Indonesia’s Economic Tightrope

May 11th, 2012
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By Sakari Deichsel & George Gorman

Recent regulations in Indonesia have looked to cap foreign ownership in the high-risk mining sector, such as this coal mining operation in the Derawan Islands in the Sulawesi Sea. Source: jaundicedferret's flickr photostream, used under a creative commons license.

Indonesia’s economy saw a confidence-boosting 6.5 percent growth in GDP in 2011 fueled by a strong middle-class consumer demand and surging foreign direct investment (FDI) inflows of $19.3 billion that year. Indonesia has continued to ride a wave of investor optimism in the first quarter of 2012 with a record 30 percent surge in FDI inflows valued at $5.6 billion. With Moody and Fitch having upgraded the country’s credit rating to investment level for the first time since the 1997 Asian financial crisis, optimism about the country’s strengthening economy has prompted optimism that Indonesia is ready to join other emerging economic superstars on the world stage.

This enthusiasm has been tempered, however, by recent protectionist moves, particularly in the mining sector. The Ministry of Energy and Mineral Resources rattled investors March 7 with the announcement of new regulations aimed at restricting foreign ownership in the mining sector to 49 percent. Under the new regulations, foreign companies must gradually reduce their stake in mining enterprises to 80 percent in six years and 49 percent in 10 years. Although domestic private investors will be able to bid on foreign shares, public sector entities will be given priority. Indonesians have long called for such restrictions on foreign ownership of mining and processing out of a sense of resource nationalism, but foreign observers view the new policy as an unanticipated lurch toward protectionism.

Opaque regulatory measures like the new mining law, where no input was solicited from the industry itself, have renewed investor anxiety about the direction of Indonesian economic policy. Such protectionist measures have complex negative reverberations as investors question whether similar restrictions might be levied against the manufacturing and service sectors in the future. Apprehension about the new mining law played a role in Standard & Poor’s decision to forgo upgrading the booming market’s credit rating in response to recent “policy slippage.” (more…)

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Posted in: Business, Development, Economics, Governance, Indonesia.

Myanmar’s ASEAN Coming Out Party

Apr 30th, 2012
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By James Wallar

Myanmar punctuated its emergence from isolation and pursuit of reforms by announcing its desire to Chair the 2014 Summit meetings of the Association of South East Nations (ASEAN).  ASEAN (too?) quickly agreed. International scrutiny will be intense on Myanmar’s stewardship of ASEAN’s programs and on whether its domestic reforms make it a credible ASEAN representative.  It is a coming out party with high risks, but high payoffs.

Myanmar’s move to chair ASEAN is a curious twist. The country rejected being a founding member in 1967 due to concerns about intrusion in its domestic policies. Now ASEAN has transformed itself into a rule-based institution, championing good governance and democracy, and engaging on member’s national issues that affect the group’s shared commitment to security, peace, and prosperity. Myanmar is doubling down on its ASEAN gambit, with the payoff being positive regional and international recognition.

The international donor community could take advantage of the developments in Myanmar and ASEAN.  Rather than creating a new compact for assistance programs, it could use Myanmar’s commitments in ASEAN to align their assistance programs. (more…)

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Posted in: ASEAN, Burma/Myanmar, Development, Governance, United States.

Indonesia’s Economic Inflection Point

Apr 27th, 2012
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By Ernie Bower

Jakarta

Jakarta's skyline. Source: yohanes budiyanto's flickr photostream, used under a creative commons license.

The world has found Indonesia and it wants to invest.  However, under the granular focus brought on by outstanding growth and decades of latent opportunity, Indonesia’s ambiguity about how much investment and trade it wants has been revealed. U.S. companies and policymakers need to go to a new level of engagement to find alignment with their Indonesian counterparts. The fact is, both sides are interested in the same things, and a paradigm shift could offer relief, prevent counterproductive policies from being implemented, and spur sustained historic new investment and growth levels.

