Growth: getting Japan back on track

Long before the lost decade it was clear that the Japanese economy would only continue to grow after its ‘miracle’ years if it increased its productivity.

Once ‘catch up’ with the leading economy was complete, domestic technological innovation and continuing structural change are the two main sources of increased productivity.

While there is still debate about the deep causes of the 1990s slowdown, the immediate causes are clear (policy change in 1990), as are the consequences (wealth declines, growth in bad debts and unemployment, falling corporate capital investment, low growth rates and price deflation). 
Combined with external shocks and a steadily appreciating yen, it is not surprising that recovery was difficult. A subtler disagreement, however, surrounds the causes of the slower productivity growth. Measurement is part of the problem, because data cannot pinpoint the sources of productivity growth and decline. A demand-driven contraction in output will create a fall in measured productivity until employment contracts. But the data cannot explain whether productivity falls because of poor management or as a result of failure to introduce new technologies. This ambiguity lies at the heart of different interpretations of the outlook for Japan.

Japan’s productivity growth has been slightly above the OECD average since the mid-1990s and does not underperform most of Europe (it only fell behind that of the US economy after the latter’s surge in the early 2000s). Japanese labour productivity grew strongly enough between 1990 and 2006 to compensate for declines in labour supply, leaving average annual GDP per capita growth not far behind that of the United States or Australia. In years to come Japan must address two crucial issues that will otherwise compromise output growth: the dramatic variation in productivity performance across sectors, and declining labour supply.

Japan’s demographic problem is well known but the impact on fiscal deficits, health care and social security spending is not the only dilemma. As the workforce ages and retires there is less labour input to produce output. Each possible strategy to overcome the labour shortage has a degree of political difficulty: raising the retirement age, increasing women’s participation in the labour force, increasing immigration and increasing trade, but they are all possible, so the ageing workforce should not automatically spell an end to economic growth.

Some observers blame declining labour inputs and reduced working hours from the mid-1990s onwards for the lost decades, but it is hard to see this as the major explanation for slow growth since 1991. Even if the potential of the economy was lowered by a reduced labour supply, that cannot explain the GDP outcome when unemployment was increasing. This gives credence to the argument that the economy was operating below its capacity, whatever one judges that capacity to be. But it does not alter the arithmetic for the future: to compensate for reduced labour supply there must be increased productivity from the remaining workforce.

The services sector is where Japan can make the most substantial productivity gains. Though measuring productivity in services is difficult, it seems that Japan has low levels of productivity relative to the United States in most service areas except finance. Growth of productivity in market services is around the OECD average, but in ‘other services’ productivity growth is slow. This means that Japan has the opportunity to catch up to international productivity levels in those ‘other’ service sectors. The apparent low productivity may be partly a measurement issue. 

Because quality of service is hard to capture, the data does not reflect high or improving quality at the same price, which should be accounted for in productivity measurements. But another source of the productivity gap with the United States in many service sectors is low levels of investment, particularly in IT and computers. And barriers to entry are high in Japan’s services, which reduces incentives to invest and thus limits new competition from domestic start-ups and from foreign entrants. The benefits from catching up to international levels of services productivity would be significant because research suggests that GDP growth appears to be much more responsive to improvements in services productivity than to additional gains in manufacturing or agricultural productivity.

Japan has a mixed record in policy responses to slow economic performance. The economy has not reached its potential for prolonged periods during the last 20 years. Though there is debate about how big the gap is, it is probable that a persistent gap — however modest — contributes to lower potential. The best policy response would be to work on two fronts: manage demand to minimise the GDP gap because the costs of deviation are large, and raise potential by focussing on productivity improvements.

How that should be done is broadly clear and, though details will matter, some things will probably not matter very much. For instance, improving corporate governance structures won’t make much difference in the absence of other changes. In Japan there are examples of old-style behaviour (Olympus) and of very new models (Rakuten). Other firms, like Sony, have not prospered despite being one of the first to adopt the Western system of external board members with committees. OECD experience suggests that shareholder activism is not a solution to all ills. In fact, Japan’s most successful growth period was under its old corporate governance system, which suggests that changes in governance structures are probably not the only key to improving productivity.

