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Pacific Island links: Ciobo, Tuna crisis, COP21, Vanuatu elections and more

  • Australian Minister for International Development and the Pacific Steven Ciobo is leading a delegation of Australian MPs on a tour that will take in Fiji, Tonga, Samoa and Solomon Islands.  
  • While in Fiji he launched the first progress report on Australia’s $320 million Pacific Women Shaping Pacific Development Scheme.  
  • The annual meeting of the Western and Central Pacific Fisheries Commission is at a halt, as a consensus on how to save overfished tuna cannot be reached. 
  • Foreign Minister Julie Bishop has announced the new High Commissioner to Papua New Guinea. Bruce Davis, previously Vice-President of the ADB and former Director-General of AusAID, will be heading to Port Moresby to take up the position.  
  • Robin Davies takes a closer look at Australia’s commitments at the climate change conference in Paris, explaining that Australia is lagging far behind when compared to other countries’ pledges. 
  • Woodside Energy has withdrawn its plans to take over the Papua New Guinean company Oil Search.  
  • The 15 MPs convicted of corruption and bribery in Vanuatu have been banned from holding public office for 10 years. Elections have been announced for 22 January 2016.  
  • The Lowy Institute hosted the 2015 GE Australia-Papua New Guinea Emerging Leaders Dialogue last week. You can read some of the key recommendations here
  • Jenny Hayward-Jones took the opportunity to reflect on Australia-PNG relations over the last year and the importance of people-to-people connections to maintain the friendship.  
  • Pacific Islands Forum Secretary-General Dame Meg Taylor on the future of our oceans and the imperative to reach a global consensus to maintain their health. 

The media battle for Syria heats up as Assad government counterattacks

The social media campaign run by ISIS and various other Islamists has been both voluminous and highly sophisticated. Part of its strength lies in its depiction of victorious Islamist fighters slaying Syrian soldiers, Western hostages and apostates in a particularly brutal fashion. Such images serve several strategic aims, including installing fear in the enemy and creating a publicly mediated image of invulnerability. In recent months, the intervention by Russian forces and Iranian advisers along with various Shi'a militias has upped the ante but it has also given the pro-regime forces some social media material to work with.

The breaking by Syrian forces of the ISIS-laid siege of the Kwereis Airbase earlier this month is not strategically decisive by any means, but it has both political and military significance. One the 10 principles of war I was taught decades ago and which hold true today is the maintenance of morale. The successful breaking of an ISIS siege to free trapped Syrian soldiers is both a PR coup for the Assad regime and a boost to pro-government morale.

At the national level the media plays a key role in maintaining morale. Compared to ISIS, the Syrian government's use of social media has been poor but it is now using the battlefield victory at Kwereis to differentiate its current military capabilities from dark episodes in the recent past.

The fall of Tabqa airbase in August 2014 was both a military and domestic political failure. The video of more than 100 Syrian soldiers stripped to their underwear being marched through the desert to their execution was an advertisement for both the proficiency and cruelty of ISIS. It also reinforced the image of a Syrian regime incapable of supporting its own troops. By contrast, Syrian news reports (watch from 3:46 to 5:10 to avoid graphic footage) of the lifting of the Kwereis siege shows both the Syrian military and ISIS in a different light. The Syrians are on the offensive, aggressive and well supported while the bearded jihadists are dead. 

The government is keen to show a population that has seen government forces under pressure for much of the past year, alert to personnel shortages, and used to battlefield reverses, that the tide has turned. That's not to say that it has, but the use of such imagery is an important tool for maintaining morale. It may convince some that the additional support provided by Russia and Iran has meant government forces are more capable than people think. The more recent images of the relieved Syrian garrison being welcomed by family and friends further reinforces the narrative of a Syrian government with its tail up and able to support a military that it had been incapable of supporting even a few weeks previously.

It is early days yet, and Russian and Iranian strategic motives are not completely in sympathy with those of the Assad regime, but the more images of battlefield victories from pro-government forces that populate the airwaves, the easier it is to maintain support amongst pro-government elements of the Syrian population, or at least call into question the efficacy of the armed opposition. Morale and momentum are changeable commodities, and media can influence both. The Syrian government is trying to use recent battlefield advances to create a narrative of regime strength and, while it may not necessarily reflect the truth on the ground. this is certainly a stronger narrative than that of a few months ago. 

