18 December 2013 | Vol. 4, № 47.

From the Editor’s Desk

Dear FDI supporters,

Welcome to the Strategic Weekly

Analysis, our final edition for 2013. This

has been a busy year with a record

number of publications. In 2013, our

Associate numbers passed 4,000 and an

ever-increasing number of people have

viewed our website, with over 700,000

doing so in November.

We are also about to complete two major

studies on the global food and water

situation and Australia’s national

objectives in the Indian Ocean region. We

have also embarked on a major study that

will seek to identify how we might

regenerate northern and inland Australia

and develop its food producing potential.

We greatly appreciate your continuing

support and remain inspired by your

interest and contributions. We are a not-

for-profit research institute and any

donations are tax deductible.

I intend to issue a regular report next

year, starting in late January that

highlights our research intentions and

other activities. I shall also issue a brief

questionnaire, seeking your advice as to

how our product is being used and asking

for any recommendations on how we can

do better.

As noted above, this will be the last

Strategic Weekly Analysis published in

2013. We will resume its publication on

29 January.

On behalf of all of us at FDI, I wish you a

happy, safe and memorable Christmas

with the best of fortune for the New Year.

Major General John Hartley AO (Retd) Institute Director and CEO Future Directions International

*****

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Some Progress, but Corruption Remains Endemic in Indonesia

A recent report by Transparency International reveals that corruption remains an endemic

problem in Indonesia. Though encouraging signs are beginning to emerge, corruption will

remain a major issue for investors in Indonesia in the future.

Background

Corruption remains endemic in Indonesia, with a recent survey by Transparency

International ranking the South-East Asian country at 114 out of 170 states worldwide. The

survey, published by the Berlin-based organisation on 3 December, draws on a wide range of

sources to assess ‘the degree to which corruption is perceived to exist among public officials

and politicians’. For the second year running, Indonesia scored 32 out of 100 (with zero

being totally corrupt), prompting media outlets to charge that Jakarta was not doing enough

to fight corruption. Though some encouraging signs are beginning to emerge, the

government must certainly do more to fight corruption in the future.

Comment

Indonesia again scored poorly in the survey, with a score of 32 out of 100 for the second

year in a row. Though the country improved four spots from last year (118 to 114), it was

still on par with Egypt and below other Indian Ocean countries, such as Ethiopia (111) and

India (94). Somalia, North Korea and Afghanistan were the worst performers, while Denmark

and New Zealand were perceived to be the least corrupt countries in the world.

The results will come as little surprise to most observers. Though Indonesia is set to become

one of the world’s top ten economies by 2020, corruption is virtually a way of life in the

archipelago state. Graft, whereby politicians exploit their position for personal gain, appears

to be getting worse, especially at the local level. At the same time, bribes and “facilitation

payments” are commonplace; the recent scandal, embroiling the Chief Justice of the

Constitutional Court, goes to show that paper bags stashed with cash are ubiquitous in

Indonesia.

For companies and investors, therefore, the ongoing challenge is to take advantage of the

tantalising economic opportunities while overcoming the issue of corruption. The majority of

multinationals operating in Indonesia have pledged to comply with strict extraterritorial

anti-corruption measures, including the US Foreign Corrupt Practices Act and the UK Bribery

Act. Such Acts expressly forbid corruption and include third party liability. But this then

poses the problem for firms: how can they resolve the tension between compliance and

making the most of growth opportunities in Indonesia?

Many companies may choose not to comply with their legal obligations and engage in

bribery. This is especially so given illicit payments to government agencies, often through

third parties, is seen as custom. For others, the tension may be too great a hurdle to

overcome. Control Risks, a global consultancy company, said in a recent report that ‘while

Indonesia’s government has significantly improved measures to combat corruption over the

past ten years, corruption remains a major impediment for foreign investment’. To be sure,

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companies, with significant time and effort, can achieve an appropriate balance – but many

bypass South-East Asia’s largest economy altogether in favour of other markets.

Yet, given that Indonesia desperately needs to attract foreign capital amid a widening

current account deficit and slumping economy, the country must do all it can to fight

corruption in the future.

