Tuesday, February 28, 2017

The Myths And Realities Of Doing Business In China

The Myths And Realities Of Doing Business In China

Who ships made-in-China goods to their destinations? What attracts a Chinese company to buy bankrupt businesses in the West? How much potential does Chinese tourism and domestic consumption hold for other economies?

While China’s emergence as a global powerhouse and its stream of exports were once seen as threats, nowadays they are increasingly welcomed as opportunities for the world economy. This is according to the latest book by Pedro Nueno, IESE professor and founder and president of Asia’s leading business management school, CEIBS, based in Shanghai.

Nueno’s book — titled Gracias, China (Thank you, China) — offers some keys to doing business in the world’s most populous country, including how to make investments there and better understand the economy’s vast potential.

In this work, Nueno finds a lot to be grateful for: the Asian giant’s ability to generate new jobs never ceases to amaze, not to mention its technological contributions, trade routes, and increasingly strong health and tourism sectors.

Is Business Done Differently in China?

For the author, a truly successful business deal isn’t one in which the other party accepts our ideas and helps implement them, but instead one in which the other party proposes how to reach results we’re after. This, he maintains, makes it hard to forge deals via email or by coming to the negotiating table with a fixed plan.

“In China, you’ve got to negotiate like you would anywhere else, with intelligence, humility and respect,” states Nueno. Yet the author points out that, unlike in Europe or the United States, China has experienced rapid development which has brought on enormous changes in a short time.

This rapid pace of change is one reason why deals may be mired in more detail, or why negotiations may slow down or seem stagnant: our Chinese business partners don’t have the benefit of drawing upon years and years of similar experiences as they ponder a deal’s possible consequences.

Opening the Door to Foreign Investment

The Chinese government has imposed some rigid regulations to control the expansion of Western businesses in certain sectors. The auto industry offers the clearest example, as foreign companies must find a Chinese partner before gaining access to the local market. Yet in most other areas, including the car parts industry, foreign corporations are allowed to invest independently.

To boost the development of industrial areas, the government has also provided incentives and benefits — including infrastructure, services and funding. For example, free-trade zones, in which bureaucracy and restrictions are reduced, help facilitate new projects. And business start-up zones provide adequate locations (often subsidized) as well as access to venture capital from Chinese and Western investors.

Many Areas of Interest

China is offers a vast array of opportunities, both inside and outside its borders, as Nueno highlights throughout the book:

  • Exports. Although Chinese manufacturing has meant displacing some Western jobs, its exports have also created new employment opportunities in transporting and commercializing made-in-China products. What’s more, foreign companies can fulfil their manufacturing needs at a lower cost in China, with access to more sophisticated technology and less need for labor.

  • Imports. Where do Chinese companies source raw materials and parts? What manufacturing machinery do they use? In many cases, the items are imported.

  • Domestic consumption. Salaries in China have risen considerably over the last decade. That has turned its domestic market into a growing source of opportunity for Western enterprises.

  • Financing. Exports have bolstered the Chinese government’s foreign exchange reserves, allowing it to sign agreements (often backed by loans) with governments from various developing countries in Africa, Latin America, Eastern Europe and Western Asia.

  • Investments abroad. Many businesses have grown thanks to Chinese investment, despite initial reservations. Following Volvo’s acquisition by the Chinese firm Geely, the carmaker increased its production in both China and Europe — and generated 10,000 new jobs from 2011 to 2015.

  • The Two Silk Roads. China has revived the Silk Road by rail, inaugurating a route between Yiwu and Madrid in 2015. Maritime transportation has also been boosted with port facilities and the necessary logistics to reach Western markets by sea.

  • Chinese tourism. The Chinese government’s efforts to extend economic development to all rungs of society has gradually created a middle class eager to travel and acquire designer brands along the way.

  • Health and education. China’s interest in high-level training and private healthcare have prompted most business schools and healthcare enterprises to establish themselves there.
Gracias, China is a book about the recent past, present and future of the Asian giant seemingly on its way to becoming the world’s largest economy. It may happen sooner rather than later, as the author predicts a significant influx of Chinese businesses moving overseas by 2020. By IESE Insight

India's 'misadventure' in Sri Lanka

India's 'misadventure' in Sri Lanka

For almost three decades, India has been accused of conducting a “misadventure” in Sri Lanka, sending thousands of soldiers for peace-keeping, where it got thrashed diplomatically, and at home, politically.

Worse — it had to leave the island nation with 1,138 soldiers killed and 2,762 wounded without getting close to resolving the ethnic strife between the majority Sinhalas and minority Tamils.