The media battle of Syria is becoming increasingly contested.

Photo courtesy of imgur user 45chris2

A larger Australian Defence Force? Reflections on the Boyer Lectures

This is the third in a series of posts marking the launch  of A Larger Australia, the book of the 2015 Boyer Lectures, by Lowy Institute Executive Director Michael Fullilove.

In his final Boyer Lecture 'The Birthplace of the Fortunate', Michael Fullilove advocates for a more capable and muscular Australian Defence Force (ADF). What could this look like and how likely is it?

He asserts upfront that the foreign policy debate in Australia is too important to be left to the foreign policy establishment. It strikes me the same could be said of defence, where the expert discourse is over-personalised, and the political debate is strategically under-informed and easily swayed by special interests, above all the defence industry. Michael's contribution is therefore timely and welcome. 

Fullilove argues that we need to beef up the ADF to 'better enable us to protect our territory and our citizens', as a hedge against the strategic shocks outlined in 'Present at the Destruction'. A more capable ADF would improve Australia's security by deterring potential adversaries, but also earn us influence 'in the minds of friends and allies'. 

Deterrence, of course, is a narrowly defined kind of influence. But, to me, the internationalist emphasis that runs through the 2015 Boyer Lectures primarily suggests an enhanced set of military capabilities in service of Australia's values and interests on the world stage. Fullilove posits that because Australia is a beneficiary of the liberal international order, we should be prepared to 'serve in its bodyguard.' A proponent of ANZUS, he sees a more capable defence force contributing to Canberra's credibility with Washington, but also building influence with partners in the region. 

This is not a treatise for armed neutrality or 'fortress Australia' ensconced behind its sea-air moat. Fullilove equates that with being 'a little nation, anxious about the world and disposed to erect barriers against it'. We should not forget either that it would cost much more than 2% of GDP to create a truly independent defence force.

It follows that a generous slice of the enhanced defence resources that Michael argues for would be directed towards 'engagement' and mobility. Recent acquisitions have already delivered a major boost to sea-and airlift capabilities, which, in conjunction with the Army's embrace of the amphibious force concept, point to an expeditionary orientation for the ADF. Expeditionary, with its imperial connotations, is a loaded term but preferable to 'power projection', capturing a broader spectrum of defence contingencies from stabilisation and humanitarian mission to coalition operations. I believe that regional countries will wear this augmentation of the ADF's deployability without too much angst. Some may welcome it.

Against more capable adversaries (ie China), the key platform in the ADF's future inventory for supplying a heftier, solo punch is likely to be the replacement to the Collins submarine. This is where the divide between engagement and deterrence is keenest, since the submarine's bottom-line purpose is to be an autonomous, stealthy strike platform, much less useful for naval diplomacy than, say, a frigate. Even with a rising budget, the ADF faces trade-offs between deterrence and engagement, given the stratospheric price tag of submarines and other strike assets like the F-35.

Fullilove is not specific about the military means, ie force structure, required to achieve a 'larger Australia'. He concentrates on the political commitment to increase funding for defence, supporting the Coalition's declared aim of boosting defence expenditure to the equivalent of 2% of GDP within a decade. Setting defence spending as a percentage of GDP has widespread appeal because it appears to signal strategic commitment proportional to the funding base. As with overseas aid, the downside to such targets is that they risk becoming ends in themselves, disconnected from any supporting strategic rationale. In practice, even large government departments like Defence struggle to acquit windfall budgets.

Defence has emerged from the First Principles Review and, after a delay necessitated by September's leadership spill and ministerial reshuffle, the Turnbull Government looks set to finalise the defence White Paper (DWP) for release in 2016. Well before Malcolm Turnbull became Prime Minister, the Coalition said it would not repeat the mistake of past DWPs by issuing a document long on strategic ambition but bereft of funding commitments. This time, the White Paper is supposed to be fully costed and will be followed by a 10-year defence capability plan and defence industry policy statement to provide 'greater certainty about the Government's key priorities and timeframes'. 

