even when we have differences over some issues, as I said in an earlier session, we should not overreact and we should, in a sense, anticipate that these incidents are not unusual even amongst close friends and neighbours, and we must recognise that our shared interests far exceed these differences.  So we must not be distracted from the larger strategic imperatives or allow incidents to derail the substantive, longstanding and mutually-beneficial cooperation.

Singapore-US Relations

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let me turn now to the US.  There is a new Administration.  It is settling in.  There’s always a period of uncertainty, a period of adjustment that goes on both domestically when a new Administration takes over, and also at the international level.  Basically because the US is such an important superpower.

As far as Singapore is concerned, we believe that our many decades of consistent policies and interactions with the US, have created trust and I believe they consider us a reliable partner.  I am confident that we will be creative and adaptable in developing win-win partnerships with the US even as President Trump pursues a new set of policies.

We have had a strong and enduring base of relations for the last 51 years.  These mutually-beneficial ties have spanned five Republican and four Democratic Administrations. On the economic front, the US is Singapore’s 4th largest trading partner in goods and our top trading partner in services.  The US is also Singapore’s largest foreign direct investor.  And Singapore is the US’ 4th largest Asian investor (after Japan, Australia and the ROK).

On the defence front, our Air Force has training detachments in Texas, Idaho and Arizona.  The US is a significant user of both Changi Naval Base and Paya Lebar Air Base.  And Singapore also supports the rotational deployment of US Littoral Combat Ships and P8 Poseidon aircraft. These fundamentals of our relationship remain unchanged and their value is recognised by both Republican and Democratic Administrations.

Similarly, the strategic and economic imperatives that have underpinned America’s longstanding engagement of our region actually remain unchanged. We have to constantly look for new areas of convergence for win-win cooperation with the US.  So for instance, one of the more recent things we are working on is cybersecurity, and we signed an MOU on Cybersecurity in 2016.

Mr Nair and Mr Low Thia Khiang also asked some searching questions about how the relationship between China and the US will impact Singapore.  And indeed, this is the key bilateral relationship that will affect peace, security and prosperity in our region and indeed in the world.

Whilst competition between the US and China is inevitable, but what is different in historical terms is that never before have two powers been so interdependent, so intertwined economically.  Even in the depths of the Cold War, remember, that the American and Russian economies were never intertwined to the same degree that the US and Chinese economy is.  So therefore, we hope that both sides, after they have measured these imperatives will come back to the same conclusion that a constructive engagement and win-win cooperation is the right formula.  If they can achieve this, this will provide space for countries in the region, including Singapore, to be part of a common circle of friends, and achieve win-win outcomes for all.

This is in fact a key reason why for the last 51 years, Southeast Asia, in particular the founding members of ASEAN, have enjoyed peace, security, prosperity over the last five decades.  So we hope that they would arrive at this conclusion.  But we should also bear in mind that we have no say.  We cannot determine the dynamics of that relationship.  Mr Low asked, “what do we do, if they don’t get along”.  And the answer, is that number one, we have no say.  Number two, we should avoid being forced to choose sides for as long as possible.

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“Relationship with Malaysia is actually as good as it ever has been.”

Now, closer to home, our relationship with Malaysia is actually as good as it ever has been.  More recently, we reached a milestone by signing the Agreement on the KL-Singapore High Speed Rail (HSR) in December 2016. And this is a landmark agreement that will transform the way both countries interact and do business. It will bring our two peoples and economies even closer together. In addition to the HSR, we are also looking to sign a bilateral agreement on the Singapore-JB Rapid Transit System (RTS) this year. The RTS will improve the flow of people and business between Singapore and Johor, and bring both sides closer together. On the whole, our bilateral relations are excellent.  Other than these connectivity initiatives, the economic, the people-to-people ties remain strong.  We will continue to cooperate on security, defence and counter-terrorism.

Mr. Baey Yam Keng asked about the Pedra Branca case and how this impacts our bilateral relations. Part of what underpins our good relations with Malaysia is a commitment by both sides to resolve disagreements amicably in accordance with international law, while allowing mutually-beneficial cooperation to continue in the meantime.  So you will recall that in 2003, Singapore and Malaysia agreed to submit the case concerning sovereignty over Pedra Branca, Middle Rocks, and South Ledge to the International Court of Justice (ICJ). In its judgment dated 23 May 2008, the ICJ found that sovereignty for Pedra Branca belonged to Singapore, sovereignty over Middle Rocks belonged to Malaysia, and sovereignty over South Ledge belonged to the State in the territorial waters of which it is located. On 2 February 2017, Malaysia applied for a revision of the judgment under Article 61 of the ICJ’s Statute.