Worst — Prime Minister Rajiv Gandhi, who had signed the July 1987 peace deal with Sri Lankan President J.R. Jayewardene (JRJ), was assassinated by Liberation Tigers of Tamil Eelam (LTTE) cadres in May 1991.

Rajiv’s daughter has forgiven the lady convicted for the assassination. It is poignant, but has not left any player in the imbroglio wiser.

The killing, masterminded by LTTE chief Vellupillai Prabakaran, who was killed in a Sri Lankan military operation in 2009, had more than a symbolic impact. It ended the popular support Tamil militants had enjoyed in Tamil Nadu and remains confined to fringe groups.

The Gandhi-Jayawardane Agreement carried JRJ’s promise of the devolution of powers to the Tamil minority and recognition of Tamil as an official language. It envisaged military assistance that took the shape of Indian Peace Keeping Force (IPKF) for operations against LTTE in northern and eastern Sri Lanka.

It was a difficult, unconventional war waged against an insurgent group, trained, at one stage, in India, with connections in Tamil Nadu.

New Delhi’s vague articulation of its military intervention in support of the accord triggered an emotional backlash in both countries.

With soldiers caught in a thankless conflict in one of the world’s densest tropical jungles, the politicians and diplomats who committed India to it became unpopular.

Conducted between 1987 and 1990, they earned Rajiv much opprobrium. He meant well and, perhaps, even JRJ did. But, it was clear that JRJ had got the better end of the bargain that he breached under pressure.

India felt cheated when his successor, Ranasinghe Premadasa, joined hands with LTTE to send IPKF out before they could complete their job.

The accord got sidelined. Political leaders opposing it assumed power in both countries around the same time. The Lankan Tamils, who had put their faith in it, were in limbo. LTTE strengthened to fight on till it was crushed in 2009. Reconciliation remains a mirage.

Documents declassified last month by the United States’s Central Intelligence Agency (CIA) confirm what is agreed. JRJ had told US president Ronald Reagan’s envoy Peter Galbraith that he was “forced” to sign the pact because his armed forces twice refused to “take Jaffna”.

“…IPKF and the Sri Lankan forces are getting on well together, and… the situation in Jaffna, while still far from normal, is gradually improving,” Galbraith said in his assessment sent to Reagan. Things changed later.

The documents indicate Americans promoted rapprochement between Rajiv and JRJ, persuading the latter who had been unhappy about Indians training LTTE cadres.

Did they help wily JRJ use a politically inexperienced Rajiv to pull his chestnuts out of fire?

In the evening of the cold war, many viewed India with suspicion after its role in the 1971 birth of Bangladesh. A brief intervention in the Maldives in 1988 strengthened these perceptions. Its navy was seen as nursing “blue water ambitions”.

A reassessment, even some soul-searching, is on among Indians, some of whom had played key roles in those events.

In his book Perilous Interventions, retired Indian diplomat Hardeep Singh Puri, who served in Colombo between 1984 and 1988, during the run-up to the accord and its implementation, blames both the international community and the United Nations for “looking the other way” at crucial moments during the crisis.

Taking an objective, even critical view of the Indian intervention, Puri, however, stresses: “In retrospect, the mistreatment of the Tamils was, in the first instance, responsible for the outside intervention. A problem with linguistic rights transformed into one of minority rights and developed into militancy, inviting intervention from across the Palk Strait.”

Commodore (Rtd.) Ranjit Rai, Naval Intelligence director at the relevant time, says the botched operations would require in-depth study of the objectives and whether they were achieved, if it aimed to obtain greater autonomy for Lankan Tamils, to relieve pressure on them, or fight LTTE to maintain Sri Lanka’s integrity and to prevent foreign interference in India’s neighbourhood.

Like most analysts, Rai thinks Indira Gandhi, in her time, viewed the Tamils’ issue quite differently from Rajiv, and had avoided getting involved directly. But, it is also true, as Puri points out; Rajiv inherited his mother’s legacy of Indians training LTTE. The difficult course correction Rajiv attempted went haywire.

Sri Lanka events in the second half of the 1980s rank among the five most significant foreign policy decisions India made in recent decades. Former foreign secretary and National Security Advisor Shivshankar Menon, in his book Choices: Inside the Making of India’s Foreign Policy, terms that “choice” between “bad and less bad”.

As Stephen P. Cohen writes in his blurb to Menon’s book, critics may feel “anyone can do it, and can do it better than the government — but the reality is that India was never spoilt for choices”.

