Regional Comprehensive Economic Partnership (RCEP) is the way forward for ASEAN


November 2, 2017

Regional Comprehensive Economic Partnership (RCEP) is the way forward for ASEAN

by M. Chatib Basri, University of Indonesia

http://www.eastasiaforum.org

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The success story of the East Asian economy was about the connection between trade and industrialisation — look at the cases of Japan, South Korea, China, Taiwan and Singapore. Trade-oriented industrialisation drove regional economic integration in through trade and investment — and integration into the world economy that was made possible by conducive global economic growth and a relatively open global economy.

 

Unfortunately, the party is now over. Many economists are beginning to talk of a ‘new normal’ global economy with slower growth and trade. Brexit, the ascendency of US President Donald Trump and anti-immigration sentiment all point to a growing resistance to globalisation. At the March 2017 G20 meeting in Germany, even finance ministers and central bank governors backed away from agreement on support for free trade and investment.

It’s premature to conclude that the world has fully embraced protectionism, but the conditions for trade liberalisation and negotiating trade agreements are tougher than they were. Economic recovery in the United States and some parts of Europe remains fragile, and China’s growth though robust is also on the wane. Against this ‘new normal’ backdrop, what can ASEAN countries do to counter this trend and mitigate its impact? What role can regional cooperation play in addressing these emerging challenges in the global trade and investment environment?

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Slowing economic growth will impact on job creation, and ASEAN nations cannot afford slow economic growth — more jobs are essential to win the fight on reducing poverty.

ASEAN and East Asia must continue to encourage economic growth to improve the socio-economic welfare of their citizens. Even though global growth  is sluggish, East Asian economies still have relatively high growth. The potential is there. East Asia must strive to achieve it growth potential.

Fiscal expansion is one possible solution for those countries that have the fiscal space — though that’s a luxury afforded to few countries in ASEAN. Room for monetary expansion is also limited due to the growing possibility of the normalisation of US monetary policy.

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Forcing the pace on continued structural reform is where progress is vital. But structural reform is much easier said than done. Further unilateral liberalisation is not easy when the rest of the world is consumed by creeping protectionism, and the progress of a multilateral agenda is still in limbo as the WTO’s Doha Round seemingly goes nowhere.

A more feasible way forward is a combination of structural reform and the revitalisation of regional cooperation.

Pursuing openness through regional economic integration will not be easy. The trend towards deglobalisation demonstrates that the original model of globalisation — rapidly reducing the barriers to trade of goods and services trade— does not have strong political backing. It’s clear that economic reform and trade liberalisation need now to be accompanied by policies that ensure that ‘losers’ in realising the overall gains from trade are effectively compensated. Where distribution of the gains from trade has not been attended to, globalisation’s positive impact has found less support among the people and political will for it has waned. A consequence is the pockets of deep political resistance to globalisation.

Restoring trust in globalisation is now a primary goal. This can be done by highlighting globalisation’s success stories and its direct and positive impact on people’s lives. The success of reform does not hang on the merits of the reform’s agenda, but rather on political support — an intrinsic dilemma of reform is that the cost is more immediate and concentrated and the benefit is more diffuse and long term. This makes it necessary to get ‘quick wins’ or success stories to ensure political support.

These circumstances underline the need for multi-stage regional cooperation. This can start slowly and then tackle more complex issues. For example, instead of negotiating over how to lower trade barriers, negotiations can start on issues related to connectivity and capacity building. These objectives are acceptable politically by nearly all member countries and can be economically beneficial. Revitalising the ASEAN infrastructure fund is another example of a ‘low hanging fruit’ in regional cooperation.

If this kind of cooperation can be carried out, people will feel its real impact of regional cooperation and ASEAN states can move forward with a more complex agenda for economic integration.

The Regional Comprehensive Economic Partnership (RCEP) fits the bill and can now be brought into play. The Trans-Pacific Partnership (TPP) is practically dead in the water since the United States withdrew. RCEP is the only way forward. RCEP provides an ongoing framework through which to promote open regionalism and an open international economy. RCEP is important for ASEAN as an initiative that was put forward when Indonesia was the chair of ASEAN in 2011 — not a Chinese initiative as some wrongly believe.

As the global economy and the support for globalisation both languish, ASEAN nations need to act immediately to preserve the economic order that gave East Asia such prodigious development. RCEP offers a practical way forward in global trade diplomacy — and ASEAN would be remiss not to pursue it fully at a time when it’s important to our global economic future.

Chatib Basri is a Senior Lecturer at the Department of Economics, University of Indonesia and formerly Indonesia’s minister of finance.

 

Here’s Fareed Zakaria–Wither Trump’s America


November 2, 2017

Here’s Fareed Zakaria–Wither Trump’s America

Engage the World says Thinker Fareed Zakaria, not retreat into your shell, my American friends. Embrace globalisation and open rule-based trading environment, and together, we can prosper.  Your economy and what you do matters to us in Asia and the rest of the world.–Din Merican

Jomo Kwame Sundaram–Need to Speak Truth to Power


October 16, 2017

Jomo Kwame Sundaram–Need to Speak Truth to Power

by Malaysiakini Team

http://www.malaysiakini.com

Tomorrow: Jomo on why Malaysians are worse off today

INTERVIEW | Jomo Kwame Sundaram, former Assistant Secretary-General for Economic Development at the United Nations, talks about the need to “speak truth to power,” among others.

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Question: In a recent speech, Prime Minister Najib Razak accused you of taking “every opportunity to attack me and my policies, from our participation in the TPPA, to the administration of welfare payments, to foreign investment in Malaysia.” What do you have to say?