That could be counted as progress towards the 'properly resourced' defence policy that Michael argues for, although the continuing political commitment to concentrate warship and submarine building in Australia is likely to exact a costly premium based on past experience. However, the willingness of the Turnbull Government to commit to the 2% of GDP defence-spending target, in face of an uncertain fiscal and growth climate, is open to question. 

We will have a better sense whether the Government shares Fullilove's ambition for an up-scaled ADF when the DWP is released. But Turnbull's inclination to use the military, as a tool of policy (or politics), appears cooler than his predecessor. Turnbull has not reversed Abbot's commitment to bombing ISIS targets in Syria. But his administration opposes ADF 'boots on the ground'. Unless a new crisis erupts in Australia's region or our GDP falls precipitously, the 2%GDP goal could prove elusive. 

Michael Fullilove asserts:

'Our voice will only command weight and authority if we accompany it with action. That means working with the US and like-minded countries to support the rule of law and the peaceful settlement of disputes in the region, and to discourage coercion and intimidation.'

This proposition is now being stress-tested in the South China Sea, where Canberra has so far largely restricted itself to verbal support for the US.

The ADF will no doubt continue to be deployed in niche coalition and peacekeeping roles globally. However, the regional stage is the defining one for our future. For that, the ADF needs to be resourced sufficiently to maintain conventional deterrence and high-end war-fighting skills to operate alongside the bigger players, but not so concentrated that this comes at the cost of presence and engagement across Southeast Asia and the South Pacific.

If that means larger, so be it.

Aid & development links: 'lazy' aid recipients, Australian charity, malaria fund and more

  • MIT and Harvard economists have debunked the claim that aid funded welfare programs in developing countries make people lazy. Vox has a good summary.

  • Devpolicy has posted the second in a two part series looking at Australian development NGO expenditure, which I have co-authored. In this post we look at how individual NGOs have changed their expenditure over time.
  • The Bill and Melinda Gates Foundation is partnering with the UK for a £1billion malaria fund and with Silicon Valley heavyweights Mark Zuckerberg and Jeff Bezos on a clean energy fund.
  • Last week aid worker Steve Dennis won a case against his former employer, the Norwegian Refugee Council, for 'gross negligence' after he was kidnapped on the job in 2012. The Guardian takes a look at what impact this landmark decision will have on the humanitarian sector, with Aidspeak describing it as a ‘game-changer’.
  • Also last week, Australian Prime Minister Malcolm Turnbull made waves when he pledged $1 billion of Australia’s existing aid program to climate change initiatives over the next five years. That equates to roughly 5% of Australia’s total aid spending over that period. It is not clear if this funding will be redirected from other areas of the aid program or will come out of existing aid funding already going to adaptation and mitigation projects in the region.
  • On the eve of a five day tour to Africa by Chinese President Xi Jinping, The Washington Post reported African countries that receive Chinese aid tend to become more violent.
  • Sticking with The Washington Post, a few weeks ago it took a look at new research asking whether a Western education leads to leaders in developing nations launching more democratic reforms. The answer is yes, providing further justification for scholarship programs funded through aid (h/t Devpolicy).
  • Meanwhile, a new report from the Australian Charities and Not-for-profits Commission shows that donations to development NGOs in Australia made up about 12% of all charitable donations in 2014, while Fairfax media asks the question 'How generous are Australians really?'

Photo courtesy of Flickr user Alex Prolmos

China's puzzling defence agreement with Australia

Last Thursday, The Australian newspaper ran an editorial, 'Strengthening links with China'. This followed its front-page coverage of the visit to Canberra by China's Chief of General Staff Fang Fenghui, for annual talks with Chief of Defence Force Mark Binskin and Department of Defence Secretary Dennis Richardson. Fang later met Defence Minister Marise Payne.

This was the 18th Defence Strategic Dialogue between Australia and China, not a number that normally commands particular excitement in the crowded schedules of top-brass summitry. However, The Australian reported that this meeting was accompanied by an agreement to 'upgrade' Australia-China defence and security relations, including stepped-up cooperation on counter-terrorism, peacekeeping and senior personnel exchanges. The newspaper heralded this as a 'positive sign of a maturing bilateral relationship'.