Puri stresses that, “Colombo itself ensures that the rights of the Tamil citizens are constitutionally guaranteed, and they are shown the respect and dignity all Sri Lankans get”.

For any Indian role in future, he warns: “Working at cross-purposes, as would appear to have been the case for several decades, will create problems for Sri Lanka and India.”

New Straits Times

Freeport vs Indonesia: In defense of public welfare

From its inception in Indonesia, Freeport’s primeval priority has always been securing the continuity of its mining operation, not swindling the investorstate dispute settlement system to reverse the course of a nation’s legislation and extract billions of dollars.

Over the course of the saga of US mining giant Freeport versus the Indonesian government, both sides have made tit-for-tat threats to take the protracted dispute to international arbitration. The critical question we have to ask is whether international arbitration constitutes the most appropriate mechanism available for reaching the best solutions for both parties.

Illustrating the arbitration, the center of gravity of the first stage will focus on the question of whether the arbitral tribunal has jurisdiction over the breach of contract allegedly committed by Indonesia. This issue stems from the government’s issuance of a new regulation requiring mining companies wishing to continue exporting copper concentrates to terminate their Contract of Work (CoW) and convert them into a special mining license (IUPK).

In the business sphere, foreign investors employ techniques to protect their investments from the risk of legal uncertainty. One of them is signing a contract with the host state. However, despite Freeport’s investment being protected by the CoW, this protection is not powerful enough due to the fact that is not covered by the Bilateral Investment Treaty, under which the second layer of investment protections are usually placed. Another reason is because the CoW designates Indonesian laws as the governing law, rather than international law.

These factors consequently delimit Freeport’s ability to dress up the claim of breach of contract as a breach of treaty under the umbrella clause. This is an advantage for Indonesia as it is generally accepted that a breach of contract per se by the host state does not give rise to direct international responsibility. It could dissuade the arbitral tribunal to accept jurisdiction over the case.

Nonetheless, since the arbitration system lacks predictability and proliferates a heterogeneity of interpretations, Freeport will likely delocalize the contract by referring to customary international law and like-minded arbitration awards.

The subsequent stage will involve “judging” the government’s attitudes toward Freeport’s investment. This is when, on one axis, the host government asserts its right to make a bona fide legal change to advance its public interests, but on the other, the investor deems such change as a deprivation of its investment.

Its analysis devolves into two frontlines. The first line will find the answer to a question whether the government’s unilateral act to terminate the CoW and oblige the divestment of 51 percent may constitute creeping and partial expropriation (indirect expropriation) under customary international law and national law.

Such expropriation may be interpreted not only restrictively as taking solely the property and titles thereof but also indirectly involving near-total deprivation of an investment.

However, it is generally believed in international law that such regulatory taking is justifiable if it is designed to protect a legitimate public welfare objective, is nondiscriminatory, proportionate or includes compensation.

Theoretically, a state cannot bind itself not to amend its laws in the future as such power is an inherent part of sovereignty. Giving up that power will mean surrendering its status as a sovereign state. A state contract, treaty or customary international law can constrain, but never remove the legislative authority of a state.

This pro-state approach shapes international arbitration, as since 2000 there has been a consistent trend in favor of differentiating justifiable regulatory taking called “police powers” and indirect expropriation. Indonesia, in this case, is exercising the former, not the later.

The second frontline will possibly revolve around the analysis of whether the Indonesian government’s change of regulatory taking that allegedly eviscerates Freeport’s investment may breach fair and equitable treatment (FET) under customary international law. Ordinarily, an arbitral tribunal employs transparency, stability and a legitimate expectations test in probing the FET standard.

The stability and predictability of legal and business frameworks are indispensable for foreign investors. Such a climate is sustained if the host state can furnish transparent, stable and predictable regulations governing the foreign investor’s investment.

Transparency and stable in this sense refer to circumstances that allow the foreign investor to be cognizant beforehand about any regulation and goal that will govern its investments. Meanwhile, the legitimate expectations cannot be construed that the state will “freeze” the legal framework, but rather investors must be protected from “unreasonable” modifications of that legal framework. This suggests that the government still reserves policy spaces.

In a plethora of arbitrations, modifications in the legal framework for foreign investment are driven by the fact that foreign investment sometimes takes a disproportionate share of national resources, and with reasonable elucidation, it is defeasible for the government to correct the situation through regulatory intervention in advancing local and national development. FET standard hedges this state’s right in a way that it does not substantially decapitate foreign investor’s businesses.