Jomo: What can I say? One should not read him out of context. He said this as proof of freedom of speech and democracy in the country. Obviously, I appreciate his commitment to freedom of speech, and presumably, freedom after speech [laughs]. In fact, some people now tease me as the PM’s “poster boy” for free speech in Malaysia.

But unfortunately, his fact-checkers did not do their homework, or perhaps facts don’t matter in this age of fake news. As many know, I have also been criticised by the PM’s critics for supporting several of his policy initiatives, most notably BR1M (Bantuan Rakyat 1Malaysia) and the minimum wage policy.

BR1M goes directly to beneficiaries and is hence much appreciated by recipients. Understandably, as with the mid-year deal for Felda settlers, opposition politicians see BR1M as bribing the electorate, but one should not condemn BR1M itself.

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However, labour market interventions, such as the minimum wage policy, have been far more significant for improving a lot of low-income earners although the public may not realise it.

I recently lauded the Health Ministry initiative to get an affordable Hepatitis C treatment, for a small fraction of the US price, for the almost half million Malaysians who suffer from it.

So factually, his speechwriters were wrong. But he was right to say that I do not blindly support everything his government has done, and have been critical of specific policies, which I have done for decades, long before he became PM.

Najib said you have been critical of the Trans-Pacific Partnership Agreement (TPPA).

Jomo: He is correct that I have long been critical of the TPPA. Before I came back to Malaysia last year, I joined some UN colleagues to critically assess the TPPA. The report was launched in Washington DC in early 2016, soon after I left the UN.

That work was not focused on Malaysia, and simply pointed out that the methodology used simply assumed away the problems the TPPA would generate, including for the US. In the US, both Democrats and Republicans cited our work to oppose the TPPA.

After returning to Malaysia, I felt obliged to point out that the gains promised by the TPPA, even by its most fervent US advocates, were actually very modest and exaggerated by its Malaysian proponents.

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I also pointed out that most of the gains to the US were at our expense. Strengthened intellectual property rights (IPRs) would raise the costs of medicines, for example.

The TPPA’s investor-state dispute settlement (ISDS) provisions would allow private tribunals to make rulings in favour of powerful foreign corporations at potentially great expense to the Malaysian government.

Even now, although the TPPA is dead in law because President (Donald) Trump rejected it, there are those trying to push TPP 11 through while the government and public are distracted by other matters.

This would be worse as it would sell out the national and public interest for next to no gain. My concern throughout has been the Malaysian public interest, including the government interest.

What about foreign investments?

Jomo: As for foreign investment, again he is correct that I am concerned about how the government is encouraging foreign portfolio investment, as in the period before the 1997-98 crisis.

Unlike Thailand and Indonesia then, the government and Malaysian corporations had not borrowed very heavily from abroad. But we were vulnerable because of the sudden exit of mainly foreign holdings from the Malaysian stock market.

Such investments have grown so much in the last decade that some estimates suggest that they exceed foreign share ownership in the mid-1970s, more than four decades ago. It is also misleading to think that because Malaysians have been encouraged to invest abroad, we should encourage foreign portfolio investments here.

 

Greenfield foreign direct investments are a different story as they may bring in new productive capacities and capabilities, including technology, management and market access. But my concern remains that Malaysian industrial capacities and capabilities remain modest, and we still have relatively few internationally competitive industrial firms.

My concerns have been expressed with the country’s interests and future progress foremost. I pray that the space for such discussion and debate will be expanded, not diminished. The PM’s affirmation of freedom of speech should, therefore, be welcomed, not feared.

So, what inspires you to do what you do?

Jomo: Many people have inspired me. Those who fought to free us from imperialism, oppression and exploitation. While in school, especially at the Royal Military College, I was inspired by Malcolm X, Martin Luther King, Yasser Arafat, Kwame Nkrumah, Ho Chi Minh and Nelson Mandela.

And yes, I do not identify with the other man I was named after – Jomo Kenyatta, father of Kenya’s current president, who was unfairly jailed by the British from 1952 until 1959, but became increasingly corrupt and tribalistic after becoming president in 1963.

Chinua Achebe’s writings turned from the disruptive colonial impact to the gangrene of corruption. Then, in 1983, I was shaken by the brutal torture and murder of my senior in school, the late Jalil Ibrahim, in Hong Kong.

We are all enjoined to “speak truth to power.” Initially, when I was at UKM (Universiti Kebangsaan Malaysia) with the late Ishak Shari, Osman Rani and Ismail Muhd Salleh, and later with others after I moved to Universiti Malaya.

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During Dr Mahathir (Mohamad)’s long tenure, I was also known as a critic, even though I appreciated many aspects of particular policy initiatives. Although I was quite outspoken in those days, BN politicians did not harass me.

 

Rather, petty university administrators who had ambitions or agendas of their own were the vindictive ones. But most left me alone as I had no ambitions in terms of university positions.

Also, there is no personal animus on my part towards the Prime Minister. As is well-known, I greatly admire his late father (Tun Abdul Razak )for many reasons. In fact, I wrote an article early last year, just after leaving the UN, on the occasion of the 40th anniversary of his untimely passing.

As a student then, in the cold winter of early 1976, we organised a memorial meeting at MIT (Massachusetts Institute of Technology) to honour his contributions soon after he passed.

Tomorrow: Jomo on why Malaysians are worse off today

Twenty years on: The Asian Financial risis and Asian Monetary Fund (AMF)


September 28, 2017

Twenty years on: The Asian Financial risis and Asian Monetary Fund (AMF) 

David Nellor

http://www.eastasiaforum.org

 

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Proposals for an Asian Monetary Fund (AMF) dominated corridor conversations at the 1997 IMF–World Bank annual meetings in Hong Kong. The Asian financial crisis had erupted a few months earlier and was engulfing the region.