Indonesia may have failed to improve on its score from last year, but some encouraging

signs are beginning to emerge. The August arrest of Akil Mochtar, the Chief Justice of

Indonesia’s Constitutional Court, on bribery charges, sends a powerful message that no

person is above the law. Meanwhile, Jakarta marked International Anti-Corruption Day on 9

December by sentencing the leader of the country’s largest Islamic party, Luthfi Hasan

Ishaaq, to 16 years’ jail for corruption and money laundering. Both high-profile cases,

conducted by the Komisi Pemberantasan Korupsi (KPK), Indonesia’s Corruption Eradication

Commission, illustrate that Jakarta is starting to take corruption more seriously.

The wider story of the KPK also points to a brighter future. Established in 2002 to tackle the

widespread proliferation of corruption following the Suharto era, it has grown in size and

power. Before the KPK was formed, only police and prosecutors had the authority to

conduct anti-corruption activities. Now, however, the Commission has almost 1,000

employees, with its budget doubling between 2008 and 2011. Most important, it remains a

fiercely independent body committed to investigating the shady dealings of public officials.

But the KPK still very much a work in progress. For all the recent hype, its prosecutions still

only represent a drop in the ocean compared to the corruption that pervades the country.

One of the problems, says Control Risks, is that other administrative arms, including the

legislature and judiciary, often try to undermine the KPK in a bid to keep the status quo.

Political parties, meanwhile, are often insincere in their attempts to stamp out corruption,

treating it as a point-scoring tool, rather than a problem that needs to be stopped.

Given this, the medium to long-term prospects for corruption in Indonesia are unlikely to

change. Companies will continue to carefully weigh up the situation before investing in

Indonesia, and may choose to boycott it altogether – a costly predicament for Jakarta as it

continues to sail into economic headwinds.

Andrew Manners Research Analyst Indian Ocean Research Programme amanners@futuredirections.org.au

*****

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White Paper to Outline Opportunities for Australian

Agriculture

The Government has announced that it will release an agriculture White Paper at year’s

end, signalling its intention to capitalise on high food demand from nearby Asian markets.

Background

Last week, Agriculture Minister Barnaby Joyce issued a media release declaring Australia’s

‘once in a lifetime’ opportunity to improve the nation’s agricultural competitiveness, as the

terms of reference for a new agriculture White Paper were released. Minister Joyce cites job

creation, increased farm gate returns, investment and economic growth as key goals of the

paper. A taskforce of industry and community leaders has been established to compile the

paper and consult with stakeholders.

Comment

Joyce’s announcement comes as plans to develop a Northern Australian food bowl have

been revived. Australia holds a “strategic advantage” in the production of food products

such as rice, high protein wheat, fish, marbled meats, sugar and dairy, which could satisfy

the changing diets of emerging Asian markets. The White Paper will detail plans of crop

relocation to maximise food production. Moving cotton crops further north and citrus

production south would allow for more efficient irrigation practices. Joyce has signalled

plans to strengthen the relationship between food and fibre processing chains. Integrating

agricultural sectors will build international competitiveness.

The White Paper’s terms of reference outline plans to improve agricultural investment

facilitation but make no mention of the role of foreign investment. The recent government

rejection of the GrainCorp takeover by American firm Archer Daniels Midland is widely

believed to have resulted from lobbying efforts from the Nationals, further highlighting the

party’s protectionist stance on foreign investment. A primary goal of the paper is ensuring

food security in Australia, an issue which is often brought up to justify the National Party’s

stance on foreign investment in Australian agriculture.

Australia is currently food self-sufficient and secure, feeding its population of 22.8 million

and exporting food products to a further 40 million people. As the country grows to become

a “bigger Australia”, the sustainability of the agricultural sector will be important. Australia

experiences widespread resource degradation and studies suggest the agricultural sector

could be seriously hit by changes to the climate. It must be noted that the future success of

domestic agricultural production may not be achievable from domestic investment alone

and that growth could lie in the accessibility of the sector to foreign investors and labour.

In 2014, the FDI Global Food and Water Crises Research Programme will launch a study into

the sustainability of Australian food systems. This study will seek to investigate the

challenges and opportunities revealed by the global food and water crises landmark study

which the programme will release early in the year.

Page 5 of 11

Jack Di Nunzio Research Assistant Global Food and Water Crises Research Programme

*****

Madagascar Presidential Election, Round 2: Many Challenges

Ahead for the Winner

A clear outcome in a free, fair and peaceful election is a prerequisite if Madagascar is to

address the many challenges it faces.