Indonesia’s economic situation is draped in a certain irony. The country worked hard for many years to get the attention of investors. The archipelagic nation comprised of more than 17,000 islands had a certain allure as the largest country and largest economy in ASEAN. As Soeharto fell, the country was focused on political reforms, not business and economics, becoming the world’s third-largest democracy. In addition, seemingly endemic problems ranging from lack of infrastructure to corruption to political risk assessments kept many potential investors at arm’s length. Even the world’s largest companies, those deploying proactive regional strategies in Southeast Asia, found that their market penetration and sales in Indonesia underperformed globally and relative to other ASEAN countries.

The macroeconomic situation has changed. Indonesia is now bounding forward as a large economy with a GDP of approximately $1 trillion that grew by 6.5 percent last year. The World Bank projects GDP growth will continue at 6.1 percent this year. Politics are relatively stable. Indonesians are looking to move ahead, make money, and invest in the future. They are innovators and social media mavens, creative and open to new ideas.

As investors press their noses against the proverbial shop-front window of Indonesia, peering in at the multitudinous opportunities on display, they are becoming more and more frustrated with a set of policies that smack of economic nationalism. These policies appear to want to force investors to do what investors would prefer to do without a regulatory gun to their head—namely, invest in the country. In that sense, such policies are counterproductive. (more…)

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Posted in: Business, Economics, Governance, Indonesia, Investment.

Arguing Over Blocks: Do China and the Philippines Both Have a Claim?

Apr 14th, 2012
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By Greg Poling

[Editor's note: This post is the first in a new blog series, The South China Sea Frame-by-Frame. It incorporates data and imagery from the CSIS  Southeast Asia Program's innovative policy tool, The South China Sea in High Resolution.]

The Philippines opened yet another chapter in the ongoing South China Sea dispute with its neighbors on February 29, 2012 by inviting foreign companies to take part in its long awaited fourth Energy Contracting Round. This round opens bidding on 15 oil and gas blocks. Two blocks, Areas 3 and 4 near the Reed Bank, fall within China’s so-called “9 dash line” claim, which is mirrored by Taiwan. Beijing quickly responded to Manila’s announcement by lodging a formal protest, reiterating its “indisputable sovereignty” over the islands and waters of the South China Sea, and calling any oil exploration “unlawful.” Taiwan’s foreign ministry followed suit with a March 13 statement saying, “The Reed Bank is part of the Spratly islands . . . and we reject any claim or occupation by any means of the islands and the surrounding waters.”

What is clear in this instance is that China and Taiwan’s claim cannot rest on the “9 dash line” alone and be taken as legitimate. There is simply no basis in international law supporting that grandiose claim – a fact even Beijing seems to increasingly recognize, as evidenced by the much-analyzed Chinese Foreign Ministry statement earlier this year that the South China Sea dispute is about the “islands and adjacent waters,” not the sea in its entirety. The “islands” in this case are the Spratlys.

The question then is not whether Areas 3 and 4 lie within the “9 dash line,” but whether they fall within the adjacent waters of nearby islands claimed by China. This is the point made last month by Robert Beckman. Under the UN Convention on the Law of the Seas (UNCLOS), to which both China and the Philippines are signatories, a country’s islands generate an Exclusive Economic Zone (EEZ) out to 200 nautical miles in it has exclusive rights to all natural resources, including oil and gas. (more…)

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Posted in: China, Philippines, South China Sea, United Nations.

Another One Bites the Dust: Troubles of the ECCC

Apr 1st, 2012
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By Kate Bissonnette

The future of Cambodia's prosecution of former Khmer Rouge officials is in doubt after yet another judge's resignation due to interference. Source: Extraordinary Chambers in the Courts of Cambodia's flickr photostream, used under a creative commons license.

