New rules for the Asian Century?

No one now seriously doubts Australia’s interdependency with its Asian neighbours.

Our borders are porous, we are exposed to one another’s risk, and our trade, investment, economic and social development, political stability and regional security depend on mutual cooperation. Increasingly, the flashpoints in Australia’s Asian relationships, for example, are about who sets the rules and standards; who monitors them and how will they be enforced. 

Southern Ocean whaling by Japan, abattoirs in Indonesia, aviation industry standards in Vietnam, food safety in China, corruption in aid delivery in Afghanistan, and treatment of asylum seekers in Malaysia matter acutely to different constituencies in Australia.

In an information-saturated world they become media storms and then political liabilities. But governments are often stymied — these are not the kind of issues that you can legislate away or resolve quickly by reference to contract, bilateral trade agreement terms, or international adjudication. ‘Stop the boats’ is a great political sound bite, but a difficult promise to deliver when human trafficking is a regulatory whirlpool involving multiple public and private actors across so many countries in the region.

How should Australia respond to this kind of regulatory complexity in Asia?

We have a unique opportunity to help build Asia’s regulatory capacity. Australia’s experience of de- and re-regulation over the last 20 years saw it emerge as a world leader in the two dominant approaches to regulation: risk-based regulation and responsive regulation. We have our fair share of regulatory lapses and disasters, but the quality of our public service, our ability to forge effective public–private partnerships and our capacity for innovation in areas such as consumer protection; disaster management; food safety; financial services; healthcare financing; higher education quality and performance; land care; road safety and water management are the envy of many countries. The colonial era of telling people how to manage their own public and private regulation is over; but we have the opportunity to be an effective middle-level player by actively brokering knowledge and norms within the region and by developing new applications for knowledge through partnerships in Asia. Those opportunities will diminish if we fail to match them with accurate understanding of how Asia is changing.

Through the 1980s and 1990s Australia built world class research, training and professional services capacity in the fields of Asian law, economics and politics. In the recent acquisition of most of Australia’s large law firms by UK and US based multinational firms, our regional expertise was what they were buying. Sensibly, much of the recently increased development aid budget is also tagged for governance reform in the region. Where we have stumbled, however, is in translating our evidence-based knowledge of regulation into the professions that export services. To be sure, regulation is a more complex field than law or accounting — managing climate change requires blended knowledge from disciplines as diverse as physics, economics, psychology, anthropology and biology.

Politics is key to regulatory and institutional change in Asia. The essence of responsive regulation is shaping the flow of events to secure outcomes that are inclusive and democracy enhancing, as well as effective and efficient. When Indonesia democratized and decentralized legal authority regional governments were tempted into a regulatory ‘race to the bottom’ in income-producing sectors such as forests and fisheries. While Burma’s military leadership permits elections and raises citizen hopes for a functioning state, its bureaucracy lacks capacity in service delivery, transparency and routine modes of accountability. What role will Australia play? Having influence in these spaces means not simply technocratic knowledge but having credibility that comes from political understanding.

As China’s economy grows, and its outbound investment increases, China seeks to be a standard-maker in areas such as computer software and IT services, intellectual property enforcement, and the supply of Chinese-made products as a condition of Chinese investment. While ratifying a vast number of international treaties, China and its policymakers resist external regulatory actors such as international ratings agencies and NGOs. Just as we saw Japan’s ‘aggressive legalism’ in the 1990s as it actively used the machinery of international trade dispute resolution, we can anticipate that China will pick and choose between — and try to shape — domestic and international rules that help propel its commerce and trade abroad.

Asia should be blanketed in young Australian journalists, diplomats, lawyers, accountants, engineers, architects, aid professionals, police and intelligence officers who are deeply knowledgeable about one or a number of countries and fluent in at least one Asian language. They should be jostling with their Chinese and Japanese and Singaporean counterparts as they develop the interpersonal networks that will influence regulatory decision-making in the region. Where are they? We have plenty of Asia specialists cresting in their careers — a kind of national dividend from the Asia literacy push in the Hawke-Keating era. Within 10 years, however, our comparative advantage in Asian law and in Japanese and Indonesian politics, economics, law and regulation will be gone.

Asian language competence is no longer a national priority. We seem to have regressed from a ‘clever country’ expectation that an educated Australian should be fluent in an Asian (and preferably also a European) language, to a tacit acceptance that monolingualism is the new normal. That comforting, but false, story meshes neatly with choices not to go the hard route of becoming professionally fluent in an Asian language.