 Under Article 61, an application for a revision of judgment must satisfy several criteria.  These criteria include: first, it must be based upon the discovery of facts which were unknown to the court and to the party claiming revision when judgment was first given.  And these newly-discovered facts must be decisive, and of such a character as to lay the case open to revision.  An application for revision must also be made at latest within six months of the discovery of the new fact, and within ten years of when the judgment was given.

Our legal team has studied Malaysia’s application carefully, including the three documents relied on by Malaysia to support its application. Our legal team strongly believes that the documents relied on by Malaysia do not satisfy the criteria under Article 61. We will submit to the ICJ our comprehensive and compelling rebuttal to Malaysia’s application by 14 June, which is the time limit fixed by the ICJ.

We are confident of our legal team and our case. We are very fortunate to still have Professor Jayakumar, and we have Senior Judge Chan Sek Keong, and Ambassador-at-Large Tommy Koh who led our original Pedra Branca team. They are also working very hard now, very enthusiastically, I may add.  They are also working with a younger team of bright legal minds in AGC. This way, we are also using this episode as an opportunity to build up expertise and experience in the next generation. Succession again. This is important as I am sure there will be more international legal issues in future.  And equally, we must ensure that the same whole-of-government spirit of unity prevails. These are crucial ingredients in order for Singapore to punch above our weight at international fora. Singapore is committed to resolving this issue amicably and in accordance with international law.

Bilateral relations with Malaysia therefore are good, will remain good, and we will continue with all our mutually-beneficial bilateral programmes. Singaporeans should not be disconcerted by these developments, because even with the best of diplomatic and personal relationships, we must expect other states to act in their own self-interests.

Relations with Indonesia

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Our relations with Indonesia are also strong.  Prime Minister Lee Hsien Loong and President Jokowi (Joko Widodo) had a successful Leaders’ Retreat in Semarang last November.  They jointly witnessed the opening of the Kendal Industrial Park, and agreed to set up an Indonesia-Singapore Business Council and to explore cooperation in the energy and tourism sectors.

The positive and stable partnership that we have enjoyed in recent times has been mutually-beneficial.  Business ties and tourism continue to grow. Singapore remained Indonesia’s top foreign investor in 2016.

This year, we celebrate 50 years of diplomatic relations with Indonesia.  The Indonesian Foreign Minister, Ibu Retno Marsudi, and I jointly announced the start of these celebrations last month during her official visit to Singapore.

We also marked a milestone in bilateral relations through the exchange of instruments of ratification for the Eastern Boundary Treaty on 10 February 2017. This was a demonstration of how both countries can work together to resolve bilateral issues in areas of mutual interest, in accordance with international law. This is an important principle that both sides share, because as neighbours, we must expect disagreements to arise from time to time, but what matters is how we resolve these disagreements.

Bilateral Relations with Brunei

Singapore and Brunei, of course, share a long-standing and a special relationship, anchored in deep mutual trust and respect, which has been built up over decades, over generations of leaders. This is epitomised by the Currency Interchangeability Agreement, which marks its 50th anniversary this year.  We will continue to build on this special relationship with the younger generation of Bruneian leaders though platforms like the Singapore-Brunei Young Leaders Programme.

Singapore in ASEAN

More broadly, Southeast Asia is our immediate hinterland.  And as many of you have said, ASEAN serves a crucial role as the main platform for regional cooperation.  ASEAN has kept our region peaceful and allowed our Member States to focus on growing our economies and improving the lives of our people.  Dr Teo Ho Pin, Mr Liang Eng Hwa, and Mr Low Thia Khiang asked very timely and important questions about ASEAN’s relevance, the pace of integration, the future of ASEAN unity and the key achievements as we celebrate its 50th anniversary.  Mr Cedric Foo and others also asked about our coordinatorship of ASEAN-China dialogue relations.

ASEAN enables us to more effectively shape our external environment and to have our views taken into account by bigger players.  In an often turbulent world, ASEAN is, as Mr Low puts it, Singapore’s anchor and a cornerstone of our foreign policy.

ASEAN has a strong value proposition. We are now already the seventh largest economy in the world and barring any mishaps, we are projected to become the fourth largest economy by 2050. Today we have 628 million people, our combined GDP US$ 2.5 trillion, and by sometime between 2030 to 2050 we hope that this will quadruple to US$10 trillion.  What’s important also is that we will have the third largest labour force in the world, and more important than that, more than half of the population of ASEAN is under the age of 30. So we have a demographic dividend that is not yet harvested.

To maintain our relevance, ASEAN must continue to be neutral, united, and committed to an open and inclusive regional architecture, and that means that we will continue to consolidate and to deepen our economic integration.  We adopted the ASEAN Community Vision 2025 and the three Community Blueprints in 2015.

We must do more to help Singaporeans better understand and to identify with ASEAN. We must also explore ways for ASEAN to ride the technological wave of the Fourth Industrial Revolution.