The United States vetoed the idea, framing the proposal as the ‘IMF versus AMF’ where any type of AMF would undermine the IMF’s central role in the global financial system. Twenty years on, the circle has been closed, with the IMF launching a framework for collaborative action with regional arrangements.

 

Arguably, at that early stage of the crisis, the US position was not unreasonable. The mood of Asian finance officials was one of denial. Set against the backdrop of the Asian miracle, it was inconceivable, they thought, that self-inflicted policy distortions — quasi-fixed exchange rates combined with independent monetary policy — as well as compromised financial sector supervision helped drive the crisis. The idea of unconditional financing — not tied to reform — that would avoid reform was, they thought, a defendable proposition.

Still, the push for an AMF did suggest gaps in the global and regional financial architecture. What followed was a struggling ASEAN seeking to catch up, stop gap consultative groups like the Manila Framework Group, and a sequence of ad hoc parallel financing arrangements from the ‘Friends of Thailand’ to Indonesia’s so-called ‘second line of defence’.

The crisis broke on 2 July 1997. By late July, plans led by Japan and in cooperation with the IMF were underway for a regionally based meeting on Thailand. This informal grouping hosted by Japan in Tokyo on 11 August, became the ‘Friends of Thailand’. The concrete outcome of the meeting was a series of financial commitments by seven countries and the multilaterals, with the United States notably absent. The absence of the United States was perhaps shaped by congressional dissatisfaction with the Clinton Administration’s financial support of Mexico, which had been provided directly by the US Treasury without congressional approval during Mexico’s 1994 crisis.

Almost remarkably, this rushed US$17.2 billion collaborative financing arrangement was the regional success story from a sequence of ad hoc efforts to provide funding to mitigate the consequences of the crisis. The support was structured as a series of bilateral arrangements between Thailand and each country. Each drawing under these agreements was triggered in parallel with Thailand’s drawings under the IMF supported program. Commitments were credible as they were both conditional and fulfilled step by step.

By contrast, Indonesia’s more than US$40 billion package — including an US$18 billion ‘second line of defence’ through bilateral support — failed. The enormous scale of the funding, especially at that time, was intended to be a ‘shock and awe’ approach signalling to financial markets that stability was assured.

Some thought the second line would never need to be drawn and perhaps commitments were made with that expectation. But markets saw through this and in short order sufficient questions arose about the willingness of countries to follow through on commitments. This triggered uncertainty at best and arguably made the situation worse.

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The South Korean experience of international support was different. The concentration of external debt through the South Korean banking system enabled the coordination of a relatively effective capital control mechanism, creating a window to develop a market-based debt restructuring in the first half of 1998. Here the US Federal Reserve played a leading role, along with other central banks, supported by the technical contributions of IMF and South Korean officials.

Asia’s leaders were unanimous in supportive statements about the need for a regional crisis response mechanism including funding. Yet there were issues that continue to pose a challenge for the credibility of arrangements, such as the ASEAN+3 Chiang Mai Initiative, today. Lee Kuan Yew, while not opposed to an AMF, cautioned that such an arrangement would need to do more than provide funding that might enable crisis countries to avoid essential reform. He went on, ‘I do not see any Asian group of governments in the AMF strong enough to tell … President Suharto, “You will do this or we will not support you”. If you don’t say that and you support him, that’s money down the drain’.

The Manila Framework Group was established in a November 1997 meeting as the direct result of the failed AMF discussions in Hong Kong. It would serve as a surveillance forum of 14 APEC economies meeting regularly and on an ad hoc basis through to the end of 2004. It played an important role by, for example, triggering a June 1998 Tokyo meeting with the G7 to respond to destabilising global currency moves. The G20 would also start in the aftermath of the Asian financial crisis.

ASEAN was a participant but not a driver when the crisis broke. Its most concrete response came a few years later when, along with the ASEAN+3 countries, the Chiang Mai Initiative was launched in 2000. It was a modest first step especially as operational modalities remained to be defined for at least a decade and only in 2016 was there a ‘dry run’ to test the Chiang Mai Initiative’s capacity to respond to crisis.

Indonesia’s hastily developed Deferred Drawdown Option, with multilateral and bilateral support during the Global Financial Crisis, was another ad hoc instrument showing that gaps in the regional financial architecture persisted well into the 2000s.

Twenty years on, the IMF has spelled out plans for how to make the global financial safety net more effective through collaboration with regional financial arrangements — an outcome that seemed remarkably distant in the midst of the Asian financial crisis.

David Nellor is a Jakarta-based consultant. He was based in Asia for the IMF throughout the Asian financial crisis and participated in discussions on regional arrangements.

 

The United States Should Join the Asian Infrastructure Investment Bank (AIIB)


September 21, 2017

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Number 397 | September 20, 2017

ANALYSIS

The United States Should Join the Asian Infrastructure Investment Bank (AIIB)

By Niruban Balachandran

The United States has not yet joined Beijing’s Asian Infrastructure Investment Bank (AIIB) as a member state, partially because of the perceived risk of legitimizing or normalizing this new multilateral development bank (MDB) at the expense of the Bretton Woods component of the postwar liberal international order: the World Bank and International Monetary Fund. A related US hesitation is the potential for Beijing to mainstream weaker, watered-down infrastructure quality standards across the East Asia and Pacific region. US policy toward the AIIB also ostensibly seeks to prevent Beijing from increasing its checkbook diplomacy in developing countries. This is understandable, given that Beijing has previously provided conditional aid with eyebrow-raising terms to developing countries, such as aid to Costa Rica and Panama under the condition that they cut off diplomatic relations with Taiwan. However, the AIIB is most likely here to stay, and as a result of Washington’s absence, the United States will have no voice or voting presence in the bank. Such a position hinders Washington’s ability to influence and shape Beijing’s development effectiveness in the region.

