Archive for the ‘Economy’ Category

Politics, NAFTA and Security Make for a Bumpy Ride

February 16, 2018

Antonio Garza (Mexico, 2002-2009)

Cross posted from Ambassador Garza’s newsletter


In two weeks, North America’s NAFTA negotiators will sit down for the seventh round of negotiations in Mexico City, and Presidents Trump and Pena Nieto have announced that they too will be meeting. The teams will have a lot on their plates, as previous rounds have eked out only slow progress on all the major issues. It is a far cry from this summer’s initial ambitious agenda that promised a modernized agreement by early 2018. Although, it’s not particularly surprising, since opening up an agreement that touches almost every sector in North America’s economies is no simple task and especially so with a U.S. team that is navigating its own domestic landmines and political risk (as I’ve written about previously). We should be preparing ourselves for a much longer timeline than initially expected, with negotiations likely stretching at least through the coming months and potentially into the coming year.

Yet, time is not on the NAFTA negotiations’ side. On July 1st, Mexicans will head to the polls to elect their next president and the pre-campaigns are already in full swing. The top three candidates have been traveling the country to meet with voters and share their campaign promises. Andrés Manuel López Obrador (AMLO) is the current leader with 23 percent of the vote. Best known for his populist platforms and discourse against the political establishment, AMLO has indirectly taken a more moderate position on NAFTA. His proposed economy minister promised to continue NAFTA negotiations and not to trash or restart the modernization process. The other top contenders—PAN party candidate Ricardo Anaya and PRI candidate José Antonio Meade (with 20.4 and 18.2 percent of the vote respectively)—have also made it clear that they would continue the talks. Yet, negotiating a thorny agreement through a political transition is sure to be a precarious endeavor.

Another controversial political issue has been the future of Mexico’s 2013 energy sector opening. While Anaya and Meade have supported the reform, AMLO has been a critical opponent, previously saying that he would roll it back or put it to a referendum. Yet AMLO’s proposed Energy Minister has adopted a less extreme path, outlining his plan to build a Mexican refinery and saying that he wouldn’t tear up existing contracts. Despite the political uncertainty, private sector interest in Mexico’s energy sector has surged. The January 31 deepwater oil and gas round was the largest to date, with investors claiming 19 of the 29 fields and pledging half a billion dollars in cash-signing bonuses. Overall, investment in the sector is estimated to reach $150 billion over the course of the current contracts.

However, while NAFTA and the energy reform are two major policy concerns, Mexicans are likely paying more attention to corruption and violence levels around the country. In the latest saga, Chihuahua Governor Javier Corral recently emerged as a national voice on corruption after his team began investigating the alleged embezzlement of more than US$12 million in state funds. The money was siphoned off under the previous (and now fugitive) governor Cesar Duarte and allegedly used to fund other PRI politicians’ campaigns. The investigation into the missing money exploded onto the national scene when it began to ensnare top PRI officials and after the federal government responded by withholding from Chihuahua $36.5 million in promised funds. The standoff led Corral to criss-cross the country protesting with a “Caravan of Dignity” and with the federal government finally backing down this past Monday and delivering the money.

These corruption scandals are also taking place in the midst of Mexico’s most violent year in recorded history. The number of homicides in 2017 surged past even the bloodiest years of the Calderón administration with no signs of slowing down. The factors driving the rise in violence are likely sub-region-specific and include everything from group infighting between different factions of the Gulf Cartel in Reynosa, local groups jockeying over lucrative poppy production in Guerrero, or fighting over who gets to sell drugs where in Ciudad Juárez. Yet one thing is clear, there has not been a strong and united federal strategy for lowering the violence. Instead, the response has been reactionary, with security issues failing to garner the same high-level attention as the country’s economic issues.

In the United States, we’ve also been grappling with our own domestic issues that directly affect Mexico. This includes the DACA debate, which will go back in front of Congress next week, and the budget’s emergency funding for the United States’ opioid crisis. Two weeks ago, U.S. Secretary of State Rex Tillerson emphasized the importance of working together with Mexico on many issues. In a speech last week at my alma mater the University of Texas at Austin, Tillerson outlined how the United States can approach cross-border security issues by improving its own drug policies and also by providing Mexico with targeted funding and training. While bilateral discussions may get overheated at times, working together on these and other cross-border issues continues to be the best way to respond to both countries’ most pressing challenges.


Put people first to get fintech right in Asia

February 12, 2018

Curtis S. Chin (Asian Development Bank, 2007-2010; Managing Director, RiverPeak Group)


Jose B. Collazo (Southeast Asian Analyst, RiverPeak Group)

Cross posted from the Singapore Straits Times


As the Year of the Rooster gives way to the Year of the Dog, fintech remains very much in the news and on investors’ minds.

From blockchain to bitcoin, ethereum and other cryptocurrencies, and initial coin offerings that allocate “tokens” as a new means of crowdfunding capital, the language and disruptions buffeting the mainstream banking and financial services industry can seem overwhelming.

But beyond the multimillion-dollar, headline-grabbing investments and acquisitions, what does financial technology actually mean for the people of Asia? Across the region, fintech deals continue to make waves. And while much of the venture capital in Asia has predominantly flowed into China, particularly among a handful of large tech companies, other countries also are seeking to position themselves as fintech hubs, says Mr Jackson Mueller, associate director at the Milken Institute’s Centre for Financial Markets.

Multimillion-dollar investments were reported last year in Hong Kong in “digital wallet operator” TNG FinTech Group, in India in online lending platform Capital Float and in South Korea’s second-largest cryptocurrency exchange, Korbit.

In Indonesia, motorbike delivery and ride-sharing app Go-Jek is now officially a “unicorn” — a tech start-up valued at more than US$1 billion (S$1.3 billion). With Go-Jek’s acquisition of payment portals Kartuku and Midtrans, and savings and lending network Mapan, the company is not only poised to be a digital payments leader, but also is in a position to influence the shape and scope of the fintech landscape in Asean’s largest economy.

According to Bloomberg, Go-Jek and the three firms collectively now process almost US$5 billion of debit-card, credit-card and digital-wallet transactions for their customers, service providers and merchants. The growing interest in fintech’s potential across Asia beyond China was made clear at Singapore’s Fintech Festival last year. The conference in November was attended by over 30,000 people focused on sharing or learning more about fintech developments from companies large and small.