For Japan the next leap in growth can only come from a shift in economic structure just as transformative as the one that took place between 1950 and 1970. This time it will be a shift to a service economy with a small, high-tech manufacturing sector. Most of conventional manufacturing will be moved offshore. There may be a ‘niche’ agricultural sector producing expensive goods adapted to local and specialist tastes, but it should be a part-time occupation and should not have its current hold over politics and trade policy. Trade in both goods and services will play a bigger part than it has so far. There are considerable challenges to setting up a service-based economy. 

The first is to change the regulatory framework so firms can easily enter and exit the market. Japan’s own processes for bank resolution — which were perfected during and in the aftermath of the banking crisis in 1997 — could be a model here.

The transition to this new structure will be difficult. There are both distractions and genuine problems along the way. Excessive focus on fiscal restructuring is one distraction; excessive gloom about the ageing population is another. By contrast, changing deep preferences for making things (monozukuri) over providing efficient services as the basis for the economy, and convincing embattled workers, students and managers that their services future will require good language skills and familiarity with the outside world, is a genuine problem that needs to be tackled now. 

Japan’s future growth potential is tied to its people’s commitment to internationalisation.

Jenny Corbett is Professor of Economics and Executive Director of the Australia–Japan Research Centre at the Crawford School of Public Policy, the Australian National University.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Japan: leading from behind’.

Indonesia's Anti-Terror Arsenal

To capitalize on recent arrests, Jakarta must upgrade its surveillance and financial tracking tools.

The swift and near-simultaneous arrests late last month of 11 individuals allegedly preparing to bomb U.S. and other Western targets throughout Java, Indonesia's most populated island, should serve as a wake-up call to Asia's national security establishment, lawmakers and leaders. The foiled plot would have been just the latest in a flurry of terrorist activity by members of Islamist organizations, all of which are registered and legally sanctioned by the Indonesian government.

During the arrests, Indonesia's elite counter-terrorism squad found explosive material, a bomb-making manual, detonators and a list of targets that included the American and Australian embassies in Jakarta and the American consulate in Surabaya, according to Indonesian government officials. Each of those arrested appears to be a card-carrying member of the Sunni Movement for Indonesian Society, also known as Hasmi, an obscure Islamist organization few had heard of previously. 

The group denies any terrorist activities or links to those arrested. In the wake of the raids, leader Adi Mulyadi told the media that "Hasmi is a non-violent organization and we focus on preaching." However, counterterrorism experts say the group is linked to Indonesia's Islamic Defenders' Front, an Islamist organization known for hate crimes. Hasmi has engaged in demonstrations against Christian churches in West Java and Israel. The ultimate objective of Hasmi, like other Islamist organizations, is to create an Indonesian Islamic Republic based on sharia law. 

The recent arrests come on the heels of other planned attacks in Indonesia. In September, law-enforcement officials revealed they had uncovered cells throughout the country with links to Jemaah Ansharut Tauhid (JAT), a well-known Islamist organization whose leader, Bakar Basyir, is also reportedly the spiritual leader of Jamaah Islamiah, the al Qaeda affiliate that operates in large swaths of Asia. According to National Police spokesman Brigadier General Boy Rafli Amar, two of the detainees from the September raids had plans to bomb Jakarta's parliament and kill members of the country's law-enforcement community. "They recruited, invited young men to be trained in a military-style jihadi camp and bought bomb-making materials," he said

All told, in the last half year, Indonesian counterterrorism officials have arrested nearly 50 militants for plotting attacks targeting foreigners and Indonesians. The groups whose members have been arrested — Hasmi, the Islamic Defenders' Front and JAT — are all sanctioned by the government and free to operate as they wish. It now appears that militant Indonesian groups not hitherto engaged in overt violence are crossing the divide and using low-intensity conflict and other terrorist tactics to achieve their objectives. 

 

What can Indonesia do in response? As a start, Jakarata should blacklist terrorist organizations and their members, ensuring that law enforcement and intelligence services can track them and providing the judiciary with the authority to put them behind bars. 