 

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The United States has not yet joined Beijing’s Asian Infrastructure Investment Bank (AIIB) as a member state, partially because of the perceived risk of legitimizing or normalizing this new multilateral development bank (MDB) at the expense of the Bretton Woods component of the postwar liberal international order: the World Bank and International Monetary Fund. –Niruban Balachandran

Some Trump administration staff have expressed interest in US membership in the new bank. For example, Trump Advisor James Woolsey wrote last November that the US should have joined AIIB, adding that he hoped its reception to Beijing’s Belt and Road Initiative would be “much warmer”. Even Japan, Washington’s key ally in Asia, has recently hinted at joining AIIB. An absent US does not serve American or regional interests.

AIIB’s mandate is to provide loans, grants, and technical assistance to build infrastructure such as roads, ports, housing, and bridges for developing countries. To date, AIIB comprises 57 founding member states, a number that will most likely rise to about 70 in the near future. The AIIB’s initial capitalization is $100 billion, with Beijing contributing half of this total. In contrast, the World Bank is governed by 189 member states, and its capitalization is over $252 billion, with the United States contributing about 17% and Japan contributing about 8% of the total; it provides loans and grants in health, education, energy, climate change, and other sectors beyond infrastructure to client countries.

Unfortunately, the voice of the United States in the AIIB is absent. According to an exhaustive February 2017 Congressional Research Service report, “China’s voting share at the AIIB (28%) is over 350% that of the second largest AIIB member nation, India (8%). This is the largest gap between the first and second largest shareholders at any of the MDBs…” In the same vein, while the United States is criticized by other governments for having “too much power” in the World Bank with a capital shareholding of roughly 17 percent, China’s AIIB capital shareholding runs at an enormous 50 percent. Additionally, unlike most other MDBs, the AIIB does not have a resident board of executive directors that have a daily voice in bank processes and decisions.

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The New Boy on the Block

If the Trump administration joins the AIIB, it can help negotiate a higher voting share for the United States, a higher capital shareholding proportion for the United States, and resident board membership for all member states within the new bank. Such outcomes would help alter Beijing’s disproportionate power in AIIB. Although negotiating for more favorable conditions on behalf of Washington and other member states may be more difficult, it will by no means be impossible. While some in Beijing might view US membership in the AIIB as a strategic risk to China’s long-term aspirations for a Sinocentric regional order, it’s worth remembering that including Washington’s voice in key infrastructure projects can advance quality of life for the poor and unblock the free flow of water, goods, and people while drawing upon America’s most innovative infrastructure experts, unmatched global and subnational convening power, and enormous US diplomatic apparatus around the world.

It is understandable that aid and development projects managed by less-experienced donors like the AIIB might run greater risks of displacing indigenous peoples, threatening physical cultural-heritage assets, and constructing dangerous, disaster-prone, and less-than-green infrastructure. In addition, a report by a prominent watchdog group ranked the AIIB the lowest among the MDBs in level of public information transparency, most notably in terms of its lack of access to information procedures and public registry for information requests, as well as its failure to adopt time-bound disclosures of board minutes, draft strategies, and policies. The United States can drive capacity-building in these domains.

If Washington’s objective is to support Beijing’s efforts in development effectiveness and infrastructure quality, then it is imperative for the Trump administration to reverse course, seek to join the AIIB as a member state, and encourage resident board membership for all member states in line with MDB governance best practices. As in the World Bank and other multilateral institutions, it is on this platform that Washington can then negotiate on weighted AIIB voting practices, express its voice in day-to-day decision-making, convene like-minded stakeholders around policy and programmatic issues, build coalitions, and vote on projects that reduce poverty.

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The Go It Alone Man in a Globalised World–America First

The AIIB is only one component of Beijing’s proposed “China-led” regional architecture, which includes the New Development (BRICS) Bank, BRI, the Regional Comprehensive Economic Partnership (RCEP) free trade agreement, the Shanghai Cooperation Organization, the China-ASEAN Interbank Association, the China-Eurasia Economic Cooperation Fund, and other multilateral initiatives. The Trump administration should therefore acknowledge that these new Chinese institutions will probably not be going away anytime soon, and that in many cases, it is best to try to advance American interests from within, or in close partnership with these institutions. For example, in May 2017, the World Bank and AIIB signed a joint Memorandum of Understanding (MOU) that establishes mechanisms for staff sharing, knowledge exchanges, country-level coordination, and other forms of close cooperation.

It is also worth noting that Tokyo’s $200 billion, whole-of-government answer to Beijing’s AIIB and OBOR – the Japan Partnership for Quality Infrastructure (PIQ) – combines the multidisciplinary capacities of the Asian Development Bank (ADB), the Japan International Cooperation Agency (JICA), the Japan Bank of International Cooperation (JBIC), and the Japan Overseas Infrastructure Investment Corporation for Transport and Urban Development (JOIN). As The Straits Times recently reported, “While Japan cannot compete with China in dollars, it has touted its superiority in its capability to build high-quality infrastructure and commitment to train local workers.”

In the same vein, Washington should also seek to further improve the AIIB’s quality-control, governance, accounting, and safeguards by first negotiating to join the new bank’s executive board, then ensuring not only that meticulous M&E practices are utilized, but also that strict environmental and social safeguards are enforced in the field to protect communities, indigenous peoples, and families across every full project cycle.

