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GBE:International Politics

Mohtar Mas’oedMagister Manajemen

Universitas Gadjah Mada

Topics

Why bother the “environment”? What “International politics” has to do with business?

“Politics/International politics” as the greatest risk for decision-making?

How to make sense of international politics?

What are the most salient international political issues of the world today?

How and via what mechanisms do they affect the way firms do business here in Indonesia?

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GLOBAL BUSINESS ENVIRONMENT

Why should we bother?

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The qualifying concept ofceteris paribus meansthat you do not need

to consider other variables

As business decision-making is affected by many different kinds of “things” or events,decision-makers have to consider many dimensions of human life, physical as well as social

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WE NEED TO UNDERSTAND

INTERNATIONAL POLITICS

CHALLENGES TO BUSINESS

CRIMINAL ATTACKS

POLITICAL INSTABILITY

LEGAL CHALLENGES

ECONOMIC VOLATILITY

RIS

K O

F L

OSS O

F L

IFE

RISK OF FINANCIAL LOSS

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What are the most challenging international

political issues facing business in Indonesia?

How does it impact on business activities?

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POLITICS: REALIST

POLITICS

Struggle for power.

INTERNATIONAL POLITICS

Struggle for power in international arena.

Politics among nations.

POLITICS: REALIST (2)

POWER: RELATIONAL

The ability of an actor to get others to do something they otherwise would not do and at a cost to others.

POWER: STRUCTURAL

The ability to narrow the range of choices open to others.

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POLITICS: REALIST (3)

HOW TO GET OTHERS TO DO?

By having/controlling sources of power, especially the sources of “structural power”

FORMS OF STRUCTURAL POWER?

To set societal agenda;

To devise rules of the game among actors;

To decide how things must be done;

POLITICS: REALIST (4)

THE SOURCES OF STRUCTURAL POWER Security structure Control over security provision

Production structure Control over production

Financial structure Control over credit

Knowledge structure Control over the creation and dissemination of

knowledge, information & technology

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What are the most challenging issues facing

Indonesia today?

What is the condition of international politics today?

(Global and regional?)

What is changing? What stays the

same?

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America Factor:Changing? Into what?

THE POST-COLD WAR U.S.The only military power;

Using it to offset (relative) decline in economic status

Acting unilaterally --“pre-emptive war”;

Pursuing “resource politics” using the pretext of “anti-terrorism”campaign.

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USA Since 1990s:The Real Objectives?

Short-term: establish new military bases and control over oil economy.

Long-term: American “sphere of influence” in the Eurasian “middle ground” between the E.U., Russia, and East Asia.

“Next to the U.S. nuclear monopoly, there was no more universally recognized symbol of the nation’s superpower status than its overseas basing system.”-- James Blaker, former Senior Advisor to the Vice Chairman of the Joint Chiefs of Staff, 1990

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Diego Garcia to south

U.S. military bases, 1989

U.S. military bases since 1990U.S. military bases since 19901. Gulf War,

1991

2. Yugoslav Wars,1995-99

3. Afghan War,2001

4. Iraq War,2003

“Their function may be morepolitical than military. Theysend a message to everyone.”

--Deputy Defense SecretaryPaul Wolfowitz, NYT 2002

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Wars since 1990

U.S. military power entered the strategic areas. Why?

“Humanitarian” interventions to halt aggression & terrorism, topple dictatorships, protect ethnic minorities? (as US Govt claims)

Extension of U.S. “imperial” influence in oil-rich regions? (as most critics say)

Military & economic counterweight to emerging competitors (EU & Japan, China); control of theiroil? (the most possible motive).

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Control over Oil

””American vital interests in the Central Region are American vital interests in the Central Region are longlong--standing. With over 65% of the worldstanding. With over 65% of the world’’s oil s oil reserves located in the Gulf states of the regionreserves located in the Gulf states of the region——from which the United States imports nearly 20% from which the United States imports nearly 20% of its needs; Western Europe 43%; and Japan, of its needs; Western Europe 43%; and Japan, 68%68%----the international community must have free the international community must have free and unfettered access to the regionand unfettered access to the region’’s resources.s resources.””

----General J. H. Binford Peay III, General J. H. Binford Peay III, Central Command (1997)Central Command (1997)

Cited in Cited in Blood and OilBlood and Oil by Michael Klare by Michael Klare (Metropolitan Books, 2004)(Metropolitan Books, 2004)

Patrolling Oil Routes

Assuring the security of the oil route that crosses many national boundaries = imposing power over other nations

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Power shift?America in decline?

Questions?

Short-term question: “What’s the relative power coming out of the current recession? What is the situation going to be after all the damage is done in 5 years?”