Readers, foreign and domestic, could be forgiven for assuming that Australia and China had conspired to catapult their defence relations on to a new strategic plane. It appears, however, there may be less to this than meets the eye. The Australian's primary source for details of the agreement was a Chinese communiqué obtained by the newspaper. China's claim that the visit yielded 'major outcomes' should be treated with caution. As The Australian's Brendan Nicholson pointed out, the media release from the Department of Defence headquarters in Russell Hill makes no reference to any agreement, saying only that the annual defence dialogue is an 'important aspect of the broader relationship'.

The lop-sided reporting on the visit suggests Chinese sources were the only ones initially available. Australian media were not invited to the ceremonial welcome for General Fang, whereas Chinese media were notified in advance. Russell Hill's minimal communications suggest Defence wanted to keep this visit low key. However, there is more to this than the ruffling of media feathers. Without corroboration from Canberra, greater scepticism was surely merited before The Australian accepted the Chinese communiqué at face value. China's intention to 'big up' the results of the dialogue between the two countries' top-ranking military officials was clear and unsurprising. Predictably, China's media lost no time before quoting Air Chief Marshal Binskin touting the agreement as 'a massive win for peace in the region'.

The Australian's editorial reports that a 'robust' exchange took place on the South China Sea. Yet the editors' claim that 'the new engagement should ideally put Australia in a better position to assert a restraining hand on Chinese expansionism in the region' smacks of fantasy. From Beijing's perspective, an agreement to upgrade the defence relationship — however modest — presents an opportunity to pocket a concession and to drive a wedge between Washington and its closest regional ally, at a time when Canberra is supposedly 'on the same page' in regard to the South China Sea. 

To be clear: I am not arguing for any downgrading of the Australia-China military relationship (though I stand by my suggestion that last month's South China Sea joint live-fire naval exercise could have been cancelled). Maintaining a two-way channel to the higher echelons of China's military is important, including 'open and frank' exchanges on the South China Sea of the kind we are told took place last week. The US military values its links with the People's Liberation Army (PLA), and Australia should utilise whatever influence and confidence it has built up with Chinese uniform counterparts.

However, The Australian's view that 'Beijing's willingness to engage in closer ties with our defence forces is an indication that Australia has nothing to lose in challenging Chinese coercion in the region', entirely misses the point that Beijing sees value in courting Canberra's defence leaders to make a strategic point to Washington and Tokyo. If this sounds like a storm in a teacup, don't forget so did the sale of Darwin port until American officials learned about it in the media.

I also fail to see why, as The Australian claims, 'striking a deal for military cooperation' with the PLA is assumed to be inherently desirable. Cooperation in disaster relief and peacekeeping is harmless enough, but embracing China as a military ally against counter-terrorism on the assumption this is 'in the interests of the West, and of Southeast Asian nations', needs careful forethought.

China has legitimate interests in combating international terrorism. But there are risks associated in legitimising China's suppression of its Uighur Muslim population under the banner of countering 'Jihadists', especially now this extends to Uighurs deported from Southeast Asia. 

Conspicuously absent from media commentary around the reported military agreement with China was any reference to the cyber attack on the Australian Bureau of Meteorology, a story broken by the ABC on 2 December. Australia's intelligence agencies have expressed a high degree of confidence that the attack, which occurred in September and could cost hundreds of millions of dollars to fix, originated in China. It would be interesting to know if Australia raised the cyber attack in the Defence Strategic Dialogue, particularly given Defence receives a live data feed from the Bureau.

It would also be helpful to the public interest if the Department of Defence could clarify the nature of any new cooperation agreement with China.

Photo: Australian Defence Image Library

COP21, China's role and developed nations' obligations as reported in Chinese media

By Marie-Alice McLean-Dreyfus, an intern with the Lowy Institute's East Asia program

Coverage of the Paris climate conference by China's media has been largely positive, with reports portraying China as a driving force in climate negotiations, willing to work with the international community to reach a consensus. So far, views on China's representation at COP21 under the leadership of Xi Jinping are very different to how China's presence at the Copenhagen talks in 2009 was perceived by Western media. Various reports at that time accused China of undermining the conference. In this week's coverage, China's media has focused on the country's domestic and international efforts to fight climate change and made very few comparisons to Copenhagen.