If we look the development of regulatory footings that govern the mining industry in Indonesia, it adduces axiomatic evidence that they do not infringe the FET standard. The Indonesian government has been exercising its regulatory power with transparency as it allows all mining companies to be aware of every one of the government’s regulatory changes by enabling the aggrieved parties to negotiate.

In the new regulation, the government does not dispossess the legality of Freeport’s operation, but provide a fully-fledged license as a “passport” to constantly export its product. It means the new mining industry regulation is predictable, indiscriminate and within the corridor of law and good faith.

Indonesia’s recourse to change the mining regime in defense of public interests is in line with international law, but it is not riskfree. When Indonesia is “sued” in international arbitration, the paucity of Freeport’s investment protections at the international level and the major “pro-state” interpretations that are starting to shape current arbitration cases will put Freeport under the upper-hand of the government.

Undoubtedly, international arbitration will clarify some legal puzzles and render an enforced award for the losing party. But, the economic, political, social, security and diplomatic costs prior, during and post that process may be cataclysmic for both sides.

From its inception in Indonesia, Freeport’s primeval priority has always been securing the continuity of its mining operation, not swindling the investorstate dispute settlement system to reverse the course of a nation’s legislation and extract billions of dollars. For now, let see how that priority works over the next 120 days.

The writerDimas Kuncoro Jati   is a member of Young International Arbitration Group (YIAG) based in London and LLM candidate in international dispute resolution at The Dickson Poon School of Law.


How to manage geopolitical instability in East Asia


How can we craft approaches to ensure regional stability and prosperity into the future?

The fate of East Asia has been significantly affected by relations between the three big powers — the United States, China and Japan. The United States has played an active role as an offshore balancer in the region, particularly under US President Barack Obama through his administration’s ‘pivot to Asia’. That concept included the Trans-Pacific Partnership (TPP) as the crucial economic pillar, US entry into the East Asia Summit, increased military engagement in the region, and the idea of conducting Sino–US relations by ‘managing differences and expanding cooperation’. Geopolitical stability in East Asia looked promising thanks to these devolpments under Obama and active support from Japan.

Donald Trump’s win in the US presidential election surprised the region. It is difficult to know precisely what the Trump administration will do. But it appears Trump is following through on his ‘America First’ approach to foreign policy and this may have spill over effects for Trump’s East Asia policy.

While it is too early to judge the Trump administration’s China policy, it appears that the United States will take a more confrontational approach toward China in the economic arena. This is underscored by the appointment of China hardliner Peter Navarro as the director of the National Trade Council and the nomination of Robert Lighthizer as US Trade Representative.

Today, China’s trade surplus with the United States accounts for about 50 per cent of the overall US trade deficit. But if the United States applies strong pressure on China, as it did on Japan in the 1980s, it will probably lead to Chinese countermeasures, which would likely result in a trade war. That outcome would be detrimental to the region.

A US–China ‘grand bargain’ may not be impossible. For China, any damage to the prospects of its high economic growth would be unwelcome. And if a grand bargain restrains aggressive Chinese behaviour in the South China Sea and East China Sea, it should be welcomed by the region.

We face many great challenges as we seek to manage geopolitical instability in East Asia. The best approach may be to pursue multilayered functional cooperation. This means starting with functions. Find those countries that have a common interest in enhancing functional cooperation on a particular issue. Different areas may require different coalitions for effective outcomes — for instance trade arrangements, financial cooperation for infrastructure investment, regional confidence-building measures, and cooperation on environmental and energy issues.

On trade arrangements, there are a number of mega-regional trade initiatives currently under discussion, such as the TPP, the Regional Comprehensive Economic Partnership agreement (RCEP), and the China–Japan–South Korea (CJK) trilateral free trade negotiations. While the Trump administration has withdrawn the United States from the TPP, the remaining 11 members might work to see what is possible among themselves. The RCEP and a CJK FTA could help to fill some of the gaps left by the TPP. But the bigger aim should be to realise a Free Trade Area of the Asia Pacific (FTAAP). Other trade initiatives should all be utilised as stepping-stones toward the establishment of an FTAAP.

On financial cooperation and infrastructure investment, we have seen the emergence of the Asian Infrastructure Investment Bank (AIIB) led by China. This is a positive development for the region given the huge demand for infrastructure investment. It is disappointing that Japan and the United States have not engaged with the AIIB. Both countries should do more to proactively engage in the creation of infrastructure in the region.