An awards program supported by the Monetary Authority of Singapore and the Association of Banks in Singapore recognized “digital disruptors” Blocko, Spark Systems, AGDelta, Flywire and six other companies for implementing innovative financial technology solutions.

For Asia’s brick-and-mortar financial institutions, the ongoing rise of fintech poses challenges to existing business models as well as opportunities to reach new customers. For policymakers and entrepreneurs, the benefits of addressing the digital divide and of harnessing the power of fintech can seem clear-cut in their combined ability to increase the level of access to capital and financial inclusion.

Across much of Southeast Asia, the unmet need for basic banking services is significant. Only 27 percent of the region’s 600 million inhabitants had a bank account in 2016, according to consulting firm KPMG. In emerging economies such as Cambodia, only 5 percent of the population have access to formal banking services. This level of the “unbanked” has negative repercussions for the region.

With little to no access to formal banking services, too many people in Asia go without the basic protections of a savings account, and may well face relatively higher costs for sending or receiving money. This, in a region where remittances were valued at US$236 billion in 2016, according to the World Bank. “Having access to basic financial services can reduce hunger, increase education and generally improve the quality of life,” said Queen Máxima of the Netherlands, the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development, in her speech at the fintech event in Singapore.

Our view too is that fintech is a disruption to be embraced. And we are not alone. Venture capitalist and fintech influencer Spiros Margaris said: “I am convinced that fintech’s greatest achievement will be not just helping the unbanked, but also the underbanked — individuals who have insufficient access to financial services — to live a better life.”

A 2017 study conducted by the Asian Development Bank and consulting firms Oliver Wyman and MicroSave found that opening the door to financial services to the unbanked could increase the gross domestic product of the Philippines and Indonesia by as much as 3 per cent and Cambodia’s by 6 percent.

Yet, the sustained benefits of fintech will be realized only if a proper ecosystem is created and maintained — one that addresses concerns of regulators while benefiting innovators and, most importantly, consumers.

Narrowing the digital divide also will continue to be a fundamental need, with increased mobile-phone ownership and Internet penetration being key factors in spurring consumer adoption of mobile financial services. Indeed, the true measure of success for fintech should not be deal size or quantity but in expanded horizons. True success is when fintech helps once-poor farming communities access funds to bring their crops to market, or helps small shopkeepers to grow bigger, or provides seed money for a young entrepreneur ready to turn a great idea into a concrete reality.

Beyond the fintech hype and jargon, let’s not forget the human element of financial technology in the year ahead. In South-east Asia and across the Asia-Pacific region, assessments of fintech must go beyond counting fortunes made and businesses disrupted or created, but also include a measure of people helped.

Twenty Years of Morocco’s Development

February 9, 2018

Edward M. Gabriel (Morocco, 1997-2001)


Twenty years ago this year I arrived in Morocco as the new United States Ambassador. It was the beginning of a close-up view of the significant changes going on in Morocco for the next two decades.

During my first meeting with King Hassan II, shortly after my arrival, he wasted no time in addressing Morocco’s agenda with the United States, challenging me on our positions, especially the Kingdom’s existential issue regarding sovereignty over the Sahara. This unexpected candid and warm exchange set the tone for regular meetings through my tenure during which concerns and grievances were voiced in private, rather than aired publicly. King Mohammed VI would continue this practice with me after his father’s death.

My first few months in the country also coincided with the beginning of the first government of Alternance, led by opposition leader Abderrahmane El Youssoufi – a watershed moment for Morocco that many political analysts mark as the beginning of significant democratic reform and economic liberalization after years of a strong-armed approach to governing and limited civil rights. Abderrahmane El Youssoufi, whose political activities had previously resulted in two years in jail and then 15 years of exile, became Prime Minister after his party, the Socialist Union of Popular Forces (USFP), won the most seats in the November 1997 elections. And since then, the international community has confirmed elections as occurring in a fair and transparent manner.

In 1998, the unemployment rate in the country was 17% and growing, with youth making up a disproportionate percentage of the population. Women lacked equal rights with men. The percentage of the population living at or below the poverty line for lower middle income countries was around 28%, and more than half of the entire adult population was illiterate, with rates among rural women much higher. Electricity in the country reached only around 60% of the population, and almost a quarter did not have access to potable water. Infant mortality rates were 23% higher than the regional average and maternal mortality ratios were nearly double. Overall, the micro-economic picture was in dire shape.

The economy was too dependent on agriculture, accounting for 20% of GDP and heavily reliant on rainfall. Infrastructure was lacking throughout the country, and environmental degradation was widely apparent throughout the cities and the countryside, presenting a challenge to the growth of tourism. Of particular note, the northern part of Morocco was completely neglected after a series of militant actions created an irreparable rift between King Hassan and his citizens there.

In contrast to the micro economic indicators, by 1998 King Hassan had established a strong macro-economic climate: low debt to GDP ratio, a low budget deficit and an open, competitive economic system. He adopted IMF and World Bank reforms that, had Morocco been a member of the European Union, would have qualified it for the Monetary Union.

Upon his death in 1999, King Hassan left the country unified with a very strong nationalistic belief in country and King, a reasonably performing economy, and most importantly, with a solid commitment in its support for U.S. objectives regarding counterterrorism and economic openness, and in promoting peace in the Middle East.

Twenty years later, where is Morocco today? Where is it headed tomorrow?

Upon ascending to the throne in 1999, King Mohammed VI immediately gave a clear indication of his vision for reform and equality for all Moroccans, stating in his first public speech in August of 1999, “How can we talk about the progress and development of society when women who constitute half of this society are being denied their rights? Our true religion, Islam, has granted them rights that are not respected. They are equal to men.” By 2004, Morocco had passed one of the most progressive family codes in the region, the Moudawana, putting women on equal footing with men in regards to children and divorce.

Also in 2004, King Mohammed established The Equity and Reconciliation Commission to reconcile victims of previous human rights abuses, providing a public forum for victims to make their case and receive compensation.