China's U-turn on climate negotiations can be partly explained by worsening pollution. In an ironic coincidence, on Monday, the day COP21 began, the northern areas of China including Beijing, Tianjin, Xi'an and Jinan were blanketed by heavy haze and pollution with an AQI air quality index of 500 (by way of comparison, the average US city has an AQI of less than 100). As Weibo user @???: asked, 'if Beijing wasn't so heavily polluted would our country care about the environment?' As if in response, an editorial in Global Times declared air pollution has acted as a 'warning bell', prompting China to act on climate change and fulfill its responsibility as the world's largest developing country.

An editorial in People's Daily gave an indication of how seriously China's leadership takes the threat of climate change. It stressed the need for the Paris talks to succeed, observing 'we have no plan B because there is no planet B'. Also emphasising China's commitment was a piece in Xinhua that highlighted the many independent and voluntary actions China has undertaken to address the challenge of a warming planet, including instances of international cooperation.

In Xi Jinping's speech to the summit he warned against a 'zero-sum mentality', and called on all countries, especially developed nations, to assume a 'shared responsibility' for climate change. While Xi stated that China's actions are driven by an international 'sense of responsibility', he reiterated the principle of 'common but different responsibility' in the UN Framework Convention on Climate Change must be adhered to. China's view is that its contributions will, and should be, different from developed countries.

The need for a Paris agreement to factor in differences between developed and developing countries was echoed in a Xinhua article, which called for an agreement that would reflect different 'national levels of development.' An opinion piece in Global Times also praised China's efforts for 'taking a lead role among developing countries', citing the establishment of the BASIC alliance and China's 20 billion yuan contribution toward a South-South climate change cooperation fund. An editorial in the English language Global Times took an uncompromising approach to the need for developed countries to take a greater responsibility. It contrasted 'China's generosity and dedication' with the actions of some Western countries who try to 'wriggle out of their due moral obligations', while blaming developing countries for blocking a new international treaty. A readers poll in the People's Daily reflected this hard-line attitude: 56% of respondents believed developed countries should accept more responsibility for fighting climate change. 

Other reports suggested China's contribution in Paris had won international approval. As one article in Global Times stated, the international community views China as an 'important contributor' to international climate change negotiations, and a 'positive driver in the multilateral negotiation process.' To further underline the importance of China at the talks, an article in Global Times used the classic technique of citing foreign media reports to support China's position. The article quoted a French media outlet which stated that 'without China's participation the climate talks would have no hope of succeeding.' And, as a visual reminder of China's pre-eminent role, the front page of Tuesday's edition of People's Daily was filled with images of Xi meeting with Barack Obama, Francois Hollande and Vladamir Putin.

Much of the coverage, along with Xi's speech, included rhetoric that has characterised Xi's rule. His reference to building a 'common destiny for mankind', his referral to a 'future of win-win cooperation', and the reference to a 'global green community of common destiny', were all, for example, echoed in a Xinhua article. This suggests the need to take action on climate change is becoming a part of the wider discourse within China.

In contrast to Copenhagen, Chinese leadership appears to have taken a constructive approach at the Paris climate talks. As China continues to rise, it is keen to be seen as a responsible international player contributing to global governance. Acting in good faith at COP21 is one way to demonstrate this. Media coverage that emphasises China's valuable contribution is making sure this international play is not lost on the domestic audience,

Photo by Chesnot/Getty Images

Why DFAT is wrong on the opportunity cost of FTAs

Last month the Department of Foreign Affairs and Trade (DFAT) secretary, Peter Varghese, had this to say about Australia’s participation in the global movement toward preferential free trade agreements (FTAs):

To not participate would carry with it a significant potential opportunity cost, as Australian businesses’ international competitive position erodes.

I hear this reasoning a lot: if everyone else is doing it, we have to do it too. But the argument is not correct. Let me explain.