We will continue to partner with organisations like the Singapore Business Federation and the Association of Small and Medium Enterprises to help our businesses maximise the economic opportunities that ASEAN presents.

Working closely with Philippines as ASEAN Chair

We will also work closely with the Philippines to ensure the success of its Chairmanship this year, and to begin preparations for our own ASEAN Chairmanship in 2018.

It is important that we strive for an integrated, outward-looking and confident ASEAN. To that end, we also hope to build new links with other regional organisations, for instance the Pacific Alliance and the Eurasian Economic Union.

At the same time, the events unfolding in the EU are also a salutary reminder for us not to reprise their problems, and ASEAN must remain pragmatic and practical in managing the pace and the scale of the implementation of our economic integration. The sequence, the pace and the scale – the implementation of all of these are very important.

ASEAN’s cohesion and unity, to be frank with you, have been tested by difficult issues, not only just last year but many times before.  Nonetheless, we have endured and we have even thrived over the past 5 decades.

Looking ahead, I can tell you that ASEAN will become more, not less, critical to our foreign policy.   I totally support Dr Teo Ho Pin’s three suggestions on strengthening unity, promoting partnerships between businesses and encouraging more people to people ties.

Now let me turn to our role as the dialogue relations coordinator between ASEAN and China. Again I want to stress that we have to be honest brokers and we have to do our best to manage this strategic partnership based on mutual benefit and respect.  We upgraded the ASEAN-China FTA in 2015 and we facilitated a successful and substantive ASEAN-China 25th Anniversary Commemorative Summit last year.  We will continue advancing other initiatives such as enhancing connectivity and making progress on the Code of Conduct in the South China Sea in the remaining one and a half years of our coordinatorship.

Relations with other countries – Japan, India, Australia and the EU – are also important, and I am glad to report that relations are also good and will deepen.

Singapore-Japan 50 year partnership

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We commemorated 50 years of diplomatic relations with Japan in 2016. We had a series of high-level exchanges including a State Visit by President Tony Tan.  We are working towards upgrading the Japan-Singapore Economic Partnership Agreement and our Air Services Agreement, and we hope to strengthen bilateral cooperation in air, land and sea transport and infrastructure through the inaugural Vice-Ministerial Transport Forum this year.

India

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In India, steady progress has been made under the Strategic Partnership signed when Prime Minister Narendra Modi visited us in November 2015.  The Strategic Partnership has allowed us to broaden and to deepen relations in diverse areas, both at the central level as well as in selected states in India.

And this was reaffirmed during Prime Minister Lee Hsien Loong’s visit to India in October 2016, when he launched the Centre of Excellence for Tourism Training (CETT) in Udaipur. The master-planning of Andhra Pradesh’s new capital city, Amaravati, by Singapore experts has been completed, and a Singapore Consortium is now bidding to be a participant in the “seed development” of this brand new city.

Bilateral Relations with Australia

Singapore has a close and longstanding bilateral relationship with Australia. This was elevated in June 2015 with the Comprehensive Strategic Partnership (CSP), and this is a substantive undertaking with over 40 bilateral initiatives that will be delivered through the period to 2025.

We have moved quickly to implement the CSP.  Key agreements were signed during PM’s visit to Australia in October 2016. The MOU on Military Training and Training Area Development gives the SAF significant enhanced access to training areas in Australia over the next 25 years.  Areas which, I may add, are multiples the size of Singapore.  This will add significantly towards addressing the SAF’s evolving training requirements.

The upgrade to the Singapore-Australia Free Trade Agreement is expected to come into force this year. It will create many more opportunities for Singapore businesses and professionals to access the Australian markets.

ASEAN-EU Relations

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Brexit notwithstanding, we continue to engage Europe and the EU, for example through the EU-Singapore FTA.  Yes, it has been delayed by certain legal hurdles that we have to go through, but so far all the countries that we have engaged within Europe have expressed support for this free trade agreement.  We are also working on the EU-ASEAN Comprehensive Air Transport Agreement.

Singapore will also continue to seek economic links and opportunities for our companies in emerging markets such as Africa, Latin America and the Middle East, and SMS Maliki will elaborate on this, after I finish my contribution. But let me just say the following short points on the Middle East.

We are one of few countries that engages in a principled way with all of the protagonists in the Middle East.  In the short one and a half years I have been here, I have accompanied the PM to Jordan, to Israel and to Ramallah, under the Palestine National Authority (PNA).  We have gone to the Temple Mount, visited the Dome of the Rock, Al-Aqsa Mosque, Church of the Holy Sepulchre, been welcomed by all parties.  And it is amazing again if you think about it: us, tiny little Singapore is welcomed by all parties.  I believe we have this special position because we take a principled position.  And we also work in a win-win way to support all parties.  So for instance, with the Palestinians we have extended our technical assistance with the PNA.  But more importantly I think one of the key secret ingredients is the fact that Singapore itself, is a successful model of multi-racial multi-religious integration.  Because that gives us a special moral standing to be able to engage, and to speak, and to interact with all parties. Very few countries have this special role that we have.