Judge Laurent Kasper-Ansermet submitted his resignation from the Extraordinary Chambers of the Courts of Cambodia, or ECCC, on March 19 after five tumultuous months as its international co-investigating judge. The United Nations and the Cambodian government established the tribunal to prosecute crimes against humanity by the former Khmer Rouge leadership, which ran the country for a terrifying three and a half years from April 1975 through January 1979, but the ECCC has struggled to demonstrate efficacy and impartiality. Kasper-Ansermet cited repeated obstruction by his Cambodian counterpart, the national co-investigating Judge You Bunleng, and the dysfunctional situation within the ECCC as reasons for his departure.

Kasper-Ansermet’s predecessor, Judge Blunk of Germany, resigned October 31, 2011, citing similar concerns. Though Kasper-Ansermet was appointed and approved by both the United Nations and Cambodian government as a reserve judge in 2010, Judge You Bunleng’s office refused to acknowledge him as Blunk’s replacement, arguing he needed to be permanently appointed. The Cambodian Supreme Court vetoed his nomination in January, but the UN special expert to the tribunal, David Scheffer, said Kasper-Ansermet had the clear authority to proceed with investigations.

The ECCC has so far managed to bring two cases, 001 and 002, to trial, but its future rests on cases 003 and 004. Those cases involve current members of the Cambodian government, and Prime Minister Hun Sen has said he will not allow them to go to trial because their prosecution could destabilize the country, though this assertion is dubious. Initial investigations into the cases were closed in April 2011, leading to allegations of political pressure and government interference in the court. Kasper-Ansermet reopened the cases in February and attempted to push them forward by notifying suspects of the charges against them in early March, without approval or cooperation from the Cambodian side of the court. The following week, drafters of the ECCC’s 2012 and 2013 budget failed to allocate resources or time to the cases; according to the drafters of the budget, the ECCC’s investigations and Pre-Trial Chamber are expected to be phased out by 2013. (more…)

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Posted in: Cambodia, Governance, Judiciary, United Nations.

Video: Dialog with U.S. Ambassador to Vietnam David Shear

Mar 30th, 2012
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[Editor's Note: This is the second in a four post series of Dialogs conducted by Ernie Bower and Murray Hiebert with U.S. Ambassadors to the region.]

Last week Ambassador David Shear stopped by to discuss the U.S.-Vietnam relationship, including recent developments on trade, human rights concerns, and prospects for a strategic partnership in the context of common interests in regional stability. Ambassador Shear emphasized that since the normalization of relations with Vietnam in 1995, the depth and breadth of international connections has steadily expanded. You can watch his conversation with CSIS Southeast Asia Program Director Ernie Bower below:

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Posted in: Human Rights, Trade, United States, Vietnam.

Fish and Foreign Policy: Renegotiating the South Pacific Tuna Treaty

Mar 26th, 2012
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By Elke Larsen

Tuna are the biggest economic link between the Pacific Islands & the United States. Source: David L.'s flickr photostream, used under a creative commons license.

Tuna is the largest economic interest shared by the United States and the Pacific Islands, consequently the 1988 South Pacific Tuna Treaty has served as the cornerstone of US-Pacific relations. Originally designed to provide aid and development to the island nations in return for U.S. access to the Western and Central Pacific Ocean’s tuna resources, it has recently become clear that that the treaty has not lived up to expectations. In May 2011 Papua New Guinea unilaterally announced it was withdrawing, giving all parties one year’s notice before the treaty would be nullified. With the Obama administration pledging to reengage the region, the 18 parties to the treaty have scrambled to breathe new life into the agreement.

The treaty collapsed for several reasons. First, it has failed to adapt to conservation measures. Tuna has become increasingly popular and scarce over the past 50 years, with Pacific fisheries now providing more than 50 percent of the global catch. With Tuna being one of the Pacific’s major natural resources, the parties to the treaty have aimed to create a sustainable fishery. It was revealed by the late 1990s that simply limiting the number of fishing vessel was ineffective as boat capacity increased. Therefore, in 2007, the Vessel Day Scheme (VDS) was launched that instead limited fishing efforts by capping the number of days that tuna vessels could operate. Overall, the South Pacific Tuna Treaty has failed to adapt to the VDS although it has become a standard operating procedure in the Pacific tuna industry; the US has had the right to operate 40 vessels fishing for unlimited periods of time. (more…)

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Posted in: Pacific Islands, Pacific Ocean, Papua New Guinea, Trade, United States.