This hasn't happened the way it should so far because, for domestic reasons, Jakarta appears to be pandering to radical Islamists. The international community until now has placed much of the blame at the feet of the country's president, Susilo Bambang Yudhoyono, who many believe has looked the other ways as militants have attacked minority groups, including Christians, Shiites and Ahmadi Muslims. 

 

Indonesia should also shore up laws that place controls on its financial sector to protect against abuse by illicit actors. According to the Financial Action Task Force (FATF), which combats money laundering and terrorism financing, Indonesia has strategic deficiencies in these areas that need to be addressed expeditiously. In the FATF's view, Indonesia has yet to adequately criminalize terrorism finance or establish procedures to identify and freeze terrorist assets.

Since February 2010, Jakarta has been promising to work with the FATF and other international organizations such as the Asia Pacific Group to redress this problem, but meaningful steps have yet to be taken. These laws must be passed and enforced if Indonesia is to curb the militant Islamist threat. Failure to do so sends the wrong message to terrorists, their financiers and the international community.

Finally, law enforcement and intelligence analysts must become proficient in the innovative tools developed in the last decade, including geospatial and network analysis tools, to attack networks and uncover financial links. Palantir, Analyst's Notebook, ArcGIS, and Google GOOG +1.90% Earth — tools many government officials do not use or are not even aware of — make it easier to manage and sort through vast reams of data. They also facilitate the tracking of financial flows and smuggling routes. Ignoring these innovations hampers the ability to capture members of rogue organizations and put them behind bars.

In the last decade, Indonesia has been a staunch ally of the U.S. and other Western democracies in the war against terrorism. It has arrested and ultimately jailed hundreds of rogue actors who intended to engage in attacks around the globe. Many countries and policy makers admire Indonesia's outstanding record and its demonstrated desire to challenge the threat of terrorism. 

Yet in order to ensure continued success, it is critical that Indonesia blacklist organizations engaging in violence, protect its financial sector from abuse and provide its analysts with the tools they need to track and capture those who mean citizens harm. 

By Avi Jorisch, a former U.S. Treasury Department official, is a senior fellow for counterterrorism at the American Foreign Policy Council in Washington, D.C. The Wall Street Journal

Indonesia's Failing Human Rights Regime

Human rights courts have never convicted in a single case in 12 years

Victims of alleged human rights violations in Indonesia, a country where human rights courts set up in 2000 have yet to convict a single case, are facing an uphill battle to bring perpetrators to justice.

Data from the local NGO Commission for Missing Persons and Victims of Violence (Kontras) estimates more than one million people suffered rights abuses between 1965 and 1998 that took place largely under President Suharto’s military rule, which ended in 1998 with his forced resignation.

“We have an unusual situation in this country. You have all these human rights violations but as things stand, no-one has been found guilty in a human rights court,” said Haris Azhar, co-ordinator of Kontras.

In 2000 the Indonesian parliament created human rights courts to hear and rule on cases concerning gross violations of human rights. Over 12 years, 12 cases have come before the country’s four human rights courts, with no resulting convictions.

Enforced disappearances
In the tumultuous run-up to the country’s first steps towards democracy in 1998, university students challenging the military regime began disappearing.

Mugiyanto, who like many Indonesians goes by only one name, was detained in 1998.

“I was blindfolded and then held, tortured and interrogated for about four days by the military’s special forces. Then they handed me to the police, and they put me in a local prison for three months. I was then released when the leadership changed,” said Mugiyanto, who chairs the Indonesian Association of Families of the Disappeared (IKOHI).

In May 1998 President Suharto stepped down and was replaced by then Vice-President Bacharuddin Jusuf Habibie.

Mugiyanto said a total of 23 students disappeared, with nine (including him) later released. Thirteen remain missing, including Ucok Siahaan, who was a 22-year-old university student whose family still awaits news.

“He visited us several times [in 1998] and each time, he told us to stock up on food and supplies because the political situation in Jakarta was out of control,” said his father, 65-year-old Paian Siahaan. “In May he telephoned us and said not to go out of the house. He said if anything bad happened, just go to the mosque.”