And so, apart from all these engagements, bilateral and regional, we need to continue to support international groupings and arrangements.  These arrangements increase opportunities for Singapore companies and Singapore to do more in the face of a world which is sometimes at risk of insularism and protectionism.

RCEP

We will work towards the expeditious conclusion of the Regional Comprehensive Economic Partnership (RCEP), and will continue to further the development of the ASEAN Economic Community. We will explore ways to take the TPP forward, despite the US’ withdrawal.

Prime Minister (Lee Hsien Loong) attended the G20 Summit in China last year at President Xi’s invitation, and he will attend the G20 Summit in Hamburg in July this year at German Chancellor Angela Merkel’s invitation.  This will be the seventh time that Singapore is invited to attend a G20 Summit.

An Independent Foreign Policy

The next aspect that I want to talk about is about how we pursue an independent foreign policy.  This means having a foreign policy that serves Singapore and Singaporeans’ interests first and foremost.

Mr Sitoh Yih Pin spoke about the importance of a rules-based international system.  And this is critical for a small state like Singapore.  And you asked how we can strengthen the multilateral system. As a small country, the rule of law is crucial for our survival. The UN, and other international organisations and fora are key components of a rules-based international system.  They create a stable framework for cooperation, for managing tensions and addressing global trans-boundary problems. The multilateral system must become more inclusive, more transparent. Global solutions must have broad-based support from countries to be effective. On our part we play our role by initiating or by catalysing the work of organisations like the Forum of Small States (FOSS), that we actually initiated, and the Global Governance Group (3G), and we work closely with many other small states to have a greater collective voice on the international stage.

We also contribute to the multilateral system through technical assistance to developing countries.  I think we have trained over 112,000 officials from many other countries because they want to understand how Singapore works, and how these lessons can be brought back home. And humanitarian assistance is important and we do contribute when there are disasters and actually it is this training, this development that makes a longer term impact on many other countries.

Foreign Policy Begins at Home

Finally, I want to stress and repeat that foreign policy begins at home.  We need the support and understanding of a united citizenry.  Ms Joan Pereira’s question about how MFA can better engage the public on Singapore’s foreign policy is very timely.

While MFA takes the lead in foreign policy, the issues are becoming more complex and cross-cutting in nature.  Other Ministries and government agencies play an increasingly vital role in Singapore’s external front.  MFA must therefore act as a coordinator to work closely with other Ministries and agencies to pursue a ‘Whole of Government’ foreign policy and to strengthen our domestic resilience in the face of an uncertain and sometimes hostile external environment.

This also means convincing Singaporeans of the need for consistent and principled diplomacy for our long term interests instead of taking the path of least resistance in order to achieve short term gains.  The events of the last six months actually is a reminder of this.  And I am grateful for the support of Singaporeans and of members of this House.

So we will continue to work with all stakeholders to raise awareness amongst our fellow Singaporeans of the stakes for us, of the principles behind our policy, and of the sometimes difficult positions that we have to take, despite the pressures we will face from time to time.

Terrorism–A Real and Present Threat

Terrorism still remains a real and present threat.  This is evidenced by the high-profile attacks in parts of Europe and Southeast Asia, and we are actually at even higher risk, even as ISIS loses its strong hold in the Middle East.  So MFA and MHA (Ministry of Home Affairs) will continue to monitor security and terrorist threats, and we stand ready to assist Singaporeans in distress overseas. We have had Singaporeans injured or otherwise involved in terrorist incidents overseas.  Singaporeans are one of the most widely travelled people in the world.  One of our top challenges is to strengthen our consular assistance. Dr Maliki will elaborate more on this later on.

A united citizenry allows us to pursue effective foreign policy.  We may be small, but the unity of our people is a source of strength.  Our stability, our consistency,our reliability are all the more valuable in an increasingly fractious world, and people respect Singapore for that. Such respect is hard-earned, but it allows our voice to be amplified and heard on the international stage.

I am grateful to Dr Teo Ho Pin and Mr Pritam Singh for your support for the staff of MFA and for adequate resources to be provided in the light of all these challenges. I totally agree with you that MFA staff must be well staffed and must be well resourced. Our MFA officers actually are the real key assets. Our budget may be, I think, the second smallest or the smallest budget of all the ministries but I think you will agree with me it is the staff of MFA.

We have a rigorous selection system. We continue to recruit high-quality people.  But we also provide continuous training to nurture our staff and to develop their leadership potential.  We also regularly review our manpower resources and our work functions to ensure that this precious manpower is deployed in an optimal way.