One way this can be achieved is through the establishment of a mechanism to coordinate cooperation between the AIIB and other institutions such as the Asian Development Bank and the IMF. Such coordination is critical to ensure that investment in infrastructure provides the best possible development gains for the region as a whole.

Greater confidence building among the five powers in Northeast Asia — the United States, China, Russia, Japan and South Korea — is sorely needed in order to de-escalate tensions, defuse nationalism and build relations rooted in win–win cooperation. Confidence building should initially focus on the low-hanging fruit of non-traditional security issues. This should include the joint establishment of concrete mechanisms for reporting on, preventing, and responding to natural disasters, major industrial accidents, acts of terrorism, and cyber-attacks. It should also include a commitment to nuclear non-proliferation. While these steps may be hard to envision based on what we have seen from the Trump administration so far, operational-level cooperation that is already underway in the region can gradually be expanded to realise easy wins.

There is a pressing need to tackle environmental and energy issues. Over the coming decades, the demand for energy will continue to grow exponentially, particularly in Asia’s emerging economies with expanding middle classes, such as China, India, and ASEAN nations. Regional cooperation —including joint efforts in areas such as energy exploration, the development of new extraction technologies, and the strengthening of nuclear safety measures—is needed to ensure that the energy demands of all nations are met. At the same time, the unabated use of fossil fuels will cause environmental damage detrimental to sustainable economic growth and poverty reduction, not to mention the planet. Intensive cooperation among nations for jointly funded and developed green energy technologies is sorely needed. The East Asia Summit and other regional forums should take up these issues in a more serious manner.

The Trump administration includes a number of climate change deniers while Trump himself has referred to climate change as a ‘hoax.’ Friends and allies of the United States will need to emphasise the importance of environmental and energy cooperation in their dealings with the Trump administration.

Managing geopolitical instability in East Asia will not be an easy task. There are understandably great concerns around the region regarding the uncertainties that the Trump administration brings. America’s friends and allies will need to cooperate, coordinate, and strive to make their views clearly heard on the importance of regional cooperation. The interconnected nature of global and regional challenges means that win-win cooperation is necessary more than ever. But given the nature of the globalised world we live in and the technological possibilities available to us, the potential for win-win cooperation is also greater than ever. Through multi-layered functional cooperation, we can manage geo-political instability in East Asia and safeguard shared regional peace and prosperity into the future.

Hitoshi Tanaka is a senior fellow at JCIE and chairman of the Institute for International Strategy at the Japan Research Institute, Ltd. He previously served as Japan’s deputy minister for foreign affairs.


Suu Kyi falls short of great expectations - Many in Myanmar expected miracles when Aung San Suu Kyi's elected government took office after decades of military misrule. The political reality has been more prosaic

Suu Kyi falls short of great expectations - Many in Myanmar expected miracles when Aung San Suu Kyi's elected government took office after decades of military misrule. The political reality has been more prosaic


Myanmar State Counselor Aung San Suu Kyi attends an event marking the 69th anniversary of Martyrs' Day at the Martyrs' Mausoleum dedicated to the fallen independence heroes in Yangon July 19, 2016

Myanmar’s first genuinely democratically elected government in more than half a century is barely a year old but a growing sense of disappointment is already apparent even among the ruling National League for Democracy (NLD) party’s most avid supporters.

In a February 26 speech at a memorial ceremony for the party’s fallen top lawyer, Ko Ni, de facto national leader Aung San Suu Kyi must have sensed the letdown as she appealed to those gathered for patience. At the event, Suu Kyi underlined that her elected government was formed after decades of military rule and that change would take time. “Ten months or a year is not much,” she said. “This is just a short period.”

With her peace process stuck, her political and economic reforms stalled, and international criticism mounting against military rights abuses in ethnic areas across the country, how much time does Suu Kyi and her NLD really have to put their democratic agenda back on track?

Domestically, Suu Kyi has been roundly criticized for mishandling a peace process with the country’s many ethnic armed groups which the previous military-dominated, quasi-civilian government initiated in 2011. Rather than a new approach, Suu Kyi has so far done little more than urge armed groups to sign an elaborate – and many say confusing – ceasefire agreement drawn up under the supervision of the previous military-dominated regime.

Internationally, her perceived as callous attitude towards the suffering of the Muslim Rohingya minority in western Myanmar has come under severe scrutiny, as United Nations investigators and human rights organizations have documented serious human rights violations committed by the Myanmar army in the remote area. Nor is the economy doing particularly well, with foreign investment commitments down and poverty as widespread as ever.