Lastly, at the bilateral infrastructure aid level, an impartial self-governing body similar to that of the World Bank’s Independent Evaluation Group (IEG) should execute an omnibus, cross-sectoral American infrastructure aid review to refine the subnational service delivery, donor coordination functions, and development effectiveness of USAID, the Millennium Challenge Corporation, the US Overseas Private Investment Corporation (OPIC), the Asia Foundation, and other crucial bilateral instruments of American infrastructure aid to the East Asia and Pacific region. Comparatively efficacious project execution and whole-of-government initiatives such as US-ASEAN Connect will continue to provide powerful insurance against the long-term marginalization of Washington’s bilateral infrastructure-aid instruments.

About the Author

Niruban Balachandran is a recent graduate of Harvard University’s John F. Kennedy School of Government’s Master’s of Public Administration, focusing on international order and strategy, as well as US-Southeast Asian relations.He can be contacted at Niruban_Balachandran@hks17.harvard.edu.

 

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Additional Read:

“Who’s Afraid of the AIIB: Why the United States Should Support China’s Asian Infrastructure Investment Bank”

Phillip Y. Lipscy (Stanford University)
Foreign Affairs, May 7 2015

When China first proposed creating the Asian Infrastructure Investment Bank (AIIB) in 2013, it generated considerable anxiety in Washington and many other capitals. Many pundits and policymakers view the AIIB as a bid to undermine or replace the international architecture designed by the United States and its allies since the end of World War II. Although several U.S. allies, including Australia, Germany, and the United Kingdom, have declared their intention to join the AIIB, others, including Japan, have expressed ambivalence. For its part, the United States has made it clear that it will seek to influence the institution from the outside. But it would be a mistake to shun or undermine the AIIB. Rather, it should be welcomed. Both the United States and Japan have far more to gain by joining the AIIB and shaping its future than remaining on the sidelines.

The details remain vague, but the AIIB is meant to be a multilateral development institution that will focus on infrastructure needs in Asia. There is no question that this is a deserving cause. Asia’s large population, rapid growth, and integration with the global economy all generate demand for better infrastructure. A report by the Asian Development Bank (ADB) estimates the region needs about $750 billion annually in infrastructure-related financing. [i] Citing historical underinvestment, McKinsey & Company, a global management consulting firm based in New York City, proclaims a “$1 trillion infrastructure opportunity” [ii] in Asia. Although precise estimates vary from one report to another, the broad point is uncontroversial: Asia needs more infrastructure, and international financing can help.

Why, then, is the AIIB itself controversial? There are essentially two reasons. First, Western governments fear that the AIIB will, in one way or another, undermine existing international aid institutions. U.S. policymakers have publicly expressed concern that the AIIB will undercut social and environmental standards adopted by existing institutions such as the World Bank and International Monetary Fund (IMF). An underlying fear is that the AIIB could eventually overshadow and undermine these institutions, which are based in Washington and seen as closely reflecting U.S. interests. Japanese policymakers have expressed similar reservations.

Second, there is concern about China’s intentions within the broader context of its economic and geopolitical rise. The AIIB signals that China intends to play a larger international role. Will China act like a responsible stakeholder by further integrating itself into the existing world order, or will it focus more on challenging U.S. hegemony by seeking to undermine and replace the post–World War II international architecture? The AIIB seems to indicate that China is interested in the second scenario. After all, why else would China choose to design its own development institution from scratch rather than working through existing institutions?

Yet both sets of concerns are largely misplaced. The AIIB is highly unlikely to undermine existing aid organizations, and the creation of the AIIB conveys very little information about China’s broader international intentions. On balance, the United States and Japan have more to gain from joining the AIIB and shaping its future than seeking to exert influence as bystanders.

INSTITUTION IN-CROWD

China has a unique relationship with post–World War II international organizations. After the Chinese civil war, Chiang Kai-shek’s Taiwan remained the de jure representative of all of China in major international organizations. This was a serious fault line of the early Cold War, triggering the Soviet boycott of the UN Security Council in 1950. However, the United States used the boycott to its advantage, securing UN Security Council authorization for operations against North Korea during the Korean War. The Soviet Union grudgingly returned to the council to aggressively exercise its veto, but the question of Chinese representation remained unresolved.

China exacerbated its international isolation by withdrawing from several international organizations, such as the Universal Postal Union and the World Meteorological Organization, in protest of Taiwan’s membership. As a result, by the 1960s, China had essentially no representation in the postwar institutional architecture. There were a few occasions on which China endorsed proposals that would pose competition with existing institutions. For example, the premier of China, Zhou Enlai, encouraged Indonesia under President Sukarno to challenge the architecture: “In these circumstances,” he said, “another UN, a revolutionary one, may well be set up so that rival dramas may be staged in competition with that body which calls itself the UN but which is under the manipulation of United States imperialism and therefore can only make mischief and do nothing good.” [iii]

China sent the largest delegation and won the most medals at Sukarno’s “Games of the New Emerging Forces,” an athletic competition created to pose direct competition against the Olympics, from which China was excluded. Indonesia also became the only country in the UN’s history to formally withdraw from the organization in 1965, and Sukarno proposed the creation of an alternative institution, the New Emerging Forces Organization (NEFO). The proposal raised concerns among U.S. policymakers, who worried that the initiative might entice developing countries away from the UN. NEFO ultimately went nowhere, though, as Sukarno’s grip over his own country slipped. Indonesia returned to the UN only a year later.

If China’s isolation from the international architecture had continued in subsequent decades, such challenges may have become more serious. However, in a pivotal UN General Assembly vote in 1971, China displaced Taiwan as the sole representative of its country in the UN. Although membership in other organizations came with varying lags, within about a decade, China had completely turned the tables on Taiwan.

