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Japan’s North Korea challenge in 2020

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Author: Naoko Aoki, RAND

North Korea began 2020 by announcing a shift toward a more hardline foreign policy approach, declaring that it was no longer bound by the moratorium on nuclear and long-range missile tests it has maintained for two years. While it is bad news for all countries in the region, it is particularly unwelcome for Japan, as it faces possible North Korean missile launches in its vicinity as it prepares to host the 2020 Summer Olympic and Paralympic Games in Tokyo.

A projectile is fired during North Korea's missile tests in this undated picture released by North Korea's Central News Agency (KCNA) on 28 November 2019 (Photo: KCNA via Reuters).

A logical step for Japan to deal with this problem is to closely coordinate its policies with its ally, the United States and its neighbour, South Korea. But this cooperation is facing obstacles, with more challenges possibly on the way.

North Korea hardened its position after almost two years of diplomacy with the United States failed to produce the results it wanted. As the prospects of diplomacy dimmed last year, North Korea began expressing its displeasure by testing short- and medium-range ballistic missiles. The test of its new submarine-launched ballistic missile landed in Japan’s Exclusive Economic Zone (EEZ) last October — the first one to do so in two years.

When Japanese Prime Minister Shinzo Abe criticised one of North Korea’s tests last November — calling it a ballistic missile test rather than a large multiple rocket launcher test as the country alleged it was — North Korea lashed out and warned that Abe ‘may see what a real ballistic missile is in the not distant future and under his nose’.

Japan’s options are now limited, with diplomacy between the United States and North Korea stalled and no sign that North Korea will accept an offer by Abe to hold a bilateral summit without preconditions to solve their many disputes. Chief among their disputes is North Korea’s Cold War kidnappings of Japanese citizens. The abduction issue continues to plague diplomatic relations between the two countries. Japan needs to strengthen bilateral policy coordination with the United States and South Korea, as well as trilateral cooperation among the countries to deal with North Korea’s belligerence.

But some aspects of these partnerships are showing signs of strain at a time when Japan needs cooperation. The first sign is that relations between Japan and South Korea — which are often uneasy at best — deteriorated even further last year to their lowest level in decades. Abe met with South Korean President Moon Jae-in in China last month for the first time in over a year. But the two countries have yet to find a way to manage their bitter economic and historical disputes, and put their relationship on a more solid footing.

In addition, South Korea and the United States are struggling to agree on how much South Korea should pay for US troops stationed in the country, after the United States asked for a significant increase in funds. The results of these talks will almost certainly affect Japan, who is already sensitive to any possibility of a reduction in US military capability in South Korea that affects the ability to deter North Korea.

The negotiations are also important for Japan because the country will be holding its own talks with the United States this year about host nation support for US troops stationed in Japan, ahead of the expiration of the Special Measures Agreement in March 2021. Japan’s relations with the United States remain strong, undergirded by Abe’s cordial personal ties with US President Donald Trump. But Abe will face the challenge of dealing with Trump’s forceful demands for an increase in host nation support.

The tensions among the United States, Japan and South Korea work to North Korea’s advantage. North Korea has a history of exploiting differences between the United States and its allies, and such cleavages make it easier for North Korea to take aggressive actions without consequences, including provocative weapons tests. If North Korea launches more missiles into Japan’s EEZ but they do not elicit strong objections from the United States and South Korea, then North Korea could become emboldened to do so again.

There is much that is beyond Japan’s control, but there are steps that it can take to try de-escalate tensions. It could show a stronger commitment to improving relations with South Korea through public statements and high-level talks. In addition to continuing the dialogue with South Korea to try resolve some of their differences, Japan could also try to carve out space for working-level military cooperation with South Korea that is out of the limelight and insulated from politics as much as possible.

Whether North Korea will begin flight-testing missiles in earnest remains to be seen. While policy coordination among Japan, the United States and South Korea may not prevent North Korea from doing so, Japan’s best shot at dealing with North Korea would be to seek a unified approach with the two other countries.

Naoko Aoki is an Adjunct Political Scientist at the RAND Corporation.



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Korean Peninsula peace prospects unravelling in 2020

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Author: Charles K Armstrong, Columbia University

After US President Donald Trump’s ‘fire and fury’ threats of late 2017 gave way to summit diplomacy in early 2018, the prospects for peace on the Korean Peninsula looked bright. But by the end of 2019 these hopes had dimmed, and as 2020 dawns, peace prospects appear to be unravelling altogether.

North Korean leader Kim Jong Un speaks during the Third Enlarged Meeting of the Seventh Central Military Commission (CMC) of the Workers' Party of Korea (WPK) in this undated photo released on 21 December 2019 by North Korea's Korean Central News Agency (KCNA) (Photo: Reuters).

A confluence of factors suggested that the dangerous confrontation between the two Koreas, and between North Korea and the United States, might have been significantly eased. Factors include a progressive government in South Korea reaching out to the North, a young leader in North Korea focussed on strengthening his country’s economy and a disruptive US president motivated to discuss directly with the North Korean leader. While there is still a chance the Korean peace process can be rescued, the coming year is more likely to see a return to the standoff that has defined the Korean Peninsula for the past 70 years.

As 2019 progressed, North Korean leader Kim Jong-un made clear his government’s growing impatience with the lack of concessions from the United States — particularly in sanctions relief — following the historic 2018 Kim–Trump Singapore summit. Last April, Kim told the Supreme People’s Assembly, North Korea’s legislative body, that the United States had until the end of the year to make a ‘courageous decision’ to change its relationship with Pyongyang. This presumably meant lifting at least some sanctions and dropping its ‘hostile policy’ towards North Korea.