Background

The run-off election between the two highest-polling candidates in the 25 October first

round poll, Jean Louis Robinson and Hery Rajaonarimampianina, remains on track for 20

December. While the two candidates are effectively proxies for bitter rivals former president

Marc Ravalomanana and current leader Andry Rajoelina, who deposed Ravalomanana with

the support of the military in 2009, many in Madagascar will be hoping that this week’s poll

will close the door on four years of political instability, economic uncertainty and

international isolation. Whether that will be the case is difficult to say at this stage, but at

least the candidates’ policy pronouncements are pointing in the right direction.

Comment

After four difficult years,

Madagascar has an opportunity

to put the recent difficulties

behind it with a successful

conclusion to an electoral

process that, so far, has been

described by foreign observers

as free and fair.

While the degree of

magnanimity that will be shown

by the victor towards the loser –

and if the loser will even accept

the verdict – is highly uncertain,

a legitimately elected president and parliament (National Assembly elections are to be held

on the same day), are absolutely required if Madagascar is to address such issues as falling

living standards and environmental degradation.

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The 2009 political crisis hit Madagascar hard. According to World Bank figures, the economy

contracted by 4.1 per cent in 2009, with meagre growth returning in 2010 (0.5%), 2011

(1.9%) and a more impressive 3.1 per cent in 2012. Per capita Gross Domestic Product fell

slightly in 2012 to US$447 from US$457 the year before, but was still an increase on the

figure of US$419 recorded in both 2009 and 2010. The World Bank estimates that 92 per

cent of the population lives on less than US$2 per day and that, with a high population

growth rate (2.9%), per capita income in 2013 has, in effect, been reduced to the level of

2001.1

Already low health standards have been affected by reduced government revenue and

overseas aid. A bubonic plague outbreak – endemic in highland areas of the island –

beginning in November occurred outside the usual season, at a lower altitude than usual and

showed increased virulence. Increased poverty, overcrowding and decaying sanitation

facilities are all contributing factors.

Illegal land clearing has escalated since 2009, with traditional slash-and-burn agriculture –

already responsible for the destruction of 90 per cent of the island’s forest cover –

exacerbated by poverty, competition for agricultural land and President Rajoelina’s early

decision to end a ban on the harvesting of valuable hardwoods, such as rosewood. The ban

was reinstated in April 2013, but only after much damage had been done to unique and

delicate ecosystems, including national parks, with a corresponding drop in the country’s

important ecotourism sector.

Large parts of Madagascar experience food insecurity, malnourishment is widespread and

agricultural production is vulnerable to locust infestations and damage from tropical

cyclones. More positively, Madagascar is a leading producer of vanilla.

Fortunately, both candidates have indicated an interest in tackling such issues. Despite a lack

of detail, Rajaonarimampianina’s manifesto, for instance, outlines a plan to create a national

Green Ticket “return-to-the-land” programme intended to boost agricultural production,

efforts to reinvigorate livestock exports, and to restore confidence to the tourist industry,

returning visitor arrivals to 500,000.2

Dr Robinson, meanwhile, has condemned the rampant illegal deforestation, noting the

important role played by the environment in the country’s economic development, and has

pledged to punish those caught logging rosewood. Dr Robinson has stated his intention to

increase funding for health and education, but the funding need to do so would largely be

conditional on overseas donors.

In any event, whoever wins on 20 December – and, in a country as large and poor as

Madagascar, the final result will not be confirmed for some time afterwards – will need the

legitimacy that can only come from a clear victory in a free, fair and peaceful poll that is

accepted by winner and loser alike. If Madagascar is turn the page, that will be the first step.

1 ‘Madagascar: Measuring the Impact of the Political Crisis’, World Bank, 5 June 2013.

<http://www.worldbank.org/en/news/feature/2013/06/05/madagascar-measuring-the-impact-of-the-political-crisis>. 2 ‘Hery Rajaonarimampianina: Programmes’. <http://www.heryvaovao.com/>.