His family has not heard from him since.

“We are angry with the government. They always said they would help us establish what happened, but nothing has been resolved,” Paian said. “We don’t want to sue anyone in a court of law. We just want to know what happened to our son. If he is gone, we want to find his remains and lay them to rest in the family graveyard. We’re old now and we just want to live in peace, but until we know what happened to our son, we can’t do that.”

State brutality in Papua
In recent years activists have reported human rights abuses in the country’s remote Papuan region, where a separatist conflict has simmered for decades. The resource-rich region, 3,000km east of Jakarta and including the provinces of Papua and West Papua, has the lowest level of human development of Indonesia’s 33 provinces.

Penihas Lokbere from Jayapura, the capital of Papua Province, said he is one of 105 people arrested by the police in 2000 in the university town of Abepura, about 10km from Jayapura.

According to Human Rights Watch, a group of unidentified people attacked a police post in Abepura, killing two policemen and a security guard.

“The police wanted to retaliate,” said Lokbere. “They came to our dormitory while we were sleeping and arrested us. They didn’t ask any questions.”

Along with his fellow students, Lokbere was imprisoned for three days, where he said he was tortured, handcuffed and beaten with a metal crook. Until now, no one has been convicted.

A 2012 joint report of the International Centre for Transitional Justice (ITCJ) and the Jayapura-based Institute of Human Rights Studies and Advocacy (ELSHAM), recorded nearly 750 rights violations against Papuans from 1960-2012, including arbitrary arrest and detention, torture and killings.

Paul Mambrasar, a representative of ELSHAM said the actual number of violations may be much higher. “Many of the victims are not ready to speak about what happened. The provinces of Papua are militarized and people are worried if they give information, they will be terrorized by the military or the police.”

The Papua region has had decades-long separatist tension related to the stalled implementation of a special autonomy arrangement (granted in 2001); communities’ lack access to natural resource wealth such as gold, copper and timber; and there have been security crackdowns on political demonstrations.

Josef Roy Benedict, Amnesty International’s Indonesia campaigner based in London, said ongoing human rights violations in the region are in part due to a culture of impunity there.

“Police officers tend to be punished only for disciplinary offences, often in closed-door proceedings, while offences by the military are dealt with through the military court system, which lacks independence and impartiality,” said Benedict.

Persecution of Ahmadis
Data from the Jakarta-based NGO Setara Institute calculated nearly 130 violations of religious freedom nationwide from January to June 2012. Most happened in West Java against minority religious groups such as the Ahmadiyah, an Islamic sect that shares many Sunni beliefs with some 500,000 adherents nationwide.

In February 2011 a 22-year-old Ahmadi, Ahmad Masihuddin, was visiting a village outside Jakarta when an Islamic fundamentalist group, which does not recognize Ahmadis as Muslim, attacked Ahmadiyah followers in the village.

"The mob was at least 1,000-strong. We [Ahmadis in the village] were outnumbered, so we ran, but I was captured," said Masihuddin. "They dragged me through a rice field, struck me in the waist with a machete and hit me with bamboo. They said they wanted to cut off my genitals."

It was only when Masihuddin called out to his assailants that he was a Muslim that the attack stopped. "They thought I was one of them, a Sunni," he said. Sunni Islam is the largest branch of Islam in Indonesia.

Three of Masihuddin's friends were killed in the attack. Perpetrators were sentenced to 3-6 months in prison, which Masihuddin said was not commensurate with the crime.

Harkristuti Harkrisnowo, director-general for human rights at the Ministry of Law and Human Rights, acknowledged the sentences were too lenient and suggested that law enforcers need to do more to protect minorities.

“On the ground there are now fundamentalist groups that blatantly threaten minorities,” she said. “The police have difficulties containing these groups, but they must try to deal with this violence.”

In 2008 the government issued a joint ministerial decree banning Ahmadis from disseminating their beliefs on the basis the reformist movement “deviated” from mainstream Islam in its teachings. Hard-line groups have used the decree to justify attacks against Ahmadis, but Harkrisnowo said the decree was issued to protect them.