Then at the fifth plenary session of the seventh Central Committee of the Korean Workers’ Party held at the end of last year, Kim laid out a ‘new path’ for North Korea that offered little hope for improved US–North Korea relations in the near term. Kim declared an end to North Korea’s self-imposed moratorium on long-range missile and nuclear tests that has been in place since 2017.

Despite ominous threats of a ‘Christmas gift’ to the United States, the end of 2019 came and went without any particular provocation from North Korea. Still, Kim promised a ‘new strategic weapon’. At the plenary session on 31 December, Kim declared that, ‘We should never dream that the United States and other hostile forces would leave us to live in peace, but make a breakthrough head-on on the strength of self-reliance to tide over the difficulties lying in the way of the advance of our socialist construction’.

Meanwhile the Trump administration insisted that the door to diplomacy remains open. Trump told reporters that he believed Kim was ‘a man of his word’ and would honour the Singapore Declaration’s promise of denuclearisation. But the United States did little to move forward on rapprochement with Pyongyang. If anything, sanctions are stronger at the beginning of this year than they had been two years earlier.

As with Iran, the Trump policy towards North Korea has long been one of ‘maximum pressure’. But North Korea faces a policy of ‘maximum pressure and engagement’, while Iran has been treated with all-round hostility, culminating so far with the targeted killing of top Iranian General Qasem Soleimani on 3 January in Baghdad. It remains to be seen how Soleimani’s death will affect North Korea, but it is safe to say that the drone strike will not inspire confidence in America’s peaceful intentions. It certainly will not reduce Pyongyang’s desire to maintain a nuclear deterrent against potential threats from the United States.

Trump may not be inclined toward any major foreign policy initiatives in 2020, particularly while he focuses on his re-election campaign and more immediately on his impeachment trial. Trump has already received domestic criticism for not getting any substantial concessions on denuclearisation from Pyongyang despite the spectacle of three summit meetings with Kim. Reaching out again to North Korea may not help Trump’s re-election prospects.

South Korean President Moon Jae-in, who effectively initiated the inter-Korean peace process by inviting North Korean participation at the 2018 Pyeongchang Winter Olympics, remains officially upbeat about Seoul–Pyongyang relations. In his 2020 New Year address, Moon repeated his longstanding invitation for Kim to visit Seoul. With US–North Korea relations stalled, South Korea is trying to engage with Pyongyang unilaterally — calling for family reunions, economic exchange and tourist visits to the North, among other initiatives. But besides their potential violation of UN sanctions, these recent proposals for inter-Korean cooperation have been met with indifference and even disdain from the North Koreans — who prefer to deal with the United States directly.  Also, like Trump, Moon will be preoccupied with domestic matters over the coming months, including a shaky economy and National Assembly elections in April.

The Korean peace process has reached an impasse. For all its strong words, North Korea is unlikely to engage in a dramatic provocation such as a new nuclear test, as that might be a step too far for China and Russia, on whom Pyongyang relies for economic and political support. Emphasising once again its longstanding slogan of ‘self-reliance’, North Korea will remain inward looking and relatively cautious for now. What lies ahead is likely neither an explosive conflict nor a breakthrough to peace, but a return to the status quo ante of Korea’s never-ending Cold War.

Charles K Armstrong is Professor of Korean studies at Colombia University.



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Greater US efforts in supporting Vietnamese Agent Orange victims

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Author: Xuan Dung Phan, Tokyo International University

The lack of formal acknowledgment by the United States of the plight of Agent Orange victims is a hurdle to post-war US–Vietnam reconciliation. But a recent victim-centred approach introduced by the United States Agency for International Development (USAID) offers some hope for change.

Diem Trong Toan, 41, who officials said was exposed to Agent Orange, talks with his mother, Nguyen Thi Y, at his house in Bac Ninh province, Vietnam, 8 August 2018 (Photo: Reuters/Kham).During the Vietnam War, the United States sprayed 11–12 million gallons of dioxin-contaminated Agent Orange to deprive the enemy of food and forest concealment. In areas that were sprayed, dioxin has permeated through the soil and water, resulting in ecological damage and harmful effects to human health. As of 2019, Hanoi claims that roughly 4.8 million victims suffered from dioxin-related conditions, including cancer and deformities, among other physical and neurological problems. There is mounting concern about the transgenerational transmission of health problems to children of later generations.

But Washington does not assume legal liability for Agent Orange victims. Still, strengthening USVietnam ties have paved the way for greater US involvement in addressing this war remnant. The United States has sponsored environmental remediation of dioxin contamination projects and provides millions of dollars each year through USAID to fund health and disability services in provinces heavily affected by the defoliant.

Many still feel that the United States has done little to reconcile with the victims and recognise their suffering. In 2008, a US court dismissed a 2004 class action lawsuit by Vietnamese victims against corporations that produced the chemical, citing insufficient causal links. Meanwhile, the US Department of Veterans Affairs dispenses billions of dollars in compensation and other benefits to Vietnam War veterans who suffer from diseases linked to Agent Orange exposure.

Controversies concerning the legal aspect have worsened recently as US courts ruled that herbicides from Monsanto, a company that produced Agent Orange during the war, are responsible for causing cancers — an assertion that the US judges rejected in the 2004 lawsuit. Last year, there were two such cases where Monsanto was asked to pay millions of dollars to American plaintiffs.