China’s history of contestation over representation sets the scene for contemporary debates about the international architecture. For decades after the end of World War II, a major Chinese foreign policy objective was to secure recognition and status in postwar international organizations. Once that status was secured, China’s unique method of entry gave it significant advantages that were denied to many other rising powers. The postwar architecture systematically advantaged the major Allied powers of World War II over countries on the wrong side of the war (Japan and Germany) or countries that were weak or colonized (Brazil and India). In many respects, China avoided these disadvantages: it automatically assumed the formal privileges that had been granted to the Republic of China, most notably permanent membership and veto power in the UN Security Council.

These factors mean that when it comes to major international institutions, China is more of a status quo power than one might expect. Much of the contemporary Chinese foreign policy narrative emphasizes China’s contributions to the Allied victory in World War II against fascism and militarism. [iv] Undermining the architecture is not in China’s interest: it provides material benefits, enhances Chinese legitimacy, and is not obviously biased against China. For sure, Chinese underrepresentation is an important problem in several areas, such as in the voting rights of the IMF and the representation of Chinese nationals among the personnel of major organizations. However, for the most part, China has more to gain from incremental adjustments of the architecture than from a wholesale redesign.

 

HOW AID WORKS

The AIIB does not alter this basic picture. It is useful to consider some features of contemporary development aid. Development aid is a highly competitive and fragmented policy area. There are at least 28 multilateral international organizations that already specialize in international development akin to the AIIB. [v] In addition, most major economies also engage in bilateral aid through their own aid agencies. These include 29 members of the Development Cooperation Directorate of the Organization for Economic Cooperation and Development and a host of developing countries, including China. To top it off, numerous private foundations and firms participate in development directly or indirectly. On a yearly basis, the ADB and Inter-American Development Bank each disburse the equivalent of about 40 percent of the World Bank’s disbursements. Yearly U.S. bilateral aid is typically on a par with World Bank disbursements.

Aid organizations often work collaboratively, pooling expertise and resources to implement projects. However, competition is also an important feature of contemporary development aid. Donors have numerous channels through which they can give out aid; likewise, potential recipients can receive aid from a wide range of sources. This is particularly true for the rapidly developing countries of Asia, which the AIIB will target.

The competition imposes accountability and places important limits on international aid organizations. A good example is the United Nations Development Program. The UNDP is considered one of the premier international development organizations. It was established in 1966 as a major agency of the United Nations, and it has near-universal membership. However, the agency was created with a decision-making structure that limits the influence of important donor states: following the broader UN principle that each member state should have equal representation, the organization follows a one-country-one-vote rule. Hence, the United States, one of the largest donors to the organization, has the same voting power as Nepal, a major aid recipient.

This means that large donor states feel their interests are not sufficiently reflected in UNDP decision-making. As a consequence, they have effectively shifted their attention elsewhere, depriving the UNDP of resources and forcing the organization to pursue “noncore” arrangements over which it has limited control. The UNDP has faced a chronic shortage of funding: adjusted for inflation, core disbursements by the UNDP peaked in 1981 and have steadily declined to about half those levels.

This type of competition has two implications for the AIIB. First, to remain relevant, aid organizations must be accountable to their stakeholders. If the AIIB is seen as being overly dominated by China, other members will turn their attention elsewhere, depriving the organization of resources, attention, and skilled staff. There is no plausible scenario under which the AIIB could supplant existing organizations such as the World Bank and ADB unless the organization suitably reflects the concerns and interests of the broader international community.

Second, maintaining governance and accountability standards in development aid is already extremely difficult, particularly when dealing with relatively successful developing countries that can pick and choose from a wide range of multilateral, bilateral, and private financing sources. For this reason, the entry of the AIIB as an additional funding source in Asia is unlikely to make a significant difference in social and environmental standards. If China truly seeks to undercut the quality and conditions of existing aid agencies, it can already do so more expediently through bilateral aid and overseas activities of its state-owned enterprises.

INSTITUTIONAL POWER

Many pundits and policymakers see the AIIB in zero-sum terms: if China is successful, the United States and its allies lose. A recent article in the conservative Japanese Sankei newspaper is illustrative, arguing that the AIIB represents China’s attempt to follow Sun-tzu’s teachings to subdue the United States and Japan without engaging in direct combat. [vi] But there is a fundamental problem with this worldview: international institutions are not like military equipment or strategic territory, which makes a country more powerful and potentially threatening.

Multilateral international institutions are fundamentally cooperative arrangements, premised on mutual benefits. On net, the activities of the AIIB are much more likely to bring benefits rather than costs to the United States as well as the broader international community. The most obvious of these is the positive spillover of economic development. China itself is testament to the importance of infrastructure investment for growth. Better infrastructure in Asia will mean more economic activity and business opportunities not only for Chinese firms but also for American, European, and Japanese firms. For sure, some infrastructure can be designed to bring disproportionate benefits to specific countries: for example, roads and pipelines that direct traffic toward China. However, in an age of interconnected markets and global supply chains, it is practically impossible to limit positive spillover effects to a single country.

Multilateralism will also make it more difficult for China to overtly manipulate projects funded by the AIIB. An important reason the United States established multilateral institutions after the end of World War II was to reassure its allies that their voices would be heard and that the United States would not seek unilateral domination. Multilateralism not only enhances but also constrains the ability of powerful states to get what they want. For all the shortcomings of U.S. foreign policymaking since the end of World War II, its emphasis on multilateralism has been a resounding success.

Take trade. Before the 1930s, U.S. trade policy oscillated between openness and closure depending on which political party controlled Congress. The contemporary trade architecture, initially based on the General Agreement on Tariffs and Trade and more recently the World Trade Organization and a host of regional arrangements, prevents such dramatic swings. It also surely benefits U.S. economic interests by maintaining the free flow of international commerce.