Language is not a substitute for knowledge and skills, but it is a tool for acquiring them. How can we understand — much less influence — China’s energy efficiency, Japan’s nuclear industry, Thailand’s political uncertainty, Burma’s healthcare, Indonesia’s human trafficking or Malaysia’s asylum policy without the benefit of deep local knowledge acquired though local languages?

Our regulatory future in Asia is more complex than we currently recognise. The only way to navigate this complexity is to move forward with Asian partners in dialogue and in collaborative shaping of regulatory institutions at the national and international level. A necessary first step in accomplishing this is to ensure that we have a generation of Australian professionals who can — literally — speak their language.

Veronica L. Taylor is Professor, Regulatory Institutions Network (RegNet), and Director, School of Regulation, Justice and Diplomacy, the Australian National University.

This post is part of the series on the Asian Century which feeds into the Australian government White Paper on Australia in the Asian Century.

Indonesia: the East's waking giant

IN the gleaming towers around the Jakarta stock exchange, all is air-conditioned hush, boutiques and coffee shops where young men and women sit tapping at their smartphones. 

Outside, the steaming street life of the city hits as hard as the heat: grim traffic jams, hustling vendors, the haunting call from the minarets, a pall of pollution and legions of police and security guards checking cars for bombs.

Both are the story of Indonesia, 14 years after it ousted its dictator, Suharto, amid street battles, smoke and gunfire that gave way to a turbulent, yet enduring, democracy in the most populous Muslim nation on earth.

"This is a young country with a median age of just 29," said Poltak Hotradero, a research analyst at IDX, the stock exchange operator, "and for teenage kids like my daughter, it's a different country from 1998."

Then the stock market index languished at about 400 and $US1 bought 16,000 rupiah. Today the index is touching record highs of about 4,000 and the dollar buys 9,190 rupiah.

"Even in the bad times, growth was 4 per cent, and now that there is no political turmoil we are growing at 6.5 per cent," said Dandossi Matram, finance director of a state-owned investment company, PT Rajawali Nusantara. "It proved that the minimum growth was 4 per cent. And where did it come from? Consumption. This market is huge."

The lure of a market of 240m people, rich in natural resources, is why David Cameron led a British business delegation here this month.

Alan Richards, chief executive of HSBC in Jakarta, said: "The major themes of the shift in economic power from west to east, south-to- south trade and the rising tigers are perhaps best demonstrated in Indonesia."

The bond markets endorsed that view recently when Indonesia sold $US2billion of 10-year dollar-denominated bonds at a yield of 3.85 per cent in a sale that was three times oversubscribed. That came after the Moody's and Fitch ratings agencies raised the country's status to investment grade.

Indonesia is typical of the "new growth" economies identified in Ruchir Sharma's Breakout Nations: In Search of the Next Economic Miracle.

Foreign investors have found that business success does not come easily in a subtle, complex society where Javanese courtliness masks predatory practices among the elite.

Suharto may have gone to his grave peacefully but his cronies live on. They dominate key sectors of the economy and play by rules set decades ago by a handful of insiders.

The highest profile casualty of this culture clash is Nat Rothschild, the financier.

Rothschild came to inspect the huge coal resources controlled by the Bakrie family, who were wily powerbrokers under Suharto and well known in the Asian markets for their agile financial engineering.

To the amazement of the Jakarta investment community, he struck a deal to bring them to the London stock market in a partnership that was christened Bumi plc.

His stated aim was to acquire stakes in natural resources in emerging markets, improve corporate governance and deliver the credibility of a London listing. It didn't work out that way.
Last week Bumi was dealing with its second share price collapse in six months, which led to the breach of covenants on a $US437m loan to the Bakries.

The company flirted with disaster last northern autumn, when the Bakries avoided a $US1.3bn default by selling part of their stake to a big Indonesian investor, Samin Tan. He replaced Rothschild as co-chairman.

The boardroom battles then became embarrassingly public with the leak of a letter from Rothschild criticising the refinancing of a dollars 600m loan from the China Investment Corporation, which is controlled by the Beijing government.

Some investors felt Rothschild was rather belated in noting that the Bakrie-linked venture traded at a "corporate governance discount" to the rest of the Indonesian coal mining sector.

"It's amazing how stupid arrogant people can be," said John Arnold, founding chairman of the British Chamber of Commerce in Jakarta and a veteran of three decades of blue-chip accountancy and consulting there.