Hanoi claims that Monsanto should also be held liable for the health damage caused by Agent Orange in Vietnam. There is growing scepticism among victims regarding Washington’s commitment to come to terms with its past. The Vietnam Association for Victims of Agent Orange (VAVA) has repeatedly voiced its dissatisfaction with the lack of recognition of Vietnamese victims’ grievances.

Continued progress is still possible because judicial mechanisms are not the only means to demonstrate contrition and make amends. The United States has taken steps towards a victim-centred response that could empower affected families.

In April, USAID signed a memorandum of intent with the Office of the Standing Board for the National Committee on the Settlement of Post-War Unexploded Ordnance and Toxic Chemical Consequences (Office 701) to support people with disabilities in provinces affected by Agent Orange. The following month, USAID helped Office 701 to collect field information to better understand the needs of affected individuals and to develop constructive intervention plans.

In December USAID announced a grant to fund activities to increase the quality of life of people with disabilities in these provinces. Among the beneficiaries are Agent Orange victims, their families and VAVA members.

Unlike existing USAID funds that mainly support capacity building and improving medical infrastructure, this is the first time a direct assistance provision has been included. This is a milestone in the reconciliation process. USAID will work with local NGOs to provide ‘hospital-based/home-based rehabilitation, palliative care, home modifications, training, personal assistance services and assistive products’, among other forms of support.

Pledging direct assistance can be seen as a move by the United States to secure an emerging partner as part of its Indo-Pacific strategy, but it should also be recognised as a powerful gesture of reconciliation built upon an understanding of the victims’ needs. While criminal justice is an important concern for the victims and their families, improving quality of life is an urgent priority.

Many affected families lack the financial capacity to pursue victims’ rights and compensation claims. The Vietnamese government provides monthly stipends to these families but the payments are far from enough to sustain decent living conditions, let alone cover healthcare services.

The new USAID fund is an appropriate form of material compensation to help redress the lingering health effects associated with Agent Orange. Hanoi is likely to welcome similar efforts from Washington to ease the financial burden of medical treatments for affected families. Direct assistance programs and other ongoing dioxin remediation activities serve as indirect recognition of the victims’ grievances.

Although Washington’s recent reconciliation efforts still eschew legal redress, they represent a nascent victim-centred response that is essential for accepting responsibility and healing the wounds of war. Moving forward, we can expect more collaborations between US and Vietnamese authorities and NGOs in addressing the most visible legacy of the Vietnam War.

Xuan Dung Phan is a research student of international relations at Tokyo International University.



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ASEAN’s RCEP and sustainability challenges and achievements

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Author: Kaewkamol Pitakdumrongkit, RSIS

As the end of 2019 drew near, Thailand hosted two ASEAN summits under the theme ‘Advancing Partnership for Sustainability’. Looking at how the meetings unfolded, one may ask: what were ASEAN’s major economic achievements in 2019? And what key challenges remain for 2020?ASEAN Secretary General Lim Jock Hoi delivers his speech at the ASEAN Secretariat in Jakarta, Indonesia, 10 January 2020 (Photo: Reuters/Ajeng Dinar Ulfiana).

Last year ASEAN made important economic gains in trade and sustainable development. The biggest trade accomplishment was the conclusion of negotiations for the Regional Comprehensive Economic Partnership (RCEP) in November by 15 nations — 10 ASEAN member states and five ASEAN dialogue partners (Australia, China, Japan, New Zealand and South Korea). According to the Joint Leaders’ Statement at the third RCEP Summit, the 15 members ‘concluded text-based negotiations for all 20 chapters and essentially all their market access issues; and tasked legal scrubbing by them to commence for signing in 2020’.

Although faced with some criticism, the conclusion of RCEP was a success.

First, while critics assert that RCEP is not as ambitious as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the former is a ‘living document’ whose details and quality can improve over time. The deal will provide firms with greater market access, enhancing transnational production networks and thereby enabling consumers to enjoy a broader range of goods.

Second, India’s absence from the agreement should not be seen as a failure because the door has been left ajar to join in future. Even without India, the agreement is set to be signed this year, making RCEP the world’s biggest trading bloc by both population and economic weight. Still, the pact will be smaller than envisaged — it will create a combined market of 2.2 billion people (down from 3.6 billion) and will account for 29 per cent (down from 33 per cent) of the world’s GDP.

Third, the conclusion of RCEP will restore market confidence to its 15 signatory countries, including the 10 ASEAN members. It showed the market that these economies will band together against the backdrop of rising uncertainties and escalating US–China tensions.

Fourth, RCEP enables ASEAN to inch closer to completing the ASEAN Economic Community 2025 (AEC 2025) — an economic integration project among 10 Southeast Asian countries. RCEP will help these states better integrate into the world’s economy and achieve a ‘Global ASEAN’. This is one of AEC 2025’s objectives.

ASEAN’s also made great strides in promoting sustainable development in 2019. Last year, ASEAN members agreed to launch the ASEAN Centre for Sustainable Development Studies and Dialogue (ACSDSD), aimed at facilitating collaboration on sustainable development between ASEAN and its development partners. ACSDSD can augment ASEAN leadership in promoting international collaboration on sustainable development by providing a platform for ASEAN to bring together various stakeholders to exchange their views on the issue. The Centre will help ASEAN to meet the United Nations’ Sustainable Development Goals by 2030.