The work in MFA is very demanding and very labour-intensive and eats up all hours of the day and night.  Our officers work under very challenging conditions and at great cost to their personal and perhaps even more so to their family lives.  I would like to express my appreciation especially to the spouses, of MFA staff and to the children who probably have absentee parents because their parents are out there looking after the longer term interests of our nation and they sacrifice so much for Singaporeans.

But our officers have proven themselves to be dedicated and professional.  They are driven by their mission to advance the interests of Singapore.  They understand our vulnerabilities and what we need to do in order to remain relevant.  I think Members of this House who have ever travelled with MFA staff – I am very sure you can attest to their professionalism and their hard work and I want to thank Members of the House for your continued support of MFA.

Conclusion

Let me conclude. The events of the past year have been a stark reminder of the reality that Singapore faces.  But it has also provided lessons on how we can overcome these challenges. I think in a way, the pressure that we have come under has made us stronger and more united. So we will face another year of uncertainty ahead, MFA will continue to enhance Singapore’s long-term value proposition and relevance to other countries; we will maintain our commitment to an independent and principled foreign policy in a rules-based global order; we will continue to work with all Members of this House to build a deeper appreciation of the hard truths that underpin our foreign policy.

 

 

 

The Anatomy of Populist Economics


February 27, 2017

The Anatomy of Populist Economics

by Economist Brigitte Granville*

http://www.project-syndicate.org

Today’s populist movements are all following a similar economic prescription, and governments in Hungary, Poland, and the US are giving the world an early dose of what the future may hold. Will voters swallow the medicine, or will they soon start seeking a second opinion

For at least the past year, populism has been wreaking havoc on Western democracies. Populist forces – parties, leaders, and ideas – underpinned the “Leave” campaign’s victory in the United Kingdom’s Brexit referendum and Donald Trump’s election as President of the United States. Now, populism lurks ominously in the background of the Netherlands’ general election in March and the French presidential election in April and May.

But, despite populism’s seeming ubiquity, it is a hard concept to pin down. Populists are often intolerant of outsiders and those who are different; and yet Geert Wilders, the far-right Dutch populist leader, is a firm believer in gay rights. In the US, Trump’s presidential campaign was described as an anti-elite movement; and yet his administration is already practically a subsidiary of Goldman Sachs.

While today’s populist resurgence comes from the nationalist right, some of the leading populist exponents in recent decades – such as Venezuela’s late president, Hugo Chávez – were firmly on the left. What they share is a zero-sum view of the world, which necessitates the creation of scapegoats who can be blamed for all problems. Moreover, because populist leaders claim to embody the uniform will of a mythical “people,” they consider democracy to be a means to power, rather than a desirable end in itself.

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But populists have more in common than an obsession with cultural boundaries and political borders. They also share a recipe for economic governance, one that Project Syndicate commentators have been tracking since long before today’s brand of populism began dominating the world’s headlines. Guided by their insights, we can begin to understand the origins of today’s populist resurgence, and what is in store for Western countries where its avatars come to power.

Diagnosing the Problem

Given populism’s many faces, is it really possible to identify a root cause? For Warwick University’s Robert Skidelsky, it is no coincidence that the two major political upheavals of 2016 – the Brexiteers’ success in last June’s referendum and Trump’s election victory – occurred in “the two countries that most fervently embraced neoliberal economics.” The US and the UK’s economic model over the past few decades, Skidelsky observes, has allowed for “obscenely lavish rewards for a few, high levels of unemployment and underemployment, and curtailment of the state’s role in welfare provision.” And this widening inequality, he writes, “strips away the democratic veil that hides from the majority of citizens the true workings of power.”

But Gavekal Dragonomics Chief Economist Anatole Kaletsky sees another dynamic at work, and offers “several reasons to question the link between populist politics and economic distress.” For starters, he points out that “most populist voters are neither poor nor unemployed; they are not victims of globalization, immigration, and free trade.” Having analyzed Brexit exit polls and voter-survey responses, Kaletsky concludes that “cultural and ethnic attitudes, not direct economic motivations, are the real distinguishing features of anti-globalization voting.”

At first blush, these arguments may seem incompatible; but their disagreement is really only between ultimate and proximate causes. For Skidelsky, “It is when the rewards of economic progress accrue mainly to the already wealthy that the disjunction between minority and majority cultural values becomes seriously destabilizing.” Likewise, for Kaletsky, “The main relevance of economics is that the 2008 financial crisis created conditions for a political backlash by older, more conservative voters, who have been losing the cultural battles over race, gender, and social identity.”

Harvard political philosopher Michael Sandel warns against focusing exclusively on “the bigotry in populist protest” or viewing it “only in economic terms.” The fundamental issue, he argues, is “that the upheavals of 2016 stemmed from the establishment’s inability to address – or even adequately recognize – genuine grievances.” And, because these grievances “are about social esteem, not only about wages and jobs,” they are difficult to disentangle “from the intolerant aspects of populist protest” – namely, anti-immigrant sentiments.