To be sure, popular expectations were unrealistically high when voters danced in the streets of the main city Yangon on November 8, 2015 as it became apparent the NLD had scored a landslide victory in Myanmar’s first democratic election in decades. Many citizens literally expected miracles of governance when Suu Kyi and the NLD were installed in power after decades of military misrule.

The political reality, however, has been more prosaic. That is in large part because the three most important ministries in government are still controlled by the military, which appoints the ministers of defense, home affairs and border affairs. The home ministry, in turn, maintains control over the powerful General Administration Department, which appoints civil servants at all levels of government across the country.

“She should have brought in an entirely new team here in Naypyidaw,” said a government insider speaking on condition of anonymity from the secluded national capital. “Instead, she has kept the old bureaucracy, including the permanent secretaries in the ministries. And they are competent in running a rigid military-controlled system, not a government that’s accountable to the public.”

The same insider says it has been “a slow slog against the power of the cronies,” reference to the military-aligned businessmen that still dominate nearly all aspects of the economy. Nor has the NLD promoted policies to lure in badly needed foreign capital. In comparison, when Vietnam liberalized its economy to foreign investment in the 1990s, one of the first decisions it took was to allow foreign banks to establish operations that facilitates bricks and mortar investments like factories, offices and hotels.

In Myanmar, foreign banks have been awarded licenses but are highly restricted in the transactions they can handle. As such, the financial sector remains in the hands of a group of mostly military-connected businessmen. It is unclear if the foreign banking restrictions are deliberate or oversight, as the restrictions have helped to stall several environmentally and politically sensitive large-scale mining projects and hydro-electric power schemes.


Employees work at the Myanmar central bank’s headquarters in Naypyitaw. As Myanmar opens up after almost 50 years of army rule, and foreign investors descend on the resource-rich country of 60 million, its long-isolated institutions are struggling to keep up. Picture: Reuters / Soe Teya Tun 

The main issue hobbling Suu Kyi and the NLD, however, is the imbalance of power between the elected government and autonomous military, analysts say. “What we have seen is not a transformation to democracy or even a process leading to democracy but the emergence of a hybrid system where the government is in charge of day-to-day duties and the military hold effective power over the administration,” says a local political scientist who requested anonymity.

Rather than a functioning relationship, as it has been described in some international media, there is still a large degree of mutual suspicion. According to the Naypyidaw insider, the military knows that Suu Kyi could, if deemed necessary, mobilize tens, if not hundreds, of thousands of people to the streets, a scenario the military clearly aims to avoid. At the same time, Suu Kyi and her NLD government know that they have to work with the military if they want even their modest reforms to be implemented.

While many feel she should push back more firmly against the military, Suu Kyi apparently senses she must tread carefully to maintain balance and stability. NLD lawyer Ko Ni was the only prominent party member who took a more assertive approach — and he was murdered in broad daylight outside Yangon’s international airport. The NLD’s president’s office released a statement that said a retired lieutenant colonel, still at large, was suspected of paying for the assassination.

Under the current 2008 constitution, which was drafted under military auspices and approved in a farcical referendum, more than 75% of all parliamentarians must vote in favor of any charter changes. With the military directly appointing 25% of all lawmakers, any proposed amendments that aimed to trim the military’s power or interests are thus unlikely to ever pass.

Ko Ni, however, had argued in private discussions that there is no provision in the 2008 constitution that says it cannot be abolished outright by a simple majority vote in parliament, a loophole the military’s drafters apparently overlooked. It is widely known that Ko Ni was quietly working on a new progressive constitution that could have been quickly adopted in such a scenario when he was shot and killed.

With Suu Kyi’s government hamstrung by parliament and the bureaucracy to implement reforms — and with support for the NLD on the wane among the country’s many ethnic minorities who still face deprivation and conflict under her democratic rule — the military appears to be preparing for a political comeback at the next general election scheduled for 2020.

Commander-in-Chief Senior General Min Aung Hlaing will by then have retired and is apparently already angling to run for the presidency or vice presidency under the military’s United Solidarity and Development Party’s (USDP) banner. Even though Min Aung Hlaing’s military has been subject to widespread criticism of rights abuses, he has managed to engage the international community and is viewed by many as more open and approachable than previous commanders.

Suu Kyi can not be held solely responsible for her government’s inability to quickly forge a prosperous new Myanmar. The military, over which she wields no power, has successfully torpedoed her peace drive through renewed offensives against ethnic armed groups and stifled reforms through its hold on the bureaucracy. That resistance has undercut Suu Kyi’s popular support and could boost the USDP’s, or any other military-backed political party’s, prospects at the next polls.