Despite these accomplishments, ASEAN still has challenges to face in 2020. The first concerns India’s participation in RCEP. Indian involvement in RCEP would not only expand the combined regional market but also strengthen regional transnational services supply chains. In short, as services increasingly take up a greater share of the global economy, the bloc would grant Indian services firms access to larger markets. This will enable businesses in other RCEP countries to work with Indian firms to bolster their region’s competitiveness in services trade.

Strong domestic opposition in India means this is easier said than done. Many fear that the agreement will lead to import surges, which they argue could exacerbate India’s US$105 billion trade deficit, undermine domestic farmers and industries and crush the ‘Make in India’ initiative.

Second, RCEP will not render ASEAN states immune from the impacts of US–China rivalry. On 15 January, Washington and Beijing inked the ‘phase one’ agreement, in which the former would not impose or reduce tariffs on still swathes of Chinese products while the latter would selectively eliminate tariffs on some US products to meet purchase requirements of US goods. However, this arrangement does not address Chinese government subsidies given to state-owned enterprises and increased US restrictions on Chinese investment. As a result, 2020 may witness continued clashing between these states emerging from these issues. The two powers are also competing on many fronts, including over technology. The transformative effect that 5G will have on future productivity means this competition is likely to persist in the long-term.

Regardless of who wins the 2020 US presidential election, Washington is unlikely to back down on 5G contestation. Neither will Beijing due to the ‘Made in China 2025’ initiative — President Xi’s signature project. Launched in 2015, the scheme seeks to gain the upper hand in innovative technologies to transform the country into a manufacturing powerhouse, enabling China to dominate the high-tech sector.

Escalating technology competition between China and the United States does not bode well for ASEAN nations, as it could entail the bifurcation of 5G networks. Regional states may be forced to choose their 5G system and thereby take a side.

Regarding sustainable development, significant challenges remains. ASEAN’s leadership on sustainable development will hinge on how effective the ACSDSD can be in facilitating cooperation between ASEAN and non-ASEAN entities. To achieve this, ASEAN can learn from its past involvement in coordinating committees such as the ASEAN Coordinating Committee on Connectivity and the ASEAN Coordinating Centre for Humanitarian Assistance on Disaster Management.

Given that sustainable development is multi-faceted and cross-sectoral, achieving such leadership will be a challenge. To ensure projects do not lead to debt unsustainability or environmental degradation, the Centre must work with the ASEAN+3 Macroeconomic Research Office (AMRO) and the ASEAN Working Group on Nature Conservation and Biodiversity respectively.

The jury is still out on the degree to which the ACSDSD can successfully pool resources from and facilitate cooperation among dissimilar stakeholders. But ASEAN’s success in handling difficult negotiations such as RCEP over the past year suggests that further big achievements can and should be pursued.

Kaewkamol Pitakdumrongkit is Deputy Head and Assistant Professor at the Centre for Multilateralism Studies, S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.

This article is part of an EAF special feature series on 2019 in review and the year ahead.



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Pushing through India’s economic slowdown

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Author: Raghbendra Jha, ANU

After two years of very robust growth, the Indian economy has begun to slow — and quite sharply. The economy grew at 6.8 per cent in 2018–19. The RBI forecasts it will grow at about 5 per cent in 2019–20, while the IMF’s forecast of 7 per cent for the 2020 calendar year is more sanguine. Quarterly growth rates have been slowing for six quarters and stood at 4.5 per cent during the second quarter of 2019–20.

Migrant labourers sit on a handcart as they wait for work at a wholesale market in the old quarters of Delhi, India, 10 October, 2019 (Photo: Reuters/Siddiqui).

With growth rates averaging 7.5 per cent over the past five years, an obvious explanation for the economic slowdown is the possible overheating of the economy and high base year effects. But given that inflation has been moderate during this period, this explanation is incomplete.

A more robust explanation is a shortfall in demand. While government expenditure has expanded considerably, private expenditure (particularly private investment) has been slipping. A powerful explanation for the shortfall is the accumulation of non-performing assets (NPAs) in the Indian banking sector, as well as the policy reaction to address the build-up. In the 2019 fiscal year, the value of NPAs in the Indian banking sector was Rs 1.8 trillion (US$25.3 billion), much more than Rs 9.3 billion (US$130.8 million) in 2017.

Credit growth was squeezed and private investment started to drop. In September 2019, India’s investment rate was 29.7 per cent of its nominal GDP, coming off peaks of more than 34 per cent at the height of the country’s growth boom. Drop-in credit adversely affected businesses, including the critical micro, small and medium enterprises which provide the bulk of India’s formal sector employment. In the very short run, CPI inflation has strayed outside the RBI’s preferred interest rate band but is still below the limit of 6 per cent. The RBI has indicated that its monetary policy stance will remain accommodative.

Policy has reacted expeditiously to these developments. Provision for coverage of NPAs rose from 48.3 per cent of NPAs to 60.6 per cent by March 2019. This has increased the resilience of the banking sector. Concurrently, greater oversight and disciplining of non-banking financial corporations (NBFCs) have brought better performance to this sector. Asset quality concerns have ensured that NBFCs incur higher borrowing costs.

In its June 2019 Financial Stability Report, the RBI indicated that credit growth in the banking sector has picked up. It attributes the growth to several reforms, including legislative measures such as the Bankruptcy Act, enhanced diligence in the provision of bank credit, further capitalisation of some banks and the merger of others. The RBI has cut the standard repo rate repeatedly, which now stands at 5.15 per cent.