In 2005, a massive anti-poverty program, the National Initiative for Human Development, was instituted in 600 of the most vulnerable poor areas of the country and city districts to increase job creation and provide adequate social services for the most vulnerable of the population. The poverty rate in Morocco now stands at 15.5%, nearly a 50% reduction. The per capita income in Morocco has nearly doubled during this time as well.

King Mohammed VI also took great efforts at rapprochement with the north of Morocco, indicating his intentions early on with his first official visit as King to Tangier, in September of 1999 – the first visit by a Monarch in nearly 40 years. These efforts have paid off. Rapprochement brought the establishment of economic zones, port and highway infrastructure, and tax incentives. With these and other measures, the north of Morocco has undergone an economic renaissance, and is now a hub for auto, aeronautics, and renewable energy manufacturing. And although youth unemployment is still problematic, the overall unemployment rate is now around 10.4%, nearly 40% percent less than it was in 1998.

Infant and maternal mortality rates have been cut in half. Electricity reaches 98.9% of the population and more than 85% have access to potable water. The birth rate is among the lowest in the region and is now comparable to rates in Europe. Morocco even has a new law that protects the civil liberties of migrants, making it one of the most progressive countries in the world on this issue. And today, while there is still work to be done, after concerted efforts Morocco has improved literacy among adults to around 70%, with rates reaching over 90% among youth, and even higher for those under 15 years old.

The cities are cleaner, with advances in waste collection and disposal. By 2030, Morocco aims to generate 50% of its electricity from renewable sources, making it a global leader on the environment. Tourism has increased five-fold since 1998.

The country has undergone an incredible transformation after years of serious efforts to modernize and expand its infrastructure, upgrading roads, ports, and airports to support its goal of becoming a commercial crossroads between Africa and the West. In line with these efforts, Morocco and the United States concluded a free trade agreement in 2004, and last year, Morocco reestablished its relationship with the African Union and many of its members following a 33-year absence.

Macro-economic rates, strong under King Hassan, remain strong today. Agriculture still accounts for a large percentage of GDP at 13.6%, but that marks a 32% decrease from when King Mohammed assumed the throne, and a substantial amount of the production is now irrigated, reducing reliance on rain. New highways now connect most of the major cities in Morocco, and a new high speed train from Tangier to Casablanca will begin service in 2018, cutting travel time between the two cities by more than half to just over 2 hours.

When I arrived in Morocco, the bilateral relationship with the US was at a low point largely due to the lack of public support for Morocco on the Sahara issue. The United Nations was extending its MINURSO mandate overseeing the dispute for only a few months at a time, constantly prompting US criticism of Morocco regarding their differences on this issue. Following discussions and agreement with Morocco in 1999, the United States proposed a new policy, which offered a political compromise to support an internationally accepted framework of autonomy under Moroccan sovereignty. By 2007, the United Nations and the United States were describing a new Moroccan sovereignty-autonomy initiative as serious and credible, and later Secretary Clinton called it “realistic”. The United States has since begun to fund Morocco to provide countrywide programs, services, and economic growth initiatives that include the Saharan regions. This, more than anything else, has solidified the relationship between our two countries during the past two decades.

Today, as I look back, I realize I’ve had a front row seat to Morocco’s internal and international evolution over the past twenty years. Morocco has come a long way, although more still needs to be done: addressing youth unemployment; improving education and creating jobs; tackling corruption and weaknesses with regard to the rule of law in both the public and private sectors; enforcement of existing laws; and, dealing with ongoing government inefficiencies.

In particular, there is a need to work for a greater convergence of the ambitious sectorial strategies launched and currently implemented so as to maximize their impact at the micro levels. The country has to tackle the issue of decentralization of the governance of the country, particularly in the Sahara, and with a priority emphasis on women and those regions that are the poorest. And perhaps most importantly, there is a need to insert the youth into the economy through effective education and job training programs.

It is obvious that Morocco is moving steadily forward, albeit at its own pace. It is a delicate balancing act as the King moves cautiously to make Morocco a more open and modern leader among developing countries. Change that comes too quickly could expose vulnerabilities and create an opportunity for those who wish to destabilize the country, terrorists among them. On the other hand, too slow a pace could cause Moroccans to rise up and demand change at a more striking rate. The United States should be cognizant of this challenge and seize the opportunity to work in partnership with Morocco as it finds its “sweet spot” for movement and change, as it is in America’s interest to see this Arab country remain stable and grow increasingly more prosperous and democratic.

North Korea’s Kim, China’s Xi both had a big year. Here’s why we should care about Asia’s 2017

January 3, 2018

Curtis S. Chin (Asia Development Bank, 2007-2010; Asia Fellow, Milken Institute)


Jose B. Collazo

Cross posted from Fox News


Asia was much in the news in 2017, as North Korea’s brutal dictator Kim Jong Un surprised experts around the world with rapid progress in his weapons program, testing intercontinental ballistic missiles and nuclear bombs. The United Nations and U.S. imposed sanctions on the North, but didn’t deter Kim from continuing to make military advances.

Kim and President Trump traded insults and threats but, thankfully, avoided going to war. Hopefully, war between the two nuclear nations will be averted in the year ahead as well.

President Trump gave up on President Obama’s failed “pivot to Asia” and said the U.S. would not join the Trans Pacific Partnership free trade agreement, which had been a top priority of the Obama administration. The new U.S. president instead embraced an “America First” foreign policy that amounted to a “pivot to America.”

So who was up and who was down in Asia in 2017? Here’s our assessment:

Worst Year: Aung San Suu Kyi and the Rohingya people

Once touted as a successful example of U.S. diplomatic engagement, the country now known as Myanmar – but still called Burma by many – was plunged into ethnic conflict in 2017 when the military in the primarily Buddhist nation launched attacks on the predominantly Muslim Rohingya minority.

One-time democracy icon and Nobel Peace Prize laureate Aung San Suu Kyi, who is now serving as state councilor (akin to prime minister) has drawn international criticism for standing by as more than 600,000 Rohingya have fled to neighboring Bangladesh following rapes, murders and the burning of their villages.

Whether a humanitarian and human rights nightmare or a clear case of “ethnic cleansing” – as U.S. Secretary of State Rex Tillerson has described it – the world has failed to effectively respond to Myanmar’s brutal treatment of an entire people.