The same logic applies to the AIIB. The AIIB will likely give China some important advantages akin to what the United States and Japan enjoy, respectively, in the World Bank and ADB. However, China will also be constrained by other members of the institution. The structural advantages that China enjoys in the AIIB will be beneficial only insofar as other members take the institution seriously and provide funding, skilled staff, and coordination. If the institution is perceived as being unfair or nontransparent, it will become nothing more than a shell organization through which China disburses bilateral foreign aid.

To put it differently, China has a basic choice. It can create an AIIB that is mutually beneficial, reflects the broader concerns of its members, and perhaps modestly overrepresents Chinese interests. If, instead, China seeks to dominate the AIIB, the institution will shrivel into irrelevance. In the former case, U.S. membership in the AIIB will provide an opportunity to influence and shape the trajectory of an institution that will make a meaningful contribution to economic development in Asia. In the latter case, there is no meaningful threat to U.S. interests anyway.

COOPERATIVE CONFLICT

Realist international relations scholars have predicted that China and the United States face inevitable conflict based on the idea that power transitions create turbulence as rising powers seek to assert their newfound authority and status quo powers resist. An optimistic alternative, based on the liberal tradition, predicts a more benign outcome, in which the pacifying effects of economic interdependence, international institutions and norms, and, perhaps one day, democracy will push Beijing and Washington toward cooperation rather than conflict.

Between these two extremes is a third possibility that ought to be taken more seriously: the renegotiation of the world order. To some degree, contestation over international institutions replicates the functions performed by military clashes in prior eras. It shapes geopolitical and economic outcomes, provides markers for relative status among states, and integrates states into groupings that share common values and purposes.

Japan’s emergence in the late twentieth century is illustrative. Scholarly work in the early 1990s predicted confrontation between Japan and the United States as the former emerged as a major economic power. The political scientist Kenneth Waltz, for example, forecasted that Japan would increase its military capabilities and perhaps acquire nuclear weapons as it reemerged as a great power and reasserted its authority. [vii] Others worried that tensions between the United States and Japan could intensify as the latter sought to reestablish its predominant position in the East Asian region. [viii]

For the most part, Japan instead maintained close ties with the United States and focused its diplomatic attention on international institutions as venues for promoting its newfound status and policy prescriptions for the international order. A crucial battleground for competing Japanese and American visions has been international economic institutions. In the World Bank and IMF, Japan sought to achieve greater voting rights and recognition for its economic approach, which has emphasized greater state intervention and a focus on basic infrastructure. Japan also sought to create regional institutions through which it could exercise influence, such as the ADB and the failed Asian Monetary Fund.

Of course, China differs from Japan in many respects, but its proposal for the AIIB is best seen in this light. The AIIB would give China somewhat greater material and ideological influence over multilateral development lending than it currently enjoys. Perhaps equally important, the AIIB can be interpreted as a marker of status and prestige. One could argue that a multilateral development bank is one of the bells and whistles that comes with contemporary great power status: the United States has the World Bank, Japan has the ADB, and the EU has the European Bank for Reconstruction and Development. China will have the AIIB.

The upshot is that the influence and prestige of contemporary international institutions give countries a new avenue through which to gently contest the contours of the world order. There is less of a need to resort to coercion or military conflict. The heart of the matter is this: Does the United States prefer a world in which China seeks to establish its influence and international prestige by building multilateral development banks or one in which it seeks to do so by building aircraft carriers? Pushing back against the former sends the troubling message that the United States is concerned about not just the means but the ends of China’s rise. The AIIB provides an opportunity to acknowledge and applaud China’s emergence as a builder of multilateral institutions and a contributor to global public goods. The institution may very well give China more influence over development in Asia, but it will be a more transparent and accountable way of exerting influence than through bilateral economic or military pressure. The AIIB may or may not ultimately succeed, but it poses very little risk to U.S. and Japanese interests, since it enters a crowded, competitive field of multilateral development agencies. The United States thus has every incentive to encourage, not discourage, Chinese foreign policy initiatives such as the AIIB.

This article was originally published by Foreign Affairs, and has been reproduced here with permission. The article is also accessible on the Foreign Affairs website.

[i] Asian Development Bank and Asian Development Bank Institute, 2009, “Infrastructure for a Seamless Asia,” Manila and Tokyo: Asian Development Bank and Asian Development Bank Institute.

[ii] Naveen Tahilyani, Toshan Tamhane, and Jessica Tan, 2011, “Asia’s $1 trillion infrastructure opportunity,” McKinsey & Company Insights and Publications.

[iii] Kent, Ann. 2007. Beyond Compliance: China, International Organizations, and Global Security. Stanford: Stanford University Press, 45.

[iv] E.g. see http://www.chinaconsulatechicago.org/eng/fyrth/t1072338.htm

[v] See Phillip Y. Lipscy, 2015, “Explaining Institutional Change: Policy Areas, Outside Options, and the Bretton Woods Institutions,” American Journal of Political Science, 59 (2): 341-356, DOI: 10.1111/ajps.12130

[vi] http://www.sankei.com/world/news/150331/wor1503310067-n1.html

[vii] Kenneth Waltz, 1993, “The Emerging Structure of International Politics,” International Security 18(2), 56, 65.

[viii] Miles Kahler and Jeffrey Frankel, 1992, “Introduction,” in Regionalism and Rivalry: Japan and the United States in Pacific Asia, edited by Miles Kahler and Jeffrey Frankel. Chicago: University of Chicago Press, 8.

The White House welcomes Malaysia’s Kleptocrat and Notorious MO1(Malaysian Official No1)


September 5, 2017

The White House welcomes Malaysia’s Kleptocrat and Notorious MO1(Malaysian Official No1) to Washington DC

by John R Malott@www.malaysiakini.com

White House meetings with Malaysian Prime Ministers seldom attract any interest in the US press.

