Publication in Economics, Politics and Public Policy in East Asia and the Pacific

New Zealand: new beginnings in the region and new politics at home

Special Author: Gary Hawke

In New Zealand, 2008 will be remembered for some remarkable successes in external economic relations, and for a change of government. The electoral fate of most governments depends on domestic success.

New Zealand became the first developed country with which China concluded an FTA, adding to notable earlier ‘firsts’: completion of negotiations for China’s admission to the WTO, recognition of China as a market economy, and entry into negotiations for an FTA. We all have to get used to recognizing such patterns as significant in international negotiations since they are influential in China, but the China-New Zealand FTA was important in other respects too. The negotiations focused less on bilateral issues than media reports did, and more on how China and New Zealand should jointly manage their interests in regional and global settings. Issues included product safety. It was ironic that the agreement was followed so closely by food contamination in San Lu, a Chinese subsidiary of New Zealand’s Fonterra.

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South Korea: Disappointed expectations but hopes head north

Special Author: Yoon Young-kwan, Seoul National University

The Korean people had high expectations at the beginning of 2008 that the new conservative government of Lee Myung-bak would bring fast economic growth and political stability. There were high hopes that President Lee’s pragmatic and conservative approach, in contrast to his predecessor’s ideologically oriented and progressive policies, would restore a balance in the overall direction of the Korean society.

Most Koreans and foreign observers, however, were surprised as they witnessed President Lee’s popularity plummet in a matter of months. His government’s negotiation over the beef trade with the United States was severely criticized by domestic NGOs and the progressive opposition groups, who were able to mobilize huge crowds in anti-government demonstrations on the streets of Seoul. Their gripe was that policy leaders had neglected people’s concern over the health issues and given too much away to the US negotiators despite a serious danger of mad cow disease with beef imports from the States. Though it turned out that there was no scientific evidence that corroborated the arguments of its critics, the Lee government had suffered a serious political blow.

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Singapore: Gearing for recovery

Special Author: Chia Siow Yue, Singapore Insitute of International Affairs

Singapore is one of the most politically stable countries in Asia and continued to be so in 2008. But the past year marked the downside of globalisation, as the economy went through the turbulence buffeted of sharp hikes in global commodity and oil prices and the unfolding financial fallout of the US sub-prime crisis and the onset of global recession.

Trade in goods and services amount to over 300 per cent of Singapore’s GDP.  Soaring global energy and food prices as well as domestic real estate and stock market bubbles and higher government service fees raised the CPI inflation rate to 7.5 per cent in June 2008 (a 26-year high) and an average 6.8 per cent for the first 10 months of 2008.  The Monetary Authority of Singapore (MAS) pursued a strong dollar policy to ameliorate the effects of higher import prices and the government introduced various subsidies, rebates and cash handouts to lessen the hardships on low income and vulnerable households. Thankfully, global commodity and oil prices are now on a sharp downtrend and the CPI increase is expected to return in 2009 to the trend rate of 1-2 per cent.

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Thailand: the end of a year of political troubles

Special Author: Pisit Leeahtam, Chiang Mai University, Thailand

Despite the initial optimism with the return to democracy, 2008 was a year of political instability and internal conflict for Thailand. Former PM Thaksin, who remained abroad after the coup d’etat, returned as his political party won the election. But he and his wife fled again to escape the court processes on his corruption charges. There has been an amazing series of events, including civil disobedience against the government, dissolution of political parties, the dissolution of the ruling People Power Party, the barring of two Prime Ministers from holding office and the closure of two international airports in Bangkok.

The two main actors in these developments are the People’s Alliance for Democracy (PAD) and the United Front Against Dictatorship (UDD). The PAD (in the yellow shirts) is comprised of middleclass citizens, urban elites, academics, state union leaders and a broader coalition of those against Thaksin. The UDD (in the red shirts) comprises lower income earners, taxi drivers, the rural population in Northeast Thailand, and Thaksin supporters. The PAD and yellow shirts movement started in 2005 when Thaksin sold his shares in Shin Corporation to Temasek without paying taxes. The anti-Thaksin demonstrations ended then when the military stepped in September 2006 and installed a caretaker government. The caretaker government established a special investigation into corruption cases against the former PM Thaksin and his wife, which bought open over 13 charges of corruption against Thaksin.

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Pakistan: A year of extraordinary challenge

Special Author: Ishrat Husain, Institute of Business Administration, Karachi

Pakistan faced a number of serious challenges in the year 2008 — more than any other country in the region. The transition from military rule to a democratically elected political regime was difficult. The terms of trade sent shocks to the economy through severe fluctuations in oil and commodity prices, the quality of economic governance was sub-optimal and Pakistan’s ‘frontline’ status in the war against terror proved to be exceptionally disruptive. The assassination of Pakistan’s leading politician, the highly respected Benazir Bhutto, created a huge vacuum in the political landscape. Although the general elections were held peacefully and were (by and large) fair and transparent the loss of the top leadership of the winning party led to a long unsettling period marked by prolonged uncertainty.