Unfortunately, the year ahead doesn’t yet look any better for Suu Kyi or the Rohingya – sadly, the joint “winners” of worst year in Asia in 2017.

Bad Year: The Political Opposition

Incumbent leaders and parties in much of Asia, from India to Japan, solidified their lock on power. Opposition parties fared badly.

One-party rule continued in China, Vietnam and Laos. And in Cambodia, a Supreme Court ruling has effectively dissolved the only credible major opposition party. The result? Cambodian leader Hun Sen is likely to continue as the world’s longest serving prime minister for some time.

Elsewhere, Thailand’s return to democracy remains on hold after a May 2014 coup. And in Japan, Prime Minister Shinzo Abe’s party scored impressive election results, swamping the nascent “Party of Hope” of popular Tokyo mayor Yuriko Koike. Incumbency does have its advantages.

A Mixed Year at Best: ASEAN

The year 2017 proved both good and bad for the 10-member Association of Southeast Asia Nations, or ASEAN. A visit by President Trump and a seemingly budding bromance between the U.S. and Filipino presidents helped mark 50th anniversary celebrations for ASEAN in Manila in November.

The Southeast Asian region, with a combined gross domestic product equivalent to $2.4 trillion, is now the seventh-largest economy in the world and on track to become the fourth-largest economy by 2050. That’s good news for American businesses from Texas to Washington investing in and selling to this booming region.

But 2017 also made clear that the association’s non-confrontational, consensus-building approach – deemed the “ASEAN Way” – may well be facing a mid-life crisis in the face of China’s growing investment and assertiveness.

While ASEAN celebrates 50 years of growing prosperity, some of the region’s most pressing problems, including the Rohingya crisis and territorial disputes in the South China Sea, have also continued to fester if not grow.

Good Year: Asia’s Fintech Pioneers

As in America, technology from e-commerce to mobile banking continues to transform Asia and create vast new fortunes. Not everyone though can be a Jack Ma, the storied Chinese billionaire and co-founder of Alibaba Group. Nor can every company be an Ant Financial Services Group, the Alibaba-affiliated payments company described by The Economist as “the world’s most valuable fintech firm.”

But 2017 proved to be a good year for Asia’s pioneers in fintech – a catch-all buzzword for the financial technology that is challenging and reshaping mainstream banking and finance companies.

In the third quarter of 2017 alone, according to consulting firm KPMG, Asia was the global leader in fintech investment, outpacing Europe and the Americas, with more than $1.21 billion raised.

And with companies looking to serve the region’s “unbanked” – only 27 percent of Southeast Asia’s 600 million people have a bank account – what was a good year for fintech is likely to only get better in 2018.

Best Year: Xi Jinping & Kim Jong Un

There’s a new Mao in town. “Best Year” in Asia goes to: the leader of the most populous nation, China; and the leader of arguably the region’s most frightening nation, North Korea.

In 2017, Xi Jinping solidified his rule as China’s most powerful leader in decades at the Communist Party Congress. Progress also continued on two landmark Xi initiatives. The first is the “One Belt One Road” or “new Silk Road” infrastructure and development program, which will better connect China to key markets. The second is the Asian Infrastructure Investment Bank, a Chinese-led rival to the World Bank.

The major uncertainty in 2017 for Xi Jinping was the behavior of the man dubbed “Little Rocket Man” by President Trump – North Korea’s Kim Jong Un. Kim’s continued survival may well rest on China’s support more than on his small nuclear arsenal. Yet the North Korean leader is likely to know that an erratic North Korea is the price that China accepts for fear of a united, democratic Korea on its border.

And so, in a year that saw Xi Jinping emerge as a voice for Chinese-style globalization and Kim Jong Un survive – if not thrive – as a nuclear-armed provocateur, we give “Best Year in Asia” to a less-than-dynamic duo linked on the world stage: Xi and Kim, frenemies in 2017.

As President Trump moves to make America great again, America would do well to pay attention to what the billions of people and their leaders on the other side of the world in Asia are up to. In an ever-shrinking world, what happens on one side of the Pacific inevitably will affect the other.

Big Lessons for Japan and America from three small countries

November 14, 2017

Curtis S. Chin (Asia Development Bank, 2007-2010; Asia Fellow, Milken Institute)

Cross posted from The Japan Times


When Prince Akishino and his wife Princess Kiko visited Bankok late last month to attend the royal cremation of the late King Bhumibol Adulyadej, they joined representatives of nations large and small. Together, they all bid a final farewell to a monarch whose remarkable 70-year reign coincided with the transformation of a nation and a continent.

The destruction of World War II and that of the Korean and Vietnam Wars, as well as the tremendous economic troubles that once swept large parts of Asia starting in 1997 beginning in Thailand seemed a world away.

The story of Asia today is one driven by its largest nations and economies. A slow-growing Japan and an increasingly assertive China dominate headlines, as do the mounting tensions that continue to be a major focus of U.S. President Donald Trump’s ongoing visit to Asia.

Yet, three of the region’s smallest countries each offer up a lesson for all of “Asia rising” as well as for the United States and Japan.

First: environment matters. “Going green” is a phrase embraced for many years by both countries and companies — in words, if not action.

The small Himalayan kingdom of Bhutan — 750,000 people in a nation of only 17,500 square kilometers — offers, however, an example that large nations can learn from.

Bhutan’s leaders have put conservation at the heart of their environmental agenda, pledging to keep the country carbon neutral and writing into their constitution the requirement that 60 percent of the nation must remain forested. Other initiatives include bans on plastic bags, restrictions on private vehicles in the capital Thimphu, and a commitment to become the world’s first 100 percent organic-farming nation.

Second, democracy must be nurtured. Another of Asia’s smallest countries, with 1.2 million people and 14,875 square kilometers, offers an example of how people can move forward post-conflict and take control of their own destinies, when given the chance.

The former Portuguese colony of Timor-Leste, also known as East Timor, this year held its first parliamentary elections administered without U.N. oversight since the country regained independence in 2002 from Indonesia. The results were a peaceful and powerful example to many nations, big and small, increasingly doubtful of the wisdom of entrusting their citizens with the power to vote.