“They aren’t allowed to publicly assemble for their own protection because if they do, they may incite violence against them,” she said.

But even without assembling for worship, they are still attacked, said Malik Saifurrahman, an Ahmadi from the island of Lombok some 1,200km east of Jakarta. Since 2002, his family house has been destroyed on four separate occasions - before it was completely burnt down in 2006.

"There were many attacks on houses, and about 300 Ahmadis were forced to move," said Saifurrahman, who added he did not know the identity of the attackers.

"I have now moved to Jakarta for study, but my family lives in a government refuge in Mataram [created] for Ahmadis who have had their homes burned down,” he said. "At first the government provided us with food and water, but now that has stopped."

Harkrisnowo said she did not know whether the authorities will re-house displaced Ahmadis.

The US Commission on International Religious Freedom's 2012 report recorded that at least 50 Ahmadiyah places of worship have been vandalized and 36 forcibly closed since 2008, even though the Indonesian constitution guarantees freedom of religious expression.

But guaranteeing this constitutional freedom has been difficult for the state , said Harkrisnowo. “The central government needs to be more firm on this issue.”

Legal wrangling
The National Commission on Human Rights - known locally as Komnas HAM - is an independent, government-appointed commission to monitor violations, advocate on behalf of victims and launch abuse inquiries. The attorney-general’s office then investigates the allegations, except for those that took place before 2000, which are handled by an ad-hoc human rights court set up by presidential decree.

Kontras’s Azhar said Komnas HAM has recommended seven cases for government investigation through ad-hoc courts - all were rejected.

Harkrisnowo said lack of prosecutions for human rights abuses thus far is not due to lack of political will, but rather too-scant evidence.

“In each case, officials have looked at whether there is sufficient evidence, or whether there have been any errors made in terms of legal procedure, and each time have decided that no one can be found guilty,” she told IRIN.

Efforts to create other legal mechanisms to prosecute human rights abuses have stalled.

Next steps
The country’s Constitutional Court declared a 2006 law on Truth and Reconciliation unconstitutional because of a provision that made victim reparations conditional on amnesties being issued to perpetrators. The government is attempting to pass a new law.

Indonesia is a state party to the International Covenant on Civil and Political Rights (ICCPR) and has ratified the Convention against Torture and Other Cruel, Inhuman or Degrading Treatment or Punishment.

But it has yet to sign or ratify the Rome Statute, the treaty that created the International Criminal Court in 2002.

Harkrisnowo said the government is preparing to ratify both the Rome Statute and the International Convention on Enforced Disappearances.

(IRIN is a service of the UN Office for the Coordination of Humanitarian Affairs.)

Cracks Open in Malaysia's Murder-Sub Scandal

A key figure says he helped PM's wife get a witness out of town

A key figure involved in the cover-up of the spectacular 2006 murder of Mongolian national Altantuya Shaariibuu appears to have gone off the reservation, giving interviews to opposition media hinting at the involvement of Rosmah Mansor, the wife of Prime Minister Najib Tun Razak, in the conspiracy.

Deepak Jaikishan, a Kuala Lumpur-based carpet dealer who reportedly was Mansor’s business partner in the past, allegedly promised RM5 million to get out of the country to a private detective who charged that Najib had been Altantuya’s former lover, after the detective filed a sworn declaration describing his knowledge of the affair between the two and giving excruciating details of sexual practices, among other specifics.

The detective, Perumal Balasubramaniam, was terrorized after being dragooned into a Kuala Lumpur police station and told his family was in danger. He immediately decamped for Chennai, India after being promised the money to recant his declaration. He has remained outside of Malaysia, issuing periodic statements giving additional details of the affairs as well as alleged attempts by Najib’s forces to cajole him into coming back and blame Opposition Leader Anwar Ibrahim for the whole thing.

Altantuya, named in French police documents as a translator, was murdered in October 2006 by two members of an elite police unit operating under Najib’s jurisdiction. The two were later convicted and sentenced to death for the crime. Abdul Razak Baginda, one of Najib’s closest associates and according to French prosecuting magistrates’ documents the alleged conduit for a €114 million bribe to the United Malays National Organization for the purchase of submarines from the French defense contractor DCN and its subsidiaries, was acquitted of the crime.