On the regional front, aggression from Taliban and Al Qaeda, which has so far been limited to the ungovernable and hostile terrain of the border areas between Pakistan and Afghanistan, spilled over to some of the settled districts of the North West Frontier province, including Peshawar, causing immense loss of life and property, and widespread fear amongst the general populace.  On the eastern borders, however, the new government, reiterated the policy of strengthening friendly relations with India, and initially made some positive overtures.

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Japan: change in paradigm to rescue the ailing economy

Special Author: Iwao Nakatani

The shock of the worldwide financial crisis over the past year has affected Japan more or less to the same degree that it has the rest of the world.

Drop in the price of stocks and other financial assets has been enormous, in spite of the Japanese financial sector being relatively unexposed to the sub-prime business, as against the financial sectors in America or Europe. The Nikkei Average, for example, fell from 15,156 yen in January 2008 to 6994 yen in October 2008, a drop of some 54 per cent. Many commercial banks are trying to squeeze their lending in response to the deterioration of their balance sheets, producing a serious credit crunch in the domestic economy.

At the same time, the yen has appreciated from 110 yen against the US dollar in January to 87 yen in December, an appreciation of more than 20 per cent. The yen has also appreciated significantly against other major currencies: it was only 160 yen per Euro in January but it rose to 114 yen per Euro in October. These changes have affected Japan’s export industries seriously and there will be more of the same in the coming year. The Japanese economy is still export-oriented in character and the sharp decline experienced by export industries like automobiles and electronics will do major damage to the economy in the coming year.

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East Asia and the global financial crisis

Author: Peter Drysdale

East Asia has a central role in speedy global recovery from the impact of the financial crisis on world capital markets and the real economy. But the reality is that there has been no coherent response to the crisis and there is no effective vehicle for developing East Asian strategies for projecting coherent Asian strategies on global economic issues, including the current crisis.

The East Asian Summit (EAS) group mightwell assume this role but it now must work actively to position itself in effective international efforts.

EAS needs to declare Asia’s deep strategic interests in policy initiatives to support global recovery. It needs to charge members of EAS represented in the G20 Summit to carry these interests forward to the April Summit in Europe in a clear and proactive initiative that situates East Asia as a leading player in restoring the health of the global economy.

There are two important aspects of East Asia’s policy response to the crisis that can be prosecuted in this context.

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W(h)ither East Asian financial cooperation?

Author: Josef Yap, President of the Philippine Institute for Development Studies (PIDS), Manila

Regional financial cooperation in East Asia flourished in the aftermath of the 1997 crisis. Driven by common experiences, objectives, and concerns—particularly the realization that fundamental reform of the international financial architecture (IFA) was not forthcoming—the ASEAN+3 countries laid out a broad framework for financial cooperation and integration. Enthusiasm for regional financial cooperation also reflected frustration among some of the countries about the emphasis on reforms of domestic financial systems. Such emphasis carried the implicit message that the root cause of the 1997 financial crisis was the lack of transparency and poor governance in their financial sectors.

The current global financial turmoil has shifted attention back to the supply side of the problem. The crisis has revived calls for fundamental reform of the IFA, revolving around proposals for new international institutions designed to regulate and stabilize international capital flows. The proposals have ranged from the modest—collective action clauses in loan contracts and greater policy coordination among G7 countries—to the ambitious, e.g. a global currency and an international clearing system using individual country currencies.

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East Asia’s response to the global economic crisis

Author: Hadi Soesastro

In East Asia, Korea was the first to be hit by the global crisis. A report by Citibank in early October 2008 showed that the Korean economy was the most vulnerable to external financial shocks in the region, in terms of both the risk of sudden stop and the risk of sudden reversal of financial flows.

Having experienced the 1997-98 financial crisis, the region has established a currency swap arrangement, known as the Chiang Mai Initiative (CMI), to help each other in the eventuality of another such crisis. Eight years have elapsed, and a crisis is looming, but what remains uncertain is how these arrangements can be invoked and what would trigger their use. Korea has not even attempted to make use of the CMI to prevent a crisis from unfolding. Under the CMI, Korea can exchange a mere $17 billion with Japan and China, and perhaps hardly anything significant with the other ASEAN countries. In view of the magnitude of the potential problem, the size of the CMI is too small. The reality is that the CMI is still ‘an initiative’.