RBI governor Shaktikanta Das has indicated that the worst of the liquidity crunch is over and private sector investment is increasing. Foreign direct investment has remained buoyant, rising by 28 per cent between April and June 2019. The current account balance has remained between 2 to 3 per cent of GDP. In other words, the Indian economy’s macroeconomic fundamentals remain strong.

But exports have fallen in light of the global economic slowdown and the US–China trade war, while sluggish domestic growth has reduced import growth. In August 2019, the Finance Minister announced a series of measures designed to stimulate the economy including tax cuts on the super-rich and on corporate profits. In total, the stimulus package was worth US$20 billion.

It is widely expected that the first regular budget of Prime Minister Narendra Modi’s second term, which will be delivered in February 2020, will contain further stimulative measures. This might mean that the government misses its fiscal deficit target by a small margin.

India has moved up 14 places in the World Bank’s Ease of Doing Business ranking to 63rd among 190 nations. Still, it failed to achieve the government’s target of 50th place. Despite substantial progress, India still lags in areas such as enforcing contracts and registering property. It takes 58 days and costs on average 7.8 per cent of a property’s value to register it.

India has declined to join the recently concluded Regional Comprehensive Economic Partnership (RCEP). A government rationale was that the short-term adjustment costs associated with joining RCEP were too high in light of the country’s weak social safety nets.

Even so, health indicators in India are improving steadily which augurs well for future productivity gains. The Modi government’s flagship program, Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana — touted as the world’s largest government-funded healthcare programme — crossed the mark in June of 5 million people treated. Free secondary and tertiary treatment valued at Rs 79 billion (US$1.1 billion) has taken place in the various state and union territories where the program has been implemented.

The Indian economy is gradually recovering from a period of slowdown. Growth prospects look promising for 2020 and beyond. Both monetary and fiscal policy are stimulative and GST collections during November and December have improved substantially, indicating a pick-up in business activity. Steady structural reforms are creating conditions for an improvement in labour productivity. India has set a target of becoming a US$5 trillion economy by 2024–25. Still, given the current slowdown, further productivity gains and stimulative measures will be needed to attain this goal.

Raghbendra Jha is Professor of Economics at the Crawford School of Public Policy, The Australian National University.

This article is part of an EAF special feature series on 2019 in review and the year ahead.



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The case for a Taiwan sovereign wealth fund

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Author: Shaokai Fan, Tufts

Taiwan needs to address a glaring gap in its financial toolkit — the absence of a sovereign wealth fund (SWF).

A Taiwan dollar note is seen in this illustration photo, 31 May 2017 (Photo: Reuters/Thomas White).

An SWF brings not just the potential for higher financial returns but also an opportunity to broaden Taiwan’s visibility as its international presence grows ever marginalised. An SWF has been explored before without any substantial progress. Conservative policymaking and lingering fears of the corruption that characterised the pre-democracy era stymied the idea for decades. Despite this, Taiwan has already centralised several of its large public funds under the Bureau of Labor Funds. The traditional vehicle to an SWF — reallocating part of Taiwan’s massive foreign exchange reserves — is not yet in motion.

Among the Asian Tiger economies, Taiwan is the only country that has not reallocated part of its reserves beyond low-risk instruments. Hong Kong has placed part of its reserves into a separate portfolio while South Korea and Singapore have both established distinct SWFs.

Taiwan’s reserves are the sixth largest in the world, totalling US$462 billion in 2018. This massive stockpile is disproportionately large compared to its peers. Taiwan’s reserves could cover nearly 19.5 months of imports, significantly higher than the coverage ratios of South Korea (seven months) and Singapore (five months).

Taiwan’s enormous reserves are partially a product of its exclusion from international financial arrangements. Taiwan cannot rely on either the IMF or the Chiang Mai Initiative during a financial shock. Yet Taiwan still has ample room to move some of its reserves into an SWF. Carving out 10 per cent of the reserves would only reduce import cover to 17.5 months while giving Taiwan a US$46 billion SWF, larger than the Brunei Investment Authority.

Apart from reserves, Taiwan has other public funds which can be managed under an SWF to streamline costs and improve efficiency. The Canadian province of Alberta operates a similar model through the Alberta Investment Management Corporation where several disparate public funds are managed through one government investment manager.

Taiwan has a similar assortment of funds, including the funds managed by the Bureau of Labor Funds, along with the Public Service Pension Fund and the National Stabilization Fund. These funds have a combined asset size of US$190 billion. If this is consolidated with a 25 per cent reallocation of reserves, the resulting fund would total over US$305 billion, giving Taiwan a formidable SWF that approaches Qatar’s QIA in size.

An SWF provides several potential benefits. The potential for higher returns is perhaps the most obvious. Given Taiwan’s ageing population and generous social system, the potential to tap into greater returns to meet future needs is indeed alluring. The indirect benefits of a SWF represent considerable value for Taiwan as well. A major SWF can deepen the financial sector and generate network effects, growing Taiwan’s appeal for the retinue of bankers, lawyers and other professionals that revolve around such funds. This would expand the opportunities available in Taiwan and help to combat the brain drain facing the country.

Perhaps the most tantalising benefit for Taiwan is global visibility. A major fund immediately puts Taiwan on the map for international bankers and investors. An SWF could join organisations like the International Forum for Sovereign Wealth Funds (IFSWF) where statehood is not a prerequisite. A fund could also give Taiwan a voice in shaping the global investment agenda. In short, an SWF could amplify Taiwan’s soft power in an arena that is less constrained by political restrictions.