Razak Baginda had been Altantuya’s lover, supposedly after Najib had given her up, according to Balasubramaniam’s sworn declaration. Immediately on being cleared without having to put on a defense, Razak Baginda fled to the UK with his wife, where he has remained ever since.

Attempts to reach Jaikishan by Asia Sentinel have been unsuccessful. He first contacted Harakan Daily, the Malay-language newspaper operated by Parti Islam se-Malaysia, the Islamic opposition leg of the three-party Pakatan Rakyat headed by Anwar, and later gave an interview to Malaysiakini, the Kuala Lumpur-based independent online news website, describing additional details. Additional interviews have also been carried by the Malaysia Chronicle, another opposition website.

In the interviews, Jaikishan acknowledged that Najib and Rosmah had asked for his help in dealing with Balasubramaniam. In a translated interview, he told Harakan Daily that “Maybe my mistake was helping in the case of Bala, getting involved in Bala’s case to help the family of the prime minister. That was when I became famous. I don’t like it. I’d like to be low profile.”

In the Harakan interview, Jaikishan compared his involvement in Balasubramaniam’s case to rescuing a drowning friend. “So I jumped into the pool to help a friend,” he said. I felt at that time, I was the only one (they) sought for help.” He quickly responded: “Najib’s family” when asked whom he meant by ‘theirs.’

Jaikisan’s motives are unclear, sources in Kuala Lumpur told Asia Sentinel. One of the articles made a veiled reference to a belief that he hadn’t been given proper thanks for his efforts. One well-wired businessman in Kuala Lumpur said Jaikishan was known to have become close to Muhyiddin Yassin, the deputy prime minister and a putative rival for the premiership should Najib stumble.

“It’s an UMNO play”, the source said. “Deepak claims he is now very close to Muhyiddin. The timing of his solicited interviews – he called the news portals and offered himself – on the eve of the UMNO assembly suggests he wanted to embarrass Najib and Rosmah.”

Another lawyer close to the Mahathir wing of UMNO said that was nonsense, and that there was no trouble between the two. He pointed to the fact that the interviews had all been given to anti-government media as an indication that he was acting for Anwar’s coalition.

In any case, the repeated interviews, including one in which Jaikishan accused the head of the women’ wing of the party of having been involved in a massive land scam that benefited Najib and his family, are significantly damaging to the prime minister, who has been fighting rumors of involvement in the Altantuya affair for the entire six years since the 28-year-old woman was murdered and her body was blown up with C4 military explosives.

Yesterday in Singapore, Apoline Cagnat, a lawyer with the French human rights law firm headed by William Bourdon, said Najib and Abdul Razak Baginda are “priority witnesses” in the investigation into bribes and kickbacks totaling about €150 million in the sale of Scorpene submarines to the Malaysian Ministry of Defense -- the initial €114 million routed through Razak Baginda’s wholly-owned company Perimekar Sdn. Bhd and a second €39 million routed through a Hong Kong-based paper company called Terasasi HK Ltd. which had no known business affairs and which was wholly owned by Razak Baginda and his father .

It is highly unlikely, however, that the French authorities probing the scandal would be able to persuade the head of a sovereign state, especially one who is suspected of helping to facilitate the transfer of kickbacks to UMNO to testify. It is also difficult to imagine what they would be willing to add to the dialogue about the case if indeed they were called to testify.

However, both the French investigation and the Jaikishan comments spell continuing trouble for Najib on the domestic political front, and within his political party. The ruling national coalition has been seeking the appropriate time to hold national elections for more than a year but has continued to put them off for a variety of reasons including a long string of scandals over cost overruns on a big port modernization at Port Klang, west of Kuala Lumpur, as well as the so-called Cattlegate scandal in which the family of the minister for women’s affairs allegedly looted a cattle-slaughtering scheme of tens of millions of ringgit for their personal use. Asia Sentinel