Image result for John Malott

The Whole World except UMNO in Malaysia knows that Prime Minister Najib Razak is MO1. Ambassador Malott says, The Washington Post website has a video that says “Prime Minister Najib, one of Asia’s most controversial leaders, is up to his neck, deep in a massive corruption scandal.”

But the September 12 meeting between President Donald Trump and you, Prime Minister Najib Razak, is very different. The White House announcement of your meeting with Trump led to articles in all of America’s major newspapers – the New York Times, the Wall Street Journal, and the Washington Post. The get-together next Tuesday was also reported around the world by AP, Reuters, and AFP, the world’s three most important news services.

There is no precedent for this much attention to a US-Malaysia summit.

Here is the key point – and the reason why there is so much attention.

All of these important news outlets focused on you, Prime Minister Najib, in their headlines and stories. The Wall Street Journal headline said, “Scandal-struck Malaysian Prime Minister to visit President Trump in Washington.” The New York Times said, “Malaysian leader in billion-dollar scandal is invited to White House.” The Washington Post website has a video that says “Prime Minister Najib, one of Asia’s most controversial leaders, is up to his neck, deep in a massive corruption scandal.”

We know who MO1 is

Image result for Najib Razak I am not a crook

Maybe Najib Razak can convince Donald Trump that he is not a crook. I am sure, however. that the US authorities  would have briefed POTUS on the controversies surrounding the beleagured Malaysian leader and the state of US-Malaysia relations.–Din Merican

Welcome to Washington, Prime Minister. We know who you are, and we know what you and your family members and cronies are alleged to have done. All of the foreign policy experts in our nation’s capital know who “Malaysian Official 1” is.

As a result, there will be intense US press interest in your visit. As I noted before, that is very unusual. You have put Malaysia on the map in the US, but for all the wrong reasons.

If you think this visit is going to help you, at least in the US and the world, you are very wrong. Why? First, because everyone who counts here is aware of the scandals in Malaysia and your involvement in them. The headlines prove that.

Second, because the foreign policy establishment here in Washington is very aware that despite your “liberal” rhetoric and British accent, you have turned Malaysia politically into an authoritarian state, and economically into a kleptocracy. They know that Malaysia is no longer the “go-go” economy that it was in the days of Dr Mahathir Mohamad.

They read that Malaysians themselves now debate whether their beloved country is becoming a “failed state” under your so-called leadership. They know that your government jails opposition leaders, starting with Anwar Ibrahim, charges them with sedition, and revokes their passports.

Third – and this is a point about US politics – the American press is watching Trump like a hawk. They know that he is totally ignorant about foreign affairs. So already the question is being raised – why is Trump meeting with this guy, meaning, you? They are ready to pounce on any comment that Trump makes during your visit.

So your trip to Washington has great potential to backfire not only for Trump, but also for you personally.

Don’t count on Trump

There are many Malaysians who say that the White House meeting means that Trump will tell the Department of Justice ((DOJ) to call off the investigation into 1MDB and the corruption that surrounds it. Baloney. Don’t count on it. Trump cannot even call off the DOJ investigation into himself! So forget that idea.

Second, why would Trump want to do anything for you, Najib? What’s in it for Trump? After all these months, we have learned that the only thing Trump thinks about and cares about, is himself, 24/7. He will never do anything to help you, or anyone else, except mouth some platitudes like, “he is a good guy” and praise your golf score – as long as you lose to him.

Image result for Najib Razak I am not a crook

Trump is likely to raise some issues with you that you are not prepared for. You thought that you were coming to Washington to raise your stature in Malaysia and internationally, and show that all is good before the next general elections. But you are walking into a minefield.

Trump is focused right now on North Korea and the threat it poses to the US, South Korea, and Japan. He is considering secondary sanctions, meaning that countries that trade with North Korea can no longer trade with the US. Think about how much you export to the US.

Malaysia has an economic connection with North Korea that is relatively small, compared to China’s North Korea connection. But there also are “illegal” or “illicit” connections. The United Nations, the Wall Street Journal, and a Washington foreign affairs website called “The Diplomat” all have reported on Malaysia’s economic ties – legal and illegal – to North Korea.

So Najib, be prepared to explain why Malaysian companies continue to bust UN sanctions, and why companies like Glocom, an arms dealer that fronts for the North Koreans, are allowed to operate in Malaysia.

Trump is mad at China, too. He thinks they are not helping the US on North Korea. He thinks that they are cheating us on trade and manipulating their currency. When he finds out that you have been “snuggling up” to China to help get you out of the 1MDB mess, he might not be happy.

Trade deficit

Trump hates trade deficits. His business background is real estate, so he doesn’t understand international trade and investment. So be prepared when he asks about the US trade deficit with Malaysia.

In 2016, Malaysia’s trade surplus with the US – our deficit – was US$25 billion, which basically represents a US$830, or RM3,544, transfer from the people of the United States to every man, woman, and child in Malaysia. Just be ready to explain why you aren’t buying more from us. And why shouldn’t all those American factories and jobs in Penang and Selangor move back to the US?

Just be ready to answer – our President doesn’t understand these things, so you will have to explain it to him.My conclusion – you thought the White House invitation was something great. You thought it would make everything right for you before the next general elections.

But you really are walking into a minefield. There will be more focus on this visit than on any other US-Malaysia visit in history.

No matter what the US and foreign press have to say, I am sure that Bernama and the sycophantic press in Malaysia that you control will declare your visit here a success.

Keep on living in your bubble, and your dream world, Prime Minister. Meanwhile, DOJ and the FBI will keep on investigating.

JOHN R MALOTT is former United States Ambassador to Malaysia (1996-98).