Rothschild may have retired from the spotlight but Aburizal Bakrie, the scion of the dynasty, is heading straight into it: he is campaigning to be president of Indonesia in 2014 at the head of Golkar, the old Suharto political party.

If the Rothschild saga is seen by some in Jakarta as a comedy of errors, most foreign investors agree that what has happened to a small London-listed company, Churchill Mining, is tragic.

Once again, the story involves coal, which has turned into black gold for Indonesia. It is the world's largest exporter of thermal coal, with output this year estimated at 390m tonnes and it sits on 40 per cent of world reserves near to eager customers in China and India.

Churchill thought it had got the rights to develop a site of 135 square miles in Kalimantan, the Indonesian part of Borneo, containing up to 2.8billion tonnes of coal and worth up to $US3bn.

But the company said that when its exploration revealed the extent of the field, the original Indonesian licence holders reappeared on the scene. They are said to include politically well-connected players, including Suharto's son-in-law, Prabowo Subianto.

The local government swiftly awarded them extensions to their licences, setting off a four-year legal battle that ended with defeat for Churchill before the Supreme Court in a hearing that diplomatic observers described as "brief".

Now Churchill's executive chairman, David Quinlivan, is taking Indonesia to an international court of arbitration seeking $US2bn.

The company said it was "a clear-cut example of an asset grab": "Churchill Mining's experience will for a long time serve as a black mark and a stark warning to investors about the risks that continue to exist in Indonesia."

The case was raised by Cameron in talks with President Susilo Bambang Yudhoyono, who has made reform a keynote of his second term in office and who will be the guest of the Queen on a state visit this year.

Corruption scandals have beset the president's party but the former general enjoys a high reputation among Indonesians, although even his political allies say he is indecisive. The government recently backed down on reforms to the country's expensive fuel subsidies after riots and demonstrations.

Companies complain that democracy has not eliminated corruption in Indonesia, merely multiplied the actors as local officials demand a slice of the action.

For investors, the good news is that democratic politics have produced moderate coalitions, isolated Islamic extremists and weathered terrorist attacks.

The bad news is that while businesses are calling for strong leadership, none of the candidates for the 2014 election looks able to deliver it.

All agree that Indonesia desperately needs to invest in infrastructure to replace worn-out roads, ports and airports, to build railways and make its cities more livable.

"If the government succeeds in implementing the infrastructure projects, then in 2020 we are going to be growing by 10 per cent or 11 per cent a year," said Achmad Reza Widjaja, chief economist at PT Bumi Resources, a Bakrie group company.

"The big problem now is the logistics and distribution in a big archipelago country like this," he said, referring to Indonesia's 13,000 islands scattered along the equator.

The key to success, say longtime business people like Arnold, is to get into sectors such as finance, retail and services and to stay away from anything, like resources, which is prey to local rent-seekers.

Kosmian Pudjiadi, a property developer, declared: "I am optimistic. In Indonesia, you can't use standard economic theory. The biggest demand is in the middle income sector. In our last development, only 5 per cent of the buyers had mortgages."
by: MICHAEL SHERIDAN From: The Australian

Warning Points to Dark Storm Clouds Over India’s Economy

New Delhi. India’s economic star is fading fast as a spluttering economy and reform paralysis put the country’s prized investment-grade rating at risk and spook foreign investors.

The latest bad news came on Wednesday when Standard & Poor’s cut India’s credit outlook to negative, saying the nation’s investment grade rating faced a one-in-three chance of being downgraded to junk. It isolated “political gridlock” as a key factor behind the warning.

But with Premier Manmohan Singh’s unruly coalition hobbled by graft scandals and infighting, analysts are deeply skeptical the Congress-led government can set the economy right.

Nobody should “hold their breath for a born-again government,” said Rajeev Malik, an economist at CLSA Asia-Pacific Markets in Singapore.

“Coming from the most conservative of the rating agencies, it’s a wake-up call for the government to do something meaningful soon,” he said of the S&P announcement. But given government “policy paralysis,” the situation “is unlikely to change substantially,” he added.

In 2007 S&P raised India’s credit rating to BBB-, the lowest investment grade, a landmark that allowed the country to tap new sources of capital by clearing the way for global funds to invest in New Delhi’s debt.

But now “there’s at least a one-in-three chance we may move the rating down in the next 24 months” if “growth prospects diminish” or reforms remain stalled, S&P credit analyst Takahira Ogawa said.