While significant economic challenges continue, the people of this newest of Asian nations deserve praise as they progress from decades of conflict and centuries of colonialism. Timor-Leste was ranked first in the Economist Intelligence Unit’s Democracy Index 2016 for Southeast Asia and fifth in Asia, behind the well-established democracies of Japan, South Korea, India and Taiwan.

Third, rule of law powers business. The densely populated city-state of Singapore, 5.6 million people in an area of only 719 square kilometers, is a leading example of a small nation that thinks big — and succeeds big. With one of the highest GDP per capita in the world, Singapore showcases the economic benefits of transparency and the embrace of free markets and free trade.

Singapore has not reached global prosperity by conforming to “small-country guidelines” or “thinking small.” This prosperous “Lion City” is ranked the second easiest place in the world to do business in the World Bank’s just released Doing Business 2018 report, behind New Zealand, and the seventh least corrupt economy in the world according to Transparency International’s Corruption Perceptions Index 2016.

As small fish in the big pond that is Asia, these three nations’ futures are by no means certain in a region that will continue to transform in the decades ahead.

According to United Nations estimates, India is on track to replace China as the world’s most populous nation. Wealth and inequality likely also will continue to grow across Asia, as will the risk of military conflict amidst competing demands for energy, water and other resources, including in the South China Sea.

As Prime Minister Shinzo Abe and Trump underscored in Tokyo, Japan and the U.S. share a vision for an Asia-Pacific that is both prosperous and at peace. Much though will depend on their actions and that of others, including China and North Korea.

Countries will continue to apply economic or military pressure to shape their smaller neighbors’ behaviors and policies — no different than today. Traditions will also endure in places such as Thailand and Japan, with their embrace of centuries-old traditions and institutions.

Asia and the Pacific, however, will be better off if all nations adopt some modern-day, “small-state ideas” offered up by Bhutan, Timor-Leste and Singapore — namely the embrace of a greener, more representative and more transparent future for all their citizens.

Albert Einstein, Donald Trump and North Korea

November 3, 2017

Thomas A. Loftus (U.S. Ambassador to Norway, 1993-1997)

Cross posted from The Cap Times


Seventy years ago Albert Einstein, in an Atlantic Magazine article entitled “Atomic War or Peace,” changed American opinion on the use of nuclear weapons.

Einstein’s intended audience in 1947 was the American people, not politicians or generals. His message: “Americans may be convinced of their determination not to launch an aggressive or preventative war. So they may believe it is superfluous to announce publicly that they will not a second time be the first to use the atomic bomb.” Einstein thought refusing to publicly outlaw first use of the bomb was a mistake.

Einstein’s immense credibility and the lucidity of his reasoning had great influence on the generation that had gone through WWII. It offered a way forward to a future without nuclear war. His ideas to contain nuclear weapons would continue to be influential after the Korean War and with baby boomers who grew up in the Cold War always thinking there might be a mushroom cloud in their future.

President Trump’s trip to Asia this month gives an opportunity to change course by stating a policy the two Koreas, Japan and China understand. #1. We will honor our treaty commitments. The United States, by treaty, is responsible for the defense of Japan and South Korea. It is called a mutual defense treaty. #2. We do not want Japan or South Korea to pursue the development of nuclear weapons. #3. We will not introduce nuclear weapons into South Korea, including so-called tactical weapons. #4. We will open talks with North Korea with no preconditions.

Today we stumble toward a war with North Korea where nuclear weapons could be unleashed, not only intentionally following a war of words by the countries’ two leaders, but through accident or miscalculation.

There are questions as to whether the North Korean early-warning system is fail safe, meaning its pre-programmed softwear could trigger a counterattack by mistake. And should North Korea develop a solid fuel rocket, the danger of war by mistake increases.

I personally experienced how frighteningly easy it would be for mixed signals to result in a nuclear conflagration. As the United States ambassador to Norway, I was at the Andoya Rocket Range in north Norway on Jan. 19, 1995, to meet scientists from Cornell University on a research project. The next day a powerful rocket, the Black Brant XII, would be launched, and would pretty much go straight up and peak at a height of 1,400 kilometers. The goal of the research was to gather data on something new: a daytime look at the northern lights. Shortly after launch, the Russian early-warning system tagged it as an attack because the system was programmed to calculate the height, arc and speed of an incoming missile and trigger a counterstrike based on that. Luckily the Russian officer of the day figured out the system got it wrong and stopped the alert. But still, Russian President Boris Yeltsin was given the Black Box and his unsteady finger was on the nuclear trigger for the next 24 hours.

If we enacted a policy that includes the four points above, the risk of both an intentional launch of a nuclear weapon and the mistaken launch of one would diminish.

In high school, I read Einstein’s article, which was reproduced as a short book. To us, war was not abstract. We practiced in school what to do when the Soviets dropped the bomb. Five miles from Sun Prairie where I grew up, Truax Field in Madison housed an Air Force Nike missile base assumed to a Soviet target. Highways were marked for evacuation routes. A big issue in the 1960 presidential race between Kennedy and Nixon was the “missile gap.” The morality of dropping bombs on Hiroshima and Nagasaki was being debated and it was becoming common knowledge that after China entered the Korean War there had been a plan by the generals to drop the atomic bomb on North Korea. And perhaps it would have happened had we not had civilian control of the military.

The stated goal of the current administration is to pressure North Korea to give up its nuclear weapons. This isn’t a realistic goal. We need to pursue the four points above, along with Einstein’s admonition that America “will not a second time be the first to use the atomic bomb.”

But how do the American people become motivated enough to inform the politicians and generals and the ersatz Dr. Strangeloves of today of their disagreement with a muddled, contradictory, war-risking policy where what passes for lucidity is the phrase, “Everything is on the table”?

Here is how Einstein said it: “The atomic scientists, I think, have become convinced that they cannot arouse the American people to the truths of the atomic era by logic alone. There must be added that deep power of emotion which is a basic ingredient of religion. It is to be hoped that not only the churches but the schools, the colleges, and the leading organs of opinion will acquit themselves well of their unique responsibility in this regard.”

As Hong Kong dims, Asia can learn much from Singapore, East Timor and Bhutan

October 3, 2017

Curtis S. Chin (Asia Development Bank, 2007-2010; Asia Fellow, Milken Institute)

Cross posted from the South China Morning Post


Twenty years ago in Asia – as Hong Kong returned to China under the “one country, two systems” formula, there was hope that the former British colony would set an example for a freer, more progressive China.