Resistance to an SWF centres on fears of corruption, mismanagement and political interference. Indeed, many countries have wrestled with these concerns when establishing their funds as well, resulting in the adoption of the Santiago Principles as a paradigm for SWF governance. The Principles specifically outline best governance practices and have been ratified by all members of the IFSWF. A Taiwan SWF should endorse these principles and commit to maximum transparency of its practices and operations.

Oversight through independent board members and third-party monitoring can add an additional layer of separation. Independent hiring practices can be established to ensure that employees are selected through merit alone. Furthermore, potential entanglement with domestic economic and political stakeholders can be minimised through an offshore-only investment mandate. These measures can give Taiwan a fund that adheres to world-class standards of governance.

Only an SWF of sufficient scale could unlock the benefits described above. Mobilising Taiwan’s massive foreign exchange reserves would be the logical starting point for this endeavour, but the assortment of other funding sources described represent additional ways to magnify the fund’s firepower.

As President Tsai Ing-wen begins her second term, her government should strongly consider both the financial possibilities and the wide-ranging intangible benefits that an SWF can bring. Improving returns is always attractive but the ability to boost Taiwan’s visibility on the world stage is a benefit that Taiwan cannot ignore.

Shaokai Fan is a Research Affiliate with the SovereigNet program at Tufts University.



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Thailand’s plastic bag ban is an overdue step towards pragmatism

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Author: Tim Forsyth, LSE

Thailand recently took an important step towards environmental protection when 75 leading retailers stopped issuing plastic bags to shoppers. This step continues a campaign started by environmentalists and local governments in Thailand to reduce urban waste and pollution. The long-term plan is to ban all single-use plastics by 2021.

A woman uses a shopping bag after the government's ban of single-use plastic, at a shopping center in Bangkok, Thailand, 2 January 2020 (Photo: REUTERS/ Soe Zeya Tun).

Thai newspapers have shown customers responding in good faith to the ban. Many are taking wheelbarrows and buckets to supermarkets, and others are re-using sacks made for transporting sugar and rice.

But critics ask why it has taken so long. The first bans of lightweight plastic bags took place in Bangladesh and India in 2002. China banned lightweight bags in 2008. And Thailand’s role in producing plastic waste has been known for years.

A recent article in Science shows that, in terms of national averages, Thailand is the world’s 6th largest dumper of plastic. Adjusting these figures for coastal populations and coral reefs, Thailand leads the world. According to the article, Thais and visitors to Thailand will — knowingly or otherwise — throw some 8.9 million plastic items into sewers and canals by 2025, resulting in more than half a million tonnes of waste in the Gulf of Thailand and Andaman Sea. Recent news stories in Thailand have reported occasions of animals, including a deer and baby dugong, dying from eating plastic bags. Despite its late arrival, the new plastic ban is a welcome and pragmatic step.

Yet too often, attempts at regulating plastic use are wrapped up in the consumerism they seek to control. From 2008–2010, shops in Bangkok started a temporary craze of selling reusable bags with the words ‘global warming’ on them. Meanwhile, supermarkets in central Bangkok remain icily air-conditioned and their products overly packaged. Bangkok’s annual carbon use has risen from some 7 tonnes per person in 2005 to nearly 11 tonnes today. This is higher than London, New York City and Tokyo (but about the same as Beijing). It is also more than twice Thailand’s national carbon average of nearly 4 tonnes per person.

Governments have often supported these trends. In 2012, first-time car buyers received tax breaks, choking Thailand’s already crowded streets by an additional half a million cars.

One factor impeding long-term environmental planning is Thailand’s chaotic politics and military coups. But military coups and failing democracy have also shaped environmentalism itself. Like other countries, Thailand’s environmentalism reflects broader worries about the impact of growth on social order and tradition. Much historic environmentalism in Thailand focussed on fears about lost wilderness and heritage. Colourful paintings on the walls of schools and public buildings often show images of bucolic rural landscapes or threatened wildlife that present the ‘environment’ as something remote from cities.

Another theme in local environmentalism is the Sufficiency Economy Philosophy promoted by the late King Bhumibol, who ruled Thailand for 70 years until his death in 2016. Sufficiency economy presents a mode of living that urges moderation and tradition. It is promoted widely in Thailand by official sources. But the US embassy once described it — in emails exposed by Wikileaks — as ‘vague and malleable’, popular only because of a ‘public reluctance to criticise anything associated with the revered King’.

Despite these limitations, environmentalism in Thailand has served an important purpose in harnessing opposition to military governments. The last military government of 2014–19 banned public gatherings of more than five people and curbed other forms of dissent. Yet, in 2018, more than 1000 people gathered in Thailand’s northern capital of Chiang Mai to protest against a government luxury housing project on forested land near the revered national park and Buddhist temple of Doi Suthep. Ironically, a similar proposal was made and criticised during 1980–90 by the prime minister deposed by the military in 2006, Thaksin Shinawatra. One of Thailand’s earliest environmental controversies was opposition to a proposed cable car on Doi Suthep in the 1960s.

Environmentalism has its strongest legitimacy in the public eye when it opposes what is seen as state corruption and where it involves national heritage and wilderness. So, a consequence of this pattern is that popular environmentalism might only be effective on selected topics, and that necessary restrictions on other topics such as plastics are ignored.

Thailand’s new ban on plastic bags is a sign that environmental policies are becoming more effective. But there are many more steps to take. The ban needs to be enforced and extended. Climate change policy needs to adopt more efficient and renewable sources of energy. Replacing fossil fuels with technologies such as hydrogen cells and solar panels are priorities for public transport and home heating, and so are addressing excessive packaging and air conditioning.