Page 7 of 11

Leighton G. Luke Manager Indian Ocean Research Programme lluke@futuredirections.org.au

*****

The Imperatives of India’s Central Asia Policy

India’s on-going strategic competition with China has ensured its “Look East Policy” has

been in the spotlight. There is, however, another policy that is just as important to its

national strategy – the “Connect Central Asia Policy”, which could secure it energy

supplies, extend its influence, support its long-time ally, Russia and, possibly, rein in

China’s growing regional influence.

Background

At the Shanghai Co-operation Organisation’s (SCO) recent meeting in Tashkent, Uzbekistan,

in late November, the Indian Foreign Secretary, Sujatha Singh, made it clear that India

sought to enhance its relationships with the Central Asian states. To this end, it had initiated

steps towards applying for full membership of the organisation which, if granted, will give

India an enormous boost towards achieving its Central Asia goal of increasing its economic,

political and cultural ties in the region. This will, in the longer term, enable India to project

its influence there.

Comment

In her speech, Ms Singh raised two issues of importance to India. The first was that the SCO

ought to hasten its efforts in rebuilding Afghanistan. On the face of it, this would appear to

be a logical move to ensure that Afghanistan is not left in a vacuum caused by the impending

withdrawal of US and Coalition troops in 2014. India’s worry is that a vacuum will give rise to

terrorism and further strife there, which could easily spill over into the rest of the region,

including India. The second issue was that of Iran. The recent agreement reached by the

P5+1 and Iran over its nuclear programme is viewed by India as an opportunity for itself and

the region to further enhance their energy and political security.

While both issues are fairly self-evident, being, as they are, of benefit to all concerned, the

catch was in Singh’s further statements on Afghanistan. Once the SCO ramped up its efforts

in Afghanistan, she stated, India could then work with Russia to create common SCO policies

on Afghanistan. This statement leaves open the possibility that there could be more at stake

for India here than just the future of Afghanistan. It is, by now, commonly held that Russia is

not overly-enamoured of China’s growing importance in a region that Russia has long

Page 8 of 11

regarded as its own area of influence. By working together with Russia, India could

potentially provide Russia additional leverage within the organisation to ensure it is not

forced to play second fiddle to China’s economic clout. It is true that Russia and China are

working together to balance the United States in Central Asia, in the western Pacific and

elsewhere. This notwithstanding, neither China nor Russia would be entirely adverse to

accumulating a degree of influence in Central Asia to the detriment of the other. It is very

possible that by working with Russia to achieve that end, India could counter China in

Central Asia, just as it seeks to do in South-East Asia. It is hardly likely that such a move

would be as plainly enunciated by India, Russia or, for that matter, China. It does not,

however, need to be.

There is an added advantage of this action for India. Given President Putin’s stated ambition

of forming a Eurasian Union with a Eurasian Economic Commission along the lines of the

European Union, India could stand to benefit by having direct economic access to the former

Soviet republics of Belarus and Kazakhstan and also to some Eastern European states, such

as Bulgaria and Hungary.

In any event, the SCO’s plan to create a Free Trade Area by 2020 is also appealing, as it

would give India access to an economically integrated area, enabling it to export is goods

and services to a population of around 1.5 billion people and increasing its trade with the

region from around US$500 million at the present time.

Given this potential, it is almost a certainty that India will use its ties with Russia to ensure it

is granted full membership in the SCO. Given the benefits to be accrued from having India on

board, it is equally sure that, barring unforeseen events, Russia will use its considerable

influence to ensure India obtains just that.

Lindsay Hughes Research Analyst Indian Ocean Research Programme lhughes@futuredirections.org.au

*****

Tension in the Middle East Set to Grow

The recent bombing of the Iranian embassy in Beirut has increased tension in the Middle

East. With alliances being formed along sectarian and strategic lines, the oil-rich region

faces increasing uncertainty.

Background

With a history of conflict, the Middle East continues to be the centre of tension. Given its

various sectarian followings, huge natural resources and the introduction of nuclear

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capabilities, the Middle East is bound to cause further headaches for policymakers. With

several countries vying for the leadership of the Muslim world, alliances are being formed in

the Middle East that could create a platform for greater instability. One such alliance that

has been formed, and that continues to grow stronger, is that between Iran and Syria, so

that the former of the two might challenge the regional dominance of Saudi Arabia.