Those days, for now, seem past as China cracks down on dissent in the run-up to a landmark Communist Party congress, and as Hong Kong jails democracy campaigners over anti-China protests. Hong Kong may no longer be the role model it once was, should Beijing’s moves, unintentional or not, transform this economic showcase into “just another Chinese city”.

Yet, at a recent Milken Institute Asia Summit that looked back 20 years to 1997 and ahead 20 more to 2037, I found hope that, amid the diversity of Asia, there remain numerous examples of a way forward for all of the region.

The story of Asia today remains very much one driven by its largest nations and economies. An increasingly assertive China, a slow-growing Japan, a rising India and a still emerging Indonesia dominate the headlines, along with mounting tensions from the Korean peninsula. Yet, all of “Asia rising” can take a lesson from some of the region’s smallest countries.

From three small countries come three big lessons for a greener, more representative and more transparent Asia. My hope for Asia 2037 is that these small nations – Bhutan, East Timor and Singapore – can inspire and show the way.

“Going green” is a phrase that has been thrown around for many years by both countries and companies. But despite the rhetoric, Asia is increasingly polluted, with man-made forest fires and smog-enveloped cities an annual occurrence. At least one Asia-Pacific nation, however, both talks the talk and walks the walk.

The small Himalayan kingdom of Bhutan – 790,000 people in a nation of 38,000 sq km – offers an example that its much larger neighbors (China to the north and India to the south) can learn from.

Bhutan’s leaders have put conservation at the heart of their environmental agenda, pledging to keep the country carbon neutral and writing into their constitution the requirement that 60 percent of the nation must remain forested. Other initiatives include bans on plastic bags, restrictions on private vehicles in the capital Thimphu, and a commitment to become the world’s first 100 percent organic-farming nation.

Money can’t buy you happiness

All this is in line with the philosophy of a “gross national happiness” index, as advocated by the fourth king of Bhutan, Jigme Singye Wangchuck. This approach to development goes beyond traditional economic measures, such as the gross national product, which only captures the economic value of goods and services produced. In addition to environmental conservation, the Gross National Happiness Commission also considers sustainable and equitable socio-economic development, the preservation and promotion of culture, and good governance.

East Timor votes in presidential election, signalling age of stability in Asia’s youngest nation

Another of Asia’s smallest countries, East Timor, with 1.2 million people and 14,875 sq km, offers an example of how people can move forward post conflict and take control of their own destinies, when given the chance.

I returned recently to this former Portuguese colony located on the eastern half of an island shared with Indonesia. The trip was as part of an international election observation mission from the Washington-based International Republican Institute. The East Timor government had invited observers to monitor the first parliamentary elections administered without UN oversight since the country regained independence in 2002 from Indonesia. The results were a peaceful and powerful example to many nations, big and small, still struggling to put the power of the vote in the hands of their citizens.
East Timor votes in presidential election, signalling age of stability in Asia’s youngest nation

While significant economic challenges continue, the people of this newest of Asian nations deserve praise as they progress from decades of conflict and centuries of colonialism. East Timor was ranked first in the Economist Intelligence Unit’s Democracy Index 2016 for Southeast Asia and fifth in Asia, behind the well-established democracies of Japan, South Korea, India and Taiwan.

Why Hong Kong can never be Singapore: just blame history

The densely-populated city state of Singapore, 5.6 million people on an area of only 719 sq km, is perhaps the leading example in Asia of a small nation that thinks big – and succeeds big. With one of the highest per capita gross domestic products in the world, Singapore showcases the economic benefits of transparency and the rule of law. Its neighbors would do well to adopt this nation’s embrace of free markets and free trade in their own search for drivers of growth and foreign direct investment.

Understandably, the pushback was significant when Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, recently argued that small states “must always behave like small states”, in remarks that were perceived to be a criticism of Singapore’s recent foreign policy.

Singapore did not succeed by thinking small, nor has it reached global prosperity by conforming to “small-country guidelines”. Having developed from a fishing village to a first-world country in just a few generations, Singapore also has become the leading finance and trade hub in Southeast Asia and a role model for rule of law. This prosperous Lion City is now ranked the second-easiest place in the world to do business in the World Bank’s “Doing Business 2017” report, behind New Zealand, and the seventh least-corrupt economy in the world, according to Transparency International’s Corruption Perceptions Index 2016.

As a small state, should Singapore hide when ‘elephants’ fight?

Being ambitious is not a bad thing. Small in geography need not mean small-country mentality and policies.

Over the past 20 years, I have seen first-hand the accomplishments and continuing challenges of Bhutan, Singapore and East Timor. Still, as small fish in the big pond that is Asia, these three nations have futures that are by no means certain.

In the two decades ahead, Asia will continue to transform. According to United Nations estimates, India will trade places with China six years before 2030 to become the world’s most populous nation, en route to 1.66 billion people by 2050. Wealth and inequality are likely to grow, as will the risk of military conflict amid competing demands for energy, water and other resources. Paradoxically, a more populous Asia dominated by large nations might also prove “smaller” as trade and technology further link the ­region.

All share a vision for an Asia-Pacific that is prosperous and at peace in 2037. Much, though, will depend on the world’s biggest powers and the region’s largest nations.

Here’s a prediction. Large countries will seek, in the years ahead, to apply economic or military pressure to shape their smaller neighbors’ behavior and policies – no different than today. Asia and the Pacific, however, will be better off if all nations adopt some modern-day, “small state ideas” offered up by Bhutan, East Timor and Singapore – namely, the embrace of a greener, more representative and more transparent future for all their citizens. That ideally will ring true in both Hong Kong and Beijing one day.

Back to the Future: Reagan, Trump and Bipartisan Tax Reform

September 29, 2017

Stuart E. Eizenstat (Ambassador to the European Union, 1993-1996)

Cross posted from The Hill


With the startling, positive outreach to the congressional Democratic leadership to forge an agreement on short-term funding of the government to avert a shutdown, increasing the debt ceiling and funding Hurricane Harvey relief, followed by further efforts to enlist Democrats on immigration reform and tax reform, the door is now more open than seemed possible for President Trump to create a bipartisan coalition for tax reform and tax cuts, just as Republican icon Ronald Reagan did in 1986. While Trump in 1991 told Congress the 1986 tax act was an “absolute catastrophe” because it closed real estate loopholes important to his business, as president he has warmly endorsed it.