Nobel laureate economist Edmund Phelps also links populist voters’ anger to their loss of dignity in the larger political economy. As the share of US employment in manufacturing has steadily declined, blue-collar workers, Phelps notes. “have lost the opportunity to do meaningful work, and to feel a sense of agency.” In other words, “losing their ‘good jobs’” meant losing “the central source of meaning in their lives.” And while many of the lost manufacturing jobs were replaced with new jobs in new sectors, as Oxford University historian Margaret MacMillan cautions, nuanced economic arguments “cannot counter the unhappiness of people who feel marginalized, undervalued, and scorned.”

A Democratic Disease

Princeton University’s Jan-Werner Mueller, who published a highly regarded book about populism last year, has identified such “feelings of dispossession and disenfranchisement” as “fertile ground” in which populist politicians can sow seeds of resentment. And, in an earlier commentary that long predated the current news cycle, Mueller explained that, “Populism cannot be understood at the level of policies; rather, it is a particular way of imagining politics.” Above all, he observes, the populist imagination is inherently divisive: “It pits the innocent, always hard-working people against both a corrupt elite (who do not really work, other than to further their own interests) and those on the very bottom of society (who also do not work and live off others).”

In its more virulent forms, populism can be thought of as being akin to an autoimmune disease, whereby democracy gives rise to forces that attack it. Andrés Velasco, a former finance minister of Chile, laments that the nature of representative democracy can create an impression that politicians are “distant and untrustworthy.” The “rhetoric of modern democracy,” he writes, “emphasizes closeness to voters and their concerns.” But elected representatives cannot spend all of their time interacting with constituents when they have a duty to govern. When this dissonance between rhetoric and reality becomes “too glaring,” Velasco notes, “political leaders’ credibility suffers.”

This loss of trust leads disaffected citizens to put a premium on perceived authenticity. So, “although populist policies reduce overall economic welfare,” Velasco notes, “rational voters choose them because they are the price of distinguishing between different types of politicians.” In fact, such a willingness to suffer further economic pain in order to avenge elite betrayals and strike back at scapegoats may be a defining element of today’s populist resurgence.

Populist leaders in Hungary and Poland, who are currently advancing their own brand of “illiberal democracy,” seem to have staked their governments’ future on this presumption. As Central European University’s Maciej Kisilowski points out, it may not even matter that “the high economic costs of illiberal democracy are already apparent.” These countries’ electorates, Kisilowski surmises, “may regard economic stagnation as an acceptable price to pay for what they want most: a more familiar world where the state guarantees the dominant in-group’s sense of belonging and dignity, at the expense of ‘others.’”

Sławomir Sierakowski of the Institute for Advanced Study in Warsaw provides further support for this point. When Jarosław Kaczyński’s Law and Justice Party (PiS) returned to power in Poland a year ago, many assumed that it would quickly fail. Instead, it has succeeded, because Kaczyński mastered the politics of “two issues near and dear to voters: social transfers and immigration,” Sierakowski explains. “As long as he controls these two bastions of voter sentiment, he is safe.” Of course, given the PiS government’s politicization of the courts, the civil service, and the press, the same cannot be said for Poland’s democratic institutions.

A Populist Placebo

But how long can populist governments sustain generous transfers in the absence of strong economic growth? The answer will depend on how long their supporters remain convinced that they can have their cake and eat it – which is precisely what former Brexit leader and current British Foreign Minister Boris Johnson promised to Leave voters. Indeed, as Columbia University’s Jeffrey Sachs observed just after the Brexit vote, “Working-class ‘Leave’ voters reasoned that most or all of the income losses would in any event be borne by the rich, and especially the despised bankers of the City of London.”

Given the UK economy’s unexpected resilience last year, the populists probably feel vindicated. But, though most economists misjudged “the immediate impact that the United Kingdom’s [vote] would have on its economy,” writes Chatham House’s Paola Subacchi, “a gloomy long-term prognosis is probably correct,” given British leaders’ desire for a complete break from the European Union’s single market and customs union.

Such delayed effects can create an alibi for unsustainable policies, which, according to Velasco, is precisely “how economic populism works.” For example, the approach that Trump seems likely to take – tax cuts, growth-stimulating measures, and protectionism, with little thought given to inflation or public debt – is untenable, and will ultimately fail. But, as Velasco puts it, “‘Ultimately’ can be a very long time.” And that can give populist governments more staying power than many observers assume. “Populist policies are called that because they are popular,” he notes. “And they are popular because they work – at least for a while.”