Instead, Korea’s President turned directly to Japan and China. In early October, he proposed a trilateral meeting of finance ministers of the three countries to coordinate policies to cope with the global financial crisis. He also proposed the holding of a summit among the three countries on the crisis, suggesting that ‘the three countries can wisely overcome the financial crisis if they join forces’. The most concrete and immediate swap of any significant amount ($30 billion) was provided to Korea by the US Federal Reserve. Read more…

Getting China Policy Right

Author: Hitoshi  Tanaka, Japan Centre for International Exchange

The international system is in a state of flux and uncertainties abound about its future form. For one, the long-term ramifications of the global financial crisis remain unclear. In a development unprecedented in the post-war era, the world’s three largest economies (the United States, Japan, and the European Union) have now entered into a simultaneous recession. At present, it is impossible to predict with any certainty how long current circumstances will persist. Meanwhile, the United States—the world’s pre-eminent world power—has recently elected a new president. Although President-elect Barack Obama has presented a strong vision for the United States’ role in the world, it will be at least six months into the new year until we know the extent to which the new administration is able to translate campaign promises into actual policy.

It is within this unpredictable international context that policymakers in Japan and overseas must rethink their respective approaches to China. The successful conclusion of the 2008 Beijing Olympic Games this past August engendered a renewed confidence in Beijing about China’s international status and influence. Although China has not been immune to the painful effects of the current financial crisis, most indicators suggest that it should be able to maintain at least 8 per cent economic growth rate for the next several years. In addition to its continuing role as the primary engine of global economic growth, China has also begun to emerge as a key player in the fields of finance, energy, the environment, and—increasingly—military affairs. The massive scale of China’s expansion and scope of its global influence ensure that the stakes for the international community are very high. Continued prosperity and stability in East Asia will depend on the international community placing a renewed emphasis on getting China policy right.

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The dance between BA and Qantas is over

Author: Christopher Findlay

The dance between BA and Qantas is over, at least for a while.

The dancers are looking at other partners: BA has a Spanish interest and Qantas is apparently (and wisely) scanning the Asian horizon – reports are that next on its dance card might be Malaysian Airlines.

In any other globalised sector, these choices would be up to the market but not in aviation where rights of access to markets are still negotiated bilaterally and the identity of airlines that get access to those rights depends on their ownership.

In many aviation agreements, the rights to fly between two countries are only given to airlines owned by either country.  Airlines of a third country are generally kept out. This is the case even in so-called Open Skies agreements.  They do lift limits on capacity offered by designated, that is, locally owned, carriers but don’t open markets to third parties.

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Oiling the squeaks

Author: Ross Garnaut

In the course of the work on climate change, members of the Garnaut climate change review team would sometimes ask how we would judge whether our efforts had been successful. Would the main indicator be the extent to which the Australian Government accepted the recommendations of our final report?

‘No,’ I would respond.

‘Policy decisions will reflect a range of pressures and constraints which we are not in a position now to assess and about which the Government is elected to form judgments. We will have done our job if the Australian community and Australian governments understand the implications of decisions that are taken.’

Whatever pressures and constraints shaped the Government’s white paper this week, it has implications for the environment and the economy. Should its policy proposals become law, they will be historic.

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Panda Bonds could help China avoid the risks of US Treasury Bonds

Author: Yu Yongding

China is deeply entangled in the global financial crisis, and will inevitably suffer heavy losses.

China’s foreign exchange currency reserve has reached about $US 2 trillion, and yet grows by some $300 billion every year.

With the worsening of the US financial crisis, the security of China’s foreign exchange reserve is facing increasingly serious pressures. Undoubtedly China must achieve a more reasonable balance of trade as soon as possible, and that objective is an integral part of the eleventh ‘Five-year Plan’. But if China cannot adequately reduce its current account and capital account surpluses over the short to medium term, then it must find some other way to guarantee the security, liquidity, and profit of its current foreign exchange reserve.

Issuing panda bonds may be a way out

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Carbon emission targets and investment in clean technologies

Author: Eric Knight

As all the talk about carbon emission reduction targets under a trading scheme comes to a head with the release of the Government’s White Paper on the Carbon Pollution Reduction Scheme, it is time to connect the dots and clarify what the climate change debate is really about: investment in carbon-reducing technology.

The driving purpose of any carbon trading scheme is to increase investment in, and the deployment of, technologies which will allow Australia to continue strong economic growth accompanied by a low carbon emissions trajectory. To the extent that the current carbon emissions trading framework distracts us from this end goal, we should be careful not to get carried away by all the political tactics and game playing.

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China’s new health deal?

Author: Ryan Manuel

The recently concluded Third Plenary outlined what Willy Lam is calling a ‘New Deal with Chinese characteristics‘. With significant growth in tax revenue from what has been a booming economy, China plans to inject an additional US $38 billion of government funding – the equivalent of 1.5% of GDP – into health.

The goal of this ambitious ‘Chinese New Deal’ will be the provision of free or nearly free universal basic health care.

The health policy released recently said that this would be achieved by increases in primary and secondary prevention, primary care in outpatient clinics, maternal and child health care, home health services for the disabled and elderly, emergency hospital services, and essential drugs.

This, of course, is quite the laundry list. Yet, in spite of the big talk, the fundamental problems of Chinese health care appear to have not been addressed at all.

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