The 1986 Tax Reform Act, signed by President Reagan almost exactly 31 years ago, was the first across-the-board tax reduction for everyone since the Kennedy tax cuts, and there have been none since. President Carter tried and failed to pass a comprehensive tax reform bill in 1978-’79, even with a heavily Democratic Congress.

The essence of the Reagan plan, embraced by the Democratic leadership that controlled the Congress, was to create a fairer, simpler tax system, with lower rates and fewer tax breaks for the wealthy and corporations, that did not inflate the budget deficit. By appealing to Democrats with the liberal idea of closing tax loopholes, shelters and deductions for the wealthy, with the conservative Republican philosophy of lowering tax rates, he forged a bipartisan coalition.

The act lowered personal and corporate tax rates, while remaining revenue neutral by broadening the tax base through eliminating tens of billions of dollars in tax loopholes for the wealthy and corporations. It also lowered the capital gains rate from 20 percent to 28 percent, agreeing with Democrats that capital gains generally benefiting the wealthy should be taxed at the same rate as ordinary income from workers — the heart of Reagan’s and now Trump’s blue-collar support. Reagan said in championing the bill that he wanted to “close the unproductive loopholes that allow some of the truly wealthy to avoid paying their fair share.”

It exempted millions of low-income families from a federal income tax by expanding the standard deduction, personal exemption and earned income tax credit; it drastically reduced the number of tax brackets, with the top rate for individuals cut from 50 percent to 28 percent; and it slashed corporate tax rates from 48 percent to 34 percent, paid for by eliminating or reducing corporate tax breaks.

Since the 1986 act, presidents and successive Congresses have eroded some, but not all, of its benefits. Scores of special, targeted tax breaks and shelters have been passed. The top tax rate for individuals has now increased to 39.6 percent, and the number of brackets has jumped to six.

For sure, President Trump is in the Oval Office in a different era: the middle of American politics has eroded; both parties are more partisan, less willing to compromise, and more subject to pressures from their left and right flanks. Yet even liberal champion Sen. Ted Kennedy (D-Mass.) voted for the 1986 Act.

Trump’s approval ratings are under 40 percent — far below Reagan’s. It will be harder to close loopholes to offset the revenue loss from tax cuts, and congressional Republican leaders seem less interested in doing so, relying upon “dynamic scoring” — that somehow tax cuts will produce so much more economic growth, tax revenues will magically close the deficit, something which has never been shown to happen.

The Republican leadership is so anxious to pass a tax bill by the end of the year, it will leave little room for the kinds of reforms Reagan and the congressional Democrats achieved to earn the tax cuts. If there is a 2017 tax bill, it is likely to be almost all tax cuts, with no tax reforms to broaden the base.

Still, there are important lessons to be learned from Ronald Reagan’s approach.

He announced his intention for comprehensive tax reform in his 1984 State of the Union message, almost a year before he submitted his proposals, so it was well thought through, and went through a lengthy odyssey in Congress, with full hearings, markups and deliberation. While Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn have been assiduously working on a tax bill for several months, speed seems to be a key goal for both the administration and the Republican leadership, to have one major victory before the end of the first session. This will almost certainly lead to cuts without Reagan-type tax reforms.

Ronald Reagan also courted Democrats, including Speaker Tip O’Neill (Mass.), Ways and Means Committee Chairman Dan Rostenkowski (Ill.), and Rep. Richard Gephardt (Mo.) and Sen. Bill Bradley (N.J.), who already had a similar bill in the hopper, working with the politically gifted Treasury Secretary James Baker. Trump got off on the wrong foot by threatening Missouri Democratic Sen. Claire McCaskill to support the principals of the tax proposal he presented in her home state. But he has recently rectified this with a sincere outreach to a number of key Democratic leaders, as Ronald Reagan did.

There are substantial hurdles to forge a bipartisan consensus: Democrats are insisting that most of the individual tax cuts be focused on the middle class, and that deep tax reductions be paid for by loophole closings; Republicans are intent on deep corporate and upper income individual tax cuts, with little reforms to pay for them. The nonpartisan Tax Policy Center indicates the Trump plan could add over $3 trillion to the deficit in the first 10 years alone, and that 40 percent of the cuts would go to the top 1 percent of earners.

But still, as in 1986, there is broad, bipartisan recognition that:

  • our tax system is too complex and unfair;
  • that reducing high marginal tax rates can encourage taxpayers to lessen reliance on tax shelters;
  • that our corporate tax system in the globalized world economy leaves U.S. corporations at a competitive disadvantage, with the highest marginal tax rates among OECD countries — although far lower actual rates, with all the special tax breaks — encouraging them to invest in low tax states abroad;
  • that U.S. corporations should be encouraged to bring back the more than $2.5 trillion they have parked abroad and make job-creating investments rather than use them for stock dividends and share buybacks;
  • that individual tax brackets should be narrowed; and
  • that the tax code favors debt over equity, by allowing deductions for interest but double-taxing corporate equity income.

The most important lesson from 1986 is that Ronald Reagan showed consistent leadership at key points when the bill seemed doomed, going to Capitol Hill, writing letters to wary Republican members, and using his bully pulpit to stay on message about its importance to audiences around the country. This will be a major test for President Trump, to see if he has absorbed Reagan’s lessons. By indicating to Democrats that he does not want to focus his tax cuts on the wealthy, he is sending a powerful signal. The tax debate is also a test for the Democratic leadership to rise to the occasion, as they did in reaching agreement with Ronald Reagan three decades ago.

Tea Leaves: Progress on the Bumpy Road to Democracy

September 1, 2017

Curtis S. Chin (U.S. Ambassador to the Asian Development Bank, 2007-2010; Asia Fellow, Milken Institute)

Cross posted from the Nikkei Asian Review


A decade ago, I traveled to East Timor, also known as Timor-Leste, to look at the condition of roads and other infrastructure in Asia’s newest country. I was working with the Asian Development Bank at the time, and returned in 2010 for a follow-up visit. It was not until July this year that I returned again — this time as an independent election observer, to witness firsthand the country’s ongoing journey to democracy.