In the meantime, populist leaders can pursue policies favored not only by their base, but also by many of their opponents. In the whirlwind of his first days in office, for example, Trump fulfilled his campaign promise to abandon the 12-country Trans-Pacific Partnership (TPP). This, Princeton University’s Ashoka Mody believes, was actually a welcome move, given that “international trade agreements, propped up by powerful interests, have become increasingly intrusive.” Similarly, before Trump’s election, Harvard University economist Dani Rodrik called for a rebalancing “between national autonomy and globalization.” In Rodrik’s view, it should go without saying that “the requirements of liberal democracy” must come before “those of international trade and investment.”

Trump’s promise of corporate tax reform has also wide appeal beyond his electoral base. For Harvard’s Martin Feldstein, who chaired President Ronald Reagan’s Council of Economic Advisers, current legislative proposals to overhaul the US’s outdated tax system could “have a highly favorable impact on business investment, raising productivity and overall economic growth.” Assuming that Trump, working with congressional Republicans, can strike the right policy balance, he will have bought himself some time with the business community.

Princeton University economic historian Harold James makes a related point, arguing that “the economics of US populism will not necessarily fail, at least not immediately,” owing to the US’s “uniquely resilient” position in the global economy. “Because [the US] has historically been the global safe haven in times of economic uncertainty,” James notes, “it may be less affected than other countries by political unpredictability.”

A Turn for the Worse

But even if Trump can extend his honeymoon, James does not discount the possibility that “today’s contagious populism will create the conditions for its own destruction.” One way that could happen, argues Benjamin Cohen of the University of California, Santa Barbara, is if the US loses its “exorbitant privilege” as the issuer of the dominant international reserve currency. If Trump “pursues his protectionist promise to put ‘America first,’” Cohen writes, “investors and central banks could gradually be impelled to find alternative reserves for their spare billions.”

Trump’s version of economic populism could also face a reckoning if it results in a new boom-bust cycle – one that could end in a period of stagflation around the 2018 US congressional elections. Just before the election, Feldstein warned that “overpriced assets are fostering an increasingly risky environment.” Given that the US economy is already at full employment, with an inflation rate near 2%, Trump’s planned fiscal stimulus could push it into overdrive, and force the Federal Reserve to raise the federal funds rate.

Such a scenario would certainly worsen the plight of Trump’s constituency of white working-class voters in America’s former manufacturing heartland. But so, too, would his trade proposals, which could easily precipitate trade wars with China, Mexico, and other trading partners. Trump has told displaced blue-collar workers to blame trade deals and competition from imports for the loss of their jobs. But, “with productivity gains exceeding demand growth” worldwide, Nobel laureate economist Joseph Stiglitz points out, America “would have faced deindustrialization even without freer trade.”

Given this, Trump’s prescription of trade protectionism, Stiglitz says, will only “make all Americans poorer.” One reason, explains former World Bank Chief Economist Anne Krueger, is that imports create and sustain jobs, too. The irony of Trump’s proposed import tariffs is that they threaten American exporters. Many export-industry jobs, Krueger points out, exist because inexpensive imports enable American manufactures to compete domestically and abroad; and “exporting to the US gives foreigners more income with which to buy imports from the US and other countries.”

Simon Johnson of MIT also fears such a lose-lose scenario. If Trump starts taxing imports, Johnson argues, “the cost per job will be high: all imports will become more expensive, and this increase in the price level will filter through to the cost of everything Americans buy.”

Botching the Operation

Other Project Syndicate commentators have pinpointed a deeper flaw in populist economics, apart from any specific policy proposal: recklessness. Populists often overplay their hand by flouting legal, economic, or political conventions, or by exerting inappropriate influence in markets to try to funnel benefits to their supporters. In fact, according to a classic study of economic populism in Latin America by Sebastián Edwards of UCLA and the late Rüdiger Dornbusch of MIT, it is standard populist practice to show “no concern for the existence of fiscal and foreign exchange constraints” in the pursuit of faster growth and redistribution.

New York University’s Nouriel Roubini suspects that Trump may be similarly tempted to interfere inappropriately in currency markets. As his stimulus measures push up the value of the dollar, Roubini says, “Trump could unilaterally intervene to weaken the dollar, or impose capital controls to limit dollar-strengthening capital inflows.” But if Trump is too reckless with his “damage-control methods,” already-wary markets will succumb to “full-blown panic.”

Mody, for his part, sees serious risks in Trump’s interference in corporations’ practices and business decisions. By bullying companies over Twitter to keep jobs based in the US (or to punish them for dropping his daughter Ivanka’s clothing line), Trump has already begun to undermine “the norms and institutions that govern markets.” And in Phelps’s view, Trump’s Twitter interventions, combined with his deregulation agenda, risk entrenching corporatism at the expense of the innovation and competition necessary to sustain economic dynamism and income growth.