Comment

The relationship between Iran and Saudi Arabia has been rocky since the 1979 revolution in

Iran. Prior to then, the two countries maintained relatively good terms, the relationship

being managed to some extent by the United States. Strategic allies with Iran and Saudi

Arabia, the US continued to control the rivalry, until the Shah was overthrown in Iran. This

event had the effect of driving a wedge between the two countries, mainly due to strategic

and sectarian competition. Both states now fight for eminence in the energy sector and

leadership of the Muslim world.

As the alliance between Iran and Syria continues to grow, tension between the two

countries and Saudi Arabia has increased. The 19 November bombing of the Iranian embassy

in Beirut, which killed twenty-three people (including an Iranian diplomat) has served only to

exacerbate the situation. Many believe the bombing is the reaction to their alliance and to

Iran’s support of Shi’a domination in Syria. Saudi Arabia has given support to the Sunni cause

in both Lebanon and Syria, making retaliation by Iran against it highly likely.

Al-Qaida claimed responsibility for the embassy attack in Beirut, saying it was to serve as a

warning to Iran to remove its troops from Syria. Hezbollah’s leader Hassan Nasrallah,

however, has accused Saudi Arabia of being involved. Nasrallah has claimed Saudi

intelligence provided backing and support for the attack, thus retaliation should be directed

at Saudi Arabia. Reacting to the bombing, Saudi Arabia advised its citizens to leave Lebanon

due to instability. Although Iranian Foreign Minister Mohammad Javad Zarif told reporters

earlier this month that Iran hopes for a ‘new page’ with the Saudis, it does not rule out an

attack by the Iranian-backed Hezbollah.

Although Iran has agreed to certain restrictions regarding its nuclear programme, the

building of a second nuclear reactor has caused concern in Saudi Arabia over its regional

hegemony intentions. Nuclear weapons in Iran could see the country make a play for

dominance in the region, but Iran’s nuclear activities have seen it struggle with sanctions

imposed upon it by many countries, including the US. This has given Saudi Arabia the chance

to fully capitalise on exporting energy products to Iran’s former customers. By agreeing to

rein in the nuclear programme, however, Iran has had some relief from the sanctions,

providing it an opportunity to regain markets lost to Saudi Arabia.

The fallout between Iran and Saudi Arabia has forced many Middle Eastern countries to

“choose a side”. Israeli scepticism of Iranian nuclear intentions has seen it draw “closer” to

Saudi Arabia, resulting in reports of a recent meeting between the heads of intelligence of

Saudi Arabia and Israel. The alleged meeting is said to have been sparked by the deal Iran

struck with the P5+1 Group regarding its nuclear programme and its plans to construct a

second reactor. Other regional states view a conflict between themselves and an Iran-Syria

Page 10 of 11

alliance as the worst possible outcome for themselves and the region. Omani Minister for

Foreign Affairs, Yousif Bin Alawi al Ibrahim, has told the Gulf Co-operation Council that

Oman would not support any aggression against Iran, as a conflict of this nature would set

the region back centuries. Although true, managing Iran has become a more difficult task, a

task that may soon become impossible if Tehran continues with its nuclear activity.

David Martin Research Assistant Indian Ocean Research Programme

*****

What’s Next?

The Bangladesh-China-India-Myanmar Forum will visit Kunming, China, for a Joint Study Group meeting on 18 December.

The leaders of 17 armed ethnic groups in Burma/Myanmar will travel to Hlaingbwe, in south-eastern Kayin state, where they will meet at the Karen National Union headquarters for a conference from 18-20 December.

India will test the Agni-III, a nuclear-capable missile with a 3,000-kilometre range, at a base on the coast in Orissa state on 18 December.

Four Somalis arrested for participating in the Westgate Mall attack in Kenya will go on trial on 18 December.

On 20 December, the Sri Lankan Government will complete its house-to-house survey to ascertain how many people died during the civil war, which ended in 2009.

The Commerce Secretaries of Nepal and India will meet in Kathmandu on 21-23 December.

Newly-elected Maldivian President Abdulla Yameen will make a visit to New Delhi on 22 December.

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Any opinions or views expressed in this paper are those of the individual authors, unless stated to be those of Future Directions International. Published by Future Directions International Pty Ltd. 80 Birdwood Parade, Dalkeith, WA 6009 Tel: +61 8 9389 9831 Fax: +61 8 9389 8803 E-mail: lluke@futuredirections.org.au Web: www.futuredirections.org.au