The definition of opportunity cost is a bit technical, but it is one of the most important concepts in economics. It basically means what you give up when you make a choice. So if Australia chooses not to sign an FTA, the opportunity cost is the difference between our welfare with the agreement and our welfare without the agreement. The opportunity cost of sitting out an agreement can be positive or negative. If it is positive, it means we can gain by signing onto an agreement. If the opportunity cost is negative, then the right choice is to sit it out.

Varghese is saying that when others sign FTAs, our opportunity cost is affected. But, generally, that’s not right. Let’s walk through a simple example.

Suppose Australian and New Zealand companies compete for a share of the dairy market in a hypothetical country called Marketland. Suppose further that the export market is worth $10 billion and the Australian and Kiwi companies are evenly matched. In the absence of any preference through a FTA, they split the market in half. If there is a preference toward one country, that country takes the entire market.

I have found this example is clearer if there is a further wrinkle. Suppose that a free trade agreement with Marketland contains another provision, suppose an intellectual property provision, that is costly for Australia, and it costs $6 billion.

Question: If New Zealand has a free trade agreement with Marketland, does that change the opportunity cost of a free trade agreement for Australia?

Answer: No. Let me explain.

First, suppose there is no agreement between Marketland and New Zealand. If Australia were to sign an agreement with Marketland, then we would be able to sell an extra $5 billion of milk (we go from half the market to all of it), but at a cost of $6 billion through the intellectual property provisions. If we sit out the agreement, we get an extra $1 billion than if we signed on. The opportunity cost of the agreement is negative $1 billion.*

Now suppose there is a pre-existing agreement between Marketland and New Zealand. If we sign an agreement, we go from selling zero milk to Marketland to selling $5 billion worth, so again increasing exports by $5 billion. But, again, it comes at a cost of $6 billion. The opportunity cost of the agreement is negative $1 billion, so the opportunity cost has not changed.

What other countries do affects our starting point, but for the most part these other agreements do not affect the overall value of an agreement of our own. The simple example above demonstrates that point. If New Zealand has a pre-existing agreement, we start off in a worse place: we start with none of the dairy market rather than half of it. But the change in welfare as a result of signing the agreement, measured here by the opportunity cost, does not change.

Confusion on this point is rife. You could see it, for example, in DFAT’s National Interest Assessment of the Korean Free Trade Agreement, where it refers to 'the opportunity cost of not proceeding with KAFTA in light of the ROK’s free trade agreements with the United States and the European Union'.

Here’s a challenge for DFAT. If it chooses to model the effect of the Trans Pacific Partnership (and I think it should), then try doing it with different assumptions about which other agreements exist, for example, the TTIP (Transatlantic Trade and Investment Partnership). I reckon it would make little difference to the cost-benefit analysis.

*This summary of the effects of the agreement may cause economists to be overcome with despair. I’m overlooking issues like the cost of the resources used to produce the extra milk. You are going to have to trust me that this is a secondary consideration for the point I am making in this post.

Photo courtesy of Flickr user Jed Sullivan

Pacific Island links: leaders in Paris, REDD+, budget woes, asbestos, ending AIDS and more

  • Pacific Island leaders are in Paris in force for the COP 21 United Nations conference on climate change. Leaders from Marshall Islands, the Federated States of Micronesia, Kiribati, Tuvalu, Fiji, Nauru, Palau, Cook Islands, Papua New Guinea and Samoa all addressed the conference in the opening days.
  • The Pacific has made global headlines for being most at risk of disappearing due to rising sea levels brought by climate change.
  • The Guardian has an excellent long-form read on the bold ambitions of REDD- as a mechanism for climate change mitigation, and its humble roots in Papua New Guinea. The New Yorker has another on the intersection of Climate Change, El Niño and PNG.
  • Paul Flanagan has produced a two part series providing some forensic level analysis of the 2016 PNG budget.
  • The ADB has released its latest Pacific Economic Monitor, highlighting budgets around the region and the significant challenges governments face in addressing falling commodity prices and El Niño. Unsurprisingly, PNG has been the hardest hit. Also, take a look at the chapter on the (minimal) economic value to hosting major Pacific events.
  • Meanwhile, PNG’s Freedom Rating has taking a slight tumble, with Freedom House authors attributing it to 'Prime Minister Peter O’Neill’s increasingly autocratic leadership style, including his disbanding of an anticorruption task force after he became subject of a corruption investigation'. Rule of law is also an issue, as PNG police continue to make headlines for the wrong reasons.
  • An asbestos removal program has kicked off in Nauru, yet local workers and refugees hired to remove the hazardous material from 41% of Nauru housing reportedly working without proper protection, while the materials themselves end up in an exposed local tip.
  • Tuesday was West Papua Flag Day, where local activists of West Papuan self-determination rights hold ceremonies to raise the Morning Star both in and outside of Papua. There have been reports of a military clamp down.
  • Tuesday was also World AIDS Day. HIV/AIDS affects Pacific Island countries to varying extremes, but Fiji is being heralded for its progress on a path to end the public health threat posed by AIDS by 2030.