What is needed is a root-and-branch rethinking of environmental priorities and an awareness that much popular environmentalism tends to romanticise Thailand’s past rather than think pragmatically about its future.

Tim Forsyth is Professor of Environment and Development in the Department of International Development, LSE.



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ASIAN (H)

Challenges for Malaysia’s meandering economy

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Author: Shankaran Nambiar, Malaysian Institute of Economic Research

The Malaysian economy seemed to be in a state of suspension in 2019. While observers expected a burst of economic activity in line with the promises made during Pakatan Harapan’s ascent to power in 2018, the year delivered little terms of economic growth.

A worker goes about his day at a construction site in Kuala Lumpur, Malaysia, October 10, 2019. Picture taken 10 October, 2019 (Photo: Reuters/Teng).

In fact, the third quarter of 2019 offered a disappointing 4.4 per cent GDP growth. The year as a whole is expected to chalk up no more than 4.6 per cent growth for Malaysia. By comparison the ADB forecasts that other ASEAN countries will do better — Indonesia with 5.1 per cent, and 6 per cent and 6.9 per cent for the Philippines and Vietnam respectively. These countries are of course at a lower stage of economic development, but the comparison is a reminder that Malaysia is not the sole attractor of trade and investment in Southeast Asia.

The Malaysian stock market is performing poorly, as is the Malaysian ringgit when compared to early 2018 when the US dollar traded for around RM3.86. But that may not be the fairest of comparisons since the anxieties surrounding the US–China trade war were not at their height then. Early in 2019, the ringgit was stronger against the US dollar, marking around RM4.05 to the dollar. From August to October, a US dollar traded for slightly above RM4.17, touching RM4.11 in December. Tensions due to the trade war seem to have impacted the ringgit.

Still, trade did very well. Malaysia’s trade surplus from January to September increased by 15.3 per cent and amounted to RM100.9 billion (US$24.7 billion). During the same period in 2018, the trade surplus was only RM87 billion (US$21 billion). The trade surplus for October was just as strong, surpassing that of the previous year.

The US–China trade war occupied considerable space in local debates. Commentators generally felt that the trade war would benefit Malaysia if prolonged, though not as much as Vietnam since Malaysia cannot compete based on cost structure. The restructuring of global value chains and the relocation of investment was also expected to work in Malaysia’s favour.

This was seemingly backed by empirical evidence, not least the fact that FDI approvals across all sectors rose to RM49.5 billion (US$12.1 billion) in the first half of 2019, representing a 97.2 per cent increase from RM25.1 billion (US$6.1 billion) in the same period last year. The manufacturing sector was a significant beneficiary — FDI rose by 74.2 per cent to RM33.1 billion (US$8 billion) in that sector (compared to RM19.0 billion or US$4.6 billion in 2018).

The United States was the biggest source of approved manufacturing FDI (RM11.7 billion or US$2.9 billion), followed by China (RM4.8 billion or US$1.2 billion), Singapore (RM3.1 billion or US$800,000) and Japan (RM2.1 billion or US$500,000).

While there are several bright spots on the horizon, all is not well with confidence in the Malaysian economy. The Vistage–MIER CEO Confidence Index for the last quarter of 2019 closed at 85.3, falling to a four-year low. Almost half the respondents felt the economy had worsened in recent months. The CEO Confidence Index represents a slice of the business environment, largely capturing the sentiment of CEOs of small and medium-sized businesses, who make up 80 per cent of its members.

The index for current economic conditions stands at 63 points — indicating CEOs’ lack of confidence in the prevailing economic circumstances. There is no doubt that the previous government — under former prime minister Najib Razak — created several serious problems, high debt being the primary issue. Blame should be given where due, but to wallow in blame does not boost confidence — nor does it address the sense that there is a lack of forward guidance from the current government.

Besides, there has been a cycle of industrialisation projects since the 1990s, including the subsidised national car project and other heavy industrialisation projects, many of which have not been successful commercially.

This has ignited demands for a sterner set of evaluative criteria that make it difficult to unquestioningly receive the Third National Car Project, the rollout of 5G technology and IR4.0 — a government initiative aimed at helping businesses grapple with transformative technologies. While cynicism about the economy and state-backed economic projects is not the most positive reception, it carries a healthy scepticism that cannot be disregarded by policymakers.

There is further scepticism about projects such as IR4.0 and 5G because they are supposedly forward looking. It is not clear if the government understands the implications of the fourth industrial revolution and what it means for small and medium-sized enterprises. Many companies may have not fully realised the potentialities of the third industrial revolution, nor do they have the resources or willingness to invest in research and development.

The same is the case with 5G, where companies may not be fully utilising existing 4G infrastructure and lack the requisite expertise to utilise 5G technology. Statements about using 5G for distance surgery in rural areas may be precocious at this stage due to uncertain levels of technical expertise among surgeons and facilities in these locations.

Old questions regarding the high cost of living, the affordability of housing, healthcare financing, the state of education and the need for upskilling also remain unanswered. These questions, as well as broader concerns about the economy, will need answering if Malaysia is to improve its economic standing at home and in the region.

Dr Shankaran Nambiar is a Senior Research Fellow at the Malaysian Institute of Economic Research. He is author of the recently published book, ‘Malaysia: At the Edge of Transformation’.

This article is part of an EAF special feature series on 2019 in review and the year ahead.