Just like the country’s roads, that voyage remains a work in progress, undoubtedly with more bumps and twists along the way. But in a world awash with cynicism, and with democracy under pressure in so many countries, I found hope in this young nation of some 1.2 million people.

The parliamentary election that I observed and a presidential poll held in March were the first run without international assistance since a United Nations mission left in 2012. A Portuguese colony for 273 years until 1975, East Timor was forcibly occupied by neighboring Indonesia until 1999, and regained its independence only in 2002 after a transition administered by the U.N.

My election day began before dawn, to the sound of roosters, in the small mountain town of Ainaro, where I stayed in a guesthouse a short walk from a beautiful colonial church. For most of the day, with my interpreter Arianto, our driver Angelo and a smartphone app that showed polling stations, I traveled on roads good and bad, and crossed rivers on bridges new and old, throughout the region.

Ainaro district, some 4-5 hours’ drive from the capital Dili, is a special place. Here, Xanana Gusmao, who would become the first president of East Timor, spent many years directing resistance to Indonesian occupation. During World War II, Ainaro was where Imperial Japan’s efforts to conquer this region came to an end.

In contrast to the mayhem and violence back then, the scenes I saw were festive and peaceful. Voters waited quietly at polling stations that opened promptly at 7 a.m. Until the polls closed early afternoon I saw voters coming on foot, by motorcycle and by bus or truck to cast their votes. Young or old, each showed a voter identification card, had his or her name confirmed on voter rolls and entered an election booth to mark a choice from some 21 political parties. A nail was provided to punch a hole in the ballot. Afterward, each voter dipped an index finger into a well of indelible ink to help prevent double voting.

Weeks later, national pride in what happened on that sunny Saturday election day can still be sensed, even as political parties jockey for position in the formation of a new government. “Once again, we have shown the world that Timor-Leste is a democratic country,” my interpreter, and now friend, Arianto Martins de Jesus told me. “The election has brought new hope for Timor-Leste’s people, no matter who leads the government.”

As with all governments — democratically elected or not — a key challenge will be delivering on people’s hopes. Running an election can be the easy part, in contrast to forming a government and running a country. But hope there is, even if at first glance East Timor is struggling on several fronts. Poverty remains high, as does youth unemployment. Oil and gas reserves, the government’s primary source of revenue, could well be depleted by 2022.

Yet notable strides have been made in the last decade to improve living conditions and increase economic opportunities. The Dili I visited in July is a far cry from the one I first saw a decade ago. Plans for East Timor’s first internationally branded hotel, a Hilton, have just been announced, and the international franchises Burger King and Gloria Jean’s Coffees are already in Dili. The infant mortality rate has almost halved since East Timor regained independence, and malaria cases have declined dramatically. Although not all in the region yet agree, East Timor’s accession to the Association of Southeast Asian Nations is richly deserved, and would help to lock in progress.

Before making the long road trip back to the capital after election day, I stopped in the old church in Ainaro and caught the start of Sunday service. Much was in the local language, but now and then I heard the word “Alleluia.” Praise and celebration were certainly in order. There may be challenging times ahead for East Timor, but the country’s commitment to the rule of law, peace and democracy bodes well for its future. This tiny young nation is an example to much larger neighbors which are still struggling, or even stalling, on their own bumpy paths to democracy.

NAFTA 2.0: Let the ‘Games’ Begin

August 25, 2017

Antonio O. Garza (U.S. Ambassador to Mexico, 2002-2009)

Cross posted from Ambassador Garza’s website


The NAFTA talks kicked off this past week in Washington DC, with negotiators from the three countries outlining their visions for improving trilateral trade. While the mood appeared to be generally constructive, tensions surfaced as U.S. Trade Representative Robert Lighthizer repeated the Trump administration’s focus on reducing trade deficits. The negotiators will sit down next in Mexico City on September 1st to continue hashing out the details on this point and others, but even if they can successfully produce a NAFTA 2.0 by early next year they may still face the biggest challenge of all. As I wrote about for Texas Monthly, the toughest part of redesigning NAFTA may not be determining the agreement’s content but managing the political risk both during and after the process.

With the 23-year old NAFTA in a vulnerable position, it’s worth taking a step back and remembering what is at stake. While far from perfect, the trade agreement guides the cross-border exchange of billions of dollars in agricultural products, motor vehicles, and appliances. It underpins millions of jobs from California to Kansas to Maine, and is the framework for entire industries’ business models. If NAFTA suddenly disappears, it would be impossible for the three region’s economies to exit unscathed. The disruptions that come from businesses’ reshuffling their operations and absorbing higher costs would cause some to shut down and others to pass along the costs to consumers through higher prices. There are ways to gradually adjust the agreement to make it work better for all parties, but this requires using proverbial scalpels to adjust, finesse, and stabilize the agreement, rather than a hammer to smash the parts that aren’t working quite right.

Yet in Mexico, the NAFTA talks are only one of the big news stories, as the country is already beginning its 2018 presidential and congressional election preparations. While the campaigns don’t kick off until next year, Mexico’s National Electoral Institute and Congress have allocated funding for political parties (unlike the United States, Mexico uses public funds for campaign financing), capping off campaign financing at the highest levels ever. There is a general sense that Ándres Manuel López Obrador is the frontrunner, but the jockeying among presidential hopefuls in the PRI and PAN parties is just beginning. For those reading the political tea leaves, changes in President Enrique Peña Nieto’s PRI will now allow individuals from outside the party to become a presidential candidate, in a move that would appear to favor the current Finance Minister Jose Antonio Meade. But with just under a year to go and a deep bench of contenders, there surely will be many twists and turns to come.

For those of you in South Texas or interested in local border issues, it’s worth tuning in to two upcoming construction projects. The first project is for a section of border wall that will cut straight through cross-border Santa Ana Wildlife Reserve and the second are LNG export terminals set to be constructed in the Port of Brownsville. These projects raise significant economic and environmental issues, and unfortunately—as I write about here—local residents’ voices and concerns have so far been given short shrift.