IMF's yuan decision: why it matters and why some are not pleased

On the 30th of November, the IMF announced its decision to include the Chinese yuan in the Special Drawing Rights (SDR) basket.

Terrific, I hear you say, yet another TLA to understand (Three Letter Acronym). Bear with me. I could go through the technical details of how it all works, but I suspect my readership would plummet so here's the quick version. SDRs are not a currency; rather, they are used as a book-keeping entry. When a country borrows from or through the IMF, that loan is recorded as a loan of SDRs, though what the country actually receives is a hard currency. Other international organisations use SDRs in this way too. SDRs also function as an asset at the IMF (Wait, they are a book-keeping entry and an asset? Yep, just like the dollar). Countries have a certain amount of SDRs allocated to them by the IMF. Countries can exchange these for currencies with other IMF members. For more details check out the IMF worksheet. If you want a gold star and to see how SDRs are used in the plumbing of IMF lending, then the FT has the page for you.

Right, hopefully that’s all clear. So what is the significance of the yuan inclusion? In and of itself, not much. Inclusion is not going to lead directly to more trading or use of the yuan, apart from perhaps at the IMF itself. The FT also has a nice piece deflating some of the hype surrounding SDR inclusion

Inclusion can, however, also be viewed as the IMF’s tick of approval.

In August, the IMF released a report that examined, in detail, the case for the inclusion of the yuan. A sticking point was whether the currency was 'freely usable', a somewhat rubbery concept that is one of the IMF's criteria.

Since that report was published, the Chinese have made some changes, perhaps with the aim of addressing this issue. For example, they have taken steps to allow the market more influence on the value of the exchange rate, and they have allowed official institutions to have direct access to bond and foreign exchange markets. That seemed to be enough for the IMF. And perhaps, economically speaking, these reforms by the Chinese are the bigger story here.

But not everyone is happy. Ted Truman, long-time Federal Reserve employee and also former assistant secretary of the US Treasury, has criticised the decision making process. In particular, he is worried the decision was politicised:

Christine Lagarde appears to have decided to give the Chinese authorities the political trophy of inclusion of their currency in the SDR basket and to take personal credit for this action. She has announced her position on the SDR basket two weeks in advance of its review by the executive board. Thereby, she has exerted pressure on the members of the executive board and on officials in the capitals of the countries they represent to agree with her.

Given the problems other IMF reforms are facing — in particular the reforms that would increase the voting share of China, which are held up in the US Congress — some may be tempted to give the Chinese some leeway. However, unequal treatment is a dangerous game to play, and I hope those in charge have not succumbed to the temptation.

Australia-Papua New Guinea relations: maintaining the friendship

The Lowy Institute, with the support of GE and the DFAT-sponsored Australia-PNG Network, is hosting the Australia-Papua New Guinea Emerging Leaders Dialogue this week. The Dialogue, which seeks to develop deeper, people-to-people relations between Australia and its nearest neighbour, takes place at the end of a year in which the official relationship has taken a few hits.

A shared history: PNG and Australian fire fighters after a training session (Photo courtesy Flickr user DFAT)

The most recent came when an AFP officer alleged in the media last week that Australian police serving as advisers in Papua New Guinea were constrained because of the Manus processing centre. I won’t deal here with the other allegations the officer made, which have been refuted by the AFP, Papua New Guinea’s police commissioner and DFAT, and which changed in later interviews with the officer in question.