Growth in Asian rival China is also slowing, but ratings agencies have kept their outlook on Beijing’s A ratings positive thanks to its strong fiscal position.

Investors have been waiting for India to reduce the role of the state, ease red tape on business and open its doors wider to foreign investment.

But elections are due within two years and Kotak Mahindra Bank economist Indranil Pan said that “given the political scenario, any big-ticket reforms will be difficult.”

Stubborn inflation is also likely to keep interest rates high, weighing on growth.

A sovereign credit downgrade to junk status would force India to pay higher interest rates on international borrowings and discourage foreign investment urgently needed to upgrade its shabby roads, ports and other infrastructure.

Until recently, the country of 1.2 billion people was a must-have in foreign investor portfolios. But interest has waned with investors jittery about graft and policy U-turns, as well as infrastructure bottlenecks and slowing growth.

The economy grew by 6.9 percent in the last fiscal year, while the fiscal deficit was a record 5.9 percent of gross domestic product and the trade deficit was up by 57 percent.

New plans to impose capital gains tax liabilities for foreign firms have also disheartened investors.

The new US ambassador to India, Nancy Powell, told a business audience in New Delhi on Friday that curbs on foreign investment and other policies had caused “significant concern and dampen sentiment about India’s investment climate.”

Ratings agency Moody’s has kept its outlook stable for India.

But Moody’s Analytics economist Glenn Levine said the government did not have the “leaders to push through tough-minded reforms needed to drive the next wave of growth.”

Even before the S&P warning, foreign portfolio investment was showing a net outflow. Direct investment is also sluggish while traders expect the rupee to hit new lifetime lows against the dollar in coming months.

Some see a return to junk status as inevitable.

“India has no light on the horizon,” Cyrus Daruwala, managing director at IDC Financial Insights, told CNBC.

Finance Minister Pranab Mukherjee said the government was “confident of overcoming difficulties” and “there is no need for panic.”

At the same time, he has repeatedly said he should not be blamed if he is unable to boost the economy, citing “the political situation on the ground.”

Agence France-Presse

Political shenanigans in Mongolia-Steppe in an ugly direction

A former president is detained ahead of elections, threatening stability

POLITICS in Mongolia has been rough-and-tumble since 1990, when the country escaped Soviet domination to become a vibrant if imperfect democracy. But when scores of security forces raided the home of a former president, Nambariin Enkhbayar, and detained him over what officials call a serious case of corruption, politics took a new and ugly turn.

Police first confronted Mr Enkhbayar on April 12th as he returned to his home in the capital, Ulaanbaatar. Witnesses say police broke his car window and assaulted his government bodyguard, but Mr Enkhbayar managed to enter his house. Supporters rushed to the site, and police staked the place out before forcing their way in and taking him away early the next morning. Many watched this live on television.

The raid has aroused two reactions in the public. One is surprise at the high degree of force deployed in the raid and the low degree of decorum afforded to a former leader taken away barefoot and with a bag over his head. The other is the belief that the case has more to do with rabidly partisan politics than corruption. Most of Mongolia’s top officials, Mr Enkhbayar included, are widely thought to have enriched themselves through their power and their oversight of the country’s lucrative mining industry. Yet the vaguely described particulars of Mr Enkhbayar’s supposed crime—alleged irregularities in the privatisation of a small hotel and a local newspaper—strike many as unconvincing. Luvsandenvev Sumati of Sant Maral, a polling firm, says that if authorities were serious about fighting corruption, they would pursue bigger wrongs. The move against Mr Enkhbayar, he says, was both clumsy and politically motivated.

The timing is fraught. Parliamentary elections take place in late June. Last year Mr Enkhbayar left the parliament’s majority party, descendant of the former Communists, to form a splinter party of his own. His son, Batshugar Enkhbayar, says his father had already persuaded six or seven members of parliament to switch.

Mr Enkhbayar senior has also earned the enmity of President Tsakhiagiin Elbegdorj of the Democratic Party and the first president who was not once a Communist. On the day of the raid, Mr Enkhbayar had released internal government documents finding Mr Elbegdorj responsible for inciting deadly violence that erupted after the last parliamentary elections, in 2008.

The timing is poor for other reasons, too. After huge foreign investment in mining, government revenues are set to bulge. It presents the government with both the opportunity to deal with inequality and poverty, and the task of avoiding the “resource curse” that has afflicted other developing countries. Investors and the IMF had seen Mongolia as a darling among emerging markets. That image suddenly looks fragile. The Economist