Video: Dialogue with U.S. Ambassador to Singapore David Adelman

Mar 26th, 2012
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[Editor's Note: This is the first in a four post series of Dialogues conducted by Ernie Bower and Murray Hiebert with U.S. Ambassadors to the region.]

Last week Ambassador David Adelman stopped by to discuss the latest dynamics in U.S.-Singapore relations with CSIS Southeast Asia Program Deputy Director Murray Hiebert. Ambassador Adelman expands on the launch of a new annual U.S.-Singapore strategic partnership dialogue, Singapore’s value for the U.S. economy and the watershed elections held in Singapore last May. You can watch the full video dialogue session below:

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Posted in: Military, Singapore, Trade, United States.

Will India’s Future Foreign Policy run through Lucknow, Kolkata, and Chennai?

Mar 21st, 2012
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By Prashant Agrawal

As India's regional parties are thrust onto the national stage, they may become pivotal foreign policy players. Here a group of Samajwadi supporters march in Mumbai. Source aljazeeraenglish's flickr photostream, used under a creative commons license.

Diplomacy is always challenging, but understanding both where power lies in Delhi and what Delhi wants can be difficult for those that live in Delhi, much less those that live in foreign capitals.  Yet, if India’s 2012 elections portend what may happen in 2014, then understanding both who is in power in Delhi and what Delhi wants is about to become much harder.

A third front government (a coalition led by a regional party) that may come into power in 2014 will be unlike any that have come before it.  The parties that won big in the last two years have little experience at ruling in Delhi.  And their foreign policy goals are even less developed.

The last non-BJP or Congress Prime Minister was I.K. Gujral, who led the last third front government, the United Front, in 1997.  No matter how one views Gujral’s performance as Prime Minister, he was experienced in dealing with foreign leaders and he had a developed world view.  Before becoming Prime Minister, he had served as Foreign Minister and Ambassador to Moscow. He is famous for his Gujral Doctrine which amongst its five principals expounded that India would not seek reciprocity with its neighbors, “but (will) accommodate them in good faith and trust.” (more…)

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Posted in: Elections, Governance, India.

Japan’s Unclear Nuclear Future

Mar 21st, 2012
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By Tim Johnson

The future of Japan's nuclear plants like this one in Takahama is murky, with significant costs for dropping it from the country's energy mix at odds with public opinion. Source: Eunhei's flickr photostream, used under a creative commons license.

In their piece, Choosing Fukushima’s Legacy, in the March 8 Wall Street Journal, CSIS’s Michael Green and Mike Wallace argue that the “consequences of not restarting Japan’s nuclear power program…are dire.”  Prior to March 2011, Japan – the world’s third largest economy – relied on nuclear power for 30% of its electricity.  Green and Wallace point out that without a stable nuclear foundation, volatile energy costs and the limits of LNG storage make Japan uniquely vulnerable to supply shocks.

Indeed, Japan’s replacement of nuclear power with fossil fuels has increased its dependency on Russia and the Middle East for energy supplies and (along with a stronger yen) has led to Japan’s first annual trade deficit since 1980.

Prior to the disaster at Fukushima Daiichi power plant last March, official policy was to increase Japan’s nuclear power capacity to meet 50% of electricity needs.   In recent weeks, calls for the continuation of Japan’s nuclear power program have been made by experts in Washington and Tokyo, and it is expected that the Japanese government’s forthcoming energy plan will preserve a significant role for nuclear power. (more…)

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Posted in: Economics, Energy, Japan, Naoto Kan.

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