But the reference to Manus bears further analysis. A number of prominent commentators on Papua New Guinea have publicly and privately regretted the impact of the political imperative to maintain the Manus island refugee processing centre as a deterrent to future asylum seekers. The ANU’s Stephen Howes and I are on the public record saying that this imperative dissuades the Australian government from tackling tough issues in Papua New Guinea and constrains Australian policy options. Anti-corruption campaigner and head of the now de-funded Taskforce Sweep in Papua New Guinea, Sam Koim, has also cautioned about ignoring corruption at the highest levels in Papua New Guinea in order to preserve the O’Neill government’s cooperation with refugee resettlement processing and resettlement.

Are we right? Is Australian policy in Papua New Guinea beholden to its immigration policy?

If the processing centre in Manus were to be closed, would Australia be freer to publicly criticise the government of Papua New Guinea about the rule of law and the behaviour of its police force?

Australia has many reasons to maintain a friendly bilateral relationship with Papua New Guinea, including:

  1. Papua New Guinea is Australia’s nearest neighbour. Its security is inextricably tied to Australia’s security. The 2013 Defence White Paper identified the security of Australia’s immediate neighbourhood (including Papua New Guinea) as the second of four key strategic interests.
  2. Bilateral trade is worth $5.9 billion. Papua New Guinea is Australia’s 17th largest trading partner. Australia takes 36% of PNG’s exports and Australian goods account for 34% of PNG’s imports, making Australia by far Papua New Guinea’s leading trading partner. The stock of Australian investment in Papua New Guinea totals $18.9 billion.
  3. Papua New Guinea is the largest bilateral recipient of Australian aid, with $554.6 million due to be disbursed this financial year. According to DFAT, Australian aid accounts for 68 per cent of total official development assistance received by Papua New Guinea and makes up 14 per cent of Australia’s total aid program. 
  4. According to DFAT, approximately 10,000 Australians live in Papua New Guinea. The latest Australian census shows about 15,000 Papua New Guineans living in Australia.
  5. Australia’s colonial relationship with Papua New Guinea gives Australia special responsibilities. The 2015 Lowy Poll found 82% of Australians agree that ‘stability in Papua New Guinea is important to our national interest’ and 77% say ‘Australia has a moral obligation to help Papua New Guinea.’

Separately and together, these are good reasons not to risk damaging the bilateral relationship, regardless of whether Australia maintains the costly processing centre in Manus.

The Australian government is constrained from speaking out about the rule of law, corruption and human right abuses because it wants to avoid the risk the PNG government would renege on its agreement to process and resettle refugees. However, by far the most most important reason for Australia’s reticence is that the nature of the bilateral relationship has changed.

After the tense times of the Howard-Somare era, Australian leaders and foreign ministers have sought to put the relationship on a friendly and more equal footing. Prime Minister Kevin Rudd set the wheels of change in motion, showing overt respect to his elder counterpart Sir Michael Somare and agreeing to Somare’s request to focus more on the bilateral economic relationship and reform the aid relationship. When Peter O’Neill replaced Somare as Prime Minister, he quickly developed a friendly relationship Julia Gillard as prime minister and Rudd as foreign minister. O’Neill understood Australian politicians well. He convinced them he was the leader Papua New Guinea needed and that he could provide the regional leadership Australia needed, presenting a viable alternative to the then undemocratic Fiji.

Through these years, PNG’s economy strengthened, benefiting from the impact of ExxonMobil’s landmark LNG investment and high commodity prices, and it developed more substantial trade relationships with Asian countries. Foreign Minister Julie Bishop has worked harder than any of her predecessors to improve the relationship in an era when Papua New Guinea is no longer dependent on Australia. Peter O’Neill’s government has a relationship of trust with Canberra because of efforts on both sides. The Manus deal helped Prime Minister O’Neill gain some leverage over Canberra but the fundamentals of the bilateral relationship had changed before that deal was struck.

The relationship could certainly be better but at this particular juncture is hard to see how an Australian foreign minister could tackle the most difficult issues in a public way without risking another hit to the official relationship. In these challenging times, strong people-to-people and business-to-business relationships are more important than ever.