As the current recession tends to be a deep and long one and to hurt everybody, it’s very difficult to predict.

Longer-term question: “What is the distribution of power going to look like in 15 or 20 years? Who’s going to be on top?”

There is clearly going to be a redistribution of power of the world. On a long-term Yes, the US will have to share power with other countries. China & India are in the best position to share power with the US.

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Is the US in Decline?

It certainly is, in relative, not absolute, sense.

The amount of power that US enjoyed in the post-Cold War era was very unusual. It stood by itself, a giant alone, astride the world stage with no one to check it or balance it.

Now, Asia is on the rise. By 2050 the four largest economies in the world will be 1) China, 2) India, 3) USA & 4) Japan (Goldman Sachs prediction).

So the relative power that America will enjoy in the 21st

century will progressively get smaller.

The Return of Asia? As Angus Madison has shown, up to 1820 the

two largest economies in the world were consistently China and India. So the last 200 years of Western domination of the world were essentially were an aberration.

What we are seeing remarkably now in the 21st

century is a return to the norm, the normal world where China and India once again become the two largest economies.

So the biggest story here is what can be called the “rebirth of civilizations.”

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The Return of Asia? (2)

Why China is succeeding? Because the Chinese minds are being opened up at a ferocious rate. What differentiated China and India in 1960’s? India

was an open society with a closed mind, while China was a closed society with an open mind.

Indicator: Why are the leading universities in the world, including Harvard, Yale, Princeton, Stanford, rushing to partner universities like Beijing, Fudan, and Tsinghua?

Isn’t it a recognition that these are “world-class”universities with “world-class” thinking going on?

Zero-sum Game?

Yes, the US has suffered a tremendous loss of credibility. It has also the problem of indebtedness, especially to China.

But, it’s not a “zero-sum” game. Where one’s loss is somebody else’s gain.

Yes, China holds so many treasury bonds and other kinds of American assets. Will China sell it off one day and US will go bankrupt?

But, China’s economy is so symbiotically connected to the US economy that American problems are dragging China down and China’s recovery will be a function of America’s recovery.

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Can Asians Learn?

Since the end of World War II, Europe and the Americas have been peaceful and productive. Hundred years of animosity & hostility in Europe has gone.

Can Asians learn from the best practices of the nations in Europe and the Americas?

OBAMA’S ZEITGEIST?WHAT CHANGES?

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Obama’s Innaugural Address (Jan 20, 2009)

“… our power alone cannot protect us, nor

does it entitle us to do as we please. . . “

China Factor: Emerging and Challenging?

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Possible flash-points

Spratley Islands

Taiwan

Korea

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Possible flashpoints

Conflict overSpratley Islands,South China Sea

Possible flashpoints

Korea

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One Way to Perceive the Issue:

To see China as a power in transition togreat power status.

In order to secure great power position,the power-in-transition tends to

challenge the status-quo

(Power transition theory)

Power Transition Model

THE CROSS OVER POINT

RISING CHALLENGER

DECLINING HEGEMON

TIME

GROSSNATIONALPRODUCT

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TESTING THE THEORY:China Question (a)

Will China surpass the US?

Is China dissatisfied?

Is China powerful?

Source: (2001)

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PRC USA

Area 9.5–9.6 Million km² 9,6 Million km²

Population 1,3 Billion 308 Million

GDP (nominal) $4.327 Trillion $14.441 Trillion

GDP (PPP) $7.916 Trillion $14.441 Trillion

GDP (nominal)/capita $3,259 $47,440

GDP (PPP)/capita $5,963 $47,440

Human Dev Index 0.772 0.956

ForEx reserves $2,273,000 (Million) $83,375 (Million)

Military expenditures $70 Billion $663.7 Billion (2010)

Nuclear warheads 240 9,400

Active troops 2,255,000 1,473,900

IS CHINA POWERFUL?

Is China Powerful?

The Power Transition (US 3% and China 6%)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

1990 2000 2010 2020 2030 2040 2050

Year

GN

P $

tril

lio

n (

PP

P)

US

China

Source: (2001)

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Is China Powerful?

Is China Powerful?(These ICBMs can reach Los Angeles)

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Is China Dissatisfied?

Rejects a World Run by Capitalists

Demands Prestige (or its “Place in the Sun”)

BUT

Not Territorially Expansionist

Increasingly Integrated in International System

Needs Investment, Trade, and Technology (That’s why China loves to host the coming Olympic Game)

Source: U.S. Embassy in China, Trade & Investment Briefing

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Hong Kong

Japan

USATaiwan Other

Singapore

Owners of US Treasury Bonds, Oct.2010

http://www.guardian.co.uk/news/datablog/2011/jan/18/us-federal-deficit-china-america-debt

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Owners of US Treasury Bonds, Oct.2010

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Hu Jin-tao vs Obama

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ACFTA and Indonesia:

Political-economy and strategic perspective

Regionalization:“a New game in town”

Apa yang dimaksud dg Free Trade Area?Untuk apa?