If those tactics are sustained and Suu Kyi fails to achieve the democratic reform, economic progress and national unity many voters expected of her elected NLD government, it is possible that her long awaited rule will be a fleeting, ineffectual interlude in a country that’s politics have been dominated by soldiers for more than half a century.

Naypyidaw photo: Reuters / Soe Zeya Tun

Monday, February 27, 2017

Indonesia’s alarming number of regional heads arrested or prosecuted for corruption

In total, 11 heads of regions (including a governor) were arrested for corruption in 2016

On Feb. 15, 2017, millions of Indonesians cast their votes in 101 regional elections throughout the country, including in the capital city of Jakarta.

Each time such large events are held a number of major issues are discussed in multiple forums and media by a range of experts, including money politics and vote-buying practices, patrimonialism, political dynasties, just to name a few.

At the center of these discussions is the possibility that the newly elected leaders will become part of future corruption problems in Indonesia.

In the World Economic Forum’s 2016-2017 Global Competitiveness Report, Indonesia was ranked 41st, a drop of four places from the previous year despite a number of reforms to its business environment.

According to the report, the two most problematic factors for doing business in Indonesia were corruption and inefficient government bureaucracy. As indicated by past cases, the two factors are closely linked to various leadership problems in Indonesian regions.

According to OECD’s 2016 Economic Survey of Indonesia, the capacity of sub-national governments to deliver high-quality public services is often lacking. Unfortunately, so are the frameworks to monitor the use of public resources. This can only mean one thing, a high risk of public resources being misused for personal or group interests.

With all the resources spent and all the failures to prevent the problems from re-emerging, it is fair to say that we still suffer from a lack of understanding of the multiple dimensions of corruption.

Although in reality many people do not understand enough about corruption, many do not seem to want to understand enough about corruption for various reasons (e.g. many consider discussing corruption among friends and family as taboo).

In a study titled “World’s Most Literate Nations” ( 2016 ) by the Central Connecticut State University, Indonesia was named the second most illiterate country in the world. Among 61 surveyed countries only Botswana scored worse than Indonesia.

The examined factors in the study represented literate behavior critical to the success of individuals and nations in what have now become knowledge-based economies. The result of the study should have raised alarm as the growing complexity of real world problems, such as corruption, demands we continually update our knowledge and information.

Possibly due to a lack of scientific references, many view corruption in Indonesia as largely a structural problem requiring only structural solutions. While this is partly true, it should be noted that so far as studies on corruption are concerned it takes multiple disciplines just to understand why people engage in corrupt activities.

Cultural, psychological, political and economic reasons are some of the perspectives worthy of consideration when designing proper corruption prevention initiatives. This is to say simply campaigning about anti corruption at public events, for example, will be ineffective in stopping people from engaging in corruption without other measures to support it. Many believe that anti corruption speeches and lectures, for example, must also be accompanied by real life examples to gradually change people’s attitude to corruption.

Finally, researchers also play an important role in understanding the true nature of corruption and in supplying anti corruption practitioners with reliable input to systematically eradicate the problem.

Many countries have taken advantage of anti corruption research to support decision makers dealing with corruption issues. Unfortunately, high quality research and publications in Indonesia are items of luxury, let alone those on corruption as the “publish or perish” maxim does not seem to apply to the country.

Indonesia is often seen as continually lagging behind its neighboring countries in terms of research capacity and high quality publications. Among the roots of the problem is that research is often perceived as mere administrative work, in particular for academics with low or no real innovation to solve real problems.

Answering research questions or testing various hypotheses is often understood merely as a routine to increase library collections with research reports and thus the scientific findings never find their way into the outside world.

Research publications should be viewed as more than just a fulfillment of researchers’ administrative duties, they should also be a fulfillment of their moral duty to contribute to making the world a better place. With regard to corruption, research publications are meant to support the formulation of anti corruption policy, assess impacts, provide alternative perspectives and facilitate broader debates and discussions.

As the great master of strategy, Sun Tzu, once said: “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

The writer, Hendi Prabowo is the director of the Centre for Forensic Accounting Studies at the Islamic University of Indonesia.


Normally, a 50-year mining project like Freeport’s Grassberg mine would deign it high time to turn its operations over to the local government, which would also be expedient politically.

However, in this case, Freeport is correct to stand its ground against Indonesia in insisting its contract of work (CoW) be honored, extended and not converted into a licensing agreement that has the potential to seriously disrupt operations.