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Pakistan’s hybrid ‘civilian–military’ government weakens democracy

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Author: Ayesha Siddiqa, SOAS

Pakistan enters 2020 slouched under the burden of a weak democracy with a strong military, a tense neighbourhood and a geopolitical environment under pressure from US–China great power rivalry. With political instability and a plummeting economy weakening, the civilian government’s dependence on the military has grown. Pakistan also faces deteriorating relations with India and amid growing concerns regarding US hostilities with neighbouring Iran blowing into its territory

Paramilitary soldiers stand guard outside the Supreme Court building in Islamabad, Pakistan, 29 January 2019 (Photo: REUTERS/Saiyna Bashir).

In 2018, Pakistan elected Prime Minister Imran Khan. But last year, instead of stabilising his government, the Prime Minister tried to crack the accountability whip on his political opponents. Leaders of both opposition parties, Mian Nawaz Sharif of the Pakistan Muslim League-Nawaz (PML-N) and Asif Ali Zardari of the Pakistan People’s Party were incarcerated alongside several other party leaders. The government arrested a prominent PML-N leader, Rana Sanaullah, under trumped-up charges of narcotics smuggling. This generated strong resentment in Punjab province, the country’s heartland.

But speculation that the displeasure would reverberate on the streets was not realised. People did not even protest the price hikes of basic utilities and food, which indicates the impact of decades of patronage politics that has systematically weakened politics in the country. The second half of last year saw a plummeting economy and rising inflation. But patronage politics deprived people of their capacity to protest and conduct political movements. An exciting exception was the student solidarity march, a disjointed movement of left-leaning students across the country.

Khan tried to bring temporary economic relief by seeking cash from Pakistan’s new benefactor China and traditional partners like the United States. Through the China–Pakistan Economic Corridor (CPEC) agreement signed in 2015, Beijing is expected to invest approximately US$ 61 billion in various projects in the country. However, the investment seems to have slowed after the 2018 change of government in Pakistan due to Islamabad’s hesitation over the cost of various projects. More importantly, Khan’s government wanted China to provide cash. Ultimately, Pakistan’s Prime Minister received conditions-laden relief of US$6 billion from the International Monetary Fund. But the inability to strengthen the economy made the government appear shaky.

Its weakness made it more dependent on the military. Pakistan’s Chief of Army Staff General Qamar Javed Bajwa held meetings with agriculturists and businessmen to convince them to pay taxes and increase exports, indicating a new form of politics where the civilian government is directly controlled by the armed forces.

Last August, Khan’s political dependency on Bajwa became more apparent when he extended the Army Chief’s tenure. The order lacked legality and became highly controversial, resulting in a court case. On 28 November, the Supreme Court ruled to extend Bajwa’s tenure by six months and ordered the Parliament to formulate new rules in the Army Act and the 1973 Constitution for the process.

Ultimately, Bajwa got the three-year extension he desired by successfully manipulating political parties that have weakened due to years of poor political direction. Pakistan’s political parties have weakened to the point where they must negotiate timidly for short-term personal benefits rather than long-term political dividends.

Bajwa’s continuation will further weaken Pakistan’s democratic institutions, as his team have adopted harsh measures to tame the judiciary and media. Restrictions were placed on the media to not air news outside of that recommended by the military’s public relations agency. In early December 2019, a group of militants threatened violence against the main English-language newspaper Dawn. The Army has a history of using militant groups in threatening political opponents with mob violence. These actions indicate that despite fighting several wars against Islamist terrorists, the military has not abandoned its traditional approach of using militants.

In late 2019 even the Taliban surfaced in some of the tribal agencies. From the military’s perspective this may be necessary to convince the Taliban to negotiate with the United States.

In July the Khan–Bajwa team undertook a successful tour of the United States. Despite not securing a promise of needed cash from Washington, the trip helped restart a conversation between the two states. This was certainly an improvement from 2018 when US President Donald Trump angrily tweeted about Pakistan, soliciting a response from Khan.

Bajwa received a 21-gun salute upon his arrival at the Pentagon and was present during most discussions with the US President, indicating Washington’s support of his extended tenure. The two countries have much to negotiate, from US troop withdrawal in Afghanistan to reducing Pakistan’s dependency on China. But 2019 was an interesting year with Pakistan’s hybrid ‘civilian–military’ government trying to balance both its relationships with China and the United States.

Pakistan has also struggled to stay out of the Iran–Saudi Arabia cold war. Close relations with Riyadh stymied the military’s ability to signal its neutrality to Iran despite Khan and Bajwa both visiting Tehran last year.

Relations with India also worsened in 2019, with the terrorist attack in Indian-administered Kashmir killing about 40 paramilitary personnel. India accused Pakistan-based group Jaish-e-Mohammed of the attack and responded by bombing an alleged terrorist training site in Balakot, Pakistan. The military exchange that followed lowered the threshold for conflict on both sides of the border. With Delhi’s hardening stance towards terror attacks, compounded with deepening religious conservatism in India, especially drastic changes in its citizenship laws targeting Muslims, South Asia has become a region to watch for escalation in 2020.

A limited war would not bode well for either India or Pakistan. It would certainly not be good for Pakistan, given that it struggled last year to portray itself as a safe tourist destination. A good network of highways, partly built with Chinese help and money, and aggressive advertisement may help. But much depends on political, economic and social stability — three areas where the country has miles to travel before it can regain confidence.

Ayesha Siddiqa is a Research Associate at the South Asia Institute and the Centre for International Studies and Diplomacy (CISD), SOAS University of London.

This article is part of an EAF special feature series on 2019 in review and the year ahead.



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