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ASEAN-Free Trade Agreement (ACFTA) as the “East Asian Regionalization”?

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ASEAN and Seven Projects

1. ASEAN-China FTA (ACFTA). Started with the Early Harvest Program: trade in fruits and vegetables.

2. ASEAN-Korea FTA (AKFTA)(signed, except Thailand)3. ASEAN-Japan Comprehensive Economic Partnership

(AJCEP) (Negotiation concluded, not yet agreed)4. ASEAN India Regional Trade and Investment Area

(AIRTIA) (Negotiation in process)5. ASEAN-Australia-New Zealand FTA (Negotiation)6. ASEAN-EU FTA (Declared Nov. 2007; negotiation not

started)7. East Asia FTA (Still in consultattion and under study).

Sumber: ASEAN Sekretariat.

ACFTAASEAN-China Summit, Bandar Seri

Begawan, (2001) accepted China’s proposal to set up ACFTA in 10 years.

ASEAN-China Summit di Phnom Penh (Nov 2002) agreed on the“Framework Agreement on Comprehensive Economic Cooperation”(CEC), includes FTA.

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Comprehensive Economic Cooperation (CEC) Three elements:

Liberalization: trade in goods, services and investment; special & differential treatment and flexibility ASEAN new members.

Facilitation

Economic cooperation

Implementation mechanism, including dispute resolution procedures

Early Harvest Program

• Covers: meat, fish, dairy product and other animal products; life tree, vegetables, fruits and nuts.

• Three categories tariff reduction and removal. Tariff for those products mut be zero in three years. Indonesia and several other members must ready by 2010.

• Rice and palm oil are excluded from the agreement.

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Agreement created in haste?

FTA was decided within a very short time.

The political leaders showed a keen interest for kicking off the project of tariff reduction by 2005.

During ASEAN Summit in Vientianne (Nov.2004), the Ministers of ASEAN members signed the “CEC”agreement, popularly known as ACFTA.

What the creators expected?

For ASEAN, China is the the third biggest trade partner (11.3% of total ASEAN trade in 2008 or US$ 192.6 billion).

China + ASEAN = GDP of US$ 6.6 trillion; population of 1.9 billion

people; total trade value US$ 4.3 trillion.

13.3% world trade; half of Asian trade (2008).

10% global FDI or US$ 167.3 FDI (2008).

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What the creator expected? (2)

ASEAN-China trade grow by 26%/th (2003-2008), especially electrical and electronics products, fuel & oil products, plastics, rubber and vegetable oil.

Electrical and electronics products = 1/3 ASEAN export to China;

Machinery and tools: 1/5 ASEAN export to Cina.

What the creator expected? (3)

• China’s newly rich midle-class of hundreds of million people was about to enter the stage of great consumption. ASEAN was interested in gaining benefit from the huge consumer’s market.

• Investment from China: especially transportation and infrastructures. China recently embarked on US$ 10 billion infrastructural investment in roads, railways, air transport facilities and information-telecommunication connecting China-ASEAN countries.

• China provided creadit facilities of US$ 15 billion to enhance regional integration and connectivity.

• In 2008 China spend in US$ 52.1 billion in FDI.

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CHINA & INDONESIA:A Classical “Division of Labor”

Source: Firman Mutakin & Aziza R. Salam, “The Impact of ACFTA on IndonesianTrade”, Economic Review. No. 218 (December 2009).

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Note: HS15 lemak hewan & nabati (sebagian besar CPO)

Source: Firman Mutakin & Aziza R. Salam, “The Impact of ACFTA on IndonesianTrade”, Economic Review. No. 218 (December 2009).

Source: Firman Mutakin & Aziza R. Salam, “The Impact of ACFTA on IndonesianTrade”, Economic Review. No. 218 (December 2009).

Note: HS84: mesin &peralatan mekanik. HS85: Elektrik & elektronik.

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China-Indonesia:“Imperialistic” division-of-labor.

Indonesia’s export to China is dominated by raw materials and primary products.

China’s export to Indonesia consists mainly of manufactured products.

China’s investment in Indonesia mostly in extractive sector.

China’s assistance centered on infrastrural projects.

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CHINA & SOUTHEAST ASIA:A STRATEGIC PERSPECTIVE

Sea lanes

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CHINA: The “Gas Guzzler”

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Possible flashpoints

Conflict overSpratley Islands,South China Sea

Seven

states

contest

the area

of the

South China

Seas

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