Vincent Lingga in his Feb. 23 commentary in The Jakarta Post is wrong to paint this as an “arbitration ploy” by Freeport to block mining reform. Indonesia mining will certainly not reform with local owners bereft of legal enforcement. Why is this? Freeport is actually doing quite a good job with its localization initiatives in Papua, compared to that alternative, no localization. In other words, the operation is benefitting Indonesia not just with taxes, but also with human resource development.

It is commonly held knowledge in the Indonesian mining industry that Freeport and Theiss have the best mining training programs in Indonesia, followed by Newmont and BUMI Resources (courtesy of their legacy Rio Tinto and BHP operations). Western standards do in fact matter.

Freeport employs 32,000 people, many of them are well trained in best-practice mining standards and techniques, with good safety inculcated in their processes. This situation could/should be replicated in all Indonesian mining activities, not just Papua.

The real fear is that if this mine is nationalized (effectively what the divestment is), training and localization in Papua will suffer inversely. Localized owners will not carry the same safety and training mandates that Freeport does. They will also probably want to cut any “non-essential” (read: safety and environmental) staff to the bone.

If a licensing agreement (IUPK) is forced, local partners, via divestment, may insist on another avenue of production, with a lower environmental and safety risk profile, you can bet on that!

Finance Minister Sri Mulyani Indrawati is wrong to interject in this that a “management tweaking” is necessary. After her many run in with the Bakrie company she should know the reality.

These potential suitors (namely insider oligarchs favored by the Indonesian government) are playing the Indonesian nationalization card. That is simply a means to an end for them to gain control of operations either directly (Freeport divestment) or indirectly (licensing regime).

Once control is gained, any environmental promises or social obligations will quickly fly out the window because the Indonesian regulatory framework has weak enforcement power.

One needs only look further than substandard mining operations in Kalimantan that have cratered the earth with black, water filled holes for coal, or strip mined vast areas of pristine jungle for iron ore strip mining, in both cases, driving out many native and endangered species.

It is real and it has happened and will probably happen again. Freeport, as a US company, simply cannot play this game. If someone gets hurt, or standards are violated, they first of all will have to answer to the US Security and Exchange Commission (SEC) for any mal-activity that impacts shareholders.

Second, they would be subject to proceedings in a US court for personal injury, where awards damages may be unlimited.

An Indonesian company will be under no such qualms. The legal system on its own is far weaker here. If any doubt, consider the issue of uncontrolled peat burning in Sumatra, despite all the “laws” the all powerful palm oil industries continue to create haze unabated each year. Similarly, there will be no oversight authority looking out for the long-term welfare of Papuans.

Building a smelter is critical, but the focus cannot be based on hardware alone. Freeport is obviously opposed to building a smelter as the Indonesian government has proven wishy-washy on this critical investment issue for political, not economic, necessity, by allowing some concentrate to be exported.

If Indonesia is serious they need to have educational incentives in place that will enhance local know-how to actually run the smelter, lest they become giant turnkeys ran by foreign operators, mostly Chinese.

Ores or concentrate or finished product? What’s it going to be presents a “moving target”. Only the Chinese via their non-capitalism driven state-owned companies can afford to play this game of potentially unrealized “pseudo-investment” of smelter building. Of the 32 new smelters built in Indonesia since 2012, most are Chinese made.

Western companies that are responsible for quarterly profit statements to shareholders cannot take this risk.

Therefore, equating Chinese state-owned companies that operate on a realpolitik level, and not a “profit statement” like Western ones, is comparing apples to oranges. Chinese are interested in long-term resource access and they will give and take as is politically expedient.

Localization is the real key to the development of Papua, not more gimmicks like cheap fuel or cash transfers to locals.

Those things can be manipulated by insiders and rent seeking government officials, however a strong jobs program can turn the outlaid rupiah up to seven times in a community. That is what is really needed for this country.

By the time this goes to press it is unknown if Freeport will have either caved into Indonesia’s licensing demand and forfeit their longstanding contract or not. The Indonesian government should lay off Freeport until they in fact can offer a better jobs program for Papua locals than Freeport can. Right now, they can’t.

The Indonesia companies, if they gain control, that want a piece of this divestment, will not feel obligated, environmentally or socially for this same ideal in Papua, but rather in spiriting profits out as quickly as possible. Papuans will suffer with local ownership and no enforceable regulatory regime in place. That’s the bottom line.

The writer, Will Hickey is associate professor at the School of Government and Public Policy, Jakarta