The Search for a Cure

With populist movements leaving political establishments reeling, could a positive counter-populist economic policy agenda soon emerge? The Nobel laureate economist Michael Spence sees an opportunity in disaffected voters’ rejection of an insufficiently inclusive economic-growth model. “With previous presumptions, biases, and taboos having been erased,” he writes, “it may be possible to create something better.” Likewise, for Stiglitz, Trumpism’s silver lining is that its opponents are experiencing “a new sense of solidarity over core values such as tolerance and equality, sustained by awareness of the bigotry and misogyny, whether hidden or open, that Trump and his team embody.”

An implicit argument running through many Project Syndicate commentaries is that the only prophylactic against economist populism is more aggressive redistribution. As Rodrik puts it, populism – and poor governance generally – emerges when elites prove unwilling to “make adjustments to ensure that everyone does indeed benefit” from the existing economic model.

Behind recent, large-scale rejections of the “system” is a widely shared sense among certain groups of voters that the “establishment” has subordinated citizens’ interests to cosmopolitan goals such as globalization, immigration, and cultural diversity. Most commentators agree that economic shocks such as the Great Recession or the eurozone sovereign-debt crisis are neither necessary nor sufficient to explain the rise of populism. Rather, populism is more a response to prolonged economic malaise, deteriorating living standards, declining trust in established institutions, and a common perception that incumbent leaders have feathered their nests at the people’s expense.

These are complex economic and political problems for which populism offers fancifully simple solutions. Efforts by the media to move the populist mind have proved counter-productive, and will likely continue to do so.Those opposed to the populist cure will have to come up with an equally powerful alternative, or look on helplessly as economic uncertainty and despair overwhelm the patient.

Policy uncertainty threatens trade growth, says World Bank


February 22, 2017

Policy uncertainty threatens trade growth, says World Bank

Warning on protectionism and threats to trade agreements in Trump era

https://www.ft.com/content/9d49b092-f859-11e6-9516-2d969e0d3b65

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Political uncertainty is slowing trade growth, a World Bank report has concluded, indicating that the rise of Donald Trump may already be casting a shadow over the global economy.

Major international institutions such as the IMF, the OECD and World Bank have recently upgraded their forecasts of global economic growth largely due to expectations that tax cuts, rising infrastructure spending and a wave of deregulation will boost the US economy under the new president. But the report by World Bank economists, released on Tuesday, highlights the fragile state of one historically important engine of global growth — trade.

To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued. Michele Ruta, World Bank report co-author

The study avoids naming Mr Trump, but highlights rising protectionism and threats to unwind trade agreements — such as those made by the president. It also raises the prospect that attempts by the Trump administration to force companies to repatriate global supply chains to the US could undermine efforts to boost lagging productivity growth. To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued Michele Ruta, World Bank report co-author International trade has been growing below historic trends for the past five years. The 1.9 per cent growth recorded in 2016, according to the team at the bank, was the slowest since the 2009 collapse in commerce that followed the global financial crisis.

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Prime Minister Justin Trudeau meets with U.S. President Donald Trump in the Oval Office at the White House–The Future of NAFTA

The team found that some of the reasons for the anaemic trade growth, which affected both developed and developing economies, were broader trends such as slow economic growth around the world and a collapse in commodity prices. But in 2016 the principal change was a surge in uncertainty about economic policy. According to the World Bank’s calculations, such uncertainty was responsible for 0.6 percentage points of the 0.8 percentage-point fall in trade growth between 2015 and 2016. The team at the bank based their figure on a study of the relationship between trade and economic policy uncertainty in 18 countries over three decades. They added they expected the impact to continue in 2017. “To the extent that the policy uncertainty will remain high we should continue to expect [global] trade growth to be subdued,” said Michele Ruta, one of the authors. The World Bank team also sought to quantify the impact of trade agreements on global trade growth. World trade grew at an annual rate of 6.53 per cent between 1995 and 2014, they calculated. Had no new members — including China — joined the World Trade Organisation or no new trade agreements been signed, international trade would have grown at just 4.76 per cent annually, they found.

One of the big consequences of the explosion in trade deals in recent decades has been the emergence of global supply chains. Such chains are widely seen by economists to have made businesses more efficient and boosted productivity. But Mr Trump and his administration have said they want to unwind those international supply chains and bring them home. “It does the American economy no long-term good to only keep the big box factories where we are now assembling ‘American’ products that are composed primarily of foreign components,” Peter Navarro, one of the president’s top trade advisers, told the Financial Times last month.

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According to the World Bank team such a move, coupled with unwinding existing trade agreements that have encouraged the establishment of international supply chains, would hurt productivity growth. “Preserving and expanding the reach of trade agreements, rather than backtracking on existing commitments, would help to sustain the growth of productivity,” the bank’s economists wrote.